James E Dale v. Minister of National Revenue, [1981] CTC 2320, 81 DTC 278

The Chairman:—The appeal of James E Dale is from tax assessments by which the Minister of National Revenue disallowed capital cost allowance of $39,381 and $36,170 on vintage automobiles purchased by the appellant and deducted the said amounts from losses claimed by the appellant in the 1976 and 1977 taxation years respectively.

Issue:

The principal issue in this appeal is summarized in paragraphs 4(h)(i) and (j) of the Minister’s reply and is whether the appellant was in the business of renting vintage automobiles in the pertinent taxation years and whether he had a reasonable expectation of profit from such a business.

The appellant submitted that the vintage automobiles were acquired and restored for the purpose of gaining and producing income from their rental and that the amounts so expended constitute a capital cost to him of property of Class 10 of Schedule B(lI) to the Regulations and that capital cost allowance was included in computing his business loss in 1976 and 1977 pursuant to subsection 9(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended and that the business loss was properly deducted by the appellant in computing his income from all sources in each of the said years by virtue of section 3 of the Act.

Summary of Facts

The appellant, a composer, arranger and orchestra conductor, exercised his profession in Canada and the United States since 1956 for which he received substantial remuneration. His work brought him into contact principally with people in the entertainment field. Among the appellant’s fields of interest other than music, his evidence is that he has from his youth always been interested in cars.

While working in Los Angeles, he came upon a company called “Cars of the Stars”, whose business was to acquire and restore vintage cars for display and for rentals to movie producers, TV commercials, parades, etc. It is alleged that Cars for Stars is the only company of its kind in the United States. The appellant stated that he felt that a similar operation might be feasible in Toronto, the centre of Canada’s TV commercial productions.

In 1971 the appellant purchased a 1952 Allard and a 1957 Jaguar XKSS, both of which he brought with him on his return to Canada in 1972 (Exhibit A-1). From 1972 the appellant continued to buy vintage cars, and although he sold some, he had 22 vintage automobiles in 1980 (Exhibit A-2). The appellant’s business is alleged to have begun sometime in 1973 at the end of which 7 vintage automobiles had been acquired. In 1975 a document was filed by the appellant under The Partnership Registration Act under the name of “Toronto Automobile Museum” (Exhibit A-3) which enterprise was incorporated in 1978.

Although a rental agreement form under the letterhead of Toronto Automobile Museum was printed (Exhibit A-4) and some inquiries in writing in respect of the appellant’s vintage cars (Exhibits A-6, A-7 and A-8), it is admitted by the appellant that relatively few rentals of vintage automobiles were made not only in 1976 and 1977 but from 1973 to 1980 (Exhibits A-5 and A-11).

Notwithstanding the respondent’s assumptions in paragraphs 4(h), (i) and (j) of his reply: that the appellant was not in the business of renting vintage automobiles and that he had no reasonable expectation of profit from that business, he nevertheless allowed in his assessment of the appellant’s income tax other related business expenses such as office rental, salaries and garage equipment. The Board must therefore accept that the appellant was in some form of business activity which the respondent suggests could be the purchase and sale of vintage automobiles.

The appellant’s evidence and his arguments were aimed at destroying the respondent’s specific assumptions by establishing that the appellant was in the business of renting vintage automboiles in 1976 and 1977 and had a reasonable expectation of profit.

Considerable evidence was called to trace the appellant’s interest in vintage cars and the purpose for which 22 automobiles were acquired since 1970.

The appellant’s evidence was that the market for vintage car rentals was virtually the same as that of music arrangements, ie in the entertainment field. The appellant also alleged that it was known in the circles in which he worked that he had vintage cars for rent and that it was not necessary to advertise. Pointing out the long delays involved in the acquisition and/or the reproduction of many parts necessary in the authentic restoration of vintage automobiles, the appellant had anticipated that some years would elapse before some of the cars could be operational and income realized from their rental. He suggested that the rental operations could in time generate income of over $100,000 a year but did not offer any substantiation of his estimate. The appellant admitted not having made any inquiry as to the profitability or indeed viability of the “Cars of the Stars”, the operations on which Toronto Automobile Museum is alleged to have been modelled.

Although the amount of income from rentals in the pertinent taxation years cannot by itself determine the issue, it does have a most important bearing on whether the appellant was in the rental business and whether a profit could reasonably be expected from the operations.

The uncontradicted evidence is that no rental income was received by the appellant in 1976 and $3,000 was received from the rental of one automobile in 1977. However, in those two taxation years the appellant received $5,700 from the sale of vintage automobiles.

In cases such as the present one, I do not feel it possible or indeed fair to attempt to determine with any accuracy the nature of the appellant’s business on the basis of income earned in the period of two years. The operations over a longer period of time must be examined.

Although the appellant had the opportunity to do so, he did not succeed in convincing the Board that the respondent’s figure of a total of only some $6,000 from rental of vintage automobiles in the years 1973 to 1977 inclusively was manifestly wrong. The appellant did not deny that the sale of vintage automobiles in that same period was roughly $23,000. it is also uncontradicted evidence that the appellant claimed $150,627.72 as capital cost allowance in respect of vintage automobiles from 1973 to 1977 inclusively.

I can accept the appellant’s explanation that some of the automobiles purchased did not turn out to be what he expected or wanted and he sold them. I can also appreciate that it would take considerable time to find or manufacture parts to repair or rebuild vintage automobiles. I cannot however understand how the appellant can claim to be in the business of renting vintage automobiles and reasonably expect to earn a profit from it in the manner he ran his operations.

The appellant testified that he did not advertise his business in any way, but relied exclusively on acquaintances in the entertainment and advertising fields who are alleged to know that the appellant was in the vintage automobile rental business. The appellant made no personal effort to promote his rental business either in or outside his professional circle. One of the first vintage automobiles was operational and could possibly have been rented as early as 1973, had the appellant advertised it.

I cannot imagine how anyone could reasonably expect to make a profit operating a vintage automobile rental business as did the appellant in the 1976 and 1977 taxation years or indeed subsequently. On the basis of the evidence, I must conclude that for whatever reason the appellant purchased the vintage automobiles, he was not really engaged in the business of renting vintage automobiles in 1976 and 1977, and could not reasonably expect to make a profit from the rental of those cars in the manner he carried out those transactions in the pertinent taxation years.

The appeal is therefore dismissed.

Appeal dismissed.