Teskey T.C.J.:
1 The appellant appeals his re-assessment of tax for the years 1990, 91, 92 and 93. In his notice of appeal he elected the informal procedure.
2 Prior to the commencement of this appeal it was decided that appeal no. 96-2277(IT)I would be determined on the decision in this file.
3 The issue before me is whether the appellant and his wife, Wilma, the appellant in file 96-2277(IT)I, who are partners in an activity with Amway, are in fact in business.
4 I have the benefit of the testimony of Mr. Delaurier given to me in the witness box and I accept his testimony as being truthful and accurate. I also have the benefit of his wife being in the witness box confirming that her husband's testimony was accurate.
5 Facts: The Minister, when he assessed the appellants who operate in partnership, assumed numerous facts which were produced in his reply to the notice of appeal and in particular in paragraph 12 thereof, subparagraphs (a) to (r), paragraph 13 and paragraph 14 and there is no evidence today that disputes any of those facts whatsoever and they stand as being factual. In fact, the evidence of the appellant substantiated almost each and every one of those individual facts assumed.
6 The Court is cognizant of the fact that the appellant put a lot of effort into the enterprise and cognizant of the fact that he believed that he was entering into a business. Also it is cognizant of the fact that he was severely ill for a period and that because his contribution to the partnership was the out of the office portion of the business, his contribution was the attempt to obtain people under him, so that when his illness removed him from the partnership, in essence the partnership ground to a halt because the wife was the in-house person, she did the figures and undoubtedly, although it wasn't said, she did the ordering and did all of those normal chores, but in essence the business ceased almost because the dynamic person of the partnership was incapacitated.
7 I have before me an enterprise that was conceived in 1987 and although there are no actual figures for 1996 in front of me, the appellant did say that '96 “did not do much”, “not doing anything”, “virtually nothing happened”, so I have an enterprise that for nine years continuously racked up losses.
8 The appellant said that in 1987 when he thought he would go into this enterprise, that he would reach Emerald. To reach Emerald he would have had to have three legs under him or three different distinct sales forces doing sales in excess of $540,000 annual sales.
9 The most sales that the enterprise ever produced was in 1990 where they produced $17,800 worth of sales and I'm rounding off to the nearest $100, but in that year they reported a loss on gross sales of $7,100, before even taking into expenses. That's the highlight. The low, I assume, is 96, in 95 and 94 that there was $5,500 in sales and in 94 $6,000 in gross sales. That is nowhere near $540,000, if that's what they had to do to produce a profit. There is no evidence before me that any amount of sales would produce a profit.
10 Although there was no business plan as such, the appellant did say in 1987 he thought he would hit Emerald in three or four years.
11 With nine years losses, continuous losses staring me in the face, there is just no way that this enterprise can fit into the criteria to say, or for me to say in my reasons, that this is a business.
12 If the enterprise is not a business, then there is no provision in the Act to deduct any expenses, they become what we call “personal expenses”.
13 The Federal Court of Appeal — the highlight of expense cases was dealt with in the Supreme Court of Canada by Chief Justice Dickson in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.).
14 The Federal Court of Appeal a year ago revisited Moldowan and talked about two types of enterprises, that is the Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.), decision written by Mr. Justice Linden of the Federal Court of Appeal and where he said, he characterized two types of enterprises, the one that has strictly nothing personal attached to it whatsoever and the enterprise that has a personal connotation.
15 Examples: A taxpayer goes out and buys a widget factory and starts to produce widgets. There is no personal element, or the taxpayer goes out and buys a residence in order to rent it, has no intention of moving into it, no intention of renting it to his mother-in-law or his father-in-law or any relative. It's going to be a strictly arm's length. That's what they call non-personal and Mr. Justice Linden at that time said that Revenue Canada ought not to second guess the taxpayer. Then he characterized the others where there's a personal element such as the taxpayer who goes out and buys a duplex, rents half and lives in the other half. Now, in that investment there is a big personal element and in those situations Mr. Justice Linden acknowledged that the courts very, very seldom will acknowledge that the enterprise is a business.
16 Now, there was a lot of confusion exactly what Linden, J. was saying in Tonn so that in the case of Corbett v. R. (1995), 95 D.T.C. 5448 (Fed. T.D.), a further decision of Linden, which was released in October of '96, he re-visited Tonn and he said that Moldowan test, which is a strict test, still is the law, that he was not trying to amend it in his Tonn decision and that a taxpayer still had to show that in his or her, enterprise as structured in the year in question, that he or she had a reasonable expectation of profit as structured then or in the near future.
17 Now, in an Amway situation, what is the near future? It certainly is not nine years. Faced with declining sales, losses nine years in a row, I have no other alternative but to say that the appellants have in no way demonstrated that they were in business. Yes, a lot of effort was going into it but any thoughts that they had of hitting $540,000 annual sales was certainly pie in the sky.
18 I would also like to comment that I believe in an Amway situation that it falls somewhere between the two positions that Linden talked about; there's not a great deal of personal element in it but there is some.
19 The appellants are using the products personally, they are using their own residence, they are using their own car and they are using their own phone, so although it is not as cloaked with the personal element as what was in Tonn, or what Linden discussed in Tonn and the other cases that he referred to, I believe that an Amway distributorship falls in between but close to personal. It does have personal elements and that again is all the more reason for me to use the Moldowan strict test of reasonable expectation of profit.
20 There is no doubt in my mind that you thought, you both thought that, yes, this can produce money, it can produce profit and I have to characterize those thoughts as being self-delusional.
21 I feel very badly for you because of your health. If this had been a strictly business you would have folded it right then and there and there are cases out there where people have a business that's making a profit and all of a sudden lose it and the courts say, well, yes, you get a couple years' losses but depending on what business it is, you can't carry on forever. There is a point there where you cease to be in business, you cease to be in a viable business, so though I may have a great deal of sympathy for you as a person and as an individual, the fact that in essence the business ceased means if you had been in business, you should have got out of it, instead of that you're still writing off against income, or attempting to write off against income losses arising from a venture that cannot be categorized as a business.
22 For those reasons your appeal is dismissed and your wife's appeal is also dismissed for those same reasons.
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