Citation: 2009 TCC 386
Date: 20090804
Docket: 2008-1865(IT)I
BETWEEN:
SCOTT OKE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
Mr. Scott Oke appeals,
by way of Informal Procedure, the assessments of the Minister of National
Revenue of the 2003, 2004 and 2005 taxation years. The Minister applied the
provisions of the Income Tax Regulations 1100(15), (17), (17.2) and
(17.3) in restricting the capital cost allowance (CCA) claimed by Mr. Oke on
his recreational vehicle. The issue revolves around whether the activity Mr.
Oke engaged in with respect to his RV was the rental of leasing property, to
which the restriction on CCA applies, or whether it was, in accordance with Regulation
1100(17.3) “property used in a business carried on by the individual in which
he is personally active on a continuous basis... .”
Facts
[2]
During 2003 - 2005, Mr.
Oke was the senior point man, as he put it, for Abbott Pharmaceutical in
promoting the sale of drugs to the Province of Ontario.
This was a full-time job. He also performed with and managed a band, which
occupied him a couple of weekends a month, other than during the winter months.
In these two activities, Mr. Oke used his considerable business skills in
dealing with contracts and business-related issues.
[3]
Through a friend, who
knew how much Mr. Oke enjoyed RVing, Mr. Oke became aware of the possibility of
buying and renting out recreational vehicles. Mr. Oke testified that he
saw an opportunity for some retirement planning, by getting out of the drug
business and relying on income from the rental of a few recreational vehicles.
[4]
He learned through Mr.
Clements, the owner of Coast-to-Coast RV Inc., which had a fleet of 30 to 40
RVs (owned by several individual owners), that limiting the market of renting
to movie production studios was the way to go as it was possible to get longer
term leases (12, 14 or 16 weeks). Mr. Clements rented exclusively to movie
producers. Mr. Oke found this attractive as, with a full-time job, it would not
require a lot of daily chores or activities.
[5]
Mr. Clements initially
was not interested in another RV owner joining his fleet, but Mr. Oke satisfied
him that he would personally maintain his unit. It was clear that Mr. Oke was
interested in the business. Mr. Oke planned his purchase of a recreational
vehicle in conjunction with a long term rental Mr. Clements had obtained with a
movie producer.
[6]
Mr. Oke was true to his
word. He took an active interest in his unit. In fact, he took a keen interest
in Mr. Clements’ business. They became friends. Mr. Clements did not have the
business acumen of Mr. Oke, and would have Mr. Oke review Coast-to-Coast’s
contracts with movie studios. It was Mr. Clements, however, who had the
contacts with the movie industry, and negotiations for the rental of part of
his fleet (including Mr. Oke’s unit) were always conducted between Mr. Clements
and the movie studio.
[7]
Mr. Oke’s unit remained
at Coast-to-Coast’s premises with the rest of the fleet. If it could be rented
to the movie industry for 16 to 18 weeks a year, that was a good and profitable
year. Mr. Clements would obtain a contract from a movie producer for a number
of recreational vehicles. He would then enter a one-page agreement with Mr.
Oke, or the other owners, with respect to their particular recreational vehicle
setting out the rate, usually $100.00 a day, and the term of the rental. The
agreement provided:
The vehicle must be insured by the owner and it is the owner’s
responsibility to inform his insurance company of rental dates. The production
company will also provide blanket coverage for the unit while under contract.
The owner is responsible for general maintenance and wear and tear
costs. Coast-to-Coast RV Inc. will notify the owner of repairs over $100.00
(eg. brakes) before commencing. We will endeavour to keep the vehicle on
production and earning.
[8]
This was the same form
used for all owners of RVs in Mr. Clements’ fleet. Obviously Mr. Clements
charged something greater to the movie studio than he paid to the owners. I
noted that a couple of these contracts referred to Mr. Oke as well as his wife
as owners of the RV. Neither party made anything of this point.
[9]
Mr. Oke did take more
of an interest in the business than other owners. Mr. Oke would look after
the maintenance of his RV, while other owners would leave that to Mr. Clements.
If an immediate problem came up while the RV was in use, Mr. Clements would
have to deal with it directly without waiting for Mr. Oke, as Mr. Clements
would always be the point of contact for the clients. Mr. Oke would go to
Coast-to-Coast’s yard to help Mr. Clements. Mr. Oke would attend "show and
tells" where the movie producers would come and check out the RVs. Mr.
Clements testified that Mr. Oke had a more businesslike appearance or manner
about him that helped at such events. Mr. Oke would also assist in shuttling
RVs to and from the movie sites.
[10]
In the first year of
his ownership, Mr. Oke tried renting privately and had two short-term leases.
He found the wear and tear was greater on the RV and that it was "not
worthwhile". He determined to stick with Mr. Clements, limiting rental of
his RV through Coast-to-Coast to movie studios.
[11]
It was interesting to
note how Mr. Oke referred consistently to "we", as in "we would
determine if we had enough RVs for a particular job". Indeed, Mr. Clements
testified he valued Mr. Oke’s help and would consider bringing him in as a
partner.
[12]
Mr. Oke covered the
insurance for the RV while in the yard, though obtained the coverage through
Mr. Clements who was able to get less expensive coverage for the fleet.
[13]
Over the three years, Mr. Oke’s RV
was leased out through Coast-to-Coast
approximately 12 times. Mr. Oke would have attended most, but not all, of the
"show and tells" Coast-to-Coast would have had to obtain those
contracts.
[14]
Mr. Oke had gross
rental income of $14,700.00, $12,795.00 and $19,425.00 and expenses, before
CCA, of $9,405.00, $7,384.00 and $3,260.00 in 2003, 2004 and 2005,
respectively. Mr. Oke claimed CCA in those years of $35,018.00, $27,513.00 and
$22,259.00. In its assessment, Canada Revenue Agency limited the CCA to
$5,295.00, $5,411.00 and $16,165.00.
Analysis
[15]
The Regulations
in issue read as follows:
Income Tax Regulations
C.R.C., c. 945
DIVISION I DEDUCTIONS ALLOWED
PART XI CAPITAL COST ALLOWANCES
SECTION 1100.
1100(1) For the purposes
of paragraphs 8(1)(j) and (p) and 20(1)(a) of the Act,
the following deductions are allowed in computing a taxpayer's income for each
taxation year:
Leasing Properties
(15) Notwithstanding
subsection (1), in no case shall the aggregate of deductions, each of which is
a deduction in respect of property of a prescribed class that is leasing
property owned by a taxpayer, otherwise allowed to the taxpayer under
subsection (1) in computing his income for a taxation year, exceed the amount,
if any, by which
(a) the aggregate of amounts each of which
is
·
(i) his income for the year from
renting, leasing or earning royalties from, a leasing property or a property
that would be a leasing property but for subsection (18), (19) or (20) where
such property is owned by him, computed without regard to paragraph 20(1)(a)
of the Act, or
·
(ii) the income of a partnership for
the year from renting, leasing or earning royalties from, a leasing property or
a property that would be a leasing property but for subsection (18), (19) or
(20) where such property is owned by the partnership, to the extent of the
taxpayer's share of such income,
exceeds
- (b) the aggregate of amounts each of
which is
·
(i) his loss for the year from renting,
leasing or earning royalties from, a property referred to in subparagraph
(a)(i), computed without regard to paragraph 20(1)(a) of the Act, or
·
(ii) the loss of a partnership for the
year from renting, leasing or earning royalties from, a property referred to in
subparagraph (a)(ii), to the extent of the taxpayer's share of such loss.
[…]
(17) Subject to subsection (18), in
this section and section 1101, "leasing property" of a taxpayer or a
partnership means depreciable property other than
• (a) rental property,
• (b) computer tax shelter property, or
• (c) property referred to in paragraph (w)
of Class 10 or in paragraph (n) of Class 12 in Schedule II,
where such property is owned by the taxpayer or the
partnership, whether jointly with another person or otherwise, if, in the
taxation year in respect of which the expression is being applied, the property
was used by the taxpayer or the partnership principally for the purpose of
gaining or producing gross revenue that is rent, royalty or leasing revenue,
but for greater certainty, does not include a property leased by the taxpayer
or the partnership to a lessee, in the ordinary course of the taxpayer's or
partnership's business of selling goods or rendering services, under an
agreement by which the lessee undertakes to use the property to carry on the
business of selling, or promoting the sale of, the taxpayer's or partnership's
goods or services.
(17.2) For the
purposes of subsections (1.11) and (17), gross revenue derived in a taxation
year from
- (a) the right of a person or
partnership, other than the owner of a property, to use or occupy the
property or a part thereof, and
- (b) services offered to a person or
partnership that are ancillary to the use or occupation by the person or
partnership of the property or the part thereof
shall be considered to be rent
derived in the year from the property.
(17.3) Subsection
(17.2) does not apply in any particular taxation year to property owned by
- (b) an individual, where the property
is used in a business carried on in the year by the individual in which
he is personally active on a continuous basis throughout that portion of
the year during which the business is ordinarily carried on; or
[16]
The Respondent argues
that Mr. Oke had a rental activity involving leasing property and is therefore
restricted in the CCA he can claim. Further, that he cannot rely on the saving
provision of Regulation 1100(17.3) as the recreational vehicle was not property
used in a business carried on by Mr. Oke in which he was personally active on a
continuous basis. The Appellant’s position is that Mr. Oke was active on a
continuous basis in the business of renting the recreational vehicle.
[17]
Both parties relied on
Justice Brulé’s two decisions in Stephens v. Her Majesty The Queen and
Phillips v. Her Majesty the Queen,
regarding the application of these Regulations in connection with recreational
vehicles. In Phillips, Justice Brulé summarized the Regulations
as follows:
13 Therefore,
in summary subsection 1100(17) defines 'leasing property' as depreciable
property, other than real property, used by the taxpayer principally for the
purpose of gaining or producing gross revenue that is rent or leasing revenue.
Subsection 1100(17.2) includes as rent, gross revenue incurred from the right
of a person other than the owner to use the property and gross revenue incurred
from services offered to a person that are ancillary to the use by the person
of the property. The changes that occurred in regards to subsection 1100(17) in
1986 are explained by H. Stikeman in TaxPartner as follows:
· "For the 1986 and subsequent taxation
years, the definition of "leasing property" in respect of property
acquired by a taxpayer or partnership is in effect expanded by the addition of
subsection 1100(17.2). Along with subsection 1100(14.1), this brings into
effect the proposals announced in the May 1985 budget intended to prevent
individuals from sheltering other income with losses created by capital cost
allowance in respect of property such as yachts, recreational vehicles, hotels,
and nursing homes used in businesses that offer services with the use of such
property. Revenue derived from the right of a person or partnership (except the
owner) to use or occupy the property, and revenue from services offered that
are ancillary to such use or occupation, are considered to be rent."
14 An
exception to subsection 1100(17.2) is provided for under subsection 1100(17.3).
In other words, subsection 1100(17.2) does not apply to property owned by an
individual where the property is used by a business carried on in the year by
the individual in which he is personally active on a continuous basis. In the
appellant's case, he must have been actively involved in the business on a
continuous basis.
[18]
It is clear there are
two elements of Regulation 1100(17.3) that Mr. Oke must prove to take
advantage of that saving provision:
(i) The property must be used in a business carried
on by Mr. Oke.
(ii) Mr. Oke must personally be active in the business
on a continuous basis throughout that portion of the year during which business
is ordinarily carried on.
The parties appear
to have jumped to the second element too quickly.
[19]
Income from business
and income from property are, under the Income Tax Act, two separate and
distinct sources of income. There has been considerable jurisprudence on what
is meant by business and carrying on a business, but little about being
personally active on a continuous basis in the business. But let us not put the
cart before the horse.
[20]
Mr. Oke’s recreational
vehicle was used in a business. I have concluded, however, that the business in
which it was used was the business of Coast-to-Coast, the business of renting
RVs to movie studios for several-week terms. Mr. Oke’s recreational vehicle was
simply one of many in a fleet operated by Coast-to-Coast. Mr. Clements
negotiated the deals with movie studios, he managed insurance for the RVs
(though owners paid), he provided emergency maintenance for all vehicles and
regular maintenance for all but Mr. Oke’s, who looked after that himself. Were
there two businesses at play? Coast-to-Coast and Mr. Oke’s? No, only one - the
business of Coast-to-Coast.
[21]
What did Mr. Oke do
over and above what other owners did that constituted the renting of his
recreational vehicle to Coast-to-Coast as a business? He suggested that he did
the following:
(i) Planned business strategies.
With respect, Mr. Oke tried briefly two short-term leases and quickly fell back
onto Mr. Clements’ strategy of longer-term leases to the movie industry. This
is no greater a strategy plan than any other owner.
(ii) Determined contracts to pursue.
Mr. Oke pursued one client - Coast‑to‑Coast. It was Mr. Clements
who pursued the movie industry clients.
(iii) Negotiated and reviewed
rental contracts. Yes, Mr. Oke looked at Mr. Clements’ contracts with the
movie studios, but that was part of Mr. Clements’ business not Mr. Oke’s.
Further, he admitted he was not involved in negotiations with the studios.
(iv) Bookkeeping. Mr. Oke
acknowledged bookkeeping was minimal.
(v) Filed quarterly GST returns. Mr. Oke
never registered a business name.
(vi) Scheduled and delivered the
recreational vehicle for regular maintenance and warranty work and contracted
with the dealer for the same.
(vii) Negotiated and purchased
recreational vehicle insurance. This overstates my understanding of the
evidence which was that Mr. Oke simply bought into the insurance that Mr.
Clements was able to arrange for the fleet.
(viii) Secured licences and clean
air tests.
(vix) Researched and negotiated the
purchase of the recreational vehicle. Again, my impression was that he was
guided very much by Mr. Clements, and, in any event, this would be no more
than any owner would do.
[22]
These factors have not
convinced me that Mr. Oke was carrying on a business. What I see is in an
individual with a keen interest in recreational vehicles, hoping to learn as
much about the business as possible. He assisted Mr. Clements in Mr. Clements’
business as much as he could, and as time permitted. Mr. Clements was
appreciative, to the point of considering Mr. Oke as a potential partner. But
that all relates to Mr. Clements’ business, not Mr. Oke’s rental of his one
recreational vehicle to Coast-to-Coast. Mr. Oke is astutely learning the
business, and his one RV is a toehold into that training process. Yes, he
spends more time than other owners. Indeed he has become a friend to Mr.
Clements because of that, but there are far too few indices of carrying on a
business to satisfy me that Mr. Oke’s source of income was business, and not
simply property. He was engaged in renting a leasing property and is properly
caught by the restriction in Regulation 1100(15).
[23]
The Appellants’ counsel
argued that it was not open to me to decide on this basis, as the Respondent
specifically addressed only the element of whether Mr. Oke was personally
active on a continuous basis. I disagree. All of the relevant regulations were
before me and I cannot ignore their import. The Appellant in his own Appeal
drafted the issue as to whether the Minister properly relied on the exemption
in 1100(17.3) of the Regulations. This clearly captures the requirement
for a business. Further in the Minister’s Reply to the Notice of Appeal, the
Minister states:
"7. By Notices of Reassessment dated
February 2, 2007, the Minister reassessed the Appellants tax liability for the
2003, 2004 and 2005 taxation years by considering business venture as rental
activity, and therefore, disallowing the business losses.
10.(c) The Appellants activity involves the rental
of his RV to television and film industry and the general leisure market
11. The issue is whether the Appellant had a
rental activity and not a rental business."
I conclude that the issue of the business was very
much put before the Court by both parties, and it is open to me to decide on
that basis.
[24]
Having reached this
conclusion, it is unnecessary to consider the issue of whether Mr. Oke was
personally active on a continuous basis. The appeal is dismissed.
Signed at Ottawa, Canada, this 7th day of August 2009.
“Campbell Miller”
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