John Woods v. Minister of National Revenue, [1985] 2 CTC 2118

Cardin, TCJ [ORALLY]:—I have had the opportunity of reviewing the pleadings, the argument and I have also read the case law and although I did not find jurisprudence particularly helpful in the resolution of this appeal, I am nevertheless ready to render my decision.

Mr John Woods is appealing from reassessments by which the Minister of National Revenue added to the appellant’s income amounts of $1,446, $1,084 and $1,720 for the taxation years 1977, 1978 and 1979, respectively, on the basis that the appellant had received or was conferred benefits as a shareholder from a corporation of which he was a shareholder by virtue of paragraph 15(1)c) of the Income Tax Act, RSC 1952, chapter 148, as amended.

The appellant’s contention is that the appellant received no benefits whatever from the corporation and he also maintains that the Minister's inclusion of those amounts in the appellant’s income caused the appellant undue hardship. However, the appellant did not explain how or why he could come to that conclusion.

As in most tax cases, the onus is on the appellant and he must establish that he was wrongly assessed. He must establish, as he has maintained, that no amount of benefit was received by the appellant and none should have been assessed.

In the proceedings on May 2, 1985, the appellant did not call any evidence and the facts as set out in the Minister's reply to the notice of appeal were not disputed. A summary of the facts are that the appellant owned 50 per cent of Apollo Leasing Limited (“Apollo"), a truck rental company. It is agreed that the appellant advanced funds to Apollo for the express purpose of buying a boat and indeed Apollo purchased in 1974 a boat at a cost of $18,075 which it sold in 1978 and bought another boat in July of 1978 at a cost of $36,871. It is admitted that the loans were made by the appellant to Apollo interest-free and the loans are still outstanding.

It is also agreed that the boats were paid for and were owned by Apollo. The appellant admits that the boat was acquired for the exclusive personal use of the appellant. It is also admitted that Apollo did not claim any capital cost allowance on the boat and the appellant indeed paid all the operating expenses of the boat.

The two issues are whether or not benefits were conferred on the appellant for the personal use of the company's boat. The second question is, if a benefit was conferred, what is the dollar value of the benefit received.

Dealing first with the question of whether a benefit existed; in my opinion, the very fact that the appellant had exclusive personal use of the corporation's asset, namely, the boat, is in itself a benefit.

Counsel for the respondent correctly stated at the hearing, that whether it was the appellant or the bank or anyone else who loaned Apollo the money for the purchase of a boat it is not material to the issue that we have before us. There can be no question that Apollo, a distinct legal entity, is the legal owner of a boat and it is also a fact that the appellant, another legal entity, is a shareholder who has exclusive use of the company's boat.

The fact that the appellant paid all the operating expenses of the boat does not in any way change the issue, which is whether the appellant received a benefit under paragraph 15(1 )(c) of the Act by having given to him the authority or the privilege of using the boat exclusively for his personal use.

There arose in my mind a question which is certainly not determinative but which I find to be interesting and it is this: if there were no benefit to the appellant why would he have chosen to go that route rather than purchasing the boat outright? There apparently is no dispute that the appellant must have had the necessary funds since he loaned the funds to the company for that purpose.

As a result of the appellant’s decision, from the corporation's point of view, it had on its books loans payable without having acquired an equivalent income-producing asset. Whereas, the appellant had receivables for the amount loaned and he also had the exclusive use of the boat as well, and, in my opinion, a benefit was conferred on the appellant at the expense, in potential terms at least, of the company within the meaning of paragraph 15(1 )(c) of the Act.

The pertinent part of paragraph 15(1 )(c) of the Act reads as follows and I quote:

Sec. 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.

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 purpose for which the boat was acquired is not, therefore, in issue here as it was in the case of The Queen v Lionel Houle, [1983] CTC 406; 83 DTC 5430, referred to by the appellant’s representative. In that case it was decided that the yacht had been acquired for business purposes, but was also used by the appellant for personal reasons. The question there was not whether Mr Houle had received a benefit in having personal use of the company yacht. The Court recognized that Mr Houle's personal use of the yacht was in itself a benefit conferred on a shareholder by the corporation within the meaning of paragraph 15(1 )(c) of the Act.

The problem there was to determine a value for the benefit conferred on Mr Houle, which is precisely the problem now before this Court.

In Houle, (supra), Mr Justice Collier, at 411 (DTC 5434), had I think interesting remarks to make on the question of determining the value and I quote from that page:

Mr Lefebvre agreed that if the “Sans Souci” [which I understand is the yacht] had been acquired for a business purpose, and the use of her by the defendant was incidental or occasional, then the proper method of valuation was to allocate the operating costs.

That was the method used by the defendant, the Minister of National Revenue. He went on to say:

There was considerable argument before me as to the validity, in any event, of the Minister's formula. In my view of the factual conclusion I have reached, it is neither necessary, nor desirable, that I should express any view.

It is my understanding that in those circumstances, that is a part-time personal use of a yacht, the Minister of National Revenue considered that the. proper method of evaluating the benefit was by allocating operating costs. It appears evident from Mr Justice Collier's remarks that if it is clear that Mr Houle had received a taxable benefit from the personal use he made of the yacht, the formula to be used in determining a value for that benefit is not at all clear and the law on that point is in my view as yet unsettled.

Although, an evaluating formula based on operating costs and capital cost allowance may well be correct under certain circumstances, it is not necessarily the best nor the only acceptable method of computing the value of benefits such as we have here where there is no capital cost allowance and no operating costs, although there is a conferred benefit on the taxpayer.

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.

Having decided that a benefit was in fact and in law conferred on the appellant under paragraph 15(1)(c) of the Act, the Court must decide the issue with respect to the amount or the value of the benefit on the basis of whether the Minister’s assessment was reasonable under the present circumstances. The appellant has not established that the Minister’s assessment was wrong or too high and I do not accept the appellant's contention that the value of the benefit received was nil on the grounds that capital cost allowances and operating expenses of the boat are not involved here.

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.

The appellant's representative, a chartered accountant, did not dispute the appropriateness of the method, nor did he question any of the figures contained in Exhibits R-1 to R-4. He did not challenge the use of interest rates of 7.7 per cent, 8.4 per cent and 12.7 per cent with a prime rate of 4 per cent in arriving at a fair market rental value of the boat for each of the years under appeal.

It is quite evident from the respondent's summary sheet, which was also not contested by the appellant, that the fair market rental and the value of rental, using prime, are substantially higher than the value of the benefit as assessed by the Minister. Indeed, the fair market rental for the duration of the sailing period, which the appellant's representative sought to have considered and calculated on the basis of a five-month period, is still higher than the amounts assessed by the Minister. In my view, the appellant has not satisfied the onus of establishing that no benefit was received by him for the exclusive personal use of Apollo’s boat, nor has he proven that the Minister's assessment for that benefit was too high.

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.

It may well be that the appellant in proceeding as he did attracted more tax than he otherwise would. However, the appeal must be decided on what the appellant actually did and in that respect the Act is clear and the appellant falls squarely within the meaning and intent of paragraph 15(1)(c) of the Act.

Moreover, the amount of the benefit assessed is reasonable in the circumstances and indeed, in my opinion, it is for the appellant a very favourable computation of the value of the benefit conferred on him by Apollo. In my opinion, the Minister’s assesssments could indeed have been considerably higher and for these reasons the appeal is dismissed.

Appeal dismissed.