Tax Court of Canada Judgments

Docket: 2001-2869(GST)I

BETWEEN:

KEVIN MANN AND BARBARA MANN,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

_______________________________________________________________

Appeal heard with the appeals of Kevin Mann (2002-3441(IT)I) and

Barbara Mann (2002-3443(IT)I) on February 13, 2003 at Toronto, Ontario

Before: The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances:
For the Appellants:	Kevin Mann
Counsel for the Respondent:	James Rhodes, Esq.

_______________________________________________________________

JUDGMENT

          It is ordered that the appeal from the assessment made under the Excise Tax Act, notice of which is dated October 3, 2000 and bears number 08DP0000081 be allowed and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the transcript of the oral reasons for judgment attached.

Signed at Ottawa, Canada, this 20th day of February 2003.

"D.G.H. Bowman"

A.C.J.

Citation: 2003TCC63

Date: 20030220

Docket: 2001-2869(GST)I

BETWEEN:

KEVIN MANN AND BARBARA MANN,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

AND

Docket: 2002-3441(IT)I

BETWEEN:

KEVIN MANN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

AND

Docket: 2002-3443(IT)I

BETWEEN:

BARBARA MANN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

(Delivered orally from the Bench at Toronto, Ontario, on February 13, 2003)

Bowman, A.C.J.

[1]      These appeals were heard together and involve the 1996, 1997, 1998 and 1999 taxation years of Kevin Mann and the 1997, 1998 and 1999 taxation years of his wife, Barbara Mann. The appeals under the Income Tax Act were heard at the same time as an appeal under the Excise Tax Act with respect to the goods and services tax for the period September 6, 1996 to December 31, 1998.

[2]      I will deal first with the income tax appeals of Mr. and Mrs. Mann. They carried on business in partnership under the name of A Mann's Holiday. The business involved the rental of a motor home, which they acquired in 1996 to replace an older one.

[3]      The GST assessment was premised upon the assumption that this was a "business" that was carried on without a reasonable expectation of profit.

[4]      This, of course, is inconsistent with the view that has been expressed on other occasions prior to the decision of the Supreme Court of Canada in Stewart v. Canada, [2002] S.C.J. No. 46, that without a reasonable expectation of profit there could be no business. This seems to be something of a legislative oxymoron, but I must deal with the legislation as I find it.

[5]      At all events, in respect of both the income tax appeals and the GST appeal, I find that the appellants did have a reasonable expectation of profit. They bought a motor home with the intention of making money from it. It was represented to them that they could make money renting it out.

[6]      In fact, with the exception of two weeks in 1998, the motor home was devoted entirely to the business activity. It was not as successful as they had hoped, however. In two of the four years they had a net loss, even before claiming capital cost allowance, and in two of the four years they had a profit, before capital cost allowance. It was represented to them that they could claim capital cost allowance, and they did so. This resulted in fairly substantial losses, which they tried to set off against other income.

[7]      I will come to the leasing rules in a moment. There are some specific items in the income tax appeals that I will deal with, and I will speak first of Kevin Mann.

[8]      For 1996 the Minister disallowed interest expenses in the amount of $776.94. He should have disallowed $240 instead. He disallowed some $97.96 of expenses claimed by the appellants, relating to GST, on the basis they had claimed input tax credits but did not include them in income. That raises a bit of a problem, because I think the assessments are inconsistent, in that the Minister did not allow the appellants input tax credits on this amount. So that amount should not have been disallowed in computing income.

[9]      However, since I propose to allow the GST appeal, on the basis that the appellants are entitled to input tax credits in the amount of something in excess of $5,000, I think that disallowance should be maintained.

[10]     The next item is $707.78 of expenses said to be personal expenses. The uncontradicted evidence by Mrs. Mann is that the motor home was not used by them in 1996 for personal use at all. Therefore, that amount should not have been disallowed. I will come to the capital cost allowance in a moment.

[11]     In 1997 the Minister disallowed some $49.69 in expenses. That is in respect of GST that was paid, and where they had claimed ITCs in respect to that amount but not included it in income. For the same reason as those given with respect to the 1996 appeal that disallowance should remain, because I am going to allow the GST appeal.

[12]     There were some other items allowed as additional deduction for interest, repairs and maintenance. I make no comment on those since they were in the taxpayers' favour.

[13]     For 1998, there were GST expenses that were disallowed in the amount of $53.01. For the same reasons as I gave in respect to 1996 and 1997, that disallowance should remain.

[14]     The next item is $3,194 expenses claimed by the partnership and disallowed because they were said to relate to Mr. and Mrs. Mann's personal expenses. That calculation is made as follows. The appellant and his wife used the motor home for two weeks during the Christmas season. The Minister calculated the personal versus business use by taking the sum of 10,429 kilometres over the total kilometres, 26,789, to arrive at 38.93% personal, and then applied that percentage to the total expenses, to arrive at the figure of $3,194.78, which he believed was personal expenses. I think that the figure is high.

[15]     Mrs. Mann testified that they took the motor home to Florida, which is about 1,200 miles and back. That works out to about 4,000 kilometres, as opposed to 10,429. I think that the proper percentage should be 4,000 over 26,789 which works out to 14.93, let us say 15%. This should be attributed to personal, which would be personal use factor.

[16]     I say that the personal use percentage of the motor home should be 15%, rather than 38.93%. I could make the calculation, but I do not want to take the time right now.

[17]     Then we come to 1999. The only disallowance was for capital cost allowance.

[18]     I think the motor home was leasing property within the meaning of subsection 1100(15) of the Income Tax Regulations. It means that the amount of capital cost allowance that can be claimed is restricted to the amount of the income otherwise determined before capital cost allowance.

[19]     I am sorry that the appellants were misled into thinking they could claim capital cost allowance on the full amount, and create a loss which would be set off against other income. It just does not work that way.

[20]     I would have liked to find some way of granting them the capital cost allowance that they are claiming, but clearly, in my opinion, the motor home was leasing property within the meaning of subsection 1100(17), and neither of the appellants was personally active in the leasing business on a continuous basis throughout the year, and accordingly, the restrictions in subsection 1100(15) apply.

[21]     There is only one thing that I think might give the appellants some relief, and that is this: in the year 2002 the motor home was disposed of. It was repossessed by the John Deere Finance Company.

[22]     It is possible - and I emphasize the word "possible" - that this may have created a terminal loss under subsections 20(16) and 20(16.3) of the Income Tax Act. It is possible that they would be entitled to terminal loss on that amount, that could be carried back or applied - first of all, applied against their income for that year, and then carried back three years. That may or may not give them any relief, but I think the Minister should look at that.

[23]     So the appeals of Kevin Mann are allowed, in accordance with the foregoing. The appeals of Barbara Mann to the Income Tax Act are allowed on the same basis, in respect of her proportionate share in the partnership.

[24]     So far as the GST appeal is concerned, the only basis upon which the claim for input tax credits was denied was that the appellants were carrying on a business without a reasonable expectation of profit. I have concluded that they were carrying on a business with a reasonable expectation of profit and, accordingly, that was a commercial activity, and they are entitled to the input tax credits. The appeal is therefore allowed on that basis.

[25]     There will be no order for costs.

Signed at Ottawa, Canada, this 20th day of February 2003.

"D.G.H. Bowman"

A.C.J.

CITATION:

2003TCC63

COURT FILE NOS.:

2001-2869(GST)I, 2002-2441(IT)I, 2002-3443(IT)I

STYLE OF CAUSE:

Between Kevin Mann and Barbara Mann and Her Majesty The Queen AND Between Kevin Mann and Her Majesty The Queen AND Between Barbara Mann and Her Majesty The Queen

PLACE OF HEARING

Toronto, Ontario

DATE OF HEARING

February 13, 2003

REASONS FOR JUDGMENT BY:

The Honourable D.G.H. Bowman Associate Chief Judge

DATE OF JUDGMENT

February 20, 2003

APPEARANCES:

For the Appellants:

Kevin Mann

Counsel for the Respondent:

James Rhodes, Esq.

COUNSEL OF RECORD:

For the Appellants:
	Name:	--
	Firm:	--

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada