Date:
20030106
Docket:
1999-2737-IT-G
BETWEEN:
CRAIG L.
DOBBIN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
McArthur
J.
[1]
These are appeals from assessments of tax for the 1990 and 1991
taxation years. The Appellant had his Corporation, Beachy Cove
Investments Ltd. (B.C.) build a home at a cost in excess of $2.7
million. It is situated near St. John's, Newfoundland, where
Canadian Helicopter Corporation (CHC) has its head office and
helicopter facilities. The Appellant was chairman and chief
executive office of CHC and controlled Craig Dobbin Ltd.
Following an Agreed Statement of Facts, I am asked to decide the
amount of benefit received by the Appellant from B.C. and the
amount of shareholder debt to be included in the Appellant's
income pursuant to subsections 15(1) and 15(2) of the Income
Tax Act.
[2]
Originally, the Appellant's position was that only 19% of the
home was for his personal benefit and the remaining 81% was used
as facilities "to conduct business on behalf of CHC and its
related group of companies, to receive clients, bankers and high
ranking personnel of companies".
[3]
In reassessing, the Minister of National Revenue included the
following amounts as benefits in the Appellant's
income:
(i)
under subsection 15(1), $262,329 in 1990 and $148,818 in
1991;
and
(ii)
under subsection 15(2), shareholder loan (Craig Dobbin Ltd.)
$643,773 in 1990 and $822,150 in 1991.
[4]
Prior to the hearing of the appeals, the parties filed a
Statement of Agreed Facts, which states:
1.
In 1987 and 1988, a dual purpose facility (house, according to
the Respondent) was built at Beachy Cove, Newfoundland, at a
total cost of approximately $2,700,000.00 (Beachy
Cove);
2.
Beachy Cove Investments Limited, owned 100% by the Appellant, was
created as the corporate vehicle for building and financing
Beachy Cove;
3.
Artwork and antiques, valued at an amount of no less than
$834,000.00, purchased and owned by the Appellant personally,
were situated in Beachy Cove during the years in
issue;
4.
Beachy Cove was available for use and was used for business and
personal purposes in the following percentages,
respectively:
|
Taxation Year
|
Business
|
Personal
|
|
1990
|
40%
|
60%
|
|
1991
|
40%
|
60%
|
5.
The following rent was charged by Beachy Cove Investments Limited
to Craig Dobbin:
|
Taxation Year
|
Rent
Charged
|
|
1990
|
$174,700.00
|
|
1991
|
$316,600.00
|
6.
Beachy Cove Investments Limited recorded the rent as an account
receivable from the Appellant. The receivables resulting from the
rent charged was assigned by Beachy Cove Investments Limited to
Craig Dobbin Limited. Craig Dobbin Limited is a corporation
wholly owned by the Appellant;
7.
Craig Dobbin Limited increased the year-end balance in the
Appellant's shareholder loan account by the assigned
amounts;
8.
By Notice of Reassessment dated November 8, 1994, the Respondent
increased the year-end balance of the Appellant's shareholder
account in Craig Dobbin Limited and included in the
Appellant's income, under subsection 15(2) of the Income
Tax Act, the following amounts:
|
Taxation Year
|
15(2) inclusion
|
|
1990
|
$643,773.00
|
|
1991
|
$882,150.00
|
9.
The 1990 and 1991 year-end balances used by the Respondent to so
reassess the Appellant included the amounts of $174,700.00 and
$316,600.00, respectively.
10.
The Appellant and the Respondent have agreed that, excluding the
issue of the artwork and antiques, the value of the additional
subsection 15(1) benefit flowing from Beach Cove Investments
Limited to the Appellant in respect of Beachy Cove during the
1990 and 1991 taxation years was as follows:
|
Taxation Year
|
Section 15(1) benefit assessed
|
Actual 15(1) Benefit (excl. art &
antiques)
|
|
1990
|
$230,166.00
|
$99,094.00
|
|
1991
|
$87,
696.00
|
See
Revised Schedule "A"
|
11.
The Appellant and the Respondent have also agreed that in
computing his income for the 1991 taxation year, the Appellant is
entitled to claim a business investment loss of an amount of
$275,000 under section 39 of the Act;
12.
Apart from the items described as "subsection 15(1) rental
benefit", and "subsection 15(2) shareholder loan",
the Appellant accepts the reassessed items described in Paragraph
8 of the Respondent's Rely to Notice of Appeal;
13.
Taking into account paragraph 10, 11 and 12, the only remaining
issues before this Court are:
(a)
What is the value of the subsection 15(1) benefit received by the
Appellant from Beachy Cove Investments Limited for the 1990 and
1991 taxation years;
(b)
What is the amount of the subsection 15(2) shareholder
debt.
Revised
Schedule "A"
Craig L.
Dobbin
Use of
Company-Owned Home
|
|
1990
|
1991
|
|
Total
Cost of Project
|
$2,817,006
|
$2,805,016
|
|
Less:
Total Cost of Two Guest Houses
|
215,000
|
215,000
|
|
Total
Cost of Main Houses
|
$2,602,006
|
$2,590,016
|
|
Less:
First Mortgage on Land Portion of Guest Houses
|
105,261
|
104,665
|
|
Company's Equity in Property
|
$2,496,745
|
$2,485,315
|
|
Prescribed Interest Rate
|
13.5%
|
10.75%
|
|
|
337,060
|
267,175
|
|
Add:
Total Operating Expenses
|
$197,634
|
245,201
|
|
|
$534,694
|
$512,376
|
|
Less:
Guest House Operating Expenses
|
6,761
|
17,995
|
|
Mortgage Interest-Guest
Houses
|
18,243
|
17,341
|
|
Depreciation
|
53,368
|
51,444
|
|
Total
Benefit
|
$456,323
|
$425,596
|
|
Less:
Business Portion of 40%
|
182,529
|
170,238
|
|
Total
Benefit
|
$273,794
|
$255,358
|
|
Less:
Rent Paid
|
174,700
|
316,600
|
|
Total
|
$99,094
|
($61,242)
|
|
Taxable Benefit
|
$99,094
|
NIL
|
[5]
The only witness on behalf of the Appellant was Keith Stanford
who was the accountant for the Appellant and his related
companies other than CHC. I was not asked to draw any inference
from the fact that the Appellant did not attend. None is
drawn.
[6]
The parties agreed that the value of the benefit conferred on the
Appellant by B.C. be determined by the equity rate of return
method as set out in Revised Schedule "A" of the
Statement of Agreed Facts. The equity rate of return that B.C.
could have received in 1990 with the $2.7 million it spent on the
home was $273,794. The Appellant paid B.C. $174,794, leaving him
with a subsection 15(1) taxable benefit of $99,094 in 1990.
The equity rate of return that could have been received by B.C.
with the money it spent on the home was $255,358 in 1991. The
Appellant paid $316,000 in rent to B.C. in 1991 overpaying
the benefit received by $61,242. There obviously was no
subsection 15(1) benefit conferred in 1991.
[7]
The Appellant submits that the additional benefit imposed by the
Minister of $99,094 in 1990 be reduced by deducting a value for
B.C.'s use of the Appellant's artwork and antiques
("art") situate in the home. The art was valued, by
agreement, at $834,000.
[8]
The Respondent states that B.C. did not receive a benefit from
the art. B.C. was created by the Appellant to build and finance a
home for himself. It was not a business - how could it enjoy a
benefit from the art?
[9]
The Appellant adds that his shareholder loan account in 1991
should be reduced by $61,242 to reflect his overpayment for the
use of B.C.'s home.
[10] The
Respondent states that this does not accurately reflect what
occurred in the 1991 taxation year, but rather what might have
occurred. In 1991, B.C. made a rental profit.
Analysis
[11] First
dealing with the art, the facts narrow down to the following.
B.C. owned the $2.7 million home. The parties agree that it was
used 60% of the time for personal purposes and 40% for business
purposes. They agree that the value of the subsection 15(1)
rental benefit flowing from B.C. to the Appellant was $99,094 in
1990 and nil in 1991.
[12] The
Appellant's position is that the $99,094 should be offset by
a proportionate share of the $834,000 in art. The art was owned
by the Appellant personally and he states that the rental benefit
B.C. is giving him should be reduced by the benefit he is giving
B.C. by placing his art in B.C.'s house. Counsel for the
Appellant submitted that the value of the art should be taken
into account, to what extent to be determined by subsequent
agreement between the parties. He states that it should be taken
into account for the same reasons the non-charging of interest
was taken into consideration in Youngman v. The Queen.
[13] The
Respondent submits that subsection 15(1) was not intended to
account for benefits flowing from a shareholder to a corporation.
It deals with the reverse only, that is benefits flowing from the
corporation to the shareholder.
[14]
Youngman involved a taxpayer who lived in a luxury house
built for him and his family by a company in which he was the
controlling shareholder. The Court held that the taxpayer
received a taxable benefit from the company yet the company had
free use of $100,000 loaned to it by the Appellant. But for this
interest-free money, the company would have incurred a financing
cost from its building of the home. The Federal Court of Appeal
found that the interest-free loan should be taken into
consideration in the determination of the amount of the benefit
to be included in the shareholder's income. The Appellant
asks to expand this reasoning to include an amount for the
Appellant's art in B.C.'s home.
[15] As stated,
the question is should B.C. be charged by the Appellant for
having received a benefit from his art? Obviously, no rental fee
was paid by B.C. to the Appellant for the art. If this was an
arm's length transaction, B.C. would pay a fair market value
rental fee and the Appellant would declare this fee as income. This is not what the
Appellant seeks. He requests a personal credit from B.C. without
including it in his personal income.
[16] The present
facts are readily distinguished from those in Youngman. In
Youngman, interest on the $100,000 loan was an integral
cost of building the home. In the present case, the value of this
art is in no way factored into the cost of the home. The
attributed rental of B.C.'s home to the Appellant is a
completely separate and unconnected transaction from the
art.
[17] In
Donovan v. The Queen, at the
taxpayer's direction, a family corporation took title to a
Florida residence. Substantial interest-free advances were owing
by the corporation to the taxpayer. The Minister of National
Revenue included in the taxpayer's income a subsection 15(1)
benefit in respect of his exclusive use of the residence. At the
trial level, Judge Teskey rejected the taxpayer's argument
that the non-interest bearing loans owing to him by the
corporation negated the benefit he derived from the use of the
residence. The taxpayer appealed and the Federal Court of Appeal
agreed with Teskey J. stating at page 6086:
...
the value of the benefit was not reduced by credit balances in
the shareholders loan accounts for the years in question as there
was no connection between the loan and the costs incurred in
acquiring the property.
This
conclusion in Donovan applies equally to the present case.
There is no connection between the art and the costs incurred in
acquiring the house. While it is not necessary to continue, I
agree with the Respondent's position that if B.C. did receive
a benefit from the art then B.C. should have a rental expense and
the Appellant must declare a corresponding amount as rental
income pursuant to sections 3 and 9 of the Income Tax Act
following the reasoning in Donovan.
[18] The
following analogy mirrors the present situation. In an arm's
length transaction, a taxpayer loans a landlord $800,000,
interest-free, the market interest rate amounting to $4,000
monthly. The landlord in turn enters into a rent-free lease with
the taxpayer for a residential property of equal value. Again,
the market rental value being $4,000 monthly. There is a wash or
offset. There is no exchange of money, yet at law, both parties
must include $4,000 monthly in their incomes pursuant to sections
3 and 9.
[19] The
Appellant took issue with the Respondent introducing the offset
argument because it was not raised in the Respondent's
pleadings. It is not necessary to deal with the Appellant's
objection because I have found that the Act does not
recognize the benefit suggested by the Appellant. In addition, I
agree with the Respondent's supplementary submissions. The
Appellant did not plead offset in the Notice of Appeal and by
raising the issue at hearing, the Respondent was forced to
address it. Proceedings by the Appellant at the objection level
are not considered pleadings before this Court.
[20] I will now
deal with the treatment of the 1991 overpayment by the Appellant
to B.C. The Appellant submits that the subsection 15(2) loan
inclusion for 1991 must be
reduced by the overpayment of rent by the Appellant to B.C. In
1991, the total benefit to the Appellant from B.C. for use of the
home was $255,358. The Appellant is credited with payment of
$316,600 in rent. He requested that his 1991 shareholder loan
account be credited with the $61,242 overpayment. Obviously,
there was an overcharge. I have no doubt that this was an error
that should be corrected unless such is prohibited by the
Act.
[21] Subsection
15(2) reads as follows:
15(2) Where a person
(other than a corporation resident in Canada) or a partnership
(other than a partnership each member of which is a corporation
resident in Canada) is
(a)
a shareholder of a particular corporation,
(b)
connected with a shareholder of a particular corporation,
or
(c)
a member of a partnership, or a beneficiary of a trust, that is a
shareholder of a particular corporation
and the
person or partnership has in a taxation year received a loan from
or has become indebted to the particular corporation, to any
other corporation related thereto or to a partnership of which
the particular corporation or a corporation related thereto is a
member, the amount of the loan or indebtedness shall be included
in computing the income for the year of the person or
partnership, ...
[22] The
Respondent stated in argument that the Appellant requests a
reduction in the shareholder loan account to reflect the
overpayment and submitted that this does not accurately reflect
what occurred. Counsel stated that it boils down to:
Unless the
Act provides otherwise, a taxpayer is entitled to be taxed
based on what he actually did, not based on what he could have
done and certainly not based on what a less sophisticated
taxpayer might have done.
[23] I accept
that the Appellant intended to charge an amount equal to the
benefit. Since B.C. included the overpayment in its revenue, the
Appellant should be allowed to reduce his shareholder loan by the
same amount.
[24] As stated
by McLaughlin C.J. in Shell: "Courts must be
sensitive to the economic realities of a particular transaction
rather than being bound to what first appears to be its legal
form". She adds that there are at least two caveats to this
rule, which I do not feel apply. There is no doubt that the
Appellant intended that the 1991 overpayment be equal to the
benefit. Through no fault of the
Appellant, the benefit in 1991 was overstated and should be
corrected to reflect the economic realities of the transaction.
By doing so, the taxpayer's bona fide legal
relationship is not recharacterized.
[25] The appeal
from the assessment of tax for the 1990 taxation year is
dismissed and the appeal for the 1991 taxation year is allowed
only to reduce the shareholder loan by $61,242. No costs are
awarded.
Signed at
Ottawa, Canada, this 6th day of January, 2003.
J.T.C.C.
COURT FILE
NO.:
1999-2737(IT)G
STYLE OF
CAUSE:
Craig L. Dobbin and Her Majesty the Queen
PLACE OF
HEARING:
Montréal, Québec
DATE OF
HEARING:
September 5, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
January 6, 2003
APPEARANCES:
Counsel
for the Appellant: Pierre Barsalou and Danislan
Saverimutha
Counsel
for the
Respondent:
John P. Bodurtha and Christa McKinnon
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Pierre Barsalou
Firm:
Barsalou Lawson
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2737(IT)G
BETWEEN:
CRAIG L.
DOBBIN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on September 5, 2002, at Montréal, Québec,
by
the
Honourable Judge C.H. McArthur
Appearances
Counsel
for the Appellant: Pierre Barsalou and
Danislan Saverimutha (Student-at-law)
Counsel
for the
Respondent:
John P. Bodurtha and Christa McKinnon
JUDGMENT
The appeal from the assessment of tax made under the Income
Tax Act for the 1990 taxation year is dismissed.
The appeal from the assessment of tax made under the Act
for the 1991 taxation year is allowed and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the
Appellant's shareholder loan account is reduced by
$61,242.
No costs are awarded.
Signed at
Ottawa, Canada, this 6th day of January, 2003.
J.T.C.C.
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