Inland Development Limited v. Minister of National Revenue, [1989] 1 CTC 2141, 89 DTC 95

Taylor, T.C.J.:— These are appeals heard in Calgary, Alberta, on July 4, 1988, and November 2, 1988, against income tax assessments for the years 1977, 1978, 1979 and 1980 in which the Minister of National Revenue had disallowed as deductions from corporate income several items of operating expenses and capital cost allowance —on surface vehicles and aircraft. The Minister of National Revenue took the position that the costs related to the above were personal, rather than corporate. The Minister's position in assessing was therefore founded substantially on paragraphs 18(1)(a) and 18(1)(b) of the Act.

Between the dates of July 4, 1988 and November 2, 1988 (above) the parties reached agreement on a number of items in dispute, which will be referenced at the end of this judgment. In the end analysis, a single point remained in dispute—whether a Bonanza aircraft had been acquired by the appellant corporation as a business asset—"for the purpose of gaining or producing income"—or as a personal asset for the primary use of the company president.

In this instance, there is no question that the purchase of the aircraft was a "capital" purchase, if a business purchase at all, and accordingly paragraph 18(1 )(b) of the Act does not come into play directly—that is not the issue.

The appellant, based in Calgary, Alberta, carried on the business of oil and gas exploration and development, and property acquisition and investing. During the years under review, its activities were substantial, varied, wide spread, and successful. The only witness for the corporation was its president, Mr. Barry Joseph McHugh, who identified his business interest as "developer, explorer, marketer, transporter and processor". In the appellant company, as well as personally and through some other corporate vehicles he covered Canada's western provinces, as well as certain incursions into the United States. The Court accepts that Mr. McHugh is qualified, competent, energetic and enterprising, as well as risk-oriented when necessary. Critical to all of this, however, is that he is a pilot of some experience, and his testimony indicated a devotion to and love of flying itself. From the very general description of the company operations provided to the Court, it was asserted that it was not unreasonable for such a corporation to own and operate an aircraft—it might well be warranted considering the possible savings of time, money and human resources. Inland did have one aircraft— and the Minister has accepted that the "Lake amphibian” was acquired and used "for the purpose of gaining or producing income”. The "Lake" (in the words of Mr. McHugh)" .. . is an exploration aircraft which has the capability of landing on waters as well as land. It has limited passenger capacity, limited navigational equipment on it. . . . The Bonanza is known as a business aircraft. It’s the most sophisticated single-engine aircraft offered on the market. It has the speed and endurance and comfort, and when properly equipped can fly under instrument flight rules, in adverse weather conditions."

I will not go into detail regarding the use, care, storage, repair, etc. for the Bonanza, since I am satisfied that record does not add to support for the appellant's position —rather it could detract from it. Many of the trips identified in the aircraft “log book”, had a business flavour, even some of the “training” trips, which Mr. McHugh took as co-pilot, earning his own licence to fly the Bonanza, and gradually increasing his competence on it. Leaving aside whether some spill-over could be demonstrated from the “training”, or "personal" flights in the Bonanza, the basic question remains, whether its acquisition as a "corporate asset" with all the attendant complications that term implies, was warranted under the circumstances. In my view it was not so warranted.

There can be little or no valid question raised by the Minister regarding the purchase of assets related directly to a business operation—they would be covered by the phrase "for the purpose of gaining or producing income". As a simple example, if a grain farmer in the middle of the prairies, purchased a truck, a plough, tractor, or some other equipment or some other similarly related assets, the need for the acquisition would either be obvious, or easily supported —on the presumption that the equipment was needed and used for hauling, tilling or ploughing, etc. If the same farmer purchased a yacht—and there was no water on his farm related to the farming operation, a reasonable question might be expected from the Minister regarding what possible value to the operation of the farm could be expected from the yacht. Again, it might be satisfactorily answered, but the effort required to dispel the Minister’s skepticism would be substantial. The real difficulty comes when the asset (or other expenditure) in question, can or may have a useful function to perform in the operation of the business- but it is far from normally required, and in addition it has a clearly perceived personal value, at least a utility very unconnected with the business operation. It is not sufficient to state that because a taxpayer is in "business", or even because he is operating that business in a “corporation”, he may acquire assets of any description using corporate funds, or make any and all expenditures, and assume that they are properly tax deductible. They may well seem appropriate as company business expenses but they may not be so acceptable as income tax business expenses, where such a distinction must be made. Only amounts of expenditures made "for the purpose of gaining or producing income”, and that are “reasonable” may be deducted to arrive at "net income" for income tax purposes.

In the circumstances of these appeals, I am satisfied that it was very pleasant and gratifying to Mr. McHugh to have available, under his control, the larger, more comfortable, better equipped and probably safer aircraft — "Bonanza", and I am sure he intended to and hoped to find some business use for it, perhaps even some regular business use for it. I have taken into account Mr. McHugh's information regarding the very ebullient economic times which pervaded the western Canadian resource provinces in 1979 when this aircraft was acquired, and the rather sudden turn-around a few years later. Even that optimism and the exhilaration of those earlier years does not make the acquisition of this second aircraft for Inland a "reasonable" expenditure. It was convenient, but not reasonable. There was no demonstrated need for it before acquisition, and there were no subsequent developments which would have required it after purchase. Its purpose and use, in my view, were largely, perhaps exclusively, related to personal indul- gence by Mr. McHugh. A major part of its air-time was in the United States, and at most times, quite convenient to Mr. McHugh's preference for winter residence in the southern States, rather than for business purposes. It was stored almost exclusively, when not being used, in the southern United States. I would mention only in passing that Mr. McHugh did make a serious effort to justify the need for the aircraft on the basis of searching out a new route for a proposed natural gas pipeline in the United States. I am more inclined to think that this was a side-line to a major purpose of flying the aircraft by Mr. McHugh —either for personal purposes or to have it stored near his winter residence. Mr. McHugh's hope for the development of such a pipeline route, and his role in it, may indeed come about, but that possible end development is in no way dependent on the aircraft "Bonanza" nor directly related to its acquisition or use in the company. The appellant has not succeeded in overturning the Minister’s position that the aircraft (and therefore the costs associated with its operation) was not a reasonable expenditure for the purpose of gaining or producing income.

For purposes of the record I quote from the transcript of the hearing, the agreement on other points reached by the parties, read by Mr. Low:

MR. LOW: Thank you, Your Honour. Your Honour, my understanding of the agreement reached between the parties is as follows, and it's going to take a while to recite, but it will be there on the record.

In 1978 the Appellant showed meals and promotion expenses of $2,405.27; 1979, $3,825.06; and in 1980, $9,052.37, for a total of $15,282.70. It is my understanding that we are agreed that the Appellant will be allowed 37 /i per cent of those numbers in each year, and will be disallowed 62 /z per cent of those numbers in each year.

The Appellant showed automobile expenses in 1978 of $4,563.07; in 1979 of $1,672.00; in 1980 of $2,879.88, and it is my understanding that the Appellant will be allowed 80 per cent of those expenses and disallowed 20 per cent of those expenses in each year.

Under the heading of international travel, the Appellant showed in 1978, $10,001.62; in 1979, $8,491.66; in 1980, $7,578.49. My understanding of the agreement is that the Appellant will be allowed in 1979, $839.00, referable to travel on the North American Continent; in 1980, $3,525.00, referable to travel on the North American Continent; and with regard to the balance of $22,836.00 over the three years, the Appellant will be allowed 25 per cent of those expenses and will be disallowed 75 per cent of that $22,836.00.

With regard to travel in Alberta, Saskatchewan and British Columbia, the Appellant showed travel costs in 1978 of $1,021.77; in 1979 of $2,232.59; in 1980 of $754.93. My understanding is that the Appellant will be allowed 100 per cent of those expenses.

The Appellant showed aircraft expenses in 1978 of $244.45; in 1980 of $274.75, for a total of $519.20. My understanding is the Appellant will be allowed 100 per cent of those expenses.

With regard to trade memberships and conventions, the Appellant showed an expense of $328.67 in 1979, which is to be allowed 100 per cent, and showed an expense of $289.28 in 1980, which is to be disallowed in its entirety.

Under the category of "other" expenses, the Appellant showed $1,002.34 in 1978, and is to be allowed 60 per cent of that, or $601.40. The Appellant showed other expenses of $4,155.63 in 1979, and is to be allowed $1,985.00 and disallowed the balance. The Appellant showed other expenses in 1980 of $2,484.80, is to be allowed $1,408.70 and disallowed the balance. The total of the allowed other expenses then is $3,995.10.

Now, Your Honour, if you’re scrupulous about the counting, you may find that those numbers don't exactly match the numbers on schedule 2 of the Respondent's Reply to Notice of Appeal.

HIS HONOUR: I suspect they may not.

MR. LOW: But close enough that we're content on both sides.

HIS HONOUR: There's no big quarrel with that, is there?

MR. BENDIN: No.

MR. LOW: Further, Your Honour, with regard to the capital items recited in schedule 1 of the Respondent's Reply to Notice of Appeal, those items in 1977, as I understand it, are beyond the scope of this hearing and we simply won't comment on those. It will have to be some other action.

We understand with regard to 1978 that the Respondent is prepared to allow the $61,501.00 item representing the Lake aircraft, call sign C-GILD in its entirety. The Appellant consents to the disallowance of the Datsun at $7,700.00.

Give me just a moment here.

HIS HONOUR: No problem.

MR. LOW: Sorry, Your Honour. Your Honour, continuing on schedule 1 for 1978, the Respondent had disallowed the value of a trailer at $8,782.00. We understand that is now to be allowed. It is an office trailer at the Abee Gas Plant. Similarly the shortwave radio is in use in the field and had been disallowed at $270.00, is now to be allowed as a capital item at $270.00.

Looking at 1979, you will appreciate, Your Honour, that the Bonanza Beech A-36 is the question which is left with you. With regard to the Pontiac Safari Wagon, the Appellant has agreed to the disallowance of that as a class 10 capital item as indicated on the schedule. And I believe there are no capital items in 1980.

Mr. Bendin, is that a complete and accurate summary, as far as you're aware?

MR. BENDIN: Yes.

The appeals are allowed, without costs, and the entire matter is referred to the Minister for reconsideration and reassessment in order that adjustments to the assessments at issue may be made where necessary, in accordance with the Court record cited in these reasons for judgments. In all other respects the appeals are dismissed.

Appeals allowed in part.