Date: 20000207
Docket: 1999-101-IT-I
BETWEEN:
AUDREY SEVERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
___________________________________________________________________
Counsel for the Appellant: Ronald Balacko
Counsel for the Respondent: Jeffrey Pniowsky
____________________________________________________________________
Reasonsfor Judgment
(delivered orally from the Bench on November 22, 1999
at Regina, Saskatchewan)
Margeson, J.T.C.C.
[1] The most substantial question before the Court in this matter is whether or not the Appellant, during 1995, had a reasonable expectation of profit from the Amway business in which she was involved. With respect to the year 1996, the Court has no doubt whatsoever that despite any action she took between 1994 an 1995, it was obvious and should have been obvious to her by 1996 that they were not working. She could not reasonably have expected to make a profit in 1996. the losses incurred in 1996 cannot be deducted apart from the losses which the Minister has already allowed.
[2] As indicated, the more difficult decision for the Court is in relation to the year 1995.
[3] In order for the Appellant to be successful here and to be able to claim in 1995 that she had a reasonable expectation of profit, counsel for the Appellant has generally admitted that it all depends upon the course or change in direction that he suggested she took between 1994 and 1995. In 1993, the Appellant had a very large gross income, $82,440. It went from $14,712 in 1992 up to $82,440 in 1993. That was a huge increase in volume. One could reasonably expect that where the volume increases the profit is going to increase as well. That did not occur here. In 1993, she had a loss of $27,361 and in 1994 she had a loss of $19,294 which was almost half of her gross income. And that is the problem in this case.
[4] There seems to have been a pattern throughout, from 1991 to 1996, that irrespective of the total increase in gross income, the expenses increased continuously. One has to conclude that the real problem that existed was the inability to cut expenses. In order to turn this business around she had to take corrective actions.
[5] The only corrective action that is suggested that she took was that she met with her up-line person who told her that she had to decrease her expenses. There was no way that she could ever have expected to make a profit unless she reduced her expenses. She intended to cut her expenses by increasing her depth and decreasing her width.
[6] Now, a note of explanation as far as the Court is concerned of what she meant by that. Her width was the number of different agents that she had over the different areas in which she operated. The depth was the amount of work done by the other agents that she retained in these different areas, the amount of sales that they created on a vertical level.
[7] She was going to decrease her expenses she said by increasing her depth and decreasing her width because it was the width that created all of the expenses. She had to buy new videos for the other people and every time she retained somebody there were additional expenses. That is the reason for the huge amount of expenses in 1993 when she was increasing her width.
[8] In order for the Court to conclude that the efforts that she made were sufficient to create a sufficient change that would bring about a reasonable expectation of profit, the Court has to know what she did. Other than as indicated above, there was very limited evidence about that. There was no evidence whatsoever about how she curtailed her expenses in the years 1993, 1994 and 1995, or what composed her expenses. There was no evidence before the Court from which it could satisfactorily conclude that the steps that she was taking between 1994 and 1995 to decrease her expenses were in fact working.
[9] In order for the Appellant to be successful here, there has to be enough evidence that the changes that she took were sufficient to bring about a change and that she could go from a business not having a reasonable expectation of profit in 1994 to having a reasonable expectation of profit in 1995.
[10] With respect to the start-up period the Minister certainly allowed a sufficient start-up period between 1991and 1995.
[11] The Court has considered the cases referred to and some of these are helpful. As pointed out one cannot consider the factual situation in cases where the businesses are completely unrelated. Also as referred to in these cases one should consider whether the expenses are excessive in comparison to the sales generated and whether they were of a personal nature.
[12] In some of the cases the Court was satisfied that material changes had taken place in the way that the business was conducted. Here, the Appellant did increase gross sales dramatically between 1992 and 1993 from $14,712. to $82,240. They decreased in the year 1994 down to $48, 310. In 1995, they remained basically the same. There was not a continual increase in sales. Once the Appellant got sick she found that she could not do as much business as she had before. She cut down the width of her market in order to cut down the expenses. However, unlike one of the cases cited, the Appellant here did not make such a drastic move such as changing the location of her business.
[13] This Court cannot help but be struck by the fact that part of the problem that the Appellant had in this case with the expenses being so high in relation to the gross income was because of the location of the business. She admitted herself that she was in a small place. Her telephone bill in one case was as high as her gross profit in one year. She had to travel long distances and it was clear that when she had to go out to increase the breadth of her business, the expenses were quite high because of the location that she was in, it being a small area.
[14] She admitted herself that being in a small area makes it more expensive to do business. The Appellant did not move when she should have realized that this business was having difficulty in making a profit from the place where it was located. Secondly, and significantly in one of the cases referred to, the business was terminated when the Appellant finally realized that profits were not realistically attainable, but the Appellant here continued on.
[15] This Court is satisfied that by 1995 the Appellant should have realized that profits were not realistically attainable.
[16] Again, in one of the cases referred to, Judge O'Connor said that it would not be unreasonable to suggest that a new start-up period should have been considered when the Appellant moved the business to Saskatoon. That of course is not a factor which this Court has to consider here because the Appellant did not make the move in the first place.
[17] Counsel for the Appellant said, in a nutshell, there was a reasonable expectation of profit in the years in question having due regard to Moldowan v. The Queen, 77 DTC 5213, and the other cases that have been referred to because the Appellant realized that she had to make some changes if she was going to make a profit. The changes that she was going to make were to consult with her up-line person. She had that consultation. He suggested to her that she had to cut down on her expenses. She agreed with that, she intended to cut down her expenses by reducing her breadth and concentrating on her depth. If she had not become sick she would have been able to do it. That is this case in a nutshell.
[18] Counsel for the Respondent on the other hand says that there were no significant steps taken by the Appellant to change the direction of the business as there were in the cases cited. In one case cited the business was only in existence for a short period of time. There was no reasonable start-up period given. In the case at bar there was a start-up period from 1991 to 1996. That was a reasonable start-up period.
[19] There were no extraordinary steps taken to change the direction of this business. The only step that she took or suggested that she took was not sufficient and it was nothing but a suggestion that this action would probably lead to changing circumstances and changing profit margins. There was no evidence to support the position that this would have been the result. It was merely conjecture on her part to think that this was sufficient to turn it around. There was no objective evidence to suggest that it would turn around.
[20] The most significant factor here is that she did not move out of the place where it was obvious she was not going to make money. She had not made money there. It was too expensive to operate the business from there and she did not take the extraordinary step of moving out. That is one action that might have changed the circumstances around.
[21] Due to the small market where she was located the expenses did not decrease. Even though this business was volume driven, the expenses did not decrease as the volume increased. That was a clear indication that this increase in the volume alone was not going to do it. There had to be something else. Counsel suggested that what it was is that she had to move the location of her business.
[22] Further, he suggested that when the Court considers the reasonable expectation of profit test, it has to consider that there were some personal factors that were considered by the Court in Tonn v. The Queen 96 DTC 6001, such as the location of the business. She wanted to be there because she lived right here. Her husband had a farm. She was not going to give up the farm to move somewhere else. There was some personal enjoyment to the business. Her home was located there. She had certain psychological benefits from the satisfaction that she got out of running this type of business.
[23] There was no reasonable expectation of profit even when you consider the change that she made.
[24] The Court is satisfied that the Appellant did take a step between 1994 and 1995 to change the direction of this business, but the Court is not satisfied that the step that she took was sufficient because of two reasons: One, the Court is satisfied that there had to be something drastic done in order to reduce the cost or the expenses of making these sales in comparison to the total sales. What the Appellant did by way of contacting her up-line person and by attempting to reduce the breadth of her business, was not sufficient under the circumstances. The Court is not satisfied that the reason for that was because she became sick. The Court is not satisfied that this is a "but for" situation and that the Appellant would have turned it around had she not become sick.
[25] If there had been some evidence given before the Court as to what the break down of expenses were before the illness took place and before she made this alteration, even though it was a small one, and then evidence to show what the expenses were and the type of expenses that there were in 1995 as compared to 1994, this may have made a difference in the decision. It the Court were able to conclude that the change in direction was reducing the rate of expenses as compared to the amount of the gross sales, then the result may have been different. The Court might have been forced to conclude that the change in direction that she took was sufficient and that in 1995 one could reasonably say that she had a reasonable expectation of profit. But there was no such evidence. From the evidence that was given, the Court concludes that it was mere conjecture on her part and perhaps on the part of her up-line agent to suggest that that could have changed the picture so drastically that there would have been a reasonable expectation of profit in 1995.
[26] Reluctantly and on the basis of the evidence before me, the Court is not satisfied that the Appellant has met the burden of showing that in 1995 there was a reasonable expectation of profit.
[27] The Court will have to dismiss the appeal and confirm the Minister's assessment.
Signed at Ottawa, Canada, this 7th day of February 2000.
"T.E. Margeson"
J.T.C.C.
COURT FILE NO.: 1999-101(IT)I
STYLE OF CAUSE: Audrey Severson and
Her Majesty the Queen
PLACE OF HEARING: Regina, Saskatchewan
DATE OF HEARING: November 22, 1999.
REASONS FOR JUDGMENT BY: The Honourable T.E. Margeson
DATE OF JUDGMENT: February 7, 2000
APPEARANCES:
Counsel for the Appellant: Ronald Balacko
Counsel for the Respondent: Jeffrey Pniowsky
COUNSEL OF RECORD:
For the Appellant:
Name: Ronald Balacko
Firm: Rusnak Balacko Kachur Rusnak S.G. Kyba
Yorkton, Saskatchewan
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada