Paul E Albrechtsen, Paul’s Hauling LTD v. Minister of National Revenue, [1979] CTC 2164, 79 DTC 167

M J Bonner:—Paul’s Hauling Ltd appeals from an assessment of income tax for the 1975 taxation year disallowing in part, as deductions in computing income,

(a) the sum of $1,160, claimed as rent for an apartment suite at 200 Tuxedo Boulevard in Winnipeg, and

(b) the sum of $4,866.61, claimed as capital cost allowance on furnishings for that apartment.

The respondent assessed on the basis that 25% only of the amounts claimed were properly deductible. He assumed that the 75% remainder of each of the deductions sought

(a) was not laid out for the purposes of gaining or producing income and thus was prohibited by paragraph 18(1)(a) of the Income Tax Act, and

(b) was unreasonable and thus was also prohibited by section 67 of the Income Tax Act.

He proceeded on the assumption that the remainder constituted a payment by the appellant of the personal or living expenses of Mr Paul E Albrechtsen, the President and Chief Executive Officer of the appellant.

Paul E Albrechtsen appeals from an assessment of income tax for the 1975 taxation year adding to his declared income the sum of $795, being 75% of the rent paid by Paul’s Hauling Ltd for the apartment. The respondent took the position that this amount was required to be included in Mr Albrechtsen’s income by paragraph 15(1)(c) of the Income Tax Act as a benefit conferred on a shareholder*, [1] or alternatively by paragraph 6(1)(a) of the Act as a benefit received by Mr Albrechtsen by virtue of his employment.

In order to put the claims of the appellants in perspective it is necessary to examine the business of the corporate appellant and the nature and extent of the business interests of the individual appellant.

Paul’s Hauling Ltd (hereinafter “Hauling”) is the outgrowth of a small trucking business established by Mr Albrechtsen at Virden, Manitoba, in 1955. Hauling was incorporated in 1956 to take over that business. In 1959 business operations of the company were moved to Winnipeg. In 1962 the business operations were again moved within Winnipeg to a new office and terminal facility located at Oak Point Road. At that time the office staff consisted of four persons, including Mr Albrechtsen. The business grew and prospered. By 1975 the permanent office staff at the Oak Point Road facility comprised ten or eleven persons. Mr Albrechtsen, as general manager of Hauling, looked after sales, business promotion, labour relations, equipment acquisition and dealings with regulatory authorities having jurisdiction over the operations of carriers of freight.

Mr Albrechtsen’s business interests were not limited to the operation of Hauling. By 1975 he owned not only all of the issued share capital of Hauling, but also all the issued shares of four other companies engaged in the business of the carriage of freight. As well, he owned not less than 65% of the issued shares of two other companies engaged in similar businesses. He was active in the management of all the companies. The head offices and terminals of the companies were located in various cities in Manitoba, Saskatchewan and Alberta.

In 1973, 1974 and 1975, the centre of gravity of Mr Albrechtsen’s business interests moved in a westerly direction from Winnipeg. He had to spend more and more time outside that city in connection with the development of the businesses of certain of his other companies whose operations were based in Alberta. In consequence he moved his residence. Late in 1973, or early in 1974, he moved to temporary quarters in Edmonton. About a year later he moved to Calgary. In 1975 Mr Albrechtsen established residence in an apartment suite in Calgary. During that year he gave up the apartment suite at 300 Roxton Road, Winnipeg, in which he had previously resided.

Mr Albrechtsen had a private office approximately twelve feet by twelve feet in size at the Oak Point Road building. It was furnished with a desk, four chairs and a credenza. When Mr Albrechtsen used it he was subject to frequent interruptions by telephone calls. it was found to be cramped for use for purposes of business meetings. Mr Albrechtsen met frequently with Terrance Penton, a resident of the city of Brandon. Mr Penton acted as a consultant to Mr Albrechtsen, mainly in the formation of long-term hauling contracts, and in preparation for Motor Transport Board hearings. Hauling contracts of the type requiring consultation were not standard form. The work required concentrated attention to detail. The atmosphere prevailing at Mr Albrechtsen’s office at Oak Point Road was unsuited to such work. Even if interruptions could be prevented the increase in the office staff precluded the expansion of Mr Albrechtsen’s private office.

In short, in 1975 Mr Albrechtsen resided in Calgary. His presence was required in Winnipeg from time to time in connection with the business of Hauling. That business had grown over the years and Mr Albrechtsen’s private office at Oak Point Road had become less and less suitable for use for substantial parts of his work. It was in response to that situation that Hauling rented and furnished the apartment at 200 Tuxedo Boulevard in Winnipeg. That apartment was appropriate for use

(a) for overnight accommodation of Mr Albrechtsen when he was in Winnipeg,

(b) for overnight accommodation of business associates of Mr Albrechtsen, Mr Penton for example, and

(c) for purposes of office work requiring a tranquil atmosphere.

The apartment was, in fact, used for all such purposes.

Mr Albrechtsen was divorced from his wife. She lived in Winnipeg with the children of the marriage. When Mr Albrechtsen saw his children he took them out of town. He does not appear to have used the apartment in connection with visits to his children. His residence was in Calgary as noted above. There was no basis in evidence for regarding the Tuxedo apartment as the second residence of a man with a mobile personal lifestyle.

Thus, the rental expense was incurred by Hauling for the purpose of gaining or producing income from its business and its deduction was not prohibited by paragraph 18(1)(a) of the Income Tax Act. The facts set forth above are also inconsistent with the inclusion, in the income of Mr Albrechtsen pursuant to paragraph 6(1)(a) of the Act, of a portion of the rent as the value of a benefit received by him by virtue of his office or employment.

The obvious intention of section 5 is to include in the taxable income of a taxpayer those economic benefits arising from his employment which render the taxpayer’s salary of greater value to him.

Per Cattanach, J, in Vernon C Hale v MNR, [1968] CTC 477 at 482; 68 DTC 5326 at 5329.

A suggestion that the maintenance by Hauling of the apartment was of economic benefit to the appellant cannot, in the circumstances of this case, be sustained.

Similarly the facts as set out above are inconsistent with the view that the payment of the rental expense by Hauling constituted the conferral of a benefit or advantage on Mr Albrechtsen, as a shareholder of Hauling. A useful general description of the scope of subsection 15(1) of the Act may be found in the following passage from the reasons for judgment of Cattanach, J in MNR v Pillsbury Holdings Limited, [1964] CTC 294; 64 DTC 5184.

While the subsection does not say so explicitly, it is fair to infer that Parliament intended, by section 8, to sweep in payments, distributions, benefits and advantages that flow from a corporation to a shareholder by some route other than the dividend route and that might be expected to reach the shareholder by the more orthodox dividend route if the corporation and the shareholder were dealing at arm’s length.

I cannot find that the provisions of section 67 apply to limit the deductions sought by Hauling. The tenor of all of the evidence has led me to the conclusion that the business of Hauling was operated with a view to keeping expenditures as low as possible. On cross-examination it was established that the apartment was approximately 1,600 square feet in area. Helen J Forlanski, Paul E Albrechtsen’s secretary, was asked on cross- examination whether the furnishings of the apartment could be described as sumptuous. She responded that they were nice. Virtually no other cross- examination was directed to the question whether the apartment was, by reason of size, or the furnishings were, by reason of splendour, the result of an outlay which was not reasonable in the circumstances. It was not suggested that other more economical means of meeting the business objectives of Hauling might have been adopted. The test in a case such as this was stated in the reasons for judgment of Cattanach, J in Gabco Limited v MNR, [1968] CTC 313 at 323; 68 DTC 5210 at 5216:

It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind.

One final matter remains. Mr Albrechtsen admitted on cross-examination that the use ultimately made of the apartment as described above related in part to the business of Hauling and in part to the business of other companies controlled by him. Counsel for the Respondent did not suggest in argument that this admission should affect the outcome of Mr Albrechtsen’s appeal, but he did suggest that only that part of the cost in question attributable to use of the apartment for purposes of the business of Hauling, as opposed to the other companies controlled by Mr Albrechtsen, was deductible by Hauling. The appeal proceeded to hearing on the basis of pleadings which did not raise this issue. Paragraph 6(2)(a) of the Tax Review Board Rules of Practice and Procedure requires:

(2) The Minister of National Revenue shall

(a) in the Reply to a Notice of Appeal admit or deny the facts alleged in the notice of Appeal and allege any further facts upon which he intends to rely;

and

In the appeal of Hauling the reply to the notice of appeal, in addition to the reference to section 67 of the Income Tax Act, stated:

8. The respondent respectfully submits that only 25% of the amounts claimed by the appellant in respect of rent and capital cost allowance truly represent expenses or outlays incurred for the purposes of gaining or producing income. Any additional amounts constitute personal or living expenses of the appellant’s President and Chief Executive Officer.

Nowhere in the reply was it pleaded as an assumption made by the respondent that the deductions disallowed to Hauling were, if deductible at all, deductible only by some one or more of the other companies controlled by Mr Albrechtsen. If the matter had been raised by pleading it as a material fact it would have been incumbent upon the respondent to establish what portion of the costs incurred by Hauling were properly the costs of such other companies. This the respondent failed to do. Counsel for Hauling argued that because all of the other companies controlled by Mr Albrechtsen were taxable at the same rate as was Hauling segregation of the costs among the companies would be nothing more than an interesting bookkeeping exercise which would not change the overall results of the revenues. I cannot accept that argument. The Income Tax Act does not contemplate what amounts to the filing of joint returns by corporations under common control. On the other hand, given the basis on which the appeal of Hauling proceeded to trial, I cannot give effect to the admission made by Mr Albrechtsen referred to above.

The appeal of Paul’s Hauling Ltd will therefore be allowed and the assessment of tax for its 1975 taxation year will be referred back to the respondent for reconsideration and reassessment on the basis that the deductions in question were improperly disallowed.

The appeal of Paul E Albrechtsen will therefore be allowed and the assessment of tax for his 1975 taxation year will be referred back to the respondent for reconsideration and reassessment on the basis that the sum of $795, referred to above, was improperly included in computing income.

Appeals allowed.