F.D. Hinkson v. Minister of National Revenue, [1988] 1 CTC 2263, 88 DTC 1119

Brulé, T.CJ.: — The present appeals, heard at Regina on September 28, 1987 are from reassessments for the appellant's 1977, 1978 and 1979 taxation years by appeal 83-781, and for the appellant's 1980, 1981 and 1982 taxation years by appeal 85-1351. The appeals, heard on common evidence with appeals (of Damon Developments Ltd. 83-798 and 85-1101), raise distinct issues which shall be dealt with separately.

Shareholder's Benefit From Use of Cottage

The appellant was, in the taxation years under appeal, an administrator and major shareholder of Plains Hotel Limited (the Corporation). The Corporation owned and maintained a cottage used by the appellant personally for different periods during the years in question. No log was kept of the time spent at the cottage each year by the appellant, his friends or his family, but the appellant estimated this to be approximately 60 days per year.

Appellant's counsel argued that the proper method of determining the benefit conferred by the use of the cottage was by calculating the fair market value rent for the period of time the cottage was used by the appellant personally. He submitted that acceptance by the respondent of this method of calculation in the past indicates it accurately reflects the benefit conferred by the company to the appellant by the use of the cottage.

In the reply to the notice of appeal, the respondent indicated that the benefit conferred by the use of the cottage should be calculated by taking into account the value of cottage related expenses paid by the Corporation and the fraction of the cottage's fair market value equal to that of the prescribed interest rate for the years in question.

Analysis

The appellant argued that the Minister is somehow bound by the method or assumptions he has relied on in assessing the appellant in previous years. Suffice it to say it is now well settled law that the Minister is not bound by past assessment practices: see Hencott Houses Limited v. M.N.R., 24 Tax ABC 402; 60 D.T.C. 405 and Admiral Investments Limited v. M.N.R., [1967] C.T.C. 165; 67 D.T.C. 5114.

It was admitted that a benefit was conferred by the Corporation upon the appellant through the use of the cottage allowed him. The evidence clearly shows this benefit was conferred on the appellant by reason of his status as shareholder. The issue turns upon the value of the benefit conferred.

The value of the benefit a shareholder derives from the use of a corporation's assets depends upon the corporation's purpose in acquiring the asset. In Lloyd Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6584, McNair, J. states at page 480 (D.T.C. 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 a shareholder.

On this point see also: M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184, and Steve Dudelzak v. M.N.R., [1987] 2 C.T.C. 2195; 87 D.T.C. 525. In the present case the evidence adduced leaves no doubt that the cottage was not acquired by the corporation for business purposes. The conclusion reached by Rip, T.C.J. in Mary Jane Soper v. M.N.R., [1987] 2 C.T.C. 2199 at 2202: 87 D.T.C. 522 at 524 could, but for the name of the parties involved, apply as well to the case at bar:

The purchase of the properties was therefore unrelated to any business purpose of the corporation. No outlay or expense in respect of the properties was incurred by Manor for the purpose of earning income from a business on the properties themselves. The properties were available for the personal use of Mrs. Soper, qua shareholder, throughout the year, notwithstanding she used the properties only several weeks a year. The costs of the properties were incurred by the corporation primarily for the purpose of having the properties available for its shareholder if and when, at her direction, she should decide to make use of them.

In the Soper case (supra) the Minister chose to assess on the fair market rental value of the property and the taxpayer did not question the method of calculating the benefit but argued the rental value ought to be allocated only for the time she actually spent on the properties.

In the present case the Minister chose to assess the appellant on a fraction of the cottage's fair market value. This method is identical to that used in the case of Lloyd Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6585. I would adopt Mr. Justice McNair’s comments at page 481 (D.T.C. 6589) of the report:

I must now decide the issue as to the amount or value of the benefit on the basis of whether the Minister's assessment was reasonable or not in the circumstances. It goes without saying that the onus of establishing that the Minister’s assumptions in this regard are erroneous rests on the plaintiff.

As stated, the plaintiff argues that the value of the benefit to him must be measured by the actual rental value of the house and not its cost. While the value of a benefit may not necessarily be the same as its cost in any and all circumstances, it does not automatically follow that such value may not equate with cost in an appropriate case. The words of paragraph 15(1)(c) of the Act are capable of the broadest interpretation and this applies perforce to the words "the amount or value thereof" as used therein. In fact, the word “amount” is substantially defined by subsection 248(1) to mean money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing”. Taken in context, the words “amount” and “value” appear to be used synonymously and interchangeably. According to standard dictionary usage, the word "value" standing alone is generally taken to mean the material or monetary worth of a thing or the fair equivalent thereof.

The appellant has not shown the Minister’s assumptions as to the benefit conferred by the use of the cottage to be erroneous. The value of the benefit received as shareholder was in fact the saving for the appellant of the capital outlay otherwise necessary to purchase the property. In the circumstances the Court is satisfied that the Minister's assessment represents the saving realized by the appellant in avoiding the capital cost of acquiring the cottage and therefore adequately reflects the benefit conferred by the corporation on the appellant qua shareholder. For this reason the appeals fail on this point.

Taxable Capital Gain on Disposition of Shares

The parties having come to an agreement as to the question of the shareholder's advance account for the 1978 taxation year, there remains to be determined the question of the taxable capital gain resulting from the disposition in that same year of ten shares of Plains Hotel Limited. The shares were disposed of by way of gift inter vivos made by the appellant to his son. Paragraph 6(g) and Schedule "C" of the Minister's reply to the notice of appeal set out as follows the assumptions relied on by the Minister to assess the appellant:

(g) that in his 1978 taxation year, the Appellant disposed of 10 shares of the Corporation to his son, Kim, by way of gift, inter vivos, and that the adjusted cost base of the said shares, being their fair market value as at the time of disposition, was $4,143.60 or $414.36 per share, being an amount greater than the actual cost of the shares to the Appellant.

SCHEDULE "C"

1978 TAXATION YEAR

TAXABLE CAPITAL GAIN ON TRANSFER OF 10 SHARES OF PLAINS HOTEL LTD. TO SON

The Court rejects the argument of counsel for the appellant that the assumptions underlying the Minister's assessment with regards to the capital gain on the shares were insufficient. The Minister indicated in Schedule "C" what assumptions underlay the calculation of capital gain. Having done this, the onus was on the appellant to establish on a balance of probabilities the assumptions were inaccurate.

Counsel for the appellant did not challenge the amount of the proceeds of disposition but sought to establish that the 1971 Valuation Day value of the share exceeded the proceeds of disposition. Mr. Hill, the appellant's accountant for many years, testified he estimated the Fair Market Value of the shares on Valuation Day to be somewhere in the range of $917 to $1,250. The witness testified he had arrived at this number by adding between 1.5 to 2 times the corporation's gross revenue to the corporation's retained earnings. No evidence was adduced to establish the authenticity of the numbers used in the calculation or that the result of this computation accurately reflected the 1971 Valuation Day value of the shares. Exhibit A-2 being an estimate, made without taking into account the corporation's liabilities, of the fair market value of the corporation's assets on December 18, 1972, is of no help arriving at the value of the shares. The appellant failed to show the Minister’s assumptions underlying the assessment were erroneous. The appeal on this point fails.

Boiler Expense Benefit

A further sum of $2,534 was added by the Minister to the appellant's 1981 income as a shareholder's benefit conferred upon him by the corporation. The appellant admits a hot water boiler installed in his personal residence in September 1981 was paid for by the corporation. In his notice of appeal the appellant states the payment made by the company was the result of an innocent oversight, the amount having been billed to the corporation by the vendor of the equipment. Mr. Hill, the appellant's accountant, testified that after an audit had revealed the oversight the situation was corrected by debiting the appellant's shareholder account. Exhibit A-3, filed by Mr. Hill as a true copy of the corporation's current general ledger indicates a sum of $2,534 was in fact debited to the appellant's shareholder's account in 1984.

The Court accepts the appellant's explanations as to the oversight and subsequent correction and therefore allows the appeal on this point.

The appeals re 83-781 are hereby dismissed and the appeals re 85-1351 are allowed in part and returned to the Minister for reassessment in accordance with the reasons for judgment.