Fingold v. R., [1996] 1 CTC 2772, 96 DTC 1305

Sobier J.T.C.C.: — The Appellant appeals from the assessments by the Minister of National Revenue (the “Minister”) for his 1988 and 1989 taxation years whereby the Minister added to his income, pursuant to subsection 15(1) of the Income Tax Act (the “Act”), the amounts of $374,000 for 1988 and $445,675 for 1989 as a shareholder’s benefit from Fobasco Limited (“Fobasco”) with respect to the use by the Appellant of a Florida condominium owned by Fobasco.

The Appellant and his brother David B. Fingold control Fobasco, which corporation controls Slater Industries Ltd. (“Slater”) a listed public corporation.

After Fobasco’s reacquisition of Slater, Fobasco’s divisions Melburn Truck Lines (“Melburn”) and Renown Steel (“Renown”) became divisions of Slater, joining Fort Wayne Specialty Alloys (“Fort Wayne”), Hamilton Specialty Bar (“Hamilton”), Sorel Forge (“Sorel”) and Slacan. In addition, Fobasco was the third largest shareholder of Cineplex Odeon, a large movie exhibitor. Fobasco also had significant holdings in Revenue Properties Company Limited as well as other investments.

Slater entered into a management agreement with Fobasco dated June 1, 1986, whereby Fobasco was to provide Slater with management and ad- ministrative services for a fee of $850,000 per annum, reviewable annually. Fobasco was also to be reimbursed for reasonable expenses incurred by it in rendering the services contemplated by the management agreement, including travel and promotional activities.

Mr. Paul Fingold was the chairman and the chief executive officer of Slater and was given direct responsibility for Melburn and Fort Wayne, as well as overall responsibility in Slater for dealing with the investment community, media relations and all acquisitions undertaken by Slater.

It was Mr. Fingold’s evidence that up to 80 per cent of Slater’s approximate $380,000,000 sales were made in the United States and that much of his time was spent in the United States, overseeing the operations for which he was responsible.

Mr. Fingold outlined his family’s connections with Florida and Palm Beach beginning with his father’s interest there. Mr. Fingold stated that his father did considerable business entertaining in Florida. After his father’s death, the Fingold family would visit their mother at her condominium at 101 Worth Avenue, Palm Beach, Florida. Although she would enjoy visits from members of her family, she took strong exception to them entertaining customers, suppliers, bankers, investment dealers, etc. at her apartment. If Fobasco and Mr. Fingold were to continue entertaining in Palm Beach, an alternative site would have to be found.

Mr. Fingold emphasized the types of persons who would be entertained were wealthy executives who would not find it appropriate to be entertained in hotels and restaurants. More often the people to be entertained were in the Palm Beach area.

A penthouse apartment condominium became available for purchase at 101 Worth Avenue and in April or May of 1987, Fobasco purchased Penthouse B. The purchase price was $1,800,000 (Canadian) and the apartment was renovated and furnished at a further cost of $2,200,000 (Canadian) for a total of approximately $4,000,000 (Canadian). With balconies, the total area of the apartment was 4,610 square feet.

The renovations included increasing the number of bedrooms from three to five, with each bedroom having its own bath. The kitchen was upgraded to restaurant standards. The apartment was decorated and furnished under Mr. Fingold’s wife’s supervision. According to Mr. Fingold, the increase in the number of bedrooms was to accommodate business guests and to offer them privacy.

A log, kept by Mrs. Fingold, shows the entertaining carried on during the months of January through April of 1988 and January through May of 1989. The log did not indicate any entertaining prior to January or after May in each year.

As far as guests remaining overnight, the log disclosed that on only one occasion did guests remain overnight and that was over the weekend of February 26, 1988. However, the log did show that considerable enter- taining was done at dinner and over cocktails.

The dressing room of the master bedroom was equipped as an office for Mr. Fingold. It contained a desk, filing cabinet, fax machine, photocopier and telephones. Mr. Fingold testified he spent about the same amount of time in that office when he was in Florida as he did in his office in Toronto when there. Of course, a great deal of his time was spent at Fort Wayne and elsewhere on Slater’s business.

The evidence indicated that Mr. David Fingold spent some time entertaining at the apartment, although for the most part, it was the Appellant and his wife who entertained business associates as well as personal friends. The Appellant also made personal use of the apartment when not entertaining and his wife spent a great deal of her time there in Mr. Fingold’s absence on business trips.

The log showed that the persons who were entertained had business connections with Slater and Fobasco. The fact that the holding company owned the apartment is not material. See Smith v. Minister of National Revenue, [1991] 2 C.T.C. 2143, 91 D.T.C. 909 (T.C.C.).

The Appellant did not adduce evidence of the number of days of personal use, but the apartment was available for his use and that of his wife during the season from mid-December until mid-May each year. I calculate the season to be about 151 days. The apartment was not used or rented during the period from May to December.

The Appellant produced two letters, one from Sotheby’s International Realty and the other from Martha A. Gottfried Inc., both carrying on business in Palm Beach, as to the rental value of the apartment. Both stated that the rental value for such an apartment should be $60,000 per annum. Although those letters are not given as experts’ opinions or reports, they are the only evidence of market rental value for the property. The Respondent did not plead with respect to the rental value nor did he adduce any evidence concerning the rental value, but based the assessments solely on a return on the investment which Fobasco had in the apartment.

Mr. Fingold takes the position that the apartment was purchased for business purposes to be used for entertaining and as an office and that if he wished a place to vacation, he would have used his mother’s apartment. He further stated that if the apartment was to be for personal use, he would not have made the renovations, but would have kept the apartment as it was at the time of purchase.

Fobasco paid none of the operating costs of the apartment but Paul and David Fingold each personally paid 50 per cent of such costs although David Fingold did not use it on a personal basis but owned a townhouse for his personal enjoyment.

The cost of the apartment as renovated was a large amount when compared with the fair rental value set forth in the letters, yet the Minister did nothing to counter that evidence but put all his eggs in the “return on investment” basket.

According to Mrs. Fingold’s log, the apartment was used on approximately 26 occasions in 1988 and 45 occasions in 1989 for business purposes or for mixed business and personal purposes.

The Federal Court of Appeal has provided some basic principles to apply when computing the value of a benefit received by a shareholder. In Youngman v. R., (sub nom. Youngman v. Canada), [1990] 2 C.T.C. 10, 90 D.T.C. 6322 (F.C.A.), Pratte, J.A. stated at page 14 (D.T.C. 6325):

In order to assess the value of a benefit, for the purposes of paragraph 15( 1 )(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.

When addressing the issue of the appropriate method of valuation of the benefit of personal use of corporate assets, there has been a tendency to use the fair market value in situations where the property was acquired and used for a business purpose. McHugh v. R., (sub nom. McHugh v. Canada), [1995] 1 C.T.C. 2652, 95 D.T.C. 778, (T.C.C.), at page 2665 (D.T.C.). In situations where the property was acquired exclusively for the shareholder’s personal use, the courts have at times found that it is more appropriate to evaluate the benefit by considering the return on the corporation’s equity in the asset.

When considering the method to be used to calculate the amount or value of the benefit, the courts have emphasized the importance of making this distinction between business purpose and use and personal purpose and use. In Youngman v. R., [1986] 2 C.T.C. 475, 86 D.T.C. 6584 (F.C.T.D.), McNair J. states at page (C.T.C. 480) 6588:

Clearly, the countervailing factors of business purpose or personal use must play a significant role in determining as a question of fact whether the particular corporate transaction is a bona fide business transaction in the sense of something that might normally accrue to an outsider in the ordinary course of business of the corporation or whether it was an inside arrangement designed primarily to benefit the shareholder.

In Dudelzak v. Minister of National Revenue, [1987] 2 C.T.C. 2195, 87 D.T.C. 525 (T.C.C.), Brulé J.T.C.C. states, at page 2198 (D.T.C. 527):

The calculation of the benefit derived by a shareholder using a corporation’s asset depends upon the corporation’s purpose in acquiring the asset and the use it makes of it.

In Cartwright v. R., (sub nom. Cartwright v. Canada), [1995] 1 C.T.C. 15, 94 D.T.C. 6677 (F.C.T.D.), Rouleau J. states, at page 20 (D.T.C. 6680):

In addition, the calculation of a benefit received by a shareholder using a corporation’s assets depends on the corporation’s purpose in acquiring it. That principle has been endorsed in this Court as well as the Court of Appeal. As stated by McNair J. in Youngman v. R. (1986), 86 D.T.C. 6584 at pages 6588-89:

Counsel for the defendant concedes, on the strength of the Houle case, that if it is found that the house on Shadow Drive was built for a business purpose and for use as a business asset so that any use of the house by the shareholders was only incidental thereto then the Minister’s assessment was incorrect.

In the case of R. v. Houle, [1983] C.T.C. 406, 3 D.T.C. 5430 (F.C.T.D.), the issue was the valuation of the benefit conferred on a shareholder for the use of his corporation’s yacht. Both parties agreed that in the event the Court found that the yacht had been acquired for business purposes, the proper method of computing the shareholder’s benefit was to allocate the operating cost. Revenue Canada had argued that the computation of the benefit should be based on a rate of return on capital expended by the Company. Collier, J. concluded that there was a legitimate business purpose and adopted the method agreed upon by the parties to compute the amount of the benefit. The Court did not express an opinion on the validity of the Minister’s formula.

In Dudelzak (supra), the Appellant lived in a dwelling owned by a corporation of which he was a shareholder. The Minister had taken the position that the dwelling had not been purchased or used for business purposes and that the benefit conferred on the shareholder was therefore equal to the maintenance costs incurred by the corporation and a return on the greater of cost or fair market value of the property. The shareholder paid a monthly rent in the amount of $1,000 for use of the dwelling. Both parties agreed that this amount represented the fair market rental value for the property. The Court found that the acquisition of the home had been motivated by business considerations and that it had been used extensively by the appellant for business purposes. Consequently, Brulé J.T.C.C. held that the rent paid by the appellant represented adequately the benefit conferred to the shareholder in relation to the use of the dwelling.

This Court, in Smith, supra, dealt with the issue concerning the value of benefits which derived from the use by the appellant of a condominium and two yachts owned by a corporation of which the appellant was a shareholder. The Court found that the yachts had been used primarily for business purposes. Consequently, the benefit to the appellant for personal use of the yachts was limited to the “per day rental” multiplied by the number of days the yachts were used for personal reasons. With regards to the condominium, the Court concluded that the corporation had acquired the condominium for the personal use of the appellant and made it exclusively available to him year round. Consequently, the Court held that the Minister had been correct in assessing the value of the benefit as being the rental value on the basis of year round availability.

As can be seen by these cases See also: Meeuse v. Minister of National Revenue, [1992] 1 C.T.C. 2470, 92 D.T.C. 1549 (T.C.C.), affirmed (sub nom. Meeuse v. Canada), [1995] 1 C.T.C. 21 (sub nom. Meeuse v. R.), 94 D.T.C. 6640 (F.C.T.D.); Giffin v. Minister of National Revenue, [1991] 1 C.T.C. 2306, 91 D.T.C. 421 (T.C.C.) that in situations where a corporation acquires an asset for business purposes and uses that asset for business purposes, the shareholder who has use of the asset will be taxed on a benefit that is equal to the fair market rental value of that asset. In cases where the corporation has acquired the asset primarily for the shareholder’s use, the courts have found that the fair market rent may not always be the appropriate measure of the benefit conferred on the shareholder.

In Youngman (supra), the Federal Court of Appeal computed the benefit that was conferred on a shareholder who had exclusive personal use of a house owned by the corporation of which he was a shareholder. The house had been built for him according to his specifications. Evidence showed that the house had not been built or used for business purposes. As for the calculation of the benefit, it was held that the fair market rental value was not appropriate. Instead, the benefit was equal to a return on the corporation’s equity in the house. Pratte, J.A. states at page (C.T.C. 14-15) 6325:

In the present case, the benefit or advantage conferred on the appellant was not merely the right to use or occupy a house for as long as he wished; it was the right to use or occupy for as long as he wished a house that the company, at his request, had built specially for him in accordance with his specifications. How much would the appellant have had to pay for the same advantage if he had not been a shareholder of the company? Certainly more than what the two experts referred to as the free market rental value since, in my view, the company would have then charged a rent sufficient to produce a decent return on its investment.

In Hinkson v. Minister of National Revenue, [1988] 1 C.T.C. 2263, 88 D.T.C. 1119 (T.C.C.), this Court evaluated the benefit conferred on a shareholder through the use of a cottage owned by the corporation. Brul*, T.C.J. found that the cottage had not been acquired by the corporation for business purposes. He rejected the fair market rent value as the proper method of evaluating the benefit and opted instead for an amount based on the cost to the company. He states at page (C.T.C. 2265) 1121:

The value of the benefit received as a shareholder was in fact the saving for the appellant of the capital outlay otherwise necessary to purchase the property.

We are here faced with the evidence given by Mr. Fingold as to the purpose of the acquisition of the apartment and its subsequent use. This evidence was not seriously challenged in cross-examination nor was it rebutted or refuted by any other evidence produced by the Respondent.

The Minister assumed that the apartment was acquired for the personal use of the Appellant and his family [1] . However, Mr. Fingold’s evidence rebuts this presumption and based upon the law a case is made for the argument that the apartment was acquired for business purposes. Having said that, it is now up to me to value the personal use of the apartment made by the Appellant, since personal use there was.

When the benefit conferred on a shareholder is computed on the basis of the fair market rental value of the asset, another issue needs to be addressed. This issue is whether the benefit should be computed on the basis of the fair market rental value for the entire period of availability for use by the shareholder or for the period of actual use. [2]

If the shareholder is able to demonstrate the period of actual use, coupled with evidence of extensive corporate use, he or she goes a long way in establishing that the actual period of use is the proper choice. However, that is not to say that the availability for use test is to be used only in cases where the purpose of acquiring the asset was solely for the shareholder’s personal use. There is room for saying that if the shareholder does not demonstrate the period of actual use, he shall be deemed to have received the benefit based upon fair rental market value for the period during which the asset was made available to him, less the business use shown to have been made.

There are two areas to canvass. One is to determine the reason for the acquisition and subsequent use, and having found that there were business reasons, to go on and quantify the personal use benefit received by the shareholder. There is nothing sacred in coupling the primary business purpose for the acquisition of the asset with a benefit based on actual use.

The Appellant did not establish the number of days of personal use as opposed to the number of occasions the asset was used for business purposes, both entertaining and other uses. However he did establish that he used the apartment for more than just entertaining and therefore he has established that entertaining was not the only business purpose for which the asset was used for. His personal use therefore is, in my opinion, incidental to the business purpose.

A log was kept for entertainment purposes, but for no other. The Appellant did not indicate the times he and his family were absent from Palm Beach and the apartment was not used by them during the season. On the contrary, the evidence was that at times when he was tending to business away from Palm Beach, his wife remained there. It seems to me therefore, not illogical or inappropriate to use the availability method to calculate the benefit. In these circumstances, that method is the most logical and appropriate.

The evidence indicated that the apartment was not purchased for use between May and December. However, although it was available to the Appellant during that period, it was his evidence that it was not used nor was it intended to be used, except during the season from December to May.

For the 1988 and 1989 taxation years, the apartment was used for business entertaining a total of 26 days and 45 days respectively. Based upon this usage and based upon a 151 days season, it was used 17.22 per cent of the time for such purpose, and in 1989, it was used 29.80 per cent of the time for business.

Assuming fair rental of $60,000 per year in 1988, $10,332 would have been the rental for the time used for business and $49,668 would be for personal use. Those figures for 1989 would be $17,880 and $42,120 respectively.

The Appellant paid one-half of the operating expenses in each year, which amounted to $26,539 in 1988 and $34,537 in 1989. These amounts are to be deducted from the personal use benefit, leaving a balance of $23,129 as a net benefit for 1988 and $7,583 for 1989. All amounts are in United States Dollars unless indicated to be in Canadian funds. Accordingly, for these reasons, the appeals are allowed, with costs, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the benefit to the Appellant for the 1988 and 1989 taxation years was $23,129 and $7,583 respectively.

The Appellant is entitled to no further relief.

Appeal allowed in part.