Citation: 2010TCC62
Date: 20100202
Docket: 2008-1019(IT)I
BETWEEN:
LOUISE C. NORTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-1020(IT)I
AND BETWEEN:
GREGORY W. NORTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellants,
who are married to each other, were carrying on a fishing business as a
partnership throughout 2001, 2002, 2003 and 2004. It was agreed by the parties
that 50.5% of the profits (or losses) of the partnership should be allocated to
Gregory Norton and 49.5% of such profits (or losses) should be allocated to
Louise Norton. As a result of a very thorough audit by the Canada Revenue
Agency (“CRA”), the Appellants were reassessed:
(a)
to deny some of the amounts
claimed as expenses on the basis that such expenditures had not been incurred
or were personal expenditures;
(b)
to reclassify other amounts
claimed as expenses as capital expenditures;
(c)
to reduce the percentage of
business use of the automobiles (which resulted in a reduction in the amount
allowed as automobile expenses); and
(d)
to reduce the percentage that the
home was used for business purposes (which resulted in a reduction in the
amount allowed as business use of the home expenses).
There
were also some acquisitions of capital assets and disposition of capital assets
that had not been taken into account when the tax returns for the Appellants
were prepared and filed.
[2] The assumptions
made by the Minister in determining the Appellants’ tax liability for 2001,
2002, 2003 and 2004 are set out in paragraph 9 of the thirty-four page Reply
(which included six pages of Schedules). There are 81 subparagraphs of
paragraph 9 designated by letters (from (a) to (cccc)) with several
subparagraphs being further divided into separate clauses. Several
subparagraphs or clauses include tables with several different amounts.
Needless to say the hearing took longer than the one day that was originally
scheduled for the hearing.
[3] There was a
significant gap in time between the conclusion of the Appellants’ case on June
1, 2009 and the opening of the Crown’s case on December 1, 2009. During that
time the parties were able to complete and execute a Partial Agreed Statement
of Facts which consolidated a list of the matters that the Appellants were no
longer pursuing and a list of the items that were being allowed by the
Respondent. Since the matters that the Appellants are no longer pursuing will
not change the reassessments, there is no need to list those matters.
[4] The following
table lists the amounts that the Respondent has agreed to allow as a deduction
in computing the income of the partnership:
|
Paragraph in the Reply:
|
Description:
|
Amount Allowed:
|
|
2001
|
2002
|
2003
|
2004
|
|
9(h)
|
Crew shares
|
|
|
$1,570.63
|
|
|
9(j)
|
Boat Fuel
|
$442.06
|
|
|
|
|
9(k)
|
Line
|
$674.28
|
|
|
|
|
9(k)
|
Rope
|
$754.11
|
|
|
|
|
9(l)
|
Line
|
|
$440.54
|
|
|
|
9(m)
|
Line
|
|
|
$523.65
|
|
|
9(m)
|
Rope
|
|
|
$1,133.80
|
|
|
9(m)
|
Bait bags
|
|
|
$265.00
|
|
|
9(o)
|
Line
|
|
|
|
$928.40
|
|
9(o)
|
Rope
|
|
|
|
$702.00
|
|
9(y)(i)
|
Lamp etc.
|
|
$65.98
|
|
|
|
9(y)(iii)
|
Line
|
|
$325.15
|
|
|
|
9(hh)(i)
|
Insurance
|
|
|
$535.50
|
|
|
9(oo)(ii)
|
Line
|
|
$284.85
|
|
|
|
9(pp)(iii)
|
Line
|
|
|
$679.14
|
|
|
9(tt)
|
Outboard motor
|
|
|
$408.46
|
|
|
9(ggg)(iii)
|
Property taxes
|
$493.42
|
|
|
|
|
9(ggg)(iii)
|
Barbeque
|
$69.99
|
|
|
|
|
9(iii)
|
Property taxes
|
|
$471.12
|
|
|
|
9(kkk)
|
Property taxes
|
|
|
$519.74
|
|
|
9(kkk)
|
Hunting ammo, fan
|
|
|
$230.53
|
|
|
9(kkk)
|
Hotel in Yarmouth
|
|
|
$139.32
|
|
|
9(lll)
|
Meal
|
|
|
|
$16.35
|
|
9(lll)
|
Cape Cod Colony Motel
|
|
|
|
$50.00
|
|
9(lll)
|
Property taxes
|
|
|
|
$131.30
|
|
9(lll)
|
Credit Notes
|
|
|
|
$60.00
|
|
Total:
|
|
$2,433.86
|
$1,587.64
|
$6,005.77
|
$1,888.05
|
[5] The Respondent
also agreed that the $215.04 spent by the Appellants to acquire a police
scanner in 2002 should be added to the undepreciated capital cost of the Class
8 assets of the partnership.
[6] As part of the
reassessment of Gregory Norton, the Minister had assumed that he sold his
lobster licence for $100,000 in 2002. The Respondent has agreed that the
proceeds of disposition for this licence were $75,000 not $100,000, which will
affect the balance of the cumulative eligible capital of Gregory Norton as of
the end of 2002.
[7] There are a
number of matters that were not resolved between the parties. Counsel for the
Appellants in his closing arguments identified the items that the Appellants
were still disputing and these will be dealt with in these reasons. The number
and letter references are to the subparagraphs of the Reply.
9(h)
– Crew Shares
[8] The assumption
made by the Minister was that $8,071 claimed by the Appellants as crew shares
in 2003 had not been incurred. As part of the Partial Agreed Statement of Facts
the Respondent agreed that $1,571 of this amount should be allowed as a
deduction leaving a balance that was denied of $6,500. During closing arguments
counsel for the Appellants stated that the Appellants should be allowed to
deduct $1,060 of this $6,500 amount (and therefore the Appellants were no
longer claiming that they were entitled to deduct $5,440).
[9] The Appellants
called three witnesses – the two Appellants and their bookkeeper. The only
witness for the Appellants who had any knowledge of this claim was the
bookkeeper. The total amount claimed as crew shares in 2003 was $13,571. Since
the Minister had denied a claim for $8,071, the amount that had been allowed
(at the time of the reassessment) was $5,500. The bookkeeper stated during her
testimony that the $5,500 (that had been allowed) related to the tuna wages or
share paid to Chance Norton (who is the Appellants’ son). The additional claim
now being made by the Appellants is that Chance Norton was paid an additional
amount of $1,060 in 2003 by two cheques – one for $660 dated July 3, 2003 and
the other for $400 dated December 19, 2003. As a result the total amount paid
to Chance Norton, as alleged by the Appellants, in 2003 would be $6,560.
[10] The auditor for
the CRA also testified during the hearing. She stated that she had reviewed the
tax return that Chance Norton had filed for 2003 and that he had only reported
$5,500 as his income from crew shares in 2003. Chance Norton did not testify at
the hearing. In the Law of Evidence in Canada, second edition, by
Sopinka, Lederman and Bryant, it is stated at p. 297 that:
In civil cases, an unfavourable inference can be
drawn when, in the absence of an explanation, a party litigant does not
testify, or fails to provide affidavit evidence on an application, or fails to
call a witness who would have knowledge of the facts and would be assumed to be
willing to assist that party.
[11] Chance Norton would have knowledge of the amount that
he was paid in 2003 and, since he is the Appellants’ son, would presumably be
willing to assist the Appellants, if his testimony would have assisted them.
Without hearing from Chance Norton
to confirm the amount that he was paid in 2003 and to explain why, if he had
been paid $6,560 as crew shares in 2003, he only reported $5,500 in his tax
return, the Appellants cannot succeed on this issue. The additional amount of
$1,060 that the Appellants claim was paid to Chance Norton in 2003 (in addition
to the $5,500) is not allowed as a deduction in computing the income of the
Appellants.
9(k),(l),(m) and (o) – Anchors, nets, traps, reels and
related materials
[12] The following amounts had been claimed as expenses by the Appellants
but were reclassified by the auditor for the CRA as capital expenditures (and
added to the Class 8 assets of the partnership as additions):
|
|
2001
|
2002
|
2003
|
2004
|
|
Anchors, nets, traps and
related materials
|
$2,767.72
|
|
|
|
|
Nets, traps and related
materials
|
|
$5,520.83
|
$12,081.78
|
$11,376.10
|
|
Reels and related materials
|
$3,600.20
|
$7,577.69
|
$4,386.38
|
$3,854.90
|
|
Total:
|
$6,367.92
|
$13,098.52
|
$16,468.16
|
$15,231.00
|
[13] The bookkeeper
testified that these amounts had been included in the amount claimed as “gear”
and were claimed as expenses in computing the income of the Appellants for
these years. The amounts that were claimed as “gear” in determining the income
of the partnership for 2001 to 2004 were the following amounts:
|
|
2001
|
2002
|
2003
|
2004
|
|
Gear:
|
$13,204.57
|
$16,119.60
|
$25,665.51
|
$24,054.66
|
[14] It also appears
that in some of the years prior to the years under appeal, the amount spent on traps
was treated as a capital expenditure. It appears that Gregory Norton was
claiming an investment tax credit in relation to the traps. Investment tax
credits are determined by multiplying the capital cost of qualifying property,
which pursuant to the provisions of section 4600 of the Income Tax
Regulations, are restricted to depreciable property of the classes as set
out in that section of the Regulations, by the applicable percentage.
Therefore in order to claim an investment tax credit in relation to the traps,
the traps would have to be capital property.
[15] The issue in this
case is whether the amount spent on traps and nets during 2001 to 2004 should
be treated as a deductible expense or as a capital expenditure. Not only was
this not an easy matter for the Appellants to resolve (who, in some years,
treated the amounts spent on traps as capital expenditures and for the years
under appeal, as an expense), it also appears that the CRA is not taking a
definitive position that the amounts spent must be treated as capital
expenditures.
[16] In the fishing
income guide published by the CRA (T4004), it is stated in relation to Line
9137 -- Nets and traps in part as follows:
Nets and traps
include lines, hooks, buoys, anchors, and radar reflectors.
Generally, you
cannot deduct the entire cost of nets and traps you bought in the year.
Instead, there are two methods you can use to deduct these costs.
Method 1
– Capital cost allowance (CCA) method
Capitalize the
cost of nets and traps and claim CCA.
See Chapter 3
for details on CCA.
Method 2
– Inventory method
Include in
inventory the cost of nets and traps and deduct the loss in value, as shown in
the following example:
Example
Value of nets, traps, twine, etc., on hand at the
end of
your 2007 fiscal period .................................. $ 750
Add: Cost
of nets and traps you bought
in your 2008
fiscal period........................ $200
Cost of twine
and other net and
trap materials
you bought in your
2008 fiscal
period (do not include
the value of your own
labour)....……………. 125 325*
Subtotal.................................................................
$1,075
Minus: Value
of nets, traps, twine, etc.,
on hand at the
end of your
2008 fiscal
period................ ….….…................$700**
Proceeds from
the sale of nets, traps,
twine,
etc.................................... .. ..…… 150 850
Loss on nets
and traps ............................................... $ 225
* If you use
the inventory method, do not deduct this
amount as an
expense.
** The value
of nets and traps on hand is the amount you
would receive
if you sold them to another fisher who
was not
related to you.
If you just
started fishing, choose one of the two methods. If you have been fishing for
several years and each year you claim the cost of replacing nets and traps, you
can keep on doing so. However, you can choose to change to either the CCA or
the inventory method. If you choose to do this in 2008, the value of nets and
traps on hand at the end of 2007 will be zero since you have deducted their
value in previous years.
You can change
from the inventory method to the CCA method. However, you cannot change from
the CCA method to the inventory method
[17] In the report of
the auditor for the CRA, a copy of which was introduced as an exhibit, the
auditor stated as follows:
Capitalization
of assets: One of the most offensive practices of this REP is her accounting
for capital purchases. Because she considers nets, traps, lines, buoys, fishing
equipment to be “gear” (it is common among fishermen to refer to their
equipment as gear) she expenses all such capital acquisitions as “gear”. Our
fishing guide defines gear as clothing and small tools and explains that these
items can be expensed.
Nets and Traps
are defined in the guide as: nets, traps, lines, hooks, buoys, anchors, radar
reflectors. Nets and traps are afforded a special treatment, although it is by
policy, not by virtue of the act. Basically, for those fishermen who have used
cost replacement method (that is they expense 100% of the cost) prior to 1988,
and have always continued to do so, for their nets and traps, they may continue
with this practice. In 1988, section 28 of the ITA was added and from that
point on, new fisherpersons, or those who had never used cost replacement
method, could no longer elect this method. Nets and traps were, from that point
onwards, considered class 8 capital assets; however, as a matter of policy, we
do allow fishermen to use an inventory method to expense nets and traps. The
inventory and capital methods are the only 2 methods available, and once a
fisherman elects the capital method, he cannot change to inventory method.
[18] Inventory is
defined in section 248 of the Income Tax Act (the “Act”) as
follows:
“inventory”
means a description of property the cost or value of which is relevant in
computing a taxpayer's income from a business for a taxation year or would have
been so relevant if the income from the business had not been computed in
accordance with the cash method and, with respect to a farming business,
includes all of the livestock held in the course of carrying on the business;
[19] The definition of
inventory is very broad and refers to a description of property the cost or
value of which is relevant in computing income. If the word “inventory” is
given a literal interpretation, what property of a business would not be
included as property the cost of which is relevant in computing income?
It does not state that the cost must be deductible, only that the cost is
relevant.
[20] The Supreme Court
of Canada in The Queen v. Canada Trustco Mortgage Company, 2005 SCC 54,
2005 DTC 5523 (Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259 D.L.R.
(4th) 193, [2005] 2 S.C.R. 601, stated that:
10 It
has been long established as a matter of statutory interpretation that “the
words of an Act are to be read in their entire context and in their grammatical
and ordinary sense harmoniously with the scheme of the Act, the object of the
Act, and the intention of Parliament”: see 65302 British Columbia Ltd. v. R.,
[1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The interpretation of a
statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a
whole. When the words of a provision are precise and unequivocal, the ordinary
meaning of the words play a dominant role in the interpretive process. On the
other hand, where the words can support more than one reasonable meaning, the
ordinary meaning of the words plays a lesser role. The relative effects of
ordinary meaning, context and purpose on the interpretive process may vary, but
in all cases the court must seek to read the provisions of an Act as a
harmonious whole.
[21] It seems to me
that the words used in defining inventory are not precise and unequivocal.
Edwin C. Harris, Q.C. in his text Canadian Income Taxation, fourth
edition, stated at pages 443 – 445 as follows:
Any business
that, in the usual course, sells goods (whether or not manufactured by it) or
land will normally maintain an inventory, i.e., a stock of things held for
sale. This inventory may be in finished form, or in progress as part of a
manufacturing or processing operation, or in the form of raw materials awaiting
manufacturing or processing. Many such businesses will also maintain an
inventory of supplies that will be consumed during the production process….
…
The Act
defines “inventory” as “a description of property the cost or value of which is
relevant in computing a taxpayer’s income from a business for a taxation year. This
definition is too broad and too vague to be of much help. It is interesting,
however, that the definition refers to the description or list of property,
rather than to the property itself – which is the more usual meaning of
“inventory”. Subject it to this difference, which does not appear to have any
important consequences, “inventory” for tax purposes generally has the same
meaning as it does in accounting practice. It includes not merely any
assets in which the taxpayer deals but also any asset that he acquires and
subsequently disposes of, even in an isolated transaction, through an
“adventure in nature of trade” (see 7.02(3) (g)). As well, it includes most
kinds of consumable supplies.
(emphasis
added)
(The above
text also included several footnote references that can be found at the bottom
of pages 444 and 445 of the text.)
[22] Justice Major,
writing on behalf of the majority of the Justices of the Supreme Court of
Canada in Friesen v. The Queen, [1995] 2 C.T.C. 369, 95 DTC 5551, stated
as follows:
31 In
order to take advantage of the valuation method in subsection 10(1), a taxpayer
must also establish that the property in question is inventory. A definition of
“inventory” is contained in subsection 248(1) of the Act:
”inventory”
means a description of property the cost or value of which is relevant in
computing a taxpayer's income from a business for a taxation year;
32 The
first point to note about this definition of inventory is that property is not
required to contribute directly to income in a taxation year in order to
qualify as inventory. Provided that the cost or value of an item of property is
relevant in computing business income in a year that property will qualify as
inventory. Generally the cost or value of an item of property will appear as an
expense (and the sale price as revenue) in the computation of income.
33 Reduced
to its simplest terms, the income or profit from the sale of a single item of
inventory by a sales business is the ordinary tracing formula calculated by
subtracting the purchase cost of the item from the proceeds of sale. This is
the basic formula which applies to the calculation of profit before the value
of inventory is taken into account, as is made clear by Abbott J. in Minister
of National Revenue v. Irwin, [1964] S.C.R. 662, [1964] C.T.C. 362, 64
D.T.C. 5227 at page 664-665 (C.T.C. 364, D.T.C. 5228):
The law is
clear therefore that for income tax purposes gross profit, in the case of a
business which consists of acquiring property and reselling it, is the excess
of sale price over cost, subject only to any modification effected by the “cost
or market, whichever is lower” rule.
34 Thus,
for any particular item:
Income =
Profit = Sale Price - Purchase Cost.
35 It
is clear from the formula above that the cost of an item of property sold by a
business is relevant in computing the income from the business in the taxation
year in which it is sold. As discussed above, an adventure in the nature of
trade constitutes a business under the Act. Therefore, an item of property sold
as part of an adventure in the nature of trade is relevant to the computation
of the taxpayer's income from a business in the taxation year of disposition
and so is inventory according to the plain language of the definition in
subsection 248(1).
36 …
The plain meaning of the definition in subsection 248(1) is that an item of
property need only be relevant to business income in a single year to qualify
as inventory: “relevant in computing the taxpayer's income from a business for
a taxation year”. In this respect the definition of inventory in the Income
Tax Act is consistent with the ordinary meaning of the word. In the normal
sense, inventory is property which a business holds for sale and this term
applies to that property both in the year of sale and in years where the
property remains as yet unsold by a business.
(emphasis
added)
[23] Therefore it
seems to me that inventory for the purposes of the Act will mean
property as described by the Supreme Court of Canada above and by Edwin C.
Harris, Q.C. in his text, together with the specific items added by the Act.
“Inventory” for the purposes of the Act will therefore mean property
held for sale, raw materials that will be used to make property for sale,
supplies consumed during the production process, livestock held in relation to
a farming business and any property described in subsection 10(5) of the Act
(that would not otherwise be included as inventory). The lobsters caught by the
Appellants would be part of their inventory until they were sold to the buyer.
It does not appear to me, however, that the traps and nets would be part of
their inventory. The nets and traps were not held by the Appellants for sale
and although they were damaged or destroyed, would not be consumed during the
production process. As a result I do not find that the inventory method as outlined
in the Fishing Guide referred to above is in accordance with the provisions of
the Act.
[24] Although the
auditor clearly stated during her testimony that it was the policy of the CRA,
as outlined in the Fishing Guide referred to above, that nets and traps had to
be treated as either inventory or capital property, neither counsel for the
Appellants nor counsel for the Respondent submitted any arguments that the
Appellants had to choose either the inventory method as described above or the capital
cost allowance (CCA) method as described above. The arguments were only based
on whether the amounts spent in each year under appeal (2001, 2002, 2003 and
2004) in relation to the nets and traps should be treated a capital expenditure
incurred in that year or should be allowed as a deduction in computing income
for that year.
[25] The Supreme Court
of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 85 DTC 5373,
[1985] 2 S.C.R. 46 dealt with the issue of whether amounts spent on the
acquisition of land to allow an open-pit mine to continue operating were on
account of capital or were current expenditures. Justice Estey, writing on
behalf of the Supreme Court of Canada stated as follows:
13 When
one turns to the appropriate principles of law to apply to the determination of
the classification of an expenditure as being either expense or capital, an
unnerving starting place is the comment of the Master of the Rolls, Sir Wilfred
Greene in British Salmson Aero Engines Ltd v. CIR (1938), 22 TC
29, at 43:
... there have
been ... many cases where this matter of capital or income has been debated.
There have been many cases which fall upon the borderline: indeed, in many
cases it is almost true to say that the spin of a coin would decide the matter
almost as satisfactorily as an attempt to find reasons. ...
…
20 At
one time, the test applied by the courts in discriminating as between revenue
and capital was the “once and for all” test. This test was adopted by Viscount
Cave, LC in British Insulated and Helsby Cables v. Atherton, [1926]
A.C. 205 at 213. Viscount Cave observed that the finding of revenue or capital
was a question of fact, but then concerned himself with the answer to the
question because of an imprecise finding below. The test he adopted at 213 was
“... to say that capital expenditure is a thing that is going to be spent once
and for all, and income expenditure is a thing that is going to recur every
year”, although he recognized that this test was not “to be a decisive one in
every case”. Later on the same page the Lord Chancellor elaborated:
... [W]hen an
expenditure is made not only once and for all, but with a view to bringing into
existence an asset or an advantage for the enduring benefit of a trade, I think
that is a very good reason (in the absence of special circumstances leading to
an opposite conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital.
In this the
Court relied upon the earlier decision of Vallambrosa Rubber Co Ltd v. Farmer,
[1910] SC 519 at 525. A few years later in Ounsworth v. Vickers Ltd,
[1915] 3 K.B. 267 at 273, Rowlatt, LJ interpreted this test as not requiring
that expenditures be made on an annual basis in order to qualify them as a
deduction from revenue but rather than the expenditures be “pursuant to a
continuous demand”.
21 This
discussion of authorities takes one full circle to the words of Lord Reid in Regent
Oil v. CIR, [1966] A.C. 295, at 313:
So it is not
surprising that no one test or principle or rule of thumb is paramount. The
question is ultimately a question of law for the court, but it is a question
which must be answered in the light of all the circumstances which it is
reasonable to take into account and the weight which must be given to a
particular circumstance in a particular case must depend rather on common sense
than on strict application of any single legal principle. [Emphasis added
by Justice Estey]
22 It
is of little help, in my respectful opinion, to attempt to classify the
character of the expenditure according to the subject of that expenditure.
…
40 In
applying the law to the above stated observations, one is thrown back to the
pronouncement by Lord Wilberforce in Tucker v. Granada Motorway Services,
[1979] 2 All E.R. 801, where he said at 804:
It is common
in cases which raise the question whether a payment is to be treated as a
revenue or as a capital payment for indicia to point different ways. In the
end the courts can do little better than form an opinion which way the balance
lies. There are a number of tests which have been stated in reported cases
which it is useful to apply, but we have been warned more than once not to seek
automatically to apply to one case words or formulae which have been found
useful in another.... Nevertheless reported cases are the best tools that we
have, even if they may sometimes be blunt instruments. [Emphasis added by
Justice Estey.]
41 We
must also remember the previously cited words of Lord Pearce in BP Australia,
supra, at 264: “It is a commonsense appreciation of all the guiding
features which must provide the ultimate answer.”
42 If
we were to apply the three-step test adopted by the Australian court in Sun
Newspapers, supra, these expenditures would qualify as expenses rather than
being capital in nature. The character of the advantage sought is that of an
advantage in the current operations of the taxpayer. The practice was recurring
and the manner in which the object of the expenditures was applied was directly
incorporated into the mining operations of the taxpayer. Finally, the means
adopted by the taxpayer to gain this advantage was the periodic outlay of its
funds which would formerly have been classified, in the vocabulary of that day,
as circulating capital. In the words of Dixon, J, as he then was, in Sun
Newspapers, supra, at 362, we are here concerned with an expenditure
of a revenue nature because:
... its
purpose brings it within the very wide class of things which in the aggregate
form the constant demand which must be answered out of the returns of a trade
or its circulating capital and that actual recurrence of the specific thing
need not take place or be expected as likely.
The same judge
in Hallstroms Pty Ltd, supra, at 648, reminds us that the
classification of such expenditures “... depends on what the expenditure is
calculated to effect from a practical and business point of view rather than
upon the juristic classification of legal rights ...”, supra. The old
rule of “once and for all” as well as the “common sense” test, supra, lead
us to a result favourable to the taxpayer's contention.
43 The
characterization in taxation law of an expenditure is, in the final analysis
(unless the statute is explicit which this one is not), one of policy….
[26] In ATCO
Electric Limited v. The Queen,
2007 TCC 243, 2007 DTC 974, [2007] 4 C.T.C. 2297, Justice Sheridan held that
the costs of replacing transformers were deductible as a current expense.
Justice Sheridan stated as follows:
60 The
case law for determining whether an expense is current or capital in nature are
well established.* In Rainbow Pipe Line Co. v. R.*, Mogan, J. set
out the relevant considerations:
1. whether
the expense was recurring or non-recurring;
2. whether
the expense was a major repair;
3. whether the expense brought into existence an asset for the
enduring benefit of the appellant's business; and
4. whether the expense was substantial in relation to the book
value of the property, other expenses and annual profits.
…
62 How
do transformers fit into the Appellant's electricity manufacturing business?
Electricity is generated at the Appellant's generating stations and makes its
way to Alberta consumers through a series of substations, wires, poles and
transformers. A transformer is a device that allows for the transfer of
electricity from one circuit to another: the voltage can be either increased or
decreased depending on what is required for the movement of electricity at any
particular point in the network. There are approximately 83,000 transformers in
the Appellant's system varying in capacity, size and price: from the “10kVA”
(10,000 volts), about the size of a garbage can* at a unit price of $300 to
$350 to the “3MVA” (3 million volts), the size of a mini-van and worth
approximately $50,000 each.
63 Because
the smaller transformers are sealed units, it is more economical to replace
than to repair them. I accept Mr. DeChamplain's evidence detailing his
calculation that in 2000, the Appellant replaced 709 transformers ranging from
10 to 75 kMV at an average unit cost of $943.16*. Only about 2,000 of the
Appellant's 83,000 transformers were 3MVA transformers. Unlike smaller
transformers, in the case of malfunction they can be opened up and repaired; in
2000, however, five of the 3MVA's had to be replaced rather than repaired.
Because of their greater value and the infrequency of their replacement, the
Appellant classified such expenses as capital; thus, their cost was not
included in the $622,990 at issue in this appeal.
64 Turning,
then, to the Rainbow Pipe Line factors, the Respondent contends that the
transformer replacement costs were “non-recurring” since the average life span
of a transformer is 33 years. This submission might be persuasive if all of the
transformers always lived up to such projections. The fact is, however, that
each year 500 to 1,000 of the 83,000 transformers in the Appellant's
distribution system become non-functional thanks to lightning strikes,
“shorting-out” and vandalism* all of which are, by their nature, quite likely
to continue to occur. In these circumstances, it is probable that the Appellant
will always be and in 2000 was obliged to replace a certain percentage of its
transformers. Accordingly, the expense of regular transformer replacement is
recurring in nature.
65 The
next consideration is whether the replacement expense was “major”. This, like
the Minister's assumption that transformers are “large”* and “expensive”*, is a
relative question. It is common ground that the Appellant's outlays were
limited to the costs of replacing transformers which had been damaged; newly
acquired transformers or upgraded models of existing transformers were not
included in the Appellant's claim. The number of transformers and the cost per
unit was small relative to the Appellant's overall distribution system,
representing less than 1% of all of the transformers in the system and their
replacement cost, less than 1% of the Appellant's revenues, expenses and profit
for 2000.
66 In
these circumstances, the replacement of a few transformers here and there in a
multi-million dollar electrical system is akin to changing a few bulbs in an
otherwise functioning string of Christmas tree lights*. Perhaps a better
example is that of the spark plug, described in Interpretation Bulletin
IT-128R:
(d) Relative value
- The amount of the expenditure in relation to the value of the whole property
or in relation to previous average maintenance and repair costs often may have
to be weighed. This is particularly so when the replacement itself could be
regarded as a separate, marketable asset. While a spark plug in an engine may
be such an asset, one would never regard the cost of replacing it as anything
but an expense; but where the engine itself is replaced, the expenditure not
only is for a separate marketable asset but also is apt to be very substantial
in relation to the total value of the property of which the engine forms a
part, and, if so, the expenditure likely would be regarded as capital in
nature.
67 In
the circumstances of this appeal, the small transformers are the sparkplugs,
rather than the engine, in the automobile that is the Appellant's electricity
distribution system. Relative to the quantum of the expense in relation to the
book value of the assets, other expenses and annual profits, the transformer
replacement expense was not “major” in the sense contemplated by Rainbow
Pipe Line.
68 It
remains to consider whether the transformers constituted an “enduring benefit”
to the Appellant's business. In support of the Respondent's position that their
replacement was an enduring benefit, counsel for the Respondent argued that the
transformers are an integral part of the electrical distribution system. As
each one was replaced, the overall asset was enhanced by 33 years of use; thus,
their replacement was a “betterment” that materially improved the distribution
system beyond its original condition.
69 I am
not persuaded this is so. The issue of the transformers' life expectancy has
already been considered above. I accept that the transformers were “integral” to
the Appellant's system in the sense that electricity could not be transmitted
without them. Their replacement, however, did not enhance the system; it merely
restored it to the state required to keep it functioning as intended….
…
70 Thus,
while any given transformer might remain useful for 33 years, at any given
moment there will always be another, somewhere in the system, that needs to be
replaced. In these circumstances, the benefit of replacing non-functional
transformers is anything but enduring; rather, the effect of the replacement
was simply to preserve the status quo of the original network.
71 For
all of these reasons, I am persuaded by the Appellant's argument that the
transformer replacement expenditures are analogous to the costs associated with
the sort of on-going maintenance repairs which Mogan, J. concluded in Rainbow
Pipe Line should be treated as current expenses. On the evidence before me,
I am satisfied that the replacement of the transformers was a current expense.
(The footnote references
have not been included but can be found with the original text.)
[27] While the
decision of Justice Sheridan in ATCO Electric Limited was appealed to
the Federal Court of Appeal (who dismissed the appeal), that part of Justice
Sheridan’s decision that related to the deductibility of the amounts incurred
in relation to the replacement of the transformers was not appealed.
[28] There was very
little evidence in this case to assist in any determination of how long a
lobster trap will last. Gregory Norton did not provide any evidence in relation
to this issue on direct examination and was evasive when he was asked this
question on cross examination:
Q. And
how long ‑‑ so you used the nets and traps and they last you for a
few years?
A. Oh,
well if you have a storm you lose them all.
Q. So
how long are they typically lasting?
A. There's
no set time, sir. It could vary. Usually nets are repaired every year and the
traps are repaired every year too but they're both built each year. There's
new ones built each year.
Q. So
you built them and then you used them and then you repaired them and the ‑‑
you ‑‑‑
A. Throughout
the year if you use them and they get damaged a bit you'll repair them and try
to get ‑‑ finish the year. And then you'll build new ones in the
winter.
[29] There was no indication of the number of traps that the
Appellants held at the beginning or end of any year or how many traps were
built each year. A copy of the agreement
of purchase and sale between Gerald Norton (Gregory Norton’s father) and the
Appellants dated December 29, 1999 was introduced. Under this agreement the
Appellants purchased 400 lobster traps with lines and buoys for $25,000. This
would mean that the amount paid for each lobster trap would be less than $62
(since some amount would presumably be allocated to the lines and buoys). Since
these assets were acquired from Gregory Norton’s father, the amount paid may
not be the best indication of fair market value. There was no evidence to establish
how the amount paid by the Appellants to Gregory Norton’s father would compare
to the fair market value of these assets.
[30] On March 7, 2002, in what appears to be an arm’s length
transaction, Gregory Norton
sold to Glen Tassell, Gary Tassell, and
Delia Tassell a boat
(the “Bound to Be”), a lobster licence, 300 lobster traps and rope, 120 buoys,
a depth sounder, a Rayteon GPS, a radio, and some other licences for $200,000.
As noted above, the parties have agreed that the proceeds of disposition for
the lobster licence were $75,000. The auditor for the CRA allocated $75,000 of
the $200,000 amount to the sale of the boat and this allocation was not
challenged by the Appellants. As a result, the balance of $50,000 was received
for the 300 lobster traps, rope, buoys, electronic equipment and the other
licences. It appears that the auditor for the CRA allocated all of the
remaining $50,000 to the disposition of Class 8 assets and therefore
presumably, no amount was allocated to the other licences (mackerel handlining licence
and gaspereaux, herring and mackerel bait fishery licences). The sale of assets
in 2002 suggests that the fair market value of the lobster traps is less than
$167 each since some portion of the $50,000 would be allocated to the rope, the
buoys, and the electronic equipment.
[31] Since Gregory Norton’s father had 400 lobster traps
(which he sold together with his licence to catch lobsters) and the Tassells
acquired 300 lobster traps (together with a licence to catch lobsters), it
seems to me that a logical conclusion that can be drawn from these two
agreements is that a person who is carrying on a business of catching lobsters
would have a large number of lobster traps. It therefore seems logical that since
Gregory Norton had another lobster licence (before he acquired a lobster
licence from his father) that he would have had 300 to 400 lobster traps before
the Appellants acquired the additional traps from his father. Louise Norton
also held a lobster licence and there was no evidence of how many lobster traps
she held. Both Appellants were setting traps and catching lobsters during the
same two months (May and June) of each year. Since there were two of them (each
with their own licence) it seems logical that they would have had a larger
number of traps than one person (or a group with only one licence in the case
of the Tassells). It does seem logical that they would have had 400 or more
lobster traps after the sale of the assets to the Tassells since each of the
Appellants held a lobster licence and were setting traps and catching lobsters
after that sale.
[32] There was no
evidence with respect to how the labour costs related to the construction of a
lobster trap would compare to the material costs. The only evidence related to
the construction of the lobster traps by the Appellants related to the material
costs since Gregory Norton constructed the traps himself. There was no evidence
with respect to the number of lobster traps that would be built each year. It
would appear, based on the amounts claimed as material costs and based on the
value of the lobster traps that they held,
that not all of the lobster traps were being replaced each year. As a result it
seems logical to conclude that lobster traps would normally last one year or
more.
[33] It seems to me
that a person carrying on a business of catching lobsters will have several
traps and each year some will have to be repaired and others will have to be
replaced. If the person is not increasing the number of traps that such person
has but is simply maintaining the same number of lobster traps each year (or a
smaller number), then it seems to me that the amount spent to repair or replace
damaged, destroyed or lost traps is incurred to simply maintain the number of
lobster traps and hence to maintain the status quo. These amounts are
being spent to satisfy a continuous demand and to maintain or restore the
number of lobster traps that the person has available for catching lobsters. As
a result it seems to me that the commonsense approach would be that such
amounts will be deductible as a current expense in computing that person’s
income from the fishing business. It does not seem to me that amounts spent to
simply restore the number of lobster traps to the number that the person had at
the beginning of the immediately preceding lobster fishing season
(as a result of traps being damaged, destroyed or lost) should be treated as a
capital expenditure. If the person increases the number of traps that such
person owns or replaces traps that have been sold, then it seems to me that the
amount spent to acquire the additional traps or the replacement traps would be
a capital expenditure. Maintaining the number of lobster traps by replacing
traps that have been destroyed or lost is analogous to replacing the transformers
in the ATCO Electric Limited case.
[34] The amount spent
on nets and traps in each of the years was as follows:
|
|
2001
|
2002
|
2003
|
2004
|
|
Anchors, nets, traps and
related materials
|
$2,767.72
|
|
|
|
|
Nets, traps and related
materials
|
|
$5,520.83
|
$12,081.78
|
$11,376.10
|
[35] The anchors
referred to above were anchors that were used to hold the nets in place. There
was no evidence of any change in the fishing activity related to the nets. It
seems to me that the amounts spent on anchors and nets each year would be
amounts spent to repair or replace damaged, destroyed or lost nets and anchors,
hence such amounts would be spent to simply restore the anchors and nets to the
number and condition of such anchors and nets as of the beginning of the current
fishing season (for nets replaced during the fishing season) or as of the
beginning of the immediately preceding fishing season (for nets replaced after
the end of the fishing season). As a result the amount spent on anchors and
nets each year is allowed as a deduction in computing the income of the
partnership.
[36] The amounts shown above include amounts for nets and
anchors (for 2001) and for nets (for 2002 to 2004). The amount spent in 2001 is
significantly less than the amounts spent in 2002, 2003 and 2004. Based on the
information contained in the Gregory Norton’s tax returns for 1996 to 1998,
the following amounts were spent on trap materials in those years:
|
|
1996
|
1997
|
1998
|
|
Trap materials
|
$4,168.95
|
$3,494.72
|
$4,937.25
|
[37] This amount does not include the amount spent on nets
during those years and therefore the amount that would have been spent on nets
and trap materials during these years would have been greater and closer to the
amount spent in 2002 on nets and traps. It seems to me that since the Appellants
acquired 400 lobster traps from Gregory Norton’s father in 1999 and sold 300
lobster traps to the Tassells in 2002, that the Appellants gained a net total
of 100 lobster traps. These extra lobster traps could explain why a smaller
amount was spent on repairing or replacing traps in 2001.
[38] As indicated
above, amounts spent to repair or replace lobsters traps that have been
damaged, destroyed or lost will be deductible as the person is simply restoring
his or her traps to the number and condition of such traps before they were
damaged, destroyed or lost. If the person sells his or her lobster traps, then
the costs incurred to replace the lobster traps that were sold will be on
account of capital. If the person increases the number of lobster traps that he
or she holds, then the cost of the additional traps will be on account of
capital. This would include the initial purchase of lobster traps by a person
who is starting the business of catching lobsters.
[39] It seems to me that the Appellants were carrying on
their business of catching lobsters on a consistent basis from one year to the
next during the years under appeal. It seems to me that each year the
Appellants were simply repairing or replacing lobster traps that had been
damaged, destroyed or lost that year or during the immediately preceding
lobster season. As a result the amounts spent on repairing or replacing the
lobster traps in this case will be deductible in computing the income of the
partnership.
[40] The amount
claimed for “gear” also included amounts for reels and related materials. These
were used in the tuna fishery. There was no indication that there was any
change in the tuna fishery during the years under appeal or that any tuna
fishing gear was sold during these years. It seems to me that, as with the
lobster traps, these amounts must have been incurred to replace reels and
related materials that were damaged, destroyed or lost. These expenditures were
made to simply restore the reels and related materials to the number and condition
of the reels and related materials that the Appellants had at the beginning of the
current fishing season (for reels and related materials replaced during the
fishing season) or at the beginning of the immediately preceding fishing season
(for reels and related materials replaced after the end of the fishing season) so
that the Appellants could continue to fish as they had been fishing. These
expenditures would have been incurred “pursuant to a continuous demand” and
commonsense would indicate that these recurring costs of replacing reels and
related material to simply restore the reels and related materials of the
Appellants should be deductible and not on account of capital. As a result it
seems to me that these amounts incurred for the reels and related materials
should be allowed as a deduction in computing the income from the fishing
business.
[41] In 2003 an amount
identified as the cost of wire mesh had been claimed as a current expense. The
auditor for CRA had included this expenditure as a capital expenditure. In 2004
an unidentified amount had been claimed as a current expense. The auditor for
CRA had included this amount as a capital expenditure. There was no evidence
with respect to the use of the wire mesh nor was there any evidence with
respect to the unidentified item. Therefore, no adjustment will be made in
relation to these two items.
9(n)
– Amount Claimed Twice for reel, drag washer assemblies and ball bearings
[42] The Appellants
produced two invoices in relation to the acquisition of 20 reel drag washer
assemblies and 5 reel ball bearings. The first invoice was dated February 18,
2003 and was from Vernon D’Eon Lobster Plugs Ltd. This invoice was for 20 reel,
#6-130 drag washer assemblies, and 5 reel, #55-130 ball bearings. The second
invoice was from Polar Foods International Inc. (who bought at least some of
the lobsters or tuna caught by the Appellants) and was dated February 22, 2003.
This invoice was for 20 reel #6-130 drag washer assemblies, and 5 reel #55-130
ball bearings and two other items that were not on the other invoice from
Vernon D’Eon Lobster Plugs Ltd. It is the position of the Appellants that these
were two separate purchases of 20 reel drag washer assemblies and 5 reel ball
bearings (and hence a total of 40 reel drag washer assemblies and 10 reel ball
bearings).
[43] However it seems
obvious to me that these two invoices were for the same 20 reel drag washer
assemblies, and 5 reel ball bearings. The invoice from Vernon D’Eon Lobster
Plugs Ltd. indicates that the 20 reel drag washer assemblies, and 5 reel ball
bearings were sold to Polar Foods International Inc. and shipped to Gregory
Norton. The invoice from Polar Foods International Inc. indicates that the
items were “picked up at Vernon D’Eon”. The increase in price on the Polar
Foods International Inc. invoice was the mark-up taken by Polar Foods
International Inc. for processing the transaction. It seems obvious that,
although these items were picked up by Gregory Norton at Vernon D’Eon Lobster
Plugs Ltd., the 20 reel drag washer assemblies, and 5 reel ball bearings were
sold by Vernon D’Eon Lobster Plugs Ltd. to Polar Foods International Inc. (to
be charged to Gregory Norton’s account) and then by Polar Foods
International Inc. to Gregory Norton.
[44] As a result, the
amount claimed by the Appellants for these 20 reel drag washer assemblies, and
5 reel ball bearings was claimed twice and no adjustment will be made in
relation to this item.
9(r) – Insurance costs
[45] The issue related to the insurance costs is whether the Appellants are
entitled to deduct insurance costs of $846.67 incurred in relation to a loan
obtained from the Credit Union. Paragraph 20(1)(e.2) of the Act
provides as follows:
20. (1)
Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's
income for a taxation year from a business or property, there may be deducted
such of the following amounts as are wholly applicable to that source or such
part of the following amounts as may reasonably be regarded as applicable thereto:
(e.2) such
portion of the lesser of
(i) the
premiums payable by the taxpayer under a life insurance policy (other than an
annuity contract) in respect of the year, where
(A) an
interest in the policy is assigned to a restricted financial institution in the
course of a borrowing from the institution,
(B) the
interest payable in respect of the borrowing is or would, but for subsections
18(2) and (3.1) and sections 21 and 28, be deductible in computing the
taxpayer's income for the year, and
(C) the assignment
referred to in clause (A) is required by the institution as collateral for the
borrowing
and
(ii) the net
cost of pure insurance in respect of the year, as determined in accordance with
the regulations, in respect of the interest in the policy referred to in clause
(i)(A),
as can
reasonably be considered to relate to the amount owing from time to time during
the year by the taxpayer to the institution under the borrowing;
[46] It is the
position of the Appellants that this insurance was required by the lender and
should be deductible. A copy of the Single Premium Credit Life and Credit
Disability Member’s Enrollment form related to the loan was introduced as an
Exhibit. This is a form prepared by CUIS – Credit Union Insurance Services.
PART 3 – STATEMENT BY MEMBER provides that:
I ELECT TO
BECOME INSURED UNDER THE POLICIES AS NOTED IN PART 2 AND AGREE TO PAY THE
REQUIRED INSURANCE PREMIUM(S). I HAVE RECEIVED A COPY OF THE ENROLLMENT FORM
AND CERTIFICATE OF INSURANCE HIGHLIGHTING THE MAIN FEATURES OF THE POLICIES.
I understand
that:
1. Election for insurance under the CUMIS Life Policies is
voluntary and purchase of insurance from CUMIS is not a factor in the approval
of my loan.
[47] Counsel for the
Appellants argued that this form was prepared by the company providing the
insurance, not by the lender, and therefore does not necessarily lead to a
conclusion that the lender did not require insurance. However, it seems to me
that there was a direct connection between the lender and the insurance company
as the insurance was arranged by the credit union and this form was prepared by
Credit Union Insurance Services. Therefore it seems to me that the statement
that the member was not required to purchase the insurance must relate to the
requirements of the lender.
[48] The Appellants,
in their testimony, stated as follows:
Gregory Norton – During Cross-Examination
Q. And
the first numbered item in there it says that:
“Election for
insurance under Cumis Life policy is voluntary and purchase of insurance from
Cumis is not a factor in the approval of my loan.”
A.
That's what it says but actually the way Cumis works for insurance for any
fisherman is if you have enough life insurance that covers off the loan that
you're buying they waive the insurance that you don’t have to have the
insurance.
But I didn't
have life insurance to cover it so it was always mandatory to buy insurance
when you have a loan.
Q. But
in this case though for this loan it was not a requirement?
A. That
says that on every Cumis thing. It always says that so you can waive it if you
have your insurance.
Q. Yes
but just reading the words of what was ‑‑ what you signed and what
you agreed to it said that's not a factor in providing the loan.
A. I'm
not sure what that says but I know I had to have the insurance or I wasn't
going to get the loan. It's required by the company.
Louise Norton – During Direct Examination
Q. Okay.
And there it says:
“Part III,
statement by member. I elect to become insured under the policies as noted in
Part II and agree to pay the required insurance...”
I don't need
to read it. It's plain for what it say ‑‑ so it's setting up an
election. What, if any, choice did you have in negotiating this loan as to
whether or not or what option did you have in setting up this loan as to
whether or not you would take life insurance on it?
A. Well,
I didn't ‑‑ or we didn't feel it was an option but we wanted
insurance on it in the event if something was to happen to myself.
Q. Who
wanted insurance?
A. In
the event that something was to happen.
Q. Who
wanted insurance on it?
A. I
did.
Q. Yeah.
What about the Credit Union, what was their attitude?
A. They
advise people to have insurance on loans.
Louise Norton – During Cross-Examination
Q. Are
you there? That is in relation to ‑‑ the document in there is in
relation to the loan you'd taken out to purchase your 2002 Ford Explorer,
correct?
Now you'd said
that the bank or the insurance company ‑‑‑
A. The
bank.
Q.
‑‑‑ or Credit Union ‑‑ the bank had told you
about insurance options.
A. I
never understood it to be an option. I always felt that we required
insurance.
Q. You
always thought that you required insurance?
A. We
were ‑‑ I was made to believe yes, I required insurance.
[49] Since the Act
provides that the assignment of the insurance must be required by the lender,
it is significant whether the Credit Union advised the Appellants to obtain the
insurance (as stated by Louise Norton during her direct examination) or
required the Appellants to obtain the insurance (as stated by Gregory Norton
and by Louise Norton during her cross-examination). In this particular case,
given the clear language of the form prepared by Credit Union Insurance Services
and the conflicting testimony of Louise Norton, in order for the Appellants to
establish that the insurance was a requirement of the Credit Union,
notwithstanding the wording of the form prepared by Credit Union Insurance Services,
it would have been necessary for the Appellants to call evidence directly from
a representative of the Credit Union to confirm that it was a requirement to
obtain the loan. Absent such evidence from a representative of the Credit Union,
the Appellants cannot succeed in establishing that the insurance was required
by the Credit Union and cannot succeed in relation to their claim for a
deduction for these insurance costs.
9(t)
– Appraisal and Water Test
[50] The Appellants
claimed $225 in relation to the cost of an appraisal of their house and $100 in
relation to a water test at their home. These costs were incurred so that the
Appellants could obtain a mortgage on their house. I accept the Appellants
testimony that these costs were necessary to obtain the mortgage. The revised
position of the Appellants is that these costs should be included as part of
the business use of their home expenses (which would be subject to the
applicable percentage that their home is used in their business).
[51] It seems to me
that these costs are related to obtaining a mortgage on their house that will
be in place for several years, and would not, but for the provisions of
paragraph 20(1)(e) of the Act be deductible in computing their
income. Since these costs were incurred in the course of borrowing money that
was used by the Appellants in carrying on their business, a portion of these
costs will be deductible as provided in paragraph 20(1)(e) of the Act.
The portion of these costs that will be deductible will be equal to the
percentage of their house that is used in carrying on their business. Since, as
noted below, I have concluded that no adjustment should be made for the
percentage use of their home for business purposes, 12.5% of 20% of these costs
(12.5% x 20% x $325) will be deductible in each year. Therefore the amount that
will be allowed for these costs will be as follows:
|
|
2001
|
2002
|
2003
|
2004
|
|
Amount Allowed:
|
$8
|
$8
|
$8
|
$8
|
|
|
|
|
|
|
9(u)
& 9(bb)(i) – Use of the 2000 Ford Explorer in 2003
[52] Gregory Norton
would purchase vehicles that were damaged (and in some cases written off),
repair the vehicles and then use them. Generally the vehicles could not be
operated on the road until they were repaired. Once the vehicles were ready to
be used on the road, the vehicle would be registered with the Province of
Prince Edward Island and the provincial sales tax would be paid. One of the
vehicles in question was the 2000 Ford Explorer and one of the issues in
relation to this vehicle is what portion, if any, of the interest paid in 2003
in relation to the amount borrowed to purchase or repair this vehicle should be
allowed as a deduction in computing income in 2003.
[53] The 2000 Ford
Explorer was Louise Norton’s vehicle. Based on the information from the Province of Prince
Edward Island it appears that the
provincial sales tax was paid on this vehicle on January 3, 2001 and therefore
this appears to be the date that this vehicle was ready for the road. In the
fall of 2002, another Ford Explorer (the 2002 Ford Explorer) was acquired. The
testimony of the Appellants in relation to the date that this newer vehicle was
available for use and the date that they stopped using the 2000 Ford Explorer
was vague.
[54] Louise Norton
testified as follows:
Q. Then
it shows you owned the 2000 Explorer, starting in January, '01 up until October
of 2003. But it shows an overlap of the 2002 Explorer starting in October of
2003 going again to October of ‑‑ I'm sorry, October of 2002 going
to October of 2003. Okay?
A. Um-hmm.
Q. Can
you explain to us why that overlap there?
A. Well,
the 2002 was bought damaged.
Q. Yes.
A. It
wasn't on the road until some time later. So that's why the two vehicles were
together. That's why we had the two vehicles and then we hung onto the '02
just basically till we got the price that we wanted before we sold it.
Q. You
held on to the ‑‑‑
A. The
2000 ‑‑‑
Q. ‑‑‑
2000.
A. ‑‑‑
until October.
Q. Okay.
Until October until you what?
A. Until
we sold it.
Q. Okay.
When do you recall the ‑‑ or do you recall ‑‑ when did
the 2002 ‑‑ when did you start using the 2002 full time if you
like, as your vehicle?
A. I'm
not 100 percent sure on the exact date.
Q. Okay.
All right. And so the 2002 was purchased in October and some repair work was
done on it.
A. Yes.
[55] According to the
records obtained from the Province of Prince Edward Island, the 2000 Ford Explorer was
sold on November 4, 2003 and the provincial sales tax was paid on the 2002 Ford
Explorer on October 22, 2002. Therefore there appears to be approximately a one
year period when both the 2000 Ford Explorer and the 2002 Ford Explorer were
both available for use. It also appears that, as soon as the 2002 Ford Explorer
was available, Louise Norton started using this vehicle. She also indicated
that the 2002 Ford Explorer had been damaged during hurricane Juan in September
2003 and that while it was being repaired she again used the 2000 Ford Explorer
but there was no indication of the length of time that she again used the 2000
Ford Explorer. Presumably since the 2002 Ford Explorer would not have been
operable until it was repaired, the 2000 Ford Explorer would have been used for
the same percentage business and personal use as the 2002 Ford Explorer during
this time.
[56] It seems to me
that once the 2002 Ford Explorer was ready for the road on October 22, 2002,
the 2000 Ford Explorer was only being held for sale or as a back-up vehicle
that was used when the 2002 Ford Explorer was damaged by hurricane Juan. The
percentage use for business purposes of the 2000 Ford Explorer would not change
for the period of time that it was being held for sale. If the Respondent is
correct, then the interest incurred in relation to an amount borrowed to buy
any vehicle or any other asset used in a business would not be deductible for
the period of time while that asset was being held for sale after it had been
replaced. It seems to me that the percentage of business use for the 2000
Explorer would remain the same for 2003 until it was sold. As a result, 25% of
the interest incurred in relation to the amount borrowed to purchase or repair
this vehicle will be deductible in 2003.
9
(y)(iii) – Kerosene Drum
[57] As part of the
audit, the auditor for the CRA added $253.11 to the Class 8 assets of the
partnership in relation to the acquisition of a kerosene drum. During closing
arguments counsel for the Appellants stated that they were no longer contesting
this issue. Therefore no adjustment will be made in relation to this item.
9
(bb), (ee), (hh), (ii) – Percentage of Business Use of the Vehicles
[58] Gregory Norton
owned trucks and Louise Norton owned the Ford Explorers. They claimed that both
the vehicles owned by Gregory Norton and the vehicles owned by Louise Norton
were used 100% of the time in carrying on their business. However is seems
obvious that Louise Norton used her vehicle personally on many occasions. She
would take the children to their hockey games and practices and she was also
taking university courses in Charlottetown. The Appellants would have to drive to do any
personal errands. The Appellants live in Annandale,
Prince Edward Island which is a small fishing community with no stores or
other services.
[59] Neither one of
the Appellants kept a mileage log. There were two journal entries that were
made in which only 25% of the costs related to Louise Norton’s vehicle were treated
as business expenses. Given the extensive use of the vehicles by Louise Norton for
personal purposes and the effective admission in the two journal entries that
her vehicles were used 25% for business purposes, the Appellants have failed to
demolish the Minister’s assumption that Louise Norton’s vehicles were only used
25% for business purposes.
[60] Gregory Norton
insisted that his trucks were used 100% for business purposes. His testimony
consisted of simply the general statement that the trucks were only used for
business purposes. The auditor for CRA compared the odometer reading on the
trucks from the time that the vehicles were ready for the road until they were
sold and determined the average number of kilometers that the vehicles were
driven each year. She also estimated the number of kilometers that
Gregory Norton drove his trucks in carrying on the fishing business. Her
analysis did not support a finding that the trucks were used 100% for business
purposes. Her conclusion was that the trucks were used 75% of the time for
business purposes. Counsel for the Appellant did not in cross-examination or
otherwise successfully challenge the analysis completed by the auditor and
therefore I find that the trucks were used 75% of the time for business purposes
and no adjustment will be made in relation to the percentage use of the trucks.
9
(bb)(ii), (hh)(the second iv), (ii)(i) – All Terrain Vehicles
[61] The amounts in
dispute in relation to all terrain vehicles are for two separate claims:
- in 2003 the amount of $533.77
was claimed as an expense for repairs and new tires for an ATV and
- in 2004 the amount of
$1,077.99 was claimed as an expense for repairs to an ATV
[62] Both claims were
denied by the auditor for the CRA. It appears that the Appellants had two all
terrain vehicles from 2001 to 2003 and three all terrain vehicles in 2004.
Gregory Norton’s testimony in relation to the all terrain vehicles was as
follows:
A. Yes,
I use a tractor that I have around the place there. And I use a four-wheeler.
Q. Okay.
And what's the four-wheeler?
A. It's
an all terrain vehicle. And I use it for ‑‑‑
Q. No,
I know what it is.
A. Oh.
Q. But
what's it's make and model?
A. Oh,
it's a 2001 Honda.
Q. Two
thousand and one Honda. How many four-wheel vehicles did you have, all terrain
vehicles did you have during this time?
A. I
had three but there was only one that was entered in the business. The '04
that I had I didn't send it over for business use.
Q. So
you had three, the family had three vehicles during this time? You say you
acquired an '04?
A. Yes.
Q. And
was that one of the three or was that an extra?
A. That's
right. No, that was one of the three.
Q. Okay.
But you only used one in the business?
A. There
was two used in the business but I only sent one over to my accountant.
Q. Okay.
When you say sent one over to your accountant, what do you mean by that?
A. Okay,
I claimed it as a business expense.
Q. Now
what kind of work would you do with the all terrain vehicle?
A. I
used it for moving equipment around the yard, like from my boathouse to the
work shop.
Q. Yes.
A. Whether
it was buoys or rope or trap material. I had a small trailer for it that I
hooked on behind. I used it to pull my nets, spread my nets out on the lawn. The
nets are heavy so ‑‑ I mostly work alone.
So
lots of times I have to use motor vehicles to help me. I use it for going up to
the woods. That's pretty well it.
Q. Okay.
What percentage of time were you using the all terrain vehicle in the business
aspect of your fishing?
A. About
50 percent of the time.
Q. Who
else used it?
A. My
two boys.
Q. The
other Honda or the other vehicle that you had I'm taking from this you said you
had three all terrain vehicles all tolled during this time span? One was a
2004 which you purchased in 2004.
So
you had another one in 2001?
A. Yes.
Q. And
what was it?
A. It
was an Arctic Cat.
Q. Yeah.
And who used that?
A. It
was used some but mostly by the kids. It was ‑‑ I used it very
little.
Q. Okay.
And you're clear that the only expense account you would have sent or expense
statement you would have sent to your accountant would be the ones relating to
that one that you used in the business?
A. Yes.
And on Cross Examination:
Q. Okay. Now one of
these ATV's was used ‑‑ you said ‑‑ you testified in
your Direct testimony that one of these ATV's was used for business use, is
that correct?
A. Fifty percent of
the time, yeah.
Q. So half of it, 50
percent of the time.
A. That's right.
Q. And the other two
were used for personal uses?
A. No. The '04 was
never sent over to be expensed out in my books.
Q. Oh, it was not
expensed out to the expense?
A. No. The '01
Honda was used 50 percent of the time as personal and 50 percent for my
business. And the other one, unless I'm mixing the names up, one of the 2001's
was used 50 percent of the time and the other one was used mostly for
personal.
[63] It appears that
from 2001 to 2003 the Appellants had two all terrain vehicles – the 2001 Honda
and the Arctic Cat. The third ATV (the 2004 Honda) was acquired in 2004. It
also appears that the Arctic Cat vehicle was used mainly by the Appellants’ two
boys. The 50% business use for 2001 to 2003 as claimed by Gregory Norton was
related to the 2001 Honda ATV. Gregory Norton stated that the amount claimed
for repairs and new tires in 2003 was for repairs and tires for the 2001 Honda
ATV. I accept that the business use of the 2001 Honda was 50% and therefore 50%
of the amount claimed for repairs and new tires will be allowed, which will
result in an additional deduction of $267.
[64] There was,
however, no indication which ATV was repaired in 2004. Since one ATV (the
Arctic Cat ATV) was used personally by the Appellants’ sons, without anything
to establish that the repairs were made to the 2001 Honda ATV that was being
used in the business (or the 2004 Honda ATV after it was acquired), no amount
will be allowed for repairs in 2004.
9(ee)(iii),
(gg)(i),(hh)(v), and (ii)(ii) - Tolls
[65] The amounts
claimed (and denied) for parking expenses and tolls were as follows:
|
|
2001
|
2002
|
2003
|
2004
|
|
Amount
|
$302
|
$231
|
$38
|
$39
|
[66] The amounts
claimed for 2003 and 2004 would represent one crossing of the Confederation
Bridge. Gregory Norton stated that he was fishing for tuna off the south coast
of Nova Scotia and would travel by truck to Shelburne, Nova
Scotia. As well the accountant for the Appellants worked in Dartmouth, Nova
Scotia. I accept that these amounts
were incurred for the purpose of earning income and they will be allowed as a
expense in computing the income of the partnership.
9(gg)(ii),(hh)(iii)
– Costs incurred to Make Vehicles Roadworthy
[67] Gregory Norton,
as noted above, purchased vehicles that had been damaged (including some
vehicles that had been written off for insurance purposes). The vehicles that
he purchased could not be driven on the road in the condition that they were in
when he purchased them. He would repair the vehicles and then register them for
road use once the vehicles were repaired. In LeCaine v. The Queen,
2009TCC382, 2009 DTC 1246, I stated that:
[22] The
capital cost of a depreciable property is included in determining the
undepreciated capital cost of that property. “Capital cost” is not defined in
the Income Tax Act (the “Act”). In the text “Principles of
Financial Accounting a Conceptual Approach” by Finney and Miller, 1968 it is
stated at page 245 that:
Incidental
costs. The cost of an asset includes not only the basic, or purchase,
price, but also related, incidental costs such as the following: costs of title
searches and legal fees incurred in the acquisition of real estate;
transportation, installation and breaking-in costs incident to the acquisition
of machinery; storage, taxes and other costs incurred in aging certain kinds of
inventories, such as wine; and expenditures made in the rehabilitation of a
plant purchased in a run-down condition.
And at page
198:
Determination
of cost. As a general statement, it can be said that the cost of an asset
is measured by, and is equal to, the cash value of the consideration parted
with when acquiring the asset. As applied to fixed asset acquisitions, cost
includes all expenditures made in acquiring the asset and putting it into a
place and condition in which it can be used as intended in the operating
activities of the business. Thus, the cost of machinery includes such items as
freight and installation costs in addition to its invoice price.
[23] In
“Accounting Standards in Evolution”, 2nd ed., by Milburn and Skinner, 2001, it
is stated at page 188 – 189 that:
The majority
of tangible capital assets are purchased from external sources. The chief
element of cost, then, is the invoiced price less any applicable cash or trade
discounts. The chief costing problem lies in ensuring that costs incidental to
acquisition and costs of making the asset capable to serve are capitalized...
With respect to equipment, costs include all customs duties and taxes,
transportation inward, insurance in transit, foundations and installation
costs, and other charges for testing and preparation.
[24] The
cost of a capital asset should be determined for the purposes of the Income
Tax Act in the same manner as it is for accounting purposes. The purpose of
determining the capital cost of an asset for the purposes of the Income Tax
Act is to determine the amount that should be added to the undepreciated
capital cost and then amortized over time by claiming capital cost allowance
(“CCA”) in accordance with the Income Tax Regulations. There is no
reason why the incidental costs (such as freight) would be added to the cost of
a capital asset for accounting purposes but not included for the purpose of
determining the capital cost of the asset for the purposes of the Act.
In each case the objective is to determine the total cost of the asset that
should be capitalized.
[68] The costs
incurred in repairing the vehicles were simply costs incurred to make the
vehicles capable of being used. These costs are simply part of the capital cost
to the Appellants of acquiring a roadworthy vehicle. These repair costs should
be added to the capital cost of the vehicles and no adjustment will be made in
relation to these expenditures.
9(kk)
– Wages reduced by $2,946.62 for 2001
[69] The Appellants
claimed $18,778.57 as crew shares and $22,992.83 as salaries or wages in
computing the income of the partnership in 2001. The auditor for the CRA
determined that the salaries or wages were comprised of the following:
|
|
Amount
|
|
Robert Jamieson
|
$4,994.99
|
|
Roger Dingwall
|
$4,886.64
|
|
Glenda Livingston
|
$3,002.49
|
|
Source deductions
|
$5,486.59
|
|
Darren Victor
|
$1,675.50
|
|
Total:
|
$20,046.21
|
[70] The difference
between the total above ($20,046.21) and the amount claimed as salaries or
wages ($22,992.83) is $2,946.62 and it is the denial of this amount as a
deduction that is in dispute. The amounts paid to Glenda Livingston (who was
the babysitter for the Appellant’s children) were also denied but the
Appellants are not disputing the denial of the deduction for the amounts paid
to Glenda Livingston.
[71] To support the
claim for the additional amount of $2,946.62 as salary or wages the Appellants
introduced statements from Polar Foods International that indicated the
following:
|
|
Amount
|
|
Share
to Jeff Palmer
|
$995.50
|
|
Share
to Jeff Palmer
|
$675.00
|
|
Share
to Share Person
|
$1,475.80
|
|
Share
to Jeff Palmer
|
$540.00
|
|
Share
to Jeff Palmer
|
$633.94
|
|
Share
to Jeff Palmer
|
$301.88
|
|
Total:
|
$4,622.12
|
[72] The total of
these amounts is significantly less than the amount of $18,778.57 that was
claimed as crew shares (and which was allowed as a deduction in addition to
salary and wages). No combination of any of these amounts will add to $2,946.62.
If the Appellants are correct, then a portion of the amount paid to Jeff Palmer
would have been claimed as crew shares and a portion would have been claimed as
salary and wages. There was no explanation of why the amount paid to him would
have been split between these two categories nor did the Appellants establish
that these amounts were not already included in the amounts claimed (and
allowed) as crew shares. Therefore no adjustment will be made in relation to
the amount allowed as salary and wages.
9(ss)
– Upgrade to Boat Engine
[73] The only evidence
related to this item was provided by the auditor for the CRA. Gregory Norton,
although he was asked more than once, was unable to recall why this expenditure
was incurred or to what it was related. As a result no adjustment will be made
in relation to this item.
9(iii) – Rental of a Stone Roller
[74] Gregory Norton indicated that he rented the stone roller to push any
rocks or other debris on the lawn into the ground before he spread out his
nets. I accept his testimony and will allow the $79.70 incurred in relation to
the rental of the stone roller as an expense in determining the income of the
partnership in 2002.
9(www)
– (cccc) - Business Use of the Home
[75] The Appellants
claim that 60% of their home was used for the purpose of carrying on their
fishing business in each year under appeal (2001, 2002, 2003, and 2004). The
Respondent allowed expenses on the basis that 12.5% of the home was used for
the purpose of carrying on the fishing business for each of these years.
[76] Gregory Norton
stated that the house was approximately 34 feet by 36 feet in size. It is a two
story house with a full basement. Using these measurements, the total square
footage of all three floors would be 3,672 square feet. There was an office on
the main level that is 100 square feet and which was accepted by the Respondent
as being used in carrying on the business. There were also some areas of the
basement that were used for storage or making bait bags. The basement was also
used for personal purposes. There were other rooms on the main floor that were
used for both business purposes and personal purposes.
[77] In order for the
Appellants’ percentage use of 60% to be accepted, 2,203 square feet of the
house would have to be used for the purpose of earning income. Since there was
no evidence that any part of the third floor was used for the purpose of
earning income, this would mean that 2,203 square feet of the 2,448 square feet
that comprised the first floor and the basement would have to be used for the
purpose of earning income or 90% of these two floors. I do not accept that 90%
of the first floor and the basement were used exclusively for business
purposes.
[78] The Appellants
also wanted to include the garage and the shed in the determination. While the
garage may have been used to store traps, it appears that it was also used for
personal purposes. The shed was not built until 2003.
[79] The Respondent’s
assumption that the percentage of business use for the home was 12.5% would
mean that 459 square feet was used for business purposes. The Appellants did
not lead sufficient evidence to demolish this assumption and therefore no
adjustment will be made to the percentage of business use of the home.
Conclusion
[80] As a result the
appeals are allowed, with costs, and the matter is referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that:
(a) the income of the partnership
for the years under appeal is to be reduced by the following amounts:
|
Description
|
2001
|
2002
|
2003
|
2004
|
|
Amount allowed by
agreement:
|
$2,434
|
$1,588
|
$6,006
|
$1,888
|
|
Nets, traps and related
material:
|
$2,768
|
$5,521
|
$12,082
|
$11,376
|
|
Reels and related
materials:
|
$3,600
|
$7,578
|
$4,386
|
$3,855
|
|
Appraisal and water test:
|
$8
|
$8
|
$8
|
$8
|
|
Interest (2000 Ford
Explorer) for 2003 – 25% of $1,354:
|
|
|
$338
|
|
|
All Terrain Vehicles –
repairs and new tires
|
|
|
$267
|
|
|
Tolls:
|
$302
|
$231
|
$38
|
$39
|
|
Rental of Stone Roller:
|
|
$80
|
|
|
|
Total:
|
$9,112
|
$15,006
|
$23,125
|
$17,166
|
(b) the $215.04 spent by the
Appellants to acquire a police scanner in 2002 is to be added to the
undepreciated capital cost of the class 8 assets of the partnership; and
(c) the
proceeds of disposition related to the sale by Gregory Norton of his lobster
licence in 2002 were $75,000 and not $100,000.
Signed at Ottawa, Canada, this 2nd day of February,
2010.
“Wyman W. Webb”
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