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Citation: 2003TCC444
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Date: 20030722
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Docket: 2002-2469(GST)I
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BETWEEN:
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MELVILLE MOTORS LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the
Informal Procedure was heard at Regina, Saskatchewan on June 19,
2003. Gregory Kohnen the Dealer Principal and part owner of the
Appellant, a Ford Motor Company dealer, was the only witness. Mr.
Kohnen was also the in-house accountant of the Appellant.
[2] The matters under appeal are
outlined in paragraphs 7 to 12 inclusive of the Reply to the
Notice of Appeal which read:
7. In so
assessing the Appellant, the Minister made the following
assumptions of fact with respect to the relevant period:
(a) The Appellant
was a registrant for the purposes of the Excise Tax Act
(the "Act");
(b) for the
reporting periods ending between January 1, 1997 and December 31,
1999, the Appellant was required to file its returns on a
quarterly basis;
(c) for the
reporting periods ending in 2000 the Appellant was required to
file its returns on a monthly basis;
(d) the Appellant
filed returns reporting tax collectible, input tax credits and
net tax as set out in Schedule A attached hereto;
(e) The Appellant
operated an automobile dealership;
(f) In 1999
and/or 2000, the Appellant paid the following people (the
"Employees") an allowance for the use of a vehicle in
the Appellant's business (the "Mileage
Allowance"):
(i) Rick
Gray;
(ii) Wayne
Stelmackowich;
(iii) Ron Wilson; and
(iv) William Finishen;
(g) all of the
Employees were employed by the Appellant in the sale of
vehicles;
(h) each of the
Employees leased a vehicle for use in the Appellant's
business;
(i) the
vehicles referred to in the previous subparagraph were leased
from the Appellant;
(j) the
Employees frequently changed the vehicles they leased;
(k) the Employees
used dealer plates on the vehicles they used in the
Appellant's business, which were leased from the
Appellant;
(l) the
Mileage Allowance paid to each of the Employees in any year was
equal to the amount of the lease payments, including the GST,
that the Employee paid to the Appellant in that year;
(m) the Appellant
collected GST of at least $719.62 from the Employees with respect
to the lease payments that they made to the Appellant in
1999;
(n) the Appellant
claimed input tax credits of at least $719.62 with respect to the
Mileage Allowance it paid to the Employees in 1999;
(o) the Appellant
collected GST of at least $1,025.12 from the Employees with
respect to the lease payments that they made to the Appellant in
2000;
(p) the Appellant
claimed input tax credits of at least $1,025.12 with respect to
the Mileage Allowances it paid to the Employees in 2000;
(q) the only
documentation the Appellant had with respect to the Mileage
Allowances paid to the Employees in 1999 and 2000 was the
cancelled cheques issued to the Employees; and
(r) any further
input tax credits which the Appellant submits it was entitled to
claim with respect to the Mileage Allowances it paid to the
Employees were not reasonable as the measurement of the use of
the Employee's vehicle for the purpose of the allowance was
not based solely on the number of kilometres for which the
vehicle was used in connection with or in the course of the
Employee's office or employment.
B.
ISSUE TO BE DECIDED
8. The issue
to be decided in this appeal is whether the Appellant is entitled
to input tax credits with respect to the Mileage Allowances it
paid to the Employees for use of their motor vehicles.
C.
STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF
SOUGHT
9. He relies
on subsections 123(1), 221(1) and 225(1) and sections 169, 174,
228, 280, 281.1 and 296 of the Excise Tax Act, R.S.C.
1985, c. E-15, as amended and section 6(1) of the Income Tax
Act, R.S.C. 1985, c. 1 (5th Supp.) as amended for the 1999
and 2000 taxation years.
10. It is submitted that
the Minister properly assessed the Appellant's net tax for
the relevant period, pursuant to sections 169, 174, 221(1),
225(1), 228 and 296 of the Act.
11. Furthermore, it is
submitted that, pursuant to sections 169 and 174 of the Act, the
Appellant is only entitled to claim an input tax credit for the
Mileage Allowances paid to the Employees for the use of his
or her motor vehicle in Canada in relation to the Appellant's
commercial activities where:
(a) the Appellant
was entitled under the provisions of the Income Tax Act to
deduct an amount in respect of the Mileage Allowances paid to the
Employees in computing its income for the 1999 or 2000 taxation
years;
(b) the Mileage
Allowance paid to the Employees was a reasonable allowance for
the purposes of subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1)
of the Income Tax Act, and
(c) the Appellant
considered, at the time the allowance was paid, that the
allowance would be a reasonable allowance for those purposes and
it is reasonable for the Appellant to have considered, at that
time, that the allowance would be a reasonable allowance for
those purposes.
12. The Mileage Allowances
paid by the Appellant are, however, not reasonable as they were
based on the lease payments, including the GST, instead of being
based solely on the number of kilometres for which the vehicle
was used in connection with or in the course of the
Employees' office or employment as required by subparagraphs
6(1)(b)(x) of the Income Tax Act. Consequently, the
Appellant is not entitled to an input tax credit with respect to
that allowance.
...
[3] None of the assumptions except
7(q) and (r) were refuted. Respecting (q) and (r):
(q) The Appellant also had had written
forms of invoices claimed by the salesmen for their mileage, and
describing numbers of kilometres travelled, which he offered to
the auditor. They were exhibited at the Hearing.
(r) The Appellant placed a
ceiling on the mileage that the salesmen could claim which
amounted to the lease fee for each month. The salesmen all
invoiced the Appellant for virtually the entire lease amount by
quarterly invoices. Mr. Kohnen stated the lease amount ceiling
was instituted because, prior to that, the salesmen were claiming
for greater mileage sums than the lease amount and their travel
was not economic to the Appellant.
[4] The Appellant's salesmen go
out and canvas customers outside of the small town of Melville,
where it is located, for sales. Some sales are made to customers
as far as 1,000 kilometres away. Mr. Kohnen testified that, as a
result, unlimited mileage could cause the Appellant's
business to lose money in a year. He admitted that the salesmen
used their leased vehicles personally. He gave an example of a
salesman using a company vehicle to drive a child to a ball game
competition where the salesman might sell a vehicle to another
parent, with the result that its usage on that occasion was
mixed.
[5] The mileage rate that the
Appellant charged the salesmen was what Mr. Kohnen
understood was the federal government rate from time to time and
was reasonable.
[6] The basic premise of the
assessment is that the mileage allowance was not based on the
number of kilometres travelled. This was because of the ceiling
fixed by the Appellant. The Appellant's argument was that the
ceiling system was the only method by which it could exercise
control over the mileage. Respondent's counsel countered that
the result was that the salesmen's invoices always reached
the ceiling and were not reasonable, were not based on mileage
and therefore the input tax credits claimed were not within the
provisions of the Excise Tax Act. Mr. Kohnen, a highly
experience car dealer, stated that all salesmen will always
invoice to the ceiling which also established that the employer
had to fix a ceiling. He is believed.
[7] Section 174 of the Excise Tax
Act reads:
174. For the purposes of this Part, where
(a) a person pays
an allowance
(i) to an employee
of the person, ...
for
...
(v) the use in Canada, in
relation to activities engaged in by the person, of a motor
vehicle,
(b) an amount
in respect of the allowance is deductible in computing the income
of the person for a taxation year of the person for the purposes
of the Income Tax Act, or would have been so deductible if
the person were a taxpayer under that Act and the activity were a
business, and
(c) in the case of
an allowance to which subparagraph 6(1)(b)(v), (vi), (vii)
or (vii.1) of that Act would apply
(i) if the
allowance were a reasonable allowance for the purposes of that
subparagraph, and
(ii) where the person is
a partnership and the allowance is paid to a member of the
partnership, if the member were an employee of the partnership,
or, where the person is a charity or a public institution and the
allowance is paid to a volunteer, if the volunteer were an
employee of the charity or institution,
the person considered, at the time the allowance was paid,
that the allowance would be a reasonable allowance for those
purposes and it is reasonable for the person to have considered,
at that time, that the allowance would be a reasonable allowance
for those purposes,
the following rules apply:
(d) the person is
deemed to have received a supply of the property or service,
(e) any
consumption or use of the property or service by the employee,
member or volunteer is deemed to be consumption or use by the
person and not by the employee, member or volunteer,
and
(f) the person is
deemed to have paid, at the time the allowance is paid, tax in
respect of the supply equal to the amount determined by the
formula
A x B
where
A is the amount of
the allowance, and
B is
(i) 15/115
where
(A) all or substantially all of
the supplies for which the allowance is paid were made in
participating provinces, or
(B) the allowance is paid for
the use of the motor vehicle in participating provinces, and
(ii) in any other case,
7/107.
[8] The relevant portions of
subsection 6(1) of the Income Tax Act read as follows:
6(1) Amounts to be included as income from office
or employment
(1) There shall be included in computing the income of a
taxpayer for a taxation year as income from an office or
employment such of the following amounts as are applicable:
...
(b) Personal or living expenses - all amounts received
by the taxpayer in the year as an allowance for personal or
living expenses or as an allowance for any other purpose,
except
...
(v) reasonable allowances for travel expenses received
by an employee from the employee's employer in respect of a
period when the employee was employed in connection with the
selling of property or negotiating of contracts for the
employee's employer,
...
(vii.1) reasonable allowances for the use of a
motor vehicle received by an employee (other than an employee
employed in connection with the selling of property or the
negotiating of contracts for the employer) from the employer for
travelling in the performance of the duties of the office or
employment,
...
and, for the purposes of subparagraphs (v), (vi) and
(vii.1), an allowance received in a taxation year by a taxpayer
for the use of a motor vehicle in connection with or in the
course of the taxpayer's office or employment shall be deemed
not to be a reasonable allowance
(x) where the measurement of the use of the vehicle for
the purpose of the allowance is not based solely on the number of
kilometres for which the vehicle is used in connection with or in
the course of the office or employment, ...
[9] The same question posed in the
case at bar was faced by Lamarre Proulx, J. of this Court in
Tri-Bec Inc. v. Canada [2002] T.C.J. No. 116,
[2002] G.S.T.C. 27. [hereinafter Tri-Bec] Paragraph 19 of
that decision reads:
Subparagraph 6(1)(b)(x) of the Income Tax Act is clear in my
view. Since section 174 of the Act refers to this statutory
provision, a reasonable allowance for the use of a motor vehicle
is one that is fixed on the basis of the number of kilometres
travelled by the taxpayer in the performance of the office or
employment.
[10] In Tri-Bec,supra, Lamarre
Proulx, J. found that in one of the four instances in question
there was sufficient evidence to warrant a finding that a motor
vehicle allowance was based on mileage. This finding occurred in
spite of a maximum amount imposed on the allowance by the
employer. However, there did exist a mechanism to adjust the
allowance downward should this be supported by an employee's
report.
[11] The fact pattern analysed in
Tri-Bec by Lamarre Proulx, J. parallels this case. Here,
the Appellant paid an allowance based upon mileage. The rate,
based generally on government rates, was reasonable. The
stipulation by the Respondent is that the ceiling fixed by the
Appellant removes the mileage basis. However, that is not so. The
Appellant is entitled to exercise control over its employees. The
Appellant could not obtain a sufficient sales volume if its
salesmen sat around the showroom. They had to get out on the road
and solicit sales. These ceilings, in these circumstances, is
both reasonable and sensible. If the Appellant made fewer sales
because of the ceiling, that was its choice as to its method of
doing business.
[12] A second argument was that the ceiling
was always met by the salesmen's invoices. The Court accepts
Mr. Kohnen's reply that, in the Appellant's circumstances
that was the best control that the Appellant could devise. Short
of travelling with each salesman it could not determine what was
personal and what was business mileage. Certainly, a
salesman's mileage could be lower. But the Appellant's
sales area and customer base was over a wide territory of about
100 kilometres by 100 kilometres. There was no personal pleasure
for either the Appellant or its salesmen in finding customers
over these distances and in these circumstances. The basis of the
mileage allowed and the input tax credits claimed were the
salesmen's mileage, subject to the ceiling. The Appellant is
entitled to conduct its business in the manner it chooses.
[13] The appeal is allowed and this matter
is referred back to the Minister of National Revenue for
reconsideration and reassessment accordingly.
[14] The Appellant is awarded its
disbursements which are fixed in respect to its out-of- pocket
expenses for postage, copying and mileage to and from Regina and
Melville to prosecute this appeal in the amount of $200.
Signed at Vancouver, British Columbia, this 22nd day of July
2003.
Beaubier, J.
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