From the Clay Court to the Tax Court

October 7th, 2014 by

If one were asked to recount a recent Bouchard family loss involving a court, one would be forgiven if the mind turned to Eugenie Bouchard’s recent defeat in the Wimbledon’s women’s final. However, it is a slightly older, but no less stinging defeat that is the subject of this piece.

In 2003, when Eugenie was just nine, her father was already sure that his daughter was going to be a star. He formed a limited partnership with Francois Gervais, father to Beatrice Gervais, another budding Quebecois tennis star of the time. The stated purpose of the partnership, aptly named Tennis Mania, was to promote junior tennis in Quebec and support young promising athletes. In reality, the purpose of the partnership was to attract investments to help finance the young tennis prodigies. Investors would receive 10% of Eugenie’s earnings when turned pro until their investment was returned, and an annual return of 10% on their investment indefinitely should Eugenie make it professionally. Initially, the partnership supported the training of both Bouchard and Gervais. However, when it became apparent that Gervais did not have the potential to go pro, she was dropped and only Bouchard remained.

In 2005, the elder Bouchard spent $25,047 of his personal funds on his daughter’s training. The partnership cut him a cheque for the amount on the same day, and claimed a $25,047 business loss that year on its tax return. Mr. Bouchard made similar arrangements in 2006 and 2007, with a total of approximately $90,000 having been claimed as losses. In 2009, the CRA placed the partnership under audit and consequently disallowed the losses. Mr. Bouchard appealed to the Tax Court of Canada

In Michel Bouchard v. The Queen, 2013 TCC 247, the issue before the court was whether the partnership was actually engaged in business, and was thus entitled to deduct the large expenses. Mr. Bouchard argued that, while the partnership and the expenses had a significant personal component, their primary purpose was to advance Eugenie’s professional career and eventually earn a profit. According to Mr. Bouchard, the significant tax savings that the model presented was mere happenstance. Her Majesty, of course, argued that the expenses claimed were purely personal, as they were for the sole benefit of his daughter, the sole beneficiary of the entire enterprise. They took the position that Mr. Bouchard’s actions didn’t not demonstrate a pursuit of profit (the overarching criteria for a ‘business’ according to the jurisprudence) and that the goal of the venture was to fund his daughter’s tennis training while creating a tax deduction for himself.

In the result, the Tax Court dismissed Bouchard’s appeal and confirmed the CRA’s assessment. Critical to their ruling was a finding that Tennis Mania was not a business as it had no reasonable expectation of profit and no realistic source of profit. They found that, at the time Tennis Mania was incepted, Eugenie was only 9 and had no legal capacity to sign away portions of her future earnings to investors; that once Eugenie became an adult, there was no way to oblige her to continue to pay investors. In short, there was no way for the partnership to secure the ‘profit’ that Bouchard had argued was there, and thus it was not carrying on a business. As well, the Court found that Tennis Mania had made no effort to attract any other athletes, which was strange for a partnership whose stated business purpose was the promotion of tennis. Game, Set, Match.

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