Date: 20020517
Docket: 2001-1577-IT-I,
2001-1578-IT-I,
2001-1782-IT-I,
2001-2651-GST-I, 2001-2746-IT-I
BETWEEN:
PHYLLIS SERVAIS,
SHAWN SERVAIS, DONALD SERVAIS, and
SERVAIS SHEET METAL
LTD.,
Appellants,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Miller, J.
[1]
The appeals by Servais Sheet Metal Ltd. (the Company) both under
the Income Tax Act and the Excise Tax Act, and the
income tax appeals by Donald Servais, Phyllis Servais and
Shawn Servais under the informal procedure were heard on common
evidence. All three Servais testified, as did both the auditor
and the appeals officer from Canada Customs and Revenue Agency
(CCRA). The main issues in the individuals' appeals relate to
the determination of the automobile benefits in 1996, 1997 and
1998 and the correctness of inclusions in the Servais' income
of certain cash payments in 1996 and 1997. The Company's
goods and services tax (GST) issue hinges on the finding of the
amount of the automobile benefits. The Company's income tax
issue relates to the deductibility of interest and insurance
expenses, as well as vehicle operating expenses and certain
purchases in 1996 and 1997.
[2]
The Company operated a heating and air conditioning business in
the Pembroke area for many years before the years in question.
Only recently has it ceased to operate. Donald Servais held 60%
of the shares of the Company and worked full time in the
business. His son, Shawn Servais, held 40% of the shares and
worked in the business when the workload required. Don's
wife, Phyllis, was not a shareholder but worked in the office,
again as the work demanded. I will deal with the circumstances
surrounding each individual's work arrangements with the
Company in turn.
[3]
Shawn Servais lived with his parents only until 1996; thereafter
he lived in Pembroke. He did not own a vehicle, but indicated
that in the years in question he was able to rely on his
girlfriend's vehicle for personal use. He was also able to
get a ride to work with a friend.
[4]
He was qualified as a sheet metal worker, and when he worked for
the Company he did estimating, installing and service calls. In
his work for the Company he used a 1993 Ford Ranger pickup truck.
The truck was described as having two seats in the front and two
fold-out seats behind, where Shawn stored computer boards and
small equipment. There was a roof rack on the truck for a ladder,
which remained on the truck when not in use. Shawn used the truck
to go to and from home, when he needed it readily available for
the purposes of handling service calls. Shawn admitted that he
used the truck occasionally for personal use, but only when he
was working for the Company.
[5]
The evidence regarding his hours of work for the Company was
somewhat confusing. He maintained that he would make ten
emergency service calls a night, every night, while he was
employed with the Company. Phyllis testified that a service call
would take one hour. She also indicated that she kept records of
such calls though none were produced. Phyllis indicated that
Shawn only worked 168 hours in 1996. Records produced at trial
showed that Shawn worked twenty-six 40-hour weeks in 1997 (July
to December), with some other irregular hourly work from March to
June. The 1998 records, which were sketchy, suggested full-time
work from January to May, then again in August, but otherwise
sporadic.
[6]
The Company had three major contracts with the Government of
Canada; two with Department of Defence (Defence Construction and
Canadian Forces Housing) and one with Supply and Services. Copies
of documents evidencing such contracts were produced but related
to periods other than the years in question. I do accept,
however, that the Company had such contracts and that one or two
of them required emergency services. One contract related to the
servicing of 1,700 units.
[7]
The 1993 Ford Ranger was owned by the Company and all expenses,
including insurance, were paid for by it. No logs were kept for
the use of the 1993 Ford Ranger.
[8]
The Minister of National Revenue (the Minister) assessed a
shareholder benefit pursuant to subsection 15(1) of the
Act for each of 1996, 1997 and 1998, on the basis that the
truck was used 75% of the time for the personal use of Shawn. The
Minister's calculation was 75% of the estimated operating
costs, plus insurance expenses and loan payments for the Ranger,
resulting in benefits of $8,110, $8,623 and $2,213, respectively,
for 1996, 1997 and 1998.
[9]
Turning next to Phyllis Servais, she was in charge of most of the
paperwork of the Company. She would type and deliver the
invoices, attend to the banking, handle receipt of service calls
and dispatch her husband or son accordingly, deal with the
Company's accountant, handle payroll and keep the books. She
made quarterly trips to the accountant for a review of the
bookkeeping. She worked both from home and the Company's
offices. Her evidence was that she only worked part of the year,
as work demanded, but acknowledged that even when she was not on
the payroll, she would accept and deal with emergency calls. When
she was fully employed with the Company she worked 40-hour
weeks.
[10]
Phyllis Servais used a 1995 Mercury Sable Station Wagon in the
performance of her duties. This vehicle was owned by the Company,
and all the expenses in connection with it were covered by the
Company. She acknowledged that she would have the keys to the
Sable even when she was laid off, though would use it seldom for
personal purposes. The Sable would occasionally be used to go to
Ottawa (an example she gave was for the purposes of collecting
bad debts), though her husband would normally be the person to
drive on such occasions. Two repair invoices were produced dated
April 1, 1996 and December 3, 1996 indicating a change in the
odometer of the Sable of approximately 18,000 kilometres over the
eight months. Phyllis Servais maintained that she relied on her
husband's 1980 Cadillac for most of her personal
outings.
[11]
The Minister assessed Phyllis Servais for 1997 and 1998 pursuant
to section 6 of the Income Tax Act, by including in her
income a standby charge, GST and operating expense benefits
totalling $9,798 for each year. The standby charge and GST were
based on an undisputed capital cost of $25,513. The operating
cost benefit was determined pursuant to paragraph 6(1)(k)
of the Income Tax Act at 50% of the standby charge and
GST. The total of $9,798 was amended at hearing by the Respondent
to $9,184.
[12]
With respect to Don Servais' use of vehicles, there were
several at his disposal. He drove the Sable to Ottawa on
occasion. He owned personally a 1981 Ford ½-ton truck
which he maintained was his primary recreational vehicle for
fishing, going to the bush and trips downtown (Pembroke). He also
owned a 1994 Ford Enforcer, bought new in 1994, though all
payments for this vehicle, including all operating costs, were
made by the Company. The reason this truck was put in his name
was because the bank insisted on this arrangement, according to
Don Servais, for financing purposes. The appeals officer
described this truck as a nice-looking truck.
[13]
Don Servais testified that he seldom drove this vehicle, but that
it was used by other employees primarily for taking men and
materials to jobs. Heavier equipment and tools were kept in this
truck. Although both Don and Shawn Servais referred to three
other employees, there was no clear evidence of how many
employees, other than the Servais, the Company had throughout the
years in question.
[14]
The vehicle used by Don Servais in the business was a 1992 Ford
¼-ton truck which had a fifth-wheel attached for the
purposes of hauling a trailer. Mr. Servais used this truck
in fulfilling his functions which he described as pricing,
tendering, laying the jobs out, making the duct work up, ordering
parts and materials, installing and providing service work. The
auditor from CCRA indicated that she understood from
Mr. Servais, when he was first asked, that this truck was
not a business truck. Mr. Servais' testimony at trial
was to the contrary.
[15]
With respect to the trailer, Mr. Servais testified that this
fully-furnished trailer, which could sleep four to six, was
acquired to accommodate employees on out-of-town work. There was
again some confusion in the testimony as to whether the use of a
trailer for unionized employees was permissible. From the excerpt
of the Collective Agreement, and the evidence of the appeals
officer, it appeared that trailers were only allowed if no other
accommodation was available. The Servais testified, however, that
only Don and Shawn Servais were unionized.
[16]
There was no document of any contract that might have required
such out-of-town accommodation in the form of the trailer.
The only example given of a possible business use related to one
night on a reserve, but the circumstances were not satisfactory,
and the trailer was returned to Pembroke. The trailer was used on
two or three occasions for recreational purposes. It was
eventually sold at the same price for which it was acquired and
in the same condition in which it was acquired, that is,
virtually new, with plastic coverings still on the
furnishings.
[17]
No log books were kept for any of the vehicles. The Minister
assessed Mr. Don Servais pursuant to section 15 in
connection with the Ford Enforcer, based on including 100% of the
operating costs, insurance, loan payments and GST. The benefits
so calculated were $4,781, $8,508 and $2,203 in 1996, 1997 and
1998, respectively. The Minister assessed Mr. Don Servais
pursuant to section 15 in connection with the 1992 Ford truck and
trailer based on including 100% of the principal and interest
payments made for the truck and trailer. The benefits so
calculated were $9,683, $8,816 and $2,126 for 1996, 1997 and
1998, respectively.
[18]
As well as the automobile benefits, Mr. Don Servais was assessed
under subsection 15(1) a benefit for certain cash payments made
to him and his wife, the latter assessment arising pursuant to
subsection 56(2). The auditor attributed the cash payments from
Don Servais on the basis of the Company's fiscal year, which
ran from April to March. The appeals officer adjusted the
payments such that only the payments received by the Servais in a
calendar year constituted benefits for that year. This had the
effect of deleting any 1995 payments from the 1996 benefit, and
moving some 1997 payments into 1996. This ultimately resulted in
an increase of the 1996 benefit by the appeals officer, and it
was on this basis the reassessment was issued on March 16,
2001.
[19]
Finally, with respect to the Company, a number of expenses
claimed were disallowed. These included the following:
|
|
1996
|
1997
|
|
Interest on Ford
Ranger
|
Nil
|
$100
|
|
Interest expense on
Ford truck and trailer
|
$2,399
|
$1,400
|
|
Interest expense on
Ford Enforcer
|
$1,255
|
$647
|
|
(Adjustment for
interest on Sable, not claimed)
|
($595)
|
($616)
|
|
Insurance: Ford
Enforcer and
Ford
truck and trailer
|
$4,025
|
$2,795
|
|
Ford
Enforcer operating expenses
|
$2,681
|
$2,017
|
|
Log
Splitter operating cost
|
$2,160
|
|
|
Purchases
|
$6,471
|
$9,269
|
[20]
The purchases consisted of payments made directly to the Servais
personally, which were not substantiated as business expenses, as
well as payments to Cashway of $1,276 and $1,550 for 1996 and
1997, respectively. The Minister determined these latter payments
pertained to the Servais' rental property business and not
the Company's business. The Appellants acknowledged such
payments related to the revenue property, and at trial sought
deductions personally from their rental property
income.
[21]
From a review of the above, it appears that certain vehicle
expenses were allowed, including operating expenses for the
Ranger, the truck and trailer and the Sable. There is no dispute
as to the log splitter operating costs, nor the amount of the
purchases.
[22]
With respect to the Company's GST appeal, the only issue
raised by the Appellant is the need to adjust the GST arising
from the automobile benefits, should I find that any of the
automobile benefits had been overstated.
[23]
This is a situation which is certainly not uncommon in small
family-run businesses in Canada. Little regard is given to the
line between business and personal expenses. The business is an
integral part of the lives of the owner/manager family and any
attempt to distinguish in any orderly manner between the business
activities and personal activities is simply foreign to them.
Thus it was with the Servais. They had an abundance of vehicles,
certainly greater than what the business could possibly need:
personal vehicles were used in the business and business vehicles
were used personally. While this is understandable, it does not
make the task of an auditor or appeals officer, in applying the
rules pertaining to automobile benefits, an easy one. It was also
clear to me that the government's explanation of these rules
to the Servais family was not fully appreciated by them. The
Servais' agent expressed this tension between the auditor and
the taxpayer as tantamount to being malicious on the
auditor's side. I did not perceive anything of the sort. My
impression was of a family business, unfamiliar with the rules,
honestly unappreciative of the need for detailed records,
certainly when it came to logs, and quite unsophisticated
generally. I have no difficulty in appreciating how they might
react to an auditor's legitimate attempts to invoke rules
based on sketchy information, when such rules were foreign to how
they carried on their business.
[24]
Before first addressing Mr. Shawn Servais' appeal, I need to
step back and look at the whole picture vis-à-vis the
Servais' surplus vehicles. If you include Shawn's access
to his girlfriend's vehicle, the Servais had available to
them for their business and personal use seven vehicles. In
assessing the Servais, the Minister in effect concluded that the
primary use of all seven vehicles was for personal purposes. This
leads to an overly harsh result.
[25]
In turning now to Shawn Servais appeal, the Appellant argued that
the Ford Ranger was not an automobile as defined in the
Act. The definition reads:
248(1)
In this Act,
"automobile"
means
(a)
a
motor vehicle that is designed or adapted primarily to carry
individuals on highways and streets and that has a seating
capacity for not more than the driver and 8
passengers,
but does not
include
(b)
an
ambulance,
(c)
a motor vehicle acquired primarily for use as a taxi, a bus used
in a business of transporting passengers or a hearse used in the
course of a business of arranging or managing
funerals,
(d)
except for the purposes of
section 6, a motor vehicle acquired to be sold, rented or leased
in the course of carrying on a business of selling, renting or
leasing motor vehicles or a motor vehicle used for the purpose of
transporting passengers in the course of carrying on a business
of arranging or managing funerals, and
(e)
a
motor vehicle of a type commonly called a van or pick-up truck or
a similar vehicle
(i)
that has a seating capacity for not more than the driver and 2
passengers and that, in the taxation year in which it is
acquired, is used primarily for the transportation of goods or
equipment in the course of gaining or producing income,
or
(ii)
the use of which, in the taxation year in which it is acquired,
is all or substantially all for the transportation of goods,
equipment or passengers in the course of gaining or producing
income;
[26]
Given the limited space behind the driver in the Ford Ranger, and
given that the vehicle was used primarily for business, I find
that this is the type of van that falls under the exception in
paragraph (e) above of the definition of automobile. As
such, it is unnecessary to calculate a standby charge in
accordance with paragraph 6(1)(e), but simply to determine
what is the correct percentage of personal use. I accept the
Respondent's determination of the operating costs, insurance
and loan payments, but I do not accept the 75% allocation to
personal use. While I believe Shawn was driven to some hyperbole
in his estimate of ten emergency calls every night, I am
satisfied that this truck, when in use, was used primarily for
business purposes. Without logs, I am faced with the same dilemma
as the auditor as to what is the most accurate guestimate of the
personal versus business use. I tip the scales to something over
50% business use. I find a personal use of 45% and, therefore,
the benefit to Shawn, pursuant to subsection 15(1), for the
three years should be $4,866, $5,173 and $1,327 in 1996, 1997 and
1998, respectively.
[27]
With respect to Phyllis Servais, there is no question she used
the Sable personally on occasion. As she was not a shareholder,
her assessment arose as an employee through the application of
paragraphs 6(1)(e) and (k). The Minister found she
was not entitled to a reduced standby charge as the business use
was less than 90%. I agree. Mrs. Servais' evidence suggested
to me her personal use was something greater than 10%, though I
only place it at approximately 25%. This is because she had the
Cadillac available for personal use. Her evidence also revealed
that she made many trips in the Sable to the Forces Housing
Development, as well as making the occasional trip to Ottawa.
Repair invoices confirmed that 18,000 kilometres were put on
the Sable over an eight-month period. This would extrapolate to
approximately 27,000 kilometres a year. With no better evidence,
I am prepared to assign 25% of 27,000 kilometres or 6,750
kilometres as the personal kilometres of Mrs. Servais for 1996
and 1997.
[28]
The Minister assessed operating costs against Mrs. Servais based
on the application of subparagraph 6(1)(k)(iv), which
reads:
6(1)
There shall be included in computing the income of a taxpayer for
a taxation year as income from an office or employment such of
the following amounts as are applicable:
...
(k)
Automobile operating expense benefit
where
(iv)
where the automobile is used primarily in the performance of the
duties of the taxpayer's office or employment during the
period or periods referred to in subparagraph (ii) and the
taxpayer notifies the employer in writing before the end of the
year of the taxpayer's intention to have this subparagraph
apply, 1/2 of the amount determined under subparagraph
(e)(i) in respect of the automobile in computing the
taxpayer's income for the year, and
That provision was
not available to the Minister to apply as there was no requisite
written notification from Mrs. Servais to the Company.
Subparagraph 6(1)(k)(v) should apply, resulting in
operating costs of 0.12 ¢ per kilometre multiplied by the
6,750 kilometres personal use, or $810 a year. I allow
Mrs. Servais' appeals for 1996 and 1997 to the extent of
reducing her operating expense benefits from $3,266 each year to
$810 each year.
[29]
With respect to Don Servais, I accept his evidence
notwithstanding the 1994 Ford Enforcer was registered in his
name, that he personally hardly ever used this truck either for
business or pleasure. He had an older truck available to him
personally as well as the Cadillac. He also confirmed that he
mainly used the 1992 Ford truck. I find he derived no personal
benefit from the Enforcer as either a shareholder or
employee.
[30]
With respect to the 1992 truck and trailer, I am satisfied these
vehicles were used as much personally (and in the case of the
trailer, more so personally) as they were for business purposes.
While there was some evidence of the trailer once being used for
an overnight job, the preponderance of evidence was that the
trailer was not used in the business, and that the truck was used
by Don Servais for both business and recreation. The Respondent
calculated the benefit based solely on the principal and interest
payments on the truck and trailer. No benefit was determined
based on operating costs or insurance. I heard nothing in the
Servais' evidence to rebut the Minister's presumption
that the calculation fairly represented the value of the benefit
arising pursuant to subsection 15(1). I recognize that the truck
was used by Don Servais for business purposes, as well as being
available personally, yet by not including any operating costs or
insurance as a personal benefit, I am recognizing his business
use of the vehicle.
[31]
The Appellant relied on the Exchequer Court of Canada decision in
the Pillsbury
case to argue that only benefits to a shareholder "as a
shareholder" are caught by subsection 15(1), and that in Mr.
Servais' case any automobile benefit arising from the truck
and trailer arose to him as an employee, not as a shareholder
and, therefore, the benefit should be struck down. The principle
flowing from the Pillsbury case does not extend to an
automobile benefit to someone who is both an employee and a
shareholder. In Pillsbury, the relationship of
creditor/debtor clearly governed the consequences. In
Mr. Servais case, the benefit cannot be so closely aligned
to just the employment status to preclude the application of
subsection 15(1).
[32]
With respect to the cash payments to the Servais in 1996, 1997
and 1998, the Appellants' agent did not quarrel with the
total amounts, but maintained that once the auditor established
the amount of such a benefit (erroneously based on the
Company's fiscal year as opposed to the calendar year of the
individual), it was not open to the appeals officer to amend
such, if it had the result of increasing the tax liability. There
is a well-established principle that once an assessment or
reassessment is issued, the Respondent cannot, on an appeal,
attempt to increase a tax liability. I am not aware of any law
that prohibits an appeals officer to amend an auditor's
findings prior to issuing a reassessment. The Appellant's
agent referred me to none and I do not accept the agent's
passionate claim of injustice in such circumstances.
[33]
I allow Mr. Don Servais' appeal to the extent only of
eliminating any benefit arising from the 1994 Ford
Enforcer.
[34]
With respect to the Company's income tax appeal, given my
findings regarding the Ford Enforcer, I would allow the appeal to
the extent of allowing the Company to deduct interest, operating
and insurance expenses pertaining to the Ford
Enforcer.
[35]
Finally, with respect to the Company's GST appeal, the appeal
is allowed to the extent of any adjustments required by the
reduction of the automobile benefits to Shawn, Phyllis and Don
Servais as set forth in these Reasons.
[36]
Although the Appellants' agent argued for an entitlement to
agent's costs, I do not find that the rules contemplate such
to someone who is not a lawyer. In any event, these informal
cases do not justify any award of costs.
[37]
The appeals are allowed and the assessments are referred back to
the Minister for reconsideration and reassessment on the
basis:
i)
In Phyllis Servais' appeal, her operating costs benefit only,
is reduced from $3,266 in each year to $810 in each
year;
ii)
In Shawn Servais' appeal, his benefit is reduced to $4,866,
$5,173 and $1,327 for 1996, 1997 and 1998
respectively;
iii) In
Donald Servais' appeal, his benefit arising from the Ford
Enforcer is eliminated;
iv) In the
Company's income tax appeal the interest, operating and
insurance expenses relating to the Ford Enforcer are allowed as
deductible expenses; and
v) In
the Company's GST appeal, the GST of $2,315 pertaining to the
automobile benefits is to be reduced to reflect the downward
adjustments of such benefits to Shawn, Phyllis and Don
Servais.
Signed at Ottawa, Canada, this 17th day of
May, 2002.
"C.J. Miller"
J.T.C.C.
COURT FILE
NO.:
2001-1577(IT)I, 2001-1578(IT)I,
2001-1782(IT)I, 2001-2651(GST)I
and 2001-2746(IT)I
STYLE OF
CAUSE:
Phyllis Servais, Shawn Servais,
Donald Servais and Servais Sheet
Metal Ltd. and Her Majesty the Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
May 7 and 8, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge C.J.
Miller
DATE OF
JUDGMENT:
May 17, 2002
APPEARANCES:
Agent for the
Appellant:
Wayne M. Lynn
Counsel for the
Respondent:
Marlyse Dumel
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1577(IT)I
BETWEEN:
PHYLLIS SERVAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on May 7 and 8, 2002 at Ottawa,
Ontario by
the Honourable Judge Campbell J.
Miller
Appearances
Agent for the
Appellant:
Wayne M. Lynn
Counsel for the Respondent:
Marlyse Dumel
JUDGMENT
The appeals from reassessments of tax made under the Income
Tax Act for the 1996, 1997 and 1998 taxation years are
allowed, and the reassessments are referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that the Appellant's operating costs benefit only, is
reduced from $3,266 in each year to $810 in each year.
Signed at Ottawa, Canada,
this 17th day of May, 2002.
J.T.C.C.
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