REASONS
FOR JUDGMENT
[Revised
transcript of reasons for judgment delivered orally
on March 11,
2010, at Montréal, Quebec.]
[1]
HIS HONOUR: I will
render my judgment in Louiseville Automobile limitée v. The Queen.
[2]
The appellant appealed
from an assessment dated September 21, 2007, for the period from
October 1, 2003, to October 31, 2003, in which the
respondent had disallowed an input tax credit of $16,100 in respect of a
Freightliner Revolution 2003 recreation vehicle, which I will be referring to
as the RV.
[3]
On October 21, 2003,
the appellant purchased the RV for $230,000 plus tax. The vehicle had
13,750 km on it, and the vendor had bought it new six months earlier.
[4]
The appellant has
existed for over 50 years. During the period at issue,
Normand Lessard was its president, employee and sole director. He has been
its director for over 40 years.
[5]
On
October 30, 2003, the appellant rented the RV to Mr. Lessard for
$1,000 plus tax per month for a period of 10 years.
[6]
Based on the lease, the
residual value is $110,000, and article 7 of the lease provides that, at
the end of the lease period, Mr. Lessard will be able to buy the RV for
$110,000.
[7]
Accordingly, during the
lease period, the appellant would potentially receive 120 months X $1,000,
which equals $120,000, and if Mr. Lessard used his right of purchase at the end
of the lease ($110,000), the total would be $230,000, the exact price paid by
the appellant at the time of purchase.
[8]
The appellant operates
a Pontiac Buick GMC dealership that sells around 500 vehicles per year.
When the RV was purchased, the appellant did not sell that type of vehicle.
[9]
Mr. Lessard testified
that he had wanted to purchase an RV for personal and business use. The appellant
bought it to make a profit, among other reasons.
[10]
To get an idea of how
much rent should be, he phoned RV dealerships to find out the depreciation.
[11]
The company had enough
money in the bank, which had a very low rate of return, and purchasing the RV
was profitable. According to Mr. Lessard, the $1,000 in rent per month was
composed of $800 for depreciation and $200 profit.
[12]
Based on the residual
value agreement, I do not see how there could be profit within that $1,000
amount, since, if Mr. Lessard had continued renting the RV for the full term of
the contract and then used his option, the company would have received the
exact amount it had paid at the outset, but over a period of 10 years.
[13]
In November 2003,
Mr. Lessard took the RV to Florida for three weeks. At the end of the
three weeks, he left the RV in Florida, where he returned in
March 2004 for three weeks. At the end of the trip in
March 2004, he returned home with the RV, which he then parked in the
appellant's lot with the other vehicles for sale.
[14]
In October 2004,
he took the RV and went to a General Motors meeting in Toronto for four days.
Right after the meeting, he went on a five- to six‑week trip in the
western United States.
[15]
At the end of that
trip, he left the RV in Las Vegas until April 2005, when he returned
to Las Vegas. He picked up the RV and went on another five- to six‑week
trip in the United States, at the end of which, he brought the RV back to Canada. It was parked in the appellant's lot and put up for sale.
[16]
Mr. Lessard said that
he had used the RV a little for business in the summer, going to various events
in the area surrounding the appellant, and that he had once taken a couple who
were good clients to Ogunquit, Maine, with him and his wife.
[17]
The appellant filed in
evidence invoices dated June 16, 2005, and July 7, 2005,
for ads that it had put out to sell the RV.
[18]
On August 2, 2006,
the appellant sold the RV to A. Roberge for $190,000 plus tax. At the time of
the sale, the odometer read 46,220 km.
[19]
In her testimony,
Christine Landry, an auditor with the Canada Revenue Agency, stated, among
other things, that, during the audit, no one ever doubted that it was the
president's RV. The respondent also filed Exhibit I‑1, which is the
insurance contract for the RV. At the bottom of the first page it reads as
follows:
[Translation]
It
is understood and agreed that all property related to professional activities
is not covered by this insurance contract.
[20]
The respondent also
filed Exhibit I‑3, which demonstrates the fair market value
calculations done by the respondent. Ms. Landry explained how the
respondent determined the residual value and interest rate used.
[21]
The respondent
concluded that the fair market value was $1,463.63 per month. For reasons that
will become evident, I do not believe it is necessary to examine in detail
Ms. Landry's testimony with regard to how the interest rate and residual
value were determined.
Analysis
[22]
The respondent claims
that paragraph 170(1)(b) of the Excise Tax Act applies
because the RV was purchased exclusively for Mr. Lessard's personal
consumption or use and that the exemption in subparagraph 170(1)(b)(i)
does not apply because the RV was not rented at fair market value.
[23]
The appellant claims
that subsection 170(1)(b) does not apply because, first, the RV was
not purchased exclusively for Mr. Lessard's personal use and, second, it
was rented at fair market value.
[24]
Was the RV purchased
exclusively for Mr. Lessard's use? The word "exclusive" is defined in
subsection 123(1) as meaning all or substantially all. It is well known
that the Canada Revenue Agency's practice is to interpret this as 90% or more,
while in jurisprudence, as little as 80% is sometimes considered to be
equivalent to all or substantially all.
[25]
In this case, the
appellant does not claim that the few times that Mr. Lessard used the RV
for business in the area or the time he went to Ogunquit are sufficient to
consider his personal use of the RV as being less than all or substantially all
of its use. Given the evidence, I agree. The appellant rather states that the
RV was not purchased exclusively for Mr. Lessard's use because the
appellant intended to make money off the RV, particularly, from its sale.
[26]
I cannot agree with
that approach for the following reasons. The evidence is not consistent with
the conclusion that the RV was purchased for resale over a more or less short
term. First, signing a 10-year lease is contradictory to a short-term resale.
Second, I note that Mr. Lessard testified that, at first, it was he who
wanted to buy an RV, and that he later decided that the company could benefit
from it. Third, other than Mr. Lessard's testimony, the first evidence of
the intention to resell is the invoice for the sale ad dated June 2005. The
fact that the RV was parked in Florida during winter 2003–04 and in Las Vegas during winter 2004–05 is inconsistent with a shorter-term resale.
[27]
In addition, although
this has very little weight because business is unpredictable, I note that the
company, in fact, lost money on the RV: it was purchased for $230,000, and the
appellant received 33 months X $1,000, which equals $33,000, from
Mr. Lessard and $190,000 from Mr. Roberge, which, in total, equals
$223,000, that is, a loss of $7,000. An amount of $230,000 invested in Canada
Savings Bonds, for example, would have had a better return.
Does $1,000 per month equal fair market value?
[28]
The appellant
criticized the Minister's calculations, but I do not believe that it is
necessary for me to analyze those calculations in detail except to observe that,
in the absence of direct comparable data (since neither party presented
comparable rental data), I agree with the respondent that an assessment of rent
at fair market value must take into account not only the residual value and,
consequently, the amount to depreciate during the lease, but also an interest
rate that would enable the lessor to make a profit in exchange for the capital
used.
[29]
In this case, if I
consider only the residual value provided by the appellant, that is, the
$110,000 used in the lease, which is clearly higher than the amount used by the
respondent, it becomes clear that, based on the lease, all the appellant should
receive during the lease is $120,000, that is, the depreciation anticipated,
and it also expects a residual value of $110,000 (the RV). (If Mr. Lessard
used his option, it would be exactly $110,000).
[30]
Given that the
appellant disbursed $230,000 and that, over 10 years, the appellant was
expecting to receive $230,000 in total, $1,000 contains no profit and, thus, no
interest. In other words, there is an interest rate of 0%. Regardless of what
the appropriate interest rate is, it must necessarily be more than 0%; a
company that rents something out to make money would include an element of
profit in the rent.
[31]
Regardless of the fair
market value of the monthly rent for the RV, the rent must necessarily be more
than $1,000.
[32]
Accordingly, the rent
was not at fair market value and the appeal will be dismissed with costs.
on this 8th day of
December 2010
Margarita
Gorbounova, Translator
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