Digby R. Kier v. Minister of National Revenue, [1990] 1 CTC 2055, 89 DTC 710

Kempo, T.C.J.:—The present appeals are from reassessments for the appellant's 1981, 1982, 1983 and 1984 taxation years. Several distinct issues have been raised which will be dealt with separately.

The appellant is a barrister and solicitor. He has been employed on a full- time basis since 1967 as legal counsel with the federal Department of Justice. Through this avenue he met and developed a close personal and businessadvisory relationship with one Mr. Walter Waterhouse, a former Revenue Canada employee. Through this contact he also came to know one Mr. Tom Graham who had similarly been employed with Revenue Canada. During the period in question the appellant was interested in investment opportunities to augment his employment income, and at all times material he relied heavily on the knowledge, research capability and advice of Mr. Waterhouse. More will be said about this later.

In the filing of his returns of income for the years under appeal, the appellant claimed items of revenue and expenses under the appellation “Kier Enterprises" which included five alleged “business sources" encompassing ventures in respect of (a) an investment with one Mr. Ahlgren, (b) a 44-foot sailing ketch, (c) classic-car leasing, (d) antique furniture acquired for resale and (e) other investment matters. Also found in the subject returns were statements of revenue and expenses concerning rental of a part of the appellant's home.

I propose to deal with the last matter first.

Rental of Home Property

The subject house had been acquired by the appellant and his wife in 1974. Following their separation and divorce, the appellant sought to rent out the unoccupied bedrooms to help alleviate the mortgage and maintenance costs.

In 1981, the total reported rental revenue was $4,500 which was paid by two tenants, one of whom occupied an upstairs bedroom and the other a bedroom in the basement. Each paid $250 per month and each was entitled to share in the house amenities. The appellant allocated two thirds of the total expenses against rental revenue which resulted in a net loss of $2,535.72 for 1981.

In 1982, the total reported revenue was $1,700. One tenant paid $200 per month and stayed until the end of August. She occupied the upstairs bedroom for four months and also did household chores, decorating and painting. Two tenants were there in the fall. One tenant, Bill Leskow, occu- pied the upstairs bedroom. Instead of paying rent he received $20 per week and free accommodation in exchange for labour done on the premises. The other, Steve Coleopy, stayed downstairs but cooked and showered upstairs. He paid $300 per month. After application of two thirds of the expenses, there was a net loss of $8,113.92.

In 1983, the two tenants remained under the same circumstances and the total revenue was $3,600. Two thirds of the claimed expenses resulted in a net loss of $5,472.34.

In 1984 Mr. Coleopy vacated after five months. Mr. Leskow had fixed the drains in the basement and had assisted in the building of a downstairs suite as well as in the repair and rebuilding of an outside deck. A new tenant occupied the basement on October 1 at $400 per month. The rental revenue for 1984 was $2,700 and, after the two-thirds expense application, a net loss of $6,396.03 was reported.

The respondent readjusted the expenses with respect to an allowable amount for mortgage interest, and disallowed costs relating to matters of cablevision and telephone, drapery, chair recovering, basement suite construction and sundeck roofing. The reassessments in issue reduced the claimed loss amounts by, inter alia, allowing only one third of certain expenses as against rental revenue.

The evidence was that the rental plan was initially and essentially to help defray the appellant's large mortgage expenses, and that main-floor kitchen and living room use privileges were to be permitted to the tenants. Until the fall of 1984 the downstairs area lacked a kitchen and an adequate shower and bath facility. There were occasions during the four-year period under review when tenant occupation had been reduced to one or none.

On viewing the matter in its entirety, and noting that the tenants were accorded, or to be accorded, non-exclusive use and liberties in the general areas of the premises, that reasonable efforts had been made to gain tenant occupancy, that reasonable and fair market value rents had been charged, that the barter arrangement with Bill Leskow had effectively resulted in a substantial set-off, it is my finding that the impugned expenses were all laid out for the purposes of gaining or producing rental income within the meaning of paragraph 18(1)(a) of the Income Tax Act (the Act) but only to the extent of one third thereof as assessed and not two thirds as claimed by the appellant.

Further, an objective compilation of the actual circumstances here is that the household furnishings were frequently shared, and accordingly the respondent has erred in the disallowance of the entire expenses in relation to cablevision and telephone, drapes, and chair recovering. These items of expense plus the expense amount of $797.18 mentioned in the immediately following paragraph are to be allowed to the extent of one third.

The last item under this particular issue concerned the identification of capital type expenditures incurred in 1984 on building the suite in the basement and erecting the roof over the outside deck. During the course of the hearing the parties entered a document (Exhibit R-12) setting out their agreement as to some relevant facts which confirmed that the deck and suite expenses were non-deductible capital expenses under paragraph 18(1)(b) of the Act to the extent of $2,649.35 and that the amount of $797.18 was incurred that year on account of maintenance and repairs under paragraph 18(1)(a) of the Act.

Lastly, the appellant no longer disputes to the accuracy of the respondent's adjustments made on reassessment in respect of the National Trust mortgage interest adjustment for each of the 1981, 1982 and 1983 taxation years concerning this property.

Kier Enterprises

(a) The Ahlgren venture

During the spring of 1980 the appellant, through the introduction and advice of Mr. Waterhouse, became involved with a venture comprising of the manufacture, marketing and franchising of a metrigraph which had been invented and patented by one Mr. Ahlgren.

As a result of inquiries made and information received the appellant insisted that his intended $41,800 monetary contribution, which he initially had agreed would go into a corporate vehicle, would instead be advanced personally to Mr. Ahlgren. It was to command interest at the rate of prime plus two per cent. Each advance was made to Mr. Ahlgren, and each was secured by his promissory note.

Both the appellant and Mr. Waterhouse testified that a lot of time and effort was expended into getting into this venture and that at the time it had every good prospect of being a money maker. The appellant explored the prospects of marketing the metrigraph venture in Washington, U.S.A. and incorporated a company there for this purpose. He also had made a down payment on a printer.

It seems very little else actually happened during 1980 for in early February of 1981 the appellant learned that not only was Mr. Ahlgren's house up for sale but that it had been transferred to Mrs. Ahlgren subsequent to the full advance of his loan.

Legal actions were commenced immediately, writs were issued and a lis pendens was filed against the Ahlgren house. Notwithstanding Mr. Ahlgren's vigorous defence that the appellant's moneys had not been loaned to him but rather was a corporate debt, the appellant achieved a successful result in November of 1981.

Because of these legal activities the appellant secured the principal loan amount and obtained interest income to the extent of $12,618.60 during the 1981 taxation year. Lesser amounts ensued in subsequent years because the civil judgment effectively reduced the interest rate to five per cent on the judgment amount. On reassessment, the respondent allowed the interest expense incurred on the appellant's borrowing of the moneys loaned to Mr. Ahlgren and disallowed all legal and alleged accounting fees paid on its collection on the premise that they were in the nature of non-deductible capital expenditures. A Mr. Ramsay testified on behalf of the respondent. During cross-examination he ventured the view that these professional fees, once properly identified, may have been accorded eligible capital expenditure treatment if the appellant had so requested.

It has been agreed that the legal fees expenditures in this matter amounted to $5,597.68. It was the evidence of the appellant and Mr. Waterhouse, which I accept, that Mr. Waterhouse's account dated March 31, 1981 for $2,500 related to the Ahlgren matter in all of its aspects, and that this amount was reasonable for the time and effort expended to that time.

The appellant’s position was that the principal loan amount sought to be recovered from Mr. Ahlgren was his own “circulating capital” which was needed to get back into some other business which he likened to that of

. . . circulating capital [which] was said to be that form or part of the wealth of a taxpayer which is intended to be used, in the sense of being temporarily expended, dedicated or disposed of by circulation in the business undertaking, and which comes back to headquarters bringing a profit.

Per Estey, J. in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.) at 121 (D.T.C. 5380). However it would be erroneous to view that statement in isolation from the words immediately following, that, "Such is the case with inventory in a sales enterprise".

The appellant purported to analogize his investment seed-money with that of an inventory-type asset. Factually, however, he was not in the business of acquiring and turning-over his investments for profit such that the capital put up in the Ahlgren venture could be categorized as in the nature of inventory. Rather, the appellant's evidence was that he was desirous of assembling a portfolio of investments from which he could augment his income. When obtained, such investments are capital in nature; they may produce capital appreciation or yield dividends; viz, Canada v. Leonard R. Young, [1989] 1 C.T.C. 421; 89 D.T.C. 5234 (F.C.A.) at 424 (D.T.C. 5236).

I agree with the submission of counsel for the respondent that the appellant's prime concern was to get back as much money as he could from Mr. Ahlgren on account of the capital sums advanced, and that the legal expenditures were essentially and primarily directed to that end. Once the legality of the capital indebtedness was determined, and its security for payment was ensured, then the preservation of the interest thereon of prime plus two per cent to the date of judgment and five per cent thereafter followed as a consequence.

However, fairness and common sense calls for some appropriate part of the legal expenses of $5,597.68 to be attributable to and deductible from the acknowledged $12,618.60 interest income for the 1981 year under the provisions of paragraph 18(1 )(a) of the Act. Respondent's counsel averred to this in an alternative submission. While due recognition should be given to the fact that it amounts to almost thirty per cent of the capital amount, the ancillary aspect nonetheless calls for some discount.

The Court holds that the amount of $1,000 is to be allowed in 1981 as a deduction for legal fees pursuant to paragraph 18(1)(a) of the Act for this purpose. While fully appreciating that this amount is somewhat arbitrary, I believe it is in the best interests of the parties to fix what the Court perceives to be a reasonable, but nominal, amount in this respect, given its subordinate nature.

On the other hand, I am unable to accord the same approach to any part of Mr. Waterhouse's fees which amounted to $2,500 as of March 31, 1981. Much of that amount related to matters involving the acquisition of the Ahlgren venture (capital) and of the meetings and of the running around trying to gain information so as to be able to collect the money. It was the legal action that brought about the result, not the continuing support and advice of Mr. Waterhouse who had urged the investment in the first place. When viewed in its proper context, his assistance was totally directed to the recovery of the appellant's capital loan.

Before leaving this subject, I would concur with respondent-counsel's submission that the cases of Gladys Evans v. M.N.R., [1960] S.C.R. 391; [1960] C.T.C. 69; 60 D.T.C. 1047 (S.C.C.) and Frappier v. The Queen, [1976] C.T.C. 85; 76 D.T.C. 6066 (F.C.T.D.) are both substantively distinguishable on their facts. In Evans, and while I am not disregarding the capital nature of the right sought to be preserved, it is quite correct that all of the amounts sought to be recovered would have been on income account since she was seeking to recover amounts as a life-tenant. In Frappier, she had incurred the expense of compensating former clients in the course of, and for the purpose of, continuing to earn income from her brokerage business. In the case at bar, by the end of 1980 the Ahlgren venture had come to an end, and all that was left to the appellant thereafter was to try and recover his invested capital.

(b) Expenses of Kier Enterprises-1981 to 1984 inclusive

It is relatively clear from the testimony that a great deal of the appellant's time, effort and expense, and the time and effort of Mr. Waterhouse, were all laid out in respect of the appellant's search for investment opportunities. He used and relied heavily upon Mr. Waterhouse's research and analytical abilities in these areas, and he sought his advice and counsel frequently. Meetings were held, and automobile and alleged promotional expenses were incurred. Throughout all the years under appeal, and notwithstanding Mr. Waterhouse's advice and knowledge of fiscal matters, the appellant persistently failed to keep a log or an accounting record of expenditures incurred in connection with any particular source of his alleged business activities. Indeed, the evidence in its entirety infers that the appellant had felt no need to source each activity with its concomitant expense but rather he felt that all could be lumped together in the cause of the alleged business of "Kier Enterprises" during each of the years under appeal.

During the trial the appellant and counsel for the respondent valiantly attempted to allocate various expenses against various automobiles owned and used by the appellant in respect of each of his ventures. Notwithstanding this effort, substantial amounts for each year have been unallocable. The same exercise and results occurred concerning matters of advertising and promotion. In form and substance, the appellant sought to defend and uphold his position that the allocation of 50 per cent of all of the identified matters to the Kier Enterprise business was eminently reasonable, that it should be allowed on that basis, and that since the unallocable amounts were "connected to" the business of Kier Enterprises they too should be allowed.

Firstly, I do not accept the appellant's position that just about anything that came under the name "Kier Enterprises" was a deductible expense. As will be seen later in these reasons, each of the ventures undertaken were fiscally distinct from the other.

Secondly, in situations where the appellant himself has been unable to make any sort of reasonably identifiable allocation of expenditures or allowances amongst his various activities apart from his own and Mr. Waterhouse's "judgment call”, the Court is in no better position to do so and is thus compelled to find that the appellant has failed to discharge his evidentiary onus of proof in that respect. That the respondent may have had some sort of administrative approach to the matter is neither determinative nor helpful.

Finally, recent authority has it that in circumstances where a taxpayer is not a trader or dealer in investments or securities, amounts expended to investigate or assemble potential investments are on account of capital, and are not deductible under paragraph 18(1)(a) of the Act; see Canada v. Leonard R. Young, supra, and D. Morgan Firestone v. The Queen, [1987] 2 C.T.C. 1; 87 D.T.C. 5237 (F.C.A.).

(c) The 44 foot sailing ketch: "The Brava Jeannie"

In 1981 the appellant, with the help and advice of Mr. Waterhouse, acquired a 44-foot sailing ketch known as the "Brava Jeannie”. It had been recently built with a reconditioned motor by one Mr. Bourassa who had intended to sail it to Australia. Mr. Waterhouse had counselled the appellant on the financial and fiscal consequences with respect to its acquisition and use, but he said he did express reservations and doubts to the appellant about the whole venture at the time.

One of the prime motivators for the acquisition rested on the urging and advice of Mr. Tom Graham who was running his own large fishing-boat charter operation on the Sunshine coast area. He assured the appellant of many referrals, and that he had little doubt but that the vessel could command $600 per day, crewed, for at least 20 days in each of June, July and August plus some days in late May and early September, Mr. Graham was to take 20 per cent of the charter rate in exchange for the referral, catering services, and the making up of advertising brochures which were to be placed in various hotels+# Vancouver. Mr. Waterhouse offered to crew the vessel at $100 per day.

The vessel was optioned by the appellant for $500 on October 2, 1981 which was exercised on December 29, 1981 for the full purchase price of $87,500. The option period was taken on the expectation that some referrals and charter revenue may still be gained during the tail-end of the season. The appropriate insurance was obtained, and the vessel was actively touted and made available for lease on either a crewed or bare-boat basis. No charters were had during the option period.

By June of 1982 nothing had happened and meetings were held. Mr. Graham advised that his fishing charters were getting cancellations, and that his own business was dropping rapidly from that of the previous two years. The appellant's reaction and response was the placement of a small ad in the Vancouver Sun and in the Seattle Post. One individual from Los Angeles responded. He wanted and contracted for a five day non-crewed charter from April Point on Vancouver Island for $1,500. No net income was enjoyed from this venture because, apart from the troubles with the client, the appellant paid Mr. Waterhouse $1,000 to take the vessel there and back plus $625.15 for motor repairs.

As noted earlier, the vessel was newly constructed. However the evidence was replete with instances of engine failures and troubles, and that much of the appellant’s time was spent on the boat trying to fix it.

In the spring of 1983 other meetings followed between the appellant, Mr. Waterhouse and Mr. Graham. Mr. Graham was then unwell, and he died in May of 1983. The engine and water-pump were still presenting ongoing problems, however a few charters were arranged resulting in gross revenue of $1,600 for 1983. Matters did not improve in 1984 as there was gross revenue of only $1,800. It was then discovered that the advertising brochures put in the hotels had likely been consistently removed. The appellant had left the matter up to Mr. Graham; he had not done any independent checks or follow-ups on his own.

The appellant stated he was not a boat person and that apart from testtype runs he did not use the boat personally - while his son may have done so on a few occasions. One part of the game plan was the expectation that the oncoming 1986 Expo event would put the venture in the black, and that it was reasonable to wait it out.

The evidence for the four years under appeal was that the revenues were insignificant, that the losses were substantial after charging capital cost allowance, that the appellant had no training, that he relied on and put all of his eggs in the Tom Graham basket, that only very minimal business-like approaches and methodology was employed, that the promotion and advertising was parsimonious and was known to be ineffective as early as the spring of 1982, and that top dollar was being asked and expected in order to protect and preserve the quality outfitting of the vessel. A jib-set type of operation was rejected in favour of word-of-mouth advertising, with retention by the appellant of full control over all aspects of the chartering.

The appellant seeks entitlement to deductions in the nature of business losses arising out of the charter venture in the rounded out amounts of $16,628 (includes capital cost allowance of $16,300) for 1981, $17,026 (includes capital cost allowance of $13,377) for 1982, $2,026 for 1983 and $1,514 for 1984. The claim for the latter two years' losses excluded capital cost allowance and were solely operational losses. In fact for all the four years, the appellant had suffered operational or cash-flow losses.

The appellant has conceded that a class 7 capital cost allowance (15 per cent) is attributable to the whole of the vessel, and that the respondent's position was correct that it was not to be partly of that class and partly of class 8 (20 per cent) as originally claimed; viz., Mersey Seafoods Limited v. M.N.R., [1985] 2 C.T.C. 2485; 85 D.T.C. 731 (T.C.C.) at 2498 (D.T.C. 740-41).

To capsulate, the appellant submitted that this venture had a reasonable expectation of profit, that the charter was to be on a fully crewed basis amounting to a business, and that the venture was free of the leasing property restrictions upon which the respondent had relied.

Analysis

As to the first matter, the classic statement of the law is found in Mold- owan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213): (S.C.C.) per Dickson, J. (now Chief Justice) at 314-15 (D.T.C. 5215).

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193.

The appellant had no previous training or experience in boat chartering. Notwithstanding the reservations of Mr. Waterhouse, the appellant concluded the venture could succeed because of Mr. Graham's advice, enthusiasm and assurances that his own fleet of 100 or so fishing charter boats could or would maintain sufficient pleasure charter referrals to keep the appellant's vessel booked for the projected times during May to September. While it was true that no such business was forthcoming during the option or trialrun period October 2 to December 29, 1981, the prime time had already passed and therefore this negative result should be viewed as a neutral factor.

The vessel's purchase was not financed, and therefore its cost of holding until the 1982 season began was minimal. The appellant had expended $328 for insurance purposes to cover the year commencing with the trial period.

When viewed from its 1981 perspective it may be inferred from all of the evidence that it was reasonable for the appellant to have subjectively anticipated the making of profit within a reasonable time. Operational costs were low, the vessel was new to all intents and purposes and Mr. Graham's assurances and promises were convincing.

However, when viewed objectively the reality of the appellant's plan for the immediate future was to have linked the fortunes of this venture with that of Mr. Graham who in turn gave only verbal promises and assurances, but no guarantees. The success of the appellant's charter venture was at the outset deliberately linked with, and therefore vulnerable to, any activity or non-activity which Mr. Graham choose to give in that direction.

There were no independent surveys or market projections done. There was no business office, no telephone number or telephone answering service or machine, no business cards, business licence, no season long liability insurance, no standard rental or charter agreement had or prepared, nor was any conventional bookkeeping system set up or any log actually kept.

That undue reliance was being placed upon Mr. Graham's activities was also shown by the appellant’s want of independent assurances that his own charter brochures were being actively and consistently marketed by Mr. Graham, by his want of carrying out any active broad-based promotional activity of his own, and by his want of any constant and timely contact with Mr. Graham for verification as to how the 1982 summer season was shaping up so that he could take independent steps to cover any projected slow or down-time for the oncoming summer season. The evidence was of a meeting held sometime during the spring of 1982 wherein Mr. Graham advised that his own business was down and that there were no referrals. The appellant’s only business response to market his vessel was by word-of- mouth and to have placed two ads, one in the Vancouver Sun and the other in the Seattle Post, during July and August of 1982.

As to the appellant's intended course of action in the spring of 1982 and onwards, he was still determined to keep his costs to a minimum and to hang his fortunes onto Mr. Graham's referrals. Accordingly, as early as the spring of 1982 the appellant had effected no change of the course or nature of the venture but chose to continue its initial and ongoing state of vulnerability to the activities of Mr. Graham. Indeed it was not until 1984, which was into the third year of the venture, that the appellant decided to check out, for himself, the manner in which his brochures that had been placed by Mr. Graham in various local hotels and only then suspected that they had probably been routinely and illegally removed by someone else.

Further, the appellant has failed to show, when faced with the realities that befell his initial hopes, to change the course or nature of this venture so as to make it profitable. For various reasons he decided against trying the brokerage or jib-set avenues of marketing because it would have meant a loss of control over how and to whom the vessel would be chartered.

There was no capability of the venture as capitalized to show a profit after charging capital cost allowance. As stated earlier, all four years under appeal produced operational losses.

Accordingly, and for the reasons expressed, the appellant has not shown, on a balance of probabilities, that the venture had a reasonable expectation of profit during the 1981, 1982, 1983 and 1984 taxation years.

The comments of Strayer, J. in Meech v. The Queen, [1981] 1 C.T.C. 421; 87 D.T.C. 5251 (F.C.T.D.) at 423 (D.T.C. 5253) are transposable to the situation at bar:

While I do not believe that a taxpayer has to prove that he took all prudent steps to satisfy himself that a profit could reasonably be expected when making the original investment, if by an objective test such an expectation would have been reasonable, such evidence would strengthen his contention that he had good reason to expect a profit within a reasonable time. The taxpayer here has not satisfied me that he took such steps.

With respect to the second ground, the appellant claims entitlement to capital cost allowance for depreciation of the vessel in 1981 and 1982. This issue turns on the provisions in force under Part XI of the Income Tax Regulations (the "Regulations") headed “Capital Cost Allowances".

Counsel for the respondent submitted that the appellant has not hurdled the prescription found in Regulation 1102(1)(c) which provides that:

1102(1) The classes of property described in this Part [Part XI] and in Schedule II [class 7] shall be deemed not to include property.

(c) that was not acquired by the taxpayer for the purpose of gaining or producing income.

in that, irrespective of whether it was a crewed or non-crewed charter venture, no reasonable expectation of profit was extant. The problem with this position, as I see it, is that it ignores the substantive provision of paragraph 20(1)(a) of the Act itself which permits a deduction for capital cost allowance notwithstanding paragraph 18(1)(a), (b) and (h) of the Act. Accordingly, but for paragraph 20(1)(a), paragraph 18(1)(h) would otherwise prohibit deductions for personal or living expenses of a taxpayer which would include the expenses of properties held in hobby-type ventures. So the answer does not necessarily lie on this ground alone.

The facts of the case do show that the subject vessel was used by the appellant principally for the purpose of gaining or producing gross revenue that was rent or leasing revenue within the meaning of Regulation 1100(17). The applicable parts read:

1100(17) Subject to subsection (18) in this section and section 1101, “leasing property" of a taxpayer. . .means depreciable property

where such property is owned by the taxpayer . . ., if, in the taxation year in respect of which the expression is being applied, the property was used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent, . . . or leasing revenue . . .

Regulation 1100(15) provides that capital cost allowance cannot be claimed against leasing property when so doing would create or increase a loss. It is my opinion that the appellant's position, that he was carrying on a "business" and is therefore outside both of these provisions, is without merit.

The appellant submitted he was entitled to capital cost allowance for 1981 in reliance on the reasons for decision of Collier, J. in Dennis Evans v. The Queen, [1987] 1 C.T.C. 316; 87 D.T.C. 5226 (F.C.T.D.). The [D.T.C.] headnote reads:

The taxpayer offered to purchase a motorhome in November 1980 and he took legal possession of it in December of that year. It was the taxpayer's intention to earn income from renting out the motorhome but no rentals occurred in 1980. The motorhome was left at the dealership and in January 1980, the taxpayer entered into à management contract with the dealer. The taxpayer claimed capital cost allowance for the motorhome for his 1980 taxation year and deducted the resulting loss from other income. The Minister disallowed the deduction on the basis that the motorhome qualified as “leasing property" and that the taxpayer could not therefore create a loss by the use of capital cost allowance.

Held: The taxpayer's appeal was allowed. The Court found that the motorhome was not "used" by the taxpayer in 1980 for the purpose of earning rental income and, therefore, that it did not fall within the definition of “leasing property". Accordingly, the taxpayer was not restricted in respect of his deduction of capital cost allowance.

At page 318 (D.T.C. 5228) Collier, J. in interpreting subsection 1100(17) of the Regulations said:

The words "was used” must, in my opinion, be given their plain ordinary meaning. The leasing property must have, in fact, been used. Hoped for, or intended use, is not included.

He therefore concluded that as the subject property was not used in the year pursuant to Regulation 1100(17), the limitative provisions of Regulation 1100(15) were not applicable, and that the claimed deduction for capital cost allowance was allowable.

I would concur with counsel for the respondent's assertion that the Dennis Evans case is factually distinguishable. Unlike Mr. Evans, the appellant was actively pursuing and promoting its use. He made sure it was fully and readily available for the purpose of gaining or producing gross revenue that was rent or leasing revenue from October 2, 1981 until year-end.

Amendments to Regulation 1100(17) were made (and published in the Canada Gazette bearing date February 26,1982) apparently to counteract the Dennis Evans situation by the inclusion therein of some deeming provisions relating back to the time of acquisition of the property. As I have found that the facts of the case have not removed the appellant's situation outside Regulation 1100(17) as it read in 1981, I need not consider the matters concerning retrospectivity arising out of these amendments as raised by each side.

Similarly, the further alternative argument raised by counsel for the respondent need not be decided. This was that if capital cost allowance was allowable for the 1981 year, the one-half year rule of Regulation 1100(2) would apply to reduce the undepreciated capital cost of the vessel to 50 per cent.

For all of the reasons given, the appellant's appeals fail in respect of claimed losses and capital cost allowance entitlements arising from his yacht chartering venture for all four years under appeal.

(d) Classic car leasing

(i) The appellant described himself as having a great interest in attaining a collection of old classic cars. One of his hopes was to have a fleet of these kinds of cars to rent out, chauffeured, for special occasions and in conjunction with his yacht charter venture. The idea never got off the ground. There was not one instance of a chauffeur trip, neither of his 1963 or 1965 Mercedes vehicles were limousine-type cars and his classic Bentley vehicle was never used for this purpose.

(ii) The large 1972 Mercedes vehicle was claimed to have been used during 1981 in the various Kier Enterprises ventures and the appellant, in addition to having claimed operational-type expenditures, claimed capital cost allowance for this vehicle on the advice of Mr. Waterhouse. No factual foundation has been laid to establish the claim to Kier Enterprises having carried on any businesses. That the appellant earned revenue from property in various ways does not transpose these matters into a business.

As recited earlier, no allocation of automobile-use expenses had been made to any particular venture, with the appellant simply allocating 50 per cent to personal use and 50 per cent to the business of Kier Enterprises. The Court finds that the appellant has not shown that these expenses, and the capital cost allowance, had been improperly disallowed by the respondent.

This is not the end of the matter however. In 1981 the appellant expended painting and repair costs on the 1972 Mercedes amounting to $3,321.71 in order to be able to lease it to Mr. Waterhouse. The conversion of this vehicle to that of a leasing property occurred, as a fact, on January 1, 1982. The consequence is that the aforementioned amounts would be properly capitalized and added to the capital cost of the vehicle as at January 1, 1982.

The further consequence is that, and I concur with the submissions of respondent's counsel here, that the 1972 Mercedes became a depreciable asset when it was deemed to be acquired by the appellant pursuant to paragraph 13(7)(b) of the Act for the purpose of gaining or producing income in the form of rent from Mr. Waterhouse. Because it was deemed to be acquired January 1, 1982, the subject vehicle was property acquired after November 12, 1981 and therefore capital cost allowance for the year of acquisition is to be limited to one half of the amount otherwise allowable; viz, Regulation 1100(2) as was applied by the respondent on reassessment.

In the result, the respondent's assessing approach concerning the 1972 Mercedes vehicle with respect to the appellant's 1981 to 1984 inclusive taxation years has not been shown to be erroneous. However, the vehicle's January 1, 1982 capital cost will have to be redetermined.

(iii) The 1965 Mercedes 220SEM vehicle was acquired by the appellant, in or about July of 1982, ostensibly for leasing purposes. This vehicle, as noted earlier, was not a limousine car, such a venture never having begun. It was used by Mr. Waterhouse for three months in 1982 as a substitute vehicle in place of the 1972 Mercedes while it was undergoing repairs. The appellant sought to deduct expenses and capital cost allowance for this vehicle in 1982. The appellant said that in 1983 and 1984 it was used by him as to 50 per cent for personal use and 50 per cent in the business of Kier Enterprises.

Factually, then, when viewed in perspective the 1965 Mercedes was merely a brief adjunct to the leasing of the 1972 Mercedes to Mr. Waterhouse in 1982. Throughout the periods in question, it retained its original status of hoped for or intended use as a leasing property as it was when initially acquired in mid-1982. Therefore, the appellant has not established entitlement to his claims in respect of this vehicle.

(iv) As to the 1963 Mercedes vehicle, the appellant conceded his error in having claimed expenses relating thereto.

(e) Antique furniture acquisitions

During the fall of 1982, and in 1983, the appellant acquired some old oak dining tables and chairs which, he believed, he and his girlfriend could coventure by sale at a profit through a small shop-type outlet. Time, effort and money was indeed expended on this matter but the girlfriend left, the shop or retail outlet was not obtained and no sales were attempted nor have yet occurred. During the acquisition periods of 1982 and 1983 the appellant said that a profitable enterprise could have been made of it, and that his co- venturer had the necessary expertise in stripping and refinishing old furniture.

In my view the respondent's disallowance of the expenses laid out in this venture for the years under appeal was not erroneous. At the time of this hearing, some six to seven years after their acquisition, the furniture was still in storage and unsold. Apart from some acquisitions, no business had begun; viz, James Bancroft v. M.N.R., [1989] 1 C.T.C. 2196; 89 D.T.C. 153 (T.C.C.). The purported "venture", the first part of which would be the acquisition of inventory-type assets, had not finished and indeed may never be completed. The appellant said he may, or will, sell them some day. An objective appreciation of the facts dictates a finding that the appellant was not in, nor was he carrying-on, an antique furniture business nor did he have, nor was he carrying-on, any venture or adventure in the nature of trade with respect thereto, viz, Tara Exploration and Development Company Limited v. M.N.R., [1970] C.T.C. 557; 70 D.T.C. 6370 (Ex. Ct.) at 6376 during the years under appeal.

(f) Other investments-interest expenses

By agreement between the parties as evidenced in paragraph 7 and Schedule H of the agreed statement of some relevant facts (Exhibit R-12), and for the reasons and as to the particulars noted therein, the appellant is to be allowed additional interest expense deductions in the amounts of $754.39 for the 1981 taxation year, $7,963.88 for 1982, $3,740.10 for 1983 and $3,757.52 for 1984. During the hearing the appellant, for the first time, produced further evidence in support of his claims for interest. It was only then that the respondent, through his counsel, was able to fully examine and factually resolve this issue with the appellant.

SUBSECTION 15(1) OF THE CANADIAN CHARTER OF RIGHTS AND FREEDOMS

The appellant has invoked the provisions of subsection 15(1) of the Canadian Charter of Rights and Freedoms (the "Charter") wherein he alleges he has been denied the right of equal protection and of equal benefit to and under the law and thereby has been discriminated against.

The proposition advanced was his alleged want of equality with that of another British Columbia taxpayer. While he, the appellant, was being obliged to pay income tax under the Act in 1986, the other taxpayer, Dr. Nelems, was not.

The appellant submitted further that as this discrimination occurred in 1986, matters of retrospectivity are of no concern in the case.

The facts upon which the appellant's charter argument rests arise out of the reported decision of Re Nelems (1987), 18 B.C.L.R. (2d) 114. It was an application for absolute discharge from bankruptcy. The reasons for judgment read:

October 2, 1987. Southin J.:- This is an application for an absolute discharge in bankruptcy. It is opposed by the bankrupt's largest unsecured creditor but not by his preferred creditor, Revenue Canada.

The applicant [Dr. Nelems], an experienced thoracic surgeon and now a member of the Medical Faculty at the University of British Columbia, made a proposal in bankruptcy of 11th February 1987.

He declared these liabilities:

Unsecured creditors:	$303,816.45
Secured creditors:	$116,000.00
Preferred creditors:	$ 62,000.00
Contingent liabilities:	$ 90,708.60
	$572,525.05

His assets, including assets of a value of $116,000 in the hands of Lloyds Bank as a secured creditor, were $179,200. Thus the deficit was almost $400,000. Lloyd's Bank was unsecured for $243,000.

The debt owing to the Crown was for income tax for the year 1986 in the amount of $62,000. Most Canadians do not earn $62,000 a year.

By his proposal, he offered his creditors $115,200 in 12 quarterly instalments. Had the proposal been accepted, the Crown would have got 100 cents on the dollar and the other unsecured creditors 20 cents on the dollar.

Mrs. Nelems also made a proposal in bankruptcy (Ex. E to his affidavit). I need not comment on it further.

Not surprisingly, the bank turned down the proposal with the inevitable consequence that Dr. Nelems was in bankruptcy.

The bank does not assert that s. 142(2) governs this application. While I do not consider that the position of a creditor such as the bank is necessarily conclusive as to whether there is evidence of any of the facts set out in s. 143, I conclude on the balance of probabilities that none of those facts is established by the evidence.

That leaves s. 142(1).

I have discussed the criteria to be applied under that provision in two judgments, Re McCallum (1987), 11 B.C.L.R. (2d) 345 (S.C.), and Re DuBois, [1985] B.C.W.L.D. 3934 (S.C.).

I do not resile from anything I said in those cases. Quite bluntly, I think people who are capable of making incomes far beyond the dreams of most Canadians should not be able to avoid the consequences of their own avarice.

But I have read the extensive material filed in this case and I have concluded that Dr. Nelems' financial condition is only in part the result of avarice.

It was substantially contributed to by his contracting tuberculosis from a patient, by his moving to Kelowna in consequence and then subsequently returning to Vancouver, by differences of opinion with medical colleagues at a hospital in Vancouver, by he and his wife's taking over the care of several orphaned children and by a bank (this creditor and its predecessor in title) which did not know what it was doing. I am not, in making this last comment, referring to the original loan agreement, but to the way his affairs were handled by the bank after his financial difficulties became more severe in 1985 when he returned to Vancouver to practise.

Had Revenue Canada opposed this discharge, I would have required him, as a condition of the discharge, to pay what he proposed to pay in February of this year. After all, the applicant had the benefit of all the services the nation provided to him as a resident of Canada in the year 1986 but did not pay his lawful share of the nation’s bills. However, for reasons that the Minister would explain no doubt to the House of Commons if he were asked to do so by an honourable member, Revenue Canada did not appear.

I am mindful also that the Court of Appeal in Re Markel (1986), 7 B.C.L.R. (2d) 228, 63 C.B.R. (N.S.) 7, did not appear to think that it was right to insist that a bankrupt pay Revenue Canada when he could pay very little in addition to his unsecured creditors.

While I am puzzled by this, it is not for me to reason why.

There will be an absolute discharge. No costs.

Application allowed.

Thusly, the appellant alleges, Dr. Nelems, who was able to pay the tax, did not have to pay, whereas he does.

In my view, the appellant's position is without merit and I adopt the following submissions of counsel for the respondent as being a complete answer to these arguments.

Firstly, nothing in the Ne/ems case indicates that Dr. Nelems did not have to pay his income tax. On its face there were $179,200 in assets of which the secured creditor would have taken $116,000 and Revenue Canada, as the preferred creditor, would have got most of its $62,000. Indeed, there is no indication whatever that the tax was in fact not paid by Dr. Nelems or that it was not possibly secured by someone else on his behalf. Whether he paid or not, and why or how, invites mere speculation at this juncture. Accordingly, there is no factual foundation for a finding of discrimination based, as alleged by the appellant, on the effect to him of the respondent's conduct in the Ne/ems matter.

Secondly, the liability to pay income tax for any particular taxation year under appeal in this case is a discrete pre-Charter act. In the case of the appellant's tax liability for his 1981, 1982, 1983 and 1984 taxation years, this annually-based liability is not an ongoing condition or state of affairs and accordingly subsection 15(1) of the Charter, not then being in force, cannot be used to invalidate that liability.

In my opinion these submissions by counsel for the respondent are sufficient to dispose of the appellant's Charter arguments under which he seeks that his entire liability for tax for all of the years under appeal be vacated.

Conclusion

For the reasons expressed, and in summation, the appellant's appeals are to be allowed, in part, and the matters referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that,

A. for the 1981 taxation year:

(a) with respect to the Kenwood Road home property, the appellant is entitled to a deduction of one third of the expenses claimed relating to cablevision and telephone;

(b) with respect to matters under “Kier Enterprises", the appellant is entitled,

(i) to a deduction of $1,000 expended in legal fees relating to the Ahlgren interest income; and

(ii) by agreement, to an additional deduction for interest expenses incurred in the amount of $754.39.

B. for the 1982 taxation year:

(a) with respect to the Kenwood Road home property, the appellant is entitled

(i) to a deduction of one third of the expenses claimed relating to cablevision and telephone, and

(ii) to a deduction of one third of the amount of $2,558.30 relating to the costs of draperies and chair recovering, and

(b) with respect to matters under "Kier Enterprises" the appellant is, by agreement, entitled to an additional deduction for interest expenses incurred in the amount of $7,963.88.

C. for the 1983 taxation year:

(a) with respect to the Kenwood Road home property, the appellant is entitled to a deduction of one third of the expenses claimed relating to cablevision and telephone; and

(b) with respect to matters under “Kier Enterprises" the appellant is, by agreement, entitled to an additional deduction for interest expenses incurred in the amount of $3,740.10.

D. for the 1984 taxation year:

(a) with respect to the Kenwood Road home property, the appellant is entitled to a deduction of one third of the expenses claimed relating to cablevision and telephone and to one third of the agreed amount of $797.18 expended for maintenance and repairs; and

(b) with respect to matters under “Kier Enterprises" the appellant is, by agreement, entitled to an additional deduction for interest expenses incurred in the amount of $3,757.52.

E. and additionally for each of the 1982, 1983 and 1984 taxation years:

(a) with respect to matters under "Kier Enterprises", the appellant is entitled to a recalculation of the allowable capital cost allowance attributable to the 1972 Mercedes vehicle on the basis that its capital cost on January 1, 1982 is to be increased by the amount of $3,321.71.

Costs

The hearing of these appeals lasted for four and one half days. The major portion of the appellant's success was due to an agreement made during the trial with respect to additional amounts of deductible interest expenses. The information on which the agreement was reached had not been produced earlier by the appellant. In view of the appellant's limited success, he is restricted to one half of his costs on a party-to-party basis.

Appeals allowed in part.