Date: 19991029
Docket: 98-3854-IT-I
BETWEEN:
ROBERT GUIMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P. R. Dussault, J.T.C.C.
[1] The appellant is contesting assessments issued for his 1994, 1995 and 1996 taxation years. Through those assessments, the Minister of National Revenue ("the Minister") disallowed $13,668, $3,840 and $12,971 for each of those years respectively as losses from carrying on a business. The reasons relied on are that the appellant had no reasonable expectation of profit and that the claimed losses are personal expenses.
[2] In making the assessments, the Minister assumed the facts set out in subparagraphs (a) to (m) of paragraph 5 of the Reply to the Notice of Appeal. Those subparagraphs read as follows:
[TRANSLATION]
(a) during the years at issue, the appellant worked in refrigeration, air conditioning and fire protection;
(b) during the years at issue, the appellant carried on an activity as a sole proprietor under the firm name Location d'autos Jaguar Enr.;
(c) that pastime involved providing a service consisting in the rental of classic cars, with drivers, for weddings;
(d) the classic car rental service was provided from May to September of each year (20 weeks);
(e) the cars were rented mainly on Saturdays;
(f) during the years at issue, the fleet consisted of two cars, a Bentley and a Jaguar;
(g) the cars were rented at about $500 for four hours;
(h) both cars were purchased entirely through loans;
(i) the appellant was the driver, but his wife and father-in-law occasionally drove as well, without being paid;
(j) the appellant's wife worked answering the telephone and as a receptionist, without being paid;
(k) the operation of the classic car rental service constantly generated losses:
(i) 1992 $8,841
(ii) 1993 $8,563
(iii) 1994 $13,668
(iv) 1995 $3,840
(v) 1996 $12,971
(l) the appellant had no reasonable expectation of profit from carrying on his activity;
(m) the losses claimed with respect to the classic car rental service were personal expenses for the years at issue.
[3] The appellant expressed disagreement with subparagraphs (c) and (e) as written and disputed the validity of the conclusions stated in subparagraphs (l) and (m).
[4] The appellant began his activities in mid-1992 after purchasing a 1989 Jaguar. The purchase was financed through a loan secured by a mortgage on a building owned by the appellant, part of which was occupied as a personal residence.
[5] In 1993, the appellant purchased a 1963 Bentley. The price of $25,000 was paid through a personal loan that was repaid in 1995.
[6] In November 1996, the appellant purchased a third car, a four-door Continental convertible, for $9,000 in cash.
[7] The rental income was $6,400, $9,000, $11,395 and $15,000 in 1994, 1995, 1996 and 1997 respectively.
[8] The appellant said that 1994 and 1996 were especially difficult because of the cost of the major repairs that had to be made to the cars, which cost amounted to $5,576 and $8,466 respectively for those years. In 1996, one expense the appellant had to pay was $3,498 to repair damage from vandalism. Since his insurance had a deductible of $2,500, he preferred to pay the entire cost of the repairs himself rather than see his insurance premiums increase in the future.
[9] The appellant argued that, once the major repairs were done, the annual cost of maintaining the cars was relatively low.
[10] Thus, only $1,144 in expenses, including registration and gasoline costs, was claimed for the three cars in 1997. The appellant said that since there were in fact very few expenses in 1997, he made a small profit of $433. He said that the reported profit was nearly twice as high in 1998.
[11] Counsel for the respondent argued that not all of the expenses incurred in 1997 were claimed, so that the appellant showed an artificial profit. Thus, he said, the registration and gasoline expenses for two cars were about $1,000 a year for the previous years, and they were in addition to the substantial maintenance and repair costs each year. He therefore questioned whether the total direct expenses related to the three cars was only $1,144 for 1997. It should be noted that no wages were claimed as an expense during the years at issue. Nor did the appellant claim capital cost allowance or home office expenses.
[12] In 1994, no amount was claimed for the telephone or the cellular telephone. Moreover, $1,200 was claimed for the tax paid on the purchase of the Bentley in 1993. It is clear that that amount was not a current expenditure that could be deducted in 1994. It was a capital expenditure that had to be added to the cost of the car in 1993.
[13] For 1994, the Minister also added to the loss claimed—the deduction of which was disallowed—an amount for the additional interest paid by the appellant on the portion of the mortgage loan used to purchase the Jaguar.
[14] During his testimony, the appellant stated that he never made personal use of the cars, that a car was provided to him for his work and that he owned a van for his family's use. Moreover, he said, the Jaguar and Bentley are right-hand-drive cars, which are not very practical for everyday use. The appellant also spoke of the limited use of the cars for rental purposes. Thus, he said, just over 11,000 kilometres have been put on the Jaguar since he purchased it, that is, an average of about 1,600 kilometres a year over a period of seven years.
[15] The appellant claimed that he currently spends about 25 hours a week on his rental activity and that he spent about 20 hours a week on it during the years at issue. He admitted that he does not pay any wages to his wife, his father-in-law or his father, who occasionally serve as drivers. His wife is also the receptionist. The appellant said that his father-in-law and father are retired and give him a hand to help him succeed.
[16] On the question of advertising, the appellant said that he went to a bridal show, the Salon de la mariée, every year from 1993 to 1997. However, it should be noted that no expense was claimed for that show for 1994. Ever since that annual show has ceased to be held, the appellant has paid for advertising on a yearly basis in the magazine Let's Get Married.
[17] According to the appellant, the use of the cars for weddings usually occurs on Saturdays but sometimes also on Sundays.
[18] When asked about his interest in renting his cars for proms as well as weddings, the appellant said that he could not do so at the time because the special licence for that purpose was granted only for cars less than two years old. The appellant said that at the time he also could not obtain the licence for antique cars at least 30 years old.
[19] Lucie Allaire, an appeals officer, testified for the respondent. She said that the appellant told her that he had begun his activity as a pastime in 1992 and that he had devoted six to eight hours a week to it at that time.
[20] Counsel for the respondent referred first to the Federal Court of Appeal's decision in Tonn v. Canada, [1996] 2 F.C. 73, in arguing that the appeals should be dismissed because the appellant had no reasonable expectation of profit from his rental activity during the years at issue. Counsel for the respondent emphasized that the appellant himself told the appeals officer that he had begun his activity as a pastime. Thus, according to counsel, the activity involves a personal element that calls for a more thorough review of the situation in light of the tests adopted by the courts for determining whether or not the taxpayer had a reasonable expectation of profit during the years at issue. Although counsel for the respondent admitted that there is not necessarily a very clear personal element in this case, he maintained that account must be taken of the circumstances as a whole. He stressed the lack of consistency in the way the appellant claimed deductions for his expenses from one year to the next.
[21] With regard to the losses, he began by pointing out that the appellant has incurred losses since 1992. With regard to the years subsequent to the years at issue, he argued that the minimal profit shown in 1997 does not reflect reality because no expense was claimed for maintaining and repairing the cars that year.
[22] Counsel for the respondent also noted that the appellant does not spend much time on his activity and has not expressed any intention of expanding it in the future.
[23] Counsel for the respondent further pointed out that the appellant has no paid employees and has not claimed any capital cost allowance. In this regard, he referred to this Court's decision in Major v. Canada, [1995] T.C.J. No. 718, in which some facts were very different from the facts of this case. Thus, although the taxpayer in Major carried on an activity similar to the appellant's, he had five cars and three paid employees. Moreover, he had claimed capital cost allowance each year.
[24] As noted in that decision, capital cost allowance is—according to the Supreme Court of Canada's decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480—an element that must be taken into account in determining whether a taxpayer has a reasonable expectation of profit. Counsel for the respondent therefore argued that, if the appellant had claimed capital cost allowance, the losses would have been much higher during the years at issue and he would have incurred a loss in 1997 as well.
[25] Finally, counsel for the respondent noted that the appellant has not claimed home office expenses either.
[26] Counsel for the respondent argued that, all in all, there is no consistency in the way the appellant claims his expenses from year to year and that—if I understand his reasoning correctly—if all the expenses had been claimed in the usual way, the losses would have been so much higher that the appellant could not claim to have a reasonable expectation of profit from his car rental activity.
[27] The appellant argued that he had to incur expenses in certain years to have major repairs made to the cars—repairs involving such things as the transmission, the suspension and the exhaust system—but said that those expenses would not be incurred again for 10 years. With regard to the argument of counsel for the respondent that he did not spend much time on his activity when he began it, the appellant argued that he did not have to be present constantly to take telephone calls, that he had an answering machine and that he scheduled his appointments in the evenings or on the weekends when people were most likely to come to meet him. He also repeated that he has not made any personal use of the cars because a car is made available to him by his employer 24 hours a day and he owns a van for his family's needs. Finally, he said that from the start he had wanted to create a business and that he invested about $65,000 for that purpose.
[28] In Moldowan, supra, Dickson J. of the Supreme Court of Canada stated at page 485:
Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R.2
_______________________________
2 [1972] C.T.C. 151.
He added at pages 485-86:
There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. 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 allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews3.
________________________________
3 (1974), 74 D.T.C. 6193.
[29] In Landry v. The Queen, 94 DTC 6624, Décary J.A. of the Federal Court of Appeal stressed that the factors identified by Dickson J. are not exhaustive and will in fact vary depending on the nature and size of the business.
[30] Referring next to a number of decisions, Décary J.A. listed as follows, at page 6626, the tests adopted by the courts over the years:
Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of the relevant periods, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer's good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.
(References omitted.)
[31] Moreover, in Tonn, supra, the Federal Court of Appeal noted the following at page 75:
The primary use of Moldowan as an objective test is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments. Errors in business judgment, unless the Act stipulates otherwise, do not prohibit one from claiming deductions for losses arising from those errors. The Moldowan test should be applied sparingly where a taxpayer's "business judgment" is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business.
(Emphasis added.)
[32] In the instant case, a review of the expenses claimed for the years at issue, namely 1994, 1995 and 1996, and of the 1997 expenses (Exhibit I-1) shows that there are certain anomalies whose effect is the understating the real losses incurred, at least during the years at issue.
[33] Thus, although the appellant said that he advertised at the Salon de la mariée starting in 1993, no expense with respect thereto was claimed for 1994, whereas a deduction was claimed for 1995, 1996 and 1997.
[34] No telephone, cellular telephone or pager expenses were claimed for 1994, whereas the expenses indicated for those items for 1995, 1996 and 1997 amount to $616, $1,194 and $1,348 respectively. Yet the appellant said that there was a cellular telephone in the Jaguar as early as 1993 and that he also had another portable cellular telephone. One may legitimately wonder whether the figures given by the appellant regarding his expenses are indeed a reflection of reality. When he testified, the appellant said that he borrowed to pay the full purchase price of the Jaguar in 1992. That loan was secured by a mortgage on the building he owned, part of which was used as a residence. Since the interest paid was not claimed as an expense associated with the car rental activity but was rather claimed against the income from the building, Revenue Canada estimated that an amount representing 32 percent of the interest paid could be attributed to the car rental activity. This had the effect of increasing the loss claimed for 1996 by $4,214 and decreasing the profit made in 1997 by $4,114. If a similar amount were added as an expense associated with the car rental activity in 1994 and 1995, the reported losses of $10,688 and $3,840 (see Exhibit I-1) would in actual fact be nearly $15,000 and $8,000 for each of those two years, without taking into account the other expenses that were not claimed.[1]
[35] Admittedly, the appellant's income from his activity increased from $6,400 in 1994 to $15,000 in 1997 and has apparently stabilized at about that level since. For the 1997 taxation year, the appellant reported a profit of $433. The profit was apparently twice as high in 1998. Yet one wonders to what extent the audit and the reassessments for the previous years may have influenced him and led him to present results for 1997 that favoured him by again understating the expenses actually incurred. In the statement of business activities submitted for 1997, under the heading "Motor vehicle expenses (not including capital cost allowance)", the expenses claimed are $694.50 and $450, for a total of $1,144.50. Those expenses are not identified. According to the appellant, the total represents all the expenses incurred for the three cars for registration, gasoline and maintenance. He said that there were no repairs in 1997. This assertion is somewhat surprising considering that the appellant owned three cars in 1997 and that the registration and gasoline expenses alone totalled just under $1,000 for the previous years when he owned two cars.
[36] As noted above, in the statements of business activities for the previous years and especially for the years at issue, it can be seen that the expenses were not all claimed consistently, and one wonders to what extent the other figures provided by the appellant can be relied on. This aspect raises serious doubt about whether the activity is really capable of generating a profit.
[37] On the question of remuneration, it must be noted that the appellant has never paid any direct compensation to anyone, and in particular to his wife, father and father-in-law, who, he said, have all worked without pay. If the appellant has paid them indirectly by taking them out to eat occasionally, as he claimed, he has also never sought to deduct those expenses, or at least part of them. The matter of remuneration is important and suggests that the activity could not be profitable if it were engaged in on a strictly commercial basis, as in such a case an employer must not only pay employees but must also assume various indirect costs, such as employment insurance contributions, contributions to the CSST, and so on.
[38] The fact that the appellant does not pay anyone any wages and that members of his family have for more than six years been helping to maintain his car rental activity by working without pay suggests that the activity is more of a pastime than a genuine business activity.
[39] Finally, there is the question of capital cost allowance. As we know, claiming capital cost allowance is optional and a taxpayer who claims it is not required to claim the maximum yearly amount allowed. In the case of so-called classic cars, such as the 1963 Bentley, it may no doubt be thought that claiming each year the maximum allowed is perhaps not appropriate, although it would seem normal to take into account nevertheless the loss in value resulting from use, unless, of course, the appellant is counting on an increase rather than a decrease in the value of the cars he purchased. It is in fact well known that, depending on the circumstances, classic cars may rise rather than decline in value over time.
[40] As for the home office expenses referred to by counsel for the respondent, we know that the appellant has claimed none even though the car rental activity is carried on exclusively out of his home. Note must be made here of subsection 18(12) of the Income Tax Act, which would have precluded any deduction of such expenses that would have increased the losses in the years at issue. The fact remains that, although not deductible where a taxpayer already has a loss because of other expenses, reasonable and justified expenses for such an office may nevertheless be carried over indefinitely for the purpose of computing income in subsequent years insofar as there is a profit once the other expenses are deducted. Here, the appellant did not even try to determine an amount that would represent the true cost of the use of an office in his home.
[41] Moreover, in a situation like the one here, where the taxpayer has a main source of income, one may legitimately wonder whether he is not attempting to "subsidize" the cost of his other activities by seeking to deduct the expenses related thereto from the income from his main source.
[42] All things considered, it is my view that the appellant has not shown on a balance of probabilities that his car rental activity could have become profitable in the foreseeable future if account were taken of all the expenses that would normally be deductible in relation to that activity if it were engaged in on a truly commercial basis.
[43] In light of the foregoing, the appeals are dismissed.
Signed at Ottawa, Canada, this 29th day of October 1999.
"P. R. Dussault"
J.T.C.C.
Translation certified true on this 17th day of August 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-3854(IT)I
BETWEEN:
ROBERT GUIMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 8, 1999, at Montréal, Quebec, by
the Honourable Judge P. R. Dussault
Appearances
For the Appellant: The appellant himself
Counsel for the Respondent: Mounes Ayadi
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of October 1999.
|
"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 17th day of August 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
[1] The loss disallowed for 1994 was put at $13,668 by the Minister, whereas the appellant had claimed a loss of $10,688. No explanation was provided regarding the amount determined by the Minister.