Citation: 2007TCC129
Date: 20070305
Docket: 2005-3136(IT)G
BETWEEN:
RÉAL BLANCHETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
Issues
[1] The Appellant is
appealing from assessments concerning the 1999 and 2000 taxation years. By
these assessments, the Minister of National Revenue (the "Minister")
disallowed expenses in the amounts of $188,919.97 and $85,912.11 for those
years respectively, which the Appellant had claimed against his income.
[2] At the hearing, it
was acknowledged that $150,557.18 of the 1999 expenses, and $21,309.60 of the
2000 expenses, were incurred by the Appellant in connection with an aircraft
that he has owned since 1991. (This is shown in the table of expenses prepared
by Mr. Vuch, the Canada Customs and Revenue Agency (CCRA) auditor,
Exhibit I‑1, Tab 8(B) for 1999 and Tab 8(C) for 2000.
In his testimony, Mr. Vuch acknowledged that, for the year 2000, the
amount of $21,309 in goods and services tax (GST) and Quebec sales tax (QST) claimed as
expenses was in relation to expenditures on the aircraft.)
[3] Pursuant to
section 9 and paragraph 18(1)(a) of the Income Tax Act
(the "Act"), The Minister disallowed all the expenses related to
the aircraft on the ground that the Appellant did not, during the years in
issue, carry on a business that required the use of the aircraft.
[4] The other expenses
were disallowed on the ground that they were either personal expenses or were
not substantiated by supporting documents. I understand from the
submissions by counsel for the Appellant that these expenses are no longer
being disputed.
[5] In addition, a
penalty under subsection 163(2) of the Act was assessed against the Appellant
on an amount of $52,368.49 for the 2000 taxation year. The Appellant deducted
this amount from his consulting income as expenses even though Bombardier
Aerospace, Defence Services (Bombardier), to which he had provided consulting
services during that year, had reimbursed him for those expenses.
The Appellant is contesting that penalty.
Facts
[6] The Appellant
obtained a bachelor's degree in business administration in 1979 and an M.B.A.
in 1981. Before that, he was a regular member of the Royal Canadian Mounted Police.
After his university studies, he became a management consultant, providing
services to various businesses. He specialized in project management,
business process modelling and re-engineering, change management,
strategic planning and positioning, and the development and operation of
computer systems (see the Appellant's résumé, Exhibit A‑2).
[7] The Appellant is
also licensed as a professional pilot with an instrument rating and can fly
single- and multi‑engine airplanes (as attested by his licence (Exhibit A‑5)
issued by Transport Canada under the Aeronautics Act and the Canadian Aviation Regulations).
[8] In 1991, the
Appellant purchased a used Piper Navajo airplane, with a capacity of six or
eight passengers,
for $85,000. According to the Appellant, the plane was equipped to fly business
people.
[9] The Appellant has a
certificate of airworthiness issued under the Aeronautics Act, which was
renewed by Transport Canada on September 27, 1996, and remains valid.
The document certifies that the aircraft is in a condition for safe operation
and is maintained and certified in accordance with the relevant requirements of
the Canadian Aviation Regulations (Exhibit A‑5). The
Appellant also has a Certificate of Registration of Aircraft issued by the
Department of Transport on March 2, 1992, showing that he owns the
aircraft, which is described as being for "private" use (Exhibit A‑5).
[10] The Appellant
explained that the aircraft was inspected every 100 hours in accordance with
Canadian safety standards in order to maintain its certificate of
airworthiness. According to him, he cannot offer air transport services to the
public with a private airworthiness certificate. However, he can rent his
plane, along with his services as a pilot, to people or businesses who will not
use it commercially but who wish to use it for private purposes (e.g. to
transport their employees). It is much more expensive to apply for a commercial
airworthiness certificate because the airplane must be inspected more frequently
and Transport Canada requires more infrastructure associated with the operation of the
airplane. The Appellant said that he maintained his airplane in accordance with
the standards required for a commercial airworthiness certificate, but was
waiting until he developed a customer base before applying for such a
certificate.
[11] When he purchased
the aircraft in late 1991, the Appellant's idea was to rent it to companies
specializing in air taxi services. However, he abandoned his efforts along
those lines when he realized that by going in that direction he would lose his
right to oversee the maintenance of the airplane.
[12] It was only in late
1994 that the Appellant and two other individuals, both of whom were pilots and
former police officers, had discussions with a view to launching an air transport
business. One of the two, Robert Duguay, died last year, and the other, Jean‑Pierre Vachon,
came to testify on the Appellant's behalf. At the time, they developed a
business plan to assess the feasibility of such a business. Two business
plans were adduced in evidence as Exhibit A‑1, Tabs 2 and 3,
but neither of these plans includes a financial analysis. Mr. Vachon, a
financial planner, had training in business administration with a focus on
finance and management. In addition, he was and still is an instrument flight
instructor. He testified that in 1994 he was put in charge of doing a cost
projection based on various scenarios. He explained that the project consisted
of offering business people door‑to‑door ground and air transportation
services. Such a commercial project would be very costly because it would
require having at least two pilots available and eventually purchasing a second
and a third plane within five years.
Thus, in addition to the aircraft already purchased by the Appellant,
Mr. Vachon envisaged a capital investment of approximately $40,000
each (it is not clear from his testimony whether the Appellant was also to
invest $40,000, because he was already supplying the plane that he had purchased
for $85,000). The Appellant, for his part, spoke of a quarter-million dollar
investment to start up the business. In any event, these financial forecasts
were not tendered in evidence, since Mr. Vachon no longer had them in his
possession. The project contemplated that the three principal interested
parties would join together by purchasing shares in a corporation in early
1995. They would obtain a licence from the National Transportation Agency of
Canada and an operating certificate from Transport Canada during the first half
of 1995.
[13] The project,
developed in late 1994, never came to fruition. Mr. Vachon said that he
personally did not proceed because discussions had led to disagreement about
actual share ownership, and because of the poor economic situation that Canada
was experiencing in 1994. Consequently, he decided to develop his own financial
planning business. He did not talk to the Appellant about this air transport
project again until just recently, when, as an air traffic controller and
instructor, he re‑administered the instrument flight test to the
Appellant so that he could renew his professional licence.
[14] Mr. Vachon also
said that if they had decided to pursue the project, they could have advertised
in specialized magazines or with the Chamber of Commerce, but that no such
advertising was done.
[15] The Appellant said
that he could not have business cards or a personalized Web site because he did
not want Transport Canada to accuse him of advertising air transport services to
the public, which his current certificate does not, and the one he had at that
time did not, allow him to do.
[16] The Appellant said
that the project developed in 1994 was put on the back burner. He decided
instead to wait until he had customers before thinking about incorporating a
company and investing more money. He said that he began seeking customers in
1995.
[17] The Appellant said
that on March 31, 1995, he began billing Ting Telecom International Network
Group Inc. (Ting), of which he had become a 20% shareholder and a director, $5,000 per month for the rental of his
aircraft. According to the Appellant, Ting had an oral agreement with him under
which he was to provide air transportation to Ting's employees.
[18] The documentary
evidence discloses that, during the first three months, that is to say, March,
April and May 1995, the Appellant billed Ting $5,000 per month as professional
fees.
The Appellant also billed $5,000 per month for the rental of his aircraft until
December 31, 1997, but was apparently no longer being paid as of
March 1, 1997 (Exhibit A‑1, Tab 4). Ting went
bankrupt and was struck off ex officio on May 9, 1998
(Exhibit A‑1, Tab 38).
[19] In the financial
statements that he filed for the years 1995 to 1997, the Appellant reported his
aircraft rental income from Ting as professional fees (Exhibit A‑1, Tab 5).
[20] Moreover, the
Appellant had an oral agreement with Air Canada from 1997 to 1999. His work
consisted in the management of technical maintenance personnel. He worked on
various projects, including a hiring process improvement project and a
marketing reorganization project. The services thus provided by the
Appellant were consulting services, and he did not have to use his aircraft in
connection with his contract with Air Canada. He said that he billed
Air Canada at an hourly rate for the services he rendered.
He reported $294,775.39 in professional fees in his statement of business activities
for 1998 (Exhibit A‑1, Tab 5) and $271,156.14 for 1999
(Exhibit I‑1, Tab 1).
[21] During the same
period, the Appellant says, he maintained his professional pilot qualifications
by flying on evenings and weekends. He also made the repairs necessary to keep
the aircraft airworthy and maintain flight safety, and, ultimately, he says, to
be able to operate his air transport business.
[22] In early 1999, the
Appellant says, he established business contacts with Eveline Sallin, the
president of Mediafun Communications Inc. (Mediafun), with regard to the
regional transportation of her company's employees in the northeastern United States. In a letter of intent
to the Appellant dated August 26, 1999 (Exhibit A‑1, Tab 8),
Ms. Sallin informed the Appellant that her business would be interested in
the Appellant's services in connection with the rental of ground and air
transportation in consideration of approximately $120,000 per year.
Ms. Sallin confirmed to the Court that this was only a letter of intent,
and was subject to the conclusion of a final agreement officially formalizing
the rental contract. She was not legally binding herself with this letter of
intent. The Appellant, for his part, was under the impression that Mediafun
(which he says was in the process of securing millions of dollars in financing)
was more than profitable enough for it to conform to the letter of intent. This
having been said, he did not see Mediafun's financial statements. He simply
trusted Ms. Sallin.
[23] The Appellant, who
was beginning to have problems with his aircraft's radiocommunication system, said
he took advantage of this new business opportunity, which seemed to be serious,
to make the necessary repairs to his aircraft. This entailed major expenses,
and the Appellant felt that with the prospect of this potential new contract,
the time had come to incur them. The Appellant specified that he
replaced the defective parts with parts that were of lower but nonetheless good
quality. He said that he also purchased a 2000 Ford Expedition truck, valued at
$54,654.13 on November 19, 1999 (Exhibit A‑1, Tab 9), with
a view to transporting his future customers on land as well.
[24] After incurring all
these expenses, the Appellant claimed input tax credits for the GST
and QST that he had paid. This resulted in an audit by the tax authorities, who
contacted Ms. Sallin. The tax authorities asked Ms. Sallin for her
business plan and her financing method. Since she had put a confidentiality
requirement in the letter of intent itself, she refused to provide the
information sought by Revenu Québec. She had no further contact with the
Appellant from that point onward and the project outlined in the letter of
intent never got underway.
[25] The evidence also
discloses that Mediafun was incorporated on December 29, 1997, and
that Ms. Sallin was its sole shareholder and director (Exhibit A‑6).
In 1998, that corporation was not operating and had no employees.
Ms. Sallin testified that at the time the letter of intent was signed, she
had no idea whether she would obtain the financing sought. However, she said
that she had prepared a five-year business plan whose starting point was 1999,
but never shared the details with the Appellant. Although she says she was holding
serious discussions with several investors at the time, she did not feel
legally bound by the letter of intent. According to her testimony, the contents
of the letter were only to materialize if the financing was secured. After
meeting with Revenu Québec, she decided not to invest in Quebec, and Mediafun
never operated a business in Canada. It was struck off ex officio
on May 7, 2004.
[26] Following this
setback, the Appellant was hired as a consultant by Bombardier in
2000 with a view to reducing the cost of pilot training, and for his assistance
in determining training needs in connection with the setting up of a school for
National Defence in Moose Jaw, Saskatchewan (Exhibit I‑1, Tab 20(C)).
[27] According to the
contract signed with Bombardier, which took effect on February 21, 2000,
Bombardier was to reimburse the Appellant for his travel expenses
associated with the performance of his work contract. Under that contract,
these expenses had to be reasonable, substantiated by supporting documents and
approved in advance by Bombardier (Exhibit I‑1, Tab 20(C),
page 2, section 3). The Appellant said that he was authorized
to travel in his own aircraft to the extent that the cost was reasonable and
comparable to what a commercial airline would have charged.
[28] François Turcotte,
the "IST director" at Bombardier, confirmed to the Court that, if the
Appellant used his own airplane to travel for his work with Bombardier, he
was reimbursed for any expenses substantiated by supporting documents up to an
amount equivalent to the cost of a commercial airline trip.
[29] The Appellant said
that he billed Bombardier for his direct expenses, such as fuel, aircraft
parking and landing fees. For example, in 2000, he was reimbursed a total of
$52,368.49 in travel expenses (Exhibit I‑1, Tab 20(A),
page 3, and Tab 20(B)). The Appellant also received
$196,591.20 in consulting fees from Bombardier (Exhibit I‑1, Tab 20(B)).
Mr. Turcotte explained that the Appellant was not authorized to carry
Bombardier employees in his aircraft because of insurance issues. He reiterated
that the Appellant was hired only for his consulting services and not for the transport
of passengers by air.
[30] Moreover,
the Appellant acknowledged that he claimed the amount of
$52,368.49 as expenses against his professional income despite the fact
that this amount had been reimbursed by Bombardier. He explained in court that
this was done by mistake. He billed for his expenses separately from his
professional fees. The copies of the bills sent to Bombardier would appear to
have been destroyed by a backup of water in the basement of his residence,
where they were being kept. Thus, when preparing his income tax return,
the Appellant did not have on hand the details of the bills with
respect to which he had been reimbursed. Apparently, he did not then realize
that he was deducting the same expenses that he had already claimed from
Bombardier.
[31] The Appellant also
said that he did not use his aircraft for personal purposes during the period
in issue. He used it to log hours in order to keep his professional pilot's
licence. He said that he also did demonstration flights for potential clients,
as well as what he called technical flights to ensure that the aircraft was functioning
properly. He said that airplanes must fly regularly and that this minimizes the
risks of corrosion. Thus, he used his plane to fly all over Canada. His pilot's
log book was tendered as Exhibit A‑1, Tab 12. It shows the
dates the aircraft flew, the code for the departure and arrival airports (there
is no way that a layperson would know where these airports are located), and
the duration of the flight. However, the log book does not say whether there
were any passengers on board. It only indicates the presence of a co-pilot. The
Appellant did not produce a list of potential customers who took part in
demonstration flights.
[32] The Appellant said
that the security standards imposed by commercial airlines have become much
more stringent since September 2001. He sees that as a bit of a window of
opportunity for private transportation, but has not as yet taken advantage of
it. He has never updated the business plan developed in 1994. He said that he
is keeping an eye open for possibilities of using his aircraft commercially. He
was hoping to find customers through his network of contacts, which essentially
involves word of mouth.
[33] Lastly, it should be
noted that, in a discussion with Mr. Vuch in the course of the audit, the
Appellant stated that he had not rented his aircraft since 1997 and that
he had claimed the GST and QST as expenses against his income because he had
made his application for input tax credits too late. Actually, according to
Mr. Vuch, the input tax credits were refused because Revenu Québec did not
consider the Appellant to have been engaged in using the aircraft in a commercial
activity within the meaning of the Excise Tax Act. As for the penalty,
Mr. Vuch considered that the Appellant had been grossly negligent in
claiming an expense for which he had been reimbursed and not including the same
amount in his income. In Mr. Vuch's opinion, the Appellant is an
educated business person who specialized in finance and must have known that he
could not deduct such an expense if he did not include it in his income (see
Mr. Vuch's report, Exhibit A‑7).
Analysis
[34] Essentially, the
issue is whether the expenses incurred by the Appellant in relation to his
aircraft in 1999 and 2000 are deductible from his income for those years.
Counsel for the Respondent is of the opinion that these expenses are not
deductible because in his view the Appellant was not operating during those
years a business that required the use of the aircraft. The Appellant, for
his part, submits that he kept the aircraft during those years for the purpose
of operating an air transport business.
[35] In order to succeed,
the Appellant must show that the aircraft was a source of income for
him during the years in issue. In Stewart v. Canada,
2002 SCC 46, the Supreme Court of Canada, at paragraph 60, summarizes as
follows the analysis that must be done in order to decide this question:
In summary, the issue of whether or not a taxpayer has a source of
income is to be determined by looking at the commerciality of the activity in
question. Where the activity contains no personal element and is clearly
commercial, no further inquiry is necessary. Where the activity could be
classified as a personal pursuit, then it must be determined whether or not the
activity is being carried on in a sufficiently commercial manner to constitute
a source of income. . . .
[36] Thus, if an activity
is clearly of a commercial nature, there is no need to analyze the taxpayer's
business decisions. In such a case, a source of income exists by definition (Stewart,
supra, at paragraph 53). To determine whether an expense is clearly
of a commercial nature, it is not sufficient for the taxpayer to show that he
or she had a subjective intention to make a profit. The taxpayer must prove
this intention on the basis of a variety of objective factors. He or she must
adduce evidence to substantiate the intention. In order to do so, the taxpayer
must "establish that his or her predominant intention is to make a profit
from the activity and that the activity has been carried out in accordance with
objective standards of businesslike behaviour" (Stewart, at
paragraph 54).
[37] Moreover, in
determining whether the taxpayer is carrying on the activity in a commercial
manner, it is the commercial nature of the taxpayer's activity which must be
evaluated, not his or her business acumen (Stewart, at paragraph 55).
[38] In the instant case,
I am not satisfied that the use of the aircraft was clearly commercial in
nature. I am not satisfied that the Appellant's predominant intention was to
derive a profit from his aircraft. Instead, the facts that emerged from the
evidence suggest that the Appellant used his consulting business to finance the
use of his aircraft for predominantly personal purposes.
[39] The evidence clearly
showed that the Appellant did not need to use his aircraft in order to carry
out his contracts with Air Canada and Bombardier. If he used his airplane,
it was a matter of personal choice and, in the case of the contract with
Bombardier, it was agreed that he would be reimbursed for his direct travel
costs up to the amount of the regular price of a flight on a commercial
airline. He was not even allowed to carry Bombardier employees on his aircraft.
[40] Furthermore,
although it is not for me to judge the Appellant's business acumen, I must
nonetheless analyze in accordance with objective standards of businesslike
behaviour whether or not the use of the aircraft was of a commercial nature.
[41] The first and only
business plans developed for the possible operation of an air transport
business were tendered in evidence without the related financial analyses. The
Court was told that an investment of roughly $250,000 would be needed in order
for the project to be viable, but no other objective evidence was adduced. Such statements
were not supported by a pro forma budget or a reliable financial analysis.
Mr. Vachon, who was initially to be the Appellant's associate, left him in
the lurch early on because there was a disagreement among those involved over
shareholding. In addition, Mr. Vachon referred to the economic recession
of 1994. Never again did the two protagonists attempt to meet to relaunch
the project.
[42] The Appellant has
not shown that he made serious efforts thereafter to start up his air transport
business. He did no advertising, being content to rely on word of mouth. He
says that he maintained his airplane in good operating condition, but, from the
moment that he became the owner of the plane, he did not really have any choice
but to maintain it if he wanted to use it.
[43] Furthermore, the
episode with Ting is not clear‑cut. According to the arbitral decision,
the airplane was used only four times, and it was the Appellant who requested
the arrangement whereby he billed $60,000 per year for the lease of his
aircraft. The Appellant himself entered the income from Ting in his
financial statements not as aircraft rental income but, rather, as professional
fees (see the statement of business activities for the years 1995 to 1997,
Exhibit I‑1, Tab 13).
[44] Then there was
Mediafun. With regard to that company, things did not advance to a stage where
the Appellant could truly think that a realistic contract was in sight.
The Appellant is a financial consultant. It is difficult to believe
that, solely on the basis of the letter of intent, and in the absence of his
other professional income, he would have jumped head first into expenditures of
such a magnitude without checking into Mediafun's financial situation more
carefully. Ms. Sallin said that she never disclosed her business plan and
financial statements to the Appellant. I am far from convinced that the
Appellant would have ventured to incur such expenses without the assurance of
the comfortable income that he was deriving from his contracts with
Air Canada and Bombardier. Time was taking its toll on his airplane and he
had to make certain repairs. His professional income enabled him to incur such
expenses, but it is presumptuous, in my opinion, to want to have us believe
that a mere letter of intent, which is not legally valid, could be the foundation
of the development of an air transport business by the appellant.
[45] Moreover, the
Appellant points to the purchase of a truck in asserting that he was serious in
his efforts to start his land and air transport business. I note, however, that
Mr. Vuch's audit report shows that the truck was considered a recreation
vehicle and therefore gave rise to no deduction for the Appellant, which position
was accepted by the Appellant's representative at the time
(see Exhibit A‑7, pages 3 and 9 of 11).
[46] In my opinion, the
facts disclosed by the evidence do not show that the Appellant's behaviour was
businesslike enough that he could claim to be operating an air transport
business. He has failed to convince me that he was not using the aircraft for
personal purposes. Even if he intended to operate the airplane commercially at
some point, he certainly has not shown that it was his predominant intention to
make a profit from this activity. Thus, I conclude that the Appellant has not
shown that his aircraft was a source of income for him. Consequently, the
expenses claimed are personal in nature and the Minister properly disallowed
them.
[47] As for the penalty
assessed under subsection 163(2) of the Act on the amount of $52,368.49 which
he deducted in 2000 even though he had been reimbursed by Bombardier, I am of
the opinion that it should be maintained.
[48] I do not find
credible the Appellant's claim that he deducted this amount by mistake. That
was the only contract that he had in 2000. He billed Bombardier himself. The
amount was relatively significant in relation to his income from Bombardier
(roughly 20%). In addition, I find it astonishing that he had in his possession
the bills for determining the amount of his expenses, but forgot that those
same expenses had been reimbursed. If he did not have the exact amount of the
reimbursement because he no longer had copies of the bills sent to Bombardier,
he had enough business knowledge to realize that he could contact Bombardier
for this information. Moreover, I find that his story that the documents were
destroyed by a backup of water in the basement of his home lacks credibility. This
revelation was made for the first time at the hearing of these appeals, as the
Appellant had never told Mr. Vuch. The Appellant adduced no evidence with
respect to the incident. In my opinion, the Respondent has shown on a balance
of probabilities that the Appellant knowingly, and under circumstances
amounting to gross negligence, failed to report an amount that he should have
included in his income if he was claiming the deduction of this amount for which
he had been reimbursed.
[49] For these reasons,
the appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 5th day
of March 2007.
"Lucie
Lamarre"
Translation
certified true
on this 8th day of
November 2007.
Erich Klein, Revisor
Email this Content