Date: 20000926
Docket: 98-2695-IT-G,
1999-490-IT-G
BETWEEN:
LAWRENCE RYCHJOHN,
RYCHJOHN INVESTMENTS LTD.
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasonsfor
Judgment
Rip, J.
[1]
Lawrence Rychjohn and Rychjohn Investments Ltd.
("Investments") appeal assessments of income tax for
1991 and 1992.[1]
[2]
The issue for both years arise from the use by Mr. Rychjohn, a
shareholder, director and officer of Investments, of a house
built and owned by Investments in Kelowna, British Columbia. The
Minister of National Revenue ("Minister") assessed Mr.
Rychjohn pursuant to subsection 15(1) of the Income Tax
Act ("Act") and sections 4300 and 4301 of
the Regulations to the Act by adding to his income
for 1991 and 1992 benefits conferred on him by Investments. The
benefits represented the value of the property used by Mr.
Rychjohn and expenses incurred by Investments in maintaining the
house. For 1991 the Minister included the amount of $83,314.24 in
Mr. Rychjohn's income, the amount being the aggregate of
$69,875.01 as a benefit on the amount of $14,443.23 representing
costs of operating the house paid by Investments, including
insurance, utilities, repairs and a loan committal fee. The
Minister added the amount of $59,618.44 in
Mr. Rychjohn's income, representing a benefit of $48,720
and costs of operating the house of $10,868.44.
[3]
The issue in Investments' appeals is whether the corporation
is precluded from deducting, in computing its income, the amount
of $4,858, being a loan commitment fee with respect to financing
the house pursuant to paragraphs 18(1)(a) and
18(1)(h) of the Act. The parties agreed that the
corporation's appeals would follow the result of Mr.
Rychjohn's appeals.
[4]
Mr. Rychjohn, a resident of Saskatoon, is president of
Investments; he and his wife, Mrs. Rychjohn, each own 50 per cent
of its issued shares. The Rychjohns reside in Saskatoon. The
corporation carries on the business of developing and selling
real estate property in Saskatoon and participating in joint
ventures in Saskatchewan and Manitoba. At times relevant to these
appeals, Investments built multi-unit residential buildings in
the Kelowna area of British Columbia.
[5]
Mr. Rychjohn is the "main player" in Investment's
development business; Mrs. Rychjohn manages the corporation's
card shops. Except for a small commercial centre in Kelowna
called Creekside Plaza, Investments has sold everything it built.
From about 1972 when he carried on the development business in
his own name, to the time of trial, Mr. Rychjohn estimated he and
Investments built approximately $200,000,000 worth of real
estate. Investments' first project in Kelowna was in 1986,
the construction of a block of 152 rental units. In 1988
Investments and Normandale Holdings Ltd. agreed to sell a
development known as Mission View Estates in Kelowna and they
used the sale proceeds to buy land for a 198-unit apartment
condominium complex project in Kelowna called Bridgewater
Estates. Normandale Holdings Ltd. ("Normandale") was
owned by Mr. Robert Ian Van Norman, a Saskatoon neighbour, friend
and business associate of Mr. Rychjohn.
[6]
The residence in issue is located on prime lakeshore property,
four miles south of downtown Kelowna, British Columbia. The
property was encumbered by an easement and a creek meandered
along the property. This required any house to be built back from
the lake and this affected adversely the view of the lake from
the house. The Normandale house did not have this problem. The
lot on which the residence is built is referred to as Lot 5,
Eldorado Court. Mr. Van Norman's house is on Lot 6.
(The Rychjohn house is sometimes referred to as the
"Eldorado house".)
[7]
Mr. Rychjohn testified that the Eldorado house was built by
Investments to test the high-end housing market in Kelowna. The
homes Investments was building in Kelowna at the time were not
"high-end". Since more than half of his time was
attending to business in Kelowna, Mr. Rychjohn said he planned to
make use of the house, rather than a hotel, when in Kelowna.
[8]
Mr. Rychjohn said he first became interested in the Eldorado lot
when it was brought to his attention by a water and sewer
contractor at the time Investments was building the Bridgewater
project. The contractor, Mr. Dan Nomis, told Mr. Rychjohn
there were high-end lots for sale on Eldorado Court, that the
developers were "short-financed" and "there was a
deal to be had". Mr. Nomis had purchased a lot.
Normandale and Investments purchased two contiguous lots, Lots 5
and 6, for $180,000 each. At trial, Mr. Rychjohn was of the view
that the asking price per lot was $300,000 but he got a good deal
because two lots were being purchased together and due to his
ability to negotiate and haggle a lower price. Respondent's
counsel suggested to Mr. Rychjohn that the price he paid for the
Eldorado Court lots was the asking price; it was no bargain. Mr.
Rychjohn persisted in his view that he did get a bargain. The
evidence was that lots on Eldorado Court, without easements, sold
for between $180,000 and $200,000. Mr. Rychjohn was
surprised "to hear people got those same prices".
[9]
Mr. Rychjohn described his thinking in acquiring the Eldorado lot
for Investments:
Well, my intention was simply that if, lookit, if I can buy
something for 180 grand and I think it's worth 300,000, right
away, I have picked up 100 grand just on the lot. And I had the
vision to see that and I knew there was that money to be made for
sure, but the intention then became further enhanced that lookit,
we are building Bridgewater Estates and we are negotiating major
sub-trades, you know, $14,000,000 worth of sub-trades.
There's a chance that maybe there's a further profit by
building a house or two houses on these properties and I'm
not ashamed to say it, I got some fabulous deals. I never got in
free, but I got some fabulous deals in building the Eldorado
homes via the Bridgewater Estates. So I thought there was another
100,000 or more and then I also could visualize that the market
is - is going up. I mean, we're talking '88,
'89, you know, I can see the markets going up and I was
right, I was dead-on. The market was starting to fly high. So
here I am, I'm a 100,000 to the good on the lot, I'm a
100,000 on the sub-trades, I'm already 220,000 ahead of the
game without even doing anything. I just know I could flip it,
but I also knew there was an appreciation coming and lakefront
properties was pretty scarce and to be quite honest with you, I
thought I was going to make a half million dollars on that
particular job and I was proved wrong, but I - boy, I
thought it was there.
[10] Mrs.
Rychjohn was not aware of the purchase, Mr. Rychjohn testified,
until he informed her. On or about November 2, 1988, he engaged
the same architect who designed two of his other projects,
including Bridgewater Estates, to design the Eldorado house. Mr.
Rychjohn said he did not "pay attention" to the
architect's description of the project, that it was "a
single family residence for Mr. and Mrs. Lawrence Rychjohn".
The only instructions he said he gave to the architect was to
design a house to fit the lot within the boundary and easement.
The eventual area of the house was 4,000 square feet. The
appellant chose the exterior of the house to be clad in
tyndelstone, which was described as "a unique feature",
the hot tub, pool, dock and three-car garage,
"everything you need for a million dollar house".
[11] According
to Mr. Rychjohn, the houses on Eldorado Court were built "as
part of the Bridgewater project". Also, in August 1990,
Investments started construction of Creekside Villas, consisting
of 264 condominium units, and Creekside Plaza, a shopping plaza;
construction was completed in 1993. Mr. Rychjohn and
Investments continued to be active in the Kelowna area well into
the 1990s.
[12]
Investments and Normandale entered into a joint venture agreement
on March 13, 1989 for Bridgewater Estates which consisted of four
paragraphs, two of which related specifically to construction of
the two homes on Lots 5 and 6 on Eldorado Court: the homes would
be built for the purpose of investment, Investments would be the
development manager for no fee, each party would have its own
title and all costs to the two homes would be borne equally up to
a described finished stage; a common dock and boat facility for
both lots would be built under the joint venture account.
[13] Lots 5
and 6 (including improvements) were transferred to the
co-venturers in 1991, Lot 6 to Normandale and Lot 5 to
Investments. In 1992 Normandale transferred ownership of Lot 6 to
Mr. and Mrs. Van Norman. The Eldorado house was listed as a fixed
(capital) asset in the joint venture statements included in the
1990 and 1991 tax returns of Investments as follows:
|
|
1990 Net Book Value
|
1991 Net Book Value
|
|
Land
|
$181,573.00
|
$ NIL
|
|
Land Improvements
|
$
450.00
|
$ NIL
|
|
Subtotal
|
$182,023.00
|
$ NIL
|
|
Building
|
$314,077.00
|
$ NIL
|
|
Equipment
|
$ 2,319.00
|
$ NIL
|
|
Pool
|
$ 13,899.00
|
$ NIL
|
|
Dock
|
$ 11,850.00
|
$ NIL
|
|
Subtotal
|
$342,145.00
|
$ NIL
|
|
Total
|
$524,168.00
|
$ NIL
|
[14] The
Eldorado house was completed in December 1990. An occupancy
permit was obtained for the Eldorado house in March 1991 and the
house was put up for sale with Mr. Colin Bull, a licensed
realtor, in September 1991 for $795,000. Mr. Rychjohn stated
Mr. Bull told him the "house should be anywhere from
$750,000 to $900,000". According to Mr. Rychjohn, the house
was a multiple listing, a sign was placed on the front yard and
it was advertised in the newspapers. Mr. Rychjohn was not present
at any "showing" of the house to prospective
purchasers. He said he did "bug" Mr. Bull "a
lot" but the house did not sell. He finally changed agents
on or about June 14, 1994.
[15] The
second real estate agent, Ms. Joan Marie Richter, according to
Mr. Rychjohn, had a "fabulous reputation". She
informed him the house was not a $1,000,000 house on a market
that was starting to "crumble". He never reduced the
price while the house was listed with Mr. Bull because the market
was steadily rising and he thought someone would buy it.
[16] Mr. Bull
had two offers to purchase, both verbal. The first offer included
a trade and the second was for about $700,000 but was subject to
the sale of the purchaser's home. Mr. Rychjohn did not
consider these offers "appropriate".
[17] During
the time the Eldorado house was listed for sale, Investments
experienced financial difficulties with cost overruns on its
projects. A mortgage was registered against the Eldorado house to
secure a line of credit to Investments for $500,000 to fund its
projects. The house was also used by Investments as security, to
the extent of $150,000 for a letter of credit and bonding on a
project.
[18] Mr.
Rychjohn estimated he spent about a dozen days a month, on
average, in Kelowna from 1986 on. Usually he would travel from
Saskatoon by car; a trip took thirteen hours. On the way he would
visit projects in North Battleford and Lloydminster and also
attend at the architect's office in Calgary. In Kelowna, he
recalled, he would usually stay at a hotel at a cost of $85 to
$150 per night. All expenses were paid by Investments. When the
Eldorado home was built he stayed on that property to save hotel
costs, but also, at times, stayed at a hotel. Mr. Rychjohn
could not produce logs of his travel to Kelowna or his stays at
the Eldorado house.
[19] On a few
occasions, when Mr. Rychjohn went skiing in the Kelowna area, he
also stayed at the Eldorado house. To relax after work he would
"unwind" on an "old" boat docked at the
Eldorado house. The family did use the house from time to time.
His son spent a week at the house in 1991 while working in
Kelowna and a daughter stayed at the Eldorado house for several
days subsequent to the years under appeal when her house was
being built in Kelowna.
[20] The
beneficiaries and owners described on the insurance policy for
the Eldorado house were Mr. and Mrs. Rychjohn. This, Mr. Rychjohn
testified, was a mistake. He could not say who paid the premiums
for the policy.
[21] Invoices
issued to Mr. Rychjohn for the house were paid by the project, he
said. I assume he meant the Bridgewater joint venture.
[22] Mr.
Rychjohn stated that he and Mrs. Rychjohn also built for resale
two homes in Kelowna. One house was built in 1996 and sold for a
substantial profit. The other house was built on Lot 12 in
Eldorado Estates "as a show home" and was also sold at
a profit. Mr. Rychjohn testified that these homes were owned by
him and his wife due to the difficulties he was having with the
tax authorities at the time.
[23] Mr.
Rychjohn acknowledged that he had been convicted of tax evasion
for the years 1989 to 1993 for failing to report income on money
deposited in his and Mrs. Rychjohn's personal bank account by
contractors for Creekside Villas and Creekside Plaza. In 1992
contractors paid Mr. Rychjohn $22,000 out of contracts it had
with Investments. Respondent's counsel asked that I consider
these convictions in assessing Mr. Rychjohn's
credibility.
[24] Mr. Bull,
the original realtor engaged by Mr. Rychjohn, was in
semi-retirement at the time of trial. He testified he sold
"primarily high-end residential" properties, but not
exclusively high-end. Mr. Bull said "high-end"
properties during the period 1980 to 1996 sold in the range of
$250,000 to over $800,000, although he could not say whether any
house in Kelowna sold in 1991 for $800,000. The listing price of
$795,000, Mr. Bull recalled, "was probably Mr.
Rychjohn's price but we didn't feel uncomfortable with
the price . . . It was not out of line". Prices
were "picking up".
[25] However,
Mr. Bull could not sell the house notwithstanding that he showed
the property on about 20 to 30 occasions during the 29 months the
property was listed with him. No valuation or appraisal of the
house had been prepared, as far as he was aware. Mr. Bull did not
know that the property was appraised in 1991 at $650,000.
According to Mr. Bull, only one offer for the property was made
while he was listing agent, the offering price of which he could
not recall.
[26] During
the times Mr. Bull visited the property he rarely saw
Mr. Rychjohn and saw only the "bare necessities"
of furniture in the house. The family room contained a television
set, coffee table and chesterfield and only two of the four
bedrooms had a bed. The dining and living rooms were empty.
[27] Ms. Joan
Marie Richter who replaced Mr. Bull as listing agent in
June 1994, is one of the leading real estate agents in
British Columbia. She impressed me as a very highly
qualified, knowledgeable and aggressive agent, much more so than
Mr. Bull. She showed Mr. Rychjohn sales of residential
properties in the Kelowna area during the past year and she
convinced Mr. Rychjohn that the listing price be reduced to
$775,000. Ms. Richter acknowledged that she did not expect to
receive an offer for the asking price; she anticipated receiving
an offer of about $30,000 to $40,000 less.
[28] Ms.
Richter noted that the house was made of brick and there are not
many brick homes in Kelowna. The yard was "meticulous".
She agreed with Mr. Bull that the house was sparsely furnished
and that she rarely saw Mr. Rychjohn on her visits to the
house; she would know he was in Kelowna when she would see his
toiletries.
[29] Until
1993 housing prices in Kelowna were increasing in value. Between
June 1994 and February 1995, the market was "dropping".
Only in 1998-1999 did the market "settle out", she
said. However, Ms. Richter was "grateful" to
obtain the Eldorado house listing since "any lakeshore
listing is a good listing". The listing was renewed with Ms.
Richter in October 1994 but the listing price was reduced to
$749,900 on her recommendation.
[30] At least
two offers to purchase were received by Ms. Richter, one on
November 28, 1994 for $650,000, which she considered low. The
offer was eventually increased to $671,000, but then cancelled.
The second offer was made on February 8, 1995 for $700,000. After
a counter-offer was made by Investments, the prospective vendor
and purchaser agreed on a price of $690,000, subject to the sale
of the purchaser's home. Mr. Rychjohn would also have free
use of the purchaser's home for two months after the sale and
thereafter would pay rent. (Apparently, Investments was about to
start construction at the time of a new development near
Kelowna.) The transaction closed on March 31, 1995.
[31] Mrs.
Rychjohn testified that she had absolutely no interest in moving
from Saskatoon to Kelowna. She denied having "input"
into the design or furnishings of the Eldorado house as she did,
for example, for the family's main residence in Saskatoon and
recreation residence at Turtle Lake. While she may have made some
suggestions for wallpaper or landscaping, the layout of the house
was not what she desired. For example, there was no eating area
in the kitchen. As far as she was concerned, her husband built
the house "to flip it and make money".
[32] When she
visited Kelowna with her husband or for business - she
managed Investment's card store in Kelowna - or to
visit her daughter, Mrs. Rychjohn would stay at the Eldorado
house only occasionally. Usually she would stay with her
daughter. (I assume this would be after 1992.) She did not
consider the Eldorado house her home.
[33] Mrs.
Rychjohn did not enjoy being cross-examined by respondent's
counsel. She could not confirm that her daughter had her own
house only in 1993. She did confirm she travelled to Kelowna by
air on about eight occasions between June 1991 and October 1992.
At other times she drove with Mr. Rychjohn. She could not
recall if she suggested a landscape design for the house. She
could not recall if it was she who chose the moulding or the
windows for the house. She remembered meeting an interior
designer, Ms. Lisa Howard, to make the home more sellable but
could not recall anything concerning design details.
[34] Lisa
Howard operated an interior design business in Kelowna when she
was visited in her studio by Mr. Rychjohn on November 19, 1989.
She attended at the Eldorado property the next day. Mr. Rychjohn
had told her he was building a house but there were design
problems, in particular with the master bedroom and family room.
She understood that she was engaged by Mr. Rychjohn to
"correct architectural issues". Ms. Howard believed
that he was building a vacation home. Mr. Rychjohn asked her to
ensure various rooms "functioned well", that there was
a view of the lake, that lighting, the television and the
fireplace be properly placed in the family room. Mr. Rychjohn was
specific with the changes he wanted.
[35] The Crown
suggested through Ms. Howard's evidence, that
Mr. Rychjohn's interest in the Eldorado property was
personal. For example, the house exterior and the fireplace were
made of tyndelstone, a stone native to Saskatchewan and not used
in Kelowna. Ms. Howard declared she never worked with
tyndelstone. She said she "completely redesigned" the
ensuite bathroom. However, she had not yet met Mrs. Rychjohn. She
said she had the "impression" Mrs. Rychjohn was
involved "and her preferences were being considered".
Ms. Howard recalled that Mr. Rychjohn made many references
to Mrs. Rychjohn and "his and Pat's
preferences". On some occasions, he told Ms. Howard he
would defer to his wife. It was only on June 12, 1990, that she
met with both Mr. and Mrs. Rychjohn to make final decisions and
to receive final instructions.
[36] Ms.
Howard's invoices for services, starting on January 1990,
were sent to Mr. Rychjohn, although accompanying explanatory
notes, also addressed to Mr. Rychjohn, referred to both Mr.
and Mrs. Rychjohn or Mr. Rychjohn alone. Various proposed designs
were also addressed to Mr. and Mrs. Rychjohn.
[37] Mrs.
Rychjohn, according to Ms. Howard, had input with respect to
colouring in the house. She chose the wallpaper, tiles, carpets
and counter tops, for example. Ms. Howard prepared notes for Mrs.
Rychjohn "asking for her input".
[38] Mr.
Rychjohn met on several occasions with Ms. Howard and
Ms. Howard said she had "one main meeting" with
both Rychjohns. Ms. Howard's impression from the
meetings was that the house was being built for use primarily as
a vacation home for the Rychjohns.
[39] Ms.
Howard did not recall Mr. Rychjohn ever informing her that the
house was built to test the high-end market. She had previously
designed homes built for speculation. In these cases the
developer and she would generally discuss the target market and
she would get a budget. She would never meet the developer's
wife. In cross-examination she agreed that in the
construction of a "principal residence" there is input
from both husband and wife but with respect to the Eldorado
residence, she conceded that input was "mainly from Mr.
Rychjohn".
[40] Mr.
Randall Rhode is a masonry contractor in Kelowna. He moved to
Kelowna from Saskatoon in 1989 and started a business known as
Cana Masonry ("Cana"). Mr. Rhode's father had done
business with Mr. Rychjohn in Saskatoon and the appellant asked
if he was interested in bidding for work on a condominium known
as Creekside Villa being built by Investments and for the two
houses on Lots 5 and 6 at Eldorado Court.
[41] Mr. Rhode
originally was engaged to clad the exterior of the Eldorado Court
residence in brick and install three masonry fireplaces. Later,
extras were added. Mr. Rhode stated an all brick house was
"not usual in Kelowna". He had done work on five other
houses in Eldorado Court, but the brickwork was minor.
[42] The
"extras" that were added included different size
windows which Mr. Rhode believed, came from the Creekside
Villa project since they were identical to the windows at the
condominium project. Mr. Rychjohn also built the steps, sidewalk
and driveway of the house with "rose" bricks. As Mr.
Rhode made improvements, Mr. Rychjohn would ask him to do
additional work on the house. Mr. Rychjohn told Mr. Rhode
the house was to be his summer residence.
[43] Mr. Bruce
Evans, a business auditor with Revenue Canada at the time, was
assigned the appellants' files. He met Mr. Rychjohn in 1993
and reviewed the corporate records of Investments, including
invoices. In reviewing certain invoices of January 12, 1990, Mr.
Evans "took notice that the house was probably built for
personal use". He investigated whether the house was
transferred from the joint venture to Investments at fair market
value. He observed that the appellant treated the Eldorado house
in the same manner as the house at Turtle Lake. He also noted
that Investments purchased a boat for $9,235.
[44] Mr. Evans
testified that on September 23, 1993, Mr. Rychjohn informed him
that he had plans to move to Kelowna since all his developments
at the time were in Kelowna and Kelowna was "booming".
However, Mr. Rychjohn did not say that the Eldorado house was the
house he planned to live in when in Kelowna.
[45] Mr. Evans
explained the benefits assessed to Mr. Rychjohn included an
amount calculated using prescribed rates of interest on $650,000,
the value of the property, and operating costs such as insurance,
utilities, repairs and, for 1991, loan commitment fees.
[46] Lionel
Lambie, a chartered accountant, is the accountant for both
appellants. He confirmed that the Eldorado house was built as a
joint venture and transferred to Investments in 1991 for about
$525,000. The house was treated as a capital asset in the joint
venture but treated as inventory when it was disposed of by
Investments in 1995. According to a summary of Investments'
tax return for its first year ending on December 31, 1991, the
joint venture apparently deducted capital cost allowance with
respect to the Eldorada house at December 31, 1989. Expenses
on the Eldorado house and a vacation residence of the Rychjohns
at Turtle Lake were paid by Investments. The Minister disallowed
those deductions and added back the amounts deducted to income in
1991. These included costs of insurance, repairs and maintenance
and taxes.
[47] Mr.
Clifford Worman, a resident of Kelowna and a contractor, worked
with Mr. Rychjohn since 1990 and was a Project Supervisor,
reporting to Mr. Rychjohn, on a condominium project in
Kelowna called Creekside Villas.
[48] In Mr.
Worman's view, the Eldorado house was "poorly
located" on its lot. The interior of the house was
essentially empty with "student-like furnishings". At
the "odd time" he saw Mrs. Rychjohn at the house and
during one summer Ryan Rychjohn, one of Mr. Rychjohn's
children, lived in the house.
[49] If I find
that Mr. Rychjohn benefited personally from his use of the house,
it is important that I determine the value of the house at a
given date. Both parties led evidence as to the value of the
Eldorado property in 1991. The Crown's valuation date is June
26, 1991. The appellant's witness appears to have considered
the value of the property during the period of 1989 to 1991.
[50] Mr.
Donald H. Gordon testified on behalf of the appellant. He is a
residential real estate appraiser with Okanagan/Kootenay Property
Services Inc. of Kelowna. His mandate was to assist me "in
determining whether or not the previous recorded 1995 transaction
of the subject property was reasonable under market conditions at
that time". He was to review past appraisal reports
completed by his firm on the Eldorado property and to re-examine
the past market trends in the Kelowna area. He, himself, did not
value the property. He opined that the market conditions at the
time supported the listing prices and the recorded transaction.
He had visited the site on January 14, 1991.
[51] According
to Mr. Gordon, the property was listed for sale with Mr. Bull
from December 15, 1992 to March 31, 1993 for $795,000 and then
relisted from April 19, 1993 to October 31, 1993 and
November 1, 1993 to February 28, 1994. He did not mention in his
report that the property was listed for 14 months before December
1992 but did not sell.
[52] On June
9, 1989, Mr. Gordon reviewed, and apparently approved, an
appraisal for mortgage financing of the Eldorado residence by
Mr. Allan Ramsay of his firm, as at May 25, 1989, at
$575,000. The appraiser wrote that the "only known sale to
break the $500,000 mark" was one of the comparables he used
in his report. The comparable was clearly a superior property due
mostly to its area of 2.5 acres and 200 lineal feet waterfront.
Nevertheless, he gave a range in value to the Eldorado property
between $555,000 and $605,000, after adjustments. The appraiser
did not mention that the property was subject to a substantial
easement that, according to the respondent's expert witness,
occupied 18.11 per cent of the property's area.
[53] In a
letter to the Royal Bank of Canada on January 16, 1991, Mr.
Gordon estimated the market value of the Eldorado property, two
days earlier, at $650,000, using comparable sales.
[54] Two years
later Mr. Gordon advised the Royal Bank of Canada that he
estimated the market value of the property, as at December 17,
1992, "in the $800,000 +
range". Mr. Gordon did not inspect the property at this
time, viewing it only from the street. He compared the property
to four other properties, one of which is on Eldorado Court and
sold in January 1992 for $990,000 and in August of the same year
for $907,000; this property is approximately 1,500 square feet
larger than the Eldorado property and has a superior lot size (88
feet lake frontage). Mr. Gordon adjusted the Eldorado
property for size to arrive at the value of $800,000. He also
stated in his report that the property was listed for $795,000
and the listing broker, who I assume was Mr. Bull, advised that
an offer of $720,000 was rejected earlier in the year. Mr. Bull
could not recall such an offer.
[55] According
to Mr. Gordon, selling prices of both average and medium homes in
Kelowna increased between 1990 and June 1993 and then declined
during the rest of 1993. Medium housing prices increased by over
30 per cent during the time the Eldorado house was listed for
sale, according to a graph presented by Mr. Gordon, but the
Eldorado did not sell. Mr. Gordon could not establish that the
price of "high-end" residential properties was
increasing at a similar rate to moderately priced residences.
[56] George
Ward, a real estate appraisal co-ordinator for Canada Custom and
Revenue Agency ("CCRA") testified as an expert for the
Crown. His view was that the value of the Eldorado property as of
June 26, 1991 was $625,000. Mr. Ward's report is dated
April 25, 2000, however, he first inspected the property on
December 7, 1993. According to Mr. Ward, real estate prices in
Kelowna rose sharply in 1989 and activity became very strong
until early 1990. Prices continued to rise during 1990, 1991 and
into 1992, but at a slower pace than during the last half of
1989.
[57] Mr. Ward
estimated the value of the land, after adjustments for the
property's larger size to the comparable properties, and for
the easement, at $4,275 per front foot, that is, $278,750 as
vacant land. He added $358,800 for improvements (on a cost basis)
to the vacant land for an aggregate value of $637,550. He also
compared the sales of four other lots and after making
adjustments to each comparable property for age, condition,
location and lake frontage, concluded the value of the Eldorado
property in 1991 was $625,000; the cost approach value of
$637,550 was, in his view, the "upper-end of the residential
market".
[58] Mr. Ward
also filed a rebuttal to Mr. Gordan's report. He questioned
Mr. Gordon (and Mr. Ramsay's) application of the
easement and their lack of awareness of the listing of the
property, among other things. Mr. Ward was of the opinion
higher-end properties increased at a lower than average rate
during the period January 1991 to December 1991 and that the 30
per cent increase in prices to the end of 1991 was too great.
[59] Mr. Ward
also questioned Mr. Gordon's appreciation of the easement. In
his May 8, 2000 report, Mr. Gordon referred to the easement as
"the massive right-of-way impending development of the
site" suggesting it covers two-thirds of the property. In a
letter Mr. Gordon wrote to the Royal Bank of Canada on February
19, 1990, which he did not refer to in his report, he estimated
the market value of Lots 5 and 6 were "in the $650,000
+range", provided the improvements
are made in accordance with the submitted plans and
specifications. The easement is not mentioned. In the subsequent
letter of January 16, 1991, Mr. Gordon refers to the
easement but minimizes its effect on value since it "does
not interfere with the enjoyment of the [property]".
Apparently, Mr. Gordon had a change of mind. I have more
confidence in Mr. Ward's report and his evidence and I give
his evidence and conclusions more weight than those of Mr.
Gordon. I agree that the value of the Eldorado house on June 26,
1991, was in the range of $625,000 to $650,000 and that the value
did not materially change from that time to the end of 1992.
[60]
Subsection 15(1) provides that:
Where at any time in a taxation year a benefit is conferred on
a shareholder . . . by a corporation . . . the amount or value
thereof shall . . . be included in computing the income of the
shareholder for the year.
[61] The
respondent's position is that the Eldorado house was built
not to test any high-end market, but as a vacation home for the
family. Counsel referred to Mr. Rychjohn's acknowledgment
that he could have acquired information about the high-end market
from knowledgeable people in Kelowna.
[62] Mr.
Rychjohn is a very confident, aggressive and dynamic individual,
always on the move. I found him to be pleasant in Court; he
constantly tried to advance his view of the appeals to ensure
that I did not misunderstand his evidence or his position. While
Mr. Rychjohn has had some problems with the fisc in the past, I
do not believe it affected the tenor of his evidence before me. I
believe that over the years - it is almost ten years
between the years under appeal and the trial date, years in which
he was dealing with the tax authorities on several matters
- Mr. Rychjohn has succumbed to his own salesmanship and
has accepted as fact certain things that I find difficult to
accept.
[63] Firstly,
I cannot find that the purpose of building the Eldorado house was
to test the market for high-end homes in Kelowna. There are more
economic ways, as Mr. Rychjohn acknowledged, to determine whether
such a market exists. Investments depends very much on highly
leveraging its construction activities; such a corporation
normally would not utilize funds available to it to test a market
in which it had no experience. There is no evidence that
Investments tested a market in this manner before it since 1989.
I infer that if this really was the intent of Mr. Rychjohn, he
would have called Mr. Van Norman to testify as what, precisely,
their intentions were with respect to Lots 5 and 6.
[64] It may
well be - and there is no conclusive evidence before me
- that Mr. Rychjohn did intend to build the Eldorado
house for him and his family but met very strong resistance from
Mrs. Rychjohn who wished to remain in Saskatoon. He then sought
to dispose of the property at a price in excess of what could be
expected based on market conditions at the time. His asking price
while the property was listed with Mr. Bull was too high and I
suspect he knew it. When he finally decided to sell the property
he retained a knowledgeable real estate agent who knew the
market.
[65] Whether
Investments built the house to test the market for high-end homes
or whether the house was built for personal use, the fact remains
that during 1991 and 1992 Mr. Rychjohn and members of his family
used the house for their personal enjoyment, although, at times,
Mr. Rychjohn used the house because he was required to be in
Kelowna for business. In both cases, whether the house was owned
by Investments to test the market or owned by Investments for the
personal use of a shareholder, the house was property owned by
Investments and used by its shareholder. In both cases, the
corporation has conferred a benefit on Mr. Rychjohn by allowing
him to use corporate property for his own benefit and the amount
or value of the personal benefit is to be included in his income
in accordance with subsection 15(1) of the Act.
[66]
Appellants' counsel argued that Mr. Rychjohn's use of the
house was not a benefit since he was required to be in Kelowna to
supervise the development and construction business of
Investments. There was a business use to the house, unlike the
situations in The Queen v. Fingold[2] and Youngman v. The Queen[3].
[67] The
personal use of the Eldorado house by Mr. Rychjohn was more than
incidental. In my view the primary purpose of acquiring Lot 5 and
building the home was for personal use. Mr. Rychjohn's
interest in the house, his input in changing design of the house,
choosing colours, for example, indicates that the house was being
prepared for him and his family's personal use and enjoyment.
He used the house and members of his family used the house for
non-business purposes. The house was available to them when they
wished. This is not a situation where the corporate owner of
property places very strict conditions on the use of the property
and it ensures any use is for the benefit of the corporation.
[68] There is
evidence however that on many occasions - the number is not
in evidence - Mr. Rychjohn roomed at the house, rather than
a hotel, when he was in Kelowna for business. Mr. Rychjohn
estimated he spent about 12 days a month at the Eldorado house
during the years in issue for the benefit of Investments, saving
Investments the cost of his lodging at a hotel in Kelowna. There
is no evidence as to cost of hotels in Kelowna in 1990 and 1991;
Mr. Rychjohn estimated the cost at between $85 to $150 per
night. Taking judicial notice of hotel rates during my travels in
Canada over the years, I believe the high end of the rates
Mr. Rychjohn estimated for 1991 and 1992 is excessive. I am
prepared to value Investments' savings (and reduction in the
benefit to Mr. Rychjohn) by having Mr. Rychjohn's stays
at the Eldorado house be calculated at $85 per night at 10 nights
a month for 10 months, that is, 100 days per year, or $8,500 in
each of 1991 and 1992 (notwithstanding an occupancy permit was
obtained in March 1991); I would therefore allow
Mr. Rychjohn's appeals by referring the assessments back
to the Minister for reconsideration and reassessment only to
reduce the benefit in each year by $8,500.
[69] The
appeals of Investments are dismissed.
[70] One set
of costs for the four appeals is awarded to the respondent.
Signed at Ottawa, Canada, this 26th day of September 2001.
"Gerald J. Rip"
J.T.C.C.
COURT FILE
NO.:
98-2695(IT)G and 1999-490(IT)G
STYLE OF
CAUSE:
Lawrence Rychjohn v. The Queen
Rychjohn Investments Ltd. v. The Queen
PLACE OF
HEARING:
Regina, Saskatchewan
DATE OF
HEARING:
December 12, 2000
REASONS FOR JUDGMENT BY: The
Honourable Judge Gerald J. Rip
DATE OF
JUDGMENT:
September 26, 2001
APPEARANCES:
Counsel for the Appellant: Reynold Robertson
Counsel for the
Respondent:
Elaine Lee
COUNSEL OF RECORD:
For the
Appellant:
Name:
Reynold Robertson
Firm:
Robertson, Stromberg
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
98-2695(IT)G
BETWEEN:
LAWRENCE RYCHJOHN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of Rychjohn Investments Ltd. 1999-490(IT)G on
December 12, 2000, at Regina, Saskatchewan, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the
Appellant:
Reynold Robertson
Counsel for the
Respondent:
Elaine Lee
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1991 and 1992 taxation years are allowed and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment only to reduce the benefit
in each year by $8,500.
One set
of costs for the appeals of Lawrence Rychjohn and
Rychjohn Investments Ltd. is awarded to the
respondent.
Signed at Ottawa, Canada, this 26th day of September 2001.
J.T.C.C.
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