SLX Management Inc. v. The Queen

SLX Management Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-03-12
Neutral citation
2010 TCC 148
File numbers
2007-2354(IT)G
Judges and Taxing Officers
Eugene P. Rossiter
Subjects
Income Tax Act
Decision Content
Docket: 2007-2354(IT)G
2007-2356(GST)G
BETWEEN:
SLX MANAGEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeal of Paul Miller
(2007-2357(IT)G) on October 1, 2 and 3, 2009 at Calgary, Alberta
By: The Honourable E. P. Rossiter, Associate Chief Justice
Appearances:
Counsel for the Appellant:
Curtis R. Stewart and Nandini Somayaji
Counsel for the Respondent:
Mark Heseltine
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 2002, 2003, 2004 and 2005 taxation years and the appeal from the reassessment made under the Excise Tax Act, notice of which is dated July 31, 2006 in respect of the period of September 17, 2001 to September 16, 2003, are allowed, 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 at Ottawa, Canada, this 12th day of March, 2010.
“E.P. Rossiter”
Rossiter A.C.J.
2007-2357(IT)G
BETWEEN:
PAUL MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of SLX Management Inc. (2007-2347(IT)G and 2007-2356(GST)G) on
October 1, 2 and 3, 2009 at Calgary, Alberta
By: The Honourable E. P. Rossiter, Associate Chief Justice
Appearances:
Counsel for the Appellant:
Curtis R. Stewart and Nandini Somayaji
Counsel for the Respondent:
Mark Heseltine
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 2001, 2002 and 2003 taxation years are allowed, 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 at Ottawa, Canada, this 12th day of March, 2010.
“E.P. Rossiter”
Rossiter A.C.J.
Citation: 2010TCC148
Date: 20100312
Docket: 2007-2354(IT)G
2007-2356(GST)G
BETWEEN:
SLX MANAGEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
2007-2357(IT)G
AND BETWEEN:
PAUL MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
REASONS FOR JUDGMENT
Rossiter A.C.J.
Introduction
[1] The core issue in these appeals is categorization of expenses. The Minister reassessed the Appellants and denied the deduction of several expenses that were made against business income, alleging that they were personal in nature. The Appellants argue that all expenses were incurred for the purpose of gaining or producing income.
[2] SLX Canada Limited (“Canada”) was incorporated to handle Canadian National Railway’s (“CN”) leased rolling stock for extended periods of time: to deal with lenders, primarily insurance companies and equipment suppliers, and to deal with options to purchase by CN when the equipment came off lease [that intent being to keep the rolling stock off CN’s balance sheet]. All operational expenses of Canada were to be the responsibility of SLX Management Inc. (“Management”) pursuant to a Management Agreement between Management and Canada. Canada was owned 51 percent by CN, 16.66 percent by Management, 16.66 percent by a David Smith and 16.66 percent by DLG Consulting. The Appellant Paul Miller (“Miller”) was the President, sole shareholder and director of Management. Smith was Vice-President of Management. During the period in question, Management’s stream of revenue was 100 percent derived from Canada; Canada’s stream of income was solely from CN. The stream of income for Canada and from CN and thereby for Management was time sensitive and set to expire in 2007.
[3] In 2000, Management started to look elsewhere for an alternative future revenue stream. Management had an aircraft for years and used the aircraft to troll North America for projects and in doing so claimed certain aircraft operating expenses plus travel. Management also claimed, as a business entertainment expense, a twelve day cruise by the principals and employees of Management plus their significant others and other persons, mostly former employees of CN who were familiar with Canada’s operations with CN over the years. There were also claims by Management for: (a) a loss of investment in an automatic technology for underground transportation equipment, (b) expenses associated with Management renting a condominium in Montreal, (c) expenses of an office in a house in Florida owned by Miller, (d) expenses for an aircraft hangar where the Management aircraft was stored on occasion in Florida, and (e) some subscription magazine expenses.
[4] CRA disallowed the deduction of these expenses/losses from Management’s income and attributed certain of them as shareholder’s benefits to Miller. CRA also alleges that there was a change of use as of September 17, 2001 of Management’s aircraft such that it triggered a deemed supply under the Excise Act. The Appellants appealed the reassessments.
Facts
[5] Miller was originally an employee of CN. Lease residuals on CN rolling stock turned out to be a problem for CN. Miller developed a method of dealing with this CN problem through Canada. Canada was a company without employees but with physical assets of up to $500 million. These assets included rail cars, locomotives and the leases for this type of equipment. All Canada did was hold assets, but it was a fully operational lease company borrowing funds, acquiring equipment, refurbishing equipment, issuing debentures, and also dealing with residual risk and the remarketing of any equipment coming back to Canada. Management looked after all business operations of Canada pursuant to an agreement and got paid by:
1. A percentage of the total amount of transactions completed which were laddered;
2. By additional monies based upon Management showing that it borrowed monies at lower than the targeted rate set by CN on a present value basis;
3. By lease profit sharing with Management, if Management could generate a profit by taking a packaged lease with debt and selling it to, say, an insurance company.
4. By additional fees to Management if there was an exceptional deal that served CN’s interests.
Article 2.01 of this Management/Canada agreement provides:
The Company appoints Management and Management agrees to manage, supervise and conduct the business in accordance with this agreement.
Business was defined to mean the business of Canada according to its articles of incorporation.
[6] The duties and services undertaken by Management for Canada were extremely broad and all inclusive, basically to run all of the operations of Canada. The head offices of both Canada and Management were in Alberta because Alberta did not have a capital tax and the cost of operations from Calgary were significantly lower than those in Toronto or Montreal. Canada was restricted by terms of operations in doing business with CN and with only A-rated Canadian corporations in order to keep its credit rating as high as possible. Management was not limited to just doing business with CN. CN wanted Management to do business with other companies. Management attempted to do a variety of projects other than those associated with CN including acquisition of land in the United Kingdom, proposals with respect to the fast-ferry operations in British Columbia, and P3 projects in Nova Scotia.
[7] Management had four employees, the Appellant, Miller, David Smith and two administrative staff on a part-time basis. Vice-President Smith was the person responsible for Management’s financial statements and tax returns plus did liaison work with the accountants and maintained the accounting records. Miller received his designated shareholder’s benefits annually on his T4 after discussions with Smith. The shareholder’s benefits related to automobile usage, shareholder’s loans and other ancillary matters.
[8] Management had a consulting and participation agreement with DLG Consulting Limited up until November 1, 1998 to provide consulting on the business of Management.
[9] One hundred percent of the revenue of Canada during the taxation years in question came from CN. Management’s stream of income was almost exclusively from Canada. The agreement between Canada and CN in relation to CN’s residuals of rolling stock, was to expire in 2007, and as a result, the stream of revenue for Canada and Management’s stream of income had a sunset of April 1, 2007.
[10] Numerous attempts were made by Miller to broaden the business of Management including attempts to work with CN on a number of proposals. During the relevant period of time, the revenues of Management were roughly $2.5 million dollars annually.
Aircraft:
[11] In carrying out its operations, Management acquired a Cessna aircraft which was used extensively for travelling within Canada and the United States and which Miller states was only used on a personal basis about ten percent of the time. In 2000, Management acquired an additional aircraft, a TBM-700, and put the Cessna up for sale. The Cessna was eventually sold by Management in April, 2002 for a handsome capital gain. The TBM-700 was technologically advanced and higher end in terms of safety and reliability compared to the Cessna, and had lower operating costs. According to Miller the TBM-700 was used in the same fashion as the Cessna in the operations of Management.
[12] The operating expenses for the TBM-700 included fuel, hangar costs, insurance, maintenance, landing fees, charts and GPS. Management provided supporting invoices and claimed the appropriate capital cost allowance for the TBM-700 for the years in question.
[13] With respect to aircraft use, Miller maintained a log of flights and used this record to calculate any personal trips which would be attributable to him as a shareholder’s benefit.
[14] The TBM-700 flight logs for the taxation years in question were maintained for the purpose of determining personal usage and maintenance. A summary of these logs for the 2002 taxation year show a total of nineteen trips, seventeen of which were attributable to business and two which were attributable to Miller personally. In the 2003 taxation year there were a total of fifteen trips, thirteen attributed to business and two attributed to personal; for the stub year of September 16, 2003 to December 31, 2003 there were five trips, one personal and four attributable to business.
[15] The usage of the TBM-700 by Management was attributed, to a large extent, to the pursuit of a distribution agreement with Socata, an aircraft manufacturing company from France. Socata did not have any distribution outlets for their aircrafts in the northwestern United States or western Canada. The pursuit for a distribution agreement involved negotiations of terms. A draft MOU was prepared by Management for Socata. In pursuing this distribution agreement, Management also sought information on the depth of pilot availability in their distributorship territory, as well as reviewed bookings of prospective purchasers for the TBM and had provided some demonstration flights on the TBM-700.
[16] In anticipation of a distribution agreement with Socata, Management attempted to solicit people familiar with the aviation industry and who might be of assistance to Management in acting as distributors in British Columbia and the northwestern United States. These persons would not take on any inventory of Socata aircraft but could be of assistance in distributing the Socata aircraft product.
[17] The TBM-700 was also used to attend a variety of aircraft conventions or TBM-700 Pilots’ Associate meetings in places such as New Orleans, Oshkosh, Orlando, and Los Cabos, Mexico. On numerous occasions the TBM-700 was used to fly to locations where Miller was investigating business opportunities for Management. These business opportunities included two visits to Premiere Electric which was a fire damage company requiring some capital investment in or about Seattle; Dixon Networks which was a company to supply commercial equipment for installation of supernet in Alberta; an introduction to a Tyco official for the purpose of petroleum business with Tyco; numerous trips to meet a Mr. Frick in Florida for the purpose of scouting out coastal properties, in particular properties which were investment properties; an opportunity in North Bay, Ontario involving technology for automated underground mining vehicles; and potential acquisition of an FBO (“Fixed Base Operation”) aircraft facility in Florida.
[18] During the periods in question, Management did not generate any revenue from its Socata ventures or any other business ventures it was investigating at the time for which the TBM-700 was used.
[19] Many trips on the TBM-700 were purportedly for business purposes, and were corroborated by witnesses other than Miller including flights to North Bay, Ontario for the automated underground vehicle technology, the FBO and prospective operations in Florida and the Premiere Electric possible investment in Seattle. Miller asserted that the TBM-700 was required to be on an on-call basis with Canada for the purpose of looking after Canada’s business operations which were tied in with CN. Miller asserted they needed to be in the air within a one-half hour demand even though during the relevant time periods, not once were they ever called upon by CN or by Canada on such an urgent basis. A retired Chartered Accountant for CN confirmed that when Canada was established and the management agreement was entered between Canada and Management the potential for Management acquiring a corporate aircraft was discussed, but CN did not care whether or not Canada or Management had a corporate aircraft.
[20] Of all the trips in the TBM-700 claimed for business purposes during the taxation periods in question, the only trip that was related to CN was a trip to Toronto or a trip to Halifax to see DLG Consulting. For other trips to Montreal, of which there might have been two or three in the time period, commercial airlines were used. No real explanation was given as to why this trip to Halifax was taken with the TBM-700 as opposed to flying commercially.
[21] Miller asserted that he and Smith used commercial airlines when it made sense and they used points as well as trains and automobiles when required.
Cruise:
[22] Management incurred as an entertainment expense a cruise of $44,818. According to Management, this cruise was undertaken for two reasons; firstly, as a thank you to key persons who generated significant revenue for Canada and therefore generated revenue for Management; secondly, it was an attempt to get some persons together who were key business architects from Management’s point of view to try to strategize where Management could go forward for additional business with CN, if any, given the sunset timelines (2007) of the management agreement between Management and Canada and Canada’s stream of business from CN. These key persons who Miller was referring to were a lawyer and accountant from Price Waterhouse, both of whom declined to attend, former personnel from CN, the Vice-President of Management and his spouse, as well as Miller and his spouse and a Mr. Gorveat and his companion from the DLG consulting. An original director of Management and architect of the documentation of Management did not attend. The cruise entertainment expense included the cost of the cruise, return airfare and other transportation costs.
[23] Spouses were invited especially for the three persons who worked for CN, as Management wanted face time with the former CN personnel and they could only give them a considerable length of face time if spouses attend. The three personnel from CN were then retired and they were not social friends of Miller, employees of Management or shareholders of Canada. It was explained that when in port, they would go on tours, and at night, Miller and Smith had dinner with the guests. They would have five or six hours face time with the guests each day and they also had two formal meetings while on the ship to discuss how Management had been developed and grown, what might happen post 2007 in terms of revenue stream and the issue of residuals of the CN rolling stock. A few proposals and ideas came out of this cruise but none related to CN business.
Montreal Condo:
[24] Miller owned a condo in Montreal where he resided before he terminated his employment with CN and developed Management. Management used this condo since its incorporation when Miller was doing transactions for Management with CN. Initially the condo was paid for on a daily basis, then a monthly basis. It sat vacant when not used by Management. When Management was dealing with CN, facilities of CN were not used as Miller felt that Management needed space to conduct its own analysis, whether it be in a hotel or a condo, and they used the condo occasionally. Miller acknowledged that he kept the Montreal condo partly because of its investment value and he was hesitant to part with the condo from a personal point of view (real estate was a building block for assets and he was hesitant to part with it). During the period of time under review, Miller only flew to Montreal on one occasion with the TBM-700 and only stayed in the Montreal condo overnight once.
Medical Expenses:
[25] Miller incurred medical expenses in 2002 of $4,277 for a visit to the Mayo Clinic and in 2003, $876 for dental treatment. These medical expenses were not for a pilot’s license check-up. His family had a history of use of the Mayo Clinic. Miller had no referral to the Mayo Clinic, nor did he have a family physician in Calgary at the time. He acknowledged that there was Alberta Health Care Insurance in existence at the time. Little explanation was given with respect to the medical expenses except that Miller thought he was important to Canada and Management and therefore his health was of concern to ensure the continued success of Management.
Automated Mining Underground Transportation Equipment (Mintronics):
[26] Glenn Brophy, a friend of the Appellant Miller, had been working for a North Bay, Ontario company involved in automated mining underground transportation vehicles. Brophy had left the company and acquired some automated underground transportation technology. Management investigated the opportunity presented by this technology and put up $38,135 to Brophy for the purpose of paying legal fees to acquire the intellectual property for the automated technology. Management was involved to the extent of acquiring the sub-surface rights for the technology. Brophy incorporated a company called 142924 Ontario Inc. when these rights were acquired. Miller made about three trips to North Bay to examine the opportunities presented by this technology. They looked at the consumer possibility of this technology with Canadian Tire as well as some other possibilities with Laidlaw, a school bus manufacturer, where the technology would be used for the purpose of transporting children; and Ford Motor Company with respect to forklift operations, and retailers generally on a “find-it” system. Miller, Brophy and a third shareholder did not have a shareholders’ agreement, but according to Brophy and Miller, the $38,135 was put up by Miller while the other shareholder and Brophy carried out other efforts to advance the use of the technology. The money for the legals, $38,135, was transferred by Management and wired to the credit of Glenn Brophy, at Canada Trust. When the business venture was not going to be successful, financial statements were prepared for 142942 Ontario Inc.. Miller only then noted that he was a shareholder in 142942 Ontario Inc. and the investment was shown as a shareholder’s loan for Miller. This was, according to Miller, an error and the investment had been made on behalf of Management.
Travel Expenses:
[27] There were numerous travel expenses also claimed by Management which were disallowed. These travel expenses were travel expenses which tied in almost exclusively with the use of the TBM-700. These are the amounts of $7,089 for 2002 and $12,799 for 2003.
Subscription Costs of Association Dues:
[28] There were subscription costs claimed in 2002 of $1,531 and in 2003 of $2,085 which related mainly to aviation magazines or memberships in flying or aeronautical associations.
Florida Home Office and Hangar:
[29] Miller purchased a house in Spruce Creek, Florida, in 2003 near a community airport and a hangar for the TBM-700 came with the property. Management was charged $1,200 per month for the use of the hangar as well as $300 per month for the use of the home office. The charges were only made on per-use basis. Miller asserted that the usage of the aircraft was not to get to Florida but for access to clients. Miller asserted that he was able to work from this property in Florida with a dedicated office with the plane also dedicated. He could go anywhere and in fact could be off the ground in thirty minutes.
[30] Miller took many flights to Florida. He would spend only a few hours or maybe a day or two on business, and then stay in Florida for an extended period of time, with the airplane close by his side. Miller’s spouse, Barbara, accompanied him on many of the flights.
Issues
[31] A: Management – Income Tax Appeal:
1. The deductibility of certain expenses from Management’s income including:
a) operating expenses for the TBM-700 owned by Management as well as the CCA claimed for the aircraft;
b) entertainment cruise expenses;
c) miscellaneous travel expenses;
d) Montreal condo expenses;
e) medical expenses;
(f) Florida home office and hangar expenses;
(g) subscription expenses and association dues.
2. The deductibility of an investment in what was known as the North Bay Project.
[32] B: Management – GST Appeal:
1. The timeliness of the GST assessment,
2. Whether there was a change of use for the TBM-700 on September 17, 2002 such that there was triggered a deemed supply under the Excise Tax Act.
[33] C: Miller – Income Tax Appeal:
1. If any of the expenses claimed by Management as deductible are not properly deductible, were they shareholders’ benefits under subsection 15(1) of the Income Tax Act or under section 56(2) of the Income Tax Act and therefore attributable to the Appellant Miller?
2. An issue of gross negligence penalties levied against the Appellant Miller was conceded by the Respondent – that is gross negligence penalties were not appropriate for 2001, 2002 or 2003.
Analysis
1. A: Management – Income Tax Appeal
[34] Section 9 – Income Tax Act
Business/Source of Income: The first issue is whether the expenses incurred by the Management in the years 2002, 2003 and a stub year ending December 31, 2003, are deductible from Management’s income for those years. Counsel for the Respondent is of the opinion that these expenses are not deductible because in its view, Management was not operating as a business during those years to which the expenses related or there was no source of income. Management, however, submits that the expenses incurred for the years in question were for the purposes of operating the Appellant’s business.
[35] Section 9 of the Income Tax Act states in part as follows:
9(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
(2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of the taxpayer’s loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source with such modifications as the circumstances require.
[36] In Stewart v. R., 2002 SCC 46, the Supreme Court of Canada dealt extensively with a source of either business or property income. At paragraph [50], the Supreme Court of Canada stated as follows:
[50] It is clear that in order to apply s. 9, the taxpayer must first determine whether he or she has a source of either business or property income. As has been pointed out, a commercial activity which falls short of being a business, may nevertheless be a source of property income. As well, it is clear that some taxpayer endeavours are neither businesses, nor sources of property income, but are mere personal activities. As such, the following two-stage approach with respect to the source question can be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the source of the income a business or property?
The first stage of the test assesses the general question of whether or not a source of income exists; the second stage categorizes the source as either business or property.
[37] According to the Supreme Court of Canada, the purpose of the first stage of the test is to distinguish between the commercial and personal activities. In Stewart, supra, at paragraph [60], the Supreme Court of Canada further stated:
[60] In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. …
[There was a variety of indicia of commerciality or badges of trade referred to by former Chief Justice Bowman in Graeme Nichol v. The Queen, 93 D.T.C. 1216]
[38] In Harquail v. The Queen, 2001 FCA 320, the Federal Court of Appeal, at paragraph [62] stated in part as follows:
It is not easy to delimit the content of the concept of carrying on business. One can see two outside parameters where the carrying on of business does not occur: on the one hand, when a company, which has been incorporated, has not actually commenced operation and, on the other hand, when a company has become dormant and is only holding annual meetings and filing its returns so as to avoid the forfeiture of its charter. There are, in between, some activities, however, which are signs that a company is operating and which should fall within the spectrum of the concept of carrying on business, even though, for example, the activities are carried on for the purpose of reaching an agreement which eventually is not reached or even though they do not result in the earning of income.
[39] In Setchell v. R., 2006 TCC 37 a taxpayer who after being laid off from her employment, took a computer course expecting that the computer course would enable her to find employment or take related freelance work and she claimed the cost of the course as a tuition expense. Madame Justice Woods stated in part as follows:
[16] … I agree with counsel that the fees are not deductible unless Mrs. Setchell was carrying on business at the time the course was taken. I do not agree, however, that it was necessary for Mrs. Setchell to have entered into business contracts in order to be considered to be carrying on a business. Judicial decisions make it clear that this is not necessary. If the capital structure of the business is in place and a taxpayer is actively pursuing business opportunities, then the business has commenced even if no business contracts have been entered into. …
[17] I also note that this test appears to be accepted by the Canada Revenue Agency. Their administrative policy is of course not law but it is helpful to refer to when it reflects the judicial decisions. The Agency's administrative policy is set out in Interpretation Bulletin IT-364, at paragraph 2. According to the Bulletin, the Agency considers that a business has not commenced if activities are undertaken in the hope that the information obtained will justify going into a business and that a business will be considered to have commenced if there are serious or continuous efforts to begin normal operations.
[40] Also, consideration must be given to Wacky Wheatley’s TV & Stereo Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 2311 (TCC). In that case, the taxpayer corporations were associated in the business of retail marketing of television, stereos and related electronic consumer products and were contemplating an expansion into the Australian market. In doing so, they incurred certain expenses which they sought to deduct as current business expenses. The Tax Court of Canada stated, in part, as follows:
[26] … These expenses were anterior to any business decision to enter the Australian market and it is my opinion that they were clearly incurred as part of the current expenses of the appellants' operations.
…
[28] In the present case, the evidence shows that expansion into new markets was an on-going concern of the appellants. It is my opinion that the expenditures in question resulted from the current operations of each of the appellants "as part of the every day concern of its officers in conducting the operations of the company in a business-like way."
[29] A major expenditure of many businesses today is monies expended to maintain or increase market share under increasingly competitive conditions. To this purpose, many corporations spend significant amounts each year in advertising, promotions and market surveys. The expenditures in issue in these appeals, in my view, related to such an endeavour. They were monies spent to determine the profit potential of the Australian market and were current expenses of the appellants. This characterization reflects the "business and commercial realities of the matter".
[41] I believe that the activities of Management can certainly be classified as commercial in nature given the commercial indicia of Management’s operations. I conclude that Management was carrying on business during the period in question as follows:
1. Management had been in operation since the early 1990s with revenues on some occasions in excess of $2 million per year.
2. Management’s operations surrounded the management of the operations of Canada but were not limited thereto and Management actively sought out other business ventures or activities.
3. The principal of Management, Miller, had professional training as an Engineer as well as Master’s Degree in Business Administration and had been working in the business environment for years. He developed Canada and Management and successfully operated both at a profitable level for a number of years.
4. Management had set out an intended course of action to develop new sources of revenue other than Canada because of the sunset of its revenue stream in 2007 from Canada.
5. Management was trawling North America for business opportunities that would show a profit. There was a certain personal aspect to the commercial nature of Management, related to the Appellant Miller’s personal interest in aircraft and aviation in general. The business prospects of Management in aviation were only part of its business pursuits being investigated.
[42] I am satisfied on the evidence and in applying the principles enunciated in Stewart, that, even though efforts of Management had not brought in revenue with respect to the ventures for which it was seeking a business deduction, Management was involved in commercial activity and searching out business opportunities. I refer to the Harquail, Setchell and Wacky Wheatley cases as support for finding the proposition that the business activities carried on by Management were for the purpose of earning income and deriving a profit. Although this purpose was not reached or attained, the activities were nevertheless commercial in nature.
[43] The Respondent’s submission that although there was a desire and an effort by Management, there was no business is simply not an accurate reflection of the activities of Management. Management was looking for opportunities and projects while they were still conducting an ongoing business and this is really no different than the situation as described in Harquail and Setchell referred to above.
Section 18 – Income Tax Act
[44] Subsection 18(1) of the Act states in part as follows:
18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
…
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business;
“Personal or living expenses” under subsection 248(1) are defined as follows:
“Personal or living expenses” includes
(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or common-law partnership or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,
(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with the taxpayer by blood relationship, marriage or common-law partnership or adoption, and
(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;
[45] In Symes v. R., [1993] 4 S.C.R. 695 (S.C.C.) the issue was whether the taxpayer could deduct child care expenses from a business income. The SCC outlined several factors that may be taken into consideration in determining whether expenses are incurred for the purposes of producing or gaining income, which may be summarized as follows:
1. Whether the expense is deductible according to accounting principles;
2. Whether the expense is normally incurred by other taxpayers carrying on similar businesses;
3. Whether the expense would have been incurred were the taxpayer not engaged in pursuit of business or property income;
4. Whether the taxpayer could have avoided the expense without affecting gross income;
5. Whether the expense is of “the trader” of “the trade”. In the latter case, the expense might be considered an income earning expense.
6. Whether a particular expense was incurred in order to approach the income producing circle or was it incurred within the circle itself.
[46] Some expenses may be considered as dual purpose expenses. These expenses are particularly deductible pursuant to paragraph 18(1)(a) which prohibits the deduction of expenses to the extent that they were not income-earning expenses. The Income Tax Act contains several deeming provisions for expenses that are inevitably dual-purpose, such as entertainment or travel expenses.
[47] Some other factors that might be considered are the extent to which a taxpayer can make a lifestyle choice while maintaining the same capacity to gain or produce income - such choices tend to be seen as personal consumption decisions and result in expenses as personal expenses. Also, in terms of need-base, traditionally expenses that simply make the taxpayer available to the business are not considered business expenses since the taxpayer is expected to be available to the businesses quid pro quo for the business income received. This translates into the fundamental distinction often drawn between the earning or a source of income on one hand and the receipt or use of income on the other hand.
I. Aircraft Expenses:
[48] There are numerous key assumptions in the Reply of the Respondent, which relate to aircraft expenses.
32. …
x) the Aircraft was used primarily or substantially all of the time for the personal purposes of Mr. Miller;
y) during the years in issue Mr. Miller devoted substantial time to Aircraft related activities that had no business purpose and no connection with the Appellant’s management duties;
z) Mr. Miller flew the Aircraft outside of Canada and North America, which trips were exclusively for his personal purposes;
…
ff) the Appellant did not acquire or use the Aircraft to gain or produce income from a business or property;
gg) the cost of the purchasing and operating the Aircraft was a personal or living expense of Mr. Miller;
hh) the cost of purchasing and operating the Aircraft was unreasonable;
[49] Paragraph 27 of the Reply reveals disallowed management aircraft expenses for 2002 of $151,408 and for 2003 of $103,377. By agreement, the 2002 figures have been adjusted downwards from $151,408 to $125,722. This reduction would necessarily lead to an equivalent reduction in the Income Tax appeal of Miller at paragraph 18(v) of the Reply for 2002 reduced from $151,408 to $145,233 and for 2003 reduced from $103,323 to $97,705.
[50] Management purchased the TBM-700 aircraft as a replacement for the older Cessna aircraft at the end of the 2000 fiscal year. Management alleges that the purpose of the aircraft was to gain and produce income for both its management agreement with Canada and other independent business ventures. Management deducted expenses related to the Cessna and the TBM-700 for 2002 and also incurred expenses with respect to 2003.
[51] The Respondent alleges that the expenses related to the TBM-700 are personal living expenses of Miller and pointed out that:
· The management agreement with Canada did not require Management to buy or maintain aircraft;
· Miller was an experienced pilot;
· The TBM-700 was insured for business and pleasure usage; and
· The Appellant Miller frequently used the aircraft to fly to Florida for personal use.
[52] The Respondent also alleges that the cost of purchasing and operating the aircraft was unreasonable. Management concedes that Miller took three personal flights in the year ending September 16, 2002 and two personal flights in the year ending September 16, 2003 and one personal flight for the stub year ending December 31, 2003.
[53] In Stewart v. R., supra, the SCC, in dealing with a personal element to certain activities, stated:
[56] In addition to restricting the source test to activities which contain a personal element, the activity which the taxpayer claims constitutes a source of income must be distinguished from particular deductions that the taxpayer associates with that source. An attempt by the taxpayer to deduct what is essentially a personal expense does not influence the characterization of the source to which that deduction relates. This analytical separation is mandated by the structure of the Act. While, as discussed above, s. 9 is the provision of the Act where the basic distinction is drawn between personal and commercial activity, and then, within the commercial sphere, between business and property sources, the characterization of deductions occurs elsewhere. In particular, s. 18(1)(a) requires that deductions be attributed to a particular business or property source, and s. 18(1)(h) specifically disallows the deduction of personal or living expenses of the taxpayer: …
[57] It is clear from these provisions that the deductibility of expenses presupposes the existence of a source of income, and thus should not be confused with the preliminary source inquiry. If the deductibility of a particular expense is in question, then it is not the existence of a source of income which ought to be questioned, but the relationship between tha