Roy W. Craik v. Her Majesty the Queen, [1995] 1 CTC 2470

Sobier J.T.C.C.:-The Court is now prepared to give judgment and reasons for judgment in the matter of Roy W. Craik v. The Queen, number 92-1363G.

The appellant appeals the assessments by the Minister of National Revenue (the "Minister") for his 1976 to 1985, inclusive, taxation years whereby the Minister included certain amounts in the appellant’s income as shown on Schedule I [not reproduced] to the respondent’s reply to the appellant’s notice of appeal. Schedule I is reproduced as Appendix A [not reproduced] to these reasons for judgment.

In addition, late-filing penalties were also assessed against the appellant as shown on Schedule II [not reproduced] to the said reply, which is reproduced as Appendix B to these reasons for judgment. It was agreed that the late-filing penalty for 1977 was a misprint and should read $4,802.64 and not $480,264.

The appellant is an insurance agent and in the years in question was involved with three corporations, namely: BL Insurance Agencies Ltd. ("BL"), Broker’s Consultants Ltd. ("BCL"), and Craik Holdings Ltd. ("CHL"). The appellant was an officer and director of each of the three corporations; he was also a shareholder of CHL and BCL. He was not a shareholder of BL. CHL was a shareholder of BL but did not hold a controlling interest.

BL was the general agent for Maritime Life Insurance Company ("Maritime") of Halifax, Nova Scotia. CHL entered into a management agreement or other agreements with BL whereby it would provide office space, furniture, other services, and would sell products of Maritime on behalf of BL. BL received commission income from Maritime and in turn would pay commissions and/or management fees to CHL.

I will first deal with those items of the assessments which are either not disputed, have been admitted as correct, or concerning which the appellant was not able to discharge the onus placed upon him to refute.

I will first deal with CHL. The appellant admits that he cannot discharge the onus placed upon him with respect to those items in Schedule I dealing with CHL headed automotive, casual labour, loan interest, office & general, and travel. With respect to the item headed rent, it was admitted by the appellant that this amount was paid by CHL for accommodation in Toronto provided to the appellant. An apartment was rented by CHL so that the appellant could remain in Toronto and not be required to drive to his home near Orangeville, Ontario on nights when he entertained and may have consumed too much alcohol or on nights where driving would be dangerous.

This is clearly a benefit conferred upon him by CHL. It was the appellant’s mistaken belief that if certain criteria as to length of stay and costs incurred were met, the benefits would not be taxable. The rent benefits were personal to the appellant and although he believed them to be expenses of carrying on business, they were taxable benefits to him under subsection 15(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act”). With respect to all those items, the appeal is dismissed.

I will deal next with the items in Schedule I under the heading broker’s consultants, namely bank charges and interest. It is the Minister’s claim that the moneys were borrowed by the appellant from financial institutions, in this case the Royal Bank of Canada (the "Royal”), for personal reasons and that BC paid the interest under bank charges with respect to those loans.

The evidence discloses that by 1976, BC and Advisory Insurance Agencies Ltd. were separately obligated to the Royal. One of the principals of those companies left and paid $5,000 to the Royal and was relieved of his guarantee. That left approximately $18,350 owing by BC.

I am satisfied on the evidence that this liability did not constitute indebtedness of the appellant but rather of BC. The Minister argued that it had not been demonstrated the amounts borrowed were for the purpose of earning income and therefore deductible. That is not the issue. The issue is whether the payments were benefits conferred upon the appellant in his capacity as a shareholder of BC. As stated, I am satisfied that the liabilities were those of BC and therefore any payments made in respect of such liabilities did not benefit the appellant, and with respect of those portions of the appeal the appeal is allowed.

I will now deal with the items in Schedule I headed BL Insurance Agencies. It was the appellant’s contention that since he was never directly a shareholder of BL he could not be assessed under subsection 15(1) of the Act. Subsection 15(1) reads as follows:

Where at any time in a taxation year a benefit is conferred on a shareholder, or On a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by....

And there follows certain exceptions which are not applicable to this appeal.

..the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of a shareholder for the year.

The provisions of section 84 are also not applicable. It was demonstrated that at all relevant times the appellant was not a shareholder of BL, but that CHL, a corporation wholly owned by him during the period 1976 to 1980, was a shareholder.

There is some doubt as to the ownership of the shares of CHL after 1980 since it appears that the shares of CHL were pledged to support obligations of the appellant to a third party. However, the appellant was entitled to receive dividends and did receive dividends from CHL after 1980.

The appellant argues that since the Minister in assessing him relied on the assumption that he was a shareholder of BL between 1976 and 1985, he is not liable for tax payable on any benefits received from BL during that time. Except for this argument, the appellant did not attempt to refute the evidence contained in Schedule I with respect to BL.

It is trite law that liability for income tax arises from the Income Tax Act and not the reasons given in any notice of assessment. (See Pure Spring Co. v. M.N.R., [1946] C.T.C. 171, 2 D.T.C. 844 (Ex. Ct.).)

However, to be taxable there must be a charging provision in the Act such as subsection 15(1) which under the present circumstances is not applicable to this appeal.

Counsel for the respondent argued that the provisions of subsection 245(2) of the Act, as it existed during the years in question, are applicable and render the appellant liable for tax. Subsection 245(2) reads as follows:

Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purposes of Part I,

The purpose of subsection 245(2) was to include in a taxpayer’s income benefits which he received indirectly from another.

One must ask the question: Did BL confer a benefit on the appellant by paying certain expenses? The answer is clearly yes. However, subsection 245(2) states that having determined that a benefit was conferred, BL shall be deemed to have made a payment to the appellant equal to the benefit conferred and the payment shall, depending upon the circumstances, be included in computing the taxpayer’s income for the purposes of Part I.

If it was intended that the appellant be made liable for tax under subsection 245(2), the benefit received must be a taxable benefit. If subsection 245(2) was in itself a charging provision, there would be no need for the words "depending on the circumstances" since absent those words it would be a charging provision. Since it would then read that the "payment shall be included in computing the taxpayer’s income for the purposes of Part I".

Therefore, subsection 245(2), not being a charging provision, one must look to the Act to see whether, under the circumstances, such a benefit is a taxable benefit. If the appellant were a shareholder of BL, he would be taxable under subsection 15(1). If the benefits were qua employee, they would be taxable benefits under paragraph 6(1 )(a). If the provisions of paragraph 6(1 )(a) are applicable, there is no need to rely on subsection 245(2).

The applicable portion of paragraph 6(1 )(a) reads as follows:

There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit...

the exceptions are not applicable.

The definition of "office” contained in subsection 248(1) includes the position of a corporation director and the appellant was a director of BL. Therefore, the provisions of paragraph 6(1 )(a) would apply to the appellant if he received taxable benefits from BL conferred by reason of his office or employment.

All payments made to or benefits conferred upon taxpayers are not necessarily taxable. As stated, there must be a charging provision such as paragraph 6(1 )(a). The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, a decision of the Supreme Court of Canada, dealt with benefits under that paragraph. Referring to Poynton, supra, Mr. Justice Dickson, as he then was, stated at page 441 (C.T.C. 399, D.T.C. 5414):

I agree with what was said by Evans J.A. in R. v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329, at page 420 (D.T.C. 6335-36), speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of section 3.

(Which is now section 6.)

Since the appellant was a director of BL, any benefit received or enjoyed in respect of, in the course of, or by virtue of him being a director will be taxable. (See Taylor v. M.N.R., [1988] 2 C.T.C. 2227, 88 D.T.C. 1571 (T.C.C.), a decision of Judge Rip of this Court.) Judge Rip at page 2230 (D.T.C. 1573) stated, and I quote part of the statement:

The words "office", "officer" and "employee" are defined in subsection 248(1) as:

"office"...also includes the position of a corporation director, and "officer" means a person holding such an office....

"employee"-includes an officer.

Thus a directorship is an office: the holder of an office is an officer, and an officer is an employee. Therefore it would appear for the purposes of the Income Tax Act a director is an employee.

The appellant readily admitted that BL paid the amounts on his behalf, but relied on the argument that since the provisions of subsection 15(1) did not apply he escapes liability. Unfortunately, he is liable under paragraph 6(1 )(a) since there can be no reason for BL to pay these amounts other than because they agreed to do so by virtue of his office or employment. No corporation would make gifts of such amounts. That they were benefits is clear. That they were made in respect of, in the course of, or by virtue of his office is also clear. There is no other logical explanation.

Except as I shall state below, the appeal with respect to benefits conferred by BL is also dismissed.

There was some confusion concerning rent paid with respect to office space. To the extent that it can be shown by the appellant that office rent was paid by any of the three companies, and in particular BL and CHL, the benefit respecting rent will be reduced by such an amount. Therefore, with respect to the benefit concerning rent paid by CHL and BL, the appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the rent benefit may be reduced as aforesaid.

Dealing finally with the late-filing penalty, all individual taxpayers are required to file their returns by April 30 of the year following. The appellant did not file his return for the years under appeal until March 1987. The reason given for not filing, namely the lawsuit with Maritime, does not excuse the appellant from filing his returns in a timely manner. They could have been filed on the basis of the facts known at the time and amended if necessary as a result of the lawsuit. This was not done.

The appeal with respect to the late-filing penalty under subsection 162(1) is dismissed except insofar as the liability for tax may be reduced as aforesaid by the reduction of the rent benefit and by the success of the appeal in dealing with interest and bank charges with respect to BCL.

The appellant is entitled to no further relief. The respondent is entitled to her costs on a party-and-party basis.

Appeals allowed in part.