Joseph L. Check, London Properties Ltd. v. Minister of National Revenue, [1987] 1 CTC 2114, 87 DTC 73

Bonner, T.C.J.:—The individual appellant, Joseph L. Check, appeals from assessments of income tax for the 1975 to 1978 taxation years. London Properties Ltd. (hereinafter called "London") appeals from notices of reassessment dated August 16, 1982, for the 1977 and 1978 taxation years. The appeals were heard together on common evidence.

London's business is described in its tax returns as “Real Estate Rentals and Investments". Mr. Check was president and controlling shareholder of the company. In 1975 London spent almost $94,000 to purchase a boat and approximately $5,000 to acquire a boathouse. It sold the boat in 1976 and spent about $170,000 on a replacement. In its returns of income for taxation years ending February 28, 1977 and 1978, London sought to deduct the operating expenses of the boats together with capital cost allowance on the boats and boathouse.

The respondent assumed that the boats and boathouse were neither acquired nor operated for the purpose of gaining or producing income from London's business or property. He assumed that London had conferred a benefit or advantage on Mr. Check as its shareholder and as its employee in relation to the use of the boats and boathouse. He therefore disallowed the deductions and stated in his reply to London's notice of appeal that he relied, inter alia, on paragraph 18(1)(a) of the Income Tax Act. Although no reference to paragraph 1102(1)(c) of the Income Tax Regulations was contained in the reply I assume that the respondent relied on it as well. That provision reads:

1102. (1) The classes of property described in this Part and in Schedule B shall be deemed not to include property

(c) that was not acquired by the taxpayer for the purpose of gaining or producing income,

I might observe at this point that salaries and wages paid to officers or employees of a corporation and benefits or advantages conferred on them are normally regarded as properly deductible payroll costs not caught by the paragraph 18(1)(a) prohibition. On the other hand the nature of payments, benefits, advantages and distributions falling within the ambit of subsection 15(1) of the Act is such that they cannot be regarded as a cost of earning the income of the business. The scope of subsection 15(1), or to be more accurate its predecessor subsection 8(1) of the former Act, is explained in M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184. In this case it is unfortunate that no one explained why London was not allowed to deduct the cost of benefits or advantages conferred on Mr. Check to the extent that they were conferred upon him qua officer or employee. Whatever the answer may be London's appeals must be disposed of for reasons unrelated to the correctness or otherwise of the respondent's assessing actions. The first relevant assessments of tax for London's 1977 and 1978 taxation years were made on July 23, 1980. London filed notices of objection to those assessments. On August 16, 1982, the respondent sent notifications (described as notices of reassessment) to London indicating that no tax was payable. Explanation forms which accompanied the August 1982 notices indicated that additional expenses had been allowed with the result that no net income was, on the respondent's calculations, earned in either year. Having regard to the decision of the Federal Court of Appeal in The Queen v. Garry Bowl Limited, [1974] C.T.C. 457; 74 D.T.C. 6401, the appeals of London must be dismissed. This Court can give no relief under paragraph 171 (1 )(b) of the Income Tax Act with respect to a notification that no tax is payable.

Originally in assessing Mr. Check the respondent included in income:

Following the filing of notices of objection the respondent reassessed on August 17, 1982, to delete the inclusions under paragraph 15(1)(a) for the 1975 and 1976 taxation years and to reduce the amounts included under that provision by $50,181.37 for 1977 and $42,782.55 for 1978. The amounts included as benefits under paragraph 6(1)(a) of the Act, viz., the amounts which the respondent assumed were benefits conferred by London on Mr. Check as its employee were, according to the reply to the notice of appeal:

. calculated upon the basis of 8% of capital cost of the boat and boathouse owned by the Company in each of the respective taxation years;

The section 15 inclusions in Mr. Check's income apparently represent the operating expenses of the boats. The logical basis for the assumption that the benefit to an individual represented by the availability of a boat is a benefit to him qua employee while the benefit to him represented by the payment of the operating expenses of the boat is a benefit to him qua shareholder is not readily apparent and, unfortunately, was not explored at the hearing.

On behalf of Mr. Check counsel took the position that the boats were acquired for business purposes; that personal use was, at most, incidental being limited to one eight-hour period only; and that the value of the benefit conferred on Mr. Check by virtue of such use should be calculated by apportioning operating expenses between business use and personal use on a time basis. Alternatively it was submitted that the value of the benefit should have been calculated on the basis of fair market rental rates.

Mr. Check testified that he had a long-standing desire to own a marina. In 1972 he started, he said, to look seriously for a suitable operation with a view to purchasing it. He found, however, that the detailed and painstaking investigation of the day-to-day operations of marinas which he considered necessary before an offer to purchase could be made was impeded by the lack of a boat. He explained that most marinas do not permit persons who do not own boats to walk freely about the docks and that it was awkward for persons who are not living on boats tied up at a marina to meet other boat-owners and to discuss with them the merits and demerits of the operation. Further, it became apparent to Mr. Check that the prices of boats were rising. Accordingly he decided to buy a boat both for use in the process of appraising marinas which he thought he might buy and also with a view to possible later use as a rental unit.

Mr. Check gave a detailed account of the history of his efforts extending over a period of several years to locate and purchase a marina operation. He did use the boats to live and sleep thereon from time to time while investigating a number of potential purchases. Furthermore, on one occasion one of the boats was used to entertain a bank manager with whom London had a business relationship.

Some aspects of the evidence given by Mr. Check were corroborated by other witnesses. They included Steve Panteluk, a man with extensive experience in the food business who assisted Mr. Check in the investigation of the restaurant operations at one marina, and Robert Gillespie, a lawyer who travelled from Edmonton to Vancouver Island on two occasions to assist Mr. Check in relation to title and other legal matters.

Time passed, circumstances changed and in the end Mr. Check did not buy a marina. Negotiations to purchase the marina at Canoe Cove on Vancouver Island took a great deal of time. During 1976 and 1977 Mr. Check's health deteriorated. In the fall of 1977 his medical advisors told him to slow down or retire. It had been Mr. Check's intention to employ a Mr. Pross as general manager of the sought-after marina operation. Mr. Pross was, according to Mr. Check, a retired electrical engineer who had spent his life working in a shipyard and was thus knowledgeable in respect to boats. In 1978 Mr. Pross died. All further thought of buying a marina was abandoned and in 1979 the second of the two boats was sold.

Mr. Check stated that the plan was that if he were to succeed in locating a suitable marina London would be caused to acquire and operate it. This evidence was corroborated by Mr. Gillespie.

Normally one might be inclined to think that the personal interests of a shareholder predominate when a company carrying on the business of real estate rentals and investments in Edmonton decides to buy an expensive pleasure craft. In this case, however, the evidence of Mr. Check, corroborated as it was by the production of documents generated during an extensive investigation of a number of marinas and corroborated also by the testimony of several independent witnesses, establishes that the boats were indeed purchased for the purposes alleged and used for those purposes, save during one eight-hour cruise taken in 1978 by Mr. Check and his wife. It is therefore necessary to consider the quantum of the benefit conferred on Mr. Check as a result of that limited personal use.

The boats were not bought so as to make them available for use by Mr. Check nor did Mr. Check in practice take advantage of the fact that the boats were available to him. Because London did not tie up its capital in the boats and boathouse in the process of satisfying the personal whims or desires of Mr. Check the inclusions in income based on the annual value of the capital invested must be deleted. Those inclusions, it will be remembered, were said to have been based on section 6 of the Act.

Subsection 15(1) of the Act requires the inclusion of the “amount or value" of the funds or property appropriated. What was appropriated as a result of the eight-hour period of personal use was the funds or property expended by London in operating the boat for that period. The log book of the boat recording hours of use was, according to the evidence, lost. It is therefore impossible to apportion costs on a time basis between total use and eight hours of use. There was evidence given by Mr. Check that the rental value of the boat for a one-day period was $500. Although rental rates normally exceed operating costs I will use the best evidence available and find the value of the benefit conferred to be $500.

The appeals of Mr. Check for all four years will therefore be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that all “section 6 benefits" are to be deleted, that the subsection 15(1) benefit for 1977 is to be deleted and that the subsection 15(1) benefit for 1978 is to be reduced to $500. Mr. Check is entitled to his costs.

Appeals allowed in part.