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Citation: 2005TCC659
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Date: 20051012
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Docket: 2004-4291(GST)I,
2004-4375(IT)I,
2004-4376(IT)I,
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BETWEEN:
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HUBERT J. WILEY,
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and JOANNE P. WILEY,
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Appellants,
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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
Miller J.
[1] The
Appellants, Hubert and Joanne Wiley, were partners in the retirement seminar
business in 2000, 2001 and 2002. Mr. Wiley acquired a motorhome in 1999 for
$170,000, which he indicated was intended for use in that business. The Wileys
conducted their business in Canada and the United States. They travelled south in the winter in their
motorhome promoting their business, scheduling seminars and actually giving a
limited number of seminars. They claimed 100% of their motorhome costs in
connection with their business.
[2] The
Respondent assessed Mr. Wiley pursuant to the Excise Tax Act denying him
an input tax credit (ITC) of $11,823 on the purchase of the motorhome, on the
basis that it was not acquired for use primarily in commercial activity, as
required by subsection 199(2) of that Act. In the alternative, if I find
it was acquired for use primarily in commercial activity, the Respondent argues
that such commercial activity was that of Mr. and Mrs. Wiley's
partnership, a separate entity under that Act, and therefore no ITC
should be available to Mr. Wiley.
[3] The
Respondent also assessed both Mr. and Mrs. Wiley in 2001 and 2002 pursuant to
the Income Tax Act, limiting their business expenses primarily in
connection with the motorhome to 5% of the expenses claimed. The Minister of
National Revenue (the Minister) also restricted capital cost allowance (CCA) on
the motorhome in 2000 and 2002 to 5% of Mr. Wiley's claim. Finally, the
Minister also restricted CCA on certain other assets of the partnership in
2002.
Facts
[4] In
October 1999, Mr. Hubert Wiley purchased a motorhome, which had been advertised
for $240,000 for approximately $170,000 plus goods and services tax (GST) of
$11,823. Mr. Wiley took out a mortgage on his principal residence in Creston, British Columbia, to fund this purchase. He remortgaged in 2001
incurring a penalty charge of $6,995. Mr. Wiley acquired the motorhome in his
own name, claiming he intended to lease it to a business which he proposed to
operate through a company, or in partnership with his soon-to-be wife, Joanne.
Mr. Wiley had a GST registration number. He reported the acquisition as a
purchase by him as a proprietor on the basis he would lease the property out.
In September 1999, Mr. Wiley also incorporated an Alberta company, Full Life Seminars Inc., which he never used in the retirement
seminar business. He ultimately decided that a partnership was the preferred
form of organization. He never leased the motorhome to the partnership, nor
contributed the motorhome to the partnership.
[5] The
motorhome sat idle until April 2000 when the Wileys used it for a one-week trip
to Edmonton, where they worked with a graphic
designer to design materials for their retirement seminar business. During late
1999 and into 2000, the Wileys were planning and organizing their business. The
motorhome was to be an essential part of that business. Mr. Wiley explained that
the business of giving seminars to retirees and potential retirees required
considerable travel to go where the market might yield results. Mr. Wiley
believed that the southern United
States in the winter was a
significant market for retirees. The Wileys had the motorhome equipped to carry
considerable materials, such as handbooks and exercise books for their
seminars. They also modified the motorhome to provide a form of office equipped
with a computer as well as providing additional storage space. They added a
hitch and acquired a standard Subaru that could be towed. Their plan was to
stay in Recreational Vehicle (RV) parks and interview retirees, assembling
information for their seminars.
[6] The
Wileys spent the summer of 2000 primarily in Alberta using the motorhome as a base. They had family in Calgary and Edmonton and had both lived and worked there, so felt they
could rely on those areas as a good source of contact. Throughout this time,
they worked on designing their website, as well as advertising through posters
at various locations in towns including retail stores and libraries. They
continued to work on seminar materials. Mr. Wiley took steps to obtain his U.S. citizenship.
[7] Mr.
Wiley testified that they used the motorhome for 166 days in 2000 for business.
The company reported no income from their business in 2000, but claimed
partnership expenses of $30,653. The Wileys drove the motorhome in November
2000 into the southern U.S. where they remained until March 2001.
Both Mr. and Mrs. Wiley testified that they worked approximately 50-hour weeks
on their seminar business, specifically when living out of their motorhome. To
be clear, this was not actually presenting seminars but in researching the
subject, writing materials, establishing a website, arranging dates, attending
activity fairs and making calls.
[8] Mr.
Wiley also claimed CCA on the motorhome of $12,000 in 2000 but allocated that
to his professional counselling business, which he carried on in 2000, but not
in 2001 nor in 2002. In January to March 2001, the Wileys attempted to organize
seminars, contacting several RV parks and resorts in the U.S. In fact, throughout 2001 they only held two
seminars – one in the U.S. and one in Canada. They made several contacts however and appeared to remain optimistic on
their return to Canada. The lack of response did lead them to a
decision to write a book about change. For the balance of 2001 and into 2002
Mr. Wiley worked on this book, ultimately published under the title
"Dancing with Change" in the summer of 2002. The Wileys estimated
using the motorhome for 90 days in 2001 and 76 days in 2002.
[9] In
July and August 2002, the Wileys used their motorhome to promote their book in
Saskatchewan, Alberta and British Columbia, though not all their promotion tours involved the
motorhome.
[10] In early December 2002, the Wileys again headed to the U.S., but with a shift of emphasis to the promotion of
the book.
[11] I find the Wileys' website of interest. Exhibit R-2 was their website
entitled "Welcome to Full Life Seminars". Parts of their website read
as follows:
The Beginning
The concept of Full Life Seminars
was developed over 1999 as we, Hugh and Joanne, met as single people and
started our relationship. We both wanted an adventure that would use our
talents, test our professional skills and provide growth in our lives. We
wanted to challenge ourselves and move into that exciting and thrilling zone of
the unknown.
With Joanne, a nurse, and Hugh, a
psychologist, we both have teaching experience, group leading experience and
realized we thrive on being with others. We wanted to travel and therefore the
idea of travelling, coaching and presenting workshops was born.
…
June - July, 2000
…. June and July passed quickly in
this fashion as we travelled in our motor coach, learning how to live as RVers
and we quickly became accustomed to this new and exciting way of life and
travel. …
January – March, 2001
We have had a glorious time here in
Arizona this winter. The
environment is fantastic. The desert was in bloom and very beautiful. We
enjoyed quite a bit of hiking.
…
We headed back to Creston about the
end of March and enjoyed the areas of San Joachim Valley, the beautiful Sacramento area, then through
Oregon, Washington and Idaho.
There are also two pages in the website devoted to motorhome living as a
retirement choice.
[12] With respect to the income tax issues, the Minister assessed the
Wileys on the basis that only 5% of the use of the motorhome was for business
purposes. The Minister did allow other business expenses in each of the years
under appeal. The effect of the Minister's basis for assessment was to
significantly reduce CCA in 2000 and 2002 for Mr. Wiley, as well as limiting
motorhome-related expenses in 2001 and 2002. The Minister also denied grocery
expenses in 2001 and 2002, and reduced meals expenses in 2001 to half the cost
claimed. The Appellants conceded these food-related items.
[13] The auditor for Canada Revenue Agency (CRA), Catherine Mary Gilmore,
testified that the basis for assessing at the 5% level was twofold. Firstly,
the auditor determined the motorhome was used for only 44 of 365 days in the
first year, which represents a usage of 12%. She then further determined the
motorhome, when used at all, was used eight hours out of 24 for business, and
she therefore roughly divided the 12% by one-third to come to an approximate 5%
usage for business purposes. The other basis she testified she relied upon was
the Wileys' suggestion to her that they made only 17 business contacts in 150
days, which again worked out roughly to a 12% ratio, again roughly divided by
one-third.
Analysis
[14] Before turning to the specific income tax and GST issues, I must deal
with a couple of preliminary issues relating to Mrs. Wiley's appeals. Firstly,
with respect to the 2000 taxation year, the evidence was that Mrs. Wiley never
filed a Notice of Objection. This is not surprising as there does not appear to
have been an issue regarding Mrs. Wiley's 2000 taxation year. In any event, on
the basis of the absence of a Notice of Objection, I quash Mrs. Wiley's appeal
of her 2000 taxation year.
[15] Secondly, with respect to Mrs. Wiley's 2002 taxation year, the
evidence was that she received a nil assessment of her 2002 taxation year. It
is well settled (see for example the case of Bruner v. R.) that no appeal lies from a nil
assessment. I therefore also quash Mrs. Wiley's appeal of her 2002 taxation
year.
[16] The issues therefore are:
(A) Income Tax Act
(i) Are Mr. Wiley,
with respect to 2001 and 2002, and Mrs. Wiley, with respect to 2001, entitled
to deduct expenses in excess of amounts allowed by the Minister?
(ii) Is Mr. Wiley
entitled to claim CCA in 2000 and 2002 beyond the amounts allowed by the Minister?
(B) Excise Tax
Act
(i) Is Mr. Wiley
entitled to claim an ITC on his purchase of the motorhome?
(A) Income Tax Act
[17]With respect to the business expenses issue, the Minister's position is
that firstly, any expenses beyond the amounts allowed are personal or living
expenses and not deductible pursuant to paragraph 18(1)(h) which reads:
18(1) In computing
the income of a taxpayer from a business or property no deduction shall be made
in respect of
…
(h) personal
or living expenses of the taxpayer, other than travel expenses incurred by the
taxpayer while away from home in the course of carrying on the taxpayer's
business;
Also the definition of "personal or living expenses" reads:
248(1) In this Act,
"personal or
living expenses" includes
(a) the
expenses of properties maintained by any person for the use or benefit of the
taxpayer or any person connected with the taxpayer by blood relationship,
marriage or common-law partnership or adoption, and not maintained in
connection with a business carried on for profit or with a reasonable
expectation of profit,
[18] The expression "expenses of properties not maintained" is
awkward. I presume the legislators did not mean that there is some expense in
connection with not maintaining property, but intended that personal or living
expenses are not expenses of property maintained in connection with a business.
So, there is a two-pronged test to meet the "personal or living
expense" definition vis-à-vis properties:
(a) were expenses
incurred on properties maintained for the benefit of the taxpayer?
(b) were expenses
incurred on properties maintained in connection with a business carried on for
profit or with a reasonable expectation of profit?
To be considered personal or living expenses, one must answer yes to the
first question and no to the second. In considering the Wileys' expenses on
their motorhome, I have no difficulty in answering the first question in the
affirmative. The motorhome was indeed their home and was used for their
personal benefit. The Respondent has acknowledged, in allowing considerable
business expenses, that the Wileys were carrying on a business. The Respondent
has also acknowledged the motorhome was used in connection with that business,
but only to the extent of 5%. So, the Government accepts that at least some of
the motorhome-related expenses were expenses incurred on property maintained in
connection with a business carried on with a reasonable expectation of profit.
[19] It appears that the expenses incurred in connection with the motorhome
serve a dual purpose; the legislators have addressed a similar dilemma in
regards to the consumption of food by enacting section 67.1, deeming cost of
food to be 50% of either the amount paid or the amount that would be reasonable
in the circumstances. There is no such deeming provision for the costs of
living in a motorhome, which serves both a personal and business purpose. In
such circumstances it is necessary to consider paragraph 18(1)(h) in
conjunction with section 67 of the Income Tax Act – what are reasonable
expenses in the circumstances?
[20] Clearly, the Wileys have chosen motorhome living as one of their
retirement choices, although they have gone further than that. They have
integrated the concept of motorhome living into their business of advising on
retirement. They want me to accept that this involvement of the motorhome is so
completely integrated into their business that 100% of its use, and therefore
all of its expenses, should be considered business-related. The Minister did
not accept this proposition and neither do I. It is not reasonable.
[21] The Respondent assessed on the basis that only 5% of such expenses
were reasonable. There are a number of ways in which to allocate between
business and personal use of a property; hours used or space used are just a
couple. The Respondent however chose two methods which are at best innovative,
and at worst irrelevant. While I have some sympathy for an auditor whose task
is, in some respects, to create something from nothing due to the lack of
records or uncooperative taxpayers, that is not the situation here. The Wileys'
story is not confusing; they are not uncooperative. They believe that because
they conduct their business from their motorhome, all expenses in connection
therewith are legitimately deductible. The Minister, while agreeing the Wileys
carry on a business and do so from their motorhome, have limited those
deductions to 5%.
[22] The Minister's first basis for the 5% allocation is the number of days
(44) the Minister determined the motorhome was in use as a percentage of days
in the year. This may well be appropriate if there is any evidence to support
the fact the motorhome was used solely personally for the balance of the year.
The evidence was however that for the balance of the year the motorhome sat
idle. To bestow any meaning on the Minister's ratio, I would have to conclude
that a motorhome sitting idle is somehow a personal use. This is not
supportable. This basis is inappropriate for determining the reasonableness of
the expenses.
[23] The second basis the auditor described was the calculation of the
number of business contacts made in the purported number of days worked (17
contacts in 150 days). While this calculation does yield a percentage, I find
it has no meaning whatsoever vis-à-vis reasonableness of expenses. The
auditor did go on to break down the Wileys' days, while living in the
motorhome, into eight hours on average of a work nature, and 16 hours on
average of a personal nature. This approach does have some merit and is supported
by the Wileys' own evidence. They both testified that their work days were
longer than eight hours, yet I take into account weekends and also consider the
Wileys' lifestyle and the nature of their activities, as outlined in their very
own website, and I conclude that the Respondent's assessment of one-third of
the Wileys' time in the motorhome was devoted to business is a reasonable
assessment.
[24] The consequences of that finding is that in 2001, I allow Mr. and
Mrs. Wiley one-third of the claimed interest expense, diesel expense,
maintenance expense, insurance expense, supplies, parking fees and electricity.
They are entitled to 50% each of that one-third. A schedule is attached
indicating the amounts.
[25] Similarly, in 2002, Mr. Wiley is allowed half of one-third of the
expenses claimed for interest, parking fees, diesel, maintenance, insurance,
supplies and propane. Again see the attached schedule.
CCA
[26] Mr. Wiley claimed CCA in 2000 and 2002 as a deduction against his counselling
business. The evidence established that Mr. Wiley did not use the motorhome in
such business. The motorhome was used by the partnership in the retirement
seminar business, though without paying any rent to Mr. Wiley. Curiously, the
Minister allowed Mr. Wiley 5% of the CCA claimed by him, on the same basis of
allocation as for the other motorhome-related expenses in connection with the
partnership.
[27] Crown counsel recognized that Mr. Wiley was facing a technical
dilemma, compounded by the Respondent allowing Mr. Wiley some CCA on the
motorhome. Mr. Wiley never suggested the motorhome was his capital contribution
to the partnership. On the contrary, he filed on the basis that only he was
entitled to CCA on the motorhome and, not as a claim against partnership income,
but as against counselling income, notwithstanding there was no evidence the
motorhome was used in his counselling business. I have no doubt Mr. Wiley's
affairs could have been structured more efficiently. It is not for me to do so
after the fact.
[28] To allow Mr. Wiley to claim CCA on the motorhome at the same 30% rate
that I am allowing the other motorhome-related expenses would be to ignore the
legal reality. The partnership actually incurred those other motorhome-related
expenses, because Mr. Wiley let the partnership use the motorhome. Mr. Wiley
was not in the commercial leasing business. I find he is not entitled under
these circumstances to claim any more CCA on the motorhome than already allowed
by the Minister.
[29] With respect to CCA in connection with other capital assets in 2002, I
heard no argument from the Wileys disputing the Minister's assessing position.
B. Excise Tax Act
[30] I turn now to the GST issue: is Mr. Wiley entitled to claim an ITC of
$11,823 in connection with his purchase of the motorhome; only if he falls
within the ambit of subsection 199(2) which reads:
199(2) Where a
registrant acquires or imports personal property or brings it into a
participating province for use as capital property,
(a) the tax payable
by the registrant in respect of the acquisition, importation or bringing in of
the property shall not be included in determining an input tax credit of the
registrant for any reporting period unless the property was acquired, imported
or brought in, as the case may be, for use primarily in commercial activities
of the registrant; and
(b) where
the registrant acquires, imports or brings in the property for use primarily in
commercial activities of the registrant, the registrant is deemed, for the
purposes of this Part, to have acquired, imported or brought in the property,
as the case may be, for use exclusively in commercial activities of the
registrant.
[31] Did Mr. Wiley acquire the motorhome for use primarily in commercial
activities? Mr. Wiley claims he did; indeed, Mr. Wiley claims that he acquired
the motorhome exclusively for use in commercial activities. I do not accept his
claim in this regard. Mr. Wiley claims to have acquired the motorhome to lease
to a company, which he incorporated but never used. As was clear from his
testimony, he opted for the use of the partnership form of business
organization to carry on the retirement seminar business. Yet he never
transferred the motorhome to the partnership, nor did he ever lease the
motorhome to the partnership. He personally retained ownership of the motorhome,
and he and his wife used the motorhome as previously described, partly for
commercial activity and partly for personal benefit. The partnership never
owned the motorhome. A partnership is an entity as defined in subsection 123(1)
of the Excise Tax Act. But in this case it is not the partnership
seeking the ITC. It is only Mr. Wiley.
[32] So, prior to asking whether Mr. Wiley bought the motorhome for use
primarily in commercial activity, I have to ask whether, given his actions, he
acquired the motorhome for use at all in commercial activity, as he, as the
registrant, as opposed to the partnership, did not carry on any commercial
activity for which he used the motorhome. He simply let the partnership use it.
He did carry on some counselling activity but he never suggested that the
motorhome was acquired for purposes of his professional counselling business. I
find Mr. Wiley could not have acquired the motorhome personally for use in a
commercial activity, let alone primarily for use of commercial activity.
[33] While I could leave the matter there, I want to more fully complete
the analysis for Mr. Wiley's benefit in two respects. First, had I been
convinced that Mr. Wiley's true reason for acquiring the motorhome was to
commercially lease it to a company, I find that very soon after he did acquire
the motorhome his intended use changed to one of personal benefit. This would
bring into play subsection 200(2) of the Excise Tax Act which would have
the same effect as denying Mr. Wiley the ITC in the first place. The Respondent
did not raise subsection 200(2) and I simply raise it to illustrate to Mr.
Wiley that it is still necessary to consider his actual use, not simply intended
use. In so doing, I reach the same result.
[34] Finally, Mr. Wiley should appreciate that if I had to resort to the
question of whether the motorhome was acquired primarily for use in commercial
activity by the partnership, I would have found that it was not, as I find as a
fact the Wileys neither intended to use, nor in fact did use the motorhome any
greater than one-third of its overall use in commercial activity. This falls
below the standard of "for use principally in commercial activities"
as required in section 199 of the Excise Tax Act. This would have
been fatal to Mr. Wiley's claim for the ITC.
Conclusion
[35] I dismiss Mr. Wiley's GST appeal. I dismiss Mr. Wiley's 2000 income
tax appeal. I quash Mrs. Wiley's appeals for 2000 and 2002. I allow Mrs.
Wiley's 2001 income tax appeal and Mr. Wiley's 2001 and 2002 income tax appeals
on the basis set out in the attached schedule.
Signed at Ottawa, Canada, this 12th day of October, 2005.
Miller
J.
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