written on behalf of Feigenbaum Law
One of the realities of owning a business is that personal and business lines can become crossed. The recent decision of the Tax Court of Canada in Jackman v. The Queen demonstrates that using company-owned property for personal reasons is permitted when the business owner properly accounts for and pays for its use. It also reaffirms the importance of proper tax planning and documentation of business and personal expenses when responding to a reassessment by Canada Revenue Agency.
The taxpayers involved in the dispute are a married couple, the primary owners of a marina in British Columbia. Their children are also involved in the business’s operation. The couple has run the business for 50 years and serves a small community in B.C. Their business began as one selling automotive equipment and parts, but they eventually acquired a dock, which they used to build the business into a proper marina.
The marina operates in a community that relies heavily upon it and other such businesses to help with logging and tourism, including whale watchers, recreational boaters, fishers, and kayakers. Many of the small communities around the marina are only accessible by boat. Throughout its operation, the business had grown to include float planes, helicopters, boats, property ownership, and even a Radio Shack franchise. The Court described the region and company as one that would fit into a remake of the Canadian television shows Corner Gas or The Beachcombers.
The boat at issue in the litigation was a 36-foot vessel named Coastal Craft. It was a “pleasure craft” by design, unlike a workboat such as a tugboat or a tanker. The taxpayers said the boat was primarily used for marketing the marina to people visiting, working in, or residing in the region. The owners and employees would regularly take the boat out into the water to engage with boat users who might be interested in using the services offered by the family’s business. They would also use the boat to travel to, attend, and entertain at boat shows in B.C. and Washington state.
The taxpayers said their efforts to market their business through Coastal Craft were successful and provided the Court with documentation showing a year-over-year increase in profits.
Regarding using the boat for personal purposes, the taxpayers said that such uses were occasional and amounted to less than six times per year. During these occasions, the taxpayers would take friends or family out to the harbour immediately in front of the marina for activities, including whale watching. They would also use it during the off-season to sleep in while moored instead of the local motel.
The taxpayers explained they recorded and paid for the use of the boat by reducing shareholder loans to $18,000 per year. They stated they did this after consulting with their accountant and believed the amount they paid for the personal use of the boat was conservatively high in the circumstances.
The Tax Court of Canada did not review the details that led to the Canada Revenue Agency’s audit of the taxpayers’ use of the boat. However, the decision did note that the CRA did not present any evidence at trial. It appears that an auditor from the CRA questioned whether the boat was used in a limited fashion for personal means or felt the taxpayers did not adequately compensate the business for their personal use of the boat. However, the CRA auditor failed to attend the hearing, and the organization did not submit any evidence.
The Court found the taxpayers’ argument to be credible. It noted that there was no evidence to support the notion that the taxpayers bought the boat for personal use. The Court also found that the amount paid for their personal use of the boat each year was within the range of a reasonable fair market value.
The Tax Court acknowledged that it was reasonable for the CRA to review the use of a company boat for personal purposes. However, it noted that all evidence shared with the Court by the taxpayers was also provided to the CRA during the audit process. As a result, the Court questioned why the matter was not resolved at an earlier stage.
The Court dismissed the reassessment against the taxpayers. The decision is a reminder of the critical role documentation plays in protecting taxpayers against allegations of improper use of business assets. Working with an experienced tax professional can help businesses keep their documentation in order and ensure their use of company property stays within the lines of the law.
Feigenbaum Consulting provides a multi-disciplinary approach to business and corporate tax planning, including creating cross-border tax solutions. Led by Mark Feigenbaum, the firm helps clients make informed choices that lower their overall tax burden, ensure compliance with tax laws, and avoid substantial financial penalties. Located just north of Toronto in Thornhill, Feigenbaum Consulting serves clients in Canada, the U.S., and worldwide. To schedule a consultation, contact the firm online or by phone at 905-695-1269 (toll-free at 877-275-4792).