Robert J. Wallace, 97361 Canada Limited v. Minister of National Revenue, [1986] 1 CTC 2308, 86 DTC 1228

Kempo, T.C.J.: —

Part I — Issues

Upon application, and by consent, the appeals of 97361 Canada Limited for its 1980 and 1981 taxation years, and the appeals of Robert J. Wallace for his 1980 and 1981 taxation years are combined for joint hearing.

It was conceded by both parties at the outset that the assessments of tax for 97361 Canada Limited for 1980 and 1981 respectively and of Robert J. Wallace for 1980 are for nil amounts, from which there is no appeal.

Accordingly only the appeal of Robert J. Wallace remains as to his 1981 taxation year and the sole issue for determination is as to the value of the benefit or advantage that has been conferred on him qua shareholder by 97361 Canada Limited with respect to his use of a 41-foot sailboat owned by the said corporation. Robert J. Wallace (hereinafter called “the appellant”) included in his 1981 income a benefit of $5,000 pursuant to paragraph 15(1)(c) of the Income Tax Act (the “Act”). The Minister reassessed by including the amount of $22,102 as the benefit which was arrived at in the following manner:

Part II — Decision

1. The appeals of 97361 Canada Limited in respect of its liability for tax for its 1980 and 1981 taxation years are dismissed, there being no appeal from the nil assessments of tax thereto;

2. The appeal of Robert J. Wallace in respect of his liability for tax for his 1980 taxation year is dismissed, there being no appeal from the nil assessment of tax thereto; and

3. The appeal of Robert J. Wallace in respect of his liability for tax for his 1981 taxation year is allowed, in part, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing his income for the year a benefit or advantage has been conferred on him, as a shareholder, by 97361 Canada Limited pursuant to paragraph 15(1)(c) of the Act of an additional value of $5,343.75 as follows:

As the appellant’s success in this appeal is limited, no costs are awarded. Part III — Reasons for Decision

The Facts and Evidence

Following two years of study, research and analysis the appellant, a successful land speculator and developer in Ontario, acquired a 41-foot oceangoing sloop (sailboat) for the sum of $117,617.20 for the stated purpose of resale at a profit.

The acquisition was completed in Port Coquitlam, British Columbia, on or about March 10, 1980 by a company especially incorporated for that purpose: 97361 Canada Limited. The vessel was its sole asset. The appellant, by the pleadings filed in this appeal, was a shareholder, officer and director of that company.

The funding was via interest-free borrowings from tax paid earnings of associated corporate entities in which the appellant held shares. There was insufficient evidence upon which to trace any interest-free shareholder loans made by the appellant or his spouse to the lending corporation as having been part of the moneys loaned to 97361 Canada Limited. In any event there was nothing in the evidence to indicate that any borrowing costs or charges were involved in the yacht's acquisition.

Both the appellant and his wife had taken a one-week sailing course at Fanshawe Sailing School in London, Ontario. For the first three months following the acquisition, they test-sailed the yacht in the Vancouver area and took all other necessary steps to ensure that all warranty-related matters were discovered and attended to. The reason for this was that the vessel was then to have been partially dismantled and trucked to the Great Lakes area in Ontario for resale. The appellant’s research had satisfied him that both the ocean-going nature of the vessel and the price he had paid for it made it highly competitive in the Ontario market and that he expected to turn a profit quickly.

The vessel was sailed by the appellant and his wife (also with their infant child on board) and was shown for sale extensively in Ontario throughout the North Channel area, the Mackinac Island area and in and around Toronto from July to September of 1980. The appellant testified that fast-rising interest rates and the declining economy severely limited the marketability of this craft because yacht-related bank loans had dried up.

Contact was then made with a broker in Fort Lauderdale, Florida, and a multiple listing and appointment of central agency agreement was signed in their favour in October 1980 (Exhibit A-7) at a list price of $165,000. It was illegal for the vessel to have been sold or advertised for sale in the United States to an American without U.S. duty being paid. That, apparently, did not preclude either the appellant or the designated agent/broker from making contacts or arrangements with non-Americans.

For the balance of the 1980 calendar year the vessel was being sailed by the appellant and his wife to Fort Lauderdale, stopping particularly for approximately nine days at Annapolis to meet the broker and to show the vessel for sale at a boat show that was then in progress. They arrived in Fort Lauderdale in mid-December.

Miscellaneous upkeep and repairs had been done by the appellant without charge to the company. He maintained frequent telephone contact with his other Canadian business concerns throughout this period of time.

The appellant filed an extract from the vessel's log (Exhibit A-10). Out of 223 recorded days for the 1980 calendar year, 69 days were for transport, 135 days were for provisioning, repairs and maintenance and sale promotion and the balance, or 19 days, was allocated to personal use. And, admittedly, the appellant and his family had lived on the vessel during sailing, transport and while anchored for show, repairs or otherwise.

At a very early time the appellant's hands-on experience with the vessel had convinced him that only a knowledgeable and experienced operator at the helm would preclude the possibility of costly damage and accordingly he ruled out the feasibility of charter or leasing options.

In any event the vessel was in Fort Lauderdale, Florida, at the end of 1980 and, according to the log, was there for 40 days (December 19, 1980 to January 28, 1981) before it was sailed by the appellant and his wife (along with their child) to the Bahamas.

The appellant acknowledged that Fort Lauderdale was the boat capital of the world and that it would have been the best place to try and sell the vessel. However, in December 1980 a declaration or affidavit had been made in support of an exemption from Florida State Sales and Use Tax in which it had been stated that the appellant was a Canadian citizen passing through Florida with the primary use of the vessel being outside of Florida waters. With this exemption the appellant said he was able to put another $10,000 worth of equipment on board free of state tax. The items purchased included sun awnings and, more particularly, the equipment that was required to take the vessel to the Bahamas.

The sojourn in the Bahamas lasted approximately five and one-half months, that is January 28, 1981 to June 11, 1981, during which period, 69 days were acknowledged to have been for personal use.

The return to Florida in June was after the height of the tourist and buying season in the area. United States duty was then paid of something in the order of $5,500 Canadian and sale advertisements appeared in newspapers and yachting magazines. The asking price was $150,000 U.S. and the boat was left in the care of an experienced individual in Fort Lauderdale.

The company claimed depreciation, or capital cost allowance, of $20,375 in calculating expenses for its 1981 taxation year. Some time in 1983 the appellant purchased the vessel from the company for himself for $174,847.

In filing his returns of income, no personal benefit was declared by the appellant with respect to the vessel for the 1980 taxation year but $5,000 was declared for the 1981 taxation year. The amount of the calculation was said to have been made by the appellant’s accountant who had had experience in such matters; but that individual did not testify. A fair market value rate of $75 to $100 per day was bandied about at the trial, however the extent of the variables rendered that evidence unreliable.

The Position of the Parties

The Minister’s counsel submits that there was no business purpose for the acquisition of the vessel by the corporation. Alternatively, any business purpose use (that is, its resale) either (a) had been put in abeyance and was totally eclipsed by the personal use of the appellant, or (b) had been postponed and was secondary to the appellant’s personal use to the degree and extent that the personal use could not be characterized as merely occasional or incidental. Accordingly the benefit to the appellant is and should be as valued by the Minister for the 1981 taxation year.

The appellant’s position was diametrical to that of the Minister, coupled with the assertion that the $5,000 benefit declared was a reasonable value for the benefit received for the year.

Both parties referred to Houle v. M.N.R., [1982] C.T.C. 2218; 82 D.T.C. 1208 (T.R.B.), affirmed [1983] C.T.C. 406; 83 D.T.C. 5430 (F.C.T.D.) and to John Woods v. M.N.R., [1985] 2 C.T.C. 2118; 85 D.T.C. 479 (T.C.C.).

Analysis

As was stated by Collier, J. in Houle, supra, at 407 (82 D.T.C. 5431) “the facts are of paramount importance.” And the evidence of the appellant satisfies me that on the balance of probabilities the vessel had been acquired in 1980 for purposes of resale at a profit.

The appellant’s conduct with respect to the vessel in 1980 encompassed many of the usual badges of trade. These included his research and analysis of cost, pricing and marketability, his testing and warranty assurance, crossCanada haulage followed by constant exposure and on-board marketing of the vessel in the areas of the Great Lakes that were frequented by cruising people who were the most potential buyers of a vessel of that capability and calibre. Also of note is the taking of the vessel down to a broker and boat show in Annapolis and then to Fort Lauderdale where it would have continued to have been a saleable item rather than to have put it in storage in the Toronto area until the following summer season. Some consideration may be accorded to the appellant’s background as a trader and speculator in the years prior to 1980 in light of his stated purpose to make a quick and profitable sale in Canada of an ocean-going sloop. As a result of his information and research no marketing competition in Canada had been anticipated.

With respect to the 1981 year, I do not find the evidence is supportive of a finding that the aforesaid business purpose had been totally eclipsed or deferred for all or part of the year. There is no doubt but that the acknowledged personal use increased markedly in the Bahamas during the January to June period and that 67 days of personal use out of 150 is substantial. Also for consideration is the trip to Key West for 14 days in November out of which three were acknowledged as personal.

I am not unmindful that a decision had been made to expend $10,000 in outfitting the vessel, tax-free, for its Bahamas trip rather than paying U.S. duty and leaving it for sale with a broker in Fort Lauderdale. And further that extensive advertising for its sale occurred only after August. However, these events, to my mind, are not indicative of a non-business purpose, ab initio, but rather are objective indicators that, for the crucial selling time of the 1981 taxation year, the business and personal motivators became so intertwined that they became at least equal. And the crucial period taken up was almost six months in duration — which is also of consequence to the matter before me.

The facts in Houle, supra, are markedly different and were the foundation for the finding of ‘‘incidental’’ personal use by the shareholder. There the formula for valuation of the benefit was an allocation of the operating costs.

The facts of Woods, supra, are also markedly different because the acquisition of the vessel was admitted to have been for the sole and personal use of the shareholder. Judge Cardin was satisfied that a benefit was conferred even though Woods paid all of the operating expenses and the company did not claim capital cost allowance. And, as noted at 2122 (D.T.C. 482), the benefit as assessed was lower than the fair-market rental value evidence he had before him for consideration. In the case at bar the evidence as to fair market rental value was negligible and almost useless.

I am of the opinion that on the facts of this case, because of an equal business/personal use for the entire period of six months of the 1981 calendar year, the value of the benefit conferred on the appellant by the company was greater than $5,000 and that it should be one-half of the operating costs for the year plus one-quarter of the capital cost allowance. Accordingly the appeal is allowed, without costs, in the manner set out in Part II of these reasons for judgment.

Appeal allowed in part.