Voyageur Travel Insurance Limited v. Minister of National Revenue, [1984] CTC 2590, 84 DTC 1566

Tremblay, TCJ:—This case was heard in Toronto, Ontario, on February 29, 1984.

1. The Point at Issue

The point is whether the appellant company is correct in deducting in the computation of its income, the amounts of $40,205 and $37,879 for the taxation years of 1976 and 1977 respectively. Those expenses were incurred on the occasion of seminars for travel agents who issue policies to their clients on behalf of the appellant. Forty-five seminars in Quebec and Ontario for 1,600 travel agents were organized during each of the taxation years. The expenses were related to the use and maintenance of a vessel.

The respondent disallowed the said expenses on the basis that they were outlays incurred for the use or maintenance of property (a yacht within the meaning of subparagraph 18(l)(l)(i) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended). The said yacht was the property of King Aviation Ltd which is an associated corporation of the appellant company.

2. The Burden of Proof

2.01 The burden 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:

3. In so reassessing the Appellant for the 1976 (and 1977) taxation year(s), the Respondent made the following assumptions or findings of fact:

(a) the facts hereinbefore admitted;

(b) that King Aviation Ltd, from which the Appellant rented the vessel in question, was an associated corporation of the Appellant;

(c) that the amount of total expenses relating to the use and maintenance of the vessel in 1976 was $47,704.57 (and in 1977 was $47,872.00);

(d) that $7,500.00 (and $9,993.00) of such expenses were included in computing the income of the principal shareholder, Mr G A Underbakke, for the 1976 (and 1977) taxation year(s) respectively;

(e) that the vessel was in Canada for three months of the calendar years 1976 (and 1977), the remaining nine months being located in, or travelling to or from, Florida, USA;

(f) that the vessel was used personally for the time it was not in Canada by the aforementioned principal shareholder of the Appellant;

(g) that the vessel in question was a yacht;

(h) that the Appellant conducted “Jolly Roger Fun Cruises’’ aboard the said vessel while the vessel was in Canada, and generally used the vessel for the pleasure of the shareholders and clients of the Appellant.

3. The Facts

3.01 The Appellant’s evidence was given by two witnesses: Mr John William Hudson, executive vice-president of the appellant, and Mr Peter Fairgrieve, vice- president of finance for the appellant.

In general, their testimonies are well summarized in the notices of appeal, the main paragraphs of which being quoted hereinafter:

1. The Appellant is a Canadian corporation that carries on the business of selling inter alia travel accident and baggage insurance to the Canadian public. Substantially all of the Appellant’s business is contracted through retail travel agents who issue policies to their clients on behalf of the Appellant. Accordingly, in order for the Appellant’s business to be successful, it is important for the Appellant to maintain a large network of travel agents across the country who are familiar with the Appellant’s specific products and trained in the marketing of insurance.

2. In order to promote its business and familiarize travel agents with its insurance products, the Appellant held a number of seminars for travel agents in Quebec and Ontario. Formal presentation of these seminars was held in a hotel meeting room, followed by an approximate 90 minute boat trip in the local area. The purpose of the boat trip was to attract travel agents to the seminars and also to enable individual travel agents to discuss matters on an informal basis with the Appellant’s trained sales representatives who hosted the trip.

3. The boat trip was taken on a 50-foot, 39-ton trawler-type vessel which was leased from another corporation, King Aviation Limited. This vessel was capable of carrying approximately 35 people and was designed for use by groups of that size, particularly as part of a business promotion, as opposed to personal use or enjoyment of the person in charge of the vessel.

4. During the taxation year in question, the vessel was used in conjunction with approximately 45 seminars which were carried on at various points between St. Catharines, Ontario and Québec City, Québec, and these seminars were attended by approximately 1,600 travel agents.

5.1 During its 1976 taxation year, the Appellant incurred the amount of $40,205.00 as its expenses of operating the vessel in conjunction with the operation of the seminars, which included rental payments to King Aviation Limited, the cost of repairs and maintenance, fuel, oil and other operating costs. Such expenses were deducted by the Appellant in computing its income for tax purposes for the 1976 taxation year.

5.2 During its 1977 taxation year, the Appellant incurred the amount of $37,879.00 as its expenses of operating the vessel in conjunction with the operation of the seminars, which included rental payments to King Aviation Limited, the cost of repairs and maintenance, fuel, oil and other operating costs. In anticipation of a reassessment, the Appellant did not deduct all of this expense in computing its income for tax purposes for the 1977 taxation year.

6. Such expenses were bona fide business expenses of the Appellant which were deductible by it in its 1977 fiscal year in computing its income in accordance with generally accepted business and accounting principles.

7. By his Notices of Reassessment dated February 28, 1980, the Minister reassessed the tax payable by the Appellant by disallowing the deduction of the aforesaid expenses incurred by the Appellant in operating the said vessel.

8. On May 28, 1980, the Appellant duly filed a Notice of Objection in respect of such reassessments.

9. In a Notification of Confirmation dated March 17, 1981, the Minister confirmed the said reassessment on the ground that:

. . . expenditures to the extent of $40,205.00 in 1976 and $37,879.00 in 1977, claimed as deductions from income in the respective years, were outlays or expenses incurred for the use or maintenance of property that is a yacht within the meaning of subparagraph 18(l)(l)(i) of the Act.

3.02 The general statement quoted above was confirmed by many documents. During his chief examination, Mr J W Hudson filed the following exhibits:

3.02.1 Exhibit A-1

The transcript of Register of Canada Registry Shipping of the Grand Voyageur on 177/1975 Toronto, Ontario. The said “Grand Voyageur” owned by King Aviation Limited had been built in 1974 in Ontario. It had a diesel engine with NHP 1.88, BHP 230 and an estimated speed of 11 knots. The gross tonnage was 37.28.

3.02.2 Exhibit A-2

An invitation to travel at the Harbour Castle Hilton Hotel in Toronto, “The Many New Sides of Travel Insurance in Canada” and among them a cruise on M V Grand Voyageur.

3.02.3 Exhibit A-3

A brochure entitled “Voyageur Welcomes You Aboard” and one can read:

The Grand Voyageur was built for Voyageur Travel Insurance Limited by Alphonse Lachance, Custom Boatyard of Isle Verte, Quebec. She was launched on July 19th, 1974 and as of May 1980, had sailed over 40,000 Miles and entertained more than 5,000 travel agents. She is registered under the Canada Shipping Act and insured at Lloyd’s.

Under heading “Accommodation”, one can read among others:

— 2 V-Bunks in forward cabin with individual closet and storage

— 2 Bunks in forward port cabin with chest of drawers and closet

— Salon area with hide-a-bed and 2 armchairs with combination coffee table/raised dining table

— Galley area with electric range and oven, microwave, fridge, freezer, double sinks, cupboards and drawers

— Bar area with ice maker, liquor dispenser, soft drink dispenser and drawers

— Wall-to-wall carpeting throughout.

Under heading “Mechanical Accessories” among others:

— Dehumidifiers in forward and aft cabins

— 50 watt stereo AM/FM, cassette, 8 track sound system, inside and outside.

3.02.4 Exhibit A-4

File entitled “Toronto Presentation, August 9, 1977”. One can read all the names with business cards of travel agents who attended that day. They were also invited to the reception at 6:00 pm. The bill shows:

— 1 tray of hot hors d’oeuvres at $48

— 2 trays of finger sandwiches at $25/tray

It is an every-day type of file records.

3.02.5 Exhibit A-5

This Exhibit is the schedule of the annual gross premiums of the appellant, varying from $374,000 in 1970 to $16,385,000 in 1980. According to Mr Hudson, this was due, among others, to the day-to-day presence at work of the president, Mr Underbakke and to the promotional seminars with the travel agents (SN p 20 to 22).

3.03 During the cross-examination of Mr Hudson, the respondent filed the following Exhibits R-l and R-2: “Grand Voyageur Presentation Schedule”, for the years 1976 and 1977.

3.03.1 In 1976, from August 5 to September 16, there were 20 days of presentations in the following cities: Québec City, Montréal, Ottawa, Kingston, Toronto (Exhibit R-l).

In 1977, from July 5 to September 4, there were 27 days of presentation in the following cities: Québec City, Montréal, Ottawa, Hamilton, St.Catharines and Toronto (Exhibit R-2).

3.04 For the years 1976 and 1977, the Grand Voyageur Itinerary (Exhibit R-3 and R-4 shows that during the period of January to the end of March, the ship was located in Florida (Key West) or in Honduras (Roatan). During the fall, (from September to December) she was in New York, Florida (Fort Pierce, Fort Lauderdale, Key West, Stuart), New Jersey (Edgewater, Cape May), Maryland (Solomons). This itinerary was prepared from different invoices (dockage charges, yacht club, marina, customs receipts, oil or gas bills, etc). It was not possible to locate the ship for every week during those years. Exhibits R-3 and R-4 were prepared in 1983. 3.05 The itinerary of Mr G A Underbakke, the then president of the appellant company, was also prepared from invoices for the years 1976 and 1977 (Exhibits A-6 and A-7). These exhibits were filed by the second witness, Mr Peter Fairgrieve, who has been working for the appellant since 1979. He had prepared Exhibits R-1 to R-4, and A-6 and A-7. Those latter exhibits show that Mr Underbakke spent a large part of his time in the south during winter, spring and fall.

3.06 Mr Fairgrieve said the lease charge for the ship was $15,000 plus $47,000 (fuel $4,000, insurance $3,000, etc).

4. Law — Cases at law — Analysis

4.01 Law

The main provision of the Income Tax Act involved in the instant case is 18(1)(1). It reads as follows:

(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;

4.02 Cases at Law

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

1. Andco Anderson Limited v MNR, [1978] CTC 2244; 78 DTC 1197.

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

3. Lionel Houle v MNR, [1982] CTC 2218, 83 DTC 5430.

4. Jaddco Anderson Limited v The Queen, [1981] CTC 11; 81 DTC 5002; [1984] CTC 137; 84 DTC.

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

4.03. Analysis

4.03.1 As well explained by counsel for the appellant in his submission, the main issue is whether the Grand Voyageur is a yacht — within the meaning of 18(1)(1). If it is not a yacht, the second issue is whether the boat was used for a business purpose and how the costs ought to be divided.

4.03.2 A yacht is not defined in the Income Tax Act. However, the English Dictionary of Legal Terms by Jowitt, describes yachts: “Vessels used primarily for purposes of pleasure”. The French version of 18( 1)(1) uses the words “bateau de plaisance” which is quite similar to the above definition.

All the details concerning the Grand Voyageur given in the brochure (Exhibit A-3) show that objectively, it is a “bateau de plaisance” (see para 3.02.3). It is added that there is a custom-made seating capacity for 23 passengers. However the requirement of the exception is not met “. . . 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”. Indeed, the travel agents were guests and did not have to pay.

4.03.3 Counsel for the appellant referred to the John Barnard Photographers Ltd case, where the Honourable L Cardin, Chairman of the then Tax Review Board, allowed the appeal for the expense of a boat which was considered as a commercial boat and had been formerly used by such agencies as the Police Coast Guard:

The taxpayer company, engaged in illustrative photography and publishing, decided to create a fishing almanac containing a wide range of features which it hoped to sell primarily to tourists. In order to carry out the necessary research and photography, it purchased a boat. In its 1975 and 1976 taxation years, the taxpayer deducted from its income the expenses associated with the boat.

Mr Cardin, however, said:

It appears to me that paragraph 18( 1)(1) is aimed at recreational facilities including a yacht used for pleasure. I do not believe that the design of a boat can by itself determine whether or not a boat is a pleasure craft. The only valid criteria, as I see it, in determining whether or not a boat is a yacht within the meaning of paragraph 18(1)(1) is the use that is generally made of it.

4.03.4 In the Jaddco Anderson Limited case, Mr Justice Jerome of the Federal Court — Trial Division, concerning the same provision 18( 1)(1) of the taxpayer’s company that entertained clients in a fishing lodge, also allowed the appeal — the facts and decision are summarized as follows:

The taxpayer company rented a fishing lodge owned by another party and used the lodge to entertain the clients of the taxpayer’s business. It claimed the rental payment as a deductible expense. The Minister disallowed the deduction and this decision was upheld by the Tax Review Board (unreported). The taxpayer then appealed to the Federal Court — Trial Division.

Held: The taxpayer’s appeal was allowed. The outlay was clearly a deductible expense of the taxpayer’s business. The statutory provision relied upon by the Crown was not meant to deny the deduction to a taxpayer who entertained clients at a lodge as opposed to some other type of rented premises; rather, it was designed to catch the lodge owner who attempted to write of (sic) his personal expenses on the lodge against business income from another source. The payment was deductible and the taxpayer’s appeal was therefore allowed.

Mr Justice Jerome expressly said in Jaddco, (supra):

It is intended, in other words, not to catch the person who entertains clients at a fishing lodge instead of a hotel, or who uses a yacht instead of transporting clients in some other way to some different kind of event.

Rather, it is intended to catch the taxpayer who is incidentally the owner of a kind of facility that is described in the sub-clause and attempted to write off some of his own expense in his maintenance or use of his own property, when, in fact, that property is not operated as a business, and is used incidentally, by the taxpayer, albeit in a legitimate fashion to entertain his clients. That, to me, is a more reasonable interpretation of the intention of Parliament in this exclusionary provision.

Also,

. . . But equally, I must conclude that if it was Parliament’s intention, as it would have to be the submission of the Defendant, that taxpayers are entitled to entertain their clients within the usual limits at one kind of commercial establishment but not at fishing lodges, equally it would have been a simple task for Parliament to make that discriminatory exclusion against one kind of entertainment, and since they have not done so, I conclude that it was not their intention so to do, but only to catch the incidental owner who attempts to write off his own expense to own this type of facility, and to deduct from his income from another business part of that expense.

The Federal Court of Appeal (Coram Pratte, Mahoney and Marceau, JJ) in February 1984 reversed the decision of Mr Justice Jerome in Jaddco, (supra), ([1984] CTC 137; 84 DTC 6135):

We are all of the opinion that the learned trial Judge erred in law in holding that Parliament had not, by section 18( l)(l)(i) of the Income Tax Act, clearly prohibited the deduction of the $8,000 in issue in the computation of the Respondent’s income for its 1972 taxation year.

5. Conclusion

The appeals are dismissed in accordance with the above reasons for judgment.

Appeals dismissed.