[OFFICIAL ENGLISH TRANSLATION]
1999-2957(IT)I
BETWEEN:
MICHEL GILLES GAGNON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on August 9, 2000, at Fredericton,
New-Brunswick, by
the Honourable Judge Gerald J. Rip
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Simon
Petit
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1994 taxation year is allowed and the reassessment is
vacated.
The
appeal from the assessment made under the Income Tax Act
for the 1995 taxation year is dismissed.
Signed at Ottawa, Canada, this 20th day of November
2000.
J.T.C.C.
Translation certified true
on this 5th day of November 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20001120
Docket: 1999-2957(IT)I
BETWEEN:
MICHEL GILLES GAGNON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, J.T.C.C.
[1] These are appeals from assessments
by the Minister of National Revenue ("Minister") under
the Income Tax Act ("Act") for the
1994 and 1995 taxation years. In making those assessments, the
Minister determined the appellant had no reasonable expectation
of profit either in 1994 when he was a "network
distributor" for Sunrider Food Products
("Sunrider") or in 1995 when he was a "network
distributor" for Amway and therefore that those activities
did not constitute sources of income under sections 3 and 9 of
the Act. Consequently, the Minister disallowed the
appellant's deduction of $3,729 in business losses for the 1994
taxation year and of $6,912 for the 1995 taxation year.
[2] In 1995, the appellant took a
computer course at the community college in Edmundston. Mr.
Gagnon has a bachelor's degree in psychology with a minor in
sociology from l'Université de Moncton. During the
years at issue, he was working full time during the day as a
graphic artist.
Sunrider
[3] Mr. Gagnon said he had been
registered since August 9, 1992, as a "network
distributor" for Sunrider, which distributed Japanese food
supplements. Unfortunately, there is no financial statement for
the activities he carried out for Sunrider for 1992 to 1995. Mr.
Gagnon wrote to a Revenue Canada employee that he had honestly
not done much with the business but the accountant he had in 1994
had insisted he report the business and that it was entirely
legal to do so.
[4] On his tax return for the 1994
taxation year, Mr. Gagnon reported a gross income of $105 from
Sunrider. He also reported $3,734.19 in expenses. His net loss as
a result of his activities for Sunrider was $3,729.19.
[5] In his letter to Revenue Canada,
Mr. Gagnon wrote that he had not received any assistance from his
sponsors at Sunrider. He also wrote: [TRANSLATION] "I
honestly did what I could for the business, but I was not
sufficiently knowledgeable about multi-level marketing."
[6] During the trial, Mr. Gagnon did
not argue that he was operating a genuine business as a
distributor of Sunrider products.
[7] I do not in fact see any
commercial element in Mr. Gagnon's activities for Sunrider. He
never had a reasonable expectation of making a profit from those
activities.
Amway
[8] Mr. Gagnon registered as an Amway
distributor on March 17, 1995, but he said that he was
not very active in Amway at first. The appellant also had a
full-time job. He was working up to 75 hours a week, but there
were weeks when he worked only 26 hours or less. Mr. Gagnon
testified that his hours of work were rather concentrated in the
period from Friday to Monday. He therefore had a great deal of
time for business meetings.
[9] The appellant stopped working
actively for Amway in 1996. Mr. Gagnon never made a profit from
that activity. In his tax return for the 1995 taxation year, he
reported a gross income of $3,287.31 from his activities as an
Amway distributor. The cost of the merchandise sold was
$3,260.75. His other expenses totalled $6,938.65. The appellant
therefore reported a net loss of $6,912.09 on his activities for
Amway.
[10] Mr. Gagnon was undoubtedly influenced
by Amway's propaganda, particularly the testimonials of people
who had been successful. Mr. Gagnon attended many Amway meetings
where he was taught techniques for selling Amway products and how
to make contacts.
[11] Mr. Gagnon determined that there were
two ways of earning an income with Amway: by selling the products
or by developing a sales team under him. He stated he had opted
for the second approach and continued operating his business
fervently, to the point that his girlfriend, now his wife, had
said that she would leave him if he continued operating the
business because he was not spending enough time with
her.
[12] In his letter to the tax authorities he
explained:
[TRANSLATION]
... During the day, while I was working [as a graphic
artist], I would listen almost continuously to instructional and
... motivational tapes. I also posted sayings of an
instructional and psychological nature all over my computer
screen and on the walls ... to prepare for what I had to
do.
[13] The appellant had drawn up a list of
people to meet with and had contacted or met with almost everyone
on his list. Unfortunately, he recruited only two distributors,
both of whom were relatives. He wrote to Revenue Canada that many
people were very interested until he mentioned the name of the
organization behind the business plan, that is, Amway. He
added:
[TRANSLATION]
... It was after I had gone through my list that I really
had trouble. I was too shy to approach strangers (it was hard
enough to approach people I knew, especially after the reactions
I had already received).
He confirmed that reaction in his cross-examination.
[14] He did not meet his objective of
recruiting at least one new distributor each month.
[15] According to Mr. Gagnon, the reason his
business did not work was because he was not very gifted at
making the approach needed to make sales. He was always afraid of
bothering people. He also believes that the demographic and
geographic situation of the area in which he lives did not help
him either.
[16] Mr. Gagnon did not have a genuine
business with Amway and had very little success with it. The
evidence indicates that Mr. Gagnon tried to operate a business,
but the business never really got started. He did not begin by
drawing up a list of customers or real distributors. He was not
making any progress.
[17] I have no doubt that Mr. Gagnon had
very good intentions when he started his activities with Amway.
He wanted to earn some money, but unfortunately he was not
successful. In light of his testimony and his attitude during his
testimony, I find Mr. Gagnon to be an honest man. Mr. Gagnon
stated that perhaps ten percent of people like him succeed in
Amway. I am certain he realized he did not have the personality
needed to be among them. He therefore withdrew from that
activity.
[18] For these reasons, the appeal from the
assessment for the 1995 taxation year is dismissed.
[19] Counsel for the respondent informed me
that the Minister reassessed Mr. Gagnon for the 1994
taxation year after the normal reassessment period, that is,
after three years after the day of mailing of the notice of the
original assessment: subsections 152(3.1) and 152(4) of the
Act. I do not have the notice of assessment in front of
me.[1] In its Reply
to the Notice of Appeal, the respondent did not claim that Mr.
Gagnon had made a misrepresentation that was attributable to
neglect, carelessness or wilful default in his tax return for the
1994 taxation year or had committed fraud in filing his return.
The burden is on the respondent to show that the taxpayer
misrepresented facts through negligence or otherwise.
[20] The reassessment for the 1994 taxation
year is therefore unfounded, the appeal from that reassessment
must be allowed and the reassessment is vacated.
Signed at Ottawa, Canada, this 20th day of November
2000.
J.T.C.C.
Translation certified true
on this 5th day of November 2003.
Sophie Debbané, Revisor
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