Gee v. R., [1997] 3 C.T.C. 2417

Margeson T.C.J.:

1 The matter before the Court at this time for decision is that of Laurie Gee and Her Majesty The Queen, 96-4120(IT)I. The sole question for determination is whether or not during the 1992, 1993 and 1994 taxation years, the Appellant, Laurie Gee, was entitled to claim the deductions in question which have been disallowed by the Minister, the amounts of $6,403, $8,519 and $10,177, respectively.

2 First of all, the Appellant has a considerable problem in this case because he is not here. It is paramount in a case like this that the Appellant be present.

3 The Court pointed out to the Appellant's agent at the beginning that there would be a problem for the Appellant to make his case if the Appellant were not present. There was some suggestion that the Appellant was not present because he was sick. He was in Victoria some six weeks ago and he knew that this case was coming up today. The Court is not satisfied that he is not able to be here. No request for an adjournment was made.

4 Under the circumstances, since the Appellant is not here, the Court will have to accede to the Respondent's request and draw an unfavourable inference against the Appellant.

5 The agent testified as best he could about what he knew of the matter and the presumptions of fact set out in the Reply.

6 Mr. Blanchard did not dispute paragraphs 5(a) and 5(b) of the Reply to the Notice of Appeal (Reply). He pointed out that he was not actually the father-in-law of the Appellant. He did not know much about the allegations in paragraph 5(c) which were the statistics of losses from the Appellant's activities from the years 1987 to 1994.

7 As far as he was concerned regarding the years in question, 1992, 1993 and 1994, the information was satisfactory and reliable.

8 He did not know what losses may have been claimed from 1978 to 1987, which was set out at paragraph 5(d). He agreed with 5(e), that he had Power of Attorney over the Appellant's affairs since 1988 and infused the necessary capital into the activities to cover the losses. He agreed with paragraph 5(f) that the assets of I.S. Cables were sold on or about October 1991. He agreed with 5(g) that the 1992 gross income was overstated by $7,200 as the Appellant included in the gross revenue, amounts received under the Agreement for Sale of I.S. Cables.

9 He did not agree with paragraph 5(h) that the portable shelters cost more to make than the Appellant charged for them. There was some evidence introduced on that point which was contradictory. He did agree that if the Appellant had raised the prices of the shelters he would not have been able to sell them, so whatever price they were sold for was the best price that could be realized for them. He did not agree with 5(j), that he and the Appellant ceased activities in 1996, he said that it was in 1995. He agreed with paragraph 5(k) but he would not agree with 5(1) that there was no business plan. His evidence did not show that there was any plan put into effect but he said that “they put a lot of thought into it.”

10 He did not agree that the Appellant did not charge for the expenses involved in setting the shelters up and for travelling. The evidence was somewhat contradictory on that. He would not agree that there was no reasonable expectation of profit and said that “we thought that there was.” He would not agree that the expenses were personal or living expenses and he would not agree that the expenses claimed in relation to the activities were not reasonable under the circumstances.

11 He said that there was a flat rate charged for gas when there was a substantial distance involved. They had on average 35 minutes to set up a shelter. The business charged $20 an hour for one man as a set up charge. He could remember no time when it took more than 35 minutes to set one up. If there were a more complicated one the maximum that could be charged would have been $100 installation charge.

12 In 1995 the business received a letter from Revenue Canada stating that money was owed for three years. No audit was done. The witness telephoned Revenue Canada and said that he was the manager. He asked for an audit which was done. Some of the information provided to Revenue Canada was never mentioned in the audit. However, it was explained by the witness called on behalf of the Respondent that it was not necessary to view every receipt because the receipts were not in issue. They had been entered into the journal and the auditor was satisfied that the amounts had been expended. She did not have to open up every envelope because it would not have advantaged her any. She was not denying that those expenditures were made. The question was whether or not they were reasonable expenses, not whether or not they were made.

13 The witness maintained that the bills and the ledgers were returned to him for 1992 but that he never received them for the year 1994. None of the expenses were personal. He charged for meals when they were on the road.

14 In cross-examination he said that he was the manager between 1987 and 1995 and he operated it until it was sold. “They thought of me as their father,” he said.

15 Between 1987, 1988 and 1991 he did not operate I.S. Cables. “I gave it to Mr. Gee in 1988 or thereabouts” he said. He agreed that there was no transfer of assets and that he kept his truck. The business of I.S. Cables was to install T.V. cables. Shaw was a major contractee between 1978 to 1987 and he agreed that during that period of time there was $120,000 in losses. In 1987 the Appellant started reporting losses for I.S. Cables in his income tax returns. Mr. Gee reported approximately $68,000 for both businesses. There was roughly $190,000 in losses.

16 He agreed that from 1978 to 1987 he reported the losses and from 1987 to 1995, Mr. Gee reported the losses. In 1991, I.S. Cables was sold for $70,000. In 1988 when he gave the business to Mr. Gee it was not worth $70,000, it was worth something less than that. It appeared that whatever it was worth, not all of the proceeds were received from the buyer.

17 From 1991 to 1996 he denied that he operated Instant Shelters himself. He said “no, I didn't operate it, I was a manager, Mr. Gee came out and helped me out”. He was asked how often this was? He said “he came over on Saturdays to give me a hand I ran the business without pay, I put money into it, plus or minus $20,000 between 1991 and 1996”. He was supposed to receive a truck and a trailer, which he did when Mr. Gee took over the business, but later on the purchaser stopped making payments and he had to sell both of these items.

18 It was suggested to him that he was the moving force, the operating mind in I.S. Cables and the Instant Shelters. He would not agree with that. He said that he was the manager. He made out the invoices, he signed the lease, he arranged for the materials, he made arrangements with the debtors and received payment. He would not agree that I.S. Cables started in 1987. He said “no, we built, we built a few for hydro and we built a few other structures but I was not actually in business.” I.S. Shelters started as a hobby for him in 1987.

19 Exhibits R-1 to R-5 were introduced by consent. These were the income tax returns for the Appellant for 1990, 1992 and 1995. He agreed with most of the information contained in them of which he had any knowledge. He did agree that during the years in question, the Appellant was certainly involved in more than this business, if he was involved in this business. He was working elsewhere, he was drawing Unemployment Insurance and social insurance benefits.

20 The Appellant's address was Vancouver and other places. The address for the business was in Sooke and the mailing address was a place in Victoria. The business premises were located in Sooke. The mail for the business did not come to the box number referred to in the documentation. The witness arranged for it, he received the mail. He did admit that he put one refund cheque back into the business. He had Power of Attorney and he could cash refund cheques.

21 With respect to the Appellant's address in 1992 as shown in Exhibit R-2, he said that he had an accountant prepare the returns of Mr. Gee. These showed his income and his expenses. He did not deny any of the information contained therein. He said that the address was his own, not the business address and not Mr. Gee's address.

22 He did verify that the workers' compensation money referred to in Exhibit R-2 was paid to the Appellant in the year in question and showed his address as 624 E 13th Ave., Vancouver, B.C. The Appellant also received monies from Pacific Electrical Installations at an address shown as a suburb of Vancouver. He also received $6,541 in Unemployment Insurance benefits that year.

23 He admitted to having received refunds but he did not know where the refund was sent that year. His position was that the Appellant was the owner, even though he did not sign any contracts and even though the witness had his name on any documentations to be signed.

24 Mr. Blanchard's position was that the Appellant was the owner of the business. He relied heavily upon the fact that Exhibit A-1, which was a Declaration for Partnership and Business Name for the Province of British Columbia showed the Appellant as the owner. “He was shown as proprietor, he had to have it.” The witness did not know whether he had one for his own business or not when he ran it before.

25 This document did show that the nature of business was “portable buildings”. Under Section C of the form, “PROPRIETORSHIP ONLY,” it listed Laurie M. Gee and it gave the address as 1-6744 Ayre Road, Sooke, B.C. But that is obviously not where the Appellant lived. This was the address of the business. It was signed by Laurie M. Gee. That was all the information that was contained in this document.

26 He admitted that during the years in question the Appellant was either working, in 1992 at least, in Vancouver and collecting Unemployment Insurance and looking for work. Mr. Blanchard said, “I imagine he was looking for work.” He did not know that he was on Unemployment Insurance during that year.

27 In 1993 there was a considerable amount of T4 income for the Appellant, $34,966.11. The address shown was the witness's address. A loss of $8,518.51 for Instant Shelters was claimed by the Appellant. There was also Unemployment Insurance benefits of $4,310. There was a refund of $5,566.38 and the witness confirmed that that amount would have been paid.

28 In 1994 there were considerable Unemployment Insurance benefits. There was also income from Joint Electrical Industries. The witness did not know what that was from. He agreed that there was a loss claimed of some $10,177.27 in that year. The Appellant received social assistance, $1,627 as far as the witness was concerned. In any event his position remained that the Appellant owned the Instant Shelter business. He would not agree that the Appellant, himself, was not involved.

29 He agreed that in 1995 the Appellant earned $32,470.63 from Electrical Installers. He claimed a loss of $9,401.62 from Instant Shelters. That was when the business closed down.

30 The witness said that in the early 1980's he worked for British Columbia Hydro and other companies. He said that he constructed steel towers and that he had experience in doing the type of business that was allegedly carried on by the Appellant. Mr. Gee had carpentry experience as well and had applied for and received a journeyman's carpentry licence.

31 The witness said that the Appellant had done many tasks which would have put him in a good position to be able to do the type of work that was involved in building and installing these instant shelters. He agreed that there was no formal business plan. There were different prices for the different units. Installation and travel costs were factored into the cost of the original structure depending upon where they were to be set up. They also factored in the cost of gas and the installation charge although there was confusion as to just how these calculations were done.

32 The witness said that they never installed any structures in Alberta or Prince George. There was a relationship with somebody who was at one time called a dealer in Prince George but the Court was unable to determine exactly what happened there.

33 Cindy Vandal has been an auditor for Revenue Canada for ten years and she worked with the department for 17 years. She did the audit in question. She dealt with Mr. Blanchard in his representative capacity under Power of Attorney for the Appellant. She was allowed to introduce a summary of a journal she prepared in 1992. This was Exhibit R-6. It was called a Summary of Income and Losses for the Laurie Gee business. This was introduced by consent. She said that she reviewed a box of records and journals that Mr. Blanchard had given to them.

34 She agreed that she did not review every receipt. They did not have to. They would do spot checks and that might be enough. In this particular case, as the Court has already said, she was not concerned that the amounts were not paid out. She satisfied herself that they were paid out and she moved on. She did not have to look at the other envelopes. She said that she reviewed three months to see whether or not the direct expenses of the taxpayer were covered by the income, whether the income exceeded the expenses or the expenses exceeded the income. She found that in the months that she checked, and she agreed that she did not check all the months, income never matched or exceeded the expenses.

35 In response to a question asked by Mr. Blanchard she said that she did not know whether there might have been months when the income exceeded expenses.

36 She found that during the three years in issue, there was always a loss. If indirect expenses were included in the summary, such as interest, GST and other indirect expenses, the losses would even have been greater.

37 She was allowed to refer to her notes of conversations which she had with Mr. Blanchard on July 18, 1995. She talked to him, she made some notes of what he said and she wrote down the summary afterwards. She was asked what he told her about who operated the business and her evidence was that Mr. Blanchard said that Mr. Gee did not and could not run it. Mr. Blanchard did and he had a Power of Attorney.

38 In a conversation of July 25, 1995 she made notes during the interview and she wrote them up afterwards. She was allowed to refer to them for the purpose of refreshing her memory. Her position was that Mr. Blanchard said that Laurie Gee was incapable for a few years of operating the business. He told her that “Laurie Gee lends a hand but he, (Mr. Blanchard) has been putting in his own money”. He said that I.S. Cables started 12 years ago. It had no major clients at that time. A new person was interested in taking over the business but did not want to pay anything for it. He did pay the rent on the shop.

39 Mr. Blanchard told her that the losses were there because Laurie Gee did not keep his contracts and there was also some indication that he had problems with drugs. Cash infusions were all made by Mr. Blanchard and not by the Appellant. With respect to travel costs, Mr. Blanchard purportedly told her that he picked up the materials. She said that he told her that they went to Alberta and to Prince George and did not claim all of the gas.

40 There was also a telephone conversation on July 27, of 1995. She made notes of it and she wrote up her notes afterwards. She was allowed to refer to the notes for purposes of refreshing her memory. He was asked who reported the losses before 1987 and he said that he did. He stopped in 1991. Between 1987 and 1991 he operated the two businesses.

41 He was asked how the Instant Shelters business started and he said that it was started as a “part-time hobby type of thing by himself.” With respect to travel and installation charges, he said that there were no charges unless it was far away.

42 She told Mr. Blanchard that she did not see any charges at all for travel and he agreed. He agreed that the cost of the items always exceeded the revenue and that is why he was getting rid of it, that was his position.

43 In cross-examination she did not recall some of the facts that Mr. Blanchard asked her about. He referred to Exhibit R-7 which was the Working Paper. She said that she prepared it and she told what sources she used. She received information from 1978 to 1986, she obtained the information from the historic print-outs in the database at the income tax department. From 1987 to 1989 she had print-outs from the current database, from 1989 to 1994 she actually looked at the returns.

44 She was referred to Exhibit R-7 which was a summary of all years of operation from 1978 to 1994. First of all, Mr. Blanchard claimed the deductions and after 1987 Mr. Gee claimed the deductions. The total losses claimed were $189,717.

45 She referred to Exhibit R-8 which was a summary of income and losses between 1987 and 1994. For Mr. Gee only, the losses were $61,808. Mr. Blanchard's losses were $127,000 plus or minus, between 1978 and 1987.

Argument of the Respondent

46 Counsel for the Respondent said that subsection 9(2) of the Income Tax Act (the Act), sets out the manner of determining losses. The basic rule is that it must be the loss of the taxpayer. One cannot claim the losses unless they belong to the taxpayer. One cannot transfer a loss over to somebody else, at least not under the circumstances that existed here.

47 In the case at bar the losses were transferred from one to the other. The Appellant was attempting to have Mr. Blanchard's losses transferred to him merely for the purpose of reducing his income. There was no “business motive involved.” It had the effect of substantially reducing the income of Mr. Gee over a period of years and resulted in a number of refunds.

48 This was not the business of the Appellant. If there was any amount which could have been claimed it should have been claimed by Mr. Blanchard. It was his business and any proper losses should have been claimed by Mr. Blanchard and not by the Appellant. This was an attempt to artificially reduce the income of the Appellant by transferring these losses to the Appellant from Mr. Blanchard when he was not actually involved in any business for which he could deduct expenses.

49 There was no reasonable expectation of profit. There was no evidence whatsoever of any involvement of Mr. Gee to any considerable extent in this business. He was living in Vancouver, he was on Unemployment Insurance, he was receiving social assistance, he was looking for work and he was working for other companies. There was confusion with respect to the addresses of the business. They were not his, even his own income tax return information was being sent to Mr. Blanchard.

50 The Appellant did not give evidence. There should be an adverse inference drawn against him. At best, Mr. Gee merely “lent a hand” to this business which was being operated by Mr. Blanchard who should have claimed the expenses if they could have been claimed at all. Mr. Gee collected T4 income as an electrician in Vancouver, he collected Unemployment Insurance, he could not have been involved in a business which would have entitled him to claim these deductions between 1978 and 1995.

51 With respect to the law, counsel for the Respondent relied heavily upon the case of Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.), which is the most recent decision of the Federal Court of Appeal with respect to reasonable expectation of profit. Many aspects of Tonn, supra, are applicable to this particular case. Counsel for the Respondent referred to Tonn, supra, at page 6009:

...As a common law formulation respecting the purposes of the Act, the Moldowan test is ideally suited to situations where a taxpayer is attempting to avoid tax liability by an inappropriate structuring of his or her affairs. One such situation is the attempted deduction of an expense incurred to gain a tax refund.

52 This is a stricter test than you might use if you find that there was no personal item involved in the business and it did not look like an attempt to claim personal expenses by camouflaging them as business expenses. Here, the purpose of the transaction was to attempt to transfer deductions from one person to the other, from Mr. Blanchard to the Appellant, because the Appellant had income. That was an artificial reduction of the income of one party and that is the very type of thing that the case of Tonn, supra, is aimed at.

53 There was an attempt to gain a tax advantage, there were suspicious circumstances. When that occurs, as here, you use a stricter test.

54 The Appellant and Mr. Blanchard worked in concert to avoid taxes. He referred to Tonn, supra, at page 6009, (referrable to Moldowan, supra):

...Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or nonbusiness motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.

55 Counsel for the Respondent said that this business was not operated prudently. There was no evidence of a business motive really. All the evidence showed that this business could not have made a profit. He referred to page 6010 of Tonn, supra, which was a reference to Maloney v. Minister of National Revenue (1989), 89 D.T.C. 314 (T.C.C.):

...The subjective, good faith, commercial hopes and dreams of an individual taxpayer do not confer upon his or her enterprise a reasonable expectation of profit if that enterprise does not meet the objective criteria of a prudent business in similar circumstances.

56 He referred to Landry v. R. (1994), 94 D.T.C. 6624 (Fed. C.A.), at 6625 :

There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream.

57 In this case, having regard to the exhibits, and the presumptions contained in the Reply, even if the Court were to find that the business was in operation during the whole period of time, the operators were given a reasonable start up period before the taxation years in question and there was no reasonable expectation of profit during the years in question.

58 Counsel for the Respondent referred to page 6012 of Tonn, supra, which again referred to Moldowan, supra, and his proposition was that you should not be just second-guessing a business man if there is not some reason for it. It was stated:

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.

59 Counsel argued that there was no plan, there was no capitalization by the Appellant. Any money that was put in was put in by Mr. Blanchard. There was no profit. From the profit and loss experience it could be seen that this business was not one from which one could really expect a profit.

60 The time that the taxpayer spent in the business was insufficient to guarantee or to even give a reasonable expectation of profit. There was no evidence introduced which would show that the factual situation of this enterprise was such that it was capable of showing that a profit could have been realized because of anything that Mr. Gee could have done. There was nothing to show that Mr. Gee could have turned this business around during the years in question when he was operating it.

61 The evidence is clear. It was Mr. Blanchard's business, it was not Mr. Gee's business. There was no reasonable expectation of profit and the appeal should be dismissed.

Argument of the Appellant

62 The Appellant for his part, through his agent under the Power of Attorney, said that he did not agree with the statements made by counsel for the Respondent. They did not manufacture until 1991, except for an odd one here and there. The business did not really start until 1991. He gave it over to Mr. Gee. Presumably he was arguing that there should have been a reasonable start up period during which Mr. Gee might be able to claim these deductions. The reasonable start up period would have been 1992, 1993 and 1994, which are the years in issue.

63 He said that he was helping out Mr. Gee. Mr. Gee had apparently been burned and was not in a physical condition to be able to run this business. But it was in his name. He relied heavily upon Exhibit A-1. It was hoped that with the assistance of Mr. Blanchard that the business would show a profit.

64 His position was that the appeal should be allowed. Mr. Blanchard said that he did not think that the information with respect to the earlier years is relevant in this particular case.

Analysis and Decision

65 As the Court has pointed out already the Appellant is not here, that makes the job of the Appellant much more difficult. It is the duty of the Appellant to satisfy the Court on a balance of probabilities that the Minister's assessment was incorrect. That is the burden that is on the Appellant. It does not shift at any point in time. The allegations contained in the Reply to a large extent remain unrebutted.

66 If this was not the business of the Appellant, then the Appellant cannot claim the deductions. On the facts of this case, there was no basis for transferring over the losses. The claim here was that this was a business being operated by the Appellant and that he should be entitled to claim the losses. The losses were reasonable and there was a reasonable expectation of profit.

67 An unfavourable inference has to be drawn against the Appellant for his absence without reasonable explanation. Where there is any conflict in the testimony, where there is a shortfall in testimony which might suggest that the Appellant had more input into this business than the evidence appeared to indicate, the Court will have to find unfavourably against the Appellant. The Court concludes that the Appellant did not have much input into the business.

68 When the question comes up as to when the business actually came into existence, the Court finds that the business was probably in existence for much longer than the years in question. If there was any start up period to which the business was entitled, then certainly that start up period would have past.

69 On the first issue the Court is satisfied that this business was not the business of the Appellant. The business was the business of Mr. Blanchard. There is no doubt that he was the moving force. He was the operating principal behind the business in spite of the fact that the Appellant's name appeared on Exhibit A-1 as being the proprietor. He might have been a proprietor in name but he certainly was not a proprietor in fact. He might have been the operator in name but he was not the operator in fact. He did not do anything with the business, he had no input into it.

70 The address that the Appellant had was not even the address of the business. He was not doing his own income tax returns. He was sending the information to Mr. Blanchard who sent them to Revenue Canada.

71 The only involvement of the Appellant was that his name appeared on Exhibit A-1 as the proprietor. Mr. Blanchard signed the contracts if there were any. Mr. Blanchard obtained the materials. Mr. Blanchard paid the bills. Mr. Blanchard sent the contracts out and he signed the lease. Mr. Blanchard contributed monies into the business when it needed monies. He put in the capital for it each year that the business lost money. When the income tax returns were completed and refunds came back, at least on one occasion, Mr. Blanchard even cashed the cheque and put the money back into the business.

72 This is all indicative of the fact that the business was really being operated by Mr. Blanchard and not by the Appellant himself. The Court accepts the arguments of Counsel for the Respondent, that there was not sufficient evidence of involvement of Mr. Gee to such an extent that he could have run the business. The most that he did was to lend a hand to the business and the principle reason for the business being set up the way it was, was so that the Appellant could claim business losses. There was certainly a substantial amount of artificiality to the whole thing.

73 On the first argument then, the Court does find that this business was not operated by the Appellant and therefore he would not be entitled to claim the expenses in any event. But if the Court should be wrong on that, then the Court does consider the reasonableness of the expenses and whether or not there was a reasonable expectation of profit.

74 The Court is satisfied that there was a personal element to this business. There were suspicious circumstances in the way this business was organized. The Court uses the more restrictive test and finds that the Appellant would have to introduce evidence to show that the objective test requirements that are set out in Moldowan, supra, had been met. The Appellant has not been able to do that in this particular case.

75 The expectation of profit here probably did amount to nothing more than “a pipe dream” by its operator.

76 This was not a real business in the sense that one could reasonably expect within a reasonable period of time that there would have been a profit. The Court is satisfied that the enterprise was certainly in existence for a considerable period of time. The argument that might normally be made about the start up period does not apply because this enterprise had a substantial amount of time to show that there was a reasonable expectation of profit before the years in issue.

77 The Court is satisfied that the Appellant has not introduced evidence which would satisfy the objective standards of Moldowan, supra. There was no business plan of any nature. There was no sufficient capitalization at all by the Appellant. Any capital that was infused was that of Mr. Blanchard. There was insufficient time spent by the Appellant to create a profit or have a reasonable expectation of profit.

78 The Court will have to dismiss the appeals and confirm the Minister's assessments.