Date: 20010710
Docket: 2000-3792-IT-I
BETWEEN:
SYLVIA WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent
Docket: 2000-3793-IT-I
AND BETWEEN:
ANDY WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard at Toronto, Ontario on April 9 and continuing on April 12, 2001.
[2] There are three principal issues. First, was the 1997 taxation year properly before the Court? Second, did the Appellants have a reasonable expectation of profit in the 1995, 1996 and 1997 taxation years from their alleged home renovation-construction-glass installation activity and from certain research and development such that the business losses suffered in those years were deductible from other income; and Third, whether the Appellants are entitled to certain scientific research and experimental development expenditures and related investment tax credits.
[3] The two appeals were heard together on common evidence. Evidence was given by Andy Wojcik ("Andy") and by his agent, Tadeusz Wojcik. The Appellant, Sylvia Wojcik ("Sylvia") did not appear. Numerous exhibits were submitted, including Exhibit A-1 containing nine tabs. Only pages 11; 50 to 61; 63 to 65; 73 to 83; 97 to 100; 102; 103; 138 to 140; and 143 to 149 of Exhibit A-1 were admitted into evidence. The Appellants also submitted as Exhibit A-2, statements of business activities for Sylvia for the years 1995 and 1996. Testimony was given by Andy that statements of business activities for himself were the same with the exception of the allocation of the losses. Counsel for the Respondent submitted Exhibit R-1, being a copy of "Answers for a Business Questionnaire: Royal Knight Contracting".
[4] After the close of the hearing the Appellants' agent filed with the Court on April 27, 2001 the Appellants' Written Submission. On May 3, 2001 counsel for the Respondent submitted Respondent's Written Submissions. Further, on May 11, 2001 the Appellants' agent submitted what he entitled "Appellants' Final Written Submissions". Subsequent to that, the Appellants' agent submitted a document entitled "Supplementary Factum of the Appellants" including a form of motion requesting the Court to admit same.
[5] I have reviewed this last document and I do not believe it is a valid motion because it does not conform with the Rules of the Tax Court of Canada requiring notice and a delay for the presentation of the motion. In any event, I do not consider that the additional documents assist the Appellants' appeals.
[6] The Reply to the Notice of Appeal in the appeals of Andy state the following:
7. In computing income for the 1995, 1996 and 1997 taxation years, the Appellant claimed business losses in amounts of $1,866.00, $2,532.00 and $2,354.00 respectively.
8. The Minister assessed the Appellant's 1995, 1996 and 1997 taxation years as filed, Notices of Assessment thereof dated March 28, 1996, April 7, 1997 and June 22, 1998 respectively.
9. In reassessing the Appellant's 1995, 1996 and 1997 taxation years, concurrent Notices of Reassessment thereof dated March 1, 1999, the Minister disallowed business losses in the amounts of $1,866.00, $2,532.00 and $2,354.00 respectively.
10. In so reassessing the Appellant, the Minister made the following assumptions of fact:
(a) at all material time the Appellant was employed full time with several glass companies;
(b) the Appellant's main source of income was employment income earned from these glass companies (Schedule A attached);
(c) in 1988 the Appellant commenced a partnership business with his spouse known as Royal Knight Contracting ("RKC") for the installation of residential windows;
(d) RKC has been in existence since 1988, and has shown business losses for the last 10 years;
(e) the Appellant and his spouse had no business plans or projections on how to develop RKC;
(f) no business income was ever generated in respect of RKC over the years with only minor gross income in 1994 and 1995 from patent work for his brother's company;
(g) the Appellant and his spouse have claimed business losses in respect to RKC for the last 10 years as follows:
|
Year |
Gross Income |
Net Business Loss |
|
1988 |
$ 1 |
$(14,069) |
|
1989 |
0 |
(17,080) |
|
1990 |
1 |
(19,664) |
|
1991 |
1 |
( 8,987) |
|
1992 |
0 |
(11,796) |
|
1993 |
0 |
(11,733) |
|
1994 |
3,155 |
(18,523) |
|
1995 |
3,745 |
(18,663) |
|
1996 |
0 |
(25,325) |
|
1997 |
0 |
(23,548) |
|
1998 |
not filed |
not filed |
(h) although it was a 50/50 partnership, the Appellant and his spouse discretionary [sic] altered their partnership allocations of income as follows:
|
Year |
Appellant's Share |
Spouse's Share |
|
1989 |
($17,080) 100% |
0 |
|
1990 |
($19,664) 100% |
0 |
|
1991 |
($ 898) 10% |
($ 8,089) 90% |
|
1992 |
($ 5,898) 50% |
($ 5,898) 50% |
|
1993 |
($ 1,173) 10% |
($10,560) 90% |
|
1994 |
($ 1,852) 10% |
($16,671) 90% |
|
1995 |
($ 1,866) 10% |
($16,797) 90% |
|
1996 |
($ 2,532) 10% |
($22,793) 90% |
(i) the inventory purchased on April 16, 1994 had not been used and remained in inventory for the years under appeal;
...
(m) the Appellant stated that most of their incurred expenditures related to the research and development activities, but they failed to provide the T661, T2038 forms and adequate documentation in support of their eligibility for the investment tax credits in respect of scientific research and development qualified expenditures;
(n) consequently, no investment tax credits were granted for the Appellant's request.
[7] The Reply in the appeals of Sylvia is essentially the same except that (i) the business losses she claimed were $16,797.00 in 1995, $22,793.00 in 1996 and $21,194.00 in 1997; (ii) paragraph 10(a) indicates that Sylvia was employed full time at Lapointe Fisher Nursing Home Ltd. which provided her main source of income and (iii) the reference in subparagraph 10(f) refers to patent work for Sylvia's brother-in-law's company. In each of the Replies, the allocation of the losses is the same. No specific allocation is made for 1997 but the loss claimed totalled $23,548.00 of which Sylvia claimed $21,194.00, i.e. 90%.
[8] The site of the original operation in 1988 was a small two room rented building. By the end of 1993 the operation, which had practically closed down was being run from the Appellants' home at 125 Cole Road. In November 1993 the Appellants acquired 12 John Street and commenced renovating it as their residence and place of business. At about this time Andy acquired considerable construction materials at auction and in 1994 the Appellants rented an industrial-commercial property at 59 Suburban Street for the storage of some of those materials. The ramifications of these various sites are set out in the Appellants' agent's submissions cited towards the end of this Judgment.
Submissions and Decision
[9] With respect to the 1997 taxation year being properly before the Court, the written submissions of counsel for the Respondent read in part as follows:
The 1997 taxation year is properly before the Court
2. By Notices of Reassessment dated March 1, 1999, the Appellants were reassessed for the 1995, 1996, and 1997 taxation years. Pursuant to subsection 152(4) of the Income Tax Act (the "Act"), the Minister of National Revenue (the "Minister") has the power to reassess taxpayers at any time within the normal reassessment period. The "normal reassessment period" for individuals is defined as the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment and the day of mailing of an original notification that no tax is payable by the taxpayer for the year. The Appellants were originally reassessed for the 1997 taxation year by Notice of Assessment dated June 29, 1998. Therefore, the Minister of National Revenue had until June 2001 in which to reassess the Appellants. The reassessment occurred in March 1999, well within the normal reassessment period. The 1997 taxation year is properly before the Court. The Appellants brought no evidence to show that the assessment and reassessment for the 1997 taxation year occurred on different dates from those stated in the Reply to the Notice of Appeal.
Reply to the Notice of Appeal, paragraphs 8 and 9
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended, subsections 152(3.1) and 152(4), Respondent's Book of Authorities, Tab 1
[10] The agent for the Appellants submitted that much of the correspondence and questionnaires with and from Revenue Canada did not refer to the 1997 taxation year and concludes from that, mainly, that the 1997 year was not properly before the Court. What the agent ignores is that it is the date of the original Notice of Assessment, namely June 29, 1998 which sets the three year clock running. In other words, it is not set running by correspondence and questionnaires emanating back and forth between Revenue Canada and the Appellants or their agent. Consequently I agree with Respondent Counsel's submissions.
[11] With respect to the reasonable expectation of profit test, I believe counsel for the Respondent has summarized the applicable principals. Her written submissions, so far as material, read as follows:
The Appellants had no reasonable expectation of profit from Royal Knight Contracting
6. The Appellants did not have a reasonable expectation of profit from Royal Knight Contracting in the 1995, 1996, and 1997 taxation years. Therefore, they have no source of income from which to deduct their losses in those years.
7. Income from business is defined as "the taxpayer's profit from that business". In order to have a source of income from business, the Appellants must have had a profit or a reasonable expectation of profit from Royal Knight Contracting in the years in question. The reasonable expectation of profit test applies to all types of activities that a taxpayer may claim are business activities.
The Act, supra, section 9, Respondent's Book of Authorities, Tab 1
Moldowan v. R., 1977 CarswellNat 243 (S.C.C.) at 4, Respondent's Book of Authorities, Tab 4
8. In order to determine whether the Appellants had a reasonable expectation of profit, the Court should consider the following factors:
profit and loss experience in past years
the taxpayer's business plan, including the existence, background, and implementation of the plan
the presence of the necessary ingredients to make the activity profitable
the time required to make the activity profitable
the persistence of factors causing losses.
Tonn v. R., 1995 CarswellNat 884 (F.C.A.) at 16, Respondent's Book of Authorities, Tab 5
9. As well, the Court may make another, more general determination as to whether the Appellants had a reasonable expectation of profit:
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.
Kaye v. R. , 1998 CarswellNat 575 (T.C.C. - Informal Procedure) (Bowman, T.C.J.) at 2, Respondent's Book of Authorities, Tab 6
10. The reasonable expectation of profit test is applied to alleged business activities whether or not the activities have a personal element to them.
Stewart v. R., 2000 CarswellNat 259 (F.C.A.) at 3, Respondent's Book of Authorities, Tab 7
The Appellants had no reasonable expectation of profit from Royal Knight Contracting
11. The Appellants commenced their alleged home renovation-construction-glass installation activity (the "Activity" under the name of Royal Knight Contracting in 1988. Andy Wojcik testified that he and his wife became involved with a subdivision project in the late eighties that was supposed to lead to construction work for Royal Knight Contracting. The Appellants were involved in this project for six years but no construction work resulted. In 1994, Tadeusz Wojcik became involved with the Activity when he allegedly began overseeing the research and development that the Appellants were performing. He was not an employee of or a partner in Royal Knight Contracting. According to Andy Wojcik, Royal Knight Contracting continued to carry on the Activity. Some time around 1994, the Appellants purchased a house at 12 John Street in Guelph, Ontario with the intention of renovating it and using it for the Activity and with the eventual intention of reselling it.
12. The Respondent submits that the Appellants have been carrying on the same Activity under the name of Royal Knight Contracting since 1988 and that no new business commenced in 1994.
9 years of losses
13. Between 1988 and 1997, Royal Knight Contracting suffered nine years of losses. Royal Knight Contracting had no customers, obtained no bids for contracts and brought in little or no gross revenue during the years under appeal. Royal Knight Contracting has brought in little or no gross revenue since it commenced operations in 1988. The Respondent submits that it is very difficult for the Appellants to show that they had a reasonable expectation of profit when the Activity has brought in little or no gross revenue over a nine year period.
Knight v. Minister of National Revenue, 1993 CarswellNat 1124 (T.C.C.) at 7 and 8, Respondent's Book of Authorities, Tab 8
Demarais v. Minister of National Revenue, 1990 CarswellNat 548 (T.C.C.) at 3 and 7, Respondent's Book of Authorities, Tab 9
Thousands of dollars of expenses claimed
14. Between 1988 and 1997, the expenses of the Activity ranged between $8,987.00 and $25,325.00. In 1995, the Appellants claimed expenses of $22,408.00, in 1996, they claimed expenses of $25,325.00, and, in 1997, they claimed expenses of $23,548.00. In these years, they brought in a total of $3,745.00 in gross revenue. Their expenses for those three years totaled $71,281.00. Their expenses were nineteen times larger than their gross revenue in the three years under appeal. Their rental expense alone (in 1995, $11,320.60 and in 1996, $12,604.60) exceeded their gross revenue.
Reply to the Notice of Appeal, paragraph 10(g), Exhibit A-2
...
No customers, no contract bids, no actual work for Royal Knight Contracting
17. Andy Wojcik testified that bids for contracts were made but he could not remember the specific contracts on which Royal Knight Contracting may have tendered bids. There was oral testimony about several projects in which Royal Knight Contracting hoped to be involved, such as the Wellington County Board project, work for the Lapointe Nursing Home, and a prospective deal with PPG, but none of these potential projects resulted in any work or revenue for Royal Knight Contracting. Andy Wojcik could not remember the dates relating to these projects so it is not clear whether these projects even relate to the years under appeal. No other evidence regarding these projects was introduced at the hearing. Andy Wojcik testified that small jobs were performed but he did not testify as to any of the specifics of these small jobs, what work was performed as part of them, or what revenue (even an approximation) was brought in as a result of them.
18. Andy Wojcik testified that Royal Knight Contracting could not obtain big contract bids because these types of bids required large cash advances. The Appellants could not obtain large cash advances because the bank would not give them financing. The Respondent submits that this inability to obtain the type of financing necessary to be successful in bidding for contracts, as well as the lack of customers generally, were persistent factors contributing to the Appellants' losses in the years in question and in previous years.
The Appellants did not have the time necessary to make the Activity profitable
19. Royal Knight Contracting was a partnership between Andy Wojcik and his wife, Sylvia Wojcik. Sylvia Wojcik worked full time at a nursing home in the years in question and, therefore, the Respondent submits that she did not have much time to devote to the Activity. Andy Wojcik admittedly had more time but he was also employed at many places of employment during the years in question: Cast Craft Corporation, AGS Contract Glazing Ltd., Pro Roofing and Cladding Co. Ltd., Speedy Auto Glass Ltd., Harding Glass & Mirror Ltd., Albion Glass Co. Ltd., Service Glass & Mirror Ltd., Applewood Glass & Mirror Ltd., TNT Glazing Ltd., KUB Glass & Mirror, and F.G. Aluminum & Glass. The worksites of Andy Wojcik's employment were all over southern Ontario: Mississauga, Kitchener, Oshawa, Brampton, Markham, and Toronto. He spent between two and four hours driving to the worksites each day that he worked. Therefore, between actual employment and his commute to and from his employment, Andy Wojcik would have had limited time to devote to the Activity. Tadeusz Wojcik testified that it was necessary for the Appellants to be employed elsewhere to finance the Activity.
No indicia of commerciality
20. The Respondent respectfully submits that Royal Knight Contracting was not being carried on in a commercially viable manner. The Appellants were content to continue to lose thousands of dollars every year, with little or no gross revenue being earned.
21. Both Andy Wojcik and Tadeusz Wojcik testified that Royal Knight Contracting was also carrying on scientific research and experimental development activites at the same time that the Appellants were carrying on the Activity. The evidence on the research and development was vague. A smokeless ashtray and an eco-dryer were mentioned. However, in order for Royal Knight Contracting to be carrying on an actual business, Royal Knight Contracting also had to be engaged in a commercial endeavour to sell and deliver a product or service to the public. As already mentioned, Royal Knight Contracting had no customers and no bids for contracts. Furthermore, it was unclear from the evidence whether Royal Knight Contacting actually had premises open to the public in the years under appeal.
Knight, supra at 7-8, Respondent's Book of Authorities, Tab 8
22. The Respondent notes that the Appellants spent minimal amounts on advertising in years when they had no customers.
Exhibit A-2
23. The Respondent submits that without customers, without premises open to the public, without some realistic plan as to how to pursue the Activity, and without even rough projections of revenue and expenses, a reasonable person, looking at the Activity and applying ordinary standards of commercial common sense, would say "no, this is not a business".
Kaye, supra at 2, Respondent's Book of Authorities, Tab 6
24. The Appellants were not carrying on the Activity with a reasonable expectation of profit. The Activity had huge losses, little or no gross revenue, insufficient financial resources, no contract bids, no customers, and no potential customers. In the nine years between 1988 and 1997, Royal Knight Contracting, supposedly a home renovation-construction-glass window installation operation, renovated one house: the 12 John Street residence, which became the Appellants' residence in 1995. No other buildings were constructed or renovated. There was no evidence of any glass installation customers or projects. There are simply no indicia of commerciality here on which this Court could conclude that there was a reasonable expectation of profit from the Activity.
[12] The arbitrary way the Appellants allocated the losses in each year is unusual at best and unreasonable in the years in question. Sylvia was allocated 90% yet the evidence shows that Andy was the person who contributed most to the partnership. The fact that no income was generated in years 1988 to 1993 (save the nominal amounts of $1.00) and the fact that the only income generated in 1994 and 1995 ($3,155.00 and $3,748.00) consisted of payments from Andy's brother, allegedly for some research and development work, do not point to a business being carried on. Andy's explanation that when he started to take only 10% of the losses - this was because of a provision in the union contract which he states limited his business activity income/losses to that 10% figure. No independent evidence on this point was given and I simply cannot accept the explanation given by Andy.
[13] With respect to the scientific research and experimental development aspect, once again I accept the written submissions of counsel for the Respondent which read as follows:
Scientific Research and Experimental Development
44. The Respondent submits that the Appellants are not entitled to have any expenses treated as expenditures on scientific research and experimental development because they have not met the many criteria set out in the scientific research and experimental development scheme in the Act.
The claim that the Appellants were unable to obtain the forms has not been established
45. The Appellants claim that the forms to claim scientific research and experimental development expenditures and related credits were consistently denied to them to prevent them from make a scientific research and experimental development claim.
46. The Respondent submits that this claim is incredible. The evidence of Harjinder Dhesy, an Appeals Officer with the Research and Development Division of the Canada Customs and Revenue Agency, establishes that the necessary scientific research and experimental development forms are available and have been available from a variety of sources. The forms can be obtained from any forms counter of a Canada Customs and Revenue Agency office by simple enquiry. The forms can be obtained by telephoning either the general enquiry line or the business enquiry line where, if the individual answering the call did not have the ability to send out the form him or herself, the Appellants would be directed to someone who could provide the forms to them. The general enquiry line and the business enquiry line are in the blue pages of the telephone book and have been there since at least 1998. As well, accountants generally would know about the business enquiry line. There is no prerequisite to obtaining the forms. The Respondent submits that the Appellants' claim of a Canada Customs and Revenue Agency conspiracy to prevent them from obtaining the forms is entirely without foundation.
47. Even if the Court accepts the claim that, for some reason, the forms were consistently denied to the Appellants prior to March 2000, the Appellants did obtain the proper forms in March 2000 when the forms were sent to Tadeusz Wojcik, their representative, by Sherry Sullivan, the Appeals Officer who dealt with the Appellants' Objections. Ms. Sullivan sent a letter to Tadeusz Wojcik outlining the process for applying to extend time to make a scientific research and experimental development claim and indicating that she enclosed forms T661 and T2038 (the scientific research and experimental development forms the Appellants were seeking). The Appellants' representative indicates that, because this letter was addressed to him personally, he felt he could not possibly have used these forms or the process outlined to make a scientific research and experimental development claim for the Appellants. The Respondent submits that, having obtained the blank forms, there was nothing to prevent the Appellants' representative from completing and filing these forms on the Appellants' behalf, and thus making a scientific research and experimental development claim on their behalf.
Exhibit A-1, pages 50-55 of the Appellants' Appeal Book
48. The Appellants claim that the forms provided to them were unreadable. Ms. Dhesy was able to read the forms. The Respondent submits that the forms were, in fact, readable. In any case, there was nothing to prevent the Appellants, either directly or through their representative, from obtaining more forms from either Ms. Sullivan or from any of the other possible sources. Tadeusz Wojcik testified that, at some point, he did consult an accountant regarding the Appellants' tax returns but that it did not occur to him to ask the accountant for the forms.
49. In any case, the Appellants are not entitled to succeed in respect of their claim for scientific research and experimental development expenditures and related investment tax credits because they fail to meet the statutory criteria.
There is no evidence that scientific research and experimental
development was being performed
50. In order to be entitled to the incentives available in respect of scientific research and experimental development ("SRED"), the Appellants must have been engaged in SRED as defined by Parliament. The preliminary words of the definition require that the Appellants must have been engaged in a "systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis".
The Act, supra, subsection 248(1), definition of scientific research and experimental development (formerly defined in Regulation 2900), Respondent's Book of Authorities, Tab 10
51. The Courts have established that scientific research and experimental development requires controlled experiments and highly accurate measurements and the testing of one's theories against empirical evidence. The Court must consider, for example, whether hypotheses were appropriately formulated and the scientific method applied. The Appellants must present cogent, detailed and documented evidence of scientific research and experimental development.
Sass Manufacturing Ltd. v. Minister of National Revenue, 1988 CarswellNat 348 (T.C.C.) (Sarchuk, T.C.J.) at 9-11, Respondent's Book of Authorities, Tab 11
Northwest Hydraulic Consultants Ltd. v. R., 1998 CarswellNat 696 (T.C.C.) (Bowman, T.C.J.) at 4-5, Respondent's Book of Authorities, Tab 12 RIS-Christie Ltd. v. R., 1998 CarswellNat 2485 (F.C.A.) at 5, Respondent's Book of Authorities, Tab 13
52. There is no evidence on which the Court could come to the conclusion that scientific research and experimental development was being carried on by the Appellants in the years in question. The evidence adduced mentioned a few projects: the smokeless ash tray, the eco-dryer, and linear motors for space transportation (the "projects"). However, there is not sufficient evidence of the nature of these activities to establish that they constitute SRED being carried on by the Appellants. The Appellants' case cannot succeed based on evidence of SRED which may have been undertaken by Tadeusz Wojcik, since he was neither an employee of nor a partner in Royal Knight Contracting.
53. There is no evidence as to what technical risk or uncertainty was identified in relation to the projects. There is no evidence of any specific hypotheses formulated in relation to the projects and there is no evidence as to the procedures used in the development of the projects. There is no evidence of any systematic observation, measurement or experiment in relation to these or any other projects.
54. Essentially, the only evidence before the Court is the repeated claim that scientific research and experimental development was being carried on; ...
The Appellants were not carrying on business in Canada as required by subsection 37(1)
55. The first requirement of subsection 37(1) is that the taxpayers must have been carrying on a business in Canada. As already set out in the first part of the Respondent's submissions, the Respondent submits that the Appellants did not have a reasonable expectation of profit and, therefore, that they were not carrying on a business in the years in question. The Appellants were not operating Royal Knight Contracting in a commercially viable manner, they were bringing in no gross revenue, and they had no customers in the years in question. Therefore, the Respondent submits that the Appellants do not meet the first requirement for claiming scientific research and experimental development expenditures and related investment tax credits laid out in subsection 37(1).
The Act, supra, subsection 37(1), Respondent's Book of Authorities, Tab 10
Expenditures must be "all or substantially all" attributable to SRED
56. Even if this Court finds that the Appellants established that their activities constituted SRED and that they were carrying on a business with a reasonable expectation of profit, there are further requirements to be met under subsection 37(1).
57. "Expenditures on scientific research and experimental development" are defined as expenditures that are "all or substantially all" attributable to the prosecution of SRED, according to the definition in subsection 37(8) of the Act.
The Act, supra, subsection 37(8), Respondent's Book of Authorities, Tab 10
58. In the Appellants' case, there is no evidence that any amounts were expenditures that were "all or substantially all" attributable to the prosecution of scientific research and experimental development. The evidence of the Appellants is that they were carrying on the Activity at the same time that they were carrying on research and development activities. They required premises for the Activity, as well as a telephone line and vehicles for use in that undertaking. Therefore, many expenses claimed as business expenses were attributable to the Activity and not "all or substantially all" attributable to the prosecution of SRED.
The SRED must be related to the Appellants' alleged business
59. Finally, subsection 37(1) requires that the scientific research and experimental development be related to the business carried on by the Appellants. There must a nexus between the business and the research and development and that nexus is simply not present here.
The Act, supra, subsection 37(1), Respondent's Book of Authorities, Tab 10
...
[14] The agent for the Appellants contends that the years in question (1995, 1996 & 1997) should be considered as start-up years because in those years the Appellants were undertaking a new business, namely research and development. I cannot accept this proposal. It is clear that to a certain extent the original activity of renovations, etc. was being carried on partly in the years in question. To allow the same entity, namely Royal Knight Contracting to have start-up years every time it commences a new business, in effect, would permit the deduction of losses over an unreasonable period of time. If persons want start-up periods for every new business, they should at least carry on those businesses through a legal entity different than the one which has already had considerable losses for several prior years.
[15] Appellant's agent also submits that processing patents and bringing research and development activities to market takes a considerable amount of time. This may be true but it ignores the fact that to qualify under the Act the research and development must relate to a business being carried on, must consist of a systematic investigation as described above in paragraphs 50 and 51 of the Respondent's submissions and that the expenditures must be "all or substantially all" attributable to research and development; the evidence does not establish that these qualifications were met. Moreover the proper forms were never filed.
[16] The Appellants' agent states further in his original written submissions in relation to 12 John Street (one of the sites where the activity was pursued) and with respect to certain materials acquired.
...
The Appellants further reiterate their earlier submissions of facts and evidence that, all along in terms of a diversified business plan, it was a prudent business plan for the Appellant to have the insurance money to start a business and have the investment funds in fact multiply in value immediately on purchases made well below market value. For example, the 12 John Street made the Appellants $10,000.00, in round figures, just from comparing the appraisals of similar lots of residential land in the area, not counting the value of the house thereon. Notwithstanding and independently, the construction materials and similar purchases were made through an auction, and were purchased at a fraction of what they would cost in retail or wholesale, thus yielding immediately a profit of several 100 percent. Thus for example, the 1994 Appellants investment of $22,000.00 would in fact bring in the neighborhood of a $100,000.00 in sales, or guaranteed profit over the expenses of said property and said construction material when the material was incorporated in a construction business of the Appellants-such as it was factually done at the 12 John Street property.
The Appellants further submit that, it took great deal of planning, research, costs and continued efforts of various sorts for the Appellants to be ready to purchase construction materials when the opportunity arose. Most certainly the Appellants did not just one day purchase the material at a local retail or wholesale outlet. This took much research and skill on part of Andy. The fact of the matter is that in terms of business plan, the Appellants were prepared to do business for quite some time and with great deal of preparation and forethought, following the Appellants business principle in that "the opportunity favors the prepared mind." This in fact happened when a Guelph business closed and the Appellants were thus ready, able and prepared to purchase great deal of the required materials and equipment for their new partnership business with their own funds. This was a very rare, or "once in a lifetime," opportunity for the Appellants, and anyone else for that matter, even though Andy had a long history of attending actions (sic) from a point of view of purchasing assets or chattels for his business.
...
The Appellants reaffirm and submit that, with such a prejudicial predisposition of the Respondent that had a direct effect on the Appellants' various business operations as stated above, starting with 1994 the Appellants (the Appellant and his wife), commenced a new business Royal Knight Contracting (RKC), that was a partnership. The property at 12 John Street was purchased through a bank loan. It was to be a construction and business office and material storage, for rebuilding, renovation, and sale of the property. The profit made from the sale of the 12 John Street was to be used in purchasing similar properties for renovation and sale, and thus further the business development along the same lines and also finance the SR & ED.
The Appellants reaffirm and submit that, the 12 John Street and was purchased for a sum of $68,000 in round figures on the 29th of November 1993. This sum was about $10,000 less than what it would take to purchase a land of similar size in the area, in fact making $10,000.00 just purchasing the land not to mention the property located thereon. The extensive and prior research on 12 John Street indicated that the Appellants were in a position to sell the rebuild and renovated property for an estimated $200,000.00 to $300,000.00 range, at a clear profit over expenses. This was due to the fact that 12 John Street had separate basements, and thus could be made into two semidetached dwellings, without much effort in that respect. This was the one of the Appellants business undertaking and plans, and the Appellants have made extra floors, new roof and roof covering, cathedral ceilings with skylight windows, modern and state of the art electrical and electronic wiring, dedicated fire alarm wiring, cable TV, Internet, and telephone, a firewall between dwellings, and the electrical wiring were on separate circuits as planned by the Appellants.
The Appellants reaffirm and submit that, essentially for the next two years, the Appellants did not live at the 12 John Street, and this property was used exclusively as business premisess, (sic) material storage, and for rebuilding and renovation. The Appellants lived at 125 Cole Road until the last quarter of 1995, and the 125 Cole Road was the residence and part business office since there were no services while the 12 John Street was being totally stripped, renovated, and rebuilt. Furthermore, the Appellant's were testing some of the SR & ED prototypes during their renovation of the 12 John Street, with the aid of the Appellant's sons.
...
... in 1994 the Appellants initially purchased construction materials for their business and that these were placed at 12 John Street. Subsequently, additional purchases of a very large quantity and volume of materials from an auction of a closing business in Guelph, made the 12 John Street too small, and the Appellants first rented land adjacent to the closing business to comply with the time condition for removal imposed by the sale, and then in May 1994 had to rent a large commercial-industrial warehouse with two offices at 59 Suburban Avenue to move and store the purchased material. The volume and type of the materials purchased necessitated the use of large trucks equipped with cranes, forklifts, and about a dozen hired workers to move the material to the 59 Suburban Avenue. Still further, some of the materials not needed for the immediate use at 12 John Street was moved by the Appellants to the 59 Suburban Avenue. Yet, still further some of the materials from the 59 Suburban Avenue was moved to the 12 John Street. Still much further, the material that was not at both said locations was purchased by the Appellants as needed and when needed, following the principle of JIT (Just In Time) material delivery to avoid the tie up of capital and costs of storage.
...
[17] The difficulty in these submissions is that a sale at profit of 12 John Street would not produce a business profit and in any event, if that property was sold there was no indication that any profit was declared in any year up to and including 1997. The sale or installation of the materials probably would result in profits but this never occurred during the years in question.
[18] I add that the Appellants have the burden of proof to show that the reassessment was wrong and to disprove the assumptions contained in the Replies and in these appeals they have not succeeded on either of those points.
[19] In conclusion, for all of the above reasons, the appeals are dismissed.
Signed at Ottawa, Canada this 10th day of July, 2001.
"T. O'Connor"
J.T.C.C.
COURT FILE NO.: 2000-3792(IT)I and 2000-3793(IT)I
STYLE OF CAUSE: Sylvia Wojcik and the Queen
Andy Wojcik and the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 9 and 12, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge T. O'Connor
DATE OF JUDGMENT: July 10, 2001
APPEARANCES:
Agent for the Appellant: Tadeusz Wojcik
Counsel for the Respondent: Sointula Kirkpatrick
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3792(IT)I
BETWEEN:
SYLVIA WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Andy Wojcik (2000-3793(IT)I) on April 9 and 12, 2001 at Toronto, Ontario, by
the Honourable Judge Terrence O'Connor
Appearances
Agent for the Appellant: Tadeusz Wojcik
Counsel for the Respondent: Sointula Kirkpatrick
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 10th day of July, 2001.
|
"T. O'Connor" |
J.T.C.C.
2000-3793(IT)I
BETWEEN:
ANDY WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Sylvia Wojcik (2000-3792(IT)I) on April 9 and 12, 2001 at Toronto, Ontario, by
the Honourable Judge Terrence O'Connor
Appearances
Agent for the Appellant: Tadeusz Wojcik
Counsel for the Respondent: Sointula Kirkpatrick
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 10th day of July, 2001.
|
"T. O'Connor" |
J.T.C.C.