Citation: 2009TCC37
Date: 20090119
Dockets: 2008-1121(IT)I
2008-1122(IT)I
BETWEEN:
ALLAN JORGENSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2008-1122(IT)I
COLLEEN JORGENSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellants, Allan and Colleen Jorgensen, are
appealing the reassessment of their 2002, 2003 and 2004 taxation years. During
that time, the Appellants were farming in partnership. The appeals were heard
on common evidence under the Informal Procedure. It was acknowledged at the
commencement of the hearing that the Informal Procedure monetary limits would
apply.
[2] There are two
unrelated issues under appeal: first, whether a ¾ ton diesel truck is a
“passenger vehicle” and the extent to which it was used in the Appellants’
business; secondly, whether land acquired following the sale of the Appellants’
farm land is “replacement property” within the meaning of subsection 44(5)
of the Income Tax Act.
The
Passenger Vehicle Issue
[3] In each of the
taxation years, the Appellants owned a ¾-ton extended cab diesel truck. The
Appellants’ practice was to purchase a new truck each year once the accumulated
mileage had caused the warranty to expire. Thus, while the Appellants owned a
different truck of the same type in each taxation year, for the purposes of
this judgment, the various vehicles are considered globally as the “Truck” and
the conclusions reached are equally applicable to each vehicle.
[4] In making his
reassessment, the Minister treated the Truck as a “passenger vehicle” as
defined in subsection 248(1) of the Act and as a Class 10.1 asset.
[5] By statutory
definition, a “passenger vehicle” is an “automobile” acquired after 1987. It is
common ground that the Truck meets the primary definition of automobile: “a motor
vehicle that is designed or adapted primarily to carry individuals on
highways and streets and that has a seating capacity for not more than the
driver and 8 passengers”[1] [Emphasis added]. The issue is whether the Truck is
excluded from that definition by the operation of either of the following
exclusions to the definition of "motor vehicle":
“automobile”
means
….
but
does not include,
…
(e) a motor
vehicle
(i) of a type
commonly called a van or pick-up truck, or a similar vehicle, that has a
seating capacity for not more than the driver and two passengers and that, in
the taxation year in which it is acquired or leased, is used primarily for the
transportation of goods or equipment in the course of gaining or producing
income,
(ii) of a
type commonly called a van or pick-up truck, or a similar vehicle, the use of
which, in the taxation year in which it is acquired or leased, is all or
substantially all for the transportation of goods, equipment or passengers in
the course of gaining or producing income, or
…
[6] The Respondent
says that the Truck is not caught by either of these exclusionary clauses: in
respect of subparagraph (i), it had a seating capacity for more than the driver
and two passengers; in respect of subparagraph (ii), its use was not “all or
substantially all” for the transportation of goods, equipment or passengers in
the course of gaining or producing income.
[7] Turning first to
subparagraph (i), the Appellants concede that the Truck, as purchased, came
with a bench seat in the space behind the front passenger seat and doors on
each side of the cab providing access to that seat. However, I accept Mr. Jorgensen’s
evidence that he modified the Truck for use in the Appellants’ farming
operation by affixing a custom-designed tool box in the rear area of the cab[2]. The toolbox was screwed into the floor so it would
stay securely in place when the Truck was in motion, a sensible precaution for
a vehicle travelling regularly between farm and field. Furthermore, to
accommodate the toolbox, the rear bench was kept folded up against the back of
the cab; because the toolbox ran the full width of the rear floor area, even if
the seat had been pulled down, there would have been effectively no foot room for
any would-be passengers. While there are doors giving access to this area, they
are significantly narrower than the full-size doors to the front passenger
seats.
[8] The Minister’s
assumption that the rear area was suitable for passengers was based on the auditor’s
report; the auditor, however, never viewed the Truck. Had he had the
opportunity to inspect it, he might have formed a different view.
[9] Having said
that, I agree with counsel for the Respondent that a review of the relevant
case law shows quite a range of outcomes, the result no doubt of their
dependency on the particular facts of each case. In my view, the facts in the
present matter are more akin to those in Muller v. Her Majesty the Queen[3], a case cited by the Appellants, than the decisions
relied upon by the Respondent[4]. I found the Appellants’ evidence, particularly
Mr. Jorgensen’s description of the appearance and use of the Truck, quite
compelling. Given the permanent nature of the adaptations to the rear area of
the cab, I am satisfied that the Truck did not, in fact, have seating capacity
for more than the driver and two passengers. It therefore falls within subparagraph
(e)(i) and is excluded from the definition of “motor vehicle” and by
consequence, from the definition of “passenger vehicle”.
[10] Should I be in
error in reaching this conclusion, I make the following findings in respect of subparagraph
(e)(ii). The Minister concedes that the Truck was used for “transportation of
goods and equipment” but says that not “all or substantially all” of its use
was for that purpose. The Minister assumed a 75% business purpose use; this,
says the Respondent, falls short of what is required to satisfy the meaning of
“all or substantially all” within the meaning of subparagraph (e)(ii).
[11] In support of the
Minister’s conclusion, counsel for the Respondent points to the Appellants’
evidence that Mr. Jorgensen sometimes used the Truck to drive himself to
meetings pertaining to the Appellants’ businesses, a use which does not fall
under the rubric of the “transportation of goods, equipment or passengers”. He
also pointed to the fact that, contrary to the legislative requirement to keep
adequate books and records, the Appellants had failed to keep a log to show the
use of the Truck; accordingly, the Appellants could not substantiate the extent
of the business use of the Truck.
[12] Certainly the
Appellants would have been well advised to maintain a daily record of the
Truck’s use. However, the standard for records keeping is one of adequacy, not
perfection. While the Appellants did not keep a formal log, they did maintain
sufficient source records of their business activities to allow them, when
requested to do so by the auditor, to reconstruct a reasonable diary[5] of the business use of the Truck. In respect of their
farm machinery and equipment sales business, the records track their attendance
at various auctions throughout rural Saskatchewan and in larger centers such as
Regina,
Calgary and Edmonton.
[13] While the log
does not reflect the Truck’s use in the farming operation, I accept the
Appellants’ evidence that its use was integral to the daily workings of the
farm for such tasks as hauling fertilizer and water for the sprayer, picking up
repairs, taking spare tires to the field and having tools at the ready for in-field
repairs. The materials transported are “goods and equipment” as contemplated by
subparagraph e(ii).
[14] The Truck was
rarely used for personal purposes: Mrs. Jorgensen said she almost never used
the Truck because she had her own vehicle which was more fuel efficient, easier
to drive and did not smell of diesel fuel. Mr. Jorgensen admitted that, on
occasion, he used the Truck to attend meetings related to the farm business but
the evidence also shows that such trips were often combined with tasks related
to “transportation” as that term is used in subparagraph e(ii). Specifically, I
accept Mr. Jorgensen’s explanation in respect of the Minister’s assumption
that Mr. Jorgensen “…used the [Truck] to travel to Lethbridge,
Alberta to visit his daughter”[6]: their daughter was studying in Lethbridge and
they stopped in to see her while hauling auction purchases from their circuit
in Alberta.
[15] On balance, I am
satisfied that the use of the Truck for purposes other than the “transportation
of goods, equipment or passengers in the course of gaining or producing income”
was minimal. The evidence supports the conclusion that the Truck was used “all
or substantially all” of the time for business purposes. Accordingly, the Truck
was excluded from the definition of “motor vehicle” and therefore, from the
definition of “passenger vehicle” as defined under subsection 248(1) of
the Act. As for the percentage of its business use, the Truck was used
in the taxation years more than 90% of the time in the Appellants’ farming
operation and farm machinery and equipment sales business.
The
Replacement Property
[16] The Minister’s
reassessment was based on his conclusion that certain land acquired following
the sale of the Appellants’ farm land was not “replacement property” within the
meaning of subsection 44(5) of the Act.
[17] In 1998, the
Appellants moved from Manitoba where they had been farming for several years
and purchased land near Balcarres, Saskatchewan.
They sold that property in 2002 and purchased 17 quarter sections of land south
of Regina, referred to in the Reply as the “Regina South Farm”. The Regina South
Farm was actively farmed to produce such crops as wheat, canola and flax.
[18] In 2004 the Appellants
sold the Regina South Farm for $2.3 million and in the same year, purchased a
piece of land zoned “agricultural” consisting of approximately 70 acres near White City,
Saskatchewan (the “White City Corner”). The purchase price was $175,000[7]. The Appellants subdivided the White City Corner (which,
at the time of purchase, was a hay field/pasture land) into multiple parcels
known as Blocks A, C, D, E and F[8]. Blocks A, C and D were rezoned from “Agricultural”
to “Concentrated Commercial”; the Appellants built a shop on Block C for
storing and repairing machinery and equipment used in their farming and
equipment sales business. Some machinery from the farming operation was also
stored there. Blocks E and F were rezoned from “Agricultural” to “Low Density
Multi-Parcel Residential” and a residence was built on Block E. The Appellants
lived in the residence until the house was sold in 2005.
[19] The question is
whether under subsection 44(5), the White City Corner is “replacement
property”:
For the
purposes of this section, a particular capital property of a taxpayer is a
replacement property for a former property of the taxpayer, if
(a) it
is reasonable to conclude that the property was acquired by the taxpayer to
replace the former property;
(a.1) it
was acquired by the taxpayer and used by the taxpayer or a person related to
the taxpayer for a use that is the same as or similar to the use to which the
taxpayer or a person related to the taxpayer put the former property;
(b) where
the former property was used by the taxpayer or a person related to the
taxpayer for the purpose of gaining or producing income from a business, the
particular capital property was acquired for the purpose of gaining or
producing income from that or a similar business or for use by a person related
to the taxpayer for such a purpose;
(c) where
the former property was a taxable Canadian property of the taxpayer, the
particular capital property is a taxable Canadian property of the taxpayer; and
(d) where
the former property was a taxable Canadian property (other than treaty-protected
property) of the taxpayer, the particular capital property is a taxable
Canadian property (other than treaty-protected property) of the taxpayer
…
[20] Because
subsection 44(5) is written conjunctively, a taxpayer seeking the benefit of
the provision must satisfy all of its requirements. In the present matter,
paragraphs 44(5)(c) and (d) are not in issue; accordingly, to
succeed in this aspect of their appeal, the Appellants must show that the
elements of paragraphs (a), (a.1) and (b) have been
fulfilled; the evidence in respect of each is considered below.
[21] The Respondent
argues first, that it cannot reasonably be concluded that the Appellants
acquired a 70-acre property to replace one of 2,720 acres (17 quarters). It
seems to me, however, that the reduction in size of the Appellants’
landholdings does not, in itself, preclude the conclusion that the acquisition
of the White City Corner was reasonable under paragraph 44(5)(a).
[22] However, paragraph
44(5)(a.1) is more problematic for the Appellants. The word “use” in that
provision has been interpreted to mean actual, rather than intended, use[9]. In the present matter, the use to which the former
property was put was as an active farm, growing a variety of crops for harvest
and sale each year. The White City Corner was essentially pastureland. While
there was some naturally occurring hay on the property, Mrs. Jorgensen
described it as “thin” and for that reason, they chose not to treat it as a
commercial crop. In at least one taxation year, the hay was baled and given
away to a neighbour. This is a far cry from the full scale farming operation carried
on at the Regina South Farm. While I accept the Appellants’ contention that, in
principle, hay has as much of an agricultural purpose as any other crop, the
fact is that the pastureland was not used for the production of a commercial
crop in the taxation years.
[23] According to Mrs.
Jorgensen’s evidence, the White City Corner was acquired primarily as a site
for the farm machinery and equipment business; Mr. Jorgensen testified
that when they purchased the White City Corner, he and his wife had decided to
“scale down” the farming operation that they had been carrying on at the Regina
South Farm. In respect of the farm machinery and equipment aspect of the
Appellants’ business, although there was a machinery shop at the Regina South Farm,
it was not the large, well-equipped multi-purpose facility that was ultimately
built on the White City Corner property. Finally, shortly after its purchase,
the White City Corner was subdivided and parts of it sold to third parties.
While I accept the Appellants’ evidence that they had not intended to use the
White City Corner property in this way, paragraph 44(5)(a.1) is not
concerned with intentions; what matters is the actual use of the property once acquired.
In these circumstances, it cannot be said that the White City Corner was
acquired for or put to the “same or similar” use as the Regina South Farm.
[24] Finally, under paragraph
44(5)(b), the question is whether the new property was acquired for the
purpose of earning income from a business that was the same or similar to the
business carried on at the former property. For the same reasons set out above,
the evidence does not support the conclusion that the White City Corner was
acquired for the purpose of gaining or producing income from the same or
similar business as was carried on at the Regina South Farm. The business carried
on at the Regina South Farm was full-scale crop production. The White City Corner
was uncultivated pastureland. Though zoned “agricultural” at the time of its
acquisition, the White City Corner was not acquired for the purpose of
exploiting that aspect of the property; rather, it was acquired for the purpose
of earning income from the farm machinery and equipment business.
[25] In my view, the
evidence does not satisfy the elements in paragraphs 44(5)(a.1) or
(b); accordingly, the White City Corner cannot be a “replacement
property” within the meaning of subsection 44(5).
[26] For the reasons
set out above, the appeals are allowed and the reassessments are referred back
to the Minister of National Revenue for reconsideration and reassessment on the
basis that the Truck was not a “passenger vehicle” as defined in subsection
248(1) of the Income Tax Act and was used more than 90% of the time in
the Appellants’ business.
Signed at Ottawa,
Canada, this 19th day of January, 2009.
"G. A. Sheridan"
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