Morris Michayluk and Gloria Michayluk v. Minister of National Revenue, [1988] 2 CTC 2236, 88 DTC 1564

Taylor, T.C.J.:—These are appeals heard on common evidence in Saskatoon, Saskatchewan on June 14, 1988, against income tax assessments for the years 1978, 1979 and 1980 dated October 17, 1984, for Morris Michayluk and October 27, 1984 for Gloria Michayluk, in which the Minister of National Revenue disallowed certain business expenses. At the start of the hearing, there was a discussion between the parties and the Court regarding exactly what items and amounts were still in dispute, which amounts were less than completely clear from the documentation filed. Compounding this initial difficulty were the facts that (a) the appellants appealed as partners, and accordingly the disallowances affected both income tax returns; (b) amended statements had been submitted by the appellants during the course of discussions with Revenue Canada, details of which amended financial information did not appear to be part of the documentation made available to the Court; (c) the question of dependents' allowances to Morris Michayluk for his wife Gloria Michayluk might enter into the matter depending upon how much, if any, the Court allowed of certain deductions for the business expenses; (d) the appellants were of the view (by virtue of certain correspondence with both Revenue Canada officials and elected representatives) that additional accommodation had been agreed upon subsequent to the October 24, 1984 reassessment, supra, and its later confirmation by the Minister after objection; and (e) the prospect of adjustments related to capital costs allowance and inventory allowance might still be in dispute. As indicated above, the available documentation did little to put the dispute precisely before the Court.

In the notice of appeal, identical for both appellants — dated October 20, 1985, we read:

Enclosed please find a brief summary of Business meetings for the years 1978, 1979 and 1980 which we have been told are not deductible from our Business Income.

The disallowing of these trips also effects [sic] our Capital Cost Allowance on our automobile and the percentage allowed for the business use of our automobile.

Our District Taxation office is the Saskatoon District Office.

We wish to have these business expenses reviewed by the Tax Court of Canada as we feel that these expenses should be tax deductible from our Business Income.

We are still in discussion with the appeals department on several additional points which if not resolved to our satisfaction, we will be bringing to the Tax Court.

1. Interest on alleged outstanding balance.

2. Discrepancy for returned stock.

3. Inventory allowance.

1978

Allowed:

1. Ambassador Rally Tickets $ 8.00

Not allowed

1. Calgary $ 129.65

2. Regina 149.61

3. Kelowna cece 297.73

4. Saskatoon 79.95

5. Prince Albert 150.00

6. San Diego 456.24

$1263.18

1979

Allowed:

1. Local Rally $ 117.85

Not allowed

1. San Diego $ 234.80

2. Calgary 100.70

3, Victoria 387.52

4, Vancouver 215.45

5, Saskatoon 21.00

6. Saskatoon 105.00

7. Prince Albert 110.00

8. Calgary 95.00

9, Hawaii 2249.13

$3518.60

1980

Allowed:

1. Local Rallies $ 383.26

Not allowed

1. Saskatoon $ 155.50

2. Saskatoon 167.00

3. Calgary 159.00

4, Saskatoon 45,00

5. Melfort 74.74

6. Calgary 291.76

7. Harrison, B.C 189.76

8. Phoenix 1201.14

$2283.90

From the reply to notice of appeal of Gloria Michayluk — again similar for each appellant:

7. In reassessing, and subsequently confirming his reassessment, the Respondent, in respect to the apparent subject matter of this appeal, being trip expenses, made, inter alia, the following assumptions of fact:

(a) the Appellant and her spouse carried on the said business as equal partners;

(b) that the Appellant and her family are Canadians ordinarily residents in

Saskatoon, Saskatchewan and they carried on their business in this locality;

(c) that the local meetings attended by the Appellant in Saskatchewan, Alberta and British Columbia were motivational in scope and the expenses incurred were a payment on account of capital;

(d) that the Appellant received benefits of an enduring nature in respect to her attendance at local meetings in Saskatchewan, Alberta and British Columbia;

(e) that the foreign trips were not sponsored by a professional or non-profit organizations;

(f) that the expenses in respect to foreign trips were as follows:

Location	Year	Amount
San Diego	1978	$ 456.24
Hawaii	1979	2,249.13
Phoenix	1980	1,201.14

(g) that the expenses in respect of the foreign trips were personal and living expenses and not outlays or expenses incurred to earn income from a business or property;

(h) that the expenses in respect of the trips were not reasonable in the circumstances except to the extent allowed in paragraph 5 above;

8. The Respondent does not presently have any knowledge of additional points of appeal in addition to the trip expense. He will await the receipt of an amended Notice of Appeal in respect of the additional items and the opportunity to reply to such items in advance of trial.

11. He submits that the Appellant has been properly reassessed in respect to the foreign trips in his 1978, 1979 and 1980 taxation years in that the expenses in respect to those trips were personal or living expenses of the Appellant pursuant to Subsection 18(1)(h) of the Act.

12. He further submits that the foreign trips were not conventions held in a location that may reasonably be regarded as being consistent with the territorial scope of the partnership business within the meaning of Section 20(10) of the Act.

13. He further submits that the local trip expenses disallowed were motivational in scope and the Appellant received benefits of an enduring nature with the results that he properly reassessed the Appellant in respect to those expenses pursuant to subsection 18(1)(b) of the Act.

14. He further submits that the disallowed trip expenses were proper and that the Appellant was properly reassessed to deny the claimed trip expenses, except to the extent allowed and set out in paragraph 5 above, pursuant to the provisions of Section 67 of the Income Tax Act.

10. He relies, inter alia, upon Sections 3, 9, 67, 169 subsections 18(1)(a), 18(1)(b), 18(1)(h), 20(10), 161(1) and 248(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c.63, s.1, applicable to the Appellant's 1978, 1979, 1980 taxation years.

In testimony, Morris Michayluk stated that during the years in question the business had experienced losses, but in the fourth year of operation (1981) the partners had shown a profit. He described the operating structure of Amway, which in very general terms consisted of a hierarchy, providing for increased earning (by way of bonuses or shared revenues) from those below to those above, dependent on sales volume. This was often referred to in the testimony as “upline” and "downline" distribution. According to Mr. Michayluk, those distributors whom he wished to emulate had done very well, and his attendance at the various conferences, seminars or conventions — whatever they might be called — was intended to provide him with the working knowledge, personal contacts and methodology which he saw in others, or which was outlined to him, so that he and his wife could profitably enlarge their own scope of activity and benefit accordingly. His attendance at the various functions — most of which were disallowed or challenged by the Minister, was vital to the existing operation, to the continued progress of these operations, and to the profit making structure they were developing in his view. Mr. Michayluk in his testimony did demonstrate deep dedication and purposeful attendance to these meetings — particularly those at which he was permitted to rub shoulders with very successful distributors in Amway, or with notable personalities and speakers from a wider area of business and public life. Mr. Michayluk provided the Court with details of the "conventions" in San Diego, Hawaii and Phoenix, including the brochures outlining the programmes for the participants. Perhaps simply noting the captioned headings for the events tells us as much as is needed regarding the thrust — at least from a publicity standpoint — for these events:

SAN DIEGO

REUNION

1978

at

the

BEAUTIFUL TOWN & COUNTRY

HOTEL & CONVENTION CENTRE

SAN DIEGO — CALIFORNIA

December 26th — January 2nd HAWAIIAN

JUBILEE

1979

Hilton Hawaiian Village

Dec. 11-21 '79 — 12-22 '79

PHOENIX

FAMILY

REUNION

Dec. 28 — Jan. 2

at the beautiful

DEL WEBB’S

MOUNTAIN SHADOW ESTATE

and the

LA POSADA

Your Hosts

DOUBLE DIAMOND

DIRECT DISTRIBUTORS

BOB & JOYCE SCHMIDT

and

GEORGE & DELORES WILLIAMS

From Mr. Michayluk’s testimony, it was evident that he enjoyed these sessions, although he did describe the hard work that was associated with them — either he and his wife were attending organized or informal gatherings fo instruction, guidance, etc., as well as discussions regarding new products, product presentation, customer relations, etc.; or they (the appellants) were in a smaller fashion providing similar knowledge, stimulation, and assistance to other distributors in their own network.

Counsel for the Minister in questioning Mr. Michayluk largely dwelt on the theme that these conferences — again whatever they might be termed, or wherever they were held — were motivational in nature. Mr. Michayluk's description of the efforts at and the effects of, these meetings prompted counsel for the respondent to advance a view that he approached these sessions with almost religious zeal and fervour. Counsel for the Minister questioned Mr. Michayluk closely regarding certain aspects of the meetings. There were no references to "Amway" in any of the brochures — other than such indications as "Double Diamond Direct Distributors", or in the daily programs guest speakers who were: Crown Ambassadors, Crown Directs, Diamond Directs, Triple Diamond, etc., all of which represented various upper levels of the total hierarchy within which Mr. Michayluk saw himself, and within which he had higher aspirations. I would note that everything presented in Court did support the view that the appellants were operating a business — and they were doing so in an organized and comprehensive fashion, albeit at annual losses. The appellants certainly had not approached this effort in any nonchalant way — indeed they entered into it with great enthusiasm. There was no disagreement from the Minister with regard to the Court accepting this "business" aspect of the operation.

Counsel for the Minister presented certain schedules, prepared by Revenue Canada, which were designed to give the Court a better understanding of the amounts apparently still in dispute between the parties, particularly the C.C.A. I can quite see how these schedules might serve to explain some of the apparent differences of the calculations between the parties from the reassessments. As I read these schedules, they represent the Minister's approach in assessing the “mileage allowances" claimed and finally allowed in the process. Counsel did agree that whatever the outcome of these appeals, the appellants should be granted the "inventory allowance" referenced earlier.

Argument

Some of the relevant comments from counsel for the respondent were:

And with respect to the in-Canada expenses, the Minister’s position is primarily, first of all, that the territorial scope was Saskatchewan. Very few distributors were mentioned from Alberta and it's questionable whether or not these are reasonable to attend conventions, or to go out to Alberta and B.C. with respect to the minimal amount of distributors that they had there.

But, more importantly, it was the nature of what was learned at all of the seminars, and whether or not it was reasonable to spend that type of money on those seminars. And briefly, they all appeared to be motivational in scope. There was obviously certain talks about the products, but those again appeared to be incidental to the meeting of the people, the motivational, et cetera.

And it's the Minister’s position that those expenses are not primarily to earn income from the business. If they were to earn income from the business, they provided some sort of an enduring benefit, much as the Hawaii convention did, were motivational in nature, and should not be considered a current expense. [Emphasis mine.]

The alternative position, of course, is that these were conventions, and they should be allowed at a maximum of two per year.

. . . the out-of-Canada conventions. . . . First of all, it's our position that they are not within the territorial scope of these particular appellants. They are not consistent with these particular appellants’ territorial scope of their organization, which, in our submission, is limited to Saskatchewan.

In addition, sir, I'll be relying on cases I’m sure you're familiar with, and that's primarily the Graves [Graves et al. v. M.N.R., [1983] C.T.C. 2594; 83 D.T.C. 548] and the Howard [J. Allen Howard v. M.N.R., [1985] 2 C.T.C. 2176; 85 D.T.C. 509] case regarding the Hawaii, the San Diego, and the Phoenix conventions, conventions or travelling expenses.

They were primarily motivational in scope, . . . The Minister relies on those points, Your Honour, and in a secondary way on the Section 67 argument that what is accomplished at the out-of-country conventions was motivational, which is capital; it was selling techniques, not specific to the business. The introduction of the down-line distributors could have been accomplished just as easily back in Saskatchewan. [Emphasis mine.]

The actual business, or the profits that the Appellants say are related to the conventions would only be incidental to the conventions.

The other case I would draw your attention to is that of Rovan, [David N. Rovan v. M.N.R., [1986] 2 C.T.C. 2337; 86 D.T.C. 1791] which causes the Minister some concern . . . . But in denying the expense in Rovan to the Minister, His Honour Judge Christie also enumerated a number of criteria.

At the bottom of page 1794, where he begins:

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.

And then going to the next paragraph:

In deciding what the primary purpose is, recourse can be had to things of this kind. The nature of the taxpayer's business in relation to the subject matters to be discussed and studied at the convention. In this regard it is relevant to consider the depth of the information the taxpayer had regarding the topics to be considered when he decided to attend, the distance travelled, the time spent, and the amount of expenses incurred . . . The nature of the convention site and its climatic attractions are also relevant.

Now, sir, if you apply all those criteria to the case at bar, it’s our position that you would have to find that this is a disguised vacation. With respect to the depth of the information, I think there's sufficient information that it was available in Canada, and the taxpayer had learned a lot of it prior.

There was also a lot of leisure time . . . [Emphasis mine.]

Analysis

Without any intent to do disservice to counsel's argument in this matter, since I accept that the issues and amounts involved, were anything but concise, I have reached the conclusion that the points must be broken down into two simpler parts — the expenses for in-Canada meetings (and the travel associated therewith)and those for out-of-Canada meetings (and the travel associated therewith). A major portion of the travel in both situations (in-Canada and out-of-Canada) was done by automobile — and the schedules noted above, submitted by counsel during argument were not analysed in detail by to the Court. I did summarize my comprehension of the thrust of the Minister’s position for the appellants, with regard to these schedules, as follows:

. . . it's an impression that I got from the line of questioning, and from the way the evidence was presented — that we were dealing with the in-Canada travelling expenses as “travelling expenses", and we were dealing with the out-of-Canada expenses as “convention expenses". In general, that these would fall under two different sections of the Income Tax Act. Counsel says she is prepared to put forward that even some of the in-Canada expenses for travelling were really convention expenses outside of your business territory. In other words, she's going to define your business territory, or attempt to, as not all of Canada, or even not all of the Prairie provinces, including B.C., where you've had conventions, but something more selective.

So, she is saying, if she proves the point, that certain of these expenses which were nominally in my mind as travelling expenses in Canada, are in fact convention expenses barred, — disallowed by Section 20(10) because of the wording of it.

On the in-Canada meetings — I do not find that the known purpose of these meetings was outside the parameters or the prospects which could be reasonably associated with the conduct of their business. No doubt there was an element of self-development in some of the meetings they attended, but many of these were called or sponsored by Amway or by distributors to whom the appellants owed a form of allegiance — either “upline” or "downline". At many of these conferences, I am satisfied that product information, product development, customer relations and information directly relevant to their operation was not just available, it was pursued diligently by the appellants. I do not see that the main purpose of attendance by the appel- lants was to contribute to the benefit of others (whether above or below in the hierarchy) certainly not without some perceived or real reciprocal return to themselves. Taken in the context of "an organized and comprehensive effort” to operate a business, it would not be difficult to reach the conclusion that the Minister’s pursuit of this part of the matter (the in-Canada meetings) was extremely aggressive, and showed a distinct lack of appreciation or understanding of the appellants’ operations. I do not see that any of sections 3, 9, 67, paragraphs 18(1)(a), 18(1)(b) or 18(1)(h) serve to sustain the Minister’s assessments on this point, and I do not regard the circumstances surrounding these particular in-Canada expenditures as falling under subsection 20(10) of the Act — as some form of "convention expenses". For this Court to disallow the charges against the business operations would require a better analysis and undermining of the appellants’ testimony than was presented by the Minister at this hearing. The appellants were not constrained by any geographical limitations that were made known to the Court. As they saw it, and as they vigorously pursued it, they were establishing a "network" of reporting sub-distributorships, which would substantially contribute to their business income. Counsel did not directly characterize these efforts as somehow “capital”, although references were made by the Minister to such prospect for the "out-of-Canada" expenses.

On the out-of-Canada expenses, there is a slightly different perspective. In my view at least as contrasted with the "in-Canada" expenses, these were conventions. I recognize that the brochures indicate little if anything to do with Amway directly — but while that is not helpful to the appellants, in my mind it is not nearly as crucial, as the Minister's misinterpretation of subsection 20(10) — see reply to notice of appeal above:

He further submits that the foreign trips were not conventions held in a location that may reasonably be regarded as being consistent with the territorial scope of the partnership business within the meaning of Section 20(10) of the Act.

Counsel noted that Rovan, supra, "gave the Minister a little bit of trouble” and I must assume that arose from the comments therein on page 2341 (C.T.C. 1794):

If the very raison d'être of the entity which holds a convention is to organize and stage conventions inside and outside of Canada for profit then I believe that its territorial scope, for the purposes of subsection 20(10), is where it in fact holds conventions. In short its territorial scope is where it goes in the fulfillment of its business. The evidence of Price establishes that the Institute is an entity of the kind just described. Consequently Monte Carlo was a location that may reasonably be regarded as consistent with the territorial scope of the Institute.

Perhaps the Minister somehow found more comfort with regard to "territory" in the very limited reference to the same phrase in Howard, supra, at page 2179 (D.T.C. 511):

. . . I would agree that in terms of the specific territorial limits of the appellant's organization no reason to go to San Diego or Honolulu was presented to the Court.

The use of the words “the specific territorial limits of the appellant's organization" (above) may have given the Minister cause to consider that the Court in Howard, supra, regaded the "territorial scope of that organization" to be a reference to the operation of the appellant. That is certainly not the interpretation I see in Howard, supra, and it is clearly not one supported by the words of subsection 20(10). The organization in subsection 20(10) is the organization putting on the convention — in Howard, supra, that was a Econoclean. In this appeal the major reference made at the hearing was to a group called Ambassador Associates, precisely the point made adequately in Rovan, supra. I readily admit that it is as difficult for me, as it appears to be for the Minister, to see an overriding reason that the "organization" in subsection 20(10) should be the sponsoring group, rather than the benefit- ting group — but that is the way I I read it.

The first point to be determined therefore is whether "Ambassador Associates" and the sites of these conventions come within the terms of subsection 20(10) — ”. . . at a location that may reasonably be regarded as consistent with the territorial scope of that organization." My impression of the description of "Ambassador Associates", is that it is an organization (whether directly related to Amway or not) whose main purpose and function is to promote, organize and manage conventions — at least the kind of meetings attended by the appellants in San Diego, Hawaii and Phoenix, which seem to lend themselves most appropriately to use of that term "conventions". It was not apparent to me that there were easily discernible territorial limits or geographical boundaries within which Ambassador Associates operated — it almost seemed to be world-wide, and capable thereof of conducting a convention at virtually any location. Conventions were held in attractive vacation spots at propitious periods during the year. While apparently deplored by the Minister I do not read Rovan, supra, to say that situation, of itself, negates the deductions sought. The question is whether the appellants’ attendance was in “in connection with the business" — that is the appellants' business of being Amway distributors. I believe that view is quite consonant with the point made in Rovan, supra, and I quote from page 2342 (D.T.C. 1794):

. . . 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.

It would be naïve to suggest that all "business" conventions are solely and entirely devoted to business. It is probably equally true that in a pure “vacation”, if business people of a similar interest and pursuit meet each other — whether formally or informally — that some "business" may be conducted, it would not be unrealistic to accept the basic contention of Mr. Michayluk that as a businessman, he worked at the stability and expansion of his operation 24 hours a day, no matter where he was, or what he was doing. The determination, once again, comes down to that familiar term “reasonable”, as one finds in section 67 of the Act:

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." [Emphasis mine.]

That does not lend itself to strictly objective criteria, and unfortunately there may always remain some "gray area" surrounding its interpretation by the Minister, and even by the Courts. In Howard, supra, the Court came to the view that there was little if any "business" reason for the attendance of the appellants provided to the Court. Clearly Mr. and Mrs. Howard had participated fully in the recreational aspects of the trips. In Howard, supra, there was no indication of an effort on the part of the appellants to build-up a "network", of distributors as in the case in these appeals. I would also suggest that the purpose for attendance at the convention in Rovan, supra, was of a very restricted nature — more like Howard, supra, than in these appeals. In these appeals I do not find that the convention locations or the climatic conditions alone should serve to disallow the deductions sought.

A second point in this “convention” question was raised by counsel and she attached considerable importance to the “motivational” aspect of the conferences, in the Minister's words “which is capital". As I have already noted, a convention probably encompasses aspects of both "business" and "vacation", and I would add some “motivation”. But I do not see that the Minister can disallow the convention expenses sought solely because they contained a motivational aspect, on the grounds that such motivation was "capital", and therefore not deductible. Even assuming that the entire convention was “motivational” even “capital” as alleged by the Minister, the deduction would not be disallowed automatically since subsection 20(10) of the Income Tax Act specifically states: “Notwithstanding paragraph 18(1)(b), . . . ", which paragraph (18(1)(b)) sets out the exception related to capital items as I read it. Simply put the Michayluks were attempting to move away from their own direct sales business, into the larger, and they felt more lucrative field of a network surrounding and supporting them. It did not appear to me that they needed further motivation, but even motivationally oriented convention expenses incurred “in connection with the business” should be deductible. In Rovan, supra, the appellant had failed to establish that his primary purpose was the enhancement of his business operations. I am impressed from the testimony on behalf of these appellants and by their own stated intentions in attending the conventions that they extracted as much “business” element from the conventions as was possible. There is no doubt that the locations, the timing and the agenda of these conventions leaves the impression that it would be difficult to focus the minds of the appellants totally and directly on business matters, and the Rovan, supra, case properly warns of the risks involved in such circumstances. But there was nothing brought out in evidence at the hearing which would indicate any other kinds of forum available to these taxpayers, related in a direct sense to the business operation they had and contemplated, at which they could meet and interchange with others of a like-mind. I have concluded that the convention expenses did not represent a “disguised vacation”, nor were the expenses purely "recreational", or for "personal motivation”, as opposed to educationally oriented. There may well have been some minor amount of "personal or living expenses" included but not sufficient to cover even a major portion of the claim. In any event, the Minister has not assessed on some such "partial disallowance” basis, and it is not for the Court to make that division.

The appeals are allowed so that the appellants may claim the “3% inventory allowance" as permitted under paragraph 20(1)(gg) of the Act; all the travelling expenses (including full mileage) and other costs of attendance at seminars, meetings, etc., in Canada; and the full cost of travelling to and attendance at the conventions at San Diego, Honolulu and Phoenix during the years in question.

The appellants are entitled to party-and-party costs.

The entire matter is referred back to the Minister for reconsideration and reassessment in accordance with these reasons for judgment.

Appeals allowed.