Jacques v. The Queen, docket 2001-1882-IT-I (Informal Procedure)

Date: 20020506

Docket: 2001-1882-IT-I,

2001-3336-IT-I

BETWEEN:

HENRI JACQUES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Lamarre, J.T.C.C.

[1]            These are appeals under the informal procedure from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 1996 and 1997 taxation years. In computing his income for each of those years, the appellant deducted amounts of $8,740 and $10,218 respectively, as business losses. In assessing the appellant, the Minister disallowed the entire loss claimed for 1996 and disallowed an amount of $7,718 for 1997 (the balance of $2,500 having been allowed as deductible legal fees).

[2]            In so assessing the appellant, the Minister relied upon the facts set forth in paragraphs 10, 11 and 12 of the Reply to the Notice of Appeal for the 1996 taxation year (appeal No. 2001-1882(IT)I), which read as follows:

10.        . . .

             (a)         at all material times, the Appellant was employed on a full time basis by the Canadian Radio-Television and Telecommunications Commission ("CRTC");

(b)         during the 1992 taxation year, the Appellant became involved with developing a patent (the "Patent") for a new invention called 'Flatfoot' (the "Product");

(c)         in 1994, the Appellant started a project that consisted of marketing various products such as home alarms, health products and telecommunications services and computers (the "Products") under the name of 'Multi-Level Marketing' ("MLM") (the "Activity");

(d)         the Appellant reported business losses with respect to the Patent and the Activity for the years 1994 - 1997 as follows:

                                             Taxation Year                            Business Losses

                                                  1994                                         $19,517.00

                                                  1995                                         4,506.00

                                                  1996                                         8,740.00

                                                  1997                                        10,218.00

                                total losses -                                            $42,981.00

(e)         the Appellant's calculation of the business loss in regard to the 1996 taxation year as indicated in subparagraph 10(d) herein can be summarized as follows:

                            Revenue                                                                                           Nil

                            Expenses

                            Business tax, fees and licenses                                               $ 345.32

                            Meals and entertainment                                                          246.78

                            Automobile                                                                                 1,509.50

                            Office expenses                                                                          1,172.27

                            Legal, accounting and professional fees                               2,000.00

                            Travel                                                            495.82

                            Telephone and utilities                                                             2,278.49

                            Capital cost allowance                                                              691.82

                            Total expenses                                                                           $8,740.00

(f)          the Appellant was not the inventor of the Product but the inventor indicated that he would grant the Appellant a financial interest of 2 - 5 % of any income realized once the Patent was obtained and the Product manufactured;

(g)         as of July, 1999, the Appellant had no formal written agreement with the inventor with respect to any income he would receive from any eventual sale of the Product;

(h)         there is no indication when a Patent will be obtained for the Product;

(i)          the Appellant was an 'Independent Representative' of MLM and did not either directly market or sell the Products referred to in subparagraph 10(c) herein and therefore had no control over any income earned;

(j)          in 1995 the Appellant was in receipt of $256.00 gross income through his association with 'Quorum International', a MLM company but the Appellant left this enterprise before the end of the said year;

(k)         during the period 1996 - 1998, the Appellant became involved with three further MLM related companies that had all gone out of business by the end of 1998;

(l)          the Appellant did not report any income with respect to the companies referred to in subparagraph 10(k) herein and the only income reported during the period 1994 - 1997 was the $256.00 indicated in subparagraph 10(j) herein; and

(m)        the Appellant did not invest any capital, engage in any lease commitments or arrange any financing with respect to the Patent or the Activity referred to in subparagraphs 10(b) and (c) herein;

11.                        The automobile expenses in the amount of $1,509.50 claimed by the Appellant have not [been] substantiated.

12.                        The professional fees in the amount of $2,000.00 claimed by the Appellant have not been substantiated.

[3]              The Minister relied upon the same facts in assessing the appellant for the 1997 taxation year, with the exception of those set out in subparagraph 10(e) and paragraphs 11 and 12. The applicable figures for 1997 are reflected in subparagraphs 9(e) and (n) and paragraph 10 of the Reply to the Notice of Appeal for that year (appeal No. 2001-3336(IT)I), as follows:

9.           . . .

            

(e)         the Appellant's calculation of the business loss in regard to the 1997 taxation year as indicated in subparagraph 9(d) herein can be summarized as follows:

                            Revenue                                                                                           Nil

                            Expenses

                            Advertising                                                                                $ 309.69

                            Meals and entertainment                                                             55.44

                            Automobile                                                                                 1,361.50

                            Office expenses                                                                          817.61

                            Legal, accounting and professional fees                               2,500.00

                            Travel                                                            327.19

                            Telephone and utilities                                                             4,277.03

                            Capital cost allowance                                                              570.03

                            Total expenses                                                                       $10,218.49

                . . .

(n)         the legal fees of $2,500.00 allowed in accordance with the reassessment referred to in paragraph 8 herein were with respect to objections filed in regard to the 1987 and 1988 taxation years and were not related to either the Product or Activity referred to hereinbefore.

10.                        The automobile expenses in the amount of $1,361.50 claimed by the Appellant have not been substantiated.

[4]            The Minister is of the view that the appellant is not entitled to a business loss for either taxation year since there is no evidence of any relevant activity carried on in the course of an income-earning process. Hence, the expenses claimed were not incurred by the appellant for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act as they were incurred before the commencement of a business.

[5]            With respect to the amount of $2,000 now claimed by the appellant as legal fees for the 1996 taxation year, the Minister is of the view that the appellant has not shown that this expense was incurred as a legal expense with respect to an appeal of an income tax assessment pursuant to subparagraph 60(o)(i) of the Act.

I.               The FlatFoot bicycle project

[6]            This project was explained by the appellant in the following terms in a business questionnaire he filled out on July 9, 1999 (Exhibit R-4, question 6):

FlatFoot Invention (a new kind of bicycle)

This is a long term project, which started in 1992 with a first prototype for which a patent was filed under the Patent Co-operation Treaty (PCT) around 1994. It was later decided to abandon that design because of safety consideration[s] for the public and for the lack of interest from potential manufacturers. In 1997/1998, the inventor developed a new prototype which no longer had a safety problem and also was a significant improvement on the first design; a patent request was filed at the end of 1998 under the Patent Co-operation Treaty (PCT). So far, a keen interest in the product has been shown by several scientists and business people. For my role in this project, the inventor has indicated that he would grant me an interest of between 2 to 5% of the project; terms and conditions have yet to be finalized.

[7]            The appellant confirmed in his testimony that his brother, André Jacques, was the inventor of the bicycle prototype in question and he indicated in the aforementioned business questionnaire (in July 1999) that he had not invested any capital in that project (Exhibit R-4, question 10). He also indicated there that he "expect[ed] to have a formal agreement with the Inventor concerning [his] 2 to 5% share before the end of this year [1999]" (Exhibit R-4, question 12).

[8]            In fact, no agreement was signed by the end of 1999. The appellant filed in evidence a document purporting to be an agreement signed in May 2000 by both his brother and himself. Facetious handwritten personal notes on the front of it taint the official nature of that document (Exhibit A-1), in which the appellant purportedly agreed to pay an amount of approximately $2,250 (1681 Euros) to the European Patent Office for [TRANSLATION] "the initiation of the preliminary international examination regarding the filing" of a priority claim with respect to a patent.

[9]            Under that agreement, the appellant was to receive a 12 per cent share of the revenues derived from the marketing of the invention. The agreement purported to cancel all previous verbal and written agreements in relation to the FlatFoot invention.

[10]          Also filed in evidence by the appellant was correspondence sent to his brother in 2001 regarding patent applications accepted for examination by the United States Patent and Trademark Office, the Patent Office of the United Kingdom, and the Canadian Intellectual Property Office.

[11]          The appellant testified that the development work was completed in 1996, that the written documentation was prepared and the first prototype built in 1997 and that the first international patent application was prepared and filed in 1998. In his view, all essential preliminaries to normal operations were put in place and there was a business with a reasonable expectation of profit.

[12]          In my view, the appellant has not demonstrated on a balance of probabilities that he himself was operating a business in the taxation years 1996 and 1997. The appellant did not invest any money in the FlatFoot project in those years and he has derived no income from that project since its inception. He said that he spent maybe only an hour or two per week on it. All the correspondence filed had been sent to his brother alone and the appellant did not call him as a witness to testify regarding the verbal arrangement they had made. I find that the agreement filed as Exhibit A-1 lacks seriousness and in the circumstances cannot be relied upon as establishing that the appellant has been effectively carrying on a business with his brother since 1996. Furthermore, most of the expenses claimed (home, automobile, travel and meal expenses) could have been incurred irrespective of the existence of a business and were therefore personal in nature (see Symes v. Canada, [1993] 4 S.C.R. 695 at page 737). In the circumstances, I am not convinced that the expenses claimed in relation to the FlatFoot bicycle project were incurred for the purpose of gaining or producing income and none of those expenses are therefore deductible under the Act.

II.             Multi-Level Marketing

[13]          In the questionnaire filed as Exhibit R-4, the appellant in answering question 2 defines this activity as the marketing of different types of products as an independent representative of companies that use multi-level marketing ("MLM") techniques to sell their products (such as home alarm/safety devices, health products, telecommunication services and computers). The appellant stated in the questionnaire that he did not invest any capital in this activity. He explains his losses in the following terms (Exhibit R-4, question 6):

Multi-Level Marketing (MLM)

In the MLM business, I have very little control as [sic] the marketability of the products since I am an Independent Representative and have no say in the day-to-day operations of the MLM company. The people that are successful in that business are the ones who build a very large organization of independent reps and being paid a percentage of all sales made by their organization. To build such a large organization can sometime [sic] take 1 or 2 years with very little net income, if any, in the interim.

In order to decrease expenses and increase revenues, I hired a programmer to put in place a self-replicating web site on the Internet. This web site was very successful in helping me build an organization of more than 2000 people during 1997. This site promoted Universal Tel tech, a MLM start-up company which unfortunately went bankrupt in 1998.

[14]          The appellant said that he spent 25 to 30 hours a week on the above activity, although he was working full time for the Canadian Radio-Television and Telecommunications Commission ("CRTC") as a professional telecommunications systems engineer. The appellant projected that his income from his MLM activities would be $500 in 1999, that it would increase to $10,000 in 2000 and would thereafter double every year (see Exhibit R-4, question 12). He said that he had started in MLM in 1994.

[15]          In fact, he received a gross income of $256 in 1995 through his association with "Quorum International", an MLM company. The appellant also filed a letter from another MLM company, Bodies Best International Inc. (Exhibit A-2, Tab 3), showing that he was paid an amount of $1,501.92 (US$1,025.84) in 1999 and $1,920.92 (US$1,276.73) in 2000 for the sale of products and services. This is the only income that has been declared from 1994 to date. The appellant testified that he ceased all MLM activities in 2000 because he wanted to concentrate on the FlatFoot bicycle concept with his brother. The expenses claimed in respect of the MLM activity are again mostly personal in nature as they could have been incurred by the appellant in any event (home, automobile, travel and meal expenses).

[16]          It was said in Tonn et al. v. The Queen, 96 DTC 6001 (F.C.A.) at page 6013, that "where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business".

[17]          In my view, the appellant has not shown that he was operating a business in carrying on the MLM activity. He did not present any business plan. When he realized that he was not making the income he expected, he did not change his way of doing things in relation to that activity. Although he said he had recruited over 2,000 people to participate in the MLM activity, that does not appear to have been any more efficient over the years, as no greater income was derived from the sale of the products. As he said himself, he had very little control over the marketability of the products and the people who are successful in MLM are those who build a very large organization of independent representatives. In his opinion, it could take one or two years to build such an organization.

[18]          Now, evidence was adduced that in the period from 1994 to 2000 the appellant claimed over $89,000 in expenses, 70 per cent of which were attributable to the MLM activity. This was in contrast to a gross income of approximately $3,700 from that activity in the same period.

[19]          In my view, the appellant has not shown that he had a reasonable expectation of profit in the circumstances. He did not try to change or improve his approach towards the MLM activity. He simply claimed his expenses without taking a more serious approach to the potential profitability of that activity. The least that can be said is that the expenses claimed were very unreasonable in comparison to the income earned over the entire period. I therefore do not accept the deduction of the expenses related to the MLM activity as I am not satisfied that the appellant was carrying on a business in respect of that activity.

III.            Legal costs in 1996

[20]          The appellant claims an amount of $2,000 as legal fees incurred in 1996. The documentary evidence provided to the Minister by the appellant in support of that claim during the audit goes back to 1996 and concerns membership fees paid to the OCGC Investor Group, not legal fees. (See Exhibit A-2, Tab 1, and Exhibit R-7.) Mr. Wally Eng, an appeals officer at the Canada Customs and Revenue Agency, testified to the same effect. Now, at the hearing, the appellant filed another letter, undated and purportedly signed for the executive committee of the OCGC Investor Group by someone whose name was not printed under his or her signature. The letter seems to indicate that the sum of $2,000 was paid in 1996 as "a contribution towards legal costs for the purpose of disputing an ongoing Revenue Canada re-assessment of prior tax years" (Exhibit A-2, Tab 1).

[21]          That letter, in my view, is self-serving evidence not corroborated by the testimony of the person who signed it. It is post facto evidence that contradicts evidence given at the time the amount was actually paid.

[22]          In the circumstances, I will not rely on an undated letter signed by an unknown person. I accept the first explanation given, namely that the payment was for membership dues. In this particular context, such an expense is not deductible under subparagraph 60(o)(i) of the Act.

[23]          The appeals are dismissed.

Signed at Ottawa, Canada, this 6th day of May 2002.

"Lucie Lamarre"

J.T.C.C.

COURT FILE NO.:                                                 2001-1882(IT)I and 2001-3336(IT)I

STYLE OF CAUSE:                                               Henri Jacques v. The Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           April 15, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge Lucie Lamarre

DATE OF JUDGMENT:                                       May 6, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Nicolas Simard

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1882(IT)I

2001-3336(IT)I

BETWEEN:

HENRI JACQUES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on April 15, 2002, at Ottawa, Ontario, by

the Honourable Judge Lucie Lamarre

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Nicolas Simard

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed.

Signed at Ottawa, Canada, this 6th day of May 2002.

"Lucie Lamarre"

J.T.C.C.