Date: 19990806
Docket: 98-75-IT-I
BETWEEN:
GASTON LAURION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] These are appeals from assessments made under the Income Tax Act (the "Act") for the 1992, 1993 and 1994 taxation years.
Points at Issue
[2] In computing his income, the appellant deducted losses of $7,377, $10,298 and $13,890 for each of those years respectively. In 1992, the losses were incurred in relation to the appellant's professional activity as a writer. In 1993 and 1994, they were related to another activity of the appellant as representative of various Quebec corporations in Vietnam.
[3] In assessing the appellant, the Minister of National Revenue (the "Minister") disallowed the deduction of the losses for the three years on the ground that the appellant did not have a reasonable expectation of profit from his activities and that the expenses giving rise to the losses constituted personal or living expenses within the meaning of paragraph 18(1)(h) of the Act. The assessments by the Minister were made following similar assessments by Revenu Québec.
Summary of the evidence
[4] The appellant and his accountant, Joseph Altenhaus, testified. Marthe Guindon, an objections officer with Revenu Québec, also testified, for the respondent.
[5] I first note that it was admitted that the appellant had no reasonable expectation of profit from his professional activity as a writer in 1992 and that the Minister's decision to disallow the losses for that year is thus no longer in dispute. However, as a number of expenses claimed for 1993 and 1994 are of the same nature as those claimed in 1992, I will return to this point a bit further on.
[6] The appellant is a professor at Concordia University in Montréal, Quebec, and a writer and translator. He has an office in his residence for the purposes of the latter two activities.
[7] The appellant stayed in Vietnam from December 15, 1993 to April 15, 1994 to learn the lay of the land and to try to sell certain products marketed by Quebec corporations, his aim being to be able to eventually either change professions or earn additional retirement income.
[8] The appellant's plan to try to develop certain markets in Vietnam was born at a one-day conference on Vietnam which he attended in 1993. The appellant, who had no business experience, stated that he had also met a number of Vietnamese before his departure, in particular physicians and teachers, as well as other persons who knew Vietnam well. He said he became interested in that country mainly because of its French culture and the fact that the approaching end of the embargo and the opening up of Vietnam to the West held the promise of interesting business opportunities.
[9] Despite his lack of business experience, the fact that he did not speak Vietnamese and the fact that he had no business relationship with anyone in Vietnam, the appellant said that, prior to his departure, he was given five different mandates for the sale of goods in that country. Those mandates were as follows:
(1) A mandate to represent the Humanitas corporation, a publishing house, [TRANSLATION] "to negotiate cooperation agreements with Vietnamese educational and cultural institutions". The agreement made no provision for commissions (Exhibit A-9).
(2) A mandate from Éditions Hurtubise HMH Ltée ("Hurtubise") [TRANSLATION] "to represent Éditions Hurtubise HMH during [his] stay in Vietnam, [. . .] to determine publishing needs in that country and to present our firm's expertise in order to determine whether partnership agreements are possible". The document states that Mr. Laurion would receive a commission, the amount or percentage of which is not indicated, [TRANSLATION] "on every transaction (publication of specific material for the market, export, etc.) [which he helped to have] concluded in Vietnam" (Exhibit A-7).
(3) A mandate from Summum Signalisation Inc. ("Summum"), operating a road signage products manufacturing business, to sell those products and to conduct a study of the market and its operation with a view to the corporation possibly setting up business locally. The document provides for a commission of an unstated amount or percentage [TRANSLATION] "on all completed sales" (Exhibit A-5).
(4) A mandate from Athlos Communications Inc. ("Athlos"), which specializes in the manufacture of devices for the detection of vehicles in operation, to represent it [TRANSLATION] "on an initial exploratory trade mission in Southeast Asia". The document provides for a commission [TRANSLATION] "representing the difference between the total price billed to the client and the Montréal wholesale price, less 5 percent, payable . . . in proportion to cash receipts" (Exhibit A-6).
(5) A non-exclusive licence from Luc Michaud, Économiste-conseil/Logiciels experts ltée ("LMSOFT") for the distribution of educational software in Southeast Asia. The document states that the licence granted is for a period of two years and is renewable if LMSOFT's gross revenue is greater than $250,000 during that period or upon agreement by the two parties. A 25 percent commission on sales is provided for. The appellant paid a non-refundable lump sum of $5,000 to obtain the licence (Exhibit A-4).
[10] The appellant obtained these mandates and this licence to represent the aforementioned corporations in November 1993, shortly before his scheduled departure for Vietnam on December 15, 1993. None of the documents states that the appellant would be reimbursed for expenses related to the performance of the mandates.
[11] Mr. Laurion confirmed in his testimony that he had established no business contacts in Vietnam before his departure. Although he was given a few names, he said that contacts could not be established until he was over there, mainly because of communication problems.
[12] The appellant's trip to Vietnam was planned to be of four months' duration, from December 15, 1993 to April 15, 1994. Once there, the appellant established a number of contacts. It was, moreover, in the travel guide Le petit futé that he apparently found his first business contact, an individual who had previously lived in France and was an importer in Vietnam at that time.
[13] As he did not speak Vietnamese, the appellant first hired a secretary-interpreter for appointments and correspondence. As he himself explained, the process is lengthy since one must first find addresses, then often wait before contact can be established. In actual fact, a certain number of contacts were made with business people, government representatives and academics. The appellant visited a number of cities including Da Nang, Hué, Dalat, Hanoi and Saigon (Ho Chi Minh City). During his meetings with academics, the appellant also distributed copies of books and software from the corporations he was representing.
[14] Although the appellant states that looking for business contacts was his main activity during his stay in Vietnam, he also gave a few lectures, one on medieval literature and two on Quebec, one in Saigon, the other in Hanoi. He also gave a few lessons in French conversation and took some courses in Vietnamese.
[15] The trip's impact from a trade standpoint was quite minor, if not nil. Hervé Foulon, president and CEO of Éditions Hurtubise took part in a mission to Vietnam organized by the Francophone Business Forum in April 1996, without however achieving any concrete results (Exhibit A-7, letter of May 22, 1996 from Mr. Foulon to Mr. Laurion).
[16] The appellant received $2,000 from LMSOFT in 1996 for the market study that he had begun in 1994. Curiously, however, the list of contacts the appellant made in Vietnam was not forwarded to LMSOFT until June 4, 1996.
[17] The appellant mentioned no other results from his efforts in Vietnam, except to say that the contract with LMSOFT was renewed on November 29, 1996 despite the total lack of sales. The appellant testified that he still maintained relations by correspondence with a few persons in Vietnam. As to the expenses incurred to represent the aforementioned corporations during his trip from December 1993 to April 1994, the appellant stated that he had sent a statement to each of the corporations, although none had reimbursed him.
[18] The testimony given by Marthe Guindon, an objections officer with Revenu Québec, sheds a somewhat different light, one might say, on the actual reasons for the appellant's trip to Vietnam. First, the appellant told her that he had obtained a six-month sabbatical from the university and that he had used the time to venture upon an exploratory mission in Vietnam with a view to finding an income-producing activity for his retirement. The appellant also said that he thus hoped to be able to spend the six winter months in Vietnam and the six summer months in Canada. The appellant also mentioned to her that he had taught a little, but that 95 percent of his time had in fact been used to make contacts. These details provided by Ms. Guindon were not denied by the appellant, who in fact stated in his supplementary testimony that he had [TRANSLATION] "scouted the terrain so as to be able eventually to establish a business in Vietnam".
[19] Ms. Guindon also testified as to her review of the case and in particular concerning the fact that she had noted that, in the financial statements submitted by the appellant with his tax returns, the income and expenses related to separate activities, that is, his activity as a writer and the business activity in Vietnam, were combined. She stated that she had not demanded a separate statement because that was not necessary to establish that the appellant was not carrying on a structured activity so as to be able to make a profit from the activity.
[20] Ms. Guindon said she had analyzed all the facts of the case in light of the tests stated by the Supreme Court of Canada in Moldowan v. Her Majesty the Queen, [1978] 1 S.C.R. 480. Thus, according to her, the appellant ventured forth solely on the basis of a conference he had attended and conversations he had had with a few persons, and he did so without any previous business experience and without doing any financial or other planning prior to his departure. In addition, he agreed to incur high expenses without knowing whether he could be reimbursed or at least receive enough money to cover his expenses. In Ms. Guindon's view, one of the reasons for the appellant's trip was related to his retirement plans and involved essentially, as was said, looking for a business to carry on, not carrying on a business. Ms. Guindon also said she considered the fact that the appellant, who had to that point engaged in activities as a writer, was indeed looking for something different in 1993 and 1994. In short, Ms. Guindon concluded that the appellant's activities during his four-month trip to Vietnam in 1993 and 1994 had not been carried on with a reasonable expectation of profit. As she moreover notes in the conclusion to her report, the trip was essentially [TRANSLATION] "an exploratory mission" whereby [TRANSLATION] "the taxpayer sought a potential income-producing activity for his retirement" (see Exhibit I-7). I also note that the report states that, just on the off chance, she had asked the appellant at a meeting whether he was a shareholder in LMSOFT and that had answered in the affirmative, although he was unable to state the exact amount of his investment.
[21] In that same report, Ms. Guindon stated that the appellant had claimed a loss of $5,877 for 1992 from his activity as a writer. She mentions [TRANSLATION] "high expenses, in particular entertainment and travel expenses (travel in France and Italy for research on the Middle Ages, according to the taxpayer), books, telephone expenses and an amount of $1,500 for 'rent'". She also pointed out that the taxpayer is a university professor, that he is required to write as part of his work, that he had written a collection of poems, a work on medieval literature and a study of political philosophy, that he admitted that the market for these types of works was very limited and that he did not anticipate an appreciable increase in his income from that source. She therefore concluded that there was no reasonable expectation of profit from that activity in 1992.
Respondent's position
[22] Counsel for the respondent relied on the principles and tests stated in Moldowan, supra, Tonn et al. v. Her Majesty the Queen, 96 DTC 6001, Mastri v. Canada, [1998]1 F.C. 66 and Mohammad v. Canada, [1998] 1 F.C. 165 in stating that the appellant had no reasonable expectation of profit from his activities in Vietnam in 1993 and 1994.
[23] Counsel for the respondent first noted the appellant's lack of experience and the absence of planning of the activities to be carried on during a trip which was of a predetermined length of four months since he had purchased his ticket in advance for that period of time. She also pointed out the absence of a business plan even though the appellant had obtained mandates from various corporations. In addition, she said, the corporations had nothing to lose and committed themselves to nothing. The appellant could obtain a percentage of any sales, but had no guarantees. In some cases, no commission was even specified in the contract. The appellant had also paid LMSOFT $5,000. Moreover, he personally had to incur and pay expenses since there was no provision for him to be reimbursed.
[24] Counsel then emphasized that the only income the appellant received was an amount of $2,000 for a list of persons contacted during his trip and that, even now, there have been no contracts, no sales and no opportunities for any.
[25] As to the expenses claimed, counsel for the respondent noted a similarity in their nature over the three years in issue, namely 1992, 1993 and 1994, despite the new activities during the last two of those years. She pointed out that the expenditure items were the same and that the amounts claimed were comparable for the three years (Exhibits I-3A (1992), I-1A (1993) and I-2A (1994)). Again with respect to the expenses, she noted as well that the appellant had also travelled in 1992 and claimed a deduction in respect of his expenses. As regards the trip to Vietnam in 1993 and 1994, she pointed out that he also gave courses and lectures and that this personal aspect of the trip must be considered. As the appellant's objective was also to plan for his retirement, she felt that this factor should likewise be taken into account along with the tax benefit of being able to deduct expenses.
[26] Lastly, in view of the nature of the expenses claimed, counsel for the respondent wondered why the Minister's decision to disallow the deduction of expenses (or the loss) was no longer being disputed by the appellant for 1992, but was still disputed for 1993 and 1994.
Appellant's position
[27] The appellant feels that his lack of experience cannot be held against him since he admits that he was starting out in business and that it was therefore normal for him to have none. Furthermore, in his view, it was impossible to plan prior to his departure, in particular because of the problems involved in corresponding with Vietnam. He believes that contacts in Asia can only be made while there and that it is therefore difficult to prepare a business plan in advance and make projections.
[28] The appellant's accountant, Mr. Altenhaus, stated that profitability cannot be achieved in two or three years and that a person must take risks if he wants to succeed. In his view, one does not start an activity unless one has a reasonable expectation of profit and that a taxpayer should not be penalized if he incurs losses in the early years.
Analysis
[29] A document that I may describe as a statement of income and expenses (Exhibit I-3A) indicates that, in 1992, the appellant's income from royalties received as a writer amounted to $275.88. The appellant deducted expenses of $7,653, which resulted in a loss of $7,377.12. The following expenses were claimed:
[TRANSLATION]
Expenses:
Rent 1,500.00
Office expenses 110.00
Telephone 270.00
Books, research materials 645.00
Public relations 80% x 960 768.00
Transportation 1,020.00
Travelling expenses – plane, hotel 3,340.00 (7,653.00)
[30] A similar document (Exhibit I-1A) shows royalties of $932.10 in 1993. Expenses (office expenses, books, etc.) claimed against this income were $932.10, so that there was no income but no loss either.
[31] The income indicated under the heading [TRANSLATION] "Business - Sales Agency" is nil. The expenses claimed are as follows:
[TRANSLATION]
Expenses:
Rent 1,800.00
Telephone 295.00
Office expenses – diskettes 451.79
Books, research materials 1,469.23
Travelling expenses, plane, hotels, meals 4,977.88
Transportation 1,260.00
Conference 45.00 (10,298.90)
[32] A loss of $10,298.90 was thus claimed for the year.
[33] For 1994, the statement of income and expenses (Exhibit I-2A) shows royalties of $744.13, while the expenses claimed for telephone, office, rent, books, etc. are also $744,13, such that, here again, there was no profit or loss.
[34] Under the heading [TRANSLATION] "Business – Sales Agency (Asia Territory)", the income entered was once again nil, while the following expenses were claimed:
[TRANSLATION]
Expenses:
Rent 1,800.00
Telephone 330.00
Office expenses – diskettes 465.00
Books, promotional materials 715.00
Travelling expenses – flight, hotel, meals 4,140.00
Transportation 1,440.00
Licence and permit 5,000.00 (13,890.00)
[35] A loss of $13,890.00 was thus claimed for the year.
[36] The appellant admits that he had no reasonable expectation of profit from his activities as a writer for 1992. The appeal from the assessment made for that year must therefore be dismissed.
[37] There is clearly no need to determine whether the appellant had a reasonable expectation of profit from his activity as a writer in 1993 and 1994 since no loss was claimed or disallowed in respect of that activity in those two years. However, the matter does not end there since a number of expenses claimed in 1992 against royalty income were claimed in 1993 and 1994 in respect of another activity described as a Sales Agency, which, as we know, generated no income during those years. These were of course the expenses claimed in respect of rent, telephone, office expenses - diskettes, books, research materials and transportation in 1993. The same items were claimed in 1994, except perhaps for the item called this time "books – promotional materials". The amount of $4,977.88 claimed as travelling expenses for 1993 and the travelling expenses of $4,140 claimed for 1994, as well as the $45 conference item in 1993 and the amount of $5,000 claimed under the "licence and permit" item in 1994 are certainly related to the appellant's plan and to his trip to Vietnam. However, he never showed that the expenses claimed for the two years in respect of rent, office expenses and transportation were related in any way to the activities carried on as part of that plan. As no such evidence was adduced, I consider those expenses non-deductible since they do not relate to any source of income. As the Minister has done, I must therefore conclude that they were personal expenses. In any case, they cannot be used to create a loss from the appellant's "business" activities on his trip to Vietnam since I find that the appellant had no reasonable expectation of profit from those activities.
[38] The trip to Vietnam was, at least in part, academic in nature since it occurred during a six-month sabbatical which the appellant was able to take as a result of his teaching job at Concordia University. The trip's planned four-month duration and the airline ticket purchased in advance can moreover be explained more by the sabbatical so granted than by business considerations since the appellant initially had neither knowledge nor experience regarding the exact nature of the business dealings he would have to be involved in and the relations he would have to establish. He moreover reported that during his stay he had engaged in certain academic activities such as giving courses and lectures.
[39] What might be called the "business" aspect of the trip was limited to the mandates the appellant obtained, prior to his departure, to represent certain corporations, establish contacts or sell their products, and to the licence obtained from LMSOFT to distribute two pieces of educational software. On this point, it should be noted that the mandates from Humanitas, Hurtubise and Summum provided for no commission of any determined amount or percentage. Nor did the appellant mention in his testimony any remuneration whatever in relation to these mandates. Even though a specific percentage in commission was provided for in the other two cases, none of the corporations undertook in any way to reimburse the expenses which the appellant would necessarily incur, and all refused to do so upon his return. The risk these corporations incurred in giving the appellant a mandate was thus minimal, if not non-existent. As for LMSOFT, it was even paid $5,000 for taking no risk.
[40] To use the appellant's own expression, his trip was essentially [TRANSLATION] "exploratory with a view to eventually being able to establish a business". One cannot therefore be surprised at the total absence of any results in relation to the mandates given. I say "total absence" because no corporation has made any sale at all to date, five years after the appellant's trip.
[41] True, it was pointed out that the appellant received $2,0000 from LMSOFT after the years in issue for a list of contacts made for that corporation during his trip to Vietnam. First, I would note that no remuneration of this kind was provided for in the initial contract signed on November 22, 1993. Furthermore, the documents filed in evidence show in fact that the appellant provided that corporation—although not until June 4, 1996, over two years after returning from his trip—with a list of contacts made during the trip, for which he billed and was paid $2,000.
[42] I would also note that the two-year distribution licence which LMSOFT granted the appellant on November 22, 1993 was not renewed until November 29, 1996, more than a year after it expired.
[43] These facts raise more questions than they provide answers. Why was the list not forwarded and the billing submitted to LMSOFT until June 1996 and not upon the appellant's return from Vietnam in April 1994?
[44] As we know, the assessments involved in these appeals were made after Revenu Québec's assessments for the same years. Indeed, the notices of the assessments in issue are dated May 9, 1996, June 27, 1996 and August 19, 1996 for 1992, 1993 and 1994 respectively. We also know that the report on objection by Ms. Guindon of Revenu Québec is dated November 22, 1996 (Exhibit I-7, page 3).
[45] The Court cannot avoid observing the coincidence and wondering whether the appellant was not seeking to establish the serious nature of his efforts after the fact by trying to prove that they were being continued. Otherwise it is hard to see why he would have waited more than two years to forward a list of contacts made for LMSOFT and to be paid a certain amount of money to do so. Similarly, it is difficult to understand why a distribution licence was suddenly renewed more than one year after it expired, when not one sale was completed and the appellant was unable to show that he had made any new approach to anyone in Vietnam after he returned from his trip in April 1994. According to his own testimony, he is now in contact with one or two persons at most, and only by correspondence. Furthermore, it was never shown that this correspondence related to the LMSOFT software distribution licence.
[46] In fact, the appellant was unable to show any serious follow-up to the efforts made during his trip or that continuous and systematic efforts were subsequently made.
[47] In Moldowan, supra, Dickson J. of the Supreme Court of Canada wrote 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 further on at pages 485 and 486:
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.
[48] In Landry v. Her Majesty the Queen, 94 DTC 6624, Décary J.A. of the Federal Court of Appeal emphasized that the factors identified by Dickson J. are not exhaustive and that they will indeed vary with the nature and extent of the undertaking.
[49] Then referring to a number of decisions, Décary J.A. enumerated as follows the tests used by the courts over the years, at page 6626:
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.[5]
[Footnotes omitted.]
[50] In addition, in Tonn, supra,the Federal Court of Appeal made the following remarks at pages 6012 and 6013:
The primary use of Moldowan as an objective test, therefore, 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.
[My emphasis.]
[51] In the instant case, the personal nature of most of the expenses claimed by the appellant as business expenses is obvious. The entirely uncertain nature of his "business" activities in 1993 and 1994 is clear as well.
[52] In view of the above analysis, I find that the appellant has not proven objectively that the activities relating to the mandates obtained from the aforementioned corporations for his trip to Vietnam were carried on with a view to making a profit or with a reasonable expectation of profit in 1993 and 1994.
[53] As the appellant no longer disputes the assessment made for the 1992 taxation year, the appeals from the assessments made for the 1992, 1993 and 1994 taxation years are dismissed.
Signed at Ottawa, Canada, this 6th day of August 1999.
"P.R. Dussault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 1st day of June 2000.
Erich Klein, Revisor