Germain Dominique Makar v. The Queen

Germain Dominique Makar v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2005-03-30 Neutral citation 2005 TCC 228 File numbers 2004-2868(IT)I Judges and Taxing Officers Eric A. Bowie Subjects Income Tax Act Decision Content 2004-2868(IT)I BETWEEN: GERMAIN DOMINIQUE MAKAR, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on March 22, 2005, at Winnipeg, Manitoba, By: The Honourable Justice E.A. Bowie Appearances: For the Appellant: The Appellant himself Counsel for the Respondent: Marley Dash ____________________________________________________________________ JUDGMENT The appeals from reassessments of tax made under the Income Tax Act for 1999 and 2000 taxation years are dismissed. Signed at Ottawa, Canada, this 30th of March, 2005. "E.A. Bowie" Bowie J. Citation: 2005TCC228 Date: 20050330 Docket: 2004-2868(IT)I BETWEEN: GERMAIN DOMINIQUE MAKAR, Appellant, And HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT BowieJ. [1] These appeals are brought from reassessments for income tax for the taxation years 1999 and 2000. In computing his income for those years under section 3 of the Income Tax Act[1] (the Act), the Appellant claimed to be entitled to deduct certain business losses from the salary that he earned working as an employee of the city of Winnipeg. By the reassessments that are now under appeal, the Minister of National Revenue disallowed the deduction of those losses on the basis that Mr. Makar was not engaged in a business during those two years as he had incorporated a company called Smart Charge Inc. (SCI) to carry on the business, and so any losses sustained are those of SCI and not the Appellant. The Minister also takes the position, in the alternative, that the expenses that gave rise to the losses claimed by the Appellant are not related to any business but are simply personal or living expenses of the Appellant, the deduction of which would in any event be prohibited by paragraph 18(1)(h) of the Act. For the reasons that follow, I am of the view that the Minister is correct as to both his primary and alternative contentions. The appeals must therefore be dismissed. [2] There is no doubt that the Appellant developed a useful invention during the latter part of the 1990s. He filed an application for a patent in the United States in July 1998, and in Canada in July 1999, for an invention described as a pulse modified invariant current battery charging method and apparatus (the Smart Charge). In due course the patent was granted. As the Appellant described it in the course of his evidence, the device that he invented is inserted in the circuit used to charge rechargeable batteries of all kinds, where it has the salutary effect of increasing the efficiency and the useful life of the battery. The Minister does not dispute the invention or its usefulness. Nor is there any dispute that at all relevant times the Appellant was the owner of the patent for the Smart Charge. The issue arises with respect to the manner in which the Appellant chose to exploit his invention. Because the Appellant accepted all the assumptions of fact that the Minister relied on in reassessing him, I shall reproduce in full paragraph 10 of the reply to the notice of appeal where these are found. 10. In so reassessing the Appellant for the 1999 and 2000 taxation years and in so confirming those reassessments, the Minister assumed the same facts as follows: (a) the Appellant is a mechanic employed by the City of Winnipeg; (b) in or around 1998, the Appellant developed and patented a battery charging device based on the Pulse Volt System which he called the Smart Charge (hereinafter the "Smart Charge"); (c) the patents for the Smart Charge are owned by the Appellant; (d) the Appellant is 100% shareholder of Smart Charge Inc. (hereinafter the "Corporation"); (e) the Corporation was incorporated in 1998; (f) the Corporation's business activity is manufacturing electronic devices; (g) in 1998, the Appellant assigned the licensing rights to the Smart Charge to the Corporation; (h) commencing October 1, 2002 the Corporation was required to pay the Appellant $100.00 per year for assigning the licensing rights to the Smart Charge; (i) the Corporation granted the exclusive right to market the Smart Charge to Nuvomedia Corporation Ltd. (hereinafter "Nuvomedia"); (j) the Corporation was responsible for marketing the Smart Charge during the 1999 and 2000 taxation years; (k) royalties that were to be paid by Nuvomedia in respect of the Smart Charge were payable to the Corporation; (l) the Corporation reported gross sales of $6,194.00 and $1,017.00 for the fiscal periods ending December 22, 1999 and December 22, 2000, respectively; (m) the gross sales reported by the Corporation were in respect of the Smart Charge; (n) the licensing agreement between the Corporation and Nuvomedia prohibits the Appellant from manufacturing and selling the Smart Charge; (o) the Appellant claimed business losses from the business named Smart Charge Inc. of $10,233.52 and $7,680.93, calculated as follows: (i) no gross income in either year; and (ii) expenses of $10,233.52 and $7,680.93 in the 1999 and 2000 taxation years, respectively, (hereinafter the "Expenses") a detailed in Schedule A which forms part of the Reply to the Notice of Appeal (hereinafter "Schedule A"); (p) the Appellant indicated the business activity relating to the business losses claimed by the Appellant in the 1999 and 2000 taxation years to be "battery conditioning device"; (q) as part of the business losses claimed in 1999, the Appellant claimed: (i) 80% of his vehicle expenses consisting of repairs fuel, registration, insurance, parking and car washes; (ii) travel and lodging expenses at 100% and included camping fees and hotel charges for himself and his spouse; (iii) 60% of the Appellant's Mastercard interest ($1,177,21 x 60% = $706.33) as start-up loan interest; (iv) advertising of $3,534.00 representing the "retail value" of 31 devices he stated were installed in potential customers' vehicles; (r) the total transactions on the Appellant's Mastercard were $7,962.12 of which $5,123.33 were for food, meals, travel and personal purchases; (s) the Appellant does not have a separate telephone line in his home; and (t) any work performed by the Appellant is done on behalf of the Corporation. With respect to subparagraph 10(b), the Appellant testified that the patent application was filed in 1998, and that the patent is for a pulse current system rather than a pulse volt system. As to subparagraph 10(k), he accepted that it correctly states the payment provision of the contract, but he added that no royalties were in fact paid. Otherwise, the Appellant agreed with the Minister's assumptions of fact. [3] The Appellant stated candidly in his evidence that business is not his forte, and so it was on the advice of others that he structured the commercial exploitation of his invention in the way that he did. No doubt he and his advisors expected that there would be significant royalty revenue flowing into the SCI in short order. Unfortunately, this did not happen. For reasons that I need not go into here, the marketing of the invention proved more difficult than the Appellant had hoped. In the meantime, however, he expended considerable time and effort in his attempts to improve the invention and to find a market for it. He also expended some money on these efforts, and that is the source of the losses that he claims to have suffered in 1999 and 2000. In accounting for these expenditures, the Appellant seems to have relied on the advice of a self-styled tax accountant or tax preparer. Like so many people who purchase and follow the advice offered by tax preparers who have no professional accreditation, the Appellant was not well served. As the chief executive of SCI, the Appellant signed and filed its income tax returns for 1999 and 2000, as well as his own. As I understood his evidence, all four returns were prepared for him by the tax preparer. All the revenues were declared by SCI; most of the expenses were claimed on the personal returns of the Appellant in a statement of business income that is said to reflect the results of his personal proprietorship, which he described as "Smart Charge Inc.". Smart Charge Inc., however, was a separate entity, and there is no doubt that by 1999 it was entitled to market the invention, and to receive any revenues that the licensing of it might generate. Similarly, any expenses arising in the course of marketing it were SCI's expenses. The only financial records of SCI to be found in the evidence are copies of hand-written statements of profit and loss for the years ended December 22, 1999 and December 22, 2000 and hand-written balance sheets as of those two dates that were extracted from SCI's income tax returns. They show modest expenses, and even more modest revenues arising from its marketing efforts. Clearly, the expenses of marketing that the Appellant claimed as his own, if they were deductible at all, were deductible by SCI. This, of course, would have resulted in that company suffering even larger losses than it declared for the two years. [4] Furthermore, in my view none of the amounts claimed by the Appellant, with one possible exception, can properly qualify as being anything other than personal expenses. For 1999, the Appellant claimed expenses totalling $10,233.52. The largest amount was $3,994.60 for automobile expenses. In 2000, he claimed $4,022.42 for automobile expenses. The Appellant's evidence was that these claims were made up of 80% of the expense of gasoline and oil changes for his personal vehicle for each of these years. Although all the use of the vehicle was for personal trips, he claimed to be entitled to this deduction because he had installed one of his charging devices in his vehicle and was using it to test improvements that he hoped to make to the invention. The 80% ratio was apparently chosen arbitrarily by him. Mr. Makar also included travel expense of $413.75 in 1999, which he said was the cost of trips to Kenora, Ontario and Dauphin, Manitoba where he stayed for some days. These trips, he said, were made to test the device in different climatic conditions. He also charged against his "business" $739.18 in 1999 and $240.19 in 2000 for interest. These amounts, he said, were the interest on his credit card, and they apparently related in some way to his travel expenses. He also included his entire telephone bill, $1,074.10 in 1999 and $704.63 in 2000, although he had only one telephone line in his house. He offered no basis on which the telephone use could be apportioned between his family's personal use and the legitimate business of SCI. The two expenses that, if they could be substantiated, might reasonably be charged to the business of SCI (but not the Appellant) are $3,534.00 for advertising in 1999 and $2,663.69 in 2000 which he said related to subscriptions having to do with his research. On cross-examination, the Appellant admitted that the "advertising" expense consisted of some 30 chargers that he had installed free in various vehicles in an attempt to attract buyers. The $3,534.00 was calculated on the basis of the retail price for these, although he was vague as to what the precise retail price was. He stated that they cost $30.00 each to manufacture, and if I had found that he was entitled to treat these as his own business expense rather than that of SCI then I would not have allowed him more than $900.00. As to the amount for subscriptions, there is no evidence as to the actual items purchased or their cost. [5] Quite apart from the fact that the Appellant had no business in 1999 and 2000, I find that the expenses claimed are almost entirely personal. Some small part might be justified as legitimately relating to the continuing refinement of the Appellant's invention, but even that could only be regarded as incremental to the value of the capital asset, the patent, and not as being on current account. As the Appellant testified that he would never sell his invention, as opposed to licensing its use, the decision of the Supreme Court of Canada in M.N.R. v. Freud[2] can have no application here. [6] The appeals will be dismissed. Signed at Ottawa, Canada, this 30th day of March, 2005. "E.A. Bowie" Bowie J. CITATION: 2005TCC228 COURT FILE NO.: 2004-2868(IT)I STYLE OF CAUSE: Germain Dominique Makar and Her Majesty the Queen PLACE OF HEARING: Winnipeg, Manitoba DATES OF HEARING: March 22, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice E.A. Bowie DATE OF JUDGMENT: March 30, 2005. APPEARANCES: For the Appellant: The Appellant himself Counsel for the Respondent: Marley Dash COUNSEL OF RECORD: For the Appellant: Name: N/A Firm: N/A For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada [1] R.S. 1985 c.1 (5th supp.), as amended. [2] 68 DTC 5279.