Hector H Ross v. Minister of National Revenue, [1984] CTC 2315, [1984] DTC 1314

Tremblay, TCJ:—This case was heard in Calgary, Alberta, on October 26, 1983.

1. The Point at Issue

The point at issue is whether the appellant, a self-employed person in many fields, is correct in claiming expenses in the amounts of $4,464, $11,206 and $7,473 in the computation of his income for the 1976, 1977 and 1978 taxation years respectively. The appellant contends that he is the owner of a boat that he rented and therefore he has the right to deduct the relevant expenses. He also contends a penalty of $1,279.13 was incorrectly levied for unreported fees.

The respondent contends that the appellant, in fact, never rented the boat.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

4. In so assessing the Appellant, the Respondent assumed, inter alia, that:

a) the Appellant owned and operated a yacht in Los Angeles harbour on which he lived while staying in Los Angeles, California;

b) the Appellant charged to companies of which he was an officer or majority shareholder the amount of $50.00 per night for his accommodation on the yacht when he was in Los Angeles, California;

c) the Appellant did not on any occasion rent the yacht to any other person;

d) the yacht was not maintained in connection with a boat rental business carried on for profit or with a reasonable expectation of proft.

2.03 Penalty

In the reply to notice of appeal, it was admitted that the penalty should be deleted.

3. The Facts

3.01 The appellant is an individual who at all relevant times resided in Calgary, Alberta.

3.02 At all relevant times, the appellant was in the motion picture business. He was a shareholder of Theater Agency Ltd (33 % per cent), Landmark Cinemas of Canada (25 per cent) and Roke Distributors Ltd (50 per cent). These companies own 78 screens in Canada and in the USA. Landmark Cinemas of Canada has an income of about $9 to $10 million per year.

3.03 Theater Agency Ltd is a holding corporation which did work for Roke Distributors Ltd in California. The appellant, who is a director of Theater Agency Ltd, did some public relations.

3.04 During the years under appeal, the appellant declared in his income tax returns (Exhibits A-l, A-2 and A-3) the following income from the different companies in salary, dividends and business (gross income):

3.05 The appellant also declared the following rental income, expenses, gross losses, his personal portion and the net losses as follows (Exhibit R-l, R-2 and R-3):

3.06 In the said years, the appellant testified he indeed owned boats (from 1976 up to August 1977: “Candolle, 36 feet, places for three people to sleep”; from 1977 to the end of 1978: “Celeste No 1, 37 feet, places for six people to sleep”). He used them for the purpose of gaining and producing income by way of renting and for promotional purposes and as such he claimed certain expenses and losses as figured above. The respondent disallowed the said losses.

3.07 In his testimony, the appellant explained that the yacht was operated in the Los Angeles harbour, California. When he was there, the boat was used as an hotel. He considered as income the $50 per night, given by the company, as equivalent to an hotel room. He did not on any occasions rent the yacht to any other persons. The yacht was used 10 to 12 weeks a year.

3.08 He used the boat not only as his residence, but also as an office and a place of entertaining for business reasons. It was important and necessary to have such a place because the film industry is in Los Angeles. This gave him the opportunity to make contact with persons. Among others, he met officers from Paramount Pictures of Canada and Ambassador Films. He filed Exhibit A-4, photocopies of 102 pages of his diary for the years 1976, 1977 and 1978. On some pages, one can read the names of persons whom he received for cocktails and dinners. He said in 1977, being the only time, he received $26,000 of finder’s fees from Ambassador Films. He said that in the motion pictures, 99 per cent of the business is verbal. The expenses for cocktails and entertainment were paid by him and not by Theater Agency Ltd.

4. Law—Cases at Law—Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 18(l)(a), (h) and (1) and 248(1), the definition of “Personal or living expenses”. They read as follows:

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

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

(1) 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, or

(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members;

248. (1) In this Act, “personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries.

4.02 Cases at Law

Counsel for both parties referred the Court to the following cases at law:

1. Tickins Industrial Products Limited et al v MNR, [1981] CTC 2079; 81 DTC 142;

2. Jaddco Anderson Limited v The Queen, [1981] CTC 11; 81 DTC 5002;

3. John Barnard Photographers Ltd v MNR, [1979] CTC 2678; 79 DTC 592.

4.03 Analysis

4.03.1 Penalty

As explained in paragraph 2.03, the penalty of $1,279.13 should be deleted.

4.03.2 From the evidence, it is obvious to the Court that the appellant did not carry on a boat rental business. If it had been so, it would not have been for profit or with a reasonable expectation of profit. He was the only client on his own yacht (paragraphs 3.06, 3.07 and 3.08). What the appellant considers as income, is normal hotel expenses reimbursed by the company.

4.03.3 The other problem is whether the expenses incurred on the yacht, such as entertainment, can be considered as expenses within the meaning of paragraph 18(1)(a) quoted above.

The evidence shows a relation between the meetings and the income. The Court thinks that in a business of this nature, entertainment is required. The Court thinks that these expenses then made for drinks, meals, etc paid by the applicant for clients are deductible. However, no evidence was given concerning the quantum of those expenses therefore they cannot be allowed. They are not included in those appearing in Exhibits 1-1, A-2 and A-3, except for the main expenses which are the maintenance of the yacht (fuel, licences, taxes, mortgage fees, repairs, supplies, capital cost allowance, etc). All those expenses must be considered as personal expenses within the meaning of paragraphs 18( l)(h) and

(1) quoted above. There is no doubt indeed that the boat used by the appellant was a yacht, a pleasure craft, within the meaning of paragraph 18(1)(1), and the John Barnard Photographers Ltd case has no application. In that case indeed it was decided that the boat involved was a work boat for fishing. It was purchased in order to carry out the necessary research and photography to create a fishing almanac. The appellant’s company was engaged in illustrative photography and publishing.

4.03.4 The Court must maintain the reassessments except for the penalty.

5. Conclusion

The appeal is allowed part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.