[OFFICIAL ENGLISH TRANSLATION]
2001-2466(IT)I
BETWEEN:
FRANCIS CORPATAUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 29, 2002, at Sherbrooke, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Marie-Aimée Cantin
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 6th day of June 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 27th day of August 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020606
Docket: 2001-2466(IT)I
BETWEEN:
FRANCIS CORPATAUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the 1997, 1998 and 1999 taxation years.
[2] The assessments under appeal were made on the basis of the following assumptions of fact:
[TRANSLATION]
(a) the appellant was a full-time professor at the faculty of education at l'Université de Sherbrooke (hereinafter "University") during the entire period in issue;
(b) the appellant's position as a professor entailed four areas of responsibility: teaching, research, participation in university life and community service;
(c) as an employee at l'Université de Sherbrooke, the appellant was generally required to perform the duties of his position at his employer's place of business, l'Université de Sherbrooke;
(d) among other things, the appellant conducted research in the field of ethnomusicology;
(e) in the context of a so-called "business", the appellant collected children's songs and instrumental pieces from various communities around the world and, according to the appellant, [TRANSLATION] "the product consists of records of ethnic children's music the purpose of which is the preservation of a universal heritage and not the making of profit" (see Annex A);
(f) the target markets were libraries, schools, ethnomusicology specialists and families;
(g) the appellant and the publisher, the ARION corporation, have been bound by a contract since May 10, 1993;
(h) under that contract, the appellant assigned to the publisher exclusive rights to the audio recordings of works in the "Chants des enfants du monde" collection for a ten-year period and in return receives royalties, the terms of which are described in the said contract;
(i) promotion and advertising of the records are the responsibility of the ARION record company of Paris, France;
(j) the statement of income and expenses for the appellant's so-called "business" indicates the following amounts:
1997 1998 1999
Gross revenue $3,500 $3,900 $3,590
Expenses:
Advertising 726
Delivery 1,631
Fuel 300 60
Maintenance, repairs 994
Motor vehicles 278
Office expenses 286
Supplies 1,428 395
Honorariums 93 109 111
Rent 195
Travel expenses 4,800 2,024 8,088
Translation, studio 1,480 1,032
Parking 50
Partial total $ 8,229 $ 4,594 $11,257
Depreciation $ 4,356 $ 5,429 $ 1,141
Total expenses $12,585 $10,023 $12,398
Net total ($9,085) ($6,123) ($8,807)
(k) the appellant did not receive any grants from the University during the period between 1991 and 1999;
(l) according to the appellant, if the royalty revenues increased to the point of covering or exceeding his research expenses, the University would use the surplus to establish special research funds, and it was clear to him that the salaries received for his research projects would be partly covered by those royalty revenues;
(m) there is an employer-employee relationship between the University and the appellant for the following reasons:
· the appellant is a salaried employee and his income is divided over 12 months with 26 pay periods;
· aside from his one month of annual summer vacation, the appellant must inform the University authorities of his non-teaching activities in order to obtain authorization from them to pursue his activities;
· the dean of the University decides on the appellant's workload;
· Mario Laforest, the dean of the faculty of education at l'Université de Sherbrooke, indicated in a letter sent to the Minister that the appellant's research in ethnomusicology is an integral part of his work as a professor;
· the appellant must submit an annual work plan to be approved at a department meeting (approval must be made and forwarded to the appellant by May 25 of each year);
· no changes to the work description can be made during the year without approval;
· the appellant must make an annual report to the University authorities concerning all of his research activities;
(n) according to the dean, Mario Laforest, [TRANSLATION] "while Professor Corpataux's work is very important and is highly original, it nonetheless is not traditional in nature, which would make it eligible for funding from the usual research organizations";
(o) according to the dean, Mario Laforest, [TRANSLATION] "the period of unprecedented budget cuts that Quebec universities have experienced in recent years has ruled out any significant financial support for the work being carried out by this professor. The only thing the professor had was time to conduct his unique work. For the rest, he had to cover the expenses incurred out of his own pocket";
(p) the appellant has reported the following business income and losses since the beginning of this research activity:
YEAR GROSS TOTAL NET
REVENUES EXPENSES LOSSES
1999 $ 3,590 $12,397 ($ 8,807 )
1998 3,900 10,023 ( 6,123 )
1997 3,500 12,585 ( 9,085 )
1996 5,000 8,502 ( 3,502 )
1995 5,775 11,767 ( 5,992 )
1994 3,000 8,946 ( 5,946 )
1993 855 1,986 ( 1,136 )
1992 1,300 3,776 ( 2,476 )
1991 850 1,655 ( 855 )
Total $27,715 $71,637 ($43,922 )
(q) the appellant did not conduct any market studies to verify his project's profitability and did not produce any specific plan of action to make his research activities profitable;
(r) the appellant failed to demonstrate that the expenses claimed for the years in issue in connection with his research activities were incurred or made in order to turn a profit or with a reasonable expectation of generating an income from them;
(s) the appellant's research work is not one of the artistic activities described in paragraph 8(1)(q) of the Act;
(t) during the 2000 taxation year the appellant received for the first time a $2,400 grant from the faculty of education at l'Université de Sherbrooke.
[3] The appellant admitted all of the facts with the exception of subparagraphs 6(c), 6(l), 6(n) and 6(r), which are reproduced below for better reading:
[TRANSLATION]
(c) as an employee at l'Université de Sherbrooke, the appellant was generally required to perform the duties of his position at his employer's place of business, l'Université de Sherbrooke;
(l) according to the appellant, if the royalty revenues increased to the point of covering or exceeding his research expenses, the University would use the surplus to establish special research funds, and it was clear to him that the salaries received for his research projects would be partly covered by those royalty revenues;
(n) according to the dean, Mario Laforest, [TRANSLATION] "while Professor Corpataux's work is very important and is highly original, it nonetheless is not traditional in nature, which would make it eligible for funding from the usual research organizations";
(r) the appellant failed to demonstrate that the expenses claimed for the years in issue in connection with his research activities were incurred or made in order to turn a profit or with a reasonable expectation of generating an income from them;
[4] The evidence, comprised of the appellant's testimony, revealed that the content of subparagraphs 6(c) and 6(l) was accurate.
[5] The appellant's explanations convinced the Court that his research and work was highly worthwhile. He also provided irrefutable evidence of the exceptional quality of the results obtained, making him a resource person in ethnomusicology who essentially could not be ignored.
[6] The awards, the recognition, the participation and invitations in connection with the various media and national and international forums moreover confirm his renown in the field.
[7] It appears from the testimony of the auditor, Robert Goulet, that the respondent did everything she could to support Professor Corpataux's work in her own way.
[8] Unfortunately, the facts, the documentation and the whole of the circumstances do not support the validity of the appellant's appeal.
[9] Although the work, the objectives and the results are very noble and there is no doubt whatsoever that they enrich our cultural heritage, it appears that the primary and fundamental purpose was not to obtain financial profit.
[10] The appellant was a regular professor at the University and was bound thereto by a contract of service. Under that contract, the appellant was accountable for work carried out in the performance of his duties.
[11] From the outset, the appellant had indicated his keen interest in the subject matter and had attempted to obtain the collaboration of his employer; the University had not shown much willingness and had even expressed reservations.
[12] The appellant's enthusiasm and tenacity finally paid off and the University ultimately accepted and even supported his initiative. The collaboration mainly took the form of greater flexibility in the scheduling of his courses. It was always clear, however, that if the project, the research and the results of the appellant's work were to generate a surplus, the University would profit directly from it. Moreover, the University alone would be entitled to any such surpluses.
[13] This can be seen very clearly in a letter dated April 1, 2001, that the appellant sent to the Canada Customs and Revenue Agency (the "Agency"), at paragraph 1:
[TRANSLATION]
1. The expenses reported in my tax returns prepared by the agency of Carole Galipeau, Carole Impôts, Conseil Street in Sherbrooke, are directly related to my responsibilities as a professor, which
are clearly set out in the collective agreement between l'Université de Sherbrooke and the Syndicat des professeurs de l'Université de Sherbrooke. The agreement provides that all professors must perform research activities as part of their responsibilities.
[14] On that same issue, Mario Laforest, the dean of the faculty to which the appellant belonged, wrote the following in a letter sent to the Agency on March 5, 2001:
[TRANSLATION]
...
Reference is made to article 12, reproduced in its entirety in attachment. However, since the required information pertains essentially to the responsibilities in the area of research, I will reproduce articles 12.01, 12.03 and 12.06.
12.01 The position of professor entails four areas of responsibility:
(a) teaching;
(b) research;
(c) participation in university life;
(d) community service.
...
12.06 A professor's annual workload includes activities in each of the four areas of responsibility indicated in paragraph 12.01.
... The only thing the professor had was time to conduct his unique work. For the rest, he had to cover the expenses incurred out of his own pocket.
[15] In light of the evidence submitted for the years in issue, it seems clear that the appellant essentially performed one or more activities in the context of his work as a professor. This was a specific project several components of which fell under the concept of business. However, in no way was this a business from a taxation perspective, which requires objectives of profit that would ultimately benefit the business person directly. Anyone who starts up and operates a business must absolutely have a reasonable expectation of eventually making a profit that he or she will obtain, failing which there is no business within the meaning of this term from a tax standpoint. In this case, there was no expectation of conventional profit. The only notion of profit was the enrichment of the cultural heritage. Moreover, if the undertaking had generated surpluses, they would have benefited the university and the appellant indirectly.
[16] The appellant moreover admitted this in answers provided to the respondent further to the mailing of a questionnaire. It would be appropriate to reproduce some of the questions and answers below: (Exhibit I-1, Tab 10)
[TRANSLATION]
...
2 (b) What were your initial long-term objectives? If your business did not develop as expected, explain the reasons for this.
The product consists of records for listening to ethnic music the purpose of which is the preservation of a universal heritage and not profit.
...
6(a) Indicate the amount of time you dedicated each week to ensuring the business ran smoothly during the period under review. This description must consider the time spent on other jobs as well as the other duties related to your business.
- Approximately 15 hours/week during the school year
- Travel abroad for approximately 4 months
...
10(c) Faced with an uninterrupted series of losses, what measures did you take to reduce expenses or increase revenues?
personal savings
grants
...
[17] There is no doubt that I would not hesitate whatsoever in siding with the appellant if the issue involved determining the quality and relevance of his work, but the question is entirely different. It is a matter of determining whether the appellant had a reasonable expectation of realizing a profit through his work and, more fundamentally, whether it was a genuine business or simply a specific part of his workload.
[18] The respondent submitted a decision by Judge Brulé in Fleming v. M.N.R, [1987] T.C.J. No. 649 (Q.L.). This decision is relevant in terms of both its content and the references found therein. A number of passages should be reproduced:
...
2. Burden of proof
"The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results not from any particular provision of the Income Tax Act, but from several court decisions, including the judgment rendered by the Supreme Court of Canada in Johnston v. Minister of National Revenue, 3 DTC 1182, (1948) CTC 195."
...
The primary intention underlying the taxpayer's activity must be considered in determining the existence of a reasonable expectation of profit. Cardin, J. stated in Marcel De Montigny v. M.N.R., 82 DTC 1034 at page 1036:
"It is clear and well-settled law that no activity can be regarded as a business within the meaning of s. 18(1)(a) of the Act, if there is no reasonable expectation of realizing a profit from it. In my view, this principle necessarily assumes that the primary intention of the businessman is to realize a monetary return from carrying on his business."
... It is clear that the research the appellants did, the books they purchased and the conferences they attended in relation to their writing activities were useful in the furthering of their careers as teachers and their reputations as experts in their field. The lack of urgency in the setting of publishing dates in the light of considerable amounts invested by the appellants over the years is a further indication that profits were not utmost considerations in the appellants' writing activities.
...
In Paul Zolis v. M.N.R., [1987] C.T.C. 183, Couture, C.J. stated at page 185:
"The aspirations or ambitions that a taxpayer may have entertained in respect of an activity in which he was engaged are not alone sufficient to bring it within the strict meaning of business in the relevant legislation no matter how genuine they might have been. What must be examined apart from the structural features of the undertaking is the manner in which it is carried on or operated by the taxpayer and from the interplay of these elements a determination made whether it is capable of yielding a profit in due course."
[19] In Matthew Corrigan v. M.N.R., 84 DTC 1764, at page 1765, Judge Bonner stated:
The problem in this case, as in many similar cases, arises because many activities which can be carried on as a business can also be carried on as a hobby. The distinction between the two classes of activity turns on the question whether the activity was carried on with a reasonable expectation of profit. It does not turn on the artistic quality of the end product of the activity, save to the extent that quality makes the product saleable at a price likely to generate a profit. It does not turn on the question whether the person who carried on the activity devoted a great deal of time and effort to it, save again to the extent that effort is likely to generate a profit.
The time and effort invested by the Appellant and his educational background are all factors which tend to indicate some likelihood of producing a work of quality. However, the evidence left unanswered the question whether and to what extent such quality was likely to generate profits, that is to say, revenues in excess of costs. In an income tax appeal the onus is on the Appellant to establish that the factual premise upon which the assessment rests is erroneous. The appellant has failed to discharge that onus.
...
[20] In the present case, the appellant became involved in a highly worthwhile project that was not initially the subject of general agreement. He further noted that the University authorities had not expressed a great deal of enthusiasm when he started.
[21] Tenacious and determined, the appellant continued to believe in the project and above all to work on it to the point that there now seems to be general agreement on the quality of his knowledge and expertise.
[22] Nonetheless, this was not a commercially viable endeavour. The appellant admitted that he had no reasonable expectation of making a profit during the years in issue.
[23] Moreover, if there had been any profits, they would not have gone to him directly because the University would have collected them and would have been able to dispose of them as it saw fit.
[24] The appellant may have found it easier to obtain financial support from the University if his project had generated surpluses; there again there was no guarantee or assurance to that effect. In the event of a profit, the University alone would have benefited from it.
[25] The appellant's work in ethnomusicology was prepared with interest, passion, attention to detail and exemplary determination. Such qualities are regrettably not sufficient to make it a genuine business; the appellant had always known that his chances of turning a monetary profit were, for all practical purposes, non-existent.
[26] Moreover, the appellant never attempted to prove that he had any kind of expectation of profit for the years in issue. The evidence essentially showed that the appellant had a great deal of interest and had succeeded over the years in demonstrating the merit of his project after putting in a tremendous amount of work.
[27] The balance of evidence shows that the appellant, through his work and the results obtained, convinced his employer, the University, of the undeniable relevance of his project.
[28] Further to that convincing demonstration, the University ultimately agreed to collaborate by offering the appellant greater flexibility to enable him to successfully complete the project.
[29] In light of such facts in that context, the appellant was not carrying on his own business; he was merely performing a specific type of work as part of his duties as a professor employed by l'Université de Sherbrooke. Accordingly, this was not a genuine business over which the appellant alone had control. He had to report like any other employee.
[30] On the basis of his knowledge, the data compiled and the interest of the global community, it is possible that a genuine business may eventually be established. Such a scenario will necessitate a severance of the employer-employee relationship and the creation of a separate entity that will need to have objectives of financial viability.
[31] For the 1997, 1998 and 1999 taxation years, no such business existed but rather what was involved was a specific component of the appellant's workload and, accordingly, his appeal cannot be allowed.
[32] The appeal is therefore dismissed.
Signed at Ottawa, Canada, this 6th day of June 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 27th day of August 2003.
Sophie Debbané, Revisor