Date: 20010529
Docket: 2000-1679-IT-I
BETWEEN:
MARIE-ANDRÉE COSSETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the 1995 to 1997 taxation years. The issue is whether the appellant carried on a business within the meaning of section 9 and paragraph 18(1)(a) of the Income Tax Act (the "Act") in respect of artistic activities involving holography.
[2] The facts on which the Minister of National Revenue (the "Minister") relied in making the reassessments are set out in paragraph 4 of the Reply to the Notice of Appeal (the "Reply") as follows:
[TRANSLATION]
(a) during the taxation years at issue, the appellant was a professor of photography at Université Laval and received as income from employment $76,212, $74,326 and $80,509 for the 1995, 1996 and 1997 taxation years respectively;
(b) the appellant is a professional artist in the visual arts;
(c) during the taxation years at issue, the appellant claimed net business losses in the amounts of $17,333, $15,842 and $26,413 for the 1995, 1996 and 1997 taxation years respectively;
(d) included in the above net business losses were capital cost allowances in the amounts of $9,966, $7,834 and $6,576 for the 1995, 1996 and 1997 taxation years respectively;
(e) for the years at issue, the source of the business losses that were claimed was the alleged business operated by the appellant from her residence as "Institut holographique et médiatique de Québec";
(f) the appellant has been claiming substantial losses since 1978 and, as can be seen from Schedule A, the accumulated losses since 1978 have totalled $245,702, while it was only in 1984 that a very small profit of $270 was generated;
(g) an analysis of the source of her gross income for the period from 1989 to 1997 shows that 34% of that income came from the sale of her works and 53% came from research grants from Université Laval and/or the Canada Council (see details in Schedule B);
(h) holography is a medium with limited commercial application, but the appellant believes that her pioneering role in holography deserves recognition as being indispensable for the development of the arts;
(i) the appellant is a member of the Regroupement des artistes en arts visuels du Québec (RAAV) and the Association d'artistes professionnels en arts visuels du Québec (Videre);
(j) since July 1, 1991, the appellant has been registered in the index of artists of the Secrétariat de l'intégration des arts à l'architecture in the discipline of photography/holography;
(k) the Minister noted (as can be seen from Schedule A) that the losses claimed by the appellant grew constantly from 1991 on;
(l) Schedules A and B show that, in comparison to the expenses claimed, the amount representing sales was very low;
(m) considering the specialized nature of the appellant's activity, its very limited saleability and the $245,702 in losses accumulated between 1978 and 1998, the Minister of National Revenue, in computing the appellant's income for the 1995, 1996 and 1997 taxation years, disallowed the deduction for losses stemming from the "Institut holographique et médiatique de Québec", as the appellant had no reasonable expectation of making a profit from this activity.
[3] Both the appellant and her accountant, Robert Gagné, testified on her behalf.
[4] The appellant admitted subparagraphs 4(a) to 4(d), 4(f), 4(g), 4(i) and 4(j) of the Reply. She admitted subparagraph 4(e) of the Reply, with the exception of the word "alleged". She denied the first part of subparagraph 4(h) of the Reply and said that commercial applications are being developed. She admitted the second part of that subparagraph. She denied subparagraph (k) of the Reply.
[5] In order to define the parameters of her evidence, counsel for the appellant referred at the outset to Interpretation Bulletin IT-504R2 of August 9, 1995, entitled "Visual Artists and Writers", and more particularly to paragraphs 4 to 7 thereof, which read as follows:
4. Section 9 of the Act provides that a taxpayer's income for a taxation year from a business (self-employment) is the profit therefrom for the year. The concept of profit is critical in determining whether a taxpayer's artistic activity or literary undertaking constitutes the carrying on of a business or is merely the furtherance of a hobby or interest of the taxpayer that is of a personal nature. Generally, any undertaking or activity of a taxpayer that results in profits or has a reasonable prospect of profits would be viewed as the carrying on of a business. On the other hand, where the activity or undertaking has no reasonable expectation of producing profits, a business would not be considered to have been carried on and any losses that resulted would not be deductible for income tax purposes.
Whether or not a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. The relevant factors to be considered in making such a determination will differ with the nature and extent of the activity or undertaking.
The nature of art and literature is such that a considerable period of time may pass before an artist or writer becomes established and profitable. Although the existence of a reasonable expectation of profit is relevant in determining the deductibility of losses, in the case of artists and writers it is recognized that a longer period of time may be required in establishing that such reasonable expectation does exist.
5. Factors which will be considered by the Department in determining whether or not an artist or writer has a reasonable expectation of profit include:
(a) the amount of time devoted to artistic or literary endeavours,
(b) the extent to which an artist or writer has presented his or her own works in public and private settings including, but not limited to, exhibiting, publishing and reading as is appropriate to the nature of the work,
(c) the extent to which an artist is represented by an art dealer or agent and the extent to which a writer is represented by a publisher or agent,
(d) the amount of time devoted to, and type of activity normally pursued in, promoting and marketing the artist's or writer's own works,
(e) the amount of revenue received that is relevant to the artist's or writer's own works including, but not limited to, revenue from sales, commissions, royalties, fees, grants and awards which may reasonably be included in business income,
(f) the historical record, spanning a significant number of years, of annual profits or losses relevant to the artist's or writer's exploitation of his or her own works,
(g) a variation, over a period of time, in the value or popularity of the individual's artistic or literary works,
(h) the type of expenditures claimed and their relevance to the endeavours (e.g., in the case of a writer there would be a positive indication of business activity if a substantial portion of the expenditures were incurred for research),
(i) the artist's or writer's qualifications as an artist or writer, respectively, as evidenced by education and also by public and peer recognition received in the form of honours, awards, prizes and/or critical appraisal,
(j) membership in any professional association of artists or writers whose membership or categories of membership are limited under standards established by that association,
(k) the significance of the amount of gross revenue derived by an artist or writer from the exploitation of that individual's own works and the growth of such gross revenue over time. In applying this factor, external influences such as economic conditions, changes in the public mood, etc., which may affect the sale of artistic or literary works will be taken into consideration, and
(l) the nature of the literary works undertaken by a writer. It is considered that a literary work such as a novel, poem, short story or any non-fictional prose composition that is written for general sale or syndicated distribution would normally have a greater profit potential than a work undertaken for restricted distribution.
6. No particular factor described in 5 above is more important than another and no one factor determines whether or not an activity is a business carried on for profit or with a reasonable expectation of profit. All relevant criteria are considered together in making a determination and the taxpayer's failure to meet any one particular factor will not in itself preclude the taxpayer's artistic or literary activities from qualifying as a business.
7. In the case of an artist or writer, it is possible that a taxpayer may not realize a profit during his or her lifetime but still have a reasonable expectation of profit. However, in order to have this "reasonable expectation of profit" the artistic or literary endeavours, as the case may be, of the artist or writer must be carried on in a manner such that, based on the criteria in 5 above, they may be considered for income tax purposes to be the carrying on of a business rather than, for example, a hobby.
[6] The appellant explained that she owns a three-storey house with an apartment on each floor. Initially, she occupied the ground-floor apartment. In 1990, she transformed that apartment into a holography centre. The second-floor apartment is rented, and she now occupies the third-floor apartment.
[7] The appellant invested a considerable amount of money in her holography centre, which explains why her expenses increased, beginning in 1990. As Exhibit A-1, she filed photographs of her centre. The centre appears to be equipped in accordance with accepted trade practices. There was no evidence to the contrary.
[8] According to Exhibit A-10, which is a statement of income and expenses for the years from 1991 to 2000, total expenses for the years from 1995 to 1997 were $21,887, $25,014 and $20,775 respectively. For the years from 1998 to 2000, when the appellant knew that the Minister was contesting her business expenses, the expenses were $10,505, $6,981 and $8,575. For those three years, she claimed no capital cost allowance. For the years from 1995 to 1997, she had claimed amounts of $9,966, $7,834 and $6,577 respectively as capital cost allowances.
[9] Exhibit A-2 is a letter from the appellant, dated May 23, 1996, to the arts adviser of the Collection Desjardins, thanking her for her visit to the institute and offering her three of her works. Exhibit A-8 is a similar letter written in March 2001.
[10] Exhibit A-3 is a document dated May 1997 that describes a creative project in photography and holography submitted to Université Laval in the context of a funding program entitled Soutien à la création en milieu universitaire.
[11] Exhibit A-6 is a publicity brochure from Université Laval's École des arts visuels. It indicates what was to be new in September 2000, including an opportunity for training in holography.
[12] As Exhibit A-7, the appellant filed a letter from the dean of the Faculté d'aménagement, d'architecture et des arts visuels. The letter, written for the purposes of this hearing on March 16, 2001, reads as follows:
[TRANSLATION]
. . .
This letter confirms that, to my knowledge, no direct financial assistance was given to Marie-Andrée Cossette to set up her holography laboratory at 1139 des Laurentides, Québec.
For several years now, the École des arts visuels of the Faculté d'aménagement, d'architecture et des arts visuels at Université Laval has been open to new technologies and to holography in particular.
As a result, courses in this area have been included in a "new media" stream for the bachelor of plastic arts degree. We are fortunate to be able to count on Ms. Cossette's acknowledged expertise in this field and we hope to rent her well-equipped and already operational holography laboratory so that this course may be offered.
We are negotiating with Ms. Cossette in this connection and are hoping we can reach an agreement very soon so that we may complete our course offerings.
. . .
[13] Exhibit A-9 is a statement by the appellant detailing her career, her work and activities to promote her works. At pages 3, 4, 6 and 7, she writes as follows:
[TRANSLATION]
. . .
I believe it is important to point out that I earn enough from my teaching to live on and to support my artistic endeavours. It is safe to say that I devote a third of my time to teaching and two thirds to professional activities relating to creation, including research, exploration, development of new techniques, laboratory work and various dissemination activities.
. . .
As a professional artist in the visual arts, my role is to create original works of art and to communicate them to my contemporaries. Although I have chosen a medium with limited commercial application, I believe that my professional achievements prove that my pioneering role deserves recognition as being indispensable for the development of the arts and that I should consequently benefit from the tax measures intended for creative artists.
. . .
Naturally, I think that the works I create can generate enough income in the medium term to show a degree of profitability. This is one of my objectives and it is amply illustrated by the number of shows where my works are exhibited for sale.
. . .
In order to create holograms, I have had to set up a laboratory that is unique in Quebec. More than any argument, this shows the long-term seriousness of my artistic activity and my hope of making it show a profit. If I had "no reasonable expectation of profit", I would abandon creative activities instead of continually trying to improve the equipment at my disposal.
In Appendix 2, you will find a description of the equipment that I require. I must point out that its total cost is over $10,000 and that this expense was to a large extent financed by a mortgage on my house.
. . .
As has been amply demonstrated, holography is an avant-garde art form that still, despite promising developments, attracts the attention of all too few collectors. More and more museums are offering shows where holograms are exhibited side by side with other new media creations. However, the development of a private clientele is still several years in the offing.
. . .
The only reasonable solution is to make a long-term investment in developing contacts in the broadest possible market, which accordingly involves sustained international activity. This is what has led me to make a major effort to promote my creative work and my research in holography through lectures, publications, participation in symposiums and other initiatives having an international impact.
. . .
[14] Exhibit I-4 is the appellant's curriculum vitae. It describes her group and one-woman shows, bursaries, participation on juries and in symposiums, publications, public collections containing her works and the prizes she has been awarded.
Arguments
[15] Council for the appellant reviewed the various factors referred to in the Interpretation Bulletin (paragraph 5 of these Reasons). He argued that the appellant devotes three days a week to her work and is very concerned with promoting her creative work. She is not represented by a dealer. She devotes two days a month to promoting her work. Holography is a medium that is not very accessible and so far has not generated substantial cash revenues. However, the value of the appellant's activity is confirmed by the fact that, in 2001, courses will be offered in this technique at Université Laval and the appellant's institute may be used for this course.
[16] Council for the respondent argued that the appellant had incurred business losses over a considerable period. She did not question the appellant's status as an artist. However, she noted that very few works had been sold and that the appellant's institute was not bringing in any money.
Conclusion
[17] I think it appropriate to take Interpretation Bulletin IT-504R2 on visual artists and writers into consideration. I find that what it says is reasonable and consistent with the Act. Paragraph 7 of the Bulletin indicates that an artist or writer may not realize a profit during his or her lifetime but that his or her work may nevertheless constitute a business within the meaning of section 9 of the Act because his or her artistic activities are carried on as a genuine artistic business rather than a hobby.
[18] In my opinion, the evidence revealed, on the appellant's part, a high degree of professionalism, sustained effort, productive participation in activities with her peers and serious research. The appellant's centre also appears to me to have been designed and set up with the same degree of care and research. What is more, I find it significant that the appellant's artistic activities were carried out in a field in which she has professional expertise. I am compelled to find that the appellant carried on a genuine artistic business that was not in the nature of a hobby.
[19] Were the expenses exaggerated? Were they directly related to the business? Once the appellant knew that the expenses related to her artistic activities could be challenged, she claimed in the ensuing years expenses that amounted to only a third or half of what had been claimed in the years at issue. As this point was not raised in the Reply, it did not really form part of the lis. I therefore have no basis on which I could reduce the amount of the expenses claimed.
[20] The appeal is allowed, with costs.
Signed at Ottawa, Canada, this 29th day of May 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2000-1679(IT)I
BETWEEN:
MARIE-ANDRÉE COSSETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on March 22, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Jean Bécotte
Counsel for the Respondent: Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are allowed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of May 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]