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Citation: 2003TCC34
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Date: 20030513
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Docket: 2002-2078(IT)I
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BETWEEN:
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PAUL CHANDLER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bonner, T.C.J.
[1] This is an appeal from an
assessment of income tax for the Appellant's 1999 taxation
year. The assessment was made on the basis that during the year a
benefit was conferred on the Appellant by Charter Telecom Inc.
(Charter). The Appellant owned 60% of the shares of Charter. It
was the position of the Minister of National Revenue (the
"Minister") that the value of the benefit was to be
included in the Appellant's income pursuant to subsection
15(1) of the Income Tax Act (the "Act").
The benefit is said to have been conferred when Charter erected a
building at its own expense on land which belonged to the
Appellant. The cost to Charter of the building was $31,707.
[2] In 1999, the Appellant was
beneficial owner of a 56-acre parcel of land (the Impala
property) located about 15 miles outside the City of Victoria.
The Appellant resided in a house located on that property.
[3] Charter was formed in April 1997
to carry on the business of designing and selling computer
networks. Charter required an office for use in carrying on its
business. The space was required for general corporate purposes
including meeting with clients and for the assembly and temporary
storage of network components. For such purposes, Charter used a
barn located on the Impala property but space in the barn was
rather primitive and access to the structure was poor.
[4] Charter therefore hired a builder
to design and build a suitable structure on the Impala property.
Work commenced on the new building which was intended to consist
of two stories with a garage at ground level and office
space above. Construction work stopped before the drywall and
insulation were installed. The work, as far as it went, was
carried out at Charter's expense.
[5] The Respondent pleaded in the
Reply to the Notice of Appeal that in assessing the Appellant the
Minister relied upon assumptions of fact which included the
following:
b) in 1999,
the Appellant was shareholder and director of Charter;
c) in 1999,
Charter's business was located at 3786 Belgrave Road,
Victoria;
d) the
Appellant's principal residence is the Residential
Property;
e) Charter
paid for the construction of a detached two storey double car
garage (the "Garage") built on the Residential
Property;
f) in
1999, the Company paid $31,707 towards the cost of the
construction of the Garage;
g) the
Appellant hired a contractor to build the Garage;
h) the
Appellant instructed Charter to pay for the construction of the
Garage;
i) in
1999, the Garage was insured by the Appellant under his
homeowner's insurance policy;
j) in
1999, the Appellant used the Garage to park his personal
vehicles;
k) the Garage
is owned by the Appellant;
l) in
1999, Charter did not have a leasehold interest in the
Garage;
m) in 1999, Charter
had not entered into a lease agreement with the Appellant for the
lease of the Garage; and
n) the
Appellant did not report the Benefit in computing his income for
the 1999 taxation year.
[6] The pleaded assumptions suggest
that the assessor had an incomplete and somewhat inaccurate grasp
of the facts. The evidence adduced at the hearing of the appeal,
in particular the Appellant's testimony, supports the
following comments on those assumptions:
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Assumption
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Comment
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b)
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The Appellant held only 60% of the equity; the rest was
held by an unrelated person
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c)
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3786 Belgrave was a mailing address only; Charter's
business was not carried on there
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e)
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The word 'garage' is an incomplete and therefore
rather misleading description of the intended structure
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e), g), h)
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The Appellant as officer of Charter took the steps
described in order to address a genuine corporate need for
space for use in the conduct of Charter's business
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j)
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Incorrect
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l), m)
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Charter was sloppy in failing to properly document the
intended arrangement
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h)
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The question is whether a benefit within the meaning of
s. 15 was conferred; if one was, then, of course, the value
should have been reported
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[7] The Minister seems to have assumed
that the value of the benefit was the amount spent by Charter.
The parties did not address the question by how much, if at all,
the value of the Appellant's interest in the Impala property
was increased by the expenditure.
[8] Paragraph 15(1)(a) of the
Act reads:
(1) Where at any time in a taxation year a benefit is
conferred on a shareholder, or on a person in contemplation of
the person becoming a shareholder, by a corporation otherwise
than by
(a) the reduction of the paid-up capital, the
redemption, cancellation or acquisition by the corporation of
shares of its capital stock or on the winding-up, discontinuance
or reorganization of its business, or otherwise by way of a
transaction to which section 88 applies,
...
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.
...
This provision is a successor to section 8 of the pre-1972
Act. Its place in the Act was considered in
M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184. At page
5186 Cattanach, J. stated:
The normal payments and distributions by a corporation
to a shareholder qua shareholder are
(a) dividends during the lifetime of the
corporation,
(b) payments and distributions in respect of reductions
in capital during the lifetime of the corporation, and
(c) payments and distributions on the occasion of the
winding-up of the corporation.
Provision in the Income Tax Act, other than
section 8, govern the taxability of such payments and
distributions when made in the orthodox way. In the remainder of
this judgment, when referring to dividends, I intend to refer to
any of these payments or distributions referred to in this
paragraph.
Subsection (1) of section 8 is aimed at payments,
distributions, benefits and advantages flowing from a corporation
to a shareholder other than those referred to in the immediately
preceding paragraph. While the subsection does not say so
explicitly, it is fair to infer that Parliament intended, by
section 8, to sweep in payments, distributions, benefits and
advantages that flow from a corporation to a shareholder by some
route other than the dividend route and that might be expected to
reach the shareholder by the more orthodox dividend route if the
corporation and the shareholder were dealing at arm's length.
This is true of paragraph (a) of subsection (1). A
corporation normally makes payments to its shareholders as
dividends unless the payment is pursuant to a bona fide
business transaction, in which event it is not a payment accruing
to the shareholder qua shareholder...
On the other hand, there are transactions between
closely held corporations and their shareholders that are devices
or arrangements for conferring benefits or advantages on
shareholders qua shareholders and paragraph (c)
clearly applies to such transactions. (Compare Robson v.
M.N.R., [1952] 2 S.C.R. 223 [52 DTC 1088].) It is a
question of fact whether a transaction that purports, on its
face, to be an ordinary business transaction is such a device or
arrangement...
[9] Construction operations commenced
in 1998 and were substantially completed, as far as they went,
sometime in the fall of the year when the payment to the
contractor was made. The cost of the building was recorded in
Charter's financial statements as a leasehold improvement.
The building was insured with loss payable to Charter. The new
structure was not used by either the Appellant or Charter during
1999.
[10] A written lease dated January 1st, 2002
was entered into between the Appellant as landlord and Charter as
tenant. The property leased was "that portion of 1979 Impala
Road, Victoria, B.C. described as being approximately 28 feet by
28 feet for the purpose of constructing an office building".
The term was ten years commencing January 1st, 2002. The rent was
$1,200 per annum payable $100 a month.
[11] A later amendment to the lease adds a
provision permitting the tenant to construct a structure and
provides further that the structure was to be and remain the sole
property of the tenant. The tenant was permitted to remove the
structure upon termination of the lease.
[12] A lease formed in 2002 cannot, of
course, retroactively eradicate the benefit if one was conferred
in 1999. However, as I see it, the 2002 documents simply
formalized an arrangement of the sort intended from the outset.
The failure to properly record the arrangement in writing was the
result of oversight, nothing more. The evidence of the Appellant,
which I accept, indicates that the erection of the building at
Charter's expense was a response to a need for space required
for the conduct of Charter's business. It was not a device
conceived with a view to conferring a benefit on the Appellant as
shareholder. I note that the Respondent did not plead that the
Minister assumed otherwise. It follows that no benefit within the
meaning of s. 15 was conferred. The appeal will therefore be
allowed and the assessment referred back to the Minister of
National Revenue for reassessment to delete the amount in
issue.
Signed at Toronto, Ontario, this 13th day of May 2003.
T.C.J.
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