Date: 20001130
Docket: 1999-5125-IT-I
BETWEEN:
SCOTT Q. JACKS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Campbell, J.
[1] These appeals are from assessments for the Appellant's 1994 and 1995 taxation years. In computing income for these years, the Appellant deducted losses arising from his endeavours as a songwriter and performer. The Minister disallowed the deduction of these losses on the basis that the Appellant had no reasonable expectation of profit from his activities as a musician.
[2] The Appellant's family has roots in the music industry and the Appellant has been involved in this industry for many years. Prior to 1991 he performed with several bands. In 1991 he was co-writing music as a member of a band called First Aid. During this time the band's first compact disc (CD) was produced. Since 1990, the Appellant has been employed full time as a mail carrier from 7:00 a.m. to 3:00 p.m. Evenings and weekends have been devoted to his music career. He testified that he worked as a mail carrier so that he would have the funds to pursue his musical activities.
[3] The Appellant introduced 23 exhibits to support his argument that these music activities were of a commercial nature. These exhibits included a website established in 1997, compact discs, Chinese videos for which he wrote theme songs, environmental videos, entertainment and newspaper reviews (including one from Belgium) and a book review of his music.
[4] The Appellant is involved with song writing, production of compact discs, live performances and playing back-up in recording sessions for other artists. He testified that he averaged 21 hours per week since 1991 immersed in self promotion, song writing, recording, performing etc. He has attempted to promote his music internationally through his website, distribution of his music through various companies such as Indie Pool and exposure to over a billion people through the Chinese video. One of the Appellant's songs has been used as a theme song for a Rochester farm hockey team and in the near future he will be performing his music for a promotional television show for the Green party.
[5] The Appellant has chosen a more hands-on approach to his music with self made compact discs, internet promotion, etc. rather than employing the usual record contract or label company where, he testified, one can easily get "lost in the shuffle".
[6] The issue to be decided is whether the Appellant's musical activities in 1994 and 1995 had a reasonable expectation of profit. Counsel for the Respondent argued that there was a strong "personal" element in the facts of the case. By the Appellant's own admission he loved music and performing. So certainly he obtained personal satisfaction from it. As he pointed out in cross-examination, composers/musicians do it because they love music – "whether its Madonna or -- or some guy on the corner of the Liquor Store playing for quarters". As counsel for the Respondent pointed out, this is a factor I must consider. I do not, however, consider the personal satisfaction which the Appellant derived from his music, to be anything more, in the facts of this case, than a positive element necessary to the continuing commitment of the Appellant to his music.
[7] Competition in the music industry is fierce. The Appellant's music does not fit into a niche of the more mainstream music such as country music where a turn around profit may be quickly realized. While counsel for the Respondent suggested that the Appellant's music was not mainstream, I agree with the Appellant when he stated that "mainstream" depends upon whose viewpoint you refer to and which artist you are referring to. I listened to the music on the several compact discs entered as an exhibit. The music of the Appellant's band is primarily instrumental with several vocals interspersed. I do not believe that what is the norm for "commercial" in the music industry today may necessarily be the norm tomorrow. The trends in types of music the public are listening to today may change next week. Music which is not "mainstream" today may be so considered tomorrow. The Appellant believed in his music and he believed he could be successful. He could easily have turned his abilities to music where profit could more easily be obtained but for any musician who truly believes in his music and its eventual success, to do so would be tantamount to being a traitor to their music.
[8] The Appellant did not have a business plan except as he said "in his head". By 1994, he had been reporting losses for three years. Prior to 1991, the Appellant had been involved in the music industry for many years – approximately 9-10 years as I recall from the evidence, with no reported losses. His main focus in 1994 and 1995 was the production and selling of compact discs. I believe that three to four years in the music industry is certainly reasonable as a start-up period. Thereafter the facts of this case show that the Appellant took varied steps at self-promotion, both nationally and internationally, with the production of a video, utilization of a website and CD distributors and exposure on the Chinese market. The facts support the Appellant's attempt to turn his musical activities around since 1995. While he is still struggling, he has had small successes and revenue has increased. The facts support a finding that there was a reasonable expectation of profit. The majority of successful artists, whether musical or not, have struggled for many years before attaining success in terms of "profit". The period 1991-1995 is just too short a period of time to flip a musical career into a profit-producing venture. I find that the Appellant did take steps to expand his market and his exposure. His activities in 1994 and 1995 cannot be viewed as two isolated years. In this type of venture it is necessary to look at several years before and after to determine how the venture has evolved and is evolving. Counsel for the Respondent argued that the Appellant's attempts with internet exposure, videos, etc. in years subsequent to 1995 had no bearing on the years in question. I do not agree. In the last several years, there has been a considerable revenue increase attributable to activities other than producing and selling compact discs (which was the primary – but not the only focus in 1994 and 1995). But these "other activities" were musical endeavours designed to promote the Appellant's music in the industry. One of these primary activities was the subcontract for the Chinese video. Counsel for the Respondent suggested these other activities were separate from the compact disc producing activity. I find they were, based on the facts, all part of the Appellant's music and his endeavours to obtain public exposure by a variety of methods. When the Appellant saw that a primary focus on one activity was not working, he broadened the focus after 1995 and included other activities aimed at self-promotion and public awareness for his music. I do not fault the Appellant for diversifying. All his activities were just different vehicles for the promotion of his music. The facts support a conclusion that the Appellant had a reasonable expectation of profit in 1994 and 1995.
[9] Although not addressed in the pleadings, the Appellant's method for recording revenue and expenses was canvassed in cross-examination. The method, if it could be so called, was inept and most certainly unprofessional. I accept the Appellant's evidence that his accountant looked after his bookkeeping and completion of his returns and he was honestly unaware of the inappropriate accounting procedures utilized which ranged from double reporting of salary figures (as an expense in one year and later as part of the inventory calculation) to reporting an increase to inventory several years after it occurred. It is fortunate for the Appellant that his accountant, who also attempted unsuccessfully to represent the Appellant at the hearing, sat down mid hearing and allowed the Appellant to conduct his own presentation. I have allowed the Appellant's appeal despite his accountant's inappropriate and decidedly unprofessional behaviour in court and his bungling of the Appellant's records. It may be appropriate for the Minister's representative to review these items of record keeping with the Appellant with a view to a satisfactory resolution.
[10] The Appellant's appeal is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant had a reasonable expectation of profit from his business as a song writer and performer.
Signed at Ottawa, Canada, this 30th day of November 2000.
"Diane Campbell"
J.T.C.C.