Date: 19990303
Docket: 97-3241-IT-I
BETWEEN:
LORNA WIGGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
(Delivered orally from the Bench at Toronto, Ontario, on October 9, 1998)
McArthur J.T.C.C.
[1] The Respondent disallowed claimed business losses in the 1993, 1994 and 1995 taxation years in the amounts of $6,322, $5,684 and $4,317, respectively, primarily on the basis that the Appellant did not have a reasonable expectation of profit. The Respondent further disallowed a claimed rental loss in 1995 in the amount of $1,084, all of which the Appellant appeals.
[2] The Appellant has been a mathematics teacher and has worked in the educational field mostly with the Ontario Board of Education for over 35 years. In 1979, she wrote a textbook entitled "Math Base One" directed at the slow-learning adolescent. In 1989, she wrote a second edition to that text and the sales were encouraging considering her limited market. She had other related endeavours including curriculum research and math consulting. She worked on weekends and during two summer months which she considered part of her business activities, separate from her employment income.
[3] Despite careful cross-examination, it was difficult to discern exactly what the Appellant did for the advancement of her business during the relevant years. I have reviewed the statements of operation contained in the Appellant's income tax returns for each year under appeal. She had no business plan although it appears she has one now for the years 1998 and 1999. She had no vouchers or receipts, no concrete evidence to support why it was necessary to expend over $3,000 for car expenses or $2,437 for conventions and seminars in the 1993 taxation year. Indeed, she did not recall what convention she attended but she suggested it may have been in the United States. She could only guess what the bank charges were and also, no evidence was provided for other expenses claimed.
[4] The Appellant's evidence was made up primarily of statements of a general nature. An example of her answers to questions during cross-examination included:
1. Concerning bank charges: "My guess is the interest charges were normally for things like gas for the car and credit card purchases".
2. Concerning car expenses: "I travel as part of my business and job. I do not log mileage".
3. Concerning conventions and seminars: "Conventions are expensive".
4. Concerning depreciation: "Probably my computer".
5. Concerning telephone: "Long distance calls".
It is sufficient to say that the expenses were difficult to sort out. The Appellant's income losses for the six prior taxation years were as follows:
1987: Income $958, loss $5,914;
1988: Income $2,393, loss $6,202;
1989: Income $1,104, loss $7,709;
1990: Income $3,687, loss $5,073;
1991: Income $3,544, loss $4,421;
1992: Income $2,526, loss $4,838.
For the years in issue, the losses were:
1993: Income $2,766, loss $6,322;
1994: Income $216, loss $5,684;
1995: Income $378, loss $4,317;
It would appear that the Appellant's professional income over the three relevant years averaged approximately $60,000.
[5] The Respondent concluded that the Appellant did not have a reasonable expectation of profit and cited the tests contained in Moldowan v The Queen.[1] The Respondent further submitted that the expenses were personal or living expenses or unreasonable pursuant to section 67 of the Income Tax Act.
[6] Despite the negative aspects of this case and the lack of specifics, the Appellant was credible. She is to be commended for her academic pursuits in the educational field of mathematics. She has written two textbooks that showed economic potential. She has been updating her knowledge through seminars and conventions, although the specifics are uncertain. She has written many articles on the subject, although again the evidence of marketing these and what they consisted of were of a very general nature. Her business suffered during the economic recession of the 1990s but is presently showing a modest profit.
[7] I find as a fact that she made expenditures in order to earn a profit from her writings and research. The books and other materials did not happen by themselves and she did have expenses. The problem is sorting out what expenses were reasonable pursuant to section 67 of the Act. It is understandable that Revenue Canada took the position that it did. I have had the advantage of hearing the Appellant's evidence for over two hours. In Tonn v the Queen,[2] Linden, J. stated:
It seems to me that for most cases where the department desires to challenge the reasonableness of a taxpayer's transactions, they need simply refer to section 67. This section provides that an expense may be deducted only to the extent that it is reasonable in the circumstances. They need not resort to the more heavy-handed Moldowan test. In fact, in many cases, resorting to section 67 may well be more appropriate. This point has been made more than a few times by Bowman, T.C.C.J. ...
In Cipollone v The Queen,[3] Bowman J. stated that
... The problem lies not in the absence of a reasonable expectation of profit ... but rather in an attempt to deduct unreasonable expenses. ...
Linden J. continued:
Bowman, T.C.C.J's approach to the problem in the case above seems very sensible and might be considered in future cases such as this one.
I believe this approach should be applied in the present case. The Appellant had a reasonable expectation of profit but attempted to deducted unreasonable expenses.
[8] Given the generality of the evidence, the problem is sorting out what expenses are to be disallowed, there being no receipts, vouchers, books or journals. The expenses claimed for bank charges (interest) and car expenses in the following amounts are not allowed for each of the three years:
1993: $3,603;
1994: $3,693;
1995: $1,531;
The remainder of the expenses are allowed.
[9] In conclusion, with respect to the business losses the Appellant is entitled to deduct expenditures totaling:
1993: Claimed $6,322, allowed $2,719;
1994: Claimed $5,684, allowed $1,999;
1995: Claimed $4,317, allowed $2,786;
[10] Turning to the rental property, in 1972 the Appellant purchased a condominium referred to as Scarlet Street. In 1995, she purchased a townhouse for $230,000 known as Dixon Street. To do so in June of 1995, she drew approximately $86,000 from a first mortgage secured by Scarlet Street which before that time had been mortgage-free. She raised the further principal sum of approximately $116,000 on Dixon Street. She moved from Scarlet to Dixon and commenced renting Scarlet for $1,100 monthly signing a two-year lease. She claims a rental loss of $1,084 created by a claim that included $2,856 for interest on the $86,000 mortgage on Scarlet Street.
[11] I have no difficulty finding that she had a reasonable expectation of profit from renting Scarlet but the interest paid on the $86,000 first mortgage was not used for the purposes of earning income but to purchase Dixon Street, which is her principal place of residence. The other expenses, but for the legal fees paid to mortgage Scarlet Street, are deductible. In conclusion, the rental loss for Scarlet Street is disallowed. The business losses claimed for 1993, 1994 and 1995 are allowed in part as indicated earlier in this judgment, and the rental loss for Scarlet Street is disallowed.
Signed at Ottawa, Canada, this 3rd day of March, 1999.
"C.H. McArthur"
J.T.C.C.