Date: 20010529
Docket: 2000-2536-IT-I
BETWEEN:
PAMELA STEWART,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller, J.T.C.C.
[1] This is an appeal by Dr. Pamela Stewart of the Minister's reassessment of the Appellant's 1995 and 1996 taxation years. At the outset of the trial it was agreed that the sole issue in dispute is whether the Appellant is entitled to deduct, against other income, losses from her purported business for 1995 and 1996 in the amounts of $6,441.61 and $4,453.31 respectively.
[2] The Appellant is a physician, who, during 1995 and 1996 worked as an employee of the Toronto General Hospital and the East End Community Health Centre. In each of these years she earned approximately $100,000 from her employment with these two entities. The employers deducted and remitted appropriate source deductions. The Appellant did not file 1995 or 1996 returns on a timely basis, but filed them after having been assessed by the Minister by notices dated November 30, 1998. The Appellant filed Notices of Objection to such assessments along with her 1995 and 1996 returns on March 3, 1999. The Minister then reassessed based on those returns on March 9, 2000. It is from those reassessments the Appellant now appeals.
[3] The Appellant commenced her practice as a physician in 1988, and in 1990 narrowed her practice to that of a family physician. For the years 1990 to 1994, she earned some professional income over and above her employment income from doing locums and working at a women's college. This professional practice she stressed was a different medical practice than what she decided to pursue commencing in 1994, which was a psychotherapy specialty. Ultimately, her intention was to obtain her qualifications in psychiatry so she could devote herself to this speciality, with an emphasis on trauma. The East End Community Health Centre with whom she was employed in a two-thirds position in 1995 and 1996 would not allow her to develop her psychotherapy practice through the auspices of that organization. She was also employed in 1995 and 1996 in a half-time position at the Toronto General Hospital, as part of her arrangement with the University of Toronto. As well, she was a single mother with an eight year old daughter. She maintained she saw two to five patients a week in her psychotherapy activity, and these patients were seen primarily in the early evening. These patients were referred to her. She rented space from a group of psychiatrists, although no rental expense was shown in her return for 1995. She also worked part-time for Parkdale Community Health Centre, for whom she would be required to make occasional house calls, although this was not considered by her as part of her developing psychotherapy practice. Income from Parkdale, however, was included in the reported professional income for 1995 and 1996 of $1,753 and $3,062 respectively, although she gave no evidence of the breakdown between the professional income from psychotherapy and the professional income from Parkdale. Clearly though the professional income from psychotherapy in 1995 and 1996 was less than $1,753 and $3,062 respectively. The expenses claimed against this income were $8,195 and $7,515 respectively. Major expenses in 1995 were capital cost allowance of $967, although she could not recall what that was for, car expenses of $4,476 and utilities of $783. Major expenses in 1996 were insurance of $1,932, car expenses of $2,453 and utilities of $1,147. No receipts were provided by the Appellant. She acknowledged no log was kept of car expenses, though she admitted some of the car expenses claimed related to work other than in connection with her psychotherapy practice.
[4] To maintain her OHIP number during the years in question the Appellant had to continue her private practice to some degree. If she did not, she would lose her OHIP number and upon acquiring a new number she would do so at a 30 percent lower rate of remuneration.
[5] The Appellant will qualify this June for her psychiatry speciality and she expects by the end of the summer to be practising fully in that speciality at a profit.
[6] The Appellant's position is that, although the time spent on the development of the psychotherapy practice was minimal, the practice was a business. She anticipated the business would yield profits upon completion of her qualifications and the ability then to devote herself full-time to this specialty. She believed the years of development honed skills that would be necessary for a future successful practice. The Respondent argues there are not enough indices of a business and from an objective perspective there could be no reasonable expectation of profit from the minimal amount of activity she carried on prior to being fully qualified in psychiatry. In the alternative, the Respondent argues, should I find there was a business, the expenses claimed were not incurred in accordance with section 18(1)(a) for the purpose of producing income from that business. The Respondent did not argue pursuant to section 67 that the expenses were not reasonable.
[7] There appear to have developed two lines of reasoning in these cases of the deductibility of business losses. The first is the familiar doctrine flowing from the Supreme Court of Canada decision in Moldowan v. Her Majesty the Queen, [1978] 1 S.C.R. 480 of whether there is a reasonable expectation of profit: if there is no reasonable expectation of profit there is no business, therefore no source of income and therefore no basis upon which the taxpayer is able to calculate a loss. The second line simply shifts emphasis from solely relying on the question of whether there is a reasonable expectation of profit to determine if there is a business, to asking, as Associate Chief Judge Bowman did in the case of Kaye v. Her Majesty the Queen, 98 DTC 1659:
Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say 'yes, this is a business'?
There is no explicit mention of profit or expectation of profit in this question. Neither does the definition of business in section 248(1) include the term profit or expectation of profit. However, section 9 clearly stipulates income from a business is the profit from the business. This approach might suggest there can be a business which may not have a reasonable expectation of profit, though one of the ordinary standards of commercial common sense may well be a genuine profit motive. The former approach demands there be a reasonable expectation of profit for a business to exist for the purposes of the Income Tax Act ("Act"); but does not apparently require indices of commerciality.
[8] How do I reconcile these positions? To have income from a source which is a business requires a business. Income in the context of a business means profit, and case law has extended profit to mean a reasonable expectation of profit. To simply have a reasonable expectation of profit does not in my view constitute having a business and vice-versa, having a business does not necessarily imply having a reasonable expectation of profit. I suggest that to have income from a source which is a business, as contemplated by section 3, requires a business with a reasonable expectation of profit. Business is not defined solely by the reasonable expectation of profit test. While this may be splitting hairs I find the appropriate approach to these cases is to first ask Associate Chief Judge Bowman's question. If that question is answered affirmatively, then the next question is the Moldowan question. If the first question is answered negatively, then ask if there is any other source of income for which the Moldowan question can be posed. If not, that is the end of it.
[9] Judge Hershfield put this somewhat differently in Spearing v. Her Majesty the Queen, 2001 DTC 3691 where he stated:
... Whether any activity is a "business" - a source of income - should be a finding of fact in each case. This requires an examination in each case of the particular activity and requires consideration of whether there is a genuine profit motive and whether the commercial indicia of the activity are sufficient to constitute it a business. ...
Clearly, however, he stipulates a double criteria of genuine profit motive and sufficient commercial indicia for the finding of the existence of a business qualifying as a source of income for purposes of the Act.
[10] The reason I have broken this approach into two steps is simply because I can envisage a situation of a business with no profit element: philanthropy, hobbies or community organizations to name a few. For the business to be considered a source of income or source of loss requires some element of a profit test. Considerable case law has grown around the reasonable expectation of profit test, which some suggest has taken on a more far-reaching life of its own than was ever intended. More recently, as noted above, the Spearing case has introduced the requirement of a genuine profit motive. The distinction perhaps lies in one concept requiring an objective approach and the other a subjective approach. The reasonable expectation of profit test appears to stand alone in determining whether there is or is not a business. The search for a genuine profit motive is presented more in the context of one factor of many in determining the existence of a business. The difficulty I find with following this latter approach arises in a situation where all commercial indices point to a business except there lacks a genuine profit motive. Does that one factor along preclude a finding of the existence of a business? This does not strike me as logical. So the first question of whether or not there is a business I find should be independent of the profit issue. The profit issues arises, once finding a business exists, in determining whether such a business is a source of income or loss for the purposes of sections 3 and 4 of the Act.
[11] In asking the first question, and "applying ordinary standards of commercial common sense", factors to consider would include:
- time spent
- capital invested
- preparation and implementation of a plan
- books and records kept
- financial statements issued
- business bank accounts
- stationary, cards, phone numbers
- advertising/promotion
- behaviour of taxpayer as a business person
- behaviour of taxpayer for personal benefit
- business premises
- adventure in nature of trade
In answering the second question of whether there is a reasonable expectation of profit, factors to include are:
- past profit and loss
- taxpayer's motivation
- capability objectively to earn a profit
- nature and stage of business
[12] As an aside, I limit this approach to business income as opposed to property income as I believe different circumstances arise in connection with income from property. The first question to be asked is simply, is there a property, before moving to the Moldowan question.
[13] In turning to the Appellant's situation and asking the first question, it is apparent there were some, but not many, elements of commerciality to justify the activities in 1995 and 1996. The Appellant had little time to devote to the development of the psychotherapy practice given her greater than full-time employment load, as well as her parenting duties. She provided no evidence of any capital expenditures in the psychotherapy activity, nor did she produce any books or records or financial statements. While she indicated it was her plan since 1994 to obtain a degree in psychiatry and immerse herself full-time in a trauma subspecialty, this I would describe more as a commendable goal than a bona fide business plan. There was no evidence of any other commercial trappings. It was clear the Appellant wished to retain her OHIP number, and it made good business sense that she did, so that some time in the future, if and when her trauma practice commenced in earnest, she could retain a higher billing rate. But this is more for a future business than the very limited activity she was engaged in in 1995 and 1996. She testified that the psychotherapy activity from 1994 to 2001, as limited as it was, was critical in equipping her with the capability to ensure a future successful practice. However, she also indicated that from graduation in psychiatry it would only take a graduate a few months to be engaged full-time in that professional practice. I fail to see how the minimal activity for the seven years previous contributed a great deal to the brief start-up period once qualified. All professionals build on their experience and engage in some form of training, and the Appellant is to be commended for the diligence and sincerity she has shown in reaching her goal. But her activities in doing so do not constitute a business. She behaved as a dedicated physician to switch career tracks to a subspecialty she clearly relished; she behaved little as a business person in the years in question. I therefore find she was not in business in 1995 and 1996 and further, there was no other source of income to which the Moldowan question could be posed.
[14] Following the approach I have enunciated, it is not necessary to explore in detail the reasonable expectation of profit issue, however, given the Court from which it stems and the quantum of reliance on this concept in business loss cases I feel somewhat obliged to indicate whether, in this case, there was a reasonable expectation of profit, had I found there was a business or other source of income. The Appellant's profit and loss history was consistently a loss. Her motivation for the limited activities stem more from a need to retain her OHIP number for future use than for current profit. The work undertaken by her could never be sufficient to earn a profit until she gave up her employment and truly started her business. The activity she engaged in can not even be described as start-up activity where losses are common. Objectively, there could not have been a reasonable expectation of profit. The expectation of profit was an expectation that down the road she would finalize her qualifications, she would give up her employment and commence business. This does raise an interesting dilemma however as to how long can a taxpayer incur losses clinging to some future expectation before that expectation is found not to be reasonable. Common sense must surely prevail in reviewing each situation.
[15] It is unnecessary to review the details of the expenses given my finding there is no business and therefore no source of income upon which the Appellant is able to calculate a loss. The appeal is dismissed.
Signed at Ottawa, Canada this 29th day of May, 2001.
"Campbell J. Miller"
J.T.C.C.