John Mercer v. Minister of National Revenue, [1990] 2 CTC 2097, 90 DTC 1608

Christie, A.C.J.T.C.:— The dispute is about whether the appellant is entitled to a claimed deduction of $10,000 in computing his income for 1981. The bulk of his income for that year was employment income as an instrument mechanic with MacMillan Bloedel Limited, a very large concern in the forest products industry. He also describes himself as a computer specialist. He received a degree in chemical engineering from the University of British Columbia in 1969.

A number of documents were placed in evidence at the hearing including an agreement dated October 30, 1981, made between Financial Planning Services, a division of Vancouver Taxsavers, a sole proprietorship registered pursuant to the Partnership Act of British Columbia, called the "licensor" and the appellant and C.S. Mercer (the appellant's father) together called the "licensee".

There are three prefatory statements that read:

Whereas the Licensor operates a business of providing financial planning services and operates such business throughout Canada under the name of "Vancouver Taxsavers Financial Planning Services";

And Whereas the Licensor has decided to modify its operations by licencing independent operations with the right to engage in its activities and business as generated from certain specified areas, hereinafter individually referred to as a "Territory";

And Whereas the Licensor has agreed to sell and the Licensee has agreed to purchase a licence to provide financial and tax planning services in a territory as defined in paragraph 8.

Clause 8 provides:

The territory licenced by this agreement is defined by the area code and telephone prefix in use by the telephone network in Canada and for the purpose of this Agreement is as follows: Area Code: 604 (This is the area code for all of British Columbia.) Telephone Prefix: 485 Territory Name: Westview Financial Planning Services or such other name as may from time to time be designated for the defined territory by the Licensor at his discretion.

Under the agreement the licensee purchases for $100 ”. . the right to engage in business making use of the licensor's financial planning systems and tax preparation systems for clients from within the territory defined in Paragraph 8 hereof.” The licensee agrees to pay $20,000

. . . as a Management Fee to the Licensor for providing management support in the form of advertising, planning, organizing, controlling, directing, marketing, obtaining financing, promoting, and monitoring the business of the Licensee within the defined territory, during the first fiscal year of the Licensee's operations. Within a reasonable time the Licensor will tender a cash performance bond of Fifteen Thousand ($15,000.00) Dollars for the minimum gross fee expectation of One Hundred Fifty Thousand ($150,000.00) Dollars generated from the defined territory over the Ten (10) year term of this licence and provided further that when during the term of this Agreement the Licensee generates a total of gross fees in excess of One Hundred Fifty Thousand ($150,000.00) Dollars, the sum of Fifteen Thousand ($15,000.00) Dollars becomes due and payable to the Licensor.

Gross fees is then defined.

A number of clauses follow that need not be considered in detail for present purposes. They relate to the qualifications of the licensee’s personnel being satisfactory to and meeting the licensor's standards; the arbitration of disputes; the length of the agreement; the annual delivery to the licensor by the licensee of a statement showing gross fees; and the keeping of detailed records regarding receipt of such fees by the licensee. The final clause is numbered 12. It reads:

It is furthermore agreed between the Licensor and the Licensee that in the event that the deduction for tax purposes of the management fee is disallowed, the Licensor or his agents shall have the first right to represent the Licensee before the appropriate department of Revenue Canada and/or the Courts, and if such representation or representations fail to uphold the deduction, then the parties hereto agree that the sale price will be adjusted accordingly or the Licensee may at his option deem this Agreement to be void ab initio and the parties will then refund and return each to the other all monies, promissory notes and any and all documents arising from the licencing arrangement.

The next document is a promissory note also dated October 30, 1981, for $20,000 payable on demand to Vancouver Tax Savers, Financial Planning Services, signed by the appellant and Cecil S. Mercer. It is stamped “Paid Dec. 31, 1981" which is the same date as a "Cash Performance Bond” signed by A. Liot as Chief Executive Officer, Financial Planning Services, Vancouver Taxsavers, Licensor." It states that Financial Planning Services, a division of Vancouver Taxsavers ("the licensor") ”. . . is held and firmly bound unto the Licensee (the appellant and his father) in the penal sum of Fifteen Thousand ($15,000.00) Dollars (Canadian Funds)." Recitals follow to the effect that the licensor operates a business of providing financial and tax planning services; that there is an agreement to purchase a licence to provide such services within a defined territory; that the licensee is obligated to the licensor for management fees in the amount of $20,000, $5,000 of which has been paid in part payment thereof; and the licensor has promised under the licencing agreement to tender to the licensee a cash performance bond of $15,000. The operative part of the bond provides:

Now the Condition of this Obligation is such that:

1. If the Licensee shall generate "gross fees" under the Licensing Agreement in excess of One Hundred and Fifty Thousand ($150,000.00) Dollars (Canadian Funds), as determined under and pursuant to the terms and conditions of the said Licensing Agreement, then the above-written obligation shall be void but otherwise it shall remain in full force and effect.

2. The Licensor may, at its option, pay to the Licensee the penal sum referred to above at any time before maturity of this Bond, provided that any such payment shall not, of itself, constitute a waiver of the condition of this obligation by the Licensor.

3. The Licensor may, at its option, set off, at any time and from time to time, any amounts due to or otherwise to be paid to the Licensee hereunder against any amounts due to or payable to the Licensor from the Licensee under the Licensing Agreement.

The appellant heard of Financial Planning Services (“FPS”) through his father, a retired engineer, who it was said believed that there were excellent opportunities in the field of financial services.

In October 1981 the appellant had no background of special significance in relation to financial planning. He said that in studying for his engineering degree he studied "economics and accounting" and when pressed for details about this regarding accounting by counsel for the respondent he replied: "That was basically Economics 200.” He also said that he prepared his own returns of income and periodically assisted his wife in the preparation of income tax returns. She is a self-employed public accountant at Powell River. When the appellant attended at the offices of FPS at West Pender Street, Vancouver, to sign the licencing agreement and the promissory note, he was given a binder. He said it ”. . . represented the start of some sort of management support programme that was going to be in place.” The binder is entitled "New Business Financing Manual” and was put together by FPS. It includes things such as this advice regarding advertising:

To increase your chances of regularly finding quality clients who lenders will want to approve, enlarge the pool of potential clients you attract to your business. Advertise in the financial and classified sections of the best area magazines and newspapers.

A small classified ad each day will cost $150 to $300 per month. Put a loan minimum in your ad so that you automatically screen out the little fellow who is looking for a small, personal loan: "Loans available from $30,000.” Also include a high upper limit so you attract those who are looking for the big money: "Loans available from $30,000 to $10 Million.”

Under "Sources of Venture Capital in Canada" is a publication with that title prepared by the Department of Industry, Trade and Commerce in 1977. Under “Technical Aids" is a pamphlet entitled “Buying a Franchise" prepared by the Federal Business Development Bank. Under "Articles on Obtaining Financing” there is another pamphlet prepared by the Federal Business Development Bank entitled "Presenting Your Case for a Term Loan.” There is promotional material prepared by Dateline Systems Limited. The only thing directly relating to income tax appears to be the "Taxsavers National Fee Schedule". Included in the schedule are these recommended minimum fees:

Tax Return including schedules — $ 50

Spouse	— $ 25
Sales person's Return	— $ 75
Real Estate Return	— $100
Business Return	— $100

The appellant said that in addition to the binder FPS erected a sign above his wife's office in Powell River. A photograph is in evidence. It is of modest size and states: “Financial Planning Services, Oele, Mercer & Associates, Tax Preparation Tax Planning Accounting Services". The appellant vacillated between 1982 and 1983 regarding when the sign was erected, finally favouring 1982. The binder and the sign were all that the appellant received in fulfilment of the undertaking by FPS for the $20,000 management fee to provide him with ”. . management support in the form of advertising, planning, organizing, controlling, directing, marketing, obtaining financing, promoting, and monitoring the business of the Licensee within the defined territory, during the first fiscal year of the Licensee's operations."

Mr. Lyle Mulligan testified on behalf of the respondent. He is presently employed by Revenue Canada as Section Chief, International Audits Division. From 1976 to 1988 he was Section Chief, Tax Avoidance, in Ottawa. In that capacity he investigated the sale of licences by FPS that has already been described. He secured samples of the kind of advertising that was being done by FPS. These are examples of what was placed in evidence.

5000

Tel: (604) 669-5000

3rd Floor, 800 West Pender, Vancouver, B.C, V6C 2V8

TAXSAVERS

Vancouver Canada

$20,000 TAX DEDUCTION	COST TO YOU . . . $5000
AS ADVERTISED IN:
The Financial Post
Financial Times of Canada
The Globe and Mail, Report on Business
The Vancouver Sun
The Province
WE EXPLAIN. . . .

How to start your own business, tax shelters, franchises, tax planning, new business financing, and more at FPS FINANCIAL PLANNING CENTRES

Come in and see us . . . anytime.

In Vancouver: 402 West Pender Street, Main Floor

Telephone Toll Free: 112-800-663-1255

(Logo) FINANCIAL PLANNING SERVICES

A Registered Trademark of Liot Financial Corporation

FIVE WILL GET YOU TWENTY.

Invest $5,000 during this taxation year and receive a $20,000 deduction on your personal income tax.

We think this is the kind of opportunity that will help you retain the money you've earned. We feel now that you've made it, you should keep it.

So if your remuneration tops $40,000 this year, it’s obviously worth your while to fill in the coupon and mail it today.

Obviously.

FINANCIAL PLANNING SERVICES

3rd Floor, 800 West Pender Street, Vancouver, B.C. V6C 2V8

Name

Add ress

City Postal Code

Telephone ___—___..— Position

Return this coupon		Tax shelters
or phone direct	(Logo)	Tax preparation services
(604) 669-5000		Tax planning services
Member		Personal financial planning
Canadian Tax Foundation		New business financing

To round out the narration as it pertains to FPS, it has long since evaporated. On March 4, 1985, Cpl. Peter Montague, Royal Canadian Mounted Police, swore an information at Vancouver charging that Angy Liot:

Between the 1st day of June, 1979 and the 1st day of January, 1983, at the City of Vancouver, Province of British Columbia, while carrying on business as a sole proprietor under the firm names of Vancouver Taxsavers and Financial Planning Services, unlawfully did by deceit, falsehood or other fraudulent means defraud members of the general public of money or other valuable security to a value of approximately Four Million Two Hundred Twenty-Seven Thousand Dollars ($4,227,000.00), contrary to Section 338(1) of the Criminal Code of Canada.

This charge relates to the selling of licences with the related tax deductions. Liot was tried in 1986 by a court composed of a judge and jury. After a lengthy trial he was found guilty. On June 10, 1986, he was sentenced to four years imprisonment.

The appellant did not earn income from providing financial planning services in 1981 or at any other time. There were no books of accounts, invoices or business records of any kind produced at the hearing regarding the alleged providing of financial planning services. In his 1981 income tax return the appellant includes a statement of income and expenses for the year ended 1981 regarding: "John Mercer—Financial Planning Services". It shows commission income of $3,000. Against this are expenses of $10,801.25 that include: "Management fees—$10,000.” This is 50 per cent of the $20,000 management fee referred to in the licencing agreement, the other 50 per cent being a matter for the appellant’s father. The $3,000 in commission income had nothing to do with a business of providing financial planning services. It related to a separate arrangement the appellant had with FPS whereby he would sell to others the same licencing agreement—promissory note—cash performance bond scheme he and his father had purchased from FPS. If this arrangement with FPS was reduced to writing the pertinent document or documents were not placed in evidence. The appellant earned $8,000 in similar commission income in 1982.

It is the position of the respondent that expenses incurred for the purpose of producing the $3,000 income are properly deductible, but this cannot include the $10,000 which does not have that relationship to the $3,000. I agree. In order for the appellant to deduct the $10,000 it is necessary for him to establish, on a balance of probability, that he was carrying on a business of providing financial services. To do this it was necessary to establish the provision of financial services and the existence of a reasonable expectation of profit from that activity. Had this been done there would be a source of income in respect of which the $10,000 could have been deducted in computing the appellant's income. I have no hesitation, however, in finding that the appellant has not established the existence of such a business. It follows that this appeal cannot succeed.

In Chatfield v. M.N.R., [1988] 1 C.T.C. 2173; 88 D.T.C. 1013, this court had before it the same essential relevant facts as exists in this case. In dismissing the appeal in Chatfield, Bonner, T.C.J. quoted clause 12 of the licencing agreement. He then said at pages 2175-76 (D.T.C. 1014-15):

Therein, it would seem, lies the only explanation for the whole affair. The appellant, who admitted he was in a high tax bracket, paid $10,000 in cash and owed nothing more to the Licensor by virtue of the cancellation of the indebtedness on the notes. He ended up in circumstances in which he was intended to be able to assert that he made a deductible $40,000 expenditure. The securing of a tax advantage was not, as the appellant suggested, one of the reasons for entering into the transaction. All of the objective evidence supports the conclusion which I have reached that it was the only meaningful reason.

The $10,000 expenditure was not made for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Income Tax Act. There was no business. The appellant incurred no further liability because the notes were never intended to create liability in the first place. Even if he did, there was no business enabling him to bring any such liability within paragraph 18(1)(a). Paragraph 1102(1)(c) of the Income Tax Regulations prohibits the deduction of capital cost allowance in respect of the capital cost of the licence.

I need only add that there is no meaningful distinction to be drawn between the facts in this case and those before my brother, Judge Taylor, in L. Farrell v. M.N.R., [1985] 2 C.T.C. 2222. There is no basis, therefore, for arriving at a different result. The appeal will be dismissed.

In the alternative counsel for the respondent relied on subsection 245(1) of the Income Tax Act . [1] But in the light of what I have already said, it is unnecessary to deal with the argument based on this subsection.

The appeal is dismissed.

Appeal dismissed.