Date: 19991027
Docket: 98-1420-IT-I
BETWEEN:
LYLE PHILLIPS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Brulé, J.T.C.C.
[1] The appellant appeals the Minister of National Revenue's (the "Minister") assessment for the taxation years 1993, 1994, and 1995. The appeal was heard on August 9, 1999 in Vancouver, British Columbia.
Facts
[2] The appellant reported business losses of $7,550.00, $8,175.35 and $8,814.80 on his income tax returns for his 1993, 1994 and 1995 taxation years respectively. He claimed the losses in respect of the rental of two recreational vehicles ("RVs"). In reassessing the appellant for those years, the Minister disallowed a portion of accounting and professional fees, insurance, interest and bank charges, maintenance and repairs and storage expenses. In addition, the Minister disallowed capital cost allowance ("CCA") claimed by the appellant in the amounts of $6,397.89, $6,858.94 and $8,666.22.
Issues
[3]a) Whether or not the RVs are "leasing property" as defined in the Income Tax Regulations (the "Regulations").
b) Whether the Minister properly disallowed a portion of the CCA claimed by the appellant in respect of the RV Rental Business in the 1993, 1994 and 1995 taxation years.
c) Whether or not the Minister properly disallowed a portion of certain expenses claimed by the appellant.
Appellant's Position
[4] The appellant has relied on Regulation 1100, arguing that it only refers to buildings, not automobiles, nor motor vehicles. Reference was made to subsection 248(1) of the Income Tax Act in support of the appellant's position. The appellant claimed that this section in conjunction with 1100(17) excludes his property from the definition of leasing property in the Regulations and therefore his RVs qualify as rental vehicles.
Respondent's Position
[5] The respondent submitted that the RVs were "leasing property" as defined by subsection 1100(17) and 1100(17.2) of the Regulations. Furthermore, subsection 1100(17.3) does not exempt the RVs from the definition of "leasing property" as the RVs were not used in a business carried on by the appellant in which he was personally active on a continuous basis throughout the years in question. The respondent submitted that the Minister correctly restricted the CCA allowable to the appellant in accordance with subsection 1100(15). In addition, the respondent submitted that the Minister properly disallowed portions of the expenses claimed by the appellant.
[6] The Minister relied on the following assumptions of fact in confirming the reassessment:
"a) during the 1991 taxation year, the appellant acquired a 1991 Travelhome 24' recreational vehicle (the "1st RV");
b) on August 11, 1994, the appellant disposed of the 1st RV to Travelhome Vacations International Inc. ("Travelhome") for proceeds of disposition of $26,000.00;
c) in November, 1993, the appellant purchased a 1994 Yellowstone Capri 26' recreational vehicle (the "2nd RV") from Travelhome at a cost of $59,492.36;
d) at all material times during the 1993, 1994 and 1995 taxation years, the appellant offered, under the name DL Rentals, the 1st RV or the 2nd RV (collectively the "RVS") for rent to third parties through Travelhome (the "RV Rental Business");
e) at all material times, Travelhome acted as a management company or agent with respect to the RV Rental Business;
f) in return for services provided by Travelhome in administering the RV Rental Business, including advertising, negotiating rental contracts, insuring, maintenance and storage of the RVs, Travelhome charged the appellant a percentage of the gross rental receipts received from the rental of the RVs as a management fee (the "Management Fee");
g) rental payments made in respect of the RVs were remitted to Travelhome who deducted the Management Fee and remitted the net amount to the appellant;
h) the RVs were used principally for the purpose of gaining or producing rental revenue;
i) the appellant had very little day-to-day involvement in the RV Rental Business;
j) the appellant's personal use of the RVs was 13%, 14% and 3% for the 1993, 1994 and 1995 taxation years, respectively, determined as follows:
1993 1994 1995
Personal kilometres driven 3,084 4,296 553
Total kilometres driven 23,260 30,065 20,355
Percentage of personal kilometres/ 14% 14% 3%
total kilometres driven
k) interest and bank charges expense of $306.88 deducted by the appellant in the 1993 taxation year and accounting and professional fees expense of $433.47 deducted by the appellant in the 1994 taxation year, in respect of the RV Rental Business, were not made or incurred for the purpose of gaining or producing income from business or property;
l) a portion of insurance, interest and bank charges, maintenance and repairs and storage expenses deducted by the appellant in the 1993, 1994 and 1995 taxation years with respect to the RV Rental Business were personal and living expenses of the appellant..."
Evidence Provided at Trial
[7] Two "Full Service Recreation Vehicle Management" agreements were entered into evidence at trial. Under these agreements, the appellant remained responsible for, among other things, the costs of insurance and the maintenance and servicing costs. In regards to the maintenance and servicing costs, the Manager was allowed to initiate the repairs without specific permission or authorization from the appellant as long as an attempt was made to keep the costs to a minimum. It is interesting to note that under the agreements the Manager makes no representation, undertaking or warranty as to the extent of revenues. Of most interest perhaps are the provisions found under Article 1:
"1.01 The Manager provides professional marketing and management of recreational vehicles to independent recreational vehicle owners, including the provision of a maintenance and service programs, recreational tours, charters and vacation packages to the general public.
[...]
1.03 The Owner wishes to be actively involved in the daily rental and tour business and wishes to retain the services of the Manager for the maintenance, service, marketing and management of the said Vehicle on a principal and agent bases."
[8] Overall the agreements provide the Manager with the power to act as agent for the appellant. In other words, the agreements provide the Manager with extensive responsibilities involving the care and rental of the RVs.
Analysis
[9] This case comes down to interpretation of the Regulations and questions of fact. Other than the production of agreements entered into with the rental agent, this case differs little from other RV cases. However, upon the Court's basic understanding of the facts and the Regulations, the RVs are "leasing property" according to subsections 1100(17) and (17.2) of the Regulations. The question of fact involves whether the appellant is entitled to the protection of subsection 100(17.3). The appellant must have established on a balance of probabilities that his involvement in the business was sufficient to enable subsection 1100(17.3) to apply.
[10] The fact that the appellant had two RVs does not change the situation. The basic conditions must still be established by the appellant (i.e. that there was a business, that the business had a reasonable expectation of profit and perhaps most importantly for the appellant that he was actively involved in the business on a continuous basis).
[11] The Minister seems to have allowed the majority of the expenses claimed and others before the trial commenced except for amounts equivalent to the percentage of personal use in the years. The main issue, therefore to be resolved is whether or not the appellant is restricted in deducting CCA because of Regulation 1100(15).
[12] It is the Court's opinion that the appellant has misinterpreted the Regulations. Subsection 1100(17) of the Regulations, may not make explicit reference to recreational vehicles however given the language of the section and the case law there is no doubt that it encompasses recreational vehicles. Subsection 1100(17) defines what constitutes a leasing property for the purposes of subsection 1100(15). The term "leasing property" in subsection 1100(17) specifically excludes rental property as defined in subsection 1100(14). Subsection 1100(14) is specific to real property therefore 1100(17) is meant to involve moveable depreciable property and not real property. In other words, RVs would be included under subsection 1100(17), not under 1100(14). It is considered that subsections 1100(15) to (20) extend the philosophy of subsections 1100(11) to (14) to 'leasing properties'.
[13] Therefore, in summary subsection 1100(17) defines 'leasing property' as depreciable property, other than real property, used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent or leasing revenue. Subsection 1100(17.2) includes as rent, gross revenue incurred from the right of a person other than the owner to use the property and gross revenue incurred from services offered to a person that are ancillary to the use by the person of the property. The changes that occurred in regards to subsection 1100(17) in 1986 are explained by H. Stikeman in TaxPartner as follows:
"For the 1986 and subsequent taxation years, the definition of "leasing property" in respect of property acquired by a taxpayer or partnership is in effect expanded by the addition of subsection 1100(17.2). Along with subsection 1100(14.1), this brings into effect the proposals announced in the May 1985 budget intended to prevent individuals from sheltering other income with losses created by capital cost allowance in respect of property such as yachts, recreational vehicles, hotels, and nursing homes used in businesses that offer services with the use of such property. Revenue derived from the right of a person or partnership (except the owner) to use or occupy the property, and revenue from services offered that are ancillary to such use or occupation, are considered to be rent."
[14] An exception to subsection 1100(17.2) is provided for under subsection 1100(17.3). In other words, subsection 1100(17.2) does not apply to property owned by an individual where the property is used by a business carried on in the year by the individual in which he is personally active on a continuous basis. In the appellant's case, he must have been actively involved in the business on a continuous basis
[15] Paragraph 7 of Interpretation Bulletin IT-195R4 provides little guidance on the issue of whether the appellant was actively involved on a continuous basis. The last part of the paragraph states:
"Whether or not an individual is "personally active on a continuous basis throughout that portion of the year during which the business is ordinarily carried on" is a question of fact. In making such a determination, consideration will be given to the nature of the business and the individual's involvement in the day-to-day operation of that business. For example, if the business consists of operating a nursing home, the simple periodic review of operating results or the occasional recommendation of the home to potential clientele by the individual will not be sufficient to establish that the individual is "personally active on a continuous basis". On the other hand, the CCA restriction will not normally apply if the individual participates on a full-time basis in management decisions, occupant services, staffing and locating clientele."
[Even though this Bulletin primarily deals with rental properties, the implications for "leasing" are virtually the same.]
[16] It is important to keep in mind the purpose of the 1986 reforms. The purpose of the changes being to prevent individuals from sheltering income with losses created by CCA in respect of property such as yachts and RVs used in businesses that offer services with the use of such property. Given the purpose and language of Regulation 1100(17), the appellant's CCA has been correctly restricted pursuant to Regulation 1100(15).
[17] In regards to the disallowed expenses, the Court has a difficult time believing that the appellant brought them into dispute. The Minister did not originally disallow all of the expenses claimed by the appellant, only portions with some additions before trial. The appellant represented his use of the RVs and these were taken into consideration by the Minister. Pursuant to paragraph 18(1)(h) of the Act, the expenses incurred while the appellant used the RV for personal use are prohibited deductions.
[18] The net result is that the appeal is dismissed.
Signed at Ottawa, Canada, this 27th day of October 1999.
"J.A. Brulé"
J.T.C.C.