Date: 20000418
Dockets: 98-1432-IT-I; 98-1437-IT-I
BETWEEN:
RÉAL BERNIER, AGENCE J.W.E.R. BERNIER LTÉE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
(Delivered orally from the bench on August 17, 1999, at
Montréal, Quebec, and modified at Ottawa, Ontario, on
April 18, 2000)
Lamarre, J.T.C.C.
[1] These are appeals heard under the informal procedure from
assessments made by the Minister of National Revenue
("Minister") pursuant to the Income Tax Act
("Act") for the 1993, 1994 and 1995 taxation
years. The appeals of Réal Bernier and Agence J.W.E.R.
Bernier Ltée ("Agence") were heard on common
evidence.
[2] By the assessments, the Minister disallowed expenses of
$72,570 in 1993, $51,672 in 1994 and $47,285 in 1995 that Agence
had claimed against its commission income. They were disallowed
on the basis that they were either personal expenses of
Réal Bernier, Agence's majority shareholder, or
expenses considered to be unreasonable given the income generated
by Agence. The Minister also disallowed all expenses relating to
the operation of a bus on the ground that the bus was used only
for Mr. Bernier's travel to the United States and that Agence
had been unable to prove it had clients there. A taxable capital
gain of $118,278 (75 percent x $157,704) was also added to
Agence's income for the 1995 taxation year following a
judgment by the Quebec Court of Appeal in April 1995 awarding
Agence compensation from Ultramar Canada Inc.
("Ultramar") for loss of rent, for repairs and for lost
profits in respect of immovable property that Agence had owned in
the early 1980s and been obliged to dispose of for $1 in
1984.
[3] Agence is contesting the assessments on the ground that
most of the disallowed expenses were incurred to produce business
income. It acknowledges the existence of a $157,704 capital gain
but submits that, even though it received that amount in 1995,
the gain is taxable in 1997 since it was not until 1997 that all
its remedies before the courts were exhausted. Agence also
contends that the capital gain results from compensation for
profit it should have made on the sale of the property, which was
supposed to occur in 1981 but which was cancelled because of
problems caused by a leak in the property's oil tank, for
which Ultramar was subsequently held liable. According to Agence,
the amount received from Ultramar in 1995 pursuant to the Quebec
Court of Appeal's judgment should be taxed at only
50 percent, the capital gains tax rate applicable in 1981,
and not 75 percent, the rate applicable in 1995.
[4] As regards Réal Bernier, the Minister disallowed,
on the basis that they were his personal expenses or were
unreasonable, expenses of $19,979 in 1993, $17,258 in 1994
and $7,591 in 1995 claimed by Mr. Bernier against his commission
income. The Minister also added to Mr. Bernier's income, as
shareholder benefits under subsection 15(1) of the Act,
the expenses claimed by Agence for the use of the bus and certain
expenses paid by Agence that the Minister considered to be Mr.
Bernier's personal expenses. The amounts thus added as a
shareholder benefit add up to $37,902 in 1993, $38,350 in 1994
and $31,781 in 1995. Mr. Bernier is contesting the disallowance
of the expenses on the ground that they were incurred for the
purpose of earning business income, and he submits that he used
the bus only for business purposes. He is therefore contesting
the taxation of the shareholder benefit.
[5] I have heard the testimony of Réal Bernier and
Sonia Borin, who was a Revenue Canada appeals officer at the
relevant time. Mr. Bernier is a financial planner who enters into
insurance contracts with various clients inside and outside the
province of Quebec on behalf of the Great-West Life Assurance
Company, from which he receives commissions and bonuses.
[6] Mr. Bernier has also worked for Agence, which acts as an
insurance broker. According to him, Agence contracts with various
clients in Canada and the United States. He did not want to
provide a list of Agence's clients in the United States on
the ground that the list was confidential. According to
Mr. Bernier, all his trips for Agence were made by bus. The
bus was equipped with a computer and facilities that enabled him
to travel outside Montréal, where he lives, without having
to find accommodation.
[7] Agence reported gross commission income of $132,007 in
1993, $78,256 in 1994 and $46,632 in 1995. Mr. Bernier reported
gross commission income of $47,693 in 1993, $41,719 in 1994 and
$51,967 in 1995.
[8] The bus expenses claimed by Agence were $38,969 in
1993, $38,960 in 1994 and $33,771 in 1995. The respondent
disallowed all of those expenses on the ground that Mr. Bernier
could not prove the existence of clients in the
United States. However, Mr. Bernier testified that almost
all his trips over 75 miles (120 km) from Montréal
were by bus. He filed a list of documents showing that he had a
number of clients in Canada outside Montréal. The evidence
also showed that Mr. Bernier travelled to the United States a
number of times. However, he did not want to disclose the names
of any clients there. The evidence is decidedly insufficient to
enable me to conclude that Mr. Bernier went there for
business purposes.
[9] I accept Mr. Bernier's testimony that he used the bus
partly for business purposes in Canada. The respondent has
already proposed to Mr. Bernier (at the objection stage) that
Agence be allowed 50 percent of the bus expenses, which I
consider reasonable in the circumstances. I therefore allow 50
percent of the expenses claimed by Agence for the bus. As regards
the shareholder benefit resulting from the use of the bus, it is
my view that 50 percent of Mr. Bernier's use of the bus was
for personal reasons, and I reduce the shareholder benefit as
calculated by the Minister by half.
[10] As for the other expenses, it is my opinion that those
incurred by Mr. Bernier or Agence to repay premiums to certain
clients in order to maintain bonuses from Great-West are expenses
incurred for the purpose of earning income and as such are
deductible. The expenses involved are those attributed to
Ghislaine Duval and Roland Gagnon.
[11] All the additional disallowed expenses relating to the
operation of the bus that are not of a capital nature and that
are supported by vouchers are also 50 percent
deductible.
[12] In conclusion, I am of the opinion that Agence should be
allowed to deduct the following additional expenses from its
income:
For the bus Other acceptable expenses
1993 $20,000 $2,000
1994 $20,000 $3,000
1995 $15,000 $1,500
[13] In other words, the total disallowed expenses for Agence
will be reduced from $72,570 to $50,570 in 1993, from $51,671 to
$28,671 in 1994 and from $47,284 to $30,784 in 1995.
[14] As for Mr. Bernier, I believe that the taxable benefit he
received from using the bus was $17,500 rather than the $37,902
assessed for 1993, $17,500 rather than the $38,350 assessed for
1994 and $14,500 rather than the $31,781 assessed for 1995. That
reduction of over 50 percent in the shareholder benefit as
calculated by the Minister takes into account the half of the bus
expenses that I consider deductible and the other expenses judged
acceptable.
[15] With regard to the capital gain issue, I note that the
property was sold in 1984 for $1. It was in 1984 that Agence
disposed of the property for $1. Agence instituted proceedings
against Ultramar in 1981, holding it responsible for the
cancellation of the sale that was supposed to take place that
year. That sale was not completed because of damage caused by an
oil tank owned by Ultramar. Agence held Ultramar responsible for
the lost profit on the property, which it assessed at $124,000.
After the proceedings were instituted, the property was assigned
to Agence's mortgagees for $1. The Superior Court of Quebec
awarded Agence some $20,000 in damages for loss of rent and for
repairs. The Quebec Court of Appeal awarded $124,000 in
additional compensation for the lost profit on the property. The
Court of Appeal rendered its judgment in April 1995.
Following that judgment, Ultramar placed $366,864 at Agence's
disposal as a tender and deposit. That amount was divided up as
follows:
$137,746 principal
$91,988 interest
$137,130 additional indemnity under article 1078.1 of
the $366,864 Civil Code of Lower Canada
[16] Agence tried to have the additional indemnity increased
by an additional amount of interest in the Superior Court of
Quebec. Its appeal was dismissed on September 6, 1996, and
the Court of Appeal affirmed that decision on November 20,
1996. The Supreme Court of Canada refused leave to appeal on May
29, 1997, and Mr. Bernier's counsel were notified of this on
July 16, 1997.
[17] The Minister established that Agence had a taxable
capital gain for the year ending on July 31, 1995. He calculated
that taxable capital gain as follows:
(i) Amount of compensation $366,864
(ii) Minus: portion applicable as interest
$91,988
(iii) Capital gain $274,876
(iv) Minus: prior reserves and excess amount
$117,172
(already reported by Agence)
(v) Revised capital gain $157,704
(vi) Taxable capital gain: 75% of this amount
$118,278
[18] As I see it, in assessing the amount received as a
capital gain, the Minister could rely only on the definition of
"disposition " in subparagraph 54(b)(ii) of the
Act, which reads as follows:
"disposition" of any property, except as expressly
otherwise provided, includes
. . .
b) any transaction or event by which
. . .
(ii) any debt owing to a taxpayer or any other right of a
taxpayer to receive an amount is settled or cancelled.
(See Wise et al. v. The Queen, 86 DTC 6023 (F.C.A.)
[19] The capital gain would result from Ultramar's payment
of the debt it owed Agence. The capital gain cannot result from
the transfer of the property, since it was sold in 1984 for
$1.
[20] Ultramar's payment of $366,864 would in this case
correspond to a disposition. To establish the capital gain,
Agence had to show what the adjusted cost base of the property so
disposed of was. Obviously, the Minister set that adjusted cost
base at nil. I cannot conclude from the evidence that the
property's adjusted cost base was anything else. Nor does
Mr. Bernier seem to be contesting it, since he admits the
existence of a capital gain of $157,704. I therefore conclude
that the capital gain resulting from the payment of the debt must
be set at $157,704. Under the definition of
"disposition" found in paragraph 54(b)(ii)
of the Act, a disposition occurs when a debt is settled or
cancelled. According to the notice of tender declaration, the
amount in question was placed at Agence's disposal on
April 26, 1995. I therefore consider that the
disposition occurred in the 1995 taxation year and that the
capital gain was realized the same year. That gain ought not to
have been included in the 1997 taxation year as was done by
Agence. The Minister will have to cancel that gain for 1997. The
taxable capital gain is therefore $118,278, that is, 75 percent
of the capital gain as determined by the Minister, since the
applicable rates are those of the year of disposition, namely the
1995 taxation year.
[21] The appeals are therefore allowed solely as regards the
portion of the expenses that I have accepted and the portion of
the shareholder benefit that I have set aside. The assessments
are confirmed in all other respects. While the appeals were filed
under the informal procedure without the appellants limiting the
amounts of tax in issue in their appeals to $12,000, it is my
view that, even though the tax decrease resulting from the
amounts I have granted the appellants exceeds $12,000 for each
year, the amount of the excess does not justify a
re-hearing in accordance with the general procedure, taking
into account the inconvenience and expense that would result to
the parties and the interests of justice and fairness, as
provided in section 18.13 of the Act.
Signed at Ottawa, Canada, this 18th day of April 2000.
"Lucie Lamarre"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 20th day of December
2000.
Erich Klein, Revisor
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