Citation: 2010TCC352
Date: 20100624
Docket: 2008-4022(IT)I
BETWEEN:
EARL BABICH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-4024(GST)I
BETWEEN:
ABLE ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The Appellant Earl
Babich (“Babich”) has appealed the reassessment of his 2003 and 2004 taxation
years. The Appellant Able Enterprises Ltd (“Able”) has appealed the
reassessment of its reporting periods March 1, 2002 to February 29, 2004. These
appeals were heard on common evidence.
Preliminary Matters
[2]
As a preliminary
matter, the Respondent brought two motions with respect to Babich’s appeal – a
motion to quash the appeal for the 2004 taxation year and a motion to amend the
Reply.
[3]
The ground for the
motion to quash was that the Notice of Reassessment dated September 25, 2008
for the 2004 taxation year was a nil assessment.
[4]
The Respondent relied
on the affidavit evidence of Daryl Argue, an Officer of the Canada Revenue
Agency (“CRA”). Included in the affidavit was a reconstructed Notice of Reassessment
dated September 25, 2008. It confirmed that the federal taxes assessed in the
notice were nil. The nil assessment was as a result of CRA’s acquiescence to
Babich’s request that employment income of $8,990 be removed from his income in
2004.
[5]
There is no appeal from
a notice which assesses no federal taxes. This was discussed by Noël J.A. in Interior
Savings Credit Union v. Canada[1]
at paragraph 17 where he stated:
[17] Nonetheless,
the term nil assessment is often used in the case law to identify an assessment
which cannot be appealed. There are two reasons why a so-called nil assessment
cannot be appealed. First, an appeal must be directed against an assessment and
an assessment which assesses no tax is not an assessment (see Okalta Oils
Limited v. MNR, 55 DTC 1176 (SCC) at p. 1178: “Under these provisions,
there is no assessment if there was not tax claimed”). Second, there is no
right of appeal from a nil assessment since: “Any other objection but one related
to an amount claimed [as taxes] was lacking the object giving rise to the right
of appeal …” (Okalta Oils, supra, at p. 1178).
[6]
The motion to quash
Babich’s appeal of his 2004 taxation year is granted.
[7]
The Respondent sought
to amend the Reply to Notice of Appeal on the grounds that the Minister of
National Revenue (the “Minister”) had assessed Babich for a benefit conferred
on a shareholder pursuant to subsections 15(1) and 15(5) of the Income Tax
Act (the “Act”) and these subsections were not included in the Reply.
[8]
Babich consented to the
amendment and the motion to amend the Reply was granted.
Issues
[9]
The issues in the two
appeals are related. The issue in Babich is whether he received a benefit from
the personal use of an automobile which was owned by Able. If he did receive a
benefit, then the quantum of that benefit is also disputed.
[10]
The issues raised in
the notice of appeal for Able are:
a)
if there was a benefit
conferred on Babich, did Able have to collect GST with respect to the benefit;
and,
b) in 2002, should the amount of $12,624.41 have
been allocated to Able’s GST account or its payroll source deduction account.
Babich Appeal
[11]
Able was incorporated
in 1999 under the British Columbia Corporations Act. Babich is its sole
shareholder and director. Able began operations in 2000 as a supplier of
firewood. In 2001, it built a saw mill and began selling cedar shakes. In 2004,
the mill burned down and it was not replaced as there was no fire insurance.
Since that time, Able has earned its income from the sale of firewood.
[12]
In 2002, Babich
purchased a 2002 Hyundai XG350 (the “Automobile”). He executed a bare trust
agreement so that he held legal title for the automobile and Able was the
beneficial owner. After representations made by Babich, the CRA accepted that
the Automobile was a business asset, allowed Able to claim an input tax credit
for the Automobile, and reclassified it from Class 10 to Class 10.1.
[13]
Babich did not keep any
records with respect to the use of the Automobile. At the audit stage of this
matter, Babich met with Tim Knight, an employee of the CRA to discuss the
business use of the Automobile. Based on representations made by Babich to Mr.
Knight, it was estimated that the business use of the Automobile was 75% in
2003 and 2004 and that the Automobile was driven a total of 41,316 kilometers
in both 2003 and 2004.
[14]
At the hearing of these
appeals Ernest Babich, Earl Babich’s father, gave evidence on behalf of the
Appellants. He has been the general manager of Able since 2000. He stated that
he and his wife, Betty Babich were the only individuals who used the automobile
in 2003 and 2004.
[15]
Ernest Babich testified
that he and his wife used the automobile to pick up materials and supplies for
Able; to collect cheques from Able’s customers; to drive employees to and from
their home and the mill; to do the banking for Able; and, to drive themselves
to and from home and the mill. Neither he nor his son kept a log with respect
to the use of the Automobile.
[16]
Ernest Babich’s
evidence was ambiguous with respect to his use of the Automobile. At one point
he stated that the Automobile was used by him and his wife for business and
personal purposes and later he stated that it was used 100% for business.
[17]
Ernest Babich stated
that his previous vehicle had been repossessed and he purchased the Automobile
in his son’s name so that he, Ernest Babich, could work for Able.
[18]
Babich tendered two
letters from the Insurance Corporation of British Columbia. They showed that for policy number 385DGH, he was
registered as the owner of the Automobile and Ernest Babich was shown as the
principal operator of the Automobile.
[19]
At no time did Babich
tell any representative of CRA that his father was the principal user of the
Automobile. This information was first revealed when Ernest Babich gave his
evidence. Ernest Babich was under the mistaken belief that if it were revealed
that he used the Automobile, no benefit would be assessed to his son.
[20]
I conclude from the
evidence presented at the hearing that the Automobile was purchased in Babich’s
name for his parents’ use. I find that Ernest Babich and his wife were the only
users of the Automobile and they used it for both personal and business
purposes.
[21]
The relevant sections
of the Income Tax Act (the Act) are as follows:
15. (1) Benefit conferred on shareholder -- Where at any time in a taxation year a
benefit is conferred on a shareholder,
…
the amount or
value thereof shall, except to the extent that it is deemed by section 84 to be
a dividend, be included in computing the income of the shareholder for the
year.
15. (5) Automobile benefit -- For the purposes of subsection (1), the
value of the benefit to be included in computing a shareholder's income for a
taxation year with respect to an automobile made available to the shareholder, or
a person related to the shareholder, by a corporation shall (except where
an amount is determined under subparagraph 6(1)(e)(i) in respect of the
automobile in computing the shareholder's income for the year) be computed on
the assumption that subsections 6(1), (1.1), (2) and (7) apply, with such
modifications as the circumstances require, and as though the references
therein to "the employer of the taxpayer", "the taxpayer's
employer" and "the employer" were read as "the corporation".
(emphasis added)
6. (1) Amounts to be included as income from office or
employment -- 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:
(e) standby charge for automobile -- where the taxpayer's employer or a person
related to the employer made an automobile available to the taxpayer, or to a
person related to the taxpayer, in the year, the amount, if any, by which
(i) an amount
that is a reasonable standby charge for the automobile for the total number of
days in the year during which it was made so available
exceeds
(ii) the total
of all amounts, each of which is an amount (other than an expense related to
the operation of the automobile) paid in the year to the employer or the person
related to the employer by the taxpayer or the person related to the taxpayer
for the use of the automobile;
6. (1)(k) automobile operating expense benefit -- where
(i) an amount
is determined under subparagraph (e)(i) in respect of an automobile in
computing the taxpayer's income for the year,
(ii) amounts
related to the operation (otherwise than in connection with or in the course of
the taxpayer's office or employment) of the automobile for the period or
periods in the year during which the automobile was made available to the
taxpayer or a person related to the taxpayer are paid or payable by the
taxpayer's employer or a person related to the taxpayer's employer (each of
whom is in this paragraph referred to as the "payor"), and
(iii) the
total of the amounts so paid or payable is not paid in the year or within 45
days after the end of the year to the payor by the taxpayer or by the person
related to the taxpayer,
the
amount in respect of the operation of the automobile determined by the formula
A
- B
where
A
is
(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
(v) in any
other case, the amount equal to the product obtained when the amount prescribed
for the year is multiplied by the total number of kilometres that the
automobile is driven (otherwise than in connection with or in the course of the
taxpayer's office or employment) during the period or periods referred to in
subparagraph (ii), and
B is the total
of all amounts in respect of the operation of the automobile in the year paid
in the year or within 45 days after the end of the year to the payor by the
taxpayer or by the person related to the taxpayer;
[22]
I conclude from all of the
evidence that a benefit was conferred on Babich. The Automobile was owned by
Able and all expenses were paid by Able. Babich was the sole shareholder of
Able and he allowed his parents to have exclusive use of the Automobile for
both personal and business purposes. According to subsection 15(5), the value
of the benefit to be included in a shareholder’s income with respect to an
automobile relates to an automobile made available to the shareholder or to a
person related to the shareholder.
[23]
The Minister of National Revenue
(the Minister) has calculated that the value of the benefit to be included in
Babich’s income for 2003 is a standby charge of $5,097.45 and an operating
benefit of $1,706.80 for a total of $6,804.25. His calculations were based on
the assumptions that the acquisition cost of the Automobile was $42,318[2]; the total kilometers
driven in 2003 were 41,316; that 25% of the kilometers driven annually with the
Automobile were for personal reasons; and, that the number of kilometers driven
for personal purposes was 10,040.
[24]
The Minister based his assumptions
on data and representations given to him by Babich. Babich now bears the burden
of showing that the Minister’s assumptions were incorrect. This he failed to
do. He has not brought any evidence which challenged the calculations and the
assumptions made by the Minister with respect to the imposition and amount of a
standby charge and operating benefit.
[25]
It was Babich’s position that he
should be able to setoff the benefit included in his income against the
shareholder loan which Able owed to him.
[26]
There was no evidence with respect
to whether a shareholder loan existed. As well, section 15 is designed to
prevent corporations from using an indirect means of conferring an untaxed
economic benefit on its shareholders.
[27]
Babich’s appeal is dismissed.
Able Appeal
[28]
Pursuant to section 173 of the Excise
Tax Act, Able is deemed to have collected GST on the benefit which was included
in Babich’s income under the Income Tax Act. The amount of GST which is
deemed to have been collected is $373.88 for the period ending February 28,
2003 and $373.88 for the period ending February 29, 2004. However, the actual
amounts assessed by the Minister were $373.84 in each period. I conclude from
the evidence that Able was correctly assessed for GST on the benefit included
in Babich’s income.
[29]
The second issue raised by Able
was whether, in 2002, the
amount of $12,624.41 should have been allocated to Able’s GST account or its
payroll source deduction account?
[30]
The facts relating to this issue
are succinctly described in a letter dated May 28, 2007 from Alan McDonell, a
Collections Officer with the CRA to Earl Babich. The second paragraph of that letter
reads:
In response to
your previous enquiry in March of 2007, we conducted a thorough review of your
account. We determined that in July of 2000, we issued a Requirement to Pay
(garnishee) to Gibson’s Pass Resorts Inc. and recovered $12,624.41, which was
applied to the arrears for Babich Enterprises Ltd. These funds were later
transferred to the payroll source deductions account for Able Enterprises Ltd
In May of 2003. The review found that in December of 2002, we conducted a
Payroll Source Deductions Examination and, since we were unaware of the moneys
that would later be transferred, we levied penalties and interest on unremitted
source deductions for 2000, 2001, and 2002. All of the penalties and interest
has now been cancelled and credits created in the process, have been applied to
the amounts assessed at the time of the Payroll Source Deductions Examination
in January of 2005. As a result of these adjustments, your balance has
decreased to $244.98 as at May 28, 2007. I have requested that a detailed
statement of accounts be mailed to you. It should arrive within 6 weeks.
[31]
Whether the amount of $12,624.41
ought to have been credited to Able’s GST account or its payroll source account
is not an issue that this court has jurisdiction to decide.
[32]
In conclusion, Able’s appeal is
dismissed.
Signed at Ottawa, Canada, this 24th day of June 2010.
“V.A. Miller”
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