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Citation: 2004TCC10
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Date: 20040106
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Docket: 2001-2584(IT)G
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BETWEEN:
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CHARLES S. SHAVER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre, J.
[1] These are appeals against
assessments made by the Minister of National Revenue
("Minister") under the Income Tax Act
("Act") for the appellant's 1996 and 1997
taxation years. The appellant is a self-employed professional,
practising internal medicine in the city of Ottawa. The appellant
is also an independent business owner ("IBO") with
Amway of Canada Ltd. ("Amway").
[2] In computing his business income
for the years at issue, the appellant deducted the amounts of
$10,403.33 and $21,121.11 respectively as business expenses for
the operation of an Amway distributorship. Those business
expenses included travel expenses in the amount of $4,568.64 in
1996 and $6,411.19 in 1997, as well as an amount of $5,562.19 as
a special promotion expense with respect to a trip to Las Vegas,
Nevada, U.S.A. in 1997. The travel expenses claimed are itemized
in Exhibit R-1, Tab 8 and are in respect of hotel
accommodation, food, gas, accident insurance, parking and one
airfare to Tampa, Florida. All of these expenses were incurred to
attend meetings organized by Amway in Canada and in the
U.S.A.
[3] In reassessing the appellant, the
Minister disallowed the following expenses, which are the subject
of the present appeals:
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For 1996:
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Business Income
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Claimed*
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Disallowed**
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Allowed**
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Travel Expenses
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$4,568.64
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$3,606.72
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$ 961.92
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For 1997:
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Business Income
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Claimed*
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Disallowed**
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Allowed**
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Travel Expenses
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$6,411.19
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$4,669.29
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$1,742.00
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Course (417.74)/Special Promotion (5562.19)
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$5,979.23
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$5,562.19
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$ 417.74
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* See Statement of Business Activities in Exhibit R-1,
Tabs 1 and 2.
** See paragraph 9 of the Amended Reply to the Notice
of Appeal.
[4] In so reassessing the appellant,
the Minister relied on the following assumptions of fact stated
in paragraph 11 of the Amended Reply to the Notice of Appeal:
(a) during the 1996 and 1997 taxation years,
the appellant reported business income from a sole proprietorship
engaged in distributing Amway products (the
"Business");
(b) with respect to the Business, during the 1996
and 1997 taxation years, the Appellant claimed the travel
expenses mentioned above;
(c) during the 1996 and 1997 taxation years,
the Appellant travelled on average once a month to Business
functions;
(d) the said Business functions represented
meetings of members that fell within the definition and rules on
"conventions";
(e) the convention expenses are limited to
two per taxation year;
(f) with respect to the Business, during the
1997 taxation year, the Appellant also claimed special promotion
expenses as outlined above;
(g) these special promotion expenses
consisted for the Appellant, his spouse and 3 other persons of
the cost to fly to Las Vegas, Nevada, USA, and for the duration
of their stay in Las Vegas, (October 30, 1997 to November 2,
1997), of the cost of car rental, accommodation and a few
meals;
(h) the expenses were incurred for a
motivational meeting with successful Amway members in the United
States of America;
(i) again, the motivational meeting
fell within the definition and rules of
"Conventions";
(j) the convention expenses being limited to
two per year and having been already claimed against travel
expenses for the same taxation year, the special promotion
expense shown above was disallowed;
(k) furthermore, the Appellant did not incur this
special promotion expense for the purpose of gaining or producing
income from a business or property.
[5] The Minister considered the
business functions or the "business training seminars"
referred to by the appellant in his Notice of Appeal as
conventions within the meaning of subsection 20(10) of the
Act. That provision reads as follows:
SECTION 20: Deductions permitted in computing
income from business or property.
420(10)3
(10)
Convention expenses. Notwithstanding paragraph
18(1)(b), there may be deducted in computing a
taxpayer's income for a taxation year from a business an
amount paid by the taxpayer in the year as or on account of
expenses incurred by the taxpayer in attending, in connection
with the business, not more than two conventions held during the
year by a business or professional organization at a location
that may reasonably be regarded as consistent with the
territorial scope of that organization.
[6] Pursuant to that provision of the
Act, convention expenses are limited to two conventions
per taxation year and that is why amounts of $961.92 and
$1,742.00 were allowed for 1996 and 1997 respectively in respect
of travel expenses incurred by the appellant to attend two of the
meetings in question. The balance of the travel expenses was
disallowed.
[7] With respect to the special
promotion expense for the trip to Las Vegas in 1997, the Minister
also alleges that it was not incurred for the purpose of gaining
or producing income from a business or property pursuant to
paragraph 18(1)(a) of the Act. Paragraphs
18(1)(a) and (b) read as follows:
Deductions
SECTION 18: General limitations.
(1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
(a) General limitation - an outlay or expense except to
the extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from the business or
property;
418(1)(b)3
(b) Capital outlay or loss - an outlay, loss or
replacement of capital, a payment on account of capital or an
allowance in respect of depreciation, obsolescence or depletion
except as expressly permitted by this Part.
[8] In the alternative, the respondent
submits that the travel and special promotion expenses claimed by
the appellant in excess of the amounts allowed by the Minister
were unreasonable in the circumstances and not deductible
pursuant to section 67 of the Act, which reads as
follows:
SECTION 67: General limitation re expenses.
In computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise
deductible under this Act, except to the extent that the outlay
or expense was reasonable in the circumstances.
Issue
[9] The appellant takes issue with the
position taken by the Minister. In the appellant's view, the
travel expenses for attending the business training seminars and
the special promotion expense with regard to the trip to Las
Vegas were reasonable current expenses incurred for the purpose
of gaining or producing income from a business and are deductible
pursuant to paragraph 18(1)(a) of the Act. In
his view, the business training seminars are not conventions
within the meaning of subsection 20(10) of the Act. He
submits that subsection 20(10) applies only to permit the
deductibility of a capital expense, which otherwise would not be
deductible by virtue of paragraph 18(1)(b) of the
Act. This is why a distinction has to be made between a
convention and the business seminars attended by the appellant.
In the appellant's view, while expenses incurred to attend a
convention have been traditionally treated as capital expenses in
the case law, expenses incurred to attend monthly business
training seminars are more in the nature of current expenses.
Accordingly, subsection 20(10) should not apply to limit the
deductibility of such expenses to a maximum of two seminars.
[10] The issue therefore is whether the
Minister erred in treating the travel and special promotion
expenses incurred by the appellant during the 1996 and 1997
taxation years as expenses incurred for attending a
"convention" within the meaning of
subsection 20(10) of the Act, and in limiting as a
consequence such expenses to two conventions per taxation year.
This Court will also have to determine whether the special
promotion expense related to the Las Vegas trip in 1997 was
incurred for the purpose of gaining or producing income from a
business pursuant to paragraph 18(1)(a) of the Act.
Finally, if the Minister erred on the first two issues, it must
be decided whether the travel and special promotion expenses
claimed by the appellant in excess of the amounts allowed by the
Minister were unreasonable and therefore not deductible pursuant
to section 67 of the Act.
Facts
[11] Dr. Shaver, the appellant, testified
that he joined Amway (which became Quixtar in 1999) in 1995. He
was sponsored at the time by Dr. S. Gardee, also an IBO and a
physician practising in the Ottawa area. The appellant and
Dr. Gardee belong to the "upline" organization (as
it is referred to in the Amway organization) of Mr. Roy Bulmer, a
retired police officer and an IBO living in Windsor, Ontario. Dr.
Gardee and Mr. Bulmer also testified.
[12] In paragraph 3 of section C of his
Notice of Appeal, the appellant said that an IBO will be
successful with Amway if, besides doing direct selling, he tries
to interact with others and interest them in becoming Amway
distributors, who then become known as "downline"
distributors. The appellant contends that such interaction is
facilitated through various "business training
seminars" available to Amway distributors. In 1996 and 1997,
the business and sales meetings attended by the appellant were
organized and sponsored by Mr. Bulmer's organization. They
were held in Windsor, Hamilton, London and Toronto in Ontario,
and in the United States (namely in Cleveland, Ohio; Florence,
Kentucky; Pittsburgh, Pennsylvania; and Ada and Grand Rapids,
Michigan; there was also one in Tampa, Florida. See Exhibit R-1,
Tab 8). Apart from the one he attended in Tampa, the
appellant drove to all the seminars.
[13] Mr. Bulmer, who is at the top level of
the Amway distributorship hierarchy, being a Diamond IBO, as it
is referred to in the Amway organization, testified that the
purpose of those business and sales meetings is to teach the
attendees how to personally use the products to be sold, how to
promote the sale of those products, and how to sponsor and
encourage new people joining the organization in order to
increase sales volume. Thus, depending on needs at the time, the
emphasis at those meetings is put on product knowledge, sales
techniques and sponsoring, all for the purpose of ultimately
encouraging the maximization of sales through sponsoring. It is
my understanding that the whole concept of the Amway
distributorship system is to give discounts and points to members
when they purchase a certain volume of products from the
organization; at the same time, the buyers' sponsors get
points on those purchases. The points earned by a
lower-level IBO help maximize the income of the
higher-level IBOs. Indeed, after enough points are
accumulated, Amway pays the IBOs bonuses out of the overall
sales.
[14] In the present case, it is my
understanding that meetings were organized by the Diamond IBOs
once a month and that the schedule at such meetings was very
intensive. Different speakers from outside or inside the
organization were invited to make onstage presentations dealing
with specialized products, sales techniques, how to build that
type of business and how the speakers personally succeeded in
that field. Speakers were limited as to the length of their
presentations and the meetings could last until two or three
o'clock in the morning.
[15] According to Mr. Bulmer, it is in the
best interests of the IBOs to attend these meetings if they want
to grow. Indeed, one purpose of the meetings is to encourage
growth so that the person attending can advance to higher levels
in the organization by encouraging people recruited into the
organization to sell, thereby enabling that attendee to
eventually increase his or her income. The meetings are organized
by Amway for IBOs associated with Amway only. There are no
social, for-pleasure activities at those meetings and attendees
pay for their own food (usually fast food at concession stands,
with no alcoholic beverages). Training books and tapes are also
available for purchase at the meetings. Videos on the promotion
of key products or on motivational subjects are presented between
speakers. No sale of products occurs at the meetings.
[16] Mr. Bulmer testified that although no
direct profit is made from those meetings, it was observed that
an increase in sales income usually happens soon after such an
event.
[17] Mr. Bulmer said that they organize
three or four larger meetings (with 30,000 people attending) and
approximately eight local events (with 5,000 to 6,000 people
attending) throughout the year in different locales, usually in
the state of Ohio or in Canada. He emphasized the fact that all
the events (the major ones and the local ones) are organized with
the same goal, which is promoting sales and teaching how to
sponsor people in order to generate income. He described a major
event as giving "a larger picture of what can be
achieved" but at a cost for the organization that is much
greater than for a small event, which is the type that "kind
of helps keep the business together" (see transcript at
page 84).
[18] Dr. Gardee, who is also a physician and
works with the appellant, testified that he joined Amway in 1994
and that since then he has achieved the Emerald level in the
Amway organization (which is one level under Mr. Bulmer). It was
he who recruited the appellant into the organization. He
explained that the concept of the business is to form
distribution organizations and to move the products in volume to
a very large distribution organization. He said that his
commission on product sales increased significantly as he built
up a larger distribution organization. The knowledge required to
achieve this was acquired through a training system by attending
the business seminars on a monthly basis. He described those
seminars as very intensive "product learning" sessions
at which there are product promotions for new products coming out
and instruction on techniques for moving those products in the
organization and on what groups to target for each product. He
said that a monthly meeting is necessary because it is an
evolving business with new products and new techniques coming out
all the time. There are also new people joining the business
regularly who want to attend the meetings to learn about the
business as soon as possible. As a sponsor, one would have to
accompany the recruits to meetings. He also confirmed
Mr. Bulmer's testimony that the promotion of a product
in a specific manner presented at those meetings would result in
a significant increase in the volume of sales within a short
time. He also said that the rate of registration of new people by
sponsors rose after those seminars. He concluded his testimony by
saying that only those who attend the seminars become successful
in that business. It is hard work to which one has to be
dedicated, he said.
[19] In the case of the appellant, it does
not seem that he was as successful as Dr. Gardee or Mr. Bulmer.
Although he has achieved the Platinum level (which is two levels
under the Emerald level attained by Dr. Gardee), he has always
suffered losses from the business. For 1996, he declared a gross
profit of $5,580 and a net loss of $4,823 (taking into account
travel expenses in the amount of $4,568 he claimed). For 1997, he
declared a gross profit of $16,574 and a net loss of $4,546
(taking into account travel expenses of $6,411 and the special
promotion expense of $5,562). He said that his wife was working
with him in the business, but the whole of the business losses
was claimed in his tax return against his professional income. He
said that he sponsored nine IBOs in 1996 and six in 1997 (Exhibit
R-2). There have been no new sponsorships since then. He said
that one of the reasons for this stagnation was that he was
disadvantaged in Canada by being limited to two conventions per
year.
[20] With respect to the trip to Las Vegas
in 1997, the appellant testified that he invited five IBOs to
reward them for their work, and he thought it would help improve
their and his own profitability. They were hosted in Las Vegas by
people standing very high in the Amway hierarchy ("Double
Diamond" IBOs). The appellant was accompanied by his wife,
and he claimed the travel expenses for the two of them and for
the five IBOs that he invited. The appellant testified that it
was an event given over totally to socializing and that they did
not attend any lectures there. He explained that two of the IBOs
invited were sponsored by him and that they were approaching a
certain level in the Amway hierarchy. The purpose of inviting
them was purportedly to motivate them and persuade them to
achieve a higher level.
[21] Mr. Robert Cardinal, the
appellant's accountant, testified that he considered that
expense as a promotional expense, as it was his understanding
that its purpose was to reward brand new IBOs under the
appellant's sponsorship for work performed or to be performed
with a view to achieving increased production numbers. The
appellant had told him that this reward would enhance his ability
to earn income from the business.
[22] With respect to the monthly meetings,
Mr. Cardinal considered them as being of a training nature and
the costs related thereto were claimed as current business
expenses.
Analysis
Travel expenses
[23] The question raised is whether the
travel expenses incurred by the appellant to attend the monthly
business seminars may be deducted in their entirety as current
business expenses or whether the deduction is limited by the
application of subsection 20(10) of the Act.
[24] The respondent obviously does not
dispute that the travel expenses were incurred by the appellant
in connection with his Amway business. Indeed the Minister has
accepted the deduction of travel expenses incurred to attend two
of the meetings for each taxation year at issue. The only reason
the travel expenses for attending the other meetings were
disallowed is that the Minister was of the opinion that the
deduction of those expenses was restricted by the application of
subsection 20(10) of the Act.
[25] Subsection 20(10) was incorporated into
the Act to overrule the judgment of the Exchequer Court of
Canada in H. Griffith v. M.N.R., [1956] C.T.C. 47, a case
in which it was held that convention expenses incurred by a
professional person could not be considered to have been incurred
for the purpose of earning income (see Canada Tax Service,
Thomson Carswell, Volume 4, page 20-2451).
[26] In Griffith, supra, the
taxpayer was a medical doctor specializing in the field of
anaesthesia and was one of the outstanding specialists in that
field. He had deducted expenses incurred for attending
conventions at which he delivered addresses and presented
lectures. The deduction was disallowed on the basis that the
expenses were not incurred for the purpose of earning income. The
appellant contended that his attendance at conventions was not
for the purpose of furthering his education, but for the purpose
of keeping his name before the public, which was a form of
advertising, and that the expenses with respect thereto were
incurred to produce income.
[27] The Exchequer Court of Canada confirmed
the decision of the Tax Appeal Board (reported at 54 DTC 470) and
was in complete agreement with the Board's conclusions of
fact and law. The Tax Appeal Board had put the question as
follows at page 473:
Do
expenses incurred by a taxpayer to attend conventions come within
the exception set out in section 12(1)(a) [now paragraph
18(1)(a)] of the Act?
What
are conventions and what is their purpose? They are gatherings of
people in the same calling, profession or trade who meet to
discuss matters of common interest, exchange opinions on recent
discoveries liable to affect their field of action and consider
the problems raised by the constant evolution of science and the
demands of modern living. These conventions make it possible for
those who follow the discussions to acquire new knowledge, or at
least to increase that they already have, thus putting them in a
better position to meet the needs of those they have chosen to
serve in their respective fields. A convention, therefore,
provides the person attending it with an opportunity to increase
his knowledge, and I agree with the respondent's submission
that it is akin to a post-graduate course in that those who
attend increase their knowledge, and that the expenditures made
by those who attend are of a capital nature. That such is the
effect of conventions seems to be acknowledged by the appellant
himself who admitted that, although in attending conventions it
was not his primary purpose to increase his knowledge,
nevertheless he might incidentally have done so, and he
recognized that conventions are a medium through which one is
kept aware of the progress being made in the field in which
one's specialty lies.
The Tax Appeal Board concluded at page 474:
After a
most serious consideration of the question in issue, I have
reached the conclusion that the expenditure made by the appellant
to attend conventions is not an expenditure made for the purpose
of earning income from his profession, but is rather an
expenditure of a capital nature and, as such, not deductible in
view of the provisions of section 12(1)(b) [now
paragraph 18(1)(b)] of the Act.
[28] The Exchequer Court was also of
the view that the expenses for attending a convention were not
incurred with the object of obtaining actual or immediate gain or
profit. The Court concluded that the fact that attending the
meetings in question would eventually lead to gaining or
producing profit in the future was too remote for consideration.
So, in the Court's view, the expenses were capital in nature
and therefore not deductible pursuant to former paragraph
12(1)(b) (now 18(1)(b)) of the Act.
Furthermore, there was no direct immediate profit deriving from
the outlay, and therefore the expense was not deductible pursuant
to former paragraph 12(1)(a) (now 18(1)(a)) of the
Act either.
[29] However, the restrictive approach
taken by the Exchequer Court with respect to paragraph
18(1)(a) of the Act has since been rejected by the
courts. An expense may thus be incurred for the purpose of
gaining or producing income from a source referred to in
paragraph 18(1)(a) of the Act, even though it is
not incurred with the object of obtaining actual or immediate
gain or profit. As long as an activity is undertaken by a
taxpayer in pursuit of profit and it is not a personal endeavour,
there is a source of income and the profitability of the activity
to which the expense relates does not affect the deductibility of
the expense if that expense is reasonable in the circumstances
(see Stewart v. Canada, 2002 SCC 46, at paragraphs
51-58).
[30] The question now remains whether
the expenses incurred by the appellant to attend the business
seminars are capital in nature. In Griffith, supra,
it was decided that the conventions attended by the taxpayer were
akin to a post-graduate course in that those who attended
increased their knowledge and therefore the expenditures made by
them were of a capital nature.
[31] In the present case, I am of the
view that although the seminars attended by the IBOs were not
akin to post-graduate courses, they nonetheless show most of the
characteristics of conventions as defined in the case law. In
Griffith, supra, conventions were described as
"gatherings of people in the same calling, profession or
trade who meet to discuss matters of common interest, exchange
opinions on recent discoveries liable to affect their field of
action and consider the problems raised by the constant evolution
of science and the demands of modern living. These conventions
make it possible for those who follow the discussions to acquire
new knowledge, or at least to increase that they already have,
thus putting them in a better position to meet the needs of those
they have chosen to serve in their respective fields".
[32] This, in my view, is very similar
to the present situation, except that instead of gaining
expertise in the medical field, the appellant gained expertise in
the business of selling Amway products. The appellant admitted
that he did not have any knowledge of that business when he
became involved in it in 1995 and that he learnt business skills
through the monthly meetings. Dr. Gardee gave similar testimony.
He said that the knowledge required to build a large distribution
organization was acquired through a training system, by attending
the business seminars on a monthly basis.
[33] Dr. Gardee described those
seminars as very intensive "product learning" sessions
and said that monthly meetings are necessary due to the fact that
it is an evolving business with new products and new techniques
coming out all the time. Similarly, Mr. Bulmer testified that the
purpose of those meetings is to teach the attendees how to
promote the sale of the products, how to recruit new members and
how to build a business. All the seminars are attended by IBOs,
who discuss there matters of common interest in the same field of
activity. The seminars all deal with issues raised by the
constant evolution in products and sales techniques and, in a
way, by the demands of modern living.
[34] A very similar situation existed
in Graves (G.) v. Canada, [1990] 1 C.T.C. 357 (F.C.T.D.),
a case in which the plaintiffs operated their own business,
buying and selling Amway products on their own account and
sponsoring other distributors whose sales contributed ultimately
to their own success. The plaintiffs had submitted in essence
that their involvement with the Amway organization involved two
aspects, the selling of Amway products and the extension, by
recruiting other distributors, of the Amway network (see
Graves, supra, at page 365). The plaintiffs had
claimed that the reason they attended meetings arranged by their
line of distributorship was to enhance their ability to
"sell" the business to others. Those meetings were
described as follows in pages 365 and 366 of the decision:
The
plaintiffs described in considerable detail what transpired at
the U.S. meetings. The trips to the U.S., as claimed by the
plaintiffs, were not an example of vacations or holidays
masquerading as business meetings. These sessions, held primarily
during the weekends, were intensive, with large group meetings,
smaller seminars, training sessions and only limited social
gatherings. These took up most of the day and, with the exception
of breaks for eating, continued with seminars and meetings into
the evening and often past midnight. . . . The plaintiffs
testified that an essential element of these trips was to be able
to hear from and speak to other members in the organization who
had achieved high rank and financial success through successfully
engaging more distributors.
The
Graves were less articulate about the actual benefits reaped from
attending such events. They spoke abstractly of motivation,
enthusiasm and vision; they were not effective in describing the
application of these themes to their business except in the most
general sense.
[35] In deciding the case, the court
analysed the situation as follows at page 366:
The
emphasis on motivation and leadership at these events was not, in
my view, strictly personal to the participants but was related to
the development of skills that would ultimately affect growth of
the business, which in the long run depends very significantly on
the extension of networks of successful distributors. The worth
of these skills to the business is not easily measurable and it
is not readily apparent how exposure to these sessions
specifically benefited the plaintiffs' business. However, I
accept that they were seen as important factors in enabling one
to successfully advance within the organization, particularly
during the years of concern in this appeal when the plaintiffs
were relative newcomers to the business and obviously eager to
succeed in its development. In my view, in this case, the trips
to the U.S. were made in connection with the business.
[36] Having said this, the court came
to the conclusion that the awareness gained by attending the
meetings in question was a capital asset, and the deductibility
of expenses incurred to attend those meetings was limited by the
application of subsection 20(10) of the Act. In that
regard, the court said at page 367:
. . . I
do not doubt that the plaintiffs believe they acquired awareness
of how others had been successful and even techniques useful in
motivating others to participate and to succeed in the Amway
network. But that awareness and their ability to convert that
into useful skills for their business, of direct sales and
maintaining and developing their part of the network, can best be
interpreted as long-term assets, capital assets under the
Income Tax Act not allowable as an expense except within
the limits of subsection 20(10). . . .
The
word "convention" is not defined in the Act. Generally,
a convention is defined as being an "act of convening";
"formal assembly" (Concise Oxford Dictionary);
or as "an assembly or meeting of members or representatives
of political, legislative, fraternal, etc. organizations"
(Black's Law Dictionary. 5th Ed. 1979). In this case,
the plaintiffs attended meetings arranged by their particular
line of distributorship which involved the assembly or convening
of members of the distributorship line. They were not loose
gatherings of people. They were organized in order to bring
together members of the line of distributorship, and other
interested persons, for business purposes. In my view these
gatherings could be categorized best, under the Income Tax
Act, as conventions.
[37] The existence of a significant
element of socializing, an element lacking in the meetings in
Graves, was not considered a necessary factor for
categorizing such meetings as conventions within the meaning of
subsection 20(10) of the Act (see Graves,
supra, page 367).
[38] In Michayluk v. Canada,
[1988] T.C.J. No. 733 (Q.L.), the court concluded that the
expenses incurred by the taxpayers, who were Amway distributors,
to attend meetings outside Canada in an attempt to move beyond
their own direct sales business into the larger, more lucrative
field of a network surrounding and supporting them, were
deductible pursuant to subsection 20(10) of the Act. The
court concluded that those meetings were conventions within the
meaning of the Act. Interestingly enough, the court did
not view the meetings in Canada in the same light: it did not
"regard the circumstances surrounding [those] particular
in-Canada expenditures as falling under subsection 20(10) of the
Act - as some form of convention expenses" (page
9).
[39] In the present case, I am not
able to make such a distinction. Indeed the evidence clearly
demonstrates that all the meetings attended by the IBOs, whether
in Canada or in the U.S.A., had more or less the same
purpose.
[40] Similarly, in Wees v.
Canada, [1994] T.C.J. No. 1192 (Q.L.), and in Roche v.
Canada, [1989] T.C.J. No. 105 (Q.L.), travel expenses
incurred by Amway distributors to attend several Amway meetings
were considered by the court as having been incurred to develop
long-term assets and therefore as being capital expenses. As a
result, only the expenses incurred for two conventions were
allowed in accordance with subsection 20(10) of the
Act.
[41] Furthermore, a distinction is
made between training costs and costs incurred in connection with
attending a convention in Interpretation Bulletin IT-357R2.
In that bulletin, it is explained that some training costs are
deductible as current expenses if they are not capital in nature.
Expenses are considered to be capital in nature where the
training results in a lasting benefit to the taxpayer, i.e. where
a new skill or qualification is acquired. Where, on the other
hand, the training is taken merely to maintain, update or upgrade
an already existing skill or qualification, the related costs are
not considered to be capital in nature. The distinction between a
training course and a convention and between a training course
and business meetings is made in paragraphs 9 and 10 of IT-357R2
as follows:
9. A training course
should be distinguished from a convention, which may be described
as a formal meeting of members of an organization or association
for professional or business purposes. Unlike a training course
which generally has a classroom format for teaching a subject in
accordance with a formal course of study, a convention does not
normally have a classroom format and those attending are normally
not expected to study text-books, prepare assignments or take
tests. A convention does not become a training course when some
of its sessions take the form of workshops. It is a question of
fact whether a "seminar" is a convention or a training
course. While conventions usually result in the acquisition of
knowledge by those attending them, the deduction of convention
expenses is specifically covered by subsection 20(10) and is
subject to the limitations contained in the provisions of that
subsection (see the current version of IT-131).
10. A training course should also be
distinguished from a meeting of a group of employees or owners of
a business where no formal training occurs. An employer's
costs incurred in connection with employee meetings of this
nature are usually allowable, as are costs of similar meetings of
the owners of a business, provided that such costs are reasonable
in the circumstances and are incurred for the purpose of carrying
on the business.
[42] While Interpretation Bulletin
definitions cannot override the legal meaning of a word or an
expression used in the Act, in the present case I find
nonetheless that the monthly seminars attended by the appellant
fit better within the IT-357R2 definition of a convention than
within the definitions of a training course or of a meeting of
owners of a business where no formal training occurs, also
contained in that Interpretation Bulletin. According to the
evidence presented at trial, the seminars in question herein can
very well be defined as formal meetings of members of an
organization (Amway) that are held for business purposes and that
result in the acquisition of knowledge by those attending them.
Accordingly, in my view, these seminars are conventions within
the meaning of the Act, as defined in the case law and,
incidentally, in the Interpretation Bulletin.
[43] Finally, it is my understanding
from the evidence that although there is a profit-making
component involved in attending the seminars in question, the
acquisition of new skills and increased knowledge by the
attendees forms an integral part of those seminars. The fact that
some members may already possess some of those skills is not a
bar to classifying the expenses incurred by them as being capital
in nature. On this point, I reiterate what the Income Tax Appeal
Board said (subsequently confirmed by the Exchequer Court of
Canada) in Griffith, supra, at page 473, before
concluding that the expenses at issue there were capital
expenditures:
. . . That such is the effect of conventions seems to be
acknowledged by the appellant himself who admitted that, although
in attending conventions it was not his primary purpose to
increase his knowledge, nevertheless he might incidentally have
done so, and he recognized that conventions are a medium through
which one is kept aware of the progress being made in the field
in which one's specialty lies.
[44] I therefore conclude on the first
issue of travel expenses that the Minister did not err in
treating them as expenses incurred in the course of a
"convention" within the meaning of subsection 20(10) of
the Act and consequently in limiting such expenses to two
conventions per taxation year.
Las Vegas Trip
[45] The appellant has acknowledged
that this trip was a purely social event. There were no lectures
and no seminars. It was not a convention. The question therefore
is whether the expenses claimed by the appellant in respect of
that trip were incurred for the purpose of gaining or producing
income from a business.
[46] The expenses consist of seven
airline tickets to travel to Las Vegas, accommodation in four
rooms, car rental, and gas for a three-day stay (see Exhibit R-1,
Tab 9). The appellant testified that two of his guests were
sponsored by him in the Amway organization. The appellant was
himself accompanied by his wife.
[47] In Rovan v. M.N.R., 86 DTC
1791 (T.C.C.), it was said that convention expenses would be
deductible in computing income if the primary purpose of
attending the convention was the enhancement of the
taxpayer's business as a source of income. The court said, at
pages 1794-95:
. . . Expenditures made for what is a vacation under the guise
of attending a convention for business purposes are not
deductible in computing income. If they were, this would in
effect be allowing certain taxpayers to have other taxpayers
share the cost of their vacations. This cannot be what the
legislation intends. This is not to suggest that indulgence at a
convention in activities normally associated with a vacation
precludes the deductibility of expenses incurred, but those
activities must be clearly subservient to the overriding business
purposes of the meeting.
[48] In my view, the same reasoning
applies to expenses claimed for attendance at a social event in a
vacation area like Las Vegas. The fact that the appellant
purported to promote his business through a vacation trip to Las
Vegas organized as a reward to IBOs who might help improve his
profitability is, in my view, too remote to justify the deduction
of the claimed expenses pursuant to
paragraph 18(1)(a) of the Act. Amounts paid
out purely for social entertainment and perhaps as a contribution
to fostering pride in a certain achievement are not deductible
expenses pursuant to paragraph 18(1)(a) of the Act.
This is particularly so as the evidence adduced is very
inconclusive as to whether the expenses incurred were actually
for the purpose of gaining or producing income from the business
(see H.A. Brown Limited v. M.N.R., 61 DTC 177 (T.A.B.);
Leffler v. M.N.R., [1971] Tax A.B.C. 717). One must
remember here that only two of the five IBOs invited were
sponsored by the appellant and that the involvement of the
appellant's wife in the business is far from clear. Also, the
evidence presented is silent as to the role the appellant's
guests played in enabling the appellant to earn income from his
business. I therefore conclude that the appellant has not proven
that the primary purpose of incurring the expenses related to the
Las Vegas trip was the enhancement of his business per se. The
expenses are consequently not deductible pursuant to
paragraph 18(1)(a) of the Act.
[49] Furthermore, the Tax Appeal Board
said in Brown, supra, at page 181, that:
In
cases of this kind a rule to be remembered is that when a
taxpayer intends to absorb the cost personally it matters not, of
course, how he spends his money but when he proposes deducting
the cost from his taxable income and actually does so, then the
reasonableness of the expenditure at once comes under scrutiny.
(See Roebuck v. Minister of National Revenue, 26 Tax
A.B.C. 11, at page 19, 61 DTC 72, at page 77.) On this point also
there will be a finding unfavourable to the appellant.
[50] In my view, this is an instance
where, even if I concluded that the expense claimed is deductible
pursuant to paragraph 18(1)(a) of the Act, that
expense is so excessive as to be unreasonable and therefore
non-deductible by virtue of section 67. (See Mohammad v.
The Queen, 97 DTC 5503 (F.C.A.); Cipollone v. Canada,
[1994] T.C.J. No. 862 (Q.L.).) The expense incurred for the trip
to Las Vegas in 1997 represents one third of gross income
for that year. This, I find, is excessive and unreasonable in the
circumstances. As Cattanach J. said in Gabco Ltd. v.
M.N.R., 68 DTC 5210 (Ex. Ct.) at page 5216:
It is not a question of the Minister or [t]his Court
substituting its judgment for what is a reasonable amount to pay,
but rather a case of the Minister or the Court coming to the
conclusion that no reasonable business man would have contracted
to pay such an amount having only the business consideration of
the appellant in mind.
[51] I therefore conclude that the
special promotion expense claimed in relation to the trip to Las
Vegas in the 1997 taxation year is not a deductible expense.
[52] The appeals are dismissed with
costs.
Signed at Ottawa, Canada, this 6th day of January 2004.
Lamarre, J.
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