L Farrell v. Minister of National Revenue, [1985] 2 CTC 2222, 85 DTC 544

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on May 17, 1985, against an income tax assessment for the year 1980, in which the Minister of National Revenue disallowed a deduction of $80,030, claimed as a loss from an operation purported to be a business by the appellant, called “Taxsavers”. The notice of appeal read in part as follows:

I agree, however, that the deduction in full be disallowed, but that I should be allowed a deduction of $20,000 for actual outlay of capital.

Regarding the ruling that the expenditure wasn’t used for the purpose of producing income, I point to my 1981 return under business income. I claimed $2,040 as income that came from this business. The fact that the business never became as lucrative as I had hoped, is not a valid reason for disallowing this claim.

For the respondent the situation was portrayed as:

— the Appellant entered into an agreement or agreements with Vancouver Taxsavers Financial Planning Services, a sole proprietorship carrying on business in Vancouver, British Columbia, under that name;

— at the time of entering into the agreement, no expense in excess of $5,100.00 in respect of each licence purchased was intended to be incurred by the Appellant to the Licensor;

— the $80,030.00 of losses claimed by the Appellant in 1980 related to amounts paid or allegedly payable to Vancouver Taxsavers as a result of entering into one or more of such licencing agreements;

— Taxsavers did not provide management services to the Appellant in the 1980 taxation year;

— the Appellant did not carry on any business in the 1980 taxation year arising from such agreement or agreements;

— the Appellant did not acquire a source of income as a result of such agreement or agreements;

— the Appellant neither gained or (sic) earned income from a business or property in respect of any of the agreements in 1980;

— no amount of the $80,030.00 was incurred by the Appellant for the purpose of earning income from a business or property;

— the primary purpose of the transactions between the Appellant and Vancouver Taxsavers was to offer a device for reducing taxes of the Appellant;

— each agreement, insofar as it purported to create a liability on the part of the Appellant to Taxsavers in the amount of $20,000.00 in respect of a management fee for services to be provided by Taxsavers, was a sham;

— the deduction of $80,030.00 in computing the Appellant’s income for the 1980 taxation year, would, if allowed, unduly or artificially reduce the Appellant’s income for the taxation year.

The Respondent relies, inter alia, upon sections 3, 9, 18(1)(a), 18(1)(b), 18(1)(e), 39(1)(b), 40(2)(g), 67 and 245(1) of the Income Tax Act, RSC 1952, chapter 148, as amended.

The taxpayer, during testimony filed a copy of an “agreement” into which he had entered on December 21, 1979, which he stated for all intents and purposes was identical to those he had signed in the 1980 year, and which formed the basis of the issue before the Court. That agreement is indexed as Exhibit A-1, and entered into this decision in its entirety.

TAXSAVERS

Tel: (604) 669-5000

3rd Floor, 800 West Pender Street,

Vancouver, B.C. V6C 2V8

AGREEMENT

BETWEEN:

VANCOUVER TAXSAVERS a sole proprietorship registered pursuant to the Partnership Act of the Province of British Columbia and having its chief place of business at the 3rd Floor, 800 West Pender Street, in the City of Vancouver, in the Province of British Columbia;

(hereinafter called the "LICENSOR")

OF THE FIRST PART:

AND:

Name Lawrence G. Farrell

Address 22 Chilton Road

Toronto, Ontario M4J 3C8

Hereinafter called the “LICENCEE”)

OF THE SECOND PART

WHEREAS the Licensor operates a business of providing financial planning services and operates such business throughout the province of British Columbia under the name of "VANCOUVER TAXSAVERS”;

AND WHEREAS the licensor has decided to modify its operations by licencing independent operations with the right to engage in its activities and business as generated from certain specified areas, hereinafter individually referred to as a “Territory”;

AND WHEREAS the licensor has agreed to sell and the Licencee has agreed to purchase a licence to provide financial and tax planning services in a territory as defined in paragraph 8.

NOW THEREFORE this agreement witnesseth that in consideration of the promises and the mutual convenants (sic) and agreement herein contained, the parties hereto agree as follows:

1. The Licensor agrees to sell to the Licencee and the Licencee agrees to purchase in consideration of the sum of ONE HUNDRED ($100.00) DOLLARS of lawful money of Canada, receipt of which the Licensor hereby acknowledges, the right to engage in business making use of the Licensor’s financial planning systems and tax preparation systems for clients from within the territory defined in paragraph 8 hereof.

2. The Licencee agrees to pay to the Licensor the sum of TWENTY THOUSAND ($20,000.00) DOLLARS upon the execution of this Agreement as a MANAGEMENT FEE to the Licensor for providing management support in the form of advertising, planning, organizing, controlling, directing, marketing, obtaining financing, promoting, and monitoring the business of the Licencee within the defined territory, during the first fiscal year of the Licencee’s operations.

3. Within a reasonable time following completion of the Agreement, the Licensor will tender a cash performance bond of FIFTEEN THOUSAND ($15,000.00) DOLLARS for the minimum gross fee expectation of ONE HUNDRED FIFTY THOUSAND ($150,000.00) DOLLARS generated from the defined territory over the TEN (10) year term of this licence and provided further that when during the term of this Agreement the Licencee generates a total of gross fees in excess of ONE HUNDRED FIFTY THOUSAND ($150,000) DOLLARS, the sum of FIFTEEN THOUSAND ($15,000) DOLLARS becomes due and payable to the Licensor. For the purposes of this paragraph, gross fees are defined as the total of actual fees collected plus outstanding receivables as generated from the defined territory of the Licencee.

4. The Licencee may service the defined territory for the term specified subject only to the production of qualifications of personnel satisfactory to the Licensor.

5. In the event that the Licencee’s qualifications to perform financial planning services are not reasonably deemed by the Licensor to meet its standards, the Licencee may at his option upgrade the staff to a level acceptable to the Licensor or appoint the Licensor as his agent and the Licensor may in turn appoint an agent or sub-licencee to service the defined territory on its behalf and the Licencee will thereby receive annually TEN (10%) percentum of the gross fees generated by the Licensor or the agent or sub-licencee appointed by the Licensor for the defined territory.

6. It is the intention of the parties that there be an amicable business relationship throughout the period of this Agreement. The Licencee shall conduct business in a dignified manner and will promote the highest possible standards to the end of advancing the business interests and good reputation of the Licensor. In the event of a dispute between the parties hereto or a dispute as between Licen- cees, then the parties may agree to be bound by the decision of the Chief Executive Officer of the Licensor or failing such agreement, to have the dispute determined by a single arbitrator appointed in pursuance to the provisions of the Arbitration Act of the Province of British Columbia RSBC Chapter 14 and amendments thereto. The Licencee shall pay any and all expenses incurred for such arbitration.

7. It is understood and agreed that unless terminated this Licence shall run for a period of TEN (10) years, the time to run from the date of execution of this Agreement.

8. The territory licenced by this Agreement is defined by the area code and telephone prefix in use by the telephone network in Canada and for the purposes of this Agreement is as follows:

Area Code:	416	Telephone Prefix:	421
Territory Name:Don Mills			TAXSAVERS

or such other name as may from time to time be designated for the defined territory by the Licensor at his discretion.

9. The laws of the Province of British Columbia shall apply to any dispute.

10. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, administrators, and/or permitted assigns; however, notwithstanding the foregoing, the Licencee cannot assign without first obtaining written approval and consent of the Licensor, such approval not to be unreasonably withheld. The Licensor is at liberty to assign at his pleasure without leave and further can without leave change the name of the business upon TEN (10) days’ written notice of his intention.

11. The Licencee covenants and agrees with the Licensor to deliver to the Licensor within TWENTY (20) days after each and every fiscal year during the term of this Contract, a statement in writing certified correct by the Licencee showing in reasonable detail gross fees as hereinbefore defined in paragraph 3 herein for each fiscal year involved and in order to facilitate the delivery of the statement, the Licencee shall make and keep detailed records and these records shall be open to the inspection and audit of the Licensor or his agents at all reasonable times. Such detailed records shall be retained and preserved during and for a period of at least one year after the expiry of the TEN (10) year term of this Agreement. The Licensor or his nominee shall have the right at all reasonable times during ordinary business hours to have a person enter the business premises to tabulate the gross fees and to check the Licencee’s methods of maintaining its records.

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

Eventually, the appellant had entered into two such agreements in 1979 (for two separate “territories”), and four such agreements in 1980. Mr Farrell had paid in cash for the year 1979 some $10,200 — the $200 for two “rights to territories”, and the $10,000 respecting two payments of $5,000 each, the $20,000 referred to in paragraph 2 of Exhibit A-1 (supra) with an allowance (as he explained it) for the $15,000 rebate referenced in paragraph 3 of the Agreement. The financial statements from which he claimed a “deduction” in his 1979 tax return were:

LAWRENCE G FARRELL

22 CHILTON RD

TORONTO ONTARIO M4J 3C8

DON MILLS TAXSAVERS

STATEMENT OF INCOME AND EXPENSES

FOR THE YEAR ENDED DECEMBER 31, 1979 FIRST PERIOD OF OPERATION

INCOME:

LICENCE FEES EARNED

SNIL

EXPENSES:

MANAGEMENT FEES	$40,000.00
CAPITAL COST ALLOWANCE	10.00	40,010.00
NET LOSS FROM OPERATIONS		$(40,010.00)
CAPITAL COST ALLOWANCE SCHEDULE
CLASS 14 EXPENDITURE	$200.00
LESS: ONE HALF NOT ELIGIBLE		(100.00)
CLASS 14 ADDITIONS		100.00
1979 ALLOWABLE DEDUCTION @ 10%		(10.00)
CARRY FORWARD TO 1980		90.00

As I comprehend the situation, the 1979 deductions claimed (supra) were not specifically challenged by the Minister (although there is some indication that questions had been raised by Revenue Canada) and Mr Farrell proceeded to increase his contributions in late December 1980 by the payment of a further $20,400 ($400 for four territories, and $20,000 representing 4 x $5,000 each, arising out of paragraphs 2 and 3 of Exhibit A-1 above). In claiming the $80,030 originally involved in this matter, the calculations apparently included the $20,400 above, plus $60,000 for the contingent amounts under paragraph 3 of Exhibit A-1 (supra), minus some costs or adjustments which were not too clearly detailed at the hearing. Mr Farrell agreed that he had not earned any income in 1980, as a result of his 1979 “investment” (although he claimed he thought there had been some income, in his capacity as an “inactive” Taxsavers operator), and there was no indication that he had even set up the semblance of a “business”. He agreed that as a stock-broker, he was not familiar with financial planning, or tax planning, as it might be expected in such a “Taxsavers” business. He had become involved with “Taxsavers” by virtue of a large advertisement in the Globe and Mail newspaper of Toronto, and he agreed that a copy of such an ad, presented by counsel for the respondent, was typical of what he had seen, and to which he had responded. The typical large type comments therein were as follows:

. . . now you must take the time to study opportunities designed to reduce personal income taxation.

An opportunity to purchase a $20,000 personal tax deduction for $5,000.

HOW TO GET A $20,000 TAX DEDUCTION.

Purchase a Taxsavers licence to operate a business territory. Then service it yourself or appoint an agent through Taxsavers to service it on your behalf. The purchase will result in an immediate $20,000 tax deduction for you.

A $20,000 tax deduction costs you $5,100.

I understand that I will be required to pay $5,000 on completion of your agreement and that this will provide me with a $20,000 tax deduction.

To attempt to analyse the Agreement (paragraphs 2 and 3 in particular), only leads one into the never-never land of conflicting and confusing words and phrases — made so, if not deliberately, then at least with only minimum regard for prudence and clarity. As I understand the assertion of the appellant at the hearing, now he is only contesting the disallowance of the $20,000 (four payments of $5,000 each) — and the four payments of $100 each for a further $400. He is focusing on these amounts, because some of the interlocking manipulation of funds and reciprocal commitments referenced in paragraph 3 of the Agreement allegedly had the effect of reducing each total payment of $20,000 (for one territory (paragraph 2)) to the net payment of $5,000 per territory which he can assert was put up in cash.

À written submission on behalf of the appellant was prepared by the legal firm of Mawhinney & Kellough of Vancouver, British Columbia. I have only extracted therefrom arguments which appear to me to require comment:

We respectfully submit that the recent decision of the Tax Court of Canada in Buckler v The Minister of National Revenue, 85 DTC 396 (Tab 2 of Brief of Authorities) is factually very similar to the case at bar and should be followed.

The fact that paragraph 12 of the agreements for the 1979 and 1980 taxation years enables Mr Farrell to rescind the arrangements if the tax deduction for the management fee is disallowed, we respectfully submit, supports Mr Farrell’s position

We respectfully submit that it is clear from Mr Farrell’s testimony that he believed he could take an inactive role under paragraph 5 of the agreement by allowing FPS or appointee to service the defined territory (lines 11 to 30 page 17 and lines 1 to 3 page 18). This belief explains why Mr Farrell may not have been as concerned as he would otherwise have been as to the particular expenditures within his territories. Quite simply, he believed someone else was taking care of it on his behalf. From the letters Mr Farrell received from Financial Planning Services he believed that profits were being generated. We respectfully submit that Mr Farrell’s conduct is similar to that of many taxpayers who are limited partners in ventures such as “MURBs".

The law is clear; there is no requirement that the outlay or expense should result in profit, either in the year of the expense or any other, nor is it necessary to show a particular causal connection between an expenditure and a receipt (see Royal Trust Company v MNR, 57 DTC 1055 (Ex Ct).

As previously noted, a critical element of this case, is that Mr Farrell has reduced his claim to $20,400 — (four times a payment of $5,100 for each one of the four territories to which he acquired "rights"). He bases this claim upon two things — that he paid the $20,400; — and that some "management services" as detailed in paragraph 2 of the Agreement must have been received. In effect, Mr Farrell thereby implies that he received "rights" for $100 and $5,000 worth of "management services" (for each territory) in 1980, — not the $20,000 worth of such services called for in paragraph 2 of the Agreement. I have no idea what he intends to do with respect to the other $15,000 of such management services. By virtue of paragraph 2 he is no longer entitled to demand them from Taxsavers, and accordingly there would appear to be no resultant "tax" claim, — he has eliminated that option (receipt of such services after January 1, 1981) by ending his “first fiscal year" as of December 31, 1980. Certainly that does serious damage to the "$20,000 tax deduction" he badly desired and originally claimed for 1980 for each territory. Paying $5,000 (which he did) and now deducting that $5,000 in 1980 (for some kind of alleged business services) gets him no place as far as improving his financial situation, while still leaving him the problem of showing that even the $5,000 is a legitimate business deduction (establishing a basis of "reasonable expectation of profit" even in later fiscal periods), — arguably the same problem which would face him if he were claiming the full $20,000 of "management fees".

As I see it, Mr Farrell, either was entitled to receive, and did receive $20,000 worth of "management services" in 1980, for each territory, and might claim that amount as an expense from a legitimate "financial planning" business, or he did not receive the management services. That present position — claiming only the $5,000 he actually paid in 1980 (leaving aside what he may have paid it for) has no basis in the testimony or evidence. That is not to say that any similar claim for the full $20,000 (paragraph 2 of the Agreement) would have been more successful — the added hurdles in the way of that claim are obvious and numerous, and must start with the taxpayer supporting the assertion (implicit in his appeal) that the undertaking has a “business” aspect. Suffice it to say that he knew nothing of accounting, financial planning, or income tax matters; was given little or no instruction or assistance in those areas; read little or nothing about the subjects during the times material; set up no establishment or operation which could even loosely be called a "business" — in short he had no interest, involvement or incentive with respect to such a venture before, during or after the period at issue in this appeal. I am not aware that a "business" can be construed or implied under those circumstances, merely because its existence would serve the income tax purposes of an individual. I do not regard the assertion that Mr Farrell received some $2,040 in December 1981, allegedly in return for his filling a role as an "inactive franchisee", however that might be defined, as any indication that the payments he made and wishes to claim represented a business venture. By December 1981, Mr Farrell had paid a total sum of $30,600 to "Taxsavers", and if the terms of paragraph 3 of the agreement had any validity at all he still owed some $90,000. That is not representative, during the year 1980, or in the foreseeable future after that year, of a business situation with a "reasonable expectation of profit" as I understand the term. There can be no question that the term "reasonable expectation of profit" is a difficult one, and does not easily lend itself to precision. Nevertheless, even the most limited and elementary criteria attached to it, would exceed the level reached by the relevant facts in this matter. There is really no evidence that Mr Farrell appreciated the requirement that he enter into a business operation in order to present a credible demand for the “tax deduction" he sought. It would appear to me that he regarded his own obligation as completed when he signed the agreements and paid his money, and that, in his view, such action alone warranted the tax deduction. On the point of the alleged "franchises" for $100 each, it would be incumbent upon Mr Farrell first to prove that he had indeed established a "business", in the income tax sense of the word, before he could claim that the payment of $100 represented a "franchise" or "right" with respect to any such business. Simply paying $100 for something called a “right”, does not establish a "business" and I fail to see that by virtue of the $100 payment in the circumstances of this appeal, that Mr Farrell has placed himself in a position with respect to that amount to claim any income tax benefit. It is not up to the Minister to determine what, if anything, Mr Farrell received for his payment of a total of $20,400 in 1980, and he has not shown in Court that it had anything to do with a business. There are no provisions in the Act, such as RRSPs or MURBs, covering the kind of payment at issue in this appeal, so that aspect of the argument of the appellant is rejected. Simply because a taxpayer is desirous of deferring the liability for income tax until a later more convenient period of time and makes some efforts purportedly toward that objective, does not produce that result automatically.

Further, I wish to note Buckler (supra), in which the learned judge highlighted at page 400 of the DTC publication [[1985] 1 CTC 2428 at 2433] the following:

. .. one cannot be unmindful of the implications of inconsistency here arising from the fact that the Respondent did allow a deduction pursuant to subsection 18(9) of the Act, (supra), of $5,000 out of the total of $20,000 paid.

The Court in the instant case was not faced with a situation in which the respondent had already allowed part of a deduction claimed — $5,000 (which in my view could only have been valid based on a “business” purpose) while denying the balance of the claim of $15,000. It was necessary in this appeal for the taxpayer to show that he had entered into a “business” not merely that he had paid over an amount of money, a barrier to some degree already breached for him by the Minister in Buckler (supra). It may be that the landmark judgment in The Queen v Paul E Graham, [1985] 1 CTC 380; 85 DTC 5256 and the parameters for “reasonable expectation of profits", which may be seen therein and which are reviewed in Gorjup v MNR, [1985] 2 CTC 2194; 85 DTC 530, will ultimately result in a more flexible definition of "business" for income tax purposes, but I am not prepared in this matter to preview that possibility.

There is no requirement to examine the points raised by the Minister and touched on in Buckler (supra), dealing with the possibility that the entire matter was a "sham", or that it would "unduly or artificially reduce the appellant's income for the taxation year’’, since in my view this matter does not touch on the same grounds as Stubart Investments Limited v The Queen, [1984] CTC 294; 84 DTC 6305, no business basis for the expenditure having been established.

I would also add that the final portion of the written submission made on behalf of the appellant has no persuasive value in this income tax appeal:

The financial planning service sector is presently being tapped by trust companies, banks, insurance companies, brokerage firms and various professionals. Obviously there is a market and a profit potential for this type of service. Mr Farrell, in an honest manner and motivated by both business and tax reasons, attempted to financially share in this market but failed. He has lost a substantial portion of his total cash outlay. We respectfully submit that the fact that Mr Farrell was duped is not a basis for denying the amounts in issue.

The appeal is dismissed.

Appeal dismissed.