BETWEEN:
and
[OFFICIAL ENGLISH TRANSLATION]
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Appeals heard on October 5, 2005, at Montréal, Quebec
Before: The Honourable Justice Louise Lamarre Proulx
Appearances:
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JUDGMENT
The appeals from the assessments under the Income Tax Act for the 2001 and 2002 taxation years are dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 17th day of January 2006.
Translation certified true
on this 22nd day of June 2006
Monica F. Chamberlain, Reviser
BETWEEN:
ÉMILIEN ARSENEAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] These are appeals under the informal procedure in respect of the 2001 and 2002 taxation years.
[2] At issue in this case is the nature of the expenses in the amount of $23,519 for the 2001 taxation year and $22,646 for the 2002 taxation year. The Minister of National Revenue (the "Minister") takes the view that these were personal expenses. The Appellant maintains that these were expenses incurred to earn business income.
[3] The facts on which the Minister based his reassessments are set out in paragraph 6 of the Reply to the Notice of Appeal (the "Reply"), as follows:
(a) The Appellant and his spouse are both retired;
(b) The Appellant has a sailboat;
(c) Since 1992, the Appellant has spent several months a year in the Mediterranean, specifically sailing along the Turkish coast;
(d) In the course of these travels, between 1992 and 2002, the Appellant has every year recorded some 20 hours of images on videotape;
(e) The Appellant has approached broadcasters and producers of television programming but has not received any positive responses with regard to distributing his films;
(f) During 1999, the Appellant received compensation of $300 for his involvement in a television program on pleasure sailing;
(g) During the fall of 2004, the Appellant broadcast some of his films free of charge on a community television station;
(h) Up to now, all the attempts by the Appellant to find a paid outlet for his films have proved unsuccessful;
(i) The expenses claimed by the Appellant include his personal living expenses during his travels, as well as the costs related to his boat and his personal vehicle.
[4] The Appellant admitted paragraphs 6(b) to 6(i) of the Reply.
[5] With regard to paragraph 6(a) of the Reply, the Appellant explained that he is retired, but that his spouse, Marie-Andrée Champagne, is semi-retired. She is a doctor and works three days a week for six months of the year.
[6] The Appellant is an engineer. He was employed by an engineering company, which he left in 1988. He subsequently worked for four years as an independent worker before retiring in 1992 at age 55. As is stated in paragraph 6(c) of the Reply, every year since 1992, the Appellant and his spouse have spent lengthy periods of time abroad. They have a sailboat. They fly to the marina where their boat is stored and begin sailing along the Mediterranean coast. They have visited several coastal countries extensively, including, recently, Turkey.
[7] At the start of the hearing, the Appellant stated that he was hoping to give a series of lectures to Les Grands Explorateurs, which would earn him $75,000. According to the Appellant, he was negotiating with the management of that organization. The contract was not signed and he did not submit any documents.
[8] In 1999, as was mentioned at paragraph 6(f) of the Reply, some of his films were shown on a non-profit basis on "Canal D" television. Following these broadcasts, the Appellant decided to start a television production company.
[9] He reportedly submitted his video projects to production houses and broadcasters, albeit without any positive results.
[10] He stated that in the year 2000, he had been commissioned by a number of pharmaceutical companies to organize and present eight conferences. He had been given a budget of $24,000. He was responsible for renting facilities and organizing the conferences. The Appellant did not submit any documentation that would have explained the exact nature of this project.
[11] The Appellant did not bring any documentation with him, except for a copy of the questionnaire that the officials of the Minister had asked him to complete in order to enable them to analyze the nature of the expenses claimed. He refused to complete it because the questions asked were not applicable to a small business.
[12] Counsel for the Respondent produced as Exhibit I-1 a document entitled "television project" with the subject "Turkey or discovery of Turkey". At the end of the document, in the section entitled "Who are we?" the first name mentioned is that of Marie-Andrée Champagne. After that comes the name of the Appellant. The Appellant explained that his spouse, who has published books in the past, produced the text portion, while he was responsible for the video portion and for the preparation of the material.
[13] The Appellant said that he had not drawn up a business plan nor had he applied for grants. He purchased a camera for $5,600. In 2001 and 2002, he did not have his films edited, as that was too expensive, namely $150 to $250 a day.
[14] In 2004, the Appellant had learned editing at a community television studio. He then built an editing room in his residence at a cost of $2,500.
[15] Counsel for the Respondent filed Exhibit I-2 the "Statements of Business Activities" for the years 2001 and 2002. In 2002, we read "Film production costs: $12,626.79". The Appellant explained that these costs were the costs of the boat, vehicle rental in the countries visited and other travel costs, excluding air travel, which is also claimed in the amount of $2,527.98.
[16] The Appellant admitted that he had not tried to reduce his losses from one year to the next, despite the absence of any revenue from his business, as that was a risk that had to be taken. He also admitted that he is an enthusiastic traveller.
Arguments
[17] Counsel for the Respondent stated that, in order for an individual to be able to deduct expenses in calculating their income, there must be a source of income, either a business or a property. Here, the source of the income is a business. When the business includes aspects that indicate that it could be regarded as a personal activity, the taxpayer must show that he is conducting his activity in a commercial manner and specifically there must be a reasonable hope of profit. Was the primary intent in engaging in the activity to generate income? It is not enough for a person to say that their intent is to produce films when the person has changed nothing in their lifestyle.
[18] Counsel for the Respondent referred to the decision of the Supreme Court of Canada in Stewart v. Canada, [2002] S.C.R. No. 46 (QL), at paragraphs 54 and 55:
[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 Modowan, 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 page 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 declined 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 that must be evaluated, not his or her business acumen.
[19] Counsel also referred to the decision by Bowie J. of this Court in Morris v. Canada, [2003] T.C.C. No. 288 (QL), and specifically to paragraph 13 of this decision:
[13] I find that Mr. Morris' activities in relation to providing guide services to people wishing to go fishing in the wilderness has a very substantial personal element to it. I infer this from the fact that he is a very enthusiastic angler, and has been for most of the past 40 years. He is also, according to his own evidence, a very accomplished boatsman. He described, with some apparent satisfaction, his ability to navigate his boat in difficult waters where others could not. The boating and fishing excursions which gave rise to the greatest part of the claimed expenses were an extension of his long-time hobby. It is necessary, then, to proceed to the second part of the inquiry. The question that must be asked and answered is: "[did] the taxpayer intend to carry on [the] activity for profit and is there evidence to support that intention?" This in turn requires that I consider whether the taxpayer's predominant intention was to make a profit as a fishing guide - a subjective analysis - and also whether he has conducted the activity "...in accordance with the objective standards of businesslike behaviour".
[20] Counsel noted that the Appellant had not shown that he had the training and experience required in connection with the activity of producing films for television. He had not learned editing until 2004. The business has generated substantial losses from the outset and is still doing so for zero revenue. The Appellant has no business plan. He does not maintain accounting books. He did not answer the questionnaire. He did not adjust his expenses. His activity is in the nature of a hobby, it is personal in nature.
[21] The Appellant has asserted that his business is a small one and that the criterion that should apply are those of a small business.
Analysis and conclusion
[22] Subsections 9(1), (2) and paragraph 18(1)(a) of the Act read as follows:
9(1) Income - Subject to this Part a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
9(2) Loss - Subject to Section 31, a taxpayer's loss for a taxation year from a business or property is the amount of the taxpayer's loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source with such modifications as the circumstances require.
18(1) General limitations - In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of
(a) General limitation - an outlay or expense, except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
[23] For the application of these provisions, there must be a business. Paragraph 18(1)(a) of the Act says specifically that in calculating the income of a taxpayer from a business, a taxpayer can deduct no expense except to the extent that it was incurred for the purpose of gaining or producing income from the business.
[24] The business referred to in these provisions is a commercial enterprise, in other words, a business operated in order to generate a profit. The taxpayer must establish that his primary intention was to generate a profit from the activity and that this activity was carried out in accordance with objective business standards.
[25] A business in the arts may not generate profits for a long time, but in order to qualify as a business, it must have certain characteristics which are normal for the activity in question. On this point, it is interesting to read Interpretation Bulletin IT-504R2: "Visual Artists and Writers".
[26] Here, we do not see the normal characteristics of a film production business. During the years at issue, the Appellant did not know how to edit his films. This may not be essential, but it does require retaining the services of a professional editor. The Appellant did not want to obtain the services of an editor because of the daily cost of such services. He did not estimate the number of days required for the editing services, nor did he estimate which editing expenses are essential to film production. Furthermore, he never questioned the high cost of the boat, vehicle rental and other travel costs over several months. This would indicate that the personal aim was more important than the business aim.
[27] There is no evidence that the Appellant received the training normally required to become a film or video producer, such as study in academic institutions or periods of training in companies specializing in this type of business or association with other filmmakers.
[28] There was no adjustment over the years of the high expenses given there was zero revenue. This would have been normal in a business context, even in the cultural field.
[29] All these elements are elements of an activity engaged in for personal purposes and not for commercial purposes, for an activity in which the predominant aim is not to make a profit. An arts business of a commercial nature may be modest, but it must display the characteristics of a commercial enterprise: the search for profit, rationalization of expenses, the ability to perform the activity in a professional or quasi-professional manner and other characteristics that are normal for a commercial enterprise of the same type.
[30] The appeals are accordingly dismissed.
Signed at Ottawa, Canada, this 17th day of January 2006.
"Louise Lamarre Proulx"
Lamarre Proulx J.
Translation certified true
on this 22nd day of June 2006
Monica F. Chamberlain, Reviser
COURT FILE NO.: 2005-1746(IT)I
STYLE OF CAUSE: ÉMILIEN ARSENEAULT AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: October 5, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice Louise Lamarre Proulx
DATE OF JUDGMENT: January 17, 2006
APPEARANCES:
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For the Appellant: |
The Appellant himself |
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For the Respondent: |
Mounes Ayadi |
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario