Date: 20010425
Docket: 2001-86-IT-I
BETWEEN:
GILBERT HENRY, ANGELA HENRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for 1997 and 1998. The appellants are husband and wife and their appeals were heard together.
[2] Gilbert Henry's appeals involved three issues — employment expenses, rental losses and business losses. He conceded the Crown's position on the first two issues, leaving only the issue of the business losses. Angela Henry's appeals involved only the issue of her claim to deduct business losses.
[3] Both appellants are intelligent, articulate and well educated. They each hold master's degrees in education. Gilbert Henry is the principal of a public school. Angela Henry is a teacher at Camosun College. Both have had distinguished careers in education.
[4] It is convenient to set out a portion of the replies to the notices of appeal. In the case of Gilbert Henry the portion is as follows.
In respect of the business losses:
r) in 1997 and 1998, the Appellant claimed business losses as follows:
1997 1998
GROSS INCOME $3,207.59 $1,100.00
LESS:
INTEREST 96.00 36.00
MEALS, ENTERTAINMENT 360.00 50.77
VEHICLE 423.30 220.12
OFFICE EXPENSES 46.90 184.24
TELEPHONE, UTILITIES 480.00 180.00
TRAVEL 180.00
OTHER EXPENSES 1,310.25 360.84
CCA 2,547.00 2,037.60
TOTAL EXPENSES 5,443.45 3,069.57
NET LOSS $2,235.86 $1,969.57
s) the revenue reported by the Appellant in 1997 consisted of $1,547.00 from the Bella Bella Community School Society ($1,500.00 for consulting fees and $47.00 for expenses), $460.59 from the Employer as reimbursement for attending a conference in Vancouver and $1,200.00 subcontract income from the Appellant's son, Damon Henry (the "Son");
t) the revenue reported by the Appellant in 1998 consisted of $500.00 from the Employer and $600.00 rental income from the Son, who was a musician residing in Vancouver at that time;
u) the amounts received from the Employer were either reimbursements for expenses or employment income received for services provided to the Employer and do not constitute income from a business or property;
v) the expenses claimed as business expenses by the Appellant in 1997 and 1998 were not incurred to earn income from a business or property but were personal or living expenses of the Appellant;
w) the payment from the Bella Bella Community School Society contained an amount to reimburse the Appellant for his expenses;
x) the Capital Cost Allowance was claimed in respect of various Amplifiers, a Drum Kit, a CD player, a tape recorder, a turn-table and records, CDs and tapes, all of which were personal assets of the Appellant; and
y) the Appellant was not operating a business in 1997 and 1998.
[5] In the case of Angela Henry the relevant portion is as follows.
b) in 1997 and 1998, the Appellant claimed business losses as follows:
1997 1998
GROSS INCOME $2,460.00 $3,048.73
LESS:
INTEREST 96.98
MEALS, ENTERTAINMENT 100.78
MAINTENANCE, REPAIRS 145.56 108.30
OFFICE EXPENSES 533.96 597.74
SUPPLIES 490.00 946.97
SALARY, WAGES 390.00 541.20
ADVERTISING 177.66
TRAVEL 921.95 1,611.69
TELEPHONE, UTILITIES 280.00
OTHER EXPENSES 1,490.00 608.80
CCA 2,719.55 1,519.55
TOTAL EXPENSES $6,788.00 $6,492.69
NET BUSINESS LOSS $4,328.00 $3,443.96
c) the revenue reported by the Appellant in 1997 consisted of $659.70 received from the Employer, $900.00 in professional development funding also from the Employer and $900.00 from her spouse;
d) the revenue reported by the Appellant in 1998 consisted of $2,448.72 received from the Employer and $600.00 from her son Damon Henry;
e) the amounts received from the Employer were reimbursements for expenses;
f) the expenses claimed as business expenses by the Appellant in 1997 and 1998 were not incurred to earn income from a business or property but were personal or living expenses of the Appellant;
g) the Capital Cost Allowance was claimed in respect of a kayak, computer hardware, software, office furniture, a briefcase, a weight machine and a bicycle, all of which were personal assets of the Appellant; and
h) the Appellant was not operating a business in 1997 and 1998.
[6] I shall deal first with Gilbert Henry's appeals. A substantial portion of the expenses consisted of CCA on musical equipment used by his 23-year old son who was trying to establish a career as a bass guitarist in Vancouver. Mr. Henry paid for about $14,000 worth of musical equipment for his son. It is not clear whether he was the owner or his son. The evidence is contradictory on this point. I think the evidence is more consistent with the equipment being owned by the son but paid for by the father. Whoever owned it, I do not see how Mr. Henry can deduct CCA on it. The nature of the business relationship, if any, between him and his son was never made clear. It might conceivably have been argued that it was a partnership, a subcontracting arrangement or a consulting contract. I think it was none of these things. Helping one's son to get started in the music business, buying equipment for him or giving advice is not a business, is not something one can charge for and is not something that gives rise to a deductible loss.
[7] So far as the other items claimed I do not think Mr. Henry was carrying on a business. Most of the items of revenue were a reimbursement of expenses or were paid for by the school board. In each of 1997 and 1998 he received money from his son.
[8] It may well be that at some point in the future Mr. Henry will establish a consulting business in education but this had certainly not occurred in 1997 and 1998. What he describes as a business had none of the indicia of a business. There was no separate telephone listing, no business bank account, no business cards, no business name, no advertising. There must at least be something that looks like a business. Although the Crown mercifully did not argue the case on the basis of reasonable expectation of profit much of what was said in Kaye v. R., [1998] 3 C.T.C. 2248, applies here.
4 I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis "Is there or is there not truly a business?" This is broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.
5 One cannot view the reasonableness of the expectation of profit in isolation. One must ask "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.
6 This leads to a further consideration — that of reasonableness. The reasonableness of expenditures is dealt with specifically in section 67 of the Income Tax Act, but it does not exist in a watertight compartment. Section 67 operates within the context of a business and assumes the existence of a business. It is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000.
[9] The same observations are true in the case of Angela Henry. Her income came from her son, her husband or her employer. Neither reimbursement of expenses nor professional development funding are income from a business. In 2000 Mrs. Henry was commissioned to write a book in her field of expertise. She is eminently qualified to do so, but it does not establish that she was carrying on a business in 1997 and 1998. As in the case of her husband, she had no business name, business cards, separate business bank account, advertising, business telephone, business financial statements, and no business income. In short, no business.
[10] I should not wish by the brevity of these reasons to imply that I do not take the appellants' cases seriously. It is true that there are some inconsistencies in the figures but I am not basing my conclusion on these inconsistencies. Rather I am basing it on the fact that by 1997 and 1998 the activities that they characterize as businesses lacked the inherent commerciality that is the hallmark of a business and that would lead a reasonable person to view their activities as a commercial enterprise.
[11] The appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of April 2001.
"D.G.H. Bowman"
A.C.J.