Date: 20000713
Docket: 1999-3630-IT-I
BETWEEN:
DAVID BATEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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For the Appellant: The Appellant himself
Counsel for the Respondent: Cathy Chalifour
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the bench at London, Ontario, on June 14, 2000)
McArthur J.T.C.C.
[1] The Minister of National Revenue reassessed the Appellant for his 1995 and 1996 taxation years by disallowing expenses in the amounts of $13,093 and $8,880 which expenses were incurred by the Appellant in what he claims to be a travel business. The issues are whether the Appellant had carried on a business and in doing so, did he have a reasonable expectation of profit. If the answer to those questions is yes, then were the expenditures claimed within the criteria of the subsections 18.1(a) and (h) of the Income Tax Act.
[2] The 37-year-old Appellant has been engaged in the travel business since 1982. Without going into the extensive details of his experience, it is sufficient to state that he is highly qualified in the travel industry. He enjoys travelling and the related business. The Appellant commenced a travel business in 1991 known as Travel Management Consultants. From 1990 to 1996, he had full-time employment with a company, Lac-Mac, which is a garment manufacturing industry. His responsibilities were in the field of travel. His travel business, which of course was separate from his full-time job, worked in unison if not in partnership, with an agency, Uni-Globe Instant Travel. He would bring clients to Uni-Globe or the other way around and organize suitable tours on their behalf. For his services, he received 49% of their commission from Uni-Globe. This arrangement lasted until about October 1996.
[3] In six years he did not make a profit and in fact, the losses escalated. In no year did his business income exceed $1,100 and averaged approximately $600 per year over the six years. The net losses claimed were: 1991 - $2,700; 1992 - $1,800; 1993 - $2,300; 1994 - $6,700; 1995 - $12,300; 1996 - $8,400. The Appellant explained that expenses increased in 1995 and 1996 because he travelled extensively to research new areas for the adventurous traveller.
[4] The Appellant appeared on his own behalf although his Notice of Appeal was prepared by an experienced tax lawyer. The basic issue is whether the Appellant had a reasonable expectation of profit. A reasonable expectation of profit is one of the tests that the courts utilize in determining whether a taxpayer was carrying on a business. A reasonable expectation of profit is part of a definition of personal or living expenses in section 248 of the Income Tax Act. It is not a free-standing criteria. In the Reply to the Notice of Appeal, the Minister stated that in 1995 and 1996, the deduction of the purported business expenses is prohibited by subsection 18.1(a) of the Act and the expenses were not incurred for the purpose of producing income from a business or property. In the same years, the deductions are prohibited by subsection 18.1(h) as they are personal or living expenses of the Appellant, the business having no reasonable expectation of profit. Further, the deduction of the expenses are prohibited by subsections 18.1(a), (b) and (h) of the Act as the business expenses were incurred to explore a business opportunity and not incurred with respect to an existing business.
[5] There is some merit to the Minister's alternative argument that expenses were personal or living, at least in part. During the two relevant years, the Appellant claimed as expenses a trip to France with his wife and to Florida with his wife and two children. While I accept that the Appellant conducted some of his travel research on these trips, there certainly was a serious personal element.
[6] I have little problem in finding that the Appellant operated a travel consultant business from 1991 to the end of 1996. It was not a travel agency because he found the governmental regulations too onerous, including a surety bond requirement of $35,000.
[7] The entire period from the inception of the business in 1991 to the end of 1996 must be taken into consideration and not just the years 1995 and 1996. The Minister apparently accepted the four prior years but drew the line when expenses increased dramatically in 1995. The Minister submits that if there was a business, the 1995 and 1996 travel expenses were capital in nature because the trips taken to Australia, France and the Far East were exploratory and not for the purpose of earning income.
[8] While very ably presented by counsel for the Respondent, I cannot accept her position. The Appellant was an expert in his field and he travelled to more adventurous areas in far away countries to cultivate interest in various tours. The ventures were not part of a new business. It was a continuation and acceleration of the activity commenced in 1991. To sell tours he had to know his product. It was not a hobby since he had earned his living in the general area of the travel industry for over 15 years.
[9] For the 1995 taxation year, I find that the Appellant is entitled to deduct business expenses. Because there was a personal element, the parties have agreed to reduce the 1995 expenses to $10,000 and in this, I appreciate their assistance. In 1996, the Appellant claimed business expenses for trips to Florida, Philadelphia and later, he spent two weeks in Asia. Shortly after that he abandoned his travel consulting business.
[10] At some point of time, the line has to be drawn and the position taken that enough is enough. With the Appellant's experience he ought to have known by the end of 1995 and after five straight years of escalating costs that the business was not going to produce a profit. At this point, surely he had no reasonable expectation of profit. The appeal is allowed to permit the Appellant to deduct a total of $10,000 in business expenses for 1995 only and he is entitled to no further relief.
Signed at Ottawa, Canada, this 13th day of July, 2000.
"C.H. McArthur"
J.T.C.C.