Date: 20010213
Docket: 2000-2763-IT-I; 2000-3576-IT-I; 2000-3577-IT-I
BETWEEN:
MARIANNE MINTENKO, RICHARD MINTENKO, MINTENKO AND CO HOLDINGS
LTD.
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1]
These appeals pursuant to the Informal Procedure were heard
together on common evidence by consent of the parties at Prince
George, British Columbia on January 24, 2001. Richard Mintenko
testified and called Mark Duthie, Dean McDonald, Russell
Weller and Wayne Denluck. The Respondent called Daniel Doyle, the
auditor on the file. There are two issues in dispute, from which
all appeals follow. They are described in paragraph 3 of the
Reply to Richard Mintenko's Notice of Appeal.
[2]
Paragraphs 1 to 7 of this Reply read:
1.
In respect of the allegations of fact contained in the Notice of
Appeal, he admits that Revenue Canada has not accepted that
Mintenko and Co Holdings Ltd. (the "Company") operated
a Charter Boat business with an expectation of profit.
2.
He denies all the other allegations of fact contained in the
Notice of Appeal.
3.
In reporting his income for the 1996 and 1997 taxation years, the
appellant did not include any amount in respect of benefits for
the use of a yacht owned by the Company and interest payments he
caused to be credited to his children's shareholder loan
accounts.
4.
By way of Notices of Reassessment dated May 31, 2000, the
Minister of National Revenue (the "Minister") included
amounts of $21,570.00 and $20,173.00, respectively, in the
appellant's income for the 1996 and 1997 taxation years.
5.
In so reassessing the appellant, the Minister relied on the
following assumptions of fact:
a)
in 1996 and 1997, was a shareholder of the Company;
b)
the Company is a corporation with a year end of February 28 and
its shareholders are as follows:
1)
the appellant,
2)
Marianne Mintenko ("Marianne"), the appellant's
spouse,
3)
Geoffrey Mintenko ("Geoffrey"), the son of the
appellant and Marianne, born December 25, 1983,
4)
Christina Mintenko ("Christina"), the daughter of the
appellant and Marianne, born May 27, 1985, and
5)
Kim Mintenko ("Kim"), the daughter of the appellant and
Marianne, born June 3, 1988;
c)
in the years in question, the Company operated a logging business
and an accounting business;
d)
in 1996, the Company traded in a 24 foot yacht, which it owned,
for a 26 foot 1996 Bayliner Cierra Express Yacht (the
"Yacht");
e)
in 1996, the Company began a boat charter activity (the
"Activity");
f)
before starting the Activity, the Company prepared no business
plan to determine if it would be profitable;
g)
the Yacht was only used for 20 days in 1996, 25 days in 1997
and 13 days in 1998;
h)
the Activity can only be carried on for part of the year;
i)
the Yacht is stored in Prince George, where the Company's
shareholders live, and the Activity takes place in Prince Rupert,
which is a 13 hour drive towing the Yacht;
j)
the trip from Prince George to Prince Rupert costs $250.00 in
fuel;
k)
the Company does not advertise the Activity;
l)
all charters in the period under review have been to family
members and friends of the appellant;
m)
the rates charged by the Company are lower than market rates;
n)
the appellant is the sole operator of the Yacht and also is in
charge of operating the accounting business in Prince George, as
well as all the other businesses carried on by the Company;
o)
the expenses of each trip are divided by the number of persons
onboard, including the appellant, and then the Company invoices
each person for that amount, which is reported as revenue to the
Company;
p)
the revenue from the Activity is not sufficient to cover the
interest expenses of the Yacht;
q)
the Company does not plan any material changes to the Activity in
the near future;
r)
the Company did not have a reasonable expectation of profit from
the Activity during the 1996 and 1997 taxation years;
(r)
the expenses claimed in relation to the Activity were personal or
living expenses of the appellant;
(s)
in 1991, the appellant caused an amount totalling $11,602.32 to
be taken out of the trust accounts of Geoffrey, Christina and Kim
to be used by the Company to buy a skidder for its logging
operation;
(t)
credits of $5,363.68, $4,218.79 and $2,019.85, respectively, were
made to the shareholder loan accounts of Geoffrey, Christina and
Kim in accordance with the sum that had come out of their
account;
(u)
promissory notes, dated December 31, 1991 and signed by the
appellant on behalf of the Company, were issued to Geoffrey,
Christina and Kim for the amounts taken from their accounts;
(v)
the promissory notes had a 5 year term, expiring on December 31,
1996 (at which time a new note was to be issued) with interest at
the rate of 12 percent per annum payable on December 31 of
every year;
(w)
interest was credited to the shareholders loan accounts of
Geoffrey, Christina and Kim at December 31 of each year from 1991
to 1996;
(x)
the skidder was sold in 1993 and the profit was not reinvested in
the Company but was debited to Marianne's shareholder loan
account;
(y)
the Company has never repaid the loans and new promissory notes
were never issued;
(z)
the Company claimed interest expense in the amount of $5,922.00
in 1997 in respect of interest credited to the shareholder loans
of Geoffrey, Christina and Kim in that fiscal year;
(aa) the
interest expense was not incurred to earn income from a business
or property; and
(bb) the
Company conferred the following benefits on the appellant in his
capacity of shareholder of the Company:
i)
$15,648.00 and $20,173.00 in respect of the use of the Yacht in
1996 and 1997, respectively, and
ii)
$5,922.00 in respect of amounts he caused the Company to credit
to the shareholder loan accounts of Geoffrey, Christina and Kim
in the 1996 taxation year.
B.
ISSUES TO BE DECIDED
6.
The issue is whether the Appellant received the benefits
totalling $21,570.00 in 1996 and $20,173.00 in 1997 from the
Company in the capacity of shareholder, or, alternatively, in the
capacity of employee.
C.
STATUTORY PROVISIONS RELIED ON
7.
He relies on section 9 and subsections 6(1), 15(1), 15(2) and
248(1) of the Income Tax Act, R.S.C. 1985, c. 1
(5th Supp.), as amended (the
"Act").
[3]
The evidence did not refute assumptions 5(a), (b), (c), (d), (e),
(f), (g), (h), (i), (j), (l), (m), (n), (o), (p), (s), (t), (u),
(v), (w), (x), (y) and (z). Assumptions r) and (rr) and (aa) and
(bb) are the subjects of dispute.
[4]
Assumption (k) was disputed because Richard and his witnesses
testified that he keeps a two foot by two foot notice board in
his professional accounting office (where he has conducted an
accounting and income tax practice for years) advertising the
fishing charters. However, Mr. Doyle, the auditor, did not see it
there when he conducted the audit and no one testified to the
dates it was there. As a result, the Court finds that the notice
board was not on display during the years in dispute, and that
the Company did not advertise the activity until after Revenue
Canada's audit began. Since the audit the Company has
endeavoured to attract foreign tourists to its charters by word
of mouth through Richard's acquaintances but, in all other
respects, (q) was not refuted.
[5]
Assumptions (s) and (x) respecting the interest benefit assessed,
require some expansion from the evidence. Marianne was the
trustee. No trust agreement was filed. Richard referred generally
to the trusts as "bare trusts", but there is no
evidence as to what he thinks this means. However, on the
evidence, the transfer of the infant children's trust money
to the Company by Marianne as trustee, was in violation of the
Trustee Act of British Columbia (R.S.B.C. Cap 464, s. 15),
since they did not constitute authorized trust investments. In
these circumstances, the first money that the Company paid back
to Marianne should clearly be applied, both in law and in fact,
to the infant children's trusts and invested by her into
lawful trustee investments for the children's trusts and
benefit.
[6]
Marianne and the Company both knowingly used the funds Marianne
held in the children's trusts to purchase the skidder. The
payment to the Company and purchase of the skidder constituted a
wrongful use of the children's trust funds. Marianne received
promissory notes for the payments. When the skidder was sold, the
Company paid Marianne's shareholder account the proceeds of
the sale. On the evidence, that amount was more than enough to
satisfy the promissory notes issued for the trust investments. By
this means, the Company disposed of the traceable trust monies to
the original trustee, Marianne, and those trust monies were gone
from the Company. (See Waters, Law of Trusts in Canada,
2nd Ed., pp. 1037 et seq.)
[7]
On the evidence, the Court finds that the entire series of
transactions with the children's trust monies was
accomplished and directed by Richard, the accountant and
directing mind of the business affairs of his family and the
Company. Richard continued to record interest payable from the
Company to the children's trusts on the Company records after
Marianne was paid. Revenue Canada disallowed these deductions and
treated them as a benefit conferred on Richard.
[8]
The Company knew the entire series of transactions as did
Richard. The Company paid the traceable trust money from the sale
of the skidder to Marianne and Richard and the Company knew that.
On Richard's direction the Company continued to claim an
interest expense respecting these funds and credited the
children's shareholder loan accounts accordingly. The only
directing mind that then knew and understood this was
Richard's. He knew what had happened, but he persisted in
doing this. But Richard never received the funds or realized any
benefit. The Company falsely book-entered the interest to the
children's benefit and retained the funds itself for its own
benefit. Similarly, the debit to Marianne's account was a
book entry. It should be noted that Richard did all the books. In
Ed Sinclair Construction & Supplies Ltd. et al v.
M.N.R., 92 DTC 1163 at 1167, Bowman, J. said:
...
Management bonuses
In 1979, 1980 and 1981 the Appellant made a number of book
entries accruing bonuses to management. In subsequent years it
reversed some of these bonuses. The Minister disallowed them on
the basis that they were contingent liabilities or reserves and
were not allocated to any specific individual.
I have seen no evidence that they were liabilities at all. The
Appellant or its accountant seems to have followed the practice
of "accruing" and deducting bonuses as at the end of
the fiscal period and reversing them in a later year, apparently
in an attempt to comply with subsection 78(3) of the Act
as it read in those years.
The determination of income must have its foundation in
economic reality and genuine transactions. It cannot be based
upon journal entries made after the event at the discretion of
accountants where there is no intention of creating genuine legal
relationships.
...
That is the case here. Therefore, the Company is not entitled
to deduct the interest expense in 1997. But Richards appeal is
allowed because the Company did not confer a benefit on him of
the $5,922.00 in respect of amounts he caused the Company to
credit to shareholder accounts on account of Geoffrey, Christina
and Kim in the 1996 taxation year. He did not receive, nor did he
benefit.
[9]
Richard had a personal boat and fished for personal enjoyment and
then had the 24 foot yacht and fished for personal enjoyment
before he purchased the 26 foot yacht in question for around
$120,000. His wife and children did not enjoy this hobby, but he
did and does. He keeps the 26 foot yacht in his yard in Prince
George and services and maintains it himself. Thus, it is a
personal pursuit or hobby within the meaning described in Tonn
et al. v. Her Majesty the Queen (F.C.A.)
96 DTC 6001. Richard testified that during the years in
dispute he was just starting the charter business and that he
deliberately charged fees below cost to attract business and to
create a market. However, at the maximum, he operates the
charters for three months per year when his accounting business
is slow, whereas Mr. Doyle testified that professional charters
from Prince Rupert (where Richard charters) operate for at least
six months per year in order to realize a profit.
[10] Therefore
the evidence is that, using the criteria set out by Dickson, J.
in William Moldowan v. Her Majesty the Queen (S.C.C.)
1978, 1 S.C.R. 480, Richard had fished, but had no training or
experience in the charter business; he had no plan, despite the
fact that he holds himself out as an accountant; he made no
profit projections until after the audit began; and he has not,
to this date, ever shown a profit after charging capital cost
allowance.
[11] Richard
submitted Exhibit A-2 projecting a profit for the charter
activity in 2000 based upon charging no capital cost allowance,
and based upon maintenance and repair expenses of $131 in 2000
and a maximum thereafter of $250 per annum; the $250 maximum for
the $120,000 yacht borders on the ridiculous. His hauling charge
of fuel only made no allowance for the real cost of hauling the
yacht back and forth from Prince George to Prince Rupert
including maintenance and repairs of the haul truck. For these
reasons, the projections are "pie in the sky".
Similarly he projects further income at $16,000 per annum in 2001
and $20,000 per annum thereafter with no real evidence to support
the projections after four years of alleged operations.
[12] In these
circumstances, the following quotation from Tonn at pages
6009 and 6010 is applicable:
"A closer look at this jurisprudence will illustrate that
this is the approach now taken in most of the cases. The cases in
which the "reasonable expectation of profit" test is
employed can be placed into two groups. One group is comprised of
the cases where the impugned activity has a strong personal
element. These are the personal benefit and hobby type cases
where a taxpayer has invested money into an activity from which
that taxpayer derives personal satisfaction or psychological
benefit. Such activities have included horse farms,30
Hawaii and Florida condominium rentals,31 ski chalet
rentals,32 yacht operations,33 dog kennel
operations,34 and so forth. Though these activities
may in some ways be operated as businesses, the cases have
generally found the main goal to be personal. Any desire for
profit in such contexts is no more than a "pious wish"
or "fanciful dream".35 It is only a
secondary motive for having set out on the venture. What is
really going on here is that the taxpayer is seeking a tax
subsidy by deducting the cost of what, in reality, is a personal
expenditure."
That is the case here as well.
[13] For these
reasons:
(a)
The Company's appeals are dismissed.
(b)
Richard's appeal is allowed respecting the benefit assessed
of $5,922 in the 1996 taxation year.
(c)
Marianne's appeal is allowed insofar as the appeal granted to
Richard for 1996 might affect her assessments.
Signed at Ottawa, Canada, this 13th day of February, 2001.
"D.W. Beaubier"
J.T.C.C.
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