Posno v. The Queen, 89 DTC 5423, [1989] 2 CTC 234 (FCTD)

Muldoon, J.:—The plaintiff is an ardent aeroplane pilot. That salient fact is the matrix for this action, being an appeal from notices of reassessment effected by the Minister of National Revenue (hereinafter: the Minister, or M.N.R.) under the Income Tax Act, cited in the record as R.S.C. 1952, c. 148 as amended, in regard to the plaintiff's 1976 through 1980 taxation years. The plaintiff claimed losses from the business venture of operating his aircraft for rent by other pilots who were absent, uninterested or impecunious too much and too often to yield any profit to the plaintiff.

To describe the plaintiff as an ardent pilot is, perhaps, an understatement. He obtained his first pilot’s licence at the minimum permissible age in 1957. The evidence discloses that he was a partner in owning a Piper Tripacer, and owned himself a 1967 Mooney. In 1973, flying an experimental aircraft, he had a serious accident, sustaining a head injury and the loss of an eye. Although the plaintiff's licence was thereupon suspended for medical reasons, he doggedly overcame that setback, ultimately attaining a rating for multi-engine aeroplanes, float aeroplanes and for instrument flight rules (1.F.R.). He is licensed to fly by day and by night. Because of the loss of his eye he is not permitted to fly a commercial airliner. However, that apart, the plaintiff is entitled to fly virtually any aeroplane he chooses, and, over more than 30 years he has logged some 4,700 hours of piloting aeroplanes. Flying is the plaintiff's avocation, if not his passion.

Two aeroplanes were owned in sequence by the plaintiff during the relevant period from 1976 through 1980. The first was a single-engine Cessna Cardinal “left over" as it were, from the plaintiff's rental corporation, U-Can- Fly, which was established in the autumn of 1973, and dissolved early in 1977, having ceased operations in September, 1976. The plaintiff characterized that Cardinal aeroplane as a "high-performance" aircraft, but its performance was Clearly not high enough for the plaintiff because, as he testified at trial, he traded off the Cardinal in 1977 as a downpayment on a really high- performance aeroplane. In spring or summer of 1973, he established Aeroflite, for buying and re-selling aircraft. U-Can-Fly was never profitable and the plaintiff, returning to his original aeroplane rental business, a changed role for Aeroflite, wanted a single, high-performance aircraft to rent: he acquired a Mooney M20], bearing registration number C-GPKA, for about $80,000. The Cardinal brought in around $50,000, and the outstanding difference was totally financed through the same Toronto-Dominion Bank branch to which was owed the debt incurred to buy the Cardinal in the first place.

The plaintiff defined a high-performance single-engine aeroplane to be one with a retractable undercarriage, a variable-pitch airscrew and a fuel- injected engine. Such was the Mooney, although the plaintiff reported that its fuel consumption at 200 m.p.h. was only a remarkably favourable eight gallons per hour.

During the material times the plaintiff was employed by the London Board of Education as what his income tax returns show to have been a "coordinator". He was co-ordinator of special education, a responsibility which engaged him for between 50 and 60 hours per week. His educational attainments then were mostly in the field of education, although he was for one successful year enrolled in the College Militaire Royal at St. Jean, after which he attained a B.Ed. degree and a licence to teach. Thereafter, according to his testimony, he obtained the following degrees: B.A. (Hons. Psychology), M.Ed., M.A. and latterly, in 1986, a Doctorate in Administrative Studies from the University of Toronto.

Reference to the material times requires an explanation which ought to be made no later than this point in the Court's reasons. Both respective counsel at trial agreed that as of October 19, 1984, the Minister announced through counsel that the plaintiff's notices of objection regarding the reassessments of his income tax for the 1976, 1977 and 1978 taxation years would not be contested. In effect the plaintiff's action is allowed, or the Minister's defence is abandoned for all purposes in regard to those three years. During the course of proceedings leading up to the trial, the defendant lodged an amended statement of defence. It bears three disparate dates. On its first page it proclaims itself to have been filed on June 6, 1984; on its fourth and last page it states that it is dated at Toronto on March 6, 1985; but the true date of filing is shown in the certified record herein, according to the assistant district administrator's certificate to have been June 6, 1985, some eight months after the defendant relented regarding the plaintiff's notices of objection and the Minister's reassessments in regard to the 1976, 1977 and 1978 taxation years. Nevertheless, the amended statement of defence filed on June 6, 1985, still purports to keep those three years' assessments in stark contention. The plaintiff's counsel contended in argument that the Minister was "still defending in fact those years" throughout the trial. That position is spurious, and counsel had the opportunity to state so in his opening statement. In her reply counsel for the defendant stated that the defendant's solicitor who prepared the amended pleading simply failed to make the adjustment consonant with the Minister's concession. The testimony with objective good reason certainly touched upon events of those three years not in issue, but the negligent pleading served only to mislead the Court unnecessarily until the clarification was expressed in argument. The responsibility for the failure to clarify the matter before the argument stage of the trial rests equally on both counsel, about which nothing more will be mentioned until the assessment of costs of this litigation is revealed later herein.

In reassessing the plaintiff, the Minister invoked paragraphs 18(1)(a) and (h) of the Income Tax Act and asserted that the plaintiff engaged in his aeroplane rental business without any reasonable expectation of profit. The statutory provisions run thus:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.

The plaintiff admits that the following computations set out in paragraph 4 of the amended statement of defence are correct:

4. In his income tax returns for 1976, 1977, 1978, 1979 and 1980, the plaintiff reported income, expenses and losses derived from the leasing of an aircraft, particulars of which are as follows:

Losses

Year	Leasing Revenues	Total Expenses	Claimed
1976	$ 7,186.91	$15,783.21	$ 8,596.30
1977	13,343.74	19,029.45	5,685.71
1978	5,616.66	18,489.17	12,872.51
1979	2,720.25	29,003.70	26,283.45
1980	7,132.87	37 ,687 .06	30,554.19

In paragraph 6 of the amended statement of defence, the Minister's assumptions, upon which the plaintiff bears the onus of controversion, are recited as follows:

6. In so reassessing, the Minister found or assumed:

(a) the facts hereinbefore pleaded;

(b) that throughout his ownership of the aircrafts referred to in paragraph 3 herein, the plaintiff incurred expenses greatly in excess of revenues generated from the leasing of the said aircrafts;

(c) that throughout the taxation years in issue, the plaintiff made extensive personal use of his aircrafts;

(d) that the Mooney Aircraft was a high performance aircraft which limited its rental potential to a relatively small group of individuals in the London area;

(e) that the capital required for the purchases of the aircraft was obtained primarily through personal bank loans to the plaintiff;

(f) that expenses of $8,596.30 in 1976, $5,685.71 in 1977, $12,872.51 in 1978, $26,283.45 in 1979, $30,554.19 in 1980 pertaining to the leasing of aircraft during the said taxation years, were not outlays or expenses of the plaintiff incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses;

(g) that the plaintiffs aircraft leasing or rental activity was not carried on for profit or with a reasonable expectation of profit.

The plaintiff was and is a most experienced aeroplane pilot, but until 1973 he had no commercial involvement with the aircraft industry. In that, he was quite inexperienced. His and a partner's aircraft leasing business, U-Can-Fly as noted, never turned a profit, despite rentals averring 400 to 500 hours per day, according to the plaintiff's testimony. The plaintiff managed it but could not obtain a commercial rating. In any event there were three like operations in the vicinity, two at the London airport. Among the competition, the plaintiff mentioned, were the London Flying Club offering instruction and rentals, as well as a similar operation, the Aero Academy. At the St. Thomas airport, a firm, Hicks & Lawrence, rented out aeroplanes, too.

In 1976 when U-Can-Fly was dissolved and the plaintiff decided to go into business renting out the high-performance Mooney C-PKA, under the name and style of Aeroflite, there were, he testified, about 60 pilots in the vicinity who were qualified to pilot such a high-performance aeroplane. All pilots and others who frequent airports pass information about available aeroplanes and their flight performances with the speed of summer lightning it seems. At trial the plaintiff quantified much more optimistically than his estimate expressed to the departmental field auditor who interviewed him in October 1981. Exhibit 15 is a transcript of the examination of that auditor, Patrick Hansen, in which the whole of his testimony was placed in evidence before the Court, as if read. In October 1981, the plaintiff qualified the potential market of 1976-1977 much more stringently than he quantified it at trial.

114 A. These are the facts. Okay, he traded-in his plane for a current one which

would be the Mooney. The new plane is a high performance, and I have here that there were maybe a handful of pilots in the area qualified to fly his plane.

115 Q. I'm sorry, did you say he agreed?

A. That's what I have written down here.

116 Q. Is that your handwriting you have there?

A. Yes.

117 Q. May I see it please?

118 Q. You say here, “Taxpayer agreed that there were 'maybe a handful’ of pilots in the area qualified to fly his plane and that market is limited"?

A. Yes.

The plaintiff said he knew, or knew about those pilots, allegedly 60 in number by the time of trial, before becoming commercially active in 1976 and such knowledge guided his judgment in creating a business plan. Asked if, in arriving at that judgment, he acquired any professional marketing advice, the plaintiff mentioned an unnamed "friend and colleague” whose business experience was in advertising, but who did not perform any market research. No one did, according to the plaintiff's testimony.

Exhibit 4(1) is a copy of the lease into which the plaintiff entered, on April 1, 1977, with Aero Academy, of the second part. The preamble and four paragraphs run thus:

NOW THEREFORE THIS LEASE AGREEMENT WITNESSETH that the parties hereto agree to the following terms and conditions:

1. IT IS AGREED that the responsibility for custody and control of the above mentioned aircraft is clearly vested in the Party of the Second Part:

2. IT IS AGREED that the responsibility for the airworthiness and maintenance of the aircraft is clearly vested in the Party of the Second Part:

3. IT IS AGREED that the lease shall commence April 1st, 1977 for a term of 60 months terminating on the March 31st, 1982. Provided, however, the said lease may be terminated on 30 days written notice provided by either party of this agreement to the other party.

4. IT IS AGREED that the above mentioned aircraft which is a Mooney 201, is leased for company purposes to the Party of the Second Part as a Class 7 Commer- cial operation and shall be operated solely by a flight crew hired and on the payroll of the Party of the Second Part, or pilots authorized by them. [emphasized words added: not in original type]

The emphasized added words were intended to permit Aero Academy to lease the plaintiffs aeroplane to pilots whose qualifications to fly it had been verified ("checked-out") by the Academy's instructors. A later lease between the plaintiff and Aero Academy dated February 14, 1981, which is Exhibit 4(5), contains no such provision.

The two above leases appear to overlap but, in fact the earlier lease of April 1, 1977, was terminated by the Academy on notice dated January 20, 1978, effective May 31, 1978. The plaintiff entered into a new lease arrangement with Hicks & Lawrence at St. Thomas, and he alleges that in 1978 he sustained a loss of 80 hours' revenue of $2,650 due to theft or other mismanagement and that in 1979 he sustained a loss of 100 hours' revenue of $3,200. The manager of Hicks & Lawrence was prosecuted for fraud and the company became bankrupt. The plaintiff did not lodge a claim with the trustee against the bankrupt estate, but then, he could not substantiate the losses, either. The plaintiff does not suggest, and the figures amply confirm, that recovery of such losses could have come even remotely close to putting him into a position of profit. They are small compared with the magnitude of his losses.

The various leases into which the plaintiff entered are all expressed in the same sparse terms, the bare minimum, he testified, to satisfy the requirements of the Department of Transport. They bear no reference to the rate which the second party would charge per hour (with or without fuel included) to the pilots who applied to fly the aeroplane, nor to the proportion of that rate which was to be turned over to the plaintiff. Such omissions were purposely effected in order to give the contracting parties the flexibility to vary the rates without having to submit new leases to the government every time they adjusted the pricing and the plaintiff's remuneration. He said it was his "marketing strategy to initiate that aircraft in the aircraft community at a relatively low attractive rate, with the expectation of increasing it within a short period of time once” he "had established" his "market base”.

In effect, the plaintiff contracted to place his Mooney aeroplane under the custody and control of the various second parties, such as the Aero Academy and Hicks & Lawrence, and thereupon he hoped for the best. The plaintiff’s passion for flying rendered him, if he was not already, an invincible optimist. The contracts are notable for their omissions, even if they were the standard model exacted by contemporary practice. The contracts did not require the second party to effect any advertising, nor to guarantee any minimum number of rental hours, nor yet to guarantee any minimum percentile of that party's total rental business revenue. Except for the plaintiff's sporadic indications of the inappropriateness of leasing to a certain pilot, he wielded no control over the times at which his aeroplane was flown, how often or by whom. When he himself sought to rent it, at the regular rates be it noted, he "had to stand in line” as did everyone else. The second party's responsibility was to make sure that the aircraft was maintained in a state of airworthiness, and the plaintiff's responsibility was to pay the bills for maintenance and repairs and insurance and so on.

On January 20, 1978, one full year prior to the 1979 and 1980 years actually in issue here Mr. R. Gardiner of Aero Academy wrote to the plaintiff, as revealed by Exhibit 4(3), to inform him ". . .we are of the opinion that with the very limited revenue this aircraft is producing for Aero Academy Limited and yourself, we simply cannot continue with this arrangement.” [Emphasis not in original text.] It will be remembered that the Mooney had been lodged with the Aero Academy already by then since April 1, 1977. That, indeed, was the plaintiff's best year in the span of years from 1976 to 1980. Revenues were $13,343.74, expenses were $19,029.45, and the loss claimed for 1977 was $5,685.71. The previous year, 1976, the loss had been $8,596.30 and the subsequent year, 1978, it was $12,872.51. Thereafter, in 1979, the loss more than doubled to $26,283.45; and again, in 1980, it rose further to $30,554.19.

Both counsel agreed in oral argument, but from diametrically opposite points of view, that the most important document exhibited in this case is specific comparisons of actual operating results and projections for the years ended December 31, 1976 through 1980. It is Exhibit 5(1), Schedule II. It was developed in 1982 by the plaintiff’s accountant, his brother, Lloyd Richard Posno, a chartered accountant who is a partner in the firm of Clarkson Gordon and whose professional curriculum vitae is shown in Exhibit 12. L.R. Posno did not testify in the capacity of an expert witness, a perfectly acceptable possibility if he and the plaintiff's counsel had chosen to invoke it. So, as a witness of fact, his testimony was limited. L.R. Posno testified that he had reviewed the plaintiff's business plan in late 1976 or early 1977 — the business plan prepared for obtaining the loan from the Toronto-Dominion Bank with which to acquire the Mooney aeroplane. This witness confirmed the Court's impression of the plaintiff's irrepressible optimism when he stated that he cross-examined the plaintiff sharply in light of previous losses as contrasted with the plaintiff's expressed expectations. Indeed this witness stated that he told the plaintiff that the latter was optimistic, from which one may easily infer that he meant "too optimistic".

L.R. Posno told the Court that the plaintiff’s business plan for the bank loan was no longer available for the preparation of Exhibit 5(1), Schedule II, but he did have some notes available and that he recalled that they were "consistent with what we discussed" five or six years earlier. Schedule II is too extensive to reproduce here, but the significant comparison resides in the disparity between the plaintiff's projected revenue flying hours and the hours actually engaged by that tightly knitted group of 60 — or "handful" — of qualified pilots in the vicinity. Those actual and projected hours, and the shortfall are now extracted, thus:

It is difficult, if not impossible, to characterize the plaintiff's expectations of profit as "reasonable" in the circumstances revealed in the evidence.

L.R. Posno stated that he regarded the plaintiff's own personal piloting of the Mooney as an asset, given that in paying the universally exacted charges for his flying he thereby increased the revenue. Exhibit 13 shows the plaintiff's personal use of the aeroplane to have been just over 47 per cent in 1979 and 1980. But the plaintiff was not in the same position as other lessees of the aeroplane, because they naturally had no intention or lawful possibility of subsidizing their flying costs by claiming business losses against the Mooney's unprofitable operations as did the plaintiff. Nevertheless had the plaintiff not been, as it were, a client of his own business, the apparent number of persons who paid to fly the aeroplane would have been diminished. The others amounted only to a pitifully small "handful", indeed, when contrasted with the numbers who would have been required to make the Mooney rental business truly profitable.

The plaintiff testified about the factors which, he said, prevented him from realizing any profit. Two of them were the relatively minor losses, earlier mentioned, which he said the business had sustained by one person's fraud while Hicks & Lawrence were his agents. Another was the incidence of accidents incurred by pilots who were not so qualified, it seems, as he thought they were but who evidently constituted part of the market of qualified pilots upon whom the plaintiff was counting to yield a profitable operation. He himself caused a significant extent of damage to the aeroplane by accidentally retracting its undercarriage after touch-down one day in July 1977, in Nashville, U.S.A. This, the plaintiff mentioned as an example of the normal risks of operating a light, but high-performance aircraft. It surely reveals the salient flaw in the plaintiff's optimistic projections, for in them he seems to have taken no account of such ordinary risks.

The plaintiff averred that the aeroplane was leased extensively in 1979. In fact, it was flown only some 211 hours in that year. The projected hours for 1979 were 900 in number. What a shortfall! However the plaintiff also testified at trial that his aeroplane had acquired a bad reputation among the pilots of his market area as a result of the accidents, and a certain twitchiness on landing which caused more accidents, and so as a result of those ordinary risks having been realized, the handful of qualified pilots featured ever more and more who declined to fly the Mooney. In any event, on his examination for discovery (Exhibit 9) four years before the trial, the plaintiff testified at Q. & A. 306 that his personal reputation was damaged more than that of his aircraft after it sustained damage from the inadvertent retraction of the wheels during a landing.

It does not appear to have been reasonable, but rather, unreasonable, to project 900 paid hours in and for the years 1979 and 1980, nor any paid utilization near such projections. The true experience was 211 hours in 1979 when there was no "down-time", and 165 hours in 1980 when there was substantial "down-time". In 1980 there had been propeller damage and a ground collision. Yet, despite that "down-time" in 1980, which ended in July, with elimination of the twitchiness, the closely knitted pilot community — the market — must have known by October 1980 that the defects had been remedied. Nevertheless, the month of November 1980, yielded only 8.5 paid hours.

If there ever was any reasonable expectation of turning a profit, it ought to have been realized when the plaintiff returned his aeroplane operation to the London Flying Club at the end of August 1979. That is, if there had in fact been a potential market of 60 qualified pilots who would have been readily gossiping about the Mooney's rehabilitation. If indeed there had been only ten qualified pilots who had been interested at all in paying to fly that aeroplane. But they were conspicuous by their absence.

Another factor to which the plaintiff attributes lack of profitability beyond his reasonable expectations was increasing interest rates. Exhibit 11 shows the bank's prime commercial lending rates from April 1,1967 to July 16, 1982. The plaintiff's brother prepared Exhibit 14 which shows, inter alia, interest charges and their percentage increases over those of 1977. In 1979 the actual increase in interest charges was $947 over the previous year, bringing the total interest for 1979 to $11,008. That expense alone can be compared with total receipts for 1979 of only $2,720.24 (Exhibit 8, page 9) which factors themselves demonstrate that the plaintiff's business enterprise as capitalized could not make a profit. Indeed total expenses, including interest charges for 1979, were $29,003.70. It is true that the interest charges for the plaintiff, in common with all others, zoomed in 1980 — in the plaintiff's case, to some $16,201, an increase of some $5,193. However, the plaintiff's reported loss in 1980 (Exhibit 8, page 17) was $30,554.19 or some $4,270 more than the loss claimed in 1979. The rise of interest rates in 1980 might be likened to the unexpected natural disasters like flood, drought or hail visited on farmers, and if, but for that sharply increased interest, the plaintiff's business would have achieved a profit in 1980, that is, if the loss sustained were attributable to the interest rate, the Court would harken to the plaintiff's plea. In this case, however, it was not the unexpected which generated the loss, for loss was the normal feature of the plaintiff’s aeroplane rental operation.

In regard to applicable jurisprudence, both counsel assert the importance of the Supreme Court's unanimous judgment in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213. The Court's judgment was delivered by Mr. Justice Dickson, now Chief Justice of Canada. An important passage of his judgment is reported at pages 313-14 (S.C.R. 485-6), thus:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] CTC 230; 74 D.T.C. 6193. [Emphasis added]

One of the criteria to be examined is whether or not the taxpayer developed a reasonable business plan. The bank's acceptance of such a plan — the reconstructed plan, Exhibit 5(1), Schedule II, projections compared with actual results — is of little value to the plaintiff, even with the explanations expressed in Schedule IIA. The bank's risk was well secured. His counsel urges that the actual expenses are covered off by the projections, but that submission just begs the question since the projections themselves are unrealistic and unreasonable, and most certainly so by the time they are boosted to 900 hours respectively for 1979 and 1980. The explanations given Schedule IIA serve to establish the unreasonable quality of those projections which the Court finds. In the first place, the losses asserted to have been inflicted by fraud have been found to be negligible and, even if the plaintiff had pursued and recovered them their realization could not nearly have made up a profit. In so far as maintenance charges incurred as a consequence of accidents, the plaintiff in his testimony at last realistically recognized that a high-performance aircraft by its refined complexity has more to go wrong with it than does a simpler aircraft. He also recognized in testimony the inevitability of accidents, including the one which he himself caused, as a major factor in unproductive, cost generating down-time, which was not provided, apparently, in the optimistic projections. Furthermore the incidence of accidents can be taken to show that there were, in fact, fewer truly qualified pilots in the market area than his optimism recognized. If they were present, their interest in the plaintiff's aeroplane was always too wan to bring them forth in profit generating numbers or hours of flight.

In regard to the criterion of profit and loss experience in previous years, it is shown to have been so hopelessly dismal as to negate any objectively reasonable expectation of profit on the facts here. The Court's finding of those facts herein leads only to the conclusions that this criterion is a negative factor for the plaintiff.

The taxpayer's training by any criterion demonstrates the plaintiff to be a highly trained pilot. His training to operate the business for which he claims the losses in reduction of income tax is negligible. Apart from the years in issue, his business, as set out in evidence, never made a profit. He placed that superb aeroplane in the hands of agents who accepted few obligations and who offered no guarantees. There is no evidence about the standards and practices of this business before the Court, but nevertheless, the plaintiff is shown to have left his business operations in a state of evident vulnerability in the hands of others who undertook nothing toward enhancing profitability for his leasing concerns.

As to the plaintiff's intended course of action, it appears from the evidence that he intended to plod along in a dismal succession of losses and more losses. He did indeed change agents and airports, as earlier herein recounted, but effected no change of the course or nature of the business operations in order to make them more profitable. The plaintiff himself flew his own aeroplane at standard rates in some enhancement of revenues, but in claiming the losses as deductible expenses he was in effect subsidizing his payment of standard rates thereby. In fact, when such expenses are incurred for no taxable profits, all taxpayers can be said to be subsidizing the plaintiff's enjoyment of piloting his own aeroplane. Such intended courses of action do not operate in the plaintiff's favour in regard to criteria for determining objectively a reasonable expectation of profit.

The capability of the venture as capitalized to show a profit after charging capital cost allowance is also negative, as demonstrated above in relation to the issue of rising interest rates.

Upon all of the facts in evidence herein, the Court makes the objective determination that the plaintiff's venture evinced no reasonable expectation of profit. The Minister's assumptions, expressed in paragraph 6 of amended statement of defence stand unimpaired, even making due allowance for the flexibility of the expression "extensive personal use of his" aeroplane in 6(c). The testimony and other evidence compel the conclusion that personal use was the principal reason for the plaintiff's acquisition of the aeroplane. The leasing business venture was his means of supporting his own flying of that high-performance aircraft. He surely would not have acquired it in the first place for leasing to others, if it had not been accessible to him, an avid aviator. Personal use was the sine qua non for the acquisition and the leasing venture. The defendant's counsel correctly concedes that not all of the plaintiff's hours of flying the Mooney aeroplane are to be counted as strictly personal, in the sense of personal pleasure or living expenses. There was flying of it which he did in relation to the leasing venture, such as checking out other pilots and ferrying which the plaintiff explained in his testimony. His flying in relation to the Aeroflite business amounted to 30.4 hours in 1979 and 36.1 hours in 1980, according to his testimony. The aeroplane's use, then, in regard to the plaintiff's business-related flying and the leased hours of others, was principally for producing rent even though such use was far short of generating a profit.

The onus rests on the plaintiff to show that there was a reasonable, objective expectation of profit when he put the Mooney aeroplane into the rental field. He has failed to do so, and so, he must bear the losses himself, instead of charging them off against his income tax to be borne by the public treasury, meaning all other taxpayers.

The words of Mr. Justice Strayer in Meech v. The Queen, [1987] 1 C.T.C. 421; 87 D.T.C. 5251, at page 423 (D.T.C. 5253) are apt here, too:

While I do not believe that a taxpayer has to prove that he took all prudent steps to satisfy himself that a profit could reasonably be expected when making the original investment, if by an objective test such an expectation would have been reasonable, such evidence would strengthen his contention that he had good reason to expect a profit within a reasonable time. The taxpayer here has not satisfied me that he took such steps.

So it was there and so it is here.

The plaintiff alleged as well that he was entitled to claim capital cost allowance for the depreciation of his aeroplane in 1979 and 1980. The argument advanced to establish this proposition wends its way through the heavy, virtually incomprehensible verbiage of subsections 1100(15), (17), (18),

(19) and (20) of the Regulations, but not through subsection 1100(17.1) as counsel contended, because the latter was added by P.C. 1982-599, subsection 1(5), that is, after the material times. Subsection 1100(20) set out at Tab 1, p. 1015 in the plaintiff's book of authorities ("case law") was substituted by P.C. 1981-1556, section 1, also after the material times. It was however, little different from its predecessor subsection 1100(20).

Part XI of the Regulations in force during 1979 and 1980 is headed "Capital Cost Allowances”. By subsection 1100(1), it is provided that for the purposes of paragraph 20(1)(a) of the Act certain deductions are permitted according to paragraph 1100(1)(a) which refers to Schedule II. In that schedule, Class 9(g) is, if acquired after May 26, 1976, (as the Mooney was), property that is an aircraft. In the plaintiff's instance, since he made the Mooney available on lease to those who paid for its use, it was “leasing property" within the meaning of subsection 1100(17) of the Regulations, which, in its pertinent parts, runs thus:

(17) Subject to subsection (18) in this section and section 1101, “leasing property" of a taxpayer . . . means depreciable property other than

(a) [not

(b) here

(c) applicable]

where such property is owned by the taxpayer . . ., if, in the taxation year in respect of which the expression is being applied, the property was used by the taxpayer . . . principally for the purpose of gaining or producing gross revenue that is rent, . . . or leasing revenue ....

Then, by subsection 1100(15), it is provided that capital cost allowance (c.c.a.) cannot be claimed against leasing property when so doing would create or increase a loss. If that were all there is to the matter it would be entirely conclusive for it is clear that a deduction for c.c.a. could only increase the loss in each year. But, there is more to consider, for with typical circuity, the Act also provides what, in certain circumstances and notwithstanding subsection (17), is not leasing property.

Subsection 1100(18) of the Regulations is part of those circuitous provisions. It states:

(18) Leasing property of a taxpayer . . . referred to in subsection (17) does not include

(a) a property (the Cardinal aeroplane) that the taxpayer . . . acquired before May 26, 1976.

Subsection (19), like paragraphs (18)(b) and (c) is not relevant here.

Then, subsection 1100(20) provides:

(20) Notwithstanding subsection (17), a property acquired by a taxpayer . . . that is a replacement property (within the meaning assigned by paragraph 13(4)(c) of the Act) that would otherwise be a leasing property of the taxpayer . . ., shall be deemed not to be a leasing property of the taxpayer. . ., if the property replaced, referred to in paragraph 13(4)(a) or (b) of the Act, was, by virtue of subsection (18) . . ., not a leasing property of the taxpayer. . . immediately before it was disposed of by the taxpayer . . . .

The foregoing passages may not be the worst examples of circuitous obscurity in the income tax legislation but they are worthy contenders. In any event, it behooves the sincere seeker of Parliament's meaning to resort to paragraphs 13(4)(a) or (b) to discover something about the property replaced. The plaintiffs counsel asserts that it was the Cardinal which the following text aptly describes as the former property:

13(4) Where an amount in respect of the disposition in a taxation year (in this subsection referred to as the “initial year") of depreciable property (in this section referred to as the “former property") of a prescribed class of a taxpayer would, but for this subsection, be the amount determined under subparagraph (21)(f)(iv) or

(v) in respect of the former property that is either

(a) property the proceeds of disposition of which were proceeds referred to in subparagraph (21)(d)(ii), (iii) or (v), or

(b) a property that was, immediately before the disposition, a former business property of the taxpayer,

and the taxpayer so elects under this subsection in his return of income under this Part for the year in which he acquires, as a replacement for the former property, a property (in this subsection referred to as a “replacement property"),

The plaintiff's counsel asserts that the Mooney is the replacement property, but has adduced no evidence that the plaintiff ever elected in his return for the year, 1977, in which he acquired the Mooney as a replacement for the Cardinal, which was a former business property pursuant to paragraph (b), to replace it with the Mooney. The latter aeroplane does figure for purposes of c.c.a. in the plaintiff's 1979 and 1980 return, but there is no evidence of compliance with the cited provisions for the 1977 year.

Therefore, one must find under subsection 1100(20) that the Cardinal (referred to in paragraph (13)(4)(a) or (b) of the Act, but it was not so referred to for want of compliance) was, by virtue of subsection (18) not a leasing property of the plaintiff immediately before it was disposed of by the plaintiff. It is the property referred to in paragraph 13(4)(a) or (b) of the Act about which subsection 1100(20) speaks, and not about amounts determined under subparagraph (21)(f)(iv) or (v), nor yet about elections stated in income tax returns for the year of acquisition. The property, strictly construed, is that which is described in paragraph 13(4)(b) — that which was, immediately before the disposition, a former business of the plaintiff — the Cardinal aeroplane. By virtue of subsection 1100(18), paragraph (a) the Cardinal was assuredly a property which the plaintiff acquired before May 26, 1976. So it was, by virtue of subsection (18), not a leasing property of the plaintiff included in subsection (17). If the Mooney, then, were a replacement property defined in subsection 1100(20) it was deemed not to be a leasing property under subsection 1100(17) of the Regulations; and therefore, the claim for c.c.a. on the Mooney escapes the prohibition imposed in subsection 1100(15), thereby coming within the allowance of undepreciated capital cost permitted in subsection 1100(1) of the Regulations for the purposes of paragraph 20(1)(a) of the Act. Now, this is very will of Parliament!

In light of the above lucid locution, the plaintiff's claim for capital cost allowance of $8,000 in 1979 and for $6,400 in 1980 (if correctly computed) as stated in paragraph 11 of the statement of defence ought not to have been disallowed by the Minister even if they did increase the rental losses over rental income, simply because of the convoluted provisions of the Act and Regulations which purport to render the Mooney not a “leasing property”, that which reason nevertheless concludes that it surely was. The extent to which the Minister purported to disallow the capital cost allowance claimed by the plaintiff on his Mooney aeroplane, to that extent the notices of reassessment must be vacated.

The preparation of a draft judgment to implement these reasons is a job for counsel pursuant to this Court's Rule 337(2)(b). Because the defendant succeeded in persuading the Court that the plaintiff never had any reasonable expectation of profit, in 1979 and 1980, and that the Minister’s assessment is to be upheld in regard thereto, (it is to be vacated only in regard to disallowing the capital cost allowance), the defendant's solicitors shall prepare the draft. The defendant's solicitors ought to confer with the plaintiff's solicitors with a view to obtaining the latter's approval as to form, if not content, of the draft.

Costs must be addressed. The defendant succeeds on the principal issue, but put the plaintiff notionally to some extra costs by failing to effect a timely and necessary amendment of the statement of defence. It was forgetfulness and perhaps also too many cooks, but not malice which drove that failure. The plaintiff succeeds on the minor issue of c.c.a. but his counsel was not entirely helpful on that issue either in presentation or citation of the correct legislation, nor accordingly in oral argument. The Court, in its discretion, will award no costs to either party. The denial of costs for the largely successful defendant is not to be construed as any unfavourable reflection on the professionalism, good deportment or competence of the defendant's counsel, for she evinced all of those qualities in goodly measure.