Date: 20000207
Docket: 1999-101-IT-I
BETWEEN:
AUDREY SEVERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
___________________________________________________________________
Counsel for the Appellant:
Ronald Balacko
Counsel for the Respondent:
Jeffrey Pniowsky
____________________________________________________________________
Reasonsfor
Judgment
(delivered orally from the Bench on
November 22, 1999
at Regina, Saskatchewan)
Margeson, J.T.C.C.
[1]
The most substantial question before the Court in this matter is
whether or not the Appellant, during 1995, had a reasonable
expectation of profit from the Amway business in which she was
involved. With respect to the year 1996, the Court has no doubt
whatsoever that despite any action she took between 1994 an 1995,
it was obvious and should have been obvious to her by 1996 that
they were not working. She could not reasonably have expected to
make a profit in 1996. the losses incurred in 1996 cannot be
deducted apart from the losses which the Minister has already
allowed.
[2]
As indicated, the more difficult decision for the Court is in
relation to the year 1995.
[3]
In order for the Appellant to be successful here and to be able
to claim in 1995 that she had a reasonable expectation of profit,
counsel for the Appellant has generally admitted that it all
depends upon the course or change in direction that he suggested
she took between 1994 and 1995. In 1993, the Appellant had a very
large gross income, $82,440. It went from $14,712 in 1992 up to
$82,440 in 1993. That was a huge increase in volume. One could
reasonably expect that where the volume increases the profit is
going to increase as well. That did not occur here. In 1993, she
had a loss of $27,361 and in 1994 she had a loss of $19,294 which
was almost half of her gross income. And that is the problem in
this case.
[4]
There seems to have been a pattern throughout, from 1991 to 1996,
that irrespective of the total increase in gross income, the
expenses increased continuously. One has to conclude that the
real problem that existed was the inability to cut expenses. In
order to turn this business around she had to take corrective
actions.
[5]
The only corrective action that is suggested that she took was
that she met with her up-line person who told her that she
had to decrease her expenses. There was no way that she could
ever have expected to make a profit unless she reduced her
expenses. She intended to cut her expenses by increasing her
depth and decreasing her width.
[6]
Now, a note of explanation as far as the Court is concerned of
what she meant by that. Her width was the number of different
agents that she had over the different areas in which she
operated. The depth was the amount of work done by the other
agents that she retained in these different areas, the amount of
sales that they created on a vertical level.
[7]
She was going to decrease her expenses she said by increasing her
depth and decreasing her width because it was the width that
created all of the expenses. She had to buy new videos for the
other people and every time she retained somebody there were
additional expenses. That is the reason for the huge amount of
expenses in 1993 when she was increasing her width.
[8]
In order for the Court to conclude that the efforts that she made
were sufficient to create a sufficient change that would bring
about a reasonable expectation of profit, the Court has to know
what she did. Other than as indicated above, there was very
limited evidence about that. There was no evidence whatsoever
about how she curtailed her expenses in the years 1993, 1994 and
1995, or what composed her expenses. There was no evidence before
the Court from which it could satisfactorily conclude that the
steps that she was taking between 1994 and 1995 to decrease her
expenses were in fact working.
[9]
In order for the Appellant to be successful here, there has to be
enough evidence that the changes that she took were sufficient to
bring about a change and that she could go from a business not
having a reasonable expectation of profit in 1994 to having a
reasonable expectation of profit in 1995.
[10] With
respect to the start-up period the Minister certainly
allowed a sufficient start-up period between 1991and
1995.
[11] The Court
has considered the cases referred to and some of these are
helpful. As pointed out one cannot consider the factual situation
in cases where the businesses are completely unrelated. Also as
referred to in these cases one should consider whether the
expenses are excessive in comparison to the sales generated and
whether they were of a personal nature.
[12] In some
of the cases the Court was satisfied that material changes had
taken place in the way that the business was conducted. Here, the
Appellant did increase gross sales dramatically between 1992 and
1993 from $14,712. to $82,240. They decreased in the year 1994
down to $48, 310. In 1995, they remained basically the same.
There was not a continual increase in sales. Once the Appellant
got sick she found that she could not do as much business as she
had before. She cut down the width of her market in order to cut
down the expenses. However, unlike one of the cases cited, the
Appellant here did not make such a drastic move such as changing
the location of her business.
[13] This
Court cannot help but be struck by the fact that part of the
problem that the Appellant had in this case with the expenses
being so high in relation to the gross income was because of the
location of the business. She admitted herself that she was in a
small place. Her telephone bill in one case was as high as her
gross profit in one year. She had to travel long distances and it
was clear that when she had to go out to increase the breadth of
her business, the expenses were quite high because of the
location that she was in, it being a small area.
[14] She
admitted herself that being in a small area makes it more
expensive to do business. The Appellant did not move when she
should have realized that this business was having difficulty in
making a profit from the place where it was located. Secondly,
and significantly in one of the cases referred to, the business
was terminated when the Appellant finally realized that profits
were not realistically attainable, but the Appellant here
continued on.
[15] This
Court is satisfied that by 1995 the Appellant should have
realized that profits were not realistically attainable.
[16] Again, in
one of the cases referred to, Judge O'Connor said that it
would not be unreasonable to suggest that a new start-up
period should have been considered when the Appellant moved the
business to Saskatoon. That of course is not a factor which this
Court has to consider here because the Appellant did not make the
move in the first place.
[17] Counsel
for the Appellant said, in a nutshell, there was a reasonable
expectation of profit in the years in question having due regard
to Moldowan v. The Queen, 77 DTC 5213, and the other cases
that have been referred to because the Appellant realized that
she had to make some changes if she was going to make a profit.
The changes that she was going to make were to consult with her
up-line person. She had that consultation. He suggested to
her that she had to cut down on her expenses. She agreed with
that, she intended to cut down her expenses by reducing her
breadth and concentrating on her depth. If she had not become
sick she would have been able to do it. That is this case in a
nutshell.
[18] Counsel
for the Respondent on the other hand says that there were no
significant steps taken by the Appellant to change the direction
of the business as there were in the cases cited. In one case
cited the business was only in existence for a short period of
time. There was no reasonable start-up period given. In the
case at bar there was a start-up period from 1991 to 1996.
That was a reasonable start-up period.
[19] There
were no extraordinary steps taken to change the direction of this
business. The only step that she took or suggested that she took
was not sufficient and it was nothing but a suggestion that this
action would probably lead to changing circumstances and changing
profit margins. There was no evidence to support the position
that this would have been the result. It was merely conjecture on
her part to think that this was sufficient to turn it around.
There was no objective evidence to suggest that it would turn
around.
[20] The most
significant factor here is that she did not move out of the place
where it was obvious she was not going to make money. She had not
made money there. It was too expensive to operate the business
from there and she did not take the extraordinary step of moving
out. That is one action that might have changed the circumstances
around.
[21] Due to
the small market where she was located the expenses did not
decrease. Even though this business was volume driven, the
expenses did not decrease as the volume increased. That was a
clear indication that this increase in the volume alone was not
going to do it. There had to be something else. Counsel suggested
that what it was is that she had to move the location of her
business.
[22] Further,
he suggested that when the Court considers the reasonable
expectation of profit test, it has to consider that there were
some personal factors that were considered by the Court in
Tonn v. The Queen 96 DTC 6001, such as the location of the
business. She wanted to be there because she lived right here.
Her husband had a farm. She was not going to give up the farm to
move somewhere else. There was some personal enjoyment to the
business. Her home was located there. She had certain
psychological benefits from the satisfaction that she got out of
running this type of business.
[23] There was
no reasonable expectation of profit even when you consider the
change that she made.
[24] The Court
is satisfied that the Appellant did take a step between 1994 and
1995 to change the direction of this business, but the Court is
not satisfied that the step that she took was sufficient because
of two reasons: One, the Court is satisfied that there had to be
something drastic done in order to reduce the cost or the
expenses of making these sales in comparison to the total sales.
What the Appellant did by way of contacting her up-line
person and by attempting to reduce the breadth of her business,
was not sufficient under the circumstances. The Court is not
satisfied that the reason for that was because she became sick.
The Court is not satisfied that this is a "but for"
situation and that the Appellant would have turned it around had
she not become sick.
[25] If there
had been some evidence given before the Court as to what the
break down of expenses were before the illness took place and
before she made this alteration, even though it was a small one,
and then evidence to show what the expenses were and the type of
expenses that there were in 1995 as compared to 1994, this may
have made a difference in the decision. It the Court were able to
conclude that the change in direction was reducing the rate of
expenses as compared to the amount of the gross sales, then the
result may have been different. The Court might have been forced
to conclude that the change in direction that she took was
sufficient and that in 1995 one could reasonably say that she had
a reasonable expectation of profit. But there was no such
evidence. From the evidence that was given, the Court concludes
that it was mere conjecture on her part and perhaps on the part
of her up-line agent to suggest that that could have
changed the picture so drastically that there would have been a
reasonable expectation of profit in 1995.
[26]
Reluctantly and on the basis of the evidence before me, the Court
is not satisfied that the Appellant has met the burden of showing
that in 1995 there was a reasonable expectation of profit.
[27] The Court
will have to dismiss the appeal and confirm the Minister's
assessment.
Signed at Ottawa, Canada, this 7th day of February 2000.
"T.E. Margeson"
J.T.C.C.
COURT FILE
NO.:
1999-101(IT)I
STYLE OF
CAUSE:
Audrey Severson and
Her Majesty the Queen
PLACE OF
HEARING:
Regina, Saskatchewan
DATE OF
HEARING:
November 22, 1999.
REASONS FOR JUDGMENT BY: The
Honourable T.E. Margeson
DATE OF
JUDGMENT:
February 7, 2000
APPEARANCES:
Counsel for the Appellant: Ronald Balacko
Counsel for the
Respondent:
Jeffrey Pniowsky
COUNSEL OF RECORD:
For the
Appellant:
Name:
Ronald Balacko
Firm:
Rusnak Balacko Kachur Rusnak S.G. Kyba
Yorkton, Saskatchewan
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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