Date:
20021010
Docket:
2002-659-GST-I,
2002-660-IT-I
BETWEEN:
T. EVANS
ELECTRIC LTD.
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for judgment
Miller,
J.
[1]
T. Evans Electric Ltd. appeals pursuant to the informal procedure
both the income tax assessments for its 1997, 1998 and 1999
taxation years under the Income Tax Act and the Minister
of National Revenue's decision under the Excise Tax
Act for the period between February 1, 1997 and April 30,
1999. The issue in the income tax appeals is whether the
Appellant is entitled to deduct all of the expenses in connection
with one-day, fly-in fishing trips for customers or whether it is
restricted to 50% of such expenses pursuant to section 67.1 of
the Income Tax Act. Further, is capital cost allowance for
the company's aircraft used to fly customers on these fishing
trips likewise caught by section 67.1? The answer to those issues
will consequently determine whether or not subsection 236(1)
of the Excise Tax Act applies.
[2]
The parties did not dispute the facts. The Appellant is an
electrical contractor and a registrant for goods and services tax
(GST) purposes. In July 1990 it acquired a Cessna 180B
aircraft, as at the time it was bidding on contracts in northern
areas only accessible by plane. These bids were not successful,
but the Appellant kept the plane. One of the Appellant's
shareholders is a pilot and enjoys flying. He occasionally flies
for pleasure with his family. The shareholder also uses the plane
for flying customers on one-day trips to remote northern lakes
for a day of fishing. Business was always discussed on these
trips, away from the hubbub and electronic pressures of the city.
The Appellant recorded the full cost of operating the aircraft as
expenses, but at year-end a reasonable amount was charged to the
shareholder loan account for the shareholder's personal use,
or a taxable benefit was recorded to the shareholder.
[3]
The costs of operating the aircraft in 1997, 1998 and 1999 that
did not relate to the shareholder's personal use were the
expenses for these customers' fly-in fishing trips. In
1997, this amounted to $3,523; in 1998, this amounted to $15,775;
and in 1999, this amounted to $4,126. The capital cost allowance
for the plane claimed by the Appellant in 1997, 1998 and 1999 was
$2,018, $1,513 and $1,135, respectively.
[4]
Consideration of $15,444 was paid by the Appellant with respect
to the fly-in fishing trips taken between February 1, 1997,
and January 31, 1998, and the Appellant claimed input tax credits
of $1,081. Consideration of $4,126 was paid by the Appellant with
respect to the fly-in fishing trips taken February 1, 1998 and
January 31, 1999 and the Appellant claimed input tax credits of
$270. The Appellant did not include half of the amount of the
input tax credits in calculating its net tax for purposes of the
Excise Tax Act.
[5]
Relevant legislation is as follows:
Income Tax Act
67.1(1)For
the purposes of this Act, other than sections 62, 63 and
118.2, an amount paid or payable in respect of the human
consumption of food or beverages or the enjoyment of
entertainment shall be deemed to be 50% of the lesser
of
(a) the
amount actually paid or payable in respect thereof,
and
(b) an
amount in respect thereof that would be reasonable in the
circumstances.
67.1(4) For the purposes of this
section,
(a) no
amount paid or payable for travel on an airplane, train or bus
shall be considered to be in respect of food, beverages or
entertainment consumed or enjoyed while travelling thereon;
and
(b)
"entertainment" includes amusement and recreation.
Excise
Tax Act
236(1) Where a registrant is the
recipient of, or pays an allowance in respect of, a supply of
food, beverages or entertainment and subsection 67.1(1) of the
Income Tax Act applies, or would apply if the registrant
were a taxpayer under that Act, in respect of the supply
or allowance, 50% of the total of all amounts, each of which is
an input tax credit claimed in a return for a reporting period in
a fiscal year of the registrant in respect of the supply or
allowance, shall be added in determining the net tax
(a) where
the registrant ceases in or at the end of that fiscal year to be
registered under Subdivision d, for the last reporting period of
the registrant in that fiscal year;
(b) where
the reporting period of the registrant in that fiscal year is
that fiscal year, for that reporting period; and
(c)
in any other case, for the reporting period of the registrant
that begins immediately after the end of that fiscal
year.
[6]
The issue is whether the expenses of operating the aircraft on
these fishing trips, as well as the capital cost allowance, are
in respect of the enjoyment of recreation.
[7]
The Appellant argues that the transportation costs is not part of
the recreation, and hardly enjoyable. It is the recreation event
itself, the fishing, which should be caught, not the mode of
transportation to get to the recreation. He suggests that to find
otherwise would require a 50% restriction to apply to automobile
costs in taking a client to lunch.
[8]
The Appellant also raises the argument with respect to capital
cost allowance, that if section 67.1 applies to restrict
deductibility of capital cost allowance to 50%, this does not
reduce the capital cost allowance for purposes of determining the
amount of recapture on disposition of the plane and, therefore,
results in a form of double taxation.
[9]
The Respondent's position is that the recreation starts not
when you get off the plane at the lake, but when you first get on
the plane and, therefore, any costs associated with the plane are
part of the recreation and thus subject to the restriction
contained in section 67.1. The Crown referred to the Sie-Mac
Pipeline Contractors Ltd. v. The Queen case which dealt
with the applicability of paragraph 18(1)(l) of the
Income Tax Act for support. She also relied upon
Interpretation Bulletin 518R, specifically paragraph
18(f) which reads:
18.
Paragraph 67.1(4)(b) includes amusement and recreation as
"entertainment". Section 67.1 also mentions the
"enjoyment of entertainment". This refers to the mere
attendance at or experience of the event or service. While not an
exhaustive list, the following items are considered to be
entertainment expenses and are subject to the 50%
limitation:
(a) the cost of
tickets for a theatre, concert, athletic event or
performance;
(b)
the cost of private boxes at sports facilities;
(c)
the cost of room rentals to provide entertainment, such as a
hospitality suite;
(d)
the cost of a cruise;
(e)
the cost of admission to a fashion show;
(f)
the cost of entertaining guests at night clubs, athletic, social
and sporting clubs and on vacation and other similar
trips.
Expenses
related to the above items, such as taxes, gratuities, and cover
charges, are also subject to the 50% limitation.
[10] With
respect to the applicability of section 67.1 to capital cost
allowance, the Respondent's argument is that the term
"in respect of" as it relates to the enjoyment of
entertainment must be given its broadest meaning as suggested by
the Supreme Court of Canada in Nowegijick v. The Queen et
al., so it would
pick up capital cost allowance related to the vehicle, which is
integral to the provision of the entertainment or recreation. The
Crown suggests that the recapture issue raised by the Appellant
is inaccurate, as only the lower capital cost allowance amount
(that is the 50% amount) would be used in the calculation of
recapture on the disposition.
Analysis
[11] What is at
issue are the operating costs of an aircraft used to fly
customers north for a day of fishing and informal business
discussions. There is no question the actual fishing falls within
the ambit of the enjoyment of recreation and, therefore, amounts
paid in respect of the fishing are subject to the 50%
restriction? But are operating costs, such as fuel for example,
closely enough tied to the recreation of fishing to warrant
restriction? This comes down to a question of when does the
recreation start. Does it start when the customers get on the
plane or when they get off the plane at the lake? I refer back to
the Interpretation Bulletin to which the Respondent
directed me and in particular the words clarifying the
"enjoyment of entertainment" - "This refers to the
mere attendance at or experience of the event or service".
It apparently specifically excludes the means of getting to and
fro the event or service. The Bulletin goes on to list the
cost of a cruise for example, yet makes no mention of the air
fare, train fare or bus fare to get to the cruise. I do not
accept that transportation to and from is implicitly included; in
fact, quite the opposite. Continuing with the cruise analogy,
they are advertised most often as cruise or cruise and air fare.
The recreational event at issue before me is the activity of
fishing. Flying in a noisy little Cessna to get to the fishing
may be enjoyable to some, but likely not to most. Even in relying
on a wide meaning of the term "in respect of" as it
relates to the enjoyment of the fishing activity, I
do not find that it encompasses operating costs of an aircraft to
get to the fishing. The fishing starts when you get to the
lake.
[12] The items
listed in paragraph 18(f) of the Interpretation
Bulletin 518R are not explicit enough to capture aircraft
operating costs. The list refers to the costs of entertaining
guests on vacation and other similar trips. It is the cost
of entertaining customers on the vacation that is being
referred to, not the cost of transporting customers to the
vacation - the entertainment. There is a distinction between true
entertainment costs and transportation costs. I believe the
Appellant's aircraft operating costs fall into the latter
category. The entertainment or recreation event is not the
flight, it is the fishing.
[13] The
Crown's reference to Sie-Mac does not dissuade me from
my view, as that case dealt with a specific statutory exception
(paragraph 18(1)(l)). Justice Linden found
that expenses incurred for the use of a lodge included flying up
to the lodge. The language of paragraph 18(1)(l) is
quite different from the language in section 67.1, the latter
being concerned not with the use of the lodge but with the
enjoyment of entertainment. Although fine, there is a distinction
nonetheless between flying to a lodge, being considered part of
the use of the lodge, and flying to a lake not being considered
part of the enjoyment of the recreation of fishing. The
distinction lies in the requirement in the latter case for
enjoyment, specifically enjoyment of recreation. In this case,
the travel is not the enjoyable part of the trip, but simply a
necessary obstacle to get to the fishing. The recreation is the
fishing and it starts when the customer gets off the plane at the
lake. The operating costs of the plane getting there therefore
are not covered by the specific wording of section 67.1 of the
Income Tax Act. The appeals are allowed and referred back
to the Minister for reconsideration and reassessment on the basis
that section 67.1 is not applicable to the operating costs,
including capital cost allowance of the Appellant's aircraft
and consequently, section 236 of the Excise Tax Act does
not apply.
Signed at
Ottawa, Canada, this 10th day of October, 2002.
J.T.C.C.
COURT FILE
NO.:
2002-659(GST)I and 2002-660(IT)I
STYLE OF
CAUSE:
T. Evans Electric Ltd.
and Her
Majesty the Queen
PLACE OF
HEARING:
Winnipeg, Manitoba
DATE OF
HEARING:
October 1, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge
Campbell J. Miller
DATE OF
JUDGMENT:
October 10, 2002
APPEARANCES:
Agent for
the
Appellant:
Laurie Baird
Counsel
for the
Respondent:
Laurel Irvine
COUNSEL OF
RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-660(IT)I
BETWEEN:
T. EVANS
ELECTRIC LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard with the appeal of T. Evans Electric Ltd.
(2002-659(GST))I)
on October
1, 2002 at Winnipeg, Manitoba, by
the
Honourable Judge Campbell J. Miller
Appearances
Agent for
the
Appellant:
Laurie Baird
Counsel
for the
Respondent:
Laurel Irvine
JUDGMENT
The appeals from reassessments of tax made under the Income
Tax Act for the 1997, 1998 and 1999 taxation years are
allowed, and the reassessments are referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that the expenses the Appellant was entitled to deduct with
respect to the fly-in fishing trips should not be limited to 50%
of the expenses incurred pursuant to section 67.1 of the
Act.
Signed at
Ottawa, Canada, this 10th day of October, 2002.
J.T.C.C.
2002-659(GST)I
BETWEEN:
T. EVANS
ELECTRIC LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
with the appeals of T. Evans Electric Ltd.
(2002-660(IT)I)
on October
1, 2002 at Winnipeg, Manitoba, by
the
Honourable Judge Campbell J. Miller
Appearances
Agent for
the
Appellant:
Laurie Baird
Counsel
for the
Respondent:
Laurel Irvine
JUDGMENT
The appeal from the assessment made under the Excise Tax
Act, notice of which is June 15, 2000, and bears number
09CR0006650 for the reporting period February 1, 1997 to April
30, 1999, is allowed and the assessment is vacated.
Signed at
Ottawa, Canada, this 10th day of October, 2002.
J.T.C.C.
Email this Content