Lamarre Proulx T.C.J.:
1 These are appeals from reassessments by the Minister of National Revenue (the “Minister”) for the 1992 and 1993 taxation years.
2 The point for determination is whether the appellant may deduct business losses of $9,930 for 1992 and $7,431 for 1993 in computing his income for those years.
3 The Minister excluded the said losses, allowing for those years only expenses equal in total to the gross income for each of those years. The gross income from professional fees for each of those years was $36,587.89 and $35,177.09. Corresponding expense amounts were thus allowed for each of those years.
4 Paragraph 32 of the Reply to the Notice of Appeal describes the facts on which the Minister relied in making his reassessments. The main facts are as follows:
[TRANSLATION](1) The appellant has been a lawyer since 1973.
(2) For the past 15 years, the appellant has been a full-time teacher of paralegal studies at the CEGEP Ahuntsic.
(3) In addition, he carries on the practice of law from his residence.
(4) Over the last few years, from 1989 to 1993, the appellant incurred losses in his law practice of $8,682, $12,987, $3,820, $9,930 and $7,431 respectively.
5 In addition to the losses described at 4 above, the evidence showed that the appellant has incurred business losses in a number of years since 1981: $5,827 in 1982, $1,254 in 1983, $823 in 1984 and $841 in 1986. Expenses were equal to income in 1981 and earnings were $1,421, $3,950 and $2,217 in 1985, 1987 and 1988 respectively. Expenses were equal to gross income, namely $27,810, in 1994 and 1995.
6 In his testimony, the appellant repeated the statement appearing in paragraph 4 of his Notice of Appeal that it was necessary to have a law practice when he was hired at the Collège Ahuntsic since the teaching was aimed at training paralegals, not lawyers. He nevertheless said that he did not believe he would be dismissed if he did not operate a law office.
7 The appellant argued that he had an expectation that his business would soon become profitable; he stated that his expenses no longer exceeded his gross income in 1994 and 1995, that is, since the reassessments in issue in these appeals.
8 The appellant also invoked the principles of administrative law and submitted that, by not informing him at the time of the initial assessment of the position he had taken, the Minister failed in his duty to inform the taxpayer in a timely fashion. He also contended that the reasonable expectation of profit rule on which the Minister based his assessment in the instant case is null and void and illegal because it is vague and allows the Minister's officials too much discretion.
9 The appellant referred to the decision of the Federal Court of Appeal in Tonn v. R. (1995), [1996] 2 F.C. 73 (Fed. C.A.), which in his view is to be taken as meaning that the reasonable expectation of profit test, which was accepted by the Supreme Court of Canada in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), at page 5215, should be applied in a limited fashion in his case.
10 My reading of Tonn is that it stands for the proposition that the reasonable expectation of profit test should be applied with moderation in cases where the individual's good business judgment in normal business circumstances is at issue, that is to say, in circumstances in which there is no evidence of a significant personal factor and in which the amount of expenses claimed is not at first glance disputable.
11 In these appeals, it is not the appellant's business judgment that is at issue, but rather the reasons for the expenses incurred—which were reasons of personal interest—and the amount of the expenses claimed year after year. A portion of the expenses claimed relates to the appellant's residence and automobile. In addition, the appellant explained that he accepted having a practice of uncertain profitability now because he wished to carry on his profession after he retired from teaching. There was therefore a personal element in the expenses claimed which allows the reasonable expectation of profit test to be applied. Tonn also states that, where a taxpayer readily accepts business losses because they can be deducted from income from another source, the reasonable expectation of profit test should also be applied.
12 Thus, the reasonable expectation of profit test may be applied here. Did the appellant's business, as managed during the years in issue, have a reasonable expectation of profit in light of the normal business characteristics of such a business? In other words, was it in the nature of a business? This was not proven.
13 From 1989 to 1993, the losses ranged from $7,431 to $12,987 and those expenses did not even include remuneration or advances for the appellant's services. It is therefore clear that this business, as operated, was not carried on in accordance with business principles. The Federal Court of Appeal in Landry v. R. (1994), 94 D.T.C. 6624 (Fr.)(Fed. C.A.), at page 6625, cited the following:
I see no reason why the reasonable expectation of profit test should not apply to my [sic] profession, liberal or otherwise, any occupation or activity which purports to be in the course of carrying on a business. As I see it, the reasonable expectation of a profit is a general rule applicable to any activity which may give rise to business income. The courts have in fact used this test in various types of factual situations.
14 As to the appellant's argument that the reasonable expectation of profit test is vague and his reference to Professor Patrice Garant's text on regulatory vagueness (March 14, 1996), I must say that this test is not a regulation and furthermore that all the decisions rendered on the subject constitute proof that the reasonable expectation of profit test is sufficiently clear to allow of interpretation.
15 In these business loss cases, the analysis is always a matter of determining whether the business is a genuine business enterprise constituted for the purpose of generating a profit while providing remuneration commensurate with the effort put into it. A taxpayer would not work in a business without remuneration and at great loss unless his own personal interest were the primary reason for continuing his efforts. The other reason would be that the business makes it possible to deduct from other income expenses that would not otherwise be deductible in computing that other income. In such cases, the business is not operated for the purpose of earning a profit.
16 With regard to the appellant's argument respecting the Minister's duty to inform the taxpayer, as was stated by counsel for the respondent, the tax system under the Act is a system of self-assessment in accordance with the Act. Furthermore, the Act provides for a normal reassessment period of three years. Every taxpayer knows that if the initial assessment is not in accordance with the Act, he may be reassessed during those three years. It is well-settled in the case law that just because the Minister has assessed in a certain way for a number of years that does not mean he is bound by that assessment method. The Minister is required to assess in accordance with the Act.
17 The appeals are dismissed without costs.
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