James v. R., [1999] 4 CTC 2036 (Informal Procedure)

Mogan T.C.J.:

The Appellant resides at Inglis, Manitoba and is the sole shareholder and director of Mean Machines Ltd. The issue is whether the Appellant received a shareholder benefit in 1994 or 1995 within the meaning of subsection 15(1) of the Income Tax Act. The Appellant has elected the Informal Procedure.

Sometime in 1993 or 1994, the Appellant decided to obtain a Master in Business Administration, a university degree commonly known as an MBA. After reviewing different universities, he chose Hariot-Watt University in Edinburgh, Scotland because that university permitted the MBA degree to be obtained through correspondence courses. The Appellant learned that the University of California at Berkley was the North American distributor for the MBA courses designed and issued by Hariot-Watt University in Scotland. Accordingly, the Appellant got in touch with the University of California at Berkley (“UCB”) and arranged to purchase the course material for certain courses necessary to obtain the MBA. The purchase price of the course material was actually paid by Mean Machines Ltd. (“MML”). That is the source of the issue in this case concerning a shareholder benefit.

According to the Appellant’s unchallenged evidence, all of the material for a particular course arrived in a sealed box (textbooks, software, tests, etc.) and could have been used by any person who obtained possession of the box. There was no time limit within which a course had to be taken following delivery of the course material. Indeed, UCB would not know the identity of the person proposing to take the course until that person identified himself/herself and paid the fee to sit the exam. Once a particular person had paid the fee and attempted his/her first exam, that person had to take all of the required MBA courses within a seven-year period following the attempt to take the first exam.

UCB offered a discount on the sale price of courses if a person would purchase three or more courses at one time. The Appellant caused MML to purchase three courses in 1994 and six courses in 1995 because he wanted to take advantage of the discount for three or more courses and to avoid any increase in tuition fees in subsequent years. Therefore, MML had purchased and taken delivery of nine courses by the end of 1995. In 1994, the Appellant did not attempt to take any courses and so he did not sit for any exam. He took his first course in 1995; his second course in 1996; two courses in 1997 and two courses in 1998. The six courses taken by the Appellant in those four years were six of the nine courses which MML had purchased in 1994 and 1995. Until the Appellant had identified himself as the candidate for the exam in the first course taken in 1995, UCB would not have known the identity of the candidate intending to take that first course.

Exhibit R-2 is an invoice from UCB dated April 19, 1994 charging the aggregate amount of $2,412.25 (US funds) for three courses. Exhibit R-3 is a second invoice from UCB dated June 1, 1995 charging the aggregate amount of $4,064 (US funds) for six courses. Exhibit R-l is an extract from the general ledger of MML showing that on May 28, 1994 MML paid $3,378.84 to UCB for the three MBA courses purchased in 1994. The amount of $3,378.84 appearing in Exhibit R-1 is the equivalent in Canadian funds to the purchase price of $2,412.25 in US funds (Exhibit R-2) for the three courses purchased in 1994. Exhibit R-l also shows that on May 31,1995 MML paid $5,676.19 to UCB for the six courses purchased in 1995. The amount of $5,676.19 in Canadian funds in Exhibit R-l is the equivalent to the purchase price of $4,064 in US funds appearing in Exhibit R-3 for the six courses purchased in 1995.

Having regard to the payments made by MML to UCB for the nine courses, the Minister issued notices of reassessment to the Appellant dated February 20, 1997 in which the Minister increased the Appellant’s income for 1994 by the amount $3,378.84 and increased the Appellant’s income for 1995 by the amount $5,676.19. These amounts were added to the Appellant’s income because the Minister concluded that they were shareholder benefits under subsection 15(1) of the Income Tax Act which states:

15(1) Where at any time in a taxation year a benefit is conferred on a shareholder,

or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by

the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.

There is no doubt that MML paid for the nine courses and that the Appellant, as sole shareholder and director of MML, intended to take the courses. The Appellant takes the position that the boxes of course material as received from UCB belonged to MML until such time as he appropriated a particular course for the purpose of taking the examination. In other words, the Appellant claims that no benefit was conferred upon him by MML until such time as he appropriated the course material from MML for the purpose of studying the material and submitting the tests and taking the examination. Consistent with this line of argument, the Appellant acknowledges that a benefit was conferred upon him in 1995 when he took the first course; that a benefit was conferred on him in 1996 when he took the second course; and that benefits were conferred on him in 1997 and 1998 when he took two courses in each of those years.

The real issue in these appeals therefore is the timing of the benefit because the Appellant acknowledges that MML conferred a benefit upon him with respect to the six courses which he took from 1995 to 1998; whereas the Minister of National Revenue claims that the benefits were conferred in 1994 and 1995 when MML purchased three courses in 1994 and six courses in 1995.

When deciding this case, I am influenced by the fact that the courses were sold with no identification as to a particular user; and any individual could use a course by studying the material and identifying himself or herself as the person who would take the exam. I therefore conclude that the course material remained the property of MML until such time as it was appropriated by the Appellant by writing the exam and obtaining the credit. My view is reinforced by the evidence of the Appellant who stated that, within a reasonable time, the course material could be returned to UCB for a refund if the material was not stale and had not been opened.

With respect to the nine courses purchased by MML in 1994 and 1995,1 find that no benefit was conferred upon the Appellant within the meaning of subsection 15(1) of the Income Tax Act until such time as the Appellant actually took possession of a particular course and started submitting its tests with a view to writing the exam. I accept the Appellant’s argument that there was a shareholder benefit but it was conferred upon him only to the extent that he took a course in any particular year. Subsection 15(1) requires that the value of the benefit be included in computing the income of the shareholder. As a matter of accounting convenience, I would take the cost of the first three courses in Canadian dollars at $3,378.84 and divide that amount by three to arrive at an average cost of $1,126.28 as the value of each course. Similarly, I would take the cost of the six courses purchased in 1995 at $5,676.19 in Canadian dollars and divide that amount by six to arrive at an average cost of $946.03 as the value of each course. On a first- in, first-out basis, I am going to assume that the three courses purchased first would be the first three courses taken by the Appellant.

I will allow the appeal for the 1994 taxation year because the Appellant did not take any course in that year. I will allow the appeal in part for the 1995 taxation year because the Appellant took only one course in that year. Using the first-in, first-out method described above, I conclude that the Appellant received a shareholder benefit in the amount of $1,126.28 in 1995 when he took the first course. Although the taxation years after 1995 are not before me in this appeal, I will make the following observations because they are consistent with the conclusions I have reached on the issue in these appeals. Under subsection 15(1) of the Income Tax Act, the Appellant received shareholder benefits in the following respective amounts:

In the above table, I have simply used the average cost of each course as being the value of the benefit within the meaning of subsection 15(1).

In paragraph 12 of the Respondent’s Reply to the Notice of Appeal, the Minister of National Revenue conceded that the Appellant is entitled to a tuition credit in the amount of $272.50 for the 1995 taxation year with respect to the fee he paid for the labour market training project — “Right Choice Driver Training” being a course which he took in 1995. And finally, the Appellant abandoned any claim with respect to a tuition credit for any of the nine courses purchased by MML from UCB. The appeals for 1994 and 1995 are allowed, with costs, consistent with the above reasons for judgment.

Appeal allowed in part.