Date: 20000323
Docket: 1999-4353-IT-I
BETWEEN:
RAYMOND LEBEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the appellant's 1994, 1995 and 1996 taxation years. They involve the disallowance of business losses claimed by the appellant from certain activities undertaken by him in the years in question.
[2] Throughout the years in question the appellant was employed by CAE Machinery Ltd. as a machinist. He struck me as a person of rather wide-ranging interests and intelligence who was prepared to embark on a variety of enterprises in an attempt to make money.
[3] We are concerned with four activities in the years in question.
(a) Jewelway. This endeavour which ostensibly involved buying jewellery from a company and selling it but it was in reality a pyramid scheme, the success of which depended on getting more participants to join.
(b) Vision Int'l Productions ("VIP") was an offshoot from the pyramid scheme mentioned in (a). The Jewelway scheme was so complicated that it was hard to explain it to prospective participants. Mr. Lebel therefore devised laminated transparencies which were supposed to simplify the presentation.
(c) A variable speed propeller. This project never progressed past the research and development stage and so far has not got off the ground.
(d) Dig-i-all. This was a web hosting business in which the appellant would, in effect, rent web sites from servers and then "sublease" portions to persons who wanted a website.
[4] From 1987 to 1996 the appellant reported losses from his various business activities as follows:
|
Taxation Year |
Gross business Income |
Expenses |
Net business income/(loss) |
|
1987 |
$1,768 |
4,138 |
$ ( 2,370) |
|
1988 |
$ 2,932 |
7,757 |
$ ( 4,825) |
|
1989 |
$ 1,013 |
2,679 |
$ ( 1,666) |
|
1990 |
$ 90 |
2,296 |
$ ( 2,206) |
|
1991 |
$ 175 |
7,198 |
$ ( 7,023) |
|
1992 |
$ 0 |
12,945 |
$ (12,945) |
|
1993 |
$ 521 |
20,270 |
$ (19,749) |
|
1994 |
$ 6,387 |
25,794 |
$(19,407) |
|
1995 |
$ 3,865 |
10,788 |
$ ( 6,923) |
|
1996 |
$ 6,272 |
8,491 |
$ ( 2,219) |
|
Total |
$ 23,023 |
102,356 |
$ (79,333) |
[5] He was in fact allowed to deduct the losses claimed in all years prior to 1994.
[6] He was denied the losses in 1994, 1995 and 1996 on the basis of no reasonable expectation of profit.
[7] He adduced in evidence a large number of receipts and I am satisfied that he has established that the expenses claimed were in fact incurred. That is not the problem. The difficulty is that his statements of business activity filed with his returns of income do not differentiate between the various activities and it is difficult for me to tell which expenses or items of revenue are attributable to which activity. In fairness to the appellant the officials of the Department of National Revenue made no attempt to do so either. After ritually intoning no reasonable expectation of profit they ceased any further attempt at systematic analysis.
[8] I shall deal with each of the four activities.
(a) Jewelway. This was a sort of pyramid scheme under which the appellant would buy "positions". On the face of it, it appeared that he was buying jewellery which he was supposed to sell but this was not the essence of the scheme. He still has the jewellery. The essence of the scheme was to persuade other people to join on the same basis as he did, and they would then induce others to join. He initially bought seven positions for $350 each.
Over the years he managed to persuade 12 people to join, although he approached hundreds. He stated that some people were making as much as $70,000 per month. It may be that some of the original promoters were doing well, but on a part-time basis the appellant, on any rational view of the matter, had no real hope of succeeding. The scheme struck me as somewhat harebrained and while I accept that what may appear to be harebrained schemes may sometimes have the potential of achieving a measure of commercial success, it is usually the original proponents or promoters of the scheme (for example, Charles Ponzi) who succeed in making money, not the victims. I do not think this activity can be called a business.
(b) VIP. This idea had more potential. The appellant concluded that he could develop transparencies which could be used to describe the Jewelway scheme to potential participants. This struck me as a reasonably viable enterprise, given the problems that I, for one, had in understanding the scheme. Although the company Jewelway originally encouraged his development of the transparencies, it reversed its position and told him to stop and so the project came to an end. By this time he had spent a substantial amount on printing of material ($11,826.99) and supplies ($4,711.09).
I regard these as legitimate expenses, but they represent the cost of inventory and can only be deducted in computing income when they are sold or used up or when the business comes to an end, as an inventory loss.
(c) The variable speed propeller. The development of this propeller is no doubt a legitimate commercial objective but it remained in the development stage. The costs are obviously capital. When and if it comes to fruition for example in the form of a patent, the costs will form part of the cost of the propeller or the patent.
(d) The web hosting business, Dig-i-all. This is clearly a business. Indeed by now he is making a profit on it. His brother and sister-in-law are both engaged in this business full time and are, apparently, making a good living.
[9] As noted above the officials of the Department of National Revenue made no attempt to analyze the various businesses. Evidently they believed that their obligations began and ended with the ritual incantation of no reasonable expectation of profit.
[10] The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment to allow the appellant to deduct such of his expenses as may reasonably be attributable to the VIP business and the Dig-i-all business.
[11] It appears that the appellant has been more than 50% successful and so he is entitled to his costs.
Signed at Toronto, Canada, this 23rd day of March 2000.
"D.G.H. Bowman"
A.C.J.