Jerome D. Taylor v. Her Majesty the Queen, [1995] 2 CTC 2223

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 included in his income for those years amounts as a taxable benefit with respect to the personal use of a yacht owned by Jerome D. Taylor Chevrolet Oldsmobile Cadillac Ltd. ("Taylor Chevrolet").

The appellant is the owner of all of the issued and outstanding common shares in the capital of 534118 Ontario Corporation ("Holdco"). Holdco is the owner of all the issued and outstanding shares in the capital of each of Limestone Auto Body Limited ("Limestone") and Taylor Chevrolet. (Limestone and Taylor Chevrolet are sometime jointly referred to as "Opcos" and singularly as an "Opco".)

Taylor Chevrolet is a General Motors automobile dealer in Kingston, Ontario, and Limestone operates an auto body repair and paint shop also in Kingston.

Limestone was the owner of the premises from which Taylor Chevrolet carried on its dealership business (the "Bagot property").

Pursuant to an offer to purchase accepted by Limestone on June 29, 1987, Limestone agreed to sell the Bagot property for a total of $2,750,000 cash. A deposit of $400,000 was submitted with the offer. The offer was conditional upon the fulfilment of certain conditions. If the conditions were met or waived, the offer became irrevocable and the deposit would not be returned to the purchaser. The conditions were waived by the purchaser and the balance of the purchase price was paid in cash on closing, which took place on December 15, 1987.

Although the vendor was Limestone, the offer to purchase also included Taylor Chevrolet as a vendor and the deposit cheque was made payable to Taylor Chevrolet, who issued a receipt to the purchaser for the deposit.

On the strength of being assured of sufficient funds to purchase a Bathtub Nonsuch 36 (the "yacht"), on October 9, 1987 the appellant purchased the yacht from a broker for $175,000. The purchase price was paid over to the broker by means of a cheque drawn on the account of Taylor Chevrolet and dated October 7, 1987.

As a result of the sale of the Bagot property, Limestone realized a capital gain of $1.4M. Limestone paid capital gains tax on this amount and paid a capital dividend to Holdco on December 17, 1987, and Holdco in turn paid a capital dividend to the appellant also on December 17, 1987. The tax paid capital dividend amounted to approximately $871,000, as set out in the financial statements, but was $907,084 according to the notice of appeal and reply to the notice of appeal.

On December 17, 1987, Limestone acknowledged receipt of a "director’s loan" from the appellant amounting to $245,681.45 (the "loan"). A receipt was issued for the loan, but no reference was included stating the purpose of the loan, only that it was a "director’s loan". However, in evidence it was stated that the loan was for $227,000. At the year-end of December 31, 1987, the balance sheet of Limestone showed $227,489 as owing to a director.

According to the evidence of Mr. Brian Smith, the general manager of all three companies, the three companies were considered one business entity and intercompany loans were not unusual. He stated that funds were channelled among the companies as needed. Since the Opcos generated the income and required funds, transfers were generally made between them.

The evidence was that although Mr. Taylor could have paid the $175,000 himself, he chose to have Taylor Chevrolet pay that amount. The $175,000 was to have been paid by Mr. Taylor to Taylor Chevrolet upon transfer of the yacht to him, title having been taken by Taylor Chevrolet according to the invoice, however the registration of the yacht was in the name of Mr. Taylor.

The yacht was carried on the books of Taylor Chevrolet as inventory and to this day, is still an asset of Taylor Chevrolet. No amount was ever shown on the books or financial statements of either Opco showing a receivable from the appellant for the purchase price of the yacht.

During the summer of 1988 and 1989, the appellant enjoyed exclusive personal use of the yacht. It was never used for corporate or business purposes by any of the companies.

Limestone having agreed to sell the Bagot property, Taylor Chevrolet had to find an alternative location. To this end, Mr. Taylor purchased a site in Kingston Township, where the dealership facility for Taylor Chevrolet was to be built by him and Taylor Chevrolet would become his tenant.

In order to finance this enterprise, Mr. Taylor received a commitment from the Canada Trust Company dated January 11, 1988, whereby it agreed to lend to him a total of $2,500,000. This facility was to be guaranteed by Taylor Chevrolet, Limestone, Holdco and Mrs. Taylor.

On January 13, 1988, Canada Trust gave a loan commitment for $9,000,000 to Taylor Chevrolet to finance the dealership business. The Bank of Nova Scotia, the group’s long-time banker had given its commitment to Taylor Chevrolet on July 15, 1987 also to provide financing, including an operating line of credit for new car sales and leases, as well as general operating line of credit. The commitments contained financial tests, including tangible net worth tests and working capital tests.

The commitments defined tangible net worth generally as a combination of paid-up capital, earned surplus, contributed surplus, postponed funds or postponed shareholder loans, less certain other amounts. Although the Bank of Nova Scotia commitment stated that the working capital test would be as defined by the Bank of Nova Scotia, the usual meaning of working capital is the excess of current assets over current liabilities and in this instance, current assets were to exceed current liabilities by at least $320,000.

The tangible net worth test for Taylor Chevrolet in the Bank of Nova Scotia commitment was the consolidated tangible net worth of Taylor Chevrolet and Holdco. However, I assume that this would also include Limestone, although not specifically mentioned in the commitment.

In each case, the tangible net worth test included postponed shareholders advances. Mr. Smith stated that the Bank of Nova Scotia did not always require that the advances be postponed, but that they would be postponed if requested or otherwise would be made available to be part of tangible net worth. According to Mr. Smith, it was necessary that the loan continue to be outstanding since its removal from the equation would reduce Taylor Chevrolet’s tangible net worth below the amount required by the Bank of Nova Scotia.

It was decided that Taylor Chevrolet would keep the yacht in inventory and retain the loan and not require Mr. Taylor to repay the advanced $175,000 and take title to the yacht. This had the apparent effect of including the value of the yacht in working capital, and the loan in the make up of the tangible net worth.

The appellant argues first that there was no benefit, and if there was a benefit, it was not a taxable benefit. He also argues that if it is a taxable benefit, it was not conferred upon him by virtue of, in the course of or in respect of his office or employment. [1]

The appellant’s argument that the benefit was not conferred upon him in his capacity as employee rests on the argument that no officer, director or employee could confer such a benefit, but that the appellant could do so only in his capacity as controlling shareholder of the companies.

Corporations do not act through their shareholders. They act through their officers and directors. The shareholders elect the directors, who in turn elect or appoint officers. Notwithstanding that other employees may not have had the authority to confer such a benefit on anyone, a chief executive officer or director such as the appellant would have such authority. Under subsection 248(1) of the Act, an officer is defined as an employee.

To say that the provisions of paragraph 15(a) of the Act are not applicable does not end the matter. There was no other reason for Taylor Chevrolet to purchase the yacht, other than to benefit Mr. Taylor. It did so at his direction and because of his connection with it. This connection included the fact that he was an officer, director and an employee. He made the decisions and he implemented them. They were carried out by him in his capacity as one who could bind the company, and this was not done in his capacity as shareholder.

The appellant does not deny that the yacht was made available to him and used by him exclusively. He readily admits that the yacht was purchased by Taylor Chevrolet for his exclusive use. There was a benefit conferred upon him. Such benefit was a taxable benefit under paragraph 6(1 )(a) of the Act.

A great deal of time and effort was expended on a attempting to show Mr. Taylor put moneys into the Opcos of at least equal value to the purchase price of the yacht. In my opinion this is immaterial. The moneys were not advanced for the purpose of permitting the yacht to be purchased, or assisting Taylor Chevrolet to purchase it, as was the case in Youngman v. The Queen, [1990] 2 C.T.C. 10, 90 D.T.C. 6322 (F.C.A.). In fact, he advanced moneys not to Taylor Chevrolet but to Limestone.

It is one thing to argue that there might be a possibility of a set-off between amounts owed to a shareholder by a corporation and amounts owed by the shareholder to that corporation and it is another to make this argument when the two corporations involved are not the same. To argue that a purchase made on his behalf by Taylor Chevrolet may in some way be offset by moneys he advanced to Limestone, while in keeping with Mr. Taylor’s belief that all of the corporate assets were in one big pot, is not in keeping with the reality of the situation.

The fluctuating state of the account between the appellant and the Opcos over the years cannot be used to change the facts. It is immaterial that he advanced moneys to one of the companies, even if he advanced moneys to Taylor Chevrolet as he did later. There is no connection whatsoever between the purchase of the yacht and the advances, except those put forward after the fact in an attempt to cobble a scenario in an effort to show a connection when none existed. The argument that advances were made by the appellant to the Opcos fails on two counts. First, the original advance was not made to Taylor Chevrolet, but to Limestone, and secondly, the fact they were amounts owing to the appellant does not lend itself to a set-off (see Donovan v. Canada, [1994] 2 C.T.C. 426, 94 D.T.C. 1143 (T.C.C.).

Having found the existence of a taxable benefit, it must be quantified.

The Minister calculated the benefit based on the value of the yacht and applied the prescribed rate of interest. This calculation was made on a monthly basis for 12 months.

The appellant argues that since he could not make use of the yacht during the winter months, then it would follow that no benefit was conferred upon him during those months. In support of this position, he refers to Cartwright v. Canada, [1995] 1 C.T.C. 15, 94 D.T.C. 6677 (F.C.T.D.). Cartwright involves the personal use of a cottage owned by a corporation controlled by Mr. Cartwright. However, in Cartwright, the Court noted that corporate assets acquired for the purpose of earning income but used incidentally by a shareholder would be considered a benefit to the shareholder equal to the amount he would have been required to pay to obtain the same benefit from a corporation of which he was not a shareholder (see Youngman, supra, at page 15 (D.T.C. 6325).

In this appeal, the yacht had no business purpose. It was acquired solely for the personal use of the appellant. The appellant’s argument that he could not use the yacht in the winter months, and that therefore there was no benefit is akin to saying the benefit was bestowed upon him only in the occasions when he would actually sail the yacht.

The yacht was given to him to do with as he pleased and accordingly the benefit accrued to him was for the entire year. The appellant has not demonstrated that the Minister’s calculation of the benefit was incorrect.

For these reasons, the appeals are dismissed with costs.

Appeals dismissed.