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Docket: 2002-2469(GST)I |
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BETWEEN: |
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MELVILLE MOTORS LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on June 19, 2003 at Regina, Saskatchewan
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Before: The Honourable Justice D.W. Beaubier |
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Appearances: |
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Agent for the Appellant: |
Gregory Edward Kohnen |
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Counsel for the Respondent: |
Lyle Bouvier |
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JUDGMENT
The appeal from the reassessment made under the Excise Tax Act, notice of which is dated April 26, 2001 and bears number 09ES0000117, is allowed and the assessment is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 22nd day of July 2003.
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"D.W. Beaubier" |
Beaubier, J.
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Citation: 2003TCC444 |
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Date: 20030722 |
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Docket: 2002-2469(GST)I |
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BETWEEN: |
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MELVILLE MOTORS LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the Informal Procedure was heard at Regina, Saskatchewan on June 19, 2003. Gregory Kohnen the Dealer Principal and part owner of the Appellant, a Ford Motor Company dealer, was the only witness. Mr. Kohnen was also the in-house accountant of the Appellant.
[2] The matters under appeal are outlined in paragraphs 7 to 12 inclusive of the Reply to the Notice of Appeal which read:
7. In so assessing the Appellant, the Minister made the following assumptions of fact with respect to the relevant period:
(a) The Appellant was a registrant for the purposes of the Excise Tax Act (the "Act");
(b) for the reporting periods ending between January 1, 1997 and December 31, 1999, the Appellant was required to file its returns on a quarterly basis;
(c) for the reporting periods ending in 2000 the Appellant was required to file its returns on a monthly basis;
(d) the Appellant filed returns reporting tax collectible, input tax credits and net tax as set out in Schedule A attached hereto;
(e) The Appellant operated an automobile dealership;
(f) In 1999 and/or 2000, the Appellant paid the following people (the "Employees") an allowance for the use of a vehicle in the Appellant's business (the "Mileage Allowance"):
(i) Rick Gray;
(ii) Wayne Stelmackowich;
(iii) Ron Wilson; and
(iv) William Finishen;
(g) all of the Employees were employed by the Appellant in the sale of vehicles;
(h) each of the Employees leased a vehicle for use in the Appellant's business;
(i) the vehicles referred to in the previous subparagraph were leased from the Appellant;
(j) the Employees frequently changed the vehicles they leased;
(k) the Employees used dealer plates on the vehicles they used in the Appellant's business, which were leased from the Appellant;
(l) the Mileage Allowance paid to each of the Employees in any year was equal to the amount of the lease payments, including the GST, that the Employee paid to the Appellant in that year;
(m) the Appellant collected GST of at least $719.62 from the Employees with respect to the lease payments that they made to the Appellant in 1999;
(n) the Appellant claimed input tax credits of at least $719.62 with respect to the Mileage Allowance it paid to the Employees in 1999;
(o) the Appellant collected GST of at least $1,025.12 from the Employees with respect to the lease payments that they made to the Appellant in 2000;
(p) the Appellant claimed input tax credits of at least $1,025.12 with respect to the Mileage Allowances it paid to the Employees in 2000;
(q) the only documentation the Appellant had with respect to the Mileage Allowances paid to the Employees in 1999 and 2000 was the cancelled cheques issued to the Employees; and
(r) any further input tax credits which the Appellant submits it was entitled to claim with respect to the Mileage Allowances it paid to the Employees were not reasonable as the measurement of the use of the Employee's vehicle for the purpose of the allowance was not based solely on the number of kilometres for which the vehicle was used in connection with or in the course of the Employee's office or employment.
B. ISSUE TO BE DECIDED
8. The issue to be decided in this appeal is whether the Appellant is entitled to input tax credits with respect to the Mileage Allowances it paid to the Employees for use of their motor vehicles.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
9. He relies on subsections 123(1), 221(1) and 225(1) and sections 169, 174, 228, 280, 281.1 and 296 of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended and section 6(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended for the 1999 and 2000 taxation years.
10. It is submitted that the Minister properly assessed the Appellant's net tax for the relevant period, pursuant to sections 169, 174, 221(1), 225(1), 228 and 296 of the Act.
11. Furthermore, it is submitted that, pursuant to sections 169 and 174 of the Act, the Appellant is only entitled to claim an input tax credit for the Mileage Allowances paid to the Employees for the use of his or her motor vehicle in Canada in relation to the Appellant's commercial activities where:
(a) the Appellant was entitled under the provisions of the Income Tax Act to deduct an amount in respect of the Mileage Allowances paid to the Employees in computing its income for the 1999 or 2000 taxation years;
(b) the Mileage Allowance paid to the Employees was a reasonable allowance for the purposes of subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of the Income Tax Act, and
(c) the Appellant considered, at the time the allowance was paid, that the allowance would be a reasonable allowance for those purposes and it is reasonable for the Appellant to have considered, at that time, that the allowance would be a reasonable allowance for those purposes.
12. The Mileage Allowances paid by the Appellant are, however, not reasonable as they were based on the lease payments, including the GST, instead of being based solely on the number of kilometres for which the vehicle was used in connection with or in the course of the Employees' office or employment as required by subparagraphs 6(1)(b)(x) of the Income Tax Act. Consequently, the Appellant is not entitled to an input tax credit with respect to that allowance.
...
[3] None of the assumptions except 7(q) and (r) were refuted. Respecting (q) and (r):
(q) The Appellant also had had written forms of invoices claimed by the salesmen for their mileage, and describing numbers of kilometres travelled, which he offered to the auditor. They were exhibited at the Hearing.
(r) The Appellant placed a ceiling on the mileage that the salesmen could claim which amounted to the lease fee for each month. The salesmen all invoiced the Appellant for virtually the entire lease amount by quarterly invoices. Mr. Kohnen stated the lease amount ceiling was instituted because, prior to that, the salesmen were claiming for greater mileage sums than the lease amount and their travel was not economic to the Appellant.
[4] The Appellant's salesmen go out and canvas customers outside of the small town of Melville, where it is located, for sales. Some sales are made to customers as far as 1,000 kilometres away. Mr. Kohnen testified that, as a result, unlimited mileage could cause the Appellant's business to lose money in a year. He admitted that the salesmen used their leased vehicles personally. He gave an example of a salesman using a company vehicle to drive a child to a ball game competition where the salesman might sell a vehicle to another parent, with the result that its usage on that occasion was mixed.
[5] The mileage rate that the Appellant charged the salesmen was what Mr. Kohnen understood was the federal government rate from time to time and was reasonable.
[6] The basic premise of the assessment is that the mileage allowance was not based on the number of kilometres travelled. This was because of the ceiling fixed by the Appellant. The Appellant's argument was that the ceiling system was the only method by which it could exercise control over the mileage. Respondent's counsel countered that the result was that the salesmen's invoices always reached the ceiling and were not reasonable, were not based on mileage and therefore the input tax credits claimed were not within the provisions of the Excise Tax Act. Mr. Kohnen, a highly experience car dealer, stated that all salesmen will always invoice to the ceiling which also established that the employer had to fix a ceiling. He is believed.
[7] Section 174 of the Excise Tax Act reads:
174. For the purposes of this Part, where
(a) a person pays an allowance
(i) to an employee of the person, ...
for
...
(v) the use in Canada, in relation to activities engaged in by the person, of a motor vehicle,
(b) an amount in respect of the allowance is deductible in computing the income of the person for a taxation year of the person for the purposes of the Income Tax Act, or would have been so deductible if the person were a taxpayer under that Act and the activity were a business, and
(c) in the case of an allowance to which subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of that Act would apply
(i) if the allowance were a reasonable allowance for the purposes of that subparagraph, and
(ii) where the person is a partnership and the allowance is paid to a member of the partnership, if the member were an employee of the partnership, or, where the person is a charity or a public institution and the allowance is paid to a volunteer, if the volunteer were an employee of the charity or institution,
the person considered, at the time the allowance was paid, that the allowance would be a reasonable allowance for those purposes and it is reasonable for the person to have considered, at that time, that the allowance would be a reasonable allowance for those purposes,
the following rules apply:
(d) the person is deemed to have received a supply of the property or service,
(e) any consumption or use of the property or service by the employee, member or volunteer is deemed to be consumption or use by the person and not by the employee, member or volunteer,
and
(f) the person is deemed to have paid, at the time the allowance is paid, tax in respect of the supply equal to the amount determined by the formula
A x B
where
A is the amount of the allowance, and
B is
(i) 15/115 where
(A) all or substantially all of the supplies for which the allowance is paid were made in participating provinces, or
(B) the allowance is paid for the use of the motor vehicle in participating provinces, and
(ii) in any other case, 7/107.
[8] The relevant portions of subsection 6(1) of the Income Tax Act read as follows:
6(1) Amounts to be included as income from office or employment
(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
...
(b) Personal or living expenses - all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except
...
(v) reasonable allowances for travel expenses received by an employee from the employee's employer in respect of a period when the employee was employed in connection with the selling of property or negotiating of contracts for the employee's employer,
...
(vii.1) reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment,
...
and, for the purposes of subparagraphs (v), (vi) and (vii.1), an allowance received in a taxation year by a taxpayer for the use of a motor vehicle in connection with or in the course of the taxpayer's office or employment shall be deemed not to be a reasonable allowance
(x) where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, ...
[9] The same question posed in the case at bar was faced by Lamarre Proulx, J. of this Court in Tri-Bec Inc. v. Canada [2002] T.C.J. No. 116, [2002] G.S.T.C. 27. [hereinafter Tri-Bec] Paragraph 19 of that decision reads:
Subparagraph 6(1)(b)(x) of the Income Tax Act is clear in my view. Since section 174 of the Act refers to this statutory provision, a reasonable allowance for the use of a motor vehicle is one that is fixed on the basis of the number of kilometres travelled by the taxpayer in the performance of the office or employment.
[10] In Tri-Bec,supra, Lamarre Proulx, J. found that in one of the four instances in question there was sufficient evidence to warrant a finding that a motor vehicle allowance was based on mileage. This finding occurred in spite of a maximum amount imposed on the allowance by the employer. However, there did exist a mechanism to adjust the allowance downward should this be supported by an employee's report.
[11] The fact pattern analysed in Tri-Bec by Lamarre Proulx, J. parallels this case. Here, the Appellant paid an allowance based upon mileage. The rate, based generally on government rates, was reasonable. The stipulation by the Respondent is that the ceiling fixed by the Appellant removes the mileage basis. However, that is not so. The Appellant is entitled to exercise control over its employees. The Appellant could not obtain a sufficient sales volume if its salesmen sat around the showroom. They had to get out on the road and solicit sales. These ceilings, in these circumstances, is both reasonable and sensible. If the Appellant made fewer sales because of the ceiling, that was its choice as to its method of doing business.
[12] A second argument was that the ceiling was always met by the salesmen's invoices. The Court accepts Mr. Kohnen's reply that, in the Appellant's circumstances that was the best control that the Appellant could devise. Short of travelling with each salesman it could not determine what was personal and what was business mileage. Certainly, a salesman's mileage could be lower. But the Appellant's sales area and customer base was over a wide territory of about 100 kilometres by 100 kilometres. There was no personal pleasure for either the Appellant or its salesmen in finding customers over these distances and in these circumstances. The basis of the mileage allowed and the input tax credits claimed were the salesmen's mileage, subject to the ceiling. The Appellant is entitled to conduct its business in the manner it chooses.
[13] The appeal is allowed and this matter is referred back to the Minister of National Revenue for reconsideration and reassessment accordingly.
[14] The Appellant is awarded its disbursements which are fixed in respect to its out-of- pocket expenses for postage, copying and mileage to and from Regina and Melville to prosecute this appeal in the amount of $200.
Signed at Vancouver, British Columbia, this 22nd day of July 2003.
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"D.W. Beaubier" |
Beaubier, J.
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CITATION: |
2003TCC444 |
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COURT FILE NO.: |
2002-2469(GST)I |
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STYLE OF CAUSE: |
Melville Motors Ltd. v. The Queen |
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PLACE OF HEARING: |
Regina, Saskatchewan |
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DATE OF HEARING: |
June 19, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice D.W. Beaubier |
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DATE OF JUDGMENT: |
July 22, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Gregory Edward Kohnen |
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Counsel for the Respondent: |
Lyle Bouvier |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |