Sylvio Gendron v. Minister of National Revenue, [1989] 2 CTC 2378

Tremblay T.C.J.:—This appeal was heard on October 14, 1987 at Québec, Quebec.

1. Issue

It must be determined whether the appellant, the principal shareholder of Les Immeubles Sylvio Gendron Inc (hereinafter called "the company") correctly failed to include the sums of $8,136 and $9,774 in his income for 1981 and 1982 as a benefit received from the company.

According to the appellant, he spent two months in each of these years in a bungalow located in Florida that was owned by the company. The appellant paid the company $1,000 per year and, in his view, this was a very reasonable price because a bungalow of this kind could be let for $4,200 per year. Moreover, he had purchased this bungalow with a view to reselling it.

According to the respondent, this bungalow purchased by the company in 1977 was never offered for sale or for rent. It was purchased for the sole purpose of obtaining a personal benefit for the appellant. In fact, it had been made available only to the appellant for 12 months a year since 1977.

The respondent calculated the benefit received by the appellant on the basis of the company's expenses for the property and the return on the cost and arrived at a fair rental value of $9,136 (1981) and $10,744 (1982).

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof is based on several judicial decisions, including a judgment rendered by the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In that judgment the Court held that presumptions of fact made by the respondent to support his assessments or reassessments are also assumed to be true until the contrary is proved. In the instant case the facts presumed by the respondent are described in subparagraphs (a) to (n) of paragraph 4 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

4. In reassessing the appellant for his 1981 and 1982 taxation years, the Minister of National Revenue relied, inter alia, on the following facts:

(a) during his 1981 and 1982 taxation years the appellant was the principal shareholder of Les Immeubles Sylvio Gendron Inc (hereinafter called "the company") [admitted by appellant]

(b) during the company's 1977 taxation year it purchased a bungalow-style property in Hollywood, Florida [admitted by appellant];

(c) the cost of this property in Hollywood of May 31, 1982 and as of May 31,1983 was $47,849, namely:

	COST OF PROPERTY
	BUILDING FURNITURE
Purchase cost
in 1977	37,750	5,361
Improvements and
additions:
1978	3,236	361
1980		1,141
	40,986	6,863

[admitted by appellant];

(d) the company obtained a long-term mortgage to 1983 at a rate of 8% per year, the balance of which as of May 31, 1982 was $11,803 and as of May 31, 1983 $11,166

(e) the sole purpose of the purchase of the property in Hollywood, Florida was to obtain a personal benefit for the principal shareholder of the company, Sylvio Gendron, by providing him with a place to stay in a popular vacation area [denied

(f) the said property was placed solely at the disposal of the principal shareholder, Sylvio Gendron, for twelve (12) months per yer [denied by appellant];

(g) the said property is the only one owned by the company outside Quebec and the only one located in a vacation area [admitted by appellant as far as the word

(h) it is the only property that the company has never been able to let, except at a ridiculously low price to Sylvio Gendron, even though it has owned the property since 1977 [denied by appellant];

(i) no evidence was adduced suggesting that the company tried, even once, to sell the property or to lease it to persons other than Sylvio Gendron [denied by

(j) the benefit conferred on and received by the appellant was calculated as follows:

	1981	1982
Expenditures by company on property,
excluding interest (by appellant's taxation year)	3,394	3,237
cost	2,742	7,937
Return on cost	5/742
Fair rental value	9,136	10,774
LESS
	(1,000)
rent paid by appellant	CL000)
Taxable benefit	8,136	9,774
[denied by appellant];

(k) the return on the cost of the property was calculated by multiplying the cost of the building and furniture ($47,849) by the rate prescribed in the Act for certain purposes for the years in question, namely, 12% in 1981,16% for the first nine (9) months of 1982 and 15% for the last three (3) months of 1982 [admitted by

(l) use of a return method to determine the fair rental value is appropriate because normally the operating costs and return on capital are factors used in a free market to establish equitably the probable fair rental value [denied by appellant];

(m) the method is also appropriate because the property in question is abroad and this makes it impractical to obtain a study of the rental market by an expert

(n) moreover, given the actual rental market, the fair rental value of the property is substantially the same as the amounts determined in subparagraph (j) [denied by

3. Facts

3.01 The appellant first admitted a number of facts among those alleged by the respondent, as was mentioned in paragraph 2.02.

3.02 In June 1976 Les Immeubles Sylvio Gendron Inc. purchased a bungalow in Florida (1410 Van Buren Street, Hollywood) at a cost of $37,272.50, including the registration stamps. When the amount of the cash payment was deducted, the mortgage in favour of the vendor was for $15,000 with an interest rate of eight per cent. The payments were $134.74 per month. There was even a clause that provided that the whole sum could be paid without penalty within two years (Exhibit A-1: bundle of documents concerning the purchase of the bungalow and Exhibit A-6: registration existing at time of purchase).

According to the notice of appeal, the appellant is the majority shareholder (99.4 per cent of the ordinary shares) of Les Immeubles Sylvio Gendron Inc. He also owns a majority of the shares of Sylvio Gendron (1980) Inc.

3.03 According to his testimony, the appellant's company had purchased the bungalow with a view to reselling it at a profit. It was the rise in the value of the Canadian dollar that led the company to make this decision. In fact, in 1976 the Canadian dollar was worth one US dollar and 15 cents ($1.15). The market was thus favourable for a purchase of this kind. It did not rent the property because, according to the witness, once it was leased, it could not be sold. Moreover, before it was sold renovations had to be made.

3.04 In 1978 and 1980 improvements and additions were made to this house, which was 35 years old, as described below:

These figures are taken from the notice of appeal. During his testimony, however, the appellant said that he had almost completely rebuilt the bungalow.

3.05 The appellant said that he himself had tried to sell the bungalow to Canadians. He had even advertised it. However, he did not file any documents to prove this.

In 1980-1981, however, he had authorized a real estate agent to sell this bungalow. On this point he filed Exhibit A-2, a bundle of four contracts concluded with Del Asselin Realty of Hollywood, Florida, allowing costs of seven per cent of the sale price. The sale price and the dates of the contracts were as follows:

3.06 As Exhibit A-3 the appellant filed two letters from Del Asselin Realty. The first, dated April 3, 1985, indicates that the house could be rented for $4,000 per year. Moreover, this letter states that “It is difficult to obtain more, since you are far from the sea, and tourists can rent condos at Crystal Towers for $4,000 or $4,500 and they are on the sea”.

In the letter dated October 2, 1985 the author stresses the fact that the price of houses sold in 1985 in the area varied from $57,000 to $64,900.

3.07 Immigrants leased or purchased houses in the surrounding area and this apparently had unfortunate consequences for the sale. Newspaper clippings (Exhibit A-4) showed that the peaking of prices set in 1981-1982 had the effect of turning away tourists and investors. The latter preferred northern Florida.

3.08 The appellant occupied the bungalow with his family for 129 days in 1981 and for 106 days in 1982, on the basis of the following telephone records:

During each of these periods the appellant spent four or five days in Canada on business (Exhibit A-5). He never loaned his bungalow to customers. During ten years the bungalow was never let. It was only occupied by the appellant during the winter.

3.09 The primary purpose of the company, which was incorporated in 1959 under the Quebec Companies Act, was to "carry on the business of construction and general contractors in the construction, erection, modification, improvement and repaid of all kinds of public and private structures".

Moreover, since it acquired so-called continuation status in 1980, the company has acquired unlimited powers.

3.10 As its source of rental income the company had 31 dwellings, 3 of which are leased to the owners of stores. Thus, for 22 years the company has owned an eight-apartment building in Sept-Iles. Each building had a superintendent, whether in Sept-Iles, Baie-Comeau (12 apartments), Shawinigan (9 apartments) or Shawinigan-Sud (2 apartments). It was the superintendent who handled the leasing of the apartments. He informed the company which investigated and made decisions.

3.11 Six per cent of the company's income came from the rental of buildings and 94 per cent from the construction of buildings.

3.12 Roland Roy, an auditor with the respondent, explained that the notice of assessment sent to Les Immeubles Sylvio Gendron Inc related to the 1980, 1982 and 1983 taxation years.

Concerning the assessment for 1980 and the question as to whether the rental income was income from a business carried on actively, the witness argued that he had kept his rental and his construction activities separate. Both activities were independent of each other. However, the rental properties could be used as collateral for the company’s loans.

The company did not provide special services other than those provided by ordinary lessors, that is the services of a superintendent and occasional repairs. Moreover, it did not provide the public with a permanent real estate rental service. Finally, the company did not have any full-time employees who were responsible for rentals. Income from this source could not therefore be considered business income but rather property income.

3.13 The bungalow in Florida was in no way used for business purposes. The appellant, the president and principal shareholder of the company, was the only person who used it. Although he did not occupy it throughout the year, it was nevertheless available to him throughout the year. This is why the company's losses in respect of the bungalow were refused.

3.14 The witness Roy explained the two methods used by the respondent to establish the benefit received by the appellant (Exhibit R-2). The first method was based on the use of the building and the second on the return on the building as well as the cost of the building and furniture.

Moreover, since Exhibit A-8 is a comparative table of the arguments of the taxpayer and the respondent, it should be reproduced here. It reads as follows:

(2) et (3) : Assuming a maximum period of use by the taxpayer of 90 days in 1981 and

1982, the fair market value method gives a rent of $1,050.00 and the cost to the company method gives a cost of $1,016 in 1981 and $972.00 in 1982.

4. Act-Case Law-Analysis

4.01 Act

The principal provisions of the Income Tax Act that apply in this case are section 3, paragraph 15(1 )(c) and section 80.4. They will be quoted as appropriate in the analysis.

4.02 Case law

The parties referred to the following cases:

(a) Expenditures on the house in Florida

1. M.N.R. v. Taylor, [1956-1960] Ex C.R. 3; [1956] C.T.C. 189; 56 D.T.C. 1125;

2. M.N.R. v. Tara Exploration and Development Company Limited, [1974] S.C.R. 1057; [1972] C.T.C. 328; 72 D.T.C. 6288;

3. Tobias v. The Queen, [1978] C.T.C. 113; 78 D.T.C. 6028 (F.C.T.D.);

4. The Consortium Group Limited et al. v. M.N.R., [1986] 2 C.T.C. 2095; 86 D.T.C. 1558 (T.C.C.);

5. Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373;

(b) Taxable benefit

6. The Queen v. Houle, [1983] C.T.C. 406; 83 D.T.C. 5430 (F.C.T.D.);

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

8. Wallace v. M.N.R., [1986] 1 C.T.C. 2308; 86 D.T.C. 1228 (T.C.C.);

9. Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6584, (F.C.T.D.);

10. Check and London Properties Ltd. v. M.N.R., [1987] 1 C.T.C. 2114; 87 D.T.C. 73 (TCC);

11. Soper v. M.N.R., [1987] 2 C.T.C. 2199; 87 D.T.C. 522 (T.C.C.);

12. Dudelzak v. M.N.R., [1987] 2 C.T.C. 2195; 87 D.T.C. 525 (T.C.C.).

4.03 Analysis

4.03.1 According to the appellant, it was the rise in value of the Canadian dollar, which was worth US $1.15 in 1976, that led Les Immeubles Sylvio Gendron Inc to purchase the bungalow in Hollywood, Florida. The appellant, who is the principal shareholder and president of the company, argued that the company had purchased this bungalow with a view to reselling it and not as an investment (par 3.03).

4.03.2 Since this bungalow was 35 years old it needed repairs and improvements. However, it was not until 1978, two years after it was purchased, that the house was repaired, and it was not until 1980 that most of the furniture was purchased (par 3.04). It seems to the Court that, for a person who buys a house in order to resell it, this is a fairly long delay before the repairs were made, especially in the case of a company 94 per cent of whose income comes from construction.

Moreover, it was not until May 1982 that an attempt was made for the first time to sell this bungalow through a real estate agent. Again, such a fact does not seem significant in the case of a person who purchases a house to resell it.

The appellant said that he tried in the meantime to sell this bungalow to Canadians. He had even advertised it although he adduced no evidence in support of his testimony (par 3.05).

4.03.3 However, the Court understands that the fact that it owned 31 apartments in Canada forced the company to purchase buildings in Florida and it may well have purchased a bungalow with a view to reselling it. This bungalow located in Florida, a vacation area, did not in itself have any connection with the company's activities.

However, the preponderance of the evidence concerning the company's intention, and such evidence is always difficult to adduce, does not favour the appellant's argument.

Rather, the facts stated above and the use of the bungalow by the appellant and his family since it was purchased favour the argument of the respondent that the company purchased the said bungalow for the appellant's personal use.

4.03.4 It is now necessary to determine whether the sum of $1,000 per annum paid by the appellant to the company for use of the bungalow is reasonable in the circumstances.

According to the respondent's calculations, the taxable benefit provided for in subsection 15(1) of the Act was $8,136 in 1981 and $9,774 in 1982, taking into account the $1,000 paid by the appellant (par 3.14).

4.03.5 Given the conclusion I have reached above that I must accept the respondent's argument that the bungalow was purchased in order to obtain a personal benefit for the appellant, it is logical to conclude first that the bungalow was at the disposal of the appellant and his family throughout the year.

4.03.6 Consequently, the annual maintenance costs, the failure to increase on the cost the expenditures made by the company and the annual return on the cost (Exhibit A-8 cited in par 3.14) seem at first glance normal factors in the calculation of the benefit received by the appellant in the circumstances.

However, it is necessary to examine the case law on this subject cited by counsel.

4.03.6(1) Case law

In Youngman (par 4.02(9)) the Federal Court ruled that the house built and paid for by the company of which the appellant, his wife and his children were the shareholders had been built for the personal benefit of the appellant and his family. The Court then decided that the market value of the rent was quite inappropriate to calculate the value of the benefit received. It found the respondent's calculation, which was based on the return on the company's equity in the residence, to be reasonable.

In this case no mention was made of the expenditures incurred by the company for maintenance.

4.03.6(2) In Soper (par 4.02(11)), Nipissing Manor Ltd. had purchased a house in Florida for the purpose of reselling it. Since the appellant principal shareholder was the only person to occupy it and although she did so for only two weeks a year, Judge Rip of the Tax Court of Canada held that the house was available to her throughout the year. The fair market value of the rent was deemed to be the benefits received by the appellant shareholder.

4.03.6(3) Houle (par 4.02(6)) and Wallace (par 4.02(8)) concerned the use by the shareholder of a boat purchased by the company for business purposes while Woods (par 4.02(7)) involved use exclusively by the appellant. In this last case the Court accepted the Minister’s notices of assessment. However, he confirmed that the amount assessed was lower by far than the fair market value of the rent the appellant would have had to pay to enjoy a boat of the same kind. The fact that the lessor was the company of which the appellant was a Shareholder greatly benefited him.

In summarizing the above-mentioned cases, counsel for the appellant made the following comments:

Now, if we make a connection from Houle in 1983 to Dudelzac, we find that the benefit is always the first motive for the purchase of the house. Is it or is it not for purposes of the business? When it is, the benefit must represent the fair market value of the use and when it is not purchased for the purposes of the business, the benefit must in fact be more or less the same thing as if the shareholder had himself purchased the property.

In the appeal, given the conclusions drawn above, "the amount or value" of the benefit as provided for in paragraph 15(1)(c) of the Act must be interpreted liberally. We should quote this paragraph although it should be noted that paragraphs (d), (e), (f) and (g) of this section do not apply in the instant case. Paragraph 15(1)(c) reads as follows:

15.(1) Where in a taxation year

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

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

The fact that a taxpayer is a shareholder of a company cannot confer on him financial benefits from the use of property that an ordinary taxpayer cannot obtain without paying for it.

This is why the calculation of "the amount or value” of the benefit received based on what it cost the company or based on the assumption of a purchase by the shareholder of the property used seems fair and reasonable to me.

Thus, in this appeal the annual maintenance costs (which were not contradicted) and the annual return on the cost of the bungalow, as explained in paragraph 3.14, seem fair and reasonable to me. The assessment must accordingly be maintained.

5. Conclusion

For the reasons given above the appeal is dismissed.

Appeal dismissed.