Citation: 2011TCC154
Date: 20110311
Docket: 2008-3986(IT)G
BETWEEN:
ART BILOUS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-3987(IT)G
AND BETWEEN:
YORKTON
DISTRIBUTORS (1976) LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The primary issue in
these appeals is whether Yorkton Distributors (1976) Ltd. is entitled to business expense and capital cost allowance
deductions for a building and snowmobiles which it claims were used to promote
its canola seed and farm chemicals business in the 2003 and 2004 taxation
years. The building and the snowmobiles it housed are referred to collectively
herein as the “Snowmobile Museum”.
[2]
The Minister does not dispute that
Yorkton Distributors incurred the expenses as claimed but says that no portion
of such amounts are deductible because their purpose was not for gaining or
producing income as required under paragraph 18(1)(a) of the Income
Tax Act. According to the Minister, such expenditures were for the personal
benefit of Yorkton Distributors’ principal shareholder, Art Bilous, who was
reassessed under subsection 15(1) for an interest benefit of $2,784 in 2004.
[3]
The Minister did not challenge the
Appellants’ evidence that in 2003 and 2004, Yorkton Distributors had sales of
$10 million and $13 million, respectively, or that, since its acquisition by
Mr. Bilous in 1976, the company has been in an increasingly profitable
situation.
[4]
As s result of the reassessments,
Yorkton Distributors’ net business income for 2003 and 2004 was increased by
$27,282 and $35,163, respectively, pursuant to subsections 3, 9 and 18 of the Act.
For ease of reference, the expenses claimed by Yorkton Distributors and the
portion disallowed by the Minister together with the capital cost allowance adjustments
in respect of Yorkton Distributors’ Class 1 and 10 assets for the construction
of the building and the purchase of snowmobiles, respectively, are reproduced
below from subparagraphs 12(y) to (kk) of the Reply to the Notice of Appeal:
2003
Taxation Year
|
Chemical Purchase Expenses:
|
|
|
Total claimed:
|
$ 60,929
|
|
Disallowed Snowmobile
Museum amount:
|
$ 8,177
|
|
Insurance Expenses:
|
|
|
Total
claimed:
|
$ 68,686
|
|
Disallowed Snowmobile
Museum amount:
|
$ 2,959
|
|
Capital Cost Allowance, Class 1
(Quonset):
|
|
|
Total
claimed for Class 1 assets:
|
$ 8,489
|
|
Disallowed
|
$ 1,729
|
|
Capital Cost Allowance, Class
10 (Snowmobiles):
|
|
|
Total
claimed for Class 10 assets:
|
$ 118,993
|
|
Disallowed
|
$ 14,417
|
2004 Taxation Year
|
Chemical
Purchase Expenses:
|
|
|
Total
claimed:
|
$ 62,441
|
|
Disallowed Snowmobile
Museum amount:
|
$ 62,441
|
|
Insurance Expenses:
|
|
|
Total
claimed:
|
$ 77,198
|
|
Disallowed Snowmobile
Museum amount:
|
$ 454
|
|
Repair & Maintenance
Expenses:
|
|
|
Total
claimed:
|
$ 58,487
|
|
Disallowed Snowmobile
Museum amount:
|
$ 1,389
|
|
Capital Cost Allowance, Class 1
(Quonset):
|
|
|
Total
claimed for Class 1 assets:
|
$ 8,810
|
|
Disallowed
|
$ 1,659
|
|
Capital Cost Allowance, Class
10 (Snowmobiles):
|
|
|
Total
claimed for Class 10 assets:
|
$ 120,764
|
|
Disallowed
|
$ 28,547
|
[5]
The Minister’s alternative position
is that even if Yorkton Distributors did incur such expenses for the purpose of
gaining or producing income, the amounts were not reasonable and ought not to
be allowed under section 67 of the Act. There are, however, no assumed
or alleged facts in the Reply pertaining to the unreasonableness of the amounts
expended by Yorkton Distributors.
[6]
The appeals were heard together on
common evidence. Testifying for the Appellants were Mr. Bilous and his brother
Rick Bilous (to avoid confusion, Art Bilous is referred to hereafter as
“Art”; his brother, Rick Bilous, as “Rick”). Rick is the operations manager of
Yorkton Distributors and as such, was generally knowledgeable about the business
including the products sold by the company, its sales and market share, and the
nature of its clientele. Rick has been interested in snowmobiles since his
boyhood days.
[7]
Also called was Jack MacKay, a Chartered
Accountant practicing in the Yorkton area for some 30 years. As the Appellants’ accountant
and a former snowmobile enthusiast, Mr. MacKay was knowledgeable about the
company’s financial and tax history as well as its advertising expenditures and
the Appellants’ respective involvement in snowmobiling and community events. Many
of his clients are farmers, a good number of whom own snowmobiles for farm
chores as well as for recreation.
[8]
Another of the Appellants’
witnesses was Dan Reeves. From 1994 to 2009 Mr. Reeves was the Yorkton sales
representative for InterAg, a division of Bayer Crop Science. He was the distributor
of Bayer transgenic canola seed and crop protection products to independent
retailers like Yorkton Distributors. Mr. Reeves is also a snowmobiler.
[9]
The last of the Appellants’
witnesses was Ben Hudye, the principal of Hudye Soil Services. Like Yorkton
Distributors, Hudye Soil Services is an independent retailer of transgenic
canola and farm input products. Its main branch is in Norquay, Saskatchewan,
about 100 kilometers northeast of Yorkton just outside Yorkton Distributors’ market area.
[10]
Testifying for the Respondent was Grant
Varley, a Canada Revenue Agency employee with some 10 years experience as an
auditor and appeals officer. In reviewing the Appellants’ objections, Mr.
Varley relied on the audit report and the information provided by the
Appellants’, effectively the same as the materials filed as Exhibit A-6. He summarized
his basis for upholding the Minister’s reassessments as follows:
A … the final conclusion was
that the predominant purpose, intent behind the museum and the skidoos was
primarily personal in nature. Throughout the review, it was an assessment of the
business aspects of it, the personal aspects of it, reviewing the documents
that had been given to me. Much of the binder of pictures, not all of them, but
some of them [in Exhibit A-6] are newer since the objection, but many of those
same types of items were submitted to me. The magazine articles, the -- I
believe the letter from the mayor was in there, those items. I reviewed all of
those and came to the conclusion that it was primarily personal.
[11]
In response to my question, Mr.
Varley stated that he had had no discussions either in person or by telephone
with Art or any of the other witnesses during his review of the Appellants’
objections.
[12]
All of the witnesses were
straight-forward and credible in the presentation of their evidence.
[13]
The evidence of the Appellants’
witnesses regarding Yorkton Distributors’ business operation, including the
products sold, the needs and interests of its clientele, the competitiveness of
the local market and the role played by the Snowmobile Museum in its overall
advertising strategy has persuaded me, on a balance of probabilities, that
Yorkton Distributors incurred the expenses claimed for the purpose of earning
business income.
Facts
[14]
Yorkton Distributors is located in
Yorkton, Saskatchewan. When Art bought the company from his former employer in
1976, it was essentially in the business of selling bulk fuel to local farmers
and had sales of approximately $80,000 annually.
[15]
Over the last decade, Yorkton
Distributors has changed its focus from bulk fuel to the sale of transgenic canola seed and crop protection
products, typically herbicides, insecticides and fungicides. In
2001, its canola seed and crop input sales were around $5 million annually; by
2003-2004, they averaged $11 million; as of the hearing date they were over $20
million.
[16]
Transgenic canola seed
is canola that has been genetically altered to be resistant to the otherwise
lethal effects of “non-selective” herbicides such as “Round Up”. Originally patented by Monsanto, Round Up’s active ingredient is glyphosate.
Since the expiry of Monsanto’s patent, many other companies have used that chemical
ingredient to manufacture their own crop protection products. While sold under
different brand names, these products are all essentially the same. As a
result, competition among manufacturers for the retail market is fierce. To
gain a competitive edge, the manufacturers rely on, among other things, the
promotional efforts of their regional distributors to sell their products to local
retailers like Yorkton Distributors and Hudye Soil Services.
[17]
As the regional distributor for
Bayer Crop Science, Dan Reeves
employed various strategies to attract the business of the local independent
retailers. Aware that many of his retail customers and fellow distributors
shared his enthusiasm for snowmobiling, sometime in the late 1990’s Mr. Reeves
established the “Big Dog Run”, an annual event to promote the sort of Bayer
farm input products sold by Yorkton Distributors. As well as raising money for
breast cancer research, the event combined informational presentations and
networking opportunities with an opportunity to enjoy the snowmobile trails in
the Yorkton area. As a distributor in the Yorkton area for some 15 years, Mr. Reeves had observed the
local retail market firsthand:
A Well, like I say,
it's a competitive marketplace. To sell to farmers, they always have a --
generally speaking, they always have kind of an “everybody's‑out-to-get-me”
attitude, so what I mean, to break that, you got to build trust with the
grower, and one way to build trust with the grower is building a relationship
with him. To build a relationship, you do events like snowmobile derbies, stuff
like that, golf tournaments, whatever, but with the snowmobile derby, you can
bring them into a snowmobile museum like Yorkton Distributors has, and what a
-- what a way to start forging a stronger relationship with a grower, a
customer.
[18]
Competing with Yorkton Distributors to build a relationship with
local growers were seven or eight other businesses, including the Yorkton
Co-op, Richardson-Pioneer, Cargill, P&H, and Viterra. Unlike Yorkton
Distributors, many of these companies were primarily in the grain-marketing business.
As an incentive to farmers to market their grain through their system, their crop
protection products were sometimes used as ‘loss leaders’, on sale at
significantly reduced prices.
[19]
In 2003 and 2004, Yorkton Distributors’ client base was three to four
hundred farmers living within a 100-kilometer radius of Yorkton. Their
farms ranged in size from a few thousand to in excess of 30,000 acres of land.
Expressed in terms of its canola seed and crop protection requirements, a
10,000-acre farm represents a sale of approximately two million dollars’ worth
of product. Mr. Hudye explained the intensity of the competition for a
share of that market:
A …-- when you look
at the marketplace and you start to segment it, you know, ten percent of the
growers in western Canada grow 90 percent of the product. Now, that's
-- that's quite a statistic because if you're in agro retailing, you want to
associate yourself with the ten percent obviously, that's where the business
is.
[20]
To associate itself
with the interests of its clientele, Hudye Soil Services tried “… to involve [itself]
in their interests, you need to find whatever it is that’s going to give you
the edge to be the person that [the farmers] prefer to do business with rather
than your competitors”. It was with this in mind that Hudye Soil
Services sponsored trips to farm conferences for its major customers and hosted
dinners for their wives in recognition of their influence on farm product
purchases. Hudye Soil Services also partnered with others in the agricultural
industry to establish an annual event known as the “Field of Dreams”, a tour of
experimental crops to demonstrate how new techniques, practices and products could
increase productivity. The partners in the project established test strips or
field‑scale plots in the local area. When the crops were ready in July, Hudye
Soil Services hosted a day‑long event for its clients to tour the test
fields to witness the beneficial effect of the products the company sold. The
event averaged 500 to 700 participants. While Mr. Hudye could not say
definitively if the “Field of Dreams” project was an effective marketing tool,
he was convinced that:
A … anything today in the ag industry that
gets you additional sales or additional market share is what's working. I mean,
if -- if you had a definition of what works or what doesn't work, I guess if
your sales are going down and you're losing market share, then maybe the Field
of Dreams wouldn't be working very well. But in our case, that isn't the case
at all. Our sales continue to increase, and so does our market penetration, so
we're real happy with it.
[21]
It was in the hope of
enjoying the same sort of success that Yorkton Distributors harnessed Art’s personal
interest and notoriety in snowmobiling to promote its business.
[22]
Art lives on a farm approximately 10
kilometers northwest of Yorkton. Within a kilometer of the farm lies the Trans-Canada
Trail, a hiking trail that extends across the country. In winter, it transforms
itself into the Trans-Canada Snowmobile Trail, providing residents of the Yorkton area
with access to some 300 kilometers of groomed snowmobile trails.
[23]
Until arthritis began to slow him
down, Art was an active snowmobiler. He is proud to have been a founding member
of the “Yorkton Sno-Riders Snowmobile Club”, Saskatchewan’s first snowmobile
club. He also helped establish the provincial association of snowmobile
enthusiasts, the Saskatchewan Snowmobiling Association.
[24]
Yorkton Distributors was similarly
involved with the development of such organizations. In the early days of the
Yorkton Sno-Riders, Yorkton Distributors paid for the club’s trail grooming
machine; the company also sold Saskatchewan Snowmobiling Association
memberships on its business premises. Yorkton Distributors was a long-time
sponsor of a Yorkton snowmobile derby to raise money for Camp Easter Seal known
as “Timmy’s Snowarama”. As a result of such involvement, over the years, both
Art and Yorkton Distributors received many Certificates of Appreciation for
their support of snowmobiling as a sport as well as their contribution to
charitable events at the community and provincial level.
[25]
In 1998, Yorkton Distributors started
collecting vintage snowmobiles, the jewel in the crown being a racing sled
originally owned by Jacques Villeneuve. A great admirer of Villeneuve’s
snowmobiling prowess, Art described him as an “icon” in Quebec, on par with
such greats as Maurice Richard and Jacques Plante. Yorkton Distributors’
acquisition of the machine and its restoration to its former greatness caused
quite a stir among local snowmobile enthusiasts.
[26]
By 2001, Yorkton Distributors had
acquired 15 other older-model snowmobiles and was rapidly running out of room
to store them. It became clear that a separate facility would be needed to
house them. Because of municipal restrictions on the use of snowmobiles within the
Yorkton city limits, the limited space available on the company’s site and the proximity
of Art’s farm to the Trans‑Canada Snowmobile Trail, it was decided to construct
the building on Art’s farm rather than Yorkton Distributors’ commercial
property which was, in any case, leased from its former bulk fuel supplier, Shell.
[27]
In 2001, Yorkton Distributors
commenced construction of a 40 x 60 foot steel building known as a “quonset”.
Although it would take another three years to complete, in the first year
of construction the quonset was heated and insulated and suitable for housing
the snowmobiles. It was equipped with basic kitchen facilities; folding chairs,
tables and barbecues would later be acquired and kept on site for events. The
interior of the Snowmobile Museum featured signage for Yorkton Distributors as well as
“Super-Trac’s Racing”, a sort of informal label adopted by Yorkton Distributors
to enhance the profile of its racing snowmobiles. The Super‑Trac’s Racing
label was also used on promotional items Yorkton Distributors gave to its customers,
items like hats and jackets. (Indeed, at the hearing of these appeals, Rick was
wearing a jacket with the Super-Trac’s Racing logo which, at the request of
counsel for the Respondent, he displayed for the Court. Counsel for the
Respondent accurately observed for the record that the jacket bore no reference
to Yorkton Distributors.) The Snowmobile Museum had no exterior signage. Because public tours
of the Snowmobile Museum were
arranged upon request rather than having regular hours of operation, exterior
signage seemed unnecessary; security was another concern, given its relatively isolated
location on the Bilous farm.
[28]
Over the next two years, Yorkton
Distributors purchased another 25 vintage snowmobiles for refurbishment. The
snowmobiles were repaired, painted and detailed to restore them to their
original condition. Meanwhile, heavy-duty shelving for their display was
constructed and installed in the quonset. A detailed description was prepared
for each snowmobile outlining such things as its provenance, technical
specifications, racing history and anecdotal snippets of interest to snowmobilers.
Also on display was a photo showing Jacques Villeneuve and the mayor of Yorkton (from
his former days as sportscaster) along with a letter from the mayor dated March
2003 commending Art for his dedication to the sport.
[29]
Meanwhile, Art and Yorkton
Distributors remained as active as ever in the snowmobiling community in the Yorkton area
and beyond. Like many in the Yorkton area, Art attended the annual provincial
snowmobile shows in Regina and Saskatoon; his company, Yorkton Distributors, was a regular
exhibitor at the shows. In 2003 and 2004, Yorkton Distributors transported the
Villeneuve snowmobile and 20 other vintage sleds in semi-trailers bearing the
Yorkton Distributors logo to the show where they were displayed along with the Super‑Trac’s
Racing signage.
[30]
By 2003, Art’s involvement in snowmobile
associations and events had attracted the attention of both the Yorkton media
and specialized snowmobiling magazines like SnoRiders West.
SnoRiders West was published in British Columbia and was automatically
distributed as part of the licensing process to all registered snowmobile
owners in Western Canada. As well as recounting Art’s personal interest in
snowmobiling, the development of the sport in Saskatchewan and the Snowmobile
Museum in Yorkton, the articles in these publications sometimes referred
his connection to Yorkton Distributors and/or Super-Trac’s Racing.
[31]
Art’s notoriety in snowmobiling
circles often provided a conversation opener for him with Yorkton Distributors’
customers. A good number of them had snowmobiles for use on their farms and/or for
recreational purposes. While Yorkton Distributors advertised its products in
newspapers, radio and television, so did its competitors. Yorkton Distributors could
not match the dramatic price reductions its grain-marketing competitors could offer.
Having no stomach for making ‘cold calls’ to potential customers and lacking
the staff to carry out an aggressive business solicitation campaign, Art felt that
to be competitive, his company needed to find a different advertising strategy.
Attributing Yorkton Distributors’ past success to the creation of trust and respect
between the company and the farmers it served, it occurred to him that the Snowmobile Museum could provide a way to enhance that relationship:
A … And I know for a
fact, like, the -- it doesn't matter where you go, uptown or down or on the street,
everybody wants to talk about snowmobiles. And [the customers] come into the
office, well, that's the number one thing is, “So, have you got any new sleds,
Art?” and I says, “Well, yeah.” It's a conversation. I think it makes people
more comfortable dealing with you but -- because it's a -- they're spending
their hard-earned cash kind of a thing, and I honestly believe some days, like,
if I was there sitting on the other side of this table writing a cheque for
$10,000 or $50,000, $100,000, I would want to be comfortable that that money is
being well spent kind of thing. Sure [the customers are] paying for your
products, but also the -- it's -- we're known in Yorkton for supporting a lot
of charity and organizations too kind of thing, and I think that's a trade-off
kind of thing. And has the museum helped? Yes, it has. Like, the museum is
associated with me, Yorkton Distributors and Super-Trac's Racing is all one
identity kind of thing…
[Transcript edited for punctuation and clarity of reference.]
[32]
In the Yorkton area,
winters are long, cold and snowy. Such conditions make for good snowmobiling
and provide farmers with the time to turn their minds to planning next year’s
crop. Hoping to capitalize on this happy coincidence, in the winter of 2003,
Yorkton Distributors collaborated with its Bayer products distributor, Mr.
Reeves, to use the Snowmobile Museum as a featured stop on the Big Dog Run trail ride. The
same event was held at the Snowmobile Museum in 2004. Mr. Reeves testified that the inclusion of the Snowmobile Museum in the event provided a unique promotional
opportunity for Bayer products, a nice change from the usual
manufacturer-sponsored golf tournaments or curling bonspiels.
[33]
While, strictly speaking, Mr.
Reeves’ other clients were not customers of Yorkton Distributors, there was a
certain amount of commercial back and forth between Yorkton Distributors and
the other independent retailers in respect of their inventory. They and Yorkton
Distributors also benefited from the product information and networking
opportunities the event provided.
[34]
In 2003 the Snowmobile Museum also figured in a strategy to spice up a Bayer product promotion event which, according
to Mr. Reeves, had gotten a little “stale”. For many years prior, Mr. Reeves
had hosted what was known as the “Puma Pizza and Pop Day” to promote a Bayer
weed spray called “Puma” sold by Yorkton Distributors. The event was held in
early June, timed to coincide with when farmers were making decisions about weed
sprays for their crops. Among the collection of snowmobiles in the Snowmobile Museum was a vintage machine by the same name as the
featured product, Puma Weed Spray. Yorkton Distributors supplied the Puma
snowmobile to use in the herbicide display at the promotional event.
[35]
Because in 2003 and 2004 the idea of using the Snowmobile Museum to promote Yorkton Distributors was still in its
early stages, no other official events were held there. However, tours were available
upon request through the Yorkton Distributors office and Art estimated that in
each of 2003 and 2004, he would have taken some 300 people through the Snowmobile
Museum, usually in groups of three or four. While among those visiting the Snowmobile
Museum were a few tourists and some snowmobile engineers from Bombardier in Quebec and the
Yamaha plant in Japan, the great majority of visitors to the Snowmobile
Museum were from the Yorkton area, including customers and suppliers of Yorkton
Distributors.
[36]
In the years following 2003 and
2004, Yorkton Distributors continued to develop its use of the Snowmobile Museum. Product information events were held at the Snowmobile
Museum site. Typically, the event would feature a morning of educational and
promotional activities followed by an afternoon of snowmobiling on the nearby
Trans-Canada Snowmobile Trail. At day’s end the participants would return to
the Snowmobile Museum to socialize
while looking at the machines on display. In 2010, a summer event was held at
the Snowmobile Museum, a crop tour similar to Hudye Soil Services’
“Field of Dreams”. Participants gathered at the Snowmobile Museum and were then taken on a tour of local crops which
had been seeded and treated with Yorkton Distributors’ products. It being
summer, the participants travelled from crop to crop on all-terrain vehicles
rather than snowmobiles. At day’s end, they returned to the Snowmobile Museum
for a barbecue and tour of the snowmobiles on display.
[37]
Prior to the construction of the Snowmobile
Museum, Yorkton Distributors had had to host such events in rented facilities:
during the winter, in local hotel meeting rooms; for summer outdoor events, in
large tents erected on its commercial site in Yorkton. Because the Snowmobile Museum was equipped with basic kitchen facilities and had
folding tables and chairs and barbecues, staging such events off-site was no
longer necessary. The opportunity for participants to view the snowmobiles on
display provided an added incentive for their attendance.
[38]
In 2003 and 2004 Yorkton
Distributors claimed the expenditures in respect of the construction of the Snowmobile
Museum and the related expenses. These claims were initially accepted by the
Minister. In 2007, an audit was conducted and in October 2007, the
reassessments under appeal were issued.
Analysis
[39]
The first issue is whether the
amounts claimed by Yorkton Distributors were properly deductible as having been
incurred by the company “for the purpose of gaining or producing income” as
required by paragraph 18(1)(a) of the Act and paragraph 1102(1)(c)
of the Income Tax Regulations. Even if that question is answered in the
affirmative, it remains to consider to what extent, if any, the amounts claimed
were “reasonable” under section 67 of the Act.
1. Whether the Amounts
Are Deductible under Paragraph 18(1)(a).
[40]
The test for the deduction of
expenses under paragraph 18(1)(a) was expressed by Iacobucci, J. in Symes
v. R., 1993 CarswellNat 1178 as: “… did
the appellant incur child care expenses for the purpose of gaining or producing
income from a business?” To make this determination, the Court was required to
“… look for objective manifestations of purpose, and purpose is ultimately a
question of fact to be decided with due regard for all of the circumstances” and must not be guided “only by a taxpayer’s statements, ex post
facto or otherwise, as to the subjective purpose of a particular
expenditure”. There followed a non-exhaustive list of criteria
which Justice Iacobucci found helpful in his analysis of the childcare expense
deduction, including whether it was a type ordinarily allowed by accountants or
normally incurred by others in the same business; whether the expense would
have been incurred by the taxpayer even if not engaged in the pursuit of
business income; whether the expense was essentially a “lifestyle” choice; and
whether the need to incur the expense would exist in the absence of the
business activity.
[41]
The application of these factors
to the present matter, argued Counsel for the Respondent, led to the conclusion
that the Snowmobile Museum
expenses were not incurred by Yorkton Distributors for the purpose of earning
income. I am not convinced this is so. The Symes criteria were used to
determine whether child care expenses, as a category, could be considered a
business deduction. The Court did not turn its mind to the particular nature of
the childcare used by the taxpayer. Here, the Snowmobile Museum expenses were
claimed as advertising and promotion, a category which easily qualifies as such
on the Symes factors. Beyond that, however, the criteria are not
particularly helpful in the present analysis.
[42]
What remains to be determined is
whether there is objective evidence to substantiate Yorkton Distributors’
subjective claim that the Snowmobile Museum expenses
were incurred to advertise and promote its business.
[43]
The Appellants relied on two cases
in which the Symes test had been applied to find that advertising
expenses were properly deductible: Matt Harris & Son Ltd. v. R.,
[2001] 1 C.T.C. 2513. (T.C.C.). and Ross v. R., [2005] 3 C.T.C. 2281.
(T.C.C.).
[44]
In Matt Harris, the
corporate taxpayer was engaged in a wood cutting business in New Brunswick.
Its principal, Mr. Harris, was a stock car and snowmobile enthusiast who
personally raced the machines. The bulk of the company’s advertising was
focussed on his participation in these events. They were very popular in New Brunswick
and regularly reported in the local newspapers and on television. In such
circles, Mr. Harris was a celebrity, so much so that other businesses paid to
have their company logos on his company’s vehicles.
[45]
In Ross, Sarchuk, J. applied
the approach taken in Matt Harris to allow the deduction
of certain employment expense deductions under
paragraph 8(1)(f) of the Act. The taxpayer was employed as a securities salesman and broker; he
claimed a deduction for expenses related to the buying and breeding of thoroughbred
racing horses, including veterinary fees, stable fees, and the transportation
of horses. As in the Matt Harris case, the taxpayer candidly
acknowledged his personal interest in the activity for which business expenses
had been claimed but argued that it was through his involvement in thoroughbred
racing that he made the client contacts that generated his employment income.
[46]
In both cases, the Court was
satisfied on the evidence presented that the purpose for which the taxpayer incurred
the expenses claimed was to earn business income. In Matt Harris, the
taxpayer’s purpose “… was to promote the name of its business and to increase
its wood and lumber business through contacts [made at stock car and snowmobile
racing events] ...”. In Ross, “… the Appellant’s testimony
establishes that there was a direct relationship between the commission income
earned in that taxation year and his thoroughbred involvement.” In both cases the Court rejected the notion that an owner’s personal
interest in the promotional activity precluded the attendant expenses from
being deductible; as Sarchuk, J. wrote in Ross at paragraph 16:
A business may
opt to advertise an activity in which its owner (or principal shareholder of
the corporation owning the business) has a keen interest or a degree of
personal satisfaction. There is no reason why the expense of a particular form
of advertising should be disallowed by the fisc solely because of the owner’s
interest satisfaction or, as in the appeal at bar, participation in the advertising
or remoteness from its business. The fact that an owner … may experience a
vicarious satisfaction from the form of advertisement does not necessarily lead
to the conclusion that the cost of the advertisement should be disallowed. If
the expense of the advertisement, whatever it is, is incurred for the purpose
of gaining or producing income from its business and the expense is reasonable
in the circumstances, the expense ought to be deductible in computing income.
This is what the Act dictates. [Emphasis appeared in original.]
[47]
While conceding the principles
drawn from Matt Harris and Ross, counsel for the Respondent,
citing paragraph 52 of Matt Harris, argued that Art’s admission of his
personal interest in snowmobiling placed a greater than usual onus on Yorkton
Distributors to legitimize its expenses in respect of the Snowmobile Museum.
If, indeed, there is such a heightened onus, then I am satisfied that burden
has been met.
[48]
In rejecting the notion that the Snowmobile
Museum had any business purpose, counsel for the Respondent also submitted that
the best that could be said of its usefulness as part of Yorkton Distributors’
promotional efforts was that it had a “business effect”, a description used by
Bédard, J. in Hébert et al. v. The Queen, 2007 DTC 854 (T.C.C.). In that
case, the corporate taxpayer had claimed promotional expenses in respect of a
fleet of “high-priced sports recreational vehicles” owned by its principal, a
corporate lawyer. The Court dismissed the appeals on the basis of the principal’s
utter lack of credibility and his failure to provide reliable objective
evidence in support of his company’s claim of a business purpose:
Assessing the credibility of the Appellant Hébert has played an
important role in my decision, given the lack of documentary or objective
evidence filed by the Appellants. Note that I have given little probative value
to the testimony of the Appellant Hébert. During the examination, the Appellant
Hébert simply made general statements that were not verifiable and, often, were
unlikely. During cross‑examination, conducted very methodically by
counsel for the Respondent, the Appellant Hébert's explanations became evasive,
vague, ambiguous, elusive, questionable, unintelligible, and difficult.
[49]
I have no similar concerns in the
present case. Unlike Mr. Hébert, the Appellants’ witnesses were credible and their
testimony supported by documentation. On cross‑examination, their
responses were candid, detailed and clear.
[50]
I am satisfied that, at least in
Yorkton Distributors’ marketing area, the names Art Bilous, Yorkton
Distributors and Super-Trac’s Racing were synonymous. Like the principal of the
corporate taxpayer in Matt Harris, Art’s dual notoriety as the principal
of Yorkton Distributors and a snowmobile enthusiast provided an opportunity for
the company to use the Snowmobile Museum as part of its promotional strategy. One result was
that Yorkton Distributors benefited from what was essentially free advertising
in the articles which appeared in the snowmobiling magazines that were
distributed as a matter of course to all registered snowmobile owners,
including those in Yorkton Distributors market area. That notoriety made the Snowmobile Museum
a useful advertising tool even for third parties, as shown by the evidence of
Mr. Reeves, the Bayer distributor.
[51]
Because in 2003 and 2004 Yorkton
Distributors had only just begun to use the Snowmobile Museum for advertising and promotional purposes, the number
of activities was more limited that it would be in later years. However, the
fact remains that, in the taxation years under appeal, the Snowmobile Museum
and/or the snowmobiles in it were used by Yorkton Distributors to break the ice
with customers at Yorkton Distributors business premises; to build rapport with
the company’s clientele while touring customers through the Snowmobile Museum;
to promote Yorkton Distributors’ association with Bayer products in the Big Dog
Run; to highlight the availability of the Bayer weed spray at Yorkton
Distributors in the Puma display; and to attract attention to the company’s
promotional display at the annual provincial snowmobile shows attended by,
among others, people from its market area.
[52]
Mr. MacKay’s uncontradicted
evidence was that, from the time Art acquired Yorkton Distributors in 1976, the
business experienced steady growth and always showed a profit. Throughout that
time, the company employed a variety of advertising strategies. In 2003 and
2004, the Snowmobile Museum was added to that promotional bundle; Yorkton
Distributors continued to see an increase in sales. In subsequent years, the
company increased its usage of the Snowmobile
Museum in its advertising; sales continued to increase. Between 2001 and
2010, Yorkton Distributors’ market share increased from approximately 15 to 40
per cent.
[53]
Counsel for the Respondent submitted
that since none of the Appellants’ witnesses were qualified experts, the Court
should disregard any of their testimony regarding the effectiveness of the Snowmobile
Museum as an advertising strategy. Quite so. However, I did not understand the
Appellants’ witnesses to say there was a definitive connection between the Snowmobile Museum and the increase in Yorkton Distributors sales. Even
had they been qualified to give their opinions, such testimony would have been icing
on the evidentiary cake. The Symes decision makes clear that there is no
obligation on the taxpayer to establish “a causative relationship between a
particular expense and a particular receipt” or even, to show that it ever bore fruit.
[54]
The real force of the Appellants’ evidence
was to show that each business devised its own plan for its particular
advertising needs. The “Big Dog Run” established by Mr. Reeves to promote Bayer
products and the “Field of Dreams” project used by Hudye Soil Services to
showcase its merchandise served the same purpose the Snowmobile Museum did for
Yorkton Distributors: to get customers in the door. In Matt Harris, Rip,
J. (as he then was) noted that business decisions are the province of the
business person, not the Canada Revenue Agency:
The tax
authority has no business telling a businessperson how to run that person’s
business. Advertising expenditures take many forms: radio, television, newspapers
(local, provincial, national), sponsorship or ownership of sports teams,
tournaments, community events … the list is endless. A form of advertising that
is beneficial to one business is not necessarily favourable to another business
or even a business’ competitior. Each business must have the freedom to choose
its own form of advertising.
[55]
Although counsel for the
Respondent urged me to do so, I am unable to see a distinction between Yorkton
Distributors’ use of the Snowmobile Museum and the lumber company in Matt
Harris sponsoring a racing car or a securities salesman in Ross maintaining
a stable of thoroughbreds. If such a distinction does exist, it is only that in
the present case, the evidence of a connection between the promotional activity
and the company’s customers is even stronger than in either of those cases. I
agree with the submission of counsel for the Appellants that Yorkton
Distributors’ use of the Snowmobile Museum to promote its business is no
different in kind from, for example, the pharmaceutical company that pitches
its products to doctors on the golf course or large corporations who pay to
affiliate themselves with major sporting events. The essence of the Yorkton
Distributors’ strategy was to exploit to its financial advantage an interest that
Art and, by association, the company shared with its clientele.
[56]
Having regard to all the
circumstances, I find that the Snowmobile Museum was used by Yorkton Distributors in 2003 and
2004 for the purpose of gaining or producing income from its business.
2. Whether the amounts
were “reasonable” under section 67.
[57]
In Hammill v. R., 2005 FCA
252, the Federal Court of Appeal commented in obiter on the proper
application of section 67 following the Supreme Court of Canada’s decision in Stewart
v. R., 2002 SCC 46. Noël, J.A. wrote that “… in the appropriate circumstances,
[s.67] can be used to deny the whole of an expense, if it is shown to be
unreasonable”. The Court went on to say that “[what] is contemplated is a
quantitative review of the expenditure.”
[58]
Counsel for the Respondent argued that
the Snowmobile Museum expenditures
were unreasonable because they outstripped significantly the promotional use to
which it was put in 2003 and 2004. He queried why Yorkton Distributors had
simply not, for example, continued its former practice of renting hotel meeting
rooms and tents to host its promotional events or limited its inventory of
snowmobiles to the Villeneuve machine and just a few others. Would it not have
been more reasonable, counsel submitted, for Art to have underwritten the cost
of the Snowmobile Museum and for Yorkton Distributors to have rented
the facilities from him as and when required?
[59]
The first difficulty I have with
this argument is that it is not supported by the Minister’s pleadings: while
the Reply identifies one of the issues to be decided as whether the expenses
were reasonable under section 67, there are no assumptions of fact or other
allegations in the Reply as to why the amounts claimed, or some portion thereof,
were not reasonable. Indeed, there is not even the bare statement that the expenses
were not reasonable in the circumstances. However, assuming it was incumbent
upon Yorkton Distributors to show the quantum of the expenditures was
reasonable, I am satisfied that the company has met its burden. In response to
the alternatives proposed by counsel for the Respondent on cross‑examination,
Art justified the company’s decision by saying that having only a few
snowmobiles, no matter how famous, would not have been sufficient to maintain
the interest of Yorkton Distributors’ pool of existing and potential customers
over the long term. As for renting facilities, while less expensive in the
short term, that strategy also involved a cost to the company. The variety of
the snowmobile collection and their display on an event-friendly site made the Snowmobile Museum a venue unlike any of the other local alternatives for
promotional events and provided potential for growth.
[60]
The other concern I have with the
Respondent’s argument is that the proposed alternatives offend the principle in
Keeping v. R., [2001] 3 C.T.C. 120 (F.C.A.), that in assessing the
reasonableness of particular expenses, it is “… not the place of the courts to
second-guess the business acumen of a taxpayer whose commercial venture turns
out to be less profitable than anticipated.” In that case, Rothstein, J.A. (as he then was) went on to say that the
trial judge erred “[i]n basing his decision [that the expenses claimed were not
reasonable] on profit margins, potential market opportunities and costs, as
well as the appellant’s approach to operating his distributorship” - and this,
in circumstances where the taxpayer’s efforts resulted in a loss.
[61]
Given the clear evidence of Art’s
long experience in the seed and farm chemical business; his knowledge of Yorkton
Distributors’ competitors and the local marketplace; and his understanding of its
clientele – how am I to substitute my judgment for Yorkton Distributors’
regarding how best to employ its advertising strategy? Other businesses in the
area used similar promotional events; indeed, they attempted to benefit by
association with the Snowmobile Museum. Finally, there is the company’s success; unlike
the taxpayer in Keeping, Yorkton Distributors was a consistently
profitable business whose sales - for whatever reason - only continued to
improve from the time it began using the Snowmobile Museum as a promotional
tool. As Art put it:
… Can we gauge
that [the effectiveness of the strategy] in any way? I don't think in any
advertising you can gauge -- honestly say that for every dollar you -- I always
say, my words is, like, for every dollar we spend we got maybe ten to twenty
back, and that's through our business being successful.
[62]
In his thorough review of the
jurisprudence dealing with section 67, counsel for the Respondent referred the
Court to, among others, the decision in Cipollone v. R., [1995] 1
C.T.C. 2598. In that case, Bowman, J. rejected as unreasonable the expenses
claimed by self-styled humourist “Dr. Phela Goodstein” of amounts ranging from
$6,693 to $14,588 over a period when her revenues were between $85 and $3,653.
While satisfied under the pre-Stewart jurisprudence that there was a
business, the Court found that the expenses claimed for such things as
automobile expenses and clothing were disproportionate and therefore, unreasonable,
given the kind of revenues the business was generating.
[63]
In the recent Informal Procedure
case of Williams v. R., 2009 TCC 93, Webb, J. found expenses claimed by a childcare business
for such items as sub‑contractors to assist the sole proprietor in her
duties and advertising to promote what was by then a failing business were
“reasonable”, notwithstanding that they were well in excess of the revenues for
the taxation years under appeal.
[64]
A similar conclusion was reached
in another Informal Procedure appeal, Ankrah v. R., [2003] 4 C.T.C. 2851
(T.C.C.). Like Justice Webb, Woods, J. was guided in her decision by the Keeping
prohibition against second-guessing the business judgment of the taxpayer.
[65]
Considered in light of the above
cases, it is difficult to see how the expenses claimed by a consistently
profitable business like Yorkton Distributors for expenses which are
significantly less than total revenues can be seen as unreasonable. What is
clear is that each case depends on its own facts.
[66]
Returning, then, to the language
of Hammill, it would not be appropriate in the circumstances of the
present matter to conclude that the expenses incurred by Yorkton Distributors
were to any extent unreasonable.
Conclusion
[67]
For the reasons set out above, Yorkton
Distributors’ appeals of the 2003 and 2004 taxation years are allowed, with
costs, and the reassessments are referred back to the Minister for
reconsideration and reassessment in accordance with these Reasons for Judgment.
[68]
In view of this result, no benefit
was conferred on the company’s shareholder, Art Bilous under subsection 15(1)
of the Act. Accordingly, his appeal of the 2004 taxation is allowed,
with costs, and the reassessment is vacated.
Signed at Ottawa, Canada, this 11th day of March 2011.
“G. A. Sheridan”
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