Date: 20000124
Docket: 98-2804-IT-I
BETWEEN:
MICHAEL BELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
MacLatchy, D.J.T.C.C.
[1] The Appellant was assessed by the Minister of National Revenue (the "Minister") for losses claimed on a business owned and operated by the Appellant for the 1994, 1995 and 1996 taxation years.
[2] The Minister assessed the Appellant for the 1994, 1995 and 1996 taxation years by Notices of Assessment mailed on May 11, 1995, May 9, 1996 and November 18, 1997, respectively.
[3] In reassessing the Appellant for the 1994 and 1995 taxation years, by concurrent Notices of Reassessment mailed on October 14, 1997 and in reassessing the Appellant for the 1996 taxation year by Notice of Reassessment mailed on December 22, 1997, the Minister disallowed the deduction of the business losses.
[4] The Appellant was employed full time in the taxation years 1992 to 1997 by Polyser Rubber Corporation and Boyer Rubber Inc. and while so employed made the decision that he could start a golf shop business out of his home. He was an avid golfer and had been so for years and was well known for his skills in his home and work area. He discussed his idea of the business with friends and acquaintances and received encouragement from them. It was made clear to the Appellant that many of his fellow workers and golf enthusiasts would be retiring early and golf was definitely on a major surge in popularity. The Appellant's skills and knowledge about the game of golf and his experience with the sport and equipment necessary, he felt, put him in a unique position to start a business of styling golf clubs to the needs of specific customers.
[5] To retain his skills, the Appellant took a course at the Golfworks Teaching – Learning Center in Newark, Ohio, U.S.A. This entailed all aspects of building personalized clubs for individuals whose skills and needs he would assess. The Appellant and one other individual in the area were the only persons operating such businesses. With a minimum of equipment, the Appellant opened his golf shop in the basement of his home where he would design and build golf clubs for his clients at a cost of about 1/3 of that charged by golf professionals at the various clubs in his business catchment area. The business was advertised by mail drop or word of mouth through the local golf clubs and prospective customers would be assessed by the Appellant for their needs and he hopefully would be retained to make clubs for their purchase.
[6] The Appellant sought advice from his accountant and other business acquaintances in order to set up his business and realized that the business would take time to produce a return on his investment of his money and time. Losses in the business for his first year, 1992, and second year, 1993, were $10,023 and $11,799, respectively. These losses were deducted from his income for those years and were accepted by the Minister. His losses for the years 1994, 1995 and 1996 were $11,885.84, $7,584.98 and $3,315.52, respectively and were disallowed by the Minister and it is these disallowed losses that are at issue.
[7] The Minister submits that the Appellant's business was not carried on for profit or with a reasonable expectation of profit and the expenses were not incurred for the purpose of producing income from a business and as an alternative that the business expenses were not reasonable in the circumstances.
[8] The Moldowan test articulated by Mr. Justice Dickson as he then was, in his 1977 decision (Moldowan v. The Queen, 77 DTC 5213 stated:
"Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business..."
The words "reasonable expectation of profit, became the test for business expense deductibility otherwise the expenses would be considered to be personal and living expenses. Each circumstance under scrutiny will rise or fall on the particular facts presented to the Court and requires the presence of a profit motive but also it must be objectively reasonable. The intention of the taxpayer must also be reasonable in the circumstances. Mr. Justice Bowman is an outspoken critic of this hindsight assessment stating that "the examination always occurs years after the commencement of the business and then the determination is ultimately based, in large measure, on the application of hindsight". This type of examination can be potently flawed.
[9] Further, as was said in Tonn et al. v. The Queen, 96 DTC 6001, by Linden, J.A.
"The tax system has every interest in investigating the bona fides of a taxpayer's dealings in certain situations, but it should not discourage or penalize, honest but erroneous business decisions. The tax system does not tax on the basis of a taxpayer's business acumen, with deductions extended to the wise and withheld from the foolish. Rather, the Act taxes on the basis of the economic situation of the taxpayer - as it is in fact, and not as it should be, ..."
[10] It must be clearly borne in mind when assessing the circumstances of each case that the business is not being operated at a loss in order to generate tax refunds or other such tax consequences. Once again in Tonn (supra):
"The cases in which the "reasonable expectation of profit" test is employed can be placed into two groups. One group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. ... Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a "pious wish" or "fanciful dream". It is only a secondary motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure."
[11] Applying the jurisprudence developed to the facts in this case, it is the opinion of this Court that the Appellant commenced his "golf shop" business with a reasonable expectation of profit from an objective viewpoint. The evidence given by the Appellant was candidly given and supported where necessary. Golf was admittedly a favourite pastime for the Appellant and freely admitted but he sincerely felt that he could develop his business into a viable venture which would enhance his income in the future and which he could develop to the extent that he could create employment for his children in the future. The Appellant had no experience in the past in this business and had nothing to fall back on other than this type of venture which had been successful for his only competitor in his area and it was a fast growing business in the U.S.A.
[12] The Appellant had unique knowledge of golf and its necessary equipment from his years of being intimately involved in the game. He attended a school at his own expense to be further knowledgeable in the business and then built a shop where he spent innumerable hours attempting to make a "go" of the venture. These were "hobby" hours but he could have spent this time enjoying the sport which he clearly loved. The Appellant sought advice in setting up his business and did not just charge his expenses for his personal enjoyment. It was a planned venture.
[13] The Appellant admitted that he had no financial plan when he started the business and this may have been one of his major errors. His expenses exceeded his profits on sales continually. He should have been alerted that there was a fatal flaw in his operation. Although this Court finds that the Appellant was engaged in a business enterprise, it was clear from the evidence given that the Appellant was sincere in his intentions for the venture but was less than realistic about how to profit from the lengthy hours and expenditures he put into it. He had no market analysis but from his sales in 1993 he could reasonably assume that the business would build rapidly. There were many reasons why the sales dropped dismally in 1994 many of which were not in the control of the Appellant.
[14] After the disastrous year of 1994 the Appellant should have wound the business down. He had invested all his leisure time and money and the results were for naught. Again, hindsight is 20-20 vision. Instead, the Appellant continued with his business a further two years suffering further losses (albeit not so extreme as previously) until it became abundantly clear that the business was a failure.
[15] The Minister accepted the 1992 and 1993 losses and at that time treated the Appellant's venture as a business but refused to recognize its existence further. This Court finds that the Minister, in these circumstances, should have given the Appellant further consideration before denying the deductibility of his further expenses.
[16] This appeal is allowed on the basis that the Appellant should be reassessed only for the years 1995 and 1996. Accordingly, the matter is referred back to the Minister for reassessment to carry out the terms of this judgment.
Signed at Toronto, Ontario, this 24th day of January 2000.
"W.E. MacLatchy"
D.J.T.C.C.