Date: 20020514
Docket: 2001-4502-IT-I
BETWEEN:
THOMAS BODANIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the 1997, 1998 and 1999 taxation years. The issue is whether the appellant, a professional musician, can deduct losses incurred in carrying on a business as a musician and composer. The losses claimed were denied on the basis that the expenses were personal or living expenses, were not laid out for the purpose of gaining or producing income from a business or property and the business did not have a reasonable expectation of profit ("REOP").
[2] Mr. Bodanis was employed as a Customs Appraiser and Inspector for Revenue Canada until his retirement in 1986. In 1986 he registered his business as an entertainer. He has spent two and one half years at The Juilliard School of music in New York. He had a band, The Bodanis Group, and played at numerous functions in the Toronto area. He belongs to the Toronto Musicians' Association, which is a local of the American Federation of Musicians. He is a member of the Society of Composers, Authors and Music Publishers of Canada (SOCAN). He has produced tapes of music and is at present working on a compact disc of Macedonian music. He has an extensive recording studio in his basement. He has since 1987 actively promoted his band by the distribution of brochures and other forms of advertisement.
[3] His entire life since his retirement has been devoted to music. It is a full-time occupation for him. If this activity is to be described as a business I think it is important that we be clear on just what that business comprises. In Mr. Bodanis' case it has several aspects. He is a musician (saxophone, clarinet and piano), an arranger, a composer and a band leader.
[4] Mr. Bodanis and his band were somewhat more active in the early 1990s than today. Nonetheless, he has not been notably successful. Paragraph 7(c) of the assumptions in the reply sets out his income, expenses and losses from 1987 to 1999.
(c) the Appellant has claimed losses for the Business since 1987 and reported income, expenses and profits/(losses) for the 1987 to 1999 taxation years as follows:
Year Revenue Expenses Loss
1987 $ 4,496.00 $14,470.00 ($ 9,974.00)
1988 $ 3,324.00 $15,317.00 ($11,993.00)
1989 $ 3,832.00 $17,195.00 ($13,363.00)
1990 $ 4,015.00 $18,192.00 ($14,897.00)
1991 $ 1,865.00 $13,974.00 ($12,109.00)
1992 $ 2,730.00 $15,719.00 ($12,989.00)
1993 $ 2,272.00 $15,195.00 ($12,923.00)
1994 $ 2,770.00 $15,279.00 ($12,509.00)
1995 $ 3,395.00 $16,546.00 ($13,151.00)
1996 $ 2,670.00 $13,775.00 ($11,105.00)
1997 $ 1,890.00 $15,503.13 ($13,163.13)
1998 $ 2,850.00 $15,132.82 ($12,182.82)
1999 $ 1,755.00 $13,923.59 ($12,168.59)
[5] The losses were allowed up to 1996 but they were disallowed in 1997, 1998 and 1999. In those years the respondent points out that the appellant had only five engagements per year.
[6] It is important to observe at the outset that the carrying on of a business as a musician, performer, arranger and composer is not restricted to only those persons who do so successfully. There are many people in the arts and entertainment field who are not successful, or who require many years before their work becomes known and recognized. A good example of this is Leblanc c. Canada, [2002] A.C.I. no 70, where a composer and musician with a series of losses was denied those losses. In allowing his appeal I quoted the decision of this court in Donyina v. R., [2001] 3 C.T.C. 2741, in which I summarized my understanding of the law relating to REOP. It is to be hoped that the Supreme Court of Canada will in its decisions in Walls and Stewart cast some light on this murky area.
[7] In Donyina the following was said:
[8] The REOP principle has been evolving. For a period of time after the Moldowan case assessors were zealously disallowing losses, that with the benefit of hindsight, they thought resulted from an activity with no REOP. Their fervour has been tempered substantially by such cases as Tonn et al. v. The Queen, 96 DTC 6001; A.G. of Canada v. Mastri et al., 97 DTC 5420; Mohammad v. The Queen, 97 DTC 5503; Kuhlmann et al. v. The Queen, 98 DTC 6652; Walls v. The Queen, 2000 DTC 6025 (under appeal to S.C.C.); Milewski v. The Queen, 99 DTC 968 (aff'd 2000 DTC 6559, F.C.A.); Kaye v. The Queen, 98 DTC 1659; Costello v. The Queen, 98 DTC 1362; Smith v. The Queen, 96 DTC 1886; Saunders v. R., [1998] 2 C.T.C. 3196, and Roopchan v. The Queen, 96 DTC 1338, as well as some earlier decisions of this court: Bélec v. The Queen, 95 DTC 121; Nichol v. The Queen, 93 DTC 1216, and N. Cipollone v. Canada, [1995] 1 C.T.C. 2598. The most recent pronouncement on this point is Keeping v. The Queen, 2001 F.C.A. 182.
[9] I shall not quote from these cases or analyse them at length. It is, I think, sufficient to summarize some of the principles that they appear to establish.
1. Where there is no personal element the REOP test should be applied sparingly (Tonn, Keeping, Bélec and Walls). The absence of a personal element does not establish conclusively that the REOP principle cannot be invoked but such an absence is a factor that carries a great deal of weight (Mastri).
2. The Minister or the court should not, with the benefit of hindsight, second-guess the business acumen of a taxpayer who embarks upon a business venture in good faith (Keeping, Tonn, Nichol, Kuhlmann, Bélec and Smith).
3. The fact that a business or property is 100% financed is not in itself a reason for applying the REOP principle (Milewski, Mohammad and Saunders).
4. A taxpayer should be allowed a reasonable period of time to get the business established (Keeping). Such a period will vary with the circumstances and may well be lengthy (Milewski).
5. The REOP principle should not be invoked as a substitute for analysis. Before invoking REOP the assessor should examine the expenses to determine whether they are reasonable or for any other reason not deductible (Smith, Costello and Cipollone).
6. For an expectation of profit to be reasonable it has to be not "irrational, absurd and ridiculous" (Kuhlmann).
7. The fact that an investment or a business is motivated in part by tax considerations is not relevant in determining whether there is a business, nor is tax motivation in itself relevant in determining the deductibility of expenses if a business exists (Stubart Investments Limited v. The Queen, 84 DTC 6305) unless of course the Minister chooses to invoke the general anti-avoidance rule in section 245, in which case we are into a fundamentally different ball-game.
8. The initial question where losses are claimed and denied is whether they are personal or living expenses, the statutory definition of which includes the REOP test. If they are not, the REOP test must be applied with extreme care and the question becomes "Is there a business?" The existence of REOP is only one factor in that determination (Kaye).
9. Reasonableness operates both in the context of the existence of a business, where section 67 disallows the deduction of expenses to the extent that they are unreasonable, and also at the liminal stage of determining whether there is a business (Kaye).
10. If what is ostensibly a rental property was acquired and held in the course of an adventure in the nature of trade and it was reasonable to expect a profit on the resale the losses (i.e. carrying costs net of rentals received) should not be disallowed on the basis of REOP (Roopchan). The court should however examine with some care an ex post facto declaration that property that was carried for some years at a loss is part of a speculative venture in which the motive was resale at a profit. This is not something that one would expect someone readily to admit if the property were sold at a profit.
11. If the taxpayer has several rental properties, some yielding a profit and some a loss, it is improper to apply REOP to the losing properties and ignore the profitable ones. The entire investment picture should be considered (Smith).
12. When to start a business and when to abandon it are business decisions in which neither the taxing authorities nor the court should intervene (Nichol). Nonetheless if losses go on being incurred year after year for an inordinate length of time sooner or later one has to apply what I shall call the "Enough is enough" principle and decide that what might have been a viable business has, with the effluxion of time, became hopeless and the best thing to do with it is to give it a decent burial. Nonetheless, a businessman's judgement to maintain a business must be treated with great respect.
[8] In Kaye v. The Queen, 98 DTC 1659 at page 1660, the following observation was made about the use of the phrase "reasonable expectation of profit":
[4] I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis "Is there or is there not truly a business?" This is a broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.
[5] One cannot view the reasonableness of the expectation of profit in isolation. One must ask "Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say 'yes, this is a business'?" In answering this question the hypothetical reasonable person would look at such things as capitalization, knowledge of the participant and time spent. He or she would also consider whether the person claiming to be in business has gone about it in an orderly, businesslike way and in the way that a business person would normally be expected to do.
[6] This leads to a further consideration — that of reasonableness. The reasonableness of expenditures is dealt with specifically in section 67 of the Income Tax Act, but it does not exist in a watertight compartment. Section 67 operates within the context of a business and assumes the existence of a business. It is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000.
[7] Ultimately, it boils down to a common sense appreciation of all of the factors, in which each is assigned its appropriate weight in the overall context. One must of course not discount entrepreneurial vision and imagination, but they are hard to evaluate at the outset. Simply put, if you want to be treated as carrying on a business, you should act like a businessman.
[9] In Tramble v. R., [2001] 4 C.T.C. 2160, I dealt with an artist whose losses were denied. In allowing her appeal I quoted the last paragraph set out above from Donyina and said:
[6] The statement is probably true enough, as far as it goes, as a practical guideline - certainly I did not intend it to be a principle of law - but it has to be applied with some care and there must be taken into account the nature of the business with which one is dealing. Artistic endeavour is something that may require a lifetime before the artist is recognized. We can all think of artists and composers who died penniless only to have their work recognized by later generations long after their death.
[10] In that case, at pages 2162-2164, I quoted at length from Interpretation Bulletin IT-504R2. The observations are equally applicable to composers.
4. ...
The nature of art and literature is such that a considerable period of time may pass before an artist or writer becomes established and profitable. Although the existence of a reasonable expectation of profit is relevant in determining the deductibility of losses, in the case of artists and writers it is recognized that a longer period of time may be required in establishing that such reasonable expectation does exist.
5. Factors which will be considered by the Department in determining whether or not an artist or writer has a reasonable expectation of profit include:
(a) the amount of time devoted to artistic or literary endeavours,
(b) the extent to which an artist or writer has presented his or her own works in public and private settings including, but not limited to, exhibiting, publishing and reading as is appropriate to the nature of the work,
(c) the extent to which an artist is represented by an art dealer or agent and the extent to which a writer is represented by a publisher or agent,
(d) the amount of time devoted to, and type of activity normally pursued in, promoting and marketing the artist's or writer's own works,
(e) the amount of revenue received that is relevant to the artist's or writer's own works including, but not limited to, revenue from sales, commissions, royalties, fees, grants and awards which may reasonably be included in business income,
(f) the historical record, spanning a significant number of years, of annual profits or losses relevant to the artist's or writer's exploitation of his or her own works,
(g) a variation, over a period of time, in the value or popularity of the individual's artistic or literary works,
(h) the type of expenditures claimed and their relevance to the endeavours (e.g., in the case of a writer there would be a positive indication of business activity if a substantial portion of the expenditures were incurred for research),
(i) the artist's or writer's qualifications as an artist or writer, respectively, as evidenced by education and also by public and peer recognition received in the form of honours, awards, prizes and/or critical appraisal,
(j) membership in any professional association of artists or writers whose membership or categories of membership are limited under standards established by that association,
(k) the significance of the amount of gross revenue derived by an artist or writer from the exploitation of that individual's own works and the growth of such gross revenue over time. In applying this factor, external influences such as economic conditions, changes in the public mood, etc., which may affect the sale of artistic or literary works will be taken into consideration, and
(l) the nature of the literary works undertaken by a writer. It is considered that a literary work such as a novel, poem, short story or any non-fictional prose composition that is written for general sale or syndicated distribution would normally have a greater profit potential than a work undertaken for restricted distribution.
6. No particular factor described in 5 above is more important than another and no one factor determines whether or not an activity is a business carried on for profit or with a reasonable expectation of profit. All relevant criteria are considered together in making a determination and the taxpayer's failure to meet any one particular factor will not in itself preclude the taxpayer's artistic or literary activities from qualifying as a business.
7. In the case of an artist or writer, it is possible that a taxpayer may not realize a profit during his or her lifetime but still have a reasonable expectation of profit. However, in order to have this "reasonable expectation of profit" the artistic or literary endeavours, as the case may be, of the artist or writer must be carried on in a manner such that, based on the criteria in 5 above, they may be considered for income tax purposes to be the carrying on of a business rather than, for example, a hobby.
[8] Whoever wrote the above demonstrated considerable sensitivity to the nature of artistic endeavour and a recognition of the validity of the aphorism ars longa vita brevis. Although interpretation bulletins are not the law and do not bind the court this one makes sense and substantially she meets the criteria in it.
[11] The question boils down to this: is Mr. Bodanis' activity a business or a hobby? It is certainly something that he pursues passionately, but this does not detract from its being a business. Artistic endeavour is by its very nature passionate. (See also Jacks v. Canada, [2000] T.C.J. No. 830, a decision of Campbell J. of this court. Cf. Jandrisits v. Canada, [1998] T.C.J. No. 80.)
[12] The Crown's case seems to be premised on a view that although Mr. Bodanis may have been carrying on a business in the earlier years, by 1997 it had ceased to be a business. I do not think the evidence justifies this conclusion. He kept careful records and I accept that the amounts spent have been established as having been spent in connection with the business. There is no suggestion that the amounts are unreasonable.
[13] The respondent submitted schedules of expenses that were disallowed. I am not prepared to accept that just because Mr. Bodanis did not give me boxes of receipts he should be denied the expenses claimed. His records are quite adequate to establish the expenditures.
[14] Each of the myriad of REOP cases that have been heard in this court turns on its own facts. In this case there is nothing "irrational, absurd or ridiculous" in Mr. Bodanis' expectation that he will make a profit. It is not for this court or the Minister to second guess Mr. Bodanis' business judgment or to tell him that he should give up the endeavour. If I apply the guidelines set out in Donyina it is clear that he falls well on the side of carrying on a business. Cases involving musicians are particularly difficult for a couple of reasons. For one thing there is always the possibility that there is a personal element by the very nature of artistic endeavour. This, as has been observed above, is not fatal. The fact that one derives enjoyment from one's work does not detract from the work being a business. Nonetheless the possibility that the activity is predominantly a personal hobby is something of which one must be aware and it adds to the difficulties in deciding this type of case. Second, the music business is, as I mentioned in Leblanc, going through a difficult time in Canada. For every performer, musician and composer who makes vast amounts of money there are many who can barely make a living or who must look to other forms of work to sustain their musical endeavours. I think this court should be very careful about dismissing appeals of musicians who are down on their luck or suffering from the current problems in the music industry.
[15] I think that Mr. Bodanis was carrying on a business in 1997, 1998 and 1999 and the losses are deductible.
[16] The appeals are allowed and the assessments are referred back to the Minister of National Revenue to allow the losses claimed from the music business.
[17] The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 14th day of May 2002.
"D.G.H. Bowman"
A.C.J.
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COURT FILE NO.: |
2001-4502(IT)I |
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STYLE OF CAUSE: |
Between Thomas Bodanis and Her Majesty The Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
April 22, 2002 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman Associate Chief Judge |
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DATE OF JUDGMENT: |
May 14, 2002 |
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APPEARANCES: |
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Counsel for the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Brianna Caryll |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
-- |
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Firm: |
-- |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |
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2001-4502(IT)I
BETWEEN:
THOMAS BODANIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 22, 2002, at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Brianna Caryll
JUDGMENT
It is ordered that the appeals from assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years be allowed and the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment to allow the losses claimed from the music business.
The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 14th day of May 2002.
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"D.G.H. Bowman" |
A.C.J.