Docket: 2012-551(IT)I
BETWEEN:
FRANK CRICHTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on March 1, 2013, at Toronto, Ontario
Before: The Honourable
Mr. Justice Randall Bocock
Appearances:
|
Agent
for the Appellant:
|
Barb
Weatherall
|
|
Counsel for the Respondent:
|
Tony Cheung
|
____________________________________________________________________
JUDGMENT
In
accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income
Tax Act for the 2005 and 2006 taxation years is allowed, in part, and the
reassessments are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that:
a)
the business operated
by the Appellant was not a farming operation; and,
b)
additional business
expenses are allowed in the amount of $6,759.17 for the 2005 taxation year and
in the amount of $7,740.00 for the 2006 taxation year.
Signed at Vancouver, British Columbia, this 4th
day of April 2013.
“R.S. Bocock”
Citation: 2013 TCC 96
Date: 20130404
Docket: 2012-551(IT)I
BETWEEN:
FRANK CRICHTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
[1]
Three issues were submitted
to the Court in respect of these reassessments for the 2005 and 2006 taxation
years (the “Relevant Years”).
[2]
First, is this
taxpayer’s undertaking a “farming” operation such that section 31 of the
Income Tax Act (the “Act”) applies in order to restrict losses in
each year to a maximum of $8,750.00?
[3]
Second, did the
Appellant have unreported income of $10,590.00 and $5,873.00 for 2005 and 2006 years?
[4]
Third, did the
Appellant incur additional business expenses of $26,718.00 above the $12,204.00
allowed in taxation year 2005 and additional business expenses of $19,688.00
above the $12,536.00 allowed in taxation year 2006?
I. Facts
[5]
The undertaking
operated during taxation year 2005 and taxation year 2006 by the Appellant was
an outdoor amusement ride consisting of a spoke harness apparatus mounted on a
portable trailer. If one imagines looking straight down on a wagon wheel, the
hub is mounted on the trailer. At the end of each spoke is a pony. The pony is
attached by a bridle to the end of the spoke which moves in circles. On each
pony, when business is brisk, sits a small child, whose parents or guardians
pay for the little one’s joy of the pony ride. In short, it is a merry-go-round
or carousel one sees at agricultural fairs and exhibitions throughout Canada. The sole difference is that the beasts of burden which carry the delighted child
are not wooden, but alive. This undertaking is known as Charlies Pride Ponies
(“Charlies Pride”).
II. Farm
or Business?
[6]
Since the conveyors of the
children are alive and not wooden, they require feed, stalls, harness, shoes,
pasture and enclosed transportation rather than petroleum, warehousing,
fasteners, struts, crating and racking. This animate rather than inanimate
state seems to have caused the Canada Revenue Agency (“CRA”) and the Minister
to believe the undertaking was a farming business. The Respondent’s counsel
submitted that the definition in subsection 248(1) caught this undertaking within
it. Respondent’s counsel focused on the advertised, but never solicited,
opportunity of portraiture with the ponies and their status as “show” animals. The
definition of “farming” is as follows:
“farming”
-- “farming” includes tillage of the soil, livestock raising or exhibiting,
maintaining of horses for racing, raising of poultry, fur farming, dairy
farming, fruit growing and the keeping of bees, but does not include an office
or employment under a person engaged in the business of farming;
[7]
In argument, the
Respondent submitted that the undertaking constituted ‘livestock raising or
exhibiting’.
[8]
With respect, 100 years
ago such an assertion would have engaged every bakery, dairy, construction
company or other business, requiring animal power to “drive” its enterprise, in
farming. These ponies reside on a farm because they must live in a barn, eat
hay and oats, be groomed and otherwise tended. This is not for the purposes of
selling them in trade, raising them for propagation or exhibiting them at
competitions or racing them, but simply to keep them alive so they can power
the carousel thereby generating ride revenue. This method of “pony propulsion” may
be anachronistic and archaic, but factually it is simply that. It is not
farming. Therefore, whatever the business losses may be, they are simply that
-- losses from business and not from farming.
III. Unreported
Income
[9]
The CRA conducted a
bank deposit analysis of the three bank accounts maintained by Charlies Pride.
Two were owned by the Appellant and one by Ms. Weatherall, Mr. Crichton’s
unpaid assistant and dutiful friend. After deducting reported T4 income for
both Mr. Crichton and Ms. Weatherall, the Minister assessed the surplus balance
as unreported income.
[10]
Although Ms.
Weatherall, who also acted as agent for Mr. Crichton, disagreed with the
characterization on the issue of unreported income, she offered no evidence to
rebut these logical and reasonable assumptions. Ms. Weatherall admitted that
the accounting records for Charlies Pride were not organized nor complete for
the Relevant Years. On this basis, the Court recognizes the requirement of the
Minister to conduct the alternative analysis in this matter, the reasonable conclusions
reach and the absence of any evidence in rebutting those assumptions.
Therefore, the Appellant cannot succeed on this ground.
IV. Disallowed
Expenses
[11]
Generally, the evidence
regarding the disallowed business expenses followed a fairly consistent, if
elongated, pattern. Ms. Weatherall or Mr. Crichton presented either direct
anecdotal evidence of the expenses from memory; some receipts (to varying
degrees of completeness) were submitted at the Hearing, or, with the consent of
Respondent’s counsel, limited documentary evidence by way of receipts was
submitted to the Court after the Hearing.
[12]
Specifically, the
Minister had disallowed those expenses where receipts were absent, unclear or
unreasonable.
[13]
Respondent’s counsel
conceded in submissions that where an expense was now supported by a document
(receipt, acknowledgment or voucher) or otherwise unambiguous evidence and had
some nexus to the business, then such an expense should be allowed. This
concession was offered in response to the Court’s indication that the most
logical basis for analysing the disallowed expenses was to concordantly follow
the Minister’s pleaded item by item comparison of claimed versus allowed
expenses culminating in a disallowed amount for each expense category.
[14]
Therefore, utilizing
the chart below, those disallowed expenses disputed by the Appellant may be
analyzed by taxation year as follows:
i)
2005
|
Expense
Description
|
Reported
by
Appellant
in
Tax
Return
|
Disallowed
by
Minister
|
Court’s
Conclusion
After
Hearing
|
Additional
Expense allowed on this Appeal
|
|
Pony Purchase(s)
|
$7,131.00
|
$6,631.00
|
On the face of total receipts produced,
there was $3,835 for Ponies Purchased, but they are assets and not a current
business expense.
|
-Nil-
|
|
Barn Expense
|
$1,990.00
|
$383.00
|
There was testimony of an additional
amount on account of barn rental of $100 per month was provided at the
Hearing for $1,200 per year.
|
$817.00
|
|
Signage
|
$230.00
|
$230.00
|
There was an invoice produced for this
sign and the expense should be allowed.
|
$230.00
|
|
Fuel / Parking
|
$1,451.00
|
$1,366.00
|
Invoices and receipts for gas for related
vehicles from credit cards and Canadian Tire totalled.
|
$387.00
|
|
Licence / Insurance
|
$1,919.00
|
$1,845.00
|
Insurance invoices for 2005 totalled
$1,079.00.
|
$1,004.00
|
|
Vehicle Maintenance
|
$1,671.00
|
$1,671.00
|
Vehicle maintenance totalled only once
(separated from vehicles repairs totalled $679.00.
|
$679.00
|
|
Casual Labour
|
$976.00
|
$976.00
|
Signage receipts totalling salaries for
causal labour totalled $710.00.
|
$710.00
|
|
|
|
|
|
|
|
Outside Training
|
$2,597.00
|
$1,397.00
|
Invoices for an additional $600.00 were
produced
|
$600.00
|
|
Bank Charges
|
$580.00
|
$580.00
|
Average bank charges were a plan fee of
$11.00 per month on one account and on average $20.00 per month of interest
charges.
|
$480.00
|
|
Tack and Harness Repair
|
$1,731.00
|
$1,731.00
|
Invoices were present for $350.94 and
this expense should be allowed.
|
$350.94
|
|
Equipment Repairs
|
$2,015.00
|
$2,015.00
|
Various repairs and equipment purchases
totalled a very conservative $717.00.
|
$717.00
|
|
Wagon Repair
|
$1,269.00
|
$1,269.00
|
Wagon equipment supplies of $345.10 were
submitted with materials at the Hearing.
|
$345.10
|
|
Pony Transportation
|
$1,105.00
|
$1,105.00
|
Invoices totalling $449.14 existed in
materials for pony transportation.
|
$449.13
|
ii)
2006
|
Expense
Description
|
Reported
by
Appellant
in
Tax
Return
|
Disallowed
by
Minister
|
Court’s
Conclusion
After
Hearing
|
Additional
Expense allowed on this Appeal
|
|
Pony Purchase(s)
|
$825.00
|
$202.00
|
The cost of ponies in 2006 was $750.00
but is a Capital Asset, not an expense.
|
-Nil-
|
|
Barn Expense
|
$2,595.00
|
$1,538.00
|
There were no additional invoices for
barn expense.
|
-Nil-
|
|
|
|
|
|
|
|
Signage
|
$285.00
|
$285.00
|
Signage expense invoice for $285.00
existed for 2006.
|
$285.00
|
|
Licence / Insurance
|
$1,200.00
|
$1,126.00
|
An additional insurance invoice of
$1,037.00 was submitted.
|
$1,126.00
|
|
Pony Transportation
|
$473.00
|
$473.00
|
A pony transportation expense receipt for
$200.00 was submitted.
|
$200.00
|
|
Vehicle Maintenance
|
$1,285.00
|
$1,285.00
|
Vehicles maintenance totalling $613.00
were identifiable.
|
$613.00
|
|
Casual Labour
|
$541.00
|
$541.00
|
Signed receipts totalling $530.00 were
submitted for 2006.
|
$530.00
|
|
Bank Charges
|
$1,426.00
|
$1,426.00
|
As in 2005, bank charges were $11.00 per
month and interest charges averaged $20.00 per month for $32.00 per month.
|
$480.00
|
|
Tack & Harness Repairs
|
$1,982.00
|
$1,816.00
|
A harness / tack wagon repair invoice
existed for 2006 in the amount of $3,891.00.
|
$1,816.00
|
|
Equipment Repairs
|
$1,813.00
|
$1,816.00
|
A conservative calculation of equipment
repairs from invoices and receipts submitted was $891.00.
|
$891.00
|
|
Wagon Repairs
|
$1,799.00
|
$1,799.00
|
As above tack/harness and wagon repair
invoice existed for 2006 in the amount of $3,891.00.
|
$1,799.00
|
[15]
In arriving at the
additional expenses allowed by the Court, care was taken to avoid double
inclusion of expenses in order to account for the possibility that the Minister
had already allowed such an expense in a different category. The Appellant must
live with such a methodology in light of the disorganized state of the books
and records of the business. In fairness to the Minister and the CRA, there
were also number of instances where invoices had not been furnished in respect
of expenses until the Hearing itself.
V.
Summary
[16]
Firstly, the business
was an outdoor amusement ride business and not a farming operation. Section 31
of the Act does not apply to limit losses from the business. Secondly,
the reassessment as to unreported business income stands as calculated by the
Minister. Third and lastly, the appeal is allowed in part and additional
business expenses are allowed to the extent of $6,759.17 in 2005 taxation year
and to the extent of $7,740.00 in the 2006 taxation year. Finally, the horses
are not inventory, but assets and a recalculation by the Minister may be
required to reflect this. Costs are not to be
awarded given the only partial success and the very poor state of books and
records for the business which likely lead to the need for an appeal in the
first instance.
Signed at Vancouver, British Columbia, this 4th day of April, 2013.
“R.S. Bocock”
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