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Citation: 2003TCC791
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Date: 20031113
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Docket: 2003-772(IT)I
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BETWEEN:
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TERRY KEEFE,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant has appealed
assessments for the 1998, 1999 and 2000 taxation years in which
the Minister of National Revenue (the "Minister") added
as income an unreported automobile benefit provided by his
employer of $13,254, $13,217 and $12,072 respectively, for each
of the taxation years in question.
FACTS
[2] The Appellant was self-represented
and testified on his own behalf. He is the sole shareholder and
an employee of the company Keefe Bros. Carpet Ltd ("Keefe
Bros."). He gave his evidence in a very straightforward
manner. His answers were direct and clear and were consistent
with what would normally be expected from a sensible small
business operator. I have no reason to think he was anything
other than truthful in his account of the operation of his
business or the nature and frequency of his use of the Jeep
Cherokee.
[3] The Appellant also called as a
witness Mr. Mark Potter, a Chartered Accountant with the firm
that over the years, has provided accounting advice to the
Appellant and to Keefe Bros.
[4] The Respondent, on the other hand,
presented no witnesses or documents. The Minister relied on the
assumptions in the Reply to the Notice of Appeal and the
cross-examination of the Appellant's witnesses.
[5] There is no dispute that:
· throughout
each of the taxation years, Keefe Bros. made a vehicle, in each
case a "Jeep Cherokee" available to the Appellant;
· the
purchase price for the Jeep Cherokees was $50,853 for the 1998
and 1999 taxation years and $50,646 for the 2000 taxation
year;
· the
Appellant has did not maintain a log book for any of the taxation
years; and
· the Jeep
Cherokee was driven approximately 40,000 kilometers per taxation
year, of which about 7,500 kilometers were for the Appellant's
non-employment purpose use.
[6] The Appellant is the driving force
behind Keefe Bros. In addition to the Appellant, the staff
consists of his wife, who acts as the bookkeeper, and an
administrative assistant. For the past 28 years, Keefe Bros. has
been engaged in the supply and installation of commercial floor
coverings, primarily carpet and sheet flooring. Most of the
Appellant's work is conducted at the clients' offices or at
project sites rather than at the Keefe Bros.
[7] The Appellant resides in
Newmarket, a distance of approximately 14 kilometers from
the Keefe Bros. office in Richmond Hill. The project sites are
located roughly within a 100 kilometer-radius of the business
office in Richmond Hill. The Appellant's practice is to call
at his clients' place of business to show samples, to tender
pricing and to provide them with flooring samples. In the normal
course of his duties, he regularly visits the client project
sites to supervise the work being done and to handle problems as
they arise on installation jobs.
[8] The Appellant testified that
typically, flooring installation has to be done in the evenings
or on weekends, especially where the buildings are
client-occupied or government services buildings, as clients
often object to the odour of the flooring adhesives. The
Appellant, as the sole owner-operator of Keefe Bros., is the
person who is ultimately responsible for any resolving
difficulties or making decisions at the project site locations.
He stated that he is "on call 24/7" and has to be ready
to respond to the installation crew when they need him. He
estimated that he would be required at the project sites outside
of what are normally considered "business hours" about 50% of the
time.
[9] Describing the Jeep Cherokee as a
vehicle that is "exclusively a business tool", the
Appellant stated that "on occasion" he takes the Jeep
Cherokee home from the office at the end of the day's work. His
reasons for doing so were that he might be going home late
directly from a job site, he might need to go directly to a
client location the following morning or he might need to respond
to an emergency job situation that night. He also stated that he
had concerns about leaving the Jeep Cherokee at Keefe Bros.
in Richmond Hill as the office is located in an industrial plaza
at the end of a dead-end street.
[10] The Appellant has varying degrees of
access to two other vehicles for non-employment purpose use: the
first is a 1992 Jeep "TJ" (currently monopolized by his teenaged
son) and his wife's car. Only the Appellant has access to the
Keefe Bros. Jeep Cherokee but he testified that he does use it
from time to time for shopping or to drop his children off at the
movies or other domestic chores. Counsel for the Respondent
cross-examined on the extent of the non-employment purpose use
and the Appellant's responses were consistent with his direct
evidence.
[11] To assist him in describing a typical
work week, the Appellant prepared a sample log for the week of
September 15-19, 2003. He was clear in his direct evidence and on
cross-examination that this sample log did not represent his
actual use of the Jeep Cherokee for any of the taxation years in
question.
[12] While there was no detailed evidence on
this point, it seems that the Minister's questioning of the
validity of the Appellant's claim to a reduced standby charge
arose during a general GST audit of Keefe Bros. In any event, the
Appellant testified that he had cooperated fully with Canada
Customs and Revenue Agency officials throughout the audit process
and this evidence was not contradicted by counsel for the
Respondent. In particular, the Appellant assisted with the
determination of the total kilometres driven in each taxation
year and the calculation of the proportion to be assigned to
non-employment purpose use.
[13] Mr. Mark Potter, a Chartered Accountant
with the firm of Norton McMullen & Co, was called as a
witness for the Appellant. For the past several years, this firm
has provided accounting services to Keefe Bros. and to the
Appellant personally. Mr. Potter provided professional advice to
the Appellant and Keefe Bros. on the reasonable standby charge
and operating benefit and calculated the reduced standby
charge.
[14] He stated that he was familiar with the
nature of the Keefe Bros. business operation. For at least the
past 20 years, he said, it had been the practice of
Keefe Bros. to purchase a new company vehicle as soon as the
current one had about 60,000 kilometres on it. Each year, in
preparing tax returns for Keefe Bros. and the Appellant, he
considered the use the Appellant made of the vehicle for anything
other than business purposes. It was this knowledge, together
with his research of the case law on this issue that prompted Mr.
Potter to advise the Appellant to claim a reduced standby
charge.
[15] In presenting the case for the
Minister, counsel pointed to the Appellant's admission that 7,500
of the 40,000 kilometres on the Jeep Cherokee in each taxation
year were "in respect of the Appellant's personal use"
of the automobile provided by his employer.
[16] Using this raw data, the Respondent
calculated the employment purpose use portion of the distance
travelled as 81%. This figure was the basis for the Minister's
assumption in Paragraph 9(g) of the Reply to the Notice of Appeal
that:
(g) in the 1998,
1999 and 2000 taxation years, the Appellant used the Cherokee
automobiles primarily in the performance of his duties in his
office or employment with the Company; however, the kilometers
the Appellant drove these automobiles were not all or
substantially all in connection with or in the course of his
office or employment with the Company;
ISSUE
[17] The issue is whether reasonable standby
charges and operating cost benefits with respect to the
automobiles made available to the Appellant were properly
included by the Minister in the Appellant's income for the
years in question.
STATUTORY PROVISIONS
[18] The relevant statutory provisions of
the Income Tax Act are set out in part below:
6(1)(a)
...
(iii) that was a benefit
in respect of the use of an automobile,
...
(e) Standby
charge for automobile - where the taxpayer's employer or
a person related to the employer made an automobile available to
the taxpayer, or to a person related to the taxpayer, in the
year, the amount, if any, by which
...
(k) Automobile
operating expense benefit - where
(i) an amount
is determined under subparagraph (e)(i) in respect of
an automobile in computing the taxpayer's income for the
year,
(ii) amounts related
to the operation (otherwise than in connection with or in the
course of the taxpayer's office or employment) of the
automobile for the period or periods in the year during which the
automobile was made available to the taxpayer or a person related
to the taxpayer are paid or payable by the taxpayer's
employer or a person related to the taxpayer's employer (each
of whom is in this paragraph referred to as the
"payor"), and
(iii) the total of the
amounts so paid or payable not paid in the year or within 45 days
after the end of the year to the payor by the taxpayer by the
person related to the taxpayer,
the amount in respect of the operation of the automobile
determined by the formula
A-B
where
A is
(iv) where the automobile
is used primarily in the performance of the duties of the
taxpayer's office or employment during the period or periods
referred to in subparagraph (ii) and the taxpayer notifies the
employer in writing before the end of the year of the
taxpayer's intention to have this subparagraph apply, 1/2 of
the amount determined under subparagraph (e)(i) in respect
of the automobile in computing the taxpayer's income for the
year, and
(v) in any other
case, the amount equal to the product obtained when the amount
prescribed for the year is multiplied by the total number of
kilometres that the automobile is driven (otherwise than in
connection with or in the course of the taxpayer's office or
employment) during the period or periods referred to in
subparagraph (ii), and
B is the
total of all amounts in respect of the operation of the
automobile in the year paid in the year or within 45 days after
the end of the year to the payor by the taxpayer or by the person
related to the taxpayer; and
...
6(2)
(2) Reasonable standby charge. For the purposes
of paragraph (l)(e), a reasonable standby charge for
an automobile for the total number of days (in this subsection
referred to as the "total available days") in a
taxation year during which the automobile is made available to a
taxpayer or to a person related to the taxpayer by the employer
of the taxpayer or by a person related to the employer (both of
whom are in this subsection referred to as the
"employer") shall be deemed to be the amount determined
by the formula
A x [2% x (C x D)+ 2 x (E - F)]
B
3
where
A is the
lesser of
(a) the total
number of kilometres that the automobile is driven (otherwise
than in connection with or in the course of the taxpayer's
office or employment) during the total available days, and
(b) the value
determined for B for the year under this subsection in respect of
the standby charge for the automobile during the total available
days,
except that the amount determined under
paragraph (a) shall be deemed to be equal to the
amount determined under paragraph (b) unless
(c) the
taxpayer is required by the employer to use the automobile in
connection with or in the course of the office or employment,
and
(d) all or
substantially all of the distance travelled by the automobile in
the total available days is in connection with or in the course
of the office or employment;
B is the
product obtained when 1,000 is multiplied by the quotient
obtained by dividing the total available days by 30 and, if the
quotient so obtained is not a whole number and exceeds one, by
rounding it to the nearest whole number or, where that quotient
is equidistant from two consecutive whole numbers, by rounding it
to the lower of those two numbers;
C is the cost
of the automobile to the employer where the employer owns the
vehicle at any time in the year;
D is the
number obtained by dividing such of the total available days as
are days when the employer owns the automobile by 30 and, if the
quotient so obtained is not a whole number and exceeds one, by
rounding it to the nearest whole number or, where that quotient
is equidistant from two consecutive whole numbers, by rounding it
to the lower of those two numbers;
E is the
total of all amounts that may reasonably be regarded as having
been payable by the employer to a lessor for the purpose of
leasing the automobile during such of the total available days as
are days when the automobile is leased to the employer; and
F is the
part of the amount determined for E that may reasonably be
regarded as having been payable to the lessor in respect of all
or part of the cost to the lessor of insuring against
(a) loss of,
or damage to, the automobile, or
(b) liability
resulting from the use or operation of the automobile.
ANALYSIS
[19] Referring to IT-63R5 as a good starting
point for the analysis of the case at hand, Counsel then directed
the Court's attention to the Department's position that "all
or substantially all" in the test set out in s. 6(2) of the
Income Tax Act means "90% or more of the distance
travelled by the automobile made available to the taxpayer by his
employer was in connection with, or in the course
of, ... employment".
[20] While I agree with counsel that this is
a good starting point, it is not, however, the end of the story.
What appears in IT-63R5 is the so-called departmental "rule
of thumb" for the determination of what is "all or
substantially all" within the meaning of this provision. The
90% value does not appear in the legislation itself. Further, the
case law is very clear that what constitutes "all or
substantially all" is a question of fact depending on the
circumstances of each case.
[21] In presenting his argument, the
Appellant relied on D. McDonald v. The Queen, [1998]
T.C.J. No. 621 in support of his position that his
employment purpose use of 81% comes within the meaning of
"all or substantially all". Counsel for the Respondent
attempted to distinguish D. McDonald on the grounds that
in that case, Rip, J. had found that the Appellant's
non-employment purpose use was less than 10% and accordingly the
meaning of "all or substantially all" did not need to
be determined. The learned judge, however, did turn his mind to
just such an analysis at paragraphs [18] to [22]:
¶ 18 The word
"substantially" is not defined in dictionaries as a
fixed portion of a whole. The so-called "90% rule" is a
rule of thumb that is no doubt convenient to assessors and tax
advisors in determining a reasonable standby charge.
¶ 19 The Oxford
English Dictionary defines "substantially" to mean,
among other things,
b. essentially,
intrinsically
c. actually,
really
¶ 20 The same
dictionary defines the word "substantial" to include
"of ample or considerable amount, quantity or
dimensions".
¶ 21 In the
French version of subsection 6(2), the words "all or
substantially all" are "la totalité, ou
presque". The word "presque" is defined by Le
Petit Robert as "à peu près". The
Collins-Robert French-English, English-French Dictionary does not
include the words "substantial" or
"substantially" in the English meaning of the word
"presque". The words included
are: "almost" and "nearly". The
word "substantially" is translated in Collins-Robert as
"considérablement" in the context of
"considerably" and "en grande partie" when
the word "substantially" means "to a large
extent".
¶ 22 These
dictionary definitions confirm that the word
"substantially", as Bowman, J.T.C.C. remarked in Ruhl
v. Canada [See Note 6 below], is elastic and an unsatisfactory
medium for conveying the concept of an ascertainable proportion
of the whole. The words "substantially all" in the
context of paragraph 6(2)(d) need not be interpreted as 90% or
more but may be a lesser proportion of the whole depending on the
facts. In the case at bar, at least 85% of the distance travelled
was in connection with Mr. McDonald's employment and in
my view that is substantially all of the distance travelled by
the automobile in the total days it was available to Mr.
McDonald.
[22] The Appellant further cited McKay v.
Canada, [2000] T.C.J. No. 712, a case in which a business use
of 80% was found to be "all or substantially all"
within the meaning of the Act:
17 The Minister considers that
for a taxpayer's use of a passenger vehicle to be "all
or substantially all" for the transportation of goods in a
commercial activity, its use must be at least 90 per cent or more
in the commercial activity. Similarly, the Minister considers a
passenger vehicle is used exclusively in commercial activities if
it is used 90 per cent in those activities. [See for example,
Revenue Canada, GST Memorandum 400-3-4, "Passenger Vehicles
and Aircrafts" (September 12, 1992), at paragraph 34] The
Courts have reduced the threshold to less than 90 per cent,
depending on the circumstances of the particular case. [See Ruhl
v. Canada [1998] G.S.T.C. 4; McDonald v. The Queen [1998] 4
C.T.C. 2569 and Wood v. M.N.R., 87 D.T.C. 312, all decisions of
the Tax Court of Canada]. And since the appellant did not claim
capital cost allowance on the Silverado for income tax purposes
in 1997, the respondent claims Mr. McKay is precluded from
claiming an ITC pursuant to subsection 202(4) of the Act.
[23] Counsel for the Respondent argued that
McKay was distinguishable from the present case in that,
as a GST case, it was not directly applicable. In my view, that
in itself does not diminish the Court's endorsement of
Ruhl and Wood as cited above.
[24] Counsel for the Respondent cited a more
recent decision of the Tax Court of Canada, Guignard v.
Canada, [2002] T.C.J. No. 506. While noting that the Court
described the 90% rule as "arbitrary", counsel argued this
decision was supportive of the Minister's position in that, at
paragraphs [18] and [19], the learned judge specifically
considered D. McDonald, distinguishing it from the facts
in Guignard. In doing so, however, Hershfield, J.
expressly stated in paragraph [20] that: "I do not take
issue with the analysis in McDonald that considers the
phrase "substantially all" and allows that it might
mean something less than 90%".
[25] Finally, counsel for the Respondent
referred to the a recent decision of the Tax Court of Canada
Ilott v. R., [2002] T.C.J. No. 675as an instance of the
Court's finding that "all or substantially all"
amounted to 90% or more employment purpose use. While that was
certainly the outcome, in reaching this conclusion, Margeson, J.
accepted the statement in Wood that the term "all or
substantially all" does not lend itself "to a simple
mathematical formula":
88 The Court is
satisfied that even though the departmental assessing policy may
be the "90 per cent rule" the cases make it clear that
something less than that might be sufficient ot meet the
Appellants' needs here. Further, the Court is satisfied that
no specific quantitative figure can be used in the determination.
The Court must look at the use of the trucks in the context of
the facts of each individual case and the Court accepts the
statements of Taylor J. in Wood, supra, that clearly the
term "all or substantially all" does not lend
itself to a simple mathematical formula. Further, it would seem
to the Court that any particular definition of
"substantially" would be only valid with
reference to the specific context in which it is found.
[26] The Respondent's position is premised
on a "simple mathematical formula". In denying that "all or
substantially all" of the kilometres travelled in the Jeep
Cherokee were for employment purpose use, the Respondent is
relying on a bare percentage derived from the agreed-upon numbers
flowing from the GST audit. While such a calculation may be a
good starting point, it is but one aspect of the entire
circumstances surrounding the use of the vehicle from which this
legal determination may be made.
[27] In Ilott, the learned judge
stated that the Appellant has the onus of presenting evidence
that "[74]...on a balance of probabilities", the
use of the vehicle in question was "all or substantially
all" for the purpose of earning income.
[28] I am satisfied that the Appellant in
this case has met this onus. As stated above, both the Appellant
and his accountant were credible and knowledgeable in their
respective fields.
[29] Their evidence established that the
Appellant is a single owner-operator carrying on business in a
100-kilometre radius of his business premises. The nature of the
business obliges him to be on site as required. The success of
his enterprise depends on his being able to get to client
premises both to secure contracts and to fulfil them.
Accordingly, I am satisfied that "all or substantially
all" of the kilometres travelled in the Jeep Cherokee were
for the purpose of earning income.
[30] Accordingly, the appeals for 1998, 1999
and 2000 taxation years are allowed and the reassessments are
referred back to the Minister of National Revenue for
reconsideration and reassessment.
Signed at Ottawa, Canada, this 13th day of November 2003.
Sheridan, J.
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