Nordstrom v. R., [1999] 3 CTC 2253 (Informal Procedure)

Bowie T.C.J.:

These appeals are from reassessments under the Income Tax Act (the Act) for the taxation years 1993 and 1994. The Appellant, during those years, held a full-time teaching position. In addition, he and his wife, in partnership, were engaged in selling Amway products. These are household products of various kinds which are sold through a pyramidic sales force. It would appear that, as is usual with pyramid sales operations, those at the top of the pyramid do very well, and those at the bottom do much less well. During the two years under appeal, the Appellant and his wife incurred net losses of $17,068.00 and $15,058.00. The Appellant’s share of these losses for the two years, amounts to $8,534.00 for 1993 and $7,534.00 for 1994. In filing his income tax returns for those two years he claimed to be entitled to offset these amounts against his income from teaching, on the basis that they are business losses. The Minister of National Revenue (the Minister) has reassessed him to disallow these amounts, taking the position that the Appellant and his wife, during the years under appeal, had no reasonable expectation of making a profit from the sale of Amway products, and that this activity on their part therefore did not constitute a business, and so was not a source of income within the meaning of that expression in section 3 of the Act, with the result that the losses from it are not available to offset other income.

It has long been settled that where a taxpayer claims to have incurred business losses in connection with some activity, the Court must ascertain objectively whether that activity was carried on by the taxpayer with a reasonable expectation of profit. Only if the answer to that question is yes will it be found that there was a business, and thus a source of income from which losses may be derived for the purpose of section 3 of the Act.! [1] Among the criteria which the Supreme Court of Canada said? [2] should guide the inquiry are the history of profit and loss, the taxpayer’s training and intended course of action, and the capability of the venture, as capitalized, to show a profit after taking capital cost allowance into account. To this list the Federal Court of Appeal has added the time required to make the activity profitable, the presence of the necessary ingredients for profitability, the profit and loss situation for the years subsequent to the years under review, the number of consecutive years during which losses were incurred, changes in the level of revenues and expenses during the relevant period, the persistence of the factors causing the losses, and whether the taxpayer has been able to adjust to them, and the degree of planning brought to the business by the taxpayer. [3]

At the hearing of the appeal, the Appellant agreed with the following assumptions relied on by the Minister in making the reassessments:

6. In so reassessing the Appellant, the Minister made the following assumptions of fact:

a) the facts admitted and stated above;

b) from 1989 to 1996, the Appellant reported losses from the activity of selling and promoting Amway products (the “Activity”) in partnership with Carolynne E. Nordstrom (hereinafter referred to as the “spouse”), as follows:

Year	Gross Income	Net Loss	Appellant’s '/2 Share
1989	$ 2,427.00	($ 1,764.00)	($ 882.00)
1990	22,284.00	( 8,918.00)	( 4,459.00)
199]	30,972.00	( 9,798.00)	( 4,899.00)
1992	38,825.00	( 10,374.00)	( 5,187.00)
1993	26,524.00	( 17,068.00)	( 8,534.00)
1994	20,591.00	( 15,068.00)	( 7,534.00)
1995	38,934.00	( 16,470.00)	( 8,235.00)
1996	66,224.00	( 13,042.00)	( 6,521.00)

C) the Appellant and his spouse commenced the Activity in or about June 23, 1989;

d) during the period from 1989 to 1996, the Appellant was employed full- e) the sale of Amway products is done by way of a down-line network marketing system in which products are sold by a person, referred to as a distributor, down the line to another person who used the products for personal consumption and/or or resells the products to another person down the line who uses the products for personal consumption or continues the process of reselling the products to other persons or other potential distributors;

time and received employment income for each year as follows:
Year	Employment
	Income
1989	$42,323.00
1990	44,630.00

Year	Employment
	Income
199]	49,266.00
1992	53,256.00
1993	54,262.00
1994	54,396.00
1995	51,253.00
1996	28,332.00

f) the products that are purchased by the Appellant and his spouse are resold by them at the same price that the Appellant and his spouse paid for the purchase of the products;

g) as the products are resold at cost, the only way a true gross profit before expenses can be generated is by way of a performance bonus, which is based on the volume of product sold, including sales of product for personal consumption by the Appellant and his spouse;

h) many of the Amway products and services purchased by the Appellant and his spouse were used and consumed personally by them:

i) gross sales reported for each year included products purchased by the Appellant and his spouse for personal consumption;

j) during the period from 1993 to 1994, the number of down-line distributors that the Appellant and his spouse sold products to decreased from 10 to 5;

k) since the inception of the Activity, the Appellant and his spouse have been unable to obtain sufficient down-line distributors in order that enough gross income could be generated so that a net profit could be expected;

1) performance bonuses reported by the Appellant and his spouse decreased from $4,332.62 in 1993 to $2,218.01 in 1994;

m) a portion of the performance bonus earned by the Appellant and his spouse for each year includes sales made to themselves for products consumed personally by them;

n) $574.00 of the performance bonus earned in 1993 and $272.00 of the performance bonus earned in 1994 was passed on to down-line distributors which the Appellant and his spouse had sold products to;

o) the Appellant and his spouse operated the Activity out of their personal residence;

p) the Appellant and his spouse promoted and sold Amway products primarily by word of mouth only;

The Appellant went on to explain that the key to success in distributing Amway products is in recruiting people to work under you who will themselves be successful, and in so doing will generate performance bonus points for the person above. It is from these performance bonus points that income is earned. The Appellant went on to cite the cases of people whom he said that he knew were making a substantial net income from Amway distribution. He stated, and I have no doubt that he fully believed it, that he always has a reasonable expectation of profit, because he is convinced that sooner or later he will meet and recruit a sufficient number of people who will be successful down-line distributors to ensure that he makes substantial profits through their sales volumes. Certainly, the Appellant views the proper route to success as being through the recruitment of others to the business, and not through the retail sale of products by his own efforts. He and his wife quite evidently devoted a great deal of their time during the years under appeal to meeting new people and exposing them to the Amway business. His diaries, which were made exhibits at the hearing, attest to this.

The Appellant produced some photocopies of sheets which purported to explain how the Amway operation works; he described these as being his business plan, together with the planning that he and his wife did each week to meet new prospects. They did not, so far as I can tell from the evidence before me, have any plan that could qualify as a fresh approach designed to overcome the factors that were causing them to suffer an unrelenting succession of losses and turn them into profits.

As appears from the financial results for the years 1989 to 1996 set out above, the Appellant and his wife have sustained losses from their Amway sales amounting to more than $90,000.00 in 772 years. In 1996 their gross income reached $66,224.00, much higher than in any previous year, and yet they still lost $13,042.00. The Appellant testified that in 1998 they had made a slight profit, but he admitted that it was less than $200.00. By this time he was working full-time at the Amway operation.

Looking at the history of this operation, and considering the lack of a proper business plan or any proposed course of action designed to turn losses to profits, I do not believe that in the years under appeal any reasonably objective person could have concluded that it had even a remote pros- pect, far less a reasonable expectation, of becoming profitable in the foreseeable future.

The appeals are dismissed.

Appeals dismissed.