Date: 19980313
Docket: 97-925-GST-I
BETWEEN:
MIRACOR HOLDINGS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1]This is an appeal from an assessment made by the Minister
of National Revenue (the "Minister") under the
Excise Tax Act (the "Act"), notice of
which is dated November 16, 1994 and bears number
05EP0102228.
[2] In assessing the Appellant, the Minister disallowed the
notional input tax credit (the "ITC") in the amount of
$10,954.02 claimed by the Appellant pertaining to a motor
vehicle, assessed the Goods and Services Tax (the
"GST") that the Appellant had collected in the amount
of $2,806.54 and allowed the Appellant the balance of the
ITC's claimed in the amount of $383.94, giving rise to net
tax of $2,422.60 plus interest in the amount of $303.81 and
penalties in the amount of $335.46, resulting in an amount owing
of $3,061.87.
[3]The Appellant objected to the assessment and, after duly
reconsidering the Appellant's objection, the Minister issued
a Notice of Decision, dated February 28, 1997, confirming
the assessment.
THE MINISTER'S ARGUMENT
[4]The Minister made the following assumptions of fact that
were admitted by the Appellant's agent at trial:
...
(b) the Appellant was a registrant at all relevant times;
(c) the Appellant purchased the vehicle on December 12, 1989,
from Maranello Motors Limited for a total purchase price of
$334,880.00, at which time the odometer reading of the Vehicle
indicated a distance travelled of 1,920 kilometres;
...
(e) the Vehicle was the only asset contained in inventory and
was reflected in the Appellant's balance sheet as at the
fiscal years ending July 31, 1991 and 1992 at the
aforementioned purchase price of $334,880.00;
(f) the Vehicle was ultimately sold in November, 1993 to
Autoforum Inc. for a total sale price of $50,000.00, at which
time the odometer reading of the Vehicle indicated a distance
travelled of 9,560 kilometres;
(g) Autoforum Inc.'s offer to purchase the Vehicle, dated
November 19, 1993, contained the following statement:
"Purchaser is aware the car is sold as is...with engine
blowing blue smoke....Vendor admits the car was used on track at
Mosport for three days";
(h) the Appellant's annual GST return for the period
covered by the appeal was outstanding at the time of audit and
was not filed until September 29, 1994;
(i) in its annual GST return for the period covered by the
appeal, the Appellant reported that it had collected Goods and
Services Tax ("GST") in the amount of $2,806.54 and
claimed input tax credits ("ITC"'s) in the amount
of $11,337.96 with the result that the Appellant claimed a refund
of net tax in the amount of $8,531.42;
(j) the annual GST return filed by the Appellant for the
period covered by the appeal included a claim for the Notional
ITC under authority of section 176 with respect to the Vehicle,
calculated as follows on the basis of paragraph 120(3)(b) and
subsection 176(1) of the Act: $334,880.00 X 50% X 7/107 =
$10,954.02;
(k) by way of the Assessment, the Minister disallowed the
refund claimed by the Appellant in the amount of $8,531.42 and
established the net tax that the Appellant had failed to remit in
the amount of $2,806.54 (GST) - $383.94 (ITC's) = $2,422.60
for the period covered by the appeal;
(l) as a consequence of the denial of the Notional ITC with
respect to the Vehicle in amount of $10,954.02, the Appellant
remitted $2,422.60 less in net tax than it was required to remit
and, as a further consequence, penalties and interest were
applied under Part IX of the Act resulting in the amount
owing set out in the Assessment ...
THE APPELLANT'S ARGUMENT
[5] In his Notice of Appeal, the Appellant argued:
The registrant purchased the 1986 Ferrari for resale purposes
as used inventory in the course of a carrying on a commercial
activity, namely auto trading of exotic cars.
...
Pursuant to section 120(3)(b) an ITC of 50% of the notional
ITC at 7% is allowed to the registrant for used goods in
inventory on January 1, 1991. The denial of the ITC implies that
the Ferrari is not considered to be inventory on hand as at
January 1, 1991 but capital property. For GST purposes, whether a
property is capital property is determined by the definition
under the Income Tax Act as stated in section 123(1).
...
The car was purchased for $334,880 in December 1989 and
subsequent to this date the market value of the same model of car
rose in value to as high as $400,000. ...
The car was purchased by a corporation with corporate funds
...
...
The registrant attempted to continually market the vehicle
...
The registrant's shareholder mortgaged his principal
residence for approximately $250,000 of the purchases price as
short term financing.
The registrant's financial statements filed for income tax
purposes and general ledger accounts described the vehicle as
inventory from the date of acquisition.
The registrant's corporate income taxes describe the
activities of the corporation as auto trading.
...
[T]he registrant was carrying on a commercial activity and
should therefore be entitled to an input tax credit.
ANALYSIS
[6]The Appellant is a corporation which is a registrant under
the Act. In December 1989, the Appellant purchased a used
Ferrari. The Appellant claimed an ITC in respect of that vehicle.
The Minister disallowed the ITC on the basis that the car did not
form part of the inventory of the Appellant.
[7]The Appellant owned the car prior to January 1, 1991
(December 1989), and paid Federal Sales Tax on the vehicle,
therefore it would be entitled to an ITC as long as the car
formed part of its inventory at the start of 1991 and the
Appellant carried on a commercial enterprise.
[8]The Minister's position is that the car was purchased
by the Appellant for the personal use and enjoyment of the
president of the company, therefore is not "inventory"
within the meaning of the Act.
[9]Whether or not the car was inventory and whether this was a
commercial enterprise depends on my finding of fact.
[10]The Appellant's evidence (the president of the
corporation) contended:
- there was little personal use of the vehicle;
- he (the president) constructed a separate facility to house
the vehicle;
- he (the president) had knowledge of the exotic vehicle
market and knew there was a shortage of exotic vehicles;
- further, he stated he took the vehicle to various markets to
sell it, specifically, in Watkins Glen, New York,
Montréal, Quebec, and Mosport, Ontario, (at car or club
rallies);
- the corporate objectives of the Appellant included that of
auto trading and the vehicle was treated as inventory on the
books of the Appellant's corporation.
[11]This evidence must be weighed against the contention
indicated:
- this vehicle was housed in a separated garage stall at the
president's home;
- while there was a general denial of personal use, there
appears from the evidence to be personal use;
- the vehicle did not appear to be actively marketed on an
ongoing basis and only directly marketed on specific
occasions;
- the vehicle was in the possession of the president of the
corporation for several years (December 1989 to November
1993);
[12]Moreover, this was the only vehicle in the Appellant's
stated inventory. Thus, in relation to auto trading the sale of
the vehicle was the only commercial activity carried on by the
Appellant during the four year duration (acquisition to
disposition).
CONCLUSION
[13]On balance I conclude there was insufficient indicia of
commerciality to find a commercial enterprise was being carried
on.
DECISION
[14]The appeal is dismissed.
Signed at Ottawa, Canada, this 13th day of March 1998.
"D. Hamlyn"
J.T.C.C.
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