Date: 20020321
Docket: 1999-1542-IT-G
BETWEEN:
DANE WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
(requested by the Appellant February 27, 2002)
(Edited from the transcript of Reasons delivered orally from the Bench at Winnipeg, Manitoba on September 5, 2001)
Hershfield, J.T.C.C.
[1] This is an appeal from a reassessment of the Appellant's 1994, 1995 and 1996 taxation years, during which the Appellant operated a grass cutting and other yard services business under the name of Lakeside Lawn Care.
[2] The appeal is allowed with costs.
[3] I will give brief findings of fact and brief reasons, and I will elaborate more fully if required by a request for these reasons in writing.
[4] The Appellant commenced the business activity in 1989 when he and a neighbour rented a power rake and offered services to other neighbours. He found that the earnings from such services were sufficient to at least cover the rental costs of the power rake and he determined that there might well be a business opportunity in the area of lawn care service and yard care service.
[5] He was a police officer at the time, employed on a full time basis in Winnipeg. He worked for four days on and had four to five days off. That cycle apparently repeated itself through the years in question. This allowed him considerable time to engage in the yard care business and I accept his testimony that he spent 40 to 50 hours per week at that business.
[6] Also he testified that he was able, at least in some years, to take holidays in May, which period was the most rewarding financially. It was the time at which power raking was undertaken.
[7] By 1994, the first of the three subject years, he had in his employ four employees and had invested considerable capital in equipment. At that time he had one lawn tractor, four mowers, three trimmers, a chemical tank, three leased trucks, three power rakes, three lawn vacuums, two leaf blowers and various spreaders and edgers.
[8] He was enjoying a number of lawn service contracts and gross revenues in the subject years 1994 through 1996 were some $39,000.00, $40,000.00 and $41,000.00 respectively.
[9] Those revenues had more than doubled and redoubled since 1990, when gross earnings were some $8,000.00.
[10] Notwithstanding that growth in gross revenues, the Appellant continued throughout the period to report losses. In fact, those losses grew from some $11,000.00 in 1990 to some $27,000.00 in 1994, $24,000.00 in 1995 and almost $32,000.00 in 1996.
[11] In addition to the subject years, evidence was provided as to what happened in subsequent years. By 1997 based on input from a new accountant whose business input was sought by the Appellant, the Appellant had cut down employment of his employees and was performing most of the services himself. He still managed to generate almost $30,000.00 of gross income. The business still lost some $5,000.00 and that was before capital cost allowance, which he had claimed in prior years, but did not claim in 1997.
[12] By 1998, he had basically trimmed down his accounts to four commercial accounts and was still able, in that year, to have gross revenues of over $10,000.00. In 1998, he showed a $3,300.00 profit but again did not claim capital cost allowance. Extrapolating from his 1996 return where he did claim capital cost allowance of $8,600.00, it would appear he would have had a small loss in 1998 if he had continued to claim capital cost allowance in 1997 and 1998.
[13] Returning to the subject years, his expenses were largely in the area of salaries and vehicle expenses. They were the two biggest categories of expenses. For example in 1994, salaries were some $23,000.00 and vehicle expenses were $12,500.00. There does not appear any other single expense that was even half of the lower of those two.
[14] No challenge was made by the Respondent on the reasonableness of any of the expenses. No challenge was made under paragraph 18(1)(a) on the basis of claiming expenses incurred without the purpose of earning income and no challenge was made under paragraph 18(1)(h). There was no personal element to the expenditures.
[15] The Respondent acknowledged that there was no personal element in respect of the undertaking of the Appellant and conceded, as well, that there was a business being conducted. That would seem to me to be a concession that there was a genuine business, but still, I will expand my findings on that question.
[16] That there is a genuine commercial enterprise being undertaken is based on my finding that the activity was clearly carried on by the Appellant in a business-like manner. He had derived a considerable number of contracts, pursuant to which he was earning significant gross receipts.
[17] He advertised and marketed in a reasonable fashion. He had advertisements in yellow pages, distributed flyers and engaged in marketing generally.
[18] He had a presence, if you will, as a lawn care service provider at least in his area. He worked and was known primarily in the area of Transcona although his area was not limited. I accept his evidence that he was recognized as part of the broader business community, at least in that area. He was requested by a sprinkling system supplier to become a sprinkling system installer in Transcona and, indeed, was recruited for that purpose and took courses in it.
[19] There is no evidence as to what the commerciality of that proved to be, but, in any event, the fact that he was recognized as being part of the lawn care business community is just another indicia, to me, of the commerciality of his endeavours.
[20] He purchased and made a substantial investment in equipment. The Minister's reply indicates that equipment investments were some $45,000.00.
[21] He was registered to and did collect and remit Goods and Services Tax. He maintained what appear to be excellent books and records in respect of the operation of the business.
[22] He was certified as a chemical sprayer or certified to handle the chemicals that are used to fertilize and weed kill lawns, and he alone operated that portion of the business.
[23] He did devote 40 to 50 hours per week at this business and in the subject years hired several employees and operated within the student employment program of, I gather, the Province of Manitoba.
[24] These all point to a genuine commercial activity - a genuine commercial enterprise. That leads to the question, if there is no personal element, no expense denials on the basis of reasonableness and none on the basis that they are not deductible under paragraphs 18(1)(a) or 18(1)(h), then on what basis would the Minister seek to deny these losses where there is a commercial activity?
[25] The Minister's counsel maintained a number of reasons, primarily based and on the premise that the doctrine of reasonable expectation of profit was still alive even where there was no personal element and relied on A.G. of Canada v. Mastri et al., 97 DTC 5420 (F.C.A.) (hereinafter "Mastri")principally, I think, to underline that a finding that there are no personal elements in relation to an activity does not mean that the test cannot apply to it.
[26] Where there is no personal element then Mastri provides thatthe reasonable expectation of profit test should be applied less assiduously. That still begs the question of applying the test where there is a finding of a genuine business. Where there is a genuine business conducted as such without personal elements, the combination of those two makes it difficult, in my view, for the Minister to apply a reasonable expectation of profit test. I concur with the comments of Judge Bowman in Kaye v. The Queen, 98 DTC 1659 at p. 1660 (T.C.C.) and his preference in cases of this type to put the matter on the basis "Is there or is there not truly a business?".
[27] Where there is no material personal element but also no genuine business, the test will of course apply. That is an example of when the reasonable expectation of profit test would apply even if an activity were being pursued without a personal benefit. Beyond that, where there is a genuine business activity, I think the room to apply the test in such case is narrow at best but counsel for the Respondent argued that the facts of this case could fit within such narrow application.
[28] Respondent's counsel argued that 40 to 50 hours per week during the subject period was simply not sufficient. The inference I think of that being that the record speaks for itself. He was putting in that amount of time and he was still losing money.
[29] Counsel argued that putting in that amount of time was not sufficient to cover the contracts that he was getting and he had to hire employees and incur employee expenses but only at a loss. If he could not put in sufficient time to make a go of it and hiring people was not the answer, it had no commercial expectations. He was in, in effect, a catch 22 situation that made it wholly unreasonable to expect that he could ever make a profit.
[30] Over and above that, it was argued that he had no plan to solve this. Counsel for the Respondent referred to the Appellant's losses as inherent in the structure of the operator, as a part timer, which he was not able to solve.
[31] Perhaps this is just another way of saying that there is no inherent commerciality to the enterprise as being operated. The suggestion is that, on the facts of a particular case, it is possible to have a genuine business enterprise, with no personal elements, that still lacks in inherent commerciality and that is within the narrow range where the reasonable expectation of profit test applies.
[32] Such a narrow range may well exist, but I do not believe it applies on the facts of this case. As I will note later in these Reasons, my finding here that there is genuine business enterprise includes a finding that there is an inherent commerciality, notwithstanding that losses are sustained throughout the subject period or, for that matter, throughout a longer period of time.
[33] Respondent's counsel went on to suggest that another factor in this case was the simple lack of concern or apparent lack of concern on the Appellant's part as to his losses that underlined that there was no genuine profit motive which is another indicia of a type of case where the absence of a personal element, even if one has a business undertaking, would leave room for the application of the reasonable expectation of profit test. Here the absence of a profit motive is, in Respondent's counsel's view, demonstrated by the taxpayer's lack of concern as to whether or not he actually made a profit.
[34] On the other hand, counsel for the Respondent did acknowledge that the Respondent was not relying on paragraph 18(1)(a). Since, there was no assertion that the expenses were not incurred for the purpose of earning income, this approach seems doubtful even if I agreed that there was no profit motive. As it is, I do not find that there was the type of, using counsel for the Respondent's words, lack of concern that would lead me to believe that there was no profit motive.
[35] It is true that the Appellant seemed unable to make a profit and was in no apparent panic about it. In fact, it is my impression drawn from his testimony that he likely had no appreciation of the extent to which he was subsidizing the business out of his earnings as a police officer and, more importantly perhaps, that he saw nothing unusual about the time it might take in this type of business to, in fact, see profits.
[36] It was of some distress and alarm to him when he found out, from Revenue Canada's point of view at least, that his business should have been profitable by that point (1994) and that he was operating a business totally irrationally, if you will, by operating it on a subsidized basis for such a long period of time (and without a business plan to change it).
[37] In my view, he genuinely thought that these activities would take time and that the subsidy would one day pay off. He was alarmed when he found out that from Revenue's perspective of what a proper business plan should accomplish, his business was taking an inordinate amount of time to show a profit. This was the first suggestion that his operation might stand for some planning and changing so he found a new accountant to give him business management advice. It seems that such advise led to focusing on fewer but larger commercial accounts with less overhead for wages.
[38] Lack of sophistication and business acumen in the subject years and even later years is not a reason to apply the reasonable expectation of profit test. Here Revenue Canada has the benefit of hindsight and applying a hindsight test to assess a person's business acumen is not one that has been approved by the Courts in terms of determining whether or not there is a reasonable expectation of profit. Even Mastri on which the Respondent relies, sets this out clearly. The Appellant's efforts may have lacked the acumen to succeed but his efforts are not thereby irrational. His persistence and willingness to subsidize his efforts should not be punished if there is any chance to succeed as there might well be in this case.
[39] There is no lack of inherent commerciality here in respect of this activity. That he was profiting by 1998 is some evidence of this - regardless of his not claiming allowances that are discretionary and not necessarily, taken or not, reflective of a true profit picture. There is no suggestion that the declining balance rates of deprecation in the Act are meant to measure each year a true reflection of depreciation in the year. Earlier depreciation claims might have made, in terms of getting a true picture of the profitability of a subsequent year, further claims unnecessary. Of course that is not why the claims were not made, but my point is only that not making claims is not always relevant.
[40] This leads me to the next point that counsel for the Respondent argued as being a factor that should permit the application of a reasonable expectation of profit test, even where there was an acknowledged business in existence and even where there was no personal element. That point related to the apparent motive of the Appellant to go into this business to earn retirement income. The Appellant testified that he hoped the business would provide a source of income (positive cash flow at least) on his retirement from the police force. The Respondent's argument is, in effect, that this is a pre-start-up activity and the expenses are personal (or capital). This is an approach to reasonable expectation of profit cases. (See McClure et al. v. M.N.R. (1988), 88 DTC 1504). However, this is not a case of preparing for a business to be carried on the future. This is a genuine business being carried on in the subject years. That is a finding of fact and it being part of a vision for future retirement income is not relevant.
[41] As I have already found, this is a genuine commercial activity and the question should not be whether or not it was commercially exploitable during the subject year, as opposed to perhaps being commercially exploitable at some future time (say, on retirement). In Mattabi Mines Ltd. v. Ontario (Minister of Revenue) [1988] 2 S.C.R. cited with approval by the Supreme Court of Canada in Symes v. Canada [1993] 4 S.C.R., a very fundamental principle in our tax system was underlined which is that it does not matter the year in which you might hope to have a profit to get the deduction currently. However remote in time that income potential might be, is not a factor in determining its deductibility. This is also a relevant principle in respect of the next argument of the Respondent's counsel.
[42] Having accepted, as counsel for the Appellant argued, that there are absolutely no expenditures here that are even "blurry" as between business and personal - there are no entertainment expenses, there are no personal car usages, there are no convention and promotion expenses - and having conceded that every expense was directly applied to a business activity, Respondent's counsel simply argues that this is an ill-fated venture which the Minister of National Revenue cannot see other than giving rise to losses in perpetuity and that the public purse should not accept that. That is why the reasonable expectation of profit test must apply. This takes us back to the question of whether it is irrational to think this activity can give rise to a profit and if not the test should apply. See Kuhlmanm et al v. The Queen, 98 DTC 6652 (F.C.A.). As I stated in Spearing v. R. [2001] 1 C.T.C. 2689, which set out in considerable more detail an analysis of this common law test, ultimately the test laid out in Kuhlmanm might well be the correct test subject to the findings of the Supreme Court of Canada in the Jack Walls and Robert Buvyer v. The Queen, 2000 DTC 6025 (appeal heard and reserved by Supreme Court of Canada on December 12, 2001). If this affords losses in perpetuity perhaps legislative intervention is required. That losses may not be recovered in the foreseeable future is not a bar to the claiming of such losses. Consider the recent Supreme Court of Canada decision in Spire Freezers Ltd. v. Canada [2001] 1 S.C.R. In that case, the Supreme Court of Canada stated that the law does not require a net gain over a determined period. Although the context was partnership law, the statement is equally true regardless of the form of carrying on business. That suggests to me that genuine business losses can be sustained, depending on the circumstances, for an indefinite period of time if you cannot, for legislated reasons such as those in paragraphs 18(1)(a), 18(1)(h) or section 67, attack the expenses giving rise to the losses.
[43] Counsel for the Respondent pointed to a number of cases in her book of authorities, all of which I think she acknowledged were distinguishable, or at least the ones examined.
[44] Petrovic v. The Queen, 2001 DTC 306 (T.C.C.) allowed for the application of the reasonable expectation of profit test, but in that case Judge Lamarre found that a personal element did exist and that the enterprise did not reveal, in its organization, an inherent commerciality. Judge Lamarre went on to state at page 315:
...Although it is not the place of this Court to second-guess the business acumen of a taxpayer who embarks bona fide on a commercial venture that turns out to be less profitable than anticipated, there must be sufficient indicia of commerciality to justify the conclusion that there is a real commercial enterprise being conducted ...
In my view there is a real commercial business being conducted here.
[45] In Stewart v. Canada, [2001] T.C.J. No. 357 (Q.L.) (T.C.C.), Judge Miller held that the Appellant was not in business in the subject years. In fact, that case looks at a situation where a taxpayer is in the pre-business on pre-start-up stages having superficial indicia of a business but not yet amounting to a legitimate commercial activity. It was only an activity setting something up for a future time as circumstances permitted. While that sounds somewhat like the retirement scenario in the case at bar, it is distinguishable on the basis that in that case it was found that there was no commercial, genuine commercial activity or genuine business at the time the activity was being examined. Here I have made a finding that there was.
[46] The last case I will refer to is Peary v. Canada, [2001] T.C.J. No. 458 (Q.L.) (T.C.C.). Respondent's counsel argued that Judge Mogan applied the reasonable expectation of profit test in that case, even where there was a genuine business and no apparent personal element. However, in that case Judge Mogan did find a personal element. He added that finding toward the end of his judgement but it is there. He notes that although there was no obvious personal involvement or element, that, in fact, there was a personal element in the fact that certain rents were being paid for the use of a building owned by the same partners receiving the rents. This self-dealing which created losses assisted the pay down of the mortgage on this particular rental property and was a personal element in the incurrence of the losses. Further, Judge Mogan was quite suspicious of the circumstances of the reason for these losses, given the way in which they were allocated. I have no suspicions here as to the motivation for incurring these expenses or the resultant losses. These losses were simply incurred as business expenses, with the genuine hope for profitability.
[47] Accordingly, for these reasons the reasonable expectation of profit basis of reassessment cannot stand and the appeals are allowed with costs.
Signed at Ottawa, Canada, this 21st day of March 2002.
"J.E. Hershfield"
J.T.C.C.
COURT FILE NO.: 1999-1542(IT)G
STYLE OF CAUSE: Dane Wilson and
Her Majesty the Queen
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: September 5, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge J.E. Hershfield
DATE OF JUDGMENT: March 21, 2002
APPEARANCES:
Counsel for the Appellant: Barbara M. Shields
Counsel for the Respondent: Tracey Harwood-Jones
COUNSEL OF RECORD:
For the Appellant:
Name: Barbara M. Shields
Firm: Aikins, MacAulay & Thorvaldson
Winnipeg, Manitoba
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada