Date: 20021010
Docket: 2002-659-GST-I,
2002-660-IT-I
BETWEEN:
T. EVANS ELECTRIC LTD.
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Miller, J.
[1] T. Evans Electric Ltd. appeals pursuant to the informal procedure both the income tax assessments for its 1997, 1998 and 1999 taxation years under the Income Tax Act and the Minister of National Revenue's decision under the Excise Tax Act for the period between February 1, 1997 and April 30, 1999. The issue in the income tax appeals is whether the Appellant is entitled to deduct all of the expenses in connection with one-day, fly-in fishing trips for customers or whether it is restricted to 50% of such expenses pursuant to section 67.1 of the Income Tax Act. Further, is capital cost allowance for the company's aircraft used to fly customers on these fishing trips likewise caught by section 67.1? The answer to those issues will consequently determine whether or not subsection 236(1) of the Excise Tax Act applies.
[2] The parties did not dispute the facts. The Appellant is an electrical contractor and a registrant for goods and services tax (GST) purposes. In July 1990 it acquired a Cessna 180B aircraft, as at the time it was bidding on contracts in northern areas only accessible by plane. These bids were not successful, but the Appellant kept the plane. One of the Appellant's shareholders is a pilot and enjoys flying. He occasionally flies for pleasure with his family. The shareholder also uses the plane for flying customers on one-day trips to remote northern lakes for a day of fishing. Business was always discussed on these trips, away from the hubbub and electronic pressures of the city. The Appellant recorded the full cost of operating the aircraft as expenses, but at year-end a reasonable amount was charged to the shareholder loan account for the shareholder's personal use, or a taxable benefit was recorded to the shareholder.
[3] The costs of operating the aircraft in 1997, 1998 and 1999 that did not relate to the shareholder's personal use were the expenses for these customers' fly-in fishing trips. In 1997, this amounted to $3,523; in 1998, this amounted to $15,775; and in 1999, this amounted to $4,126. The capital cost allowance for the plane claimed by the Appellant in 1997, 1998 and 1999 was $2,018, $1,513 and $1,135, respectively.
[4] Consideration of $15,444 was paid by the Appellant with respect to the fly-in fishing trips taken between February 1, 1997, and January 31, 1998, and the Appellant claimed input tax credits of $1,081. Consideration of $4,126 was paid by the Appellant with respect to the fly-in fishing trips taken February 1, 1998 and January 31, 1999 and the Appellant claimed input tax credits of $270. The Appellant did not include half of the amount of the input tax credits in calculating its net tax for purposes of the Excise Tax Act.
[5] Relevant legislation is as follows:
Income Tax Act
67.1(1)For the purposes of this Act, other than sections 62, 63 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment shall be deemed to be 50% of the lesser of
(a) the amount actually paid or payable in respect thereof, and
(b) an amount in respect thereof that would be reasonable in the circumstances.
67.1(4) For the purposes of this section,
(a) no amount paid or payable for travel on an airplane, train or bus shall be considered to be in respect of food, beverages or entertainment consumed or enjoyed while travelling thereon; and
(b) "entertainment" includes amusement and recreation.
Excise Tax Act
236(1) Where a registrant is the recipient of, or pays an allowance in respect of, a supply of food, beverages or entertainment and subsection 67.1(1) of the Income Tax Act applies, or would apply if the registrant were a taxpayer under that Act, in respect of the supply or allowance, 50% of the total of all amounts, each of which is an input tax credit claimed in a return for a reporting period in a fiscal year of the registrant in respect of the supply or allowance, shall be added in determining the net tax
(a) where the registrant ceases in or at the end of that fiscal year to be registered under Subdivision d, for the last reporting period of the registrant in that fiscal year;
(b) where the reporting period of the registrant in that fiscal year is that fiscal year, for that reporting period; and
(c) in any other case, for the reporting period of the registrant that begins immediately after the end of that fiscal year.
[6] The issue is whether the expenses of operating the aircraft on these fishing trips, as well as the capital cost allowance, are in respect of the enjoyment of recreation.
[7] The Appellant argues that the transportation costs is not part of the recreation, and hardly enjoyable. It is the recreation event itself, the fishing, which should be caught, not the mode of transportation to get to the recreation. He suggests that to find otherwise would require a 50% restriction to apply to automobile costs in taking a client to lunch.
[8] The Appellant also raises the argument with respect to capital cost allowance, that if section 67.1 applies to restrict deductibility of capital cost allowance to 50%, this does not reduce the capital cost allowance for purposes of determining the amount of recapture on disposition of the plane and, therefore, results in a form of double taxation.
[9] The Respondent's position is that the recreation starts not when you get off the plane at the lake, but when you first get on the plane and, therefore, any costs associated with the plane are part of the recreation and thus subject to the restriction contained in section 67.1. The Crown referred to the Sie-Mac Pipeline Contractors Ltd. v. The Queen[1] case which dealt with the applicability of paragraph 18(1)(l) of the Income Tax Act for support. She also relied upon Interpretation Bulletin 518R, specifically paragraph 18(f) which reads:
18. Paragraph 67.1(4)(b) includes amusement and recreation as "entertainment". Section 67.1 also mentions the "enjoyment of entertainment". This refers to the mere attendance at or experience of the event or service. While not an exhaustive list, the following items are considered to be entertainment expenses and are subject to the 50% limitation:
(a) the cost of tickets for a theatre, concert, athletic event or performance;
(b) the cost of private boxes at sports facilities;
(c) the cost of room rentals to provide entertainment, such as a hospitality suite;
(d) the cost of a cruise;
(e) the cost of admission to a fashion show;
(f) the cost of entertaining guests at night clubs, athletic, social and sporting clubs and on vacation and other similar trips.
Expenses related to the above items, such as taxes, gratuities, and cover charges, are also subject to the 50% limitation.
[10] With respect to the applicability of section 67.1 to capital cost allowance, the Respondent's argument is that the term "in respect of" as it relates to the enjoyment of entertainment must be given its broadest meaning as suggested by the Supreme Court of Canada in Nowegijick v. The Queen et al.,[2] so it would pick up capital cost allowance related to the vehicle, which is integral to the provision of the entertainment or recreation. The Crown suggests that the recapture issue raised by the Appellant is inaccurate, as only the lower capital cost allowance amount (that is the 50% amount) would be used in the calculation of recapture on the disposition.
Analysis
[11] What is at issue are the operating costs of an aircraft used to fly customers north for a day of fishing and informal business discussions. There is no question the actual fishing falls within the ambit of the enjoyment of recreation and, therefore, amounts paid in respect of the fishing are subject to the 50% restriction? But are operating costs, such as fuel for example, closely enough tied to the recreation of fishing to warrant restriction? This comes down to a question of when does the recreation start. Does it start when the customers get on the plane or when they get off the plane at the lake? I refer back to the Interpretation Bulletin to which the Respondent directed me and in particular the words clarifying the "enjoyment of entertainment" - "This refers to the mere attendance at or experience of the event or service". It apparently specifically excludes the means of getting to and fro the event or service. The Bulletin goes on to list the cost of a cruise for example, yet makes no mention of the air fare, train fare or bus fare to get to the cruise. I do not accept that transportation to and from is implicitly included; in fact, quite the opposite. Continuing with the cruise analogy, they are advertised most often as cruise or cruise and air fare. The recreational event at issue before me is the activity of fishing. Flying in a noisy little Cessna to get to the fishing may be enjoyable to some, but likely not to most. Even in relying on a wide meaning of the term "in respect of" as it relates to the enjoyment of the fishing activity, I do not find that it encompasses operating costs of an aircraft to get to the fishing. The fishing starts when you get to the lake.
[12] The items listed in paragraph 18(f) of the Interpretation Bulletin 518R are not explicit enough to capture aircraft operating costs. The list refers to the costs of entertaining guests on vacation and other similar trips. It is the cost of entertaining customers on the vacation that is being referred to, not the cost of transporting customers to the vacation - the entertainment. There is a distinction between true entertainment costs and transportation costs. I believe the Appellant's aircraft operating costs fall into the latter category. The entertainment or recreation event is not the flight, it is the fishing.
[13] The Crown's reference to Sie-Mac does not dissuade me from my view, as that case dealt with a specific statutory exception (paragraph 18(1)(l)). Justice Linden found that expenses incurred for the use of a lodge included flying up to the lodge. The language of paragraph 18(1)(l) is quite different from the language in section 67.1, the latter being concerned not with the use of the lodge but with the enjoyment of entertainment. Although fine, there is a distinction nonetheless between flying to a lodge, being considered part of the use of the lodge, and flying to a lake not being considered part of the enjoyment of the recreation of fishing. The distinction lies in the requirement in the latter case for enjoyment, specifically enjoyment of recreation. In this case, the travel is not the enjoyable part of the trip, but simply a necessary obstacle to get to the fishing. The recreation is the fishing and it starts when the customer gets off the plane at the lake. The operating costs of the plane getting there therefore are not covered by the specific wording of section 67.1 of the Income Tax Act. The appeals are allowed and referred back to the Minister for reconsideration and reassessment on the basis that section 67.1 is not applicable to the operating costs, including capital cost allowance of the Appellant's aircraft and consequently, section 236 of the Excise Tax Act does not apply.
Signed at Ottawa, Canada, this 10th day of October, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2002-659(GST)I and 2002-660(IT)I
STYLE OF CAUSE: T. Evans Electric Ltd.
and Her Majesty the Queen
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: October 1, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: October 10, 2002
APPEARANCES:
Agent for the Appellant: Laurie Baird
Counsel for the Respondent: Laurel Irvine
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-660(IT)I
BETWEEN:
T. EVANS ELECTRIC LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard with the appeal of T. Evans Electric Ltd. (2002-659(GST))I)
on October 1, 2002 at Winnipeg, Manitoba, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Laurie Baird
Counsel for the Respondent: Laurel Irvine
JUDGMENT
The appeals from reassessments of tax made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the expenses the Appellant was entitled to deduct with respect to the fly-in fishing trips should not be limited to 50% of the expenses incurred pursuant to section 67.1 of the Act.
Signed at Ottawa, Canada, this 10th day of October, 2002.
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J.T.C.C.
2002-659(GST)I
BETWEEN:
T. EVANS ELECTRIC LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard with the appeals of T. Evans Electric Ltd. (2002-660(IT)I)
on October 1, 2002 at Winnipeg, Manitoba, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Laurie Baird
Counsel for the Respondent: Laurel Irvine
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is June 15, 2000, and bears number 09CR0006650 for the reporting period February 1, 1997 to April 30, 1999, is allowed and the assessment is vacated.
Signed at Ottawa, Canada, this 10th day of October, 2002.
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"Campbell J. Miller" |
J.T.C.C.