Citation: 2011 TCC 180
Date: 20110323
Docket: 2010-2215(IT)I
BETWEEN:
CHRIS SKALING,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. FACTS
[1]
The appeals deal with
the Appellant’s 2006 and 2007 taxation years.
[2]
During the years under
appeal, the Appellant was employed as an automobile mechanic by Alpine
Transmission & Auto Repairs Ltd. (“Alpine”).
[3]
The Appellant worked
four days per week for Alpine.
[4]
Prior to 2006, the
Appellant’s hobby was working on high performance automobiles which were used
in drag races.
[5]
The Appellant explained
that “drag races” were races where “muscle cars” competed in
straight-line racing usually over a distance of one-quarter mile. (Transcript,
page 5, lines 19 to 25 and page 6, lines 14 to 25)
[6]
The Appellant stated
that in the 2006 year, he started a business which consisted of rebuilding
automobile engines plus entering his 1970 Buick GS (the “Race Car”) in drag
races at various race tracks in British
Columbia (the “Business”). (Transcript,
page 34, lines 5 to 8)
(Note: The Appellant testified that he actually
started the Business in 2002, but because he was very busy at Alpine, he was
forced to discontinue his Business until 2006.) (Transcript, page 24, lines 15
to 20).
[7]
The Business operated
by the Appellant was a sole proprietorship.
[8]
The Appellant operated
the Business from a garage at his home.
[9]
The Appellant said that
he had the following income from the Business of rebuilding automobile engines:
a)
2006 - $19,223;
b)
2007 - $20,795.
[10]
When the Appellant
commenced operating the Business, he owned a number of tools (the “Tools”)
which he claims that he had acquired over a number of years.
[11]
The Appellant also owned
a Truck and Trailer used to haul the Race Car to and from the race tracks.
[12]
The Tools, the Race Car
and the Truck and Trailer were all acquired by the Business in 2006 and
recorded by the Appellant’s accountant, Mr. Jim Mitchell, in the Capital Cost
Allowance Schedules (“CCA”) of the Business.
[13]
The Tools were recorded
in the Appellant’s CCA Schedule at a value of $27,140.
[14]
The Minister of
National Revenue (the “Minister”) maintained that the fair market value (“FMV”)
of the Tools at the beginning of 2006 was not more than $13,750.
[15]
The value of the Race
Car was recorded on the books of the Appellant at a value of $35,546. The
Minister maintained the FMV of the Race Car was $4,455.
[16]
The Truck and Trailer
were recorded on the Appellant’s books at a value of $40,000.
[17]
In the 2007 taxation
year, the Appellant claimed Supplies of $13,432. (Note: This amount
was the operating expense of the Race Car for that year.)
[18]
When the Appellant
filed his 2006 and 2007 income tax returns, he claimed CCA on the Tools, Race
Car and Truck and Trailer.
|
2006 Taxation Year
|
|
CCA
|
Allowed by Canada Revenue Agency (“CRA”)
|
|
Tools at 20 per
cent
½ year rule: $2,714
|
$1,357
|
|
Race Car at 30
per cent
½ year rule: $5,332
|
$0.00
|
|
Truck and
Trailer at 30 per cent – ½ year rule: $6,000
|
$0.00
|
|
2007 Taxation Year
|
|
CCA
|
Allowed by CRA
|
|
Tools at 20 per
cent: $4,885
|
$2,443
|
|
Race Car at 30
per cent: $9,000
|
$0.00
|
|
Truck and
Trailer at 30
per cent: $10,030
|
$0.00
|
(Exhibit R-1, Tab 4)
[19]
The CCA Schedules of
the Appellant and the Minister show the following:
|
2006 Taxation Year
|
|
Additions to 2006 CCA Schedule
|
Allowed by CRA
|
|
Tools: $27,140
|
$13,570
|
|
Race
Car: $35,546
|
$0.00
|
|
Truck and
Trailer: $40,000
|
$0.00
|
|
UCC End of the Year
|
Allowed by CRA
|
|
Tools:
$24,426
|
$12,213
|
|
Race
Car: $30,214
|
$0.00
|
|
Truck and
Trailer: $34,000
|
$0.00
|
|
Net amount of capital assets disallowed: $89,116
|
|
Net amount of CCA disallowed for the period:
$12,689
|
|
Ending UCC: $12,213
|
|
2007 Taxation Year
|
|
Beginning UCC on 2007
CCA Schedule
|
Allowed by CRA
|
|
Tools:
$24,426
|
$12,213
|
|
Race
Car: $30,314
|
$0.00
|
|
Truck and
Trailer: $34,000
|
$0.00
|
|
UCC End of the Year
|
Allowed by CRA
|
|
Tools:
$19,541
|
$9,770
|
|
Race
Car: $21,214
|
$0.00
|
|
Truck and
Trailer: $23,910
|
$0.00
|
|
Net amount of CCA disallowed: $21,473
|
|
Ending UCC: $9,770
|
(Exhibit R-1, Tab 4)
(Note: The Appellant testified that he
discontinued the Business at the end of 2008 because he is unable to work
and receives a disability payment).
B. ISSUE
[20]
The issue is whether
the Appellant is allowed to deduct amounts in excess of the amounts that were allowed
by the Minister.
C. ANALYSIS AND DECISION
[21]
In cross-examination, Counsel
for the Respondent asked the Appellant the following questions:
Q … Approximately
how many races in '06 and in '07 [did] Steve Braithwaite
participated in? If you recall.
(Note:
Steve Braithwaite was the driver of the Race Car).
A Not
too many. We kind of slowed down. Probably half a dozen perhaps. We didn't go
to Bremerton either one of those years.
(Note: Bremerton
is the location of a race track in the State of Washington.)
Q So
that's half a dozen in total for both years?
A No
no, each year.
(Transcript,
page 46, lines 9 to 17)
[22]
Counsel for the
Respondent also asked the Appellant the following question:
Q And
you were not provided money by some wealthy person to assist you in your auto
racing, is that correct?
A No, I was provided by
actually -- yeah, Peter Wille at Victoria Automatic. Transmission stuff and
whatnot, the parts like I discussed earlier. $1,000 from Lordco.
(Transcript, page
46, line 25 to page 47, lines 1 to 6)
[23]
At page 35 of the
transcript, the Appellant said:
A Lordco
used to give me $1,000 every year for sponsorship that I could -- it was on an
account. Account number 474 at Lordco. I go in there and I get parts not at
wholesale but at cost, and I could buy up to $1,000 worth of parts.
(Transcript,
page 35, lines 21 to 25).
[24]
Counsel for the
Respondent also asked the Appellant:
Q …what prize money was
won in '06 first and what prize money was won in '07?
A I know in Port Alberni, I think we got -- I think it was like 4 or 500 bucks for one race
and then just trophies other than that.
Q Okay. So is it fair to
state that over two years you got some trophies but the only prize money you
generated was 4 to $500?
A I think we got a few
first prizes at Western Speedway, but the pay isn't that great, right? You'd be
like 150 bucks or whatever.
(Transcript, page
48, lines 1 to 11)
[25]
Counsel for the
Respondent then said:
Q … Can you tell the court, in terms of '06, what sort of
expenses would you be incurring for the auto racing activity?
(Transcript, page 48, lines 13 to 15).
[26]
The Appellant responded
with the following information:
|
Item
|
2006
|
2007
|
|
A pair of slicks
at $750 per year times 2
(Note: “slicks”
are specialized rear tires designed for racing)
|
$1,500
|
$1,500
|
|
Race fuel
(approximate cost)
|
$500
|
$500
|
|
Valve springs
|
$150
|
$150
|
|
Coil springs
($150 x 2)
|
$300
|
$300
|
|
Fuel for the
Truck to get the Race Car to the track and back to the Appellant’s home
|
$300 to $500
|
$300 to $500
|
|
TOTAL:
|
$2,750 to $2,950
|
$2,750 to $2,950
|
(Transcript, pages 48 to 54)
[27]
At page 56 of the
transcript, Counsel for the Respondent said:
Q … This is a passion. Racing is a
passion of yours, correct? …
A Yes.
It's a passion, it's what I know. My dad taught me…
(Transcript, page 56, lines 18 to 22).
[28]
Counsel for the
Respondent called Dalyce Levesque as a witness. Ms. Levesque is an auditor
with the CRA. She was the auditor on this file. Counsel for the Respondent
said:
Q … And can you tell the
court what were the issues that were the subject of this audit?
A …through the course of
the audit I determined that Mr. Skaling was in the business of building custom
engines, so I determined that the race car, the truck and trailer were not
related to those. I also determined that the -- he had tools, but that they
were valued inaccurately and reduced the valuation of those tools.
(Transcript, page 69, lines 14
to 15 and lines 21 to 25 to page 70, lines 1 to 2)
[29]
Counsel for the
Respondent asked the auditor at page 75:
Q Now,
your evidence indicates you didn’t allow any amounts for the car, the
truck/trailer. Can you tell the court why you didn’t allow any amounts in respect
of those items for capital cost allowance?
A The
race car and the truck and trailer were related to, of course, racing and my
interview and discussion with Mr. Skaling indicated that he was in the business
of building Buick engines and not -- there was no -- the business of racing
wasn't there.
(Transcript,
page 75, lines 5 to 13)
Advertising
[30]
Counsel for the
Respondent noted that the auditor had allowed an advertising expense. Counsel
for the Respondent said:
Q Can you
tell the court why you decided to allow that?
A Given that he was in the business of building engines, it
was discussions with my team leader and we decided that it was reasonable that
he may use his hobby of racing to advertise that building [sic “business”]
since it is, you know, it is a similar industry. …
(Transcript, page 76, lines 23 to 25
to page 77, lines 1 to 4)
(Note: Ms. Levesque stated at page 77 of the
transcript that to be reasonable and fair, a percentage of his operating costs
of his Race Car be allowed as an advertising expense. According to Exhibit R-1,
Tab 3, the following expenses were allowed: advertising in 2006 at $445 and
2007 at $1,343. This is 10 per cent of the amount claimed by the Appellant.)
[31]
In his argument, Mr.
Mitchell, the Appellant’s accountant, said that the Appellant has not gone
overboard in any expenses. He said that the Race Car and the engine rebuilding
business is one Business, all designed to promote Mr. Skaling’s endeavours
to establish a Business on his own and be self-employed.
[32]
Counsel for the
Respondent noted that the CRA determined that the capital cost of the UCC for
the Tools was one-half of what was claimed.
[33]
Counsel for the
Respondent stated that the CRA determined that the capital cost that was
allowed was restricted to the Tools and that any capital cost claimed re the Race
Car, the Truck and the Trailer were disallowed because they were not part of
the Business. It was noted by Counsel for the Respondent that 10 per cent of
the operating expenses claimed for 2007 were allowed, i.e. 10 per cent of
$13,432 or $1,343 (see paragraph [17]
above).
[34]
Counsel for the
Respondent said:
MR.
WHITTAKER: I think that the basic premise for that was simply auto racing
was not a business. While the taxpayer may have described it as a business, there
was no reasonable expectation of profit. So that’s the basic reason why
that was disallowed. Plus, CRA took the view that the race car, the trailer and
the truck, while there could be an argument that there was some business
purpose to rolling it into the engine rebuilding part of the business, there
was also a large personal element. And because there's a person element as
well, the capital cost allowance would not be available. That's really the nub
of the CRA position.
(Emphasis added)
(Transcript,
page 104, lines 13 to 24)
[35]
Counsel for the
Respondent then stated:
MR. WHITTAKER: Our
basic position is this, and the appellant has testified that auto racing was
his passion and that's clearly understandable. So we say there's a large
personal element to the race car, the purchase of the truck, the trailer, and
because of that large personal element, we submit based on the law that the
capital cost allowance is not available for those assets.
(Transcript,
page 105, lines 11 to 17)
[36]
As noted above, Counsel
for the Respondent said that the basic reason the expenses related to the Race
Car were disallowed is that there was no reasonable expectation of profit.
[37]
In Stewart v Canada
(Her Majesty The Queen), [2002] 2
S.C.R. 645, 2002 SCC 46, [Stewart], the Supreme Court of Canada
dealt with the question of whether the reasonable expectation of profit test
is an acceptable test to determine whether a taxpayer was carrying on a
commercial venture. Justices Iacobucci and Bastarache said:
5 It
is undisputed that the concept of a “source of income” is fundamental to the
Canadian tax system; however, any test which assesses the existence of a source
must be firmly based on the words and scheme of the Act. As such, in order to
determine whether a particular activity constitutes a source of income, the
taxpayer must show that he or she intends to carry on that activity in pursuit
of profit and support that intention with evidence. The purpose of this
test is to distinguish between commercial and personal activities, and where
there is no personal or hobby element to a venture undertaken with a view to a
profit, the activity is commercial, and the taxpayer's pursuit of profit is
established. However, where there is a suspicion that the taxpayer's activity
is a hobby or personal endeavour rather than a business, the taxpayer's
so-called reasonable expectation of profit is a factor, among others, which can
be examined to ascertain whether the taxpayer has a commercial intent.
…
50 It is clear that in order to apply s. 9,
the taxpayer must first determine whether he or she has a source of either
business or property income. As has been pointed out, a commercial
activity which falls short of being a business, may nevertheless be a source of
property income. As well, it is clear that some taxpayer endeavours are
neither businesses, nor sources of property income, but are mere personal
activities. As such, the following two-stage approach with respect to the
source question can be employed:
(i)
Is the activity of the taxpayer undertaken in pursuit of profit, or is it a
personal endeavour?
(ii)
If it is not a personal endeavour, is the source of the income a business or
property?
…
52 …
Thus, where the nature of a taxpayer’s venture contains elements which suggest
that it could be considered a hobby or other personal pursuit, but the venture
is undertaken in a sufficiently commercial manner, the venture will be
considered a source of income for the purposes of the Act.
53 We emphasize that this “pursuit of profit”
source test will only require analysis in situations where there is some
personal or hobby element to the activity in question. With respect, in
our view, courts have erred in the past in applying the REOP test to activities
such as law practices and restaurants where there exists no such personal
element: see, for example, Landry, supra; Sirois,
supra; Engler v The Queen, 94 D.T.C. 6280 (F.C.T.D.). Where the
nature of an activity is clearly commercial, there is no need to analyze the taxpayer’s
business decisions. Such endeavours necessarily involve the pursuit of
profit. As such, a source of income by definition exists, and there is no
need to take the inquiry any further.
(Emphasis
added)
[38]
In other words, the
Supreme Court of Canada in Stewart introduced a new test for determining
whether an activity was a business, especially when there was some “personal or
hobby” element to the activity in question.
[39]
In my opinion, Mr.
Skaling was pursuing a personal activity or a hobby when he was engaged in auto
racing AND the auto racing activity was not undertaken in a sufficient
commercial manner to be considered a source of income.
[40]
I have reached this
conclusion because the Appellant stated that when he entered races he only
earned $400 to $500 in one year, plus $150 for a total of $550 or $650 in cash
prizes and a number of trophies. However, he owned the following assets which
were related to racing:
a)
Race Car - $35,546;
b)
Truck and Trailer -
$40,000.
In addition, the Appellant claimed that he had Tools
with a value of $27,140. In other words, the FMV of the assets used by the
Appellant were in excess of $100,000 whereas the income for 2006 and 2007 was
$550 to $650 for both years.
[41]
It should also be noted
that the Appellant had the following operating expenses for the Race Car and
Truck and Trailer:
a)
2006 - $2,750 to $2,950;
b)
2007 - $2.750 to $2,950.
(See paragraph [26] above.)
[42]
In his argument,
Counsel for the Respondent referred to the decision of the Supreme Court of
Canada in Hickman Motors Ltd. v Canada (Her Majesty the Queen), [1997] 2 S.C.R. 336, 51 D.T.C. 5363, to support the Minister’s
decision that CCA should not be allowed on the Race Car and on the Truck and
Trailer. I agree with the Minister’s position on this issue.
D. CONCLUSION
[43]
After carefully
examining the evidence and reviewing the relevant Court decisions, I have
concluded that the Minister was correct when he concluded that the Appellant’s
“hobby” of drag racing did not constitute a commercial venture or a business.
[44]
The appeals are dismissed,
without costs.
Signed at Vancouver, British Columbia, this 23rd day
of March 2011.
“L.M. Little”
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