Date: 20080124
Docket: A-539-06
Docket: A-537-06
Docket: A-538-06
Docket: A-540-06
Docket: A-541-06
Docket: A-542-06
Docket: A-543-06
Docket: A-544-06
Citation: 2008 FCA 31
CORAM: LÉTOURNEAU
J.A.
SEXTON
J.A.
PELLETIER
J.A.
A-539-06
BETWEEN:
ARPEG
HOLDINGS LTD.
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-537-06
BETWEEN:
BERTHA
M. MATHISEN
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-538-06
BETWEEN:
WILLIAM
MATHISEN
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-540-06
BETWEEN:
P. ANNE
MATHISEN
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-541-06
BETWEEN:
BARBARA BELL
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-542-06
BETWEEN:
CHRISTOPHER
G. MATHISEN
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-543-06
BETWEEN:
E. JANE
RATCLIFFE
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
A-544-06
BETWEEN:
MARY MCNEIL
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
[1]
This is an appeal from the decision of Madam
Justice Woods of the Tax Court of Canada, reported at 2006 TCC 593, [2006]
F.C.J. No. 470, dismissing the appeals of the corporate appellant Arpeg
Holdings Ltd. and of the individual appellants Christopher Mathisen, Bertha
Mathisen, William Mathisen, P. Anne Mathisen, E. Jane Ratcliffe, Mary Mcneil
and Barbara Bell.
[2]
The issues in the appeal are the validity of a
waiver of the normal re-assessment period with respect to the corporate
appellant and the calculation of the value of the shareholder benefits received
by the individual appellants.
[3]
The corporate appellant is a holding company
which was set up by the late Dr. Arne Mathisen who was the husband of the appellant
Bertha Mathisen and the father of the other individual appellants. Arpeg held
certain properties. In 1996 it disposed of one of those properties and filed a
replacement property election. In the spring and summer of 2000, in the course
of an audit of the corporation’s 1997 and 1998 income tax returns, the auditor,
Mr. Eng, became concerned about the replacement property election in the 1996
taxation year. As the normal reassessment period for that taxation year would
expire on September 15, 2000, Mr. Eng asked Mr. Mathisen to sign a waiver of
the normal reassessment period as provided in subsection 152(4) of the Income
Tax Act. Christopher Mathisen (Mr. Mathisen) signed the waiver. As a
result of the audit, the Minister reassessed the corporation by denying the
replacement property election which resulted in a significant additional tax
liability for the corporate appellant. The appellants do not dispute the
disallowance of the replacement cost election but they seek to set it aside
nonetheless by challenging the waiver on the ground that Mr. Mathisen was not
authorized to sign such a document and that the execution of the waiver was
induced by Mr. Eng’s misrepresentations as to the nature of the document. The
appellants say that, as a result, the doctrine of non est factum
operates so as to make the waiver a nullity for all practical purposes.
[4]
As a result of the same audit, the Minister
assessed the individual appellants in respect of benefits which they received
as shareholders of the corporate appellant. The individual appellants do not
deny that they made personal use of certain corporate properties but they
object to the calculation of the value of those benefits.
[5]
The first issue is the validity of the waiver.
If the waiver is not valid, the reassessment of the corporate appellant is out
of time and of no effect.
[6]
The first ground for challenging the waiver is
that the corporation had not authorized Mr. Mathisen to sign the waiver on its
behalf. The Tax Court judge analysed this issue in terms of Mr. Mathisen’s
actual, implied and ostensible authority. She concluded that Mr. Mathisen had
both implied and ostensible authority to sign the waiver on behalf of the
corporate appellant. In particular, she noted that there was no evidence that the
corporation had not given the agency any express notice of any limitation in
Mr. Mathisen’s authority to deal with tax matters on behalf of the corporation.
[7]
The Tax Court judge’s conclusions on this issue
are amply supported by the evidence. The matter was not pursued in oral
argument and rightly so. There is no basis on which we could intervene on this
issue.
[8]
The appellants’ second challenge to the waiver
is a plea of non est factum. The appellants argue that the execution of
the waiver was induced by Mr. Eng’s misrepresentation. As a result, they say,
it is not enforceable against the corporation. There are differences in the
evidence of Mr. Mathisen and that of Mr. Eng. In particular, much of Mr. Eng’s evidence as to the nature of any
discussion between him and Mr. Mathisen comes in through a note which contains
past recollection recorded. The difficulty is that Mr. Eng is not able to say
when the note in question was prepared, which means that the Minister cannot
show that the note was made contemporaneously with the events recorded. On
that basis, the appellants argue that the Tax Court judge erred in considering
this evidence. If the note is set aside, the appellants say that the only
evidence on the issue of the discussions is that of Mr. Mathisen and it
supports the conclusion that the latter was misled as to the contents of the
waiver.
[9]
The difficulty with the appellants’ argument is
that it ignores the fact that Mr. Mathisen’s evidence is only useful if it is
believed. Having observed Mr. Eng and Mr. Mathisen give evidence, in chief and
in cross-examination, the Tax Court judge concluded that in the case of a
conflict between the evidence of Mr. Mathisen and Mr. Eng, she preferred the
evidence of Mr. Eng. The
appellants conclude from this that, where there is no contradiction, she
believed Mr. Mathisen. My own view is that the Tax Court judge could not have
decided as she did if she believed Mr. Mathisen.
[10]
The Tax Court judge was very circumspect in
dealing with Mr. Mathisen’s evidence. She rejects the notion that Mr. Eng had
any reason to mislead Mr. Mathisen. If Mr. Mathisen did not sign the waiver,
there was still plenty of time to reassess within the normal reassessment
period. The Tax Court judge also rejected the notion that Mr. Eng could think
that Mr. Mathisen could be fooled as to the nature of a document which carries
the bold type heading “WAIVER IN RESPECT OF NORMAL REASSESSMENT PERIOD”. It is
implicit in this that the Tax Court judge also rejected the suggestion that Mr.
Mathisen was in fact fooled as to the nature of a document whose nature is
conspicuously displayed on the document itself. Finally, even though she
appears to have drawn no adverse inference from it, the Tax Court judge
contrasted Mr. Mathisen’s evidence that he did not read the waiver because he
had forgotten his reading glasses with her own observation of Mr. Mathisen
reading hand-written journal entries without the benefit of reading glasses in
the course of his testimony.
[11]
It is only in the rarest of circumstances that
an appeal court will interfere with a trial judge’s assessment of credibility.
In this case, not only is there no basis on which we could intervene, the
conclusion which the Tax Court judge was asked to draw by the appellants is so
inherently unlikely as to be unworthy of any credit. In order to subscribe to
the appellants’ argument, the Tax Court judge would have to believe that an
experienced businessman, responsible for a large successful family business,
who has had the benefit of a graduate education in business, would sign a
document which is clearly labeled as a waiver simply because a tax auditor told
him that he, the auditor, needed it to complete his audit. There is no basis
on which the Tax Court judge can be criticized for failing to embrace such a
story.
[12]
While this is sufficient to dispose of this
aspect of the appeal, I think it proper to refer to one other element of proof
because of the allegations made with respect to Mr. Eng’s truthfulness. The
appellants made much of Mr. Eng’s concession that he was inclined to be
secretive about the points he was pursuing in his audit. They suggest that
this confirms that he would be likely to downplay or minimize the true nature
of the waiver. However, when one examines the waiver which Mr. Mathisen signed,
one sees that the waiver plainly and explicitly states that it is in reference
to the gain from the disposition of a certain property, and the replacement
property election made with respect to the proceeds of disposition of that
property. There is no concealment whatsoever as to the true nature of the
document. It brings little credit to anyone to advance a theory so at odds with
the facts.
[13]
The appellants go on to argue that the Tax Court
judge erred further when she concluded that Mr. Mathisen’s carelessness in
failing to read the waiver is a complete bar to the application of non est
factum. The Supreme Court’s last review of the law with respect to non
est factum is found in Marvco Colour Research v. Harris [1982] 2
S.C.R. 774 in which the Supreme Court essentially repudiated the position which
it had taken in an earlier case, Prudential Trust Co. v. Cugnet [1956]
S.C.R. 914. In that case, the Supreme Court had held that only carelessness
amounting to negligence (because it was a breach of a duty owed to others)
would bar recourse to non est factum. In other words, mere carelessness
on the part of the person executing the document would not preclude that person
from invoking non est factum. In Marvco, the Supreme Court followed
the decision of the House of Lords in Saunders v. Anglia Building Society
[1971] A.C. 1004 and concluded that, as between an innocent third party and one
who is careless in the execution of a document, the careless party should bear
any loss resulting from his or her own carelessness.
[14]
The appellants point out that there is a
difference between a dispute which concerns only the two parties to the
transaction and one, as in Marvco, where a third party has acted on the
strength of a carelessly signed document. The only authority cited on this
point, Free Ukrainian Society (Toronto) Credit Union Ltd v. Hnatkiw
[1964] 2 O.R. 169, is of no assistance as it says that negligence is not an
issue in the case of deliberate misrepresentations made to an illiterate man so
as to induce him to sign a promissory note. That point is not contentious. The
case does not stand for the proposition that as between two contracting
parties, one party may avoid his obligations under the contract by failing to
take steps to know what his obligations are.
[15]
Mr. Mathisen is a sophisticated, well educated,
successful businessman. He cannot avoid the consequences of signing the waiver
by not reading it, or by saying that he didn’t read it. There is no reason to
disturb the Tax Court judge’s conclusion on this point.
[16]
The last issue is the question of the benefits
to shareholders and, in particular, the value to be given to those benefits.
The shareholder benefits in question in the appeal are the use of properties
located at Whistler and at Crescent Beach. The Whistler properties are three shares of Whistler Ski Lodges
Ltd which entitle the appellants to the exclusive use of three properties
located in Whistler B.C. The evidence was that the properties were not rented
in the 1997 and 1998 taxation years, which are the years in respect of which
the individual appellants were re-assessed. The properties were used for
business use 25 days annually and for personal use 51 days annually in those
years. The fair market value of the rent which could be charged for the use of
each Whistler property was $134.79 per day.
[17]
The Crescent Beach property is a home located on land
which was acquired as a farm property. Over the years, parcels of the original
acquisition were sold and the farm operations moved elsewhere. The home
remained on the property and was used as a summer residence for the months of
July and August of each year by Mrs. Bertha Mathisen. The home was not rented
in the years in question. The fair market value of such accommodation was
between $2,000 and $2,500 per month.
[18]
The Minister reassessed the individual
appellants with respect to the Whistler and Crescent
Beach properties on the “cost of capital approach” in
which the benefit is equal to the notional return earned if the capital cost of
the asset were invested at a prescribed rate. That calculation yielded a gross
benefit with respect to the Whistler and Crescent Beach properties in the following amounts
which were allocated between the shareholders on the basis of their share
holdings. The amounts in question were:
1997 1998
Whistler $
29,364.61 35,829.48
Crescent Beach $ 32,885.00 38,603.00
[19]
In the case of the appellant Mrs. Bertha
Mathisen, the appellants argue that the value of the benefit, however
calculated, must be reduced by the amount of corporate expenses which she paid in
respect of the property. The mechanics of such transactions were that the
corporation paid the expenses and reduced the amount of its obligation to Mrs
Mathisen (her shareholder loan account) by the same amount.
[20]
The appellants challenge the Minister’s cost of
capital approach on the ground that it amounts to a mis-reading of this court’s
reasons in Youngman v. Canada [1990] F.C.J. No. 341, (1990) 90 DTC 6322
and Fingold v. Canada [1997] F.C.J. No. 1250. The appellants say that
both of these cases involve properties which were constructed or acquired for
the benefit of the shareholder. The appellants also say that, unlike Youngman
and Fingold, the properties in question in this case were acquired for
business purposes. It simply transpired over time that personal use was made
of the properties.
[21]
The distinction suggested by the appellants is
not relevant. As this court said in Youngman, the first step is to identify
what the benefit is, that is, what the company did for the shareholder. The
second step is to determine what the shareholder would have had to pay to
obtain that benefit if he or she were not a shareholder. In both Youngman
and Fingold, the Court found that the benefit was the right to have at
their disposal the property in question. In Youngman, the property was
a house built to the shareholders’ specifications. In Fingold, it was a
luxury condominium purchased and renovated for the use of the shareholder and
his wife. In both cases, the corporation’s capital was tied up in property
which did yield a return. The cost of the benefit is the income which that
capital could have earned had it been productively employed during the taxation
year in question. That is what a person dealing at arm’s length would have to
pay for the use of that capital.
[22]
In the present case, the properties were not on
the rental market in the years in question. While there were days in which the
properties were used for business functions, the properties were at the
shareholders’ disposition on any other occasion, even if they chose not to make
use of them. Thus the proper measure of the benefit is not the cost of renting
equivalent accommodation for the period of actual personal use, but is the
corporate income foregone by having the corporation’s capital tied up in
unproductive assets. The Tax Court judge did not err in confirming the
Minister’s approach to the assessment of the benefits received by the
shareholders.
[23]
The last issue was the adjustment to be made, if
any, with respect to the benefits conferred on Mrs. Mathisen. In the case of
the Whistler properties, Mrs Mathisen had access to the properties on the same
basis as the other shareholders but she incurred the cost of certain corporate
expenses with respect to those properties. With respect to the Crescent Beach property, Mrs. Mathisen was the only shareholder who made any
personal use of the property but, once again, she incurred the cost of certain
corporate expenses in relation to the maintenance and upkeep of the property.
[24]
The Tax Court judge refused to consider any
deduction with respect to these payments on the basis that no evidence was led
to establish a reasonable apportionment. In my view, the Tax Court judge erred
on this point. The ledgers for the properties in question are available and it
is possible to identify the various heads of expenses paid in relation to the
properties. Mrs. Mathisen should get no credit for personal expenses such as telephone
and cable. She should be credited with the payments made to B.C. Hydro to the
extent of the business use of the properties. Fixed costs such as condominium
fees, taxes, insurance should be credited in full. The details of the
calculation are left to the Minister. In summary, the amount of the benefits
conferred on Mrs. Mathisen is to be reduced by the amount of the adjustments
permitted above.
[25]
In the end, I would dispose of these appeals as
follows:
1.
I would allow the appeal in File No. A-537-06
with costs fixed at $1,500 and disbursements and I would remit the matter to
the Minister for reassessment on the basis that, in the calculation of the
shareholder benefit received by the appellant, she is to be given credit for
certain payments made as provided in paragraph 24 of the Reasons for Judgment.
2.
I would dismiss the appeals in Files Nos.
A-539-06, A-538-06, A-540-06, A-541-06,
A-542-06, A-543-06 and A-544-06 with one set of costs and disbursements in each
file.
3.
A copy of these reasons will be placed in each
file.
"J.D.
Denis Pelletier"
“I
agree
Gilles
Létourneau J.A.”
“I
agree
J. Edgar Sexton J.A.”
Email this Content