Date: 20010424
Docket: 2000-4193-TI-I
BETWEEN:
ELIZABETH GIROUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.
[1] The Appellant appeals her assessment of income tax for the years 1995 and 1996. In her Notice of Appeal, she elected the informal procedure.
Issue
[2] The issue is whether the Appellant's enterprise was a business in those years and if so, what expenditures was she entitled to deduct from income in those years.
Facts
[3] In computing income for the 1995 and 1996 years, the Appellant claimed business losses in the amounts of $18,494 and $21,552 respectively.
[4] The Minister of National Revenue reduced the expenses by $4,861.29 to $13,632.71 for the 1995 year. The Appellant accepted most of the reductions of her claimed losses for 1995 but left in dispute an interest amount of $2,627.38 and a rental claim of $327.42.
[5] The Appellant acknowledged that $1,000 of the interest amount was personal and the balance of $1,600 would be interest paid on a line of credit. The evidence substantiated that the rental claim of $327.42 would be proper. Thus, the revised alleged business loss for 1995 is ($13,632.71 + $1,600 + $327.42) $15,560.13.
[6] Concerning 1996, the Appellant's position was the same in regards to business losses and expenses disallowed. Again, the evidence was similar to 1995 and my findings are the same.
[7] Thus, the revised alleged business loss for 1996 the Appellant may be entitled to deduct from income is ($9,831.58 + $1,559 + $327.42) $11,718.
[8] The Appellant claimed losses for the enterprise from 1993 to 1998 and reported income and expenses as follows:
Year Revenue Expenses Loss
1993 $1,890.00 $18,082.00 ($16,192.00)
1994 $1,200.00 $25,888.00 ($24,688.00)
1995 $1,628.00 $20,122.00 ($18,494.00)
1996 $2,515.00 $24,037.00 ($21,522.00)
1997 $3,267.00 $22,049.00 ($18,782.00)
1998 $2,278.00 $11,058.00 ($ 8,780.00)
[9] With the corrected figures for 1995 and 1996, it can be said that the Appellant claimed losses for the enterprise in 1993, 1994, 1997 and 1998 and reported income expenses and losses for those taxation years and the corrected expense figures and losses for 1995 and 1996 change the schedule as follows:
Year Revenue Expenses Loss
1993 $1,890.00 $18,082.00 ($16,192.00)
1994 $1,200.00 $25,888.00 ($24,688.00)
1995 $1,628.00 $17,188.00 ($15,560.00)
1996 $2,515.00 $14,232.00 ($11,717.00)
1997 $3,267.00 $22,049.00 ($18,782.00)
1998 $2,278.00 $11,058.00 ($ 8,780.00)
[10] The average loss for the six years was approximately $16,000, on an average income of $2,140.
[11] The Appellant at all material times was a teacher with the London Board of Education who earned in 1995 and 1996 a salary of $68,744.36 in both years. She holds a Master's degree in education.
[12] The Appellant's husband, Glen Murray Seymour (the "husband") was injured at work in 1988. As a result of this disabling injury, he was on worker's compensation up to the end of 1992. Although benefits ceased, I am satisfied that the husband's physical condition was such that he would require a home job with lots of rest.
[13] The Appellant and her husband, for various reasons, decided that in 1993, the Appellant would start a business that she would finance and the husband would manage the affairs of the business and be the sole operator thereof.
[14] It was stated that the husband would not have compensation for his efforts until a profit was made or unless he required funds for personal expenses. The enterprise paid the husband $1,000 in 1995 and $6,000 in 1996 as the husband required these amounts for personal expenses.
[15] The enterprise was that of audio and video recording, voice-over, animation, character development, web page development, desktop publishing, production and sale of audio tapes and compact discs (CDs) and the sales of computer and system software known as Image Group Interactive.
[16] The husband had university education in music and a background in the above field of activities.
[17] The husband did operate the enterprise in a frugal reasonable manner and was able to increase its manpower by taking on replacement students from Fanshawe College.
[18] In 1995, the enterprise in concert with a Ronald Ryan Delavigne ("Delavigne") produced, on computer, Christmas music which was turned into cassettes and CDs. A big issue was made that the CD maker was late in delivery
and they lost the 1995 Christmas sales.
[19] However, the projected revenue was only $13,000 and the total costs was approximately $5,000, leaving $8,000 to be split evenly between the enterprise and Delavigne. So, even if their plan had worked out, the 1995 loss would still be approximately $11,500.
[20] However, even if the CDs had been delivered on time, the enterprise and Delavigne, only had orders for $3,000 worth of these CDs which would have resulted in a total loss of about $2,000 to be split equally.
[21] Both the Appellant and her husband said that the idea behind the enterprise was an attempt to get back to the husband the income he was making at the time of his disability. The Appellant stated the husband's taxable income at the time of his disability was $35,000.
[22] When the Appellant was asked what would happen if the enterprise, after expenses, produced an income of $35,000, her answer was that it would be paid to her husband as compensation for his efforts.
[23] She also stated, when asked about profit in excess of this amount, her answer was that she never felt that would occur and she was just trying to get back what her husband had before he was injured.
Analysis
[24] The Appellant argues that the 1995 net income should have been as follows:
|
1995 Revised Income |
||
|
Description |
Net Loss |
Net Income |
|
Cas Car Income |
$ 15,400.00 |
|
|
Other Sources |
1,628.57 |
|
|
Revised Income |
$ 17,028.57 |
|
|
Business Loss |
$ 13,632.71 |
|
|
Business Rent |
327.42 |
|
|
Interest Adjust |
1,737.45 |
|
|
Revised Loss |
$15,697.58 |
|
|
Revised Net Profit |
$ 1,330.99 |
|
[25] The Appellant further argued that the year 1996 should have been as follows:
|
1995 Revised Income |
||
|
Description |
Net Loss |
Net Income |
|
Cas Car Income |
$ 13,500.00 |
|
|
Other Sources |
2,485.00 |
|
|
Revised Income |
$ 15,985.00 |
|
|
Business Loss |
$ 9,831.58 |
|
|
Business Rent |
327.42 |
|
|
Interest Adjust |
1,187.87 |
|
|
Revised Loss |
$11,346.49 |
|
|
Revised Net Profit |
$ 4,638.51 |
|
[26] However, the enterprise in order to show a profit to the Appellant, would have to produce sufficient revenues to pay the husband's compensation to the amount of $35,000 annually.
[27] The income put forth by the Respondent in argument is not sufficient as it does not take into consideration the Appellant's stated intention to pay the husband up to $35,000 annually to replace his lost salary. Therefore, the income would have to be increased in 1995 by at least twice the amount put forth in argument and in 1996, be increased by approximately two and a half times as submitted in argument.
[28] The only financial proposal before the Court was one prepared by Delavigne for himself, which has proven totally unrealistic.
[29] Taking in all the usual indices of whether an enterprise is a business such as the profit and loss experience from 1993 to 1998 (which is the start and the ending of the enterprise), the taxpayer's training in the type of enterprise which was nil, the taxpayer's course of action (which was her husband's course of action), the capability of the enterprise as capitalised to show a profit after claiming capital cost allowance, I am not convinced that the Appellant had a reasonable expectation of profit in any of the six years.
[30] It is noted that the Appellant, on December 16, 1993, executed and registered a Ministry of Consumer and Communication Registration of sole proprietorship of "Image Group Interaction" a "Multi-Media Video and Graphic Design" and on December 22, a vendor's permit was issued by the Ministry of Finance to Elizabeth Giroux and Glen Seymour, operating as "Image Group Interaction" and "Multi-Media Video and Graphics". However, since the enterprise was not a business, I do not have to make a finding as to who was the actual owner of the enterprise.
[31] The Appellant certainly financed, from her salary, the enterprise.
[32] For all the above reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 24th day of April, 2001.
"Gordon Teskey"
J.T.C.C.