Gaston C Payette, Appellant, >>and And. >>minister of National Revenue, Respondent., [1978] CTC 2223, 78 DTC 1181

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec on June 7, 1977.

1. Point at Issue

The issue is whether losses resulting from the printing and sale of books written by the appellant are deductible from investment and rental incomes. These losses were in the order of $39,000 for the period 1970, 1971, 1972 and 1973.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments. are incorrect. This burden of proof results not from any particular provision of the: Income-Tax Act, but from several court decisions, including the judgment rendered by the Supreme Court of Canada in R IV S Johnston v MNR, [1948] CTC 195; 3 DTC. 1182.

3. Facts

3.1. The appellant died at the age of 74, a few months before the hearing of the case. The main witness was his son, Mr Robert Payette. 3.2. The appellant quit school at the age of 12 and was still an adolescent when he entered the business world. He pursued his education on his own.

3.3. His first business transactions mainly involved selling radios, and he built the company which is still known today as Radio Payette.

3.4. From the late 1940’s to 1952, the appellant worked in modern advertising, primarily in the publication and sale of decals. According to the witness, this business became very profitable, since the appellant had a large mailing list in Canada and the United States.

3.5. The appellant purchased a number of apartment buildings over the years. In 1970 his rental income had reached $48,000.

3.6. In 1953, however, the 51-year-old appellant transferred the management of his business to his son Robert, although he retained his interests in Radio Payette and the apartment buildings. He then began work in the publishing field. In his notice of appeal, the appellant Stated that:

My main occupation since 1953 has been that of a publisher. In fact, I have devoted at least fifty hours a week to this occupation . . . I work as a researcher, author, publisher and salesman.

3.7. According to the evidence submitted, this new occupation was not a financial success. The financial results of 1966 to 1973, as submitted by the respondent, and not contradicted by counsel for the appellant, were as follows:

3.8. Although the appellant-referred to himself as a publisher, he only published books that he wrote himself. He published his own books because this was less costly than to have them done by a publisher. If the books cost $1 to publish, he could sometimes sell them for $2. He also did his own advertising. A publisher often has very little to do with advertising. The appellant believed that, in view of his experience in advertising and his mailing list of possible customers, he could cut costs and make a bigger profit.

3.9. The following. is a list of the books published by the appellant, with the years of publication, number of copies published and number of copies sold or given away, according to the evidence (the question marks indicate that the witness could not furnish any information concerning these points):

According to the witness, there are still approximately 5,000 books in stock.

3.10. Judging from the titles, most of the books dealt with female psychology. The evidence did not reveal the underlying reason for this, but it seems that the appellant believed that this subject would prove profitable in publication. In his notice of appeal, he stated the following at paragraph 3:

. . all men could benefit from an understanding of women and most women seek to understand themselves. This is true of all social classes and ethnic groups in every country.

3.11. In his advertising as well as in his books, the appellant referred to himself as a “marriage counsellor”. According to his son, however, he had no office in which he could “counsel” people, nor did he ever advertise as a marriage counsellor except for the purpose of selling his books. Any consultations which may have taken place were by mail following the publication of his books. The evidence did not show that he charged fees for this service. The evidence did, however, reveal that he had never taken any specific courses in psychology. His knowledge in this field, as in others, was the result of reading. He received several letters, including one from a psychiatrist, congratulating him on his books. According to his son, the appellant had a huge library and did a great deal of reading.

3.12. The appellant only began declaring income and expenditures under the Income Tax Act with regard to the publication of his books in 1966.

3.13. The following is the appellant’s statement of income and expenditure for 1971, given as a typical example of the various expenditures which explained the appellant’s losses with regard to the publication and sale of his books:

This statement of income for 1971 was admitted by the respondent as being representative of the other years concerned.

3.14. The investigation into the following main items of expenditure established that:

(a) the “purchase” of $3,475-worth of books from Harpell Press was really the cost of the books that the appellant had had printed at Harpell Press; six invoices were filed as Exhibit A-9 to show the cost of printing;

(b) “New York Times: advertising” and “Book World: advertising” for $6,260.50 and $1,415.63 respectively was for advertisements; the New York Times’ circulation was in the order of two million persons; the advertisement was filed as Exhibit A-5: an advertisement from the Washington Post was also filed as Exhibit A-6;

(c) the $3,000 for “clerical costs” was for the salary of a secretary;

(d) the $3,059.68 for “Travel: book business” was mostly for trips to the USA to visit bookstores and other possible buyers or sellers;

(e) “C Podlone: text revision” in the amount of $360 was payment to a person who revised the appellant’s English texts.

4. Act, Comments and Precedents

4.1. Act

The main sections concerned are paragraphs 12(1)(a), (h) and 139(1)(ae) of the old Act and paragraphs 18(1)(a) and (h), section 67 and subsection 248(1) of the new Act.

4.2. Precedents

The learned counsel cited the following cases: Her Majesty the Queen v Douglas C Matthews, [1974] CTC 230; 74 DTC 6193; Ken Huband v MNR, [1974] CTC 2001; 74 DTC 1039; MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279; Donald Preston McLaws v Her Majesty the Queen, [1976] CTC 15; 76 DTC 6005; Marcel Crépeau v MNR, 37 Tax ABC 280; 65 DTC 99; Williamson v MNR, 1 Tax ABC 369; 50 DTC 147; Alan R Needham v MNR, [1974] CTC 2078; 74 DTC 1057; Riedle Brewery Ltd v MNR, [1939] SCR 253; [1938-39] CTC 312; 1 DTC 499-29; F George Walker v MNR, 76 DTC 1224; John S Stewart v MNR, [1964] CTC 45; 64 DTC 5023; Onni Paju and (Diva V Paju v MNR, [1974] CTC 2121; 74 DTC 1087; Ernest C Hammond v MNR, [1971] CTC 663; 71 DTC 5389.

The Board examined this list of precedents as well as several of the judgments to which it refers.

The main sections of the Act concerned in this list, as in the case at bar, are paragraph 12(1)(a) and subparagraph 139(1 )(ae)(i) of the old Act, which read as follows:

12. (1) In computing income, no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,

139. (1) In this Act,

(ae) ‘‘personal or living expenses” include

(i) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

The basic problem is therefore whether the publication of the taxpayer’s books is a “business carried on for profit or with a reasonable expectation of profit’’.

The facts mentioned in paragraphs 3.6 and 3.7 show that, from 1953 to 1973, the appellant devoted almost all of his time to the study and publication of books. His first book was published in 1963. The losses for 1953 to 1966 are not known—only those for 1966 to: 1973.

The Board is well aware that the business of writing and publishing books is of a very special nature. It can sometimes be sufficient for one book to make the headlines to make the author famous and thus supply him with income which far surpasses the money initially laid out.

Did the appellant have the chance to meet with such success? The Board doubts it, both because of his lack of basic training and because of the subject with which he dealt. Having quit school at the age of 12, the appellant was a self-educated man. It is true that several self-educated people have written books which were undoubtedly successful. In the case at bar, however, was not the subject of female psychology too difficult and thus practically doomed to failure?

When an economist by profession publishes work on the economy, a lawyer on law or a doctor on medicine, there is no doubt a good chance of success. Publishing books on female psychology without any suitable training in the subject is not only a very difficult task, but also one which is unlikely to succeed.

The Board’s doubts concerning the appellant’s chances of success are confirmed by the fact that, over a period of 8 years, the appellant lost over $74,000. Can it then reasonably be assumed that the appellant was writing for “profit or a reasonable expectation of profit”?

Mahoney, J of the Federal Court correctly pointed out in Her Majesty the Queen v Douglas C Matthews that the word “reasonable” applies to “expectation”, and not to “profit”.

In view of the evidence submitted in the case at bar, the very expectation of profit was unreasonable. In some cases, losses over periods of one or two or three years can sometimes be explained by special circumstances. The respondent probably applied this principle when he accepted the losses from 1966 to 1969. It is sometimes even possible to explain and predict a lack of income over a fairly long period of time. In the case of a tree nursery, for example, seed or tiny seedlings are planted with the knowledge that the trees will be sold only when they have reached a reasonable size, after a long period of time. In a case such as this, it:is known that a profit will be made one day, but that because of the nature of the undertaking, the first few years will see nothing but expenditure and no income. A principle such as this cannot, however, be applied to the case at bar.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.