Lloyd Youngman v. Her Majesty the Queen, [1986] 2 CTC 475, 86 DTC 6584

McNair, J.:—This is an appeal by the plaintiff, pursuant to section 172 of the Income Tax Act, S.C. 1970-71-72, c. 63, from a decision of the Tax Review Board dated May 21, 1982. The Board dismissed the plaintiff's appeal from a reassessment with respect to his 1979 taxation year wherein the Minister included in income $6,526 as the value of a benefit conferred on the plaintiff by a corporation of which he was a principal shareholder. The plaintiff seeks to have the assessment overturned on the ground that there was no actual shareholder benefit.

The plaintiff and his wife and three children are the shareholders of Andrich Developments Limited, a corporation governed by the Ontario Business Corporations Act, R.S.O. 1980, c. 54, having its head office in Guelph, Ontario. The plaintiff and his wife each own 35 per cent of the issued and outstanding voting shares of the corporation. The remaining shares are owned by their three children on the basis of 10 per cent to each. The plaintiff’s wife, Beatrice Youngman, is president of the corporation and the plaintiff is its secretary-treasurer. Both are directors as well.

In 1964, the plaintiff purchased 16 acres of land in the Township of Guelph near the city boundary. The intent at the time was to subdivide the property into a 19-lot extension to a presently existing subdivision in the Shadow Drive area of the township. Annexation of the area to the city seemed imminent at one stage, but nothing came of this. The plaintiff entered into an extensive series of negotiations with the appropriate municipal authorities with a view to making his subdivision dream a reality. Three separate subdivision plans were prepared over the years but different obstacles to their fruition always seemed to interpose. By the summer of 1978 it was apparent that the plaintiff's subdivision proposal had reached a dead end.

Andrich Developments Limited was incorporated on January 2, 1965 for the corporate purposes of management activities, land development, property acquisitions and rental operations. On August 26, 1966 the plaintiff conveyed the 16 acre parcel to the corporation, which became an active proponent in name at least of the proposed subdivision development. In January, 1978 Andrich obtained from The Canada Trust Company a first mortgage loan of $80,000 on the property with interest at 9 /4 per cent per annum. The loan was repayable by monthly instalments of $702 for principal and interest on a 25 year amortization.

The plaintiff and his wife had lived for some 23 years in a comfortable home on Forest Hill Drive in Guelph. Early in 1977 the plaintiff conceived the idea of having the corporation build a new model home on Lot 1 of the proposed Shadow Drive subdivision extension. This would not only provide them with a bigger and better family home but it would also demonstrate the subdivision's adaptability to attractive homes of this type. The Youngmans felt that the model home would thus serve to eliminate opposition to the proposed subdivision development on the part of neighbouring home owners.

The plaintiff and his wife were the designers and architects of their dream home, although a draftsman was hired to prepare the actual blueprints. Mrs. Youngman looked after the interior decorating. The home on Forest Hill Drive was sold for $86,500 on August 31, 1978 and the proceeds were paid to the corporation. The Youngmans obtained cost estimates from several building contractors. The average cost of $159,600 fell short of their level of expectation. The plaintiff estimated that the model home would cost in the vicinity of $250,000. A cost plus contract was finally entered into with Reidco Guelph Limited on October 28, 1977 and construction commenced. The final cost of the Shadow Drive residence came to $395,500. The plaintiff and his family moved into their new home in December of 1978. The house was more commodious and luxurious than the former home and the amenities were pleasanter and more in keeping with the stately style.

Andrich Developments Limited paid for the house on Shadow Drive and assumed the burden of the mortgage payments. The plaintiff had some second thoughts regarding the extent of corporate investment in the house with the result that he entered into two exclusive listing agreements for its sale. The first agreement dated September 26, 1979 listed the house until April 25, 1980 at a sale price of $375,000. The second agreement was for the period from May 30 to November 21, 1980 and listed the property at a reduced price of $365,000. The listing agreements prohibited public advertisement and stipulated that prospective purchasers could only view by appointment. The Youngmans did not want a lot of curiosity-seekers traipsing through their house. No offers of purchase were ever received.

The plaintiff was aware that some rent would have to be paid to the corporation by himself and his wife for their occupancy of the premises, and he made local inquiries as to the going rental rates. Commencing February 1, 1979, the Youngmans made rental payments of $1,100 per month to Andrich, of which $800 was for actual rent and $300 for utilities.

In the 1979 assessment, the Minister reassessed the plaintiff for $6,526 as the net amount of the value of the benefit conferred on the plaintiff by Andrich Developments Limited in the 1979 taxation year. The assessment was attributable to a number of factual assumptions which are pleaded with particularity in the statement of defence. The basic underlying assumption was a nine per cent return of capital on a relatively tax free investment. The investment was taken to be the corporation's equity in the residence, after deducting the outstanding mortgage of $79,413.55 from the actual cost figure of $395,549.34. The evaluation formula was set out in Schedule “A” of the defence as follows:

The final assumption was that the corporation did not build the residence for the purpose of producing or gaining income from a business or property.

The issues in the case are whether there was such a benefit and, if so, what was the proper measure of its value.

The statutory provision on which the Minister relied in making his assessment is paragraph 15(1)(c) of the Act, which reads in part 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, 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.

Four grounds of appeal are asserted. Counsel for the plaintiff argues, firstly, that the assessment simply raises an issue of fact as to the fair market rental value of the property which, based on the testimony of the plaintiff's experts was $800 to $950 per month, plus utilities of $300. He contends that there is no foundation in law or in fact for the Minister’s determination of a rental equivalent of some $3,000 per month, based on equity cost and return of investment calculations. Secondly, plaintiff's counsel contends that the Crown has substituted the word “cost” for the words “amount or value thereof” in paragraph 15(1 )(c) in relation to the alleged benefit and thereafter uses the words interchangeably to arrive at an indefensible result. Thirdly, it is objected that the departmental assessor mistakenly relied on Regulation 4300 made under the authority of section 80.4 of the Act to arrive at his investment return rate of nine per cent. This submission was not strenuously pressed and it is common ground that it is not too material. Finally, counsel for the plaintiff contends that the notional nine per cent return is nothing more than a flagrant example of imputed taxation inasmuch that the tax collector is telling the taxpayer what might have been saved to the pocket if $395,500 of corporate funds had not been tied up in an imprudent investment. This submission actually dovetails with the first two and can be conveniently dealt with as part thereof.

In summary, the real issue from the plaintiff's standpoint is whether the amount or value of the benefit is synonymous with the fair market rental of $1,100 per month.

Basically, the Crown's position is that the compelling motive for building the luxury residence on Shadow Drive was to provide a home for the principal shareholders of the corporation. The primary purpose was personal use rather than the earning of income. Counsel for the defendant cites several factors that, in his view, support this submission. Firstly, there is no real evidence that the building of the model home on Lot 1 would be likely to lessen neighbourhood opposition to the plaintiff's proposed subdivision development. Secondly, it is pointed out that the cost of building and decorating the house was dictated by the shareholder occupants whose expensive tastes resulted in a cost overrun of $145,500 or thereabouts.

Counsel for the defendant stresses that the continued, extravagant spending on the house after the demise of the subdivision proposal in the summer of 1978 is further indicative of the commitment to personal use. The plaintiff's explanation that they could not downgrade the house at that stage without risk to its ultimate saleability is simply not maintainable. De- fendant's counsel submits that the exclusive listing agreements do not represent anything approaching the semblance of a serious and concerted effort to sell the property. He contends that the whole course of conduct beginning in 1977 points inevitably to a shareholder benefit and not to a bona fide business transaction.

As to assessing the value of the benefit, counsel for the defendant submits that the fair market rental approach is not the appropriate method because there were no comparable properties against which to measure the dictated terms of tenancy enjoyed by the Youngmans. This approach would view the benefit solely from the standpoint of what the corporation realised in rent and totally ignore the broader perspective of what the shareholders were enabled to enjoy in terms of the actual benefit bestowed. He makes the final point that, absent the corporation, the Youngmans would have had to either borrow approximately $400,000 to build their dream home or provide that money from their own funds. In the first case, they would have incurred the interest costs of the loan and, in the second case, they would stand to lose the interest they would have otherwise earned on their money. Instead, the corporation saved them from these choices and built the house for them.

Paragraph 15(1)(c) of the Income Tax Act provides in effect that where a corporation has conferred a benefit or advantage on a shareholder, otherwise than in the circumstances related in paragraphs (d), (e) and (f), the amount or value thereof shall be included in the shareholder’s income for the year, except to the extent that it is a deemed dividend under section 84. There is no definition of “benefit" or “advantage” in the Act and the words are thus capable of the broadest possible interpretation. Nor is there any simple, prescribed formula for resolving any question of shareholder benefit within the meaning of paragraph 15(1)(c). Essentially, each case must be decided on its own particular facts.

In M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184, two subsidiary corporations lent over $1 million to their parent corporation, evidenced by demand interest-bearing notes. The parent corporation repaid the loans and the subsidiaries agreed to waive the interest accrued thereon. The Minister assessed the interest waived as a taxable benefit conferred on the shareholder within the meaning of subsection 8(1), and included the same in computing the income of the parent corporation. The taxpayer appealed to the Tax Appeal Board, which allowed the appeal, whereupon the Minister appealed to the Exchequer Court of Canada. The Minister’s appeal was dismissed on the ground that the mere fact of waiver of interest was not sufficient of itself to bring the transaction within paragraph 8(1)(c). To come within the ambit of that section, there must be an arrangement or device whereby a corporation conferred a benefit or advantage on a shareholder qua shareholder.

Cattanach, J., said at 300 (D.T.C. 5187):

. . . in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder. For example, Parliament could never have intended to tax the benefit or advantage that accrues to a customer of a corporation, merely because the particular customer happens to be a shareholder of the corporation, if that benefit or advantage is the benefit or advantage accruing to the shareholder in his Capacity as a customer of the corporation. It could not be intended that the Court go behind a bona fide business transaction between a corporation and a customer who happens to be a shareholder and try to evaluate the benefit or advantage accruing from the transaction to the customer.

On the other hand, there are transactions between closely held corporations and their shareholders that are devices or arrangements for conferring benefits or advantages on shareholders qua shareholders and paragraph (c) clearly applies to such transactions. . . . It is a question of fact whether a transaction that purports, on its face, to be an ordinary business transaction is such a device or arrangement.

The case of The Queen v. Houle, [1983] C.T.C. 406; 83 D.T.C. 5430, held that a taxpayer who used his company's yacht partly for business and partly for personal use did not receive a benefit from capital expended for personal use on the ground that the yacht was purchased by the corporation for business reasons and the personal use was only incidental.

Woods v. M.N.R., [1985] 2 C.T.C. 2118; 85 D.T.C. 479 (T.C.C.), is a case very similar to the one at bar, except that the benefit involved the use of a boat rather than a residence. The taxpayer, who owned 50 per cent of a truck rental company, advanced money, interest free, to the company for the purchase of a boat, admittedly for his own personal use. The taxpayer paid all the operating expenses of the boat and the company did not claim any capital cost allowance. Upon reassessment, the Minister added to the taxpayer's income amounts representing benefits received or conferred on the taxpayer as a shareholder. The method of assessment was based on a calculation of eight per cent of the capital cost of the boat prorated over three years. The taxpayer appealed on the ground that he received no benefits whatever from the company, despite the privilege of using the boat exclusively for his personal use. There were two issues at trial: whether any benefit had been conferred, and the dollar value of any such benefit. The Tax Court held that the taxpayer had received a benefit from the company by virtue of his exclusive personal use of a corporate asset. The amounts assessed were not only reasonable but considerably below the fair market rental values which the taxpayer would otherwise have had to pay for the personal use of a similar boat from an owner other than the company.

Cardin, T.C.J., stated the rationale at 2120 (D.T.C. 481):

Now, of all the case law cited, including those submitted by the appellant, the most distinguishable feature of the instant appeal is the fact that not only did the appellant have the boat available to him the year round, but that Apollo had acquired the boat exclusively for the appellant’s personal use with no business purpose whatever in mind.

The learned judge went on to make this significant point at 2121 (D.T.C. 482):

The evidence has shown that the use by the respondent of eight per cent of the capital cost of the boat pro-rated over three years in determining the value of the appellant’s benefit was, to a point, arbitrary. I say “to a point” because in the absence of a specific formula the respondent resorted to the computation in analogous sections of the Act dealing with valuations of conferred benefits comparable to that of having the exclusive personal use of a company’s boat.

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.

Counsel for the defendant concedes, on the strength of the Houle case, that if it is found that the house on Shadow Drive was built for a business purpose and for use as a business asset so that any use of the house by the shareholders was only incidental thereto then the Minister’s assessment was incorrect. Otherwise, the assessment is valid.

The first question is: was there a benefit? In my opinion, there was. I am unable to accept the plaintiffs argument that the primary purpose of the luxury house on Shadow Drive was a business purpose. The indications are all to the contrary. The supposition that the house would likely serve as a showplace to allay neighbourhood opposition to the proposed subdivision development is largely opinionative and self-serving and lacking in corroboration. Hence, it is ineffectual as evidence of any real business motivation. The Youngmans were given free rein to design and decorate the house as they saw fit, which is indicative to some degree of the fact that it was not built for corporate business purposes. Furthermore, the fact that they caused the corporation to continue spending lavishly on the house after the subdivision became a lost cause is explicable only by the inference that the purpose behind the undertaking was personal rather than business use. By the plaintiff’s own admission, the house was an improvident corporate investment. The sale listings were nothing more than feeble flurries that failed to evince any real and concerted effort to sell the property with a view to cutting the loss. As the principal shareholders of a closely held private corporation, the Youngmans were in the unique and advantageous position of being able to acquire through corporate funding a house built to their own specifications and expectations and, having accomplished that, of being able to dictate the terms of lease under which they would continue to occupy the house as their home. The true position is more analogous to that of owner than lessee.

Taking everything into account, there is simply no cogent and compelling evidence of a bona fide business transaction. I find rather that the weight of evidence amply supports the conclusion that the house was intended for the personal use of the Youngmans from the very outset. In my opinion, a benefit was conferred on the plaintiff as a shareholder of Andrich Developments Limited within the meaning of paragraph 15(1)(c) of the Income Tax Act.

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.

Viewed in this light and having regard to the evidence in its entirety, I accept the defendant's submission that the fair market rental value of the premises is totally inappropriate for measuring the value of the benefit because it bears no relation to the actual cost of what was conferred by the corporation on its principal shareholder. What was saved to the Youngmans is the capital cost of acquiring their luxury home. The corporation's equity in the residence on Shadow Drive represents, in my view, the true measure of the value of the benefit conferred on the plaintiff.

In my opinion, the Minister's assessment of $6,526 as income to the plaintiff in the 1979 taxation year and his evaluation method for determining the same were reasonable and logical and correct in the circumstances.

For the foregoing reasons, the plaintiff’s appeal is dismissed with costs.

Appeal dismissed.