Citation: 2009 TCC 390
Date: 20090806
Docket: 2007-4945(IT)G
BETWEEN:
RICHARD CABALLERO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Mr. Caballero was
employed as an executive at a major Canadian software company and earned a
six-figure salary. In 2002, while still employed he began taking steps to start
up a new business. At the beginning of 2003 he quit his job and devoted his
full-time and attention, savings and credit to his new venture. By mid‑2003
he returned to full-time employment for financial reasons but continued to
pursue his new venture. By the end of 2004 he concluded that his inability to
obtain financing meant the business was not viable and he shut it down sometime
thereafter. In 2003 and 2004 he incurred approximately $33,000 of expenses,
primarily on obtaining professional accounting advice, market research
information, branding services and similar intangibles from third-party
professional firms. He seeks to deduct these expenses as a loss from the
business. It is the position of the Canada Revenue Agency (“CRA”) that
Mr. Caballero had not yet started to commence his business when he shut it
down and, thus, he had no business from which any loss arose. Further, it is
the Crown’s position that, even if there was a business, all of his expenses
were on account of capital. By the end of the trial, there were no remaining
disputes as to the quantum of the expenses related to the venture.
[2]
The business which
Mr. Caballero was trying to get up and going was that of providing on-site
mobile massage therapy services to corporate clients via large well-equipped
and well-staffed massage buses. He went about this in an entirely commercial
and business-like way.
[3]
Mr. Caballero is a
certified fitness instructor and it is perhaps from this perspective that he
thought he recognized a business opportunity. His plans were to have Registered
Massage Therapists (“RMTs”) provide massage therapy services that are covered
under many health plans. The buses to be used were to be large Prévost coaches
costing approximately $500,000 each. The conversion and equipping costs would
be another $500,000, with the result that each bus would cost approximately
$1,000,000. This is the amount per bus that had to be financed. His business plan
had aimed to have a number of buses on the streets in Toronto and in Vancouver within a few years, but was to start in Toronto with one bus followed quickly by a second.
[4]
Mr. Caballero
recognized that financing was the key to getting his new business rolling and
that a financing of the type needed would require a fully‑developed
business plan together with firm business specifications and costs, a supply of
RMTs, expressions of interest from business clients, and credible financial
projections amongst other things. To this end Mr. Caballero undertook the
following:
1)
He paid approximately
$3,000 for market research survey work to be done and received a Market
Research report at the end of October 2003.
2)
He developed a Business
Plan dated November 3rd and obtained professional help to do so.
3)
He had a chartered
accountancy firm prepare three-year projected financial results to assist him
with his business plan. He paid approximately $6,000 to the C.A. firm for this and related advice.
4)
He paid almost $7,000
for professional corporate branding services relating to his business brands,
Wellness Dimensions and Serenergy Health.
5)
He paid approximately
$3,000 for mailing list type contact information.
6)
He used a broker to
identify an available downtown property available for lease in a Toronto building suitable for parking the buses indoors
together with providing a small amount of office space.
7)
He spoke to a Centennial
College in Toronto
which trained RMTs to develop a supply of credentialed and qualified employees.
He made arrangements for a person who was an experienced RMT to join him when
the business was operational.
8)
He worked with a coach
conversion company to identify the appropriate coach and to prepare
specifications and technical drawings for the converted and equipped buses. He
obtained a written proposal or estimate for the buses and their conversion.
9)
He spoke with a number
of key potential corporate clients to obtain their expressions of interest. Most
corporations wanted to wait until they could see an operational bus before
committing but he did obtain one confirmed expression of interest in writing.
10)
He spoke with potential
lenders and potential investors, including potential suppliers of equipment,
about possible financing of the buses for his business.
11)
He had a written
Business Overview dated May 2004 prepared by the same organization that conducted
his market research for this purpose.
12)
His business had a
website as well as the usual business cards and stationary.
[5]
I am satisfied in this
case Mr. Caballero’s business commenced in 2003 and was continued in 2004
notwithstanding that it was never operational. He pursued its start-up
diligently and professionally over a short timeframe, mostly on a full-time
basis. He spent almost all of the money in question on the purchase of
intangible professional services from reputable third parties. There was no
hobby or other personal aspect to his venture. The intangibles he purchased
could not be sold for value if his pursuit did not materialize. (He was not
making improvements to real estate or stocking up on equipment or inventory.)
Without a doubt, Mr. Caballero intended to, and did, pursue things in an
entirely business-like and commercial fashion.
[6]
It is possible to
commence to carry on a business for purposes of the Income Tax Act (the
“Act”) before the business is operational. A business can be expected to
have different types and different levels of activities throughout its course.
What it does during its start-up or winding-down phases can be expected to
differ significantly from what it does during its operational phase. It may
even have periods of relative dormancy when its normal operations are interrupted.
[7]
In Spasic v. The
Queen, 2009 TCC 193, I wrote:
[10] The Court’s former Chief Justice Bowman in his 1998
decision in Kaye v. The Queen, 98 DTC 1659, described the test to be
applied simply as "Is there or is there not truly a business?" Of
this he went on to write:
. . . One must ask “Would a reasonable person, looking at a
particular activity and applying ordinary standards of commercial common sense,
say ‘yes, this is a business’?” In answering this question the hypothetical
reasonable person would look at such things as capitalization, knowledge of the
participant and time spent. He or she would also consider whether the person
claiming to be in business has gone about it in an orderly, businesslike way
and in the way that a business person would normally be expected to do.
And:
Ultimately, it boils down to a common sense appreciation of all of
the factors, in which each is assigned its appropriate weight in the overall
context. One must of course not discount entrepreneurial vision and imagination,
but they are hard to evaluate at the outset. Simply put, if you want to be
treated as carrying on a business, you should act like a businessman.
[11] The Supreme Court of Canada in Stewart v. Canada,
2002 SCC 46, 2002 DTC 6969, describes this as the need to look at the
commerciality of the activity in question.
[8]
In the oft-quoted
decision of the former Chief Justice Bowman in Gartry v. The Queen, 94 DTC 1947,
Bowman C.J. had occasion to consider whether a taxpayer had started to operate
his commercial fishing business in circumstances where the boat he was in the
process of buying for that purpose sank before he took ownership of it. The
taxpayer thereafter gave up on the business and sought to deduct the money he
had spent on a number of things including intangibles such as legal and
accounting fees, insurance interest, etc. Bowman C.J. wrote in
paragraph 16:
. . . In determining when a business has commenced, it is not
realistic to fix the time either at the moment when money starts being earned
from the trading or manufacturing operation or the provision of services or, at
the other extreme, when the intention to start the business is first formed.
Each case turns on its own facts, but where a taxpayer has taken significant
and essential steps that are necessary to the carrying on of the business it is
fair to conclude that the business has started. That is certainly the case
here. The appellant had borrowed money, agreed to buy the boat, arranged for a
crew, obtained the necessary licences, arranged with a substantial number of
owners of boats with "G" licences to utilize his services when the
boat became available, arranged and paid for modifications to be made to the
boat and placed insurance. In my view the business had been commenced and was
well underway when the expenses in question were incurred. Interpretation
bulletins are of course not the law and they should be referred to with some
caution. However the observations in Interpretation Bulletin IT-364 as to when
a business commences make eminently good sense both as a matter of law and as a
matter of business reality. The appellant has met the criteria set out in that
bulletin. . .
[9]
While
Mr. Caballero’s business may not have been as “well underway” as
Mr. Gartry’s, I am satisfied that it had commenced on the facts of this
case.
[10]
The CRA’s
Interpretation Bulletin IT-364 “Commencement of Business Operations” provides
as follows under the heading “Date When Business Commences” in
paragraph 2:
It is not possible to be specific about the point in time when a
contemplated business becomes an actual business. Generally speaking, it is the
Department's view that a business commences whenever some significant activity
is undertaken that is a regular part of the income-earning process in that type
of business or is an essential preliminary to normal operations. In order that
there be a finding that a business has commenced, it is necessary that there be
a fairly specific concept of the type of activity to be carried on and a
sufficient organizational structure assembled to undertake at least the
essential preliminaries. . . Where an activity consists merely of a review of
various business possibilities in the expectation or hope that information will
be obtained to justify going into a business of some kind, such an activity
does not represent the commencement of a business. A business would be reviewed
as being merely contemplated for the future if no serious or reasonably
continuous efforts are being made to begin normal business operations.
[11]
In this case it seems
clear that Mr. Caballero’s business efforts went well past the
contemplation stage and he was pursuing the essential preliminaries, not merely
hopefully reviewing business possibilities. He was making serious and
reasonable continuous efforts to begin normal operations. This was not a mere
dream of Mr. Caballero as was the case in Brunet v. The Queen,
2008 DTC 4207 (affirmed 2008 DTC 5450).
[12]
In paragraph 3 of
the Interpretation Bulletin the CRA provides:
. . . the business would be viewed as having
started if market surveys were undertaken on a reasonably extensive basis for
the purpose of establishing the most appropriate way or place to carry on the
business. Any positive and continuous steps taken to introduce a particular
product to an intended market are activities of an operating nature even though
they precede the creation of the sales organization of the business. . .
[13]
Mr. Caballero’s
efforts satisfy this description by the CRA as well.
[14]
Having determined that
Mr. Caballero had commenced to carry on business, there remains the issue
of whether his business expenses are deductible as current expenses or if they
are capital expenditures. The major expenditures incurred in the business as
described above were in respect of services obtained for the preliminary
efforts to create the business. In a case such as this, expenditures for the
creation of a business entity or structure are on capital account. These are
not properly deductible as current expenses because of their capital nature in this
case even though similar expenses, incurred in respect of a business already
operational, a business expansion or a new line of business, may be deductible
when incurred by a taxpayer already carrying on business. Mr. Caballero’s
other business expenses such as motor vehicle expenses and business and
entertainment expenses all related to the obtaining of those same services and
information which I have described as capital and thus should themselves also
be regarded as expenditures of a capital nature.
[15]
While the expenditures
are not deductible as current expenditures and are capital expenditures, it is
also the case that they are eligible capital expenditures. The eligible capital
expenditure characterization of the expenses was not argued extensively in this
case. As it is generally well-summarized by the CRA in its Interpretation
Bulletin IT‑143R3 “Meaning of Eligible Capital Expenditures” in
paragraph 2 thereof:
An "eligible capital expenditure", which is defined in
subsection 14(5), may be broadly described as an outlay or expense made or
incurred by a taxpayer:
(a) in respect of a business;
(b) as a result of a transaction occurring after 1971;
(c) on account of capital; and
(d) for the purpose of gaining or producing income from the business
(whether or not income from the business was actually produced by such outlay
or expense).
[16]
Interpretation Bulletin
IT-364 on “Commencement of Business Operations” described above provides in paragraph 7:
. . . Expenses incurred for the purpose of earning income normally
are deductible in the year when incurred even if, after all the efforts made,
the business has to be wound up before its normal operation ever does begin.
Fees or other costs incurred in connection with the proposed acquisition of
capital assets when acquired, are to be classed as eligible capital
expenditures if the assets are not in fact acquired, perhaps because of an
abandonment of the business. . .
[17]
Mr. Caballero’s
appeal for 2003 and 2004 is allowed in part with costs.
Signed at Ottawa, Canada, this 6th day of August 2009.
"Patrick Boyle"
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