Saul Simkin v. Minister of National Revenue, [1983] CTC 2721, 83 DTC 651

Tremblay, TCJ:—This case was heard on December 9, 1982, at the City of Winnipeg, Manitoba.

1. The Point at Issue

The point at issue is whether the appellant is correct in considering as non-taxable the amount of $15,945.88 expended by BACM Construction Co Ltd, in 1975 for the restoration of his yacht. The appellant, an executive officer of the said company, contends that for many years the yacht had been used for the entertainment of the clientele of the company, and that it was equitable that the company pay for the restoration.

The respondent disallowed the deduction of the expense in the computation of the company’s income and included the said amount in the appellant’s income on the basis that the said expense constituted a benefit in favour of the appellant.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be cor- rect. In the present case, in subparagraphs 5(a) to (d) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

5. In assessing the Appellant for the 1975 taxation year, the Minister of National Revenue relied on the following assumptions of fact, inter alia:

(a) at all material times the Appellant was an executive officer of BACM Construction

Co Ltd (“BACM”) and its subsidiaries situated at Winnipeg, Manitoba;

(b) during the relevant taxation year, 1975, the Appellant was the owner of a boat or yacht named the Jade-A;

(c) during the taxation year 1975 of the Appellant, BACM expended the sum of $15,945.88 in repairing and remodelling the Appellant’s yacht;

(d) the amount of $15,945.88 expended by BACM on the Appellant’s yacht was a benefit conferred on the Appellant as an employee of BACM.

3. The Facts

3.01 At the beginning of the trial, the Court was informed that the figure of $15,945.88 included in the appellant’s income is not in dispute. Three invoices were produced as Exhibit A-1.

3.02 Mr Saul Simkin, in his direct testimony, testified that:

(a) he was retired but was, in 1975, the chairman and chief executive officer of BACM Construction Co Ltd (“BACM”). However, he was not a shareholder of BACM;

(b) the activities of BACM were in cement, concrete product, construction, gypsum products, land development, house building, etc;

(c) BACM had about 50 subsidiaries involved in these activities in Western Canada;

(d) the approximate volume of business that BACM and its subsidiaries were doing was between four and five hundred million, then, Genstar, the parent company of BACM was the 22nd largest company in Canada;

(e) he had been working for BACM or its predecessor companies since 1930. In 1975, he “worked day and night, for 7 days and 7 nights . ..”;

(f) in 1962, he bought a one-year-old Criscraft Roamer 35, 35 feet long. It could accommodate 20 persons. It had a stove, a fridge and a head (toilet). There was no bedroom. Its name was Jade-A;

(g) Jade-A was located at the Manitoba Yacht Club about 5 miles north of the city limits of Winnipeg;

(h) it was used for business purposes:

A Well, we never made an acquisition that wasn’t done on the boat because Western Canada was a very small area then and if you were seen with somebody that you were trying to make a deal with, to acquire or to sell, it was all over; everything had to be kept secret. Most of the deals we made were made very rapidly.

Q How rapidly?

A Oh my God; we grew from 1962 to 1975 — we had done I think from $10 million to $500 million, give or take — in those years. We acquired companies and we also made major decisions about our senior personnel on that boat. In other words, we had a Chairman and Chief Executives of a lot of other companies and we couldn’t discuss it in offices at that time. It was like the telegraph, if you said something here then tomorrow morning it was all over Western Canada, so we used to go on the water. You couldn’t hear a thing, there was just the people on the boat.

So, all of the major decisions that went on between Genstar and BACM and the subsidiaries at that time, all major decisions, were made on the boat. It took sometimes up to two days to make decisions. We didn't sleep on the boat, but we were on the boat, on the river, and 4 or 5 or 6 of us, however many there were, if we didn’t conclude our deal that night we came back and slept over in Winnipeg and then came back on the boat the following day. But most of the time it took the one day and sometimes a day and a half. (SN p 8-9)

(i) Jade-A was used for only 5 months from May 15 to October 15 each year;

(j) he scarcely used it for his personal use:

I didn't have time for personal use. I am sure there was the odd time, but I don’t think — I can't really remember the times I went out with my children for a ride. I just don’t remember the times. Maybe a few times in the last 15 years. Always the personnel of the corporation or other people coming in. There were an awful lot of Europeans coming in then and they were investing in Canada at the time.

(k) BACM never paid him rental or fee for the use of the boat. However, they paid for the maintenance, repairs, fuel and entertainment;

(l) in 1975, he had trouble with the boat (motor, roof was leaking, floor was rotting, etc). He ordered the boat be put in shape. After the repairs, it was used for business until April 1977, when he retired;

(m) there was only one boat in Winnipeg which could be rented and it belonged to a Bill Harris. He used to charge $50 an hour plus all costs (fuel, etc).

3.03 In cross-examination, the appellant testified that:

(a) Jade-A and an island were purchased together in 1962 under the Bankruptcy Act, for $22,000. The island was sold after. However, the market value of Jade-A was then $10,000 to $12,000. It was in relatively good shape;

(b) he does not remember if Jade-A was used for personal purposes in 1975;

(c) the major deals of BACM were made on Jade-A, but not all the business was done on it. However, most of the acquisitions of BACM were done in the summer months;

(d) the repairs detailed in Exhibit A-1 were actual;

(e) the motor was repaired for $6,000. Now the same kind of motor would be sold for $29,000;

(f) the following paragraph of the notice of objection is correct:

3. The outlays made in the year in question by the “employer” were expended for the same reasons and in the same manner as in prior years and constituted proper expenses to the “employer” having regard to the benefit received thereunder.

By “benefit received thereunder” he meant that “the benefits were all of the meetings taking place on that boat in connection with the business of BACM”.

3.04 In re-examination, the appellant testified that:

(a) Concerning personal use, from 1967 to 1977, “I don’t think I used it three times”;

(b) in 1962, 1963 and 1964 when the 2 children were at home, the boat was used more often for the family.

3.05 Mr Leo Alfred testified that:

(a) in 1975, he was working for BACM as shop foreman in the mechanical and he has been with this company since 1963;

(b) in 1975, he had to remove the two motors of the inboard and give them an overhaul. They were losing power and using excessive oil;

(c) the expenses on Exhibit A-1 concerning the engines (diesel engines, six-cylinder) were actual. It was the first time it was done;

(d) the sum of $2,200 was expended on parts. It took 240 hours of labour at $15.50 per hour.

3.06 Mr Fred Weitzel testified that:

(a) he had been working for BACM since 1948 until he retired in 1979;

(b) in 1975, he was the construction supervisor. Concerning the boat, the carpenters replaced the roof and the windows;

(c) Exhibit A-2 (a hand-written letter written by himself) described the things he thought needed repair after seeing the boat. The list of Exhibit A-2 is in substance the first page of Exhibit A-1;

(ch) the expenses on Exhibit A-1 are actual;

(e) he was responsible for the maintenance, paint and to “fix up odds and ends”. In 1975, it was really a major operation.

4. Law — Cases at Law — Analysis

4.01 Law

The main provision of the Income Tax Act involved in the instant case is 6(1 )(a). It reads as follows:

6. Amounts to be included as income from office or employment.

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) Value of benefits.—[be value of board, lodging and other benefits of any kind whatever (except the benefit he derives from his employer’s contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment;

4.02 Cases at Law

The counsel for both parties referred the Court to the following cases at law:

1. Louis J Harris v MNR, [1966] CTC 226; 66 DTC 5189;

2. The Queen v Alberta & Southern Gas Co Ltd, [1976] CTC 639; 76 DTC 5244;

3. Gordon McKee v The Queen, [1977] CTC 491; 77 DTC 5345;

4. James F Kennedy v MNR, [1973] CTC 437; 73 DTC 5359;

5. Jack Salter v MNR, [1982] CTC 2689; 82 DTC 1702;

6. Cyril John Ransom v MNR, [1967] CTC 346; 67 DTC 5235;

7. Farries Engineering Ltd et al v MNR, [1982] CTC 2118; 82 DTC 1120;

8. Robert Shorrocks Williams v MNR, [1955] CTC 1; 55 DTC 1006;

9. Harry O Waffle v MNR, [1968] CTC 572; 69 DTC 5007;

10. Charles-Edouard St-Germain v MNR, [1969] CTC 194; 69 DTC 5086;

11. Ethel Annabelle Angle v MNR, [1969] CTC 624; 69 DTC 5423;

12. The Queen v Peter Neudorf, [1975] CTC 192; 75 DTC 5213;

13. Charles Perrault v The Queen, [1978] CTC 395; 78 DTC 6272.

4.03 Analysis

A. Mr Hill — Appellant’s argument

4.03.1 The appellant’s submissions can be outlined in the following points:

1. The payment for repairs is really a payment for use;

2. the use was for 1975 and solely for the business of BACM;

3. in restoring the boat to its original condition, it is not an increase in the value of the asset;

4. whereas there is no increase in value to the appellant, the owner of the boat, there is no benefit for him as provided in paragraph 6(1 )(a).

4.03.2 He based the last point on the Farries Engineering Ltd and Kennedy cases (referred to above). In the latter Mr Justice Jackett said on page 441 of the Canada Tax Cases that an improvement only confers a benefit if the improvement increases the value of the person’s interest.

Mr Hill contends that pursuant to the evidence, BACM in making an overhaul of the boat simply reimbursed the expenses incurred by the appellant, and therefore there was no increase in value.

B. Respondent’s argument

4.03.3 The Minister’s position is that the value of the work done was equal to the benefit which was conferred by BACM. The cost to the corporation is in fact the benefit. Referring to the Williams case, he contends if the appellant had not been employed by BACM he would not have been entitled to have his yacht refurbished. Therefore, the benefits are “in respect of, in the course of, or by virtue of his employment”.

4.03.4 It is the preponderance of the evidence that for more than 20 years, Jade-A was used by BACM Construction Ltd, the appellant’s employer, almost exclusively for business purposes (para 3.02(h) to (j)).

It is obvious that if the appellant had rented Jade-A to BACM at $50 per hour plus all costs as a Bill Harris would have (para 3.02(m)) the total would have been an income for the appellant, and an expense for BACM during the said years.

Also the expenses incurred by the appellant would have been deductible pursuant to the Income Tax Act. However, that procedure was not followed, and the amount of $15,945.88 spent in 1975 by BACM in the restoration of Jade-A is computed by the respondent in the appellant’s income on the basis of paragraph 6(1 )(a) quoted above.

On the one hand, if it is true that it was because the appellant was an employee of BACM that the latter paid for the repairs, then it is also true on the other hand, that it was because BACM received advantages from the appellant.

In fact, BACM made the repairs because it received advantages during 1975 and former years. The problem is whether the $15,945.88 is an increase in the value of the appellant’s asset: Jade-A. It was purchased, along with an island, for $22,000. However, the market value of Jade-A in 1962 was $10,000 to $12,000 (para 3.03(a)). It is difficult to admit that the whole amount of $15,945.88 does increase the value of Jade-A. The amount includes, in part, the restoration of Jade-A to its original condition. The Court thinks that 60 per cent of the amount can reasonably be considered for this. The other 40 per cent must be considered as a payment for use or as an advantage to the appellant, and therefore taxable in his income.

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.