Date:
20020912
Docket:
2001-3456-IT-I
BETWEEN:
PETER
KINSEY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Miller
J.
[1]
How many people dream of retiring to the South Pacific with a
50-foot boat, large enough to accommodate 12 people?
Mr. Kinsey had such a desire, and indeed he accomplished that
dream, having emigrated to Fiji in 2000. He built his boat in
Canada from 1985 to the early 1990s and sailed it to the South
Pacific in 1997. In 1989, he commenced claiming the business
activity of boat chartering. From 1993 to 1998, he reported
revenues of $49,909 and expenses (mainly capital cost allowance
'CCA') of $435,368. The Respondent disallowed the loss of
$10,010 for the 1998 taxation year. Mr. Kinsey appeals against
that assessment under the informal procedure. He maintains the
loss was a legitimate business loss. The Respondent maintains
that the boat chartering activity did not constitute a business
in 1998 given the significant personal element and the lack of
any reasonable expectation of profit.
Facts
[2]
Mr. Kinsey did not appear to give evidence in this matter. His
accountant of several years, Mr. Lotoski, attempted to provide as
much background of the matter of which he was personally aware.
He was not able to provide detailed information regarding the
boat's activities or Mr. Kinsey's expectation in
connection with those activities. Indeed, when questioned about
the cost of the boat, a fundamental fact one might presume an
accountant of long standing would have at his fingertips, Mr.
Lotoski claimed he did not know, but then upon reflection
suggested $200,000. Given the records showed that CCA in four or
five years was over $400,000, with still over $100,000 of
undepreciated capital cost, I found this response weakened Mr.
Lotoski's credibility. He was the Appellant's only
witness.
[3]
Prior to 1985, Mr. Kinsey spent several years sailing: indeed he
undertook a four-year solo sailing trip. He returned to Vancouver
in the mid-80s after being abroad for a number of years living
aboard a sailboat. Back in Canada, he started to build his
50-foot boat. Mr. Lotoski confirmed that he understood Mr.
Kinsey's original plan was to leave Canada and move to Fiji.
It took several years to construct the boat at a cost which I can
only guess was significantly greater than $500,000. In 1989, Mr.
Kinsey started reporting the business activity of boat
chartering, although there is no evidence of any revenue
producing activity at that time. The first evidence of revenue
producing charters was in 1993. The revenues and expenses for the
years following are as follows:
Peter
Kinsey
Taxation
Year 1998
|
|
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
NET BUSINESS LOSSES
CLAIMED FROM 1993 TO 1998
|
|
|
|
|
|
|
|
|
Revenue
|
$ 642
|
$
4,950
|
$32,035
|
$ 1
|
$
1,809
|
$10,472
|
|
Expenses
|
$137,806
|
$104,960
|
$55,335
|
$67,786
|
$48,999
|
$20,482
|
|
Net
business loss claimed
|
$(137,164)
|
$(100,010)
|
$(23,300)
|
$(67,785)
|
$(46,990)
|
$(10,010)
|
[4]
Mr. Kinsey was a paramedic, who during the late 1980s and 1990s
worked only partly in Canada. He used his employment earnings to
finance his boat, though in 1995 and 1996 on the advice of
Revenue Canada, according to Mr. Lotoski, Mr. Kinsey
borrowed funds to finish the boat. There was no documentary
evidence of any such loan. Given the CCA rates applicable to the
Class 7 boat, Mr. Kinsey was able to write off significant
amounts against his employment income. Revenue Canada was well
aware of Mr. Kinsey's activities and questioned the sizable
deductions in the mid-1990s. Mr. Lotoski explained that
Mr. Kinsey requested the refund of approximately $150,000 in
taxes for the 1992, 1993 and 1994 years, which was not
forthcoming until May 1996 when he received $55,000, August 1996
when he received $77,000 and January 1997 when he received the
balance of $12,000. Mr. Lotoski maintained that this failure of
Revenue Canada to provide these refunds was a major obstacle in
Mr. Kinsey's pursuit of his business. He needed this
money to pay off his loan. Had he received all his refund in May
1996, according to Mr. Lotoski, he would have been gone. Mr.
Lotoski indicated that Mr. Kinsey's largest expense at this
time was $20,000 in accounting fees, in defending his tax
returns.
[5]
Mr. Kinsey started his charter activity out of Sooke, British
Columbia. In December 1995, he advertised for a captain for such
charters. Mr. Lotoski presented a two-page pamphlet for the
1995-1996 season in which it stated Mrs. and Mr. Kinsey are
veteran sailors, sailing with their two children.
[6]
Mr. Lotoski advised Mr. Kinsey to send out letters to sailing
associations to try to drum up business. He also assisted in the
development of a website. Mr. Kinsey's website won an
award though after the year in question. Mr. Lotoski also
provided a copy of a brochure sent out in 1999 for the 2000
charters.
[7]
In 1997, Mr. Kinsey sailed the boat to the South Pacific. It is
there the chartering activity was intended to take place. Indeed,
Mr. Lotoski referred to 1999 as only the second year of
operation.
[8]
With respect to the charter activity, some of the literature
provided by Mr. Lotoski indicated that the price for one
person for a 15-day charter was C$3,750. Mr. Lotoski cannot
provide any exact information on the number of charters in 1998
or other years. The promotional material contained a testimonial
regarding the gourmet food and wine. No such expenses showed up
in Mr. Kinsey's 1998 business activity report filed with
Revenue Canada. Neither was there any insurance expense in 1998
or other overhead-type items. There is no evidence of the
expenditures for 1997. In 1999, of the $21,298 expenses reported
in the Statement of Business Activities, $9,661 was CCA, $7,892
was for travel, $1,378 for professional fees and $1,996 for
repairs.
[9]
According to Mr. Lotoski, while in the South Pacific, Mr. Kinsey
lived in a hut, which cost him next to nothing. There is no
documentary evidence of a title or lease. Mr. Lotoski suggested
Mr. Kinsey moored his boat in a lagoon in front of the
hut.
[10] Returning
to the charter activity, Mr. Lotoski stated that global events
and Revenue Canada's dilatoriness in refunding Mr.
Kinsey's money affected Mr. Kinsey's business
activity. Mr. Kinsey emigrated to Fiji in late 2000. In 2001, Mr.
Lotoski indicated Mr. Kinsey had over US$30,000 net
income.
Appellant's Position
[11] Mr. Lotoski
recognized the significance of the recent Supreme Court of Canada
decision in Stewart v. The Queen
and its impact on this area of the legitimacy of an activity as a
business. He argued that, as there was no personal element
involved in Mr. Kinsey's boat charter activity, it is
unnecessary to consider the reasonable expectation of profit
test. He maintained that just because Mr. Kinsey loved sailing
that is not sufficient to determine there was a personal element
involved. Mr. Lotoski suggested that Mr. Kinsey need only
establish that his predominant intention was to make a profit,
which he argues is the case here. Why else would Mr. Kinsey
advertise his boat? People do not advertise pleasure boats for
charter.
[12] Mr. Lotoski
maintains Mr. Kinsey carried out his activity in accordance with
the objective standards of businesslike behaviour, citing the
advertising efforts.
[13] If I find
there is a personal element, Mr. Lotoski maintains that it was
still undertaken in a sufficiently commercial manner to
constitute a source of income.
Respondent's Position
[14] The
Respondent maintains there is a strong personal element in
Mr. Kinsey's activities. She attributes this to his life
as a sailor: it is not just enjoyment but his way of life.
Further, she claims Mr. Kinsey's life was aboard the boat.
His wife and children joined him. The only evidence to the
contrary was the unsupported statement by Mr. Lotoski that Mr.
Kinsey lived in a hut. Finally, she relies on the assumption in
the Reply to the Notice of Appeal that the Activity was not a
purely commercial venture. The evidence has not rebutted that
assumption.
[15] As a
personal element exists, then one looks to the pursuit of profit
source test enunciated by the Supreme Court of Canada in
Stewart. The Respondent argues that the evidence has not
proven that Mr. Kinsey's predominant intention was to make a
profit nor that he carried out his activity in a businesslike
manner. There was no evidence to how long Mr. Kinsey was sailing
in 1998, how many charters he booked, nor what prospective
customers were contacted. There was no steady growth and revenue.
The business activity report for 1998 was questionable. Finally,
if full CCA continued to have been taken, there was no capability
of profit. Without Mr. Kinsey's evidence the Respondent
argues, I cannot find he carried on in a commercial
manner.
Analysis
[16] In
determining whether Mr. Kinsey had a business, the first question
to ask is whether his activity was undertaken in pursuit of
profit or was it a personal endeavour. As the Supreme Court of
Canada pointed out in Stewart, the object of this question
is to distinguish between commercial and personal activities, and
is only required where there is a personal element to the
activities in question. While I agree with Mr. Lotoski that
simply enjoying sailing is not enough to constitute a personal
element, I find that Mr. Kinsey's case goes well beyond just
enjoying sailing. His life was sailing - he lived and breathed
it. All his efforts went towards sailing off with his family to
live in the South Pacific. That is not the picture of a man
driven by the pursuit of profit.
[17] The Supreme
Court of Canada stipulated that if a personal element exists in
the activity, then the taxpayer must establish:
(i)
his predominant intention to make a profit from the activity;
and
(ii)
that the activity has been carried on in accordance with
objective standards of businesslike behaviour.
Whether Mr.
Kinsey had a reasonable expectation of profit is a factor to
consider but is not, according to the Supreme Court of Canada,
the only factor nor is it conclusive. This raises the interesting
possibility obviously considered by the Supreme Court of Canada
of an activity, with some personal element, being carried out in
such a commercial manner, that despite no reasonable expectation
of profit, it still constitutes a business. Given the volume of
source of income cases appearing in the Tax Court of Canada, I
will undoubtedly have an opportunity to consider such a
situation. Mr. Kinsey's situation, however, is not
it.
[18] As
mentioned, there is a personal element in Mr. Kinsey's
activities. His life was aboard ship. His family was aboard ship.
There was insufficient evidence to find otherwise. His objective,
according to Mr. Lotoski, was to sail to the South Pacific, and
take his family with him. The chartering of the boat was to
assist in the accommodation of this lifestyle. This is not a
criticism; indeed, Mr. Kinsey may be one of the fortunate few who
have realized such a fantasy dream. But it was a dream of a new
and wonderful life, very much a personal element, not a dream of
a money-making venture.
[19] Having
found the personal element in the activity, I need to examine
whether Mr. Kinsey's predominant intention was to make a
profit from the activity. It is clear from my findings on the
issue of a personal element that the predominant purpose was not
the pursuit of profit, but the pursuit of lifestyle. That is not
to say there was no pursuit of profit. Clearly, there was some
minimal charter activity in the year in question. This limited
amount of revenue-producing activity combined with limited
activity carried out in accordance with objective standards of
businesslike behaviour are not sufficient to find a business
exists.
[20] Mr. Lotoski
argues there was considerable commerciality. There was some
evidence of a list of sailing associations being considered for
contact. There was also evidence of a brochure in 1999 and an
award-winning website. These are consistent with a commercial
venture. However, I weigh that against Mr. Kinsey's
method of financing (reliance on tax refunds as opposed to
conventional financing), the incapability of showing a profit
while in Canada, no evidence of an expectation of profit, the
lack of any formalized plan, the vagueness of reported business
activity expenses, and the lack of any evidence of time devoted
to the business side of the boat activities. On balance, I find
that there are not sufficient indices of commerciality to find
that Mr. Kinsey's activities overcome the personal element to
the extent that they can be characterized as a business. They do
not.
[21] The appeal
is dismissed.
Signed at
Ottawa, Canada, this 12th day of September, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-3456(IT)I
STYLE OF
CAUSE:
Peter Kinsey and Her Majesty the Queen
PLACE OF
HEARING:
Kelowna, British Columbia
DATE OF
HEARING:
September 4, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge
Campbell J. Miller
DATE OF
JUDGMENT:
September 12, 2002
APPEARANCES:
Agent for
the
Appellant:
Dewey Lotoski
Counsel
for the
Respondent:
Jasmine Sidhu
COUNSEL OF
RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3456(IT)I
BETWEEN:
PETER
KINSEY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on September 4, 2002 at Kelowna, British Columbia, by
the
Honourable Judge Campbell J. Miller
Appearances
Agent for
the
Appellant:
Dewey Lotoski
Counsel
for the
Respondent:
Jasmine Sidhu
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1998 taxation year is dismissed.
Signed at
Ottawa, Canada this 12th day of September, 2002.
J.T.C.C.
Email this Content