Date: 19980313
Docket: 97-925-GST-I
BETWEEN:
MIRACOR HOLDINGS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1]This is an appeal from an assessment made by the Minister of National Revenue (the "Minister") under the Excise Tax Act (the "Act"), notice of which is dated November 16, 1994 and bears number 05EP0102228.
[2] In assessing the Appellant, the Minister disallowed the notional input tax credit (the "ITC") in the amount of $10,954.02 claimed by the Appellant pertaining to a motor vehicle, assessed the Goods and Services Tax (the "GST") that the Appellant had collected in the amount of $2,806.54 and allowed the Appellant the balance of the ITC's claimed in the amount of $383.94, giving rise to net tax of $2,422.60 plus interest in the amount of $303.81 and penalties in the amount of $335.46, resulting in an amount owing of $3,061.87.
[3]The Appellant objected to the assessment and, after duly reconsidering the Appellant's objection, the Minister issued a Notice of Decision, dated February 28, 1997, confirming the assessment.
THE MINISTER'S ARGUMENT
[4]The Minister made the following assumptions of fact that were admitted by the Appellant's agent at trial:
...
(b) the Appellant was a registrant at all relevant times;
(c) the Appellant purchased the vehicle on December 12, 1989, from Maranello Motors Limited for a total purchase price of $334,880.00, at which time the odometer reading of the Vehicle indicated a distance travelled of 1,920 kilometres;
...
(e) the Vehicle was the only asset contained in inventory and was reflected in the Appellant's balance sheet as at the fiscal years ending July 31, 1991 and 1992 at the aforementioned purchase price of $334,880.00;
(f) the Vehicle was ultimately sold in November, 1993 to Autoforum Inc. for a total sale price of $50,000.00, at which time the odometer reading of the Vehicle indicated a distance travelled of 9,560 kilometres;
(g) Autoforum Inc.'s offer to purchase the Vehicle, dated November 19, 1993, contained the following statement: "Purchaser is aware the car is sold as is...with engine blowing blue smoke....Vendor admits the car was used on track at Mosport for three days";
(h) the Appellant's annual GST return for the period covered by the appeal was outstanding at the time of audit and was not filed until September 29, 1994;
(i) in its annual GST return for the period covered by the appeal, the Appellant reported that it had collected Goods and Services Tax ("GST") in the amount of $2,806.54 and claimed input tax credits ("ITC"'s) in the amount of $11,337.96 with the result that the Appellant claimed a refund of net tax in the amount of $8,531.42;
(j) the annual GST return filed by the Appellant for the period covered by the appeal included a claim for the Notional ITC under authority of section 176 with respect to the Vehicle, calculated as follows on the basis of paragraph 120(3)(b) and subsection 176(1) of the Act: $334,880.00 X 50% X 7/107 = $10,954.02;
(k) by way of the Assessment, the Minister disallowed the refund claimed by the Appellant in the amount of $8,531.42 and established the net tax that the Appellant had failed to remit in the amount of $2,806.54 (GST) - $383.94 (ITC's) = $2,422.60 for the period covered by the appeal;
(l) as a consequence of the denial of the Notional ITC with respect to the Vehicle in amount of $10,954.02, the Appellant remitted $2,422.60 less in net tax than it was required to remit and, as a further consequence, penalties and interest were applied under Part IX of the Act resulting in the amount owing set out in the Assessment ...
THE APPELLANT'S ARGUMENT
[5] In his Notice of Appeal, the Appellant argued:
The registrant purchased the 1986 Ferrari for resale purposes as used inventory in the course of a carrying on a commercial activity, namely auto trading of exotic cars.
...
Pursuant to section 120(3)(b) an ITC of 50% of the notional ITC at 7% is allowed to the registrant for used goods in inventory on January 1, 1991. The denial of the ITC implies that the Ferrari is not considered to be inventory on hand as at January 1, 1991 but capital property. For GST purposes, whether a property is capital property is determined by the definition under the Income Tax Act as stated in section 123(1).
...
The car was purchased for $334,880 in December 1989 and subsequent to this date the market value of the same model of car rose in value to as high as $400,000. ...
The car was purchased by a corporation with corporate funds ...
...
The registrant attempted to continually market the vehicle ...
The registrant's shareholder mortgaged his principal residence for approximately $250,000 of the purchases price as short term financing.
The registrant's financial statements filed for income tax purposes and general ledger accounts described the vehicle as inventory from the date of acquisition.
The registrant's corporate income taxes describe the activities of the corporation as auto trading.
...
[T]he registrant was carrying on a commercial activity and should therefore be entitled to an input tax credit.
ANALYSIS
[6]The Appellant is a corporation which is a registrant under the Act. In December 1989, the Appellant purchased a used Ferrari. The Appellant claimed an ITC in respect of that vehicle. The Minister disallowed the ITC on the basis that the car did not form part of the inventory of the Appellant.
[7]The Appellant owned the car prior to January 1, 1991 (December 1989), and paid Federal Sales Tax on the vehicle, therefore it would be entitled to an ITC as long as the car formed part of its inventory at the start of 1991 and the Appellant carried on a commercial enterprise.
[8]The Minister's position is that the car was purchased by the Appellant for the personal use and enjoyment of the president of the company, therefore is not "inventory" within the meaning of the Act.
[9]Whether or not the car was inventory and whether this was a commercial enterprise depends on my finding of fact.
[10]The Appellant's evidence (the president of the corporation) contended:
- there was little personal use of the vehicle;
- he (the president) constructed a separate facility to house the vehicle;
- he (the president) had knowledge of the exotic vehicle market and knew there was a shortage of exotic vehicles;
- further, he stated he took the vehicle to various markets to sell it, specifically, in Watkins Glen, New York, Montréal, Quebec, and Mosport, Ontario, (at car or club rallies);
- the corporate objectives of the Appellant included that of auto trading and the vehicle was treated as inventory on the books of the Appellant's corporation.
[11]This evidence must be weighed against the contention indicated:
- this vehicle was housed in a separated garage stall at the president's home;
- while there was a general denial of personal use, there appears from the evidence to be personal use;
- the vehicle did not appear to be actively marketed on an ongoing basis and only directly marketed on specific occasions;
- the vehicle was in the possession of the president of the corporation for several years (December 1989 to November 1993);
[12]Moreover, this was the only vehicle in the Appellant's stated inventory. Thus, in relation to auto trading the sale of the vehicle was the only commercial activity carried on by the Appellant during the four year duration (acquisition to disposition).
CONCLUSION
[13]On balance I conclude there was insufficient indicia of commerciality to find a commercial enterprise was being carried on.
DECISION
[14]The appeal is dismissed.
Signed at Ottawa, Canada, this 13th day of March 1998.
"D. Hamlyn"
J.T.C.C.