[OFFICIAL ENGLISH TRANSLATION]
2001-1573(IT)I
BETWEEN:
ÉTIENNE GAGNON
S/N ÉBÉNISTERIE GUILLAUME ENR.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 29, 2002, at Matane, Quebec, by
the Honourable Judge François Angers
Appearances
For the Appellant: The Appellant himself
Counsel pour the Respondent: Stéphanie Côté
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant had a source of income from which he could deduct his expenses.
Signed at Ottawa, Canada, this 29th day of June 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 17th day of September 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020629
Docket: 2001-1573(IT)I
BETWEEN:
ÉTIENNE GAGNON
S/N ÉBÉNISTERIE GUILLAUME ENR.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] These appeals were brought under the Informal Procedure and heard at Matane, Quebec, on May 29, 2002. By notices of reassessment dated May 15, 2000, the Minister of National Revenue (the "Minister") disallowed the appellant the amounts of $7,769 and $6,084 in respect of net business losses for the 1997 and 1998 taxation years respectively.
[2] In making and confirming those reassessments for the years in issue, the Minister assumed the following facts, which were admitted by the appellant, with the exception of subparagraph (l):
[TRANSLATION]
6.(a) at all relevant times, the appellant was a cabinet-maker employed by a cabinet-making business;
(b) in 1992, the appellant began building his own cabinet-making shop; he purchased a lot and built a workshop on it;
(c) the appellant admitted that he had started up his operation in order to make up for the periods when he was unemployed;
(d) the appellant started up his operation in January 1993 under the trade name "Ébénisterie Guillaume Enr." and devoted approximately 10 to 12 hours a week to it;
(e) advertising was done by word of mouth and no market study was conducted;
(f) the appellant admitted that his main employment had grown so much that he had had to work overtime since 1993;
(g) he admits that he turned down a number of customers and was unable to ensure that the operation remained profitable because he did not have the time needed to do so;
(h) the appellant had no recovery plan to ensure the profitability of Ébénisterie Guillaume Enr.;
(i) since 1992, Ébénisterie Guillaume Enr. has earned no profit; the net business losses claimed are as follows:
|
1992 |
$ 4,580 |
|
1993 |
$ 13,989 |
|
1994 |
$ 10,145 |
|
1995 |
$ 10,754 |
|
1996 |
$ 9,588 |
|
1997 |
$ 7,769 |
|
1998 |
$ 6,084 |
|
|
|
|
Total |
$ 62,909 |
(j) according to the income tax returns, the statements of income of Ébénisterie Guillaume Enr. contain the following information:
Year Gross Expenses Losses CCA Net
Income before CCA Losses
1992 2 ** ** * 4,580
1993 1,299 ** ** * 13,989
1994 6,134 ** ** * 10,145
1995 7,958 ** ** * 10,754
1996 7,980 12,002 4,022 5,566 9,588
1997 11,629 14,477 2,848 4,921 7,769
1998 10,804 12,150 1,346 4,202 6,084
* capital cost allowance for 1992 to 1995 totalled $18,274
** not available
(k) operating expenses always exceeded gross income; the capital cost allowance increased the operation's losses;
(l) the amounts claimed in respect of business losses are instead personal and living expenses of the appellant;
(m) consequently, the Minister disallowed the appellant the respective amounts of $7,769 and $6,084 claimed by him in respect of net business losses for the taxation years in issue.
[3] In his testimony, the appellant provided a report on the efforts he had made to carry out a project designed to occupy periods of unemployment and to subcontract with his employer at the time. First, in 1992, he purchased a lot some two or three kilometers from his private residence. In August of that same year, he built a workshop and then purchased the machinery and tools needed to ply his trade as a cabinet-maker. Thus, he initially invested more than $45,000 in his facilities. He registered his business under the trade name "Ébénisterie Guillaume Enr.", registered for the GST and QST and commenced his operations at the start of 1993.
[4] Mr. Gagnon is a cabinet-maker by trade and, at the time, was working as a cabinet-maker for the same employer that is now the Matane Home Hardware renovation centre. In April 1993, he began working full time for that employer and therefore became less available for his own business. In spite of that, the appellant had the time to carry out certain contracts for his customers. People contacted him at home by means of an answering machine when he was absent. He explained that Matane is a small town and that advertising was done by word of mouth. The fact that he had a construction background also helped him attract a clientele, which he described as consisting of ordinary people, building contractors, non-profit organizations and, from time to time, his own employer in the case of more specialized, non-repetitive work. His availability varied with the years, reaching some 20 hours a week in 1998. He expected to leave his employment in order to devote himself full time to his business as soon as he had received confirmation that he was eligible for wage loss insurance. He said that he had been turned down by an insurer in 2000 but thought he might be approved this time.
[5] The table of the appellant's statements of revenue and expenditure (Exhibit I-8) covering the period from 1992 to 2000 was filed in evidence. Before CCA, the appellant's cabinet-making business incurred declining losses until 1998. The losses over the years in issue were less than $2,500. The income for those two years amounted on average to approximately $11,217. Depreciation obviously helped increase the losses of the appellant's cabinet-making business for the two years in issue, but those losses were within the limit allowed. The appellant acknowledged that the figures in the table in question were accurate.
[6] The point for determination is whether the appellant operated a cabinet-making business during the 1997 and 1998 taxation years. If he did not, the Minister was therefore justified in disallowing the appellant the net business losses claimed.
[7] In Stewart v. Canada, [2002] S.C.J. No. 46, the Supreme Court of Canada recently considered the applicable test for determining whether a taxpayer has a source of income from a business for the purposes of section 9 of the Income Tax Act (the "Act"). It clearly held that the "reasonable expectation of profit" test should not be accepted as the applicable test in such a case. Iacobucci and Bastarache JJ. came to this conclusion in their decision in paragraphs 4 and 5, quoted below:
4. In our view, the reasonable expectation of profit analysis cannot be maintained as an independent source test. To do so would run contrary to the principle that courts should avoid judicial innovation and rule-making in tax law. Although the phrase "reasonable expectation of profit" is found in the Income Tax Act, S.C. 1970-71-72, c. 63, (the "Act"), its statutory use does not support the broad judicial application to which the phrase has been subjected. In addition, the reasonable expectation of profit test is imprecise, causing an unfortunate degree of uncertainty for taxpayers. As well, the nature of the test has encouraged a hindsight assessment of the business judgment of taxpayers in order to deny losses incurred in bona fide, albeit unsuccessful, commercial ventures.
5. It is undisputed that the concept of a "source of income" is fundamental to the Canadian tax system; however, any test which assesses the existence of a source must be firmly based on the words and scheme of the Act. As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence. The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to a profit, the activity is commercial, and the taxpayer's pursuit of profit is established. However, where there is a suspicion that the taxpayer's activity is a hobby or personal endeavour rather than a business, the taxpayer's so-called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.
[8] They went on to analyze the application of section 9 of the Act, which applies only where it has been established that the taxpayer had a source of income consisting of a business or property. In paragraphs 60 and 61, they examined this question as follows:
60. In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. However, to deny the deduction of losses on the simple ground that the losses signify that no business (or property) source exists is contrary to the words and scheme of the Act. Whether or not a business exists is a separate question from the deductibility of expenses. As suggested by the appellant, to disallow deductions based on a reasonable expectation of profit analysis would amount to a case law stop-loss rule which would be contrary to established principles of interpretation, mentioned above, which are applicable to the Act. As well, unlike many statutory stop-loss rules, once deductions are disallowed under the REOP test, the taxpayer cannot carry forward such losses to apply to future income in the event the activity becomes profitable. As stated by Bowman J.T.C.C. in Bélec, supra, at p. 123: "It would be... unacceptable to permit the Minister [to say] to the taxpayer... 'The fact that you lost money ... proves that you did not have a reasonable expectation of profit, but as soon as you earn some money, it proves that you now have such an expectation."
61. As stated above, whether or not a taxpayer has a source of income from a particular activity is determined by considering whether the taxpayer intends to carry on the activity for profit, and whether there is evidence to support that intention. As well, where an activity is clearly commercial and lacks any personal element, there is no need to search further. Such activities are sources of income.
[9] In the instant case, the appellant invested a fairly substantial amount in the construction of a workshop, which he subsequently equipped with the tools needed to carry on his trade as a cabinet-maker. The workshop is a few kilometers from his residence and is used solely for the purposes of his trade. Although he does not devote all his time to his business, he operates it as a sideline to his regular work. The appellant's intentions at the outset were to use his business to supplement his income during periods of unemployment, but a permanent employment reduced his productivity. However, he continued devoting time to his business, accepting contracts and constantly operating it in accordance with his availability. He carried on his activities under a trade name and is registered for GST and QST purposes. He still hopes to operate his business on a full-time basis and is awaiting a decision as to whether he is eligible for wage loss insurance. The appellant testified in a candid and sincere manner and, although he is perhaps not producing at his maximum level, I can conclude that he is carrying on his activities in a commercial manner and that there is a source of income in this case.
[10] For these reasons, the appeals are allowed and the assessments for the taxation years in issue are referred back to the Minister for reconsideration and reassessment on the basis that the appellant had a source of income from which he could deduct his expenses.
Signed at Ottawa, Canada, this 29th day of June 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 17th day of September 2003.
Sophie Debbané, Revisor