Citation: 2009TCC509
Date: 20091020
Docket: 2008-2406(IT)I
BETWEEN:
ELAINE MCLEAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-2410(IT)I
AND BETWEEN:
IAN MCLEAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellants, who are married to each
other, had claimed various expenses in computing their respective employment
incomes for the 2004 and 2005 taxation years. They were also carrying on
business as a partnership during those years as a Mannatech Associate. They
were reassessed to deny or reduce certain expenses that had been claimed by
each of them in determining their income from employment and in determining the
income of the partnership.
[2] At the commencement of the hearing, the
agent for the Appellant and counsel for the Respondent submitted a summary in
which the parties agreed that Ian McLean would be entitled to claim an
additional amount of $253 for parking in computing his employment income for
2004. The Appellants also agreed that they were no longer pursuing their claim
in relation to the deductions that had been denied or reduced by the Respondent
except for the following amounts, which are still in dispute in these appeals:
Ian McLean – Employment Income 2004
|
Description
of Expense
|
Amount Claimed
|
Amount Disallowed
|
|
Marketing Course
& Materials
|
$2,529
|
$2,529
|
Elaine Armstrong-McLean – Employment Income 2004
|
Description
of Expense
|
Amount Claimed
|
Amount Disallowed
|
|
Marketing Course
& Materials
|
$2,529
|
$2,529
|
Partnership Income 2004
|
Description
of Expense
|
Amount Claimed
|
Amount Disallowed
|
|
Purchases
|
$8,011
|
$8,011
|
|
Travel Expenses
|
$7,715
|
$7,715
|
|
Courses &
Professional Development
|
$1,056
|
$1,016
|
Partnership Income 2005
|
Description
of Expense
|
Amount Claimed
|
Amount Disallowed
|
|
Purchases
|
$15,639
|
$15,639
|
|
Travel Expenses
|
$10,320
|
$9,779
|
Employment Expense
[3] Each of the Appellants claimed the amount
of $2,529 in computing their income from employment in 2004. This amount
relates to a course identified as a Klemmer course. There are a number of
problems related to the claim for a deduction for the cost of this course.
[4] One problem is the number of times that the
registration fee appears to have been claimed. It appears that the amount of
$2,529 that was claimed by each of the Appellants as a deduction in computing
their income from employment is also one‑half of the total of $4,355 and
$703.01 that appears in the Education & Professional Development schedule
that was maintained by the Appellants. The schedule indicates that these
amounts were incurred March 1, 2004. The $4,355 amount was identified as
“Personal Mktg course” and the description for the $703.01 amount was “Course
Material”. The name of the training company for both entries was identified as
“Klemmer & Associates”. However for some unexplained reason the total
amount claimed as an expense in computing the income of the partnership for
“Courses & professional development” was $1,056.34 of which $40 was related
to Mannatech (and was allowed); leaving a balance of $1,016 that was claimed in
relation to the Klemmer course in computing the income of the partnership.
[5] However, as noted above, the full amount of
$2,529 each (or $5,058 in total, which would have included the $1,016 referred
to above) was also claimed by the Appellants as a deduction in computing their
income from employment.
[6] As if this was not sufficient, course fees
of $2,177.50 (one-half of $4,355) and $508.17 also appear in the schedule for
Travel. The dates for these are February 10, 2004 and January 15, 2004 and both
are identified as Course fees for Klemmer & Assoc. The entry for one
identifies San Francisco and for the other identifies Aurora.
It appears that these amounts were included in the amount of $7,715 that was
claimed as a deduction for travel in computing the income of the partnership
for 2004.
[7] Another problem relates to the Appellants’
purpose in taking this course. The employment income of both Appellants
included commissions based on sales made or contracts negotiated. Paragraph
8(1)(f) of the Income Tax Act provides in part as follows:
8. (1) In computing a taxpayer's income for a taxation year from an
office or employment, there may be deducted such of the following amounts as
are wholly applicable to that source or such part of the following amounts as
may reasonably be regarded as applicable thereto:
…
(f) where the taxpayer was employed in the year in connection with
the selling of property or negotiating of contracts for the taxpayer's
employer, …
amounts expended by the taxpayer in the year for the purpose of
earning the income from the employment (not exceeding the commissions or other
similar amounts referred to in subparagraph (iii) and received by the taxpayer
in the year) to the extent that such amounts were not
(v) outlays, losses or replacements of capital or payments on
account of capital, except as described in paragraph (j),…
[8] A restriction imposed on the deductibility
of the amount expended in computing income from employment is that it must have
been expended for the purpose of earning income from that employment. The
following exchange took place between Ian McLean and his Agent during the
hearing:
Q. The question around the Klemmer course, could you explain
what that was about and what it was for?
A. The Klemmer course was held in San
Francisco, and it was about ‑‑ this
particular course ‑‑ well, actually, let me say that attending
Klemmer were also many multi‑level marketing people.
Klemmer was about creating leaders. It was about creating teamwork
and about achieving goals, and this fit in really well with Mannatech and
growing our business, and it was ‑‑ it taught how to overcome fear
of rejection, because in the business you are told "no" a lot when
you approached people that weren't interested in the product.
So it had to do with building one's confidence, how to handle
negative people or rejection.
[9] It was only in response to a leading
question from his Agent that the Appellant linked the Klemmer course to his
employment:
Q. Would what [sic] course help you in your appraisal
job?
A. It would. My job really is generation of appraisal
business, so there are sales involved. It certainly gave me ‑‑ it
equipped me in order to bring business in, my new business development for my
job.
…
Q. Would that course increase your standing in the appraisal
industry?
A. It would. It would show my ability to generate business,
and the more business I generated, the higher profile I would have.
Q. So what would you say the inherent value would be in this
course? Like, what actually happens? You take this course and something
happens, and you sell more or you do more. What happens?
A. What happens to me in order to do that?
Q. Yes.
A. It gives me confidence. It gives me an ability to relate
to people, to connect to people better, because that's the nature of the
business and that's what their focus was.
Q. Is there something new about you being able to relate to
other people and have more confidence? Did you have, like, zero or did you –
A. Well, no, it was the multi‑level marketing business.
As I mentioned, you're having to talk to many people before you get a sale.
Q. I get how it relates –
A. Okay.
Q. But in terms of your appraiser's job.
A. I see.
[10] On cross-examination Ian McLean stated as
follows:
Q. In essence, you describe what the Klemmer courses are, but
before we go there, I would like to refer you to and to clarify the issue for
the court. If you go to the third page of the notice of appeal under "marketing
course and materials", from reading that paragraph, your position is that
if the Klemmer course is denied as an employment expense, then your alternative
position would be that it should be claimed as a business expense?
A. Correct.
Q. So going back to annex number 1, the second paragraph, you
state:
"The main reason for taking the Klemmer courses was to learn to
how to be successful in our direct sales business, Mannatech." (As read)
Correct?
A. Because we were contemplating Mannatech or contemplating
an MLM type of business, but really Klemmer, as a course, can be applied to my
employment, as well, because it is a sales position, and the principles that I
learned in Klemmer would help me in that, as well.
So it is ‑‑ it's more than Mannatech. It's not
specifically related to Mannatech.
[11] And on redirect:
Q. Compensation, thank you. I would like to come back to the
courses that you took. There was evidence submitted that if the course didn't
qualify for a business expense, then it should be considered as an employment
expense. If one failed, the other one would stand in place. Is that what was
testified?
A. I believe so.
Q. To what value would you put the Klemmer course towards
your appraisal income?
A. In terms of generating additional business, appraisal
business, that would have helped me generate business for appraisals.
Q. So would it be worth taking that course just for the
appraisal business alone?
A. No. It's broader than that. It's for, I would suggest ‑‑
I would say any particular sales related, or to help people in business, in
general.
[12] These questions and answers suggest that
the rationale for taking the course in relation to his employment was developed
after Ian McLean took the course and that his purpose in taking the course at
the time that he took the course was not to earn income from his employment.
The Appellants also introduced a letter from Ian McLean’s employer.
However this letter was not written until November 17, 2007, well after Ian
McLean had taken the course and after he had been reassessed. I am not
satisfied that Ian McLean’s purpose in taking the Klemmer course was to earn
income from his employment.
[13] Although Elaine McLean (who testified after
Ian McLean) did mention both the Mannatech business and her employment as
reasons for taking the Klemmer course, I am not satisfied that her purpose in
taking the course was to earn income from her employment.
[14] There are also some concerns about whether
the Appellants took the course for personal reasons (and hence not for the
purpose of earning income). In the Advanced Leadership Seminar Agreement for
the Klemmer course, it is stated that:
This is a personal growth seminar. It is no way a medical model
designed to fix psychological problems. It is about you attaining the success
that you desire.
[15] In this same agreement the following
question is asked:
What do you want to accomplish by participating in this workshop?
[16] It would appear that in response to this
question Ian McLean stated as follows:
1: Break
through “programs”
2: Discover
personal gifts
3: Develop mission statement and vision to move from success to
significance.
[17] It is not clear how these goals relate to
earning either income from employment or from a business.
[18] In my opinion, the Appellants have failed
to establish that they are entitled to deduct the cost of the Klemmer course in
computing their income from employment.
[19] The Appellants also take the position (and
claimed a portion of the cost of the Klemmer course) in computing the income of
the partnership. However according to the Travel expense schedule, the course
fees were incurred on January 15, 2004 (in the amount of $508) and on February
10, 2004 (in the amount of $2,177). The Klemmer course was held in March 2004.
[20] In Setchell v. The Queen,
[2006] 2 C.T.C. 2259, 2006 DTC 2279, Justice Woods stated that:
16 Although the Martin
case is not relevant, I agree with counsel that the fees are not deductible
unless Mrs. Setchell was carrying on business at the time the course was taken.
[21] In this case, one of the assumptions made
by the Respondent in the Reply was that the partnership business commenced in
August 2004 and not only did the Appellants not introduce any evidence to
contradict this but Ian McLean in direct examination and in cross-examination
confirmed that the partnership business commenced in August 2004. Therefore the
Appellants were not carrying on business when they took the Klemmer course and
the cost of this course is not deductible in computing the income of the
partnership.
Partnership
- Purchases
[22] The amount claimed for purchases was for
purchases of the products for consumption by the Appellants, Ian McLean’s
mother, Elaine Armstrong-McLean’s mother, and the Appellants’ daughter. None of
the purchases were made for the purpose of resale and therefore none of the
products purchased would be part of the inventory of the business.
[23] The Appellants advanced two arguments to
support their position that the cost of the purchases should be allowed as an
expense in computing the income of the partnership. The first argument was that
they purchased the products so that they could tell those whom they wanted to
become Mannatech Associates and who would buy a Premium/All-Star Pack that they
used the products themselves. The second argument was that they would purchase
product to help other individuals meet their purchase quota that they would
have as a result of agreeing to buy a Premium/All-Star Pack or some other
package.
[24] The Mannatech business was described as a
multi-level marketing business. The goal of the Appellants was to develop legs
for their business. The legs would be comprised of people whom the Appellants
(or their down line teams) had recruited as Mannatech Associates (people who
committed to buy Mannatech products and who would try to recruit other
Associates). The steps were described in the brochure “Your Economic Stimulus
Plan – 4 Steps to Enrich Your Life” prepared by Mannatech as follows:
Step 1 – Enroll
with a Premium/All-Star Pack and set up your monthly $100 auto order
Step 2 – Start
your Power Teams A & B by enrolling 2 people like you did for yourself in
Step 1
Step 3 –
Complete your Power Team by helping your first 2 team members each enroll two
as in Step 1
Step 4 – Help
your first two Team Leaders complete their Power Teams by growing their teams
to 6 each
[25] The Appellants would not sell product
directly but would sell Premium/All-Star Packs. When a person bought a
Premium/All-Star Pack that person committed to buying $100 or more in product
each month from Mannatech. In order to establish legs, the Appellants needed to
find individuals who would not only purchase the Premium/All-Star Pack but who
would also try to enroll others who would buy the Pack and in turn try to
enroll others.
[26] The products sold by Mannatech were
described in the same brochure as follows:
Exclusive Products
Help friends and
loved ones achieve a better quality of life in the three areas of greatest
consumer concern: their health, weight and fitness, and skin.
Mannatech’s
overall category of health products was strategically developed to help
nourish, balance, protect and support the body's cells with concentrated,
standardized and stabilized sources of nutrients.
Mannatech’s Weight
and Fitness products are designed to help you achieve the healthy body you
want. Our newest product, OsoLean powder, along with a proper diet and exercise
routine, helps you lose fat, not muscle, while managing your weight.
The Mannatech
Optimal Skin Care System products are a proprietary, water-based system,
designed to nourish, hydrate and promote more youthful, radiant-looking skin.
[27] It is important to determine the purpose
for the purchase of the products. The Appellants stated during their direct
examinations that there was a business purpose for the purchases and did not
acknowledge that there would be any personal reason for purchasing the
products. The products had health benefits and the Appellants believed in the
benefits that the products would provide. Elaine Armstrong-McLean, during her
cross-examination, described the personal benefit that she realized from taking
some of the products:
Q. I
would like to address now ‑‑ when you chose to enrol in Mannatech,
did you have any health concerns?
A. Did I
have a health concern?
Q. Yes.
A. Yes, I
did have one health concern.
Q. What
were your health concerns?
A. I
mean, everyone has health concerns. I had a health concern, sure.
Q. What
was it?
A. It was
a condition called episcleritis, and I looked at the opportunity that perhaps
this product could possibly be a great ‑‑ you know, everybody wants
to get better, but the fact is is that if I did get better, then my testimony
would be phenomenal to build our business.
Q. Can
you describe what is that health ‑‑
A. Episcleritis?
Q. Yes,
that's right.
A. Episcleritis
is a condition in your eye that you will ‑‑ it will become red and
inflamed. It is painful sometimes, but it can come and go, and it's treated
with steroids.
I saw the value
in ‑‑ I did see the value in Mannatech, but definitely the value
that I could ‑‑ if it ended it, it was fabulous, that I could get
up there and give my testimony.
I could give you
my testimony right now, because I don't have red eyes anymore.
Q. You
took the Mannatech product to help you cure that problem with your eye?
A. No,
because ‑‑ okay. We bought in immediately for the business. Then
there is certainly a benefit of me taking the product. There is a benefit to
everyone that takes the product, because everybody has some kind of ailment.
So there is
always a benefit, a personal benefit, but when we bought in, we bought in it as
a business.
Q. You
also have arthritis, for which you used the Mannatech product?
A. Yes, I
had two things. I bought ‑‑ yes, I had had arthritis, but I don't
know. I don't know what you ‑‑ how you want me to respond to that.
Q. I'm
just saying, like, you used the Mannatech product to help you with your
arthritis, also?
A. Well,
there's that component. There's that benefit.
[28] It does not seem to me that the personal
reasons for acquiring the products can simply be ignored or considered
insignificant. The products were purchased for the personal consumption of the
Appellants or individuals who were close to the Appellants. Surely the
Appellants cared enough about their mothers and their daughter that they would
buy products for them that they believed would be beneficial for their health
and well being. To treat the purchase of the products as only a business
decision seems to suggest that there was no personal element in the decision to
purchase the products and no personal motivation in purchasing products for Ian
McLean’s mother, Elaine Armstrong-McLean’s mother and the Appellants’ daughter.
Surely they cared enough about these individuals that the purchase of products
for their consumption was not solely motivated by an increased bonus or
commission.
[29] Justice Iacobucci of the Supreme Court of
Canada in Symes v. R., 1993 CarswellNat
1178, [1994] 1 C.T.C. 40, 94 DTC 6001, 161 N.R. 243, [1993] 4 S.C.R. 695,
19 C.R.R. (2d) 1, 110 D.L.R. (4th) 470 made the following comments on business expenses versus personal
expenses in relation to paragraphs 18(1)(a) and 18(1)(h) of
the Act:
52
Even without distinguishing Bowers,
supra, in this fashion, however, I believe that I should move beyond
paragraph 18(1)(h) of the Act and the traditional classification of child care
in the analysis of whether child care expenses are truly personal in nature.
The relationship between expenses and income in Bowers, supra, was
subsumed in that case, as it was in cases to follow, within an apparent
dichotomy. As stated by Professor Arnold, "The Deduction for Child Care
Expenses", supra, at page 27:
The
test established by the case for distinguishing between personal and living
expenses involved a determination of the origin of the expenses. If the
expenses arose out of personal circumstances rather than business circumstances
the expense was a non-deductible personal expense
There
are obvious tautologies within this approach. "Personal expenses" are
said to arise from "personal circumstances", and "business
expenses" are said to arise from "business circumstances". But,
how is one to locate a particular expense within the business/personal
dichotomy?
And further:
76
It may also be relevant to consider
whether a particular expense would have been incurred if the taxpayer was not
engaged in the pursuit of business income. Professor Brooks comments upon this
consideration in the following terms (at page 258)
If
a person would have incurred a particular expense even if he or she had not
been working, there is a strong inference that the expense has a personal
purpose. For example, it is necessary in order to earn income from a business
that a business person be fed, clothed and sheltered. However, since these are
expenses that a person would incur even if not working, it can be assumed they
are incurred for a personal purpose -- to stay alive, covered, and out of the
rain. These expenses do not increase significantly when one undertakes to earn
income.
77
I recognize that in discussing
food, clothing and shelter, I am adverting to a "but for" test
opposite to the one discussed earlier. Here, the test suggests that "but
for the gaining or producing of income, these expenses would still need
to be incurred". I must acknowledge that because it is a "but
for" test, it can be manipulated. One can argue, for example, that
"but for work, the taxpayer would not still require expensive
dress clothes". However, in most cases, the manipulation can be easily
rejected. Continuing with the same example, one can conclude that the expense
of clothing does "not increase significantly" (Brooks, supra,
at page 258) in tax terms when one upgrades a wardrobe. Alternatively, one can
focus upon the change in clothing as a personal choice. Or, finally,
considering that all psychic satisfactions represent a form of consumption
within the ideal of a comprehensive tax base, one can focus upon the increased
personal satisfaction associated with possessing a fine wardrobe.
...
79
Since I have commented upon the
underlying concept of the "business need" above, it may also be
helpful to discuss the factors relevant to expense classification in need-based
terms. In particular, it may be helpful to resort to a "but for" test
applied not to the expense but to the need which the expense meets. Would the
need exist apart from the business? If a need exists even in the absence of
business activity, and irrespective of whether the need was or might have been
satisfied by an expenditure to a third party or by the opportunity cost of
personal labour, then an expense to meet the need would traditionally be viewed
as a personal expense. Expenses which can be identified in this way are
expenses which are incurred by a taxpayer in order to relieve the taxpayer from
personal duties and to make the taxpayer available to the business.
Traditionally, expenses that simply make the taxpayer available to the business
are not considered business expenses since the taxpayer is expected to be
available to the business as a quid pro quo for business income
received. This translates into the fundamental distinction often drawn between
the earning or source of income on the one hand, and the receipt or use of
income on the other hand.
[30] It seems to me that the need (whatever
health related issue was to be addressed by taking the products) existed
separate and apart from the business. As noted by Elaine Armstrong-McLean “everyone has health concerns” and “there is a benefit to everyone that takes the product,
because everybody has some kind of ailment”. The Appellants were purchasing the products
for consumption by themselves and by their mothers and their daughter. Whatever
need or health concern any of these individuals had in relation to the products
that were to be consumed existed separate and apart from the business.
[31] It also seems to me that the Appellants
cannot convert the personal expenditure made in making the purchases of products
into a business expense based on the argument that they needed to use the
products that they were trying to convince others to buy. In my opinion this
argument, in the words of Justice Iacobucci, is a “manipulation [that] can be easily rejected”. If the
Appellants are right, then any person who owns a specialty food store could
argue that the cost of food purchased through the store but consumed by his or
her family is a deductible expense because they are eating what they sell and
therefore could promote the business by making this statement. If the
Appellants are right, any person who owns a car dealership could justify the
total cost of a car as a business expenditure (regardless of how the car is
being used) as the person would take the position that to convince customers to
buy the particular brand of automobile, he or she had to drive one himself or
herself. It does not seem to me that this is the correct result and I do not
accept the Appellants argument that the purchases were made for business purposes
and not personal purposes so that the Appellants could personally endorse the
products by telling others that they were taking the products.
[32] The products were purchased for the
personal consumption of the Appellants, their mothers and their daughter and
the cost was a personal expenditure and not a business expense.
[33] The Appellants had indicated that some
purchases were made to provide products to potential customers on a trial
basis. However, the Appellants did not provide any details or any estimate of
how many purchases would have been made for this purpose or for whom these
purchases were made. The Appellants indicated that the potential customers were
family and friends and this would also raise the issue of whether they were
purchasing product because the other person was a family member or friend that
the Appellants wanted to help with a particular health issue or whether it was
strictly business.
[34] As a result no amount will be allowed as a
deduction in computing the income of the partnership for the purchases made in
2004 or 2005.
Partnership
- Travel
[35] The amount claimed for travel in 2004
included the course fees and travel related to the Klemmer course. As noted
above, the partnership business did not commence until August 2004 and since
the Klemmer course was held in March 2004 in San Francisco, these expenditures were incurred before the business
commenced and hence are not deductible in computing the income from the
business carried on by the partnership.
[36] There was also an amount identified as
course fees – Aurora for Klemmer & Associates. This amount
was incurred on January 15, 2004 which was also before the business commenced.
[37] The balance of the amount claimed for
travel in 2004 related to a trip to Kananaskis to attend Ian McLean’s nephew’s
wedding and to visit / meet with friends in Calgary.
In LeCaine v. The Queen, 2009 TCC 382, I had stated that a
person’s decision to attend a funeral would be a personal decision and I did
not allow any portion of the cost of attending a funeral as a business expense.
A wedding is different and the occasion may better lend itself to conducting
business. However, I do not accept the proposition that the only reason that
the Appellants attended Ian McLean’s nephew’s wedding in Kananaskis was for the
purpose of earning income. Surely the Appellants also had a personal reason to
attend the wedding and to see the other family members and friends who would be
gathered there. I do not accept that the family and friends of the Appellants
ceased to be family and friends and became only potential Mannatech Associates.
[38] In my opinion the main purpose in attending
the wedding was personal and the insistence of the Appellants that the only
purpose in travelling to Kananaskis was for the purpose of earning income
discounts any personal feelings that the Appellants may have for Ian McLean’s
nephew, the other members of his family, and their friends who would be at the
wedding or in Calgary to such an extent that it affects the Appellants’
credibility. The Appellants seemed to be convinced that if they cloaked any
trip with a few business meetings that they could convert the total cost of any
trip that would otherwise be a personal expenditure into a business expense.
[39] However, as noted above, it seems to me
that a portion of the travel costs could be considered to be for the purpose of
earning income. While it may not have made the Appellants the most popular
people at the wedding reception, it seems to me that they would have used that
opportunity to try to convince family and friends to become Mannatech
Associates or purchase one of the packages of products. They would also have
had such discussions with the friends with whom they were visiting in Calgary. The business purpose would however be incidental to
the personal portion and I would allow only 10% of the following amounts as a
deduction in computing the income of the partnership in relation to the trip to
Calgary and Kananaskis in 2004:
|
Item
|
Amount
|
|
Meals (50% of
$131.08)
|
$65.54
|
|
Parking
|
$73.56
|
|
Car Rental
|
$46.29
|
|
Accommodation
|
$194.00
|
|
Airfare
|
$1,141.06
|
|
Car Fuel
|
$27.34
|
|
Total:
|
$1,547.79
|
[40] The above amounts do
not include the $3.51 identified as “Arts & Letters” as it is not clear
whether this was the amount paid for the card for the wedding nor does it
include the amount of $40.55 (a “Wine March.” [sic]) which is identified
in the Travel schedule as a “gift”. Therefore the amount that will be allowed in computing
the income of the partnership in 2004 for travel will be $155.
[41] For 2005, the total amount that was claimed
as a travel expense in computing the income of the partnership was $10,320.45.
An amount of $541.58 was allowed by the Canada Revenue Agency (“CRA”) as a
deduction in computing the income of the partnership which left a balance of
$9,778.87 as the amount in dispute. A schedule showing the various amounts that
were included in the total amount of $10,320.45 was introduced as an Exhibit by
the Respondent but the Respondent failed to identify in the Reply (or
otherwise) which items comprised the travel amount that was allowed of $541.58.
Therefore it is impossible to determine which travel items in the schedule are
included in the amount of $9,778.87 that is in dispute.
[42] Justice Rothstein
of the Federal Court of Appeal (as he then was) stated in The Queen v. Anchor
Pointe Energy Ltd., 2003 DTC 5512 that:
[23] The pleading
of assumptions gives the Crown the powerful tool of shifting the onus to the
taxpayer to demolish the Minister's assumptions. The facts pleaded as
assumptions must be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[43] Simply stating that $9,778.87 of the total
amount of $10,320.45 is being denied does not help the Appellants or me in
identifying which components of the travel claim have been denied. There are
several items included in the total amount of $10,320.45 and it is impossible
to determine which ones are the items that are still in dispute. As a result if
any of the items that are allowed herein are also included in the $541.58 that
was allowed by the CRA, then such duplication would arise as a result of the
failure of the Respondent to identify which items have been allowed (or denied)
and such amounts will be allowed as a deduction notwithstanding that such
amounts may have already been included in the $541.58 amount that was allowed.
[44] Included in the amount claimed for travel
was the cost of a weekend stay at the Millcroft Inn and Spa. The only people
who attended this weekend “business meeting” were the Appellants. This claim
illustrates the thinking of the Appellants discussed above that any trip
cloaked with a “business meeting” can become a business expense even though
such a trip would otherwise be a personal expenditure. It does not seem to me
that spouses who are carrying on business as a partnership can convert personal
expenditures into business expenses simply by discussing business matters. If
the Appellants are correct, then the cost of breakfast (or any other meal that
they eat together) could become a business expense simply by discussing
business matters during the meal. This does seem to me to be the correct
result. It seems to me that the cost of a weekend trip during which the
Appellants only met with themselves is a personal expenditure and not a
business expense. I do not accept that the Appellants no longer do anything for
personal reasons. No amount will be allowed as a deduction in computing the
income of the partnership in relation to the weekend getaway at Millcroft Inn
and Spa.
[45] The Appellants also travelled to three
Mannatech events – the annual convention held in Dallas in March 2005, a
Proevity seminar held in Niagara
Falls in April 2005 and a
Power of Purpose Seminar held in Ingersoll in June 2005. The cost of attending
the annual convention would be deductible pursuant to subsection 20(10) of
the Income Tax Act.
Although counsel for the Respondent had raised in argument the issue of whether
both Appellants had attended the convention since only Elaine Armstrong-McLean
had discussed the convention during her testimony, I find on a balance of
probabilities that both attended the convention. It seems clear that both
Appellants were involved and active in the partnership and therefore more
likely than not that both attended the convention.
[46] With respect to the seminars, it seems to
me that the Appellants attended these seminars for the purpose of earning
income from the Mannatech business and that the amounts spent would not be on account
of capital. Justice Woods in Setchell, supra, noted that:
22 The general principle is that training costs will be deductible
as a current expense if they are incurred to maintain, update or upgrade an
already existing skill or qualification.
[47] The seminars (which appear to be one day
seminars) were held to teach the individuals about new products and how to
conduct their business and hence would be more akin to upgrading or maintaining
an existing skill than in acquiring a new skill. Therefore the costs of these
seminars are deductible in determining the income of the partnership for 2005.
[48] However, the amounts are not easily
determined as the Travel schedule prepared by the Appellants has the items
related to the convention and the seminars interspersed with other items that
are not related to these events. It would appear, however, that the following
relate to the convention in Dallas:
|
Item
|
Amount Allowed
|
|
Car fuel
|
$25.54
|
|
Meals (50% of
$657.45)
|
$328.72
|
|
Car Rental
|
$272.56
|
|
Parking
|
$111.55
|
|
Accommodations
|
$736.02
|
|
Airfare
|
$2,216.54
|
|
Total:
|
$3,690.93
|
[49] Included in the amount above are the costs
related to the four days following the convention when the Appellants were
meeting with Lorraine and Bill LeBlanc in San Antonio and trying to enlist others in the business. I am
satisfied, on the balance of probabilities, that the extra time spent in Texas was for the purpose of earning income. There was no
evidence of any other activities that the Appellants did while they were there.
The above amounts do not include the amounts that were identified on the
schedule by the CRA auditor as duplicate amounts as no explanation was provided
by the Appellants to explain why these were not duplicated. The above amounts
do not include the items identified as purchases, posters or marketing material
as no explanation was provided by the Appellants in relation to these items.
[50] It would appear that the following
expenditures relate to the Proevity seminar:
|
Item
|
Amount Allowed
|
|
Meals (50% of
$113.36)
|
$56.68
|
|
Accommodations
|
$125.36
|
|
Total:
|
$182.04
|
[51] The above amounts do not include the
amounts that were identified by the CRA auditor on the schedule as duplicate
amounts as no explanation was provided by the Appellants to explain why these
were not duplicated. The above amounts do not include the items identified as
purchases as no explanation was provided by the Appellants in relation to this.
[52] The only amount identified in relation to
the Power of Purpose seminar was $226.38. This amount was identified in the
schedule as meals and accommodation. However, since the cost of meals would be
subject to section 67.1 of the Income Tax Act, it is necessary to
separate the cost of meals from the cost of accommodation. Since this was not
done by the Appellants, it will be assumed that one-half of the amount was for
meals and the balance for accommodation. As a result the following will be
allowed in relation to this seminar:
|
Item
|
Amount Allowed
|
|
Meals (50% of
$113.19)
|
$56.60
|
|
Accommodations
|
$113.19
|
|
Total:
|
$169.79
|
[53] Another trip that the Appellants claimed that
they made for the purpose of earning income was a weekend trip to Niagara-on-the-Lake
where they met Harold and Alison Wilson who were friends of the Appellants
and who had been friends for years. The difficulty in this case is
distinguishing between personal expenditures and business expenditures when the
people with whom the Appellants are trying to do business are family and
friends. It seems to me that the Appellants should be entitled to a deduction
for travel to the extent that the travel was made for the purpose of earning
income but not to the extent that the travel was made for the purpose of
meeting old friends. It seems to me that since the Appellants travelled to
Niagara-on-the-Lake to meet with individuals who had been (and still are) their
friends, that the business portion should be incidental to the personal
portion. I will allow 25% of the cost of the trip to Niagara-on-the-Lake as a
deduction in computing the income of the partnership.
[54] As a result the following will be allowed
in relation to the trip to Niagara-on-the-Lake:
|
Item
|
Amount Incurred
|
Amount Allowed (25%)
|
|
Meals
|
$178.15
|
$22.27
|
|
Accommodations
|
$188.90
|
$47.22
|
|
Total:
|
|
$69.49
|
[55] The last trip that was addressed was a trip
to Florida to meet with Deborah Baron who was
their “immediate up line”. She was the person who recruited the Appellants into
the business. She was a friend of Elaine Armstrong-McLean and Deborah Baron and
her two children stayed with the Appellants for a year. Again the difficulty is
mixing friends and business and trying to determine what portion of the
expenditure was made for the purpose of earning income. I do not accept that
the Appellants should be entitled to deduct 100% of the cost of travelling to
meet their friends as a business expense on the premise that they are doing
business with their friends. As noted above, it seems to me the business
portion should be incidental to the personal portion. I will allow 25% of the
cost of the trip to Florida as a deduction in computing the income of
the partnership.
[56] It would appear that the following amounts
are related to this trip and the following amounts will be allowed:
|
Item
|
Amount Incurred
|
Amount Allowed (25%)
|
|
Meals
|
$190.77
|
$23.85
|
|
Car Rental
|
$299.71
|
$74.93
|
|
Parking
|
$68.95
|
$17.24
|
|
Airfare
|
$1,335.98
|
$334.00
|
|
Total:
|
|
$450.02
|
[57] There was also a reference to “reading
material” in relation to the trip to Florida. No
explanation was provided for this and therefore no amount is allowed for this
item.
[58] The Appellants also claimed an amount in
relation to passport photos. However this amount was incurred in November 2005
which was after the various trips referred to above and it is not clear whether
this was related to a personal trip or a business trip that the Appellants were
planning to take. No amount will be allowed in relation to the passport photos.
[59] As a result the following amounts will be
allowed as a deduction in computing the income of the partnership for 2005 for
travel in addition to the $541.58 that has been allowed by the CRA:
|
Item
|
Amount Allowed
|
|
Mannatech
Convention in Dallas
|
$3,690.93
|
|
Mannatech
Proevity Seminar
|
$182.04
|
|
Mannatech Power
of Purpose Seminar
|
$169.79
|
|
Trip to
Niagara-on-the-Lake
|
$69.49
|
|
Trip to Florida
|
$450.02
|
|
|
$4,562.27
|
Partnership
– Courses and Professional Development
[60] The amount claimed relates to the Klemmer
course in 2004 which was dealt with above. No amount is allowed as a deduction
in computing the income of the partnership in relation to the Klemmer course.
Conclusion
[61] As a result, the appeals are allowed,
without costs, and the matter is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that:
(a)
in computing the income
from employment for Ian McLean for 2004 he is entitled to an additional
deduction of $253 for parking;
(b)
in computing the income
of the partnership for 2004, a deduction of $155 for travel is allowed; and
(c)
in computing the income
of the partnership for 2005, an additional deduction of $4,562 for travel is
allowed.
Signed at Ottawa, Canada, this 20th day of October,
2009.
“Wyman W. Webb”
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