O'Connor T.C.J.:
1 These appeals were heard in Toronto, Ontario on June 3, 1997 pursuant to the Informal Procedure of this Court.
2 Although there were originally three issues, it was agreed at the hearing that only one issue remained, namely, was the Appellant entitled in the years 1989 through 1992 to capital cost allowance deductions with respect to his yacht charter operation?
3 The principal facts are as follows. In 1985 the Appellant purchased a yacht named Margaux I. It was built in France but was registered in 1985 in Canada pursuant to the Canada Shipping Act. In November of 1985 the Appellant entered into an agreement with Bimini Yacht Charters Limited (“Bimini”) appointing Bimini as his agent to charter the yacht to third parties and provide numerous services, including mooring, cleaning and maintaining, insuring, promoting the charter operation and staffing. More particularly, the agreement provided as follows:
Services to be Provided by Bimini
1. Bimini agrees as agent for the Owner to provide the following services:(g) Provide charterers with skippers, cooks, provisioning and beverages as requested and in any event to charter the Yacht not less than fifty percent (50%) of the time with a skipper or cook.
(h) Before each charter see that the Yacht is clean, fully equipped as prescribed, that equipment and Yacht are in good working order ... see that water, engine fuel, ice, propane, outboard fuel, are topped off, that clean linens are aboard and that all gallery and head supplies are aboard, the cost of which is to be borne by Bimini.
(k) Keep the Owner advised as to the charter locations from time to time and of the particulars of each charter.
(l) Use its best efforts, including various promotion techniques to maintain and keep the yacht under charter and in conformity with the applicable laws and regulations, entering into, as agent for Owner, charter agreements...
Fees and Revenue Sharing
5.1 The gross charter revenues (being the amount received by Bimini less 22-1/2% travel agents and/or brokers fees) shall be distributed 65% to Bimini and 35% to the Owner. Bimini shall pay the Owner's portion of the revenue quarterly, 15 days after the month following the end of the quarter...
5.2 ...
5.3 Bimini hereby guarantees that the minimum income to the Owner pursuant to this Agreement over its four (4) year term is $86,112.00 ... In the event that the total revenue shall be less than $86,112.00 as calculated above, Bimini agrees to pay the Owner the difference between the amount received and $86,112.00 on expiration of this Agreement. In the event that this Agreement is terminated by the Owner prior to its expiry, the amount set out in this agreement shall be pro-rated on a per diem basis based upon a term of 1,460 days.
4 The agreement makes it clear that Bimini was the sole agent of the Appellant and that it was clearly an agent, notwithstanding Bimini's remuneration took the form of a share of revenues.
5 The agreement was terminated by the Appellant because of lack of performance by Bimini and a new agreement was entered into on January 15, 1991 with North South Yacht Vacation Limited (“NSYV”). This second agreement contained similar provisions to the Bimini agreement and had as an expiry date June 30, 1992. It did not provide that the charters were to be made at least 50% of the time with a skipper and cook, nor was there any income guarantee. It made clear, however, that NSYV was acting as the Appellant's agent.
6 In filing his returns for the years in question the Appellant claimed various expenses related to the yacht operation including interest charges and certain maintenance and repair charges. In addition, the Appellant claimed capital cost allowance in the amounts of $15,804.26, $13,433, $11,418.58 and $17,515.92 in the respective years 1989, 1990, 1991 and 1992.
7 The Minister of National Revenue (“Minister”) reassessed on July 13, 1993 to disallow all of the losses for the yacht operation. After the filing of a Notice of Objection the Minister reassessed on April 26, 1996 to allow all of the expenses claimed with the exception of the said capital cost allowance amounts. The Minister's position was that notwithstanding that the Appellant was carrying on a charter operation business through the intermediary of his agents, nevertheless the yacht was a “leasing property”. Therefore, because of subsection 1100(15) of the Income Tax ActRegulations (“Regulations”), the Appellant was not entitled to deductions for the capital cost allowances since they increased losses.
8 The Appellant submits firstly that because he purchased the yacht in 1985 he is not subject to the restrictions in subsection 1100(15). In other words, he was grandfathered under the transitional provisions for implementation of amendments adopted in 1986. He submits further that because he was operating a charter business subsection 1100(17.3)(b) of the Regulations applies. He points out that he was a hands-on operator and that the operation was not what is referred to in the industry as a bare boat operation. He wanted the yacht to be operated by a skipper at least 50% of the time as provided in the Bimini agreement. He adds that simply because the physical day-to-day arrangements were handled by his agents, nevertheless they were his agents and it was he who was responsible for most of the expenses of the yacht. As an indication of his involvement he refers to the detailed provisions of the agency agreements. Further, he submitted Exhibit A-10, being a hand written, five page letter of November 1989 pointing out to Bimini the Appellant's detailed concerns about Bimini's bad handling of the operation and making numerous demands. The letter concludes:
I am prepared to spend whatever time is necessary to return matters to an even keel.
9 Appellant referred further to Exhibit A-8, being an authorization and letter of December 1990 to NSYV to seize the yacht and to commence NSYV's charter operation. The letter also sends the insurance coverage and details the list of equipment on the yacht.
Analysis
10 The relevant subsections of the Regulations read as follows:
1100(15) Notwithstanding subsection (1), in no case shall the aggregate of deductions, each of which is a deduction in respect of property of a prescribed class that is leasing property owned by a taxpayer, otherwise allowed to the taxpayer under subsection (1) in computing his income for a taxation year, exceed the amount, if any, by which- (a) the aggregate of amounts each of which is
(i) his income for the year from renting, leasing or earning royalties from, a leasing property or a property that would be a leasing property but for subsection (18), (19) or (20) where such property is owned by him, computed without regard to paragraph 20(1)(a) of the Act, or...
exceeds- (b) the aggregate of amounts each of which is
(i) his loss for the year from renting, leasing or earning royalties from, a property referred to in subparagraph (a)(i), computed without regard to paragraph 20(1)(a) of the Act, or...
1100(17) Subject to subsection (18), in this section and section 1101, “leasing property” of a taxpayer ... means depreciable property other than1100(17.2) For the purposes of subsection (17), gross revenue derived in a taxation year from(a) the right of a person or partnership, other than the owner of a property, to use or occupy the property or a part thereof, and
(b) services offered to a person or partnership that are ancillary to the use or occupation by the person or partnership of the property or the part thereof
1100(17.3) Subsection (17.2) does not apply in any particular taxation year to property owned by
11 With respect to the Appellant's grandfathering argument, based on the fact that the boat was purchased in 1985, the Appellant refers to the Budget Papers tabled in the House of Commons by the Minister of Finance on May 23, 1985. So far as material, these Budget Papers provided as follows:
Recently there have been a number of transactions designed primarily to provide income tax shelters to taxpayers investing in businesses which provide recreational and other services through the use of yachts, recreational vehicles, hotels, nursing homes and other similar property. While these industries are important elements of the economy and deserve the support of Canadians, this support should not be effected through tax shelter arrangements.
Accordingly, the budget proposes that the Income Tax Regulations be amended so that individuals will no longer be able to shelter other income with losses created by capital cost allowance from such property used in businesses that offer services combined with the use of the property.
The new rules will not apply if the investors are individuals who are personally active in the day-to-day operation of the business....
Subsequent to the introduction of the budget, because of certain lobbying efforts by the yachting industry and other industries, modifications to the transitional rules were introduced in 1985 to the effect that the budget proposals do not apply to new property acquired before 1986 (originally the date was May 23, 1985). The Appellant submits therefore that since he purchased a new yacht in 1985 the changes introduced by P.C. 1986-2770 expanding in subsection 1100(17.2), the definition of rent do not apply to him. I agree with the Appellant.12 Counsel for the Minister did not, however, agree that the grandfathering argument ended the matter. She pointed out that subsection 1100(15) existed prior to 1986, that the yacht is “leasing property” and, therefore, the capital cost allowance is limited. Appellant submitted that he was not a mere passive investor but was actively engaged in the operation of a business, and therefore protected by subsection 1100(17.3). Subsection 1100(15) applies only to “leasing property”. Subsection 1100(17) defines “leasing property” as being property used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Subsection 1100(17.2) expands the definition of rent. However, subsection 1100(17.3) states that subsection 1100(17.2) shall not apply to property owned by an individual where the property is used by a business carried on in the year by the individual in which he is personally active on a continuous basis. I believe that, reading all of the subsections together, one must conclude that if in virtue of subsection 1100(17.3) “rent” is not considered to exist when the owner is personally active in the business, then, since the Appellant was receiving rent (not a royalty), the yacht is not “leasing property” and the restrictions in subsection 1100(15) are not applicable. In my opinion, the Appellant, on the basis of all of the evidence submitted, was actively involved in running the business as contemplated in subsection 1100(17.3). That he was carrying on a business with a reasonable expectation of profit, although at first an issue, was no longer contested by counsel for the Minister. Sometimes in cases of this nature the personal use of a yacht by its owner will be a definite negative in determining whether a business existed. The Reply makes no reference to this and no evidence was presented establishing any personal use.
13 In certain Interpretation Bulletins related to the issue in this appeal and in the Reply of the Minister there is reference to a “bare boat charter”. On the basis of the evidence in this case, I am satisfied that the Appellant was not in a bare boat charter business. He wanted the yacht to be completely furnished, stocked and skippered. Without reviewing in detail the various types of charters, I refer simply to an article of Elizabeth A. Hadder appearing in Volume 32 of the Canadian Tax Journal at page 929 and following. This article discusses in detail the advantages and disadvantages from a tax point of view of a yacht operation. At page 938, the article states as follows:
Revenue Canada states that in establishing whether a depreciable property is used “principally” for a given purpose, the determining factor is the proportion of time that the property is used for that purpose.
Property used more than 50% of the time for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue is considered to be used principally for that purpose. Such revenue includes charter fees and other revenue for the use of a vessel leased to an operator on a “bare-boat” basis.
Conversely, where a boat is chartered on an “all-inclusive basis” for more than 50 per cent of the time, the boat will not, in that particular taxation year, be a leasing property as defined under regulation 1100(17). An all-inclusive charter exists where the owner supplies not only the use of the boat but also a crew and other services (such as provisions) necessary to operate the boat. A bare-boat charter occurs where the owner supplies only the use of the boat.
I am not certain how the distinction between bare boat charters and all-inclusive charters arose, nor am I convinced that it would necessarily be determinative on the issue of whether capital cost allowances should be limited. I have noted that in the decision mentioned below there is reference to a bare-boat charter.14 Counsel for the Minister referred to the case of MacKay v. Minister of National Revenue (1989), [1990] 1 C.T.C. 2036 (T.C.C.)where this Court held, with respect to a yacht operation, that the limitation on the deduction for capital cost allowance applied. The facts in MacKay are drastically different from the facts in this case and, in my opinion, the decision in MacKay has no application to this appeal.
15 In conclusion, the appeal is allowed, with costs and the matter is referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for Judgment.
Email this Content