Tercier Motors Ltd, Edward Tercier v. Minister of National Revenue, [1984] CTC 2629, 84 DTC 1620

Christie, CJTC:—The first issue to be disposed of relates only to Tercier Motors Ltd (“the company”) which is a private corporation incorporated under the laws of Alberta and carries on business as an automobile and marine equipment dealer at Bonnyville in that province. In 1975, the company purchased real estate in Bonnyville known as the Lakeshore Apartments. The following year these apartments were sold to Golden Flow Developments Limited at a profit of $18,611. In its 1976 return of income the company treated this profit as a capital gain. By notice of reassessment which was mailed on March 3, 1980, pursuant to the provisions of the Income Tax Act, RSC 1952, c 148, (“the Act”), the respondent took the position that: “Profit on sale of Lakeshore Apartments considered to be an adventure in the nature of trade”. In paragraphs 4 and 8 of the reply to the notice of appeal it is said that the respondent agrees that the disposition of the Lakeshore apartments was on capital account. Counsel for the Minister of National Revenue confirmed this at the commencement of the hearing. In the circumstances, this aspect of the company’s appeal is allowed.

The second issue in the appeal of the company in respect of its 1976 taxation year and the issue in the appeal of Edward M Tercier (“Tercier”), who was the principal shareholder of the company at all relevant times, were heard together. This was done by agreement among the parties and with the concurrence of the Court. The company owned a Hughes 500 helicopter. The respondent disallowed $7,560.40 claimed by the company as a deduction in respect of the helicopter on the ground that it was not an outlay or expense made or incurred by the company as a deduction in respect of the helicopter on the ground that it was not an outlay or expense made or incurred by the company for the purpose of gaining or producing income within the meaning of paragraph 18(l)(a) of the Act. It was included in Tercier’s income for his 1976 taxation year as a benefit conferred on him as a shareholder within the meaning of paragraph 15( l)(c) of the Act. The $7,560.40 relates to the use of the helicopter for 38.6 hours in 1976 which represents 34 per cent of the total flying time of the aircraft in that year. Paragraphs 5(c) and (d) of the reply to notice of appeal in respect of Tercier regarding this second issue read:

5. In reassessing the Appellant as he did, the Respondent relied, inter alia, upon the following facts:

(c) that the 38.6 hours of helicopter flying time of the Appellant represented 34% of the total number of flying hours of the helicopter in the year 1976, and was comprised of 4 hours of personal use and 34.6 hours of training time;

(d) that an amount of $7,560.40 in respect of the 38.6 hours of use of the helicopter by the Appellant in his 1976 taxation year was calculated upon the following basis:

Although precisely the same words are not used in paragraphs 5(c) and (d) of the reply to notice of appeal regarding the company, the substance is the same. The evidence establishes that 34.6 hours represents use of the helicopter in the course of training Tercier to fly it and the remaining four hours relates to personal use of the helicopter by him. There is no disagreement regarding the method by which the $7,560.40 is computed. The helicopter was purchased in the fall of 1975 from an enterprise engaged in construction. Prior to that time the appellant company owned a fixed-wing airplane which had been purchased in 1969 and used for the purposes of its business. Tercier piloted that aircraft, having learned to fly it with a government grant at the Canadian Forces Base at Cold Lake, Alberta. The training of Tercier as a helicopter pilot was under the supervision of one Brian Cleveland, a certified instructor. Tercier obtained his helicopter licence in April of 1976. The helicopter was sold in 1979 and a second one purchased in 1980. This second aircraft was sold in 1983. Tercier spent 10 hours in training to fly the second helicopter. No evidence was forthcoming which refuted the evidence on behalf of the company and Tercier that the latter’s training was for the purpose of enabling the helicopter to be used in the business of the company. Personal use of the aircraft was during the period relevant to this aspect of the company appeal regarding its 1976 taxation year and Tercier’s appeal was minor and incidental. It was not regarded by the company as economically feasible to hire a full-time commercial pilot to fly the helicopter. It was used, among other things, to transport drivers to pick up automobiles which were being taken in trade by the company. It was frequently necessary to make trips from Bonnyville to Edmonton, a distance of 208 kilometers, and the travelling time for those trips was greatly reduced by usage of the helicopter. Mr Robert Sylvester, who was the other primary shareholder of the company at the relevant time, confirmed that Tercier’s training enured to the benefit of the company. In the circumstances I see no reason why that portion of the $7,560.40 which is related to the time spent training Tercier to fly the helicopter is not properly deductible by the company as an expense incurred by it for the purpose of gaining or producing income within the meaning of paragraph 18(l)(a) of the Act. The fact that Tercier was the principal shareholder of the company is irrelevant. The clear distinction of identity between a corporation and its shareholders must not be lost sight of: Salomon v Salomon & Co Ltd, [1897] AC 22. The position is no different than if the company had selected a salesman employed by it, who held none of its shares, to be trained to pilot the helicopter for the purposes of the company’s business. It follows that the portion of the $7,560.40 which pertains to the training of Tercier is not a taxable benefit in his hands pursuant to paragraph 15(1)(c) of the Act. The four hours of personal use of the helicopter was, however, properly included in computing his income as a benefit within the meaning of the paragraph just mentioned. As paragraph 5(d) of the reply to the notice of appeal indicates, of the $7,560.40, $5,630.40 is a capital cost allowance. It was argued on behalf of Tercier that the respondent is without authority to treat any portion of the capital cost allowance as a taxable benefit to be included in computing Tercier’s income in 1976. I disagree and in this regard reference is made to the judgment of the Exchequer Court in Canim Lake Sawmills Limited v MNR, [1961] CTC 25; 61 DTC 1035, as interpreted by the Tax Appeal Board in Starky v MNR, 27 Tax ABC 6; 61 DTC 360. The headnote in Starky reads:

An aircraft owned by a company of which the appellant was principal shareholder was used extensively by him for personal trips. It was established that the appellant did do business on behalf of the company on some of these trips. The Minister assessed him for the proportion of time in which he had put the aircraft to personal use, basing the assessment on a percentage of the total cost of the operation of the plane to the company, including depreciation. The appellant argued that this assessment was excessive and, inter alia, that trips he had to make to and from a summer cottage in connection with business matters should be allowed.

Held'. The appeal was dismissed. The Board found the assessments were reasonable in view of the time in which the appellant had put the aircraft to personal use. The trips were found to have been made for the personal convenience of the appellant. As he had made a personal choice to take up a temporary residence for a large part of the tax years in question his transportation must be regarded as a personal expense and therefore the benefits received were taxable under section 8 of the Income Tax Act. In giving its reasons the Board considered the question of deductions for depreciation.

Subsection 8(1) of the Income Tax Act 1948 which was the applicable legislation in Starky is now, and was at the time relevant to these appeals, subsection 15(1) of the Act. In delivering the judgment of the Tax Appeal Board, W S Fisher, QC, said at 17 [366]:

As to the appellant’s contention that the amounts arrived at as the value of the benefit conferred upon him by the company were excessive because they included, particularly in the 1950 and 1951 assessments, the fixed costs in connection with the planes such as insurance, certificates of airworthiness, storage and depreciation, I have come to the conclusion that this submission cannot be concurred in. In the recent Exchequer Court decision in Canim Lake Sawmills Limited v Minister of National Revenue, not yet reported in the Exchequer Court Reports but reported in [1961] CTC 25 and 61 DTC 1035, the appellant lumber company carried on its operations in a heavily- wooded area about 240 miles from Vancouver. It operated its own sawmill and also handled the output of other sawmills in the area. The company’s president and sales manager used an aircraft owned by the company to make regular trips to Vancouver, which also happened to be where his family resided. The company introduced evidence to show that it was essential that its president make regular trips to Vancouver to arrange for the marketing of its lumber, and that, because of the time that would have been consumed if he had travelled by car, the use of the plane for such trips was necessary. In assessing the taxpayer, the Minister refused to allow a deduction claimed by the company in respect of the cost of operating the aircraft and in respect of capital cost allowance for it, as the Minister alleged that the plane had neither been acquired nor used by the company for the purpose of earning income from its business. The Court allowed the appeal and permitted the company a deduction of 85% of the cost of operating the aircraft and 85% of the capital cost allowance in respect of it, as the evidence disclosed that no more than 15% of the total use of the plan was attributable to its personal use by the company’s president.

If the submission advanced by Mr Starky in the present appeal were to be concurred in, namely, that since depreciation of an airplane goes on, or is suffered, irrespective of whether the airplane has been used or not, and irrespective of whether it has been used for personal purposes or for company business, therefore all of the depreciation should be deducted by the company and no part thereof should be included in the valuation of the benefit received by the shareholder who has made use of the plane, then it would seem to me that, in the Canim Lake Sawmills case (supra), the Court would have allowed 100% of the depreciation incurred by that company as a deduction rather than only 85%. By inference, also, from the judgment in that case, it may be assumed that, since 15% of the use of the sawmill company’s plane was attributable to its personal use by the company preident, then 15% of the depreciation on the plane, or the proportion not allowed to the company as a deduction, would be included as part of the value of the benefit conferred upon the said sawmill company president when he came to be assessed on his personal income.

The final question relates to the company alone and its 1977 taxation year. The helicopter purchased in 1975 is again involved. It was used in 1977 for a period of 48.2 hours to fly passengers to a fishing camp known as Culchoe Nu Lodge (“the lodge”) which is located at Stewart Lake, BC. The camp site was purchased in 1977 and, at all times relevant to this appeal, the lodge was a partnership of which Tercier was a substantial partner. The financial statements for the the lodge, as at December 31, 1977, contains a statement of partners equity which reads:

The company sought to deduct $14,491.30 from its income in 1977 in relation to those trips. This amount is compiled on this basis: maintenance expense — $9,935.54; fuel expense, $10/hour — $482 and capital cost allowance, 41 per cent thereof — $4,073.76. By notice which was mailed on March 3, 1980, the company was reassessed by the respondent who disallowed the claimed deduction of $14,491.30. On May 21, 1980, the company objected to the reassessment and on March 1, 1982, it was confirmed by the respondent. The company’s notice of appeal is dated May 31, 1982, and is based upon the allegation that the company was providing the lodge with commercial air services at “the going rate for helicopter rentals at that time”. Extracts from the helicopter log were introduced in evidence by the company. They show trips related to the lodge and among the passengers were two of the partners in the lodge, namely, Kanik and Roy. Another passenger was Mr Lloyd McMahon. Roy and McMahon will be referred to again shortly. The lodge was not billed for air services in 1977. A bill was sent many months later on the advice of Mr Ronald Galigan, a chartered accountant. The company’s Memorandum of Association was placed in evidence by the respondent. Although it covers a broad area of commercial activity, supplying air services is not included. Tercier admitted in cross-examination that the company was not licensed to operate a commercial air service. I am not at all satisfied that a contractual relationship existed between the company and the lodge whereby the former was to supply the latter with air services. Indeed, at the hearing of the appeal, the company shifted away from that position to relying on an argument that the deduction claimed pertained to the promotion of its business. Evidence in this regard included documents to show that, between 1977 and 1983, the company had transacted a significant volume of business with Roy and McMahon, or business enterprises controlled by them. Nevertheless, on the whole of the evidence, I am not satisfied that this is a proper basis for allowing the deduction claimed. Galigan was called as a witness by the company and he testified that he regarded the $14,491.30 as a legitimate expense of the company. An attempt was made to explain away the fact that the lodge was not billed until 1979 for services allegedly rendered in 1977 for the rather obtuse reason that it had been done in order to satisfy Revenue Canada during the course of negotiations regarding the company’s tax liability. I believe that the real and true purpose for the expenditure of the $14,491.30 by the appellant was to promote Tercier’s personal interest as a partner in the lodge and that it was unrelated to gaining or producing income from the business of the company.

To sum up, the company’s appeal in respect of its 1976 taxation year regarding the sale of the Lakeshore Apartments is allowed. The company’s appeal in respect of its 1976 taxation year regarding costs incurred in the operation of the helicopter is allowed to the extent that they relate to the 34.6 hours of use of the aircraft, namely, $6,774.11. Tercier’s appeal in respect of his 1976 taxation year is allowed regarding costs incurred in the operation of the helicopter except to the extent that they relate to four hours personal use of the aircraft by him, namely, $786.28. These last two mentioned matters are referred back to the respondent for reconsideration and reassessment accordingly. The company’s appeal in respect of its 1977 taxation year is dismissed.

Appeal dismissed.