Maurice Moloney, Raymond L. Young, Gary A. Russell and Steven S. Fullard v. The Queen, [1989] 1 CTC 213, 89 DTC 5099

Joyal, J.: —The individual plaintiffs appeal against their tax assessment disallowing certain business expenses claimed by them in their returns for the 1983 taxation year. The plaintiffs all reside in the Greater Vancouver area.

The expenses claimed all have the same source. They relate to licences for the sale of copyright material in a designated territory. This material consists of a self-teaching course in speed-reading developed by one H.N. Thill of Richmond, B.C. This course, called Advanced Reading Course, consists of a vinyl and plastic package, in a large book-size format, containing an instruction pamphlet of some 60 pages, a selection of four general interest books and a set of four cassettes containing a series of six lessons.

The course had been marketed by Mr. Thill for a dozen years as an instruction course and Mr. Thill himself had conducted these courses in various areas of British Columbia. He later developed a self-teaching course roughly in the format I have described. In 1979-80, a program was conceived of having this new self-teaching course sold and distributed by selling exclusive copyright licences in a defined geographic area. The program contained some interesting features. It called on a licensee to pay a licence fee of $100 and to prepay royalties to the copyright owner in the amount of $20,000. The licensee would concurrently appoint a marketing company to do the selling for him in his defined territory. This marketing company, in turn, would provide the licensee with a cash bond of $17,500 as a form of performance guarantee that it would duly and properly carry out its marketing operations.

This method of promoting the sale of the Advanced Reading Course offered a licensee an immediate deduction of $20,000 from his income otherwise earned. If the licensee’s earned income was already high, he might benefit from a tax reduction of some $10,000 for each licence purchased.

The territories chosen were originally in the Greater Vancouver area and the evidence discloses that some licences as well as a certain quantity of the product were sold over the next couple of years in that area.

In 1983, a more ambitious program and one more directly related to the issues before me was put in place. As the evidence will later disclose, Mr. H.N. Thill assigned his copyright in the Advanced Reading Course to a Grand Cayman Island company called Applied Research Limited. This assignment of copyright excluded the territory of Canada. Applied Research was to become the licensor of the product and it being an off-shore company, it would appoint Mr. Thill its general attorney to act on its behalf.

Concurrently, a marketing group would be incorporated under the name of Omni Educational Marketing Corp. (Omni). As each licensed territory was purchased, Omni would undertake, on behalf of the licensee, to market the product in his designated United States area.

The other undertaking by Omni would be to put up a cash performance bond of $17,500 with respect to each licence purchased by the licensee. The funds for this purpose would have to come from some source. That source would be a new lending company, Cawin Financial Corporation, which was incorporated at about the same time. Cawin would agree to a debenture issue on behalf of Omni in the sum of $25 million.

In order to get the whole program operational, a suitable management group would have to take charge. For this purpose, another company, H.N. Thill & Associates Inc., was incorporated. On behalf of Applied Research, H.N. Thill & Associates would undertake to sell licensed territories in the United States. It would look after all the elements of the campaign including a categorization of these territories under zip codes and comprised in the areas of California, Florida, Ohio, Massachusetts and elsewhere. Its other role would be to finance the $100 licence fee and remaining $2,500 in advance royalties on behalf of each licensee. This would be in the form of a promissory note for $2,600 payable on a due date but only callable upon the licensee receiving his tax refund from Revenue Canada. The licensee's right, title and interest in his licensed territory would be pledged to H.N. Thill & Associates Inc. as security for the note.

With all the players in place, the program to sell these licensed territories on a $20,000 advance royalty basis got under way. The program was a great success. During the next several months, some 2,000 subscribers applied for and received from Applied Research the exclusive licence to market the Advanced Reading Course in some defined zip code area of the United States. For each licence, advance royalties of $20,000 were expended against which the licensee received a cash bond of $17,500 from Omni and in all but a few cases, financed the balance through a promissory note to H.N. Thill & Associates. Each licensee claimed $20,000 as a business expense in his tax return for that year. In his mind, that $20,000 was an expense "properly deductible for the purpose of gaining and producing income from the business or property".

The evidence does not disclose whether Revenue Canada was on the lookout for this. I have every reason to think it was because of the prior history of the marketing scheme when it only affected a few licences in the Greater Vancouver area. In any event, as soon as the 1983 tax returns were filed by licensees, Revenue Canada disallowed the expenses. Notices of objections were filed but the assessments were confirmed on the following grounds:

Expenditures . . . claimed as deductions from income in respect of advance royalty payments have not been shown to have been outlays or expenses incurred by you for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act; that the said amounts were not reasonable in the circumstances within the meaning of section 67 of the Act and would unduly or artificially reduce your income within the meaning of subsection 245(1) of the Act.

Dozens of other licensees whose expense claims were disallowed on the same grounds, filed their statements of claim in this Court. As each case moved up the procedural stream, some nine of them became ready for trial. Four of them, comprising the individual plaintiffs before me, were selected by counsel for the parties to be tried together on common evidence.

It is admitted by counsel for the parties that these four cases are fairly representative of the hundreds of cases where Revenue Canada disallowed identical expenses. It is acknowledged that the determination of the issues at this trial, if not conclusive with respect to each individual case, should nevertheless be of assistance, one way or the other, to all of them.

1. The Evidence

As can be expected, considerable oral and documentary evidence was adduced in the course of the trial. Perhaps we should deal first with the oral evidence.

(1) Oral Evidence

The plaintiff Gary Russell, an airline captain enjoying considerable income, was informed of the scheme by a Thill & Associates representative. He applied for a licence and was granted three of them. He paid $60,000, but not in cash. He received three payments of $17,500 from Omni which he endorsed over to Applied Research and paid the balance by way of three promissory notes to Thill in the amount of $2,600 each. He expected an income of some $55 per Advanced Reading Course sold in his territories during the life of each licence. When presented with the proposal by the Thill people, he did not seek outside advice. He knew nothing of Omni and even less of Applied Research. He did not know the names, the officers, the programs or the capital structures or operations of these companies. He did receive subsequently some flyers from Omni and a smaller one from Woodward's department store, but that was about all.

Mr. Russell had been given territories described as CA 235, Anaheim, Santa Anna, Garden Grove, zip codes 92709, 92633, population 41,479; Territory CA 234, same general area, zip codes 92635, 92645, 90742, population 41,361; and territory CA 236, same general area, zip codes 92670, 92710, population 41,164. He was told there were colleges and schools in those areas, which was a feature he liked if the product was a speed-reading course, but that’s all he knew about them.

He further admitted that without the cash performance bond of $17,500 from Omni for each of the licensed territories, he would not have participated in the deal. He readily acknowledged the tax advantage he could gain. As a matter of fact, he had obtained a $25,864.06 tax refund for 1983 reducing his taxes for that year to zero. This had enabled him to pay off the $7,800 in notes to Thill. If everything else went bust, he said, his only downside exposure was that $7,800 against which of course he had realized a $25,864 tax-saving. With that kind of deduction, he concluded, he was not very much worried about the success of his licensing scheme.

The next plaintiff, Raymond L. Young, formerly a bank vice-president and now involved in development work, described how the scheme was explained to him in the fall of 1983 by a friend who knew about it. Having earned considerable income together with a fairly large taxable capital gain that year, Mr. Young applied for and obtained four licences, one identified by zip codes in Houston, Texas, and the other three by zip codes in Chicago,

III. He went through the same routine, received the same cash guarantee of $70,000 and executed promissory notes to Thill for a total amount of $10,400. He was somewhat aware of the nature of the product and felt the program had merit. He knew of the tax advantage, discussed it with his accountant but relied on the Thill people to a total degree. He claimed $70,000 as expenses in his 1983 tax return and when this was disallowed, he was informed by H.N. Thill that he need not worry about his promissory notes. His licences would be sufficient security and there would be no recourse against him nor would he find himself facing a holder in due course.

Mr. Young admitted in cross-examination that the tax savings were the key motive in subscribing for the licences. He confirmed that there was no financial risk involved. His exposure consisted of a $1 fee paid when he applied for a licence.

The next plaintiff to testify, Mr. Maurice (Moss) Moloney, is a real estate salesman and at a relatively young age, a very successful one. In the year 1983, he was enjoying a high level of commission income. On November 4th of that year, he subscribed to licences for four territories, received from Omni the cash bond of $17,500 for each licence and signed promissory notes to Thill in the total amount of $10,400.

Like the others, Mr. Moloney knew nothing about Omni, about Applied Research or about Cawin. He was happy with the tax deduction the licences were providing him. He did charge off part of his royalty expenses in his 1983 tax return and paid off $5,200 of his notes with Thill. The balance of the notes has remained outstanding. He professed ignorance of tax laws and he was satisfied that if, as he had been told, he could claim these advance royalties as a business expense, the actual marketing of his licensed territories was of minimal concern.

Mr. Steven Fullard was the last plaintiff to testify. He also enjoyed a high income. He bought two licences in 1983. He had no intention of marketing the course himself. This, he said, he would be leaving to Omni. He, like the others, did not make enquiries as to Applied Research, or as to Omni. The cash bond, he said, was good enough for him. He confirmed the understanding with the Thill group that the promissory notes of $5,200 would only be payable out of any tax refund he might receive. These notes are still outstanding.

Mr. Patrick Higginbotham also testified on behalf of the plaintiffs. Mr. Higginbotham had enjoyed many years of business experience, especially in the field of advertising and marketing. In the course of his activities, he had dealt with Mr. H.N. Thill and had become acquainted with the Advanced Reading Course. He had recognized the marketing possibility of this product. In 1979, he became associated with Canam Business Systems, which also involved Mr. Thill and the Advanced Reading Course and which promoted the earlier program for the sale of franchised areas.

Mr. Higginbotham left Canam in 1981. In 1983, he was approached by Mr. Thill to renew his involvement in the marketing of Mr. Thill’s product. Omni Educational Marketing was incorporated. Mr. Higginbotham did not have any capital to put into the venture and if the new company were to post a cash performance bond with licensees, that cash had to come from somewhere. Money would also have to come from somewhere to pay development and marketing costs as well as operation expenses.

Mr. Thill told him not to worry. A company called Cawin Financial Corp, would provide the necessary capital. As a matter of fact, shortly after Omni had been incorporated, it secured from Cawin a debenture loan in the amount of $25 million.

Concurrently, according to Mr. Higginbotham, steps were taken to improve the product and make it more attractive. The benevolent assistance of a direct mail specialist had been secured to help with the marketing plans. A bank account was opened for the company and an application for a Provincial Sales Tax exemption was filed. The company also retained the services of P.S. Promotional Services Inc., which in turn had a group called Marktrend prepare and submit a report on “Results of a Survey on Speed Reading Courses”, dated July 19, 1984. The survey was encouraging and in the designated geographical area where it had been conducted, namely Greater Vancouver, it indicated an encouraging demand for the product.

From March 1983, when Omni was incorporated and in subsequent years, Mr. Higginbotham ran the show. He acknowledged that he knew little of the activities of either Applied Research or of Cawin and was not involved in their operation. He did not know the background of these companies. Apart from one Keith Wilson, he did not know who their principal players were. Neither for that matter did he know how Cawin was to deliver on its $25 million line of credit.

Mr. Higginbotham identified the financial statements for Omni at December 31, 1983 which indicated a loss of $31,000. The major expense had been a $25,000 fee payable to Cawin for arranging its $25 million debenture. Shareholders' equity was nil and the company had virtually no assets.

In the financial records of Omni as of December 31, 1984, Mr. Higginbotham stated that of some $148,000 in product sales during that year, all were sales in Canada and none were sales in the United States.

The witness also acknowledged that for the year ending December 31, 1985, the financial statement of the company showed no product inventory and a shareholder's equity of — $20,186. The witness estimated that at that time, the company had contracted to do the marketing for some 2,000 licensed territories in the United States.

An expert witness, Mr. R.G. Elton, a chartered accountant, also testified on behalf of the plaintiffs. Mr. Elton, in his report dated October 17, 1988 with reference to the operation of Omni in 1983, had been asked whether or not there was a business conducted by Omni in that year and whether or not the business had a reasonable expectation of profit. Mr. Elton's answer to both questions was yes. He described Omni as an "active" business, i.e. it earned income, it had engaged in activities and the human resources behind it, headed by Mr. Higginbotham, had the necessary skills. He had examined various Omni documents, an Advanced Reading Course pam- phlet, the marketing survey, invoices relating to Omni expenses from September 1983 through April 1987, and price quotations for the production of the product. He had also reviewed a research study prepared by P.S. Promotional Services in 1986 covering an advertising program for the states of Massachusetts and Ohio, and had also looked at the debenture agreements between Cawin Financial Corp, and Omni, one for $25 million dated October 11, 1983 and one for another $25 million dated May 31, 1984.

Mr. Elton also submitted some profit and loss projections covering a 15- year period 1984-1998. He took as example the states of Ohio and Massachusetts and assumed that all zip code territories in these two areas were licensed. He admitted that his observations and conclusions were based on the premise that some 5,000 active licences would be sold with each licence providing $20,000 in advance royalties to get the program going in a mass scale.

In respect of the documentary material which Mr. Elton had inspected and to which he referred in his expert report, he admitted that he did not know about Cawin Financial Corp. and had not examined the bank records and statements pertaining to either Cawin and Applied Research. He also admitted that the gross sales of Omni in 1984 of some $148 000 were sales in Canada only and there was no evidence of sales made in the licensed territories in the United States. He further admitted that for Omni's programmed approach to mass marketing of the product to achieve realization, there would have been required a proportionally massive infusion of capital into Omni's coffers, yet there was no evidence of this having taken place.

The next witness, Mr. H.N. Thill, was called by the Crown. Mr. Thill explained that he had incorporated H.N. Thill & Associates on August 9,1983 and became its chief executive officer. A few days earlier, on August 4, 1983, he had been given a power of attorney by Applied Research to which company Mr. Thill had assigned the United States copyright to his Advanced Reading Course. On August 15, 1983, Thill and Associates had entered into an agreement with Applied Research whereby in return for services to be rendered, Applied Research would pay to the Thill company a monthly fee of $100,000.

On October 6, 1983, Mr. Thill had also incorporated Cawin Financial Corp. This was the company whose sole shareholder was to be Applied Research and the purchase of shares would provide Cawin with the necessary backing to enter into a debenture loan with Omni in the amount of $25 million. This loan would enable Omni to put up its $17,500 cash performance bond as each licensee subscribed for a territory.

In retracing the history of the promotion and sale of licences, Mr. Thill testified that in 1983, some 1,000 licences were sold. Of these, some ten per cent consisted of two or more licences issued to the same subscriber. Some subscribers had actually paid their $20,000 advance royalty payments and had received in return a $17,500 cash bond. Most subscribers availed themselves of the $2,600 loan from Thill & Associates. Some 120 of them had put up the necessary cash in that amount.

Mr. Keith Edward Wilson was the last witness to testify. Mr. Wilson, whose background was in financial administration had become in 1983 a director of both H.N. Thill & Associates and Cawin Financial Corp. Both Cawin and the Thill group shared the same office at 1818 Cornwall Avenue in Vancouver. As licences were issued, so the witness testified, Applied Research would buy shares in Cawin Financial Corp. The proceeds of these share issues would then be used by Cawin to make good on its loan advances to Omni. The proceeds of the loan advances would then be used by Omni to pay its cash bond to each subscriber.

(2) Documentary Evidence

With the co-operation and consent of counsel, and for which the Court is most appreciative, the parties tendered a whole mass of documents and papers in suitably bound books. These books, marked Exhibits 9 to 13 inclusively pertained specifically to the plaintiffs themselves, namely Messrs. Russell, Moloney, Young and Fullard. Three volumes of documents, marked Exhibits 7 to 9 inclusively and tabbed 1 to 46, consisted mostly of corporate documents and banking records pertaining to Applied Research, Cawin, Omni and H.N. Thill & Associates Inc.

The consideration which a court must give to these documents must necessarily be in the context of the basic dispute between the parties, namely that on the one hand, the plaintiffs were entitled to deduct their advance royalty payment of $20,000 for each licensed territory and on the other, that the Crown has decided that they were not.

(a) Documents relating to the plaintiffs

The volume marked Exhibit 10 contains documents relating to the plaintiff Gary E. Russell. It discloses at Tab 9 a typewritten form prepared by H.N. Thill & Associates and completed by the plaintiff on September 27, 1983. It is entitled "Client Application”. The document states that H.N. Thill & Associates Inc. is sole authorized agent for Applied Research and states that it may recommend that qualified applicants be granted a licence to distribute the Advanced Reading Course. H.N. Thill & Associates also declares that it is prepared to make available partial funding for the new licence. The plaintiff, in return, agrees to have his 1983 tax return prepared by the company for a fee of $50.

The plaintiff goes on to disclose in Tab 9 his address, occupation, marital status, name of employer and level of salary or other income. He also discloses his taxable income for 1982 and the amount of tax deducted at source.

Tab 3 contains the three licence agreements with Applied Research covering three designated territories in California described in zip codes. The agreements are all dated September 27, 1983 and call for the payment of advance royalties in the amount of $20,000 each.

Tab 5 also discloses a promissory note dated September 27, 1983. It is in the amount of $7,800 and is payable in full on August 1, 1984. The payee is H.N. Thill & Associates Inc. As collateral for the note, the maker, Mr. Russell, pledges all his right, title or ownership interests in the Advanced Reading Course acquired in part with the proceeds of the note.

Tab 5 discloses three cheques dated October 11, 1983 from Omni in the amount of $17,500 each, payable to Gary E. Russell and Applied Research. Each cheque shows the endorsement of Mr. Russell on the back thereof.

Tab 6 contains the Standard Operation Agreement between Omni and the plaintiff for each licensed territory. It is dated September 27, 1983. As contractor, Omni undertakes to market the course in the territory concerned and to pay the appellant a royalty fee of $20 plus the sum of $35 for each course sold. The contract has a term of 15 years.

Tab 7 contains the Performance Bond Conditions attaching to each territory. This is where Omni puts up $17,500 as a cash bond to be held by the plaintiff and to be released to Omni in sequential assessments of $7,500 and $10,000 upon the sale of the first 750 courses and of a further 750 courses respectively. The document also provides that any balance of bond funds remaining unreleased at the expiration of the agreement shall be forfeited as damages.

Tab 14 contains a computer print-out on Estimates of Population and Households for Orange County in the state of California and for various areas in the state of Florida. The document has purportedly been prepared by a United States firm, National Planning Data Corporation. There are indicated some 70 zip code areas in California and an equal number of areas in Florida.

Tab 8 is Mr. Russell’s tax return for 1983 indicating an earned income of some $89,000, a business expense of $60,000, a tax payable of $2,400 and a claim for refund of tax of $25,800.

Tab 10 is a lengthy report under the letterhead of H.N. Thill & Associates dated February 12, 1985. It is addressed to “Dear Client". The report follows up on Revenue Canada's challenge not only to the plaintiff's business expense for the year 1983 but to Revenue Canada's position respecting all the other taxpayers who had subscribed to or paid for the licences and had claimed similar expense deductions. The circular letter proposes that H.N. Thill & Associates undertake to handle the client's appeal through all the necessary steps and that a fee of $140 be charged for this purpose to each taxpayer wishing to appeal his individual assessment.

Tab 13 contains two further and undated information circulars sent by the Thill group to its clients advising of the developments respecting their tax appeals.

Exhibit No. 11, relating to the plaintiff Maurice Moloney, Exhibit No. 12, relating to the plaintiff Raymond L. Young and Exhibit No. 13 relating to the plaintiff Steven S. Fullard, contain all the relevant documents found in Exhibit No. 10, the contents of which I have just described. At the minimum, they all indicate identical transactions into which they all entered prior to claiming their business expenses. There might be certain particularities in each of them, but for purposes of the case, they do not affect the basic issue touching all of them.

(b) Corporate documents

The next set of documents pertains to the operating history, financial statements and bank records of the various corporations, namely Applied Research, H.N. Thill & Associates Inc., Cawin Financial Corp, and Omni Educational Marketing Ltd. These documents are found in Volumes I, Il and Il] and contain some 46 documents or series of documents.

(i) Applied Research Ltd.

With respect first of all to Applied Research Ltd., the following documents are found in Volume I. According to Tab 1, Applied Research appears to have been incorporated in Grand Cayman on or about December 12, 1981. The three original share subscribers, all for one share each at $1 per share, are Grand Cayman nominees. Between April 4, 1984 and May 23,1986 some 1,825 additional shares at $1 per share were purchased by several people residing mostly in the Greater Vancouver area. Among these shareholders may be found the names of H.N. Thill and other people associated with H.N. Thill & Associates Inc., namely Keith Wilson, Edouard Cop and William Sinclair.

Tab 14 is a document dated March 15, 1983 attesting to the assignment by H.N. Thill to Applied Research of his copyright in the work entitled Advanced Reading Course to all countries except Canada.

Tab 15 is a form of power of attorney dated August 4, 1983 whereby Applied Research appoints H.N. Thill its sole attorney in Canada.

Tab 16 is an agreement dated August 15, 1983 whereby Applied Research appoints H.N. Thill & Associates Inc. to provide promotional and management services with respect to the granting of licences to market the Advanced Reading Course in the United States. The fees payable to H.N. Thill & Associates Inc. for these services are fixed at $100,000 per month.

Tab 24 in Volume II contains the monthly bank statements of Applied Research for the period of September 30, 1983 to December 31, 1987.

Applied Research's previous balance in the bank was nil. On September 1983, the account is credited with $13,000. On September 29, 1983, the account is simultaneously credited with $87,500 and debited with $100,000 leaving a credit balance of $500.

In the course of October, 1983, 13 credit items totalling $2,677,500 are disclosed, as against 11 debit items totalling $2,694,504.

The large credits and debits in the following months appear to follow the same pattern. They may be put in summary or table form as follows.

Exhibit 21, which was filed at trial, is a collection of bank statements and cancelled cheques relating to Applied Research. These documents disclose that in 1983, over $8 million were deposited to the account. In the same period of time, over $6 million were paid out to Cawin and some $960,000 to H.N. Thill & Associates Inc.

In 1984, Applied Research was credited with some $22 million of which substantially the same amount was paid to Cawin and $68,000 to the Thill group.

In 1985, over $7 million was received against which cheques were issued to Cawin and the Thill group in the amount of $4.6 million and $460,000 respectively.

For the whole of the year 1987, funds deposited to the account of Applied Research were in excess of $11 million. Debit items were just about the same. The company's balance at credit on December 31, 1987 amount to $342.30.

(ii) Omni Educational Marketing Corp.:

The next group of documents pertains to Omni. Its certificate of incorporation is dated March 8, 1983. Its two original subscribers are Patrick E. Higginbotham and Patricia Clever. Tab 35 in Volume II contains Omni's balance sheet at July 12, 1983. At the time, it had $100 in the bank but no other assets. Tab 18 of Volume I contains a copy of the $25 million debenture with Cawin Financial Corp, dated three months later, namely October 11, 1983. Omni's balance sheet at December 31, 1983 also found in Tab 35, discloses performance bonds receivable of $6,362,000 and debenture liability of $6,397,500. Omni's income statements also show nil income, nil sales and nil inventory.

Tab 36 is a copy of Omni's balance sheet at December 31, 1984. It shows a nil inventory, an accounts receivable item of $131,502 and performance bonds receivable of $28,586,250. On the other side of the ledger, it shows accounts payable of $82,291, long term debenture liability of $28,672,250 and negative shareholders' equity.

Omni's income statement for that year shows sales of $148,600, nil inventory at the beginning and at the end of the period and a net income of $15,255.

In Tab 37, Omni's balance sheet as of December 31, 1985 shows accounts receivable of $130,850 and performance bonds receivable of $34,993,500. On the liability side, its debenture debt is at $35,093,750. It continues to show negative shareholders' equity.

In its income statement for that year, i.e. 1985, no income or sales are reported. Similarly, no income or sales are reported for the year ending December 31, 1986 (Tab 38). The balance sheet, however, shows inventory values of $45,000, performance bonds receivable of $38,304,000, and on the liability side, $38,447,250 in debt, accounts payable of $73,000 and a debit of $101,325 in shareholders' equity.

Tab 39 contains Omni's bank statements for the period September 20, 1983, when it had a credit balance of $100, to September 18, 1987 when it had a credit balance of $448.60. In the meantime, massive amounts of money were deposited to its credit. Concurrently, massive amounts were paid out. From September 18, 1983 to November 20, 1987, some $34 million worth of cheques were issued in $17,500 amounts or in multiples thereof representing approximately 2,000 individual licensed territories in which the company had undertaken to carry on the marketing of the product and for which it was providing the cash performance bond to licensees.

Tabs 42A, 42B, 42C and 42D contain Omni's own lists of licensees or subscribers who contracted with Omni to do the marketing in their individual territories. These lists contain the name, the client number and the date on which the cash performance bond was issued. For the period September 1, 1983 to January 31, 1984, Omni contracted with over 1,000 subscribers and paid out in excess of $18 million in cash bonds. Among the subscribers listed as having been paid the cash performance bond are the plaintiffs Russell and Fullard on October 11,1983, the plaintiff Moloney on November 23, 1983, and the plaintiff Young, on January 23,1984.

From February to April, 1984 an additional 476 subscribers had purchased some 488 licensed territories and for which Omni paid out some $8.5 million in cash performance bonds.

(iii) H.N. Thill & Associates Inc.

This company was incorporated on August 9, 1983. Its share-subscriber was Mr. H.N. Thill. On August 17, 1983, according to Tab 5 of Exhibit 7, Mr. Thill together with Keith Edouard Wilson, William Rae Sinclair and Edouard Cop were appointed Directors.

Tab 27 discloses the balance sheet of this company as at July 28, 1983. It is a bit of an odd document as the company itself was not incorporated until August 9, 1983. For what it might be worth, the company had some $25,000 in bank and the same amount in shareholders’ equity.

Tab 27 also discloses H.N. Thill & Associates Inc.'s balance sheet of June 30, 1984. Among its assets are $3,810,000 in notes receivable. Among its liabilities are $3,677,000 due to Applied Research Ltd. Its income statement indicates fee income of $546,000 and expenses of $560,000.

Tab 43 includes promotional material under H.N. Thill & Associates Inc. letterhead. It would appear that it was circulated sometime before November 24, 1983. Whomsoever the addressees might be, the circular says “If you are interested in a large tax refund without changing employment please call me for a free no-obligation consultation”.

Another circular, dated September 21, 1983 is also found under Tab 43. It is a six-page document explaining in detail the tax-shelter scheme in which an investor might become interested. The document clearly outlines the whole process whereby a business expense deduction may be claimed through the purchase of licensed territories, the payment of advance royalties and the payment to the licensee of a cash performance bond. Page 6 of the document entitled "Payment Options” states:

1/ a) $20,000.00 cash or certified cheque for first year advanced royalties plus $100.00 for 20 year license made payable to APPLIED RESEARCH LID.

b) Within 10 days you will recieve (sic) a cheque made payable to yourself from the marketing company in your licensed area. This cheque is your performance bond for $17,500.00 and may be cashed immediately.

c) You have now paid $20,000.00 in advanced royalties and in order to insure proper marketing in your area you have secured a $17,500.00 bond from a marketing company.

d) Your first year business expense is $20,000.00 in advanced royalties against no income. The $17,500.00 is not income, but a bond offered to insure proper marketing.

2/ a) $2,500.00 cash or certified cheque as part payment for first year advanced

royalties plus $100.00 for 20 year license made payable to APPLIED RESEARCH LTD.

b) Within 10 days you will recieve (sic) a cheque made payable to BOTH yourself and APPLIED RESEARCH LTD. from the marketing company in your area. This two-party cheque for $17,500.00 is your performance bond and is signed over to make up the balance of the $20,000.00 first year advanced royalties.

c) You have now paid out a total of $20,000.00 in advanced royalties and in order to insure proper marketing in your area you have secured a $17,500.00 bond from a marketing company.

d) Your first year business expense is $20,000.00 in advanced royalties against no income. The $17,500.00 is not income, but a bond offered to insure proper marketing.

3/ a) $1.00 cash or certified cheque plus a promissory note due after you recieve

(sic) your 1983 tax return. The promissory note is for $2,600.00 plus 12% interest until paid, This note is made payable to H.N. Thill & Assoc., and your interest in your licensed area is held as collateral for the note.

b) Within 10 days you will recieve (sic) a cheque made payable to BOTH yourself and APPLIED RESEARCH LTD. from the marketing company in your area. This two-party cheque for $17,500.00 is your performance bond and is signed over to make up the balance of the $20,000.00 first year advanced royalties.

c) You have now paid out a total of $20,000.00 in advanced royalties and in order to insure proper marketing in your area you have secured a $17,500.00 bond from a marketing company.

d) Your first year business expense is $20,000.00 in advanced royalties against no income. The $17,500.00 is not income, but a bond offered to insure proper marketing.

(iv) Cawin Financial Corporation

This company was incorporated on October 6, 1983. Mr. H.N. Thill was the incorporator. The first directors appointed were Mr. Keith Wilson, Mr. William Sinclair and Mr. Edouard Cop. On October 10, 1983, according to company minutes found in Tab 10, the directors allotted to Applied Research Ltd. a total of 8,000 common shares for a subscription price of $1,000 a share payable in periodic instalments, the final instalment to be on or before March 31, 1984. On May 4, 1984, there is a record in the minutes of the allotment to Applied Research Ltd. of 22,000 common shares at the subscription of $1,000 per share payable in instalments up to June 30, 1985.

It was on October 11,1983 that Cawin Financial Corporation entered into a debenture loan agreement with Omni in the amount of $25 million. By November 30, 1983, according to Tab 19, share certificates issued to Applied Research indicated a total purchase of some 6,386 shares of a value of $6,386,000.

At October 12, 1983, as found in Tab 29, Cawin’s balance sheet showed current assets of $1,000 and debenture notes of $191,000. Shareholders' equity was fixed at $192,000.

Tab 26 shows Cawin's only assets at September 30, 1984 as being $27,380,250 in notes receivable and shareholders' equity at $27,355,000. Its income for the year was a fee of $25,000 and its only expense was $24,000 for management fees.

As at September 30, 1985, as found in Tab 30, Cawin's assets had grown to $33,606,087 in notes receivable and its shareholders' equity had increased for the year to $33,582,050. The Company had no income and minimal expenses of $30 for bank charges and $1,100 for consultant fees.

For the year ending September 30, 1986, as found in Tab 31, no income was reported but its assets had increased to $38,122,385 and its shareholders' equity to $38,057,050.

Tab 33 contains Cawin's bank statements for the period October 1983 to December 1987. On October 12, 1983, $192,000 was paid in the company's account and on the same date $191,000 was paid out. On October 13, 1987, $367,000 was paid in and $367,000 paid out. On October 18, 1983, $368,000 was paid in and $368,000 paid out. The same pattern appears in all subsequent months and, with some variations from time to time, the statements indicate massive deposits corresponding on the same date with massive payouts. At December 30, 1983, its bank balance was $2,141. At the end of 1984, it was $137. On December 31, 1987, the bank balance stood at $3.41.

The Case for the Plaintiffs

I should perhaps summarize at this time the position taken by the parties at the conclusion of the evidence stage. Plaintiffs’ counsel ably led the Court through the various steps taken by the plaintiffs to incur the advance royalty expense of $20,000 for each licensed territory in order to have me conclude that the payments in the 1983 taxation year

a) were incurred to earn business income

b) were reasonable in the circumstances

c) did not unduly or artificially reduce the plaintiffs’ income.

Counsel referred to the evidence of the plaintiffs and to their intention to enter into a scheme which had definite profit potential. The plaintiff Russell said he was satisfied that there was more to the transaction than a tax deduction. The plaintiff Moloney's approach, after he had consulted his lawyer, was consistent with his general business style. The same could be said for the plaintiff Fullard who was attracted to a side business which would require no active participation on his part. Finally, as far as the plaintiff Young was concerned, he appreciated both the business and the tax opportunities the scheme offered to him. Mr. Young was satisfied that he had entered into a legally-binding transaction and with respect to the outstanding notes with H.N. Thill & Associates Inc., he had taken steps to protect himself by having that company agree to a "no recourse” position with respect to them.

Counsel for the plaintiffs also found support in the evidence given by Mr. Higginbotham who had directed the affairs of Omni. Mr. Higginbotham had some 25 years of experience in marketing. He had acquired a thorough knowledge of the Advanced Reading Course having sold licensed territories for it in 1979-81 through a company called Canam Systems. This strategic approach to selling the product through mass marketing was sound and he entered into the plan with every expectation that it would prove a financial success. There was of couse no assurance that operations over the first year or two would produce a profit. Planning sales over large designated areas takes time. Nevertheless the necessary ingredients to make of it a viable venture had been put in place.

All of the foregoing, according to plaintiffs’ counsel, had of course been confirmed by Mr. Elton in his expert report. Mr. Elton’s analysis of Omni's purposes and objects had indicated to him that a definite business was in existence in 1983, that it was headed by a competent executive and that there was a reasonable expectation of profit as its operations started to roll.

Plaintiffs' counsel further suggested that the viability of the plan was buttressed by the evidence of Mr. Thill, a witness called by the Crown. Mr. Thill had a thorough knowledge of the product, having held the copyright in it and having marketed it over many years. Developing a home-study course had obvious advantages, both as to price and as to the flexibility it afforded to anyone wishing to purchase it.

The Court should conclude, argued counsel, that the plaintiffs were engaged in a business venture. Given the wide definition found in subsection 248(1) of the Income Tax Act, of the word “business” and as interpreted by the Court in The Queen v. Cadboro Bay Holdings Ltd., [1977] C.T.C. 186; 77 D.T.C. 5115, to include the dictionary definition of business, Omni, on behalf of the plaintiffs, was at all material times carrying on a business.

Furthermore, stated counsel, the expenses were reasonable under section 67 of the Act. The evidence of Mr. Higginbotham and Mr. Thill, as supported by the market survey prepared by Marktrend, was to the effect that it was reasonable to expect sales of 1,000 courses in each territory, which would provide the necessary revenue to Omni with which to reduce its cash bond exposure and in turn enable each plaintiff to earn $35 for each course sold.

Counsel also argued that neither section 18 nor section 67 of the Act requires that for an expense to be deductible or to be judged reasonable, it is a requirement that the business show a profit in the year the expense is incurred nor in any other year. It is only necessary, said counsel, to show that the venture itself had the necessary ingredients to indicate to any reasonable observer that it stood a reasonable chance of profit. On the face of it, the Court should find that the structure for the mass marketing of the product had the necessary integrity to make it an attractive proposition to any investor.

The Court should appreciate, said counsel, that Applied Research, by purchasing shares in Cawin Financial Corporation was providing the latter with the funds to lend to Omni. Secondly, these funds would be advanced by way of a loan to Omni. Thirdly, the same funds, in Omni's hands, would enable it to provide to each subscriber a satisfactory guarantee of due performance. This sort of sequential guarantee was part and parcel of many business transactions involving two or more parties so as to achieve a better balance of risk between them.

In effect, argued plaintiffs’ counsel, any measure to minimize the risk incurred in an expenditure should not affect the taxpayer's entitlement to the usual deduction. In support, counsel quoted the case of Ce/ber v. The Queen, [1980] C.T.C. 505; 80 D.T.C. 6369 (F.C.T.D.) later affirmed by the Federal Court of Appeal.

In that case the taxpayer had paid out some $38,333.33 in a motion picture venture against which a sum of $30,000 in Government of Canada bonds had been pledged. When the taxpayer attempted to deduct the applicable 60 per cent depreciation on the total amount, the Crown took the position that a depreciation allowance on that amount, and not on the amount of exposure, i.e. $8,333.33 would artificially or unduly reduce the taxpayer's income.

At trial, Walsh, J. stated at page 509 (D.T.C. 6372):

I do not find on the evidence before me that the outlay of $38,333.33 was unreasonable. The fact that the risk on the downside was minimized by the guarantee of a return on the investment of at least $30,000 plus bond interest equivalent to interest which would have been earned on $30,000 of the original investment, indicates that the outlay or expense was [not] unreasonable.

The trial judge also found in that case that the transaction was not a sham as contemplated in section 245 of the Act. His Lordship said at page 509 (D.T.C. 6372):

There is no sham involved in this transaction as far as can be seen from the documentation and it would require something more than an imputation of motive to consider that it was a transaction entered into by Mr. Gelber to artificially reduce his income . . .

In its appeal to the Court of Appeal, reported at [1983] C.T.C. 381; 83 D.T.C. 5385, the Crown again argued that the amount of allowable expense incurred by Mr. Gelber should at least be limited to the amount at risk, i.e. $8,333.33, as this sum represented the real amount the taxpayer had expended. The Court of Appeal dismissed this argument. It found that on the evidence and in accordance with the conditions of Mr. Gelber's contract, the transaction did not result in an unduly large or artificial capital cost and section 245 did not apply.

Counsel for the plaintiffs then referred to the legal effectiveness of a transaction and quoted the Federal Court of Appeal decision in Atinco Paper Products Ltd. v. The Queen, [1978] C.T.C. 566; 78 D.T.C. 6387. Counsel also referred to the "sham" test defined in Snook v. London Symbol and West Riding Investments Ltd., [1967] 1 All E.R. 518; [1967] Q.B. 786. With reference to the "business purpose" test, counsel quoted Vivian v. The Queen, [1983] C.T.C. 107; 83 D.T.C. 5144 which suggests that an absence of a business purpose, so long as all the purported transactions are actually carried out, does not constitute a sham.

Of greater weight in counsel's argument was his reference to the Tax Court of Canada's decision in Buckler v. M.N.R., [1985] 1 C.T.C. 2428; 85 D.T.C. 396. This case appears to be on all fours with the case before me. In fact, the transaction which the taxpayer entered into in that case involved substantially the same players in the same scenario but carrying different names.

In Buckler, the Crown's assumptions of facts to either a section 18, a section 67 or a section 245 challenge were substantially the same as those before me. Nevertheless, the Court found that the taxpayer had effectively rebutted them. The Court stated that:

a) the taxpayer was equally motivated by both an investment purpose and a tax purpose;

b) that the payment made by him was for a bona fide business purpose and not motivated solely for tax advantages;

c) no reasonable inference could be drawn that the amount claimed was excessive, unreasonable, unnatural or abnormal;

d) the evidence at the hearing fell short of establishing any connection or conspiracy between the various parties which would support a finding of artificiality, simulation or fiction.

The Court went on to say that, on the evidence heard, the conduct of the taxpayer did not amount to a "designed effect of defeating the expressed intention of Parliament", repeating the comment in this respect of Estey, J. in the Supreme Court of Canada decision in Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294 at 315; 84 D.T.C. 6305 at 6322.

The Case for the Crown

Crown counsel summarized his case in the following terms:

(a) the plaintiffs were not carrying in a business directly or indirectly through Omni and therefore, no business expenses may be claimed under section 18 of the Act;

(b) in fact, the plaintiffs did not incur a business expense at all;

(c) whatever the findings with respect to the foregoing, the scheme into which the plaintiffs became engaged is the kind of scheme covered by subsection 245(1) of the Act.

Referring to the $25 million debenture loan by Cawin Financial Corporation to Omni, Crown counsel questioned where it was or if such an amount had ever existed. The same question, he said, could be asked with respect to the second debenture loan of $25 million purportedly advanced some six months later.

Counsel for the Crown found it surprising that no investment moneys or risk capital actually flowed into Omni for purposes of making its operations work in accordance with its purported mass marketing approach. Although bank statements relating to either Applied Research, Cawin or Omni showed enormous cheque transactions, a more thorough analysis of these transactions could only lead the Court to conclude that they were all selfcancelling. These manoeuvres, argued counsel, served no business purposes. They were only created to give an appearance of business activity.

Furthermore, in the case of the plaintiffs as in the case of some 90 per cent of the subscribers to the plan, no expense dollars were actually put up as advance royalties. Counsel underlined that Omni issued its $17,500 cheque payable to Applied Research and the subscriber, the latter in turn endorsing it to Applied Research. The only exposure facing the subscribers was the $2,600 promissory note which, notwithstanding its tenor, would only be repayable upon the subscriber receiving his tax refund. This is evidence that the main or sole purpose of the whole scheme was its tax benefits.

Even if it should be found that there existed a business purpose, such purpose, suggested Crown counsel, could not stand the business test, that of a reasonable expectation of profit.

Finally, counsel urged upon the Court the alternative or concurrent finding of artificiality in the whole scheme of a nature to bring into play section 245 of the Income Tax Act.

Findings

On the face of the documentary evidence submitted to me and which provides a rough history of the Advanced Reading Course marketing scheme, my first reaction is to doubt that the kind of expense claimed by each plaintiff is the kind of expense contemplated by the framers of the Income Tax Act. Absent any special tax provisions, I should rather quickly observe that the underlying purpose of the statute is to tax income and to refuse to allow any deduction from such income except for expenses reasonably incurred to earn it. Any deviation from this basic approach may only be found in particular or exceptional provisions in the statute, as in meas- ures for loss carry-overs, quick write-off schemes, premium allowances on certain investments and similar tax expenditure measures.

No doubt, the highly complex Income Tax Act does itself create certain artificialities making difficult the application of commonsense rules to their interpretation. No doubt also such artificialities, juxtaposed to other artificialities, create loopholes here and there which no amount of plugging will eliminate. The plug is too often like an amoeba: the moment it is put in place, it is transformed into a new loophole, thus creating a never-ending downward spiral of complexities which in turn creates a new realism which is not real at all but which is nevertheless clothed with legality. I need only mention that the Income Tax Act contains some 140 ''deeming" clauses to give weight to this phenomenon.

I make these observations not with a quizzical look directed towards Parliament and its legislative wisdom but with a furrowed brow in contemplating the task of separating substance from form, reality from appearance or fact from fiction, in an interpretative junket through the Income Tax Act, a task all the more difficult by the imaginative structure which was displayed before me during the course of the trial and which attracted the participation of so many taxpayers.

Having initially expressed my doubt as to whether or not the scheme reflected the true intent and spirit of the statute, I must nevertheless acknowledge its apparent legitimacy. It has a logical design, good basic structure and appropriate supporting members. The structure, which I find was put up by Mr. H.N. Thill has all the appearances of a sophisticated business venture with the ostensible purpose of marketing a product called an Advanced Reading Course in the United States.

As owner of the copyright in the product, Mr. Thill assigned it to Applied Research Ltd., an off-shore company of which not much is known even to this day. Mr. Thill became general attorney for Applied Research and he could thereby direct all its activities. He incorporated Cawin Financial Corporation. Mr. Thill also controlled this company through Applied Research. I find Mr. Thill also exercised strong if indirect influence in the operation of Omni, the company responsible for the marketing of the product. This cannot be otherwise when one recalls that it was Cawin Financial Corporation, effectively controlled by Mr. Thill, which entered into a couple of $25 million bond debentures with Omni, the marketing company. Given Omni's financial position at all relevant times. I should find that Mr. Thill would make sure that the funds were used by Omni for the purposes intended, whatever these purposes might be.

I should also find that the program to sell franchised areas to subscribers was conceived, initiated and carried out by Mr. Thill or through the agency of his company. An examination of the written material collected in Tab 43 can only lead to the conclusion that Mr. Thill was the guiding and controlling hand throughout.

It was through H.N. Thill & Associates Inc. that the marketing scheme to sell franchised areas is the United States was publicized. It was through its agents that potential investors were approached to subscribe to these franchised areas. It was company staff which prepared and completed individual subscriber's application forms. It was Mr. Thill's company which looked to these subscribers as clients, arranged to complete their tax returns for a flat $50 fee and financed them through a $2,600 promissory note. It was Mr. Thill’s company which agreed not to call the notes until tax refunds had been received.

No doubt, there was a business motive and a reasonable expectation of profit in what H.N. Thill & Associates Inc. set out to do. Its activities do not suggest that it was set up for charitable purposes. Although, from the documents filed it is difficult to source the whole income stream for that company, I can summarily conclude that it expected to gain several million dollars from the redemption of its notes and from tax return fees. A rapid calculation involving some 2,000 subscribers redeeming $2,600 worth of notes is ample evidence of this.

However, much as one might admire the entrepreneurial skills of Mr. Thill and his company in successfully marketing franchised areas, the issue before me is the record of operations of Omni in selling the Advanced Reading Course in the designated areas of the United States and in the real intention of the investors in participating in the program.

In that respect, I find that the business purpose test as well as the expectation of profit test can only be made to apply to Omni's projected operations in the United States. The operating franchise assigned to it by each subscriber was limited to United States areas. Whatever operational experience can be observed in the financial documents relating to Omni must be kept within that context. Its sales of the Advanced Reading Course in Canada are not evidence of business activity within the territorial limits imposed by its contracts with the subscribers.

The evidence at to Omni's experience in that respect is lacking of any substance. Mr. Elton, in his expert testimony relating to Omni's business and its reasonable expectation of profit, had to admit that at no time did he look into Applied Research or specifically into its bank statements. Nor did he give any evidence of having enquired into the operations of Cawin Financial Corporation. He had to admit that for a company which could put its hands on some $50 million, Cawin was not that well known in financial circles.

Mr. Elton further agreed on cross-examination that it was only on the basis of a number of assumptions that he had been able to prepare some very impressive mathematical projections showing handsome financial returns for Omni. He concluded, however, in the face of the very large turnover of funds in and out of Omni's bank account, that the system was sitting in suspension "until somebody did something”. That “something”, I understood him to say, was a massive injection of cash, either by way of shareholders' equity or of debt. As at 1988, however, neither of these measures had come to pass.

Furthermore, Mr. Elton acknowledged that over a period of some five years, he had no evidence of United States sales nor, with but one small exception, of any advertising or promotional programs in any of the United States designated areas. When faced with a kind of triple-play from Tinkers to Evers to Chance, with substantial funds going around in a closed circuit, he had to admit that he had "not seen anything quite like it before".

The situation thus described may be illustrated by visualizing sequential transactions within a closed circuit: the subscriber pays $20,100 to Applied Research which invests $17,500 in Cawin and advances $2,600 to H.N. Thill & Associates; Cawin in turn lends $17,500 to Omni which pays back $17,500 to the subscriber who concurrently receives $2,600 from H.N. Thill & Associates.

In graphic terms, the circuit might be drawn as follows:

I have reviewed the evidence of Mr. Thill on these points and I find his verbal assertions and statements somewhat vague or incomplete. Although he stated that he was not familiar with the affairs of Cawin Financial Corporation, I find this difficult to reconcile with the more objective fact that he was in effective control of Cawin through the apparently increasing investment by Applied Research in Cawin common shares. Furthermore, I find on the evidence that cheques representing the cash bonds deposited in Applied Research's bank account and immediately paid out to Cawin were corresponding items which in fact represented an organized and formalized circulation of funds of which Mr. Thill had full knowledge.

Little is known of the background of Applied Research. It is an off-shore company. The names of its incorporators are known but little else. Applied Research paid massive sums to purchase Cawin shares, and available documents show high levels of banking activity. The Court, nevertheless, is left with no idea of the company's financial situation or of the warp and weft of its operations. The Court is left with the simple and bland assertions of Mr. Thill that the company "had only to bring down $2 million and $3 million of its treasury in Cayman Island to sustain operations here". His further statement to the effect that Applied Research "had now come down with several million dollars for us to keep operating on" appears again to be a selfserving assertion to which little evidentiary weight may be attached. I fail to see where any capital infusion by Applied Research actually sprinkled down into Omni's coffers. Mr. Elton's own evidence in this respect, at least as of the date of his report, namely October 17, 1988, confirms this.

I stated earlier that the "business" test as well as the "reasonable expectation of profit" test can only be made to apply to Omni's operations in the United States market. Mr. Elton's evidence is that there was no business activity conducted by Omni in that country. Admittedly, there was a research study prepared by P.S. Promotional Services in 1986 covering the media plan for Massachusetts and Ohio. I find, however, that this activity, coming three years after the plan was put in place, is but a small wart on a large elephant. It is completely disproportionate to the massive undertaking by Omni in carrying out its contractual undertakings.

I find that in the scheme which was put in place, a scheme whose business purpose was to sell a speed-reading course in some 2,000 zip code areas in the United States and covering a population of some 80 million people, little, if any, money entered or left the system. No doubt, Omni conducted some kind of business. No doubt also it sold some products in the local market as a result. It might perhaps be said that it met the "busi ness" test and the "reasonable expectation of profit” test if only Canadian operations are considered. To suggest, however, that Omni made any kind of effort commensurate with its massive undertakings to get the United States business off the ground taxes, as it were, one's credulity.

If the program was to make the investment more attractive to licensees, and if one of the business tools for doing this was the filing of a cash guarantee by Omni of due performance, how could the circular funding of massive amounts of paper have generated the kind of venture capital obviously necessary to achieve the program's ultimate purpose? The documentary evidence relating to Omni as well as the oral evidence of its projected activities provide the Court with no window into any conscious or reasonable accumulation of facts to enable anyone to conclude that it would actually carry out its program or for that matter that it was ever given the financial resources to do so.

The finding which I have made earlier that all the four companies involved, namely Omni, Applied Research, Cawin Financial and H.N. Thill & Associates Inc., were effectively controlled by one or more individuals leads to the conclusion that throughout the experience of the year in question, there existed a non-arm's length relationship. This is the kind of relationship where a court may cut through the forms of contractual obligations, shred the veil of corporate identities and analyze the pith and substance of the whole undertaking.

I must find in that respect that under the cover of formalized commercial transactions, the scheme had no real business purpose behind it. Omni at no time was given the financial resources to achieve what might otherwise have been a viable objective. Nor is there any evidence that Omni itself took any measures which would enable it to protect its multi-million-dollar exposure on its cash bonds or to set up any kind of organizational and financial package in order for it to meet its contractual obligations to its subscribers. Any activity directed toward the United States market was minuscule as compared to the massive financial commitments it had to face.

It will be remembered also that Mr. Elton himself predicated his "reasonable expectation of profit” projections on the assumption that Omni would secure a line of credit of $1 million for its first full year of operation in 1984. Omni never put its hands on that kind of money.

As for Cawin, I would view it simply as a straw corporation blithely advancing millions of dollars of re-circulating funds to Omni and holding as dubious security a floating charge over Omni's assets.

I must also make findings with respect to the tax position of the plaintiffs before me. It was argued that as far as they are concerned, they entered into a business venture which required them to expend an amount of $20,000. This amount, being otherwise deductible under section 18 of the Act, should not now be disallowed on the ground that the purported intention of the mass marketing program was not carried out or that no business activity required for it ever took place. Subjectively speaking, the plaintiffs' intentions had not only a tax deduction feature but a profit potential as well.

I cannot subscribe to that argument. On the basis of their own evidence and of their response to the actual and effective thrust of H.N. Thill & Associates's approach to them, I must find that their true intent and purpose was the attractive tax deduction the scheme would provide to them. This tax deduction was all the more attractive in that it required no actual cash outlay on their part. On that basis, as I conclude from the evidence, they were quite prepared to share a portion of their tax saving with H.N. Thill & Associates once the tax refunds had been claimed and received.

Among the four plaintiffs, two of them, namely Raymond Young and Steven Fullard, did not receive tax refunds nor reduce any portion of their notes to H.N. Thill & Associates. They would not appear to be exposed to anything and whatever liability arises out of these outstanding notes is not a matter for this Court to decide.

The other two plaintiffs, Gary Russell and Maurice Moloney, did receive tax refunds which triggered off the redemption of notes in the amount of $7,800 and $5,200 respectively. They might as a result be out by that much. There might, however, be equities as between maker and payee in this respect which could be of assistance to them, but again, it is not a matter which this Court is called upon to consider.

Conclusions

By reason of the intricacies, special provisions, deeming clauses and other complexities of the Income Tax Act, it would have defied any draftsman's skill to express the intention of Parliament in section 18, section 67 and section 245 of the statute in more precise terms. Such words as "reasonable" or “unduly” or “artificially” cannot be reduced to a mathematical or scientific formula.

Section 18 prohibits the deduction of any outlay or expense except to the extent that it was incurred for the purpose of gaining or producing income from a business or property. I interpret this provision as imposing a burden on a taxpayer to justify such outlay or expense as having been made for a business purpose.

Section 67 expresses the general intent of the statute that, in any event, such outlay or expense must be reasonable in the circumstances.

Section 245 expresses the same general intent when it disallows any disbursement or expense in respect of a transaction or operation which, if allowed, would unduly or artificially reduce income.

It may be observed that these sections are in pari materia With each other. Severally, they constitute a statutory check on expenses and assure that such expenses are for a business purpose, that they are reasonable in the circumstances and that they are not made in respect of transactions or operations which, if allowed, would unduly or artificially reduce income.

In essence, these "restraint" provisions are made the subject of scrutiny as to purpose, reasonableness or artificiality.

Such scrutiny must necessarily involve an investigation into all the facts and circumstances surrounding the claimed deduction and on the conclusions which may be drawn from them. In so doing, a court should be wary of case law which, when it involves issues of fact and circumstances, has been referred to as an unruly horse.

In this respect, although it might be tempting to be guided by the Ge/ber case, or by the Buckler case (op cit.), each of which is based on its own set of facts, I should prefer to stick to the actual facts in the case before me and, in the process of arriving at a judicial result, let myself be guided by the broader principles expressed from time to time by the Supreme Court of Canada.

It was in the Stubart case (op cit.) that Estey, J. on behalf of the Court reemphasized the common sense approach to the interpretation of the Income Tax Act to better support the expressed intention of Parliament.

It was in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, that Dickson, J., as he then was, established an objective test as to whether or not any business had a reasonable expectation of profits. This objective determination had to be made from all the facts. It follows, in my view, that declarations of intent or purpose enjoy only limited weight when balanced against more objective facts and circumstances.

In The Queen v. Bronfman Trust, [1987] 1 C.T.C. 117; 87 D.T.C. 5059, the Supreme Court reaffirmed the commonsense test in the interpretation of the Income Tax Act. Speaking for the Court, the Chief Justice said at page 128 (D.T.C. 5067):

This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers’ transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help avoid the inequity of tax liability being dependent upon the taxpayer's sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

I find all the foregoing principles particularly appropriate to the issues before me. They underline an objective and common sense approach to statute interpretation and bring added respect for the commercial and economic realities of transactions which have tax connotations. It is an approach which also undermines any attempt to reduce the tenor of the statute to the absurd.

On the basis of such an approach, I am satisfied that the expense claimed by each of the plaintiffs had no business purpose and that otherwise, it was, in the circumstances, an unreasonable amount. I should finally conclude that it was in any event made in respect of transactions or operations which would unduly reduce the income.

Taken individually, none of the facts to which I have referred, at perhaps greater length than necessary, may be taken as conclusive. Taken all together, however, I should find that they amply justify the conclusion reached.

In effect, the plaintiffs have failed to rebut the assumptions of fact made by the Crown. The individual assessments must therefore be confirmed and the plaintiffs’ actions dismissed with costs.

Actions dismissed.