Is the CRA Allowed to Criticize Business Practices?
The Canada Revenue Agency (“CRA”) was recently faulted for encroaching and inappropriately second-guessing the Appellants’ business practices in Jackman v HMQ, 2022 TCC 73. Ultimately, the Appellants’ appeals of the CRA’s reassessments for their 2013 and 2014 taxation years were allowed with costs.
Background & Facts
The Appellants, Bruce and Nancy Jackman, owned and operated a successful multigenerational business in Port McNeil on Vancouver Island for 50 years. The business, C.A.B. Industrial Automotive Supplies Ltd. (“CAB”), provided a diverse range of goods and services to communities in the region in which it operated. In order to carry out its functions, including marketing activities and fuel and provision sales to other boaters in the region, CAB owned a pleasure craft boat, the Port McNeil Explorer. As part of their marketing activities, the Appellants used the boat to travel to and attend boat shows in British Columbia and Washington, which the Appellants considered a key practice in successfully generating revenues from CAB.
The marketing activities undertaken by the Appellants were described as “creating opportunities to socialize with clients and potential clients, dining at other marinas with them, entertaining them on the Port McNeil Explorer, and generally chatting up boating in the region and their marina and facilities.” The boat was also used to aid in other business endeavours, including delivering parts to commercial activities down the Archipelago.
The Appellants submitted that personal use of the boat was very occasional and only occurred less than a half-dozen times, specifically “taking friends or family or visiting relatives out in the harbour immediately in front of the marina to get a better view of watching the whales that could be seen from the shore and docks.” In each of the two years that were reassessed by the CRA, the Appellants recorded and paid, by way of reducing shareholder loans, a total of $18,000 to CAB in respect of their personal use of the boat.
The issue before the Tax Court of Canada (“TCC”) was to determine the value of a shareholder benefit in respect to the personal use of a boat owned by the corporation.
Decision & Analysis
The TCC found that there were no issues with respect to the Appellants’ credibility. Further, the TCC made the following specific findings at paragraph 16 of the decision:
- The Port McNeil Explorer was acquired by CAB for business purposes. It was owned, used and available for use primarily for business purposes.
- The personal use of the boat was limited to the 5 percent range.
- There is no support for the proposition that the Appellants used their role as shareholders to use their company’s resources to buy a boat for personal use.
- The $18,000 that the Appellants paid to CAB each year to account for their occasional personal use of the boat was reasonable.
Justice Boyle explained the existing principal that the CRA is not allowed to simply second-guess a business’s marketing strategy or efforts, even if they turn out to be unsuccessful in generating revenue. In doing so, Justice Boyle quoted former Chief Justice Rip in Matt Harris & Son Ltd v HMQ:
“The tax authority has no business telling a businessperson how to run that person’s business. Advertising expenditures take many forms: radio, television, newspapers (local, provincial, national), sponsorship or ownership of sports teams, tournaments, community events . . . the list is endless. A form of advertising that is beneficial to one business is not necessarily favourable to another business or even a business’ competitor. Each business must have the freedom to choose its own form of advertising.”
In other words, the TCC reaffirmed the principal that it is a normal practice for Canadian business owners to “maintain, establish or enlarge relationships with customers, suppliers and clients over pleasurable social activities such as lunch or dinner, going to a sports game, attending a music festival, playing golf, etc.”
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This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.