The Canadian Tax authorities have recently begun posting results of their decisions on the internet, and not surprisingly, several cases have involved members of Amway. Three cases are of particular interest: in two, which involved the same line of sponsorship, taxpayers' appeals were denied. In the third, the taxpayer's appeal was upheld. The court's reasoning in each case bears examination.

Nordick v. Her Majesty the Queen

The appeal was heard in January, 1999, in Saskatoon, Saskatchewan. The issue was

"whether the Appellant is entitled to deductions from income of losses of $9,068.63 in 1994 and $10,520.39 in 1995 resulting from the operation of an Amway distributorship."

The court found in favor of Mr. Nordick, for several interesting reasons. In its list of reasons for upholding Nordick's claims, the court stated that

"In my opinion the situation of the Appellant in this case differs from the normal Amway distributor case."

These differences included the following:

1. meticulous record keeping
2. an increase in gross sales from year to year
3. a reduction in losses from year to year
4. no attempt at a "tax driven scheme." The appellant did not deduct home-business costs, nor pay a salary to his wife who kept the detailed business records
5. the element of personal or social satisfaction in "business" activities was minimal
6. the business was terminated when Nordick realized there was no profit potential.

These are indeed substantial differences from the "normal Amway case" characterized by the courts.

Keeping v Her Majesty the Queen

The next case involves Lyman Keeping, a Direct Distributor from Newfoundland. The case was heard in May, 1999 in Newfoundland.

Keeping claimed losses associated with his Amway activity of $61,912 over a six-year period from 1990-1995, based on gross income of $832,769. The income amounts include "sales and performance bonuses and tool rebates, a portion of which are paid to others."

The tax court determined that Keeping was not operating with the expectation of profit because:

"His business training is what Amway representatives told him and these representatives had an interest in keeping everyone in the Activity, whether they suffered losses or not, since they were also Amway contractors entitled to residuals. His losses have continued to this day.

"Historically, there is no reasonable expectation of profit in the Activity after calculating capital cost allowance. However, that is a small part of his expenses.

"At his expense level, which was consistent in 1993 and 1994, he had to gross well over $300,000 per year to break even. . .

"Thus, in 1993 and 1994 there were two major problems for the Appellant: the very low margin of profit of the Appellant and the high costs which he would incur to develop and service second and third "legs" or groups from Garnish in order to achieve the Sapphire or Emerald status so as to obtain residuals from his distributors."

Noseworthy v. Her Majesty the Queen

This case was heard in May, 1999, in Newfoundland

Ronald and Joy Noseworthy operated their Amway activity together, and sponsored Lyman Keeping. Over the six-year period from 1990-1995, the Noseworthys claimed losses of $119,162 based on gross income of $967,279. These figures also include bonuses earned by others and tool rebates.

The court denied the appeal, claiming that the Noseworthys did not operate it with the expectation of making a profit.

Joy Noseworthy had initiated the Amway membership; in 1990, Ron added his name to the application. The bank account was in both names, both traveled to attend functions, and the division of labor between them was along standard Amway lines. She handled products and paperwork, while he dealt with tools and recruiting.

In spite of this, Ron had attempted to claim 100% of the business losses against his income as a teacher. However, he would only have been able to claim 50% of the business losses in any case.

According to the court, it was clear by 1994 that the following hindrances would prevent them making a profit:

1. The low margin of profit allowed by Amway
2. The significant investment of time and money to travel to a populated enough area to develop a business
3. Mr. Noseworthy's full-time teaching job
4. "Mr. Noseworthy's own attitude, which was evident from his testimony. In his testimony Mr. Noseworthy simply over-rode any possibility that Mrs. Noseworthy had a partnership interest in the Amway distributorship despite all of the documents and registrations which exist to that effect. It was a remarkable display from an English teacher at the high school level. It confirmed his Amway history; he believed in 1990 that he would achieve the Emerald level and a profit and he set a course to do it within five years. He has never deviated from that course and had no intention of doing so in 1994 or 1995 despite a failure to develop even one Direct Distributor leg."
5. "It was apparent from Mr. Noseworthy's appearance on the stand that what he really enjoys about Amway is the various group meetings and conferences, organizing them, lecturing at them and attending them. They appear to have become a way of life for him and an integral part of his social life."

The Noseworthy's appeal was denied.

In both the Keeping and the Noseworthy cases, several factors strongly influenced the decision of the court:

1. The lack of any business plan other than the "Amway plan."
2. The unwillingness of the appellants to change their plans, activities or strategies despite strong evidence that a profit was impossible
3. The part-time nature of their activity, along with full-time employment.

Additionally, for those who are still skeptical about whether their uplines profits from the sale of "tools" to their downline, is the notation in both cases that sales figures reflect income from "tool sales" or "tool rebates."

Full Text of Nordick

Full Text of Keeping

Full Text of Noseworthy

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This page updated Jul-14-00