Date: 19991027
Dockets: 98-1912-IT-I ;98-1913-IT-I
BETWEEN:
SUE-ANN E. STEPHENS, WILLIAM B. STEPHENS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Brulé, J.T.C.C.
[1] These appeals were heard on common evidence on August 12, 1999, at Vancouver, British Columbia.
[2] The appellants, Mr. and Mrs. Stephens, appealed the Minister of National Revenue's (the "Minister") decision with respect to the reassessment of their 1994 and 1995 taxation years for income tax payable and the disallowance of Capital Cost Allowance ("CAA") for a recreational vehicle owned in partnership as a small business venture.
Facts
[3] The appellants purchased in partnership a recreational vehicle ("RV") in February of 1994. At the time of purchase Candan RV Centre was contracted to store, maintain and rent the vehicle to approved clients for a period specified in the three-year contract. In other words, Candan was hired to act as rental agent because it had 13 years experience in the area and the appellants did not. Under the contract with Candan it would receive 30% of the gross revenue as a fee for services and then it would hand over the remainder to the appellants. There appears to have been no requirement in the contract with Candan that the RV be rented out a certain amount of time every year or that a certain level of income be generated yearly.
[4] In filing returns of income for the 1994 and 1995 taxation years, the appellants reported individual business losses of $2,203.29 and $5,747.48, respectively, in respect of their individual 50% interest in the rental of a recreational vehicle reported under the name of "W & S Stephens". The Minister disallowed CCA claimed by both appellants in the amounts of $2,203.29 for 1994 and $5,747.48 for 1995.
Issue
[5] The interpretation of subsections 1100(15), (17) and (17.3) of the Income Tax Regulations (the "Regulations") as it applies to a recreational vehicle.
Appellants' Position
[6] The appellants submitted that for the past 10 years this type of business has been accepted by Revenue Canada and the CCA has always been permitted; furthermore, there has never been a question of an RV being subject to the restriction as defined in subsection 1100(15) of the Regulations.
[7] The appellants submitted that unlike what the respondent argued they did not need to be involved on a "continuous basis in the day-to-day operation of the business". The appellants submit that they were involved on a continuous basis with the business as prescribed under subsection 1100(17.3) of the Regulations and are therefore entitled to the exemption with respect to "rent derived" as defined in subsection 1100(17.2). The appellants rely on the ordinary meaning of the words and Webster's Dictionary to state that they only had to be active on an uninterrupted or constant basis. Furthermore, the wording of the Regulation makes no reference to "day-to-day" operation of the business only that the appellants be personally active on a continuous basis. They further argued that at all times they acted in good faith on information received from other owners based on their experiences, professional tax consultants and Revenue Canada itself.
[8] In an interesting argument, the appellants submitted that Revenue Canada has violated its own fairness initiative by choosing a random sampling of similar small businesses for reassessment. Therefore, due to the limitations for reassessment, many clients will not be reassessed, having enjoyed the benefit of claiming the full CCA deductions for a number of years. The appellants state that only a random sample of 5% of small businesses similar to theirs was reassessed and therefore Revenue Canada's reassessment practice in their case amounts to discrimination.
[9] The appellants rely on Revenue Canada's newly released "Fairness Pledge" dated February of 1999. The Pledge emphasizes Revenue Canada's commitment to fairness and commits the Department to accurate and understandable information, consistency, flexibility, accountability for its actions on fairness, timeliness, impartiality and client support. The appellants submit that none of these criteria would be met if Revenue Canada is allowed to get away with what it is trying to do. They argued that chartered accountants, other taxpayers and even Revenue Canada's own officials have interpreted the Regulations a certain way and it would be unfair and contrary to the Revenue Canada's underlying principles to be allowed to now change the rules.
[10] The appellants asked the Court for the exemption under subsection 1100(17.3) and to be able to claim the full CCA of their vehicle. In the alternative, the appellants asked the Court that if Revenue Canada has interpreted the Regulations correctly, that the interpretation be in force as of the day of judgment, not retroactively.
Respondent's Position
[11] In reassessing the appellants, the Minister relied on the following assumptions of fact as indicated in the Reply to the Notice of Appeal:
"a) at all material times during the 1994 and 1995 taxation years, the appellant, together with her spouse, owned a recreational vehicle (the "RV") which was offered for rent to third parties (the "RV Rental Business") through Candan RV Center ("Candan");
b) at all material times Candan acted as a management company or agent with respect to the RV Rental Business;
c) in return for services provided by Candan in administering the renting out of the RV, including advertising, negotiating rental contracts, insuring, maintenance and storage of the RV, Candan charged the appellant a percentage of the gross rental receipts received from the rental of the RV as a management fee (the "Management Fee");
d) rental payments received in respect of the rental of the RV were remitted to Candan who deducted the Management Fee and remitted the net amount to the appellant and her spouse;
e) the RV was used principally for the purpose of gaining or producing rental revenue; and
f) the appellant and her spouse had very little day-to-day involvement in the rental operation of the RV."
[12] The respondent submits that the RV was leasing property as defined by subsections 1100(17) and 1100(17.2) of the Regulations as it was used principally for gaining or producing rental revenue. Furthermore, subsection 1100(17.3) does not exempt the RV from the definition of "leasing property" as the RV was not used in a business carried on by the appellants in which they were personally active on a continuous basis throughout the 1994 and 1995 taxation years. Therefore, the respondent submits that the Minister properly restricted the CCA allowable to the appellants in the 1994 and 1995 taxation years.
[13] The issue in this case comes down to interpretation and questions of fact. In order for the RV to not be considered a "leasing property" according to subsections 1100(17) and (17.2) of the Regulations, the appellants must have established, on a balance of probabilities based on the evidence presented at trial, that they were carrying on a business with a reasonable expectation of profit and that they were actively involved in that business on a continuous basis. On the basis of all of the evidence, the appellants were not actively involved in running a business as contemplated in subsection 1100(17.3). The RV was used by the appellants for the purpose of gaining gross revenue that is rent or leasing revenue. The RV was a leasing property as defined in Regulations 1100(17) and (17.2) therefore the deduction of CCA is restricted by Regulation 1100(15).
Analysis
[14] In the Court's opinion based on the pleadings, the appellants have placed emphasis on the wrong issue. Revenue Canada has not all of a sudden changed its interpretation of the Regulations. Regardless of the fact that much of the case law surrounds yacht charter operations, it is the Court's opinion that the case law establishes Revenue Canada's consistent interpretation of the Regulations. It is not a matter of whether recreational vehicles as a general class fall under Regulation 1100(17.3) but a matter of whether in the appellant's particular case they meet the conditions set out within the Regulations. The issue remains one of whether or not the appellants were involved in the business on a continuous basis. It is a question of fact. The appellants had the onus of showing that their RV was not a leasing property as defined under the Regulations and if they could demonstrate that then their CCA claim is not restricted by Regulation 1100(15).
[15] Subparagraph 20(1)(a) of the Income Tax Act allows for the deduction of CCA in computing income from business or property as long as it is deducted according to the Regulations. If the property is a leasing property then Regulation 1100(15) restricts the amount of CCA that can be claimed by a taxpayer in computing his income for a taxation year. The amount of CCA that may be deducted in respect of a taxpayer's "leasing property" is limited to the total of the taxpayer's net rental income from such leasing property and from any other property that would be leasing property if not excluded from that category by subsections (18), (19) or (20).
[16] Subsection 1100(17) of the Regulations defines what constitutes a leasing property for the Court's purposes. The term "leasing property" in 1100(17) specifically excludes rental property as defined in subsection 1100(14). Subsection 1100(14) is specific to real property, therefore subsection 1100(17) is meant to involve moveable depreciable property and not real property. In other words, RVs would be included under 1100(17) as leasing property not under 1100(14). 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 (CD-ROM) 1999 – Release 7 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), 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."
[17] 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. The same applies for the members of a partnership that owns property. In the appellants' case, in order for subsection 1100(17.3) to apply Mr. and Mrs. Stephens, as members of "W & S Stephens" must be personally active in the business on a continuous basis.
[18] Paragraph 7 of Interpretation Bulletin IT-195R4 (dealing with Rental Property – Capital Cost Restrictions) provides little guidance on the issue of whether the appellants were 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.]
[19] The appellants argued, relying on Evans v. R., [1987] 1 C.T.C. 316 and a dictionary (Oxford), that the ordinary meaning must be given to the words in the Regulation. Therefore, they were active in the business on an uninterrupted or constant basis. They further argued that:
"[They] continued as the owners of the business, continued to be responsible for all aspects of the business and as the registered owners of the leasing vehicle, continued to assume all personal liability and responsibility for the operation of the business."
[20] Stating the above is one thing but actually supporting the submission with evidence is another. Stating that they were owners of the business does not make what they were involved in a business nor does it make themselves, as members of the partnership, actively involved in the business on a continuous basis. From the assumptions of fact the Minister relied on, Candan was responsible for everything including, among many other things, "insuring" the RV. What was left for the appellants to do?
[21] In the appellants' case, there seems to be very little evidence provided that the appellants were involved at all in the rental of their RV. It was mentioned that the appellants called Candan once a month for an update. What exactly was discussed in these phone calls seems to be unknown. The Court has doubts that this is sufficient to constitute continuous active involvement in the business. Was it every month they called? Who called (i.e. husband or wife or both)? Did they give any instructions to Candan as to what needed to be done or how the situation could improve? Did the appellants threaten moving the RV to another rental agent?
[22] In view of the above the Court hereby dismisses the appeals.
Signed at Ottawa, Canada, this 27th day of October 1999.
"J.A. Brulé"
J.T.C.C.