Theriault v. R., [1999] 4 CTC 2307 (Informal Procedure)

Watson D.J.T.C.:

These appeals were heard in Sudbury, Ontario, on June 24, 1999 on common evidence under the Informal Procedure.

In computing their income for the 1995 taxation year, the Appellants reported a business loss in the amount of $15,259.08, divided in equal amounts of $7,629.54 each. By Notices of Reassessment dated April 2, 1997, the Minister of National Revenue (the “Minister”) disallowed the said business losses.

In confirming the reassessments, the Minister made the following assumptions of fact:

(a) the Appellant and his spouse operated a small business known as “Pathfinders”;

(b) during the 1995 taxation year, the Appellant’s spouse was a full-time employee of Zellers;

(c) Pathfinders commenced operations in 1987;

(d) Pathfinders provided a variety of products which cater to hunters, fishermen, hikers and outdoors men;

(e) ninety percent of Pathfinders’ sales came from the sale of maps (i.e. hiking maps, MNR maps, geological maps and fishing maps);

(f) from 1987 to 1994, Pathfinders operated in shopping malls and/or the downtown area;

(g) in 1994, Pathfinders moved into the Appellant’s principle residence situated in a residential area;

(h) Pathfinders is located at 463 Clinton Avenue, Sudbury, Ontario which is the residence of the Appellant and his spouse;

(1) the business operates in 374 square feet and occupies the living room in the Appellant’s residence;

(j) the Appellant reports 50% of the business losses;

(k) the Appellant’s spouse reports 50% of the business losses;

(l) the Appellant’s calculation of business loss for the 1995 taxation year can be summarized as follows:

	1995
Gross income:	$32,370.01
Cost of Goods Sold	19,863.72
Gross Profit	$12,506.29
Expenses:
Advertising	533.45
Bank service charge	970.60

	1995
Business tax, feest etc.	233.60
Delivery, freight	771 . 10
Insurance	770.51
Interest	3,419.90
Motor vehicle expenses	4,554.38
Office expenses	42.60
Supplies	3,582.11
Legal, accounting fees	650.00
Property expense	2,332.27
Salaries, wages, benefits	1,560.00
Travel	1,959.77
Provincial sales tax	2,042.08
Sub-total	23,422.37
Capital cost allowance	4,343.00
Total business expenses	27,765.37	27,765.37
Net business income (loss)		($15,259.08)
Appellant’s reported share of business loss (50%)		($ 7,629.54

(m) the business had experienced losses from 1987 to 1995 as follows:

Year	Gross Sales	Expenses	Net Loss
1987	$ 21,892	$ 45,496	($ 23,406)
1988	24,139	45,007	( 20,868)
1989	126,896	133,968	(	7,072)
1990	209,766	239,426	( 29,660)
199]	47,876	95,446	( 47,570)
1992	87,788	115,646	( 27,858)
1993	83,232	126,336	( 43,104)
1994	59,562	155,682	( 96,120)
1995	32,370	47,629	( 15,259)
Total	$693,521	$1,004,636	($311,115)

(n) the Appellant had no reasonable expectation of profit from the business in the 1995 taxation year.

At the hearing, the agent for the Appellants admitted all the allegations except for paragraph (n) above.

The sole issue before the Court was whether the Appellants had a reasonable expectation of profit from the business for the 1995 taxation year.

The burden of proof is on the Appellants; they must establish on a balance of probabilities that the Minister’s reassessments were ill-founded in fact and in law.

During the 1995 taxation year, Guy was a full-time employee of Inco Limited while Beverley was a full-time employee of Zellers. The business started up in 1987; in 1995, it operated out of their family residence in Sudbury, Ontario, selling maps and fishing equipment. The store was open from 9 a.m. to 5:30 p.m. from Monday to Friday and the two Appellants worked during their free time from their full-time employment; there was also an employee who minded the business when they were both away and who lived in the basement of their residence. The business operated at a loss from 1987 to 1995 and made a small profit in 1996 when they did not pay any rent, claim motor vehicle expenses or capital cost allowance.

The two Appellants were the only witnesses at the hearing. Guy had no previous business experience but had hunted and fished since he was 16 years old. They had not prepared a business analysis to project a viable plan for making a profit. Over the previous 5 years, the business had net losses of $29,660, $47,570, $27,858, $43,104 and $96,120; it was not surprising that it had a net loss in 1995.

A reasonable expectation of profit is an objective test and not just a fanciful dream. The objective test includes the examination of profit and loss experienced in the past years; it also examines the operational plan and background to the implementation of the operational plan including the planned course of business action; other criteria include the time spent on the activity, the background, education and experience of the taxpayer, the time required to establish the intended business, the presence or absence of ingredients leading to profits, the record of profits and losses, the cause of the losses and the flexibility of the taxpayer to make adjustments in the face of the losses.

I have reviewed the cases provided to me by counsel for the Respondent and they include Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), Mastri v. R. (1997), 97 D.T.C. 5420 (Fed. C.A.), Mohammad v. R. (1997), 97 D.T.C. 5503 (Fed. C.A.), Landry v. R. (1994), 94 D.T.C. 6499 (Fr.) (Fed. C.A.) and Hugill v. R. (1995), 95 D.T.C. 5311 (Fed. C.A.).

Taking into consideration all the circumstances of these appeals, including the testimony of the Appellants, the admissions and the documentary evidence, in the light of the well-established case law, I am satisfied that the Appellants have failed in their onus of establishing on a balance of probabilities that during the 1995 taxation year, they had a reasonable expectation of profit in the operation of the business known as “Pathfinders”.

Accordingly, the appeals are dismissed.

Appeal dismissed.