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Docket: 2001-2852(IT)I |
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BETWEEN: |
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RODNEY MARTIN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on March 12, 2003 at Timmins, Ontario.
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Before: The Honourable D.G.H. Bowman, Associate Chief Judge |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Carole Benoit |
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JUDGMENT
It is ordered that the appeals from assessments made under the Income Tax Act for the 1998 and 1999 taxation years be allowed and the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment to permit the appellant to deduct in computing his income the losses of $9,985.04 and $11,661.19 claimed by him from the fur trapping business.
The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 20th day of March 2003.
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"D.G.H. Bowman" |
A.C.J.
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Citation: 2003TCC155 |
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Date: 20030320 |
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Docket: 2001-2852(IT)I |
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BETWEEN: |
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RODNEY MARTIN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] These are appeals from assessments for the appellant's 1998 and 1999 taxation years. By those assessments the Minister of National Revenue disallowed losses claimed by the appellant from the trapping business operated by him under the name of Rodney Martin Trapline.
[2] The reply sets out his revenues and losses from 1987 to 1999, as follows:
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Taxation Year |
Gross Revenues |
Net Business Income (Loss) |
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1987 |
$ 2,070 |
($ 4,806) |
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1988 |
2,909 |
($ 4,003) |
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1989 |
2,655 |
($ 6,310) |
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1990 |
1,446 |
($ 7,585) |
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1991 |
1,025 |
($ 5,692) |
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1992 |
1,150 |
($ 6,565) |
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1993 |
431 |
($ 8,361) |
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1994 |
1,887 |
($ 6,188) |
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1995 |
1,582 |
($ 6,546) |
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1996 |
1,997 |
($ 8,892) |
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1997 |
2,137 |
($ 9,760) |
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1998 |
1,562 |
($ 9,985) |
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1999 |
999 |
($ 11,661) |
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Total |
$ 21,850 |
($ 96,354) |
[3] The losses were allowed for all years up to and including 1997.
[4] The appellant inherited the trapline from his father many years ago and he has operated it since that time.
[5] Both the appellant and his wife have full time jobs. The appellant works as a maintenance person and his wife is a bookkeeper. They both spend their weekends and holidays on the trapline.
[6] The operation of a trapline involves constant maintenance of the roads. The appellant has a cabin where he cleans and skins the animals that he traps. Recently he extended the cabin. Also, one room in the basement of his house is used for storing furs.
[7] In order to keep the trapline (and the annual licence) the appellant must trap at least 75% of his annual quota of 42 beavers. There is a quota of 29 martins and one lynx. There is no quota on wolves or foxes. It seems the province of Ontario encourages the trapping of beavers for ecological reasons.
[8] The trapline seems to be about 25 miles in length to judge by the map that was put in evidence. In 1997 a fire destroyed a large portion of the trees in the forest. In 2001 high winds blew down trees on the trapline. All this contributed to the difficulties faced by Mr. Martin and he was put to additional expense and considerably greater effort to clear the trapline. Neither fire nor wind storms, however, were alone responsible for the losses. The problem, according to Mr. Martin, was the low prices for furs.
[9] The assessments were based upon the view that the appellant did not have a "reasonable expectation of profit" from the fur trapping business. None of the expenses were challenged.
[10] The assessments were issued before the decision of the Supreme Court of Canada in Brian J. Stewart v. The Queen, 2002 DTC 6969. Counsel for the respondent amended the reply. Very properly, she refrained from amending the assumptions. She also did not change Part B of the reply (issues to be decided), which reads:
7. The issue is whether the Appellant had a reasonable expectation of profit from the Activity in the 1998 and 1999 taxation years.
[11] Part C was restated by removing paragraph 9 and adding paragraphs 9.1 and 9.2.
[12] Paragraph 9, which was removed, originally read:
9. He respectfully submits that, for the 1998 and 1999 taxation years, the Activity did not have a reasonable expectation of profit and did not constitute a source of income within the meaning of sections 3, 4 and 9 of the Act and consequently, the losses were properly disallowed.
[13] Paragraphs 9.1 and 9.2 read:
9.1 He respectfully submits that, for the 1998 and 1999 taxation years, the Activity was undertaken as a personal endeavor.
9.2 He further submits that the Activity was not carried on with a sufficiently commercial manner for it to have a reasonable expectation of profit and could not constitute a source of income within the meaning of sections 3, 4 and 9 of the Act and consequently, the losses were properly disallowed.
[14] The Stewart case represented a fundamental rethinking of the tests to be applied in determining whether a business existed the losses from which could be deducted. It was obvious that prior to Stewart the "reasonable expectation of profit" test, stated by Dickson J. (as he then was) in Moldowan v. The Queen, [1978] 1 S.C.R. 480 at 485, was being misused and overused.
[15] The importance of the Stewart case will be apparent from the following passages from the reasons for judgment.
[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.
...
[54] It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated as follows: "Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?" This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
[55] The objective factors listed by Dickson, J. in Moldowan at p. 486 were: (1) the profit and loss experience in past years; (2) the taxpayer's training; (3) the taxpayer's intended course of action; and (4) the capability of the venture to show a profit. As we conclude below, it is not necessary for the purposes of this appeal to expand on this list of factors. As such, we decline to do so; however, we would reiterate Dickson, J.'s caution that this list is not intended to be exhaustive, and that the factors will differ with the nature and extent of the undertaking. We would also emphasize that although the reasonable expectation of profit is a factor to be considered at this stage, it is not the only factor, nor is it conclusive. The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer's activity which must be evaluated, not his or her business acumen.
[16] Since Stewart the Federal Court of Appeal has routinely allowed virtually all appeals from decisions of this court where the taxpayer has lost on the basis of REOP.
[17] Counsel argued that there was a personal element in the appellant's trapping activities. It may be that he derived some personal satisfaction from trapping. Trapping seems to have been a family tradition. My recollection is that Mr. Martin said something like "Trapping is in my blood".
[18] The existence of a personal element must be put in perspective. There is frequently a personal element in the carrying on of a commercial enterprise in the sense that the person derives great personal satisfaction from the activity. This does not make the activity any the less a business. Professional artists, photographers, writers, musicians (and sometimes even lawyers) no doubt derive great satisfaction from what they do but if their activity is commercial and is intended to yield a profit it is nonetheless a business. It is only where the personal element so overshadows any element of commerciality as to substantially displace it that one may conclude that the activity is merely a hobby and is not a business at all.
[19] For example in a recent decision of the Federal Court of Appeal, Morris v. The Queen, 2003 FCA 116, the court said at paragraph 12:
[12] According to Stewart (at para. 50), in order to determine if a source of income exists a court should first ask: "is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?" The factors listed in Moldowan provide objective criteria for answering this question. Thus, even though the taxpayer has a personal interest in the activity, if "the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act": Stewart at para. 52. The Court went on to say (at para. 54) that to establish an intention on the part of the taxpayer to pursue an activity for profit, rather than personal interest,
requires the taxpayer to establish that his or her predominant intention is to make a profit and that the activity has been carried on in accordance with objective standards of businesslike behaviour.
[20] I do not think that the conclusion that the personal element overshadowed the commercial motivation is justified here. It is clear Mr. Martin hoped and expected to earn a profit and continues to hope to do so. He explored various ways of improving his return from the business - including having fur hats made up so that they could be sold. This turned out not to be profitable. He routinely sends furs to the auction in North Bay and sells as many as he can.
[21] It may well be that the business of trapping furs in Canada is going through a difficult cycle. It seems at this point not to be economic, but then one might question the economics of farming in Canada as well. It is nonetheless a business because it is a commercial enterprise carried on with a view to profit and falls within the definition of business in section 248.
[22] The appellant's activity here has the necessary ingredients of commerciality to make it a business - the commitment of substantial capital, the organized and businesslike way in which records are kept and the devotion of enormous amounts of time by the appellant and his wife and, in earlier years at least, his sons as well as the intent to earn a profit. Perhaps some people might see Mr. Martin's hopes as overly optimistic or even ill conceived but if an intent to earn a profit is a necessary ingredient in a business it certainly exists here.
[23] One of the cases cited in Stewart was Kaye v. The Queen, 98 DTC 1659. At page 1660 the following passage appears.
[4] I do not find the ritual repetition of the phrase [REOP] 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 a 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.
[7] Ultimately, it boils down to a common sense appreciation of all of the factors, in which each is assigned its appropriate weight in the overall context. One must of course not discount entrepreneurial vision and imagination, but they are hard to evaluate at the outset. Simply put, if you want to be treated as carrying on a business, you should act like a businessman.
[24] This passage illustrates the approach I have taken in the pre-Stewart era and the approach that I am applying here which I believe is consistent with and supported by Stewart.
[25] It is difficult to imagine how a business that forces one to go out every weekend, sometimes in sub-zero northern Ontario temperatures, and attend and clear traplines and clean and skin beavers and other animals and store the skins in one room in the basement of the house can by any stretch of the imagination be called a hobby. The appellant's wife accompanies him on the trapline, does the bookkeeping and puts up with having the house smelled up with the pelts. Frankly, I think she deserves to be highly commended.
[26] There is one final point that ought to be mentioned because it illustrates rather eloquently just what was wrong with the pre-Stewart REOP approach. In the letter from the CCRA to Mr. Martin the following paragraph appears.
Please ensure that no further losses are claimed in relation to trapping. You are not required to report either the trapping income or expenses on your tax returns until a year in which you make a profit.
[27] In other words, if you lose money we don't want to hear about it. If you make money we want part of it.
Q.E.D.
[28] The appeals are allowed and the assessments for 1998 and 1999 are referred back to the Minister of National Revenue for reconsideration and reassessment to permit the appellant to deduct in computing income the losses of $9,985.04 and $11,661.19 claimed by him from the fur trapping business.
[29] The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 20th day of March 2003.
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"D.G.H. Bowman" |
A.C.J.
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CITATION: |
2003TCC155 |
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COURT FILE NO.: |
2001-2852(IT)I |
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STYLE OF CAUSE: |
Between Rodney Martin and Her Majesty The Queen |
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PLACE OF HEARING: |
Timmins, Ontario |
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DATE OF HEARING: |
March 12, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman Associate Chief Judge |
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DATE OF JUDGMENT: |
March 20, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Carole Benoit |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
-- |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |