Date: 19990113
Dockets: 97-360-IT-G; 97-362-IT-G
BETWEEN:
COOPER INCORPORATED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
BETWEEN:
CARSON LAKE LUMBER LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on December 10, 1998 at Toronto, Ontario by the
Honourable Judge G.J. Rip
Reasons for judgment
Rip, J.T.C.C.
[1] Cooper Incorporated ("Cooper Inc.") and Carson
Lake Lumber Limited ("Carson") appeal income tax
assessments for their 1992, 1993 and 1994 taxation years in which
the Minister of National Revenue ("Minister") denied
the deductions of expenses and outlays claimed by each of the
appellants. In the Minister's view, the outlays or expenses
were not made or incurred for the purpose of earning income from
a business or property pursuant to
paragraphs 18(1)(a) and (b) and
20(1)(a) of the Income Tax Act
("Act"). The Minister added that in the event
the outlays and expenses were otherwise deductible, they were not
reasonable in the circumstances and, pursuant to section 67 of
the Act, are not deductible.
[2] The appeals were heard on common evidence. Steven Cooper
was the only witness. For all practical purposes since 1989, when
he took carriage of the business from his mother, he has been in
charge of the operations of both appellants, although his mother
is their President. He is also a practising physician.
[3] The appellants are located in Pembroke, Ontario and Dr.
Cooper carries on a "small private practice" in that
city "assisting in surgery". He has a substantial
income from his medical practice and does not take a salary from
either appellant. He estimates he devotes about 40 to 50 hours a
week, day and night, to his practice and approximately 50 hours
to the appellants' investment and business activities. He
often works day and night.
[4] Cooper Inc. is primarily a holding company, investing in
certificates of deposits, bonds, mortgages and shares in
corporations. It also owns real estate, both vacant land and
rental property.
[5] Cooper Inc. owns the shares of Carson. The shares of
Cooper Inc. are owned by the Estate of Phillip Cooper, deceased.
Phillip Cooper was Dr. Cooper's father. Dr. Cooper and
his mother are the executors and trustees of the Estate. The
beneficiaries are Dr. Cooper and his sister, a lawyer in
Toronto.
[6] Carson carries on the business of manufacturing softwood
in its mill. The company has a manufacturing facility on a
100-acre site in Pembroke. It also owns 47 acres near Pembroke
and 2,000 acres of forestland in various areas of Ontario. It
also has rights to cut wood on Crown property. Private dealers
also send logs to Pembroke for cutting.
[7] Carson employs about 40 employees during the year, 20
people in the sawmill and 10 to 15 in the manufacturing facility;
other employees include millwrights, foremen, and heavy equipment
operators. Carson owns heavy equipment to carry on its logging
business.
[8] Customers of Carson are located around the world, said Dr.
Cooper. The majority is in Ontario and Quebec. Other customers
are in United States, Europe and the Middle East, at times. The
majority of customers are wholesalers but a small number are end
users of the product. Dr. Cooper stated that he personally deals
with the customers "face to face" and visits them on a
"regular basis" since there is "lots of
competition". He described Carson as a "medium
size" operator in an industry consisting of "very few
large" companies and "very few small" companies.
In order to compete, Carson has expanded by building new grading
and surface finishing facilities and has found a niche
market.
[9] Among Cooper Inc.'s real estate holdings are
properties in the Toronto area, a two-acre property near Highway
7 and Kipling Ave., a 93-acre property near Newmarket and a town
house in Thornhill. The first two properties requires rezoning
before they can be developed and to this end Dr. Cooper is, and
was, "actively involved" in negotiations with municipal
officials and travels to Toronto for meetings.
[10] In the summer of 1992 Cooper Inc. purchased a simple
engine Bonanza airplane ("aircraft" or
"airplane") for $280,000.00 U.S. Dr. Cooper testified
that there were lots of changes in the lumber industry during the
previous 10 to 15 years and wholesalers had taken over much of
the work Carson had traditionally done. Sales at Carson were
falling and the company had to change its approach in doing
business. According to Dr. Cooper, the company could hire a
junior salesman for $80,000.00 a year, which was not feasible for
a company of Carson's size, he said, or he, himself, could
undertake additional work. But, he asserted, he was very busy and
did not have enough time.
[11] Dr. Cooper testified that a trip by automobile between
Toronto and Pembroke and return is ten hours. If an airplane were
available he could fly to Toronto in the morning and be back in
Pembroke in the early afternoon to attend to his medical practice
and business for the appellants. "And", he declared,
"this did happen" once the airplane was acquired.
[12] The airplane is used "exclusively" for
business, Dr. Cooper testified. The airplane is flown to United
States for repairs and maintenance and also was used for training
Dr. Cooper to fly.
[13] Dr. Cooper testified that having the airplane available
to him made it easier to meet customers quickly and efficiently,
to obtain orders and to check on complaints; this resulted in
additional orders to Carson. According to Dr. Cooper, over
the years Carson increased its business volume and number of
customers:
Year Gross Sales Additional Customers
1992 $1.3 million 8
1993 1.5 million 10
1994 2.3 million 11
Carson also increased its annual sales of board feet of lumber
during this period.
[14] Dr. Cooper learned to fly in 1990 and received his
pilot's license, Visual Flight Rules (V.F.R.), in 1992. In
1997 he received an Instrument Flight Rules (I.F.R.) license. He
stated that originally he did not like flying but now enjoys
it.
[15] In cross-examination, Dr. Cooper acknowledged that from
time to time when he flew to Toronto he arranged to visit a house
his father's estate was building for his mother in Thornhill.
A room was being made available in the house for the exclusive
use of Carson to use as an office. Dr. Cooper said when he
visited Carson's customers in Toronto, he would frequently
visit the house to check on the progress of its construction. The
house was on the way to and from the Buttonville airport, where
Dr. Cooper would usually land the aircraft in Toronto. When he
went to Toronto, he said, he would do more than one thing, but
his main purpose would be to see customers.
[16] In a letter dated August 3, 1994, to Revenue Canada, Dr.
Cooper acknowledged making several trips by airplane to Toronto.
He informed Revenue Canada that Carson "has built an office
in Toronto" and that he had made several trips to Toronto
"to both supervise the construction as well as to sometimes
pick up or drop off an employee ..." who supervised the
trades in his absence and helped in the construction of the
office. Dr. Cooper did not inform Revenue Canada that the office
was located in a house built for his mother.
[17] Dr. Cooper's mother moved into the house in 1995,
although the house was completed in late 1994.
[18] Minister's counsel reviewed with Dr. Cooper flight
logs for the periods from September 12, 1992 to September 22,
1993 and June 23, 1993 to May 4, 1995, an outline of flights
prepared by the appellants at the request of Revenue Canada and
an analysis of flight descriptions of uses of the aircraft
prepared by Revenue Canada. The upshot of this evidence is that
Cooper Inc. made limited use of the airplane: primarily to
transport Dr. Cooper or his mother to meetings respecting
rezoning requests and to inspect the vacant land for garbage
cleanup. Carson's use of the aircraft permitted Dr. Cooper to
have meetings of various durations, some as little as 20 minutes,
with customers at small local airports, to transport customers or
members of their families, and to view and inspect company
property.
[19] According to an analysis by Revenue Canada of the use of
the aircraft, the aircraft was not in use 86 per cent of the days
it was owned by Cooper Inc. Out of 942 days during the period
October 1992 to April 1995, the aircraft was used by the
appellants only 71 days, or eight per cent of the time. Dr.
Cooper stated that during the first year the aircraft was owned,
11 per cent to 13 per cent of the flights was used more for
training and maintenance. During a 33-month period, there were 55
flights by both appellants, approximately 1.6 flights per
month.
[20] Appellant's counsel conceded that the aircraft was
used for personal reasons about 10 to 15 per cent of the time.
Respondent's counsel did not question this allocation.
[21] Cooper Inc. calculated the capital cost allowance
("CCA") for the aircraft and its operating expenses as
follows:[1]
|
|
1992
|
1993
|
1994
|
|
|
|
|
|
|
Depreciation Operating Expenses
|
($22,520.00)
( 0.00)
|
($41,302.97)
($16,813.97)
|
($30,977.50)
($ 7,945.00)
|
|
|
|
|
|
|
Total Expenses per
Fin. Statements
|
($22,520.00)
|
($58,116.94)
|
($38,922.5)
|
|
|
|
|
|
|
Add: depreciation*
Less: CCA**
|
$45,040.00
($45,041.00)
|
$82,606.00
($80,714.00)
|
$61,955.00
($62,428.00)
|
|
|
|
|
|
|
Total Aircraft
Deductions Per
T2S1
|
($22,521.00)
|
($56,224.94)
|
($39,395.00)
|
* Total of depreciation. Half of the total depreciation for
each of the 1992 to 1994 taxation years was expenses by the
Cooper Inc. and half was expensed by its subsidiary, Carson, in
its 1992 to 1994 taxation years, respectively.
** Total of CCA. Half of the total CCA for each of the 1992 to
1994 taxation years was deducted by the Cooper Inc. in the
computation of its taxable income and half was deducted by Carson
in the computation of its taxable income for its 1992 to 1994
taxation years, respectively.
[22] Carson deducted expenses in the amounts of $11,260.00,
$20,652.00 and $15,489.00, respectively, with respect to the
aircraft. Apparently, at the end of each of its 1992, 1993 and
1994 taxation years, Cooper Inc. debited an account,
"Receivable from Carson Lake Lumber Limited", half of
the capital cost allowance with respect to the aircraft in the
amounts of $22,520.00, $41,302.00 and $30,977.00, respectively.
Carson deducted these amounts, allocating them as to 50 per cent
travel expenses and 50 per cent as travel and entertainment
expenses, in computing its income for each year.
[23] I have no doubt that Dr. Cooper is a very energetic and
indefatigable person. His devotion of 100 hours a week to his
medical practice and the interests of the appellants is almost
mind boggling, bearing in mind the need for physician and surgeon
to be alert when his services are required. I can appreciate the
factors that caused Cooper Inc. to acquire the aircraft to make
Dr. Cooper's work more time efficient. His talents could be
better used in business and in medecine rather than in travelling
from place to place. The use of an aircraft would shorten travel
time. On my appreciation of the evidence the acquisition of the
aircraft by Carson Inc. was to accommodate Dr. Cooper and his
desire to practice his profession as much as it was for the
appellants. This, of course, does not mean the aircraft was
purchased solely to satisfy Dr. Cooper; the availability of Dr.
Cooper's services to Cooper Inc. and Carson was important to
the two appellants since he was their driving force.
[24] At least two of the cases[2] cited during argument discuss whether a
particular aircraft was "required" by the taxpayer for
its business. Whether or not an aircraft is required for a
taxpayer's business is for the taxpayer to decide, not the
Court. For a taxpayer to deduct capital cost allowance, the
aircraft has to have been acquired by the taxpayer for the
purpose of gaining or producing income.[3] And the outlays or expenses must be
reasonable in the circumstances: section 67.
[25] As far as Cooper Inc. is concerned the only evidence of
the use of the aircraft is that on occasion it facilitated the
travel of Dr. Cooper or Mrs. Cooper, or both, to Toronto to make
representations for rezoning of the land it owned and to meet
advisors. When in Toronto, Dr. Cooper on occasion also inspected
the company's vacant land.
[26] Cooper Inc.'s income for 1992, 1993 and 1994 was as
follows:
Year Interest Income Gross Rental
Income*
1992 302,459 24,982
1993 253,060 16,486
1994 236,367 20,565
* Gross income before deductions for depreciation, insurance,
property taxes and repairs and maintenance.
[27] The bulk of Cooper Inc.'s income during the years in
appeal was from interest. There is no evidence that during the
years in appeal, or within a reasonable time thereafter, Cooper
Inc.'s income would be increased as a result of the ownership
and use of the aircraft. Quite simply, Cooper Inc. did not
acquire the aircraft for the purpose of gaining or producing
income. That the land it owned may have increased in value over
the years is not very likely the result of owning an
aircraft.
[28] Cooper Inc. used the aircraft for purported business
purposes less than ten times during the years in appeal. The bulk
of the use of the aircraft by Cooper Inc. was for training,
exercising the engine, flight tests and for travel to the United
States for warranty work. The use of the aircraft by Cooper Inc.
for its business was infrequent. The amounts of $22,521.00,
$56,224.94 and $39,395.00 Cooper deducted in its 1992, 1993 and
1994 taxation years, respectively, as outlays and expenses with
respect to the aircraft, if they are otherwise deductible in
computing income under the Act, were not reasonable in the
circumstances and, pursuant to section 67 of the Act, are
not deductible in computing Cooper Inc.'s income for those
years.
[29] On the other hand Carson used the aircraft in the course
of its business, notwithstanding the aircraft was not used in the
business to any great extent. Evidence was led - and it was not
seriously challenged in cross-examination - that as a result of
the availability and use of the aircraft Carson increased the
number of its clients and its gross sales in a very competitive
market place. Carson carried on a business that would be
advantaged by the availability and use of an aircraft. The
aircraft expenses and outlays incurred by Carson, therefore, were
for the purpose of gaining or producing income. I am also
satisfied that the outlays or expenses incurred by Carson were
reasonable in the circumstances. The method of calculating the
amounts charged by Cooper Inc. to Carson are not unreasonable.
However, due to the personal use of the aircraft, which I find to
be 15 per cent of the whole, the amounts charged to Carson and
deducted by Carson will have to be adjusted to reflect personal
use.
[30] Therefore, the appeals by Cooper Inc. are dismissed. The
appeals by Carson are allowed and the assessments are referred
back to the Minister for reconsideration and reassessment on the
basis that the aircraft expenses and outlays of Carson be reduced
by 15 per cent, representing the personal use of the
aircraft. The successful parties are entitled to their costs.
Signed at Ottawa, Canada, this 13th day of January 1999.
"G.J. Rip"
J.T.C.C.
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