Enright v. The Queen, docket 97-1120-IT-G

Date: 20001031

Docket: 97-1120-IT-G

BETWEEN:

MARTIN ENRIGHT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1]            This appeal pursuant to the General Procedure was heard at Victoria, British Columbia on October 18, 2000. The Appellant testified and called Jane Buddy and Alexander Cockburn, who both manage boat charter brokers in the Vancouver area.

[2]            The Appellant has appealed assessments for his 1993 and 1994 taxation years which disallowed expenses he claimed respecting the Honey Bear II, a 41' yacht. Paragraphs 7, 8 and 9 and Schedule A of the Reply to the Notice of Appeal read:

7.              In so reassessing the Appellant, the Minister relied on, inter alia, the following assumptions of fact:

(a)            the facts stated in paragraph 2 above;

(b)            the Appellant has been a pleasure boater since 1974;

(c)            at all material times, the Appellant was employed full-time as a commercial airline pilot with Canadian Airlines International, as a result of which he was away for extended periods each month, and he earned the following amounts from that employment in the 1990 to 1994 taxation years:

Taxation Year	Income
1990	$112,395
1991	129,833
1992	134,599
1993	115,589
1994	139,852

d)             the Appellant owned a 38-foot Chris Craft boat valued at approximately $132,500, and on or about March 22, 1988, the Appellant traded in that boat and purchased a 47-foot Chris Craft boat called the Honey Bear II (the "Boat") for a total purchase price of $155,000;

e)              during the remainder of 1988 and throughout , the Appellant overhauled the Boat and added improvements and equipment to bring the undepreciated capital cost of the Boat to $255,000;

f)              the Appellant began using the Boat for charter operations in 1990;

g)             from 1990 to 1994, the Appellant reported the following gross revenue, expenses, and business losses from the Activity, as further detailed in the attached Schedule "A":

Taxation Year	Gross Revenue	Expenses	Net Income (Loss)
1990	$1,500.00	$12,645.00	($11,145.02)
1991	2,300.00	11,686.51	(9,386.50)
1992	2,500.00	19,309.98	(16,809.98)
1993	4,910.00	54,788.71	(49,878.71)
1994	10,530.00	54,913.87	(43,663.87)
TOTAL	$21,740.00	$152,623.93	($130,884.08)

h)             at all material times the Boat was moored in Vancouver, B.C. and the Appellant lived on Vancouver Island, B.C.;

i)               the Appellant signed a contract with Delta Charters Inc. ("Delta Charters"), pursuant to which Delta Charters secured charters for the Boat and provided a cook in exchange for a fee of 20%;

j)               the Appellant personally skippered all charters which were secured through Delta Charters;

k)              at all material times, the normal charter rate for the Boat was $650 per day or $4,500 per week;

l)               the main charter season runs from June 18 to September 18 (a total of 90 days);

m)             in 1993, the Boat was used 25 days for a total engine log time of 68.10 hours, and in 1994, the Boat was used 28 days for a total engine log time of 112.70 hours, as detailed in the attached Schedule "B";

n)             for 3 days in 1993 and 13 days in 1994, the Appellant rented the Boat to a friend and fellow pilot, Mike Dressler, at a rate of $250 per day, during which times the Appellant did not skipper the Boat and no cooking services were provided (the "Dressler Rentals"),

o)             the days used and engine log time referred to in paragraph (l) above include personal use by the Appellant and also include the Dressler Rentals;

p)             the Boat was never chartered in June of any year;

q)             the gross revenue in 1993 and 1994 is detailed as follows:

Revenue	1993	1994
from Delta Charters	4,160.*	7,280.**
from Dressler	750.	3,250.
Total	$4,910.	$10,530.
*               two short term charters
**            one two-week charter

r)              the Appellant claimed CCA in 1993 and 1994 only, in the amounts of $34,425.00 and $33,086.25, respectively. The maximum permissible CCA was not claimed in 1993;

s)              the Appellant made capital acquisitions which were not included in the CCA schedule, including a 14-foot Boston Whaler (valued at approximately $10,000), a Honda generator ($600), and capital repairs to the Boat ($5,000);

t)              in 1991, repair expenses in the amount of $2,274.77 were incurred with respect to the Activity but not included in the expenses claimed;

u)             at all material times, there was a mortgage on the Boat (the "Mortgage"), and in each of the years from 1990 to 1994 inclusive, the interest expense on the Mortgage exceeded the gross revenue:

	1990	1991	1992	1993	1994
Interest Expense	$15,795	$15,390	$13,343	$11,147	$12,051
Gross Revenue	1,500	2,300	2,500	4,910	10,530

v)             the Appellant ceased the Activity in 1994;

w)             the Boat was not acquired by the Appellant for the purposes of gaining or producing income from a business or property;

x)              the Claimed Business Losses were not made or incurred for the purpose of gaining or producing income from a business or property; and

y)             the Appellant did not have a reasonable expectation of profit from the Activity during the 1993 and 1994 taxation years, and

z)              the expenses claimed in relation to the Activity were personal or living expenses of the Appellant.

B.             ISSUES TO BE DECIDED

8.              The only issue under appeal, as set out in the Appellant's Notice of Appeal is, whether the Appellant had a reasonable expectation of profit from the Activity in the 1993 and 1994 taxation years.

C.             STATUTORY PROVISIONS RELIED ON

9.              He relies on sections 3 and 9, paragraphs 18(1)(a), 18(1)(h) and 20(1)(a), and subsection 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), as amended (the "Act").

SCHEDULE "A"
BUSINESS LOSSES CLAIMED
FOR FISCAL PERIODS ENDING DECEMBER 31, 1990, 1991, 1992, 1993 and 1994
	1990	1991	1992	1993	1994
Reported Gross Revenue	$ 1,500.00	$ 2,300.00	$ 2,500.00	$ 4,910.00	$ 10,530.00
LESS:       Operating Expenses claimed:
Motor vehicle/Automotive	($ 590.00)	($ 520.54)	($ 1,073.07)	($ 1,461.86)	($ 1,854.65)
Insurance	( 1,735.00)	( 1,815.00)	( 1,895.00)	( 1,752.88)	( 1,945.00)
Interest	( 15,795.00)	( 15,390.00)	( 13,343.47)	(11,147.38)	(12,051.22)
Heat, Light water	( 594.92)	( 597.70)	-	( 527.58)	-
Maintenance and Repairs	( 1,084.79)	( 1,570.00)	( 1,218.03)	( 1,872.63)	( 1,988.44)
Moorage	( 2,708.51)	( 2,881.32)	( 3,417.43)	( 3,224.44)	( 3,636.38)
Legal, accounting	-	-	( 230.75)	( 241.10)	( 284.25)
Telephone	-	-	( -. )	( -. )	( 410.03)
Office	-	128.28	-	( 135.84)	( -.00)
Total Operating Expenses claimed	($ 22,508.22)	($ 22,902.21)	($21,177.75)	$20,363.71)	($22,169.97)
Add:        Reduction to expenses for
personal usage	9,863.20	11,215.71	1,867.77	nil	1,062.35
Net Operating Expenses claimed	($12,645.02)	($11,686.50)	($19,309.98)	($20,363.71)	($21,107.62)
Net Income/(Loss) before claims for
Capital Cost Allowance ("CCA")	($11,145.02)	($9,386.50)	($16,809.98)	($15,453.71)	($10,577.62)
Less:        CCA on Class 7 assets	( nil )	nil	nil	(34,425.00)	(33,086.25)
Net Income/(Loss)	($11,145.02)	($9,386.50)	($16,809.98)	($49,878.71)	($43,663.87)

[3]            The Appellant testified that he accepted assumptions 7(a), (b), (d), (e), (f), (g), (h), (j), (k), (o), (q), (r) and (v). Paragraphs (c) and (m) were not refuted by the evidence. To assumption (i) it should be added that the customer, not Delta, paid for a cook. To assumption (c) it should be added that some of the extra log time was business use for repairs or transporting Honey Bear II between its Vancouver moorage and Vancouver Island for business purposes, but these were quite minor time periods insofar as actual usage for business purposes is concerned. The Appellant used these occasions and substantial additional time relating to them for personal enjoyment purposes. Respecting assumptions (s) and (t), the Appellant regarded these as personal and the Court finds them to be personal. Assumptions (w) to (z) are the subject of the dispute.

[4]            The Appellant was born in New Zealand in 1950. He sailed while he lived there. He immigrated to Vancouver, Canada in 1968. He trained as a pilot until 1970 and then obtained work as a pilot. In 1972 he joined what is now Canadian Airlines. He has been with that corporation since then. Commencing in 1986 Canadian Airlines began having serious financial problems that became general public knowledge shortly thereafter. The Appellant testified that as these developed he looked at his prospects as a pilot with other airlines and decided that his age was a disadvantage and that he would not likely get new employment as an airline pilot.

[5]            Commencing in 1974, the Appellant had owned fair sized boats and had sailed the British Columbia coastal waters. He first had a 31-foot Chris Craft and traded it in 1980 for a 38 foot Chris Craft. On March 22, 1988 he traded it for a 47 foot Chris Craft priced at $155,000, which he named the Honey Bear II. (Exhibit AR-1, Tab 8).

[6]            Before purchasing the Honey Bear II he had inquired about charters. He learned that he had to have diesel engines (in contrast to his previous personal boats' gasoline engines); the bedrooms and bathrooms had to be of stateroom standards and separate from the crew; the deck had to be high from the water, contrary to personal fishing boats; and it had to be well-equipped electronically and for navigation purposes. Moreover, the boat had to be large. All of these characteristics were in Honey Bear II and not in his earlier boats.

[7]            His inquiries to charter brokers were all preceded by the warning that they had to see his boat first before they would agree to broker it for charters. The Appellant is believed about these facts. He is also believed when he testified that he calculated projections about his income from charters. Exhibit A-1 contains the essence of these calculations, although it was prepared and typed after Revenue Canada began assessing him for 1990 – 1992 and then 1993 – 1994.

[8]            Charters were popular and there was good revenue from them in Vancouver in 1988 for a well turned out boat of Honey Bear II's size. The weekly rate with a skipper (the Appellant) was $4,500. The customer had to pay all other expenses including extra crew and fuel. A similar daily rate was $600 to $700. An established boat with about a 15 year history could expect about 100 days of charters or about 15 or 16 weeks. At 15 weeks, that would gross $67,500. The charterer's (charter brokers) fee was 20%, to yield an annual income to the Appellant of $54,000.

[9]            After paying $155,000 for Honey Bear II on March 28, 1988, the Appellant had to refit it to bring it up to standard for charter purposes and broker inspections. He did much of this himself at Sidney, thereby raising its value to $255,000. He then remortgaged the boat to pay for this in May of 1990 for $130,000 (Exhibit AR-1, Tab B). It was not until then that it was fit to charter and after that both Ms. Buddy and Mr. Cockburn saw it and approved of it for charters. However, after 1989 the charter market dropped sharply until 1996, at which time, Mr. Cockburn testified, the volume of charters in the Vancouver area was 50% of the 1989 figure. This was confirmed by Ms. Buddy, of Bayshore Charters, a daily charterer. When Ms. Buddy saw the Honey Bear II in about 1990 she told the Appellant that the boat was fine, but she had to supply work to her veteran boats first and he should list elsewhere as well. Mr. Cockburn, who charters by the week as "Delta", gave the same advice. The Appellant took the advice and also listed with the third major charterer, Creative Charters, operated by Wendy McNabb, who closed and disappeared suddenly in late June, 1990. McNabb had booked some charters for the Appellant but they were lost when she disappeared.

[10]          The Appellant was allowed losses claimed for 1990, 1991 and 1992 on a start-up basis.

[11]          For 1993 and 1994, cross-examination indicated that the actual charter use of the Honey Bear II, according to its log book of engine hours, including its few charters and its use by Dressler (on rental at $250 per hour) was such that in each year they totalled less than 50% of total engine hours. The Appellant testified that additional hours were used transporting the vessel from its Vancouver moorage to his personal home harbour at Sidney, British Columbia. But this is a maximum four hour trip which took days as he crossed. Similarly, repairs were done while doing a day cruise; that might be advisable on occasion, but in this case it was frequent. Thus, about 50% of the engine hours in each of 1993 and 1994 appear to be personal. But the Appellant did not show any personal use in 1993 and in 1994 he showed $1,062.35 out of $21,107.62 in operating expenses as personal.

[12]          Moreover, Mr. Cockburn testified that a charter boat, for best charter results, should be moored at the charter broker's location. The Appellant could not do that with either Ms. Buddy or Mr. Cockburn. But during the main summer charter season, it spent far more time near his home in Sidney than at its mooring in Vancouver where the brokers and their customers were.

[13]          It is in light of this evidence and the evidence that before this proposed business, the Appellant sailed yachts extensively as a hobby, that the Court finds that the Appellant's operation of the Honey Bear II had "a strong personal element" to use the words of Linden, J.A. in Enno Tonn et al. v. The Queen (F.C.A.), 96 DTC 6001 at 6002. Sailing has clearly provided the Appellant with personal satisfaction and enjoyment over all of the years of his life.

[14]          On its history, the Honey Bear II was not a purely commercial operation. Generally, and on the evidence, the Appellant was its only crew; it was small scale and personal. The Appellant's plan was premised on achieving charter hours accomplished by veteran operators after years of experience (with developed customer relations). The Appellant was allowed three start-up years and did operate in a sharply declining market after 1989. However, even given the long term start-up required, operating expenses based on very little sailing activity from 1990 to 1994 averaged about $22,000 per year. With active charters they would be much higher if only due to operation costs, wear, tear, maintenance and repairs due to heavy use. Early capital cost allowance was over $30,000 per annum. Given this and an overly optimistic income forecast of $54,000 per year in a full season, a profit was not foreseeable. No estimates were obtained from any witness of what income the Appellant might have expected in the good year of 1988 with five or ten years of charter experience or even on a start up basis. As depreciation occurred, repairs and maintenance from active use would increase.

[15]          The Appellant testified that he expected chartering to yield him a living. The actual prospective numbers in both 1990 and 1992 (and for that matter in 1988, insofar as there is evidence of costs) indicates that after the vessel costs, in his best scenario, nothing would be left either for income for the Appellant or profit for the Honey Bear II.

[16]          Thus, on the figures presented, the Honey Bear II might possibly break even over a long time but it was unlikely to be profitable; the Appellant and his boat knew sailing, but had no experience or training in charter customers – that aspect had to be learned as did business operating skills; in the years on record there were only losses and the Appellant quit the business in 1995 (due at least in part to the Revenue Canada audits). Losses were incurred in all years of operation with or without charging capital cost allowance. While part of this might be due to the market, it is also true that the boat was not left in Vancouver for customer viewing, it was getting personal use in the prime commercial season. Adjusting to the failing market would certainly mean mooring Honey Bear II in Vancouver constantly when it was not on charter. The Appellant invested a reasonable amount of capital into Honey Bear II and he had the hours available and Captain Dressler available for charter purposes. But the charter operation of Honey Bear II itself had no reasonable expectation of profit based upon the numbers that were available to the Appellant in 1988, 1990 or 1992.

[17]          For this reason, the appeal is dismissed.

[18]          The Respondent is awarded party and party costs.

Signed at Calgary, Alberta this 31^st day of October 2000.

"D.W. Beaubier"

J.T.C.C.