Toews v. R., [1997] 2 CTC 3117

Bowie T.CJ.:

The Appellant appeals from his reassessments for income tax for the taxation years 1980, 1981 and 1982. In each of those taxation years he claimed to be entitled to take into account in computing his income for taxation purposes a business loss sustained in connection with the business of distributing a speed reading course called “The Advanced Reading Course” (the course).

The losses claimed for the 1980, 1981 and 1982 years are respectively $12,759.57, $21,416.06 and $8,510.39 according to the Reply to the Notice of Appeal. These amounts do not appear to be in dispute.

In 1980, the Appellant was approached by one Marilyn Wintonic, who drew his attention to a proposal whereby he could acquire the rights to distribute the course in a specific geographic region. The Appellant stated in his evidence, and I accept this evidence as true, that he had taken a speed reading course himself in connection with his postgraduate studies, that he understood the benefit of such courses, and that in his opinion it was a viable product which could be successfully marketed. Although those selling the rights to distribute the course emphasized for promotional purposes the tax advantage that might be gained through their particular method of sell- ing the distribution rights, I am satisfied that the Appellant was motivated primarily by his interest in making a profit, and that he would not have entered into these transactions simply for the tax advantage to be had from them. He apparently did see the product that was to be sold. A copy of it was made an exhibit in the trial. It consists of a thin booklet and an audio cassette, both labeled Advanced Reading Course. The Appellant apparently obtained these at about the time he acquired his distribution rights. For some reason they remained sealed in plastic at the time of the trial, but I believe that the Appellant must have seen another copy and inspected the contents. He also testified that he had seen television advertising which was aired in the Vancouver region where the product was test-marketed, and that as a result of viewing those television advertisements he had made comments about them to Marilyn Wintonic, who was an employee of Cannon Business Systems Inc., the company which had been engaged by St. John International Ltd., holder of the Canadian rights, to sell licenses to distribute the course in Canada.

The Appellant testified that he wished to acquire distribution rights in Vancouver and the lower mainland of British Columbia, but these were unavailable. What was available, and was obtained by the Appellant, was part of the City of Toronto having a population of approximately 45,000.00. He entered into a letter of intent with Cannon Business Systems Inc., and subsequently three further documents were executed. The first is a license agreement whereunder St. John International Ltd., granted a license to the Appellant to distribute the course in the defined area of Toronto. It provides that the license shall pay a license fee of $100.00 upon execution, and a royalty of $20.00 for each course sold, with an advance royalty of $20,000.00 to be paid immediately. The term of the license is 20 years. At the same time the Appellant entered into what is called a standard operating agreement with Raesan Development and Management Corporation (“Raesan”) of Mount Vernon, Washington. The purport of that document is that Raesan will market the course in the area covered by the Appellant’s license, paying the Appellant $35.00 for each course it sells. The third document is a performance bond given by Raesan to the Appellant in the total amount of $15,000.00 to guarantee sales of 1,000 courses. In the result, then, the Appellant paid $20,100.00 pursuant to the license agreement, of which $20,000.00 was advance royalties, and he received from Raesan a performance bond of $15,000.00 pursuant to the standard operating agreement. This had the result of reducing the Appellant’s outlay to $5,100.00. Documents pertaining to the 1981 and 1982 taxation years were not introduced into evidence, but if I understood the Appellant correctly his acquisi- tiens of additional territories in those years were pursuant to similar arrangements.

The Appellant holds a Masters Degree in Business Administration, and appears to have some knowledge and experience in the ways of business. Nevertheless, he entered into these transactions with remarkably little investigation of the people with whom he was dealing, and of their ability to fulfill their contractual obligations. This may simply have been the result of his enthusiasm for what he considered a highly marketable product having the potential to provide him with a net income of $15.00 per unit on minimum projected sales of 1,000 units for the first year. Whatever the reason, it is clear from his evidence that he knew little about Raesan. He does not appear to have investigated its financial condition, or its experience and resources available to enable it to carry out its marketing obligations under the standard operating agreement. It is clear too from his evidence that no marketing activity was undertaken in the Appellant’s territory in Toronto, Ontario. He never received any income from sales in that territory, and he was unable to say whether there had been any sales in any other parts of Canada, other than the test marketing in Vancouver. No advertising was done in the Toronto area, and in fact there was no evidence before me of any advertising of the product except in connection with the Vancouver test marketing.

The central issue in dispute is whether the Appellant, either through his own effort or the efforts of Raesan, was engaged in business during the relevant years. The Minister says that he was not. The Appellant, despite the lack of activity in the Toronto area, says that he was, and that there was commercial activity in connection with the product in Vancouver and the lower mainland of British Columbia. This activity would have spread west to east and reached his territory in Toronto, but for difficulties caused by Revenue Canada’s refusal to recognize the entitlement of purchasers of these licenses to claim business losses arising out of the payment of the advanced royalties. It is the Appellant’s position that Revenue Canada, by refusing to recognize the entitlement of licenses to a business loss, effectively killed off the marketing of licenses, thereby causing cash flow problems for the companies involved which ultimately led to the cessation of their activities. But for this, the marketing of these courses would have rolled out across the country from west to east, reaching Toronto in due course.

It is speculative to say what might or might not have happened in other circumstances. I must decide the case before me on the basis of the facts as they actually occurred, not the facts that might have been. [1] The question that I must decide is whether the Appellant, personally or through his agent, engaged in any business having a reasonable expectation of profit. In my view he did not. The following two assumptions were made by the Minister in reassessing the Appellant.

1) the Appellant in taking part in the arrangements hereinbefore described, did not, at any relevant time, either by himself or through others acting for him or on his behalf, carry on business;

2) Raesan did not have a viable marketing program in place nor were there sufficient employees to carry out a marketing and distributing business.

Not only do these assumptions stand unrebutted, but the evidence at trial confirms them. The Appellant argued that he did in fact personally take part in business activity, namely the making of suggestions concerning the nature of the product, and concerning the content of the advertisement which he viewed on a Vancouver television broadcast. While these contributions may have been of some assistance to the marketers, I do not think they can be characterized as commercial activity. Nor did they in fact have any impact in the geographic area covered by the Appellant’s license. I agree with the statement made by Judge Bonner of this Court in La Liberté v. R., (1996), 96 D.T.C. 1483 (T.C.C.), at 148 where he said “a business is a commercial activity and is not constituted by desire alone”. I have noted that this Appellant entered into the arrangements that he did for business reasons, and with a good deal of enthusiasm for the product. Under other circumstances business activity might have occurred in which he would have had an interest. However, that was not to pass, and I find that no business was carried on by him, or by Raesan on his behalf. It is trite to say that without a business, and one which has a reasonable expectation of profit, there cannot be a business loss. [2]

The Appellant relied heavily in argument upon the finding in Buckler v.

that some 500 speed reading courses had been sold in the territory of Dr. Buckler’s license in Surrey, B.C. Assuming that fact to be true, although it has not been proven before me, it is of no assistance to the Appellant. The fact that Dr. Buckler, or someone on his behalf, carried on business in Surrey, B.C. does not bear on the question whether this Appellant, Or someone on his behalf, carried on business in Toronto, Ontario.

The appeals are dismissed.

Appeals dismissed.