Dailley Recreational Services Ltd, Virginia M Dailley v. Minister of National Revenue, [1985] 1 CTC 2148, 85 DTC 134

Taylor, TCJ:—These are appeals heard on common evidence, commenced on April 10, 1984 and concluded on November 16, 1984. Reference is made to a ruling given by the Court dated August 20, 1984, [1984] CTC 2762, 84 DTC 1680, on certain submissions provided by counsel. Arising out of that ruling is a determination of fair market value of the real property at issue as at February 29, 1980 being $256,000, and this judgment will contain that point. Two other points had been raised by counsel for the appellants, and remained for determination at the November 16, hearing:

(1) Where an actual sale takes place between parties not dealing at arm’s length, are the parties required to pay fair market value inclusive of commission or may they reduce the agreed purchase price between them by the amount of commission that would normally be payable in an arm’s length transaction?

(2) Where a corporation sells an asset to its sole shareholder, it is deemed, under the provisions of subparagraph 69( l)(b)(i), to have received proceeds of disposition therefore equal to the fair market value. If the corporation is deemed to have received fair market value under the provisions of section 69 of the Income Tax Act, has the shareholder also received a benefit under the provisions of subsection 15(1)? The argument is based on the fact that if the corporation has received or is deemed to have received fair market value, then there is no benefit to the shareholder.

The argument of counsel for the appellants on point (1) above was essentially that the net receipts to the corporation (Dailley Recreational Services Limited) would have been about six per cent less by virtue of a real estate commission which would have been paid, in the event the sale had been to an arm’s length party and a real estate agent used. In effect, counsel was arguing for a “cost of disposition’’, based on a notional commission. There are several valid arguments against that proposition — most of which were dealt with by counsel for the respondent — but as I see it they all come down to a recognition of the simple fact that in this transaction only certain costs paid or incurred are deductible for income. I am not aware that any of these deductible costs cover the hypothetical situation presented by counsel for the appellant. In this particular situation, there is as much reason to believe that the introduction of a real estate agent, and the consequent payment of a commission, could have resulted in a net return to the vendor greater than $256,000, as there is to believe that the amount of $256,000 was the maximum fair market value obtainable. Nevertheless that perspective is not regarded as having any influence on the prima facie determination of the Court that the “fair market value’’ for purposes of paragraph 69(1 )(b) of the Act was $256,000 in the circumstances of this case.

On point (2) above, the Court is essentially faced with the “double taxation” argument. An oversimplified way of putting this argument, is — “Now that we have straightened out the inaccuracy for the corporation, of the original reporting of $137,000 as “proceeds of disposition”, — (now determined to be $256,000), the matter should be closed.” Subsection 69(1) of the Act does not explicitly provide that the same “deeming” process should apply to the second party to a transaction (where the amount paid is /ess than fair market value) but in the circumstances of this case, one should also look to subsection 69(4) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The evidence in this matter shows that the excess amount at issue is simply the difference between the cost of the real property to the corporation at acquisition, and the “fair market value” of that same property at the date of transfer to Mrs Dailley. While undoubtedly not reflected on the books of the corporation as an asset at the date of sale to Mrs Dailley, that difference was nevertheless a valuable, identifiable and quantifiable asset at that date. Subsection 69(1) does not restrict itself to “real property”, any “property”, it deals with “anything”. Whether the “property” to be dealt with under subsection 69(4) of the Act would be the “real property”, or the excess “amount” (fair market value minus cost) does not become relevant in this appeal — the only point arising out of subsection 69(4) is whether or not it was “appropriated . . . for the benefit of . . .”. I do not agree with counsel for the appellant that the provisions of subsection 69(1) of the Act, serve to insulate Mrs Dailley from the taxation at issue.

Subsection 15(1) of the Act cuts a much greater swath in taxing a shareholder than relying solely on appropriation. In this matter, the party completely responsible for diverting some of the accumulated, and realizable wealth of the corporation into the hands of a shareholder, was that same shareholder, the sole shareholder — Mrs Dailley. I am satisfied that Mrs Dailley appropriated the property and that as a shareholder she falls within the ambit of paragraph 15(l)(b) of the Act. It was the argument of counsel for the respondent that she could fall within the ambit of paragraph 15( l)(c), and indeed he may be right — but based upon the above line of reasoning, I have no doubt at all about the viability of the Minister’s assessments against the taxpayer. Counsel for the respondent noted for the Court the following cases of jurisprudence in support of his argument Perreault v The Queen, [1978] CTC 395; 78 DTC 6272; Joachim Santarossa, Mario Santar ossa, and Joseph Santarossa v MNR, [1978] CTC 2390; 78 DTC 1294. I would add the recent case of Olson v MNR, [1984] CTC 3092; 84 DTC 1826 which deals with the complexities and complications which can arise out of section 15 of the Act.

Before leaving this matter, I am constrained to comment on the case of Raymond T Emery v MNR, [1980] CTC 2570; 80 DTC 1508, relied upon heavily by counsel for the appellant. It is difficult, if indeed possible, to reconcile certain comments in Emery (supra) with the reasons for decision given above in this judgment. I would however note that the recorded judgment in Emery (supra) gives as some background to the decision the following:

— Regardless of the intentions of the appellant. Pleasure Valley was the owner of the house, having acquired legal title, received rent from the appellant, entered the cost of the house on its books, and responsibility for payments of taxes, property assessments, etc.

. . . The argument of counsel for the respondent on this point was that although the amounts in the two appeals were mathematically the same ($8,120), they were each from a different base and perspective — that of Emery related to the value attributed by the Minister to his use of the property during the period May 1972 to December 1974.

While there was no particular evidence offered by either party regarding rental payments from Emery to Pleasure Valley, the Board cannot ignore the fact that the alleged payment for such rent was one of the major assumptions upon which the Minister concluded that the trust arrangement asserted by the appellant did not exist. Assuming appropriate economic rental payment by the appellant for occupancy of the property, such payments would negate the assertion that a benefit was conferred on him during the relevant period (May 1972 to December 1974).

It may be that there was, at the minimum, a degree of uncertainty on all sides regarding the basis of the assessment against Emery. That assessment appears to have been founded on some form of “economic rent’’ attributed originally to the arrangements between Emery and Pleasure Valley. And it would also appear that the taxpayer had relied upon some form of “trust arrangement’’ in contesting that assessment. In the end analysis there was no one to contest the “Pleasure Valley’’ assessment, (the appeal was withdrawn), and nothing was provided to establish the value of the property at transfer, although Emery apparently did not present any contrary evidence.To whatever degree the decision in Emery (supra) may have had validity in those circumstances, it cannot be used as the basis for a proposition in these appeals, that the taxpayer Mrs Dailley should escape the tax assessed under subsection 15(1) of the Act because of the fact that the taxpayer Dailley Recreational Services Limited was assessed under subsection 69(1) of the Act.

Both appeals are allowed in part in order that reassessments may be struck based on the determination of the Court that the fair market value of the real property involved was $256,000 as of February 29, 1980 rather than $285,000 used in the assessments. The matter is referred back to the Minister for reconsideration and reassessment. In all other respects the appeals are dismissed.

Appeals allowed in part.