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Citation: 2003TCC353
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Date: 20030520
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Docket: 2002-2852(IT)I
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BETWEEN:
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DALLAS DUCE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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AND BETWEEN:
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Docket: 2002-2868(IT)I
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AUDAX INVESTMENTS INC.,
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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.T.C.C.
[1] These appeals were heard together
on common evidence by consent of the parties at Saskatoon,
Saskatchewan on May 14, 2003. Mr. Duce was the only witness.
[2] The particulars of the matters in
appeal by both parties are best set forth in paragraphs 13 to 24
of the Reply to the Notice of Appeal of Audax Investments
Inc. ("Audax"). They read:
13. In computing income
for the 1996, 1997 and 1998 Taxation Years, the Appellant
deducted the following amounts as business expenses with respect
to the Property and trips to Hawaii:
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SCHEDULE
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1996
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1997
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1998
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HAWAII PROPERTY EXPENSES
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Account/
journal entry
#815
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A/C Condo Maintenance
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$11,944.28
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$11,837.99
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$11,618.77
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J.E. #6
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Condo Interest
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$ 9,332.18
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$ 9,219.04
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$ 9,073.82
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A/C
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Telephone
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$ 160.01
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#814
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A/C
#818
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Utilities
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$ 53.38
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A
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$21,276.46
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$21,057.03
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$20,905.98
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A/C
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Airline, gas, rental car Honolulu
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$ 2,442.12
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#808
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A/C
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Airline tickets, car rental, gas, hotel
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$1,365.87
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#801
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A/C
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Car rental in Honolulu and misc.
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$ 1,135.39
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#705
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B
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$ 3,807.99
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$ 1,135.39
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Total disallowed re Hawaii Condo (A & B)
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$25,084.45
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$21,057.03
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$22,041.37
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14. The Appellant's
income tax returns were initially assessed on the following
dates:
1996: 3 March 1997
1997: 12 March 1998
1998 22 February 1999
15. By Notices of
Reassessment dated February 2, 2001, the Minister disallowed
expenses, among other items, in the amount of $25,084, $21,057
and $22,041 for the 1996, 1997 and 1998 Taxation Years as
detailed in Schedule 1 of paragraph 13 above.
16. The Appellant filed
Notices of Objection received on March 7, 2001.
17. In response to the
Notices the Minister confirmed the reassessments by Notification
of Confirmation dated the 19th April 2002.
18. In so assessing the
Appellant, the Minister made the following assumptions of
fact:
(a) The
Appellant's business was investments and salt water
processing.
(b) The Appellant
investments were with respect to joint ventures in oil
stocks.
(c) Dallas Duce is
the sole shareholder (herein "the Shareholder") of
the Appellant.
(d) Associated or
related corporations of the Appellant were: Duce Electric Ltd.,
Northern Boundary Electric Ltd., Duce Developments Ltd., Willett
Manufacturing Ltd and Duce Oil Ltd.
(e) The Appellant
purchased a condominium in Hawaii in 1985.
(f) The
condominium unit address was #16H, 521 Hahaione St., Honolulu,
Hawaii (the "Property").
(g) The Property was
purchased for $125,000 US.
(h) The Mortgage
balance on purchase price of the Property was $91,908.49 US.
(i) The
Appellant recorded the Property as a capital asset on its Capital
Cost Allowance schedule.
(j) The
Property was a 2 bedroom, 2 bath, fully furnished apartment
having 1,200 square feet approximately and parking.
(k) The Appellant
rented out the Property by long term leases for periods from 1989
- 1992 and claimed consistent losses with respect to the property
since its acquisition.
(l) In 1994
the Property was damaged by a flood and renovations totaling
$8,000 were expensed.
(m) The Property has not
been rented out by the Appellant since 1992 and no efforts were
made by the Appellant to rent it.
(n) The Property was
not advertised for sale by the Appellant.
(o) The Property was
used each year since 1992 for vacations by the Shareholder, his
friends and his family at the Shareholder's sole
discretion.
(p) The Shareholder
had the use of the Property for the 365 days of each year under
Appeal.
(q) If the Property
was used by certain employees of the Appellant's and of the
related or associated corporations, it was used at the
Shareholder's sole discretion.
(r) Employees were
not issued T4s by the Appellant or by the related or associated
corporations for the alleged use of the Property.
(s) Related or
associated corporations did not pay for any alleged use of the
Property.
(t) The
Appellant did not use the Property for promotional purposes.
(u) The Property was
managed as a part of a condo complex and annual visits to the
Property by the Shareholder were not required but were
vacations.
(v) The Appellant
did not maintain any books and records with respect to the use of
the Property for the 1996, 1997 and 1998 Taxation Years.
(w) The renting of the
Property was not undertaken in a commercial manner by the
Appellant.
(x) The Appellant
did not have a business plan or an intended course of action to
become profitable with respect to the Property.
(y) The Property did
not provide the Appellant with a source of income.
(z) The Appellant
does not have a reasonable expectation of profit with respect to
the Property.
(aa) The Shareholder and the
Appellant do not deal at arm's length.
(bb) The Shareholder and the
Appellant are related persons.
(cc) The Property is a personal
use property used primarily for the personal use or enjoyment of
the Shareholder and his friends and family.
(dd) The Appellant claimed the
expenses as detailed in Schedule 1, paragraph 13 above with
respect to the Property and vacationing in Hawaii.
(ee) The Appellant paid for
personal expenses incurred by the Shareholder with respect to the
Shareholder and his friends and family's vacation trips to
Hawaii for airline tickets, gas, rental car, hotel and
miscellaneous as follows:
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1996
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1997
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1998
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Airline, gas, rental car Honolulu
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$2,442.12
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Airline tickets, car rental, gas, hotel
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$1,365.87
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Car rental in Honolulu and misc.
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$1,135.39
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Expenses paid for by the Corporation for the
Appellant
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$3,807.99
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$1,135.39
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(ff) Property taxes,
interest and maintenance on an alleged capital investment would
not be deductible as current expenses.
(gg) The expenses, detailed in
Schedule 1 of paragraph 13 above, paid for by the Appellant for
airline tickets, gas, rental car, hotel, the Property's
telephone, utilities, maintenance and interest were not incurred
by the Appellant for the purpose of gaining or producing income
from a business or property, but were personal or living expenses
of the Appellant's Shareholder and Shareholder's family
and/or friends.
B.
ISSUES TO BE DECIDED
19. The issues are:
(a) whether the
Minister properly denied the expenses as detailed in Schedule 1
of paragraph 13 above on the basis that the Property did not
constitute a source of income; and
(b) if it did
constitute a source of income:
(i) whether
the expenses as detailed in Schedule 1 above were incurred
by the Appellant for the purpose of gaining or producing income
from a business or property or whether they were personal and/or
living expenses of the Shareholder; and
(ii) whether the
expenses were reasonable in the circumstances and
(iii) whether they were
capital in nature and not deductible as current expenses.
C.
STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF
SOUGHT
20. He relies on, among
other things, sections 3, 4, 9, 12, 18, 20, 53, 54, 67, 251
subsections 56(2) and 248(1) and paragraphs 18(1)(a), 18(1)(b),
8(1)(h) and 20(1)(a) of the Income Tax Act (the
"Act") as amended for the 1996,1997 and 1998
Taxation Years.
21. He submits that the
disallowed expenses, as detailed in Schedule 1 of paragraph 13
above, were not incurred for the purpose of gaining or producing
income from a business or property within the meaning of
paragraph 18(1)(a) of the Act but were personal or living
expenses of the Shareholder and his family or friends within the
meaning of paragraph 18(1)(h) of the Act.
22. He submits that the
Property did not constitute a source of income for the Appellant
in the 1996, 1997 and 1998 Taxation Years as its rental was not
undertaken in pursuit of profit and was not sufficiently
commercial in nature.
23. He submits that the
disallowed expenses if found to be incurred for the purpose of
gaining or producing income, which is not admitted but is denied,
are unreasonable in the circumstances within the meaning of
Section 67 of the Act.
24. Alternatively, he
submits that if the Property is considered to be a capital
investment of the Appellant, then the property taxes, interest
and maintenance are not deductible as current expenses and are
capital in nature.
[3] Mr. Duce appealed assessments for
calendar years 1996, 1997 and 1998 that he received a benefit
from Audax either as a Shareholder under subsection 15(1) of the
Income Tax Act (the "Act") or as an
employee under section 6 of the Act of $25,079, $21,596
and $24,271 respectively. The Court accepts Mr.Duce's
testimony that, during the years in question, he was not an
employee of Audax.
[4] Of the quote, assumptions 18(a) to
(n) inclusive, (q), (r), (s), (v), (w), (aa), (bb), (dd) and (ee)
were either not refuted or were established by the evidence. Mr.
Duce was the sole Shareholder and Director of Audax and of other
corporations described in assumption 18(d).
[5] With respect to the remaining
Audax assumptions in paragraph 18, the Court finds:
(o) The Appellant has been separated
from his wife, Darlene, since about 1984, when the Property was
purchased. The couple have two sons who are now adults; they only
visited the Property once with Mr. Duce and that was not in 1996,
1997 or 1998.
(p)(t) Audax had the use of the Property for 365 days of
the year. The Shareholder did not. After real estate prices in
Hawaii collapsed in 1992, Audax, because it had been losing money
renting, decided to use the Property for promotional purposes for
Audax's and its related corporations' businesses and it
did so. Based upon the actual use by Mr. Duce in the years in
question, as compared to other users, the Court finds that Audax
did use the Property for promotional purposes and did so
successfully.
(u) The Court finds that annual visits
to the Property by someone on Audax's behalf were necessary
for the purposes of maintenance, upkeep and, generally, good
management. Mr. Duce was that person. Mr. Duce admitted that his
visits were for a "rest" and were 50% personal although
he testified that the first 4 to 6 hours of each day in Hawaii
were usually spent on business. Nonetheless, his visits to Hawaii
were intended to get him away from a very busy little oil
business operated by his various companies in the Estevan area of
Saskatchewan, and they did so.
(x) Audax had a business plan for the
Property from the beginning; it changed slightly, as will be
shown. The Property was purchased to "flip" when its
value reached $500,000 U.S. Audax thought it could rent the
Property and pay the mortgage down at a profit. It could not.
Just before the price collapse in 1992, comparable properties
were selling for over $300,000 U.S. and asking prices were in the
$400,000 U.S. range. After the collapse, combined with a bad
tenant experience and followed by a damaging water leak, Audax
decided to stop losing money by renting and to use the Property
for promotional free stays until the price of $500,000 U.S. was
again achieved. There is no evidence that this selling agenda was
even abandoned, but in the interim, the use had changed.
(y) Thus the Property was used by
Audax for promotion in 1996, 1997 and 1998. The Court finds that
this was successful and proved profitable to Audax both
respecting customer and employee usage. The property was a source
of income to Audax and its related corporations through tips,
discounts and deals it brought about, one way or another.
(z) There is a reasonable
expectation that the Property can be sold at a profit as was
intended when it was purchased. The 1999 Honolulu property tax
assessment of the property fixes its value at $148,900 U.S.
(Exhibit A-2).
(cc) The property is not a personal use
property for the use in enjoyment of Mr. Duce and his friends and
family.
(ff) Is correct as a matter of law,
however, on the evidence, the Property is not a capital
investment. It is an income item, purchased with the intention to
"flip" it at a profit.
[6] Assumption 18(gg) goes to the
heart of the appeal, and will be dealt with as follows:
1. Travel Expenses
The Court finds that Mr. Duce's primary purpose in
travelling to Hawaii in 1996, 1997 and 1998 was for a rest. The
travel expenses he incurred were personal or living expenses to
him and were properly disallowed pursuant to subsection 15(1) of
the Act.
2. Property
Expenses
The Property was acquired for a business purpose, namely to
sell at a profit. In the years in question it was used for a
business purpose, namely to promote the business of Audax and its
related and associated corporations. These two purposes were,
jointly, the primary purposes that Audax owned the Property in
1996, 1997 and 1998. On that basis, the determination of any
personal benefit to Mr. Duce is based upon the actual usage of
the Property. (McHugh v. Her Majesty the Queen, [1995] 1
C.T.C. 2652.) The Court calculates the usage as follows:
(i) Overall Seasonal Days of
Usage Based Upon First and Last Occupancy Dates in Evidence
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1997
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1998
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1999
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Mr. Duce
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14
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17
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29
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Total of all users
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117
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175
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227
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(ii)
Actual Number of Days Used in Each Year
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1997
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1998
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1999
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Mr. Duce
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17
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19
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25
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All users
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87 +or -
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82-5
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130
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Because actual usage is the McHugh criterion, the Court
adopts number (ii) as described. For the three years, Mr.
Duce's usage averaged approximately 20% of the total usage of
the Property.
[7] Therefore, these matters are
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that all of the
travel expenses in question were of personal benefit to Mr. Duce
pursuant to subsection 15(1) of the Act; and that 20% of
the Property expenses in question were a personal benefit to Mr.
Duce pursuant to subsection 15(1) of the Act.
Signed at Ottawa, Canada, this 20th day of May 2003.
J.T.C.C.
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