Schatroph v. R., [1997] 3 C.T.C. 2148

Bowie T.C.J.:

1 This income tax appeal arises out of the purchase by the Appellant of the rights to distribute a self-taught speed reading course (which I shall simply call “the course”), in a particular geographic area. World rights to the course were owned by a Mr. T.H. Thill. He assigned those rights, except for the rights to distribute in Canada, to a Grand Cayman Island company called Applied Research Ltd. That company appointed Mr. Thill to act for it as its agent, or general attorney. The Canadian distribution rights were retained by Mr. Thill. In 1983 Mr. Thill caused to be incorporated a company called H.N. Thill Associates Inc., which I shall call Thill Inc. It was to promote sales of the rights to sell the course in defined geographic areas of the United States.

2 The Appellant met Mr. Thill and was persuaded by him to enter into two transactions. One was the purchase of a licence to sell the course in a particular geographic area of the United States. The Appellant in his evidence seemed uncertain as to which part of the United States he had purchased the licence for, but it appears that it was part of the state of Nebraska, and by the end of the trial he had decided that it was within the city of Omaha. For this licence he paid a licence fee of $100.00.

3 He also was required to pay an advance royalty of $20,000.00. This appears to have been calculated on the basis of $20.00 per prospective sale, calculated on the basis of projected sales of 1,000 courses in his territory. At the same time, he entered into an agreement with Omni Marketing Corporation (Omni) under which Omni was to market the product for him in his territory. Omni was to provide him with a performance bond of $17,500.00.

4 Payments of the licence fee and the advance royalty were to be made in this way: The Appellant provided to Applied Research $2,600.00 of his own money and the balance took the form, according to his evidence, of a promissory note for $17,500.00. The $17,500.00 represented by this promissory note was, of course, precisely offset by the performance bond given to him by Omni.

5 When filing his income tax return for the 1985 taxation year the Appellant claimed a business loss of $20,000.00, being the advance royalty payment made by him. There was no revenue, because there were no sales, so that the only business transaction undertaken by him during the year was the purchase of the licence and the payment of the advance royalty.

6 It is the Appellant's position that he expected to make money from these transactions as a result of sales that would be made on his behalf by Omni. His evidence was that Mr. Thill explained to him that he would obtain a tax advantage based upon the loss resulting from making the $20,000.00 advance royalty payment. He relied upon this as being all that he needed to know to make it advantageous to him to put up $2,600.00 in cash, and a promissory note for $17,500.00, offset, as I have said, by the performance bond.

7 The expected saving in income tax considerably exceeded his required cash contribution of $2,600.00. Mr. Thill pointed out to him the benefit from a taxation point of view of the $20,000.00 loss, and I have no doubt that that motivated the Appellant in his decision to participate in this scheme. In his evidence the Appellant was quite unable to tell of any effort that had been made by Omni, as his agent, to market the course in Nebraska or anywhere else. Certainly the Appellant himself made no such efforts, nor it seems did he demand any kind of reporting from Omni as to its efforts.

8 In assessing the Appellant the Minister made the following assumption: “The Appellant, in taking part in these arrangements, did not, at any relevant time, either by himself or through others acting for him or on his behalf, carry on a business.” There was no evidence led before me to rebut this assumption, and I therefore find that the Appellant did not carry on any business at all. It is trite to say that if there is no business there can be no loss from a business to be offset against the Appellant's income. I refer to the decisions of the Federal Court of Appeal in Tonn v. R.[FN1: <p>(1995), 96 D.T.C. 6001 (Fed. C.A.)</p>] and Moloney v. R.[FN2: <p>(1992), 92 D.T.C. 6570 (Fed. C.A.)</p>] .

9 I should note as well that the facts of this case are, for practical purposes, totally indistinguishable from the facts in the case of Moloney, which was decided by the Federal Court of Appeal in 1992. I am bound to follow that decision, of course, and dismiss the appeal.

10 I should add, however, in respect of the Appellant's contention, even though it was unsupported by any significant evidence, that he intended to carry on a business, or intended to have a business carried on for him by Omni, that I adopt the part of the reasons for judgment of Judge Bonner in La Liberté v. R.[FN3: <p>(1996), 96 D.T.C. 1483 (T.C.C.)at 1485</p>] where he said, after quoting from the judgment of Mr. Justice Iacobucci in Symes v. R.[FN4: <p>(1993), 94 D.T.C. 6001 (S.C.C.)</p>] :

In any event a business is a commercial activity and is not constituted by desire alone.

11 The appeal is dismissed.