The Queen v. Ginter, 77 DTC 5274, [1977] CTC 418 (FCA)

Collier, J:—The Minister of National Revenue included in the defendant’s taxable income for 1967 an amount of $50,634.05. The Minister applied subsection 8(1) of the Income Tax Act.* [1] The relevant portions of that subsection were as follows:

8. (1) Where, in a taxation year,

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

The taxpayer objected. He successfully appealed to the Tax Review Board. The plaintiff appeals, by way of trial de novo, from that decision.

The Minister’s position is that certain improvements to business premises owned by the defendant conferred a benefit on him; those improvements are alleged to have been made by or on behalf of a corporation of which the defendant was, for practical purposes, the only shareholder.

The defendant’s position is twofold. It is said, firstly, he never acquired ownership of the improvements in question. Secondly, it is contended if ownership or title to them did in fact pass, they had, in the circumstances here, no value to the defendant; there was, therefore, no tax liability.

In respect of paragraph 8(1 )(c), the question of benefit or no benefit, and the value if any, is primarily a question of fact.* [2]

In 1962 the defendant purchased at an auction the brewery assets of Caribou Brewery Co Ltd, Prince George, British Columbia. Those assets consisted of land, buildings and equipment. In the same year Uncle Ben’s Tartan Breweries Ltd (Uncle Ben’s) was incorporated. The defendant, at all relevant times, owned the shares of Uncle Ben’s.

The brewery premises were leased by the defendant to Uncle Ben’s. The formal agreement expired in 1967. Uncle Ben’s has never, in fact, made any rent payments to the defendant. The explanation seems to be that Uncle Ben’s has never really made any profits. The formal lease agreement was not renewed. After 1967 the defendant and the company carried on as before. In the absence of any evidence I assume the continuing tenancy was, theoretically, on a periodic basis.

The main witness on behalf of the defendant was the taxpayer himself. I accept his evidence.

I earlier noted Uncle Ben’s did not make money. The defendant stated the main reason for unprofitability was the location of the brewery at Prince George. Ninety per cent of the market was in the lower mainland. All supplies had to be hauled in from elsewhere. These matters became evident in the first two or three years of operation.

The defendant’s solution was to try and move the brewery operation to the lower mainland. In 1964 he started looking for land. Eventually, in 1971, he found suitable property in Richmond, BC. Construction of a new plant began.

I revert backwards in time. Around 1967 the beer market was growing but the Prince George Brewery had limited production facilities. Uncle Ben’s acquired 12 used fermentation tanks in order to increase capacity. It was necessary to build an addition to the brewery building to house these tanks. This was done in 1967. The cost of the addition was $50,634.05, the amount the Minister has added into income. Uncle Ben’s did not itself pay the costs of construction. The money came from other corporations owned by the defendant. The cost was treated as a debt of Uncle Ben’s.

The structure to house the tanks was at the north-west corner of the original building. The addition was a 60’ x 60’ concrete block Structure with a steel truss roof system. The addition had only two new outside walls: the north wall and the west wall. The two remaining walls were, for practical purposes, those of the existing building. A concrete block bearing wall ran the length of the structure down the centre.

The method of construction has some significance. The floor was poured first. The fermentation tanks were then put in place. The walls and roof were then erected.

I accept the defendant’s evidence that this structure probably would not comply with present building codes; that the addition cannot, practically, be used for anything else but as a space to house the additional fermentation tanks.

The parties here have agreed:

. . . Upon completion the tanks and building addition became an integral part of Uncle Ben’s expanded brewing operation.

It was also agreed the addition to the brewery buildings was carried on Uncle’s Ben’s books as an asset. Neither the original formal lease, nor the subsequent periodic tenancy, made any determination as to the actual ownership of the addition.

The defendant testified it was always the intention of Uncle Ben's (and for practical purposes his own intention) to move these fermentation tanks to the Richmond operation, when that came into being. Appropriate space in the Richmond plant was, indeed, ultimately reserved.

The defendant further testified that in order to remove the tanks from the addition and move them to the new plant at Richmond, the easiest method would be to tear the addition down. That, he said, was his plan and that of his company.

Mr Robertson, a building contractor, agreed that if one wished to remove the tanks at the lowest cost, the whole addition should be demolished. If, on the other hand, one wished to make use of the addition, the west wall could be torn down. The tanks could then be removed and the wall restored. At today’s prices that would necessitate an expense of at least 50% of the new construction cost of the entire addition.

On March 26, 1970 the defendant sold, for $1,414,518, the brewery assets to Uncle Ben’s Tartan Holdings Ltd. That was a newly in- corporated company in which the defendant owned all the voting Shares. On March 30, 1970 that company sold the same brewery assets back to Uncle Ben’s for the same sum. The reason for these transactions was not explained in evidence.

To complete the history, I record that the Richmond operation has never gone into production. Both it and the Prince George operation were hit by labour problems in 1975. In 1976 Uncle Ben’s went into receivership. I understand it owned the Richmond operation. The fermentation tanks have, as a result, never been moved from Prince George.

I turn first to the submission on behalf of the defendant that he never became the owner of the addition. He gave sworn testimony to that effect.

In my view there is a presumption that additions or improvements of the kind in question become the property of the owner of the land. That presumption can be rebutted.” [3]

In my opinion the evidence before me is not strong enough to rebut the presumption. The fact that the building was carried on Uncle Ben’s books as an asset is not conclusive. I suspect the defendant in his affairs, from a practical business reality point of view, made little distinction between himself and his companies. The defendant is, as well, confronted with his own documents transferring the land and premises (Exhibit 2), and the plant, fixtures and equipment (Exhibit 3) to the holding company. In those documents there is no reservation of any kind in respect of the addition. As I see it, the legal effect was to transfer the land, the original building and the addition from the defendant as owner to his holding company. That disposes of the first point raised by the defendant.

I go to the issue as to whether a benefit was conferred on the defendant.

The plaintiff relies on the following authorities in support of the position that a taxable benefit was conferred: St-Germain v MNR (cited earlier); Kennedy v MNR (cited earlier); The Queen v Neudorf, [1975] CTC 192; 75 DTC 5213.

In the St-Germain case the taxpayer was the principal shareholder of a company which manufactured insulated windows. He also owned land with a building on it. The premises were leased on a monthly basis to his company. The company operated its business on those premises. In 1959, 1960, and 1961 the company made substantial additions to the leased premises. The additions were for use by the company in its business. They were carried as an asset on the company’s books.

Abbott, J said at page 476 [197, 5088]:

At the hearing before us, counsel for .respondent was informed that, if the improvements and additions to the property belonged to the appellant as owner, from the time they were effected, the court was satisfied that section 8(1) does apply and that we did not need to hear him on that point.

It is clear to me that, from the very outset it was never contemplated that these improvements and additions would be removed on the termination of the lease; with the exception of the shed, they were an integral part of, and permanent improvements and additions to, the existing buildings.

and again at page 477 [197, 5088]:

As I have stated, the lease, given by appellant to the company controlled by him, was a verbal one and on a month to month basis. The extensive additions and improvements made to the leased premises were of a permanent character, were integrated with the existing buildings and could not be removed with any conceivable economic advantage to the tenant. It was never contemplated that they would be removed.

In the case before me I have carefully considered the evidence given by the defendant. I have scrutinized it closely, bearing in mind the defendant and the corporations involved are, for practical purposes, one, and the defendant’s evidence could conceivably be tailored to obtain the best tax result.

I accept the defendant’s statement as to the practical situation: the addition was a temporary one; it was useful only to the brewing company, and only while the business remained at Prince George. Further, I accept the defendant’s evidence it was always the intention to construct and operate a brewery in the lower mainland; this intention was well on the way to being carried out when labour problems and bankruptcy intervened. I am satisfied that if the plans of the defendant and his companies had materialized the addition would have been demolished in order to remove the tanks and relocate them at the lower mainland operation.

That conclusion therefore distinguishes the basis on which tax liability was imposed in the St-Germain case. There, the additions were permanent. They obviously added value to the premises and, in that sense, value to the interest of the owner of them. In the case before me the addition would have been removed or demolished on the termination of the periodic tenancy. That tenancy would itself have terminated when the tanks were taken to the lower mainland.

The facts in the Kennedy case are quite similar to the facts in the St-Germain case. The taxpayer was in the automobile dealership business. Some real property and building premises were acquired by a company all of whose shares belonged to the taxpayer. The original cost of the land and premises was $159,000. Changes and alterations to the premiums were made at an overall cost of $185,000. The total cost to purchase the property and make it suitable for the kind of business carried on was, therefore, $344,000. The company then sold all the property to the taxpayer at a net cost of approximately $259,000. The Minister added into the taxpayer’s income the difference of approximately $85,000.

In a subsequent year the company expended a further $42,000 on an addition to the building. The Minister assessed a benefit of that value to the taxpayer.

In respect of the addition in 1966, the Federal Court of Appeal applied the St-Germain case, holding the improvement made by the taxpayer’s company to his property was a benefit conferred on him by the company in that particular year.

But Chief Justice Jackett in the Kennedy case said, at pages 844-5 [441-2, 5362]:

That is not, however, the end of the matter. Where a tenant improves the leased premises, the extent to which, if at all, the improvement confers a benefit on the landlord will depend on the extent to which the improvement increases the value of his reversionary interest and that, in turn, will depend on the term and conditions of the lease and on the nature of the improvement. If there is a long term lease, it may be that no benefit will be conferred at all. Compare King v Earl Cadogan, [1915] 3 KB 485 (CA). If the lease is a monthly tenancy, the result may be a benefit equal to the amount by which the value of the property was improved. Compare St-Germain v MNR, [1969] SCR 471; [1969] CTC 194; 69 DTC 5086.

In my view the defendant here has shown, for the reasons I have outlined above, the value of his reversionary interest was not increased by the addition of the structure used to house the fermentation tanks.

It is not disputed the amount spent on the construction of the addition ($50,634.05) was, at the time, worth that much to Uncle Ben’s. But it is clear on the evidence, in my opinion, it had no value to the landlord, then or afterwards.

The appeal is therefore dismissed. The defendant is entitled to his costs.

Appeal dismissed.