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Docket: 2004-807(IT)I |
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BETWEEN: |
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BARRY KOWALCHUK, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeals heard on common evidence with the appeals of Barry Kowalchuk Contracting Ltd. (2004-1976(IT)I) and (2003-3495(GST)I)) on September 23, 2004 and September 9, 2005 at Edmonton, Alberta
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Before: The Honourable Justice Diane Campbell |
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Appearances: |
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Agent for the Appellant: |
Ace H. Cetinski |
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Counsel for the Respondent: |
John-Paul Hargrove, Elena Sacluti and Tyler Lord (Student-at-Law) |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 2000 and 2001 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 23rd day of November 2005.
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"Diane Campbell" |
Campbell J.
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Docket: 2004-1976(IT)I |
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BETWEEN: |
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BARRY KOWALCHUK CONTRACTING LTD., |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of Barry Kowalchuk (2004-807(IT)I) and Barry Kowalchuk Contracting Ltd. (2003-3495(GST)I)) on September 23, 2004 and September 9, 2005 at Edmonton, Alberta
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Before: The Honourable Justice Diane Campbell |
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Appearances: |
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Agent for the Appellant: |
Ace H. Cetinski |
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Counsel for the Respondent: |
John-Paul Hargrove, Elena Sacluti and Tyler Lord (Student-at-Law) |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2001 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 23rd day of November 2005.
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"Diane Campbell" |
Campbell J.
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Docket: 2003-3495(GST)I |
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BETWEEN: |
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BARRY KOWALCHUK CONTRACTING LTD., |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of Barry Kowalchuk (2004-807(IT)I) and Barry Kowalchuk Contracting Ltd. (2004-1976(IT)I) on September 23, 2004 and September 9, 2005 at Edmonton, Alberta
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Before: The Honourable Justice Diane Campbell |
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Appearances: |
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Agent for the Appellant: |
Ace H. Cetinski |
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Counsel for the Respondent: |
John-Paul Hargrove, Elena Sacluti and Tyler Lord (Student-at-Law) |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act with respect to Notice of Assessment dated January 17, 2003 which bears number 10BT0200522 and Notice of Decision dated May 22, 2003, is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 23rd day of November 2005.
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"Diane Campbell" |
Campbell J.
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Citation: 2005TCC757 |
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Date: 20051123 |
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Dockets: 2004-807(IT)I 2004-1976(IT)I 2003-3495(GST)I |
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BETWEEN: |
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BARRY KOWALCHUK, BARRY KOWALCHUK CONTRACTING LTD., |
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Appellants, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
CampbellJ.
Introduction:
[1] These three appeals were heard together on common evidence and arise from the reassessment of a long list of expenses of Barry Kowalchuk Contracting Ltd. (the "Company"). The income tax appeals are in respect to the 2000 and 2001 taxation years. The owner of the Company, Barry Kowalchuk, ("Kowalchuk") was reassessed in respect to his 2000 and 2001 taxation years, while the Company was reassessed for the 2001 taxation year. The Company was reassessed in respect to its GST returns for the reporting periods ending March 31, 2001 (the "2001 fiscal year") and March 31, 2002 (the "2002 fiscal year"). During the hearing, at the insistence of the Agent for the Appellants, the appeal, respecting the 2002 fiscal year of the Company's GST appeal, was permitted to be withdrawn. I am therefore dealing only with the period April 2000 to March 31, 2001, or the 2001 fiscal year end, in respect to the corporate GST appeal.
[2] One of the main problems in these appeals is lack of proper documentation. The Minister of National Revenue (the "Minister") submits that the Company did not keep either a paper copy or electronic copy of its general ledger for the business for the 2001 taxation year and that the T-2 corporate tax return for the March 31st, 2002 fiscal year end had not been filed. In the Notice of Appeal filed in respect to the GST corporate reassessment, the Appellant admitted that when the Company was audited "the books and records of the Appellant were 'incomplete'," (paragraph 5 of that Notice of Appeal). The Canada Revenue Agency (the "CRA") auditor completed the audit based upon the existing records available at the time and assessed the Appellant Company net tax, penalties and interest in the GST appeal. During this period, the Company's Income Tax Return for the fiscal year ending March 31, 2002 was also reassessed, with several adjustments being made, including an adjustment to the capital cost allowance ("CCA") reported respecting a 2001 Dodge 2500 Quad Cab pick-up truck (the "truck") and the disallowance of a number of expenses. There was also a reassessment of the income tax returns for Mr. Kowalchuk's 2000 and 2001 taxation years, which increased his income as a result of benefits which the Minister determined he received as a shareholder of the Company. At the end of the day we are dealing with a personal income tax matter, a corporate income tax matter and a corporate GST matter.
The Evidence:
[3] Barry Kowalchuk, his wife Wendy Kowalchuk, and his former accountant, Dan Mason, gave evidence on behalf of the Appellants. The Respondent called the auditor Janice Minamide.
[4] Wendy Kowalchuk testified that her husband started the Company around 1998 or 1999. It is an excavation and construction firm based in Edmonton. Mrs. Kowalchuk attempted in 2000 and 2001 to complete some of the bookkeeping for the Company but she had absolutely no background or training in this line of work and admitted on direct examination that she "...didn't know what I was doing, I just put them in", in referring to how she recorded various expenses on the books (Transcript page 28). The Company had an outside accountant, Dan Mason, during this period. She stated that when she phoned his office she would receive help and sometimes someone from that office would assist her at her residence. However she admitted that she really did not understand what she was supposed to do or how or where to enter the items in the corporate books. After 2001, she no longer attempted the bookkeeping and limited her duties to the corporate invoicing.
[5] Mrs. Kowalchuk was not able to recall much information concerning the expenses except for the following. She said that Canadian Aggregate was the gravel and concrete supplier for her husband's company. She specifically recalled this expense of $3,738.32 with Canadian Aggregate because the owner came to her home and they argued over this account. In respect to the liquor expense her only comment was that a lot of contractors would drop by the house for drinks. She also stated that the expense of $2,508.00 related to the erection of a fence around their house to protect the bobcat and trailer and other Company equipment and tools from theft. These items were often at the house where the corporate office was located because the Company had no warehouse or storage space.
[6] On cross-examination Barry Kowalchuk confirmed that his 2001 Dodge Quad Cab truck, when at his residence, was located on a 130-foot driveway, along with three personal use vehicles, one of which was a pick-up or hobby truck. He explained that his neighbour shared the cost of the six-foot high steel fence around his home. This fence was necessary to prevent theft of these items. Since most of the equipment was very heavy, it could never be carried over the top of this type of fence.
[7] The truck was a heavy duty three-quarter ton diesel vehicle. It had a fixed fuel tank and he used it to haul fuel, tools and equipment including bobcats, a small driving packer and water and sewer equipment. It was equipped with a fixed-in fifth wheel hitch inside the box so that the trailer could pull heavy equipment. It had two regular sized doors and two small rear doors. There was a small bench-seat in the back that was able to accommodate six people. Although the back seating area of the truck was used occasionally for transporting his customers and sub-trade people, for most of the time it was used to carry his laser and grading equipment. It was actually cheaper for him to own this truck than to purchase a fifteen thousand dollar conversion unit for the truck which would be a tool kit equipped for the back of the truck.
[8] The truck was constantly with him at the work site where he worked from five o'clock in the morning until nine or ten o'clock in the evening, six to seven days per week. He made a lot of daily trips for material and diesel fuel. In addition he travelled to out-of-town work sites in the wintertime where he would be located at camps. At these camps the truck remained running and was not shut off. The only time he used this truck for personal use was a weekend when it was used to pull a rented R.V. trailer and for a period of several months when his young daughter was ill in the hospital. He used this truck to visit his daughter at the hospital each work day during his lunch hour rather than return to his home and switch to one of his personal use vehicles. Other than these two occasions, he stated he never used this truck for personal use. Based on this, he estimated that over 90 percent use of this truck would be related to his business. He stated that the only passengers using the truck would be his business clients and occasionally it was used to pick up a worker who did not have a license.
[9] In the 2001 taxation year, funds were inter-mingled because he maintained only one account for both business and personal. He stated he was unsure of how the bookkeeping should work and that Dan Mason had advised him to simply keep all of his receipts.
[10] Regarding the meal and liquor expenses, he testified that the majority of these purchases were for conducting public relations for his company, including entertaining project managers. It was these managers who gave him his contracts. He estimated that 80 to 90 percent of the liquor expenses and over 90 percent of the meal expenses would be business-related.
[11] Dan Mason, the Company's former accountant, testified that after all of the data on the Company's computer was lost, the only remaining document, aside from the cash receipts and the cash disbursement journals, which the auditor had reviewed, was a detailed trial balance (Exhibit A-10), dated January 10, 2003. This was prepared by Mr. Mason based on a re-creation of the clients' records. Apart from the cash receipts and cash disbursements, there were no computer records and no general ledger which could allocate each transaction to its proper account. He explained that the problem with an auditor viewing only cash receipts and disbursements is that there was no inclusion for items paid by cash or items that might be dealt with by way of a journal entry. Mr. Mason also introduced an amended financial statement for the year ended March 31, 2001 dated November 25, 2004 (Exhibit A-11) and a GST return dated November 24, 2004 (Exhibit A-13). On cross-examination he agreed that these documents were not reconciled to the original documents because there was no method of reconciliation of the original records with the new records because of the lack of original documentation to support each transaction. The tax implications in the new versions of the financial statements were more favorable to the Appellants when compared to the reassessment calculations. Mr. Mason did confirm he used the same box of documents to recreate his amended documents as the auditor had used. He confirmed that his statements did take into account those items which he considered to be personal, while the balance he attributed to business because of the nature of work performed by an excavating company. He stated that in the Appellants' industry, the practice was to buy meals and liquor for the customers to keep work contracts coming in. With respect to the GST reassessment, Mr. Mason stated that the seven thousand dollar difference he calculated would be attributed to bringing into account the excavator, the Dodge cab truck and the trailer.
[12] Janice Minamide, an auditor with CRA, provided evidence respecting the method she employed to conduct the audit. She testified that she used the cash receipts and cash disbursements and compared these totals to the amounts contained and reported in the corporate returns for that reporting period. In doing this, her objective was to see that the documents, books and records supported the amounts reported on the corporate returns.
[13] On cross-examination she explained that she made a number of adjustments including assessing unreported GST collected and collectible, disallowing some input tax credits ("ITCs") respecting the vehicle, taking into account the trade-in value on a 1998 truck and assessing the GST collectible on that transaction, calculating standby charges and operating benefits and adjusting other overstated input tax credits.
[14] After reviewing the Bill of Sale for the Excavator (Exhibit A-8), she confirmed that if this item had been claimed on the GST return, she would have allowed it as claimed. However, she was unable to ascertain the actual amounts included as ITCs on the GST return because she was not provided schedules or working papers by the Appellant or his accountant to support those amounts.
The Issues:
[15] (A) Respecting the Appellant, Barry Kowalchuk Construction Ltd.:
(1) Did the Minister correctly disallow personal expenses ($12,803.71)?
(2) Was the 2001 Dodge 2500 Quad Cab a passenger vehicle and a class 10.1 asset for capital cost allowance purposes?
(3) Did the Appellant have any employees?
(B) Respecting the Appellant, Barry Kowalchuk:
(4) Did Mr. Kowalchuk receive benefits from the Company in the 2000 taxation year ($27,322.00) and the 2001 taxation year ($3,706.00) pursuant to subsection 15(1)?
(5) Did he receive a benefit for a standby charge ($10,813.00) and an operating cost benefit ($960.00) in the 2001 taxation year?
(6) Did he receive these benefits as a shareholder or as an employee of the Company?
(C) And regarding the Corporate GST appeal:
(7) Was the GST collected or collectible ($7,213.55) properly reassessed for the 2001 fiscal year end?
(8) Were the ITCs properly disallowed ($26,525.81) for the 2001 fiscal year end?
[16] In respect to the GST appeal, only the 2001 fiscal year end (April 2000 through March 31, 2001) was left with me for decision.
Analysis
[17] The Reply to the Notice of Appeal for the Company relied on the assumption that many of the Company's expenditures were personal expenses of Mr. Kowalchuk and were therefore not incurred for the purpose of earning income (assumptions 8(i) and 8(j) of the Company's appeal). The Reply to the Notice of Appeal in Mr. Kowalchuk's appeal contained two extensive lists of expenses for his 2000 and 2001 taxation years which the Minister assumed were personal expenses paid by the Company. For the purposes of my analysis the Appellants conceded that the motor bike and snowmobile items were personal expenses.
[18] The majority of the meal expenses which were disallowed seem to relate to meals which Mr. Kowalchuk consumed personally. Determining the percentage of meal expenses which should be deductible by the Company is difficult. Mr. Kowalchuk testified that of the meal expenses, the percentage relating to himself with contractors would be "...99 percent of them will be contractors" (Transcript page 82). He acknowledged that the occasional receipt would reflect those meals purchased during the visits with his daughter when she was hospitalized. He also testified that individual meals would be rare since he was never alone on the job but he was always with contractors. Yet many of the receipts were for values of less than $8.00 to $10.00. These amounts clearly reflect the cost of meals for one person because it is simply impossible for two or more individuals to obtain a meal for that total amount. It therefore appears that Mr. Kowalchuk's estimate of one percent for personal meals for himself and 99 percent for business-related meals, that he shared with contractors, is just simply unrealistic. I do not have any documentation or oral testimony which would permit me to alter the Minister's assessments in regard to the meal expenditures.
[19] With respect to the liquor expenses, the Appellants argued that those purchases were required as gifts to obtain prospective clients and future contracts. Mr. Kowalchuk stated that this was a typical practice in the construction industry. His testimony was corroborated by Dan Mason. He estimated that between 10 to 20 percent of the liquor purchases were for personal consumption and the remainder would be attributed to entertainment purchases for contractors and clients (Transcript pages 80-81). The Company expensed thousands of dollars in liquor purchases in this time period. Considering the hours worked each week by Mr. Kowalchuk, I believe the amounts spent on liquor are in excess of what they would realistically be for personal consumption. I therefore accept his estimate of between 10 to 20 percent as being for personal use. I am prepared to allow 85 percent as a reasonable estimate for business-related liquor costs. Therefore that percentage of those expenses will be deductible by the Company under paragraph 18(1)(a) of the Income Tax Act. The evidence suggests that some of these purchases were gifts while others related to entertaining but because I have no evidence at all regarding any sort of breakdown and where again the onus is on the Appellant, I must conclude that the liquor purchases are subject to the 50 percent reduction under section 67.1 of the Income Tax Act.
[20] Approximately $2,500.00 of the disallowed expenses related to the cost of erecting a fence around Kowalchuk's residence for the purpose of protecting the Company's equipment from theft. I accept his evidence as to the requirement of the fence and the nature of the fence that had to be erected to protect his equipment when it was not in use. It was installed at his personal residence but that residence was also the location of his head office and the property where his equipment was stored when not being used. This is a legitimate business expense and the evidence of both Wendy and Barry Kowalchuk confirmed its necessity. I am allowing a deduction for the amount claimed in respect to the fence.
[21] I am also prepared to allow the amount of $3,738.32, which according to the evidence of Wendy Kowalchuk, was paid by certified cheque to Canadian Aggregate for the purchase of gravel. The evidence suggests this was the company the Appellant regularly dealt with in respect to purchasing gravel and in addition Wendy Kowalchuk specifically recalled this cheque because she quarrelled with the owner over the amount when he came to her residence.
[22] The expenditures of the Company which are disallowed because they were not made for the purpose of producing income will be taxable as a benefit to Mr. Kowalchuk. The issue is whether the benefits are received by him in his capacity as a shareholder or an employee. Both types of benefits are taxable either as an employee benefit under subsection 6(1) of the Income Tax Act or as a shareholder benefit under subsection 15(1) of the Act. The difference in the characterization of the benefits will affect the deductibility by the Company because employee benefits will generally be deductible while shareholder benefits will not be.
[23] The Minister has assumed that the Appellant is not an employee of the Company and therefore any disallowed expenses should be included in his personal income as a shareholder benefit under subsection 15(1). The Minister relied on the fact that no payroll source deductions were reported or submitted in the Company's 2001 taxation year. In addition the only income reported by Kowalchuk in his 2000 taxation year was commission income of $8,000.21 and in his 2001 taxation year business income of $7,400.00. No employment income was reported by Kowalchuk in either taxation year and the Company did not deduct any wages paid to employees in its 2001 taxation year.
[24] The onus is on the Appellants to overcome and demolish the Minister's assumptions that the benefits were received by Kowalchuk as a shareholder and not as an employee. Little evidence was produced at the hearing to overcome the Minister's assumptions. At page 75 of the Transcript, in response to questioning by the Agent for the Appellants regarding the Minister's assumption that the Company had no employees, Mr. Kowalchuk responded: "I don't have employees, I hire subtrades because we don't know how to do payroll...". His Agent then asked him the next question: "...so they're make a point here that you're not an employee, so the company has no employees, not even you?" To which Mr. Kowalchuk responded:"Well, I would guess I would be an employee". When asked if the income he reported as commission income in his 2000 taxation year, would be called a commission, Mr. Kowalchuk responded: "Not really, no" (Transcript page 97). These vague denials alone are not sufficient to overcome the assumption that Kowalchuk is not an employee.
[25] The Minister has also made the assumption that Mr. Kowalchuk was at all material times a director of the Company (assumption 11(b) of the GST appeal). Subsection 248(1) defines the term "employee" to "include officer", The term "officer" is also defined in the final words of the term "office" to include "the position of a corporation director". When I take these statutory provisions together with assumption 11(b) and the evidence that Mr. Kowalchuk was actively involved in the day-to-day operations of the Company (see paragraph 8 of this judgment), I conclude that he was an employee of the Company. Realistically it would be virtually impossible for this Company to conduct its business and complete its contracts without Mr. Kowalchuk's services as an employee.
[26] A large item, common to all three appeals, and in dispute is the 2001 Dodge 2500 Quad Cab truck. The Minister has re-characterized it as a "passenger vehicle" as defined in subsection 248(1) of the Income Tax Act. The characterization of this vehicle pursuant to this section will directly impact on the capital cost allowance calculation, the ITC claim under the GST appeal and the standby charges and operating costs assessed to Mr. Kowalchuk personally.
[27] On January 6, 2001, the Company traded in its 1998 Dodge pick up truck to purchase the 2001 Dodge (referred to as the "truck" in these appeals), according to an invoice with Leduc Chrysler Ltd. (Exhibit A-6). The Minister assumed that the 2001 Dodge truck was a passenger vehicle, within subsection 248(1) of the Income Tax Act and within subsection 123(1) of the Excise Tax Act, made available to Mr. Kowalchuk as a shareholder for his personal use and for which the Company was paying all operating costs. Consequently Mr. Kowalchuk was assessed for receipt of a shareholder benefit for a standby charge and an operating cost benefit in the 2001 taxation year pursuant to subsections 15(1) and 15(5) of the Income Tax Act.
[28] Subsection 248(1) defines "passenger vehicle" as "an automobile acquired after June 17, 1987...". The key word in this definition is "automobile". That term is defined in paragraph 248(1)(a) to mean:
...
(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,
In paragraph 248(1)(e) there are two exemptions from this definition as follows:
...
(e) a motor vehicle of a type commonly called a van or pick-up truck or a similar vehicle
(i) that has a seating capacity for not more than the driver and 2 passengers and that, in the taxation year in which it is acquired, is used primarily for the transportation of goods or equipment in the course of gaining or producing income, or
(ii) the use of which, in the taxation year in which it is acquired, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income;
The determination of whether the truck is a passenger vehicle, and not automotive equipment within the definition of subsection 248(1), will depend on its seating capacity and the amount it was used for transporting goods, equipment or passengers in the course of gaining income. It is not disputed that the truck is a pick up truck or that it was used to some extent for transporting equipment to produce income. What is in dispute is the amount that the truck was used for this purpose. The determination of the truck as a passenger vehicle or automotive equipment will place the truck in either a Class 10 or Class 10.1 category with different tax consequences.
[29] The distinction between these two exemptions to 248(1)(a) is focused on the number of seats and ultimately the passenger capacity of the truck. If there is room for more than two passengers, the use of the vehicle must be "all or substantially all" for transportation in the course of producing income. If the seating capacity is less, then it needs to be used "primarily" for the above purpose.
[30] The truck has an extended cab which means a second row of seats that increases the seating capacity of the truck to generally five or six people. In fact Mr. Kowalchuk stated that he could probably get six people in the truck. It therefore does not meet the criterion contained in sub-paragraph 248(1)(e)(i) because its seating capacity is more than one driver and two passengers. If the truck is to fall within the second exemption of (ii) it must therefore be used "all or substantially all" of the time to transport equipment to produce income.
[31] This definition has been considered in Pronovost v. The Queen, 2003 TCC 139, Ruhl v. R. (1997), [1998] G.S.T.C. 4 (TCC) and Myshak v. The Queen, [1997] G.S.T.C. 59 (TCC). At paragraph 20 of the Pronovost decision, Justice Bowman (now Chief Justice) suggested that the Minister's rule of thumb, that "substantially all" refers to 90 percent or more, is an insufficient measurement because it is arbitrary and does not suggest what unit of measurement should be used. The Minister concluded in the present case that since at least 20 percent of the kilometres were driven for personal use and enjoyment, the truck was not used "all or substantially all" of the time for transportation in the course of producing income. The Appellants have argued that the personal use was minimal and that over 90 percent use of the truck was related to the business.
[32] The Appellant, Mr. Kowalchuk, described the truck as having a fixed fuel tank that was used to haul diesel fuel. It has a fifth wheel hitch and it hauled his construction equipment, including a driving packer, bobcats and water and sewer material. He explained that the size of the back bench seat was, in his words, "little" and that it could accommodate up to six people if those individuals were not too "big" (Transcript page 65). However he used the back bench most of the time for his laser and grading equipment. His wife never drove this truck as she was unable to drive a standard. Except for the two instances of personal use described by Mr. Kowalchuk (one weekend to haul his R.V. and lunch time trips to the hospital to visit his daughter for several months), he stated the truck was used strictly for business purposes. He had three other personal use vehicles at his residence including a hobby truck. In fact he stated that sometimes he would use these vehicles to do business-related work. Although the truck was parked at Mr. Kowalchuk's residence when not in use, this was where his head office was located and where he stored his equipment and tools. He called it a "work truck" and when asked how much enjoyment he got from the truck, he replied: "If you like riding around with a diesel six speed, it's made for just pulling stuff, it's not made for joy riding" (Transcript page 71).
[33] I have no hesitation in finding that the truck was used substantially for the transportation of goods and equipment in the course of earning income. I accept Mr. Kowalchuk's evidence respecting the personal use of the truck which I agree would be less than 10 percent of the total use. I believe another approach to this issue would be to look at the Company's taxation year which ran from April through to the end of March each year. The truck was purchased on January 6, 2001 (Exhibit A-6) which differs from one of the Minister's assumptions that it was purchased in February 2001. The definition of "motor vehicle" in sub-paragraph 248(1)(e)(ii) requires that one look to "the use of which, in the taxation year in which it is acquired, is all or substantially all..." (Emphasis added). Since the truck was purchased in the taxation year ending March 31, 2001 (the Company's taxation year 2000) the use of the truck between January 6, 2001 and March 31, 2001 will be the determining factor here. Mr. Kowalchuk testified that his daughter was hospitalized on July 24 so therefore this personal use factor would not influence the determination of whether the truck in that taxation year was an automobile in the taxation year it was purchased. From this viewpoint the personal use is again reduced because that personal use of visiting his daughter at lunch time by using the truck likely occurred outside the period of the purchase of the truck.
[34] Since I have concluded that the truck is not a passenger vehicle but is automotive equipment, it falls within Class 10 of the Income Tax Regulations for the purposes of capital cost allowance deductions. Both Class 10.1 and Class 10 have a capital cost allowance rate of 30 percent but the capital in Class 10.1 has a capital cost allowance upper limit of $30,000.00 plus tax. Therefore the amount of $5,552.00 which the Minister disallowed and added to the Company's taxable income for the 2001 taxation year will be adjusted in accordance with my reasoning.
[35] Based on my conclusion that the truck is not a passenger vehicle, the standby charge and operating cost benefits to Mr. Kowalchuk will be deleted.
[36] The Minister also denied an ITC on a portion of the cost of the truck ($1,115.42). The treatment of vehicles under the Excise Tax Act mirrors the provisions in the Income Tax Act, such that vehicles that are deemed to be passenger vehicles have a maximum limit for the purpose of the ITC claim. The Minister disallowed $1,115.42 of the $3,215.42 claimed as an ITC. However the truck here is not a passenger vehicle within the meaning of subsection 248(1) of the Income Tax Act and subsection 123(1) of the Excise Tax Act. The amount claimed for an ITC will therefore be permitted.
[37] In respect to the GST appeal for the 2001 fiscal year the Minister also denied a variety of over-claimed and unclaimed ITCs ($26,525.81), including the aforementioned truck ITC, claimed by the Company in that year.
[38] Most of the ITCs claimed were denied due to a lack of documentation. The technical requirements, contained in paragraph 169(4)(a) of the Excise Tax Act and section 3 of the Input Tax Credit Information (GST/HST) Regulations, dictate that sufficient documentary evidence must be provided to support a taxpayer's claims. The Appellant has simply argued that the assessment is too high. The Appellant's amended financial statements suggest that possible variations may exist but do not show where the Minister's assessment is wrong.
[39] Associate Chief Justice Bowman, as he then was, at paragraph 13 of Helsi Construction Management Inc. v. The Queen, [2001] T.C.J. No. 149 stated:
[13] We are dealing with one of the technical requirements under a statute that is somewhat unique for its specificity. Moreover it is the foundation of a self-assessing system that operates in the commercial world. Unfortunate as it may seem to the appellant, rules are rules. . . .
[40] Simply put the Appellant cannot claim ITCs without providing the required supporting documentation. The Appellant simply did not do so. The Appellant's amended financial statements, which cannot be reconciled to the original documentation because there were no supporting records, do not suffice.
[41] The last item in respect to the GST appeal, is the Bill of Sale for the excavator (Exhibit A-8). The Appellant's position is that this item was not included in the GST calculations at the time of audit and should be accepted now. The Respondent's witness, Janice Minamide, testified that she could not ascertain whether the Bill of Sale amount was included in the calculations as the Appellant was unable to provide working papers or other supporting documentation during the audit. She submitted that if the Bill of Sale amounts were included at the time of the audit, then her calculations would reflect the inclusion. However she could not say with certainty whether it had been included. I am prepared to give the Appellant the benefit of the doubt here and accept the Bill of Sale so that the Company may claim an ITC in this regard.
[42] Respondent counsel suggested that the evidence of both Mr. and Mrs. Kowalchuk was not reliable or credible because of the way it was elicited by their Agent. I disagree with counsel's submissions. This hearing was conducted pursuant to the Informal Procedure Rules and the fact that the Agent's questions were leading in some instances is only one factor upon which I assess credibility and therefore reliability of the evidence. In my observations of both Wendy and Barry Kowalchuk, including their demeanour in giving evidence, and their responses to questioning, by both their Agent and Respondent counsel, I am not prepared to reject what they told me simply because some of their evidence was in response to leading questions. In fact on a review of the Transcript their Agent asked questions which were more akin to lengthy statements than questions. I am quite sure by the time Mr. Cetinski got to the end of some of his questions, the Kowalchuks were unsure of just exactly what he was trying to elicit from them.
[43] In summary, the appeals are allowed, without costs, on the basis that:
(a) The Appellant, Barry Kowalchuk, is an employee of the Company;
(b) 85 percent of the liquor purchases which relate to the business are deductible by the Company under paragraph 18(1)(a) of the Income Tax Act but are subject to the 50 percent reduction rule contained in section 67.1. The remaining 15 percent are personally taxable to Mr. Kowalchuk's income from employment and deductible by the Company as an employee benefit;
(c) The amount claimed for erecting the fence is a business expense;
(d) The amount paid to Canadian Aggregate for gravel is a business expense;
(e) The truck is automotive equipment within Class 10 of Schedule II of the Income Tax Regulations and the Company shall be permitted the appropriate capital cost allowance deduction;
(f) The standby charges and operating cost benefits assessed to Mr. Kowalchuk respecting this truck will be deleted;
(g) The Appellant Company shall be permitted to claim an ITC in respect to the acquisition of the truck;
(h) The Appellant Company shall be permitted to claim an ITC in respect to the Bill of Sale (Exhibit A-8) for the excavator;
(i) The Appellant Company shall be permitted to claim ITCs in respect of the fence, the gravel and allowed liquor expenses.
Signed at Ottawa, Canada, this 23rd day of November 2005.
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"Diane Campbell" |
Campbell J.
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CITATION: |
2005TCC757 |
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COURT FILES NO.: |
2004-807(IT)I 2004-1976(IT)I 2003-3495(GST)I |
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STYLE OF CAUSE: |
Barry Kowalchuk Contracting Ltd. and |
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PLACE OF HEARING |
Edmonton, Alberta |
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DATE OF HEARING |
September 23, 2004 and September 9, 2005 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Diane Campbell |
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DATE OF JUDGMENT |
November 23, 2005 |
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APPEARANCES: |
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For the Appellant: |
Ace H. Cetinski |
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Counsel for the Respondent: |
John-Paul Hargrove Elena Sacluti Tyler Lord (Student-at-law) |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |