Wilfred L. Giffin and Fundy Construction Company Limited v. Minister of National Revenue, [1991] 1 CTC 2306, 91 DTC 421

Margeson, T.C.J. [Orally]:—These two cases were heard on common evidence by the consent of the parties. They involve reassessments by the Minister of the income of the appellants for the 1982, 1983, 1984 and 1985 taxation years. By notices of reassessment dated January 16, 1987, the Minister assessed the appellant, Wilfred L. Giffin, in 1982 an additional sum of $15,261, for 1983—$14,814, for 1984—$13,861 and for 1985—$12,849 for a total reassessment of $56,785. These amounts represented benefits which the Minister argued were conferred upon the taxpayer by Fundy, the company, representing personal use by the taxpayer of a house in Naples, Florida, and for persona expenses in travelling to and from the house.

With respect to the Fundy appeal, the Minister issued notices of reassessment dated March 3, 1987, advising the company that the Minister had reassessed the income tax liability of the company for the years 1982, 1983, 1984 and 1985 by disallowing the deductions of travelling and entertainment expenses of: in 1982—$4,013, in 1983—$4,662, in 1984—$2,563, and in 1985—$2,895, for a total of $14,133. Further, the Minister disallowed property and maintenance expenses for the property in Florida in the amount of $5,556 in 1982, $4,756 in 1983, $4,853 in 1984, and $6,286 in 1985, for a total of $21,451. Further, the Minister disallowed capital cost allowance in 1982—$9,759, in 1983—$8,462, in 1984—$7,357, in 1985—$6,234, for a total of $31,812.

The evidence given before me discloses that the appellant, W.L. Giffin, at all relevant times was the chief shareholder, chief executive officer, chief operating officer, president and director of the appellant company. He is a graduate engineer from Nova Scotia Technical College, now called the Technical University of Nova Scotia, in 1950, and he also graduated from Acadia University in 1948. He has been working in various aspects of the construction industry since 1980. His company has done, or at least has been involved in, major construction projects in Nova Scotia and New Brunswick, including hospitals, schools, the World Trade and Convention Centre in Halifax and apartments. The company is the owner of a large tract of land at Williams Lake in Nova Scotia, which at this point in time has not been developed.

He was also involved in the work of the Canadian Construction Association and has been a director twice. He was involved throughout the years in labour relations, the Nova Scotia Construction Association, the bid depository, and held most positions in the association—that would be the Nova Scotia Construction Association—including that of president in the 19705. It is fair to say that he was involved personally in apartment buildings in Amherst, Nova Scotia, and with townhouses in Florida, which he bought, fixed up or repaired and sold in 1982.

In 1981, the company bought the Naples property, which is the subject matter of these hearings. Mr. Giffin said that he had property in Florida before. He had no problems with rental and felt that it would be a good business property. He said be went to his accountants to get advice about the purchase, obviously tax advice, its use and occupation. He said he also talked to his bank manager about it. He felt that the property could be rented when his company was not using it and he could make enough money from the rental to meet the expenses, is the way the appellant put it. His intentions were to use it for prospective clients, associates, company employees and, generally speaking, to attract company business. His evidence was that he made efforts to rent it, including such things as contacting the rental agencies in Florida and advertising it in Nova Scotia. However, the facts are that it was never rented and no rental income was ever derived from it. Mr. Giffin acknowledged that from that point of view, it was a mistake. Some of the reasons for it not working, from the rental point of view, were that it was ten minutes, apparently, from the beach and also that condo units were more attractive to people who wanted to rent them in Florida at that period of time than were houses. There were other things mentioned by him as well which made the property unattractive for prospective rental clients.

The property was obviously used for personal purposes by Mr. Giffin and his wife. It was used by other associates of his, his two sons, who were employees of his company, various others whom he described as business associates, insurance people, business contacts and prospective work sources for the company. Some other contacts, including bankers, were offered the use of it, but they declined for one reason or the other.

He readily admits he used it himself, but basically says that whenever he was in it, he was always doing company work, and as he puts it, he never had a real vacation. According to his evidence, he did estimates, looked at sites, studied construction methods at some sites in Florida. He considered these all to be business purposes-related. He sets out in argument, and gave evidence in support of, the periods of time that he occupied the property personally. Ultimately, the property was sold.

Argument

Mr. Ryan for the appellant argues that the property was acquired for the purpose of gaining or producing income, with a reasonable expectation of profit. He points to Mr. Giffin's experience in various fields, including rentals. He says that he sought accountants’ advice, bankers' advice, made the purpose for the purchase known at the time of the acquisition. He says that it was not used by Mr. Giffin except for short periods of time. He says that he tried to rent it through agencies, that there were no restrictions about when the property was available to be rented. He says that he could not have done more to rent it.

With regard to the expenses made by the company, he says that they were necessary. His position is that the company got a benefit from the property and that the expenditures were reasonable.

The reasonable rental rate that should be used to determine Mr. Giffin's benefits should be $712.50 U.S. per month, according to Mr. Ryan's argument. He calculates the personal benefit component to be as follows: in 1982—$798, in 1983—$776.63, in 1984—$349.13, in 1985—$399,. all these amounts being in U.S. dollars. The solicitor for the appellants' position is that the personal expenses allotted to the appellant Giffin and set out in Schedule A in the Minister's reply should be added to his income as well. He further agrees that the travel and entertainment expenses claimed by the appellant Fundy, and as set out in Schedule A of the Minister's reply, should be disallowed by the Minister and that these disallowances were proper. He further submits that the maintenance expenses claimed by the company and the capital cost allowances claimed by the company should be allowed to the company. He further argues that the travelling and entertainment expenses disallowed the company by the Minister in Schedule A to the reply were properly disallowed.

Mr. Ryan cites The Queen v. Lionel Houle, [1983] C.T.C. 406; 83 D.T.C. 5430, a decision of the Federal Court in 1983, as authority for his proposition that here, as there, the purpose of the purchase was both personal and business. Therefore, he argues, Mr. Giffin should only be charged for the time he used the property as a benefit and not for the whole year. He further distinguishes the case at bar from Woods v. M.N.R., [1985] 2 C.T.C. 2118; 85 D.T.C. 479, as in that case, he says, the property which was a boat, was for the exclusive personal use of the taxpayer.

The position of the Minister is that the property was acquired for the purpose of providing a recreational residence for Mr. Giffin and not for business purposes. She refers to the facts relied upon by the Minister and says that they are not rebutted, and, indeed, she says, they were reinforced by the viva voce evidence of Mr. Giffin given in Court before me. She implies that the appellant mentioned no one else but his sons as users of the property until he came to Court, when he added other names. His memory got better as time went on, from what she says. She points out that Fundy's work was all done in Nova Scotia and New Brunswick and not in Florida. She says that the company got no benefit from the house, that the appellant got accountants’ advice about keeping strict records regarding the house, its expenses, its use, but he did not follow it.

There are no documents, she says, to support his evidence about business purposes for the house and no documents whatever that support a conclusion that the company ever benefitted in any way from the purchase of the house. There is nothing to back up his rental theory, she says. They never had a feasibility study done. They should have. She says the house was available for 365 days a year by Mr. Giffin, his friends and his family, and he should be charged for the whole year.

Ms. Miller's position is that the test is an objective one, not a subjective one. There never was any income, in fact, from the rental, she says. Further, there should be substantial profit or a probability of substantial profit, not just some profit. She argues that the expenses and capital costs should not be allowed. She agrees with the monthly rental value of $712 U.S. If I do not find that the house was used 100 per cent personally, I should find 50/50, that is, that the house was used 50 per cent of the time by the appellant personally and 50 per cent of the time by the company.

Analysis and Decision

The appropriate sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as they relate to Mr. Giffin’s personal appeal are subsections 56(2) and 245(2). Basically, the argument is that he received a benefit from the company, and these sections require him to add to income, in each of the years under question, the amount of that benefit. The sections of the Income Tax Act applicable to the company's appeal are sections 3, 9, paragraphs 18(1)(a), 18(1)(b), 20(1)(a), subsection 248(1) and Regulations 1100(11) and 2102(2) (c).

In order for the company taxpayer to succeed in this case, it must prove to me, on a balance of probabilities, that the house in Florida was purchased and used for the purpose of gaining or producing income, with a reasonable expectation of profit. Further, that the expenses of the house to be allowed were reasonable under all the circumstances, as well as the purchase price of the house, having regard to the business of the company as a whole. The capital cost allowance claim inevitably flows from the same reasoning. He must also show that the expenses claimed by the company were not personal and are related to an active business.

A leading case on the subject of whether there is a reasonable expectation of profit is the case of Moldowan v. The Queen, one referred to by counsel for the Minister, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213. That case, to my mind, stands for the proposition that the test is an objective one and that the determination must be made from all the facts. Included in that determination are such things as profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as Capitalized to show a profit. But, as we know, that list is not exhaustive.

As referred to in the case of Raymond Morrissey v. The Queen, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, and also referred to by the Minister, actual or potential profit has to be demonstrated. The taxpayer's mere intention to earn a profit is not sufficient.

The only evidence before me is the evidence of Mr. Giffin. He asserts that when he purchased the property he had a business purpose in mind, that he expected to make a profit, that he intended to rent the property and that he expected to make a rental profit. I am satisfied that this was his intention when he bought the property. I am also satisfied that when he bought the property he had a personal use in mind. Therefore, in this case, a dual purpose. I am satisfied that the property was used for business purposes, but also that the property was used for personal purposes. However, that does not end the matter nor does it entitle me to give the taxpayer the relief he seeks. Because there is the further question as to whether the taxpayer has satisfied me, as required, that the property purchased gave to the company a reasonable expectation of profit and, further, that any expenses sought to be deducted were reasonable in the whole scheme of things, as disclosed by the evidence. I have carefully scrutinized the appellant Mr. Giffin and drawn from his evidence all reasonable deductions that I am entitled to make from the evidence, and I must say that I am not satisfied, on a balance of probabilities, that there was a reasonable expectation of profit from this house when it was bought or at any time since. There was no profit, in fact, and there is no evidence before me of any business plan study, market analysis or course of action which one could look at at any time, in a business sense, and say confidently that, "Here we have an asset which might reasonably be expected to show a profit in a reasonable period of time, and when we compare the cost of the asset against the benefits the company would possibly have derived from it, that it will be worthwhile".

I find it difficult to see how Fundy's business was going to be enhanced in Nova Scotia and New Brunswick by owning a house in Florida that could not be rented and was not rented at any time. But, more importantly, there was no evidence before me, except the statements of Mr. Giffin, even about what steps he took to try and turn a profit, or that one could reasonably be expected to look at. It seems to me that at least there should be evidence from some accepted source, other than the taxpayer himself, as to what the property would cost, what it would cost to maintain it, how much benefit the company could reasonably expect to draw from it, what actual benefits the company drew from it, so that, in the end, you could look at the balance sheet and say, Here's what it costs. Here's what the company got out of it, and from the point of a business action, it was a reasonable and sound investment".

In the present case, all we have is the taxpayer's intention, as evidenced by him. There is no acceptable evidence apart from that as to what the company's benefit was or as to what it might be. Further, it seems to me that one would have to keep a strict account of when the property was used and by whom, what company business was being dealt with at the time that it was being used, and so, ultimately, you could point to a corresponding benefit. Surely the evidence here falls far short of the degree of such proof required.

In the end result, I am not satisfied that there was a reasonable expectation of profit, as required, or that any expectations made were reasonable, having regard to all the circumstances, and, consequently, the Minister's disallowance of the property maintenance expenses and capital cost as set out in Schedule A of the reply of the Minister are confirmed. Further, I am not satisfied that the travelling and entertainment expenses as referred to in the same schedule are deductible, and, consequently, the Minister's reassessment and disallowance in that regard is confirmed.

With regard to the appeal of Wilfred L. Giffin, I am satisfied that the amounts as set out in Schedule A of the Minister’s reply as personal expenses were properly disallowed and the Minister's assessment relative thereto is confirmed.

The last remaining issue is the question of the personal benefit conferred upon Mr. Giffin by the company. I am satisfied that there was a personal benefit conferred, and I am satisfied, on a balance of probabilities—from the taxpayer's point of view—that the evidence of the value of the personal benefit so conferred was not so great as the Minister argues. I am satisfied that that benefit was less than the amounts attributed to the taxpayer by the Minister in Schedule A of the reply.

I accept the argument of the solicitor for the appellant that the case at bar is similar to that of The Queen v. Lionel Houle, supra, and that the house in the case at bar was purchased for business purposes and personal purposes, that there was a taxable benefit to the taxpayer, but that benefit was limited to 34 days in 1982, 33 days in 1983, 15 days in 1984 and 17 days in 1985. Based upon the evidence, I find as a fact that the monthly rental rate of $712.50 per month U.S., as agreed upon by the parties, is the correct basis of the calculation for the benefit conferred upon Mr. Giffin, and that that benefit was as follows: 1982— $798; 1983—$776.63; 1984—$349.13; and 1985—$399. In the result, the appeal is allowed with respect to that portion of the Minister's assessment referred to and the matter will be remitted to the Minister to. reflect these findings. The rest of the appeal, as indicated, will be dismissed.

The taxpayer has been successful in part, and by his actions in admitting part of the Minister's claim has simplified the trial, and so he will have 60 per cent of his costs.

Appeal allowed in part.