8 September 1980 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

To- VANCOUVER DISTRICT OFFICE

FROM HEAD OFFICE Corporate Rulings Directorate D.S. Delorey 995-1723

ATTENTION S.M. McKenzie, Chief of Audit

RE: Paragraph 18(1)(l) IT-148R

This is in reply to a memorandum from your J.C. Fitz-Clarke in which he describes the following situation: XXXX but feel that the reference to tugboat in paragraph 4 of IT-148R

counters your proposal. With respect to the wording of this paragraph 4, you ask

(a) why this type of vessel design was excluded, and

(b) was paragraph 18(1)(1) enacted to disallow a situation as described above or was it enacted to stop "personal use" type situations only.

Because paragraph 18(1)(1) simply refers to a yacht, without mentioning anything about the use to which it is put, references to the dictionary meaning of "yacht" led us to the conclusion that, if a vessel was designed primarily for pleasure, it could be considered a "yacht" for purposes of paragraph 18(1)(1) and all expenses related thereto would be disallowed pursuant to that paragraph, regardless of the use to which it was put. The converse to this view was that if a vessel (such as a tugboat) was not designed, or substantially modified, primarily for use as a pleasure craft, it would not meet the definition of a "yacht" for purposes of 18(1)(1).

However, because of the decision rendered by the Tax Review Board (79 DTC 592) in the John Barnard Photographers Ltd. case, we have reconsidered the position taken in IT-148R .

After receiving the Barnard judgement, we consulted with the Department of Finance to determine if the judgement was contrary to the intent of the legislation, given that the Board member had reached his conclusion based on the use to which the craft was put, rather than its design, etc. From a policy point of view, Finance agreed with the Board's decision on the basis that paragraph 18(1)(1) had as its intention the disallowance of expenses related to a yacht used for the entertainment or recreation of clients, suppliers, shareholders, or employees, regardless of the fact that the taxpayer might have an argument that such use represented a legitimate business expense. It was not the intention to disallow expenses related to a yacht that was used for other business purposes.

Based on Finance's comments, it was decided not to appeal the Barnard case and to adopt the position that if a yacht is used for genuine business purposes, and those purposes do not include the entertainment or recreation of clients, suppliers, shareholders, or employees, the expenses of maintaining the yacht (including c.c.a.) will not be disallowed pursuant to 18(1)(1) and Regulation 1102(1)(f). We understand that IT-148R is to be revised accordingly.

Given the above background, it is our view that in the converse situation we should take the view that 18(1)(1) and Regulation 1102(l)(f) (if the boat is acquired after December 31, 1974) are applicable. In other words, if a tugboat's sole use is limited to the entertainment or recreation of clients, suppliers, shareholders, or employees, that tugboat can be said to be a yacht for purposes of paragraph 18(1)(1).

Granted the matter is not free from doubt, but we feel that such a stand is necessary to avoid giving the taxpayers the best of both worlds. We therefore support your proposed reassessment.

While it would not affect our position, you might wish to determine if the tugboat was modified to any extent for the use to which it is now put. If it was, such a fact would weigh heavily in our favour should the matter proceed to the courts.

Original signed by

R. E. THOMPSON Chief Merchandising, Manufacturing, & Construction Section Corporate Rulings Division Corporate Rulings Directorate Legislation Branch DSD/jw 18(1)(1), Reg. 1102(1)(f)