Date: 20010201
Docket: 2000-1156-IT-I
BETWEEN:
CARLA CALLEGARO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the Bench at Vancouver, British Columbia on November 24, 2000)
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Vancouver, British Columbia on November 22, 2000. The Appellant was the only witness. She has appealed reassessments respecting her 1994, 1995 and 1996 years which disallowed her claims for business losses respecting "Carlada's Cattery" in which she bred, showed and sold Persian cats.
[2] Paragraph 6 to 15 inclusive of the Reply to the Notice of Appeal read as follows:
6. In computing income for the 1994, 1995 and 1996 taxation years, the Appellant claimed losses from the Cattery Activity of $14,046.85, $14,293.00 and $21,126.59 respectively (the "Losses").
7. In reassessing the Appellant by Notices dated March 30, 1998, the Minister disallowed the Losses.
8. In so reassessing the Appellant, the Minister relied on the following assumptions:
a) the Appellant worked full time in the 1994, 1995, 1995 taxation years for the Maple Ridge-Pitt Meadows Community Services Council;
b) the Appellant is the mother of two children, Jessica who was born in May 1987 and Jason who was born in September 1988;
c) the Appellant has pursued the Cattery Activity since the early 1980's;
d) losses in connection with the Cattery Activity were first claimed in 1988 with the Appellant's ex-spouse reporting the losses from 1988 to 1991;
e) The Appellant was separated from her spouse in 1991 and divorced in 1992;
f) the Appellant has been claiming losses from the Cattery Activity since 1992 as shown on Schedule "A";
g) 28 cats were sold during the period 1994 to 1996;
h) the average price of each cat sold during this period was $340;
i) as part of the expenses in respect of the Cattery Activity, the Appellant claimed that wages were paid to her children totaling $7,200, $9,600 and $9,600 in the 1994, 1995 and 1996 taxation years respectively;
j) the children were aged 6 and 7 in the 1994 taxation year;
k) the Appellant also claimed amounts related to work-space-in-home, as detailed on Schedule "B", totalling $9,219, $5,006 and $8,067 in the 1994, 1995 and 1996 taxation years respectively;
l) the Appellant's reported income for the years from the Cattery Activity was $1,860, $3,100 and $4,550 respectively;
m) the Appellant did not have a reasonable expectation of profit from the Cattery Activity during the 1994, 1995 and 1996 taxation years;
n) the expenses claimed in relation to the Cattery Activity were not incurred for the purpose of earning income from business or property but were personal or living expenses of the Appellant; and
o) the expenses claimed in relation to the Cattery Activity were not reasonable in the circumstances.
B. ADDITIONAL MATERIAL FACTS RELIED ON
9. As a result of her divorce, the Appellant changed residences and claimed moving expenses of $2,199 in the 1994 taxation year (the "Moving Expenses").
10. The Moving Expenses were not incurred to enable the Appellant to commence carrying on a business or to be employed at a new work location in the 1994 taxation year. Further, the distance from the former residence to the new residence was less than 40 kilometres.
C. ISSUES TO BE DECIDED
11. The issues are whether:
a) the Appellant is entitled to claim business losses with respect to the Cattery Activity in the 1994, 1995 and 1996 taxation years; and
b) the Moving Expenses are deductible in computing the Appellant's income for the 1994 taxation year.
D. STATUTORY PROVISIONS RELIED ON
12. He relies on section 3, 9, 62 and 67, subsections 18(12), 152(9) and 248(1) and paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act”).
E. GROUNDS RELIED ON AND RELIEF SOUGHT
13. He respectfully submits that the Appellant did not have a reasonable expectation of profit from the Cattery Activity in the 1994, 1995 and 1996 taxation years and the Minister properly disallowed the losses in accordance with section 9 of the Act.
14. In the alternative, if it is found that there was a reasonable expectation of profit from the Cattery Activity, which is not admitted but is specifically denied, he submits that:
a) the expenses claimed by the Appellant, as detailed on Schedule "B", were not incurred by the Appellant to earn income from business or property but were the personal and living expenses of the Appellant and therefore, the expenses are not deductible from income pursuant to paragraphs 18(1)(a) and 18(1)(h) of the Act,
b) the work-space-in-the-home expenses were not properly claimed pursuant to subsection 18(12) of the Act; and
c) the expenses are not reasonable in the circumstances under section 67 of the Act.
15. Finally, he submits that the Moving Expenses were not incurred to enable the Appellant to commence carrying on a business or to be employed at a new work location in the 1994 taxation year. Further, the distance from the former residence to the new residence was less than 40 kilometres. Therefore, no expenses are deductible pursuant to section 62 of the Act.
[3] The Respondent reviewed its submissions in Schedule "A" and "B" with the Appellant. They were not filed with the Reply and therefore the Court ruled that the Respondent bore the onus of proof respecting them. They constituted the auditor's detailed calculations of the alleged losses. They were confirmed upon review with the Appellant.
[4] However, in her evidence in chief, the Appellant submitted revised calculations of her losses claimed based upon her understanding as a result of the reassessments. They are contained in Exhibit A-6. They are accepted because the Court believes not only that she did not understand what her unidentified tax-preparer was doing. In addition, the Court finds that, even now, she does not fully understand the mathematical calculations involved. In summary, they read as follows:
1994 1995 1996
Income $1,860.00 $3,100.00 $4,550.00
Expense 5,167.00 5,489.00 8,009.38
Loss $3,307.00 $2,389.00 $3,459.38
These calculations omitted previous deductions of wages to her children, work-space-in-home expenses and some auto expenses. They are reasonable, based upon the Appellant's testimony and the provisions of section 67 of the Income Tax Act.
[5] The question before the Court is whether the Appellant had a reasonable expectation of profit. With that, the Appellant must overcome the decision of the Federal Court of Appeal in Enno Tonn et al v. The Queen, 96 DTC, 6001 at 6009 and 6010 wherein the Court said:
A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. 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. Such activities have included horse farms,30 Hawaii and Florida condominium rentals,31 ski chalet rentals,32 yacht operations,33 dog kennel operations,34 and so forth. 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".35 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.
[6] The Appellant acquired a Persian cat in 1980 and between then and 1987 became the owner of three Persian cats. During those years she states that it was a hobby. However, in 1988 it became a business and the Court accepts this as true. She began then to build a breeding stock of Persian cats. In 1991 or 1992 one of her male Persians was best all breed cat in Canada and seventh in the world. Until 1994 she and her husband were in partnership in the Cattery. They moved into a less populated area so as to have their 20 breeding cats away from people they might bother. They built a special addition onto their house for the cats and their kennels and they selected cats for breeding with "Silver" and show quality in mind. They paid $3,000 U.S. for one cat and they had to euthanize one male which they feared had a disease. That fear was confirmed in the subsequent autopsy.
[7] For these reasons, the Court accepts the Appellant's testimony that as of 1988 it was not a hobby; rather, there was a start-up business owned by a husband and wife partnership. When that partnership broke up upon their divorce, the Appellant continued as a sole proprietor. Moreover, in the Court's view, a sole proprietorship is much different than a partnership in that decisions and inputs of wisdom are no longer shared, labour is not divided or specialized and everything from financing to hours of work becomes more onerous for the individual operator. For these reasons, the break up of the marriage extended any start-up period to which the Appellant is entitled.
[8] The Appellant's gross Cattery income in evidence during her individual business operation years is as follows:
1994 $1,860
1995 3,100
1996 4,550
1997 9,300
Moreover, her net 1997 income before deducting house expenses was $1,469.27. She explained that this occurred because she had litters of four or five kittens, rather than two or three, so it was a good year. That explanation is accepted. She sold the kittens and, in that year, she traded breeding stock for $100 or $200 each plus future consideration of a kitten, should she decide to go back into the business. In fact, she phased back down to a hobby status after 1997 as a result of the pressures of time and these reassessments.
[9] At page 5215 of William Muldowan v. The Queen, (SCC) 77 DTC, 5213, Dickson, J. set out some criteria with which to determine a reasonable expectation of profit. Using them, the Court finds:
1. Profit and loss experience in past years - The Appellant's experience is entirely of losses until 1997.
2. The taxpayer's training - Before commencing the business with her husband in 1988, the Appellant had familiarized herself with the subject of the business for eight years. However there is no evidence that she or her husband had actually operated a business before 1988.
3. The taxpayers' intended course of action - The Appellant intended to build up a sufficient stock of breeding females to produce both show and pet cats. Her emphasis was on producing sufficient show-quality Persians to both constitute advertising and to raise the price of her pet Persians. She achieved that quality in 1991 or 1992. By 1994 she had about 20 breeding females which typically produce litters of two or three kittens, although they may produce litters of four or five kittens. When they finally produced four or five in 1997 she did show a profit when premises-at-home charges are not included. It should be noted, however, that her gross income in 1997 was only $9,300. The Appellant feels that this was low because she only sold one quality kitten for $800 or $900. However, because she had stopped going to shows and reduced her sales expenses, it is fair to suggest that, overall, the net result was about as good as it would have been had she showed.
4. The capability of the venture to show a profit after charging capital cost allowance - Based on the foregoing analysis, allowing an extended start-up period due to the break up of the partnership, and accepting the restrictions on home capital expenses required by the Income Tax Act itself, the venture had the ability to show a marginal or modest profit after charging C.C.A. if the expenses were the reasonable ones set out in Exhibit A-6. Based upon Appellant's testimony, she closed the business in 1997 and this testimony is also accepted.
[10] For the foregoing reasons, the Court accepts the Appellant's plea that she had a reasonable expectation of profit from her Cattery in 1994, 1995 and 1996. However, section 67 was pleaded by the Respondent and the Appellant properly filed Exhibit A-6. Based upon these two facts, the Appellant is allowed losses for the years in question as follows:
1994 $3,307.00
1995 2,389.00
1996 3,459.38.
[11] The appeal is allowed on that basis.
Signed at Ottawa, Canada, this 1st day of February, 2001.
"D. W. Beaubier"
J.T.C.C.