Atraghji v. R., [1998] 2 C.T.C. 2424

Lamarre T.C.J.:

1 These appeals, with respect to which the appellant elected the informal procedure, are against assessments of tax for the 1986, 1991, 1992 and 1993 taxation years made under the Income Tax Act (“Act”).

2 In computing his income for these years, the appellant claimed net business losses of $23,867 for 1986, $273,000 for 1991, $311,938 for 1992 and $303,917 for 1993. He also claimed non-capital losses from prior years of $133,067 for 1986, $243,000 for 1991, $261,938 for 1992 and $293,917 for 1993. All these losses were disallowed by the Minister of National Revenue (“Minister”) who, in arriving at his decision, relied on the following assumptions of fact:

Business Losses:

• (a) since the early eighties, the Appellant, a professional aerospace engineer, has been working on the development of a prototype called an ornithopter (the “Activity”);

• (b) an ornithopter is a human-powered flying machine aimed at the recreational aviation market;

• (c) the net business losses requested by the Appellant, as stated in paragraphs 3 and 6 above, pertained to the Activity;

• (d) upon the Minister's request to submit financial statements to support the said net business losses, the Appellant provided, on September 15, 1995, the information shown on the attached Schedule “A”;

• (e) no income was derived from the operation and none was anticipated for the near future;

• (f) the Appellant did not have a set plan of action to make the Activity profitable in the near future;

• (g) the Activity was undercapitalized;

• (h) the Appellant does not have the financial resources required to build the first prototype, nor is he in a position to take the necessary steps to obtain the financial resources required;

• (i) the project is not viable;

• (j) the Activity, as operated during the 1986, 1991, 1992 and 1993 taxation years, was not capable of yielding a profit;

• (k) the profit motivation is not the main reason for the Activity;

• (l) the Appellant did not have a reasonable expectation of profit from the Activity in the 1986, 1991, 1992 and 1993 taxation years;

• (m) all expenses reported for the 1991, 1992 and 1993 taxation years, as listed on the attached Schedule “A”, are for the Appellant's estimated personal time expended;

• (n) as for the balance of expenses that the Appellant tried to claim from the Activity, they represent the cumulative expenses allegedly incurred since the 1980's to develop the machine;

• (o) the expenses incurred for the Activity during the 1986, 1991, 1992 and 1993 taxation years were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant;

Non-Capital Losses from Prior Years:

• (p) the Minister has no record of any non-capital losses totalling $133,067 from prior years carried forward to the 1986 taxation year;

• (q) the non-capital losses from prior years applied against the 1991, 1992 and 1993 income do not exist; and

• (r) the Appellant cannot apply any non-capital losses from prior years against the 1986, 1991, 1992 and 1993 income.

  Schedule “A”

  Edward Atraghji

  Income Statement

  1986	1991	1992	1993
  GROSS INCOME	$0	$0	$0	$0
  EXPENSES:
  Consulting Fees (50 hrs, 100 hrs, 50 hrs)	$5,000	$10,000	$5,000
  Design and Construction (500 hrs, 1,000 hrs, 500 hrs)	15,000	30,000	15,000
  Testing (200 hrs each year	10,000	10,000	10,000
  Office Expenses	$9,227
  Patent	1,301
  Workshop	2,500
  Mobile Test Rig	3,000
  Entertainment	250
  Professional Dues	286
  O.H.I.P.	720
  Financial Services	80
  TOTAL EXPENSES	$17,364	$30,000	$50,000	$30,000
  NET BUSINESS LOSS	($17,364)	($30,000)	($50,000)	($30,000)

3 The appellant, who was the only one to testify at the hearing, admitted paragraphs (a), (c), (d), (n) and (p). While he denied the other allegations of fact, he did not present any convincing evidence demonstrating that the Minister was wrong in his assumptions of fact.

4 Counsel for the respondent argued that the losses claimed by the appellant were not deductible against his other income, as the appellant did not show that he was operating a business during the taxation years at issue. Indeed, the appellant, who had started his project in the 70s, was still at the development stage. He is still looking for investors and does not have any product to market or to advertise.

5 As was said by Décary J.A. in the decision of the Federal Court of Appeal in Landry v. R. (1994), 94 D.T.C. 6624 (Fr.)(Fed. C.A.) at 6625:

It is possible for someone, with the best will in the world, to practise an activity that takes all his or her time and that activity may still not be a business for the purposes of the Income Tax Act (“the Act”). For the purposes of determining whether there is a source of income, only an activity that is profitable or that is carried on with a reasonable expectation of profit is a business.

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.

6 Applying the tests stated by Décary J.A. in Landry, supra, I find that the appellant has not shown on a balance of probabilities that he had any expectation of profit in the years in issue. In particular, the necessary ingredients for profits ultimately to be earned were not present: the appellant never derived any income from his activity (which he has carried on for more than 17 years now), and there was no planning done.

7 Moreover, as stated by Décary J.A., the taxpayer's good faith and the time and energy devoted to the undertaking are not in themselves sufficient to turn the activity carried on into a business.

8 I therefore conclude that the appellant is not entitled to deduct any of the business losses claimed for the taxation years in issue pursuant to paragraph 18(1)(a) of the Act, nor is he entitled to deduct any non-capital loss from prior years under paragraph 111(1)(a) of the Act.

9 The appeals are dismissed.