DR J G Cyr v. Minister of National Revenue, [1978] CTC 2757

Guy Tremblay [TRANSLATION]:— This case was heard in Quebec City, Quebec, on April 7, 1977.

1. Summary

The Board must decide whether, in respect of the 1971 taxation year, the appellant was entitled to deduct $21,331.39 as a loss arising from an airline company. This loss primarily consists of the capital cost allowance claimed on an airplane.

2. Burden of proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in RW S Johnston v MNR [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 The appellant, who was forty-nine years of age in 1971, was involved in a number of spheres of activity.

(a) The appellant practised general medicine and surgery in Grand Falls, New Brunswick, from which he earned a gross income of $92,338.04 and a net income of $62,018.81.

(b) Since 1952 he has been operating a pharmacy to serve his patients’ needs.

(c) Since 1967 he has been the principal shareholder in a company that sells pharmaceutical products in the Maritime provinces.

(d) He has buildings for rent on which he made an operating loss of $353.37 in 1971.

(e) He owned seven hundred acres of land, two hundred of which were used to grow potatoes. At one time, a hundred or so persons worked on his potato farm, which incurred operating losses of $7,500 in 1971.

(f) He owned a motel in Rimouski.

(g) He owned race horses.

(h) He owned a construction company, St-Léonard Construction Inc, which had heavy equipment, calling for large investments.

(i) He has since the fall of 1969 owned an airline company, “Commuter Air Services Ltd,” which has a seven-passenger WOG Aero Commander 500 and a four-passenger Cessna 180 JOA, which have been the property of appellant since 1967 and 1968 respectively.

(j) The appellant also personally owned a seven-passenger CF-SJA Aero Commander 720, which he acquired in December 1968. This plane incurred an operating loss of $21,331.39 in 1971, a loss which the respondent disputes.

(k) The appellant set up a company called the St-Léonard Flying Club Ltd for training young air pilots.

3.2 The financial statements of Commuter Air Services Ltd for 1969, 1970, 1971, 1972, and 1973 reveal the following:

1969

Income $ 7,850.00

Expenditure $36,787.01

Less personal expenses $20,868.61 $15,918.40

Losses $ 8,068.40

1970

Income $ 3,363.50

Expenditure $23,997.04

Less personal expenses $14,486.78 $ 9,510.26

Losses $ 6,146.76

1971

Income $ 4,764.00*

Expenditure:

General insurance $ 1,940.80

Bank interest and costs $ 2,812.00

Operating expenses $ 7,098.60

Depreciation $ 9,360.00

Wages $ 2,691.10

Travel $ 1,467.89

Rent $ 350.00

Professional fees $ 375.00

$26,095.39

Losses $21,331.39

‘Included in this amount of $4,764.00 is an amount

of $200 for personal use.

		1972	1973
Income	$ 1,201.50
Expenditure	$11,945.70		$17,107.91
Less personal expenses
Losses	$10,744.20		$17,107.91
	. .	—

3.3 The appellant maintained that he bought this plane in order to obtain an air carrier’s licence. Since Grand Falls, New Brunswick is in a remote setting, an airline company and the availability of a sevenpassenger airplane were social and economic necessities. The appellant’s background as an aviator during World War II did not sway his decision to use the plane for the economic and social end sought.

3.4 The airplane had to log five hundred hours’ flying time at $150 an hour in order to be profitable.

Given the minimal number of hours that the appellant could personally use the said plane and the very. high expenses always inherent in operating an airplane of this type, flying time would cost between $300 and $400 an hour.

3.5 The government was in favour of this airline company. It had even promised, through a number of its representatives, to charter this airplane for five hundred hours. DOT economists concluded, upon analysis, that there was a need for an airport in this region and that such a venture would be profitable, which was further confirmed by a study accompanied by the pro forma financial statements of Commuter Air Services Ltd. The statements were based on the premise that the company owned or used three airplanes, thus including the Aero Commander 720.

3.6 This pressurized airplane had been purchased at the end of 1968 from a mining company for $65,000. The appellant considered this to be a good price as the airplane would cost $300,000 new, and the radio system alone was worth $100,000. The airplane consumed thirty- five gallons of fuel an hour.

3.7 An air carrier’s licence required $250,000 as collateral and could Only be granted to a company. In 1969, the appellant proceeded to acquire a majority of the shares of Commuter Air Services Ltd and transferred two planes to it, namely, the Aero Commander 500 and the Cessna 180.

3.8 He did not transfer the Aero Commander 720 because the bank objected: the airplane served as security for his personal debt with them. The bank clearly did not want to release appellant, the surety, in favour of the company.

3.9 The Industrial Development Bank initially promised a loan of $100,000 to the company to aid the development of industrial aviation in this part of New Brunswick. However, the loan was refused after more thorough study revealed that the risks were too great.

3.10 This airplane seemed to be dogged by misfortune in 1971.

(a) A mechanic mistakenly used motor oil instead of hydraulic oil. The resulting damage amounted to $15,000 and destroyed the airplane’s pressurization.

(b) The airplane broke two wings on landing on its return flight from Fredericton, where it has gone to pick up 2 sick persons. The appellant had to have the airplane repaired in Oklahoma, USA.

(c) The airplane had another breakdown on a flight to Edmonton which cost $7,000.

3.11 During 1971, the airplane was used for a total of 75.9 hours, 3.5 of which were for the appellant’s recreational purposes, as indicated in Exhibit A-8.

3.12 The appellant rented his personal airplane to Commuter Air Services Ltd for commercial use. This company could not get an air carrier’s licence unless it had 3 planes at its disposal. 2 it owned, the two transferred by the appellant—the seven-passenger WOG Aero Commander 500 and the four-passenger Cessna 180 JOA. The appel- lant’s seven-passenger CF-SJA Aero Commander 720 was the third airplane available.

3.13 According to Exhibit A-4, on June 25, 1971 the appellant rented his airplane to Fredericton Aviation Ltd for one year. This company subsequently found itself unable to honour this agreement because of financial difficulties and it was, according to the appellant, cancelled in January 1972. However, on the contract submitted as Exhibit A-4 the following handwritten words appear: “Cancelled mutually August 16/71.” According to Exhibit A-5, Fredericton Aviation Ltd had, from June 24, 1971 to August 13, 1971, used the appellant’s plane for 30.5 hours at a cost of $60 an hour.

3.14 Details about income for 1971, in particular the number of flying hours, are found in the airplane’s log books (journey log books, technical log books, including engine, propeller and so on). These books were nevertheless not produced at the hearing since, according to the evidence, they had been lost or stolen. They existed when the appellant’s tax return was prepared, the log books being used as a source of information in preparing the return.

3.15 The evidence further showed that the appellant has never personally held an air carrier’s licence, which would only be granted to a company.

3.16 According to the minutes of Commuter Air Services Ltd dated October 3, 1969, submitted as Exhibit 1-1, the appellant rented his personal plane to this company for one dollar a year.

Moreover, according to the appellant, the renting of his plane at a cost of $50 an hour was a verbal agreement. It appears from Exhibit A-8 that in 1971 the total of hours was calculated at a rate of $60 an hour.

3.17 It appears from the appellant’s tax returns that in 1969 and 1970 the airplane was used for his personal ends roughly 60% of the time.

3.18 The company’s income and expenditure for the fiscal year from February 28, 1970 to January 31, 1971 were as follows:

Of the expenditure, wages amounted to $4,900.40 and the remainder was depreciation.

3.19 From October 1969 to January 30, 1970, the company’s income amounted to $430.80 whereas its expenditure was $9,446.21.

3.20 The respondent, through his notice of assessment dated May 27, 1974, disallowed the expenditure of $21,331.39 claimed by the appellant for his seven-passenger plane.

3.21 The appellant appealed to the Minister, filing a notice of objection dated August 22, 1974.

3.22 The Minister notified the appellant on March 7, 1975 that he upheld the assessment of May 27, 1974.

3.23 The appellant submitted a notice of appeal to the Board on June 2, 1975.

4. Act, case law and comments

4.1 The sections of the old Act involved are paragraph 12(1 )(a) and subparagraph 139(1 )(ae)(i), as well as the regulation regarding the Capital cost allowance authorized for the airplane. It should be pointed out that this capital cost allowance can only be allowed on condition that the plane was acquired for gaining or producing income in accordance with Regulation 1102(1). Paragraph 12(1)(a) and subparagraph 139(1)(ae)(i) state:

12(1) In computing income, 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 property or a business of the taxpayer. . .

139.(1) In this Act,

(ae) “personal or living expenses include

(i) 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 . . .

4.2 The Board took notice of the following judgments, several of which were cited by counsel:

— Her Majesty the Queen v Douglas C Matthews, [1974] CTC 230; 74 DTC

6193;

— Ken Huband v MNR, [1974] CTC 2001; 74 DTC 1039;

— MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279;

— Donald Preston McLaws v Her Majesty the Queen, [1976] CTC 15; 76

DTC 6005;

— Marcel Crépeau v MNR, 37 Tax ABC 280; 65 DTC 99:

— Williamson v MNR, 1 Tax ABC 369; 50 DTC 147;

— Alan R Needham v MNR, [1974] CTC 2078; 74 DTC 1057;

— Riedle Brewery Ltd v MNR, 1939 SCR; [1938-39] CTC 312; 1 DTC 499-29;

— F George Walker v MNR, 76 DTC 1224;

— John S Stewart v MNR, [1964] CTC 45; 64 DTC 5023;

— Onni Paju & Oiva V Paju v MNR, [1974] CTC 2121 ; 74 DTC 1087;

— Ernest C Hammond v MNR, [1971] CTC 663; 71 DTC 5389;

— R C Huffman Construction Company of Canada Ltd v MNR, 39 Tax ABC

172; 65 DTC 597;

— William E Newton v MNR, [1969] Tax ABC 1174; 69 DTC 778;

— D Carom v MNR, [1977] CTC 2085; 77 DTC 67.

4.3 Considering the appellant’s numerous activities, as shown by the evidence (paragraph 3.1), some would describe him as a “wheeler dealer’, while others would regard him as an “entrepreneur’’ or “captain of industry.’’ Although the Board does not have to rule on ’any of these descriptions, it finds that the appellant was at the heart of an impressive number of activities, some of which were financial successes and others which were not, but all were of an economic nature, that is, they were designed to earn income. Do they, however, meet the second condition set down in apragraph 139(1)(ae), namely, that they were carried out with “a reasonable expectation of profit’’? This is the important question to be answered with regard to the activities of the CF-SJA Aero Commander 720.

4.4 So far as the activities of the above airplane are concerned, it did not meet with much financial success, as indicated in paragraph 3.2. Indeed, since its purchase, it has incurred nothing but losses (1969: $8,068.40: 1970: $6,146.76; 1971: $21,331.39; 1972: $10,744.20; 1973: $17,107.91).

Did the appellant, a former wartime aviator, succumb to a natural weakness for the predilections of youth, as the respondent claims, by setting up this airline company in addition to all his other activities? The Board does not believe that the appellant bought this airplane merely for his personal use. The high cost of operating it, together with the appellant’s financial and working life as a whole, are proof to the contrary. At the very least, the evidence showed that the appellant’s realization of his youthful predilections in maturity coincided with a social and economic need in this corner of New Brunswick. The government even promised to lend assistance by renting it. According to an analysis conducted by federal economists, it would be profitable to operate an airport in the region, an opinion which was confirmed by a study accompanied by the pro forma financial statements of Commuter Air Services Ltd (paragraph 3.5).

Further, the $65,000 cost cf the seven-pasenger airplane, on which the radio system alone was. according to the appellant, worth $100,000 may have been a great temptation to gratify a latent weakness for his youthful predilections, but it was also a good opportunity to acquire an asset that might fill a need.

There is no doubt that there were risks attached to such a venture, of which the Industrial Development Bank was also aware, since it refused Commuter Air Services Ltd a loan of $100,000 in 1971 precisely because of the very great risks involved (paragraph 3.9). However, would this loan have helped the aviation activities in this region, and the appellant’s in particular, to become profitable? No definite proof to this effect was submitted.

To take chances in business is not necessarily synonymous with undertaking ventures without expectation of profit. In the great financial Success stories of today, in the economic growth of nations, do we not find at bottom one or more men who have risked all their time and money? We call them “business tycoons.’’ Many as well, who have taken the same risks to achieve the same ends, have lost everything. These we often call “born losers’’. The two often missed exchanging places by very little. Luck and circumstances accounted for much. Nearly always these people have risked and done what the government did not dare risk or could not do. When they succeeded, they were taxed by the government, and rightfully so.

In light of the evidence as a whole, the Board concludes that the appellant, in this airline company, by reason of the needs and other circumstances submitted in evidence, carried on business for profit and was in a position to think that there would be a reasonable expectation of profit for 1971. In the Board’s view, a period of three years (the company was started in 1969) is not, under the given circumstances, too long a period in which to try to make a business of this type profitable.

5. Conclusion

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

Appeal allowed.