J Allen Howard v. Minister of National Revenue, [1985] 2 CTC 2176, 85 DTC 509

Taylor, TCJ:—This is an appeal heard in Calgary, Alberta, on June 3, 1985, against an income tax assessment for the year 1979 in which the Minister of National Revenue disallowed an amount of $2,543.89 travel expenses claimed. The reason for the claim as filed with Revenue Canada reads:

Your office has indicated that the disallowance is based on the travel expenses being incurred for attendance at a convention which was not within the territorial scope of the sponsoring organization. The sponsoring organization in this case has business interests throughout the world and specifically has many business interests in the USA where this convention was held. I dispute your decision that the convention was not within the territorial scope of the sponsoring organization.

The Minister’s reply to notice of appeal states:

— . . . the Appellant, in computing his income in his 1979 taxation year, deducted a total amount of $3,543.89 on account of travel expenses, that the Appellant and his Spouse travelled to San Diego, California, in the month of January, 1979 and to Honolulu, Hawaii in the month of December, 1979 . . .

— that an amount of $2,543.89 as deducted by the Appellant on account of purported travel expenses in the computation of his income in his 1979 taxation year was not made or incurred for the purpose of gaining or producing income from the business or property of the Appellant in his 1979 taxation year;

— that an amount of $2,543.89 as deducted by the Appellant on account of purported travel expenses in the computation of his income in his 1979 taxation year was a personal or living expense of the Appellant in his 1979 taxation year.

— . . . in the alternative, that the amount of $2,543.89 as deducted by the Appellant on account of purported travel expenses in the computation of his income in his 1979 taxation year was not reasonable in the circumstances.

The appellant, in partnership with his wife Gayle, operated as “Howard Enterprises”, selling and distributing “Amway” products in a territory generally in the southern part of Alberta, near Calgary. The financial statement for the year in question gave the following information:

HOWARD ENTERPRISES

STATEMENT OF INCOME AND EXPENSES

YEAR ENDED DECEMBER 31, 1979

INCOME

Product Sales			$34,058.50
Commissions			10,273.27
GROSS INCOME			$44,331.77
EXPENSES
Automobile		$ 3,014.93
Commission		4,364.19
Cost of Goods Sold	$36,172.81
plus
opening inventory	5,037.66
minus
closing inventory	10,999.38	30,211.09
Bank Charges & Interest		1,162.14
Advertising		110.00
Entertainment		515.68
Insurance		16.00
Licenses		30.50
Local Meeting Expenses		566.47
Office Rent & Expenses		1,591.05
Postage & Shipping Expenses		103.38
Legal & Accounting		304.00
Repairs on Equipment		243.98
Sales Aids		1,110.11
Sales Promotion		993.71
Telephone		977.58
Travel		3,543.89
Outside Services		210.00
RDC Charges & Servicing		1,173.68
Sundry		161.00
Depreciation		129.99	50,533.37
NET LOSS FOR THE YEAR			($ 6,201.60)

In filing his tax return, including his regular professional income as a lawyer, the appellant had claimed a business loss of $3,100.80 from "Howard Enterprises” (one half of the above). The Court was informed that $1,000 of the $3,543.89 had been allowed by the Minister, which allegedly represented travelling other than the disputed San Diego and Honolulu trips. This other travelling had been to Victoria, British Columbia, Red Deer and Edmonton, Alberta, etc, to hold or attend rallies and promotional meetings organized for, by, or under the guidance of Amway. The appellant described his business relationship with Amway, which consisted in very broad terms, of a series of distributorships superimposed one on the other, which resulted in a form of "commissions” paid to him by some of his subordinate distributors and dealers, and by him, in turn to some of his superior distributors. The principles of the "business” operation were not in issue in this appeal, the Minister not having challenged the “reasonable expectation of profit” perspective. While the more “local” meetings and seminars allowed by Revenue Canada were smaller in nature and shorter in duration, it was difficult to see in what manner they differed in principle from the San Diego and Honolulu trips disallowed by Revenue Canada, at least according to the description given by the appellant. As an example, he presented an agenda for the Honolulu trip and agreed that he had taken his wife and family along with him but the expenses for his children were not charged against the business. In general, the convention (as he termed it) was for 12 days, and while during each day there was clearly opportunity for personal pleasure and enjoyment, the schedule also provided for meetings and conferences according to Mr Howard. In addition, it was the testimony of the appellant that he gained a great deal from the daily contact, both formal and informal, with other business people in attendance, particularly Amway distributors and dealers. The conferences (San Diego and Honolulu) were sponsored and organized by "Econoclean”, an agency connected with Amway, and described by the appellant in this way:

. . . When this item was disallowed, I was advised that the disallowance was made solely on the basis that the convention was not held within the territorial scope of the sponsoring organization. This appeal presumes that this is still the position of Revenue Canada.

Econoclean Enterprises Ltd is a business organization which is able to carry on business in many countries around the world, including Canada, the United States of America, Great Britain, Ireland, France, West Germany, Switzerland, Holland, Australia, Japan and Hong Kong. I am advised by one of the owners of that company that the company does have substantial business dealing and derives income from same in at least Australia, West Germany, Holland, Great Britain, and the United States of America, in addition to Canada. On that basis, it seems to me that the convention in question was at a location that could reasonably be regarded as consistent with the territorial scope of the company. The Company derives income, in fact, from operations in both San Diego and Hawaii.

The appellant stressed that the only point of disfavour pointed out to him by Revenue Canada had been the non-compliance with subsection 20(10) of the Act which reads:

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 him 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.

As an analogy, Mr Howard noted that he was unable to see any difference at all between him attending a legal convention in, let's say, Dallas, Texas, as part of his professional occupation, and attending a sales convention in Honolulu as part of his Amway business, providing all other relevant conditions in the Income Tax Act were met.

The position of the Minister was essentially that the territory of the appellant did not extend to either San Diego or Honolulu, and indeed he had made no sales in those places. The disallowed expenses were “travelling” expenses not “convention” expenses and should be disallowed as such. The Minister’s counsel cited the case of Graves v MNR, [1983] CTC 2594; 83 DTC 549, and noted a recent oral decision of this Court — Giebelhaus v MNR, (not published), both of which are dismissed appeals unfiled on similar grounds. The critical phrase from Graves (supra) is:

Under the item “Travelling”, the Court is willing to allow 30% of the amount mentioned in the 1979 taxation year, namely $2,317.00 — 30% of it would be $695.10. This 30% is to cover travelling in Canada but not in the United States. The travelling expenses incurred in the US were not reasonable and also they were not incurred to earn income. There was no need for the couple to go in the US to learn what could have been learned in Canada.

As I read Graves (supra) there is no indication that the $2,317 was for convention expenses (which is asserted by the appellant in this matter), and while the Minister in this appeal has made an effort to restrict the question to “travelling expenses” (subsection 18(1) and paragraph 18(1)(h)), I am not persuaded that such a delineation is possible according to the facts. 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. But his argument that this was a “convention”, while not accepted by the Minister, has not been successfully overturned by the Minister, and the facts are in support of it being termed just that — a “convention”, not “travelling”. A slight criticism might be levelled at Mr Howard, since he filed his tax return showing the amount as “travelling” (supra), but that terminology does not determine the issue at stake. The “Agenda” for the Honolulu trip (noted above) is headed:

HAWAIIAN LUAU 1979

HILTON HAWAIIAN VILLAGE HONOLULU, HAWAII

DECEMBER 1 - 12

CREATE

YOUR

DREAM

The events are headed (for example)

DECEMBER FOUR

RALLY — 9.00 PM IN CORAL ROOM #4

YOUR GUEST — SKIP & SUE ROSS — CROWN DIRECTS

YOUR HOSTS — FERD & HELGA BERG

DECEMBER FIVE

SEMINAR — 9.00 AM IN CORAL ROOM #4

YOUR GUEST — SKIP ROSS

YOUR HOSTS — HAROLD & JOY PINNEY

DECEMBER SIX

SEMINAR — 8:30 AM IN CORAL ROOM #4

YOUR GUEST — SKIP ROSS

YOUR HOSTS — JACK & JOAN ARENS

DECEMBER SEVEN

RALLY — 8:00 PM IN CORAL ROOM #4

YOUR GUEST — GEORGE & DOLORES WILLIAMS

YOUR HOSTS — HAL & HELEN HARRIS

DECEMBER EIGHT

DD SEMINAR — 9.00 AM IN CORAL ROOM #2

YOUR GUESTS — JIM & SHARON JANZ

YOUR HOSTS — LLOYD & WILMA HANSON

The back page of the program reads as follows:

DEFINE YOUR PURPOSE

“Nothing”, said Carlyle “is more terrible than activity without insight.”

The tragedy of life is not hardship, labour and suffering; but meaninglessness emptiness, effort without objective, the fever-racked man who aimlessly passes through the motions of his accustomed daily conduct is a pitiable object. How much more so those whose daily conduct is merely the expression of the fever of life.

Only the man whose activity is directed by a great purpose can be fundamentally happy. Life easily degenerates into the mere dance of death unless it be intelligently directed. Behind the expenditure of the precious energy of life there must be the highest degree of wisdom. Otherwise that energy which can never be recaptured is wasted. Have you defined your purpose?

As I noted above, and based on the appellant’s testimony, I am in agreement that it was a “convention”, rather than “travelling”, to whatever degree that distinction appears to have merit to Mr Howard. A convention, yes, but probably more of a “self-help” or “personal motivation” conference than a regular business convention. If I am to accept his testimony and statements regarding “Econoclean (supra)”, I must also note that there is nothing in the entire Honolulu schedule which even mentions “Econoclean”, “Amway” or even the products or sales efforts associated therewith. I can believe that Mr Howard might well return from Hawaii refreshed, motivated, and ready for his business task. But he might accomplish the same thing by a good swim or a game of tennis — the main point is that there is nothing to support the assertion inherent in his appeal that the convention was “in connection with the business” (subsection 20(10) of the Act so strongly relied on by the appellant). There is no need for the Court to consider the alternate argument of the respondent — “was not reasonable in the circumstances” — an argument arising out of section 67 of the Act. It is completely unreasonable to associate any known part of the convention with the business “Howard Enterprises”.

While the circumstances surrounding the convention expenditures may meet one aspect of the requirements set under the Income Tax Act, it falls measurably short of meeting all of the constraints which it must address, in order to be deductible from income.

The appeal is dismissed.

Appeal dismissed.