Date: 19991110
Docket: 98-171-IT-I
BETWEEN:
RANDY CORBETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] In computing income for the 1995 taxation year, the Appellant deducted the amount of $4,946.90 as a business loss from Corbett’s African Imports (the “Activity”). The bulk of these expenses consisted of $4,300.00 for air travel and $646.90 for the purchase of samples. The Minister disallowed the deductions on the basis that they were not incurred by the Appellant for the purpose of gaining or producing income from a business or property but were personal expenses of the Appellant.
[2] At the commencement of the hearing the Appellant submitted that the appeal should be allowed because the hearing was not set down in accordance with the provisions of subsections 18.17(1) and 18.17(1.1) of the Tax Court of Canada Act which provides:
“18.17 (1) Subject to subsection (1.1), the Court shall fix a date for the hearing of an appeal referred to in section 18 that is not later that one hundred and eighty days or, where the Court is of the opinion that it would be impracticable in the circumstances to fix a date for the hearing of the appeal within that period, three hundred and sixty-five days after the last day on which the Minister of National Revenue must file a reply to the notice of appeal pursuant to subsection 18.16(1) or (3).
(1.1.) The Court may, in exceptional circumstances, fix a date for the hearing of an appeal referred to in section 18 at any time after the periods referred to in subsection (1).”
[3] The Court decided to proceed with the hearing of the appeal and adjourned the decision on the Appellant’s motion, giving to the parties appropriate time to file submissions on this point. It was agreed that if the motion were allowed then the Court would not have to proceed with deciding the matter on its merit. However, if the motion should be dismissed then the Court would proceed to consider the appeal on its merits.
[4] Both parties submitted written memorandum on this issue and the Court has considered those written memorandums in making its decision on the motion of the Appellant to allow the appeal because the provisions of the Act were not complied with.
[5] This issue was considered by Christie, ACJTC, as he then was, in the case of Anthony M. Hayes and Her Majesty the Queen, on October 14, 1998 under docket # 97-3080(IT)I. As here, these are appeals governed by the informal procedure prescribed under section 18 and following sections of the Tax Court of Canada Act. There was another issue in that case which is not of issue in the case at bar.
[6] In that case, as in the case at bar, there was nothing in the Court file to show whether or not it would have been impracticable in the circumstances to set the matter down for trial within the time prescribed by subsections 18.17(1) and 18.17(1.1) of the Act nor was there anything in the evidence in the case at bar to establish whether or not “exceptional circumstances” existed. However, Judge Christie considered this was an administrative oversight only, and of itself could not determine the question whether the reassessments under appeal were correct of not. He decided that this must be decided on the merits, and relevant circumstances pertaining to the reassessments. However, he indicated that the administrative oversight would be drawn to the attention of the Registrar with a view to avoid repetition in other cases.
[7] In Hayes (supra), Judge Christie referred to Ginsberg v. The Queen, 96 DTC 6372 where the Federal Court of Appeal held that the failure of the Minister of National Revenue to reassess tax “with all due dispatch” as stipulated in subsection 152(1) of the Income Tax Act did not afford a ground upon which to vacate the reassessment.
[8] As far as this Court is concerned that is sufficient to dismiss the Appellant’s motion and the Court is entitled to consider the matter of the assessment on its merits.
[9] However, if there is any question with respect to the existence of exceptional circumstances or whether or not it would be impracticable in the circumstances to fix a date for hearing the appeal within that period this Court is aware of the operations of the Tax Court of Canada, as to how it sets down appeals and as to the difficulty it has in setting down appeals in remote parts of Canada such as Yellowknife. It would be impracticable for the Court to set a matter down for hearing in such an area within the time prescribed in the Act if that were the only case that was ready for hearing in Yellowknife. Further, this Court is aware of the fact that due to the shortage of the number of judges on the Court and the number of cases which are ready for trial, that it would be impracticable to set this case down for hearing within the period prescribed in the Act. Further, this Court is satisfied that in light of the fact that the matter was to be heard in Yellowknife without a number of other cases to be scheduled for the same time, that due to the lack of a full complement of judges on the Court many sitting days are lost each year and the Court considers that these are exceptional circumstances which would bring in to play the provisions of 18.17(1.1).
[10] The motion of the Appellant to allow the appeal is dismissed and the Court will proceed to consider the assessment on its merits.
Facts
[11] In evidence the Appellant testified that in 1995, he went to Africa primarily on a holiday. Any business aspect to this trip came about as a result of that holiday accidentally. In 1991, the Appellant also made a trip to Africa and after the second trip there arose in his mind the question as to whether or not it would be feasible to start a business importing goods from Africa and selling them in Canada. This was also discussed with the Appellant's wife. He said that he made the trip and identified some goods that he believed were saleable in Canada. He did not bring back samples due to the fact that he could not carry much luggage back with him.
[12] He ordered stock and had it delivered. They also proceeded to prepare brochures and to have them delivered. They then moved to Yellowknife and have not yet decided if the business would be viable there.
[13] The witness said that the costs of the trip were $55,000 to $60,000. He claimed the airfare only and he indicated that if he made a separate trip it would be in the nature of $8,000 to $10,000., if he went alone. If others went, it would be more.
[14] In cross-examination, he confirmed his 1995 income tax return which showed income from the Worker’s Compensation Board of $60,235.33 during which time he was a full-time employee. He said that he left the Worker’s Compensation Board in April 1998, did consulting for nine months and then came to Yellowknife in February of 1999.
[15] In 1995, he worked from 8:00 a.m. to 4:00 p.m. consulting. This was a full time business. He had an office in South-East Edmonton but not in his home. He was an employee of a consulting company from April 1998 to January 1999. In 1998, he was required to visit the clients, but 75% to 80% of his time was spent in the office. In Yellowknife he worked from 8:30 a.m. to 5:00 p.m.
[16] He reconfirmed that in 1995, he started the trip as a pleasure trip on a safari. He did not have a specific idea of business at this time. However, he was impressed with the type of goods that he had seen on the trip in 1991. He introduced Exhibit A-1 which was one of the articles which he imported and wished to sell. It was quite inexpensive in Canadian terms and he believed that it would be unique. He bought one sweater and received other items in 1995. He admitted that he did not do any research on the matter until he returned home.
[17] He purchased five to ten items, a leather jacket, a purse, and some carvings from the horn of a cape buffalo. He has not sold any of the carvings. He only proceeded with marketing of the sweaters. He sold 50 to 55 sweaters. They had a demonstration party and they gave out about 5,000 brochures which were hand delivered. He also prepared some invitations for house parties. He had some sales, although these were minimal to 1997. They were not completing any marketing plan. They were looking for someone to act as their sales persons.
[18] In 1995, he had no experience and no program was put into operation until 1996. He could not say when they received their first supply of goods. Then he said that the first consignment was received on July 21, 1997, but then they obtained other suppliers after that. He did not have any documents with him to confirm this. He had no shop, he sold from his home. He held parties (like Tupperware parties). He did not know how many he held in 1997, he did not know how many sales he had at these parties.
[19] The process was to get together with someone who would put on a show. They would take over the supplies. People would drop in and might place an order. They would order the supply and deliver it. He also did a mailing out in the Edmonton area. He was not sure what items they had in 1997 except jerseys. He had no record of the 1997 sales with him.
[20] In 1996, there were no sales. They spent that time working out details with people in Africa. He did not have a 1998 or 1999 record of sales with him, but he said there were no sales in 1999.
[21] He did no market research in 1995. In 1996, they did some work to attempt to determine what type of sweaters were viable in the market and the price. He was confident that that price range that he had would be satisfactory and that the quality was comparable to any other sweater found in the Edmonton area.
[22] They went to shops, spoke to managers in stores but they could not sell these items in those stores due to competitive rules. They were confined to home shows but they also wanted to hire someone else in mid-1998 to do market research in the stores.
[23] They sent out 5,000 flyers and a colour brochure. These were by direct home delivery by someone else. These were sent out in 1997 or 1998. There was a telephone number on the brochures and an e-mail address. Minimal orders were received and the business was not profitable.
[24] In 1997 and 1998 they had some 300 sweaters for sale and samples of 40 that they had to order. There were 25 leather jerseys. They had an inventory, but he did not have the inventory list with him. He did not know how many they have now. He was not certain whether they sold any as a result of the delivery of the brochures.
[25] With respect to the home shows, sometimes they had $1,000.00 worth of orders but he had no records with him to support this. He confirmed that the allegations in paragraph 5(b) of the Reply to the Notice of Appeal were correct in that the expenses claimed in 1995 were made up of $4,300.00 in air travel and $646.90 for the purchase of samples. He did not know if they would continue with the business. In Calgary they had someone take the samples to the stores with mixed results. In 1995 they were not up and running and ready to sell things.
[26] Between 1995 to 1997 there was a delay in receiving goods. He became sick and could not make any inquiries until September. He confirmed that doing business in that area of the world was very difficult and that it took a long time to get a response. They made some inquiries south of the border with respect to marketing these products but they did not pursue it to any extent. He admitted that the capital for the business was limited to his own personal disposable income supply and that he had no other capitalization.
Argument of the Respondent
[27] In argument Counsel for the Respondent said that the $4,300.00 expense for the air fare was not for business purposes. The $646.90 for the samples was at the time when the business had not yet begun. There was no business in existence in 1995. There was no activity of this nature in that year. Therefore, these deductions cannot be allowed.
[28] These expenses were not incurred for the purpose of gaining or producing income but if there was a business that existed the expenses were personal or living expenses of the Appellant. The Appellant was properly reassessed in accordance with paragraphs 18(1)(a) and 18(1)(h) of the Act.
[29] With respect to the start-up expenses his position was that these are only applicable if there is in place a business structure that has a capacity of generating income in the foreseeable future. In this case there was no such structure in place. There were no financial arrangements in place. It was at best a hobby that might proceed at some point in the future.
[30] Counsel referred to William Moldowan v. Her Majesty the Queen, 77 DTC 5213, Enno Tonn, Rose Marie Tonn and Lester Sinanansingh v. Her Majesty the Queen, 96 DTC 6001, The Attorney General of Canada v. Mastri, 97 DTC 5420 and Patricia Watt v. Her Majesty the Queen, 97 DTC 5459 in support of his position that there was no source of income against which the Appellant could deduct the expenses here. In 1995, 1996 and 1997, there was no reasonable expectation of profit. There was no basis for projecting income.
[31] This position was that the appeal should be dismissed and the Minister’s assessment confirmed.
Argument on behalf of the Appellant
[32] In argument the Appellant referred to income tax bulletin 364 in support of the argument that it is not necessary for the business to have earned income in the year in question for the expenses to be deducted. The question is whether or not the structure was in place to enable income to be earned. He asked the questions – Were the essentials in place here? Were the preliminary steps in place? He concluded that they were and that there was enough evidence that the business had commenced because some significant activity had been undertaken for its commencement.
[33] His position was that the appeal should be allowed and the Minister’s assessment quashed.
Analysis and Decision
[34] In light of the decision in Moldowan (supra) the Court is satisfied that there was no reasonable expectation of profit in the year 1995 on the facts presented in this case. On any objective observation of all of the facts, including the profit and loss experience in past years, the taxpayers training, the taxpayers intended course of action and the capability of the venture as capitalized to show a profit after charging capital cost allowance, the Court is satisfied that the only reasonable conclusion to be drawn is that there was no reasonable expectation of profit.
[35] The Court is satisfied there was no source of income, or income stream existent in the year in question against which the Appellant could deduct the expenses sought to be deducted here.
[36] The case of Enno Tonn, Rose Marie Tonn and Lester Sinanansingh (supra) does not assist the Appellant’s case. There could be no doubt that there was a significant personal element involved in these expenses no matter how favourably to the Appellant’s position the Court considers the facts. The argument of Counsel for the Respondent that the expenses were personal and living expenses is well taken.
[37] There is no merit in the argument that these were start-up costs and the Court is satisfied that there was no structure in place which could reasonably have been expected to produce income within a reasonable period of time.
[38] At best this was a hobby that might produce income at sometime in the future and at worst these were merely personal or living expenses of the Appellant in the year in question.
[39] The appeal is dismissed and the Minister’s assessment is confirmed.
Signed at Ottawa, Canada, this 10th day of November 1999.
"T.E. Margeson"
J.T.C.C.