Date: 19990728
Docket: 98-410-IT-I
BETWEEN:
GUY CAVANAGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Somers, D.J.T.C.C.
[1] This appeal was heard at New Carlisle, Quebec, on May 25 and 26, 1999 under the informal procedure. It is an appeal from income tax assessments for the 1993, 1994 and 1995 taxation years.
[2] By notices of reassessment dated December 23, 1996 for the appellant's 1993, 1994 and 1995 taxation years, the Minister of National Revenue (the "Minister") added the following amounts to the appellant's income:
[TRANSLATION]
1993 1994 1995
Professional fees $6,632 $2,699
Disallowed farm losses $2,768 $3,745 $2,840
Disallowed expenses
home office $2,921 $4,229 $3,978
advertising $ 514 $ 520 $2,047
meals $4,236
automobile $4,506 $4,075 $8,209
c.c.a. automobile $2,158 $1,440 $1,353
[3] The point for determination is whether the income amounts of $6,632 and $2,699 for the 1993 and 1994 taxation years were included in the appellant's income for those years.
[4] Following a discussion between the parties at the hearing of this appeal, counsel for the respondent admitted that the amounts of $6,632 and $2,699 should not be added for the 1993 and 1994 taxation years respectively.
[5] The Minister disallowed the amounts of $2,768, $3,745 and $2,840 for the 1993, 1994 and 1995 taxation years respectively.
[6] The appellant, a lawyer by profession, has a law office in New Richmond, Quebec, approximately one and a half kilometers from his residence. In addition to his law practice, he also owns two businesses (logging and farming). The place of business of these two concerns is located in the appellant's home, where he says an office has been fitted up to run them.
[7] The appellant decided to venture into grape growing with a view to selling wine for profit, and to that end, in 1993, he prepared the land on which his residence is located. In 1994 and 1995, he planted 600 vines on .5 of the 17 hectares of land around his house. The appellant testified that he could produce 600 bottles of wine a year and that he intended eventually to expand the wine-making operation.
[8] In his notice of appeal, the appellant stated that he operated a vineyard of approximately 600 vines consisting of eight different grape varieties. He said that this is an experimental phase of the operation, the purpose being to determine in the near future which grape varieties can grow and be productive on the Gaspé Peninsula.
[9] The appellant said that he had sought information from viticultural experts before embarking on this venture and had obtained documentation and attended meetings so that he would be well informed when starting up the business.
[10] A plan, filed as Exhibit A-5, taken from a book written by Jean Richard entitled Fruits et petits fruits shows that this part of the Gaspé Peninsula (which is included in section 4b), where the appellant's vineyard is located, is suitable for growing grapes. Other regions of the province of Quebec known for viticulture, including the Sherbrooke area, are also shown in section 4b of that plan.
[11] Other material appearing in the newsletters of the Association des vignerons, on which the appellant drew, provides statistics, including a list of the investments made in 1994, 1995 and 1996, an assessment of grape growing in Quebec at vineyards that were producing in 1994, and the economic contribution of vineyards.
[12] It would appear from his testimony that the appellant wishes eventually to expand the vineyard to 10,000 vines. He hopes to have a sales potential of 600 bottles a year. In the questionnaire signed by him, the appellant admitted that there would be no profits before 1998 and that the years from 1993 to 1998 were an experimental phase. He also admitted that he had not taken any courses in viticulture, although he had spoken to people, attended meetings and drawn on the literature dealing with this field of economic activity.
[13] The work done thus far has been done by him, his wife, his children and friends. In 1998, he produced 100 bottles and hopes to sell to friends and restaurant owners within three years. However, he could not give us the names of persons who would be prepared to purchase wine from him. He has made no effort to approach the Société des alcools du Québec or other retailers to determine their interest in buying his wine. No expert in this field of economic activity testified to explain the viability of this kind of business.
[14] No business plan, market study or budget forecasts were filed in evidence. The appellant answered that he had his entire business plan in his head.
[15] The Revenue Canada auditor went to the site in 1996 and observed that vines were planted over an area of approximately 150' x 700'. He was able to see grape vines. No financing or business plan was submitted to the auditor. During this visit, the appellant apparently told the auditor that the business plan was in his head, and he repeated the same words at the hearing of this appeal. He also told the auditor that the business was in an experimental phase and that he did not want to be too big at first.
[16] The appellant is claiming restricted farm losses. To do so, he must prove that he had a reasonable expectation of profit. In support of his application, the appellant relies on Her Majesty the Queen v. Andrew Donnelly, Federal Court of Canada, A-604-93, a decision rendered on October 15, 1997. At pages 1 and 2 of this judgment, Robertson J.A. writes as follows in reference to Moldowan v. The Queen, [1978] 1 S.C.R. 480, 77 DTC 5213:
. . . the taxpayer must satisfy two tests in order to succeed. First, he must establish that the farming operation gave rise to a "reasonable expectation of profit" and, second, that his "chief source of income" is farming (the so-called "full-time" farmer). If the taxpayer is unable to satisfy the first test no losses are deductible (the so-called "hobby" farmer). If he satisfies the first test but not the second then a restricted farm loss of $5,000 (now $8,500) is imposed under section 31 of the Income Tax Act . . .
[17] In Moldowan, supra, Dickson J. states at page 485:
If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.
[18] Moreover, Robertson J.A. writes in Donnelly, supra:
If the taxpayer is unable to satisfy the first test no losses are deductible . . . .
[19] In order to claim losses, the appellant had to meet the first test before the second test could be considered, regardless of whether the activity in question was his primary source of income or not.
[20] Was there a reasonable expectation of profit? The appellant commenced his operations in 1993, when he prepared his land for grape growing. The appellant repeated a number of times—in conversations, in his Notice of Appeal and in his replies to a questionnaire—that his business was in an experimental phase. The appellant is not an expert in this field of economic activity. His knowledge is limited to what he was able to garner from attending meetings of Quebec grape growers and reading literature on the subject. No business or financing plan was prepared; he said he had all that in his head. He did not determine whether there was a market for his wine on the Gaspé Peninsula. No restaurant owner or even the Société des alcools du Québec was approached. The appellant said he was limiting himself at first to selling wine to his family and friends.
[21] Grapevines are a very fragile crop, sensitive to the vagaries of the weather. In Moldowan, supra, Dickson J. writes as follows at pages 485 and 486:
In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.
[22] In light of these remarks by Dickson J., the evidence did not show that the farming business had a reasonable expectation of profit. As the appellant was unable to satisfy the first test, he may not claim a restricted farm loss. The Minister correctly disallowed the farm losses for 1993, 1994 and 1995.
[23] The Minister disallowed the home office expenses claimed. The appellant claimed expenses of $2,921, $4,229 and $3,978 for the 1993, 1994 and 1995 taxation years respectively.
[24] The appellant testified that he had a home office for his logging and farming businesses. The auditor saw in the basement of the appellant's residence an office which you had to enter by a back door to reach.
[25] To claim home office expenses for his farming business, the appellant had to show that there was a reasonable expectation of profit and the Court has already determined that there was no such expectation.
[26] As for his logging business, the evidence does not conclusively establish that the appellant used this home office for the purposes of his business. There are few entries in his records. He met with a logger once a month. The appellant has no business card or letterhead, agenda or advertising associated with this business. The appellant has his law office one and a half kilometers from his home. If he meets with a logger during the day, it is more practical to see him at his law office.
[27] For the above reasons, the Minister correctly disallowed the home office expenses of $2,921, $4,229 and $3,978 for the 1993, 1994 and 1995 taxation years respectively.
[28] The amounts of $514, $520 and $2,047 claimed as advertising expenses were disallowed. The boat charter expense cannot be allowed as a valid expense. This expense was not related to his office; the cheque issued to Jean-Marc Bertrand was not related to any invoice. The appellant's explanations justifying these expenses were quite vague.
[29] For 1995, the appellant claimed an amount of $1,826 as an expense for a brochure prepared and distributed during his election campaign for the mayoralty of New Richmond. The brochure merely states that the appellant practises law in New Richmond. The rest of the brochure is a statement of his program if he were to be elected mayor. This advertising was not related to his law office, but to his mayoral election campaign. The Minister correctly disallowed this expense.
[30] The evidence is vague as to the advertising expenses. The appellant did not discharge his burden of proof.
[31] The Minister correctly disallowed the amounts of $514 for 1993, $520 for 1994 and $2,047 for 1995.
[32] The parties agreed that the amount of $4,236 for meal expenses would be reduced to $2,236 for the 1995 taxation year.
[33] The appellant claimed 100% of automobile expenses whereas the Minister allowed 15%. The appellant explained that he is entitled to 100% of operating expenses for his Explorer, which he uses exclusively for his two businesses and his law practice.
[34] The appellant's law practice covers all jurisdictions: criminal, civil, Youth Court and administrative tribunals. He must often travel to the courthouse in New Carlisle, 50 kilometers from New Richmond. He said he also has to travel to the courthouses in Amqui, Percé, Gaspé and Rimouski, in addition to making trips to Québec and Montréal. However, the appellant did not file sufficient evidence to justify the claim for 100% of automobile expenses. He did file in evidence a statement of automobile expenses for each of the taxation years 1993, 1994 and 1995. He did not, however, produce all the supporting documentation; no log was filed to prove the trips to New Carlisle, Percé, Gaspé, Amqui, Rimouski, Québec or Montréal; and there was no evidence as to the frequency of those trips.
[35] The appellant filed as Exhibit A-21 the amounts allowed by the Quebec Department of Revenue in respect of automobile expenses for the 1984 taxation year. The Department of National Revenue is not, however, bound by the Quebec Department of Revenue's decision. Moreover, no explanation was provided in support of that decision.
[36] Section 230 of the Income Tax Act lays down certain requirements for taxpayers, such as keeping records and books of account in order to be able to claim expenses for business purposes.
[37] In Adélard Racine v. The Minister of National Revenue (87-2119(IT)I), P.R. Dussault, J.T.C.C. wrote as follows in his decision of October 24, 1990, at page 4:
It is clearly not deductions that are at issue here, but rather income tax payable. This is an obligation for small and large taxpayers alike to the extent, as stated above, that they operate a business. It is not up to the Department to do this, that is to say to keep books and records for the taxpayer. It is the taxpayer's responsibility to keep adequate books and records. In addition, specific records must on occasion be kept in respect of such things as the use of an automobile (based on the number of kilometers travelled) in order to establish the percentage of use for personal and business purposes. It is not up to the Department to find this information since the Act establishes an initial obligation for the taxpayer to do so. If the taxpayer does not meet this responsibility, the Department assesses on the basis of the information it obtains, sometimes with certain difficulties, information which it deems reasonable. Once the assessment has been made, the taxpayer must demonstrate that it is incorrect. In this case, I have no evidence that the expenses incurred for the purpose of gaining income are greater than those that were allowed. I even find some evidence suggesting that the total deductible amount should be reduced. However, I have no power to render a decision that would increase the amount of income tax previously assessed. I therefore can only dismiss the appeal.
[38] In Gary C. Graves and Mary J. Graves v. Her Majesty the Queen, 90 DTC 6300, a decision dated March 31, 1990, MacKay J. of the Federal Court writes as follows:
It is unfortunate that Mr. Graves, a chartered accountant by profession, did not keep a careful record of the mileage travelled for business purposes. None of the mileage logs submitted at trial present an accurate accounting of the distances travelled for business purposes. Both logs were described as "estimates" by Mr. Graves. Mr. Graves was unsure as to which log was more accurate. Indeed, even the figure representing the total mileage travelled for 1979, upon which the plaintiff calculated the percentage of business use, was an estimation.
There may be special circumstances where the exact mileage of certain trips was not recorded or where mileage logs have been lost or destroyed and resort must be to estimates of distance travelled or to other secondary sources to determine distances travelled. However, that is not the case here. In my view, a taxpayer cannot simply estimate distances travelled in the hope that this will suffice as an adequate accounting of mileage actually completed in the course of business for which expenses are claimed as a business expense.
[39] Expenses may be considered deductible if they are incurred in order to earn income. Such expenses must not be of a personal nature. The appellant informed the Court that he had two vehicles, one for his family and the other, the Explorer, used exclusively for the businesses and the legal practice.
[40] The appellant stated that he went home for lunch quite regularly. The regular trip of approximately one and a half kilometers from his home to his law office was for personal purposes, not to generate income. This example alone proves that a vehicle cannot be used exclusively for a business or for the practice of law. The few supporting documents filed do not relate the expenses to either of the vehicles.
[41] The Act requires that a record be kept of expenses incurred to earn income and no record was filed in this case. There is no evidence as to the number of kilometers travelled and no log was filed to prove the frequency of the trips to the various courthouses in the Gaspé region.
[42] The appellant claimed deductions for 100% of automobile expenses, whereas the Minister granted 15%. The respondent admitted that 15% was not generous and that this percentage was negotiable, but the appellant was unable to prove on the basis of vouchers or other documentation that the percentage he claimed should be allowed. The Court cannot arbitrarily set a percentage without sufficient supporting evidence.
[43] In light of section 230 of the Income Tax Act and the cases cited, the Minister correctly established the business portion of the automobile expenses at 15%.
[44] For the reasons given, the meal expenses are reduced from $4,236 to $2,236 for the 1995 taxation year.
[45] The appellant, a lawyer by profession, is seeking costs. In appeals under the informal procedure, the awarding of costs is left to the judge's discretion. According to well-settled case law and as a general rule, costs are not awarded in informal proceedings. Furthermore, according to the case law, costs are not awarded where the appellant represents himself. In the circumstances, costs are denied.
[46] The appeal is allowed, without costs, on the basis that, under the agreement entered into by the parties at the hearing, the amounts of $6,632 and $2,699 for the 1993 and 1994 taxation years respectively are not income.
Signed at Ottawa, Canada, this 28th day of July 1999.
"J.F. Somers"
D.J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 31st day of May 2000.
Erich Klein, Revisor