Date: 20030304
Docket: A-478-01
Neutral citation: 2003 FCA 116
CORAM: STRAYER J.A.
BETWEEN:
BRUCE MORRIS
Applicant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia on March 4, 2003.
Judgment delivered from the Bench at Vancouver, British Columbia on March 4, 2003.
REASONS FOR JUDGMENT OF THE COURT BY: EVANS J.A.
Date: 20030304
Docket: A-478-01
Neutral citation: 2003 FCA 116
CORAM: STRAYER J.A.
BETWEEN:
BRUCE MORRIS
Applicant
and
HER MAJESTY THE QUEEN
Respondent
(Delivered from the Bench at Vancouver, British Columbia
on March 4, 2003)
EVANS J.A.
[1] This is an application for judicial review by Bruce Morris requesting the Court to set aside a decision of the Tax Court of Canada, dated July 12, 2001, in which the Judge dismissed Mr. Morris's appeal against the Minister's reassessments for the taxation years 1996, 1997 and 1998. The decision is reported as Morris v. R., [2001] 4 C.T.C. 21114.
[2] Mr. Morris made lengthy submissions challenging the validity of the Income Tax Act, R.S.C. 1985, c. 1, questioning the propriety of the use by counsel of an "uncertified" copy of the Act, and impugning the conduct of officials of Canada Customs and Revenue Agency. However, the only viable issue raised by this application is whether the Judge committed a reviewable error when he found that Mr. Morris had no reasonable expectation of profit from his activity as a fishing guide and therefore could not deduct against his other income the losses that he had incurred in connection with that activity.
[3] The Judge rendered his judgment before the Supreme Court of Canada decided Stewart v. Canada, 2002 SCC 46, which clarified the law concerning the role of reasonable expectation of profit in determining the source of a taxpayer's income. The question to be decided is whether the decision under appeal can be allowed to stand in the light of Stewart.
[4] Mr. Morris has been a full-time employee of BC Rail for eighteen years. He works a 40-hour week, which is normally spread over five days, but sometimes four. He has five weeks of paid holidays each year, of which one is devoted to his family. In addition, Mr. Morris occasionally provides river rescue and retrieval services, when and as required, for Prince George Search and Rescue, and the RCMP.
[5] Mr. Morris is also a life-long, ardent and skilful angler whose talents have not only given him considerable enjoyment, but have also brought him competitive success. Being apprehensive about the security of his employment with BC Rail, in 1996 he started a fishing guide activity, First Cast Guiding, which he conducted from his home, where he keeps his boats.
[6] From 1996 to 1998 First Cast Guiding had a minimal level of business: one client who went out with Mr. Morris on approximately five one-day fishing trips, and perhaps one or two other clients. Thus, in 1996, Mr. Morris reported nil income from his business and $7,090.00 in expenses. In 1997, he reported $300.00 in income and $12,921.58 in expenses for a net loss of $12,621.58. In 1998, his reported income was $770.00 and his expenses $13,997.89, for a net loss of $13,227.89.
[7] The activity showed no significant increase in revenues but increasing net losses for the years 1999 and 2000, despite some advertisements and a website which he acquired in 1999. Thus, Mr. Morris reported income from the activity in 1999 as $400.00 and a net business loss of $13,335.00. In the taxation year 2000, his reported income was $1,000.00 and a net business loss of $17,611.00. Moreover, it would seem that some of this revenue is attributable to his river search and rescue activities
[8] The Judge applied the factors set out in Moldowan v. The Queen, [1978] 1 S.C.R. 480 for determining whether Mr. Morris had a reasonable expectation of profit from First Cast Guiding. In Moldowan, Dickson J. (as he then was) said (at 486):
The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowances. This list is not intended to be exhaustive.
[9] Accordingly, the Judge regarded the minimal revenue and considerable expenses of First Cast Guiding in the years in question as negativing a reasonable expectation of profit, together with Mr. Morris's full-time paid employment and the limited time that this enabled him to devote to the business. The Judge also noted Mr. Morris's inability to explain many of the expenses that he had claimed. Finally, the Judge found (at para. 18, point 4) that, in view of Mr. Morris's fondness of fishing, evidenced by his participation in competitions and the frequency of his personal fishing trips, "there was a very strong personal element involved" in his angling activity.
[10] Although the Judge made no finding, it is clear from the evidence that Mr. Morris had virtually no previous business experience, and no training. As for Mr. Morris's intended course of action, he planned to increase his business by advertising and his website, giving away fishing trips, making his trips accessible to people with handicaps, and through word of mouth. The business seems to have been undercapitalized.
[11] The Judge's finding that Mr. Morris had a strong personal interest in fishing assumes a particular importance because the Court stated in Stewart that, although a reasonable expectation of profit is not a necessary requirement to establish a source of income for the purpose of section 9 of the Act when the activity is of a commercial nature, if there is a personal or hobby element in the activity in question it is still relevant to determine if there is a reasonable expectation of profit from the activity in order to decide whether the taxpayer had a commercial intent. In these circumstances, the objective criteria prescribed in Moldowan remain relevant, although the existence of a reasonable expectation of profit from the activity is only one of the circumstances that must be examined when ascertaining whether the taxpayer has a commercial intent: Stewart at paras. 5 and 55..
[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.
[13] The Judge in the case before us did not ask himself this question. In light of the evidence before him, the findings of fact that he made, and the new context in which the Moldowan factors must be considered, we are not satisfied that the Judge must have concluded that Mr. Morris was not operating First Cast Guiding in the pursuit of profit and that he was proceeding in a non-businesslike manner.
[14] There was undoubtedly some evidence before the Judge indicating that Mr. Morris intended to make money from the fishing guiding activity. For example, he had obtained the licences, permits and insurance necessary for operating his business, purchased larger equipment, did some advertising and, in 1999, acquired a website. These indicia of a profit motivation are not mentioned by the Judge in the analysis section of his reasons. Further, Mr. Morris testified that he was concerned that he might be laid off from his employment and was trying to use his angling expertise to establish an alternative livelihood. Moreover, on the taxpayer's projection of the number of potential clients at the fee that he intended to charge, Mr. Morris could in theory have made have made a small profit in the years in question. On the other hand, the quality of his record-keeping and his level of financial knowledge of his business were unlikely to win him any accolades from his local Chamber of Commerce, the revenue generated from the business was minimal and he was seriously undercapitalized. Nonetheless, given the nature of the activity and Mr. Morris's lack of business sophistication, we are not satisfied that the manner in which he operated First Cast Guiding was necessarily incompatible with an intention to pursue profit.
[15] Counsel for the Minister brought to our attention a recent decision of this Court, Mendoza v. Canada, 2003 FCA 17, upholding a pre-Stewart decision by the Tax Court disallowing the deduction of expenses on the ground that, since the taxpayers had no reasonable expectation of profit, they had no source of income. Like the case before us, there was a personal element in the activity considered in Mendoza.
[16] However, the importance of the particular facts of such cases tends to decrease their precedential significance. For example, in Mendoza there were no indicia of a commercial aspect to the lease of an apartment by the taxpayers to their handicapped son at a rent that was well below market. In our case, on the other hand, Mr. Morris had incurred expenses that were consistent with an intention to pursue profit from First Cast Guiding and there was evidence that the fees that he proposed to charge were not necessarily out of line with commercial rates.
[17] In these circumstances and in view of the reorientation of the applicable legal tests after Stewart, it is not safe to allow the Tax Court's decision to stand. However, in so saying, we should not be taken to be indicating how this case ought to be decided when the appeal is reheard. Nor do we say that all or any of the expenses that Mr. Morris has claimed are reasonable or related to First Cast Guiding, even if he establishes that, despite his personal interest in fishing, and his lack of commercial success and his rudimentary business skills, First Cast Guiding is a source of income.
[18] Finally, we wish to emphasise that in deciding that this application must be allowed we have given no credence whatsoever to Mr. Morris's unsubstantiated attacks on the integrity and credibility of officials of Canada Customs and Revenue Agency.
[19] For these reasons, we would allow the application for judicial review with costs inclusive
of disbursements in the sum of $500.00, set aside the decision of the Tax Court, and remit the matter to the Tax Court to be decided by a different Judge in accordance with these reasons.
(Sgd.) "John Maxwell Evans"
J.A.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-478-01
STYLE OF CAUSE: Bruce Morris v. The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: March 4, 2003
REASONS FOR JUDGMENT : EVANS J.A.
CONCURRED IN BY:
DATED: March 4, 2003
APPEARANCES:
Mr. Bruce Morris FOR THE APPLICANT
Ms. Johanna Russell
Ms. Patricia Babcock FOR THE RESPONDENT
SOLICITORS OF RECORD:
Mr. Bruce Morris
on his own behalf FOR THE APPLICANT
Mr. Morris Rosenberg FOR THE RESPONDENT