Date: 20020912
Docket: 2001-3456-IT-I
BETWEEN:
PETER KINSEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller J.
[1] How many people dream of retiring to the South Pacific with a 50-foot boat, large enough to accommodate 12 people? Mr. Kinsey had such a desire, and indeed he accomplished that dream, having emigrated to Fiji in 2000. He built his boat in Canada from 1985 to the early 1990s and sailed it to the South Pacific in 1997. In 1989, he commenced claiming the business activity of boat chartering. From 1993 to 1998, he reported revenues of $49,909 and expenses (mainly capital cost allowance 'CCA') of $435,368. The Respondent disallowed the loss of $10,010 for the 1998 taxation year. Mr. Kinsey appeals against that assessment under the informal procedure. He maintains the loss was a legitimate business loss. The Respondent maintains that the boat chartering activity did not constitute a business in 1998 given the significant personal element and the lack of any reasonable expectation of profit.
Facts
[2] Mr. Kinsey did not appear to give evidence in this matter. His accountant of several years, Mr. Lotoski, attempted to provide as much background of the matter of which he was personally aware. He was not able to provide detailed information regarding the boat's activities or Mr. Kinsey's expectation in connection with those activities. Indeed, when questioned about the cost of the boat, a fundamental fact one might presume an accountant of long standing would have at his fingertips, Mr. Lotoski claimed he did not know, but then upon reflection suggested $200,000. Given the records showed that CCA in four or five years was over $400,000, with still over $100,000 of undepreciated capital cost, I found this response weakened Mr. Lotoski's credibility. He was the Appellant's only witness.
[3] Prior to 1985, Mr. Kinsey spent several years sailing: indeed he undertook a four-year solo sailing trip. He returned to Vancouver in the mid-80s after being abroad for a number of years living aboard a sailboat. Back in Canada, he started to build his 50-foot boat. Mr. Lotoski confirmed that he understood Mr. Kinsey's original plan was to leave Canada and move to Fiji. It took several years to construct the boat at a cost which I can only guess was significantly greater than $500,000. In 1989, Mr. Kinsey started reporting the business activity of boat chartering, although there is no evidence of any revenue producing activity at that time. The first evidence of revenue producing charters was in 1993. The revenues and expenses for the years following are as follows:
Peter Kinsey
Taxation Year 1998
|
|
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
NET BUSINESS LOSSES CLAIMED FROM 1993 TO 1998
|
|
|
|
|
|
|
|
|
Revenue |
$ 642 |
$ 4,950 |
$32,035 |
$ 1 |
$ 1,809 |
$10,472 |
|
Expenses |
$137,806 |
$104,960 |
$55,335 |
$67,786 |
$48,999 |
$20,482 |
|
Net business loss claimed |
$(137,164) |
$(100,010) |
$(23,300) |
$(67,785) |
$(46,990) |
$(10,010) |
[4] Mr. Kinsey was a paramedic, who during the late 1980s and 1990s worked only partly in Canada. He used his employment earnings to finance his boat, though in 1995 and 1996 on the advice of Revenue Canada, according to Mr. Lotoski, Mr. Kinsey borrowed funds to finish the boat. There was no documentary evidence of any such loan. Given the CCA rates applicable to the Class 7 boat, Mr. Kinsey was able to write off significant amounts against his employment income. Revenue Canada was well aware of Mr. Kinsey's activities and questioned the sizable deductions in the mid-1990s. Mr. Lotoski explained that Mr. Kinsey requested the refund of approximately $150,000 in taxes for the 1992, 1993 and 1994 years, which was not forthcoming until May 1996 when he received $55,000, August 1996 when he received $77,000 and January 1997 when he received the balance of $12,000. Mr. Lotoski maintained that this failure of Revenue Canada to provide these refunds was a major obstacle in Mr. Kinsey's pursuit of his business. He needed this money to pay off his loan. Had he received all his refund in May 1996, according to Mr. Lotoski, he would have been gone. Mr. Lotoski indicated that Mr. Kinsey's largest expense at this time was $20,000 in accounting fees, in defending his tax returns.
[5] Mr. Kinsey started his charter activity out of Sooke, British Columbia. In December 1995, he advertised for a captain for such charters. Mr. Lotoski presented a two-page pamphlet for the 1995-1996 season in which it stated Mrs. and Mr. Kinsey are veteran sailors, sailing with their two children.
[6] Mr. Lotoski advised Mr. Kinsey to send out letters to sailing associations to try to drum up business. He also assisted in the development of a website. Mr. Kinsey's website won an award though after the year in question. Mr. Lotoski also provided a copy of a brochure sent out in 1999 for the 2000 charters.
[7] In 1997, Mr. Kinsey sailed the boat to the South Pacific. It is there the chartering activity was intended to take place. Indeed, Mr. Lotoski referred to 1999 as only the second year of operation.
[8] With respect to the charter activity, some of the literature provided by Mr. Lotoski indicated that the price for one person for a 15-day charter was C$3,750. Mr. Lotoski cannot provide any exact information on the number of charters in 1998 or other years. The promotional material contained a testimonial regarding the gourmet food and wine. No such expenses showed up in Mr. Kinsey's 1998 business activity report filed with Revenue Canada. Neither was there any insurance expense in 1998 or other overhead-type items. There is no evidence of the expenditures for 1997. In 1999, of the $21,298 expenses reported in the Statement of Business Activities, $9,661 was CCA, $7,892 was for travel, $1,378 for professional fees and $1,996 for repairs.
[9] According to Mr. Lotoski, while in the South Pacific, Mr. Kinsey lived in a hut, which cost him next to nothing. There is no documentary evidence of a title or lease. Mr. Lotoski suggested Mr. Kinsey moored his boat in a lagoon in front of the hut.
[10] Returning to the charter activity, Mr. Lotoski stated that global events and Revenue Canada's dilatoriness in refunding Mr. Kinsey's money affected Mr. Kinsey's business activity. Mr. Kinsey emigrated to Fiji in late 2000. In 2001, Mr. Lotoski indicated Mr. Kinsey had over US$30,000 net income.
Appellant's Position
[11] Mr. Lotoski recognized the significance of the recent Supreme Court of Canada decision in Stewart v. The Queen[1] and its impact on this area of the legitimacy of an activity as a business. He argued that, as there was no personal element involved in Mr. Kinsey's boat charter activity, it is unnecessary to consider the reasonable expectation of profit test. He maintained that just because Mr. Kinsey loved sailing that is not sufficient to determine there was a personal element involved. Mr. Lotoski suggested that Mr. Kinsey need only establish that his predominant intention was to make a profit, which he argues is the case here. Why else would Mr. Kinsey advertise his boat? People do not advertise pleasure boats for charter.
[12] Mr. Lotoski maintains Mr. Kinsey carried out his activity in accordance with the objective standards of businesslike behaviour, citing the advertising efforts.
[13] If I find there is a personal element, Mr. Lotoski maintains that it was still undertaken in a sufficiently commercial manner to constitute a source of income.
Respondent's Position
[14] The Respondent maintains there is a strong personal element in Mr. Kinsey's activities. She attributes this to his life as a sailor: it is not just enjoyment but his way of life. Further, she claims Mr. Kinsey's life was aboard the boat. His wife and children joined him. The only evidence to the contrary was the unsupported statement by Mr. Lotoski that Mr. Kinsey lived in a hut. Finally, she relies on the assumption in the Reply to the Notice of Appeal that the Activity was not a purely commercial venture. The evidence has not rebutted that assumption.
[15] As a personal element exists, then one looks to the pursuit of profit source test enunciated by the Supreme Court of Canada in Stewart. The Respondent argues that the evidence has not proven that Mr. Kinsey's predominant intention was to make a profit nor that he carried out his activity in a businesslike manner. There was no evidence to how long Mr. Kinsey was sailing in 1998, how many charters he booked, nor what prospective customers were contacted. There was no steady growth and revenue. The business activity report for 1998 was questionable. Finally, if full CCA continued to have been taken, there was no capability of profit. Without Mr. Kinsey's evidence the Respondent argues, I cannot find he carried on in a commercial manner.
Analysis
[16] In determining whether Mr. Kinsey had a business, the first question to ask is whether his activity was undertaken in pursuit of profit or was it a personal endeavour. As the Supreme Court of Canada pointed out in Stewart, the object of this question is to distinguish between commercial and personal activities, and is only required where there is a personal element to the activities in question. While I agree with Mr. Lotoski that simply enjoying sailing is not enough to constitute a personal element, I find that Mr. Kinsey's case goes well beyond just enjoying sailing. His life was sailing - he lived and breathed it. All his efforts went towards sailing off with his family to live in the South Pacific. That is not the picture of a man driven by the pursuit of profit.
[17] The Supreme Court of Canada stipulated that if a personal element exists in the activity, then the taxpayer must establish:
(i) his predominant intention to make a profit from the activity; and
(ii) that the activity has been carried on in accordance with objective standards of businesslike behaviour.
Whether Mr. Kinsey had a reasonable expectation of profit is a factor to consider but is not, according to the Supreme Court of Canada, the only factor nor is it conclusive. This raises the interesting possibility obviously considered by the Supreme Court of Canada of an activity, with some personal element, being carried out in such a commercial manner, that despite no reasonable expectation of profit, it still constitutes a business. Given the volume of source of income cases appearing in the Tax Court of Canada, I will undoubtedly have an opportunity to consider such a situation. Mr. Kinsey's situation, however, is not it.
[18] As mentioned, there is a personal element in Mr. Kinsey's activities. His life was aboard ship. His family was aboard ship. There was insufficient evidence to find otherwise. His objective, according to Mr. Lotoski, was to sail to the South Pacific, and take his family with him. The chartering of the boat was to assist in the accommodation of this lifestyle. This is not a criticism; indeed, Mr. Kinsey may be one of the fortunate few who have realized such a fantasy dream. But it was a dream of a new and wonderful life, very much a personal element, not a dream of a money-making venture.
[19] Having found the personal element in the activity, I need to examine whether Mr. Kinsey's predominant intention was to make a profit from the activity. It is clear from my findings on the issue of a personal element that the predominant purpose was not the pursuit of profit, but the pursuit of lifestyle. That is not to say there was no pursuit of profit. Clearly, there was some minimal charter activity in the year in question. This limited amount of revenue-producing activity combined with limited activity carried out in accordance with objective standards of businesslike behaviour are not sufficient to find a business exists.
[20] Mr. Lotoski argues there was considerable commerciality. There was some evidence of a list of sailing associations being considered for contact. There was also evidence of a brochure in 1999 and an award-winning website. These are consistent with a commercial venture. However, I weigh that against Mr. Kinsey's method of financing (reliance on tax refunds as opposed to conventional financing), the incapability of showing a profit while in Canada, no evidence of an expectation of profit, the lack of any formalized plan, the vagueness of reported business activity expenses, and the lack of any evidence of time devoted to the business side of the boat activities. On balance, I find that there are not sufficient indices of commerciality to find that Mr. Kinsey's activities overcome the personal element to the extent that they can be characterized as a business. They do not.
[21] The appeal is dismissed.
Signed at Ottawa, Canada, this 12th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2001-3456(IT)I
STYLE OF CAUSE: Peter Kinsey and Her Majesty the Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: September 4, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: September 12, 2002
APPEARANCES:
Agent for the Appellant: Dewey Lotoski
Counsel for the Respondent: Jasmine Sidhu
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm: N/A
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3456(IT)I
BETWEEN:
PETER KINSEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 4, 2002 at Kelowna, British Columbia, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Dewey Lotoski
Counsel for the Respondent: Jasmine Sidhu
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada this 12th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.