Date: 20000229
Docket: 98-2583-IT-I
BETWEEN:
JOSEPH KOCZKUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Kelowna, British Columbia on February 18, 2000. The Appellant was the only witness. He has appealed reassessments for his 1993, 1994, 1995 and 1996 taxation years.
[2] Paragraphs 4 to 7 of the Reply to the Notice of Appeal set out the particulars of the reassessments. They read:
4. In computing income for the 1993, 1994, 1995 and 1996 taxation years, the Appellant deducted the amounts of $1,970.33, 5,310.57, $11,542.02 and $14,784.00, respectively, as business losses (the "Losses") as detailed on Schedule "A". [not included]
5. In respect of the 1995 taxation year, the Minister of National Revenue ("the Minister") on initial assessment disallowed the amounts of $420.90 and $292.57 claimed for clothing and grooming, respectively.
6. In assessing and reassessing the Appellant for the 1993, 1994, 1995 and 1996 taxation years, the Minister disallowed the deduction of the Losses.
7. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:
a) the facts stated and admitted above;
b) the Appellant began a activity of distribution of Amway products (the "Amway Activity") in 1993;
c) the Appellant operated the Amway Activity as Clerin Enterprises;
d) during the Relevant Years, the Amway Activity was operated on a part-time basis;
e) in 1993 the Appellant was employed by Raven Ridge Homes Ltd.;
f) in 1994 the Appellant was employed by James Johnson Enterprises Ltd. and Ram-Muel Contracting Ltd.
g) in 1995 and 1996 the Appellant was employed by James Johnson Enterprises Ltd.;
h) during the Relevant Years, the Appellant worked full time as an employee, 5 to 7 days per week at 8 to 16 hours per day;
i) the Appellant spent 8 to 12 hours per week on the Amway Activity;
j) the Appellant did not spend sufficient time on the Amway Activity to make it profitable;
k) the Appellant did not provide a business plan to determine if the Amway Activity would be profitable;
l) the expenses of the Amway Activity increased over the course of the Relevant Years;
m) during the Relevant Years, expenses substantially exceeded gross revenues from the Amway Activity;
n) the Appellant does not plan any material changes to the Amway Activity in the near future;
o) the Appellant has discontinued the operation of the Amway Activity;
p) the Appellant is a carpenter and did not have experience in marketing and sales;
q) the Amway Activity sales included purchases by the Appellant and his family for personal use;
r) the Amway Activity was not a purely commercial venture;
s) expenses claimed by the Appellant included expenses in respect of the Appellant's travel to conventions in excess of two conventions per year;
t) the Appellant claimed expenses relating to his family's vacations, which he combined with trips made in respect of the Amway Activity;
u) the Amway Activity is undercapitalized;
v) the Appellant did not have a reasonable expectation of profit from the Amway Activity during the Relevant Years;
w) the expenses claimed in relation to the Amway Activity personal or living expenses of the Appellant; and
x) the expenses claimed in relation to the Amway Activity were not reasonable in the circumstances.
[3] Assumptions 7(b) to (h) inclusive, (k) to (q) inclusive, (s), (t) and (w) were either confirmed or were not refuted by the evidence.
[4] The Appellant has his high school. He was a carpenter and now is an assistant town foreman. He was recruited into Amway and began recruiting in the Chilliwack area on the basis that he wanted to become a Direct dealer which, including himself, would give him commission from 78 recruited purchasers which he calculated would yield him commissions of $2,100 per month. Chilliwack, in British Columbia's lower mainland, is a large market. He worked at it part-time for four months in 1993 and 12 months for each following year. In 1993 he recruited 2; in 1994 "a few more"; at the end of 1995 he had 20 people; and by the end of 1996 he had recruited "around 30" people. He then quit. His gross incomes from Amway in these years, including commissions from his own purchases were:
1993 $150.00
1994 534.41
1995 784.46
1996 1,590.51
[5] Using the criteria set out by Dickson, J. in William J. Moldowan v. The Queen (S.C.C.), 77 DTC 5213 at 5215, the Appellant had no previous experience in business, sales or accounting; he had no training except what Amway representatives told him; he had no capital, but the enterprise didn't require much; and the losses do not include charges for capital cost allowance for his vehicle.
[6] Crown counsel suggested that the Appellant had a personal interest in reduced prices for his Amway purchases and tax avoidance for the deductions claimed, but there is no evidence that his Amway prices were lower than ordinary retail prices. The evidence is that the Appellant and his wife had three young children and he was working hard to earn a living for them. As much as possible, they purchased through Amway. On the evidence, the Appellant appears to have accepted the Amway sales pitch and thought he could make extra money selling the Amway idea so as to acquire extra income. He had no spare income and he tried to do this as best he could.
[7] With no sales or business experience he was not critical. He simply accepted the Amway concepts and their encouragement uncritically.
[8] The Appellant started for four months in 1993 and operated for 12 months in 1994. But he admitted in cross-examination that he never set numbers of recruits as annual goals. Nor did he look back critically at what was in fact his unsuccessful experience and decide to either quit or change his approach. He simply ploughed on as best he could.
[9] In the Court's view, even with no training or experience, the Appellant is entitled to try to succeed in business. But he must try on a reasonable basis. After 1994 the project was a failure and could be foreseen as such by the end of 1994. But the Appellant did not examine his experience, his approach, his territory or his recruiting subjects so as to change or improve or, on the other hand, realize that the project should be terminated. When he finally quit at the end of 1996, it was because of his family responsibilities and the expectation of a fourth child. He then felt that he did not have the spare time for Amway.
[10] It is this failure to look at his own experience and learn from it that the Court finds is unreasonable. That failure became unreasonable as the end of 1994 approached.
[11] The appeal is allowed for 1993 and 1994. It is dismissed respecting 1995 and 1996.
Signed at Ottawa, Canada this 29th day of February 2000.
"D.W. Beaubier"
J.T.C.C.