Donald G. Mackay and Keith F. Eaman v. Minister of National Revenue, [1990] 1 CTC 2036, 89 DTC 515

St. Onge, T.C.J.:—The appeals of Donald G. MacKay and Keith Eaman were heard on common evidence on May 26, 1989, in the City of Ottawa, Ontario, and the issue is whether the appellants are allowed to deduct capital cost allowance in connection with a yacht in their 1982, 1983 and 1984 taxation years. In reassessing the appellants, the respondent said:

3. In reassessing the Appellant for the 1982, 1983 and 1984 taxation years, the Respondent disallowed deductions for capital cost allowance in connection with the yacht in the amounts of $21,120.46, $17,465.96 and $19,253.09 respectively.

4. In reassessing the Appellant as described in paragraph 3, the Respondent assumed, among others, the following facts:

(a) On 24 September 1981, the Appellant and Keith F. Eaman ("Eaman") agreed to purchase a fibreglass Whitby 42 luxury yacht (the "yacht") from Continental Yacht Sales Limited for $119,215.00.

(b) In November 1981, the Appellant and Eaman entered into a written agreement to form the MacKay-Eaman Partnership (the "Partnership") for the purpose of purchasing, owning and operating the yacht.

(c) The yacht is the Golden Gael II, official number 802144. It was constructed in Canada, had not been used for any purpose whatever before it was acquired by the Partnership, and is registered in Canada in the Port of Ottawa. It is a certified vessel as defined in s. 1101(2a) of the Income Tax Regulations.

(d) In November 1981, the Partnership and Arnold Vandenbelt Jr. ("Vandenbelt"), who is the Appellant's father-in-law, entered into a written agreement under which Vandenbelt agreed to lend the Partnership $50,000 until 1 May 1987 for the purpose of purchasing the yacht.

(e) At all material times, the Partnership and Vandenbelt were not dealing with each other at arm's length.

(f) Under the agreement referred to in paragraph 4(d), the Partnership agreed to pay Vandenbelt annual instalments of interest in the following amounts on the following dates:

Date	Amount Amount
1 May 1983	$7 ,000
1 May 1984	7,000
1 May 1985	7 ,000
1 May 1986	8,000
1 May 1987	9,000

(g) Under the agreement referred to in paragraph 4(d), Vandenbelt agreed to enter into an agreement with the Partnership for the purpose of chartering the yacht.

(h) On 1 May 1982, the Partnership as owner and Vandenbelt as charterer entered into an agreement which provided for a charter party by demise of the yacht from 1 May 1982 to 30 April 1987.

(i) Under the agreement referred to in paragraph 4(h), the Partnership leased the yacht to Vandenbelt under a bare-boat charter, and not an all-inclusive charter.

(j) At no time during the 1982 to 1984 taxation years did the Partnership carry on a yacht charter business.

(k) Under the agreement referred to in paragraph 4(h), Vandenbelt had the obligation to man, victual, navigate, manage and operate the yacht at his own expense. He also had the obligation to: engage, employ and pay the master, officers and crew; keep the yacht in good running order and maintain it in good mechanical and cosmetic condition; pay all port charges, tolls pilotages and other costs; keep in force at his expense insurance acceptable to the Partnership; and indemnify the Partnership against any liens, claims and uninsured losses.

(l) Under the agreement referred to in paragraph 4(h), Vandenbelt had the full use of the yacht for the purpose of a pleasure craft, except for a period of three weeks each year when the Partnership was entitled to its full use.

(m) Under the agreement referred to in paragraph 4(h), the yacht's home port is Nassau Harbour, Bahamas.

(n) At all material times, the yacht was in the Caribbean, and not in Canada.

(o) Under the agreement referred to in paragraph 4(h), Vandenbelt agreed to pay the Partnership the following amounts as monthly charter hire on the first day of each month:

Period	Monthly Amount
May 1982 to April 1983	$1,000.00
May 1983 to April 1984	1,083.33
May 1984 to April 1985	1,166.66
May 1985 to April 1986	1,250.00
May 1986 to April 1987	1,333.33

(p) Under the agreement referred to in paragraph 4(d), Vandenbelt and the Partnership agreed that if the charter hire referred to in paragraph 4(o) was in default, it could be offset against both the principal referred to in paragraph 4(d) and the interest referred to in paragraph 4(f).

(q) At all times during the 1982 to 1984 taxation years, the yacht was owned by the Partnership and was used by the Partnership principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. It was a leasing property as defined in s. 1100(17) of the Income Tax Regulations.

(r) During the 1982 to 1984 taxation years, the Partnership reported the following amounts as rental income, expenses and losses from the bare-boat charter of the yacht to Vandenbelt:

	1982	1983	1984 1984
Rental Income	$ 7,000.00	$12,583.31	$13,583.27
Expenses
C.C.A.	$42,240.92	$42,240.92	$42,240.92
Interest	7,323.62	5,274.31	3,584.56
Insurance	368.00
Legal	68.30
Miscellaneous	40.12
Operating			6,263.96
Total
Expenses	$50,040.96	$47,515.23	$52,089.44
Loss	$43,040.96	$34,931.91	$38,506.17

(s) The Partnership's rental income from the bare-boat charter of the yacht to Vandenbelt, calculated without deducting capital cost allowance, was the following

Year	Yacht Rental Income
1982	$ 800.04
1983	7,309.01
1984	3,734.75

(t) The capital cost allowance on the yacht available to the Partnership, calculated in accordance with s. 1100(15) of the Income Tax Regulations, was the following:

Year	C.C.A. On Yacht
1982	nil
1983	$7,309.01
1984	3,734.75

(u) The capital cost allowance on the yacht disallowed to the Partnership was the following:

Year	C.C.A. Disallowed
1982	$42,240.92
1983	$34,931.91
1984	$38,506.17

(v) The capital cost allowance on the yacht disallowed to the Appellant was the following:

Year	C.C.A. Disallowed
1982	$21,120.46
1983	17,465.96
1984	19,253.08

(w) On 31 May 1982, the Partnership as owner and Vandenbelt (purporting to carry on business under the name A & A Yacht Chartering) as agent entered an agreement which purported to appoint Vandenbelt as the Partnership's managing rental agent for the yacht from 1 June 1982 to 1 June 1987.

(x) Under the agreement referred to in paragraph 4(w), the Partnership assumed none of the risk involved with the operation of the yacht, nor was it entitled to share in any of the revenue generated by the yacht.

(y) Under the agreement referred to in paragraph 4(w), Vandenbelt had no obligation to account to the Partnership for any revenue earned by the yacht, and his sole monetary obligation towards the Partnership was to pay the same flat monthly fee referred to in paragraph 4(o).

(z) Under the agreement referred to in paragraph 4(w), Vandenbelt had the obligation to: provide the crew, equipment, provisions and other services necessary to operate the yacht; pay all running and maintenance expenses; keep the yacht in a good state of repair, clean and seaworthy; provide winter storage and summer docking; and provide insurance.

(aa) From 1982 to 1985, the yacht was used personally by Vandenbelt at least 60 percent of the time.

(bb) From 1982 to 1985, Vandenbelt (under the name A & A Yacht Chartering) chartered the yacht to third parties under all inclusive charters. The total amount of time during which the yacht was so chartered did not exceed two or three weeks per year.

(cc) The chartering referred to in paragraph 4(bb) was conducted by Vandenbelt on his own behalf, and not as agent for the Partnership.

(dd) The chartering referred to in paragraph 4(bb) earned low gross revenue and involved high expenses, and at No time did Vañdenbelt have a reasonable expectation of profit.

(ee) During the years ending 31 May 1983 to 1985, Vandenbelt (under the name A & A Yacht Chartering) declared the following amounts as gross revenue and net operating loss from the chartéring referred to in paragraph 4(bb):

Year	Gross Revenue	Net operating Loss
1983	$2,250.00	$3 550.00
1984	1,500.00	5,735.00
1985	1,430.00	6,062.00

(ff) During the years ending 31 May 1983 to 1985, Vandenbelt (under the name A & A Yacht Chartering) claimed as expenses the flat monthly fee paid to the Partnership plus all operating expenses. He reported a business loss in all years.

At the hearing the appellants admitted paragraph 3 and subparagraphs 4(a) to (d), subparagraphs 4(f), (g), (k), (I) and (n), the figures of subparagraph (o), subparagraph (p), and subparagraphs (r) to (z). The other subparagraphs are denied. Mr. MacKay was the only witness heard. He explained that, with his friend Mr. Eaman, he decided to go into the business of chartering a boat. His father-in-law was in Florida where he had a boat to live on.

The appellants purchased a new boat which was constructed in Canada for the price of $119,215 and everything was done in order to get a capital cost allowance.

The partnership was to operate the boat in Florida where his father-in-law, a very competent sailor, was to be the manager. He was willing to give up his own boat as long as he could get some income from the partnership.

As already admitted in the proceedings, some $50,000 was borrowed from the father-in-law and the appellants explained that this loan had two advantages; one, to get the father-in-law involved in the venture; two, to obtain a loan at a better interest rate.

According to the partnership agreement with Mr. Vandenbelt filed as Exhibit A-1, Tab 14, the partnership was the owner of the boat and Mr. Vandenbelt was to be paid a flat fee for his work.

The agreement is as follows:

THIS AGREEMENT made the 31 day of May, 1982

BETWEEN:	MACKAY-EAMAN PARTNERSHIP
	hereinafter called the "OWNER"
	—and —
	ARNOLD VANDENBELT
	carrying on business under the
	name A & A YACHT CHARTERING
	hereinafter called the "AGENT"

WHEREAS the owner is the owner of a Whitby 42 being described as a 42' fibreglass ketch and hereinafter referred to as "yacht" (Golden Gael II, official #ON802144).

AND WHEREAS the agent carries on the business of renting the yacht, as an “all inclusive charter".

AND WHEREAS the Owner desired to have the Agent manage the rental of the yacht and the Agent has agreed to accept such appointment as agent of the Owner;

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and in pursuance of the agreements herein contained and other valuable consideration, the Owner hereby appoints the Agent and the Agent hereby accepts such appointment as managing rental agent for the owner of the yacht on the terms and conditions herein set forth:

TERM

1. The term of this Agreement shall extend from the 1st day of June 1982, to the 1st day of June 1987.

NOTE: This agreement supersedes all previous agreements and drafts between the above parties and is considered the final agreement.

DUTIES OF THE AGENT

2. The agent agrees to manage the rental of the yacht on behalf of the owner during the term of this Agreement in a faithful, diligent and honest manner and in particular agrees:

a. To rent the yacht at fair market rental charges as established by the Agent from time to time;

b. To pay all running expenses and maintenance expenses during the period of this Agreement except charges and additions made at owners request;

c. To advertise the availability of the yacht for rent in a reasonable fashion;

d. To maintain the yacht in a good state of repair, clean and seaworthy; ordinary wear and tear excepted;

e. To promptly attend to and complete as expeditiously as possible and at its cost, the repair of any damage or mechanical defect to the yacht, whether during a rental period or otherwise;

f. To collect all rents and other charges payable by lessees pursuant to nay [sic] lease for the yacht;

g. To provide winter storage and/or summer docking for the yacht during the term hereof;

h. Generally to do and perform and where desirable contract for all things desirable or necessary for the proper and efficient management of the yacht and to perform any other act whatsoever to carry out the intent of this Agreement;

i. Included shall be all running rigging, sails and tackle, dingy, outboard, bimini top, navigation and piloting equipment for the Bahama Islands, linens, blankets, pillows, snorkelling equipment suitable for a party of 4 for a charter of 2 weeks;

OWNERS REMUNERATION

3. The Agent agrees to pay the Owner a flat monthly fee as per paragraph “7” a, b, c, d, e, of the loan agreement dated November 1981, between Arnold Vandenbelt Jr. and the MacKay-Eaman Partnership.

OWNER'S USE

4. Subject to the terms of paragraph 3 of this Agreement, the Owner shall be entitled to the use of the yacht for the Owner's own purposes for a maximum of three rental weeks during a rental season, on the condition that the Owner notifies the Agent in writing of the specific weeks of such intended use on or before the 1st day of January, preceding the rental season.

RECORDS AND REPORTS

5. The Agent shall keep and retain a full and proper ships logs with all transactions fully recorded.

INSURANCE

6. The Agent agrees that on behalf of the Owner it shall arrange and maintain at its cost, comprehensive liability insurance on the yacht to a limit of not less than ONE MILLION DOLLARS ($1,000,000.00) inclusive and the Owner agrees that the Agent shall be named as an insured party along with the Owner in any such policy or policies which shall provide protection against any claims for personal injury, death or property damage or loss for which either the Owner or the Agent might be held liable as a result of their respective obligations as Owner and Agent. In addition, the Agent shall arrange and maintain at its cost and on behalf of the Owner, standard marine insurance coverage protecting against all perils to the yacht to the extent of its full replacement value; a minimum of $135,000.00 (U.S. funds).

TERMINATION

7. In the event of total loss of the yacht through no fault of the Owner, this Agreement shall terminate forthwith and the Agent shall immediately assist the Owner in processing a claim to the appropriate insurer for the Owner's compensation.

NOTICES

8. Any notices required to be given by either party to the other shall be sufficiently given if delivered, or mailed by prepaid registered post addressed to the Owner at P.O. Box 2116, R.R. #2, Cumberland, Ontario, KOA 150, and the Agent at P.O. Box 1685, Jensen Beach, Florida, 33457-1685.

In order to show what was done to get clients, an application form and a business card were filed as exhibits.

The appellant also explained that Mr. Vandenbelt and himself knew a lot of people in Canada and the United States that were interested in renting a boat in Florida. Exhibits A-4 and A-5 were filed to show the following income of the partnership:

Under cross-examination the appellant admits that the father-in-law, Mr. Vandenbelt, had complete control of the boat, was under no obligation to rent the boat for five years, and had only to pay $1000 a month for it.

Counsel for the appellants argued that the appeals should be allowed because the operation of the yacht owned by the appellants and chartered by their agent should be considered as a business venture rather than a leasing property and that the capital cost allowance deductions should be granted under subsection 1100(17) instead of being limited by subsection 1100(15) of the Income Tax Regulations.

He referred the Court to Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310, to say that all the facts should be taken into consideration to decide whether there is a reasonable expectation of profit.

According to him, the Court must take into consideration:

(1) the existence of a partnership;

(2) the purpose of the said partnership was to operate a boat;

(3) 3 the tax ruling;

(4) the certificate of registration;

(5) an experienced sailor as agent;

(6) 6) real negotiations between appellants and Vandenbelt; and

(7) the fact that they did advertise.

On the other hand, counsel for respondent argued that the appellants leased the boat in order to get a deduction for depreciation over a period of three years and that they never did operate a real business. The boat was leased to the father-in-law for his own personal business and all the appellants got was $1,000 a month.

He also argued that Mr. Vandenbelt had all the risk of operating the boat and was not even heard as a witness to deny subparagraph 4(aa) to 4(ff) of the reply of the notice of appeal; that it is a clear case of an attempt to work around subsection 1100(17) of the Income Tax Regulations.

The Court is not satisfied with the evidence adduced by the appellants and is far from convinced that the appellants did operate a business with a reasonable expectation of profit.

Exhibit A-1, Tab 14, shows that Mr. Vandenbelt had complete control of the situation, did not have to split any profit with the owners of the boat, and his only obligation in that respect was to pay $1,000 a month.

This is sufficient to show that the yacht was a leasing property and there was no hope for the appellants to operate a business with a reasonable expectation of profit for the years under appeal.

Furthermore, the numerous figures mentioned in the reply to notice of appeal and admitted by the appellants indicate that the appellants leased the yacht in order to get the maximum deduction for depreciation over a period of three years.

As to the facts mentioned by counsel for the appellants, none of them show that the appellants did operate a business with a reasonable expectation of profit. Mr. Vandenbelt did not even testify and the Court considered that none of the respondent's allegations have been denied.

The onus was on the appellants to show that the Minister’s reassessments were wrong in fact and in law and they failed to do so.

Consequently, the appeals are dismissed.

Appeals dismissed.