Abogado v. The Queen, 96 DTC 3254, [1995] 1 CTC 2711 (TCC)

Margeson J.T.C.C.:-This decision was heard under the informal procedure and the decision given here is in accordance therewith.

This appeal is with respect to the appellant’s taxation years 1990 and 1991. At the time of the trial the only items still in dispute were with regards to paragraphs 5(g), 5(i) and 5(j) of the reply to notice of appeal.

The Minister had disallowed expenses for those years of $641.08 and $1,240.88 respectively taking the position that they were not incurred for the purpose of gaining or producing income from a business or property, that they were convention expenses and no amounts in excess of the amounts allowed were deductible. The Minister had allowed the deductions for two conventions in each of those two years.

Facts acts

The appellant testified that he commenced working for Amway Products in 1984. He learned how to build up a business of distribution of these products by seeking out prospective distributors, learning how to retail products, passing this information on to new distributors that he had sponsored, training them and assisting the new distributors in sponsoring others. He also learned how to keep business records and determine ordering and pickup times for customers. All of the above were directed to becoming a group leader and learning how to enlarge his group.

In 1985 and 1986 his income tax returns were audited and certain expenses similar to those involved in this appeal were disallowed. He spoke to the chief of appeals and it was his belief that there was a personality conflict with the chief of appeals. He was allowed to claim expenses for two of the least expensive functions in those years according to him. He also met with the director of taxation in Regina in an attempt to resolve the situation and made certain recommendations that were obviously not followed. However, he testified that in 1985 and 1986, he was allowed to deduct expenses for all of his functions.

For the taxation years 1987 to 1991, he said that he filed in the same manner but was audited again for 1990 and 1991. He met with the same chief of appeals who told him that all of the functions for which expenses were Claimed were "conventions" under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act").

The appellant sought to have adjustments made on the basis of the successful arguments he felt he had made in 1985 but was told that these adjustments were made merely because they were small and of no effect. Since that time, the expenses have increased considerably.

The appellant’s evidence was that he can earn more income by assisting others in his group to increase volume since he earns a percentage of their sales. He accomplishes this by the use of cassettes and by holding functions that he referred to'as "house meetings" or sometimes he held the functions at hotels for new or prospective distributors. These seminars were for training purposes and sometimes for "local seminars" and sometimes "regional seminars".

The appellant indicated that he would hold four weekend functions per year and would bring in some representatives from Amway to address the gathering. The appellant indicated that he was attempting to reach a new level of sales that he referred to as "Go Diamond" which required him to have a certain number of direct distributors sponsored by him. These distributor functions were not sponsored by Amway itself. Amway apparently had one convention per year which the appellant did not attend.

The appellant’s indication was that his goal in sponsoring someone was to teach them how to do what he was doing thus increasing the total volume of sales and enhancing his own financial position. In 1990 and 1991, he said that approximately 100 to 150 other distributors attended these functions. He believed that if he had not gone to these functions, the majority of the other distributors would not have attended. His position was that by going to these functions he was able to update his skills and this helped his distributors to learn. If any of the distributors received any training or motivation at these functions, it would be beneficial to him and would impact his income in a positive way. He said that salespeople have to be taught and retaught.

Exhibits A-l and A-2 were introduced by agreement and the appellant said that all of these expenses were used to earn income and they did not relate to "conventions". He wanted the other salespeople to be there to learn what they could so as to increase their volume of sales, thus enhancing his own income.

The appellant said that he purchased his goods from Amway for the group and then sold to the distributors. Bonuses are determined by volume.

The tax returns for the relevant years were also admitted by agreement. The appellant indicated that he attended up-line functions including those of his personal sponsor. These were held four times per year in the local area or in Winnipeg.

Issues

The issues are:

1. Were the expenses reasonable under the circumstances in accordance with section 67 of the Act?

2. Were the expenses incurred for the purpose of gaining or producing income from a business or property under paragraph 18(1 )(a) of the Act?

3. Were the expenses capital outlays or losses under paragraph 18(l)(b) of the Act?

4. Were the expenditures "convention" expenses under subsection 20(10) of the Act?

Appellant’s position

The appellant referred to the case of Friesen v. M.N.R., [1990] 1 C.T.C. 2002, 89 D.T.C. 682 (T.C.C.), at page 2004 (D.T.C. 684), where the Court found that the expenses for the attendance in Canada at meetings similar to those in issue in the case at bar were proper expenses pursuant to section 18 of the Act. Those expenses related to trips to Bismark, North Dakota, and other meetings in Canada. Other out of Canada trips were considered to be covered by section 20 of the Act. The appellant referred to Roche v. M.N.R., [1989] 1 C.T.C. 2199, 89 D.T.C. 156 (T.C.C.), as supporting his position that all the meetings in Canada qualified for deductions and the only meetings classified as conventions were those outside of Canada. The appellant took the position that Graves v. Canada, [1990] 1 C.T.C. 357, 90 D.T.C. 6300 (F.C.T.D.), supported his position that the expenses for meetings in Canada were deductible although those expenses relative to meetings in the U.S. were not.

The appellant also referred to several interpretation bulletins which he believed stood for the proposition that expenses related to the upgrading of existing skills are deductible. He said that he was expected to be in attendance.

Finally, the appellant said that the type of expenses he was claiming have been allowed in other cases and should be deductible in the case at bar.

Respondent's position

Counsel for the respondent relied heavily upon the decision in Graves, supra, as the most recent decision on the issue facing the Court in this case. Counsel argued that Mr. Justice MacKay of the Federal Court-Trial Division decided that whether or not the gatherings were held in Canada or outside Canada was not the determinative factor. Further, that the distinguishing feature is not whether the expenses are considered to be related to "upline" or "downline" meetings. Counsel took the position as she believes the learned trial judge took in Graves, supra, that the training, knowledge or awareness that the appellant gained at any of these meetings were really "long-term assets" or "capital assets" under paragraph 18(1 )(b) of the Act and only allowable as an expense if they met the criteria under subsection 20(10) of the Act.

Counsel agreed that these meetings were not a "charade". She appeared to agree that there might not have been a great element of socializing to these meetings but her position was that there need not be in order for the meetings to be classified as conventions under subsection 20(10).

Counsel took the position that these meetings were not simply employer/employee meetings but were designed to discuss motivation and sales techniques. They were glaringly similar to the type of meetings held in Graves, supra.

Counsel did not place much weight on the argument that the expenses were not reasonable. She argued that the Minister has already allowed deductions for the expenses of two conventions under subsection 20(10) of the Act and that was all that was allowable. She said that the appeal should be dismissed and the Minister’s assessment confirmed.

Rebutter

In rebutter, the appellant referred again to Interpretation Bulletin IT-357R2 which he said suggested that expenses incurred to upgrade an existing skill are deductible. The functions in question earn income according to him and his position was that the expenses were not related to a capital asset.

Analysis and decision

In order for the appellant to be successful here the expenses sought to be deducted must have been reasonable under the circumstances under section 67 of the Act; they must have been made for the purpose of gaining or producing income from a business or property under paragraph 18(l)(a); they must not have been a capital outlay or loss under paragraph 18( l)(b); and they must not have been convention expenses under subsection 20(10) of the Act since the appellant has already been allowed to deduct the expenses for two conventions in accordance therewith.

The Court is satisfied on the facts as disclosed by the evidence that the expenditures were made by the appellant in relation to his involvement in two aspects of the Amway organization, the selling of Amway products and the recruiting of others to join the Amway network of distributors. The more products sold by themselves and the distributors they recruited, the more profit the appellant would make and the higher the bonuses he would earn.

The thrust of the appellant’s testimony was that his own enthusiasm for the business, his ability to motivate others to join the organization, his awareness of the needs of the marketplace, his knowledge of available and necessary techniques of sales and motivation and ultimately the success of his business were all enhanced by these meetings which he held. Consequently, the expenses relative to such meetings should be deductible as they were expended for the purpose of gaining or producing income from his business.

The Court is satisfied on the basis of the evidence that the expenses were reasonable under the circumstances and are not excepted from deduction under section 67 of the Act.

The Court is satisfied that the expenses incurred here were related to the business of the appellant and were incurred for the purpose of gaining or producing income therefrom. There was no evidence to suggest that the meetings were otherwise and the appellant’s testimony as to the purpose of the meetings and the results that were achieved from them were sufficient to rebut the resumptions contained in paragraph 10(b) of the reply. Counsel for the respondent did not argue this point vociferously. The more difficult hurdle for the appellant is presented by paragraph 18(1)(b) of the Act. The facts in the case at bar are strikingly similar to those portrayed in Graves, supra. Like Mr. Justice MacKay in that case:

I do not doubt that the plaintiffs believe they acquired awareness of how others had been successful and even techniques useful in motivating others to participate and to succeed in the Amway network. But that awareness and their ability to convert that into useful skills for their business, of direct sales and maintaining and developing their part of the network, can best be interpreted as long-term assets, capital assets under the Income Tax Act not allowable as an expense except within the limits of subsection 20(10).

The Court finds that paragraph 18(1 )(b) prohibits the deduction of the disputed expenses claimed here except in accordance with subsection 20(10) of the Act.

The appellant took some solace from Interpretation Bulletin IT- 357R2 which he believes gave credence to the argument that what he was doing was upgrading his existing skills rather than obtaining a new skill and therefore the expenses related to that upgrading were deductible.

The Court does not accept that position even if that is what the bulletin intended. That distinction would not change a capital or long-term asset into one that was not. Indeed the enhancement of an existing skill would appear to be in the same category as the development of a new skill and would constitute a capital or long- term asset.

The term "convention" is not defined in the Act. Webster’s Ninth New Collegiate Dictionary defines it as:

the summoning or convening of an assembly, an assembly of persons met for a common purpose

That is exactly what took place in the case at bar where the appellant and the members of his distributorship line were convened for business purposes as he indicated in his testimony.

Mr. Justice MacKay in Graves, supra, discussed the line of cases in the Tax Court of Canada which considered not only the term convention but facts very similar to the facts in the case at bar.

The Court is satisfied that there need not be a "significant amount of socializing" at the meeting for it to be a convention as was argued in Graves, supra. Further, the Court is satisfied that there can be no real distinction based upon whether the meetings were "upline meetings" which involved people senior to the taxpayer or "downline meetings" which involved people sponsored by the taxpayer. The Court agrees with MacKay J. when he said at page 368 (D.T.C. 6308):

It is my opinion that whether or not the meeting or conference can be a convention within subsection 20(10) depends upon an assessment of the nature of the meeting and its relationship to the taxpayer’s business rather than upon the particular standing of the taxpayer or his status in relation to others who may attend.

Likewise, this Court does not find as determinative of the meaning of convention, the location of the meeting. Such a factor might be significant in any given case dependent upon the facts but would more than likely impact upon the question of the reasonableness of the expenses.

The Court finds that the expenses in question were convention expenses under subsection 20(10) of the Act and since the Minister allowed the appellant to deduct the expenses for two conventions in his assessment, the appellant has already claimed the maximum deduction under that section.

The appeal is dismissed and the assessment is confirmed.

Appeal dismissed.