Judith Collins and David Collins v. Minister of National Revenue, [1993] 2 CTC 2181

Taylor, J. (orally):—These are appeals heard on common evidence from David Collins and Judith Collins with respect to the taxation years 1983 through 1986. The point is that during those years, as partners in a business called Princess Yachts, they filed in their tax returns losses. The Minister's reply starts in 1982. And even though 1982 is not in issue, I will read from the Minister’s reply to indicate the amounts at issue. These are filed by each of the partners.

There seems to me to be little purpose in reviewing the evidence. I would suggest that, as a matter of record, if any additional information is required by either party in addition to the comments I intend to make, that I will rely to whatever degree necessary on the notice of appeal and notice of objection filed by the appellant and in particular the reply to notice of appeal filed by the Minister. The reply to notice of appeal has been dealt with by the Minister in considerable detail and has been used as a basis for his questioning of his own witnesses and other witnesses by counsel for the appellants. The comment made by Mr. Bruce, the counsel for the appellants, in his argument I believe is significant to what I have to say and to my view of this appeal. Mr. Bruce started his comments by in a sense going back to the year 1980 and bringing things up through this period of time. That is because, as I understand the testimony, the Original interest of the two parties went back to about the year 1980 and it was in the subsequent year, 1981, that they became quite actively involved and interested in determining whether or not there might be a marketability and business venture suitable in the rather expensive yacht class to Newfoundland. Both parties had been involved in a marine-related business, obviously a successful one from the other information in their tax returns, but they did not show, in my opinion, any interest on a personal basis going back to those years in the yachting business as such. In my view, their lack of involvement with the yachting business, including the fact that they seemed to be virtually disassociated from it, is a positive factor in their favour. They are business people, in my estimation, and looked at the prospects here primarily from a business viewpoint.

I am not naive enough to think that people acquiring a yacht of this dimension when they live by the seaside might also not consider that there might be some pleasurable times involved with their use of it. That does not enter into this at all. There is no evidence, in my view, to support a conclusion that the interest of Mr. and Mrs. Collins going back to 1980 was one which was based on their personal desire to have an expensive yacht in Newfoundland. Having said that, there was a great deal of discussion, and quite properly so, between counsel with respect to the fact that deciding to do this, they didn't make projections or make market studies in the classic form of the word. In my view, neither was that necessary at that point in time, nor would it have been practical to do so. I take a great deal from a comment made by Mr. Donaldson who was their main supplier, their main dealer, in the sense that the Collinses became subdealers to Mr. Donaldson out of Toronto. He said, "The only way to sell yachts"—I'm paraphrasing him—‘ Was to test the market by having a yacht in the water.” I take it that that’s what the Collinses set out to do. The history of the year 1981 is a little bit mixed up because they purchased a yacht which was never delivered here because in the end analysis it was sold to the Coast Guard. The details of that are something less than totally clear to me and I haven't reached the conclusion that they have anything fundamental to do with this case. They then proceeded to purchase a 35-foot yacht from Oceania which they eventually named the Sea Princess.” Now, that was in the class of expensive yachts. In my view, they were sufficiently astute business people to know that this was not something you were going to sell out of a corner grocery store, that you might sell one yacht, two yachts, three yachts over a period of time, hopefully in a short period of time. Their expectations were buoyed at that point in ’80, '81, perhaps in '82, by a general feeling that the economy of Newfoundland was going to pick up. I think they were also aware of the boating establishment generally. I think that there were indications that this might be a useful and profitable business. Very clearly there was a limited profit margin available to them. They were getting a 10 per cent discount from the list price of Oceania Boats from the Toronto dealer, so therefore that was the margin of profit within which they had to work. Both Mr. and Mrs. Collins are not impoverished.

I know nothing about their total financial situation, but I’m satisfied from a review of their income tax returns available to me that they were in a position that they could afford to do just that, to test the market with a yacht, with the 35-foot"Princess" and to do so with, in their view, a reasonable risk. Because reasonable risk must go along with reasonable expectation of profit. They recognized they were in a high dollar market, a certain high risk attached to that, and that that was not going to be something to be turned around immediately.

I have listened carefully to the testimony and the evidence, and the major factor which comes out of it is that the “Sea Princess" purchased in 1982 was eventually sold in 1984. This was sold after considerable effort on the part of both parties, as I understand it, to either sell the yacht at its full list price or close to it or sell other yachts, that is, get orders for other yachts, based on the availability and the visibility of the “Sea Princess.” I was also impressed by the fact that, as well as the parties could recall, there had been about 50 machine hours on this yacht. That isn't a great deal. It does not, in my view, demonstrate a great passion for simply deep sea sailing with a beautiful yacht. So I'm satisfied that at the outset of this venture the Collinses could see, and based on their business assessment of it, their discussions with Mr. Donaldson from Toronto, their knowledge of the marine industry in the area and their belief, a reasonably well-founded belief, that there would be a market for some lengthy period of time, because of what was regarded then as a rather buoyant and hopeful economy, for rather expensive yachts.

One might say in retrospect that their expectations were a little bit high. But that’s easy enough. We don't have 20/20 hindsight when we're getting into a thing like this. So at the outset of this venture, I am perfectly satisfied that the Collinses are entitled to say that they were embarking on something which they felt could produce a business and a viable business. Mrs. Collins indicated in her testimony that they had been in their other business for seven or eight years, that it had been very successful and they were rather looking around to see what else they might expand into or get into. Perhaps even the thoughts went through their minds of changing their lines entirely. I don't know. But that was a reasonable prospect at that point in time.

Now, I reach the point that, having sold the "Sea Princess" in 1984, in my opinion, after selling the "Sea Princess" or when that became the only viable option, that the business of Princess Yachts Sales and Service can no longer be said to have been one that demonstrated a reasonable expectation of profit. The years under appeal show that there was a total loss—I've given the individual amounts before—in 1982 of $20,656—that's the year before appeal— the next year, $25,656, and in 1984, the year of the only sale of anything approaching the kind of merchandise that they were going to be engaged in, produced a loss of $68,974. In my view, after the experience and knowledge they had pained early in the game in 1980 and ‘81, after visiting a sufficient number of shows and then purchasing the yacht for testing the market, going through 1982 without results, going through 1983 without results, the conclusion has to be reached that it was at that point in time that serious consideration had to be given to them. To use Mr. Collins’ own expression,"there comes a time to cut your losses".

I have no doubt whatsoever that for the years 1985 and 1986 this was no longer a business related in any way to the sale of high-class expensive Oceania yachts. Whatever other business it may have been or whether it was a business at all is not mine to decide and I'm not interested in that. Those years are certainly dismissed.

I have debated over the last several hours in my mind whether the matter deserved consideration on the part of the Collinses up until the sale of the yacht “Sea Princess” in September of 1984, which would, for all intents and purposes, take into account the allowance of the loss for that entire year. In my opinion, that would be inappropriate. The experience they had from 1983—it's clear and evident on their statement of income, interest and bank charges, insurance, all the factors which go into the cost of keeping this yacht afloat, keeping it going. I have to take into consideration that from September 1983 on there was virtually no possibility of selling the “Sea Princess" over the wintertime. I appreciate they had to keep it and that entailed certain carrying costs and certain insurance. I have no idea at what point after the start of the sailing season in 1984 the Collinses should have done what prudence would have dictated, that is, wind this matter up, but it certainly was long before the end of the sailing season. So I am doing something that I do very rarely. I have decided that, in the end analysis, the year 1983 will be allowed to Judith and David Collins as filed, and one-half of the year 1984 loss will be allowed to the Collinses on the basis that it was originally a total of $68,974. So one-half of that. The years 1985 and 1986 will be dismissed.

I only have one other comment to make. The matter of costs. Unless there is something which you two come up with and submit to the Court which would be more appropriate, it will also be included in my judgment that the appellants are entitled to party-and-party costs on the basis of 50 per cent of the normal party-and-party costs. Now, that is the end of the matter. The appeal therefore is allowed in part as I have indicated, so that 1983 will be allowed, 1984 on the basis of 50 per cent of the loss and 1985 and 1986 are dismissed. And I might add that even though I appreciate Mr. Mercer's work and everything else, I did not need obviously to take into account in any way, shape or form the years which extended beyond 1986.

Appeal allowed in part.