The Queen v. C.I.P. Inc., 88 DTC 6005, [1988] 1 CTC 32 (FCTD)

Reed, J.:—The issue in this case is whether a converted tug boat is a yacht. Paragraph 18(1)(l) of the Income Tax Act, S.C. 1970-71-72, c. 63 provides that certain kinds of business expenses are not to be allowed as deductions in computing a taxpayer's taxable income:

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of:

an outlay or expense made . . . for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course . . . [Emphasis added.]

The French version of the provision reads as follows:

Dans le calcul du revenu du contribuable, tiré d'une entreprise ou d'un bien, les éléments suivants ne sont pas déductibles:

. I un débours ou une dépense faite . . . pour l'usage ou l'entretien d'un bien qui est un bateau de plaisance, un pavillon, un chalet, un terrain de golf. . .

There is no dispute that the defendant incurred legitimate business expenses of $28,963 and $52,222, for the 1979 and 1980 taxation years respectively, when it hired the Breeze for the purpose of entertaining guests thereon. In the absence of subsection 18(1)(l) the expenses would clearly be deductible. The defendant is a corporation whose business comprises logging as well as the manufacturing and sale of forest products. The vessel in question was built in 1943, as a tugboat, and used in that capacity in 1975. In 1977 the vessel was purchased by its present owners, Mr. and Mrs. Butt and converted to its present use. The conversion involved changes which would enable the boat to be used as the Butt's residence and changes which would enable it to be used for fishing charters and similar recreational excursions. Among the changes made were the removal of the tugboat's winch and the conversion of the area where the winch had stood into a lounge. The lounge has panelled walls and a carpeted floor. Once the refitting was completed in 1977, the Butts sold their home on land and moved into the vessel; they continue to reside thereon to this day. The Breeze is used for fishing charter purposes during a season limited to four to six weeks a year, when Mr. Butt can take holidays from his regular job. Some use is also made of it on day and weekend charters for weddings and similar parties.

Part of the advertising brochure put out by the owners reads as follows:

The Breeze is ideally suited for sales seminars, private executive meetings or your own special cocktail party. The Breeze offers accommodation for up to 12 passengers on overnight charters or larger groups for day or evening cruises. . . .

The main deck features six comfortable double cabins and a well equipped galley specializing in fine "home" cooking. The spacious, tastefully decorated lounge has cozy sofas, a piano and an “electric organ" . . . the highlight of fun-filled evenings.

The cases cited to me which deal with the meaning of the word "yacht" in paragraph 18(1)(l) are: Barnard Photographers Ltd. v. M.N.R., [1979] C.T.C. 2678; 79 D.T.C. 592 (T.R.B.); Ross v. M.N.R., [1984] C.T.C. 2315; 84 D.T.C. 1314 (T.C.C.); Voyageur Travel Insurance Ltd. v. M.N.R., [1984] C.T.C. 2590; 84 D.T.C. 1566 (T.C.C.) and, of course, the Tax Court decision in this case, C./.P. Inc. v. M.N.R. (Court file number 84-1432 (IT), decision dated November 14, 1985). In addition the decision The Germania, [1917] A.C. 375 (P.C.) is cited. It dealt with the distinction between a yacht and a merchant ship for the purposes of the sixth Hague Convention.

Neither the Ross case nor The Germania are useful. The boat in question in Ross was clearly a yacht; the issue in The Germania, as noted, is different from that in this case. In the Barnard case the Tax Review Board had under consideration a "23-foot all weather boat, considered as a commercial boat by the vendors". The boat was used for research by the taxpayer and the Board found that "very little use, if any, was made of the boat for pleasure". The Minister argued that the design of the boat was that of a pleasure craft and that the taxpayer used it for fishing, therefore, it should be classified as a yacht or “un bateau de plaisance” for the purposes of subsection 18(1). The Board held that it was not accurate to classify everything that had "a bow, a stern, a hull, a cabin and a motor as a yacht, regardless of the use" to which it was put. That the test must be "the use that is generally made" of the vessel.

In the Voyageur case, the vessel in question was a 50-foot, 39 ton trawler type, capable of carrying approximately 35 people. It was designed for use by groups of this size as opposed to being designed for the personal use or enjoyment of the person in charge of the vessel. It was, in fact, used by the taxpayer in conjunction with approximately 45 seminars carried on between St. Catharines, Ontario and Quebec City, Quebec. These were attended by approximately 1,600 travel agents. A test as such was not articulated in that case although reference was made to the English Dictionary of Legal Terms by Jowitt:

. . . the English Dictionary of Legal Terms by JOWITT, describes yachts: "Vessels used primarily for purpose of pleasure". The french version of 18(1)(l) uses the words “bateau de plaisance” which is quite similar to the above definition.

The Court concluded that “all the details given in the brochure . . . show that objectively it is a bateau de plaisance". Reference was made to the fact that the vessel contained custom made seating capacity for 23 passengers.

A wealth of dictionary definitions have been cited to me with reference to the meaning of the word "yacht": Webster's New Twentieth Century Dictionary; The Oxford Universal Dictionary; The Shorter Oxford English Dictionary; The Houghton Mifflin Canadian Dictionary of the English Language; Random House Dictionary of the English Language; Jowitt's Dictionary of English Law; The Word Book Dictionary; Funk and Wagnalls Comprehensive Standard International Dictionary; The Columbia Encyclopedia in One Volume (2nd ed.); Webster's New Twentieth Century Dictionary; Webster's Third International New Dictionary. I think what emerges from all these references is that the word "yacht" in the English language signifies a type of pleasure boat. The two categories "yacht" and "pleasure boat" are not in English co-extensive. The definitions indicate that a yacht is usually thought of as a vessel which has a considerable degree of manoeuverability and speed. Webster's Third New International Dictionary carries the definition: "a sailing or power boat used for pleasure (as racing or cruising) and characteristically built for speed with a sharp prow and graceful lines”.

That does not end the matter, however, because the French version of paragraph 18(1)(l) describes a vessel which is encompassed by that paragraph as "un bateau de plaisance". In my view this is a broader term than "yacht" and it indicates that Parliament did not intend paragraph 18(1)(l) to be limited to a category of vessels having a particular type of design ("sharp prow, graceful lines", etc.). Rather, in my view, it is the nature of the function which the vessel generally serves which is the criteria.

Counsel for the taxpayer argues that it is important to note that Parliament did not refer in paragraph 18(1)(l) to a vessel used as a yacht (or pleasure craft) but to a vessel which is a yacht. Thus, it is the nature of the vessel, not the particular use which the taxpayer makes of it which is significant. I agree, but that nature is to be determined by reference to the use which the vessel generally serves. In my view, that is the test which was applied in the Barnard case and by Bonner, J. in the Tax Court decision in this case. The applicable test is: "what use is generally made of the vessel”. If it is primarily or generally used as a pleasure craft, then it falls within paragraph 18(1)(l). Bonner, T.C.J. in the Tax Court concluded:

. . . for the use . . . of property that is a yacht. . . "Those words make it plain that the nature of the use made of the property is irrelevant for purposes of paragraph 18(1)(l) except to the extent that such use identifies the nature of the property. The Barnard decision is not, as I read it, authority for the proposition that the use of a vessel for pleasure identifies the vessel as a yacht during the period of such use. . . . The Breeze was a tugboat fitted out or converted for use as a residence and for the entertainment and housing of fishing parties. Despite the refitting it remained a vessel which in ordinary english usage could accurately be described only as a tugboat or perhaps as a converted tugboat. It did not by virtue of the refitting become a vessel which could accurately be described as a yacht or "bateau de plaisance". None of the definitions of the word "yacht" to which reference was made in argument make transitory use for pleasure purposes the sole criteria on which a vessel could be identified as a yacht. [Emphasis added.]

I agree with both that analysis of the test to be applied and of the characterization of the evidence in this case. The vessel's primary use is as a residence for the Butts. That is the use which the vessel generally serves. It is used occasionally for recreational purposes (4 to 6 weeks in the summer when Mr. Butt can obtain holidays from his regular job and to some extent for day excursions and on weekends). The vessel does not fit with the category of a “yacht” or “un bateau de plaisance”.

Counsel for the defendant argues that such characterization leads to arbitrary results, as would a criteria which focused on the design of the vessel. The Associate Chief Justice referred to such arbitrary results and the discriminatory impact of paragraph 18(1)(l) in Jaddco Anderson Limited v. The Queen, [1981] C.T.C. 11 at 12-13; 81 D.T.C. 5002 at 5003-4. Counsel for the plaintiff argues that the only rational way to interpret paragraph 18(1)(I) is to apply criteria which focus on the use the taxpayer is making of the vessel, camp, lodge or golf course, rather than on the nature of the property itself. But Parliament did not frame the proscription in that fashion. Perhaps this occurred because the proscription refers both to the use of property of a certain nature as well as to expenses arising out of the maintenance of such property.

In any event paragraph 18(1)(l) requires a determination of the nature of the vessel in question and the Breeze is not "un bateau de plaisance”. For the reasons given, the plaintiff's action is dismissed.

Action dismissed.