Tax Court of Canada Judgments

Docket: 2002-3310(IT)I

BETWEEN:

ISAAC ANKRAH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on June 3, 2003 at Toronto, Ontario

By: The Honourable Justice J. M. Woods
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Ather A'Amer

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is allowed, without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct the following amounts:

Advertising	$4,261.00
Interest/bank charges	$    263.59
Meals/entertainment	$1,361.96
Office	$9,183.00
Professional fees	$    350.00
Salaries	$8,410.44
Travel	$6,250.00
Conventions	$1,780.86
Continuing business education	$1,961.77.

Signed at Ottawa, Canada this 18th day of July, 2003.

"J.M. Woods"

J.

Citation: 2003TCC413

Date: 20030718

Docket: 2002-3310(IT)I

BETWEEN:

ISAAC ANKRAH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Woods J.

[1]      Mr. Isaac Ankrah appeals an income tax assessment for the 1996 taxation year that disallowed certain expenses incurred in respect of an Amway distributorship. The Crown takes the position that there is insufficient documentation and that the expenses are not reasonable or are personal or living expenses. The Crown does not dispute that the Amway distributorship constitutes a business for purposes of determining whether there is a source of income under the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act").

[2]      The matter was heard under the Court's Informal Procedure.

Facts

[3]      Mr. Ankrah is married with three children and is employed as a computer program analyst. Beginning in 1989,[1] Mr. Ankrah commenced business as a distributor of Amway products in order to supplement the family income. He stated that he was attempting also to assist his country by creating jobs. Mr. Ankrah and his wife, Gabriella, described the hard work and sacrifice they have endured in pursuing their dream and they recognized that it would take several years before profits would materialize.

[4]      For the first ten years of the distributorship, Mr. Ankrah reported the following losses for tax purposes:

YEAR	LOSSES
1988	$ 2,590
1989	18,977
1990	26,454
1991	18,945
1992	5,610
1993	16,302
1994	15,174
1995	12,494
1996	29,489
1997	5,995

[5]      The appeal relates only to the 1996 taxation year in which the reported loss of $29,489 was disallowed in full by the Minister of National Revenue (the "Minister"). At the hearing Mr. Ankrah abandoned his claim to a portion of the expenses claimed in the return. The expenses originally claimed in the 1996 tax return and the revised amounts claimed at the hearing are set out in the following statement of income and expenses:

	REPORTED	REVISED
SALES REVENUE	$ 35,025.30	$ 35,025.30
BONUS INCOME	15,701.56	15,701.56
GROSS REVENUE	50,726.86	50,726.86
OPEN INV	13,511.25	13,511.25
PURCHASES	42,291.32	42,291.32
OTHER DIRECT COSTS	31.08	31.08
CLOSING INV	26,762.65	26,762.65
GROSS PROFIT	21,655.86	21,655.86
ADVERTISING	4,643.83	5,013.47
BAD DEBTS	5,805.48	0.00
INTEREST/BANK CHG'S	263.59	263.59
MEALS/ENTERTAINMENT	1,361.96	1,361.96
OFFICE	4,642.09	10,803.26
PROFESSIONAL FEES	350.00	350.00
SALARIES	8,410.44	8,410.44
TRAVEL	1,342.54	12,500.00
CONVENTIONS	17,612.32	1,780.86
CONT. BUS. ED.		1,961.77
AUTO - FUEL	6,641.83
- LEASE	5,580.00
- INSURANCE	1,114.00
- LICENSE	90.00
- PERSONAL %	(6,712.92)
TOTAL EXPENSES	51,145.17	42,445.35
NET PROFIT (LOSS)	(29,489.31)	(20,789.49)

[6]      Mr. Ankrah and his business associate, Mr. Jack Verduyn, referred to the distributorship as an unconventional business in which people played a key part. This was described as contrasting with a conventional business in which products are sold. The "people" aspect of an Amway distributorship was described as the need to recruit, train and motivate other distributors. Mr. Ankrah stated that he had over 40 recruits in 1996 and that many of the expenses at issue were connected with the training and motivation of these recruits.

[7]      At the hearing, the Crown challenged the deduction of the cost of travelling to meetings, the purchase of self-development books and tapes and the purchase of Amway products as promotional items. These items are described in the above statement of income and expenses as travel and conventions, office, and advertising, respectively.

[8]      Mr. Ankrah is claiming expenses of over $10,000 on self-development books and tapes used by him and his wife and purchased as gifts for his recruits. The books and tapes were referred to as "tools" at the hearing. Mr. Verduyn was asked about the business connection with respect to books such as "Men are from Mars, Women from Venus" and "Chicken Soup for the Soul." He stated that it was important for distributors to understand the difference between men and women because the business was a people business.

[9]      The claim for travel costs was in excess of $15,000. Most of these expenses consisted of car expenses in travelling to meetings. The reason given for the large number of meetings was that "motivation" was a significant aspect of the business. To illustrate, Mr. Ankrah recounted a story in which for a period of time he visited the city of Cleveland two or three times a month in order to provide support to a policeman who was a new recruit.

[10]     In addition to incurring costs on travel and self-development books and tapes, Mr. Ankrah expended considerable sums in purchasing Amway products as promotional items in order to motivate and train recruits.

[11]     Some explanation for the revision to the expense claims is relevant in connection with the issue of sufficiency of documentation. During the audit of the 1996 taxation year, the expenses claimed in the tax return were determined not to be supported by proper receipts. Accordingly, Mr. Ankrah's accountant prepared a revised statement based on receipts that were available. An auditor for the Canada Customs and Revenue Agency ("CCRA") gave evidence to the effect that that these receipts were satisfactory as proof but that the losses were still being disallowed on the basis that there was no reasonable expectation of profit. While the discussions between the parties continued, the documentation was lost, apparently through no fault of Mr. Ankrah. As a result, in 2003 the CCRA requested that Mr. Ankrah prepare another revised list of expenses based on the best information that he had available. By necessity this was often guesswork.

[12]     At the hearing, Mr. Ankrah based his claim on the estimates he prepared in 2003. The reconstructed statement was based in part on:

1.                  Mr. Ankrah's 1996 personal calendar showing events attended;

2.                  an estimate of products purchased for promotional purposes based on products in Mr. Ankrah's house in 2003, the prices being estimated from price lists from 1996 or thereabouts; and

3.                  an estimate of travel costs based on a proration of the mileage on Mr. Ankrah's van which, in 2003, had recorded 600,000 kilometers. The proration took into account both the number of years in which the van was driven and the proportionate business use. Once the kilometers were estimated, an amount of 20 cents per kilometer was applied to determine costs of using the van in 1996. The 20 cent figure was an estimate of what employees were allowed by businesses and the government in 1996.

[13]     There is a large discrepancy in the business mileage reported in the 1996 tax return and the 2003 estimate prepared by Mr. Ankrah. In the tax return, Mr. Ankrah reported mileage of 6,000 kilometers whereas the estimate prepared in 2003 was 62,000 kilometers. The only explanation that Mr. Ankrah could provide for the large discrepancy was that, given his extensive business travel, the 6,000 kilometer figure in the tax return was clearly wrong.

Statutory Provisions

[14]     The relevant statutory provisions as they read in 1996 are:

18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a)         an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

...

(h)         personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business; ...

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Issues

[15]     The Crown is challenging the deductibility of a portion of the cost of books and tapes, promotional items, and travel, either on the basis that these expenses are not reasonable for the purposes of section 67 or are personal or living expenses. This position differed from the reassessment which simply disallowed the entire net loss. A second issue is whether the documentation was sufficient to prove the expenses.

Sufficiency of Documentation

Submissions of Parties

[16]     The Crown submitted that the documentation was insufficient in several respects. The main concern was the significant differences between the amounts reported in the tax return and the revised claims. It was suggested that these differences called the amount of actual expenses into question. The Crown also questioned the sufficiency of certain invoices that were prepared in US currency. It was suggested that this would be unusual for a Canadian transaction.

[17]     Mr. Ankrah submitted that the documentation was sufficient because when this matter was raised on audit, he engaged an accountant to prepare a revised statement based on actual receipts. Further, Mr. Ankrah suggests that he ought not to be penalized for the loss of the documents through not fault of his own, especially when the CCRA suggested that he reconstruct his expenses through the best available information, which he has done.

[18]     In reference to the currency issue on the invoices, Mr. Ankrah submitted that this is normal business practice since the invoices were based on Amway precedents and Amway conducts business throughout the world.

[19]     In reference to the discrepancy on mileage, Mr. Ankrah suggested that, based on his evidence of extensive business travel, the business mileage reported on the 1996 tax return is clearly an error. In reference to the discrepancy on conventions, Mr. Ankrah abandoned his claim to all but two conventions in order to conform with subsection 20(10).

Analysis

[20]     In my view it would not be appropriate to disallow the expenses on the basis of sufficiency of documentation. Although Mr. Ankrah was somewhat sloppy in the preparation of the 1996 tax return, this was rectified during the audit by hiring an accountant to prepare a revised claim based on actual receipts. The evidence provided by the CCRA auditor was that this revised statement was based on proper documentation. In addition, I accept Mr. Ankrah's explanation for the US currency in the invoices. The discrepancy with respect to the mileage will be discussed below.

Reasonableness and Personal Use

Submissions of Parties

[21]     The Crown took the position that the cost of books and tapes, promotional items, travel and conventions were all excessive and should be disallowed, in whole or in part, pursuant to section 67 of the Act.

[22]     In essence, the Crown's position was that it was unreasonable for Mr. Ankrah to incur these expenditures after the business had sustained losses for seven or eight years. It was suggested that Mr. Ankrah should have reduced his expenses by providing personal training to potential recruits instead of incurring the costs of books and tapes, promotional items and travelling to meetings. The Crown also suggested that there might be a personal element in these expenses in that there is little nexus between self-development books and the business and the persons that received the promotional items might be personal friends.

[23]     The only case law cited in support of the Crown's position was the case of Graves v. The Queen, 90 DTC 6300 (F.C.T.D.), and particularly the following passage at page 6307:

It is notable that the plaintiffs emphasized in testimony the aspects of learning about motivation and leadership in achieving success as the valuable element of the conferences attended in the U.S. In terms of education or training the sessions did not involve advance study or testing or formal curricula normally associated with training sessions to maintain or upgrade skills or knowledge in a field in which the plaintiffs already claimed some expertise. If they had attributes of this sort expenses of attendance might have been allowable under section 18(a) as regular training expenses.

[24]     Mr. Ankrah submitted that the deduction of the expenses should be allowed because the courts have accepted Amway distributorships as viable businesses and Amway is not on trial. He suggested that it was reasonable to spend large amounts on books and tapes, travel, and promotional items because the general development and "motivation" of people was very important to the business.

Analysis

[25]     Mr. Ankrah was not a sophisticated businessman. He did not approach the operation in a business-like fashion and appeared to accept the Amway methods blindly and uncritically. The only basis he provided to support the reasonability of the expenses was the statement that one has to spend money on a people business in order to make a profit. However, I accept the genuineness of Mr. Ankrah's statement that he was motivated by a desire to earn income from the enterprise.

Whether a Business

[26]     Courts have considered the deductibility of expenses incurred by Amway distributors on many occasions and each case has been decided on its own particular facts. In cases heard prior to the recent Supreme Court jurisprudence on reasonable expectation of profit ("REOP"), Amway losses had sometimes been denied based on the REOP doctrine. See Nordstrom v. R., [1999] 3 C.T.C. 2253 (T.C.C.) and Koczkur v. R., [2000] 2 C.T.C. 2414 (T.C.C.).

[27]     The Crown has conceded that there is a business and a source of income in this case. A similar concession was made by the Crown in its consent to the reversal of the decision of Bowman A.C.J. in Elke v. R., [2001] 2 C.T.C. 2453 (T.C.C.). The reason noted by the Federal Court of Appeal for the reversal was the intervening decision of the Supreme Court of Canada in Stewart v. R., [2002] 3 C.T.C. 439 (S.C.C.). For this reason, I accept that Mr. Ankrah's distributorship is a business for purposes of this appeal. However, I note that the issue in Stewart was the REOP doctrine whereas the decision of Bowman A.C.J. in Elke was based on a lack of commerciality rather than REOP. The facts in Stewart pertained to a rental operation, which was a clearly commercial venture.

Paragraphs 18(1)(a) and (h)

[28]     Certain other Amway cases have disallowed expenses on the basis that they were personal or living expenses for the purposes of paragraph 18(1)(h) of the Act. See the decision of Hershfield J. in Spearing v. R., [2001] 1 C.T.C. 2689 (T.C.C.).

[29]     In my view the books, tapes and Amway products purchased for use by the Ankrah family should be disallowed by virtue of paragraph 18(1)(h). These items may have been of some benefit to the business but they were clearly personal or living expenses and should be disallowed. The Crown submits that many of the items purchased as gifts may have been given out of friendship rather than for business reasons. There was no evidence to support this. All the evidence was consistent with the gifts being promotional items.

[30]     There was very little evidence to show what portion of the books and tapes and Amway products were purchased for the Ankrah family's personal use. The invoices for books and tapes showed multiple orders of the same book and therefore it would appear that the majority of books and tapes were purchased as promotional items for other people. I believe that a reduction of 15 percent in the expense allowed for books and tapes and promotional items would be appropriate to remove the personal element. This would reduce the "advertising" expense to $4,261 and the "office" expense to $9,183.

[31]     In respect to travel and convention expenses, the evidence supports that these were business rather than personal expenses. However, I believe that the expense of $12,500 claimed for mileage is excessive. At the hearing, Mr. Ankrah limited his claim for conventions to two in accordance with subsection 20(10). However, in claiming business mileage of 62,000 kilometers, it appears that a portion of this mileage related to travel to conventions. A second problem with the mileage charge is that Mr. Ankrah computed the cost at 20 cents per kilometer. This probably overstates the cost of operating his vehicle which had over 600,000 kilometers on it. In the circumstances, I believe it would be reasonable to reduce the mileage charge in the revised statement from $12,500 to $6,250.

Section 67

[32]     The Crown submits that it was unreasonable for Mr. Ankrah to incur large expenditures after the business had incurred losses for several years. It was suggested that instead of spending large sums of money on recruits, the same result could have been achieved by personal training.

[33]     The difficulty with the Crown's position is that supplants the business judgment of the taxpayer. Mr. Justice Rothstein commented on this in another Amway case, Keeping v. R., [2001] 3 C.T.C. 120 (F.C.A.), at paragraph 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. R. (1997), [1998] 1. F.C. 66 (Fed. 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.

This comment was made in the context of the REOP doctrine but I see no reason why it should not also apply in the context of section 67.

[34]     The phrase in section 67 "reasonable in the circumstances" is broad but I do not believe that it should apply to reduce expenses based on poor business judgment. Section 67 is commonly applied to reduce the quantum of expenses in cases where the taxpayer is motivated partly by something other than business reasons, such as a payment of salaries to family members. This was described by Mr. Justice Cattanach in the case of Gabco Limited v. M.N.R., 68 DTC 5210 (Ex. Ct.) at page 5216 as follows:

It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind.

[35]     Mr. Ankrah arguably has exercised bad judgment in incurring these expenses. However, the expenses were incurred with an honest belief that they would eventually lead to profits and I do not believe that section 67 should be applied in these circumstances.

[36]     Mr. Ankrah has incurred significant losses from the Amway distributorship over many years. If the deduction of those losses is not an appropriate tax result, it is a matter for Parliament to address. I note that section 31 of the Act was enacted in 1988 to address a concern with farming losses.

Conclusion

[37]     For the foregoing reasons, the appeal in respect of the 1996 taxation year is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that Mr. Ankrah be entitled to deduct the following expenses:

Advertising	$4,261.00
Interest/bank charges	$    263.59
Meals/entertainment	$1,361.96
Office	$9,183.00
Professional fees	$    350.00
Salaries	$8,410.44
Travel	$6,250.00
Conventions	$1,780.86
Continuing business education	$1,961.77

Signed at Ottawa, Canada this 18th day of July, 2003.

"J. M. Woods"

J.

CITATION:

2003TCC413

COURT FILE NO.:

2002-3310(IT)I

STYLE OF CAUSE:

Isaac Ankrah v. Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

June 3, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J. M. Woods

DATE OF JUDGMENT:

July 18, 2003

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Ather A'Amer

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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