Date: 19980309
Dockets: 96-1301-IT-G; 96-1398-IT-G
BETWEEN:
JOMANIC-CAN INC., GEORGES D’AOUST,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Sarchuk, J.T.C.C.
[1] The appeals of Jomanic-Can Inc. (the corporation) and
Georges D’Aoust (D’Aoust) from assessments of tax
with respect to their 1991, 1992 and 1993 taxation years were
heard together on common evidence.
[2] At all relevant times, D’Aoust was the sole
shareholder of the corporation, the primary activity of which was
the construction of commercial and residential projects
throughout the Baffin region. For a number of years, the
corporation maintained its office in a warehouse building (the
warehouse) in Iqaluit, Northwest Territories. In 1991, the
corporation completed the construction of a large complex
adjoining the warehouse. This complex consisted of a luxury home
for D’Aoust and four apartments (the corporate residence),
an office area, a conference area and a garage. Concurrently, the
warehouse was renovated and was connected to the new complex by
way of an enclosed walkway. The total construction costs of the
complex (including the renovations to the warehouse) amounted to
$785,611.
[3] In 1991, D’Aoust lived in a two-bedroom apartment
which formed part of the warehouse owned by the corporation. He
paid no rent. In assessing D’Aoust for that taxation year,
the Minister of National Revenue (Minister) included in income
shareholder benefits with respect thereto in the amount of
$5,556.
[4] In assessing D’Aoust for taxation years 1992 and
1993, the Minister included in income shareholder benefits in
respect of use of the corporate residence in the amounts of
$43,974 and $38,982, respectively, and an interest benefit in
respect of utilities, heat and property taxes paid on the
corporate residence in the amount of $17,879 in each of those
years.
[5] In 1991, the corporation capitalized the total
construction costs of $785,611 and capital cost allowance (CCA)
was taken in each of 1991, 1992 and 1993. In reassessing, the
Minister, inter alia, reduced the CCA (due to the removal
of the corporate residence) in the amounts of $11,784, $23,097
and $22,173, respectively. In addition, the Minister by his
reassessment removed 75% of the undepreciated capital cost of the
complex (i.e. relating to the corporate residence and personal
use of the apartments) in the amount of $589,208 in taxation year
1991. The Minister further disallowed as a business expense the
amounts of $17,879 in each of 1992 and 1993 as representing the
portion of utilities claimed in those years related to the
corporate residence.[1]
[6] In assessing D’Aoust, the Minister relied, inter
alia, on the following assumptions:
With respect to taxation year 1991:
1. D’Aoust resided in an apartment owned by the
corporation and attached to the warehouse.
2. D’Aoust paid no rent to the corporation.
3. A reasonable estimate of the value of the benefit conferred
on D’Aoust by the corporation in the 1991 taxation year was
$5,556.
With respect to taxation years 1992 and 1993:
1. The luxury home consisted of living quarters and a swimming
pool and trophy room.
2. Three of the apartments were occupied by
D’Aoust’s nanny, D’Aoust’s son, the
daughter of Labelle (Noella Labelle, the common-law spouse of
D’Aoust); the fourth apartment was empty.
3. Not less than 75% of the construction costs related to the
luxury home and four apartment suites.
4. In each of 1992 and 1993, the corporation credited
D’Aoust’s shareholder loan account - $12,000 for use
of the residence and for food expense.
5. In 1992 and 1993, an investor could expect rates of return
at the prescribed rates per the Income Tax Act on an
effectively risk-free investment.
6. A reasonable estimate of the value of the benefit, the use
of the residence, conferred on D’Aoust by the corporation
in the 1992 and 1993 taxation years was $43,974 and $38,082,
respectively.
7. Not less than 50% of the heating and property taxes and the
portion of utilities claimed in 1992 and 1993 related to the
luxury home and four apartment suites.
8. A reasonable estimate of the benefit, of heating, property
taxes and utilities in the 1992 and 1993 taxation years was
$17,879 in each of both years.
[7] With respect to the corporation, the Minister’s
assessment was based inter alia, on the assumptions
that:
1. Not less than 75% of the construction costs relate to the
luxury home and four apartment suites.
2. Not more than 25% of the total construction costs relate to
property used for the purpose of gaining or producing income from
a property of business.
3. Not more than 50% heating and property taxes and the
portion of utilities claimed in 1992 and 1993 related to the
luxury home and four apartment suites.
[8] A number of other issues were raised by the Appellants in
their respective pleadings. All but the foregoing have been
abandoned or settlements have been reached.
Evidence
[9] Mr. D’Aoust is a general contractor and has carried
on that business for a number of years. He is knowledgeable in
all phases of construction, project management and does most of
the estimating for the corporation. The bulk of the
corporation’s income is derived from government and
municipal projects since there is not much in the way of
private-sector construction in Iqaluit.
[10] The decision to construct the complex was taken in 1989.
Concurrently, D’Aoust decided to renovate the warehouse and
to convert his former living quarters and the corporate offices
into rental apartments.[2] Building materials were ordered as early as 1989,
construction began shortly thereafter and was completed towards
the end of 1991. D’Aoust moved into his new residence as of
the beginning of 1992.
[11] The Appellants maintain that the primary purpose for the
construction of the complex was to provide new offices for the
corporation, as well as accommodation for the engineers,
architects, the accountant and others who had occasion to travel
to Iqaluit to do business with the corporation. According to
D’Aoust, alternative accommodation was scarce and expensive
and this was important since the cost was often borne by the
corporation.
[12] The Appellants contend that the Minister erred in
assessing on the basis that 75% of the total construction costs
related to D’Aoust’s residence and the four apartment
suites. They asserted that the buildings (i.e. both complex and
warehouse) were used primarily for the corporation’s
business and that D’Aoust’s personal living area
represented but a small portion of the total. They conceded that
D’Aoust had the benefit of the use of the trophy room and
pool area, but argued that these sections were used primarily for
business meetings and gatherings. On this basis, the Appellants
initially contended that 87% of the total area was dedicated to
business use.
[13] At trial, counsel for the Appellant conceded that the
pleadings understated D’Aoust’s personal living area
and proposed a “use” calculation for the warehouse
and complex combined, the result of which was to increase the
personal use portion to 37%. Applying this to the total cost, he
would reduce the construction cost to be allocated to personal
use to $290,450. I do not propose to review this calculation in
depth since in my view, there is simply no acceptable evidence to
support it.[3]
[14] On the evidence, it is fair to say that the creation of a
unique residence designed to accommodate D’Aoust’s
personal requirements was the major factor in the construction of
the complex.[4] The
living area was well finished with oak trim and fittings, a
spiral oak staircase to the second level and a mezzanine to the
master bedroom which overlooked the pool. Initially,
D’Aoust contended that the trophy room and pool area were
used for business meetings as well as personally. However, in the
course of his evidence, it became apparent that if there was any
business use, it was minimal. The trophy room is some 1,200
square feet in size and is used by D’Aoust to display his
hunting trophies which include approximately 100 mounted heads
and a number of animals including a polar bear, a leopard, a
lesser kudu and a muskox. Although he testified that these had
relatively no value, in an asset statement prepared for a bonding
company, the current value of the trophies was listed at
$100,000. The evidence adduced provides little support for the
Appellants’ assertion that there was some business purpose
behind the construction of the trophy room and indeed, the pool
area.
[15] I am also satisfied that the Minister was correct in
treating the apartment units in the complex as personal assets in
the taxation years in issue. At all relevant times, one of the
one-bedroom apartments was used by the Appellant, D’Aoust,
to house the housekeeper/nanny. The evidence is that
D’Aoust’s son used one of the suites for the better
part of 1993 and the daughter of Noella Labelle,
D’Aoust’s spouse, used a bedroom unit for the better
part of one year as well. The remaining suite and the bedroom
unit were used variously by D’Aoust’s parents, other
relatives, relatives of his spouse and friends. D’Aoust
said that to the best of his recollection, the suites had also
been utilized by architects and other individuals with whom he
did business in the two taxation years. Unfortunately, his vague
generalizations as to the nature and extent of such business
activities in those years make it virtually impossible to reach
any conclusion with respect to the extent of the use.
D’Aoust did concede that none of the individuals who used
the facilities in those years were ever charged or paid any rent,
nor was any record whatsoever kept of their comings and
goings.
[16] It is clear that the Minister’s assessments with
respect to the corporate benefits to D’Aoust in 1992 and
1993 were based on the amount of $589,208 which was assumed to be
the capitalized cost to construct the corporate residence.[5] It was the
Appellants’ responsibility to demonstrate by way of
acceptable evidence that this assumption was wrong. In my view,
given the nature of the construction required for
D’Aoust’s residence, the apartments, the trophy room
and pool is difficult to accept D’Aoust’s attempts to
justify his rule of thumb construction costs as being applicable
equally to the warehouse renovations and to the construction of
the complex.
[17] In the alternative, counsel argued that the amount of
$237,000 representing the cost of the renovations to the
warehouse, should be subtracted from the total construction cost
and further adjustments should be made for the business use of
the garage and apartment suites in the complex. This submission
was premised on D’Aoust’s estimates of the cost of
renovating the warehouse based on a general “rule of
thumb”. It was conceded that since the renovation to the
warehouse and the building of the complex was performed together,
there was no way of being precise. Accordingly, D’Aoust
applied his “rule of thumb” estimates with respect to
the cost of various parts of the construction ranging from $36
per square foot to $72 per square foot.
Conclusion
[18] With respect to the alternative submission, I can say
without equivocation that on the testimony before me, any attempt
to calculate or otherwise determine the cost of the renovations
to the warehouse would be an exercise in sheer speculation. I
note that on several occasions, Revenue Canada asked the
Appellants to provide “approximate costs” for each of
the following areas of the complex: the corporate residence, the
four apartments, the corporate office, the garage, the link to
the warehouse, as well as for the warehouse renovations. The
Appellants claimed that such details were not available and
provided nothing more than a schedule of expenses broken down
into categories such as wages, material, subcontracts,
professional fees, etc. It is evident from D’Aoust’s
testimony that no effort was made to allocate the cost of
construction between the complex and the warehouse renovations or
between personal and business use. Given the nature of the
residence being constructed, it is hard to believe that this was
inadvertent.
[19] Given that the cost of construction of the complex
included the installation of a heated pool, a large Jacuzzi in
the master bedroom, a feature fireplace in the trophy room and
other touches, it is difficult to see how D’Aoust proposes
to justify his comments that the costs of renovation and the
costs of the building of the complex were relatively speaking the
same.
[20] The major obstacle which the Appellants in these appeals
face was created by their failure to distinguish, and more
importantly, to keep proper track of business and personal
expenses. The result is that today D’Aoust finds himself in
the position of attempting to provide a best estimate of the
allocation of building costs as between the old warehouse
renovations and the construction of the new residence/office.
Notwithstanding his experience in the construction business, I
find that his testimony falls far short of establishing, on a
balance of probabilities, that the Minister’s assessments
were wrong.
[21] The Minister calculated an imputed interest benefit to
D’Aoust for 1992 and 1993 based on the capitalized cost to
construct the corporate residence. In so doing, the Minister
utilized the prescribed rates set out in the Income Tax
Act and reduced the benefit by $12,000 to reflect the charge
to the shareholder loan account for personal use of the corporate
residence in those years. Although counsel questioned the
validity of the amounts, I am satisfied that there was no error
on the part of the Minister in assessing as he did. As well, with
respect to utilities, property taxes and heating that were
assessed to the Appellant, D’Aoust, there is simply no
evidence before me to demonstrate that any amount other than the
amount assessed should be considered. Frankly, the Appellant,
D’Aoust, has not discharged the onus upon him with respect
to any of the foregoing submissions.
[22] As previously indicated, several issues have been settled
between the parties. In result, the appeal of D’Aoust with
respect to the 1991 taxation year is allowed and the matter is
referred back to the Minister for reconsideration and
reassessment on the basis that he is entitled to claim an
advertising and promotion expense in the amount of $1,866. As
well, the corporation had credited D’Aoust’s
shareholder loan account for $5,000 in 1991 with respect to the
use of the Appellant’s motor vehicle. This amount was
treated by the Minister as a benefit from the corporation in his
assessment. The parties now agree that no such benefit was
received by D’Aoust. He is entitled to no other relief in
that year. With respect to taxation years 1992 and 1993, the
appeals are dismissed.
[23] The appeal of the corporation with respect to its 1992
taxation year will be allowed and the assessment is referred back
to the Minister for reconsideration and reassessment on the basis
that the Appellant is entitled to deduct a travel expense of
$2,800. The corporation is entitled to no further relief in that
taxation year. With respect to the taxation years 1991 and 1993,
the appeals are dismissed.
[24] In these appeals, there will be one set of costs to the
Respondent, to be taxed.
Signed at Ottawa, Canada, this 9th day of March, 1998.
"A.A. Sarchuk"
J.T.C.C.
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