Date: 20010604
Docket: A-372-99
Neutral citation: 2001 FCA 182
CORAM: RICHARD C.J.
BETWEEN:
LYMAN KEEPING,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
HEARD at St. John's, Newfoundland, on Tuesday, May 29, 2001
JUDGMENT delivered on Monday, June 4, 2001
REASONS FOR JUDGMENT DELIVERED BY: ROTHSTEIN J.A.
CONCURRED IN BY: RICHARD C.J.
SEXTON J.A.
Date: 20010604
Docket: A-372-99
Neutral citation: 2001 FCA 182
CORAM: RICHARD C.J.
ROTHSTEIN J.A.
SEXTON J.A.
BETWEEN:
LYMAN KEEPING,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
[1] This is an appeal of a May 14, 1999 decision of the Tax Court, dismissing the appellant's appeal. The issue is whether the appellant had a reasonable expectation of profit from the operation of his Amway distributorship in 1993 and 1994.
[2] Although the appellant has pointed out factual errors made by the Tax Court Judge, and the respondent concedes at least one material factual error, the appeal is to be decided on the proper application of the reasonable expectation of profit test established in Moldowan v. The Queen, [1978] 1 S.C.R. 480 and explained in subsequent jurisprudence.
[3] The Respondent stipulated that this Court was not being asked to base its decision on any personal benefit that may have accrued to the appellant from the operation of the Amway distributorship. The respondent conceded that the appellant stayed in the Amway distributorship in the hope he could make a profit. Indeed, the Tax Court Judge, while observing that the appellant purchased eighty percent of his household goods wholesale from Amway and took a few trips to conventions at Niagara Falls and Atlanta, did not base his decision on personal benefit. The Minister in his pleading did not make any assumption about personal benefit and the evidence is much too scant to warrant any adverse finding to the appellant based on personal benefit.
[4] The basis of the Tax Court Judge's finding that the appellant had no reasonable expectation of profit in 1993 and 1994 was:
1. The low margin of profit that Amway allowed him.
2. The small population or market base in the Burin Peninsula, near Garnish, which required him to drive for four hours to develop a market at great cost in both time and money.
3. His teaching job, which limited the time that he could devote to the Activity.
4. His mind set, which continues to this day, that he can leave an established "leg", or group, to fend for itself without servicing it and that it will the maintain itself.
Taken together, these prevented the Appellant from having a reasonable expectation of profit in 1993 and 1994.
[5] With respect, I am of the opinion that the analysis conducted by the Tax Court Judge amounted to second-guessing the business acumen of the appellant which is not the place of the Courts. As stated in Mastri v. Canada (Attorney General), [1998] 1 F.C. 66 (C.A.), at paragraph 12:
In summary, the decision of this Court in Tonn does not purport to alter the law as stated in Moldowan. Tonn simply affirms the common-sense understanding that it is not the place of the courts to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated.
In basing his decision on profit margins, potential market opportunities and costs, as well as the appellant's approach to operating his distributorship, the Tax Court Judge was second-guessing the business acumen of the appellant. In doing so, the Tax Court Judge erred in law.
[6] While it is not necessary to canvass the evidence in detail, I would note that notwithstanding its low profit margins, there was evidence of the operation of other successful Amway distributorships by individuals who follow the Amway business plan as did the appellant. Further, the evidence was that to become profitable might take five or six years or more. In this case, the appellant, in the relevant years, had been in operation for less than five years. There is no indication that the Amway distributorship was being operated for any non-business motive. In these circumstances, the reasonable expectation of profit test should have been applied sparingly and not to second-guess the business judgment of the appellant. See Mastri, supra, at paragraph 10, referring to Tonn v. Canada, [1996] 2 F.C. 73 (C.A.).
[7] The appeal should be allowed with costs and the matter should be remitted to the Minister of National Revenue for reassessment in accordance with these reasons.
"Marshall Rothstein"
J.A.
"I agree
J. Richard C.J."
"I agree
J. Edgar Sexton J.A."