Citation: 2009 TCC 601
Date: 20091207
Docket: 2008-1351(IT)I
BETWEEN:
CAROLYNN SOKIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
The appellant, now vice‑president,
domestic client services and administration, with the MI Group, has appealed
the reassessment of her 2003 and 2004 taxation years on the basis that she is
entitled to deduct the following disallowed expenses:
|
|
2003
|
2004
|
|
Gross Income as declared
|
0
|
0
|
|
Expenses
|
|
|
|
- Business taxes, fees and licences
|
$5,414
|
$2,348
|
|
- Insurance
|
‑
|
$2,102
|
|
- Meals & entertainment
|
$187
|
$633
|
|
-
Motor vehicle
(not including CCA)
|
$1,637
|
$2,009
|
|
- Office
|
$5,605
|
$4,526
|
|
- Supplies
|
$398
|
$3,662
|
|
- Travel
|
‑
|
$2,194
|
|
- Other (407 ETR)
|
______ ‑
|
$820
|
|
Total Expenses
|
$13,290
|
$18,294
|
|
|
|
|
|
Net Business Income (Loss)
|
($13,290)
|
($18,294)
|
[2]
In assessing
Mrs. Sokil, the Minister of National Revenue (the “Minister”) took the
position that the appellant was not carrying on a business operation but rather
was involved in an arrangement to help defray her personal or living expenses.
According to the Minister, the appellant’s purported business operation was not
undertaken in a sufficiently commercial manner to result in the earning of
income and therefore would not qualify as a source of income for the purposes
of section 3 of the Income Tax Act, R.S.C. 1985, c. C‑1
(5th Supp.), as amended (the “Act”).
[3]
In the fall of 2003,
Mrs. Sokil and her husband, Mr. Walter Sokil (the “Sokils”), were introduced to
a web-based network marketing company known as FFL Vacations Ltd. (“FFL”) and
operating as Fun For Life Club International (“Fun For Life”). The mission of
Fun For Life, as described in one of its brochures, was the following:
To put the FUN back into your life!
Fun For Life Club International has created a very exciting,
innovative opportunity for you to combine the enjoyment of vacationing with the
potential of earning additional income.
Experience life to its fullest – enjoy affordable vacations at four
and five star resorts around the world and enrich the quality of your life and
those around you with opportunities for more income.
[4]
Mrs. Sokil testified at
the hearing and explained that she, along with her husband, purchased two
vacation packages of three weeks each that gave them an entitlement to two
business centres. The initial business centre was purchased in September of
2003. The name of their business was ‘Here’s The Deal” and their web site
was registered as www.funforlifeclub.net/htd. The business consisted of selling
memberships and vacation packages through their web site. At the beginning,
Mrs. Sokil had a 65% interest in the venture, and her husband 35%. At the
end of 2004, Mrs. Sokil became pregnant and she ceased to be active in the
venture; her husband continued alone throughout 2005.
[5]
In a letter dated
November 30, 2006, to the Canada Revenue Agency (“CRA”), the appellant provided
the following information as to how the system worked and how the business was
carried on:
. . . With Fun For Life Club International, if you
choose to purchase a business centre, they provides [sic] you with a
personally dedicated website, product building seminars and prospecting tools,
opportunity and training conferences as well as a tracking function which
records any customers who purchase from your website as well as a number of
“certificates” which can be used to redeem travel within the club. These
certificates can be sold, gifted, donated or used by the business holder.
Initially, income revenue was generated when 14 people joined the
club through our dedicated website. We did not generate 14 sales until 2004 so
we incurred losses in 2003.
. . .
In order to run our business, we purchased brochures, business cards,
and company CDs to hand out to potential customers.
We run this business out of our home on a part time basis as we both
hold day time positions with other firms. We set up one of the bedrooms in our
home as an office. This included purchasing a laptop computer, desk, and other
office material in order to manage the business from home. This bedroom is a
dedicated office and is not utilized for any other means.
Since the business is web based, we had to obtain and maintain
internet capabilities and utilized both the phone and computer to contact
potential customers. In addition to this, we attended business building
meetings on a regular basis to assist us in growing our business centre. My
vehicle was used for driving to meetings and going to meet potential customers.
Depending on the location of the meeting and/or the client, the 407 ETR was
utilized.
[6]
In terms of documentary
evidence, no signed purchase agreement and no proof of payment for the vacation
packages was filed by the appellant, but the following documents were submitted
for consideration by the Court:
-
a business card showing
that Carolynn and Walter Sokil were independent affiliates of Fun For Life;
-
a Fun For Life brochure
giving general information concerning the bonus system, which generally works
as follows: for every three-week vacation package sold, one business centre is
activated in the bonus rewards system. Once activated, the business centre is
entered into a 2 x 2 bonus structure with six available spots to be
filled. Once all 6 positions are filled in the bonus cycle, you are
automatically moved into a new bonus cycle and you are entitled to a US$1,600
bonus as a qualified FunAffiliate;
-
the terms and
conditions attached as Schedule “A” to the FunPurchaser Subscription Form (this
document bears no date, is not addressed to the appellant and is not signed);
-
a brochure giving
information concerning the business profile of Fun For Life;
-
a one‑pager
entitled “Welcome Aboard!”, which explains that the Welcome Kit contains the
vacation certificates, along with brochures, a presentation CD, an order form
and other promotional items (this document bears no date, is not addressed to
the appellant and is not signed);
-
a document entitled
“FunWeek Policies and Procedures”, which appears to be attached as Schedule “A”
to the Membership Agreement (this document is version (1) dated April 17, 2006,
is not addressed to the appellant and is not signed);
-
a Fun For Life sales
support document entitled “6 Step Business Building Process” (this
document is not addressed to the appellant and is not signed);
-
a FunPurchaser
Entitlement Certificate showing that Here’s The Deal (the business name used by
the Sokils) is the owner and person entitled to the use and enjoyment of one
FunWeek;
-
an e-mail from Fun For
Life to W. Sokil sent on January 20, 2004, which explained the new
compensation plan that came into effect on February 1, 2004;
-
a blank Printed
Materials Order Form;
-
three FunPurchaser
Subscription Forms representing sales of FunPacks, respectively signed by the
purchasers on October 25, October 29 and November 26, 2003,
together with cheques made payable to Fun For Life Club International;
-
a commission cheque
dated April 28, 2004 in the amount of US$1,600 made payable to Walter and
Carolynn Sokil and drawn on a bank account of Fun For Life Club (this income was
not reported by the appellant in her 2004 tax return); and
-
a brochure of the
Oakville Arts Council providing information for sponsors of the Mayor’s Awards
for Business and the Arts for 2004 together with an In Kind Donation Form
showing that “Here’s The Deal”, an affiliate of the Fun For Life Club,
sponsored a prize consisting of one week’s accommodation for 2 people at a
luxury resort valued at approximately $1,600.
[7]
The CRA disallowed as being
personal expenses all the expenses claimed by the appellant and determined that
they were not incurred for the purpose of earning income from a business. Many
discrepancies were noted by the CRA in respect of the claims:
(a)
no gross income from
the business was declared by the appellant in her tax returns for the 2003 and
2004 taxation years, although commissions in the amount of US$1,600 were received
in 2004;
(b)
for 2003, the expenses
were claimed for the whole year despite the fact that the initial vacation
package was bought in September of that year;
(c)
for 2003 and 2004, the
appellant claimed 100% of the expenses despite the fact that her husband had a
35% interest in the venture (no allocation of expenses was made);
(d)
in the 2003 tax return,
an amount of $4,171.93 was claimed as the cost of one vacation package while an
amount of $2,348 was claimed for a similar package in 2004 (the difference in
the cost of those vacation packages has not been explained);
(e)
insurance expenses in
the amount of $2,102 were claimed for 2004 despite the fact that this cost was
attributable to insurance for two cars for the full year; no claim for
insurance expenses was made in 2003;
(f)
expenses for meals and
entertainment were claimed in 2003 ($187) and 2004 ($633) but the names of the
persons entertained were not provided by the appellant;
(g)
motor vehicle expenses
were claimed for 2003 ($1,637) and 2004 ($2,009) but no log of business travel
and no names of clients were provided, and receipts for only $8.50 for 2003 and
$60 for 2004 were provided;
(h)
office expenses in the
amounts of $5,605 were claimed for 2003 and $4,526 for 2004 and the appellant
provided receipts in the amounts of $5,641.92 for 2003 and $1,102.01 for 2004.
Furthermore, the costs relating to the laptop computer, colour printer, desk
and projector should have been capitalized as they were depreciable assets;
(i)
supplies in the amount
of $398 for 2003 and $3,662 for 2004 were claimed, but the appellant provided
receipts for only $227.44 for 2003 and no receipt at all for the 2004 supplies;
(j)
travel expenses in the
amount of $2,194 were claimed for 2004 for a trip to the Dominican Republic organized for the founding members of Fun For Life;
the appellant’s spouse was also on that vacation trip;
(k)
with respect to the
407 ETR amount of $820 claimed for 2004, the appellant provided a
statement for $30.76 addressed to her and another, for $573.35, addressed to
Wolodymyr Sokil.
[8]
In summary, the
appellant claimed self-employed business losses totalling $31,584 for 2003 and
2004 but did not report any gross income in her tax returns.
[9]
The appellant's counsel
acknowledged that receipts were either missing or did not match with the claims
made in the tax returns, that certain expenses should have been capitalized as
depreciable assets and that the records were badly kept. Despite all that, he
argued that the appellant has tried the business side of Fun For Life, that she
has acquired the tools necessary to carry on a business, that she did promote
her business and that she did some advertising to recruit members. According to
him, the appellant entered into a credible venture with a reasonable
expectation of turning a profit.
Analysis
[10]
The issue is whether
the appellant was entitled to deduct business losses for the 2003 and 2004
taxation years.
[11]
The term “business” is
defined in subsection 248(1) of the Act as follows:
“business” includes a profession, calling, trade, manufacture or
undertaking of any kind whatever and, except for the purposes of paragraph
18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f),
an adventure or concern in the nature of trade but does not include an office or
employment.
[12]
The basic rules for
computing income under the Act are found in Division B of
Part I, sections 3 and 4. Paragraph 3(a) refers to the
various sources of a taxpayer’s income, as follows:
Section 3: Income for taxation year
The income of a taxpayer for a taxation year for the purposes of
this Part is the taxpayer’s income for the year determined by the following
rules:
(a) determine the total of all amounts
each of which is the taxpayer’s income for the year (other than a taxable
capital gain from the disposition of a property) from a source inside or
outside Canada, including, without restricting the generality of the foregoing,
the taxpayer’s income for the year from each office, employment, business and
property.
[13]
The basic rules for computation
of the income or loss from a business are found in section 9 of the Act:
Section 9:
(1)
Income. Subject to this Part, a taxpayer’s
income for a taxation year from a business or property is the taxpayer’s profit
from that business or property for the year.
(2) Loss. Subject to section 31, a taxpayer’s loss for a
taxation year from a business or property is the amount of the taxpayer’s loss,
if any, for the taxation year from that source computed by applying the
provisions of this Act respecting computation of income from that source with
such modifications as the circumstances require.
[14]
Restrictions concerning
the deduction of expenses are found in paragraphs 18(1)(a) and 18(1)(h)
and in section 67 of the Act:
Section 18:
(1) General limitations. 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;
Section 67: General limitation re expenses
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.
[15]
The Supreme Court of
Canada developed in Brian J. Stewart v. The Queen, 2002 DTC 6969, a
two-stage approach to determining whether a taxpayer has a source of business
income such that section 9 of the Act applies. In paragraph 50, the
two-stage approach is set out as follows:
. . .
(i) Is the activity of the taxpayer
undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the
source of the income a business or property?
The first stage of the test assesses the general question of whether
or not a source of income exists; the second stage categorizes the source as
either business or property.
[16]
The Supreme Court of
Canada provided further explanation concerning the first stage of the test in
paragraphs 52, 54 and 55 of the Stewart decision:
[52] The purpose of this first stage of the test is simply to
distinguish between commercial and personal activities . . . Thus,
where the nature of a taxpayer's venture contains elements which suggest that
it could be considered a hobby or other personal pursuit, but the venture is
undertaken in a sufficiently commercial manner, the venture will be considered
a source of income for the purposes of the Act.
. . .
[54] . . . Thus, in expanded form, the first stage of
the above test can be restated as follows: “Does the taxpayer intend to carry
on an activity for profit and is there evidence to support that intention?”
This requires the taxpayer to establish that his or her predominant intention
is to make a profit from the activity and that the activity has been carried
out in accordance with objective standards of businesslike behaviour.
[55] The objective factors listed by Dickson J. in Moldowan at
p. 486 were: (1) the profit and loss experience in past years; (2) the
taxpayer's training; (3) the taxpayer's intended course of action; and (4) the
capability of the venture to show a profit. . . .
[17]
In the case at bar,
there was clearly an acquisition of a personal or recreational asset, namely
the vacation packages, and the appellant took advantage of that asset when she
went to the Dominican Republic on a trip organized for the founding members of
Fun For Life.
[18]
Considering all the
facts of the case, I come to the conclusion that the prime intention of the
appellant was to obtain a personal benefit, and the possibility of earning income
was only accessory thereto.
[19]
The evidence submitted
by the appellant was not sufficient to establish that a business was carried on
with a view to making a profit. The activities conducted by the appellant were
not pursued in a commercial manner. Her home-based business activities were
conducted as a hobby or as a part‑time sideline to augment her employment
income.
[20]
I do not think that the
appellant entered into this venture with a reasonable expectation of making a
profit. In 19 months of operation, the venture generated revenue of only
US$1,600, which had to be shared with her husband, and a loss of $32,000. The
changes brought to the commission structure in 2004 made it almost impossible
for her to make a profit, and that is one of the reasons why, as stated in paragraph 19
of the Amended Notice of Appeal, the appellant is suing FFL for
misrepresentation with regard to her being involved in a business. To break
even, 24 sales of vacation packages would have been required while the
appellant sold only six vacation packages. The earning of income in the venture
was only incidental and no profit could be generated.
[21]
The appellant had no
experience in Internet business and her course of conduct was not in accordance
with objective standards of businesslike behaviour. No separate bank account was
opened for the venture and no adequate books and records were kept. The
appellant’s course of conduct, in terms of time spent on, and effort devoted to,
the development of the venture, was not undertaken in a sufficiently commercial
manner to constitute a source of income, even though some advertising was done.
[22]
The expenses that were
deducted as business expenses were not paid or incurred by the appellant to earn
income but were personal or living expenses as defined in
subsection 248(1) of the Act. The appellant is thus precluded by
paragraph 18(1)(h) of the Act from deducting those expenses
in the computation of her net business loss.
[23]
Finally, the amount of
expenses claimed as business expenses is clearly not reasonable in the
circumstances and, by virtue of section 67 of the Act, cannot be
deducted.
[24]
For these reasons, the
appeals from the reassessments made for the 2003 and 2004 taxation years are
dismissed.
Signed at Ottawa, Canada, this 7th day of December 2009.
"Réal Favreau"
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