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Citation: 2009 TCC 10
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Date: 20091130
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Docket: 2006-215(IT)G
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BETWEEN:
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CHRISTINE RABY,
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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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AMENDED REASONS FOR JUDGMENT
Little J.
A.
FACTS
[1] Aapex Driving Academy Ltd. (“Aapex”)
was incorporated under the laws of the Province of
Ontario in 1994.
[2] At all material times, Christine Raby
(“Raby” or the “Appellant”) and her brother, Michael Racine (“Racine”), owned 51% and 49% of the common
shares respectively of Aapex.
[3] Aapex owned and operated a driving
school that offered both classroom instruction and in-car driving lessons to
its customers.
[4] The classroom instruction and driving
lessons were taught by driving instructors employed by Aapex.
[5] The Appellant maintains that she was an
employee of Aapex.
[6] The Appellant maintains that she
received a salary from Aapex in the following amounts (Transcript, p. 110, lines
20 – 21):
(a)
2000
- $28,000;
(b)
2001
- $30,000; and
(c)
2002
- $0.
[7] The Appellant stated that she owned
between 22 to 27 automobiles and one truck (the “Vehicles”) during the relevant
taxation years.
[8] The Vehicles were registered and licensed
in the Appellant’s name (Transcript, p. 103, lines 2 – 5).
[9] The Appellant said that she provided
the Vehicles to Aapex for its use in operating its business; the Vehicles were
used by the driving instructors during driving lessons.
[10] The
Minister of National Revenue (the “Minister”) determined that the Appellant charged Aapex a fee
for the use of the Vehicles based upon a per kilometre rate (“Vehicle Fees”).
[11] The Vehicle Fees that were used for each
of the 2000, 2001 and 2002 taxation years were calculated based on rates
prescribed under Regulation 7306 of the Income Tax Regulations
(“Regulations”).
[12] At the end of each taxation year, Aapex
credited the Vehicle Fees in a shareholder account shared by Raby and Racine
(the “Shareholder Account”). The following amounts were used in the respective
taxation years:
(a)
2000
- $273,991;
(b)
2001
- $343,959; and
(c)
2002
- $431,946.
[13] The Minister determined that the Vehicle
Fees credited in the Shareholder Account were divided equally between Raby and
Racine.
[14] Aapex paid all of the operating expenses
relating to the use of the Vehicles including gas, loan payments, license
payments, insurance, maintenance and repairs (the “Vehicle Operating Expenses”).
[15] At the end of the 2000, 2001 and 2002
taxation years Aapex made an adjusting entry in its books to reverse most of
the Vehicle Operating Expenses for the year by debiting the amount of the Vehicle
Operating Expenses in the Shareholder Account.
[16] The following Vehicle Operating Expenses
were not adjusted in the books of Aapex (the “Unadjusted Operating Expenses”):
(a)
2001
- $19,914 for insurance;
(b)
2001
- $34,383 for maintenance and repairs; and
(c)
2002
- $7,619 for interest on loan payments for the Vehicles.
[17] Counsel for the Appellant maintains that
the Appellant’s portion of the Vehicle Fees credited in the Shareholder Account
was never received by her. Instead, counsel for the Appellant maintains that the
Appellant received cash payments of approximately $580 a week from Aapex for
the use of the Vehicles (“Cash Payments”).
[18] Counsel for the Appellant maintains that
the Appellant received the following Cash Payments from Aapex for the use of
the Vehicles:
(a)
2000
- $31,660;
(b)
2001
- $48,010; and
(c)
2002
- $30,160.
[19] The net of the amounts debited and
credited in the Shareholder Account that were in excess of the Cash Payments
remained in the Shareholder Account.
[20] Most of the driving instructors of Aapex
were permitted to use the Vehicles for their personal use outside of Aapex’s
regular business hours.
[21] The instructors paid the Appellant the
following amounts for personal use of the Vehicles (the “Instructor Vehicle
Fees”):
(a)
2000
- $9,180;
(b)
2001
- $12,500; and
(c)
2002
- $14,920.
[22] During the relevant taxation years, the
Appellant did not include in her income any Vehicle Fees, Instructor Vehicle
Fees, or any other payments received by her with respect to the use of the
Vehicles.
B.
ISSUES
TO BE DECIDED
[23] The issues to be decided are whether the
Minister properly assessed Raby to include in her income the amounts of
$136,995, $178,239 and $222,433 in the 2000, 2001 and 2002 taxation years,
respectively, as business income pursuant to subsection 9(1) of the Income
Tax Act (the “Act”);
C.
ANALYSIS
[24] I found the evidence presented during the hearing by both
parties to be contradictory and confusing. With the limited evidence available
to me, I was able to find the following.
[25] The Minister reassessed the Appellant’s
2000, 2001 and 2002 taxation years to include the Appellant’s portion (50%) of
the Vehicle Fees in her income as business income pursuant to subsection 9(1)
of the Act.
[26] Counsel for the Respondent said that the
theory underlining the reassessments is that the shareholders of Aapex failed
to declare income received through a business they operated in concert with
Aapex. Ms. Bruce said that Aapex operated a driving school and that the
shareholders of Aapex (Raby and Racine) collected income through a car rental
business.
[27] In the Reply to the Notice of Appeal the
Minister denied that the Appellant had received any salary from Aapex in 2000
and 2001 (see subparagraph 11(g)).
[28] The Minister determined that the
Appellant was required to include the income received from the car rental
business in computing her income pursuant to subsection 9(1) of the Act.
[29] During the hearing, counsel for the
Respondent stated that the revised total business income of the Appellant
should be calculated as follows:
Profit earned by
rental of vehicles to Aapex:
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Taxation Year
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2000
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2001
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2002
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Income
Less Expenses
Gas
Loan Interest
Licenses
Insurance
Maintenance & Repairs
CCA
Total Expenses
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281,402.69
64,294.54
10,233.95
1,180.38
27,937.88
37,067.51
51,024.00
191,738.26
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363,862.89
59,727.16
12,589.25
2,378.10
38,953.22
34,549.72
59,860.00
206,057.45
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462, 853.17
74,747.28
13,816.98
2,595.50
38,374.87
54,186.82
56,167.00
239,888.45
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Profit
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89,664.43
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157,805.44
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222,964.72
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Ms. Raby’s net
income:
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Taxation Year
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2000
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2001
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2002
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Profit (from above)
Add: Instructor Vehicle
Fees
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89,664
9,180
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157,805
12,500
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222,965
14,920
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Total
Percentage
attributable to Raby
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98,844
50%
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170,305
50%
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237,885
50%
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Total Net Business
Income
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49,422
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85,153
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118,942
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(Note: This is a
change from the original reassessments.)
[30] During the hearing counsel for the
Appellant maintained that the non-taxable automobile allowance that is provided
for in paragraph 6(1)(b) of the Act should be applied in this situation
with respect to all of the Vehicles owned by the Appellant.
[31] The tax-free automobile allowance
provided for in subparagraph 6(1)(b)(vii.1) is provided for to assist
employees who receive a reasonable allowance from their employers for the use
of their own vehicles while performing their employment duties.
[32] Counsel for the Appellant maintains that
the Vehicle Fees credited in the Appellant’s Shareholder Account should be
tax-free on this basis. Counsel for the Appellant maintains that the Vehicle
Fees were appropriately determined on a per-kilometre basis to provide an allowance
to the Appellant for use by Aapex of her fleet of 22 – 27 Vehicles.
[33] I do not agree with the submissions made
by counsel for the Appellant on this point. Although I accept the Appellant’s
evidence that she is an employee of Aapex, and that the Vehicle Fees were
calculated on a per-kilometre basis, I do not believe that subparagraph
6(1)(b)(vii.1) would provide a tax-free allowance to an employee who provides
an entire fleet of automobiles to her employer for use in the operation
of the employer’s business. Such an allowance in these circumstances is not a
“reasonable allowance”, as is required by subparagraph 6(1)(b)(vii.1).
[34] However, as an employee of Aapex, the
Appellant also used the automobiles during driving lessons. On this basis, I
have concluded that the Appellant should be allowed to receive a reasonable
allowance for two automobiles on a tax-free basis pursuant to subparagraph
6(1)(b)(vii.1). The reasonable allowances should be calculated on a
per-kilometre basis, using the appropriate rates provided under the Regulations.
[35] For the remaining 20 – 25 Vehicles owned
by the Appellant in the relevant taxation years, I have concluded that
subparagraph 6(1)(b)(vii.1) does not apply to the respective Vehicle Fees to
exempt them from being taxed in the hands of the Appellant.
[36] Counsel for the Respondent maintains
that the Appellant and her brother were operating a car rental business.
[37] Based on the evidence before me I have
concluded that the Appellant and Racine were operating either a car rental
business or an adventure in the nature of trade when they provided 22 – 27
Vehicles to Aapex.
[38] However, I do not agree with the
Minister’s calculation of the Appellant’s business income with respect to the
Vehicles. The revised total net business income amounts for the Appellant
includes the full amount of the Appellant’s portion of the Vehicle Fees,
Instructor Vehicle Fees, less the Vehicle Operating Expenses and CCA.
[39] I accept the Appellant’s evidence that
the full amount of the Vehicle Fees were never actually received by her.
Instead, the Vehicle Fees were simply a year-end calculation of the appropriate
automobile allowance under subparagraph 6(1)(b)(vii.1), based on the rates
provided under the Regulations. The Vehicle Fees, along with the Vehicle
Operating Expenses, were simply credited and debited in the Shareholder Account
the Appellant shared with her brother.
[40] I find it significant that the Appellant
only received the Cash Payments from Aapex for the use of the Vehicles. In
addition, the Appellant received the Instructor Vehicle Fees directly from
those instructors for personal use of the Vehicles.
[41] At the year-end of each relevant
taxation year, Aapex made the appropriate journal entries for the Vehicle Fees
and the Vehicle Operating Expenses. Any amounts that exceeded the Cash Payments
and Instructor Fees received by Raby were credited in the Shareholder Account.
I accept the Appellant’s evidence that she did not receive any of these
additional amounts that were credited in the Shareholder Account.
[42] In the absence of any records indicating
that the Appellant actually received the full amount of her portion of the
Vehicle Fees, I have concluded that only the actual cash payments that she
received from Aapex and the Instructor Vehicle Fees that she received should be
included in her income in each of the relevant taxation years. The Cash
Payments received in each relevant taxation year is the true net amount of
funds received by the Appellant in exchange for the use of the Vehicles by
Aapex.
[43] Based on the evidence before me, I am
satisfied that the Appellant received the Cash Payments and Instructor Vehicle
Fees in full and that these payments were not shared with Racine. Therefore, the entire amount of
these payments should be included in the Appellant’s income.
[44] I have concluded that the Appellant’s
business income pursuant to subsection 9(1) of the Act for the relevant
taxation years should be determined as follows:
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Taxation Year
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2000
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2001
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2002
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Cash Payments
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$31,660
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$48,010
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$30,160
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Instructor Vehicle
Fees
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9,180
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12,500
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14,920
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Total Net Business
Income
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$40,840
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$60,510
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$45,080
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[45] The Appellant should also be allowed a
non-taxable automobile allowance for two vehicles pursuant to subparagraph
6(1)(b)(vii.1) of the Act.
[46] The appeals are allowed, and the
Minister is to reassess the Appellant in accordance with the conclusions
outlined above. Since success is divided by the parties I am not prepared to
award costs.
Signed at Vancouver,
British Columbia, this 30th day of November 2009.
Little
J.
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