Gordon G. Duncan and Marjorie J. Duncan v. Her Majesty the Queen, [1994] 1 CTC 2393, 94 DTC 1142

Bell, J.T.C.C. (orally):—The decision which I must make in this case is based entirely upon fact. In my opinion, the valuation that I must determine in respect of the transaction in question of land transfer by the appellants to Duncan Associates Ltd. in January 1994 is either $92,000 or $184,000. There is, in my opinion, no supportable ground upon which I can find any other value. No findings of law are involved in these appeals.

The onus is on the appellants to prove that the reassessments from which their appeals are taken is wrong. Although I am not required to make a finding on this matter, with respect to the matter of onus shifting, I’m inclined to the view that if an appellant succeeds in shifting the onus to the respondent, he will, in so doing, have also succeeded in establishing his case to the Court's satisfaction.

I must make my decision on the preponderance of evidence as I interpret it. Keeping that test in mind, 1 have listened very carefully to everything that has been said in the past two days and I have devoted substantial effort outside this courtroom to examining what appeared to me to be the significant exhibits and portions thereof presented to the Court.

My impression of the evidence that I heard is that the testimony of Mr. Duncan and of Mr. Cooke was organized, forthright, logical and helpful. Mr. Erb's testimony was also of assistance.

On the other hand, I found Mr. Sneesby's evidence to be somewhat subjective, incomplete and, accordingly, not strongly persuasive.

While acknowledging the points which respondent's counsel advanced in applying the preponderance of evidence test, the weight of what I have heard persuades me to accept what appellant’s counsel has submitted in his argument as a good summary of what was being shaped as, and after hearing argument from both sides has become my conclusion—namely, acceptance of the value of the land in question and for the transaction in question of $184,000.

Accordingly, the appeals are allowed.

I note the concession by respondent's counsel that Marjorie J. Duncan is entitled to a capital gain reserve as claimed and my judgment will take that into account.

Appeals allowed.

Arthur S. Donovan v. Her Majesty The Queen

[Indexed as: Donovan (A.S.) v. Canada]

Tax Court of Canada (Teskey, J.T.C.C.), January 5, 1994 (Court File No. 92-2892).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63)—15, 85—Income Tax Regulations—4301—Shareholder benefit—Barter

The appellant, who was 78 years old, retired 15 years previously. In 1979, the appellant incorporated Holdings for tax planning purposes upon the advice of professionals. All the issued common shares of Holdings were issued to and are still held by the four children of the appellant. In 1979, the appellant acquired 27,409 Class A preferred shares of Holdings. In 1979, the appellant purchased a lot in Florida upon which he built a retirement home. The lot cost $39,252 and the house $256,913 for a total amount of $296,165. The appellant paid the $296,165 out of his personal funds but directed that title be taken by Holdings. At the end of Holdings's first fiscal year, the appellant owed Holdings $58,947. At the end of the second fiscal year, Holdings owed the appellant $157,610. During the years under appeal— 1986, 1987 and 1988—Holdings owed the appellant, by way of non-interest bearing shareholder loans, sums of money of not less than $640,000, $640,000 and $733,000, respectively. During the years in question, the book value of the Florida residence remained on Holdings’s books at the actual original cost thereof. For the years under appeal, the Minister assessed the appellant on the basis that a benefit was conferred by Holdings on the appellant in his capacity as a shareholder of Holdings within the meaning of section 15. The Minister assessed the value of the benefit by applying the prescribed rates of interest as set forth in Regulation 4301 of the Income Tax Regulations to the total cost of the residence, the rate of interest being the weekly average yield of treasury bills. The appellant appealed. The appellant's position was that the value of the benefit should be set at nil or in the alternative, if the benefit was more than nil it should be calculated on the fair market value of the rental value of the residence.

HELD:

The appellant’s exclusive use of the Florida residence constituted a benefit to him within the meaning of section 15. There was no connection between the large non-interest bearing loans to Holdings in the years 1986, 1987 and 1988 and the original cost of the house. Although the original cost of the house was put on the books of Holdings as a shareholder's loan from the appellant by the first fiscal year end, namely January 31, 1980, this shareholder's loan had been repaid in full and the appellant owed Holdings $58,947. Accordingly, the appellant could not point to the large non-interest bearing shareholder loans in 1986, 1987 and 1988 and say there was no benefit or there was no value to the benefit. Moreover, the transaction had many of the characteristics of a barter transaction. If the appellant had kept title to the asset personally, he would have lost the interest that he might have made on the money that the property cost him. However he would have the potential of any capital appreciation that might accrue. Accordingly, the value of the exclusive use of the Florida residence had to be substantial and had to be based on the cost of losing the interest on the original capital cost. In the result, the appellant failed to establish that the Minister’s assessment was wrong or too high. Appeal dismissed.

Richard Van Banning for the appellant.

Patricia Lee and Henry Gluch for the respondent.

Cases referred to:.

Youngman v. The Queen, [1990] 2 C.T.C. 10, 90 D.T.C. 6322;

Woods v. M.N.R., [1985] 2 C.T.C. 2118, 85 D.T.C. 479;

Gold Coast Selection Trust Ltd. v. Humphrey, [1948] A.C. 459, [1948] 2 All E.R.

379.

Teskey, J.T.C.C.:—The appellant appeals his assessments of income tax for the years 1986, 1987 and 1988. These appeals were heard under the General Procedure Rules.

Issues

The two issues before me are:

1. Whether a benefit was conferred by ASDCO Holdings Inc. ("Holdings") on the appellant in his capacity as a shareholder of Holdings within the meaning of section 15 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act"), and

2. If a benefit was conferred, what is the amount or value of the benefit?

Facts

The facts before me are:

1. The appellant is a 78 year old retired manufacturer who retired when he was 63 years old.

2. The appellant and his brother equally owned a manufacturing corporation known as Donlee Manufacturing ("Donlee").

3. Holdings was incorporated pursuant to the laws of the Province of Ontario for tax planning purposes in 1979 upon the advice of professionals.

4. Upon incorporation, a portion of the shares held in Donlee by the appellant was transferred to Holdings under the roll-over provisions of section 85 of the Act.

5. Immediately thereafter, Donlee then redeemed the shares held by Holdings at the price of $69.05 a share for a total considered to the appellant of $2,620,201.

6. The remaining shares of Donlee held by the appellant were then immediately sold in an arm's length transaction to third parties.

7. All the issued common shares of Holdings were issued to and are still held by the four children of the appellant.

8. The appellant, on payment of $2,740,900 in 1979 acquired 27,409 Class A preferred shares of Holdings. These preference shares have a 10 per cent non- cumulative dividend rate and a par value of $100 each.

9. The appellant retired in 1979 from active business on the sale of his interest in Donlee.

10. In 1979, the appellant decided to own a winter retirement residence in Florida.

11. On the advice of professionals, in order to save United States estate taxes on his death, it was decided that Holdings would hold title to any residence purchased. There are, of course, many other legitimate reasons to have Holdings hold the title to the property in question.

12. In that year, the appellant purchased a vacant lot (the only lot left in a 55 lot subdivision) near Boca Raton in Florida, approximately eight miles from the ocean. Although the developer/builder offered four different model homes to choose from in this subdivision, only the smallest least expensive home would go on this last remaining lot. The appellant was able to negotiate, prior to construction, that an additional room would be added to the house.

13. The appellant purchased the lot for $39,252 and had a house built thereon and furnished for an additional $256,913 for a total amount of $296,165.

14. The appellant paid the $296,165 out of his personal funds but directed that title be taken by Holdings. This asset was shown on Holdings books at actual cost, there being no allegation or claim that Holdings held title to the residence in trust for the appellant.

15. The first fiscal year end of Holdings was January 31, 1980.

16. As of January 31, 1980, the appellant owed Holdings $58,947.

17. As of January 31, 1981, Holdings owed the appellant $157,610.

18. Holdings changed its fiscal year end from January 31 to December 31 in 1981 so that the next fiscal year ending after January 31, 1981 was December 31, 1981.

19. As of December 31, 1981, Holdings owed the appellant $15,112.

20. As of December 31, 1982, the appellant owed Holdings $642,104.

21. During the year 1986, Holdings owed the appellant loans of not less than $685,484 without interest.

22. During the year 1987, Holdings owed the appellant loans of not less than $685,484 without interest.

23. During the year 1988, Holdings owed the appellant loans of not less than $733,542 without interest.

24. The appellant paid personally, right from the time the lot was purchased up to the present time, all expenses covering this residential property. In 1986, approximately $14,000 in capital expenses were paid personally by the appellant and put in Holdings books as shareholder loans by the appellant to Holdings and Holdings’ capital cost was adjusted upward to reflect this additional capital expense.

25. At no time has Holdings taken capital cost allowance on the capital cost of the building or its furnishings.

26. During the three years in question, namely: 1986, 1987 and 1988, the book value of the Florida residence remained on Holdings books at the actual original cost thereof and all during this three year period, Holdings owed the appellant, by way of non-interest bearing shareholders loans, sums of money of not less than $640,000, $640,000 and $733,000 respectively.The appellant's position is that, during the years before me, since Holdings owed him at all times approximately twice the amount of the book value of the residence, there was no benefit conferred upon the appellant by Holdings since the appellant was in the position to transfer the residence to himself at any time therein at the then market value and just reduce his shareholders loan to Holdings by that amount. The appellant argues that the decision in Youngman v. The Queen, [1990] 2 C.T.C. 10, 90 D.T.C. 6322 (F.C.A.), is authority for his position.

Respondent's position in issue 1

The respondent submits that in order for the appellant to take advantage of the decision in Youngman, supra, he must not only show that he either loaned to Holdings the total cost of the residence or paid the total cost personally (which I so find) but that amount must be continuously loaned by the appellant to Holdings from day one up to the end of the years in question which it was not (see facts 16 to 20 inclusively). The respondent further submits that unless the appellant fits exactly within the dicta of Youngman, that the appellant cannot set off the benefit of the use of the residence against the non-charging of interest on his shareholders loans to Holdings. This would be, in essence, a barter transaction. That is, if the true rental of the residence was $20,000, which is offset by interest on the loans of $20,000, that the $20,000 would be income in the appellant's hands and be taxable.

Analysis of issue 1—whether benefit conferred

Cardin, J.T.C.C., (as he then was), in Woods v. M.N.R., [1985] 2 C.T.C. 2118, 85 D.T.C. 479, said at page 2120 (D.T.C. 480):

. . . the very fact that the appellant had exclusive personal use of the corporation's asset, namely, the boat, is in itself a benefit.

And again at page 2120 (D.T.C. 481):

The fact that the appellant paid all the operating expenses of the boat does not in any way change the issue, which is whether the appellant received a benefit under paragraph 15(1)(c) of the Act by having given to him the authority or the privilege of using the boat exclusively for his personal use.

There arose in my mind a question which is certainly not determinative but which I find to be interesting and it is this: If there were no benefit to the appellant why would he have chosen to go that route rather than purchasing the boat outright?

In this case, the appellant picked out the lot in a location that he desired to have a winter residence and had the home erected thereon, (the design of which was his choice). He has had and continues to have exclusive use of the house and its furnishings. Thus, the answer to issue 1 is yes there was a benefit to the appellant simply by having exclusive use of this asset, namely the property, house and contents.

The appellant’s position on this issue really goes to the value of the benefit and not whether this was or was not a benefit.

Having determined that the appellant received a benefit, I must deal with the value of the benefit.

Issue 2—value of the benefit

The appellant's position is that the value of the benefit should be set at nil on the basis of the Youngman decision, supra, or in the alternative, if the benefit is more than nil it should be calculated on the fair market value of the rental value of the residence. This amount was agreed upon if the Court should find that this is the proper method of calculating the benefit.

The respondent assessed the value of the benefit by applying the prescribed rates of interest as set forth in Regulation 4301 of the Income Tax Regulations (the "Regulations") to the total cost of the residence, the rate of interest being the weekly average yield of treasury bills.

Analysis of issue 2

The Act was amended with respect to a benefit conferred after June 1988. For the purposes of this appeal, there was no change.

In 1986, 1987 and up to June 1988, section 15 of the Act read:

15 (1) Where in a taxation year. . . .

(c) a benefit or advantage has been conferred on a shareholder by a corporation, otherwise than

the amount or value thereof shall . . . be included in computing the income of the shareholder. . ..

After June 1988, section 15 of the Act read:

15 (1) Where, in a taxation year, a benefit has been conferred on a shareholder .. . . otherwise than by

the amount or value thereof shall . . . be included in computing the income of the shareholder for the year.

This appeal is different from the Youngman appeal, supra, in that the corporation in Youngman purchased the 16-acre property therein in 1966 with the purpose of subdividing the 16 acres into residential building lots. The municipal authority did not approve the proposal subdivision project and by 1978 (some 12 years later) the project appeared doomed to failure. Also both Youngman and his wife, who owned 35 per cent of the shares of the corporation (their children holding the 65 per cent remainder) testified to the effect that the decision to have the corporation build the house had been made not only for the purpose of providing them with a bigger and better house but also in the hope that the building of such a nice home in that area might serve to eliminate opposition to the proposed development. Also Youngman was able to demonstrate that during construction of the house, which took virtually all of 1978, that on August 21, 1978 he loaned the corporation $86,500 interest free in order to assist in the financing of the construction, which loan was always outstanding.

Pratte, J.A. with Heald and Stone, JJ.A. concurring, said at pages 14-15 (D.T.C. 6325-26) in Youngman, supra:

The appellant’s main proposition is that, under paragraph 15(1 )(c), what is to be added to the income of the shareholder is the value of the benefit that he received rather than the cost of that benefit to the corporation. That proposition is certainly well founded. However, it does not support the appellant’s conclusion. In determining the value of benefit, one may take its cost into consideration. Free market value is not, in all circumstances, the sole indication of real value.

It is now well settled that paragraph 15(1)(c) applies only when a shareholder has received, qua shareholder, a benefit or advantage from a corporation. In valuing a benefit allegedly received by a shareholder, it is therefore necessary to find what the shareholder would have had to pay for the same benefit in the same circumstances if he had not been a shareholder of the company. A shareholder receives no benefit for the purposes of paragraph 15(1)(c) if, in the same circumstances, he would have received the same benefit from a company of which he is not a shareholder. For instance, if a company builds an expensive house with the intention of selling it at a profit and later, after realizing that it cannot be sold for more than half its cost, sells it at that low price to one of its shareholders, that shareholder in all likelihood certainly gets a benefit out of that transaction but paragraph 15(1 )(c) does not apply to it.

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. 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. It is impossible to determine with accuracy the amount of that rent. However, subject to one important reservation, I cannot say that it would have been less than what the Minister assumed it to be. That reservation is that if the appellant had been dealing with a company of which he was not a shareholder, consideration would certainly have been given, in determining the rent payable, to the fact that he had himself lent more than $100,000 without interest to the company in order to help to finance the construction of the house. As long as that loan remained outstanding, the rent otherwise payable would, in my view, have been reduced by an amount equal to the interest that should normally have been paid on the balance of the loan.

The appellant herein cannot and does not allege that there was any business purpose in the purchase of the lot near Boca Raton nor the building of the winter residence thereon. The evidence is quite to the contrary. The lot, house and furnishings were paid for by him personally and title was placed in the corporation's name due to advice received from professionals.

I have come to the conclusion that the appellant cannot point to the large noninterest bearing shareholder's loans in the years 1986, 1987 and 1988 and say there is no benefit or there is no value to the benefit. I come to the conclusion that the value of the benefit is substantial for several different reasons, namely:

Firstly

There is no connection between the large non-interest bearing loans to Holdings in the years 1986, 1987 and 1988 to the original cost of the house. Although the original cost of the property, house and furnishings were put on the books of Holdings as a shareholder's loan from the appellant by the first fiscal year end, namely January 31, 1980 of Holdings, this shareholder's loan had been repaid in full and the appellant owed Holdings $58,947 (see fact 16 above).

There was a shareholder's loan to Holdings of $157,610 at year end January 31, 1981, and $15,112 at year end December 31, 1981 (see facts 17 and 19). However, this is not the original cost, namely $296,165. Also as of December 31, 1982, the appellant owed Holdings $642,104. The appellant cannot demonstrate a connection between the original cost of these assets and his shareholder loans in 1986, 1987 and 1988. I believe that these differences of fact from Youngman are significant and Youngman does not apply herein.

Or, in the alternative:

Secondly

I believe the argument of the appellant works against himself. He points to these large shareholder's loans in the years in question and says that it offsets the exclusive use of the Florida residence. The use is taxable because, the appellant, in fact, received interest in specie, namely exclusive use of the Florida residence which is taxable whether he is a shareholder or not of Holdings.

Or, in the alternative:

Thirdly

From reading Youngman, it appears that the Federal Court of Appeal did not have put to it nor did it consider the implications of barter.

Barter, on occasion, is used by some people to gain goods or services, the benefit of which is not declared as income in an attempt to avoid taxes. An example of this would be if I lend my arm's length landlord $300,000 interest free and the landlord, in turn, does not charge me rent on the apartment which I occupy, which would normally have an annual rental of $20,000, the tax authorities lose tax on income of $20,000 from both my landlord and myself if the same is not declared. The $20,000 is taxable income in both hands.

The House of Lords decision in Gold Coast Selection Trust Ltd. v. Humphrey, [1948] A.C. 459, [1948] 2 All E.R. 379, stands as authority for the proposition that where a taxpayer receives an asset or use of an asset as the result of an exchange (barter) for the purpose of computing income to that taxpayer, the value thereof has to be taken into consideration, even though it is neither realized nor realizable.

Since there is no evidence before me as to the market value of the rental of the property in 1979, nor as to the market value of the property in the years 1986, 1987 and 1988, there is no way for me to attempt to determine if the transaction made economic sense to Holdings. However, this is not really important as the value of the benefit is what the shareholder receives and not the cost of the benefit to the corporation.

If the appellant had kept title to the asset personally, he would have lost the interest that he might have made on the money that the property cost him, however he would have the potential of any capital appreciation that might accrue. By placing title to the property into Holdings, any capital appreciation accrued to his children. This was a decision he made and therefore the potential for capital appreciation is irrelevant. There is nothing wrong with a shareholder loaning money interest free to his corporation. Where, however, the shareholder takes a benefit from the corporation, the non-interest shareholder's loans have to be looked at in a different light.

The value of exclusive use of the Florida residence has to be substantial and has to be based on the cost of losing the interest on the original capital cost. The appellant has not established that the Minister of National Revenue's assessment was wrong or too high.

The appeals are dismissed with costs.

Appeals dismissed.