Mary Jane Soper v. Minister of National Revenue, [1987] 2 CTC 2199, 87 DTC 522

Rip, T.C.J.:—The appellant, Mary Jane Soper, appeals income tax assessments for 1977,1978,1979 and 1980 in which the respondent, the Minister of National Revenue, added to her income as a benefit or advantage conferred on her qua shareholder by Nipissing Manor Ltd. ("Manor") the purported fair rental value of property owned by the corporation for 1977, 1978, 1979 and 1980 pursuant to subsection 15(1) of the Income Tax Act ("Act").

At all relevant times Mrs. Soper was the controlling shareholder of Manor. In each of 1975, 1977 and 1979 Manor carried on the business of operating a nursing home in Corbeil, Ontario. Starting in 1975 Manor acquired three properties in the State of Florida. Mrs. Soper testified the properties were purchased because she “became infatuated with Florida and felt that there was a possibility of making a profit in real estate as well as have a place to go for a rest".

The first property ("Property 1") was purchased on December 2, 1975, for $59,650 and was situated in Seminole. Property 1 consisted of a house having three and one-half bedrooms and a Florida room and a large yard, according to Mrs. Soper. The property was sold in July 1979 and Manor claimed a capital loss on its disposition. The second property ("Property 2"), situated in Largo, was purchased on February 7, 1977, for $79,355 and was sold in October 1978 at a profit. The house on Property 2 was similar to that on Property 1 but the yard had a swimming pool. The third property ("Property 3"), also in Seminole, was acquired for $87,656 on July 7, 1979, and was sold in 1984; the house in Property 3 is similar to the other houses, but the swimming pool was smaller than Property 2's pool. The profits on the sales of Properties 2 and 3 were reported as capital gains and assessed as such.

The properties were not offered for rent. None of the properties were purchased to be used in the business of Manor.

In 1977 and 1978 Mrs. Soper and her family spent one month at Property 1 and Property 2. The evidence is not clear what property was made use of in a particular year when the corporation owned two properties. In each of 1979 and 1980 they made use of a property for two weeks. Other persons who stayed at the properties included two married members of the staff of the nursing home who spent two weeks at the properties in each of 1977 and 1978 and four weeks in 1980. The nursing home also provided transportation to Florida and lodgings at the properties for three nursing home patients in 1977 and 1978; the properties were used by patients for two weeks in 1977 and about ten days in 1978. No rent was paid by staff or patients for use of the properties.

Manor paid costs of transportation and lodging not only for the patients but also for the staff; the corporation also paid all maintenance and related costs of the properties. Manor did not deduct any of the expenses nor did it deduct capital cost allowance in computing its income for the relevant years.

According to the Minister's reply to notice of appeal, in making the assessments the Minister assumed the monthly fair rental value of the properties to be as follows:

The Minister assessed Mrs. Soper by calculating the values of the benefits or advantages conferred on her by Manor as follows:

*The evidence does not explain the amount of $290, although it may be the average of $300 for Property 1 and $280 for Property 3. However such "averaging" would not be consistent with the determination of values for previous years. In any event this value was not questioned by the appellant.

At trial the Minister's counsel acknowledged that the fair rental value for Property 3 in 1980 was $280 and not $420. Notwithstanding Manor owned Properties 1 and 2 during 1977 and 1978 and Properties 1 and 3 in 1979 it appears the values determined by the Minister of the benefits or advantages conferred on Mrs. Soper were in respect of only one property and no explanation was forthcoming at trial to clarify the matter. In any event the appellant did not question the quantum of the benefits, except for the $420.

Mrs. Soper was a very credible witness and I have no hesitation in accepting her evidence. At no time was it the intention of Manor or Mrs. Soper that any of the three properties would be used in the corporation's business. However the properties in fact were used by patients of Manor as well as by Mrs. Soper and her family.

The evidence leaves no doubt the properties were not acquired in connection with the nursing home business of the corporation. The purpose in acquiring the properties was two-fold: to sell eventually at a profit and for Mrs. Soper to have a place to rest. In fact some use was made of the properties in connection with Manor's business but that was incidental to the purpose of acquisition.

The parties agree that Manor conferred a benefit on Mrs. Soper qua shareholder by permitting her and her family to use the Florida properties. The issue between the parties is how to determine the quantum of the benefit. Mrs. Soper says she derived a benefit from Manor only when she and her family actually made use of the properties. Counsel for Revenue Canada submits that where a corporation acquires an asset for use in its business, and occasional personal use is made of the business asset by a shareholder, the proper method of determining the benefit is to allocate operating expenses in respect of the asset between personal use and business use; she further submits that where acquisition of an asset by a corporation is not for business purposes but for personal use of a shareholder, the value of the benefit so conferred is to be calculated to include the portion of operating expenses and cost of acquisition of the asset.

Notwithstanding counsel for respondent's view, in making the assessments in issue the Minister added to the appellant's income an amount equal to fair rental value of a single property owned by Manor in the year. In earlier reassessments the respondent calculated the annual benefits as the aggregate of operating expenses and imputed interest on corporate funds used to acquire the properties.

The appellant only argued that the benefit conferred on her be valued on the basis of the time she enjoyed the properties. There was no suggestion by the appellant or her agent that the determination of fair rental value was an erroneous method of calculating the benefit conferred on her.

Subsection 15(1) of the Act provides that:

15(1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

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

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

Where a taxpayer who was the sole shareholder of a company used the company's yacht which was purchased as an asset to be used in the corporation's business partly for business and partly for personal use, the benefit conferred may be calculated as a percentage of the total operating expenses based on the number of hours of personal use as compared to business use: The Queen v. Houle, [1983] C.T.C. 406; 83 D.T.C. 5430.

In the case at bar the corporate assets used by the shareholder were not acquired for business purposes; the evidence indicates the properties in Florida were acquired by Manor as capital assets and not as inventory or otherwise to be used by Manor in a business.

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.

A case similar to the case at bar is Woods v. M.N.R., [1985] 2 C.T.C. 2118; 85 D.T.C. 479 where this Court found that the taxpayer had received a benefit from a company, of which he owned 50 per cent of the shares, by virtue of his exclusive personal use of a corporate asset which was actually used by him for several months of each year. Cardin, T.C.J. stated, at page 2121 (D.T.C. 482):

Although the fair market rental value approach used by Mr. Michienzi, the respondent's auditor, in arriving at a dollar figure of the appellant's benefit does not reflect the basis of the Minister’s actual assessment, it appears to me to be a logical and a proper approach to the value of the appellant's benefit.

On the basis of the evidence I find that a benefit was indeed conferred on the appellant and that the amounts of $1,446, $1,084 and $1,720 included in the appellant's income for 1977, 1978 and 1979 respectively are not only reasonable, but are considerably below the fair market rental values which the appellant would otherwise have had to pay for the benefit of having the personal use of a boat from an owner other than Apollo.

In my opinion, the Minister's assessments could indeed have been considerably higher and for these reasons the appeal is dismissed.

In Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6584, the Federal Court found that the "fair market rental value" was inappropriate on the facts of that case as it bore no relation to the actual cost of what the corporation conferred upon the shareholder. In the case at bar it was not argued that the fair rental value was inappropriate nor did the appellant suggest a different method of valuing the benefit.

As previously stated the appellant does not question the fair rental value as the method of calculating the benefit. She says only that the fair rental value ought not be allocated for 12 months of each year but only for that time she used the several properties. In considering Mrs. Soper's submission one must ask who was benefiting from the properties when they were not being used by Mrs. Soper. Manor was receiving no income from the properties but was paying all expenses: surely Manor gained no benefit. The limited use of the properties by Manor was determined by Mrs. Soper; any benefit to Manor was at the discretion of Mrs. Soper and was incidental to her use of the properties. It was Mrs. Soper who controlled the use of the properties and who derived the benefits from Manor's ownership of the properties.

One of the purposes of the acquisition of the properties was to provide a place for Mrs. Soper to rest and the properties were available to her at all times for this purpose. Clearly, then, each of the properties were being maintained for Mrs. Soper throughout the year, even if the corporation intended one day to dispose of each property at a profit.

Revenue Canada was not unreasonable to Mrs. Soper in calculating the amount of benefits conferred on her by Manor. The use of fair rental value by the respondent to calculate the benefit conferred on Mrs. Soper was proper in the circumstances.

The appeals are dismissed.

Appeals dismissed.