Couillard c. La Reine

Couillard c. La Reine Court (s) Database Tax Court of Canada Judgments Date 2004-12-09 Neutral citation 2004 TCC 805 File numbers 2003-3326(GST)I Judges and Taxing Officers Louise Lamarre Proulx Subjects Part IX of the Excise Tax Act (GST) Decision Content Docket: 2003-3326(GST)I BETWEEN: JEAN-YVES COUILLARD, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on common evidence with the appeal of Cécile Beauchemin (2003-3328(GST)I) on July 14, 2004, at Montréal, Quebec Before: The Honourable Justice Louise Lamarre Proulx Appearances: For the Appellant: the Appellant himself Counsel for the Respondent: Denis Émond ____________________________________________________________________ JUDGMENT The appeal from the assessment under the Excise Tax Act for the period of October 1, 1998, to June 30, 2002, notice of which bears number 03401279 and is dated January 31, 2003, is allowed, and the assessment is 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 9th day of December 2004. "Louise Lamarre Proulx" Lamarre Proulx J. Translation certified true on this 7th day of February 2005. Jacques Deschênes, Translator Docket: 2003-3328(GST)I BETWEEN: CÉCILE BEAUCHEMIN, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on common evidence with the appeal of Jean-Yves Couillard (2003-3326(GST)I) on July 14, 2004, at Montréal, Quebec Before: The Honourable Justice Louise Lamarre Proulx Appearances: Appellant's Agent: Jean-Yves Couillard Counsel for the Respondent: Denis Émond ____________________________________________________________________ JUDGMENT The appeal from the assessment under the Excise Tax Act for the period of October 1, 1998, to June 30, 2002, notice of which bears number 03401280 and is dated February 7, 2003, is allowed, and the assessment is 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 9th day of December 2004. "Louise Lamarre Proulx" Lamarre Proulx J. Translation certified true on this 7th day of February 2005. Jacques Deschênes, Translator Citation: 2004TCC805 Date: 20041209 Docket: 2003-3326(GST)I 2003-3228(GST)I BETWEEN: JEAN-YVES COUILLARD, CÉCILE BEAUCHEMIN, Appellants, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] __________________________________________________________________ REASONS FOR JUDGMENT Lamarre Proulx J. [1] These appeals were heard on common evidence. The assessments pertain to the period of October 1, 1998, to June 2, 2002. The dispute involves an input tax credit (ITC) claim in respect of the restoration and operation of a sugarhouse. The appellants submit that the operation is part of their farming business. The Minister of National Revenue ("the Minister") severed this operation from the appellants' farming business and submits that it is not a commercial activity. [2] Jean-Yves Couillard is a farmer. He stated that the sugarhouse dates back to his great-grandfather's time. He explained that he was the president of the Union des Producteurs Agricoles (UPA) of St-Hyacinthe from 1977 to 1985 (eight years). He was then the general vice-president of the UPA from 1983 to 1994 (11 years). He was unable to look after the operation of the sugarhouse during those years. Subsequently, he wanted to restore the sugar bush and sugarhouse. He started to do so in 1996, but did most of the work in 1999. The ice storm of 1998 damaged not only the trees, but the shack and appurtenances as well. A great deal of work was needed to clean the underbrush and make the maple trees productive. The year 2002 was the first in which Mr. Couillard was able to tap the trees. He tapped 550 trees that year, and tapped 800 trees last year. [3] The appellant has been farming since the age of 16. He is now 72. He said he would be very sad if maple products were no longer considered farm products. He noted that there is a federation of maple producers within the UPA. Whether it was in his great-grandfather's day, his grandfather's day or his father's day, springtime always began with work on the sugar bush. [4] The appellant stated that his sugar bush is considered small. He produced Exhibit A-1, a confirmation of an insurance policy in respect of the sugarhouse and its equipment and for general agricultural civil liability. [5] Counsel for the respondent produced Exhibit I-2, the financial statement of the two appellants' business. Page 15 shows that the sale of products such as corn and soy generated revenues of $136,215 and $100,817 respectively in 2002, that the crops generated $290,502 in 2001, and that maple products generated $1,237 in revenues in 2002 and no revenues in 2001. [6] Auditor Danielle Fleury audited the appellants' business. She stated that when she visited the sugarhouse, she noticed that the maple syrup boiler was installed in a small room adjacent to what she called a cottage. The cottage has a foyer, a living room, a kitchen, a washroom and a second-floor bedroom. In her opinion, it constituted personal use property and the expenses were personal as well. Upon examining the financial statements for 1998 through 2001, she saw that no maple syrup revenues were reported. [7] Mr. Couillard said that the small room containing the boiler is actually a sizeable 24 feet by 30 feet. He agreed that the sugarhouse is not open to the public but is designed for maple syrup production. As for the adjacent room, Mr. Couillard said that it was not a cottage, but rather, a rest area for the people engaged in collecting maple sap and producing maple syrup. [8] The reasons stated in the notice of objection and notice of appeal for obtaining the credit are the same as those given at the hearing. [9] In his written submissions dated July 30, 2004, counsel for the respondent states as follows: [TRANSLATION] QUESTION 1 Are maple products zero-rated supplies within the meaning of Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15 (hereinafter "ETA")? In response to this question, we attach to these arguments a table compiled by Germaine Banville of the Ministère du Revenu du Québec. The table states that maple products, with the exception of maple cream and maple taffy, are zero-rated supplies. QUESTION 2 What is the amount of the ITC claimed by the appellant? For the period in question, namely January 1, 1999, to June 30, 2002, the total ITC claimed by the appellant is $2,433.59. ARGUMENTS - Audit The appellant is entitled to his ITC because the supply is zero-rated. However, as stated in the document produced as Exhibit R-1 (page 2 of 4), the auditor disallowed the ITC based on subsection 170(2) because ". . . the use of property or services of such quality, nature or cost is not reasonable in the circumstances, having regard to the nature of the commercial activities." - Objection On the objection, the Ministère du Revenu du Québec, on behalf of the respondent, maintained the assessment based on the definition of "commercial activity" in section 123 of the ETA and on Stewart v. The Queen, [2002] 2 S.C.R. 645, at paras. 50, 54 and 55 (copy attached). The Minister determined that the appellant was carrying on the activity recreationally, not commercially. EVIDENCE In our opinion, the evidence shows that the appellant is carrying out the sugarhouse-related activity recreationally. The appellant submits that he is entitled to the ITC regardless of the nature of the activity because it is a farming supply and is therefore zero-rated. This approach disregards subsection 170(2) of the ETA. In our opinion, the evidence shows that the sugar bush activity is not operated commercially and that the auditor correctly applied subsection 170(2) of the ETA. Analysis and conclusion [10] Subsection 170(2) of the Excise Tax Act (the "ETA") provides: 170(2) Further restriction - In determining an input tax credit of a registrant, no amount shall be included in respect of the tax payable by the registrant in respect of property or a service acquired, imported or brought into a participating province by the registrant, except to the extent that a) the consumption or use of property or services of such quality, nature or cost is reasonable in the circumstances, having regard to the nature of the commercial activities of the registrant; and b) the amount is calculated on consideration for the property or service or on a value of the property that is reasonable in the circumstances. [11] Section 123 of the ETA defines "commercial activity" as follows: "commercial activity" Commercial activity of a person means (a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person, (b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and (c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply; [12] Paragraphs 50, 54 and 55 of the decision of the Supreme Court of Canada in Stewart v. Canada, [2002] 2 S.C.R. 645, read 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. . . . 54 It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated as follows: "Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?" This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour. 55 The objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1) the profit and loss experience in past years; (2) the taxpayer's training; (3) the taxpayer's intended course of action; and (4) the capability of the venture to show a profit. As we conclude below, it is not necessary for the purposes of this appeal to expand on this list of factors. As such, we decline to do so; however, we would reiterate Dickson J.'s caution that this list is not intended to be exhaustive, and that the factors will differ with the nature and extent of the undertaking. We would also emphasize that although the reasonable expectation of profit is a factor to be considered at this stage, it is not the only factor, nor is it conclusive. The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer's activity which must be evaluated, not his or her business acumen. [13] According to this decision, the first thing to determine is whether the business is a personal endeavour of the taxpayer. If it is not, the reasonable expectation test is set aside for the purposes of the Income Tax Act. However, the definition of commercial activity in the ETA specifically requires that the business of an individual be operated with a reasonable expectation of profit. Based on the case law (see Janitsch v. R., [2004] G.T.C. 326; Mann v. R., 2003 DTC 1172; and Nadoryk v. R., 2003 DTC 5744 (F.C.A.)), the decision in Stewart, supra, does not apply to the ETA ― at least not entirely ― given the difference between the enactments. [14] The Minister has not placed the commercial nature of the appellant's farming business in doubt or in issue. The controversy is about whether the sugarhouse activity was a personal endeavour or a business endeavour. Is it a personal endeavour of the appellants? If so, the Minister submits that it must be severed from the appellants' farming activities. [15] I must therefore analyse the evidence adduced. I found the appellant to be a credible witness and consider his account of the facts plausible. The appellant explained that the building which the auditor considered a personal cottage was not one, and that it was used by the people who collected the maple sap and made maple products. He also explained that the maple-related activity was the first to follow the winter season. In addition, it should be borne in mind that the appellant said he put a great deal of effort into restoring the sugar bush itself. It is true that the proceeds from the sale of the products were low, but the operation must be considered in its historical context having regard to the restoration of the building, equipment and trees. [16] In my opinion, the evidence shows that the sugar bush business was operated as part of the appellants' farm, not as a personal endeavour of theirs. [17] The appeal is accordingly allowed. Signed at Ottawa, Canada, this 9th day of December 2004. "Louise Lamarre Proulx" Lamarre Proulx J. Translation certified true on this 7th day of February 2005. Jacques Deschênes, Translator CITATION: 2004TCC805 COURT FILE NOS.: 2003-3326(GST)I 2003-3228(GST)I STYLES OF CAUSE: Jean-Yves Couillard and the Queen Cécile Beauchemin and the Queen PLACE OF HEARING: Montréal, Quebec DATE OF HEARING: July 14, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice Louise Lamarre Proulx DATE OF JUDGMENT: December 9, 2004 APPEARANCES: For the Appellants: Jean-Yves Couillard For the Respondent: Denis Émond COUNSEL OF RECORD: For the Appellants: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada