Prime v. The Queen, docket 97-2350-IT-G

Date: 19990203

Docket: 97-2350-IT-G

BETWEEN:

ART PRIME,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Beaubier, J.T.C.C.

[1] These appeals pursuant to the General Procedure were heard at Yarmouth, Nova Scotia on January 28 and 29, 1999. The Appellant and his wife, Elizabeth, testified. The Respondent called Susan Hines who conducted the audit in question.

[2] The Appellant was reassessed for his 1991, 1992 and 1993 taxation years. He appealed. At the opening of the hearing his counsel agreed that the addition to income of a net of $16,623 in 1992 and $1,067 in 1993 was accepted. Therefore, the following sums remained in dispute.

Disallowed Claims

1991 $8,311.00

1992 $38,779.00

1993 $7,227.00

[3] These claims relate to whether the Appellant was in the business of buying, repairing or improving and selling used 1940's fabric covered Piper aircraft during the years in question. Therefore, that question will be dealt with first in order that the principle relating to these claims can be resolved. The argument is whether they were personal or not. That is, was purchasing, repairing and flying these aircraft merely a hobby for Mr. Prime?

[4] The Appellant is 41. He resides at Deerfield, near Yarmouth. He attended grade 10 high school and subsequently became a journeyman mechanic in gasoline engines and worked for a GM dealership in Yarmouth. In 1981 he opened his own business in auto repair and remains in that business, with an emphasis on transmission repair.

[5] In November, 1986 he purchased a Piper aircraft ("PA 11") for $8,500 (Exhibit A-1). Mr. Prime learned to fly at this time. His neighbour, Steve Gray, is a licensed aircraft maintenance engineer. The two of them worked on the PA 11 and the Appellant increased its engine's horsepower. He sold this PA 11 on November 10, 1987 for $14,000. He testified that he recovered his cost on this, but he also testified that he may have lost $2,000 on it.

[6] On November 14, 1987 Art Prime purchased CF-ZIM, another PA 11, for $23,000 (Exhibit A-3) in Montreal and had it flown to Yarmouth. This plane had floats. Mr. Prime and his neighbour, Steve Gray, restitched the inside of the fabric wings. They made it airworthy immediately. Mr. Prime borrowed the money to purchase CF-ZIM from the Royal Bank of Canada.

[7] On October 3, 1990 Mr. Prime purchased CF-VWW in Calgary for $17,000 (Exhibit AR-14). It was a Piper PA 12. He and a friend flew it back to Yarmouth. They arrived on November 8, 1990 (See the log Exhibit AR-15). It had engine problems and never flew from November, 1990 until August 30, 1992.

[8] Mr. Prime testified that he tried to sell CF-ZIM and that an unnamed British Columbia man phoned a few times and offered $30,000 for it, but Mr. Prime wanted $35,000. However, it did not have a Certificate of Airworthiness from December 20, 1990 until it crashed while Mr. Prime was flying it on Labour Day weekend, 1991 at Stanley, Nova Scotia (Exhibit AR-32). He crashed it while taking off from a nearby lake after attending the fly-in at Stanley. CF-ZIM was not insured at the time. Mr. Prime stated that the insurance premiums were about $6,000 or $7,000 per year. Fortunately, Mr. Prime was not hurt in the crash and he and some friends recovered the wreckage from the lake. It is in storage and unrepaired. The Department of Transport records show that Mr. Prime flew CF-ZIM 32 times between December 25, 1990 and August 30, 1991 without a Certificate of Airworthiness. Mr. Prime stated that the lack of a Certificate was due to his inadvertence to file after he had personally installed floats on CF-ZIM. There is no corroboration for this statement.

[9] Mr. Prime still owns CF-VWW. He has installed floats on it. He testified that the floats and an engine upgrade from 135 hp to 150 hp would make this plane worth between $70,000 and $95,000. This evidence of value is not accepted by the Court. There is no acceptable evidence of fair market value except for the Appellant's purchases and one sale in 1987.

[10] Both planes are two seater Piper fabric covered models. CF-ZIM was manufactured in 1948. CF-VWW was manufactured in 1947. Mr. Prime testified that any market for them was for antique aircraft. When he and his wife wanted to entertain other couples with flying, they rented a four-seater aircraft. Thus, the use of and market for these planes is restricted.

[11] The pertinent names and fiscal periods of Mr. Prime's personally owned auto repair businesses are as follows:

1991 Prime's Auto Repairs

March 31, 1991

1992 Prime's Auto Repairs

March 31, 1992

Prime's Auto Repairs

April 1, 1992 to December 31, 1992

1993 Prime's Transmissions

February 28, 1993 (See Exhibit AR-60)

(See Exhibit AR-65)

Mr. Prime also was assessed so as to include undeclared income from log sales in 1993.

[12] The first hand written record identifying an aircraft or aircraft related item that appears in Mr. Prime's business records is a journal entry by his accountant, Mr. Surette. It occurred in "Prime Transmission & Parts Journal Entries, February 28, 1993" on a sheet dated January 25, 1994. It reads:

² Airplane

Personal $18,017.00

To set up airplane

inventory for resale $18,017.00

(Exhibit AR-55, page 2)

This appears to refer to the CF-VWW.

[13] Mr. Prime's first income tax return which refers to an airplane is his 1991 return which he signed April 30, 1992. "Prime's Auto" statement of assets at March 31, 1991 shows:

1991 1990

Airplane $20,252 $22,270

(Exhibit AR-50)

Prime's Auto March 31, 1990 Statement of Assets (Exhibit AR-28) does not make any reference to any airplane.

[14] CF-ZIM crashed on Labour Day weekend in September, 1991, before Prime's Auto Repairs' March 31, 1992 fiscal year-end. Prime's Auto Repairs had two fiscal year ends during Mr. Prime's 1992 calendar taxation year. Its March 31, 1992 statement of assets showed:

1992 1991

Airplane $18,017 $41,017

Thus, none of these asset statements relating to "Airplane" corresponds with the previous year's statement.

[15] Similarly, Mr. Prime stated that he purchased both CF-ZIM and CF-VWW for repair and resale at a profit. But he did not provide dated copies of any advertisements for their sales that he placed for any of the years to and including 1993. He also testified that he used word of mouth to try and sell the aircraft and that he went to fly-ins for the purpose of selling CF-ZIM. Mr. and Mrs. Prime testified about three of these fly-ins, including the one at Stanley. Mr. Prime testified that he had a "For Sale" sign on CF-ZIM when it was moored at the lake three miles from the Stanley Fly-in, that he and his wife camped at the fly-in and showed the plane to two or three people at Stanley.

[16] CF-ZIM's log book was in the plane when it went down. It was recovered, but it is not in evidence. Copies of CF-VWW's log book are in Exhibit AR-15. These sheets begin with 1,256.1 hours when Mr. Prime purchased it at Calgary on November 2, 1990 and conclude with 1,346.5 hours on January 8, 1995. Mr. Prime did not particularize any of the logged flights as being sales demonstrations. Aside from minor test flights after repairs, the remaining flights were for personal enjoyment despite an unusual annotation to the contrary that he appears to have entered into the log book. Mr. Prime referred to unacceptable offers to him to buy the wreckage of CF-ZIM from Mr. Gray; Eddie Peck, a dealer with a business at Digby, and a third person in the industry. He never identified any other person with whom he dealt respecting either plane.

[17] Mr. Prime suggested in his testimony that he was just starting his airplane business and that his plan was to fix up or enhance 1940's Piper aircraft and sell them. He expected to profit from that. He is a licensed gasoline engine mechanic and became a licensed flyer in the late 1980's although his actual flying license was not described. He still has to pay others to supervise and certify his aircraft work. Since his purchase of CF-ZIM in 1990, he has not shown a profit or sold a plane. Although he successfully operates a car repair business, he has not repaired or sold the wreckage of CF-ZIM since it crashed in 1991. The corroborating evidence of attempts to sell CF-VWW consists of a few advertisements commencing in 1994. The evidence of any reference to the aircraft in Mr. Prime's business records clearly commences after the 1991 crash of CF-ZIM. The Court finds that this consisted of back-dating from April 30, 1992 when Mr. Prime signed his income tax return for 1991 and includes a "Prime's Auto" asset statement which referred to an airplane in 1990. It is an obvious after the fact attempt to deduct the CF-ZIM crash loss from income.

[18] This finding is supported by the Appellant's admission that many of the expenses claimed for the business during the years in question were in fact personal. Similarly, the audit brought out his logging income. Mr. Prime never showed the purchase of CF-ZIM or CF-VWW on his financial statements at the time of their purchases. The parts that he purchased for them were expensed in Prime's Auto and deducted without identification that they were for aircraft.

[19] There is no evidence respecting the time Mr. Prime spent on the aircraft as distinct from his automotive or other business. His counsel argued that the "catastrophic" loss of CF-ZIM in the 1991 crash set the alleged aircraft business back. But the Royal Bank of Canada did not call any loans. Most important of all, the crash does not explain why Mr. Prime has not sold or obtained any income from CF-VWW from 1991 until 1999. The crash did not set back the possible sale of CF-VWW, with or without floats.

[20] The leading case on the hobby or business question is Enno Tonn et al v. The Queen (F.C.A.) 96 DTC 6001. Based on the criteria set out therein, commencing at page 6013, this aircraft operation started out as a hobby and never became commercial in any of the years under appeal. It was small and unorganized. It never made money and, more important, there is no satisfactory evidence that during the years in question Mr. Prime tried to make money from the aircraft. Because of the lack of corroborating evidence and the clear and repeated evidence of back dating and deduction of personal items as business expenses, Mr. Prime's testimony without written dated corroboration is not accepted or believed respecting his claims. There is no estimate of a time period required to make the alleged aircraft business profitable, but as of January 1999 there is no evidence of a sale or a profit. Nor is there any evidence of a possible income stream from the aircraft outside of a sale.

[21] The Court does not find that Mr. Prime ever had a reasonable expectation of profit from the aircraft enterprise because he is not a credible witness and there is no acceptable evidence that he ever was in, or intended to go into, the aircraft business. There is no acceptable evidence that either CF-ZIM or CF-VWW could be sold at a profit with or without their hidden expenses being calculated, or of the market price that either could obtain.

[22] On this basis the Court finds that the Appellant was not in the alleged business. The assessments are confirmed.

[23] The appeals are dismissed.

[24] The Respondent is awarded its party and party costs.

Signed at Saskatoon, Saskatchewan this 3^rd day of February 1999.

"D.W. Beaubier"

J.T.C.C.