Date: 19990611
Docket: 97-1713-IT-G
BETWEEN:
DONALD TAYLOR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This appeal arises from a Notice of Reassessment relating
to the 1990 taxation year, in which the Minister of National
Revenue (the "Minister") added management fees and
shareholder's benefits, in the amount of $5,000 and $15,000
respectively. The Appellant objected to the reassessment in a
Notice of Objection dated September 11, 1995. The objection
was later confirmed by the Minister via a Notice of
Confirmation.
FACTS
[2] A Partial Statement of Agreed Facts was filed. It
reads:
The Appellant, Donald Taylor and the Respondent, Her Majesty
the Queen, by her solicitor, agree to the following facts
provided that:
1) such admissions are made for the purpose of these
proceedings only; and
2) the parties are permitted to adduce additional evidence
which is not contrary to these agreed facts:
a) at all times material hereto, the Appellant as a 50%
shareholder and a Mr. Edward McKibbon was a 50% shareholder of
Hall Industries Ltd., ("the Corporation");
b) in 1989 the shareholders and the Corporation agreed in
principle to transfer ownership of 8 hectares of land, located at
Lower Derby, New Brunswick and on or about September 25, 1990 the
Corporation filed the appropriate documentation to transfer its
ownership of 8 hectares of land, located at lower Derby, New
Brunswick, to the following people:
- Jonathan Taylor (son of Appellant) 4 hectares
- Edward McKibbon (shareholder) 1 hectare
- Scott McKibbon (son of shareholder) 1 hectare
- Kim McKibbon (daughter of shareholder) 1 hectare
- Tammy McKibbon (daughter of shareholder) 1 hectare
c) the transfer of the land was at the direction of, or with
the concurrence of the Appellant;
d) at all material times the Appellant and his son, Jonathan
Taylor, were not dealing at arm's length;
e) in the 1990 taxation year the Corporation reported the
transfer by showing deemed proceeds of $10,000.00 as the value of
the land transferred;
f) in transferring the land the Corporation reported a Capital
Loss of $31,000.00 and Management fees to the shareholders of
$10,000.00;
g) of this $10,000.00 the Appellant received a $5,000.00
Management fee from the Corporation, as did Mr. McKibbon, for the
transfer of the land; and
h) in the Appellant's return of income for the 1990
taxation year, the Appellant did not report or include in income
the $5,000.00 Management fee.
[3] Hall Industries Ltd. ("Hall") was a corporation
of which the Appellant was a 50% shareholder. On November 9,
1978, Hall purchased land located at Lower Derby, New Brunswick,
which included two mill buildings, a warehouse and approximately
eight hectares of land, for a purchase price of $41,000. All the
buildings on the property were destroyed by two fires occurring
in 1980 and 1986.
ISSUES
[4] The issues are:
1. what is the fair market value of the land in question at
the time of the transfer? and
2. did Hall confer a benefit upon the Appellant in his
capacity as a shareholder, pursuant to subsection 15(1) of
the Act in the 1990 taxation year?
THE SUBMISSIONS
[5] The Appellant submits that Hall tried unsuccessfully to
sell the property between 1986 and 1990. At that time, the land
had remnants of the burned buildings and was overgrown with
brush. In September of 1990, Hall subdivided the land and
transferred the lots to various individuals, including the
Appellant's son, Jonathan Taylor, who received four hectares
of the land in question. The Appellant submits that he contacted
appraisers who informed him that it would not be possible to
determine the value of the land on the date of transfer, as it
was impossible to determine the condition of the land for
appraisal purposes. He also submitted that there was no
comparable sales in the area.
[6] The Minister submits that the transfer of the land to
Jonathan Taylor was at the direction or with the concurrence of
the Appellant and that the Appellant and his son were not dealing
at arm's length at the time of the transfer. Hall reported
deemed proceeds in the amount of $10,000 in relation to this
transfer and reported a capital loss of $31,000 in the 1990
taxation year. In addition, Hall reported management fees paid to
the shareholders in the amount of $10,000. The Minister submits
that at the time of the transfer the fair market value of the
eight hectares of land was $68,900. It is submitted that the land
transferred to the Appellant's son had a fair market value of
no less than $15,000 and that no consideration was given by
either the Appellant or his son in relation to this transaction.
The Minister maintains that the true fair market value was
$20,000. Consequently, the Minister submits that Hall conferred a
shareholder's benefit upon the Appellant in the amount of
$15,000 and that the Appellant received a management fee in
relation to the transfer of the land from Hall in the amount of
$5,000 in the 1990 taxation year.
ANALYSIS
FAIR MARKET VALUE
[7] The Minister submits that the fair market value of the
land in question was at least $15,000 at the time it was
transferred to the Appellant's son. The Appellant does not
accept this contention and has put the fair market value of the
property into issue.
[8] In an attempt to establish the fair market value, counsel
for the Minister has filed an expert report from
D.G. Stilwell, regarding the appraisal of the land. The
Appellant, on the other hand, has submitted that he was unable to
get an appraisal due to the difficulty in determining the
condition of the land. In Ample Investments Ltd. al. v.
M.N.R., 90 DTC 1748 (T.C.C.), Brulé J.
addressed the difficulties which arise when different valuation
methods are used to appraise property. He stated at
page 1750 that:
In trying to account for the differences in valuations in
addition to explanations given or omitted one must consider the
source of the valuations.
[9] The Court is cognizant of the fact that the comparables
are not exact and therefore adjustments have been made to account
for the differences between the properties. The weight attributed
to the appraiser's evaluation will depend on the techniques,
factors and objective sources employed by the appraiser.
[10] The Appellant asserts the land in question could not be
sold and the value of the land was diminished to zero because of
the value of the site clean-up problems and costs. He
specifically referred to concrete abutments and foundations not
being capable of simple removal and other environmental
concerns.
[11] The Minister's evidence was, as indicated, a
qualified appraiser capable of giving expert opinion as to real
estate appraisal value. The appraisal report used the comparable
land sales method as the most reliable to determine an estimate
of land value (at page 18):
Eight sales have been analyzed in order to arrive at an
indication of market value for the subject property as of
September 25, 1990.
[12] The appraiser's expert report put in evidence
was:
As a result of the analysis and interpretation of the data
gathered, my estimate of the retrospective market value of the
subject property is as follows:
|
November 9, 1978
|
Nineteen Thousand Eight Hundred Dollars
($19,800)
|
|
|
|
|
September 25, 1990
|
Ninety-Three Thousand Four Hundred Dollars
($93,400)
|
[13] In essence, the Appellant states the appraisal is wrong,
the appraiser did not allow for significant site development
impediments.
[14] The onus is on the Appellant to show the Minister's
assessment is in error. To simply assert the value was zero and
site development problems existed in the absence of any other
significant acceptable evidence does not dislodge the
Minister's assumptions.
CONCLUSION
FAIR MARKET VALUE
[15] I conclude at the time of transfer the four hectares
parcel of land transferred to the Appellant's son, Jonathan,
had a fair market value of not less than $15,000 and that the
Minister's assumption that in fact the parcel had a fair
market value of $20,000 has not been dislodged.
INCOME INCLUSION, SUBSECTIONS 15(1) AND 56(2)
[16] Subsection 15(1) of the Act read as
follows:
15(1) Where, in a taxation year, a benefit has been conferred
on a shareholder, or on a person in contemplation of his 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,
(b) the payment of a dividend or a stock dividend,
(c) conferring on all owners of common shares of the
capital stock of the corporation a right to buy additional shares
thereof, or
(d) an action described in paragraph 84(1)(c.1),
(c.2) or (c.3),
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.
[17] And subsection 56(2) of the Act read:
56(2) A payment or transfer of property made pursuant to the
direction of, or with the concurrence of, a taxpayer to some
other person for the benefit of the taxpayer or as a benefit that
the taxpayer desired to have conferred on the other person (other
than by an assignment of any portion of a retirement pension
pursuant to section 64.1 of the Canada Pension Plan or a
comparable provision of a provincial plan as defined in section 3
of that Act or of a prescribed provincial pension plan) shall be
included in computing the taxpayer's income to the extent
that it would be if the payment or transfer had been made to
him.
[18] The underlying purpose of subsection 56(2) is to ensure
that a taxpayer cannot avoid being taxed on a benefit by
directing that it be conferred on a third party. Hence, the
provision is not applicable to benefits arising from bona
fide business transactions in which there is adequate
consideration.[1]
According to the Supreme Court of Canada in Newman v.
M.N.R., [1998] 1 S.C.R. 770, 98 DTC 6297
at page 6300, there are four prerequisites established in
the wording of subsection 56(2):
1. an actual transfer or payment to a person other than the
taxpayer;
2. the payment or transfer must be at the direction of or with
the concurrence of the taxpayer;
3. the payment or transfer must be for the taxpayer's
benefit or as a benefit he wished to confer on another; and
4. the payment or transfer would have been included in the
taxpayer's income if it had been paid to him.
[19] A fifth requirement was introduced by the Federal Court
of Appeal in Winter et al. v. The Queen,
90 DTC 6681, in which Marceau, J.A. stated at
page 6684 that:
[T]the validity of an assessment under subsection 56(2) of the
Act when the taxpayer had himself no entitlement to the payment
made or the property transferred is subject to an implied
condition, namely that the payee or transferee not be subject to
tax on the benefit he received.
[20] In other words, the individual who receives the benefit
must not be subject to tax. However, this prerequisite is
qualified by the requirement that the taxpayer has no entitlement
to the payment made or property transferred.
CONCLUSION
INCOME INCLUSION
[21] I conclude the fair market value of the land exceeded the
amount the land was transferred for and a benefit was conferred
upon the Appellant's son. The Appellant owned 50% of the
shares of Hall and the Appellant's son received 50% of the
land transferred. The transfer did occur under the direction of
the Appellant. A benefit did exist and such a benefit would have
otherwise been included in the Appellant's income as a
shareholder's benefit pursuant to subsection 15(1) of
the Act had the benefit been paid directly to him.
DECISION
[22] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 11th day of June 1999.
"D. Hamlyn"
J.T.C.C.
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