Peter Lee v. Minister of National Revenue, [1991] 1 CTC 2667, 91 DTC 615

Margeson, T.C.J.:—This case involves the decision by the Minister of National Revenue, by notices dated April 5, 1989 for the 1985 taxation year; May 9, 1989 for the 1986 taxation year and May 9,1989 for the 1987 taxation year, whereby the Minister assessed the taxpayer for a benefit conferred upon him as a shareholder of the limited company, Archer Construction Ltd. (hereinafter referred to as "the company").

The Minister added to his income in those years respectively $9,289; $19,097 and $4,542. These amounts the Minister alleged represented lease payments and car expenses paid by the company for an automobile used by the appellant. The Minister's assumptions were that the use by the appellant of the automobile was exclusive and assessed him for the whole amounts. The taxpayer appeals from that decision.

Facts

Evidence was given before me by Mr. Peter Lee, the appellant, who in the relevant years was also a shareholder, president and director of the company although other members of his family also owned shares in the company.

The appellant described the business of the company as being that of seeking out properties for business development, looking for properties for friends overseas, in some cases, putting offices in a number of projects and also rental of both residential and commercial properties. According to his evidence, he was from Brunai and arrived in Canada in 1979 with landed immigrant status as an entrepreneur. In Brunai, he had been involved in building construction and was well known there for such as well as in Malaysia and Singapore.

For the purposes of these proceedings the appellant produced a list of properties as Exhibit A-1 which are most relevant in relation to the appeal. This list contains seven different properties, five of which were rental units and two of which were industrial in nature, basically for warehouse use. As I understand the evidence, part of property no. 7 had some warehouse rental units constructed and rented while the remainder was vacant land.

The appellant introduced Exhibit A-9 which was a lease for a 1986 jaguar VanDen Plas entered into by the company and Canaplan Leasing Inc. on October 9, 1985 for 36 months and attached to it as Schedule "A" is a rental payment schedule requiring the payment of $697.80, referred to as basic monthly rental, $48.85 of sales tax for a total monthly payment of $746.65. The schedule also contains a provision that the lessee may extend the lease beyond the lease term on a month to month basis at a rate of $697.80 plus sales tax. This is strictly a lease arrangement and not a lease purchase agreement and is referred to as a“ Vehicle Lease Agreement”.

The lease contains a working page with the following figures:

$52,255.00

— 20,000.00 (trade)

$32,255.00 net taxable)

+ 2,258.00 (at 7%)

$34,513.00

4- 20,000.00 (add trade back)

$54,513.00 (Total)

The lease further provides for the sale of the vehicle at the end of the lease period and if the sale value (a) net sales proceeds, plus (b) the amount of any insurance recoveries (if any), plus (c) the amount of accumulated depreciation (36 x $281.13) exceeds the depreciated value ($15,000) the lessee is refunded the excess, less the sum of $100. In the event that the amount received in (a), (b) and (c) is less than the depreciated value, then the lessee must pay to the lessor as additional rent the deficiency plus the sum of $100.

The appellant said he leased a car such as a Jaguar because it looks better in his part of the world and prestige is an important consideration in doing business in that part of the country. He likewise felt that in Canada the same principles would probably apply.

In 1985 and 1986, the appellant heard that National Homes Ltd., an industry involved in the construction of prefabricated homes, was to be sold by the receiver. He went to the site on a number of different occasions and told people about it in Brunai in hope that the possibility of a joint venture might arise. These actions took place over a period of one and a half years all on behalf of the company.

The company made an offer of purchase on January 26, 1987 to the trustees in bankruptcy for National Homes Ltd. for $555,888.88 and made a deposit on the purchase. It was felt that there would be a good market outside of Canada for the product of this company. The appellant had experience in this kind of business outside of Canada and felt it would be profitable. He took various people to view the plant, including an engineer, many times he said, an accountant, a quantity surveyor and businessmen. He admits that some of them were in British Columbia sightseeing but everyone except Mr. Leung came to Vancouver to see the plant. He met with them as many as two or three days at a time and drove the Jaguar then and also during visits to the site.

The proposed purchase of National Homes Ltd. did not come to fruition but the company became interested in other properties such as an Expo building which they expected to turn into a strip mall. For such projects, he had contacts with Singapore businessmen and some came to Vancouver to see the site and the Jaguar was used for such purposes. That project did not materialize because there were too many restrictions and it was not bound to be financially feasible. In 1989, the company also became interested in other properties but these are not relevant to the taxation years in question and were only offered to show the course of conduct of the company over a number of years.

The appellant testified that the company had two vehicles, the Jaguar and a 1983 Jeep Cherokee which was used for carrying tools and supplies to the projects and for the company's work in maintenance of the properties. It was undoubtedly used by the appellant on a personal basis as well. The appellant owned vehicles in his own name and his daughter's including a $50,000 Mercedes Benz in the years 1985, 1986, 1987. His wife also had a K-Car which all the family drove.

According to the evidence submitted as per the agreement, there were 2,862 kilometres on the Jaguar as of November 18, 1985; 7,471 kilometres as of May 30, 1986 and 24,537 kilometres as of January 19, 1988. The Mercedes was used for 61,638 kilometres between July 30, 1981 and October 20, 1988 and the K-Car for 39,000 between June of 1984 and July 1988. He admitted that he, his son and daughter used the Jaguar for 1985, 1986 and 1987 personally and it was also used for business purposes. His wife did not drive the Jaguar. He also drove his Cherokee but there are no records for it.

The appellant's evidence was that for the years 1984, 1985 and 1986, he drove the Jaguar three to four times a week for the company's purposes. His office was at 1225-73rd Street until 1986. He drove to his office and to the Surrey properties about 15 kilometres away and then checked the Surrey properties which were close together. He also visited the National Homes Ltd. site at Abbotsford which was about 45 kilometres away. He normally drove the Jaguar. He admits having used the Jaguar for getting groceries as well as it being used by his son and daughter for the same purposes. His evidence was that for the years in question, he used the Jaguar 60 per cent for the company purposes and 40 per cent for his own personal purposes.

In cross-examination the appellant said that in 1985 there were three drivers in his household and in 1986 and 1987 there were four. The Mercedes was in his daughter's name. He said he conducted inspections of the properties, investigated complaints by tenants on the average of one per week, some of the tenants had complaints once or twice a month. He normally drove the Jaguar to the properties. He also visited the non-income producing properties once a month.

According to the appellant, from May 1985 he went to the Ontario Street property at least once a week as there were lots of complaints. He also fixed some things at the property and normally took the Jeep for these purposes but once every two months he took the Jaguar.

With respect to the 860 East 15th Street property, this was kept only for eight months and was sold in 1985. He went there once a month and his son drove him in the Jaguar or the Jeep. He visited the 4553 Fraser Street property once a month and then went around to check all the properties to see if anything needed to be done, if it did, he would go back with the Jeep to fix it.

The same thing applied to the 4561 Fraser Street property. He also used the Jaguar mostly for taking businessmen out to brief them on properties available. He did not keep a diary of appointments or mileage for business use. He did not have a list of those persons he took to the properties. When asked about who he drove around in the Jaguar after it was bought in 1985 to see the properties, he could not be more specific. Again, when asked in cross- examination to tell accurately from his records how many kilometres he drove the Jaguar for business purposes to come up with the figure of 60 per cent, he could not be more specific.

With respect to the National Homes Ltd. property regarding the offer to purchase, the appellant made a trip to Abbotsford in 1986 to show the property, he further took other people there to see it in July or August 1986 and others in November and December 1986. Furthermore, in November 1986 an accountant came over and showed him the property. In essence, he said he showed the property six times and made ten trips at the beginning to look at it and go through the property with the manager and he used the Jaguar for such purposes.

In redirect, he did respond that the trips referred to by the respondent's solicitor were not all the trips he took for business purposes and there were others but he could not be more specific as to how many.

Mr. Edward Renyk gave evidence when called by the appellant. He is a chartered accountant and he received information from the appellant's daughter about the company and prepared the financial statements. He referred to Exhibit A-12 as a computer printout of the company's cheques paid to the Canaplan Company on the lease of the Jaguar. He testified that this list represented the payments made by the company on the Jaguar during the period under reassessment.

Mr. Renyk identified Exhibit A-13 as a list of automobile expenses for 1985-1986-1987 prepared by the tax department. He said these came from the company records and they agreed with his calculations of them. Some of the expenses were particularized as to certain cars and others were not. He assumed that those paid to the Jaguar dealers were the Jaguar but other expenditures could not be identified. He said $7,265 was paid during 1985 and $3,230 during 1986.

Mr. Renyk was referred to the Minister's allegations in paragraph 3(e) of the reply and testified that the Minister's presumptions were incorrect. He said the Minister was referring to the amortization of the lease and not to the lease payments. He said the amounts paid under the lease for 1985 were $2,023.28; for 1986 $8,959.80; for 1987 $2,239.95 for a total of $13,223.03.

He further agreed that he could reconcile paragraph 3(e) of the reply with the company's books and ledgers as the amounts paid by the company for automobile expenses for the Jaguar and other cars during the assessment period.

He said he only saw the appellant driving the Jaguar twice in the period he worked for him. It was suggested to him that the company really paid the amortized value of $54,573 under the lease, but he disagreed. He said the manner in which he treated the lease for income tax purposes was in accordance with generally accepted accounting principles and acceptable under the provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). He said the accrual under the lease for the company was $18,168 including the trade-in, but that was not the amount paid under the lease.

The respondent called Mr. Charles Pruiet, an auditor for Revenue Canada who did the audit on the company between September 1988 and June 1989. He calculated the payments under the lease on the basis of the $54,504 amortized over three years or $1,514 per month. That is the amount he says was payable under the lease and not the $746.65 per month figure proposed by the appellant.

Mr. Pruiet had access to the company's records but was unable to determine how many properties the company had, there were no mileage records he says for the vehicles, no diary for the Jaguar and no records regarding the use. He assigned a benefit to the appellant obviously based upon 100 per cent personal use of the Jaguar and the standby charge based upon the figure of $1,514 a month, as indicated above. He did not give the appellant the advantage of paragraph 6(2)(b) available to him by reason of subsection 15(5) of the Income Tax Act. (The result which would be to reduce the standby charge to two-thirds of the total amounts alleged even if all of the miles were found to be personal ones.) Mr. Pruiet had not assigned any benefit of the Jeep to the appellant personally giving him the benefit of the doubt.

Mr. Pruiet admitted that in 1985 he used the figure of $746.65 per month as the basis for his assessment but his supervisor told him he was wrong and that the proper basis was $1,514 per month which he used thereafter as the basis for the 1986 and 1987 assessments.

Appellant's Position

The appellant argues that there is a language problem here and any difference between the evidence of the appellant in direct examination and cross examination, especially with respect to the number of trips he took on business, in that he did not refer to all of the trips in cross examination, reflect that language problem.

He argues that the appropriate sections to be considered are subsections 15(1); 15(5); 6(1); paragraph 6(1)(e); subsections 6(2) and 6(2.2); and paragraphs 6(1)(a) and 6(2)(b). He says that the appellant should be assessed for a proper standby charge plus the proper portion of the automobile expenses paid by the company for him. However, he argues that the Minister is wrong in assuming the facts as he did that 100 per cent of the expenses should be applied to the taxpayer. They should be apportioned on a reasonable basis to the taxpayer in accordance with the above referred to sections.

Firstly, he says the Minister under paragraph 6(2)(b) should have only charged two-thirds of the appropriate amount under the lease and he has assessed him on the basis of the whole amount. Even if all the mileage were personal he says, the Minister is still wrong and the assessment must be varied because he did not apply subsection 15(5).

He says the lease was a capital lease and as such was properly amortized rather than expensed. He refers to the case of The Queen v. Lagueux et Frères Inc., [1974] C.T.C. 687; 74 D.T.C. 6569. That case, as I read it, held the Minister correct in treating the contracts of leasing as contracts of sale giving entitlement to a capital cost allowance and not a deduction for rental costs and expenses. That case was one of rental purchase whereas the one at bar is strictly a rental one but as the case decided, the name given to the transaction was not material in determining its true character.

The appellant contends that under paragraph 6(2)(b) "the amount payable by the employer" in the year was the amount of $746.65 as set out in the lease. The amortization amount only applies to the year 1985 when the unit was leased and the Minister used the proper figure in that year of $35,760 as per Exhibit A-14. He says it is not for the Minister to reassess in Court, that the trade-in value is irrelevant except in the year it was bought and the Minister used the figure of $746.65 in that year as the amount paid under the lease and that is the proper amount.

The appellant says that he did not keep any mileage records but that he was not required to do so for the years in question. The amount has to be apportioned. He cites Biermann v. M.N.R., [1989] 2 C.T.C. 2107; 89 D.T.C. 405, whereby Judge Lamarre Proulx reduced the personal mileage aspect to ten percent or 4,000 kilometres whereas the Minister had argued for 12,000 kilometres.

The appellant argues that he drove the car for less than 12,000 personal kilometres over the two years and the Court must determine the amount. Given the number of cars he had access to and the total kilometres driven, he says the figure of 60 per cent for business use is reasonable. He further argues that because the car was obtained for prestige purposes that does not make it personal. It is not for the Minister to determine what kind of car he buys, reasonableness of the expense is not the question here as is shown in the case of Bouchard v. The Queen, [1983] C.T.C. 173; 83 D.T.C. 5193. The appellant does not argue the expense analysis, as determined by the Minister, only the proper percentage to be applied toward him personally.

The appellant submits as follows:

(1) That the mileage travelled in each year was less than 12,000 kilometres for personal use.

(2) That 60 per cent of the kilometres were business and 40 per cent were personal.

(3) That the term amount payable under the lease under paragraph 6(2)(b) must mean what amount is required to be paid under the lease and that amount is $746.65 per month.

(4) That the appellant is only liable for 40 per cent of the operating expenses.

Respondent's Position

The respondent's position is that the appellant has not satisfied the Court that he used the car 60 per cent for business purposes. His use was sporadic. For an 18-month period from November 1985 through to 1987, he used the Jaguar for business purposes only for a total of 2,160 kilometres according to his evidence. The vehicle travelled 15,985 kilometres and 13,825 kilometres were unaccounted for. His argument is that he has shown business use for 15 per cent only.

The respondent further argues that the appellants children used the vehicle, they used it for shopping and for other personal uses.

With regard to the standby charge her position is that the proper amount payable under the lease was $1,514 per month and he was assessed for that amount by the Minister. She says it is that amount and not $746.65 per month. She says that the fact that they reduced the amount payable because of the trade-in is irrelevant, the real amount is $1,514 per month.

The respondent suggests that the fact that the accountant only saw him drive the car on two occasions is not determinative of anything. The reasonable standby charge according to her should be set on the basis of 85 per cent personal. She agrees that he should be reassessed on the basis of 85 per cent of $1,514 per month. She says that the appellant is not disputing the amount of the operating expenses and the appellant should be assessed on the basis of 85 per cent of the found operating expenses and the other 15 per cent would be business.

Analysis and Decision

It is clear front the evidence that the Minister proceeded to make the assessments in the year in question on the basis of presumed facts which have been shown to be incorrect. On that basis, the burden on the appellant to show that the Minister so proceeded has been met and the assessments will have to be varied.

The Minister proceeded on the basis that all the charges on the lease and all of the car expenses related to the Jaguar were for the personal benefit of the appellant. From the evidence given before me I am satisfied, on the balance of probabilities, that this was not correct as a portion of these were definitely business related and the appellant is entitled to have them taken into account in assessing the benefit to him.

A question arose as to the effect on the " burden of proof" of the finding that the Minister proceeded on incorrect assumptions of fact. The appellant argues that as a result, the burden of proof on the whole of the evidence shifts to the Minister and has the effect of requiring the Court to give the benefit of any doubt to the taxpayer. However, it seems to me that the effect is almost neutral in this case since the Court must decide on the basis of the evidence as a whole the answers to the various questions posed and the Court cannot see where there is any presumption one way or the other. The general rules of evidence, including credibility, must be considered by the Court in determining the answers to the questions.

I believe the appellant, in his submission, has correctly stated the questions which must be answered by the Court in this appeal. Indeed the Minister did not seriously argue that the questions were incorrect but certainly disagreed as to what the answers should be.

The questions applicable are as follows:

(1) Were there less than 12,000 kilometres travelled per year for personal use on the Jaguar by the appellant?

(2) How many kilometres were travelled by the Jaguar over the years under appeal?

(3) What percentage of the kilometres were personal and what percentage were business-related?

(4) What was the proper amount payable on the lease?

(5) What were the expenses paid by the company in the years under appeal?

It has been difficult for the Court to determine the number of kilometres that the car actually travelled during the relevant period but the evidence discloses that as of November 18, 1985 there were 2,862 kilometres on the Jaguar. As at May 30, 1986, there were 7,471 kilometres on it and as at January 19, 1988 there were 24,537 kilometres on the car. These figures were agreed upon by the parties in Court. Deducting from the total mileage on the car as at January 19, 1988 the figure of 2,862 kilometres, the total mileage on the car before the relevant period of time commenced, I am left with the total mileage travelled of 21,675 kilometres. The kilometres were put on the car over a relevant period of 2.08 years from November 18, 1985 to December 31, 1988. I find that the car was driven 10,420 kilometres per year.

This finding then substantiates the argument that the car was driven less than 12,000 kilometres per year during the relevant period of time for personal use and the appellant is entitled to take advantage of paragraph 56(2)(b) and subsection 15(5) and consequently the taxpayer can only be charged two-thirds of the total amounts expended and not 100 per cent as the Minister calculated.

The answer to the third question is also most difficult to answer on the basis of the evidence which was really quite unsatisfactory. No appointment book was kept by the appellant, no log was kept as to what kilometres were personal and what kilometres were for business purposes but the finding must be made and there is some evidence upon which this finding can be made.

The appellant did give evidence that he used the Jaguar for 60 per cent business and 40 per cent personal. He was questioned as to how he arrived at this figure and certainly was severely tested by the questions put to him by the Minister's representative.

It is true that if you add up the total number of trips the appellant remembers he took in the Jaguar for business purposes and multiply that by the number of kilometres that each trip required as per his memory, you certainly would come close to the argument of the Minister that the proven percentage is closer to 15 per cent business rather than 60 per cent as he alleges. However, I was satisfied that as the appellant said in redirect, and I am also satisfied that I can conclude on the basis of all of the evidence before me, that the specific trips that the appellant remembered taking and to which he referred in his cross-examination were not all the trips he took for business purposes. I am satisfied that he took many more than that and consequently, I find that the calculation of 15 per cent advanced by the Minister is not realistic.

I am satisfied that the appellant gave his evidence forthrightly, and though I am not satisfied that the language barrier posed by his solicitor was as great a hindrance as suggested, it certainly did give him some difficulty. In essence his position that he used the Jaguar for 60 per cent business and 40 per cent personal use has not been seriously challenged by the Minister, certainly not to the extent that I cannot accept his evidence on that. Further, I am somewhat strengthened in my finding by the evidence that the appellant also had available to him and his family three other vehicles during most of the relevant period of time, all of which had considerable kilometres, and taking that factor into account as well as his demeanour before me, I accept his evidence that the Jaguar was used 60 per cent for business and 40 per cent for personal use and I so find.

With respect to question 4, the evidence of the lease itself, the words used therein, the evidence of Mr. Renyk, the appellant’s accountant, and even the actions of the respondent's auditor in his own calculations for the year 1985, lead me to the conclusion that the amount payable under the lease was $746.65 per month and not $1,514 as alleged by the Minister in the years 1986 and 1987.

The Minister's solicitor never really seriously challenged the validity of the lease, there were no arguments that it was a mere sham or was other than it purported to be. If there were nothing more than the lease itself I would be hard pressed to find that it was a lease for anything more than $746.65 per month. With the evidence of Mr. Renyk who explained the manner in which the lease was set up in the company's books on an amortization basis, and who said that the amounts payable under the lease were on the basis of $746.65 per month and not $1,514 per month, the Court is satisfied that this is the proper figure to use during the periods under review.

If the company should choose to amortize its lease of the motor vehicle over a 36-month period in accordance with generally accepted accounting principles, and if it is not contrary to the Income Tax Act, and there was no serious question that it-was, then I cannot see how that changes the payments under the lease clearly set out in the document itself to some other amount.

The fact that there was a trade-in of some $20,000 when the car was purchased so as to reduce the monthly payments thereafter does not change the amount clearly set out as payable in the lease itself.

We are dealing here with the question of the value of the benefit conferred upon the appellant in the years in question, so the question of the effect of the trade-in vis-a-vis the appellant as opposed to the company who was leasing it, does not enter into the equation.

I find that the company paid on behalf of the appellant during the relevant years the amounts as follows:

There was no real question between the parties as to the total amount of the expenses paid by the company for the automobiles and the Court finds that in the year 1985 that amount was $7,265 and in the year 1986 that amount was $3,230. The appellant will be charged with 40 per cent of those expenses.

The appeal is allowed, with costs, and the matter referred back to the Minister for reconsideration and reassessment based upon the above findings.

Appeal allowed.