Sie-Mac Pipeline Contractors Ltd. v. Minister of National Revenue, [1989] 1 CTC 2334, 89 DTC 230

Brulé, T.C.J.:—The appellant is appealing from a reassessment of income taxes in respect of the 1984 taxation year and a notification in writing in respect of the 1982 and 1983 taxation years.

At the outset it was pointed out to the Court that in respect of the 1982 and 1983 years there was no tax payable by the appellant and the notices sent were not assessments within the meaning of subsection 152(4) of the Income Tax Act. Consequently under the provisions of subsection 171(1) the Court has no jurisdiction to entertain an appeal for the 1982 and 1983 taxation years. Accordingly it was agreed that the only matter under appeal at the hearing was in respect of the appellant's 1984 taxation year.

Facts

In 1984 the appellant incurred expenses of some $12,800.65 in hosting certain of its most valued customers at a lodge. The Minister denied this deduction on the basis that such was an outlay or expense incurred for the use or maintenance of property that is a lodge within the meaning of subparagraph 18(1)(l)(i) of the Income Tax Act. The amount was not in dispute.

Appellant's Position

Counsel for the appellant took the position that his client was merely paying for services in the lodge known as the Hoeya Hilton and did not have the "use" of the whole of the premises. Evidence was tendered which showed that the appellant took some of its valued customers away from the city both to entertain them with fishing and to hold educational sessions respecting the company. It was mentioned that by going out of the city there was incentive for the customers to attend and they were a captive audience. All those invited, other than company personnel, were already customers and still were at the time of the hearing.

The appellant did not have exclusive use of the lodge, rather it was charged by the owner for the services rendered. The lodge involved was not large and even though the complement of the appellant's party did not occupy the whole place the owner testified that to give good service he did not take other guests during the period involved.

The expenditures were all separately billed as was shown to the Court by way of exhibit. This was in no way different from the services offered by a large hotel. Often recreational facilities at large hotels are billed for their use and this was in no way different from the use of the fishing facilities at this lodge.

Minister's Position

The court was told that the provisions of the Income Tax Act disallowed all outlay or expense for certain specific purposes and the appellant fell within the ambit of these provisions. The appellant was making use of recreational facilities and as such expenses incurred were disallowed. Counsel relied principally on the decision in The Queen v. Jaddco Anderson Ltd., [1984] C.T.C. 137; 84 D.T.C. 6135, wherein the Federal Court of Appeal disallowed expenses which appeared to be of a similar nature. This case was followed in Duramould Ltd. et al. v. M.N.R., [1984] C.T.C. 2571; 84 D.T.C. 1498.

Analysis

The section of the Income Tax Act relied upon by the Minister reads as follows:

Section 18: General limitations.

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

Sec. 18(1) (I)

(1) Use of recreational facilities and club dues.—an outlay or expense made or incurred by the taxpayer after 1971,

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward.

From the evidence given there are two major points to consider. First of all did the appellant rent the property and secondly did it only wish to provide entertainment for its clients?

As to the first point it was clear that the property itself was not for rent. It was operated by a Mr. McLean who described that while the place primarily catered to fishermen there were frequent sales meetings and product seminars. When such were involved the lodge provided a fully equipped meeting room. While the place could hold up to 24 people, if a group wished to hold business seminars and included at least 14 people Mr. McLean did not accommodate other guests at the same time. He described how with the appellant's invitees fishing was available to those desiring to do so in the early morning and sometimes in the evening while in the afternoon business meetings wer held. Services were charged by Mr. McLean as provided and these were seen by the exhibits placed before the Court.

The place operated as a hotel providing certain recreational facilities, much the same as one might find in many places in Canada. While on larger scales places like Chateau Montebello and Banff Springs conduct in principle, similar operations.

It is interesting to note that Interpretation Bulletin IT-148R2 dealing with subparagraph 18(1)(l)(i) says in paragraph 1:

The subparagraph is not restricted to a taxpayer who is the owner of a property described therein but also applies to a taxpayer who rents a property from the owner and, in either case, the use of the property may be by the taxpayer himself or by his employees or customers.

[Emphasis added.]

While the Hoeya Hilton was described as a lodge in its advertising brochures this is a word often used with the meaning of a hotel.

Jowitt's English Dictionary of Legal Terms describes a lodge to include an inn or resort hotel. Here we have a property more akin to a hotel. Services were provided and the owner-manager and his staff were present at all times to provide the services.

The subparagraph speaks of "use of the property". Again if one looks at the meaning of the word 'use' there is found a broad meaning. In John's Canada Tax Words & Phrases, 1986 edition there is found at page U-5 "the first meaning assigned to the word use’ in Johnson's Dictionary is 'to employ to any purpose', it is therefore a word of wide signification.”

Black’s Law Dictionary says "The use of a thing means that one is to enjoy, hold, occupy, or to have some manner of benefit thereof."

In the U.S. publication of Words and Phrases, 1969, Volume 43A, at page 303 it is said that the "term 'use', as applied to real property can be construed to mean a right which a person has to use or enjoy the property of another according to his necessities", and at page 311 there is found the following:

Generally the 'use' of a thing does not mean the thing itself but only that the user is to enjoy, hold, occupy, or have in some manner the benefit thereof.

In the Canadian Law Dictionary by J.A. Yogis, 1983, the word “use” is described as "the right to enjoy the benefits flowing from real or personal property".

It would seem from the definitions that "use of property" tends to mean exclusive use such as is found in ownership or in renting from an owner. As mentioned above the Interpretation Bulletin 148 R2 contemplates renting a property. This was not done here, rather paying for services provided by the owner of a property.

In the case of The Queen v. Jaddco Anderson Ltd., supra, the Federal Court of Appeal found that subparagraph 18(1)(l)(i) was sufficient to overturn the Federal Court-Trial Division decision but no reasons were given. Looking at this case as originally appealed in the Tax Review Board, [1978] C.T.C. 2244 the facts disclosed that the appellant rented property. This thus distinguishes that case from the present one before the Court where no property was rented, only services from the property owner which were paid for.

As to providing entertainment for its clients there is no doubt this took place principally by offering the fishing facilities of the Hoeya Hilton. At the same time the evidence showed that business meetings were held in the afternoons and also that the company officials had the opportunity to have several conversations with the corporate clients. The clients present represented some $3,000,000 annually of contracts for the appellant.

For these reasons I do not find that subparagraph 18(1)(1)(i) has application in this case. Accordingly the appeal is allowed with costs and the matter referred back to the Minister for reconsideration and reassessment.

Appeal allowed.