Gary C. Graves and Mary J. Graves v. Her Majesty the Queen, [1990] 1 CTC 357

MacKay, J.:—The plaintiffs, Gary C. Graves and Mary J. Graves, appeal pursuant to subsection 172(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, from the decision of the Tax Court of Canada rendered August 29, 1983. At issue are questions of partnership as between the plaintiffs in their operation of a business and certain business expenses claimed for home office operations, for vehicle costs and for travel for the 1978 and 1979 taxation years.

Facts

The plaintiffs are husband and wife. They commenced operation of an independent distributorship of Amway of Canada Limited on October 7, 1978. In connection with this business Mr. Graves reported income, expenses and resultant losses of $1,549 and $6,787 for 1978 and 1979 respectively. Except for this business Mrs. Graves did not engage in employment or other business which produced income in the years in question. Mr. Graves filed personal income tax returns for the 1978 and 1979 taxation years and Mrs. Graves filed a return for 1979. Mr. Graves initially claimed 25 per cent of the reported loss from the business in completing his personal tax return for the 1978 taxation year as a deduction against other income and he indicated the balance, 75 per cent, was distributed to Mary J. Graves. Subsequently he revised his claim to 50 per cent of the loss. With respect to the 1979 taxation year, Mr. Graves claimed 100 per cent of the loss.

By notices of reassessment dated January 25, 1982, the Minister of National Revenue reassessed the plaintiffs for the 1978 and 1979 taxation years and the plaintiffs filed timely notices of objection. The reassessments were confirmed oy the Minister by notification of confirmation dated September 8, 1982. In the names of both plaintiffs Mr. Graves then filed notices of appeal to the Tax Review Board, now the Tax Court of Canada, from the reassessments and their respective appeals were heard on July 20, 1983. By separate judgments with joint reasons dated August 29, 1983, the Tax Court allowed the appeals in part. Mrs. Graves’ appeal of the reassessment of the 1978 taxation year was quashed upon motion by the respondent Minister of National Revenue. Her appeal of the reassessment of the 1979 taxation year and Mr. Graves' appeals with respect to both the 1978 and 1979 taxation years were allowed in part and the matter referred back to the Minister for reassessment so that, in the words of St- Onge, T.CJ. . . . "the expenses allowed in the . . . Reasons for Judgment be considered as expenses of a partnership and should be claimed by each partner on a 50% basis” From that decision the plaintiffs appeal.

Two matters are in issue in this appeal. The first is whether some of the expenses claimed by the plaintiffs in relation to their business, which were disallowed by the Minister's reassessment, and allowed in part by the Tax Court of Canada, were incurred for business purposes within provisions of the Income Tax Act. In relation to certain of these expenses, even if properly classified as business expenses, a further question arises because of the reassessments, that is, whether they could be considered reasonable in the circumstances as required by section 67 of the Act. The second issue to be determined is whether the plaintiffs carried on the business in partnership and if so whether they did so as equal partners or on some other proportionate basis which should be reflected in any division of the losses arising from the partnership in accord with paragraph 96(1 )(g) of the Income Tax Act as it then was (subsequently amended by 1988, c. 55, s. 66(2)).

Legislation

The sections of the Income Tax Act and the Partnership Act, R.S.N.S., 1967, c. 224 relevant to these issues, as applicable in 1978 and 1979, are as follows. The Income Tax Act provided:

s. 18 (1) 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;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

(The amendment of s. 18(1 )(h) by S.C. 1988, c. 55, s. 10(3) has no significance for the situation of Mr. and Mrs. Graves)

s. 20 (10) Notwithstanding paragraph 18(1)(b), there may be deducted in computing a taxpayer's income for a taxation year from a business an amount paid by the taxpayer in the year as or on account of expenses incurred by him in attending, in connection with the business, not more than two conventions held during the year by a business or professional organization at a location that may reasonably be regarded as consistent with the territorial scope of that organization.

s. 67 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.

s. 96 (1) Where a taxpayer is a member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(g) the amount of the loss of the partnership for a taxation year from any source or from sources in a particular place were the loss of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer's share thereof.

(The amendment of s. 96(1 )(g) by S.C. 1988, c. 55. s. 66(2) has no significance for the situation of Mr. and Mrs. Graves)

s. 103 (1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.

The Partnership Act of Nova Scotia provided as follows:

s. 3 Partnership is the relation which subsists between persons carrying on a business in common, with view of profit; but the relationship between members of any incorporated company or association is not a partnership within the meaning of this Act.

s. 26 The interests of partners in the partnership and their rights and duties in relation to the partnership shall be determined, subject to any agreement, express or implied, between the partners, by the following rules;

(a) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise sustained by the firm.

Expenses claimed

At the commencement of trial, counsel for the parties filed their agreement that the only expenses in issue were those claimed as home office expenses, vehicle expenses and travel expenses; any claim for casual labour expenses, initially raised in the statement of claim, was specifically withdrawn by the plaintiffs.

Each of these matters were dealt with in great detail at trial. For that reason I have given more than ordinary attention to the specifics of these claims hoping to fully and finally address the matters in contention between the parties.

Home Office Expenses

Prior to their involvement in the Amway business, the plaintiffs built a home in Upper Tantallon, Nova Scotia. The home was a split level design consisting of four levels approximately 2,760 square feet in all, not including a two-car garage of 506 square feet. Diagrams of the home were submitted in evidence showing the portions which the plaintiffs claim were used for purposes of the business in 1978 and 1979. It is not disputed that the plaintiffs did use a portion of their home for business purposes. What is at issue is the percentage of the total space used for that purpose and, reflecting this, the amount of expenses properly deductible.

It was agreed between the parties that the total 1979 household expenses amounted to $7,898. It was further agreed that if the Court found that the amount of home office expenses deductible was greater than $600, being the amount awarded under this heading by the Tax Court of Canada, then the 1978 amount would be one quarter of the 1979 amount up to a maximum of $312, the total amount claimed by the plaintiffs for these expenses in 1978.

The plaintiffs claimed that in 1979 they used 22 per cent of their home for business purposes. This use consisted of an area, in the words of Mr. Graves during trial, which incorporated

. . . approximately half of the basement, half of the garage, and one closet on the family room level used to store files from the Amway business . . .

Mr. Graves indicated that he calculated the 22 per cent of household expenses claimed by his measuring of the space used for the business as a portion of the total area of the premises. Revenue Canada in its reassessment allowed the plaintiffs 3 per cent of total household expenses, which reflected a share of total space of the house and garage constituted by an enclosed room, called the product room, constructed in the basement level in 1979 to store Amway products ordered and received weekly for sale and distribution to other dealers. The Tax Court of Canada allowed $600 for home office expenses based on an estimate of rental equivalent of $50 per month for 1979. That figure represents about 8 per cent of total house expenses.

The portion of the basement said to be used for business purposes included the product room, an enclosed space measuring 8 feet by 10 feet with shelving, created in 1979 to store Amway products and promotional materials. Following inspection by a departmental auditor that space was conceded to be used for purposes of the business in the reassessment by the Minister. In addition, the otherwise unfinished basement included a carpeted area where a filing cabinet, a desk and chair for paperwork associated with the business was done, and a reception area with tables, a couch and chairs. The reception area provided a space for distributors to wait and collect products each week following delivery by Amway to the plaintiffs who were direct distributors. In 1979 the Graves supplied some 10 or 12 distributors, in addition to their own direct retail selling, and these distributors were called each week following receipt of a shipment and all attended at more or less the same time to expedite transfer of the goods. Mr. Graves testified that by 1979 he and his wife were handling $15,000 to $20,000 worth of products monthly and that the basement area including the product room, the desk-working space and the reception area was not used for purposes other than their Amway business. From the sketches of the area admitted in evidence access from the abutting garage to the basement level and thence to other levels in the house appears to have been through the area otherwise devoted to the business.

The plaintiffs also claim that a storage cupboard, some 15 square feet in size on the family level half a storey higher than the basement level, was used exclusively for business purposes. There, old files from the business, order forms and distributor records, were stored in what Mr. Graves described as “a couple of good sized boxes". In cross-examination he said he had been "just looking for extra space and that closet was not being used for anything so we could use it for that" (i.e. storage of files). I am not persuaded that any space for storage of files additional to that claimed as used exclusively for business purposes in the basement level is reasonable, particularly in the circumstances in 1979, for even at the end of that taxation year the business had been operating only for 15 months and I see no reason, and none was expressed, why files accumulated in that time, and indeed beyond, could not be stored in the area of the basement said to be devoted to the business.

Finally, the plaintiffs claimed half of their two-car garage was used for the business, basically since one of their vehicles was primarily used for business. That claim, in my opinion, is without merit. The plaintiffs owned two cars and built a two-car garage prior to becoming involved in their Amway business. I am not persuaded that use of the garage could properly be classified as an expense made or incurred for the purpose of gaining or producing income from the business. The type of deductions contemplated under paragraph 18(1 )(a) of the Income Tax Act do not include expenses arising simply by virtue of casual connection to a business activity. Moreover, not only must expenses incurred be for the purpose of gaining or producing income from the business, they must also be reasonable expenses as required by section 67 of the Act. The expense claimed by the plaintiffs with respect to their use of the garage meets neither of these requirements.

Counsel for the defendant referred to Locke v. MNR (1965), 38 Tax A.B.C. 38; 65 D.T.C. 223, where the Tax Appeal Board disallowed a claim by a lawyer that a portion of his household expenses was a business expense arising from his evening and weekend use of a study in his professional activities, in addition to the professional work carried on at his regular office. There the Board stated that those seeking to claim the use of portions of their dwelling as business expenses would be well advised to consider, among factors that could support such a claim: that the portion of the home is separate from the living quarters of the family; that they have foregone personal use of that portion for the sake of the business and it was not used just for personal convenience; that an appreciable amount of business was there transacted; that there was a sign on the dwelling announcing the business to the general public and that a telephone is listed for business purposes. The Graves had no sign and no separate business telephone, but these are only some of the factors to be considered. I am satisfied on the evidence presented that a portion of the plaintiffs’ home was used virtually exclusively for purposes of the business. It was the only space in which a vital part of the business, receiving and distribution of goods, was carried on. In any event, the Minister has accepted as a legitimate business expense, the use of the product room, part of the area claimed by the plaintiffs. I am satisfied on the evidence that it is established that some space additional to that was here used for purposes of the business within paragraph 18(a) of the Act, even though not all of that space was separated by walls from the rest of the house.

My conclusion is that the area claimed as used exclusively for business purposes in 1979 on the basement level of the house, including the product room and the adjoining working area with a desk and the reception area, is appropriately classed as space occupied for purposes of the business. That space seems to me reasonable in the circumstances of a small but developing business as the Graves had established by 1979. I do not include any portion of the additional space claimed, for storage of old files or for use of garage space. In evidence the portion of the basement level claimed was described by Mr. Graves variously as "approximately half” and later in cross-examination as "more than half, nearly two thirds”, still later in re-direct examination as "two thirds". In the sketch of the house tendered in evidence and used as the basis for questions in examination of Mr. Graves about 1979, the basement level dimensions are indicated as 30 feet by 20 feet, that is 600 square feet in area, whereas in cross-examination Mr. Graves described the house as including 690 square feet on the basement and each of the other three levels, 2760 square feet in all, plus 506 square feet for the garage. Counsel for the defendant appeared to accept the dimensions as given in testimony.

In the result, considering some lack of clarity in relation to the area within the basement level, and the portion described as used for business purposes, and the access way through that portion from the abutting garage to other portions of the house, I find that one half of the basement area described in testimony as 690 square feet for the whole basement, that is, 345 square feet, is a reasonable allocation of the portion of the Graves' home used for purposes of the business. That is 10.6 per cent of the total space in the house and garage. In view of the agreement by counsel about household expenses, this would mean that for 1979 $837.18 would be allowed for home office expenses, somewhat more than recognized by the Tax Court; and similar expenses allowable for 1978 would be $209.30.

Vehicle Expense

During the relevant period, the plaintiffs owned two cars, one of which was said to be used primarily for business purposes. The plaintiffs claimed 90 per cent of the expense arising from use of that car. The Minister in reassessing the amount claimed allowed 50 per cent, and the Tax Court of Canada increased this to 75 per cent. The plaintiffs now come to this Court seeking the full amount initially claimed, that is 90 per cent of the expenses agreed between the parties as a total expense of $3,854. arising from use of that car. The Minister does not contest the Tax Court decision and thus at issue is $714, the difference between the total amount initially claimed by the plaintiffs and the amount awarded by the Tax Court of Canada.

During the initial stages of an audit concerning the taxpayers' claim, Revenue Canada requested further documentation from the plaintiffs detailing their expenses. Mr. Graves submitted what he has referred to as a "consolidated" travel log which provided specifics of mileage travelled for business purposes and resultant out of pocket expenses. Revenue Canada decided that the log was not acceptable for it was not a book of original entry and the mileage appeared to be an estimation of distance travelled in multiples of five or ten miles rather than an accurate accounting of actual distance. The Minister refused the expense claimed but allowed 50 per cent of the total vehicle operating costs. That decision, according to testimony at trial, was based in part upon the unacceptable nature of the log submitted and also by taking into consideration that the plaintiffs lived in an area without close access to grocery stores and other amenities and would therefore have to travel some distance by car for personal matters.

On appeal, the plaintiffs submitted what were referred to by Mr. Graves as "other original log books" which included among other notations details of vehicle expenses. According to the testimony of Mr. Graves, it was from these documents that the "consolidated" mileage log was created. He had compiled the figures from the original documents in his “consolidated” log for submission to Revenue Canada because the original documents were too disorganized and difficult to interpret. He admitted that the "consolidated" log was not a book of original entry and that the mileage figures reported both in that document and the original logs were in large part estimates "within a mile or two either way”. He stated that it had been his experience with Revenue Canada that mileage logs did not have to be exact. Aside from the estimations of distance travelled, it appeared from his cross-examination that there were many differences in mileage recorded in the “consolidated” log and the “original” logs. Most of these inconsistencies which were identified showed the mileage figures reported in the "consolidated" log were higher than those recorded in the “original” documents. Mr. Graves stated that where an inconsistency occurred, one of the two entries must therefore be “certainly incorrect". However, he was not clear as to which of the two logs might be the more reliable. He explained that the figures contained within the “original” log were kept on a daily basis or within a day or two of travel, but he further explained that the figures contained within the "consolidated" log, prepared approximately two years after the date of original entry, were probably more reliable as with the passing of time he had become more familiar with distances and that the original mileage estimates were therefore "just a guess". That was at least in part borne out by evidence of Mrs. Graves that, after the trial commenced, she had checked the odometer readings for two of the trips recorded differently in the logs and the higher mileage recorded in the “consolidated” log was accurate.

It is unfortunate that Mr. Graves, a chartered accountant by profession, did not keep a careful record of the mileage travelled for business purposes. None of the mileage logs submitted at trial present an accurate accounting of the distances travelled for business purposes. Both logs were described as "estimates" by Mr. Graves. Mr. Graves was unsure as to which log was more accurate. Indeed, even the figure representing the total mileage travelled for 1979, upon which the plaintiff calculated the percentage of business use, was an estimation.

There may be special circumstances where the exact mileage of certain trips was not recorded or where mileage logs have been lost or destroyed and resort must be to estimates of distance travelled or to other secondary sources to determine distances travelled. However, that is not the case here. In my view, a taxpayer cannot simply estimate distances travelled in the hope that this will suffice as an adequate accounting of mileage actually completed in the course of business for which expenses are claimed as a business expense.

Mr. Graves states that ten per cent of the total mileage of the automobile represented personal use. The Tax Court of Canada found that 75 per cent of the vehicle expenses were incurred for business purposes, the balance being personal use. The evidence as presented at trial through the testimony of the taxpayers was not persuasive that the finding of the Tax Court should be changed. Simply put, the onus on the plaintiffs to prove their claim was not met in relation to vehicle expenses claimed, and the appeal in this respect is not allowed.

Travel Expenses

The parties agreed that the total travel expenses claimed for the 1978 and 1979 taxation years were $132 and $2,732. Portions not allowed by the Minister's reassessment or by the Tax Court, were expenses incurred by the plaintiffs in travel to the United States in each taxation year. The plaintiffs contend that this travel was undertaken for business purposes and should be allowed as a proper business deduction. The defendant in essence argues that the trips were not for business purposes but represented personal or living expenses.

The Minister's reassessments allowed $17.74 for 1978 and $415 for 1979. Upon appeal, the Tax Court of Canada allowed 30 per cent, or $695.10, of the balance of the total amount claimed by the plaintiffs in 1979, "to cover travelling in Canada but not in the United States". The Court concluded that "the travelling expenses incurred in the U.S. were not reasonable and also they were not incurred to earn income. There was no need for the couple to go in the U.S. to learn what could have been learned in Canada”. The outstanding claims in this action were agreed by counsel as $114.26 for 1978 and $1,621.90 for 1979, all for travel to attend meetings in the U.S.

In issue are three or four trips to the U.S. made by the plaintiffs to Maine, North Carolina and Florida in 1979, and one trip to Maine In 1978. The plaintiffs contend that these trips were essential and the expenses were incurred for the purpose of gaining or producing income from their Amway business. A large part of the plaintiffs’ business involved motivating others to join the organization. This required a certain enthusiasm and motivation to engage the interest and secure loyalty of others to join and continue as distributors. By engaging more distributors, the plaintiffs built their line of distributorship and, in essence, strengthened their business, earning an increasing share of their business revenue from commissions or bonuses related to the sales by distributors whom they recruited to the organization.

The plaintiffs operated their own business, buying and selling Amway products on their own account, and sponsoring other distributors whose sales contributed ultimately to their own success. They were part of an Amway network, known as the "Yager" Organization, which had its base in North Carolina, and an ensuing line of distributorship referred to as the “Down East Distributor’s Organization” which had its base in Maine. As I understand the plaintiffs’ testimony, and for the purposes of this case, the "Yager" and "Down East" organizations are essentially one direct line of distributorship. The plaintiffs distinguished their tie to this network from that to Amway Canada, the latter being primarily concerned with the supply and selling of products. They submitted that in essence their involvement with the Amway organization involved two aspects, the selling of Amway products, and the extension, by recruiting other distributors, of the Amway network. The more products sold by them and by distributors they recruited, the higher their profit and the higher their ascent within the organization.

The plaintiffs claim that their trips to the U.S., all to attend events arranged by their line of distributorship, enhanced their ability to "sell" the business to others. It was not unusual for distributors they recruited to attend these functions along with the plaintiffs. They admit that there were various events sponsored in Canada, irregularly by the Down East organization, and by Amway of Canada Ltd. but they state that such events were not generally as helpful to them in their line of distributorship, its particular philosophies, and in developing the network of distributors.

The plaintiffs described in considerable detail what transpired at the U.S. meetings. The trips to the U.S., as claimed by the plaintiffs, were not an example of vacations or holidays masquerading as business meetings. These sessions, held primarily during the weekends, were intensive, with large group meetings, smaller seminars, training sessions and only limited social gatherings. These took up most of the day and, with the exception of breaks for eating, continued with seminars and meetings into the evening and often past midnight. I accept that the plaintiffs may have had a few hours during each day or evening in which to sightsee or otherwise relax, but that would be the norm during any business day whether at home or abroad. In this case, the personal activities of the plaintiffs while away from the meetings were brief and clearly subordinate to the business purposes of the meetings. When the plaintiffs did decide to remain for a few days' vacation after one event, they properly did not claim expenses for these days. The plaintiffs testified that an essential element of these trips was to be able to hear from and speak to other members in the organization who had achieved high rank and financial success through successfully engaging more distributors.

The Graves were less articulate about the actual benefits reaped from attending such events. They spoke abstractly of motivation, enthusiasm and vision; they were not effective in describing the application of these themes to their business except in the most general sense. I accept that the plaintiffs would require motivation and commitment both to convince others to join and to continue in this business, and also to remain so involved personally when, it appears, for the decade from 1978 they experienced consistent financial losses. Motivation in matters of self-employment is always important. While I remain sceptical about specific benefits reaped from attending these U.S. functions, it is not for me to consider whether in a business sense these functions were of use to the plaintiffs.

The emphasis on motivation and leadership at these events was not, in my view, strictly personal to the participants but was related to the development of skills that would ultimately affect growth of the business, which in the long run depends very significantly on the extension of networks of successful distributors. The worth of these skills to the business is not easily measurable and it is not readily apparent how exposure to these sessions specifically benefited the plaintiffs' business. However, I accept that they were seen as important factors in enabling one to successfully advance within the organization, particularly during the years of concern in this appeal when the plaintiffs were relative newcomers to the business and obviously eager to succeed in its development. In my view, in this case, the trips to the U.S. were made in connection with the business.

I believe resolution of the issue presented by the taxpayers' appeal in relation to travelling expenses requires consideration of the application of subsection 20(10) relating to limited convention expenses which may be claimed, as well as the application of paragraph 18(a), the benefit of which the plaintiffs urge and the Minister denies. If either section is applicable, expenses to be allowed must still be reasonable in the circumstances in accord with section 67 of the Act.

The reassessment by the Minister and the decision of the Tax Court make no reference to subsection 20(10). Nor do the pleadings of the plaintiffs or the defendant, which were filed in this matter early in 1984 and were not thereafter amended despite subsequent decisions of the Tax Court which have dealt with the issue as presented in similar cases involving Amway distributors. The possibility of treating expenses for attendance at conferences in the U.S. as convention expenses was, however, dealt with by counsel for the parties in discussing some of those cases, and the authorities submitted by counsel for the plaintiffs for consideration of this Court included a copy of Interpretation Bulletin IT-131R, Feb. 28, 1986, Convention Expenses, published by the Department of National Revenue. In my view, it is essential to consider those cases and whether it is appropriate to apply subsection 20(10), even though this was not directly addressed by the parties. To do otherwise would be to ignore the developing jurisprudence since the decision of the Tax Court in this case in 1983.

It is notable that the plaintiffs emphasized in testimony the aspects of learning about motivation and leadership in achieving success as the valuable element of the conferences attended in the U.S. In terms of education or training the sessions did not involve advance study or testing or formal curricula normally associated with training sessions to maintain or upgrade skills or knowledge in a field in which the plaintiffs already claimed some expertise. If they had attributes of this sort expenses of attendance might have been allowable under paragraph 18(a) as regular training expenses. Nor did the skills and development sought by the plaintiffs have any apparent direct bearing on the business of the plaintiffs, as sessions for product promotion and develop- ment, or sessions involving primarily distributors operating in similar social settings, for example, in the Atlantic provinces, might be considered to do. 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). That section allows deduction from income of a business of expenses incurred for this purpose in “attending, in connection with the business, not more than two conventions held during the year by a business or professional organization at a location that may reasonably be regarded as consistent with the territorial scope of that organization".

The word "convention" is not defined in the Act. Generally, a convention is defined as being an "act of convening”; “formal assembly" (Concise Oxford Dictionary); or as "an assembly or meeting of members or representatives of political, legislative, fraternal, etc. organizations" (Black’s Law Dictionary. 5th Ed. 1979). In this case, the plaintiffs attended meetings arranged by their particular line of distributorship which involved the assembly or convening of members of the distributorship line. They were not loose gatherings of people. They were organized in order to bring together members of the line of distributorship, and other interested persons, for business purposes. In my view these gatherings could be categorized best, under the Income Tax Act, as conventions.

Counsel for the plaintiffs submitted that the meetings in the U.S. should not be classified as conventions for in his view a convention implies a "significant element of socializing”, an element that was very limited at these meetings as described in evidence. That may be a typical element in popular use of the word, but in my view it is not a necessary factor in "convention" as used in subsection 20(10). That subsection was considered by Christie, C.J. T.C.C. in Rovan v. M.N.R., [1986] 2 C.T.C. 2337; 86 D.T.C. 1791, at 2341 (D.T.C. 1794), who said it does not include expenses made for what is a vacation under the guise of attending a convention for business purposes, and that the primary purpose of attendance may depend upon such factors as the nature of the taxpayer's business in relation to the subject matters to be discussed at the convention, the depth of information the taxpayer had regarding the topics to be considered when he decided to attend, the distance travelled, the time spent, the amount of expenses incurred, the nature of the convention site and its climatic attractions. I would add that in a particular case other factors may be relevant in assessing whether purposes in attending a conference bring it within a "convention" under subsection 20(10) and these may include the nature of the conference, its structure and organization, its relationship to the business of the taxpayer and its location within the limits specified for a "convention" under subsection 20(10), its purposes and possibly the frequency of its occurrence.

In Friesen v. M.N.R., [1990] 1 C.T.C. 2002; 89 D.T.C.682 (T.C.C.), Teskey, T.C.J., distinguished between "up-line" meetings which involved Amway sponsors senior to the taxpayer and "down-line" meetings involving people sponsored by the taxpayer. For purposes of that case he classified the "up-line" meetings as conventions within subsection 20(10). The “down-line” meetings in his view fell within the ambit of section 18. That distinction, with respect, would be somewhat arbitrary. It would mean that for one taxpayer of junior position in the organization, as the Graves were in 1978 and 1979, a meeting would be classified as a "convention", whereas for another taxpayer of senior position, it would not be classified as a “convention”. 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.

Earlier reference has been made to cases, dealing with similar claims by Amway dealers for expenses, considered by the Tax Court since 1983. In this case, that Court without argument or reference to subsection 20(10) disallowed the claim that expenses incurred were for the purpose of producing income under paragraph 18(a) (Graves v. M.N.R., [1983] C.T.C. 2594; 83 D.T.C. 548 (T.C.C.)). In another case the taxpayer claimed that expenses for travel to the United States for conferences were convention expenses within subsection 20(10) but the appeal was not allowed in the absence of evidence that the conference had any relevance to the business of the taxpayer. (Howard v. M.N.R., [1985] 2 C.T.C. 2176; 85 D.T.C. 509 (T.C.C.).) On the other hand, expenses for travel to conferences in the United States were allowed by the Tax Court, though the basis for the decision, which is unreported, is unclear (Ross v. M.N.R. (1987), Court File No. 84-2547(IT) (T.C.C.)). Where evidence was presented by a Saskatchewan couple that meetings attended in Canada, whether "up-line" or "down-line", emphasized product distribution and development, customer relations and information directly relevant to their Amway distributorship, expenses of travel were allowed and in addition, in light of the evidence of the taxpayers' interests and connection with their business, expenses for travel to attend conferences outside Canada were allowed as convention expenses within limits set by subsection 20(10) (Michayluk v. M.N.R., [1988] 2 C.T.C. 2236; 88 D.T.C. 1564 (T.C.C.), followed in Roche v. M.N.R., [1989] 1 C.T.C. 2199; 89 D.T.C. 156 (T.C.C.)). Finally, in Friesen, supra, expenses of travel to attend certain conferences were found to be recognizable as convention expenses under subsection 20(10) but in the circumstances of the case were found to be unreasonable and thus were not allowed in light of section 67.

This case, on the evidence presented, is analogous to Michayluk, supra. Expenses for travel and attendance at meetings in Canada have already been allowed as a result of the decisions of the Minister and of the Tax Court and are no longer in issue. The expenses incurred in attendance at meetings in the U.S. were, in my judgment, incurred in connection with the plaintiffs’ business and in a location reasonably consistent with the territorial scope of the sponsoring agency, the Yager and Down East line of Amway distributorships (see Howard, Michayluk, supra). Conventions held by this line of distributorship in Maine, North Carolina and Florida were held by and within the territorial scope of that organization.

In light of subsection 20(10) the expenses incurred in attending two conventions each year may be deducted from income of the business unless, in accord with section 67, the expenses incurred are considered, as they were by the Tax Court here, not to be reasonable in the circumstances. In coming to its conclusion in this case the Tax Court said the expenses "were not incurred to earn income" and "There was no need for the couple to go in the U.S. to learn what could have been learned in Canada". The first of these references is not relevant, in my opinion, to the question of whether expenses are reasonable, particularly whether convention expenses under subsection 20(10) are reasonable. The second reference to learning in Canada may have been supported by evidence at the Tax Court hearing but though urged by counsel for the defendant in this Court, that conclusion was contrary to the evidence of the taxpayers. Questions in cross-examination of Mr. Graves implied that whatever the benefits of attendance at the U.S. meetings were they could have been obtained by acquiring audio tapes produced at those meetings or from local events organized by Amway of Canada Ltd. or by other Amway dealers or perhaps by others within Halifax, but this suggestion was disputed with reasons by the taxpayer. No other evidence was before me and I was not invited to take judicial notice of or otherwise referred to any particular program, event, conference or training available in Canada that would have provided what the taxpayers believed they obtained in connection with their business in attending the U.S. meetings organized by their line of distributorships.

A second ground upon which counsel here suggested these expenses were unreasonable in the circumstances was that for the years in question, and indeed for the whole decade following establishment of the business in 1978, the plaintiffs suffered annual losses. At the time of trial, nearing the end of their eleventh year in business, Mr. Graves said he believed that at year end the business would show a profit but he had not at that stage attempted to forecast with precision the year's results. The suggestion of counsel reflects the view of Teskey, T.C.J. in Friesen, supra, that convention expenses are unreasonable when a business continues to operate at a loss. That may be the appropriate result where there is a history of losses to note. In Friesen, the taxpayer had been an Amway distributor since 1979 and six or more years later, for 1985 and 1986, his claims for travel to U.S. conferences were disallowed by the Court as unreasonable in circumstances where the taxpayer paid $6,000 to his wife as wages, and losses were experienced in the business not only in the years in question but in the years previous and the two years subsequent, that is, for a decade before the matter reached the Tax Court.

In my view the circumstances here are different from those in Friesen. Here the years in question were the first two years of the business. While it is true that now for a decade the Graves have apparently experienced losses, most of that period, since 1983, is subsequent to the decision of the Tax Court from which appeal is taken. In my view it would be inappropriate to view their profit and loss experience with the hindsight of ten years, a longer time span than available to the Minister or the Tax Court whose decisions are here in issue. Moreover, unlike Friesen neither taxpayer here drew wages from the business in the years in question.

After considering the evidence presented and the argument of counsel I conclude on this matter that expenses claimed by the plaintiffs for travel to conferences in the U.S. in 1978 and 1979, were convention expenses, incurred in connection with the business and, otherwise within subsection 20(10), are allowable deductions from income of the business up to two trips per year. Further, I conclude that in the circumstances the expenses here claimed were not unreasonable. Thus, expenses of attendance at the convention in Maine in 1978 is an allowable deduction, as are the expenses of attendance at the first two of the conventions in the U.S. attended in 1979.

Partnership

The final issue in this appeal relates to the legal relationship between Mr. and Mrs. Graves in the operation of the business in 1979, and the consequent apportionment of the business loss between them in that year. When the plaintiffs became involved in the Amway business in October 1978 they both signed a document entitled “Application for Amway Distributor Authorization”. Their signatures appear on that application, Mr. Graves’ above a notation "APPLICANT SIGN HERE" and Mrs. Graves above a notation “IF HUSBAND AND WIFE PARTNERSHIP BOTH MUST SIGN”. Beneath the space for signatures is a note in somewhat larger letters "NOTE: AMWAY DOES NOT ENCOURAGE THE FORMATION OF PARTNERSHIPS (OTHER THAN HUSBAND AND WIFE) BECAUSE OF THE LEGAL COMPLICATIONS TO EACH MEMBER OF THE PARTNERSHIP”.

On February 26, 1979 Mr. Graves filed his income tax return for the 1978 taxation year and in that return he clearly indicated that his wife was his partner and that the losses incurred from the Amway business were to be distributed between his wife and himself on a 75/25 per cent basis respectively. Some three months later, on May 14, 1979, (after eight months in the business), Mr. Graves wrote to Revenue Canada requesting that the losses reported on his income tax return for 1978 be considered on a 50/50 basis rather than as originally indicated on the return filed in February.

On March 14, 1980 Mr. Graves filed his 1979 income tax return claiming 100 per cent of the losses incurred from the Amway business for that taxation year. By letter addressed to Revenue Canada and also dated March 14, 1980, Mr. Graves advised as follows:

Last year for the 1978 taxation year, I filed my self-employed income as a partnership with my wife. However my wife and I have never legally established a partnership and do not intend to. Therefore this year (1979) I am filing more correctly my self employed income as my own income and will continue to do so in the future. However, my 1978 return remains to be corrected on the same basis. Please make the necessary corrections on both my wife’s and my return for 1978.

The Department then inquired of Amway of Canada Ltd. and was advised by letter that the distributorship was registered in both of the plaintiffs’ names.

The Minister’s assumptions of fact underlying the reassessments which the plaintiffs appealed included the assumption that the plaintiffs carried on the business as equal partners in both years. That assumption and the resulting distribution of losses on an equal basis was upheld by the Tax Court. In the statement of claim initiating this appeal from that decision it is stated:

9. The fact the Plaintiffs anticipated forming a partnership towards the end of 1978, which was the formative year for the distributorship, should not in any way prejudice the Plaintiffs from deciding not to do so and to leave the distributorship business the sole property of Mr. Graves for the year 1979 and subsequently.

[Emphasis added.]

Thus, in this appeal the partnership question arises only in relation to 1979. While counsel at trial discussed the issue of partnership in relation to both of the years, the pleadings in this matter clearly indicate that issue was settled for 1978 and that resolution was not appealed.

The Income Tax Act, although dealing with matters arising from partnership arrangements, does not provide a definition of the term "partnership". The relationship depends upon provincial law, in this case the Partnership Act of Nova Scotia. Section 3 of that Act defines "partnership" as "the relationship which subsists between persons carrying on a business in common, with view of profit . . .” (excluding corporate arrangements). Paragraph 26(a) of the Act, as noted earlier, provides that, subject to any agreement, express or implied between the partners, they are entitled to "share equally” in the capital, profits and losses of the business.

Here there was no written agreement and evidence of any express agreement at all was scanty. Indeed after a decade the parties recalled only that they had initially planned a partnership though they could not recall any specific discussions about terms. Later, as the business developed, changing the arrangement seemed to better reflect their participation in it. Mrs. Graves could only recall brief discussion of a partnership, at least in the years in question, at the time her husband was dealing with his income tax returns, but she did endorse the changes in arrangements that her husband's correspondence with the Department in 1979 and 1980 indicated.

Counsel for the plaintiffs urged that one should not readily imply a partnership agreement between husband and wife where the arrangements were at least as consistent with co-operative efforts from community of interest arising from the marriage relationship (see: Comforth v. The Queen, [1982] C.T.C. 45; 82 D.T.C. 6058 (F.C.T.D.); Travica v. M.N.R., [1988] 1 C.T.C. 2359; 88 D.T.C. 1260 (T.C.C.) and cases cited therein; Flicke v. M.N.R., [1980] C.T.C. 2538; 80 D.T.C. 1473 (T.R.B.)). Yet that principle, it seems to me, does not preclude consideration of conduct from which, in an appropriate case, an agreement may be implied.

What does the evidence here reveal about the conduct of the parties from which might be implied a legal relationship in the business, a partnership, going beyond mere community of interest arising from the marriage relationship. In contrast to the letter of May 1980 from Mr. Graves asking that the business be treated as a sole proprietorship in his name there was evidence of the following, largely from testimony of Mr. and Mrs. Graves:

(1) When first introduced to the idea of an Amway distributorship Mrs. Graves had been most enthusiastic, and only after involvement for a few months did Mr. Graves actively participate in the business.

(2) As the original application of a distributorship indicated, they had signed the form as partners and originally had intended the business would operate as a partnership. This was consistent with the philosophy of their Amway distributorship line which emphasized full involvement of spouses and their full participation together in a distributorship and in Amway related activities.

(3) The information to the Department of National Revenue from Mr. Graves in February 1979 with submission of his tax return for 1978 and later in May of 1979, both done within the year here in question, affirmed the existence of a partnership between the plaintiffs. Only later, in 1980, when completing tax returns for 1979, did Mr. Graves advise that the arrangements previously described by him were changed, retroactively.

(4) In relation to the business Mr. and Mrs. Graves shared responsibilities, each concentrating mainly on different aspects. Mrs. Graves looked after any retail sales to customers, initially a major part of the business when first organized but later a minor part in terms both of generating income and time committed. She also looked after the paper work, ordering, supplying and ensuring distribution of products to their distributors. She accompanied her husband to meetings, at least from time to time, and she assisted with social aspects of sessions organized to introduce and recruit others to the Amway network. She worked with the wives of distributors whom they sponsored, introducing them to the role of supporting their spouses and to handling the records of a distributorship. Mrs. Graves also attended with her husband the conferences or conventions organized by the Yager and Down East Distributors line of dealers, and her expenses in doing so were a part of the deductions from business income claimed by the plaintiffs even as late as this appeal. Those expenses could only be deductible if she were a partner in or an employee of the business.

(5) Mr. Graves’ involvement in the business was largely concentrated on the extension and consolidation of the Amway network through his own downline of distributors. He recruited distributors, sponsoring them and seeking to motivate and support their continuing active involvement. Over time this became the major source of revenue in the business, from earnings as bonuses or commissions related to the sales of others whom they had sponsored as distributors.

On the evidence presented at trial I find that the conduct of the parties here supports an implied agreement that the business operated as a partnership within the year here in question. While their activities in relation to the distributorship might be consistent with their cooperation arising from the marriage relationship and their community of interest, the advice to the Department, twice in 1979, reflecting their admitted original intent and their signatures on the application for a distributorship, was given during the year in question. Whatever effect may be given to the later advice of May 1980, in my view it is not persuasive that the business operated in 1978 and 1979 as a sole proprietorship. I imply from the conduct of the parties that in those years there was an implied partnership agreement between the plaintiffs and that a partnership, as defined by section 3 of the Partnership Act of Nova Scotia, existed in operating the Graves’ distributorship.

From the implied partnership agreement for 1979 what terms, if any, can be implied for proportionate shares of the partners? Counsel for the defendant urged that equal shares was the only appropriate conclusion, as assumed by the Minister on the basis of advice from Mr. Graves at the time and supported by paragraph 26(a) of the Nova Scotia Partnership Act. I note that the statutory provision is subject to any implied agreement between the parties. Counsel for the defendant also submitted that evidence of share participation did not clearly support any other distribution of shares between Mr. and Mrs. Graves and that in the circumstances of this case subsection 103(1) of the Income Tax Act supported the position of the Minister and the Tax Court. In my view, that section of the Act is not directly applicable to this case. The evidence, from testimony of the plaintiffs, in addition to describing their respective activities in the business, included estimates by Mr. Graves, with which his wife generally agreed

(1) that his efforts in the business produced 90 to 95 per cent of its revenues, through extending and consolidating the line of distributors and the resulting bonuses from their efforts, and

(2) that his time commitment to the business ranged from 15 to 20 hours per week and his wife's time ranged from 5 to 10 hours per week.

While it was not entirely clear that these estimates related specifically to 1979 rather than to later years as the business developed, there can be no doubt that even in its first few months the results within the business indicated that changing patterns of time commitment and effort yielded changing returns. Thus, in the first few months when Mrs. Graves was actively engaged in developing a retail sales line of customers most of the limited earnings of the business came from this source. In later years this was a minor source of revenue for the business. Mr. Graves' somewhat later involvement and his emphasis on extending the line of distributors had already had an impact by May of 1979 when, in light of the volume of monthly sales by them and their line of-distributors, the Graves became direct distributors and from then on received most of the products for themselves and their distributors by direct shipment and delivery to them weekly from Amway of Canada Ltd.

It is my assessment from the evidence that Mrs. Graves’ involvement in the business in 1979 was a more significant factor in its development at that stage than the letter in May 1980 from Mr. Graves to the Department implicitly acknowledged. I believe it was also more significant than the plaintiffs, looking back a decade at the time of trial, were prepared or able to acknowledge. As the Tax Review Board did in Flicke v. M.N.R., supra, in implying a partnership agreement and its terms, I am persuaded on the basis of the evidence here that the agreement implied from conduct and testimony of the plaintiffs supports the conclusion that the terms of that agreement include distribution of shares in the partnership business on the basis of 70 per cent for Mr. Graves and 30 per cent for Mrs. Graves in the year 1979.

Conclusion

For the above reasons, the plaintiffs’ appeal from the decision of the Tax Court of Canada is allowed in part and the matter is referred to the Minister of National Revenue for reassessment on the basis of the judgment herein which includes the following findings.

Expenses

(a) Home office expenses—10.6 per cent of the total area of the dwelling and garage was used virtually exclusively for business purposes. Accordingly, $837.18 is allowed as an expense made or incurred for the purpose of gaining or producing income from the business for the 1979 taxation year. In accord with the written agreement of the parties, the amount claimed by the plaintiffs for these expenses for the year 1978 will be adjusted to $209.30, that is A of the amount determined for 1979.

(b) Vehicle expenses—the appeal by the plaintiffs is dismissed.

(c) Travel expenses—the appeal is allowed to permit a deduction from the business income within the limits of subsection 20(10) of the Act, as convention expenses. Thus, the plaintiffs’ claim of $114.26 as expenses for travel to the U.S. in the 1978 taxation year is allowed. The claim regarding travel expenses to attend the first two conventions attended in the U.S. in 1979 is allowed.

Partnership

The business was operated on a partnership basis. In 1978 as accepted by the Minister and not contested herein by the plaintiffs the latter were equal partners. The division altered in 1979 by agreement implied from the conduct of the plaintiffs to provide for a 70 per cent/30 per cent arrangement as between Mr. Graves and Mrs. Graves respectively. The loss from the business for 1979 is distributed for purposes of income tax on the basis of their respective shares in the business, in accord with paragraph 96(1)(g) of the Act.

Costs

As the success of this appeal was mixed, costs are not awarded to either side.

A separate judgment will go accordingly.

Appeals allowed in part.