Tax Court of Canada Judgments

Date: 19990113

Dockets: 97-360-IT-G; 97-362-IT-G

BETWEEN:

COOPER INCORPORATED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

AND

BETWEEN:

CARSON LAKE LUMBER LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on December 10, 1998 at Toronto, Ontario by the Honourable Judge G.J. Rip

Reasons for judgment

Rip, J.T.C.C.

[1] Cooper Incorporated ("Cooper Inc.") and Carson Lake Lumber Limited ("Carson") appeal income tax assessments for their 1992, 1993 and 1994 taxation years in which the Minister of National Revenue ("Minister") denied the deductions of expenses and outlays claimed by each of the appellants. In the Minister's view, the outlays or expenses were not made or incurred for the purpose of earning income from a business or property pursuant to paragraphs 18(1)(a) and (b) and 20(1)(a) of the Income Tax Act ("Act"). The Minister added that in the event the outlays and expenses were otherwise deductible, they were not reasonable in the circumstances and, pursuant to section 67 of the Act, are not deductible.

[2] The appeals were heard on common evidence. Steven Cooper was the only witness. For all practical purposes since 1989, when he took carriage of the business from his mother, he has been in charge of the operations of both appellants, although his mother is their President. He is also a practising physician.

[3] The appellants are located in Pembroke, Ontario and Dr. Cooper carries on a "small private practice" in that city "assisting in surgery". He has a substantial income from his medical practice and does not take a salary from either appellant. He estimates he devotes about 40 to 50 hours a week, day and night, to his practice and approximately 50 hours to the appellants' investment and business activities. He often works day and night.

[4] Cooper Inc. is primarily a holding company, investing in certificates of deposits, bonds, mortgages and shares in corporations. It also owns real estate, both vacant land and rental property.

[5] Cooper Inc. owns the shares of Carson. The shares of Cooper Inc. are owned by the Estate of Phillip Cooper, deceased. Phillip Cooper was Dr. Cooper's father. Dr. Cooper and his mother are the executors and trustees of the Estate. The beneficiaries are Dr. Cooper and his sister, a lawyer in Toronto.

[6] Carson carries on the business of manufacturing softwood in its mill. The company has a manufacturing facility on a 100-acre site in Pembroke. It also owns 47 acres near Pembroke and 2,000 acres of forestland in various areas of Ontario. It also has rights to cut wood on Crown property. Private dealers also send logs to Pembroke for cutting.

[7] Carson employs about 40 employees during the year, 20 people in the sawmill and 10 to 15 in the manufacturing facility; other employees include millwrights, foremen, and heavy equipment operators. Carson owns heavy equipment to carry on its logging business.

[8] Customers of Carson are located around the world, said Dr. Cooper. The majority is in Ontario and Quebec. Other customers are in United States, Europe and the Middle East, at times. The majority of customers are wholesalers but a small number are end users of the product. Dr. Cooper stated that he personally deals with the customers "face to face" and visits them on a "regular basis" since there is "lots of competition". He described Carson as a "medium size" operator in an industry consisting of "very few large" companies and "very few small" companies. In order to compete, Carson has expanded by building new grading and surface finishing facilities and has found a niche market.

[9] Among Cooper Inc.'s real estate holdings are properties in the Toronto area, a two-acre property near Highway 7 and Kipling Ave., a 93-acre property near Newmarket and a town house in Thornhill. The first two properties requires rezoning before they can be developed and to this end Dr. Cooper is, and was, "actively involved" in negotiations with municipal officials and travels to Toronto for meetings.

[10] In the summer of 1992 Cooper Inc. purchased a simple engine Bonanza airplane ("aircraft" or "airplane") for $280,000.00 U.S. Dr. Cooper testified that there were lots of changes in the lumber industry during the previous 10 to 15 years and wholesalers had taken over much of the work Carson had traditionally done. Sales at Carson were falling and the company had to change its approach in doing business. According to Dr. Cooper, the company could hire a junior salesman for $80,000.00 a year, which was not feasible for a company of Carson's size, he said, or he, himself, could undertake additional work. But, he asserted, he was very busy and did not have enough time.

[11] Dr. Cooper testified that a trip by automobile between Toronto and Pembroke and return is ten hours. If an airplane were available he could fly to Toronto in the morning and be back in Pembroke in the early afternoon to attend to his medical practice and business for the appellants. "And", he declared, "this did happen" once the airplane was acquired.

[12] The airplane is used "exclusively" for business, Dr. Cooper testified. The airplane is flown to United States for repairs and maintenance and also was used for training Dr. Cooper to fly.

[13] Dr. Cooper testified that having the airplane available to him made it easier to meet customers quickly and efficiently, to obtain orders and to check on complaints; this resulted in additional orders to Carson. According to Dr. Cooper, over the years Carson increased its business volume and number of customers:

Year Gross Sales Additional Customers

1992 $1.3 million 8

1993 1.5 million 10

1994 2.3 million 11

Carson also increased its annual sales of board feet of lumber during this period.

[14] Dr. Cooper learned to fly in 1990 and received his pilot's license, Visual Flight Rules (V.F.R.), in 1992. In 1997 he received an Instrument Flight Rules (I.F.R.) license. He stated that originally he did not like flying but now enjoys it.

[15] In cross-examination, Dr. Cooper acknowledged that from time to time when he flew to Toronto he arranged to visit a house his father's estate was building for his mother in Thornhill. A room was being made available in the house for the exclusive use of Carson to use as an office. Dr. Cooper said when he visited Carson's customers in Toronto, he would frequently visit the house to check on the progress of its construction. The house was on the way to and from the Buttonville airport, where Dr. Cooper would usually land the aircraft in Toronto. When he went to Toronto, he said, he would do more than one thing, but his main purpose would be to see customers.

[16] In a letter dated August 3, 1994, to Revenue Canada, Dr. Cooper acknowledged making several trips by airplane to Toronto. He informed Revenue Canada that Carson "has built an office in Toronto" and that he had made several trips to Toronto "to both supervise the construction as well as to sometimes pick up or drop off an employee ..." who supervised the trades in his absence and helped in the construction of the office. Dr. Cooper did not inform Revenue Canada that the office was located in a house built for his mother.

[17] Dr. Cooper's mother moved into the house in 1995, although the house was completed in late 1994.

[18] Minister's counsel reviewed with Dr. Cooper flight logs for the periods from September 12, 1992 to September 22, 1993 and June 23, 1993 to May 4, 1995, an outline of flights prepared by the appellants at the request of Revenue Canada and an analysis of flight descriptions of uses of the aircraft prepared by Revenue Canada. The upshot of this evidence is that Cooper Inc. made limited use of the airplane: primarily to transport Dr. Cooper or his mother to meetings respecting rezoning requests and to inspect the vacant land for garbage cleanup. Carson's use of the aircraft permitted Dr. Cooper to have meetings of various durations, some as little as 20 minutes, with customers at small local airports, to transport customers or members of their families, and to view and inspect company property.

[19] According to an analysis by Revenue Canada of the use of the aircraft, the aircraft was not in use 86 per cent of the days it was owned by Cooper Inc. Out of 942 days during the period October 1992 to April 1995, the aircraft was used by the appellants only 71 days, or eight per cent of the time. Dr. Cooper stated that during the first year the aircraft was owned, 11 per cent to 13 per cent of the flights was used more for training and maintenance. During a 33-month period, there were 55 flights by both appellants, approximately 1.6 flights per month.

[20] Appellant's counsel conceded that the aircraft was used for personal reasons about 10 to 15 per cent of the time. Respondent's counsel did not question this allocation.

[21] Cooper Inc. calculated the capital cost allowance ("CCA") for the aircraft and its operating expenses as follows:[1]

	1992	1993	1994
Depreciation Operating Expenses	($22,520.00) ( 0.00)	($41,302.97) ($16,813.97)	($30,977.50) ($ 7,945.00)
Total Expenses per Fin. Statements	($22,520.00)	($58,116.94)	($38,922.5)
Add: depreciation* Less: CCA**	$45,040.00 ($45,041.00)	$82,606.00 ($80,714.00)	$61,955.00 ($62,428.00)
Total Aircraft Deductions Per T2S1	($22,521.00)	($56,224.94)	($39,395.00)

* Total of depreciation. Half of the total depreciation for each of the 1992 to 1994 taxation years was expenses by the Cooper Inc. and half was expensed by its subsidiary, Carson, in its 1992 to 1994 taxation years, respectively.

** Total of CCA. Half of the total CCA for each of the 1992 to 1994 taxation years was deducted by the Cooper Inc. in the computation of its taxable income and half was deducted by Carson in the computation of its taxable income for its 1992 to 1994 taxation years, respectively.

[22] Carson deducted expenses in the amounts of $11,260.00, $20,652.00 and $15,489.00, respectively, with respect to the aircraft. Apparently, at the end of each of its 1992, 1993 and 1994 taxation years, Cooper Inc. debited an account, "Receivable from Carson Lake Lumber Limited", half of the capital cost allowance with respect to the aircraft in the amounts of $22,520.00, $41,302.00 and $30,977.00, respectively. Carson deducted these amounts, allocating them as to 50 per cent travel expenses and 50 per cent as travel and entertainment expenses, in computing its income for each year.

[23] I have no doubt that Dr. Cooper is a very energetic and indefatigable person. His devotion of 100 hours a week to his medical practice and the interests of the appellants is almost mind boggling, bearing in mind the need for physician and surgeon to be alert when his services are required. I can appreciate the factors that caused Cooper Inc. to acquire the aircraft to make Dr. Cooper's work more time efficient. His talents could be better used in business and in medecine rather than in travelling from place to place. The use of an aircraft would shorten travel time. On my appreciation of the evidence the acquisition of the aircraft by Carson Inc. was to accommodate Dr. Cooper and his desire to practice his profession as much as it was for the appellants. This, of course, does not mean the aircraft was purchased solely to satisfy Dr. Cooper; the availability of Dr. Cooper's services to Cooper Inc. and Carson was important to the two appellants since he was their driving force.

[24] At least two of the cases[2] cited during argument discuss whether a particular aircraft was "required" by the taxpayer for its business. Whether or not an aircraft is required for a taxpayer's business is for the taxpayer to decide, not the Court. For a taxpayer to deduct capital cost allowance, the aircraft has to have been acquired by the taxpayer for the purpose of gaining or producing income.[3] And the outlays or expenses must be reasonable in the circumstances: section 67.

[25] As far as Cooper Inc. is concerned the only evidence of the use of the aircraft is that on occasion it facilitated the travel of Dr. Cooper or Mrs. Cooper, or both, to Toronto to make representations for rezoning of the land it owned and to meet advisors. When in Toronto, Dr. Cooper on occasion also inspected the company's vacant land.

[26] Cooper Inc.'s income for 1992, 1993 and 1994 was as follows:

Year Interest Income Gross Rental Income*

1992 302,459 24,982

1993 253,060 16,486

1994 236,367 20,565

* Gross income before deductions for depreciation, insurance, property taxes and repairs and maintenance.

[27] The bulk of Cooper Inc.'s income during the years in appeal was from interest. There is no evidence that during the years in appeal, or within a reasonable time thereafter, Cooper Inc.'s income would be increased as a result of the ownership and use of the aircraft. Quite simply, Cooper Inc. did not acquire the aircraft for the purpose of gaining or producing income. That the land it owned may have increased in value over the years is not very likely the result of owning an aircraft.

[28] Cooper Inc. used the aircraft for purported business purposes less than ten times during the years in appeal. The bulk of the use of the aircraft by Cooper Inc. was for training, exercising the engine, flight tests and for travel to the United States for warranty work. The use of the aircraft by Cooper Inc. for its business was infrequent. The amounts of $22,521.00, $56,224.94 and $39,395.00 Cooper deducted in its 1992, 1993 and 1994 taxation years, respectively, as outlays and expenses with respect to the aircraft, if they are otherwise deductible in computing income under the Act, were not reasonable in the circumstances and, pursuant to section 67 of the Act, are not deductible in computing Cooper Inc.'s income for those years.

[29] On the other hand Carson used the aircraft in the course of its business, notwithstanding the aircraft was not used in the business to any great extent. Evidence was led - and it was not seriously challenged in cross-examination - that as a result of the availability and use of the aircraft Carson increased the number of its clients and its gross sales in a very competitive market place. Carson carried on a business that would be advantaged by the availability and use of an aircraft. The aircraft expenses and outlays incurred by Carson, therefore, were for the purpose of gaining or producing income. I am also satisfied that the outlays or expenses incurred by Carson were reasonable in the circumstances. The method of calculating the amounts charged by Cooper Inc. to Carson are not unreasonable. However, due to the personal use of the aircraft, which I find to be 15 per cent of the whole, the amounts charged to Carson and deducted by Carson will have to be adjusted to reflect personal use.

[30] Therefore, the appeals by Cooper Inc. are dismissed. The appeals by Carson are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the aircraft expenses and outlays of Carson be reduced by 15 per cent, representing the personal use of the aircraft. The successful parties are entitled to their costs.

Signed at Ottawa, Canada, this 13th day of January 1999.

"G.J. Rip"

J.T.C.C.

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