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Docket: 2002-2852(IT)I |
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BETWEEN: |
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DALLAS DUCE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence with the appeals of Audax Investments Inc. (2002-2868(IT)I) on May 14, 2003 at Saskatoon, Saskatchewan.
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Before: The Honourable Judge D.W. Beaubier |
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Appearances: |
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Counsel for the Appellant: |
Todd M. Rosenberg |
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Counsel for the Respondent: |
Anne Jinnouchi |
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed atOttawa, Canada this 20th day of May 2003.
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"D.W. Beaubier" |
J.T.C.C.
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Docket: 2002-2868(IT)I |
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BETWEEN: |
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AUDAX INVESTMENTS INC., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence with the appeals of Dallas Duce
(2002-2852(IT)I) on May 14, 2003 at Saskatoon, Saskatchewan.
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Before: The Honourable Judge D.W. Beaubier |
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Appearances: |
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Counsel for the Appellant: |
Todd M. Rosenberg |
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Counsel for the Respondent: |
Anne Jinnouchi |
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed atOttawa, Canada this 20th day of May 2003.
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"D.W. Beaubier" |
J.T.C.C.
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Citation: 2003TCC353 |
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Date: 20030520 |
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Docket: 2002-2852(IT)I |
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BETWEEN: |
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DALLAS DUCE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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AND BETWEEN: |
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Docket: 2002-2868(IT)I |
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AUDAX INVESTMENTS INC., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.T.C.C.
[1] These appeals were heard together on common evidence by consent of the parties at Saskatoon, Saskatchewan on May 14, 2003. Mr. Duce was the only witness.
[2] The particulars of the matters in appeal by both parties are best set forth in paragraphs 13 to 24 of the Reply to the Notice of Appeal of Audax Investments Inc. ("Audax"). They read:
13. In computing income for the 1996, 1997 and 1998 Taxation Years, the Appellant deducted the following amounts as business expenses with respect to the Property and trips to Hawaii:
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SCHEDULE
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1996 |
1997 |
1998 |
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HAWAII PROPERTY EXPENSES
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Account/ journal entry
#815 |
A/C Condo Maintenance |
$11,944.28 |
$11,837.99 |
$11,618.77
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J.E. #6 |
Condo Interest |
$ 9,332.18 |
$ 9,219.04 |
$ 9,073.82 |
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A/C |
Telephone |
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$ 160.01 |
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#814 |
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A/C #818 |
Utilities |
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$ 53.38
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A |
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$21,276.46 |
$21,057.03 |
$20,905.98
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A/C |
Airline, gas, rental car Honolulu |
$ 2,442.12 |
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#808 |
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A/C |
Airline tickets, car rental, gas, hotel |
$1,365.87 |
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#801 |
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A/C |
Car rental in Honolulu and misc. |
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$ 1,135.39 |
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#705 |
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B |
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$ 3,807.99 |
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$ 1,135.39 |
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Total disallowed re Hawaii Condo (A & B) |
$25,084.45 |
$21,057.03 |
$22,041.37 |
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14. The Appellant's income tax returns were initially assessed on the following dates:
1996: 3 March 1997
1997: 12 March 1998
1998 22 February 1999
15. By Notices of Reassessment dated February 2, 2001, the Minister disallowed expenses, among other items, in the amount of $25,084, $21,057 and $22,041 for the 1996, 1997 and 1998 Taxation Years as detailed in Schedule 1 of paragraph 13 above.
16. The Appellant filed Notices of Objection received on March 7, 2001.
17. In response to the Notices the Minister confirmed the reassessments by Notification of Confirmation dated the 19th April 2002.
18. In so assessing the Appellant, the Minister made the following assumptions of fact:
(a) The Appellant's business was investments and salt water processing.
(b) The Appellant investments were with respect to joint ventures in oil stocks.
(c) Dallas Duce is the sole shareholder (herein "the Shareholder") of the Appellant.
(d) Associated or related corporations of the Appellant were: Duce Electric Ltd., Northern Boundary Electric Ltd., Duce Developments Ltd., Willett Manufacturing Ltd and Duce Oil Ltd.
(e) The Appellant purchased a condominium in Hawaii in 1985.
(f) The condominium unit address was #16H, 521 Hahaione St., Honolulu, Hawaii (the "Property").
(g) The Property was purchased for $125,000 US.
(h) The Mortgage balance on purchase price of the Property was $91,908.49 US.
(i) The Appellant recorded the Property as a capital asset on its Capital Cost Allowance schedule.
(j) The Property was a 2 bedroom, 2 bath, fully furnished apartment having 1,200 square feet approximately and parking.
(k) The Appellant rented out the Property by long term leases for periods from 1989 - 1992 and claimed consistent losses with respect to the property since its acquisition.
(l) In 1994 the Property was damaged by a flood and renovations totaling $8,000 were expensed.
(m) The Property has not been rented out by the Appellant since 1992 and no efforts were made by the Appellant to rent it.
(n) The Property was not advertised for sale by the Appellant.
(o) The Property was used each year since 1992 for vacations by the Shareholder, his friends and his family at the Shareholder's sole discretion.
(p) The Shareholder had the use of the Property for the 365 days of each year under Appeal.
(q) If the Property was used by certain employees of the Appellant's and of the related or associated corporations, it was used at the Shareholder's sole discretion.
(r) Employees were not issued T4s by the Appellant or by the related or associated corporations for the alleged use of the Property.
(s) Related or associated corporations did not pay for any alleged use of the Property.
(t) The Appellant did not use the Property for promotional purposes.
(u) The Property was managed as a part of a condo complex and annual visits to the Property by the Shareholder were not required but were vacations.
(v) The Appellant did not maintain any books and records with respect to the use of the Property for the 1996, 1997 and 1998 Taxation Years.
(w) The renting of the Property was not undertaken in a commercial manner by the Appellant.
(x) The Appellant did not have a business plan or an intended course of action to become profitable with respect to the Property.
(y) The Property did not provide the Appellant with a source of income.
(z) The Appellant does not have a reasonable expectation of profit with respect to the Property.
(aa) The Shareholder and the Appellant do not deal at arm's length.
(bb) The Shareholder and the Appellant are related persons.
(cc) The Property is a personal use property used primarily for the personal use or enjoyment of the Shareholder and his friends and family.
(dd) The Appellant claimed the expenses as detailed in Schedule 1, paragraph 13 above with respect to the Property and vacationing in Hawaii.
(ee) The Appellant paid for personal expenses incurred by the Shareholder with respect to the Shareholder and his friends and family's vacation trips to Hawaii for airline tickets, gas, rental car, hotel and miscellaneous as follows:
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1996 |
1997 |
1998 |
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Airline, gas, rental car Honolulu |
$2,442.12 |
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Airline tickets, car rental, gas, hotel |
$1,365.87 |
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Car rental in Honolulu and misc. |
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$1,135.39 |
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Expenses paid for by the Corporation for the Appellant |
$3,807.99 |
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$1,135.39 |
(ff) Property taxes, interest and maintenance on an alleged capital investment would not be deductible as current expenses.
(gg) The expenses, detailed in Schedule 1 of paragraph 13 above, paid for by the Appellant for airline tickets, gas, rental car, hotel, the Property's telephone, utilities, maintenance and interest were not incurred by the Appellant for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant's Shareholder and Shareholder's family and/or friends.
B. ISSUES TO BE DECIDED
19. The issues are:
(a) whether the Minister properly denied the expenses as detailed in Schedule 1 of paragraph 13 above on the basis that the Property did not constitute a source of income; and
(b) if it did constitute a source of income:
(i) whether the expenses as detailed in Schedule 1 above were incurred by the Appellant for the purpose of gaining or producing income from a business or property or whether they were personal and/or living expenses of the Shareholder; and
(ii) whether the expenses were reasonable in the circumstances and
(iii) whether they were capital in nature and not deductible as current expenses.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
20. He relies on, among other things, sections 3, 4, 9, 12, 18, 20, 53, 54, 67, 251 subsections 56(2) and 248(1) and paragraphs 18(1)(a), 18(1)(b), 8(1)(h) and 20(1)(a) of the Income Tax Act (the "Act") as amended for the 1996,1997 and 1998 Taxation Years.
21. He submits that the disallowed expenses, as detailed in Schedule 1 of paragraph 13 above, were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act but were personal or living expenses of the Shareholder and his family or friends within the meaning of paragraph 18(1)(h) of the Act.
22. He submits that the Property did not constitute a source of income for the Appellant in the 1996, 1997 and 1998 Taxation Years as its rental was not undertaken in pursuit of profit and was not sufficiently commercial in nature.
23. He submits that the disallowed expenses if found to be incurred for the purpose of gaining or producing income, which is not admitted but is denied, are unreasonable in the circumstances within the meaning of Section 67 of the Act.
24. Alternatively, he submits that if the Property is considered to be a capital investment of the Appellant, then the property taxes, interest and maintenance are not deductible as current expenses and are capital in nature.
[3] Mr. Duce appealed assessments for calendar years 1996, 1997 and 1998 that he received a benefit from Audax either as a Shareholder under subsection 15(1) of the Income Tax Act (the "Act") or as an employee under section 6 of the Act of $25,079, $21,596 and $24,271 respectively. The Court accepts Mr.Duce's testimony that, during the years in question, he was not an employee of Audax.
[4] Of the quote, assumptions 18(a) to (n) inclusive, (q), (r), (s), (v), (w), (aa), (bb), (dd) and (ee) were either not refuted or were established by the evidence. Mr. Duce was the sole Shareholder and Director of Audax and of other corporations described in assumption 18(d).
[5] With respect to the remaining Audax assumptions in paragraph 18, the Court finds:
(o) The Appellant has been separated from his wife, Darlene, since about 1984, when the Property was purchased. The couple have two sons who are now adults; they only visited the Property once with Mr. Duce and that was not in 1996, 1997 or 1998.
(p)(t) Audax had the use of the Property for 365 days of the year. The Shareholder did not. After real estate prices in Hawaii collapsed in 1992, Audax, because it had been losing money renting, decided to use the Property for promotional purposes for Audax's and its related corporations' businesses and it did so. Based upon the actual use by Mr. Duce in the years in question, as compared to other users, the Court finds that Audax did use the Property for promotional purposes and did so successfully.
(u) The Court finds that annual visits to the Property by someone on Audax's behalf were necessary for the purposes of maintenance, upkeep and, generally, good management. Mr. Duce was that person. Mr. Duce admitted that his visits were for a "rest" and were 50% personal although he testified that the first 4 to 6 hours of each day in Hawaii were usually spent on business. Nonetheless, his visits to Hawaii were intended to get him away from a very busy little oil business operated by his various companies in the Estevan area of Saskatchewan, and they did so.
(x) Audax had a business plan for the Property from the beginning; it changed slightly, as will be shown. The Property was purchased to "flip" when its value reached $500,000 U.S. Audax thought it could rent the Property and pay the mortgage down at a profit. It could not. Just before the price collapse in 1992, comparable properties were selling for over $300,000 U.S. and asking prices were in the $400,000 U.S. range. After the collapse, combined with a bad tenant experience and followed by a damaging water leak, Audax decided to stop losing money by renting and to use the Property for promotional free stays until the price of $500,000 U.S. was again achieved. There is no evidence that this selling agenda was even abandoned, but in the interim, the use had changed.
(y) Thus the Property was used by Audax for promotion in 1996, 1997 and 1998. The Court finds that this was successful and proved profitable to Audax both respecting customer and employee usage. The property was a source of income to Audax and its related corporations through tips, discounts and deals it brought about, one way or another.
(z) There is a reasonable expectation that the Property can be sold at a profit as was intended when it was purchased. The 1999 Honolulu property tax assessment of the property fixes its value at $148,900 U.S. (Exhibit A-2).
(cc) The property is not a personal use property for the use in enjoyment of Mr. Duce and his friends and family.
(ff) Is correct as a matter of law, however, on the evidence, the Property is not a capital investment. It is an income item, purchased with the intention to "flip" it at a profit.
[6] Assumption 18(gg) goes to the heart of the appeal, and will be dealt with as follows:
1. Travel Expenses
The Court finds that Mr. Duce's primary purpose in travelling to Hawaii in 1996, 1997 and 1998 was for a rest. The travel expenses he incurred were personal or living expenses to him and were properly disallowed pursuant to subsection 15(1) of the Act.
2. Property Expenses
The Property was acquired for a business purpose, namely to sell at a profit. In the years in question it was used for a business purpose, namely to promote the business of Audax and its related and associated corporations. These two purposes were, jointly, the primary purposes that Audax owned the Property in 1996, 1997 and 1998. On that basis, the determination of any personal benefit to Mr. Duce is based upon the actual usage of the Property. (McHugh v. Her Majesty the Queen, [1995] 1 C.T.C. 2652.) The Court calculates the usage as follows:
(i) Overall Seasonal Days of Usage Based Upon First and Last Occupancy Dates in Evidence
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1997 |
1998 |
1999
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Mr. Duce |
14 |
17 |
29
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Total of all users |
117 |
175 |
227 |
(ii) Actual Number of Days Used in Each Year
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1997 |
1998 |
1999
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Mr. Duce |
17 |
19 |
25
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All users |
87 +or - |
82-5 |
130 |
Because actual usage is the McHugh criterion, the Court adopts number (ii) as described. For the three years, Mr. Duce's usage averaged approximately 20% of the total usage of the Property.
[7] Therefore, these matters are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that all of the travel expenses in question were of personal benefit to Mr. Duce pursuant to subsection 15(1) of the Act; and that 20% of the Property expenses in question were a personal benefit to Mr. Duce pursuant to subsection 15(1) of the Act.
Signed at Ottawa, Canada, this 20th day of May 2003.
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"D.W Beaubier" |
J.T.C.C.
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CITATION: |
2003TCC353 |
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COURT FILE NO.: |
2002-2852(IT)I 2002-2868(IT)I |
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STYLE OF CAUSE: |
Dallas Duce v. The Queen |
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PLACE OF HEARING |
Saskatoon, Saskatchewan |
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DATE OF HEARING |
May 14, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.W. Beaubier |
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DATE OF JUDGMENT |
May 20, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Todd M. Rosenberg |
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Counsel for the Respondent: |
Anne Jinnouchi |
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COUNSEL OF RECORD: |
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For the Appellant: |
Todd M. Rosenberg
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Name: |
Todd M. Rosenberg |
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Firm: |
MacPherson Leslie & Tyerman 1500-410 - 2nd Street East Saskatoon, Saskatchewan S7K 5T6 |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |
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