Date: 19990922
Dockets: 98-1271-IT-I; 98-1882-IT-I
BETWEEN:
RAYMOND KEERY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman J.T.C.C.
[1] These appeals are from assessments for the 1993, 1995 and 1996 taxation years. The issue for each year is whether the appellant was carrying on a business, the losses from which are deductible in computing his income. A second question had to do with a claim in 1993 for a disability tax credit in respect of his wife, but the appellant did not proceed with that issue.
[2] The appellant has been a high school teacher for about 24 years. In 1985 or 1986 he and a partner, Peter Cullen, started a business on Highway 11 south of Orillia. The business involved the production and sale of tackle and gear for ice fishing. They rented a store and kept ponds in which minnows (shiners) were stocked until sold as bait. The fishing tackle that they produced was also sold through Canadian Tire stores.
[3] In addition to the sale of tackle and bait they also rented ice huts to fishermen who stayed in them on the ice while fishing.
[4] For this purpose they had borrowed $20,000 from the bank.
[5] In August and September 1990 the appellant's partner Cullen sold the tackle business to one Clarke for $8,000, the licence for Lake Couchiching to Robert Battegello, for $5,025, six ice huts for $3,000 and bait for $3,400. He appropriated these funds and disappeared to England leaving his wife and children. He left the appellant solely liable for debts to the bank ($23,668), the Ministry of Natural Resources ($8,081), an amount owing on a leased but dilapidated GMC truck ($11,934.78).
[6] In the result the appellant was left with no assets except a commercial licence and 14 ice huts and debts of over $40,000.
[7] In 1991 he tried to pick up the pieces and start over with a view to earning enough money to recoup his losses and pay off his debts. He built 6 more ice huts and sold the business (or at all events such of it as was left) to Battegello for $3,000 down and $11,000 over two years.
[8] He continued selling worms and minnows. He built a cooler on the property of Paul Srigleys. He advertised the rental of ice huts through a Pizza Pizza outlet. He appears to have developed a sort of association with Battegello in an attempt to assist Battegello to earn some money to pay him what he owed. This was to no avail. Battegello developed heart problems and moreover Battegello's partner left him in somewhat the same circumstances as Cullen left the appellant. It seems the appellant, a respectable and honest high school teacher, had the misfortune to become involved with people who were at best unreliable and at most larcenous. There was also some vague allusion to another individual who was charged with murder, but his role in this saga is too nebulous to merit more than passing reference.
[9] During 1992, the appellant tried to collect from Battegello and obtained a writ of seizure against him. However the cheques which Battegello issued to him bounced. In the winter, Battegello sold to one R. Wroe, but nothing was obtained by the appellant from this sale.
[10] Battegello had stored a large amount of bait at Wheatley, Ontario. He went to collect it in April and was transporting it in a large tank for the Orillia Spring Perch Derby. The truck hit a deer on the highway and hundreds of gallons of minnows were strewn all over the highway and lost. Undaunted, the appellant took the truck back to Wheatley to get more minnows but the rear tire came off. In the result no bait was delivered.
[11] In 1993, the appellant succeeded in reaching a settlement with Battegello and ultimately was paid off in 1996. He continued to try to develop the bait business but in that year as the result of high water and overfishing, no bait was caught. This situation continued into 1994. He continued to try to establish the minnow, worm and leech business in Michigan, Wisconsin and Minnesota, but without success. He was assisted by three good friends, Nick Kruit, John and Paul Srigleys.
[12] He conditionally sold the business to N. Kruit for $15,000 but that deal fell through. In 1995, the supply of minnows simply dried up. To add to his problems, his accountants failed to file a notice of objection to the 1994 assessment.
[13] In 1995 and 1996, he tried to diversify into other lines of business, largely because he needed the money to support his son, who is hydrocephalic and requires care and supervision.
[14] The other businesses that he tried to get into in 1995 and 1996 were CD Rom Technology (Leadership & Employability Clubs of Canada), Amway and Software sales — Renco Technologies Solid Edge. In 1996, he broke his leg and was off work for three months. In that year he also built 10 outhouses for the Haliburton Forest & Wild Life Reserve.
[15] I have set out in some detail the almost incredible litany of misfortunes that befell him. They would have crushed a lesser man. Was he carrying on a business or businesses? On this point, I entertain no doubt whatever. He was engaged in a commercial undertaking, the sole object of which was to earn income. There was no personal element involved. It is impossible to believe that chasing around the waterways of Ontario looking for minnows, frogs and leeches which it is intended to sell at a profit can contain any component of self gratification or personal enjoyment other than the prospect of earning a profit. His activity falls within the definition of business in section 248 as "an undertaking of any kind".
[16] "Enterprise or affair" is defined in the French version of the Income Tax Act as follows:
“ entreprise ” ou “ affaire ” comprend une profession, un métier, un commerce, une industrie ou une activité de quelque genre que ce soit et, sauf pour l'application de l'alinéa 18(2)c), de l'article 54.2 et de l'alinéa 110.6(14)f), un projet comportant un risque ou une affaire de caractère commercial, mais ne comprend pas une charge ou un emploi.
[17] Clearly, the appellant's commercial activity fell within that definition. The respondent however says that despite its commercial animus he had no reasonable expectation of profit. It is more accurate to say that he had no profit and therefore the respondent concludes that he had no reasonable expectation of it. The two are not the same. In Kaye v. R., [1998] 3 C.T.C. 2248, in commenting on the NREOP principle I said:
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.
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.
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.
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.
[18] Here we have all of the elements of a business — commercial animus, a pure profit motive, a type of business that is carried on by many people in that area and a significant commitment of capital and time to the enterprise.
[19] It cannot be said that his expectation of profit was unreasonable in the sense that it was "irrational, absurd and ridiculous", the words used by the Federal Court of Appeal in Kuhlmann et al. v. The Queen, 98 DTC 6653 to define "unreasonable" in the context of NREOP.
[20] The problem is that Mr. Keery had no profits from 1987 on. The losses in 1987, 1988 and 1989 were relatively insignificant (about $2,500 each year). Starting in 1990, however, they increased substantially:
TAXATION GROSS COST OF NET
YEAR REVENUE GOODS SOLD EXPENSES LOSS
1991 NIL $1,325.00 $16,494.00 $17,819.00
1992 $1,573.20 $345.46 $14,418.01 $13,190.27
1993 $5,400.00 NIL $17,269.51 $11,869.51
1994 $2,724.00 $859.39 $14,554.86 $12,690.25
1995 $4,233.36 $1,081.07 $15,127.20 $11,974.91
1996 $1,007.00 * $759.79 $19,927.69 $18,920.69
* Not deducted by the Appellant.
[21] These large losses are attributable to events beyond Mr. Keery's control, including the amount of interest which he had to pay on bank borrowings. At least some of the bank borrowings — probably a large part — were for business purposes.
[22] Counsel for the respondent argues that the appellant should have realized, when Cullen absconded with most of the appellant's equity in the business, that it was time to call it quits. With the benefit of hindsight she is probably right.
[23] Probably he should have cut bait in 1991. However, the Crown's argument is reminiscent of that advanced in Nichol v. The Queen, 93 DTC 1216 at 1219:
Essentially, what the Minister is saying is that, at the end of 1985, when the revenues had fallen significantly short of the projections, the Appellant should have realized that 1986 would not be a successful year and he should therefore have cut his losses and stopped the business in that year. It is a matter of business judgment whether to start a business and it is a matter of business judgment whether and when to terminate it. This taxpayer made the business judgment to continue the operation for another year notwithstanding the results of the 1985 season. He hoped to turn the business around by forming a new league in 1985, to which the Royals would belong, and in 1986 to improve the team's performance by creating a farm team and by persuading the Canadian Press to give much greater publicity to the Royals' games.
As it turns out none of these remedial actions worked and he discontinued the operation after 1987. He made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and it was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or penalize him for having made a judgment call that, with the benefit of 20-20 hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today. We were, after all, not there in 1986.
[24] The appellant's problem is not that he did not have a business but that his accounting records are something of a mess. The income and expense of all of the business activities in which he engaged in 1995 and 1996 are flung together into an undifferentiated farrago and I am left to try to extract some meaningful commercial data. That is, with some trepidation, what I propose to do.
[25] No doubt one might simply dismiss his appeal but I should try to do better than that for him. He has had enough troubles. I might say that this is more than the Department of National Revenue has even attempted to do. It has used NREOP as a substitute for analysis.
1993
[26] He claimed a loss of $11,869.51, based on sales of $5,400 and expenses of $17,269.51. Two items need adjustment — the interest of $7,661 and the automobile expense of $7,042 ($3,642 + CCA $3,400). Both were claimed at 100% with no personal use element. I have very little to go on but the best (and only) evidence I have is the 1992 assessment in which the Minister apparently with the agreement of the appellant or his representative attributed 72.58% of the interest payments to business. In 1993 if this percentage is used it works out to $5,560, or a reduction of $2,101.
[27] Similarly, the automobile expense including CCA should be reduced to the percentage calculated by his accountant in 1995, 68%, or $4,788, a reduction of $2,254. The business loss for 1993 should be therefore $7,514.
1994
[28] Not objected to.
1995
[29] I see no reason not to accept the summary of business income prepared by the appellant's accountant, Mr. Paul Taylor, C.A. and entered as Exhibit R-1, subject only to a reduction of the mortgage and Visa interest of $7,005 to 72.58%, or $5,084, a reduction of $1,921.
[30] I note that the loss computed by Mr. Taylor was $4,959. The main reason that the amount is so much less than $11,974 claimed in the return of income is that Mr. Taylor included $11,250 (3/4 of $15,000) for the conditional sale of the fishing license to Mr. Kruit. Since the deal did not close this amount should be written off in 1996. The business loss for 1995 should be $3,038.
1996
[31] The $11,250 mentioned above should be written off in 1996. Unfortunately we have no analysis similar to that prepared for 1995 by Mr. Taylor. I have no idea what some of these expenses are. In the absence of any evidence I do not see how the business taxes ($366), meals and entertainment ($1,611), supplies ($2,034) and salaries and wages can be allowed at all.
[32] The loss for 1996 should be adjusted as follows:
Amount claimed $18,920
Plus $11,250
$30,170
Minus $366 (Business taxes etc.)
$1,670 (27.42% of the interest of $6,093)
$1,886 (32% of $3,819 (automobile expenses
+ $2,077 CCA)
$2,034 (supplies)
$3,750(salaries, wages and benefits)
Total $9,706
Revised business loss: $20,464
[33] There is a certain rough and ready element to these calculations, but it is the best I could do in light of the unsatisfactory evidence.
[34] The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons. The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 22nd day of September 1999.
"D.G.H. Bowman"
J.T.C.C.