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Citation: 2003TCC63
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Date: 20030220
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Docket: 2001-2869(GST)I
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BETWEEN:
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KEVIN MANN AND BARBARA MANN,
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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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AND
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Docket: 2002-3441(IT)I
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BETWEEN:
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KEVIN MANN,
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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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AND
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Docket: 2002-3443(IT)I
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BETWEEN:
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BARBARA MANN,
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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
(Delivered orally from the Bench at
Toronto, Ontario, on February 13, 2003)
Bowman, A.C.J.
[1] These appeals
were heard together and involve the 1996, 1997, 1998 and 1999
taxation years of Kevin Mann and the 1997, 1998 and 1999 taxation
years of his wife, Barbara Mann. The appeals under the Income
Tax Act were heard at the same time as an appeal under the
Excise Tax Act with respect to the goods and services tax
for the period September 6, 1996 to December 31,
1998.
[2] I will deal first
with the income tax appeals of Mr. and Mrs. Mann. They
carried on business in partnership under the name of A Mann's
Holiday. The business involved the rental of a motor home, which
they acquired in 1996 to replace an older one.
[3] The GST
assessment was premised upon the assumption that this was a
"business" that was carried on without a reasonable
expectation of profit.
[4] This, of course,
is inconsistent with the view that has been expressed on other
occasions prior to the decision of the Supreme Court of Canada in
Stewart v. Canada, [2002] S.C.J. No. 46, that without
a reasonable expectation of profit there could be no business.
This seems to be something of a legislative oxymoron, but I must
deal with the legislation as I find it.
[5] At all events, in
respect of both the income tax appeals and the GST appeal, I find
that the appellants did have a reasonable expectation of profit.
They bought a motor home with the intention of making money from
it. It was represented to them that they could make money renting
it out.
[6] In fact, with the
exception of two weeks in 1998, the motor home was devoted
entirely to the business activity. It was not as successful as
they had hoped, however. In two of the four years they had a net
loss, even before claiming capital cost allowance, and in two of
the four years they had a profit, before capital cost allowance.
It was represented to them that they could claim capital cost
allowance, and they did so. This resulted in fairly substantial
losses, which they tried to set off against other income.
[7] I will come to
the leasing rules in a moment. There are some specific items in
the income tax appeals that I will deal with, and I will speak
first of Kevin Mann.
[8] For 1996 the
Minister disallowed interest expenses in the amount of $776.94.
He should have disallowed $240 instead. He disallowed some $97.96
of expenses claimed by the appellants, relating to GST, on the
basis they had claimed input tax credits but did not include them
in income. That raises a bit of a problem, because I think the
assessments are inconsistent, in that the Minister did not allow
the appellants input tax credits on this amount. So that amount
should not have been disallowed in computing income.
[9] However, since I
propose to allow the GST appeal, on the basis that the appellants
are entitled to input tax credits in the amount of something in
excess of $5,000, I think that disallowance should be
maintained.
[10] The next item is
$707.78 of expenses said to be personal expenses. The
uncontradicted evidence by Mrs. Mann is that the motor home
was not used by them in 1996 for personal use at all. Therefore,
that amount should not have been disallowed. I will come to the
capital cost allowance in a moment.
[11] In 1997 the Minister
disallowed some $49.69 in expenses. That is in respect of GST
that was paid, and where they had claimed ITCs in respect to that
amount but not included it in income. For the same reason as
those given with respect to the 1996 appeal that disallowance
should remain, because I am going to allow the GST appeal.
[12] There were some other
items allowed as additional deduction for interest, repairs and
maintenance. I make no comment on those since they were in the
taxpayers' favour.
[13] For 1998, there were
GST expenses that were disallowed in the amount of $53.01. For
the same reasons as I gave in respect to 1996 and 1997, that
disallowance should remain.
[14] The next item is
$3,194 expenses claimed by the partnership and disallowed because
they were said to relate to Mr. and Mrs. Mann's personal
expenses. That calculation is made as follows. The appellant and
his wife used the motor home for two weeks during the Christmas
season. The Minister calculated the personal versus business use
by taking the sum of 10,429 kilometres over the total kilometres,
26,789, to arrive at 38.93% personal, and then applied that
percentage to the total expenses, to arrive at the figure of
$3,194.78, which he believed was personal expenses. I think that
the figure is high.
[15] Mrs. Mann
testified that they took the motor home to Florida, which is
about 1,200 miles and back. That works out to about 4,000
kilometres, as opposed to 10,429. I think that the proper
percentage should be 4,000 over 26,789 which works out to 14.93,
let us say 15%. This should be attributed to personal, which
would be personal use factor.
[16] I say that the
personal use percentage of the motor home should be 15%, rather
than 38.93%. I could make the calculation, but I do not want to
take the time right now.
[17] Then we come to 1999.
The only disallowance was for capital cost allowance.
[18] I think the motor home
was leasing property within the meaning of
subsection 1100(15) of the Income Tax Regulations. It
means that the amount of capital cost allowance that can be
claimed is restricted to the amount of the income otherwise
determined before capital cost allowance.
[19] I am sorry that the
appellants were misled into thinking they could claim capital
cost allowance on the full amount, and create a loss which would
be set off against other income. It just does not work that
way.
[20] I would have liked to
find some way of granting them the capital cost allowance that
they are claiming, but clearly, in my opinion, the motor home was
leasing property within the meaning of subsection 1100(17),
and neither of the appellants was personally active in the
leasing business on a continuous basis throughout the year, and
accordingly, the restrictions in subsection 1100(15)
apply.
[21] There is only one
thing that I think might give the appellants some relief, and
that is this: in the year 2002 the motor home was disposed of. It
was repossessed by the John Deere Finance Company.
[22] It is possible - and I
emphasize the word "possible" - that this may have
created a terminal loss under subsections 20(16) and
20(16.3) of the Income Tax Act. It is possible that they
would be entitled to terminal loss on that amount, that could be
carried back or applied - first of all, applied against their
income for that year, and then carried back three years. That may
or may not give them any relief, but I think the Minister should
look at that.
[23] So the appeals of
Kevin Mann are allowed, in accordance with the foregoing. The
appeals of Barbara Mann to the Income Tax Act are allowed
on the same basis, in respect of her proportionate share in the
partnership.
[24] So far as the GST
appeal is concerned, the only basis upon which the claim for
input tax credits was denied was that the appellants were
carrying on a business without a reasonable expectation of
profit. I have concluded that they were carrying on a business
with a reasonable expectation of profit and, accordingly, that
was a commercial activity, and they are entitled to the input tax
credits. The appeal is therefore allowed on that basis.
[25] There will be no order
for costs.
Signed at Ottawa, Canada, this 20th day of
February 2003.
A.C.J.
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