Date: 19981021
Docket: 97-2784-GST-I
BETWEEN:
DENISE GRAVELINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Counsel for the appellant: Yolaine Lindsay
Counsel for the respondent: François Trudel
Reasons for Judgment
(delivered orally at Montréal, Quebec, on September 18, 1998)
Archambault, J.T.C.C.
[1] These are appeals from assessments issued pursuant to Part IX of the Excise Tax Act (“the Act”) for periods which, according to the Reply to the Notice of Appeal, run from October 1 to December 31, 1995 and from January 1 to March 31, 1996. According to the testimony of the respondent’s auditor, the amounts of the input tax credits (“ITC”) which were the subject of these assessments related to a greater number of periods, between July 1, 1992 and March 31, 1996.
[2] The amount of ITCs covered by the first assessment represents a sum of $1,459.87, and that covered by the second assessment, a sum of $8,239.94. In her Notice of Appeal Ms. Graveline admitted that as regards the ITCs covered by this second assessment, she was entitled only to $3,623.37.
[3] The case turned on Ms. Graveline’s entitlement to ITCs under s. 169 of the Act. Essentially, the question is whether the ITCs were claimed for goods and services acquired in the course of carrying on a commercial activity. The respondent argued that the breeding of cats by Ms. Graveline was not a “commercial activity” because Ms. Graveline [TRANSLATION] “operated her cat breeding business without a reasonable expectation of profit”.
[4] This concept of commercial activity is to be found in s. 123 of the Act;
“commercial activity” of a person means
(a) a business carried on by the person (other than a business carried on by an individual or a partnership... without a reasonable expectation of profit . . .)
[My emphasis.]
Facts
[5] After having been a teacher for some 25 years Ms. Graveline went into the business of breeding cats. She indicated that she had spent the first 20 years of her life on a farm. Her cat breeding began in 1986 in the basement of her residence located in St-Hyacinthe. Between 1986 and 1988 Ms. Graveline acquired 22 cats, the total cost of which was $9,225. Ms. Graveline did not purchase any new cats until 1992: 30 new cats were purchased between 1992 and 1997.
[6] Between 1986 and 1998 Ms. Graveline purchased equipment, including a ventilator for about $2,000, a water tank for about $1,500 and a vacuum cleaner for $3,000, as well as cat cages costing some $3,200.
[7] From the outset her cats suffered from serious health problems. First there were problems of skin disease, then respiratory and other viral diseases. From 1992 onwards there were other health problems: cats delivered mummified kittens or kittens with significant birth defects. Many of these kittens died soon after birth.
[8] After a few months’ research, Ms. Graveline discovered that the new feed she had adopted in 1992 had caused these new problems. It is thus not surprising that the health problems which occurred starting in 1992 had driven up considerably her veterinary expenses, which for 1993 amounted to $1,698 in the first quarter, $1,390 in the second, $2,592 in the third and $3,035 in the fourth.
[9] Ms. Graveline also had difficulty finding the right media to market her kittens. She first put advertisements in newspapers in her town and neighbouring towns. She also tried advertising on community cable television, but without too much success. Because of these difficulties her kittens were not sold quickly enough and this resulted in an overpopulation of cats. This partly explains the many health problems of her cats.
[10] More recently Ms. Graveline seems to have found a better means of offering her services: she puts advertisements in the telephone directories of nearby towns and this seems to have produced better results.
[11] Other problems arose in 1994. Following a complaint made by her neighbours the town of St-Hyacinthe issued her an order requiring her to move her cat breeding business outside that municipality. That forced her to question whether she wanted to continue her breeding operation. Ultimately, since she believed the business would be successful, Ms. Graveline decided to put her home in St-Hyacinthe up for sale and set up her residence and her business in the village of St-Liboire.
[12] The evidence provided the following information on Ms. Graveline’s gross receipts, the amount of her expenses, the number of cats sold and, for certain years, the level of her inventory:
Year Amount of expenses Gross receipts Number of cats sold
and (inventory)
1991 $17,035 $2,850 N/A
1992 $20,052 $6,598 40
1993 $24,053 $5,430 35
1994 $20,737 $4,675 21 (325 cats)
1995 $24,756 $5,820 34 (188 cats)
1996 $21,297 $6,200 32
1997 $20,921 $11,636 70
1998 (September 15) N/A $13,044 71
[13] Ms. Graveline estimated her gross income for the remainder of 1998 at an additional amount of $5,000 and expected that her expenses would be lower than the previous year.
[14] In her testimony Ms. Graveline stated that she spent between 10 and 12 hours a day, seven days a week, looking after and raising her cats. In addition to these activities Ms. Graveline also took part in a number of shows.
Analysis
[15] The issue is whether Ms. Graveline operated a business with a reasonable expectation of profit from July 1, 1992 to March 31, 1996. Before deciding this point, I would like to mention certain rules by which I must be guided. First, the determination as to the existence of a reasonable expectation of profit must be made with respect to the relevant period. Of course, activities which are hobbies cannot constitute a business, much less a business carried on with a reasonable expectation of profit. Unless there are special circumstances - as there would be, for example, if a taxpayer engaged in the activities more for personal pleasure than to make a profit, or if the activity was carried on more with a view to being able to deduct personal expenses - care must be taken not to be too demanding in assessing the facts. So far as it is reasonable to do so, the taxpayer should be given the benefit of the doubt. It would be unfair for a taxpayer to be regarded as operating a business with a reasonable expectation of profit only if he is making profits. The operation of a business generally involves significant risk of loss and tax benefits should not be refused those who are legitimately trying to carry on a business for profit. (See, inter alia,Tonn v. The Queen, 96 DTC 6001 (F.C.A.)).
[16] Further, even if a business suffers losses for a number of years, that does not necessarily mean that the business was not being carried on with a reasonable expectation of profit. It is important to bear in mind that when a person establishes a new business it is natural that a reasonable time should elapse before the business starts making profits. On the other hand, repeated losses for a large number of years may be a good sign that the business is not being carried on with a reasonable expectation of profit. In analyzing repeated losses it is important to consider the circumstances in which they occurred and to look at the efforts made by the taxpayer to find a solution for his problems. If the losses continue to occur despite all the taxpayer’s efforts to correct the situation, it is possible that an activity which constituted for a given period a business carried on with a reasonable expectation of profit will cease to be so in a subsequent period. Finally, each appeal must be looked at on its own merits, each case being sui generis.
[17] When I analyze the evidence presented here as a whole, I come to the conclusion that a reasonable expectation of profit existed during the period from July 1, 1992 to March 31, 1996. The facts which lead me to this conclusion are the following. First, it should be noted that Ms. Graveline invested nearly $10,000 in the purchase of her equipment. To this capital must be added the money which financed the operating losses. From 1991 to 1997 operating expenses exceeded gross receipts by some $100,000. Ms. Graveline indicated that she used her personal savings to finance them. Further, the fact that her inventory amounted to as many as 325 cats on December 31, 1994 is in my opinion a clear sign that Ms. Graveline was operating a business and was not carrying on an activity that could be described as a hobby.
[18] The fact that she had to spend very long hours on this activity each week is also a sign that it was a business. I do not think a person engaged in a hobby would spend as much time and energy on the breeding of cats.
[19] However, it must be admitted that from its inception Ms. Graveline’s business has not made a profit and that it has accumulated significant losses. Still, this state of affairs can be explained. First, there were the serious health problems with her cats with which Ms. Graveline found herself faced. This fact largely explains her high expenses and her rather low gross receipts. In addition to the health problems mention may also be made of marketing problems, of the problems which arose in the move and of the problems created by competition from amateurs.
[20] On the other hand, the financial information mentioned above contains certain encouraging signs. Gross receipts increased steadily from 1994 to 1998 and expenses fell from 1995 to 1998. The evidence also showed that Ms. Graveline took steps to improve her stock. She diversified the breeds of her cats. She even bought a sire which cost $2,000. Over the years Ms. Graveline acquired experience. In view of all these facts, I believe that in the relevant period she could expect that the business would be profitable.
[21] Before concluding I would like to comment on the decision in Two Carlton Financing Limited v. The Minister of National Revenue, 98 GTC 2141. Counsel for the respondent cited this decision in support of his argument that the fact that a taxpayer reported no sales during the period at issue might provide the Court with a basis for inferring that the taxpayer was not engaged in a commercial activity.
[22] After reviewing the facts of that case I have come to the conclusion that Two Carlton lends no support to the Minister’s argument. It seems clear to me that the problem in that case involved credibility. It was far from certain that the taxpayer had actually operated a qualified business for ITC purposes. I note that the business had in the past provided financial services which were not covered by the Act. In the final analysis my brother Judge Rip concluded that he was not persuaded by the evidence put before him that the taxpayer in that case had actually carried on a qualified commercial activity.
[23] For these reasons I conclude that Ms. Graveline’s appeals should be allowed and the assessments referred back to the Minister on the basis that
Ms. Graveline was entitled to ITCs of $1,459.87 with respect to the first assessment and $3,623.37 with respect to the second.
Signed at Ottawa, Canada, this 21st day of October 1998.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 31st day of May 1999.
Erich Klein, Revisor