Date: 20010529
Docket: 2000-2090-IT-I
BETWEEN:
DENNIS WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the Bench at Regina, Saskatchewan on April 24, 2001)
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Regina, Saskatchewan on April 20, 2001. The Appellant and his wife, Margaret, testified. The Respondent called the auditor on the file, Nicole Reichel.
[2] Paragraphs 7 to 12, inclusive, of the Reply outline the matters appealed. They read:
7. In computing income for the 1995 and 1996 Taxation Years, the Appellant deducted the amounts of $8,958 and $5,071 respectively as business losses ("Business Losses").
8. In reassessing the Appellant for the 1995 and 1996 Taxation Years, the Minister of National Revenue (the "Minister") disallowed the deduction of the Business Losses.
9. In so reassessing the Appellant, the Minister made the following assumptions of fact:
(a) the facts as admitted and stated above;
(b) for the relevant period, the Appellant worked full time with W.T. McGinn & Associates as an engineering technologist;
(c) for the 1995 and 1996 Taxation Year, the Appellant reported employment income of $41,022 and $34,902 respectively;
(d) the Appellant was sponsored into the Amway Activity ("Activity") in 1986;
(e) the Activities carried on by the Appellant were with respect to selling Amway products and recruiting other people to sell Amway products;
(f) time to devote to the Activity was minimized due to the full time employment of the Appellant;
(g) the Appellant first reported business operations from his Activity in his 1990 Taxation Year;
(h) during the period in question, the Appellant operated the Activity in question with his spouse ("Spouse");
(i) the Appellant's Spouse also had T4 employment earnings and employment insurance income during the 1995 and 1996 Taxation Years;
(j) the Appellant claimed the entire amount of the losses from the Activity on his personal income tax;
(k) neither the Appellant or his Spouse had any previous training or experience in the Activity;
(l) before starting the Activity, the Appellant had not prepared a business plan to determine if the Activity could become profitable; (m) there are no major start-up costs associated with this Activity;
(n) there are no lease agreements or major capital expenditures required with this Activity;
(o) in respect of his 1995 and 1996 Taxation Years, the Appellant reported the following income (losses) from his Activity:
TAXATION GROSS NET
YEAR INCOME EXPENSES INCOME (LOSS)
1995 $14,134 $23,092 ($8,958)
1996 $15,174 $20,245 ($5,071)
(p) the Appellant's 1995 gross income of $14,134 from the Activity included personal use of vehicle of $4,222 and personal consumption of $4,072;
(q) the Appellant's 1996 gross income of $15,174 from the Activity included personal use of vehicle of $2,657, personal consumption of $3,321 and unrelated source of income of $2,386;
(r) the Appellant derived no earning power from personal use of automobile, personal consumption and the unrelated source of income as referred to in paragraph (p) and (q) supra;
(s) the Appellant claimed continuous losses from the Activity for the 1990 to 1996 Taxation Years (inclusive);
(t) the Minister allowed start-up losses of $16,498 for the 1990 to 1994 Taxation Years as detailed below:
TAXATION BUSINESS
YEAR LOSS
1990 ($ 2,010)
1991 ($ 2,899)
1992 ($ 1,755)
1993 ($ 3,275)
1994 ($ 6,559)
($16,498)
(u) the Appellant operated the Activity out of his personal residence;
(v) the Appellant claimed office-in-home expenses which increased the Business Losses claimed;
(w) office-in-home expenses are not deductible to increase or create a loss;
(x) the Appellant has not planned any material changes to the Activity in the near future;
(y) the Appellant did not have a reasonable expectation of profit from the Activity during the 1995 and 1996 Taxation Years; and
(z) the expenses claimed in relation to the Activity were personal or living expense of the Appellant.
10. In the alternative, if it is determined that the Appellant had a reasonable expectation of profit from the Activity and was thus entitled to claim losses against other income, which is not admitted but denied, the proportion of expenses claimed was incorrect and in fact unreasonable in the circumstances.
11.The issues are:
(a) whether the Appellant had a reasonable expectation of profit from the Activity in the 1995 and 1996 Taxation Years; and,
(b) if the Appellant had a reasonable expectation of profit from the Activity, which is not admitted, but denied, whether the proportion of expenses claimed was correct in fact and reasonable in the circumstances.
12. He relies on sections 3, 4, 9, and 67, on subsection 248(1) and on paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) (the "Act") as amended for the 1995 and 1996 Taxation Years."
[3] Assumptions 9(b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (m), (n), (o), (p), (q), (r), (s), (t), (u) and (v) were not refuted.
[4] The essential question is whether, on the facts of this case, the Appellant had a reasonable expectation of profit from his Amway operation in 1995 and 1996. He started it and operated it from his home on Harvey Street in Regina. By 1995, any start-up period had ended.
[5] The Appellant submitted Tonn v. R., 96 D.T.C. 2001 in support of this case. It is, for the most part, a compendium of law respecting this subject.
[6] Using the criteria contained in Moldowan v. R., S.C.C. 77 D.T.C. 5213 at 5215, the Appellant had no previous business experience when he started, he had no training except from Amway, and his capital requirements were very little and that is one of the reasons he entered into it. His 1995 and 1996 losses included capital cost allowance claimed, respectively, at $3,229 and $2,261. The Appellant's plan at start-up was, essentially, the material of the plan which he received from Amway, supported by various Government and FBDB material.
[7] The Appellant's Financial Statements were prepared by a Regina firm of accountants, presumably based upon generally accepted accounting principles. However, for the purposes of determining true profitability, they have a number of gaps. Using the 1996 statements, these include:
Income,
"sales, commissions or fees," $8,949;
"other income," $6,225,
which consists of PV bonuses, $247;
add back personal use auto, $3,321;
add back personal use auto, $2,657.
Thus only $247 is real income; therefore, $ 247
$9,196.
From this, inventory is deducted -12,590.
Thus, the simple result is -$3,394.
[8] Similarly, listed expenses include a number of items that are questionable on their face:
Motor vehicle, $2,167;
CCA $2,261;
unclaimed, in-home costs, $ 749.
[9] The very fact of the two descriptions "add back personal use auto" of $3,321 and $2,657 into "income" in 1996 constitutes an admission of an association of personal use or interest. Similarly, the discrepancy between sales, et cetera, of $8,949 and costs of goods of $12,590, together with the failure of the Financial Statements to describe personal consumption of $3,321, indicates a second area where personal use comes into question. Neither of these questions were answered by Mr. and Mrs. White's testimony.
[10] More important, however, is the fact that in the last three years in evidence, losses reported had increased from earlier years. The Whites said that commercial sales and an on-line program would solve this. However, no evidence was provided to the Court on their more recent Amway history to establish the truth of these statements.
[11] Aside from any possible personal interest, on the evidence, the Appellant's losses have, on average, increased over the years. Moreover, the Appellant did not prove any increase in prospects for, or in amounts of, sales or down-line commission income which would turn this around.
[12] Thus, in both 1995 and 1996, the Appellant had no reasonable expectation of profit from the Amway activity. For this reason, the appeal is dismissed.
Signed at Ottawa, Canada this 29th day of May, 2001.
"D.W. Beaubier"
J.T.C.C.