Bruce and Nancy Jackman (the “Jackmans”) operated a successful marina in Port McNeill on Vancouver Island. They owned the marina through a corporation, C.A.B. Industrial Automotive Supplies Ltd. (the “Corporation”). One of the primary industries in Port McNeill is tourism. Tourists include boaters, whale watchers, fishermen, and kayakers. The marina services many of the needs of the tourists. It also provided services to local businesses.
The Corporation acquired a 36 ft. pleasure craft (the “Pleasure Craft”) which it used to market the marina to the owners and operators of smaller marinas in the region and also to their customers. The Jackmans socialized with and entertained clients and potential clients both on and off the Pleasure Craft. They also used the Pleasure Craft to travel to, attend, and entertain in boat shows in British Columbia and Washington.
The Jackmans, with the advice of their accountants, valued their personal use of the Pleasure Craft at $18,000 per year and compensated the Corporation with this amount.
Not surprisingly, the CRA became interested in the use of the corporate-owned Pleasure Craft by the Jackmans. The CRA was not satisfied with the $18,000 annual valuation of the Jackmans’ personal use of the Pleasure Craft. The CRA reassessed the Jackmans. The CRA took the position in Tax Court that the Jackmans used their role as shareholders of the Corporation to use its resources to buy the Pleasure Craft so that it would be available to them for their personal use.
The Tax Court judge Boyle J. concluded that the Jackmans were credible witnesses. The Department of Justice (“DOJ”) lawyer agreed that they were credible. The DOJ lawyer did not call any witnesses to contradict the evidence of the Jackmans.
The Tax Court found in favour of the Jackmans. In particular, Boyle J. found, as a matter of fact, that the Jackmans’ personal use of the Pleasure Craft was minimal and that the $18,000 per year compensation paid by them to the Corporation was reasonable. In doing so, Boyle J. criticized both the CRA and the DOJ.
Boyle J. reiterated that the CRA is not allowed to second-guess a business’ marketing strategy or efforts even if those efforts turn out to be unsuccessful. Boyle J. referred to paragraphs 49 to 52 of the decision of the former Chief Justice Rip of the Tax Court in Harris & Son Ltd. v. The Queen, 2001 UDTC 28. Paragraphs 50 to 52 read as follows:
[50] 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.
[51] A business may opt to advertise an activity on which its owner (or principal shareholder of the corporation owning the business) has a keen interest or a degree of personal satisfaction. There is no reason why the expense of a particular form of advertising should be disallowed by the fisc solely because of the owner’s interest, satisfaction or, as in the appeal at bar, participation in the advertising or remoteness from its business. The fact that an owner of a business (or a director of a corporation) may experience a vicarious satisfaction from the form of advertisement does not necessarily lead to the conclusion that the cost of the advertisement should be disallowed. If the expense of the advertisement, whatever it is, is incurred by the taxpayer for the purpose of gaining or producing income from its business and the expense is reasonable in the circumstances, the expense ought to be deductible in computing income. This is what the Act dictates.
[52] However, when the form of advertising has a significant personal element, the taxpayer has a greater than normal onus to establish that the expense was truly incurred for the purpose of earning income from the business. It is quite possible that an expense may serve the needs of both the business and the shareholder and, in such a case, one may have to determine the primary purpose of the expense or, perhaps apportion the expense among the business and the shareholder. This was not raised in the pleadings or at trial and I need not consider whether the Act would support such an approach.
At paragraph 18 of the decision, Boyle J. criticized the DOJ as follows:
[18] While it makes sense that CRA might want to review the use of an expensive pleasure craft by a marina owner operator, it can be noted that in this case the appellants’ evidence was very much the same as the detailed answers given in written discovery, and the respondent did not call any witnesses with contrary evidence or bring contradictory evidence with which to challenge the appellants’ testimony. Even after the evidence was all before the court, unchallenged even as to credibility, this appeal carried on into its second day for argument. This all appears to have been driven by one or more CRA officials who did not attend for any of the evidence. It is the Department of Justice that represents the respondent Her Majesty the Queen. CRA is not Justice’s client in a solicitor-client relationship. That is not changed by any funding agreement between the two departments. The respondent needs to be mindful of that, and perhaps especially so where, as here and is often the case, the “instructing” CRA auditor, litigation agent, or appeals officer does not even attend the evidence portion of the hearing.
From time to time, I have discussed the role of the DOJ in tax disputes with DOJ lawyers. The DOJ is responsible for providing litigation services to the CRA. When a file is assigned to a DOJ lawyer, that lawyer takes instructions from a CRA employee (the “Instructing Employee”). The DOJ “bills” the CRA for its services and the CRA “pays” the DOJ. The DOJ lawyer advises the Instructing Employee on the likely outcome of the tax dispute. However, the Instructing Employee decides whether to settle and whether to proceed to court. The Instructing Employee is able to disregard the advice given by the DOJ lawyer. The Instructing Employee may instruct the DOJ lawyer to take a case to court even if the DOJ lawyer advises the Instructing Employee that the CRA will lose.
The DOJ follows the model followed by the law firms who provide services to private (i.e., not government) clients. However, there is an important difference: the private client pays the law firm’s fees. The private client can incur a financial cost if the law firm gives it good advice and the private client does not follow it. The private client has skin in the game. Sometimes the Instructing Employee does not.
Boyle J. is saying that since the Jackmans were credible and the DOJ lawyer was not able to call witnesses to rebut their evidence, the DOJ and the CRA should not have forced this dispute to go to trial. The DOJ lawyer said that the Instructing Employee made the decision. Boyle J. was not satisfied with this.
Unfortunately, the comments of Boyle J. are not consistent with the manner that the DOJ sees its role. It is not likely that the DOJ will change its view of its role as a result of this decision. Should changes be made which would deter the Instructing Employee from forcing a file to go to court when the DOJ lawyer warns the Instructing Employee that the CRA will most likely lose in court?
First published in Tax Topics, Report No 2634, August 30, 2022
