Date: 19990129
Docket: 98-814-IT-I
BETWEEN:
WILFRED H. NORDICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Saskatoon, Saskatchewan on January 20, 1999 pursuant to the Informal Procedure of this Court.
Issue
[2] The issue is whether the Appellant is entitled to deductions from income of losses of $9,068.63 in 1994 and $10,520.39 in 1995 resulting from the operation of an Amway distributorship.
Facts
[3] The basic facts are as follows. The Appellant was employed as a heavy duty mechanic at a potash corporation in Saskatchewan and had been with that employer for the last 23 years. In several years there were frequent periods when the Appellant and other employees were laid off for considerable periods of time, in some cases, for three or four months. The Appellant testified that he desired to leave the mine either on retirement or earlier and wanted to be his own boss. Thus he was looking forward to starting his own business with a minimum investment. In early 1992 he started up the Amway business under the name of WM Enterprises. He relied on the Amway brochures setting forth business plans and projections. He intended hopefully some day to have substantial profits. He attended meetings and conventions, listened to tapes and examined the literature supplied by Amway.
[4] He explained that for no personal reasons but simply to improve the Amway business he moved from his home in Humboldt, Saskatchewan (population 5,000) to Saskatoon (population approximately 180,000). The reasons for the move to Saskatoon were supported by the testimony of the Appellant's wife. There was some suggestion by counsel for the Respondent that the move may have been motivated by the fact the Appellant and his wife had two children in Saskatoon. This possible motive is mitigated by the fact that the Appellant and his wife also had one child in Humboldt. One certain non-reason for the move was proximity to the mine as Humboldt is only 20 miles from the mine whereas Saskatoon is approximately 72 miles therefrom.
[5] In both cities the Appellant made efforts to attract customers and distributors down line.
[6] The Appellant confirmed that his other business experiences were minimal at best and that he did no advertising personally but relied on the input of Amway and its marketing policies. He made his own attempts at marketing by visiting malls, airshows and other public places. Further he obtained a telephone list of all of the employees at the mine and stated that he contacted many of them in an effort to sell Amway products or obtain distributors. He also engaged the services of Welcome Wagon in Saskatoon in an effort to meet new prospects whether as customers or distributors. He did register the business name and also registered for GST purposes.
[7] He employed his wife as his secretary, bookkeeper and salesperson but the business paid no salary to her. The Appellant's wife also attended Amway meetings and took copious notes of what went on at those meetings. Those notes were not submitted as exhibits but several copy books were shown to the Court as evidence of the considerable amount of note-taking.
[8] The books and records kept by the Appellant's wife were extremely detailed. These were filed as Exhibits A-12, A-13 and A-14.
[9] The Appellant testified and was generally confirmed in this respect by the testimony of his wife that when he was not working at the mine, i.e., lay-off periods, he would spend as much as 100 hours a week in the Amway business. When he was working at the mine his shift was 40 hours a week and his testimony was to the effect that he used time after work and weekends in Amway activities.
[10] Despite his efforts the Appellant reported losses as follows:
|
TAXATION YEAR |
GROSS INCOME |
GROSS PROFIT |
OPERATING EXPENSES |
NET LOSSES |
|
1992 |
$812.14 |
($382.73 |
$11,960.27 |
($12,343.00) |
|
1993 |
$5,551.61 |
($1,564.78) |
$13,524.72 |
($15,089.50) |
|
1994 |
$4,834.74 |
$871.27 |
$9,937.90 |
($9,068.63) |
|
1995 |
$4,900.32 |
($90.19) |
$10,430.20 |
($10,520.39) |
In 1996, a year in which his Amway losses were $3,489 he finally determined that the vision was gone and consequently the Amway business was closed.
Submissions
[11] Counsel for the Respondent submitted that the Appellant had no reasonable expectation of profit from the Amway activity in 1994 and 1995. He referred to several decisions in similar Amway situations where, with I believe one exception, the Amway distributor in question was considered not to have had a reasonable expectation of profit. Counsel also indicated that the Minister had given the Appellant a reasonable start-up period, namely the years 1992 and 1993. He pointed out further that the Appellant had no business plan, made no inquiries of possible markets whether in Humboldt or Saskatoon and that he had no other business experience.
[12] Counsel for the Appellant naturally takes the opposite viewpoint. He suggests that there was a reasonable expectation of profit. This was not a normal Amway case and Amway distributorships should not necessarily be considered as non-businesses. He pointed out that the dramatic action of the Appellant in moving from Humboldt to Saskatoon to improve the Amway business is certainly an indication that wanted to improve the business and realize a profit once he moved to the larger market. He thus argues that the startup period should be recommenced at the point when the move was made, namely in August of 1993 and that the years 1994 and 1995 can be considered as further reasonable startup years. He argues that the indicia of a business being carried on were evidenced by the fact of registering the business name, registering for GST purposes, although not required to do so because of the amount of sales, the time put in by the Appellant and his wife and the record keeping which was minute in detail as evidenced by Exhibits A-12, A-13 and A-14.
[13] He adds that this was clearly not a tax driven plan as no costs for use of house space were charged to the business and no salary was paid to the Appellant's wife. He submits that the Appellant had a reasonable expectation of profit and when he concluded it was realistically unattainable, he did the logical thing and closed the business after the 1996 year. Further, although the Appellant had no personal business plan, it was not unreasonable for him to rely on Amway's plans, projections and marketing and advertising.
[14] He referred to all of the usual cases dealing with the subject of reasonable expectation of profit. Moreover, he quoted Bowman, T.C.C.J. in Kaye v. Her Majesty the Queen, 98 DTC 1659 as follows at 1659 and following:
[4] I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis "Is there or is there not truly a business?" This is a broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.
[5] One cannot view the reasonableness of the expectation of profit in isolation. 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.
[6] This leads to a further consideration -- that of reasonableness. The reasonableness of expenditures is dealt with specifically in section 67 of the Income Tax Act, but it does not exist in a watertight compartment. Section 67 operates within the context of a business and assumes the existence of a business. It is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000.
[7] 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.
Analysis and Decision
[15] In my opinion the situation of the Appellant in this case differs from the normal Amway distributor case.
[16] The following are the principal factors leading to my conclusion that there was a business with a reasonable expectation of profit.
1. I accept the credibility of the Appellant and his wife.
2. The activity was operated as a business. Witness the registration of the name and the registration for GST purposes and the extremely detailed books and records kept by the Appellant's wife.
3. The Appellant and his wife went to great efforts to learn and attempt to grow the business, including reviewing the books and tapes and attending at numerous meetings, sometimes on a weekly basis. Moreover, much time was devoted to the business.
4. The Appellant did increase gross sales considerably from the year 1992 to 1993 and succeeded in reducing expenses by approximately 25% in 1994versus 1993. Also losses were reduced in 1996.
5. The move to Saskatoon was a clear indication that the Appellant and his wife were attempting to run and improve a business.
6. There was no tax driven scheme. No salary was paid to his wife and no house space charges were assessed to the business.
7. The business was terminated when the Appellant finally realized profits were not realistically attainable.
8. There may have been a small personal element, but in my view, in an Amway situation such as the present that is, at best, a minor consideration.
9. Counsel for the Appellant is not unreasonable in suggesting that a new startup period should have been considered at the time of the move to Saskatoon in August of 1993 and therefore losses in 1994 and 1995 should be permitted.
[17] For all of the above reasons, the appeals are allowed with costs.
Signed at Ottawa, Canada this 29th day of January 1999.
"T.P. O'Connor"
J.T.C.C.