Tax Court of Canada Judgments

Docket: 2002-4618(GST)I

BETWEEN:

STEPHEN G. COLLIER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on July 31, 2003 at Toronto, Ontario

Before: The Honourable Justice J.E. Hershfield
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Nimanthika Kaneira

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Excise Tax Act, notice of which is dated August 23, 2002, and bears number 08DP0000223, is dismissed.

Signed at Ottawa, Canada, this 12th day of September 2003.

"J.E. Hershfield"

Hershfield, J.

Citation: 2003TCC621

Date: 20030912

Docket: 2002-4618(GST)I

BETWEEN:

STEPHEN G. COLLIER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Hershfield, J.

[1]      This is an appeal from a reassessment for the period from January 1, 1998 to December 31, 1999 (the "Period"). The reassessment assessed GST during the Period on taxable supplies which the Appellant failed to declare and remit and denied input tax credits ("ITCs") in respect of a commercial activity (a vending machine business) for expenses incurred during the Period on the construction of a home which the Appellant used for the conduct of his business. ITCs were also denied in respect of expenses incurred during the Period for the maintenance of his dogs.

[2]      In a written submission made by the Respondent following the hearing of the appeal, the Respondent relies on the following facts and analysis:

A.         FACTS

2.          The Appellant was registered for GST purposes for the operation of vending machines.

3.          The Appellant's wife, Elaine Collier, was a GST registrant with respect to her business, a bed and breakfast (the "B & B").

4.          Sometime in 1998, the Appellant and his wife constructed a new home (the "new home"). Both the B & B and the vending machine businesses were run out of the new home.

5.          Elaine Collier was allowed 50.8% of the total input tax credits on the construction of the new home. This amount was based on the percentage of the home used for the B & B business.

6.          The Appellant stated in his evidence that the vending business uses 7.1% of the premises for its business;

7.          The Appellant has claimed 7.1% of the total input tax credits on the construction of the new home. The Minister has disallowed this on the basis of subsection 208(4) of the Excise Tax Act.

B.          ANALYSIS

8.          Subsection 208(4) reads as follows:

208(4) Where an individual who is a registrant acquires, imports or brings into a participating province an improvement to real property that is capital property of the individual, the tax payable by the individual in respect of the improvement shall not be included in determining an input tax credit of the individual if, at the time that tax becomes payable or is paid without having become payable, the property is primarily for the personal use and enjoyment of the individual or a related individual.

9.          A plain reading of the section indicates that the eligibility for the input tax credit should be determined by looking at the registrant, in this case, the appellant.

10.        The Appellant's business uses his property 7.1% of the time. Thus, looking at this registrant, it is obvious that he is not eligible for the input tax credit.

11.        The Respondent submits that it is improper to consider all the businesses run out of the property to determine the appellant's eligibility for the input tax credits.

12.        Subsection 208(4) is clear. It states "where an individual who is a registrant". I submit that it is improper to consider other registrants operating their business out of the same property to determine the appellant's eligibility for input tax credits.

13.        The Appellant's spouse was entitled to and did receive input tax credits with respect to her business and her business' use of the property.

14.        The Appellant is not entitled to any input tax credits for the use of his residence for his vending business.

15.        Sullivan and Driedger on the Construction of Statutes[1] states the following with respect to the plain meaning rule:

If a text has a plain meaning, extra-textual evidence of legislative intent (like legislative history or presumed intent) is inadmissible to contradict that meaning. The plain meaning constitutes definitive evidence of legislative intent and it is impermissible to rely on other factors to contradict it. Further, other factors may not be relied on to "create" ambiguity - that is, cast doubt on the meaning of a text that is otherwise plain.

16.        Thus, I submit that the plain reading of subsection 208(4) indicates that in defining the eligibility for input tax credits, one should look at the registrant concerned and not at other registrants that might be operating businesses out of the same establishment.

c.          GUARD DOG EXPENSES

17.        I was not asked to provide submissions with respect to input tax credits claimed for "guard dog" expenses. However, I would submit that the expenses relating to the appellant's dog were personal expenses and would have been incurred regardless of whether the appellant was engaged in the vending business. In his evidence, the Appellant admitted that he bought his dog(s) before he ever commenced the vending business.

[3]      While the foregoing narrows the facts and issue that the Respondent wants me to consider, the Appellant's evidence at the hearing warrants elaboration. The Appellant has also made a submission since the hearing but same consists largely of evidentiary matters covered at the hearing and I will deal with same in the elaboration that follows.

[4]      The property in question is a 5,959 square foot home located on 13 acres in or near the Blue Mountains in the Collingwood area. The property is bounded by a provincial park and close to a private ski club and a golf course. The Appellant acknowledged that there were few commercial enterprises in the area.

[5]      The 13-acre property consisted of two fields and a forested area. The home, on a hill, overlooks a pond with an island with willow trees.

[6]      The property was acquired with a view to the future retirement of the Appellant and his wife. They were seeking a change in lifestyle. The Appellant was winding down a marketing consulting business for high tech companies. As well, but prior to the vending machine business which was his primary activity in the subject Period, he had engaged in the stained glass and word processing businesses as a sole proprietor. No evidence was provided as to the level of activity and commerciality of these activities. The Appellant did testify, when addressing the business need for having his dogs, as to the number of vending machines he operated and the coinage he handled on a regular basis. However, even this operation, which was clearly a commercial activity, was declining in the subject Period. That is, the number of vending machines being operated was declining.

[7]      During the subject Period the Appellant's wife worked for an insurance company in the property and commercial underwriting area. More recently she has changed jobs and is working as a consultant. The Respondent accepts that she operated a bed and breakfast ("B & B") at the subject property as a sole proprietor at all relevant times even though the B & B did not have its first guest until the summer of 2001. No evidence was offered as to the commerciality of the B & B business. It was not necessary to do so given that the Respondent's own assumptions and assessing position did not put the commerciality of the B & B at issue. I note here as well that the Appellant testified that his wife also had a sewing business that she operated from their home - as if saying so made it so. I certainly would not on the evidence provided have found this to be a commercial activity.

[8]      While the Respondent's submission refers to a new home built in 1998 by the Appellant and his wife on the subject property, the Appellant described the construction as a major addition designed for business activities. Regardless, it is not at issue that the Appellant and his wife resided at the subject property as their sole residence and that there was a substantial improvement to the real property in 1998. Subsection 208(4) is the appropriate provision of the Excise Tax Act (the "Act") to consider in deciding the issue as narrowed by the Respondent. It is not at issue whether the improvements to the real property were designed to some extent at least for a commercial activity. The Respondent accepts business use by the Appellant's wife in respect of the B & B at 50.8% and, as asserted by the Appellant, at 7.1% by him for his vending business. That is, the Respondent has accepted the overall business use of the property at 57.9% but it does not admit to the relevance of such combined use. Rather, the Respondent argues that, on a plain reading, subsection 208(4) is a bar to the Appellant claiming an input tax credit since his use of the property is not primarily for business. I do not accept the Respondent's position that there is a readily discernible plain meaning construction of this provision on the facts of this case. However, before explaining my position, I find it necessary to make further observations on the personal versus business use of the subject property as advanced by the Appellant at the hearing and in his submission.

[9]      The Appellant and his wife live in a very gracious four-bedroom home. There are no separate commercial areas for the B & B activity except as the Appellant allows from time to time and except as his wife chooses to use them as such. In such cases, allocating use of the property between personal and commercial use is difficult. Factors to consider might include time spent in various areas of the B & B by guests versus time spent in the same area by the owners for their personal use. Some spaces will be necessary for or complement personal enjoyment while at the same time might be argued to complement the business use of the property. I have not been provided with the basis for the Respondent's acceptance of the 50.8% commercial use of the subject property as a B & B. It must, I assume, reflect a carving up of various spaces and recognizing in respect of each such space a personal use versus business use factor. Once such allocation is made there is, it seems to me, a notional segregation of space that is attributed 100% commercial usage or 100% personal use as the case may be. In effect the Respondent has said that 50.8% of the subject property is segregated, 100%, as commercial use space. [2] I would add that such notionally segregated commercial use space cannot be recounted as available space for personal use by anyone. Its use has been fully accounted for.

[10]     The Appellant submits that the segregated commercial use space for the B & B is some 68.5% of the subject property. This is unreasonable in my view considering the basis of the allocations he urges. For example, the large, open, front foyer to the home (436 square feet) is described by the Appellant as a front reception and display area 90% of which he has designated for business use. This is the front foyer of their home. The kitchen/dining area is described to include the Appellant's wife's office and sewing area and out of a total of some 800 square feet (over 60% of which is their own kitchen and dining room albeit shared at breakfast with paying guests when they have them) the Appellant acknowledges only some 120 square feet as personal. That the Appellant has designed commercial space to be shared with necessary or enhancing personal space does not make the space less personal in its function and use. What is "necessary or enhancing" personal space is subjective but in the context of this gracious home designed without any real or apparent separation between self and guest (other than the upstairs bedrooms and lounge area totalling 1,345 square feet which afford reasonable separation of guest quarters) one might expect that much of the remaining space might be seen as enhancing a chosen personal lifestyle as opposed to being so heavily weighted to accommodate business needs.

[11]     In short, the allocations of business use advanced by the Appellant are unreasonable in my view. On my review of the evidence I might have allowed some 2,700 square feet or some 45% for the B & B. Nonetheless the Respondent has accepted commercial use of the property of 50.8% for the Appellant's wife's B & B activities and commercial use of 7.1% in respect of the Appellant's activities. Further, it has accepted that the Appellant's wife's use of the property was not, for the purposes of subsection 208(4), primarily for personal purposes but the Respondent does not admit that the use of the property as a whole (by its various users) is not primarily for personal purposes.[3] Such distinction is not so readily drawn from the wording of the subject provision of the Act.

[12]     As I have said, accepting that 50.8% of the property being used for commercial activity by the Appellant's wife, should mean, or so it seems to me, that notionally 50.8% of the property has been carved out and accepted as 100% commercial use space not available to her or anyone else for any other purpose. In this context the usage assigned to the Appellant's wife for the B & B is "spent" which means the portion of the property left for her or anyone else's personal use is 49.2%. Since less than one-half of the property is available for the Appellant's use (personal or otherwise) the bar to ITC claims in subsection 208(4) does not apply. That is, in this context, a plain reading of the subject provision does not support a finding that the subject property "is primarily for the personal use and enjoyment of the individual or a related individual". That is the test in the Act. The Act does not ask if a particular person's use of the property is more personal than business. It is not the use of the property by an individual. The Act in this instance asks if the property is primarily for the personal use of the Appellant (i.e. the individual accepted as having made an improvement to the property) and his wife (a related individual). For the Appellant and his wife, the use of the property is accepted at 57.9% for business.

[13]     I do not mean to be blindly dismissive of the Respondent's position that the subject provision needs to be read as asking if the particular person's use of the property is more personal than business. Perhaps neither that construction nor the construction I have advanced above is "plain" in light of the other. Accordingly, I have considered a hypothetical example of property shared by arm's length persons in the hope of seeing how the subject provision might best be construed.

[14]     Consider the case of two unrelated co-owners of real property. Each occupies recognizable, separate space and each has done and paid for their own improvements. They may have agreed on how improvements would be accounted for on a sale of the property. Co-owner "A" spent $100,000. "A" occupies and improved 50% of the total space all for business purposes. "B" occupies and improved the other 50% of the space 95% for personal use. "B" spent $20,000.00 on the 5% commercial improvements. The property as a whole is not primarily for personal use. The construction of subsection 208(4) that I have advanced would give "A" ITCs on $100,000.00 and "B" ITCs on $20,000.00. The Respondent would presumably give "A" ITCs on $100,000.00 and "B" no ITCs.[4] The approach I have advanced helps persons, who have small relative commercial usage of a property, ride the coattails of persons with higher relative commercial usage of the property. Why should co-owned shared property give such a dramatic benefit to one of the users or conversely why should such case deprive a commercial user of credits where another uses a majority of the whole of the shared property for personal use? The better question might be whether I have properly defined "the property" in this example. It seems to me I have not. There are two properties consisting of one space used by "A" and another space used by "B". For the purposes of subsection 208(4) the test of personal use of "the property" must be applied to each property.

[15]     Where a property consists of segregated spaces as in the above example, treating each segregated space as a separate "property" for the purposes of subsection 208(4) seems a logical approach to resolving the issue posed by such example. What if the spaces in question are not actually segregated spaces? Can "the property" referred to in subsection 208(4) be a notionally segregated space?

[16]     I am forced to consider this question given the facts of this appeal. The Appellant and his wife have taken the unusual position that the B & B operated on shared property is hers and hers alone. I am forced then into this intellectual maze of how to treat a shared personal property an undivided part of which is devoted to only one person's business.   

[17]     While I was inclined at one point in my consideration of this appeal to suggest that a shared property, such as a married couple's home, could not be split into multiple properties primarily for the commercial use of one and primarily for the personal use of another, I have come to the view that this is not only possible but is an appropriate conclusion on the facts of this case.[5] The subject provision directs itself to "the property" that the Appellant has improved. If it is correct to notionally carve up the property as between personal and business use, it is only a small step to accept that "the property" the Appellant has improved is the notionally segregated property that excludes his wife's B & B. This case is based on segregated uses. Portions of this "home" have been accepted as being carved out for a B & B operated solely by the Appellant's wife. The Appellant's wife then must be seen as having one property consisting of two portions: her home portion (shared by her and the Appellant) which is 42% of the whole property and her B & B portion which is 51% of the whole property. The portion of her property used for her and the Appellant's personal use is 42/93rds which is to say her property is not primarily for her and the Appellant's personal use. Similarly, the Appellant must be seen as having one property consisting of two portions: his home portion (shared by him and his wife) which is 42% of the whole property and his vending business portion which is 7% of the whole property. The portion of his property used for him and his wife's personal use is 42/49ths which is to say his property is primarily for his and her personal use.[6] This approach is consistent with the language of the subject subsection and affords a result that makes the most sense to me in the context of a shared property an undivided part of which is used in the operation of a sole proprietorship. I am satisfied that the segregation of uses in this case directs me to find that the Appellant, as a person making an improvement to the subject property, is not entitled to ITCs as "the property" he improved (his home exclusive of the B & B operated solely by his wife) was primarily for his and his wife's personal use. Accordingly the appeal is dismissed on this point.

[18]     As to the guard dog expenses, I am not satisfied that the Appellant has met the required burden of proof to claim a portion of food and veterinary care expenses for his pet dogs. The Appellant testified that on a prior break-in at a former home, the police had said that dogs were a good deterrent against theft. Since the Appellant carried large sums of coinage around for deposit while making collection rounds at his vending machines, he kept the dogs in his vehicle to deter potential robberies. I accept his testimony that the dogs in this setting would bark at strangers approaching the vehicle but these were not trained guard dogs. They were friendly pet golden retrievers that would not bother guests at the B & B. That they were put to some use as they accompanied their owner while he serviced his business does not detract from their primary reason for being kept which was as pets. He would have incurred 100% of the subject expenses regardless of the incidental business benefit derived from having his pets accompany him on business. As stated in the Respondent's submission there was also evidence at the hearing that the Appellant had one of these dogs since 1982 which was before he even started the vending machine business. It was owned as a pet. It was replaced by a similar dog in 1998 when the original dog died. In any event, I am not satisfied that any expenses were incurred here as part of the Appellant's business. Accordingly the appeal is dismissed on this point as well.

Signed at Ottawa, Canada, this 12th day of September 2003.

"J.E. Hershfield"

Hershfield, J.

CITATION:

2003TCC621

COURT FILE NO.:

2002-4618(GST)I

STYLE OF CAUSE:

Stephen G. Collier and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

July 31, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J.E. Hershfield

DATE OF JUDGMENT:

September 12, 2003

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Nimanthika Kaneira

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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