Citation: 2006TCC333
Date: 20060616
Docket: 2005-2917(IT)I
BETWEEN:
RICHARD PARENTEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] These appeals from reassessments
under the Income Tax Act ("the Act") in respect of the 2002
(post‑bankruptcy) and 2003 taxation years were heard under the informal
procedure.
[2] In his post-bankruptcy
income tax return for the 2002 taxation year, and his income tax return for the
2003 taxation year, the Appellant reported an employment-related taxable
benefit of $5,250 in relation to the occupancy of a condominium located at 60,
rue du Lac, unit 401, in Magog, Quebec, which his employer made available to
him.
[3] In his
reassessments, the Minister of National Revenue ("the Minister")
increased the Appellant's reported income by $7,098 for each of the years 2002
(post-bankruptcy) and 2003.
[4] In reassessing the
Appellant, the Minister relied on the facts set out in subparagraphs 7(a) through
(l) of the Amended Reply to the Notice of Appeal (the "Amended
Reply"). These subparagraphs read:
[TRANSLATION]
(a) During
the period in issue, the Appellant was an employee . . . of Can‑Am
Immigration Services Inc. ("CAIS").
(b) During the
period in issue, CAIS made a condo of which it was the
lessee available to the Appellant ("the Condo"). The Condo
is located at 60, rue du Lac, unit 401, Magog.
(c) Under an
agreement signed on January 15, 2001 by CAIS (represented by
the Appellant) and 9047‑9692 Québec Inc. (represented by
Daniel Leblanc), the rental payments for the Condo were set at $2,000 per
month and were non-refundable.
(d) In the event
that CAIS purchased the condo, a part of the rent
paid, specifically $1,000 per month paid, would be deducted from the purchase
price.
(e) CAIS
did not purchase the condo.
(f) The monthly
taxable benefit in respect of the housing was calculated as follows:
|
(i)
|
area of the 4½-room condo
|
1,020 sq. ft.
|
|
(ii)
|
work room used for business
|
120 sq. ft.
|
|
(iii)
|
area of condo for personal use
|
900 sq. ft.
|
|
(iv)
|
$2,000 x (900/1,020) =
|
$1,764
|
(g) Since the
Appellant made an assignment of his property on May 23, 2002, the taxable benefit of $21,168 ($1,764 x 12) is broken down as follows in respect of the Condo
for the 2002 taxation year:
|
(i)
|
pre-bankruptcy tax return
(5 months x $1,764)
|
$8,820
|
|
(ii)
|
post-bankruptcy tax return
(7 months x $1,764)
|
$12,348
$21,168
|
(h) The Appellant
reported $5,250 as a taxable benefit related to the use of the Condo in his
post-bankruptcy income tax return for the 2002 taxation year.
(i) The Appellant was discharged from
bankruptcy on February 24, 2003.
(j) CAIS went bankrupt on August 1, 2003, and therefore ceased, from
that point onward, to pay the Condo rent for the benefit of the
Appellant.
(k) For the 2003 taxation year, the taxable
benefit in respect of the Condo is $12,348 ($1,764 x 7 months).
(l) The Appellant reported a total taxable
benefit of $5,250 related to the use of the Condo in his tax return for the
2003 taxation year.
[5] Paragraph 8 of
the Amended Reply is also relevant. It reads:
[TRANSLATION]
At this stage in the proceedings, he submits that CAIS paid the
electrical bills associated with the Condo occupied by the Appellant.
[6] The witnesses were
the Appellant and Guy Potvin, a Canada Customs and Revenue Agency auditor at
the relevant time.
[7] In 2001, the Appellant
was the Chief Executive Officer of Can-Am Immigration Services 2000 Inc. ("Can-Am") and his son was
the sole shareholder and director of that corporation. On January 15, 2001, an agreement was
signed between Can-Am, represented by the Appellant, and 9047‑9692 Québec Inc.,
represented by Daniel Leblanc, in relation to an offer to purchase the
condominium situated at 60, rue du Parc, unit 401, in Magog. According to
the Appellant, Can-Am wished to purchase the condominium in order to make it
available to him (Exhibit A‑9). The agreement is drafted as follows:
[TRANSLATION]
. . .
RE: Purchase Offer #
PA 66522
Property
situated at 60, rue du Lac, unit 401, Magog
The parties agree as
follows:
The parties understand and agree that 9047‑9692
Québec Inc., represented by Daniel Leblanc, shall defer the deed to a later
date.
Consequently, the purchaser, Can-Am
Immigration 2000 Inc., shall pay a non‑refundable rent in the amount of two
thousand dollars ($2,000) per month. However, should the property be
purchased, a portion of the rent paid, namely one thousand dollars ($1,000) per
month paid, shall be deducted from the selling price.
The parties accept these terms and
conditions.
Signed at Magog, January
15, 2001.
. . .
[8] According to the
Appellant, Can-Am wished to purchase the condominium in 2001, in 2002, and,
lastly, in 2003. Apparently, the selling price was $235,000 or $240,000.
Although the building that housed the condominium was on Lake Memphremagog, and was a few minutes
from the Magog town centre, where Can-Am's office was located, it was close to a
railway, which reduced its value. According to the Appellant, the condominium
was a four-and-a-half room, 1,013 square‑foot apartment. For reasons
that were not explained, the purchase never took place and Can-Am went bankrupt
on August 1, 2003.
[9] On the Can-Am balance
sheet, the $1,000 per month that was to be applied against the eventual
purchase price of the property was entered under the heading [TRANSLATION]
"Investments – Advances on purchase of a condominium" (Exhibit A‑8).
[10] According to the
Appellant, Can-Am did not pay the agreed-upon $2,000 rent for April, May, June
and July 2003.
[11] During the period in
which Can-Am made the condominium available to the Appellant, it also paid the
electrical bills. According to the Appellant, electricity cost $77 per month in
2006 (Exhibit A‑2). No information was provided for the years 2002
and 2003.
[12] After Can-Am went
bankrupt, the corporation that owned the condominium rented it to the
Appellant's new spouse for $1,200 per month starting August 1, 2003, for a period of 11
months (Exhibit A‑9). As of July 1, 2004, the rent was
increased to $1,217 per month (Exhibit A‑9).
[13] The Appellant
acquired the condominium in 2005 for the sum of $220,000.
[14] Mr. Potvin, the
auditor, explained that he initially tried to establish the rental value of the
condominium made available to the Appellant during the years 2002 and 2003, but
ultimately established the taxable benefit by using Can-Am's rental cost
($2,000) as a basis, multiplied by the area that the Appellant used for
personal purposes (900 square feet), divided by the total area of the condominium
(1,020 square feet). According to this calculation, the taxable benefit was
established at $1,764 per month. In addition, Mr. Potvin stated that Can-Am
was not entitled to capitalize $1,000 per month because it never purchased the condominium.
[15] Counsel for the
Respondent relies, inter alia, on the decision of the Federal Court of Appeal
in Youngman v. Canada, [1990] F.C.J. No. 341 (QL), in support
of her argument that Can-Am's non-refundable rental cost of $2,000 per month
should be used as the basis for the calculation. Furthermore, she states that
since the Appellant obtained a benefit regardless of Can-Am's failure to pay
the rent for the four months preceding its bankruptcy, no reduction is
warranted in this regard. She adds that even if Can-Am had purchased the
condominium, this would also have been a benefit to the Appellant.
[16] In Youngman, supra,
the appellant had a luxurious custom-made home built at a cost of $395,500, by a
corporation of which he and his wife were shareholders, on land owned by that
corporation. The appellant lent $86,000 to the corporation to help it finance
the construction.
[17] In 1979, the
appellant paid $800 per month in rent to the corporation, plus $300 per month
in other expenses related to the property, for a total of $12,100 over the
course of the year. The corporation paid the mortgage interest, municipal taxes
and insurance, which totalled $8,799. The assessment was based on these costs
paid by the corporation, plus an amount of $28,452, which represented a 9% rate
of return on $316,135, which was considered to be the corporation's investment
in the residence. The total benefit of $37,251 was divided between the
appellant and his wife ($18,625 each) and, the $12,100 that the appellant paid
as rent and other expenses was subtracted from his share.
[18] At trial, the
appellant had adduced expert testimony on the rental value of the house. One
expert established the rental value at $800 per month, plus utilities. The
other expert estimated the value at roughly $950 per month.
At paragraph 8 of the decision of the Federal Court of Appeal, Pratte J.A.
made the following comments regarding the experts' testimony:
. . . Both
agreed that there was no comparable house on the market in the area. One said
that, in that area, the free market rental value of houses bore no relation to
their real value.
[19] Following this, at
paragraph 9 of the decision of the Federal Court of Appeal, Pratte J.A.
explained the basic argument that the appellant raised at trial and the way in
which the judge dealt with the argument:
9. The
appellant's basic argument at trial was that the assessment was wrong because,
instead of being based on the value of the benefit that the appellant had
received from his company - which value was established by the uncontradicted
evidence of the two experts - it was based on the costs that the company had
incurred to provide him with that benefit. The Trial Judge rejected that
argument. He first found that the appellant's company had not built the house
for a business purpose since, in his view, it had been, from the outset, built
for the personal use of the appellant. He also found that, in the
circumstances, the fair market rental value was totally inappropriate for
measuring the value of the benefit conferred on the appellant because that fair
market rental value bore no relation to the actual costs of that benefit.
[20] The appellant
invoked the same argument before the Federal Court of Appeal. Here is how Pratte
J.A. addressed it at paragraphs 17 to 19 of the decision:
17. The appellant's
main proposition is that, under paragraph 15(1)(c), what is to be added
to the income of the shareholder is the value of the benefit that he received
rather than the cost of that benefit to the corporation. That proposition
is certainly well founded. However, it does not support the appellant's conclusion.
In determining the value of benefit, one may take its cost into consideration.
Free market value is not, in all circumstances, the sole indication of real
value.
18. It is now well
settled that paragraph 15(1)(c) applies only when a shareholder has
received, qua shareholder, a benefit or advantage from a corporation.
In valuing a benefit allegedly received by a shareholder, it is therefore
necessary to find what the shareholder would have had to pay for the same
benefit in the same circumstances if he had not been a shareholder of the
company. A shareholder receives no benefit for the purposes of paragraph 15(1)(c)
if, in the same circumstances, he would have received the same benefit from a
company of which he is not a shareholder. For instance, if a company builds an
expensive house with the intention of selling it at a profit and later, after
realizing that it cannot be sold for more than half its cost, sells it at that
low price to one of its shareholders, that shareholder in all likelihood
certainly gets a benefit out of that transaction but paragraph 15(1)(c)
does not apply to it.
Note 2: M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294.
19. In order to
assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first
necessary to determine what that benefit is or, in other words, what the
company did for its shareholder; second, it is necessary to find what price
the shareholder would have had to pay, in similar circumstances, to get the
same benefit from a company of which he was not a shareholder. In the
present case, the benefit or advantage conferred on the appellant was not
merely the right to use or occupy a house for as long as he wished; it was the
right to use or occupy for as long as he wished a house that the company, at
his request, had built specially for him in accordance with his specifications.
How much would the appellant have had to pay for the same advantage if he had
not been a shareholder of the company? Certainly more than what the two experts
referred to as the free market rental value since, in my view, the company
would have then charged a rent sufficient to produce a decent return on its
investment. It is impossible to determine with accuracy the amount of that
rent. However, subject to one important reservation, I cannot say that it would
have been less than what the Minister assumed it to be. That reservation is
that if the appellant had been dealing with a company of which he was not a
shareholder, consideration would certainly have been given, in determining the
rent payable, to the fact that he had himself lent more than $100,000 without
interest to the company in order to help to finance the construction of the
house. As long as that loan remained outstanding, the rent otherwise payable
would, in my view, have been reduced by an amount equal to the interest that
should normally have been paid on the balance of the loan.
[Emphasis added.]
[21] It can therefore be
concluded that where a corporation confers a benefit on a shareholder by making
a residence or dwelling available to that shareholder, one must try to
determine "what the shareholder would have had to pay for the same benefit
in the same circumstances if he had not been a shareholder of the company."
(Youngman, supra, at paragraph 18).
[22] As far as employees are
concerned, paragraph 6(1)(a) of the Act also prescribes that the value
of the board, lodging or other benefit of any kind received or enjoyed by them in
the year must be included in their income, subject to the specified exceptions.
Thus, in my opinion, it is appropriate to determine the value of lodging made
available to an employee free of charge based on the amount that he would have
had to pay a third party for similar lodging.
[23] This is, in fact,
the position adopted by the tax authorities in Interpretation Bulletin IT-470R
(Consolidated), Employees' Fringe Benefits, dated October 10, 1999.
Indeed, paragraph 6 of the Bulletin states:
Rent-Free
and Low-Rent Housing
6. When
an employer provides a house, apartment, or similar accommodation to an
employee rent-free or for a lower rent than the employee would have to pay
someone else for such accommodation, the employee receives a taxable benefit.
The employer is responsible for reasonably estimating the amount of
such a benefit, which would normally be considered to be the fair market rent
for equivalent accommodation had the employee rented from a third party,
less any rent paid. . .
[Emphasis added.]
[24] In the case at bar,
we know that Can-Am wished to purchase the condominium starting in 2001 under a
purchase offer that seems to have been accepted, but that the seller and Can-Am
agreed, inter alia, to defer the deed of sale to a later date under the
agreement signed on January 15, 2001 (Exhibit A‑9). However, Can-Am
agreed to pay $2,000 in non-refundable monthly rent. In the event that the property
was purchased, an amount of $1,000 for each month of rent paid was to be
deducted from the selling price.
[25] Unlike counsel for
the Respondent, I do not believe that the purchase of the condominium would
have benefited the Appellant. Can‑Am would have become the owner and
could have realized a gain upon resale. In the agreement of
January 15, 2001, Can‑Am reserved the option to purchase the condominium
at any time. But that is not the issue, nor is the issue whether Can‑Am was
entitled to capitalize $1,000 per month as an advance on the purchase of the
condominium.
[26] Rather, the issue
here is the value of the benefit received and enjoyed by the Appellant during
the years 2002 and 2003 by reason of Can‑Am making the condominium in
Magog available to him free of charge and paying the electrical bills during
those years.
[27] What must be
determined on this point is the price that he would have had to pay in order to
rent a similar condominium and cover the electrical bills himself. And the
evidence discloses that an 11-month lease for $1,200 per month was signed by
the Appellant's new spouse and 9047‑9692 Québec Inc., the owner
of the condominium, on August 1, 2003 (Exhibit A‑9). The
lease was renewed for 12 months on July 1, 2004 (Exhibit A-9). I
emphasize that these were contracts between people who were dealing with each
other at arm's length, and that I have absolutely no evidence suggesting that
the corporation that owned the condominium granted a special price or rebate on
the rent. Moreover, according to the Appellant, there were no $2,000‑per‑month
rentals in Magog in 2002 and 2003. As I have already stated, the condominium
is a four-and-a-half room apartment that is slightly larger than 1,000 square
feet.
[28] Under the circumstances,
I find that the Appellant would likely have had to pay $1,200, in 2002 and
2003, to rent the condominium that Can-Am made available to him free of charge.
[29] The fact that Can‑Am
did not pay the rent from April to July 2003 should not reduce the benefit,
as the Appellant continued to occupy the condominium, and Can-Am continued to
be liable for the rent.
[30] Mr. Potvin's breakdown
between the area of the condo used for personal purposes and the area used for
business purposes, and the determination of the taxable benefit based solely on
the part used for personal purposes, was not the subject of any debate. Thus, I
will make no pronouncements on the merits of the auditor's breakdown under the
circumstances. Using this same apportionment, but with a $1,200 monthly rental
cost instead of a $2,000 monthly rental cost as the basis, I find that the
value of the benefit is $1,059 per month ($1,200 x 900/1,020).
[31] As for the
electrical expenses paid by Can‑Am, the Appellant has shown that they
were $77 per month in 2006 (Exhibit A‑2). In the absence of more
accurate information, I believe that $70 per month cannot be too far off the
mark as an estimate for 2002 and 2003, so I am fixing these expenses at $70 per
month.
[32] The total value of
the benefit to the Appellant is therefore $1,129 per month, and $7,903 for each
of the years 2002 (post-bankruptcy) and 2003. In light of the foregoing, the
appeals from the assessments made under the Act for the 2002 (post‑bankruptcy)
and 2003 taxation years are allowed, and the assessments are referred back to
the Minister for reconsideration and reassessment on the basis that the value
of the benefit to the Appellant, resulting from the occupancy of a condominium
made available to him by his employer, is $7,903 for each of those years.
Signed at Ottawa, Canada, this
16th day of June 2006.
"P. R. Dussault"
Translation
certified true
on this 20th day
of February 2008.
Brian McCordick,
Translator
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