Date: 20001020
Docket: 1999-619-IT-G
BETWEEN:
RICHARD O’NEILL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] This appeal is from reassessments of the Minister, Notices of which were dated August 15, 1995 in which the Appellant was reassessed by including the amounts of $3,267 and $4,860 in income for the 1992 and 1993 taxation years, respectively, as the value of benefits conferred on the Appellant by C & C Limited (hereinafter referred to as C & C) and by disallowing the deduction of the Allowable Business Investment Loss (“ABIL”) of $44,489 claimed by the Appellant in the 1993 taxation year.
[2] At the time of trial, the parties submitted a partial statement of agreed facts which is as follows:
The Appellant, Richard O’Neill, and the Respondent, Her Majesty the Queen, by their solicitors, agree to the following facts for the purpose of these proceedings:
The Appellant is Mr. Richard O’Neill, residing at 68 Harrington Drive, St. John’s, Newfoundland.
This Appeal arises from two Notices of Assessment, both dated August 15th, 1995 and relates to the Appellant’s 1992 and 1993 taxation years.
The Appellant was a shareholder and the general manager of O’Neill Motors Limited throughout the relevant years.
Mr. McNeill was a shareholder, the president and general manager of McNeill’s Transport Limited throughout the relevant years.
In November 1990, the Appellant and Loyola McNeill purchased all of the shares of C & C Limited (C & C), a Newfoundland corporation, for $30,000. They each acquired 50% of the shares. $24,000 of the purchase price was obtained through a personal loan of the Appellant and Mr. McNeill. This loan was secured by a chattel mortgage of C & C.
The only asset of C & C at the time was a small aircraft (a Cessna 180) equipped with floats. The aircraft had call letters C-FEDK (commonly referred to as EDK).
At the time C & C was purchased it had no operations and the aircraft EDK was not operable and was in need of a major repair.
C & C did not have a company bank account. The Appellant and Loyola McNeill had a joint bank account.
From November 1990 through early July 1992, the Appellant and Mr. McNeill, to some extent personally, with the help of others, repaired EDK, to bring it back to an operable condition by July 9th, 1992.
All of the expenses associated with the repair and storage of the aircraft EDK were paid for by the Appellant and/or Mr. McNeill personally, but were ultimately recorded in the financial statements of C & C as shareholder loans without interest.
In or around early August 1993, C & C purchased a Dehavilland Beaver aircraft with call letters C-GUBS (commonly referred to as UBS) for $210,000. To complete this transaction, C & C traded in EDK and another aircraft for a combined value of $198,000. The total amount paid by C & C at this time was $26,700 (= purchase price less trade in value, plus GST).
The third aircraft, a Cessna TU 206-G, with call letters C-FDJI, was purchased from a third party and traded in on the UBS purchase along with EDK.
Upon completion of the aforementioned transaction and as of early August, 1993, C & C owned only one aircraft, UBS.
The Appellant held a permit to occupy land at Round Pond in a remote area of central Newfoundland that was, and still is, only accessible by air. The Appellant and Mr. McNeill, through personal labour and with the help of friends, constructed a cabin on this land.
As of the date of the airplane crash in 1993, no applications were made to the relevant departments of the Provincial Government to run an outfitting operation and no permit was obtained for the cabin to approve it for use in an outfitting operation.
The Appellant did not report any income for use of the cabin.
No revenue was earned or recorded by C & C for outfitting operations. C & C’s only recorded revenue, while owned by the Appellant and Mr. McNeill, were amounts received from O’Neill Motors Limited and McNeill’s Transport Limited.
The insurance policy held on the aircraft UBS did not cover commercial use of the aircraft.
In early October 1993, the Appellant was involved in a plane crash with the aircraft UBS. UBS was damaged to the extent of being written off. At this time, the salvage value of UBS was assessed at approximately $5,000.
Net insurance proceeds of $131,650 were received from the loss settlement on UBS. These proceeds covered the chattel mortgage taken out by C & C for this plane, but ultimately left C & C in a significant deficit position.
After the crash in 1993, no further work was carried out on the cabin.
After the crash in 1993, no operations were conducted by C & C and they were ultimately struck from the Registry of Companies.
C & C did not file any income tax returns while owned by the Appellant and Mr. McNeill until March 15th, 1994. On this date, both the 1992 and 1993 T2 returns for C & C were signed by the Appellant and subsequently filed with Revenue Canada.
C & C did not have any financial statements compiled between 1990 and the date of the plane crash in 1993.
Throughout the relevant period, C & C did not maintain any books of financial accounts for any purpose, however, financial statements for C & C were prepared for the 1992 and 1993 taxation years in February, 1994 by Wayne Sooley.
Mr. McNeill, ultimately did not claim an ABIL in relation to C & C in his 1993 taxation year.
DATED at St. John’s, Newfoundland this 15th day of August, 2000.
[3] Further viva voce evidence was adduced at the time of trial.
Evidence
[4] Mr. Richard O’Neill testified that he attended Memorial University for four and one-half years and had finished at that institution in 1977. He entered into a Datsun Car Dealership in 1979 under the name of O’Neill Motors Limited. It was owned by himself, his brother and his father. Initially his father had 60% control of the business but now the Appellant has a majority interest with his brother having a minority interest in the limited company.
[5] The Appellant is also active in another business known as Toyota Central Limited Clarenville 10352 Newfoundland Incorporated which has the Land Rover and Jaguar franchises. The Appellant was President of this company. The Appellant also has an interest in a construction company involved in snow removal and earlier had a trucking business for a year and one-half in the 1990s. At this time he is mostly involved in the car business.
[6] In the past, he had leased aircraft to others for the summer and fall on a monthly lease basis although he was only in this business for about a year in the mid-90s.
[7] C & C was owned by himself and Mr. Loyola McNeill. He has known Loyola McNeill since the early 1980s. They had a common interest in flying. Mr. O’Neill became involved in flying in 1980 or 1981 and received his pilot’s license. In the mid-80s they were involved in flying together to the extent of approximately 30 hours per year on a personal basis and they flew together more often on a commercial basis. They purchased the shares of C & C in November 1990. They believed that an “outfitting business” would be profitable. The Appellant has spent some time in hunting camps in the North.
[8] Their plan involved buying the company, obtaining an aircraft at a reduced price, rebuilding it, selling it, obtaining another aircraft and developing a camp. They had no written plan. No financing arrangements were made with the exception of a bank loan for which the aircraft was given as security. At first he said that C & C borrowed the money. However, after seeing Exhibit A-1 at Tab-1 he admitted that the loan was indeed personal and that the note was in the name of the Appellant and Loyola McNeill. A bank account was set up and it was referred to at Tab 19 of the same exhibit which showed the account in the names of Rick O’Neill or Loyola McNeill. The loan was for $24,000 and $6,000 was placed in the account by the account owners in order to buy the shares of C & C.
[9] This company owned an aircraft, C-FEDK, hereinafter referred to as “EDK”. This aircraft had an unserviceable engine and other problems as well. It was rebuilt as soon as the account holders could afford it. By July of 1992 it was serviceable again. The work on this aircraft was completed at the McNeill warehouse, some at O’Neill Motors and some at Provincial Airlines Limited hangar. Expenses were paid for by the two account holders personally and out of the joint account above referred to.
[10] He referred to Tab 18 of Exhibit A-1 which contained the information with respect to this aircraft and monies paid for its repair. He said that there was no other bookkeeping with respect to the aircraft.
[11] By July 1992 they had an aircraft, they had equity in it and they intended to use it as a down payment on a new plane. The camp located at Round Pond was partially finished. It contained walls and a roof although it had to be enlarged. A permit was obtained in 1989 from Crown lands with respect to this remote wilderness property. He obtained a permit and erected a camp on it. It was a log cabin.
[12] Supplies were brought into Round Pond in July 1992 such as lumber and windows for the camp. They had also started on the plumbing. No more work was done on the cabin that year. He was busy in the car business and Mr. McNeill was active in business as well.
[13] No contractor was retained to build the cabin and in this way he hoped to save money. He and Mr. McNeill had no agreement as to how the aircraft was to be used. “You just took it and used it”.
[14] By June 7, 1993 not much construction had taken place on the cabin by the Appellant and any use of the plane was of a personal nature. Passengers included someone who wanted to go along on the flight, staff of the Appellant’s car business and those entitled to promotion sales rewards as employees. The only revenue in 1992 and 1993 by C & C was from O’Neill Motors and McNeill Transport.
[15] He and Mr. McNeill bought a “Beaver” aircraft between June and August of 1993. It was an eight seater and had a 5900 pound capacity. It was obtained through the use of a broker. The broker took EDK on a trade. It was in Toronto at the time. There was also a cash out lay of $26,700. This financial arrangement was set out in Exhibit A-1 at Tab 17 and it involved a loan from the National Bank. The Appellant said that they had a $75,000 equity in the plane and a $140,000 outstanding loan.
[16] By August of 1993 he and Mr. McNeill were still not ready to take customers into the camp even though they had purchased the Beaver aircraft by that time. It was his position that it was necessary to obtain the aircraft when it was available. Costs are usually higher in March and April and lower in the late fall. Most outfitters use Beaver aircraft.
[17] He referred to Tab 3 of Exhibit A-1 which was the aircraft log for the August and September flights. He had to be checked out on the Beaver before he was able to fly it by himself. He looked at the log and said: “It looks like I was doing check-out time and flying in supplies as well.” He was not quite sure about this. Mr. McNeill had to fly 10 hours in the Beaver as well. He was a commercial pilot. After 10 hours he could check out Mr. O’Neill as a pilot.
[18] He said that a Beaver aircraft has to be used every ten days or the oil will sit in the bottom of the engine. One of the trips shown in the log was for the regional manager from Toyota. No revenue was obtained for C & C from this trip. He planned to take two men in to cut logs for the extension but this was aborted. One trip was for Mr. McNeill’s brother and brother-in-law. Up to October 8, 1993 the work done on the camp was completed by him and other persons who provided free labour. They were rewarded by having a plane ride and by using some of the time for fishing. None of these were paid trips.
[19] On October 8, 1993 there was an engine failure at 300 feet and the plane was wrecked. It was removed by the insurance company.
[20] For outfitting purposes they would have to obtain commercial insurance although there was no need for it up to that point. When the insurance company set out the net settlement figure it was at $131,650 which covered the bank loan but the Appellant and Mr. O’Neill lost their equity in the aircraft. The witness said: “It put everything back by $80,000. No more work was done on the cabin and no efforts were made to get a new plane.” It was late fall when the insurance claim was settled and Mr. McNeill did not have the wherewithal to continue with the enterprise. His business took a downturn as there was a downturn in the fishing industry.
[21] Since the crash in October of 1993 he and Mr. McNeill have gone into the camp from time to time and last year they put locks on the door.
[22] The permit to the lot was in his name. It was never transferred over to C & C. When asked why this was the case he said: “I wrote to the Minister for it. It was as much Mr. McNeill’s as mine. We intended to transfer it to C & C Limited.” He said there was no business plan in place but he did not see this as extraordinary since he did not have a business plan for other businesses as well. He had plans for O’Neill Motors and Toyota Central but not for the others. He had some ideas as to how much revenue the outfitting business would generate from talking to other outfitters. He calculated it at a quarter of a million dollars per year. There was no estimate of expenses. They intended to target American hunters to the extent of 40 to 50 people per year. This number would be required to make a profit.
[23] He indicated that there was good hunting in the area of the camp and possibly fishing although he was not sure about this. He said, “we expected it to be profitable since my other businesses were. I have another business planned now but I have no business plan for it because it will not work.”
[24] In order to commence the outfitting business they needed the permit from Crown lands which he did not think would be a difficult proposition since Mr. McNeill was politically well connected. They needed a cabin and they needed an aircraft because it was not feasible to charter an aircraft from someone else because Charter Aircraft are too busy in the fall season when they are needed. It made more sense to have their own plane.
[25] He has never used an outfitter to “do a hunt” but has used their camps while snowmobiling. He had talked to outfitters about how much they were paying their employees. This took place over casual conversation during the evening.
[26] They had no concerns about receiving a permit since they only needed to be the only camp within a five mile radius of another camp and in their case they had 25 miles radius. It was not reasonable to have a Beaver aircraft for personal use. If they were not going to enter into a business they could have left the Beaver aircraft in their own names and not put it in the name of the company. That way there would be no personal use claim. He admitted that they had used the plane personally.
[27] The primary purpose for the expenditures was to build a camp, obtain an aircraft and start the outfitting business. The other aircraft would have been enough if they were only going to use it for personal purposes. If the operation had started in 1994, Loyola and his son were commercial pilots and they could have flown in customers. The Appellant was not able to carry paying customers but could carry in supplies. There was no reason for him to be involved with the Beaver aircraft except in support of the outfitting business, so far as he was concerned. The time for a float plan was from May to October but they were able to put wheels on the plane if they needed to but they had no use for it in the winter.
[28] The salvage for the aircraft was sold to Hill Investments from Halifax and one of the O’Neill companies bought it back and it was rebuilt, then it was sold. They did not use it.
[29] Mr. Sooley was the accountant who prepared the 1994 financial statements for C & C for 1992 and 1993 and also dealt with Revenue Canada. The Appellant did not know how much use Mr. McNeill made of the aircraft. Each had their own log books.
[30] He identified Exhibit A-1 at Tab 3A as his log book. There were also written notes that would not be in his original log book. They were put in when he was answering questions for Revenue Canada.
[31] In cross-examination he said that he was a partial owner of O’Neill Leasing which leased vehicles in the early 1980s. His business had leased one aircraft and owned one, two or three. He flew some of these aircraft for pleasure and some flights were work related. He would have used them for dropping off someone, picking them up and may have taken the Japanese President out fishing. He then said that the O’Neill Company has owned up to four aircraft. The only one he did not fly was the aircraft that was leased for one year.
[32] The idea of the outfitting business was to build a camp, have an aircraft and cater to customers for revenue. It would be involved in catering to hunters at first then perhaps in catering to fishing persons or those interested in canoeing. Hunting was the major thought and the months of September, October and possibly into November were the appropriate times of the year for this venture. He referred to the summer months as June, July and August.
[33] With respect to the EDK aircraft, the first plane, expenses were met by use of his Visa and none of them were accounted for except on a piece of paper. There was a 50-50 split between himself and Mr. McNeill for these expenses. There may have been expenses made by Mr. McNeill that he was not informed about. The Appellant had most of the receipts. He did not have Mr. McNeill’s pilot’s log and he had never seen it.
[34] His predominant business was the car business. This business requires him to be out of the area in the fall. He could not recall whether this was the case in 1992 and 1993. In his business the sales are greatest in the spring and he does most of his travelling in October and November. All of his time could be consumed with this business. He may vacation one and one-half to two months a year. He mixes business and pleasure trips. He was formerly the President of the Canadian Association of Japanese Operators and this required four meetings a year. These meetings took him to Ottawa, Washington and he spent one week in Japan every two years. These meetings took approximately two to three days. In the years 1992 and 1993 he was on the board but he could not say if he was President at that time or not. He believes it was well into the 1990s.
[35] Mr. McNeill had two businesses including a freight forwarding business and one other. This witness used the plane for ferrying equipment to the camp, taking in lumber for the roof, bedding, supplies and the toilets. These were referred to as one-time supplies. Food was taken in when needed.
[36] The Beaver aircraft had eight seats. He has taken four people plus himself in the aircraft. He was asked how reasonable it was to buy a Beaver aircraft when they were not ready to get into business and knowing that it had to be used every ten days which was an added cost. Every time they used the plane they brought in gas or supplies and they did some work. He brought Terry Gibson to the camp in the plane but did not charge for it. He hired two people to cut logs plus one other person. He was to pay an hourly rate but he could not remember what it was. This was on September 28, 1993 but these people did not go in and were not paid. The extension was never done as the airplane crashed before this took place.
[37] He was asked when he intended to apply for the charter licence and he said, “That fall, I honestly believed that we would be ready to bring people in by the next fall.” He also said that Mr. McNeill had to move to Toronto due to a downturn in business. His vision was to have three bedrooms plus one bath and to accommodate six people. There was no floor plan. They would just go in and build. Mr. McNeill and he would have had a consensus as to what to build. He said, “I thought we could get an outfitters’ licence through Mr. McNeill’s political connections. There would be no problem getting the licence.”
[38] With respect to the purchasing of C & C, it was as easy to purchase the company with the plane and there would be some tax saving. They intended to rebuild the aircraft. The shares were held 50-50 by himself and Mr. McNeill. He said, “I guess the certificates were transferred to us but I don’t know what happened to them.” In the year 1993, C & C earned revenue from his garage. From July 15, 1993 Mr. McNeill took some customers in. He did not know the extent of the charges. There was never an invoice from C & C to O’Neill Motors. It would have been put on a piece of paper. He reiterated that he owned the cabin at Round Pond. The cabin was closed-in in the early 1990s. He did not know how often he went to Round Pond but he would stay overnight. There was a tent on the other side of the lake that was used by them before the cabin was ready. He started going to Round Pond in June 1987. Some of these trips were personal and some were business related. No one was charged for these trips.
[39] Between 1985 and 1987 there was a mixture of personal and business trips but he had nothing to show which was which. He did not have a licence to fly commercially. His licence was for pleasure flying only. His flights usually took place on the Avalon Peninsula. He flew between 1985 and 1993. He did not fly between 1994 and 1996. It was possible to maintain a pilot’s licence even though you did not fly for five years. He never lost his licence at any time. In 1997 his pattern of flying was similar to that of the years 1985 to 1993. There never was a time when he could not use the company’s plane. He flew a lot of times with Mr. McNeill. He was an experienced pilot and was available.
[40] Mr. McNeill would have put his 10 hours in on the Beaver aircraft. The salvage of the aircraft was bought for $5,000 by Hill Investments and one of his companies bought it back for $6,000. After a year it was rebuilt by one of his companies and it was sold. He did not know the sale price but said that his companies put in approximately $150,000. It was worth $210,000 and he recalled that his companies made money on it from the sale. He and Mr. McNeill took out the loan to pay $125,000 together with the $26,700 to pay for the balance of the purchase price of the Beaver aircraft.
[41] He was referred to Exhibit A-1 at Tab 21 in regard to the loan for the Beaver. He admitted that the first financial statements produced for the C & C were for 1993 and these were produced in February of 1994. They never commenced the outfitting operation since the plane crashed before they got it started. He was asked why he drew up the 1992 statements and he said he did not know. Then he said that this was to carry the loss forward on the advice of his accountant.
[42] There was nothing going on in 1993. They lost $88,059 as a result of the crash. Prior to the crash there was no intention to file a return for C & C because there was no activity. Interest was never expensed to C & C for the outstanding loans in 1990, 1991 or 1992. Gas was used in 1992 but none was charged to C & C “It must have been paid by us”.
[43] With respect to the revenue shown for the year of 1993 of $9,809, he said that the $4,600 was from O’Neill Motors and the rest may have come from Mr. McNeill’s companies. He did not know anything about any invoices. He did not know whether there was a net or gross profit. He assumed that the legal bill was paid by himself and Mr. O’Neill. He did not know how it would have been expensed for accounting purposes.
[44] With respect to the outfitting business, it never got started. In 1990 they were at the concept stage. He could not say how the plan was formulated because there was nothing on paper. By 1993 they knew what they wanted to do, they had the aircraft and they could move on. They knew that they had to extend the camp, obtain the licence and start looking for business.
[45] EDK was never contemplated for the outfitting business. It was sold at a loss. If they had waited to buy the Beaver aircraft it may have cost them more money. In 1993 the cabin was not ready for outfitting. The attempt to expand was the first major step to get the camp ready for outfitting.
[46] The company was never registered as an outfitter. He did not know what was involved in registering as Mr. McNeill was in charge of that item. He did not know what permits were required.
[47] Again he was questioned with respect to the plan for the operation and he said that it was for hunting in the fall and maybe fishing in the summer. The majority of the business would come from American Big Game Hunters. Mr. McNeill had a number of friends who were outfitters and he left that aspect of the business up to him. He did not know about it. He did know that all outfitters on the west coast were full. This information came from word-of-mouth. He expected to earn about a quarter of a million dollars annually which would come from about 50 hunters who would pay $4,000 each for the experience.
[48] He admitted that they had done nothing with respect to obtaining staff. They were not ready for that aspect of the business. They would do it in July of 1994. It was his position that cooks would cost about $500 a week, guides would cost between $300 to $400 a week and the camp hands would cost about $300 a week. It would not be feasible to look for this type of staff a year in advance. Then he said “somewhere we put it down on paper”.
[49] He was referred to Exhibit A-1 at Tab 13 and he said that he never made such a request before 1995. Mr. McNeill had been in touch with the government before that. He did not know what the restrictions were in 1993. He was asked if he took into account the weather factor and he said, “as much as anyone else”.
[50] In re-direct he said that he had sufficient time to devote to this business. His time requirements would have been minimal. The Beaver was the most suitable aircraft for this operation. He did less flying after the Beaver was purchased than before. It was equally available to him and Mr. McNeill.
[51] He was referred to Exhibit A-1 at Tab 19, page 3 and he said that the interest was charged to the joint account on a monthly basis. Deposits were from their private sources. After he referred to Tab 18 at page 2 he said that there was insurance on the aircraft.
[52] Ignatius Loyola McNeill is now retired. He does part-time work consulting in the trucking business and sometimes he drives. He has been driving a truck since 1954 and was also a radio technician. He also did repairs and acted as an operator for about 10 years. He took courses in this field. He came back to trucking in the year 1974 but he also had a pilot’s licence. In 1976 he became involved in an out-of-province transportation business as a driver. In 1978 he bought a transport licence and operated in Canada and the United States. At one point he had up to 35 trucks. The business name was McNeill’s Transport Limited. He was the President and General Manager. This company went out of business in 1998 but by that time he had retired.
[53] He was also involved in a supermarket and general store, building supplies, contracting in the late 60s and in the school bus business. He obtained a pilot’s licence in the 60s. At first he had a private pilot’s licence and then obtained a commercial licence in the 70s. He had an airline transport licence as well. He used several aircraft since 1979. These were involved in the transport business but did not include C & C’s plane. He knew Mr. O’Neill for a number of years. They became friends when Mr. O’Neill was learning to fly. C & C’s sole purpose was to buy a Cessna 180, repair it and trade it in to obtain a Beaver. The Beaver was more expensive. They were going into the outfitters business. They built a cabin at Round Pond and after about five years it was 99% ready. They repaired the EDK and flew it for the first time on June 2, 1992. It was on wheels and then put on floats on June 8, 1992.
[54] They talked about the outfitting business a number of times. They would look for an outfitters licence one day for hunting and fishing. He first went to Round Pond in 1985 and set up the camp in 1986. It was just a nice place to go. In 1989 they started the cabin. It was across the lake from the camp which they had occupied earlier and about one half to three quarters of a mile away. They did not put much hard labour into the camp but used the services of a number of people who liked to go to that area. Assistance was rendered by himself and Mr. O’Neill with respect to the logs for the cabin. By the end of August 1989 it was covered in but no windows were put in until the fall when the windows were installed and the roof was completed. Two years later, it was finished. The work period was from June 1 to November 1 in any year depending upon the weather.
[55] He was questioned about the plan for the business and he said there was a lot of talk leading up to what they were going to do. They had to have the camp complete. They needed an aircraft to do the work. They wanted a Beaver. In June 1993 they went to Ontario to look at a Beaver at Hawksbury. It was in good shape. They bought it and it was brought to Newfoundland on August 6, 1993. On August 8, 1993 he flew it for the first time. This plane could accommodate five people and carry 5900 pounds although the pay load was 2200 pounds. He said, “At this time we were in business. We were going to apply for a charter licence. I was a commercial pilot”.
[56] The charter licence was a very extensive proposition. The aircraft had to be properly outfitted. They needed a contract with an engineering firm with respect to repairs and needed a chief pilot with sufficient hours. He needed 10 hours on the Beaver to become chief pilot. It would take him six months to obtain his licence. Then they needed an outfitters licence which would take approximately six months. To obtain the outfitters licence they were required to make a detailed application. These applications were quite extensive. They would need people to complete the application for them. He knew people who could do it. He knew people in the department who could guide him through the process. Then he had to obtain the necessary flying hours but this was achievable.
[57] It would have taken about six to eight months after November of that year to complete the applications. By that time, he was a qualified pilot. Hangar facilities were needed for maintenance but this was achievable. The facility would have to meet requirements which were extensive, so many feet per person were required. There were restrictions with respect to the type of structure. The Department of Health would oversee the facility. He had no concern about the number of outfitters in the area and he thought there was no problem meeting this requirement. He had no concern about obtaining a licence. They were well situated in politics and one of the officials had visited the site.
[58] The provincial government wanted to develop this type of facility. He knew several persons in the outfitting business who charged about US$3,500 for a moose or caribou hunt. Their cabin could accommodate four hunters over eight weeks. However, the facility was not viable at that time to handle this number of people. They had to add on to the facility, expected to carry about seven people per trip and about 70 people per season which would earn them about $200,000 a year. Then they could get enough money from the fishing to cover the expenses.
[59] With respect to staff they needed a cook and a helper in the kitchen plus two to three guides. They had people who were interested in doing that for them. They were not difficult to find. It was not feasible to hire these people at this time since they were not ready. It would take 30 days to obtain the staff that they needed.
[60] He calculated that after five years they would be able to obtain sufficient clients to make a profit.
[61] It was his position that they would get 20 people the first year and after five years they would get 70 people. He knew which magazines to advertise in and which shows to go to. They had talked about enlarging the cabin. Richard O’Neill was going in to look at the logs. The plane crashed on October 8th, 1993 and it was written off. All of their plans were concluded at that time.
[62] In April of 1994 this witness lost his pilot’s licence. He was doing business in Ontario at that time although this would not affect their outfitting business because he was looking forward to it. He lived in Ontario for two years. When the plane crashed they lost all of their equity in it. Funds received from the insurance were sufficient to pay off the bank.
[63] There was no written plan for the business although that had to be done to make an application for an outfitters’ licence. They needed an accounting firm to do it for them. Spurrell Sooley Accounting Limited were used by both partners and they would have used them for making the application. He said: “Up to that time it was just scribbling on the desk. Even at that we expected to make a profit”.
[64] With respect to the relationship between himself and Mr. O’Neill he said that there was no agreement in place as to when they could use the aircraft. When they wanted to use it they used it. In order to get the required hours to fly the Beaver, he would have to be around for five months. This was not a problem for him even though he had moved to Ontario. EDK was used mostly for supplies to the camp and the Beaver was used mainly to enable him to get his hours in.
[65] He did not have a business plan for his trucking business until he had to go to the bank for money. This did not pose a problem for him and his business was successful. He flew EDK into Round Pond mainly for supplies although Richard O’Neill used it mostly.
[66] With respect to the required flying hours on the Beaver he said that he needed 100 hours to satisfy himself that he was familiar with the craft. He needed only 10 hours to take it up by himself for insurance purposes. He had a friend who checked him out. He needed 50 hours to get the lower deductible which was $5,000. He got 40 hours in on the plane and Mr. O’Neill needed training hours as well.
[67] With respect to financial records, he said that Mr. O’Neill had them in a file. A lot of the transactions were done in cash out of their own pockets. They knew what each other was owed each month when they paid for the repairs out of their own pockets. He flew commercially in 1993 for Provincial Airlines Limited but this did not require a lot of his time.
[68] In cross-examination he said that he wanted to complete the camp first so that they could go fishing and hunting. He was asked why and he said: “We were going there to relax, we wanted a fixed shelter”.
[69] When questioned about any discussions concerning the amount of income that might be earned from the business he said, “We just talked about the income when we were together, flying or sitting in the camp. It was common knowledge at the time. We did no research and did not need to. This would have come when we made our application for the outfitters licence”.
[70] The cabin had water and sewer by 1992. He had the information about the charter licence and the outfitters requirements about six months before the Beaver was purchased. He did nothing more about it than that. The cabin had two bedrooms with one double and two single beds in each. They could accommodate four hunters and two workers. The hunters would have to share a cabin with the workers. There were a lot of fish at Round Pond. It was also good for hunting. He hunted there himself. It was located on a migration route for caribou during the months of September, October and November. Moose were also plentiful. Thousands of moose and caribou were seen in that area.
[71] He admitted that they first went to Round Pond for pleasure and this intention changed to that of a commercial venture after they started the cabin and talked to people and saw that there were other operations in the area. He could not remember what expenses, if any, were charged to C & C and most of it came out of their own pocket.
[72] He was asked why they had no financial statements before the plane crashed and he said, “because it was before we purchased the Beaver. It was our own money out of our own pocket and until that time it was not a commercial venture”. He worked full-time with the transport company in 1992 and 1993 but he was “scrounging time for flying”. He entered a business relationship with Mr. O’Neill when they purchased the Beaver. In the year 1993 C & C claimed to have earned income which was money paid to it from McNeill Transport which allotted rewards to its workers. They did the same thing in prior years but he could not remember when they started putting the money into C & C.
[73] In the year 1992 he made several trips to the camp with other people and his plane was used. He also used C & C’s plane in 1992 to take people in and to take in supplies but no money was received. He also used the C-FJAI but no money was received by C & C for its use. There may have been an invoice for C & C or there may have been an agreement to pay so much to take the clients to the cabin.
[74] In 1993 he had no financial difficulties. He believed he may have claimed the loss for C & C and it may have been disallowed. He was shown Exhibit R-2, admitted by consent, which was a printout of his return for the year 1993 showing the disallowance of a loss. He did not remember. No losses were claimed before or after for C & C.
[75] With respect to the outfitting business, they had all intentions of proceeding with the application for the licence until the crash took place. The plane was not fully insured because of the cost of the insurance. They considered trying to obtain government financing for the venture in the future. He was asked about the requirements that had to be met before an outfitters’ licence was obtained and he said that there were quite a few.
[76] He admitted that the building was not ready at that time and it would not be complete until the application was submitted. He obtained the application form in the winter of 1992 which was placed on his desk for six months, uncompleted. The operation would take place within one to three years down the road.
[77] He was referred to Exhibit A-1 at Tab-13 and he said that they had discussed the requirements set out in this letter. He was aware of the restrictions but no applications were made before the construction was started. When EDK was purchased he knew that they would have to rebuild and sell it at a profit in order to enable him to buy the Beaver. They traded in his plane and the EDK for the Beaver. If there was any insurance on EDK, it came out of their own pockets. He did not know who paid for the insurance on the Beaver. They had to borrow money from the National Bank to make up the difference for the purchase price. He could not explain where the balance of the money came from which is shown in Exhibit A-1 at Tab 21 at page 5. His company received $113,000 for the sale of FDJI.
[78] In re-direct he said that he gave figures at discovery that they would put through about 60 to 70 people in the outfitting business for a total of $215,000 income. Their plan was not contingent on government financing. He had no cash into the cabin itself. He recognized the letter from the Department of Tourism, Culture and Recreation at Tab 13 with respect to the outfitting licence requirements. He had no information that would suggest that the requirements had changed between 1992 and the date that this letter was sent.
[79] The Respondent called Jeff Haines who was a Canadian Customs and Revenue Agency business auditor. He had formerly been an appeals officer and an auditor. He was the appeals officer in this case. To him the issues were whether or not the Appellant was entitled to an ABIL with respect to C & C and whether or not the Appellant had obtained a personal use benefit from C & C.
[80] He referred to Exhibit R-1 at Tab 15 and said there was an audit conducted by John Clarke. These results were shown at Tab 11 which he reviewed. He also reviewed the Notice of Objection and the audit procedure used. The ABIL was disallowed because it did not meet the test of having been expended for the purpose of gaining or producing income. The outfitting enterprise contemplated had not commenced business and therefore the expenses were not related to income. The personal use element of the assessment was not commented upon by the Appellant except that he was objecting to it. The benefit assessed was not adjusted.
[81] The method used by Mr. Clarke in assessing the personal use benefit was a method that the department utilized. He reviewed the document at Tab 12 and said that the Appellant disagreed with everything that they had done. The Department of Tourism told Mr. O’Neill that they needed a business plan to be able to obtain an outfitters’ licence.
[82] In cross-examination the Appellant was again referred to Exhibit R-1 at Tab 11 which was Mr. Clarke’s report and he agreed with it. There was no difference in the conclusions that he made and the conclusions that Mr. Clarke made. They never got into the matter of quantifying the amount because the expenses were not laid out to earn income. Business was not started nor was it leading up to being started. There was no formal business plan and this was also one factor that he considered. No applications were made to the government for the outfitters’ license. There was a chance that a licence may not be approved. The cabin was controlled by Mr. O’Neill. Further, the auditor wondered if this was such a good plan why did they not continue on after the plane crashed. Insofar as the auditor was concerned, the plane was purchased for personal use and then it was upgraded and then it crashed. The monies invested in the plane were not laid out to produce income. The first plane purchased was not suitable for the business venture but perhaps it was for personal use for two persons. There were no expenses claimed for the plane except for interest and insurance. This witness knew that a Beaver aircraft was normally used in the outfitting industry but he did not have any information that a Beaver aircraft was generally not used for personal use nor did he try to find that out.
[83] His understanding was that the remains of the plane never left the province and the invoices were just small ones without any details attached to them. He asked the Appellant what happened to the plane and he received no response.
[84] With respect to the outfitting business no permits were in place. This was a factor that he considered. No action was taken to obtain the permits except that Mr. McNeill had obtained the applications. No prudent businessman would have invested over $210,000 in an airplane for the outfitting business when he did not have a permit for it. Insofar as this witness was concerned permits were the most important thing. The whole operation started with a permit, then the building and then the plane. The real test was whether or not the Appellant was in business and whether he was moving toward a business. The cabin was a personal thing and was not owned by C & C.
[85] With respect to the question of benefits, he referred to Exhibit A-1 at Tab 7 and he agreed that after the plane crashed on November 16, 1993 it was no longer available for their use. Further, EDK was not available until June so that these elements would affect the personal benefit assessed. There was some reduction. Nothing was presented to him to enable him to change the benefit assessed to the Appellant.
Argument on behalf of the Appellant
[86] Counsel for the Appellant argued that the first issue was whether or not the ABIL was available for the Appellant. The second argument was with respect to the personal use benefit. Referring to Hickman Motors Limited v. The Queen, [1997] 2 S.C.R. 336, the Appellant concluded that in accordance with the findings in that case and based upon the evidence here, the burden of proof in the case at bar had shifted to the Respondent. It was his position that the taxpayer had demolished the presumptions contained in the Reply and that the Respondent should be called upon to revoke the prima facie case made out by the Appellant and to prove the assumptions. He argued that there are different tests to be used when one is considering reasonable expectation of profit and the test to be used when one is considering whether or not there is a business, such distinctions having been referred to in paragraphs 67 to 72 in Hickman, supra.
[87] The loss in the case at bar was clearly a capital loss and all of it related to the loss of equity in the plane. The question to be asked is whether or not there was a business and if there was, when did it commence? It was his position that the business commenced when the Appellant purchased the aircraft. It was not unlike any other business. You start slowly, in an unsophisticated way (as the Appellant and his partner did in their other businesses). They decided to do it at a pace they could afford without borrowing large sums of money. They could have hired a large crew to build the cabin, but they did not. There was no rush. When a suitable aircraft became available, they purchased it. The aircraft is the key to this business situation. The aircraft was what they needed to make the business viable. It was purchased to run the business. The nature of the aircraft made it commercially satisfactory for this purpose. It is what was used in the industry. The purchase and use of this Beaver was inconsistent with a “personal use”.
[88] The Beaver was bigger and more expensive to operate than other aircraft but it was an essential part of the act of commencing the operation. Purchase of this aircraft would enable them to apply for the charter licence and to move forward. There was really no other transportation available and other charters had their own camps to attend to. To go ahead with the outfitting business without this plane was stupid. The problem faced by the Appellant here was the old “chicken and egg problem”. It was necessary to have the aircraft to be able to apply for the licence.
[89] The question may be asked as to why the Appellant should have bought the plane when he did, the answer is that it was an opportunity that came to them because the aircraft was available.
[90] The loss occurred in a catastrophic way. The absence of a business plan is not of great significance in the case at bar. The plane was not bought or held without proceeding with the business because it was only in their possession for about two months when it was lost.
[91] Counsel referred to the case of Nichol v. Canada, [1993] T.C.J. No. 541 (Q.L.), [1993] 2 C.T.C. 2906, particularly at paragraphs 5 and 12 in support of his position that the Minister should not be second guessing or substituting its business judgment for the reasonable judgment of businesspersons.
[92] In the case at bar they acted in good faith in the hope and expectation that it would be profitable. The question is not whether or not the venture has proved to be profitable. Counsel also referred to Tonn v. Canada [1996] 1 C.T.C. 205 and said that the Appellant would not have acted the way he did if his intentions were purely personal. It makes no sense for him to have acted that way. The expenses put forward in this case were to be considered to be start-up costs as referred to in paragraph 44 of Tonn, supra.
[93] In accordance with Geropoulos v. The Queen [1998] T.C.J. No. 339 (Q.L.), in order for there to be a business it was not necessary for the Appellant to obtain the permit first. That case was with respect to the development of a property and the necessary permit had not been obtained before the expenditures were made.
[94] In this case counsel submitted that the purchase of the aircraft put the Appellant and his partner in business so as to allow them to become operational. It was not unwise to purchase the aircraft at that time. It could have been sold if the plans did not come to fruition. The personal side has to be separated from the business side. This was not a personal use aircraft. There was a plan in place for the business which was sufficient.
[95] The appeal with respect to the disallowed ABIL should be allowed with costs.
[96] With respect to the issue of the personal use benefit assessed against the Appellant the cabin was obtained for business use even though it was not in C & C’s name. The aircraft was equally available to the Appellant and Mr. McNeill. The aircraft would have been only available to the Appellant less than 50% of the time. The assessment was based upon 100% availability to the Appellant and this was incorrect. It should have been 50/50 vis-à-vis the Appellant and Mr. McNeill. On the basis of the evidence it is clear that the plane was available to both the Appellant and Mr. McNeill on a 50/50 basis. This presumption has not been rebutted.
[97] He relied upon the case of Youngman v. The Queen (1990), 90 DTC 6322, particularly at paragraph 18 in support of his position that the amount of the assessed benefit has to take into account the fact that the Appellant had lent money to C & C without interest in order to help finance the business, and as long as that amount remained outstanding the value of the benefit would have to be reduced accordingly. This was not done in the present case. This should not be done arbitrarily but you must take all the factors into account. Again a reduction has to be made on the basis of when the aircraft was available for the Appellant. Not only does the assessment have to take into account that the plane was only available 50% of the time for the Appellant, but there were periods of time when the plane was not available to either and an allowance has to be made for this.
[98] With respect to the personal use benefit, if the Court should find that there was one, then the amount of the benefit has to be reduced accordingly.
[99] The Appellant seeks costs on both issues.
Argument on behalf of the Respondent
[100] Counsel for the Respondent submitted written and oral arguments. She said there were two issues: (a) whether the Minister properly disallowed the ABIL claimed by the Appellant in 1993, relating to his investment in C & C; and (b) whether the Minister properly assessed the Appellant by including an income for the 1992 and 1993 taxation years, taxable benefits from C & C for personal use of the aircraft owned by C & C.
[101] With respect to the ABIL counsel took the position that the Appellant’s duty is to establish that C & C was in fact operating a legitimate business for business purposes rather than operating some entity for personal reasons. The question to be answered is: “Was there a business?” Counsel referred to the usual line of cases and the question of whether or not there was a reasonable expectation of profit in order for there to be a business in existence, such as Moldowan v. The Queen, [1977] C.T.C. 310 (S.C.C.); Tonn, supra, and concluded that C & C never operated a business and that the Appellant had no reasonable expectation of profit in the year in relation to C & C. Further, funds invested by the Appellant and C & C were not an outlay to earn revenue. Thus, the resulting loss cannot be claimed as an ABIL.
[102] Counsel said that in the determination here it is important to analyse the operations of C & C and the history and actions of its shareholders surrounding this purported venture. As it was in the case of Prime v. The Queen, [1999] 3 C.T.C. 2342 (T.C.C.), it is appropriate to apply Tonn, supra, to determine if there was a business. Here, the Appellant had a history of flying. This was chiefly for personal reasons and began in the early 80s and continues to this date. With the exception of the Appellant’s claim regarding C & C he never offered his flying services for hire or for any other business purpose. He may have flown to various locations to attend business functions or tend to business matters but this would be the extent of his flying in relation to any business.
[103] The set up and running of an outfitting operation involves much planning and hard work. This operation must also be governed by strict rules and regulations as set out by the province of Newfoundland. In the case at bar none of the identified steps were pursued or accomplished by the Appellant or C & C. In fact, there is no concrete evidence indicating that this venture was anything more than an idea that the Appellant and Mr. McNeill had, which never came to fruition. At the very best, one could consider this venture to be in the early planning stages. Perhaps even a vision with potential, but operations were certainly never commenced, by any stretch of the imagination.
[104] There was no evidence of C & C having concrete plans or projections. No marketing was undertaken and no research conducted to establish the viability of such a business. Not even the specifics of what the business would entail were ever laid out or specified. The case of Wallace v. M.N.R., [1986] 1 C.T.C. 2308 (T.C.C.), provides a good example of what the “badges of trade” are and what conduct might indicate the presence of a business. None of these existed in the case at bar.
[105] There was simply no evidence to support the Appellant’s contention that his investment in C & C was for a business purpose and not personal. There is no evidence to support his claim that he had a legitimate business interest and actively pursued it.
[106] The onus is on the Appellant to provide sufficient evidence to demonstrate that he was operating a business. The Respondent submits that there is insufficient evidence in the case at hand to meet that burden of proof.
[107] At the time of the purchase of the first aircraft there was certainly no business in existence from which you could deduct a loss. Unlike Hickman, supra, the Minister’s assumptions in the case at bar were not demolished and the burden remains on the Appellant in this case.
[108] Counsel argued that it was hard to make an assessment as to whether or not there was a business on the criteria exhibited in this case because it was still nothing more than a vision. No business actually existed. The question is whether it ever started or not.
[109] One must consider the issue of profit and loss and revenue in previous years. In the case at bar the only revenue was not from an outfitting business. It was for payment for the use of a personal asset.
[110] Further, no revenue was ever shown until the financial statement was prepared after the crash. No other income was earned to offset the costs.
[111] With respect to experience, the taxpayers had none in respect of an outfitting business. All they knew is what they were told by others. As to their intended course of action there was very little positive in the evidence in this regard. Very little was done to start-up the business. They had intended as early as 1990 to begin their business but did nothing to promote it. There were many trips to and from the camp but nothing was accomplished. The cabin was not in a satisfactory condition to satisfy the requirements of a business.
[112] It is not enough to establish that the plane was capable of being used in the business. The visions and expectations which were referred to by the Appellant were not realistic. This was a controlled business and the Appellant had no guarantee that he would obtain the permit that was required. It was not reasonable for them to expect to earn a profit from his enterprise. All the Court has is the word of the Appellant and his partner. They would not be able to know what the situation was until they had obtained the permit.
[113] When the Court considers the issue of the capability of the business to show a profit after capital cost allowance, the matter becomes very difficult because the Appellant and his partner were not in a position to charge capital cost allowance. They had not reached the point where they could earn income.
[114] With respect to the amount of time required to show a profit this issue is not significant in the case at bar because the Appellant had not reached that point in time where this could be calculated. There was no record to show what profit and loss was.
[115] Counsel reiterated that nothing had been completed. All that the Appellant and his partner did was to show that they were going to add new rooms to the cabin. They produced no plans. They did not know what the current licence requirements were as is shown by the evidence. They completed no marketing, they had done no advertising and they had no projection of expenses. They hoped to be up and running by 1994 but had no set timelines to show when the business would be licenced and how many patrons they would have in one year or any time thereafter.
[116] The primary purpose for the purchase of the airplane and the use of the cabin was personal. If there was a business purpose, it was secondary. They had unrealistic expectations. There was no business in existence in 1992 and 1993 against which they could make an ABIL claim. The Appellant and his partner each put $44,000 into the enterprise in 1990 when there was no business. It was a vision only. The Appellant was a full-time automobile dealer. He had a personal use in flying. In 1990 there were personal loans in the name of the Appellant and his partner. There was no loan in the name of the company. They progressed at their own pace. It took them five years to get the camp in the state that it was in and yet it was not complete enough to carry on the business which they contemplated. No serious amount of time was spent to develop the camp.
[117] In the years 1992 and 1993 all expenses were paid personally by the Appellant and his partner not by C & C. This clearly shows a personal use factor. The camp was built by the work of friends. There was no proposal put forward which would indicate that their requirements were met.
[118] The Appellant said that the business was to target the American market but the 1995 regulations said that there was a moratorium on this type of development with strict control over new entrants. No new licenses were available for big game. They would be entitled to target residents but they said that their interest was in the American market. The Appellant basically admitted that he had a personal use and that C & C was just a convenient way for them to make personal use of the aircraft. The business was never launched. No statements were drawn up nor returns filed until after the crash. No favourable inference can be drawn from any revenue purportedly drawn by C & C. The Appellant has been going to Round Pond since the 1970s. This was a personal pursuit. All the time spent there was of a personal nature.
[119] Mr. McNeill said that it was a nice place to get away to. The salvage was sold to a related company and ultimately profit was made by one of Mr. O’Neill’s companies. The question to be asked is whether or not this was the real salvage value.
[120] There was no evidence of a business in existence. C & C never operated a business even in 1992 and there was no expectation of profit. Investment was not made to earn income. Both the Appellant and his partner had an interest in flying and a larger aircraft would have enabled them to take more people. Even if the plane was purchased for business purposes, the Appellant was not in business. The fact of buying the plane did not make it a business at that time. The case of Nichol, supra, cited by counsel for the Appellant is quite distinguishable from the case at bar. In that case all planning had been completed and all the badges of trade had been completed. However, here there is no evidence that Mr. McNeill and the Appellant had invested enough time to get the business going. They did not block off their time in order to promote this business.
[121] Counsel took the position that the arguments with respect to the unavailability of an ABIL and the assessment of personal use benefit were alternate arguments and if there was no ABIL there was no benefit. Further, if there was an ABIL and there was a benefit then the amount of that benefit would have to be reduced. There would have to be an allowance made for the investment of Mr. O’Neill and Mr. McNeill in the business. In that regard the parties agreed that the reduction should be to $1,633.50 in 1992 from $3,267.00 and the reduction should be to $1,701.00 in 1993 from $4,860.00.
[122] In rebuttal, counsel for the Appellant took the position that if there was a business at the time the business started it was when the Beaver aircraft was purchased. Counsel for the Respondent did not disagree with this position. Counsel further admitted that the evidence was that the Appellant and his partner did not find out what was needed but they had obtained application forms earlier. It was not important to put their plan on paper. The Court should not make any unfavourable inference with respect to the amount received for the salvage or that Mr. O’Neill’s company may have bought it back.
[123] The parties agreed that costs would follow the issue of the ABIL.
Analysis and Decision
[124] The Court agrees with both counsel in that there are two issues in this case. The first issue is whether or not the Minister properly disallowed the ABIL claimed by the Appellant in 1993. The second issue is whether or not the Minister properly assessed the Appellant by including in income, taxable benefits from C & C for personal use of the airplane and in that regard the amount of the benefit is also in dispute.
[125] In the Reply to Notice of Appeal the Respondent did not argue in the alternative. However, at the time of trial counsel for the Respondent conceded that she could not have it both ways. The Court is satisfied that in the event that the Appellant is not entitled to claim an ABIL in the year in question, then there can be no assessment against the Appellant for a taxable benefit from C & C for personal use of the airplane.
[126] However, in the event the Court should find that there was an ABIL in the year in question, thus finding that there was a business in operation in the year in question which could justify the claim of the ABIL, it must decide whether or not the Appellant was properly assessed the taxable benefit from C & C for the personal use of the airplane. In that regard the Court must decide whether or not the Minister made the right assessment of the Appellant with respect to the quantum of the benefit in the year in issue.
[127] In that regard, counsel for the Respondent agreed at the close of the trial that the quantum of the benefit as assessed by the Minister was incorrect and that the amount of the benefit should be reduced to $1,633.50 in 1992 and to $1,701.00 in 1993, in accordance with arguments advanced by the Appellant.
[128] The Court is in agreement with this conclusion.
[129] The Court is satisfied that there is very little dispute as to the actual facts in this case based upon the Partial Statement of Agreed Facts and based upon the viva voce evidence given at the time of trial. None of the facts were of a contentious nature and the real issue is as to whether or not the Court is satisfied that the Appellant has established on a balance of probabilities that the Appellant was involved in a business, as that term is understood under the Income Tax Act (“Act”) during the time that he sought to make the deduction in the year 1993.
[130] The parties agree that the important time for consideration is the time at which the aircraft was wrecked when it crashed in October, 1993. The parties agreed that if there was a business, the earliest it would have started would have been on the date of the purchase of the Beaver aircraft. Therefore, the question becomes, in October 1993, did the Appellant suffer a capital loss from the disposition of shares or debt of a “small business corporation” (an ABIL) so that the relevant portion of the loss can be deducted pursuant to subsection 38(c).
[131] Counsel for the Respondent summarized the requirement by arguing that it must first be established by the Appellant that C & C was in fact operating a legitimate business with a business purpose rather than for personal reasons. The question to be answered is: “Was there a business”? according to her.
[132] Counsel for the Appellant takes the position that on the burden of proof, in accordance with the decision in Hickman, supra, that the Appellant has, by the evidence, demolished the presumptions of the Minister and that the burden now falls to the Minister to give evidence to the contrary, satisfactory to the Court that there was no business in operation during the relevant time.
[133] Counsel for the Appellant further relied upon this case in arguing that there was a distinction between the “reasonable expectation of profit” test and the “purpose of producing income” test. As indicated in Hickman, supra, at page 20, the Court said:
The “reasonable expectation of profit” test questions whether there is a business, whereas the “purpose of producing income” test presupposes a business and questions the usage of a piece of business-owned property. The “reasonable expectation of profit” test looks at the historical and anticipated results of several years of operations, and asks: “will the revenue of this operation ever be greater than its expenses, such that a profit will occur?” The “purpose of producing income” test looks at an item of property and asks: “does it produce revenue, or is it at least used for that purpose?” These two tests address very different issues. Both tests could be applied separately to the same taxpayer at the same time.
[134] In the case at bar the Court is satisfied that there was no profit in the year in question from the operation of the Appellant and consequently, the Court must be satisfied that there was a reasonable expectation of profit in the year 1993, to be determined by applying the principles of Moldowan. As indicated, the Court is satisfied that the real test is whether or not there was a business in 1993.
[135] On the question of burden of proof Hickman, supra, makes it clear that the initial onus of “demolishing” the Minister’s exact assumptions is met where the Appellant makes out at least a prima facie case. In that case, the Court was satisfied that the Appellant adduced clear, uncontradicted evidence, while the Respondent did not adduce any evidence whatsoever. The case held that:
Where the Minister’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: . . . Hence, in the case at bar, the onus had shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”.
[136] Counsel for the Respondent in the present case argues that such was not the case on the basis of the evidence here, that the Minister’s assumptions were not demolished and that the burden or proof remains on the Appellant.
[137] On that issue the Court is satisfied that the onus of proof has not shifted in this case. The Court is satisfied that the onus of “demolishing” the Minister’s exact assumptions was not met and that a prima facie case on behalf of the Appellant was not made out.
[138] Consequently, the real issue is still whether or not the Appellant has established on a balance of probabilities that there was a business in place at the time of the crash. To answer that question the Court has to look at the presumptions contained in the Reply and the evidence given in Court, considering the arguments of counsel.
[139] It was the position of counsel for the Appellant that a business was operating at the time of the crash. However, the evidence of both the Appellant and Ignatius Loyola McNeill were not consistent in that regard. For instance the Appellant himself said that the permit to the lot was in the name of the Appellant not in the name of C & C. This was one of the most important elements of the business. Then he said: “I wrote to the Minister for it. It was as much Mr. McNeill’s as mine. We intended to transfer it to C & C Limited”. The Appellant also said there was no business plan in place even though he did not see this as extraordinary since he did not have a business plan for other businesses either. He had some idea as to how much revenue the outfitting business would generate from talking to other outfitters. They intended to target American hunters to the extent of 40 to 50 people per year although it was quite obvious that these persons could not be attracted in the first year and that it would be several years before they could reasonably expect to make a profit.
[140] The Appellant also admitted that they could not commence the outfitting business without the permit from Crown lands being obtained. It is true that he believed that they were politically well connected and this would not prove to be a problem. However, the fact is that the permit was not in place and this was a pre-requisite to the operation of the outfitting business. With respect to the camp itself it was obviously not completed at the time of the crash and a considerable amount of work had to be done on it before they could even hope to have it approved by the appropriate government authorities.
[141] The witness said that he intended to apply for the charter licence by the next fall and he honestly believed that they would be ready to bring people in by then. However, that part of the business was left up to Mr. McNeill. On the other hand, he said that their vision was to have three bedrooms plus one bath to accommodate six people. Yet, there was no floor plan. They would just go in and build. He and Mr. McNeill would have had a consensus as to what to build. He said: “I thought we could get an outfitters’ licence through Mr. McNeill’s political connections. There would be no problem getting the licence.” Later on in his testimony he admitted that they never commenced the outfitting operation since the plane crashed before they got it started. This was either a Freudian slip, a mis-statement or an expression of his true belief in the state of affairs with respect to this operation but in any event it was said. Further, he was asked why he drew up the 1992 statements and he said that he did not know but then said it was to carry the loss supposedly on the advice of his accountant.
[142] He did admit that there was no intention to file a return for C & C before the plane crashed because there was no activity. This certainly is some indication of the presence or absence of the business. Further, no interest was ever expensed to C & C for the outstanding loans in 1990, 1991 and 1992.
[143] The Appellant had very little knowledge about the amount of income shown for the years 1993 except to say that the $4,600 was from O’Neill Motors and the rest may have come from Mr. McNeill’s companies. He did not know anything about any invoices. He did not know whether there was a net or a gross profit. He assumed that the legal bill was paid by himself and Mr. O’Neill, but did not know how it could have been expensed for accounting purposes.
[144] All of this evidence would appear to indicate a belief after the fact, that there was a business in existence but it came after the crash had taken place and after the significance of the loss became manifest to them.
[145] Again with respect to the nature of the clientele that he hoped to attract to their operation he indicated that they were targeting American big game hunters. However, most of this information came merely from word of mouth from talking to other people and on that basis he concluded that they could earn about a quarter of a million dollars annually which would come from about 50 hunters who would pay $4,000 each for the experience.
[146] It is quite clear however that this could not have been done in the first year of the operation and it would take several years for them to be able to reach this stage.
[147] Ignatius Loyola McNeill was questioned at some length with respect to whether or not a business was in existence and his evidence also was not completely consistent nor was his evidence completely consistent with the evidence given by the Appellant. At one point in his evidence he said that they merely talked about the outfitting business a number of times and that they would look for an outfitters’ licence one day for hunting and fishing. They first went to Round Pond in 1985 and set up the camp in 1986. It was just a nice place to go. In 1989 they started the cabin. It was across the lake from the camp which they had occupied earlier and about one half to three quarters of a mile away. They did not put much hard labour into the camp but used the services of a number of people who liked to go to that area. Mr. O’Neill merely rendered assistance with respect to gathering the logs for the cabin. By the end of August 1989 it was covered in but no windows were put in until the fall when the windows were installed and the roof was completed. Two years later, it was finished according to him. However, the evidence made it clear that the cabin was never put into a condition where the Appellant could reasonably expect to obtain the necessary government licence because they had not completed the extension to the cabin by the time the plane crashed.
[148] This witness was questioned about the plan for the business and he said there was a lot of talk leading up to what they were going to do. They had to have the camp completed. He also indicated that by the time they purchased the Beaver aircraft they were in business. Then he said “we were going to apply for a charter licence”. The charter licence is a very extensive proposition. The aircraft had to be properly outfitted. They needed a contract with an engineering firm with respect to repairs and needed a chief pilot with sufficient hours who knew how to operate the business. This witness did not feel there was any difficulty in completing these outstanding matters but the fact remains they were not complete. They needed an outfitters’ licence which would take approximately six months and which required the making of a detailed application. It was obvious he could not make the application himself and they would have to retain the assistance of chartered accountants to do this. It is true that he was satisfied that there would not be any difficulty in obtaining the licence but again there could be no certainty in that regard, particularly where the evidence showed that the process was detailed, demanding, and that the plan had to be in place before the licence could be issued. He was also confident that he would obtain the necessary flying hours to be able to get a chief pilot licence but again this was not completed.
[149] His position was that it would take about six to eight months after November of the year of the crash to complete the prerequisites to receiving customers. He said himself that the facility would have to meet the requirements which were extensive. There were restrictions with respect to the type of structure. The Department of Health would oversee the facility and again he had no concern about obtaining a licence because he believed they were well situated in politics and one of the officials had visited the site, but that belief was insufficient to satisfy the Court that the obtaining of the outfitters licence was a certainty. He said that when they obtained 70 people per season they would earn about $200,000 a year and would obtain enough money from the fishing to cover the expenses. They would get 20 people the first year and after five years they would get 70 people. Again, this belief was based upon what people had told him, his own knowledge about this type of enterprise, the fact that he knew which magazine to advertise in and which shows to go to. Again, they had talked about enlarging the cabin. However, this was not done. When the plane crashed on October 8 all their plans were concluded. Up to the time that they would seek the advice of Spurrell Sooley accountants to prepare the application for an outfitters’ licence, there were just scribblings on the desk. However, even at that they expected to make a profit. Nothing more concrete than that was offered to enable the Court to conclude that such a belief was well-founded.
[150] This witness was questioned about any discussions that took place regarding the amount of income that might be earned from the business and he said, “We just talked about the income when we were together, flying or sitting in the camp. It was common knowledge at the time. We did no research and did not need to. This would have come when we made our application for the outfitters’ licence.” His evidence was that about six months before the Beaver was purchased he inquired about the charter licence and the outfitters’ requirements. He did nothing more than that although before the crash he had obtained the application forms. At the end of his evidence he admitted that the building was not ready at that time and would not be completed until the application was submitted. The application form was obtained by him in the winter of 1992. It was placed on his desk for six months, uncompleted. The operation would take place within one to three years down the road.
[151] The position of counsel for the Respondent was that at the time of the crash there was no business in place. There was no concrete evidence that the venture was anything more than an idea in the Appellant’s and Mr. McNeill’s heads. This venture never came to fruition because of the crash. At best it was in the early planning stages. Perhaps even a vision with potential, but operations were certainly never commenced by any stretch of the imagination.
[152] Counsel said that there was no evidence of C & C having concrete plans or projections. No marketing was undertaken and no research conducted to establish the viability of such a business, no specifics about the business or what it entailed were ever laid out or specified. Counsel referred to the case of Wallace, supra, set out in counsel for the Respondent’s argument. She relied upon the case of Wallace, supra, and stated that the “badges of trade” which would be relevant to an operation of this type were not in place.
[153] Of considerable significance is the case of Nichol, supra. In this case Bowman T.C.J. was faced with the question of whether or not the losses sustained by the taxpayer in an unsuccessful venture concerning a semi-professional baseball team in London, Ontario were deductible. He considered the facts in the case and was satisfied that:
The planning and the projections of the London Royals had too many of the badges of trade and, if I may say so, the indicia of commerciality to be dismissed as a mere hobby or an idealistic labour of love.
Further, he referred to ELB Productions Ltd. v. M.N.R., 91 DTC 1466 where the Court observed:
I accept that the money was spent in good faith in the hope and expectation that it would result in a profitable enterprise. The fact that Mr. English made an error in judgment and that his expectations turned out to be wrong is not, in itself, a reason for denying deductibility. As Cattanach, J. observed in a somewhat different context in Gabco Limited v. M.N.R. [68 DTC 5210] [1968] C.T.C. 313 it is not the place of this Court or of the Minister of National Revenue, after the event, to second-guess a taxpayer’s business acumen. At page 323 Cattanach, J. said:
It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind. . . .
In that case the learned trial judge rejected the Respondent’s contention that there was no reasonable expectation of profit based upon the facts as he found them. However, this Court is satisfied that the facts in the present case, as disclosed by the evidence, are far removed from the facts in that case and the result can offer little consolation to the Appellant’s position here.
[154] The Court does not accept the argument of counsel for the Appellant that at the time the Beaver aircraft was lost, the Appellant had reached such a stage of development in its enterprise that it could have been referred to as a “business” by any reasonable definition of that term as contemplated by the Act. It is not an answer to this deficiency to say that this business was like any other and that it started slowly, in an unsophisticated manner and at a pace at which the developers could afford without borrowing large sums of money. The question as always is, was there a business at the relevant time? In the case at bar, was there a plan? Did they have the requisite equipment? Did they have the requisite licence? Were they prepared and able to carry on the business of outfitting at the time that the plane was lost? The Court must find conclusively that they were not.
[155] The Appellant needed far more than just a plane in order to make this enterprise viable. The Court is not satisfied that the purchase of this aircraft made the venture commercially viable at that point in time. The aircraft was certainly an essential part of the operation but it was not all of the operation or the major part of the operation and with its purchase, together with what facilities and assets the enterprise had available at the time of the crash, the enterprise could not have gone forward.
[156] Counsel for the Appellant argued that the purchase of the aircraft would have enabled the Appellant to apply for the charter licence and to move forward and that it would not have been practical to obtain the charter licence first or to spend that amount of money in obtaining the licence without first obtaining the plane which was available at that time. It is true that a plane was necessary in order to obtain a licence but because they had the plane it does not mean that they would obtain the licence.
[157] The Court is satisfied that the loss of the plane was a catastrophic event. The absence of a business plan alone is not sufficient to allow the Court to conclude that there was no business in place but it does not accept the argument of counsel for the Appellant that the business had started and failed due to the catastrophic loss.
[158] The Court is satisfied that the money was spent in good faith with the hope and expectation that somewhere down the road the Appellant and his partner would be in a position to commence the business and to earn a profit from it, but that moment had not yet arrived insofar as this Court is concerned.
[159] Again the Court does not accept the argument of counsel for the Appellant that the purchase of the aircraft put it in business and allowed it to become operational. The fact that the airplane could be sold if the venture did not go forward is not a factor which dictates that a business was in place at that time.
[160] The Court accepts the argument of counsel for the Appellant that the personal use element should be factored out from this equation and it is certainly possible that a business might have been existent even though the Appellant and his partner may have used the company’s assets, including the cabin and plane. The Court does not find that there was no business in place merely because there was a personal element involved in the use of these assets.
[161] Counsel for the Respondent argued that the primary purpose for the investment was of a personal nature and there may have been a secondary commercial purpose. But again both of those elements might have existed and a business may still have been in place. However, the Court has already concluded that this enterprise had not reached the stage of a business at the time of the loss of the Beaver aircraft.
[162] The end result is that on the issue of the ABIL for the 1993 taxation year, the appeal is dismissed, with costs and the Minister’s assessment in that regard is confirmed.
[163] On the matter of the assessments of the personal benefits against the Appellant in the years 1992 and 1993 the appeals are allowed and the matter is referred back to the Minister of National Revenue for reassessment and reconsideration on the basis that the assessments in that regard are vacated.
[164] With respect to the matter of costs on the personal benefit issue, the Appellant will not be entitled to his costs because he has not been substantially successful overall in this appeal.
Signed at Ottawa, Canada, this 20th day of October 2000
"T.E. Margeson"
J.T.C.C.