Rowe
D.J.T.C.C.:
—
The
appellant,
Lorenz,
appeals
from
an
assessment
of
income
tax
with
respect
to
the
1989
taxation
year.
The
appellant,
Parsons,
appeals
from
an
assessment
of
income
tax
with
respect
to
the
1987
taxation
year.
The
appellant,
Murphy,
appeals
from
an
assessment
of
income
tax
with
respect
to
the
1987
taxation
year.
The
appellant,
Rosenthal,
appeals
from
an
assessment
of
income
tax
with
respect
to
the
1988
taxation
year.
The
appeals
were
heard
on
common
evidence
and
all
relate
to
the
participation
by
the
appellants,
separately,
in
a
business
venture
which
involved
the
publication,
marketing
and
distribution
of
a
magazine
called
Enjoy.
Each
appellant
had
claimed
a
business
loss
pertaining
to
the
operation
of
a
magazine
publishing
business
and
the
Minister
of
National
Revenue
(the
“Minister”)
disallowed
the
loss
in
each
instance.
The
appellants
assert
that
the
payment
of
license
fees,
professional
fees,
interest
and
advance
royalties
were
expenses
relating
to
the
publishing
of
Enjoy
and
were
paid
in
order
to
derive
income.
The
Minister’s
position
is
that
each
appellant
-
in
the
relevant
taxation
year
-
did
not
carry
on
a
business
of
publishing
and
distributing
magazines
because
there
was
no
reasonable
expectation
of
profit.
In
the
alternative,
the
Minister
maintains
the
expenses
were
unreasonable
under
the
circumstances
and
therefore
not
deductible
under
the
Income
Tax
Act
(the
“Act”)
and
further
that
the
deduction
claimed
by
each
appellant,
if
allowed,
would
unduly
or
artificially
reduce
his
or
her
income
because
the
transactions
giving
rise
to
the
claimed
deductions
were
a
sham
and
the
deduction
is
therefore
prohibited
by
subsection
245(1)
of
the
Act.
Each
appellant
was
served
with
a
Request
to
Admit
pertaining
to
certain
enumerated
documents,
copies
of
which
were
provided.
There
was
no
response
from
any
appellant
within
the
time
limited
by
the
Request.
Four
binders,
containing
documents,
were
admitted
into
evidence,
as
follows:
Exhibit
R-l
-
tabs
1-34,
inclusive
Exhibit
R-2
-
tabs
35-37,
inclusive
Exhibit
R-3
-
tabs
38-48,
inclusive
Exhibit
R-4
-
tabs
49-64,
inclusive
The
position
of
the
Minister
as
set
forth
in
the
Reply
to
the
Notice
of
Appeal
of
the
appellant,
Murphy,
is
set
out
below
and,
except
for
particulars
specific
to
Murphy,
applies
to
all
of
the
appellants
in
describing
the
mechanics
of
the
transactions
which
are
the
subject
matters
of
these
appeals.
(a)
the
Appellant
claimed
the
business
loss
as
a
result
of
his
participation
in
a
tax
scheme
involving
the
following
companies:
Applied
Research
Inc.
(“Applied”)
Capella
Holdings
Ltd.
(“Capella”)
Procyon
Publishing
Corporation(“Procyon”)
Cawin
Financial
Corporation
(“Cawin”)
H.
N.
Thill
and
Associates
Ltd.
(“Thill”)
(b)
Applied
is
a
Grand
Cayman
Islands
Company
incorporated
on
December
3,
1981;
(c)
Capella
is
a
British
Columbia
company
incorporated
on
September
29,
1987;
(d)
Procyon
is
a
British
Columbia
company
incorporated
on
October
26,
1987;
(e)
Cawin
is
a
British
Columbia
company
incorporated
on
October
6,
1983;
(f)
Applied
owned
all
of
the
shares
of
Cawin,
and
Cawin,
in
turn,
owned
99%
of
the
shares
of
Procyon;
(g)
the
sole
shareholder
and
director
of
Capella
was
Keith
Wilson,
who
was
also
a
director
of
Thill,
Cawin,
Procyon
and
Applied;
(h)
the
particulars
of
the
tax
scheme
were
as
follows:
(i)
Applied
purportedly
owned
the
copyright
to
“Enjoy
Magazine”;
(ii)
Thill,
as
agent
for
Applied
promoted
the
sale
of
licences
to
publish,
distribute
and
market
Enjoy
Magazine
in
specific
geographic
areas
of
Canada;
(iii)
each
participant
(the
“Participant”)
in
the
tax
scheme
would
sign
a
License
Agreement
with
Applied
whereby
he/she
would
agree,
inter
alia,
to
pay
a
licence
fee
of
$1,000
and
an
Advance
Royalty
of$30,000
to
Applied
for
each
territory
for
which
a
licence
was
purchased;
(iv)
simultaneously,
the
Participant
would
enter
into
an
Operating
Agreement
with
Procyon
whereby
the
latter
would
agree
to
publish,
distribute
and
market
Enjoy
Magazine
as
the
exclusive
authorized
and
independent
representative
of
the
Participant;
(v)
the
Operating
Agreement
called
for
Procyon
to
deposit
with
Capella
a
performance
bond
of
$25,000
for
each
territory;
(vi)
Capella
would
allegedly
loan
the
Participant
$26,000
towards
the
payment
of
the
Advance
Royalty
for
each
territory;
(vii)
the
Participant
would
sign
a
promissory
note
to
Capella
for
the
amount
of
the
alleged
loan
and
would
receive
a
cheque
in
that
amount,
which
the
Participant
would
endorse
over
to
Applied.
The
balance
of
the
Advance
Royalty
($5,000)
was
paid
by
the
Participant
to
Applied;
(viii)
the
transactions
referred
to
above
involved
a
circulation
of
funds
between
Applied,
Cawin,
Procyon,
Capella
and
the
Participant,
with
the
only
actual
injection
of
funds
being
the
$5,000
payment
made
by
the
Participant
to
Applied;
(ix)
in
filing
his/her
income
tax
return
the
Participant
would
claim
in
respect
of
each
geographic
territory
for
which
he/she
purchased
a
licence,
a
deduction
of
$31,000
plus
miscellaneous
carrying
charges,
on
the
basis
that
this
amount
represented
an
expense
incurred
by
the
taxpayer
in
the
course
of
carrying
on
a
business.
As
no
income
was
derived
from
the
alleged
business
the
effect
of
the
claimed
deduction
would
be
the
creation
of
a
loss,
which,
in
the
Participant’s
view
could
serve
to
reduce
the
Participant’s
other
sources
of
income.
(i)
during
1987
the
Appellant
signed
simultaneously
the
following:
1)
a
document
entitled
“License
Agreement”
with
the
Appellant
shown
as
“Licensee”
and
Applied
shown
as
“Licensor”;
2)
a
document
entitled
“Operating
Agreement”
with
Procyon;
3)
a
document
entitled
“Promissory
Note”
with
Capella;
4)
a
document
entitled
“Assignment”
with
Capella;
(j)
the
document
entitled
“License
Agreement”
purported
to
create
the
following
rights
and
obligations:
-
the
Appellant
was
granted
the
right
and
licence
to
publish,
distribute
and
market
a
publication
referred
to
as
Enjoy
Magazine
within
two
specified
territories
for
a
period
of
one
year
in
consideration
of
which
the
Appellant
was
to
pay
Applied
Research
$1,000
per
unit
as
a
“license
fee”,
and
$30,000
per
unit
as
an
“Advance
Royalty”;
-
the
licence
was
renewable
by
the
Appellant
on
an
annual
basis
on
payment
of
a
$100
per
unit
fee;
-
the
Appellant
was
to
pay
to
Applied
a
royalty
of
25
cents
per
copy
of
Enjoy
Magazine
distributed
within
the
territory;
-
the
$30,000
per
unit
payment
described
as
an
Advance
Royalty
was
in
respect
of
the
royalty
due
on
the
first
120,000
copies
of
Enjoy
Magazine
distributed
by
the
Appellant
within
each
territory,
and
the
Appellant
had
no
claim
for
a
refund
of
any
of
the
Advance
Royalty;
(k)
the
document
entitled
“Operating
Agreement”
purported
to
create
the
following
rights
and
obligations:
-
the
Appellant
appointed
Procyon,
for
a
term
of
six
years,
as
his
exclusive,
authorized
and
independent
representative
to
publish,distribute
and
market
Enjoy
Magazine
in
the
territory
licensed
by
the
Appellant;
-
Procyon
agreed
to
pay
the
Appellant
a
royalty
of
30
cents
per
copy
of
Enjoy
Magazine
distributed
within
the
territory;
-
Procyon
was
to
deposit
a
performance
bond
of
$50,000
with
Capella;
(l)
the
Appellant
signed
a
document
entitled
“Promissory
Note”
to
Capella
for
an
alleged
loan
of
$52,000.00
to
fund
the
payment
of
the
Advance
Royalty,
and
as
collateral
for
the
note
he
assigned
to
Capella
his
claim
against
the
performance
bond
and
50%
of
the
royalties
due
from
Procyon
until
the
loan
was
repaid...
Wilfred
Rosenthal
testified
he
is
a
resident
of
West
Vancouver,
British
Columbia.
He
claimed
a
business
loss
in
the
sum
of
$31,000
for
his
1988
taxation
year
resulting
from
his
participation
in
what
he
regarded
as
“a
strict
business
investment”.
He
thought
it
would
provide
income
after
his
retirement.
He
stated
that
a
partner
had
introduced
him
to
Ken
Holloway
who
was
associated
with
Thill.
Holloway
showed
him
a
copy
of
Enjoy
magazine
-
Exhibit
A-2
-
published
in
the
United
States
and
told
him
that
there
would
be
a
Canadian
version
produced.
The
appellant
stated
Holloway
also
showed
him
another
magazine
called
Just
Grand-Canada’s
Grandparent
Magazine
-
Exhibit
A-3.
As
a
result
of
his
discussions
with
Holloway,
the
appellant
decided
to
invest
and
signed
a
Letter
of
Intent
-
Exhibit
A-
1,
dated
April
29,
1988.
He
paid
the
sum
of
$5,000
to
Thill
and
expected
to
be
assigned
a
territory
within
British
Columbia
in
which
he
would
be
the
sole
distributor
of
the
magazine
when
it
was
published.
He
understood
the
magazine
would
be
produced
in
Richmond,
British
Columbia
and
details
of
marketing
would
be
worked
out
later.
He
renewed
his
license
to
publish
and
market
Enjoy
magazine
for
the
1990
year
by
paying
the
sum
of
$100.00
and
received
a
letter
-
Exhibit
A-4
-
dated
June
19,
1990
from
Henry
Thill,
President
of
Thill,
advising
that
a
publishing
contract
had
been
negotiated,
on
his
behalf,
with
Procyon
and
Maturity
Communications
Inc.
(MCI)
which
would
commence
publishing
Canadian
Enjoy
with
the
first
issue
coming
out
in
July,
1990
with
an
initial
circulation
of
“slightly
over
100,000”.
In
July,
1990,
Rosenthal
stated
he
asked
Holloway
about
the
magazine
and
received
a
response
to
the
effect
there
had
been
problems
with
the
publishing
company
and
a
new
publisher
would
have
to
be
located
to
produce
the
magazine.
He
was
somewhat
concerned
but
took
comfort
in
an
assurance
from
Henry
Thill
in
a
letter
dated
April
29,
1988
-
Exhibit
A-5
-
that
“should
a
challenge
to
the
tax
treatment
of
this
business
occur,
H.
N.
Thill
&
Associates
Inc.,
is
prepared
to
arrange
defence,
pay
legal
fees
and
other
costs
in
order
to
bring
a
test
case
to
court
on
behalf
of
you
and
the
rest
of
our
clients”.
He
identified
the
licensing
agreement
dated
April
28,
1988
he
had
entered
into
with
Applied
-Exhibit
A-6
-
as
well
as
the
agreement
of
the
same
date
with
Procyon
-
Exhibit
A-7
-
whereby
he
agreed
that
Procyon
would
be
his
exclusive
agent
to
publish,
distribute
and
market
Enjoy
magazine
in
his
territory.
He
stated
he
understood
from
his
discussions
with
Holloway
that
various
corporations
were
interconnected
and
several
agreements
were
necessary
in
order
that
Enjoy
could
be
published.
He
had
been
a
securities
salesman
in
Vancouver
for
12
years
and
had
also
been
in
the
real
estate
rental
business.
He
considered
that
his
investment
of
$5,000
was
reasonable
in
order
to
become
involved
in
the
publishing
business.
On
January
14,
1991
he
received
a
Notice
of
Reassessment
pertaining
to
his
deduction
of
a
business
loss
for
his
1988
taxation
year
in
which
the
Minister
disallowed
the
claim.
He
went
to
Holloway
at
Thill
and
spoke
to
him
about
the
reassessment
and
on
March
26,
1991
signed
a
Notice
of
Objection
which
had
been
prepared
for
him
by
the
staff
at
Thill.
He
also
spoke
to
his
own
accountant
who
had
prepared
his
tax
return
in
which
the
loss
in
the
sum
of
$31,000
had
been
calculated
on
the
basis
of
information
received
from
Thill.
He
stated
he
did
not
think
it
was
necessary
for
him
to
do
any
independent
analysis
of
the
information
provided
to
him
and
felt
he
could
rely
on
Holloway
and
on
the
fact
that
he
had
been
shown
actual
copies
of
magazines
published
in
the
United
States.
He
was
merely
investing
in
a
Canadian
version.
He
believed
he
would,
in
due
course,
be
occupied
in
managing
and
supervising
the
distribution
of
the
magazine
within
his
own
territory
and
that
income
could
be
earned
to
assist
in
his
retirement.
In
cross-examination,
the
appellant
stated
he
expected
revenue
to
flow
to
him
from
advertising
and
royalties
but
the
precise
details
would
have
to
be
worked
out
after
the
magazine
was
published.
He
was
confident
Holloway
and
Thill
were
looking
after
his
interests.
He
had
not
dealt
with
Thill
before
but
when
he
visited
the
office
he
was
satisfied
the
business
had
been
there
for
some
time.
He
did
not
appreciate
that
in
total
-
in
light
of
the
number
of
investors
-
there
were
to
be
up
to
200
million
magazines
distributed
annually
and
stated
the
publishing
venture
was
new
to
him
but
he
accepted
the
word
of
the
people
at
Thill.
Even
though
he
had
entered
into
an
agreement
with
Procyon
-
Exhibit
A-7
-
giving
that
company
an
exclusive
six-
year
term
to
perform
all
of
the
work
related
to
the
publishing,
distribution
and
marketing
of
Enjoy
magazine
in
his
assigned
territory,
he
still
believed
that
he
would
be
playing
a
role
in
the
business.
He
was
aware
of
tax
benefits
to
the
investment
but
his
main
purpose
for
investing
was
to
secure
an
income
for
the
future.
He
did
not
know
what
his
losses
might
be
as
a
result
of
participating
in
the
Enjoy
venture
and
he
has
never
been
asked
to
pay
the
$26,000
promissory
note
to
Capella.
This
money
had
been
borrowed
so
he
could
pay
an
advance
royalty
to
Applied
but
he
is
satisfied
his
total
obligation
was
never
to
exceed
the
sum
of
$5,000
he
had
paid
to
Thill.
When
he
received
his
tax
refund
in
excess
of
$18,000,
he
realized
a
good
portion
of
that
had
flowed
from
claiming
a
business
loss
in
Enjoy
and
he
did
not
concern
himself
as
to
how
he
could
have
a
loss
of
$31,000
from
an
investment
of
$5,000.
He
stated
he
thought
he
would
make
money
in
the
future
and
knew
Thill
was
selling
licenses
to
investors
for
the
U.S.
version
of
Enjoy.
He
did
not
know
who
controlled
the
various
companies
involved
but
understood
they
were
working
together.
He
did
not
specifically
recall
signing
a
promissory
note
in
the
sum
of
$26,000
but
when
it
was
shown
to
him
-
Exhibit
R-5
-
agreed
he
must
have
done
so
upon
the
instructions
of
Holloway.
Later,
when
he
spoke
to
Holloway
about
the
complexity
of
the
various
agreements,
he
was
told
there
had
been
some
“tax
problems”
which
had
been
resolved.
He
stated
that
Thill
had
not
lived
up
to
the
commitment
to
help
out
with
his
tax
problems
arising
from
the
investment.
James
Murphy
testified
he
lives
in
Calgary,
Alberta,
is
self-
employed
and
that,
in
1987,
he
was
approached
by
a
representative
of
Thill
who
solicited
him
to
make
an
investment
in
Enjoy
magazine.
He
took
the
material
to
his
accountant
and
his
lawyer
and
thereafter
decided
to
purchase
two
units
which
would
give
him
the
rights
to
distribute
the
magazine
within
two
territories.
He
understood
from
the
Thill
representative
that
he
would
be
the
only
investor
in
Alberta.
He
understood
that
revenue
would
be
derived
from
selling
advertising
and
that
Procyon
would
be
the
exclusive
marketer
of
the
magazine
pursuant
to
the
agreement
he
had
signed
with
it.
In
1990,
he
queried
Henry
Thill
about
the
lack
of
progress
in
publishing
the
magazine
and
was
told
the
problem
was
caused
by
one
or
more
of
the
other
companies
involved
and
he
assumed
these
other
entities
were
all
dealing
with
each
other
-
and
with
Thill
-at
arm’s
length.
The
appellant
stated
he
is
a
person
experienced
in
sales
and
marketing
and
he
made
his
investment
on
the
basis
that
advertising
revenue
would
lead
to
a
profit
if
1,000,000
copies
a
month
of
Enjoy
could
be
distributed.
Since
he
had
been
told
by
the
Thill
representative
that
he
had
the
exclusive
right
to
distribute
the
magazine
within
Alberta,
he
was
confident
that
even
without
any
special
knowledge
of
the
magazine
business
the
proposition
was
viable.
He
had
seen
the
copy
of
Enjoy
-
Exhibit
A-2
-
and
the
other
magazine
-
Exhibit
A-3.
He
was
aware
his
investment
could
produce
a
tax
refund
upon
claiming
a
business
loss
for
the
1987
taxation
year.
He
invested
in
December,
1987,
and
thereafter
was
in
Vancouver
every
three
months.
As
a
result,
during
1988
and
1989
he
visited
the
Thill
office
and
spoke
to
Ken
Holloway
who
told
him
Thill
was
looking
for
a
new
publisher.
The
appellant
paid
his
annual
fee
of
$100
to
renew
his
license
with
Applied
for
1988
and
1989.
In
cross-examination,
he
stated
he
had
been
contacted
by
Revenue
Canada
concerning
his
claim
for
a
business
loss
in
the
sum
of
$64,410
relating
to
his
investment
in
Enjoy
and
that
he
requested
his
1987
return
of
income
be
assessed
forthwith
on
the
basis
the
loss
not
be
allowed.
When
he
received
his
Notice
of
Assessment,
he
filed
a
Notice
of
Objection
and
proceeded
to
appeal
once
the
Notice
of
Confirmation
had
been
issued
by
the
Minister
on
October
28,
1994.
He
was
referred
to
a
bundle
of
documents
-
Exhibit
R-6
-
which
he
identified
as
relating
to
his
investment
with
Thill.
He
understood
that
Enjoy
was
going
to
be
a
recipe
magazine
designed
for
a
well-
focused
and
affluent
readership
within
specified
territories.
Apart
from
that,
he
had
nothing
of
substance
upon
which
to
base
any
belief
that
the
various
companies
involved
were
capable
of
carrying
out
an
obligation
to
publish
and
distribute
the
magazine.
He
did
not
receive
any
guarantee
from
Thill
that
he
would
be
the
only
distributor
in
Alberta.
In
signing
the
various
agreements
with
Thill,
Capella,
Applied
and
Procyon
he
did
not
take
note
that
the
address
for
all
of
these
entities
was
the
same,
and
was
the
working
office
of
Thill.
Because
he
bought
two
units,
he
signed
two
sets
of
documents
and
borrowed
a
total
of
$52,000
from
Capella
for
the
purpose
of
making
payment
of
advance
royalties
to
Applied.
He
never
expected
to
have
to
pay
this
sum
and
was
aware
that
his
tax
benefit
would
exceed
his
total
cash
outlay
of
$10,000.
William
Parsons
testified
that
he
lives
in
Surrey,
British
Columbia,
and
is
a
realtor.
He
stated
that
the
evidence
given
by
Rosenthal
and
Murphy
applied
to
his
situation
as
well.
Some
of
his
business
associates
had
known
of
Thill.
Holloway,
from
Thill,
approached
him
on
the
basis
there
was
a
good
investment
opportunity
available.
The
appellant
stated
that
because
he
is
a
realtor,
due
to
legislation
governing
his
occupation,
he
is
restricted
in
the
manner
by
which
he
can
earn
additional
income
and
one
must
be
a
full-time
realtor
in
order
to
retain
a
license.
He
thought
Enjoy
could
succeed
in
the
British
Columbia
magazine
market.
As
a
realtor,
he
has
done
a
lot
of
advertising
in
magazines
over
the
years
and
is
aware
of
the
longevity
of
some
publications.
In
return
for
his
investment
he
was
not
aware
of
being
assigned
a
specific
territory
but
assumed
it
would
be
within
British
Columbia.
He
did
not
have
any
knowledge
of
the
publishing
business.
He
continued
to
renew
his
license
by
paying
Applied
the
sum
of
$100
a
year
for
the
next
five
years
even
though
no
magazine
was
being
produced.
In
his
view,
it
was
a
nominal
amount
to
maintain
his
involvement
with
Enjoy.
When
he
contacted
Holloway
for
an
explanation
about
the
absence
of
any
magazine,
he
was
given
excuses
of
one
kind
or
another.
After
his
business
loss
of
$31,000
was
denied,
he
contacted
Thill
and
a
Notice
of
Objection
was
prepared
for
him
which
he
signed.
In
cross-examination,
the
appellant
agreed
that
on
September
28,
1988,
Revenue
Canada
sent
him
a
letter
advising
that
his
loss
would
be
reviewed
and
enclosed
a
questionnaire
pertaining
to
his
Enjoy
investment.
He
identified
various
documents
he
had
signed
-
Exhibit
R-7
-
and
stated
he
thought
he
would
share
with
others
the
right
to
distribute
the
magazine
within
the
province
of
British
Columbia
as
opposed
to
being
assigned
a
specific
territory.
He
signed
the
documents
and
agreements
on
December
31,
1987
and
knew
there
would
be
a
tax
advantage
in
making
the
investment
but
that
this
was
not
his
main
reason
for
being
involved.
He
was
not
concerned
about
signing
a
promissory
note
to
Capella
in
the
sum
of
$26,000
bearing
interest
at
10.5%
per
annum.
He
had
spent
about
one-half
hour
with
Henry
Thill
prior
to
signing
the
investor
documents.
He
also
knew
two
business
associates
who
had
previously
invested
with
Thill.
He
was
not
aware
that
Revenue
Canada
had
taken
issue
with
any
of
the
previous
activities
marketed
by
Thill.
He
did
not
receive
any
independent
accounting
or
legal
advice
and
has
never
been
called
on
to
repay
the
note
to
Capella.
He
does
not
know
of
any
issue
of
Enjoy
magazine
that
had
ever
been
published
and
does
not
recall
being
told
that
100
separate
licenses
to
publish
and
distribute
Enjoy
would
be
issued.
In
any
event,
he
had
“no
reason
to
look
into
it”.
Benita
Lorenz
testified
she
is
a
teacher
living
in
Richmond,
British
Columbia
and
that
she
overheard
a
conversation
between
two
of
her
colleagues
concerning
their
investment
with
Thill.
She
obtained
the
phone
number
of
Thill
and
telephoned
Ken
Holloway.
She
told
him
she
was
interested
in
investing
in
the
publishing
venture.
Later,
she
met
with
Holloway
and
handed
him
a
$5,000
cheque
in
order
to
proceed
with
the
investment.
She
did
not
know
anything
about
the
publishing
business
and
did
not
know
how
business
revenue
would
be
produced
but
felt
that
somehow
“down
the
road”
she
could
augment
her
income.
When
she
signed
the
investor
documents
she
did
not
ask
many
questions
even
when
signing
a
promissory
note
and
stated
the
investment
was
an
“act
of
faith”.
When
the
time
came
for
filing
her
tax
return
she
went
to
Thill’s
office
and
had
it
prepared.
She
did
not
understand
how
the
loss
was
calculated
but
did
receive
a
tax
refund.
She
paid
the
annual
license
fee
of
$100
for
four
or
five
years.
After
receiving
notice
that
her
return
for
the
1989
taxation
year
had
been
reassessed,
she
went
to
see
Holloway
at
Thill
and
a
Notice
of
Objection
was
prepared
for
her
to
sign.
In
cross-examination,
she
identified
documents
-
Exhibit
R-8
-
she
signed
in
order
to
make
her
investment.
She
stated
she
did
not
discuss,
with
Holloway,
the
matter
of
a
tax
refund
and
assumed
her
co-workers
had
all
made
money
as
a
result
of
investing
with
Thill.
She
agreed
she
had
invested
only
$5,000
and
had
received
a
tax
refund
in
the
sum
of
$11,653.
In
the
past
she
had
always
prepared
her
own
tax
return
but
allowed
staff
at
Thill
to
prepare
her
1989
return.
She
did
not
question
the
origin
of
the
refund
or
consider
it
might
have
a
connection
to
the
business
loss.
She
did
not
recall
signing
a
promissory
note
and
has
no
idea
why
she
would
have
signed
a
document
entitled
Undertaking
&
Acknowledgement
issued
under
subsection
123(3)
of
the
Securities
Regulation
made
pursuant
to
the
Securities
Act
of
British
Columbia
when
she
did
not
read
any
of
the
documents
pertaining
to
her
investment
in
Enjoy
magazine
other
than
the
opening
paragraph
in
each
one
and,
perhaps,
other
“bits
and
pieces”.
She
stated
she
thought
she
may
have
seen
one
of
the
magazines
referred
to
by
Wilfred
Rosenthal
during
his
testimony.
William
Holmes
testified
that
he
has
been
a
Chartered
Accountant
for
25
years
and
for
the
past
12
years
has
worked
as
an
auditor
at
Revenue
Canada.
He
did
an
audit
of
the
program
known
as
Enjoy
Canada
relating
to
the
investment
by
various
individuals
in
a
publishing
venture.
He
examined
the
books
and
records
of
the
following
corporations:
Capella,
Cawin,
Thill,
Procyon
and
Applied.
He
obtained
banking
records
and
investor
documents
for
each
transaction.
In
total,
72
persons
had
purchased
79
or
80
units
in
the
Enjoy
venture.
He
summarized
banking
transactions
for
the
five
companies
for
the
period
October
27,
1987
to
May
29,
1989.
He
listed
bank
deposits
and
disbursements
from
each
account.
He
detected
a
pattern
of
deposits
from
one
company
to
another
in
a
fashion
that
caused
him
to
conclude
that
it
was
a
self-cancelling
circularization
of
funds
which
was
made
possible
because
all
of
the
companies
involved
had
accounts
at
the
same
branch
of
Lloyds
Bank
in
Richmond.
At
all
times
each
account
had
a
minimal
balance
and
it
was
necessary
for
a
deposit
from
another
entity
to
be
made
before
a
cheque
to
another
corporation
could
clear
the
account.
He
found
21
examples
of
the
circularization
of
funds.
He
traced
cheques
from
one
company
to
another
and
on
through
the
circuit.
The
effect
of
that
kind
of
movement
of
money
is
to
create
the
appearance
of
lots
of
activity
so
that
large
assets
and
liabilities
show
up
on
a
balance
sheet.
All
of
the
payments
from
one
company
to
another
had
to
do
with
advance
royalties
and
license
fees.
He
stated
that
Applied
owned
100%
of
the
shares
of
Cawin.
Capella
would
issue
a
cheque
to
an
investor
pursuant
to
a
loan
arrangement
secured
by
a
promissory
note
and
the
investor
would
endorse
the
cheque
in
favour
of
Applied
-
for
payment
of
advance
royalties
-
and
it
would
be
deposited
into
the
account
of
Applied.
Then,
Applied
wrote
a
cheque
to
Cawin
and
Cawin
wrote
a
cheque
to
Procyon
and
a
cheque
to
Capella
for
$1,000.
Procyon
wrote
a
cheque
in
the
sum
of
$25,000
to
Capella
for
the
performance
bond.
Cawin
was
the
funding
arm
of
Applied.
Holmes
referred
to
a
spreadsheet
he
had
prepared
and
labelled
Analysis
of
Circularization
of
Funds
found
in
the
documents
at
Tab
57
of
Exhibit
R-4.
The
first
example
was
a
series
of
transactions
occurring
on
December
23,
1987.
He
pointed
to
an
entry
indicating
that
on
December
23,
1987,
11
cheques,
totalling
$307,000,
had
been
issued
by
Capella
to
various
investors
and
these
had
been
all
endorsed
in
favour
of
Applied
and
deposited
to
the
Applied
account.
Applied
wrote
a
cheque
in
the
sum
of
$315,000
to
Cawin
which
went
into
the
Cawin
account.
Cawin
then
issued
a
cheque
in
the
sum
of
$302,000
to
Procyon
which
was
deposited
into
the
Procyon
account.
Cawin
also
wrote
Capella
a
cheque
for
$10,000
which
went
into
the
Capella
account.
Procyon
wrote
a
cheque
to
Capella
in
the
sum
of
$300,000
which
was
deposited
into
the
Capella
account
so
that
Capella
would
have
the
money
to
cover
the
cheques
it
had
issued
to
the
various
investors
totalling
$307,000
which
they
had
endorsed
to
Applied.
In
order
to
illustrate
the
movement
of
funds,
Holmes
prepared
a
document
labelled
Schematic
of
the
Circularization
of
Funds
which
was
entered
as
Exhibit
R-9.
He
explained
the
diagram
pertaining
to
circularizations
of
funds
on
February
25,
1988.
Procyon
was
not
included
in
that
particular
circuit.
In
that
instance,
nine
cheques
to
investors
-
totalling
$286,000
-
were
issued
by
Capella
and
these
were
promptly
endorsed
by
them
in
favour
of
Applied
and
deposited
to
the
Applied
account.
Applied
wrote
a
cheque
to
Cawin
in
the
sum
of
$285,000
and
Cawin,
in
turn,
wrote
a
cheque
to
Capella
for
$285,000.
He
stated
there
were
12
more
circularizations
from
April
1,
1988
to
April
30,
1989
and
referred
to
the
schematic
on
Exhibit
R-9
pertaining
to
transactions
dated
December
21,
1988
which
he
had
considered
to
be
a
perfect
example
of
the
circularization.
On
that
day
Capella
issued
five
cheques,
totalling
$109,000,
to
investors.
These
cheques
were
all
endorsed
as
required
in
favour
of
Applied
and
went
into
the
Applied
account.
Applied
wrote
a
cheque
in
the
sum
of
$109,000
to
Cawin
which
it
deposited
and
then
issued
a
cheque
in
the
sum
of
$100,000
to
Procyon.
The
balance
of
$9,000
went
to
Capella
where
it
was
soon
joined
by
the
other
$100,000
when
the
Procyon
cheque
to
Capella
was
deposited
into
the
Capella
account.
The
diagram
explaining
the
December
21,
1988
transactions
is
reproduced
below:
Holmes
stated
that
he
prepared
a
summary
of
net
deposits
and
disbursements
and
attempted
to
eliminate
the
effect
of
transfers
of
funds
between
the
various
corporations.
Tab
54
of
Exhibit
R-4
is
the
Summary
of
Disbursements
and
the
Analysis
of
Flow
of
Funds
is
at
Tab
55.
He
pointed
to
the
entry
of
the
sum
of
$446,013
which
represented
the
total
of
funds
paid
in
by
investors.
He
transported
that
sum
to
a
worksheet
he
prepared
-
Tab
52
-
which
was
an
Analysis
of
Disbursements
and
he
concluded
that
there
was
a
total
of
$473,228
in
the
system.
The
disbursements
out
of
the
system
were
as
follows:
$314,200
to
Thill
28,543
to
principals
or
spouses
of
principals
of
Thill
51,323
to
consultants
retained
by
Thill
and/or
employees
of
Thill
40,600
to
Omni
Educational
for
marketing
of
Advance
Reading
course
program
(Speed
Read)
1,000
to
Plymouth
Publications
re:
US
Enjoy
magazine
These
disbursements
totalled
$435,666
and
Holmes
estimated
that
the
remaining
amount
of
nearly
$40,000
may
have
been
spent
by
Thill
and
related
companies
on
expenses
which
appeared
to
be
attributable
to
costs
related
to
planning
for
publication
of
the
Canadian
version
of
Enjoy
magazine.
He
noted
that,
on
occasion,
an
investor
would
write
a
cheque
in
the
sum
of
$5,000
to
Thill
-
in
trust
for
Applied
-
and
the
funds
would
just
remain
in
the
Thill
account
and
not
make
the
trip
through
the
circuit.
The
appellant,
Rosenthal,
had
no
questions
for
Holmes.
The
appellant
Murphy
cross-examined
Holmes
as
to
whether
he
was
satisfied
as
to
the
accuracy
of
his
diagram
-
Exhibit
R-9
-
pertaining
to
the
movement
of
funds.
Holmes
stated
that
he
was
satisfied
and
further
commented
that
he
was
able
to
identify
certain
disbursements
to
third
parties
which
may
have
been
attributable
to
pre-production
costs
of
Enjoy
magazine,
but
of
the
sum
of
$51,323
paid
to
consultants
and
employees
most
of
that
was
paid
to
the
principals
of
the
companies
or
their
spouses.
The
appellant
Parsons
asked
Holmes
why
Revenue
Canada
had
not
warned
the
various
investors
of
the
nature
of
the
audit.
Holmes
stated
that
taxpayers
had
been
sent
a
proposal
letter
explaining
the
reasons
behind
the
forthcoming
reassessments
in
which
the
business
losses
claimed
from
the
Enjoy
ventures
were
being
disallowed.
The
appellant
Rosenthal
submitted
that
he
had
always
believed
the
tax
aspects
of
the
investment
were
merely
under
review.
The
appellant
Murphy
submitted
that
as
an
investor
he
merely
contracted
with
various
other
persons
to
carry
on
the
business
and
that
this
is
normal
commercial
practice.
The
appellant
Parsons
submitted
he
had
merely
attempted
to
invest
in
a
business
which
could
have
led
to
profit
and
stated
he
still
believes
Revenue
Canada
should
have
advised
investors
of
tax
problems
with
the
investment.
The
appellant
Lorenz
adopted
the
submissions
of
Parsons
and
Murphy.
Counsel
for
the
respondent
submitted
it
was
clear
the
assumptions
of
fact
relied
on
by
the
Minister
had
not
been
challenged
and
that
there
was
no
reasonable
expectation
of
profit
for
the
alleged
business
purported
to
have
been
carried
on
by
any
of
the
appellants
during
the
relevant
taxation
year.
In
the
case
of
Watson
v.
R.,
(sub
nom.
Watson
v.
Canada)
[1995]
2
C.T.C.
2460,
the
Honourable
Judge
Hamlyn,
Tax
Court
of
Canada,
considered
the
situation
involving
the
taxpayers
who
had
invested
with
Thill
in
the
Enjoy
magazine
venture
in
the
United
States.
In
that
case,
only
one
issue
of
Enjoy
was
printed
and
less
than
20%
of
the
copies
were
actually
distributed.
In
the
within
appeal,
not
one
copy
of
Enjoy
Magazine
-
the
Canadian
version
-was
ever
produced.
A
closer
examination
of
the
disbursements
identified
by
Holmes
during
his
audit
indicates
it
is
doubtful
there
was
much
more
than
$15,000
spent
in
relation
to
attempting
to
publish
the
magazine
as
the
other
disbursements
to
printers
and
others
may
have
been
in
payment
of
services
rendered
to
Thill
for
other
tax
schemes
being
promoted
during
the
same
general
time
frame.
However,
nothing
turns
on
the
amount
of
money
that
may
have
been
expended
in
payment
of
services
to
third
parties
not
related
to
the
Thill
group.
In
any
event,
the
players
on
the
Thill
team
were
basically
the
same
as
in
Watson,
supra,
and
there
is
little
to
differentiate
between
the
facts
there,
or
in
the
cases
quoted
therein,
and
in
the
within
appeals.
At
page
2467
and
following
of
his
judgment,
Hamlyn
J.T.C.C.
stated:
Computation
of
loss
from
a
business
Section
3
of
the
Act
sets
out
the
rules
to
determine
a
taxpayer’s
income.
A
business
loss
is
taken
into
account
by
virtue
of
paragraph
3(d)
which
states
that
any
positive
amount
determined
under
paragraph
3(c)
is
reduced
by
“the
aggregate
of
all
amounts
each
of
which
is
his
loss
for
the
year
from
business.”
The
provisions
of
the
Act
that
apply
to
the
computation
of
a
loss
from
a
business
are
those
that
apply
to
the
computation
of
income
from
a
business,
or
in
the
words
of
subsection
9(2):
9(2)
a
taxpayer’s
loss
for
a
taxation
year
from
a
business
or
property
is
the
amount
of
his
loss,
if
any,
for
the
taxation
year
from
that
source
computed
by
applying
the
provisions
of
this
Act
respecting
computation
of
income
from
that
source...
The
general
provision
of
the
Act
for
calculating
business
income
(and
therefore
a
business
loss)
is
subsection
9(1)
which
states
that
:
9(1)
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
In
calculating
this
profit
(or
loss)
paragraph
18(l)((a)
stipulates
that
no
deduction
shall
be
made
in
respect
of:
18(1
)(a)
an
outlay
or
expense
except
to
he
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
the
business
or
property.
Even
if
an
outlay
or
expense
is
made
for
that
purpose,
it
still
is
subject
to
the
general
imitation
of
section
67
that:
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense
...
except
to
the
extent
that
the
outlay
or
expense
was
reasonable
in
the
circumstances.
For
the
taxation
year
in
issue,
the
version
of
subsection
245(1)
that
applied
also
disallowed
deductions
made:
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
Meaning
of
business
In
any
event,
a
loss
from
a
business
presupposes
that
there
is
a
business.
Subsection
248(1)
gives
an
extended
definition
of
“business”
as
including
a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatever
and...an
adventure
or
concern
in
the
nature
of
trade...
However,
in
this
case,
it
is
the
ordinary
meaning
of
“business”
which
is
relevant.
In
Moloney,
supra,
it
was
noted
at
pages
C.T.C.
227-28,
D.T.C.
6570
that
for
an
activity
to
be
a
business
it
must
produce
income
in
its
own
right
and
not
merely
from
applying
the
Act:
While
it
is
trite
law
that
a
taxpayer
may
so
arrange
his
business
as
to
attract
the
least
possible
tax
,
it
is
equally
clear
in
our
view
that
the
reduction
of
his
own
tax
cannot
by
itself
be
a
taxpayer’s
business
for
the
purpose
of
the
Income
Tax
Act.
To
put
the
matter
another
way,
for
an
activity
to
qualify
as
a
“business”
the
expenses
of
which
are
deductible
under
paragraph
18(l)(a)
,
it
must
not
only
be
one
engaged
in
by
the
taxpayer
with
a
reasonable
expectation
of
profit,
but
that
profit
must
be
anticipated
to
flow
from
the
activity
itself
rather
than
exclusively
from
the
provisions
of
the
taxing
statute.
More
recently,
in
Bendall
v.
Canada,
[1995]
2
C.T.C.
2172
(T.C.C.),
this
Court
addressed
the
meaning
of
business.
Judge
Bonner
wrote:
The
issue
here
is
whether
the
appellant
carried
on
a
“business”
within
the
meaning
of
the
Income
Tax
Act.
That
word
is
to
be
given
its
ordinary
meaning
and
that
meaning
does
not
include
a
tax
avoidance
scheme
which
is
nothing
more
than
a
pale
imitation
of
a
business.
The
appellant
was
not
involved
in
a
commercial
activity
either
directly
or
through
Omni
as
his
agent.
The
objective
evidence
regarding
the
manner
in
which
the
scheme
operated
and
the
actions
and
inaction
of
the
parties
point
clearly
to
a
conclusion
that
both
the
appellant
and
the
promoters
of
the
scheme
were
indifferent
to
the
marketing
of
the
speed
reading
course
and
to
the
earning
of
profits
from
that
activity.
There
can
be
no
doubt
that
what
was
sought
was
a
tax
deduction
which
would
result
in
a
refund
part
of
which
was
to
go
to
enrich
the
promoters
of
this
scheme
and
the
remainder
of
which
was
to
go
to
the
appellant.
I
disbelieve
the
appellant’s
testimony
as
to
his
subjective
intention.
As
noted
in
Symes,
E.C.
v.
Canada,
[1993]
4
S.C.R.
695,
[1994]
1
C.T.C.
40,
94
D.T.C.
6001,
per
Iacobucci
J.,
at
page
736
(C.T.C.
58;
D.T.C.
6014):
As
in
other
areas
of
law
where
purpose
or
intention
behind
actions
is
to
be
ascertained,
it
must
not
be
supposed
that
in
responding
to
this
question,
courts
will
be
guided
only
by
a
taxpayer’s
statements,
expost
facto
or
otherwise,
as
to
the
subjective
purpose
of
a
particular
expenditure.
Courts
will,
instead,look
for
objective
manifestations
of
purpose,
and
purpose
is
ultimately
a
question
of
fact
to
be
decided
with
due
regard
for
all
of
the
circumstances.
In
my
view
the
deduction
of
the
component
elements
of
the
“losses”
is
prohibited
by
paragraph
18(1
)(a)
of
the
Act.
The
ratio
of
the
decision
of
the
Court
of
Appeal
in
Moloney
is
contained
in
the
following
passage
at
page
6571
:
In
our
view
the
judgment
under
appeal
is
based
on
the
trial
judge’s
findings
of
fact,
notably
that
the
appellant
never
intended
to
carry
on
the
business
of
marketing
the
speed
reading
course
himself
or
through
Omni,
that
neither
the
appellant
nor
Omni
had
the
means
or
the
ability
to
do
so,
and
that
the
sole
purpose
of
the
scheme
was
to
obtain
tax
refunds
and
nothing
else.
That
decision
is
none
the
less
applicable
despite
the
absence
in
this
case
of
evidence
showing
the
“circularity
and
simultaneity
of
the
transactions
between
the
related
companies”.
The
essential
facts
in
this
case
and
in
Moloney
are
the
same.
I
will
therefore
dismiss
the
appeals
with
costs.}
Then,
having
reviewed
the
jurisprudence,
Hamlyn
J.T.C.C.
continued
as
follows:
Analysis
The
appellants
primarily
bought
a
tax
reduction
scheme.
The
assertion
that
an
investment
of
$500
would
provide
retirement
or
future
income
does
not
stand
the
test
of
reality.
The
appellants
did
nothing
other
than
sign
documents
and
pay
the
licence
fee.
No
investigation
took
place
by
them,
no
research
was
conducted
by
them,
no
business
plan
was
developed
by
them
and
certainly
they
made
no
efforts
to
operate
a
business.
The
activities
of
Thill
and
Plymouth
beyond
the
limited
appellants’
efforts
necessitate
examination
because
of
the
operating
agreement
between
Plymouth
and
the
appellants.
I
conclude
that
the
operating
mind
behind
the
scheme
was
Mr.
Thill.
Because
of
his
interrelationships
with
the
corporations
and
the
individuals
involved,
this
fact
leads
to
a
conclusion
that
the
relationships
among
Applied,
Cawin,
Thill,
Federated
and
Plymouth
were
at
non-arm’s
length
and
Mr.
Thill
and
Thill
controlled
the
tax
scheme
throughout.
The
tax
scheme
is
essentially
the
same
as
that
before
the
Court
in
Moloney,
supra,
and
the
Federal
Court
of
Appeal
has
pronounced
on
that.
As
to
the
development,
production
and
distribution
of
Enjoy
by
Plymouth,
from
the
evidence,
I
conclude
there
was
insufficient
capitalization
to
undertake
the
business
proposal
that
was
outlined.
Moreover,
there
was
no
documentary
or
other
evidence
to
support
the
assertion
of
Mr.
Thill
that
sufficient
capital
was
always
available.
In
any
event,
either
way,
insufficient
capital
or
unlimited
funds,
the
control
actions
of
Thill
lead
to
a
conclusion
that
profit
was
not
the
objective
of
Plymouth.
The
activities
of
Plymouth
were
directed
to
enhance
the
marketing
activities
of
Thill
in
the
selling
of
licences
and
not
per
se
to
represent
the
appellants’
business
under
the
licences.
The
fact
that
Plymouth
forfeited
the
performance
bonds
and
that
Federated
forgave
the
promissory
notes
from
the
appellants
supports
a
conclusion
the
activity
was
that
of
a
tax
scheme
and
not
that
of
a
business
of
developing,
publishing
and
distributing
a
magazine.
The
paper
entries
on
the
books
created
an
aura
of
a
substantial
enterprise
without
any
real
substance
behind
it.
This
illusion
brings
into
doubt
the
veracity
of
the
amounts
alleged
to
have
been
expended
on
Plymouth
by
Thill.
The
continued
marketing
of
the
licences
and
the
renewal
of
the
licences
after
the
project
had
failed
(appellant
Madayag),
the
payment
of
royalties
far
in
excess
of
what
copies
of
Enjoy
had
been
printed
and
farther
still
in
excess
of
what
was
distributed,
the
payment
of
income
that
could
not
be
reconciled
with
the
advertising
revenue,
and
the
ceasing
of
funding
after
the
initial
issue
run
are
all
indicia
of
a
scheme
to
create
the
impression
of
a
business
rather
than
a
business.
Moreover,
I
conclude
the
actions
of
Thill
in
view
of
the
evidence
of
Mr.
Frederickson-that
he
told
Mr.
Thill
what
was
really
involved
and
the
costs
to
expect
($3-4,000,000)
and
Mr.
Thill’s
direction
to
carry
on
are
consistent
with
an
inference
the
enterprise
was
designed
and
destined
to
fail.
No
business
was
carried
on
by
Plymouth
or
Thill
that
enured
to
the
benefit
of
the
appellants.
Specifically,
I
conclude
that
the
fact
of
the
publication
of
one
issue
of
Enjoy
given
the
findings
herein
does
not
bring
this
case
outside
the
Moloney,
supra,
decision.
The
assumptions
of
the
Minister
have
not
been
dislodged.
I
therefore
conclude
the
alleged
expenses
reported
by
the
appellants
are
not
deductible
within
the
meaning
of
paragraph
18(
l)(a)
of
the
Act.
The
appeals
are
therefore
dismissed
with
costs.
Even
if
one
could
accept
that
the
appellants
were
sufficiently
naive
to
believe
they
were
participating
in
something
other
than
a
scheme
which
would
produce
a
quick
tax
refund,
that
subjective,
wholly
irrational,
act
of
faith
is
not
sufficient
to
transform
their
participation
in
the
Thill
tax
shelter
scheme
into
a
business.
The
evidence
indicates
that
each
appellant,
having
no
experience
in
the
publishing
business,
made
the
investment
on
the
basis
of
representations
made
to
them
by
a
salesperson
or
company
officer
from
Thill.
By
executing
the
various
documents
contained
in
the
investor
package,
and
specifically
the
agreement
with
Procyon,
each
appellant
forfeited
the
right
to
have
any
direct
control
over
the
marketing
or
distribution
of
the
magazine
even
if
it
had
ever
been
published.
There
is
no
doubt
that
Thill
-
the
corporation
-
and
Henry
Thill,
personally,
had
a
reasonable
expectation
of
profit
from
the
venture
as
did
those
associated
with
him
for
that
purpose.
However,
if
individuals
do
not
bother
to
make
inquiries
before
making
a
business
investment
in
an
area
of
endeavour
in
which
they
have
absolutely
no
knowledge
and
then,
by
various
agreements,
totally
abdicate
all
practical
control
over
the
putative
enterprise
they
run
the
risk
of
being
tarred
with
the
same
brush
as
the
primary
promoters
of
the
scheme
and
other
persons
contracted
to
carry
out
the
requisite
business
operations
of
the
alleged
enterprise.
Such
an
investment
is
not
the
same
thing
as
buying
shares
in
a
corporation
listed
on
a
stock
exchange.
Each
of
the
appellants
claimed
a
business
loss
on
the
basis
that
they
were
in
fact
engaged
in
the
publishing
business,
not
that
they
had
lost
money
by
purchasing
shares
in
any
of
the
various
corporations
that
were
necessary
to
carry
out
the
scheme.
On
objective
analysis,
the
circuitous
funnelling
of
monies
from
one
corporate
account
to
another
corporate
account
within
the
system
of
related
companies
was
not
an
activity
that
was
capable
of
producing
profit
for
any
appellant.
There
was
nothing
of
substance
upon
which
any
reasonable
expectation
of
profit
could
be
based.
The
appellants
relied
on
Thill
and
associated
corporations
to
earn
a
profit
for
them
when
an
objective
examination
clearly
reveals
these
entities
were
completely
disinterested
in
producing
any
magazine
at
all.
In
the
face
of
such
monumental
disinterest
their
collective
lack
of
competence
to
do
the
very
thing
promised
is
irrelevant.
The
entire
purpose
of
the
scheme
was
to
provide
an
investor
with
a
reduction
in
income
tax.
The
structure
of
the
scheme
-
with
an
advance
royalty
payment
of
$30,000
supposedly
paid
to
the
holder
of
a
copyright
to
a
non-existent
publication
-
was
irrevocably
destined
from
the
outset
to
bring
profit
only
to
the
principals,
officers
and
shareholders
of
the
playercorporations
and
their
officers,
directors
and
shareholders
within
the
Thill
group.
No
one
else
stood
a
chance.
The
appellants
-
even
now
-
have
difficulty
with
the
proposition
that
in
order
for
them
to
be
successful
on
appeal
they
have
to
demonstrate
there
existed,
for
them,
in
the
relevant
taxation
year,
a
reasonable
expectation
of
profit
in
relation
to
the
activity
which
they
claim
resulted
in
a
deductible
business
loss.
The
fact
is
Thill
spent
$1,000
of
their
money
on
Enjoy
in
the
United
States
and
-
through
Omni
-
$40,600
on
the
speed
reading
course
which
was
another
scheme
entirely
in
which
they
had
no
interest
whatsoever.
Of
the
nearly
$395,000
which
ended
up
accruing
to
Thill,
there
is
no
evidence
that
this
amount,
or
any
part
of
it,
bore
any
rational,
decent
relationship
to
any
legitimate
attempt
to
produce
the
publication.
Once
the
smoke
cleared,
Thill,
alone,
remained
to
enjoy
the
fruits
of
the
scheme
which
were
distributed
among
the
officers,
directors,
shareholders
and
employees
of
the
corporation.
In
the
end,
the
assumptions
of
fact
relied
on
by
the
Minister
are
intact.
In
each
instance
the
Minister
was
correct
in
concluding
that
the
deduction
of
the
advance
royalties,
license
fees
or
other
expenses
were
prohibited
by
paragraph
18(1)(a)
of
the
Act.
It
is
obvious
there
was
no
business
being
carried
on
by
any
appellant
and
it
is
not
necessary
to
go
further
and
specifically
find
that
the
expenses
claimed
were
unreasonable
or
that,
in
any
event,
the
deduction
would
be
prohibited
by
subsection
245(1)
of
the
Act.
However,
the
evidence
overwhelming
supports
both
of
these
conclusions.
The
appeal
of
Benita
Lorenz
is
dismissed
and
the
respondent
is
entitled
to
costs
on
a
party-party
basis.
The
appeal
of
James
(Jim)
Murphy
is
dismissed
and
the
respondent
is
entitled
to
costs
on
a
party-party
basis.
The
appeal
of
William
Parsons
is
dismissed
and
the
respondent
is
entitled
to
costs
on
a
party-party
basis.
The
appeal
of
Wilfred
Rosenthal
is
dismissed
and
the
respondent
is
entitled
to
costs
on
a
party-party
basis.
When
calculating
the
costs
for
each
appellant,
counsel
for
the
respon-
dent
should
claim
only
one
set
of
costs
as
it
applies
to
the
days
in
Court
occupied
by
the
hearing
of
the
appeal.
Appeal
dismissed.
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