Roocroft v. R., [1998] 3 CTC 2554

Christie A.C.J.T.C.:

These appeals are governed by the Informal Procedure provided for under section 18 and following sections of the Tax Court of Canada Act. The years under review are 1990, 1991, 1992. The issues are:

(i) Did the appellant have a reasonable expectation of profit in the years under review from commercial activities carried on under the name Effective Advertising Graphic Design (“Effective”); [1] and

(ii) Was the appellant correctly reassessed in respect of the disallowance of expenses claimed from a real estate business carried on in 1991 and 1992 under the name Roocroft Sales?

Paragraphs 4 to 8 inclusive of the Reply to the Notice of Appeal read:

from a business or property, issued a Notification of Confirmation in respect of the reassessment for the 1990 taxation year, and issued Notices of Reassessment for the 1991 and 1992 taxation years, allowing certain expenses claimed in respect of Roocroft Sales (‘Roocroft’).

8. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) all facts hereinbefore admitted and stated;

(b) from 1990 to 1992 the Appellant reported the following losses from Effective:

Year	Income	Expenses	Net Loss
1990	$2,472	$18,204	$15,732
1991	$1,614	$12,512	$11,098
1992	$ 239	$11,141	$10,092

(c) for the 1987, 1988 and 1989 taxation years, the Appellant also reported net losses in respect of Effective in the amounts of $12,068, $17,587 and $12,203, respectively;

(d) Effective was never registered as a business with the Ministry of Consumer and Commercial Relations;

(e) during all relevant periods, the Appellant was a full-time employee of Ontario Provincial Police as an electronic design engineer;

(f) for the 1990, 1991 and 1992 taxation years, the Appellant reported only incidental sales in respect of Effective, made to the employer of the Appellant’s spouse;

(g) the expenses incurred by the Appellant for the 1990, 1991 and 1992 taxation years, included the cost of Equipment Leases in the amounts of $7,432, $5,899 and $9,541, respectively;

(h) the Appellant did not have a reasonable expectation of profit from Effective during the 1990, 1991 and 1992 taxation years;

(i) the expenses claimed in respect of Effective were personal or living expenses of the Appellant;

(j) for the 1991 and 1992 taxation years, the Appellant reported the following losses from the second business he and his spouse commenced in 1990, Roocroft:

Year	Income	Expenses	Net Loss	Appellant’s
				Portion
				50%
1991	$1,377	$ 8,390	$7,013	$3,507
1992	$6,489	$19,548	$13,059	$6,529

(k) the expenses claimed in respect of Roocroft included the cost of educational courses and other personal items, as listed in Exhibit ‘A’, attached to this Reply;

(l) the expenses in the amounts of $3,218 and $3,220 (the ‘Expenses’), claimed by the Appellant for the 1991 and 1992 taxation years, respectively, were not expenses incurred for the purpose of gaining or producing income from a business or property;

(m) the Expenses were personal or living expenses of the Appellant.

Exhibit ‘A’

FOR THE YEAR ENDED 1991

Original business loss claimed (100%)		$7,013.87
Less disallowed expenses:
Courses-Educa		3,217.73
tion
Revised business loss		$ 3,796.17
(100%)
50% - Jean Roocroft		$ 1,898.08
50% - Richard Roocroft		$ 1,898.09
FOR THE YEAR ENDED 1992
Original business loss claimed (100%)		$13,059.72
Less disallowed expenses:
Courses-Educa- $3,042.54
tion
Portable	33.34
barbeque
Wool	16.54
Door Alarm	44.07
with Chimes
Unidentified	51.75
Expenses
Art Apprecia	32.05	3,220.29
tion Book
Revised business loss		$ 9,839.43
(100%)
50% - Jean Roocroft		$4,919.72
50% - Richard Roocroft		$4,919.71

The appellant’s wife, Jean, described Effective’s activities in this way:

It was desktop publishing. Basically we were doing graphic arts but on a computer; where before a type setter would have to do it on special equipment and it was a much higher cost. We were able to do it for much less money.

Various efforts to secure customers were related, but success was minimal. The basic trouble was that the linked computer technology was changing so fast that Effective could not keep up to the pace. These changes were re- fleeted in the price that could be obtained for what Effective was offering to the market. Mrs. Roocroft said:

We would have been much better off if we hadn’t had the business, but we had signed leases for the business. These leases were basically in effect until 1992 for computers, laser printers, photocopiers.

Mrs. Roocroft expressly confirmed the correctness of what is said in paragraphs 8(b) and (c) of the Reply to the Notice of Appeal. This exchange took place between her and counsel for the Crown in the course of cross- examination:

Q. So essentially since 1987 when you started Effective, none of the years had made any profit, and even in the best year the expenses were really quite a lot compared to your revenue.

A. Correct, that’s why 1992, long before we were ever audited, we realized by then the leases were all finishing. There was no reason to carry on the business because it was never going to make a profit.

Q. Which year was that?

A. Well, 1992 was the last year the business ever operated.

Q. Yes. So since, you know, Effective has been running at such a deficit since 1987, why didn’t you discontinue the activity after two or three years?

A. We kept hoping - the bottom line is we were committed to leases. These bills had to be paid one way or the other. We both work for a living. We believe that when you have a debt, you have to pay it. So the whole idea of keeping the business going was try to generate as much revenue as possible towards paying these bills. This was not for our pleasure, believe me.

Q. Yes. But isn’t it quite obvious that, you know, compared to the revenue, you know, the revenue was only a fraction of your expenses, isn’t that true?

A. Yes, it is true.

Q. Yes. So it appears then that to keep it going you can keep on claiming expenses in your income tax return, isn’t that true?

A. But we didn’t.

Q. You didn’t claim?

A. As soon as the leases were expired and the expenses that we were committed to, there was no longer a business. That’s why in ’91 we started to refocus.

The appellant testified and through him his returns of income for 1990, 1991 and 1992 were placed in evidence. During the years under review he was employed full-time with the office of the Solicitor-General for Ontario. His employment income from this source was: 1990 - $48,006.00; 1991 - $50,783.00; 1992 - $53,352.00.

The foregoing completes the review of the evidence on the first issue, i.e. reasonable expectation of profit. In the course of argument Mrs. Roocroft said:

Like my husband said, there was always an expectation of profit. That’s why we continuously did different things to try and promote business. Ourselves like many, many other thousands of people started businesses in the late ’80s, early ’90s and it did not function. The only thing that kept us from going bankrupt was the fact we had full-time jobs. If we hadn’t have had full-time jobs, this business probably would have been closed down earlier, but we tried to keep it going and we tried to generate new income continuously.

As I have said with reference to other litigation of this kind, in order for business losses to exist, they must arise out of profit motivated commercial activity that can be regarded as a source of income. In Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), a decision of the Supreme Court of Canada, Dickson J. (later Chief Justice), in delivering the judgment of the Court, said at page 5215:

Although originally disputed, it is now accepted that in order to have a ‘source of income’ the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., 72 D.T.C. 6131.

and later on the same page:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts.

This pronouncement about “objective determination” is most important in relation to cases of the kind at hand. In Kerr v. Minister of National Revenue (1984), 84 D.T.C. 1094 (T.C.C.) this is said at page 1095:

The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep- felt they may be. The issue is to be decided by objective testing.

In Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.) Linden J.A. said at page 6012:

The primary use of Moldowan as an objective test, therefore, is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments. A note of caution must be sounded for instances where the test is applied to commercial operations. Errors in business judgment, unless the Act stipulates otherwise, do not prohibit one from claiming deductions for losses arising from those errors.

In Brill v. R. (1996), 96 D.T.C. 6572 (Fed. C.A.) he said at page 6577:

The other case relied on by the taxpayer was Tonn v. The Queen where deductions for interest inter alia were allowed on loans taken out to buy residential units for the purpose of gaining rental income. When the hoped [sic] for profit did not materialize, the Minister had sought to disallow the deductions on the basis of Moldowan to the effect that there was no reasonable expectation of profit during the years in question. This Court, reversing the Tax Court Judge, held that the deductions were properly allowed and suggested that Moldowan be used sparingly in cases where there was no personal element or suspicious circumstances. It stated also that Moldowan not be used to second guess good faith business judgments that were flawed.

He went on at page 6578:

In applying Moldowan, it is not whether profit is earned, but whether it could reasonably be earned. As long as the business has a reasonable chance of earning profit in the year or in the near future, the interest is deductible, whether or not there actually was a profit earned in a given taxation year. That is the lesson of the Tonn case, which only seeks to restate and clarify the application of the principle of Moldowan. Thus, where as here, if no profit is possible in the year or in the near future, no deduction can be allowed (at least as long as Moldowan continues to govern cases such as these).

The latest decision of the Federal Court of Appeal of which I am aware dealing with reasonable expectation of profit is Mastri v. R. (1997), 97 D.T.C. 5420 (Fed. C.A.). Robertson J.A., speaking for the Court, carefully reviewed what was said in Tonn about reasonable expectation of profit and its relationship to Moldowanand came to this conclusion:

In summary, the decision of this Court in Tonn does not purport to alter the law as stated in Moldowan. Tonn simply affirms the common-sense understanding that it is not the place of the courts to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated.

As will be seen from paragraphs 8(a) and (b) of the Reply to the Notice of Appeal, income in 1990 was 13.5% of expenses. The same percentages for 1991 and 1992 are 12.8 and 2.1. In addition these losses were incurred regarding Effective: 1987 - $12,068.00; 1988 - $17,587.00; 1989 - $12,203.00. It has already been noted that Effective came into existence in 1987. It ceased to function in 1992. There are, therefore, uninterrupted annual losses over a period of some six years.

An examination of the whole of the evidence adduced at trial leads me to the conclusion that when it is objectively regarded there was no reasonable expectation of profit during the years under review or in the near future. It follows that this aspect of the appeals cannot succeed.

Turning now to the second issue, namely, the disallowed expenses in relation to the real estate business. This business was carried on by the appellant and his wife in partnership.

It will be seen from paragraph 8(j) and Exhibit “A” to the Reply to the Notice of Appeal that in respect of 1991 losses in the amount of $7,014.00 were claimed and $3,218.00 was disallowed. In the result only $3,796.00 was allowed, 50% of which or $1,898.00 was allocated to the appellant. Regarding 1992 the analogous numbers are: $13,060.00; $3,220.00; $9,840.00; $4,920.00.

It is to be borne in mind that the onus is on the appellant to establish on a balance of probability that the Minister of National Revenue erred in reassessing in the manner just indicated.

The trial of these appeals commenced on August 29, 1997. The evidence adduced on behalf of the appellant relating to the expenses pertaining to the real estate business was unsatisfactory. I thought that if the appellant and his wife had an opportunity to make full disclosure of whatever documents they have to sustain the validity of the claims for the disallowed expenditures this might lead to a settlement regarding the second issue. Settlement was not achieved. Consequently the trial continued on April 20, 1998.

At that time a number of documents were placed in evidence on behalf of the appellant. They consist of letters and receipts. First I will dispose of what counsel for the respondent informed the Court there was no objection to allowing. This consisted of 50% of these amounts in respect of 1991: $90.95 regarding Toronto Real Estate Board’s program entitled “Orientation For The Prof.”; $30.00 respecting Toronto Real Estate Board’s program entitled “Treb Online Computer Training”. In respect of 1992 50% of these amounts: $349.00 for “The Complete Real Estate Financial Planning Systems Program & Materials” and “Allan Dalton’s Real Estate Power Language For The 90’s”; $180.83 respecting “Robbins Research Int. San Diego Seminars”; $212.37 for “Robbins Research International Inc. - Course Registration Card”; $10.00 for “Rick Willis Seminar”; $16.54 regarding balloons and ribbons used for promotion; $32.05 for art books; $57.75 for software; $14.69 for burglar alarm. [2]

With respect to the balance of the claims for deductible expenses the onus of proof previously stated has not been complied with. Exemplary of this are receipts not dated in 1991 or 1992 which are the relevant; undated receipts or receipts in respect of which there is insufficient evidence to establish deductibility.

In the result the appeal pertaining to 1990 is dismissed. The appeals regarding 1991 and 1992 are allowed and the matter is referred back to the Minister to be reconsidered and reassessed on the basis that the appellant is entitled to deduct 50% of $129.95 or $60.47 in computing his income for 1991 and 50% of $873.22 or $433.61 in computing his income for 1992. The appellant is entitled to no other relief regarding 1991 and 1992. There will be no order with respect to costs.

Appeal dismissed.