Raymond T Emery v. Minister of National Revenue, [1980] CTC 2570, [1980] DTC 1508

D E Taylor:—This is an appeal heard in the City of Calgary, Alberta, on May 14, 1980, against an income tax assessment for the year 1974 in which the Minister of National Revenue taxed an amount of $8,120 as an appropriation to a shareholder. In assessing, the respondent relied, inter alia, upon sections 2, 3, subsection 15(1), section 40 and subsection 69(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

History

This appeal was originally to be heard on common evidence with the appeal of Pleasure Valley Investments Ltd (Pleasure Valley). When Pleasure Valley was called for hearing, the Trustee in Bankruptcy for the Company informed the Board that he was withdrawing the appeal and a judgment dismissing that appeal was granted by the Board. The basis of the assessment against Pleasure Valley had been essentially the reverse side of the same matter at issue in this Emery appeal—the transactions surrounding the transfer of certain real estate (the property) from Pleasure Valley to Emery, and the taxing consequences flowing therefrom. An amount of $8,120 (the difference between the cost of the property and the value assigned to it by Revenue Canada on transfer to Emery) had been assessed to tax in Pleasure Valley as gain on capital account. Emery was the major shareholder of Pleasure Valley and, in May 1972, the Company purchased a house in Calgary for $34,380. Emery resided in the house and paid rent for its use (this “rental” element is taken directly from the respondent’s reply to notice of appeal). On December 31, 1974, Emery paid $34,380 to the Company for the house and title was transferred to him. The respondent determined the fair market value of the property at date of sale (Dec 31/74) to be $42,500, and

(1) a capital gain in the amount of $8,120 was included in the house of Pleasure Valley, and

(2) a shareholder benefit of an equal amount was included in Emery’s income.

Contentions

For the appellant:

— During the relevant years, Emery was in the midst of divorce proceedings requiring financial settlements, and for security placed the property in the Company name in trust rather than taking it in his own name originally.

For the respondent:

—A non-arm’s length capital dispostion of the house occurred on December 31, 1974;

— Between May 1972 and December 1974 Pleasure Valley was the registered owner of the house;

— No trust agreement or other arrangement was entered into by the appellant prior to the Pleasure Valley acquiring the house;

— 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.

Evidence and Argument

The agent for the appellant submitted certain documentation intended to substantiate Emery’s claim that a trust arrangement existed. The Board rejected that claim (of an “in trust’’ relationship) at the hearing, but the Board questioned the parties regarding an apparent conflict arising from the dismissal of the appeal of Pleasure Valley. Since the amount in question ($8,120) was therefore taxable in the hands of the Company, should it again be taxable by the respondent in the hands of this appellant? 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. Also, the point was raised by the agent for the appellant that this appellant, during the time he resided in the property, had added more than the $8,120 to the real estate by way of improvements, and that he should not now be taxed thereon in any event.

Findings

While the point raised by the agent for the appellant—the added improvements—is interesting, no physical proof was provided to the Board upon which counsel for the Minister could examine the appellant. Further, it is highly doubtful that in law this appellant would have any proprietary rights in the improvements under the circumstances of this appeal. That point is therefore rejected. However, in my view, it is not the critical point at issue.

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). In my view, the assessment of a capital gain against the Company at the date of transfer would be inconsistent with assessing a shareholder benefit against this appellant at the same date. There is no indication in the material available to the Board to support the argument of counsel for the respondent that the two amounts of $8,120 were of a different origin—to me they represent the opposing sides of the same transaction—either the Company had a capital gain (which proposition the Company has accepted), or there was a benefit conferred upon this appellant. The effect of the dismissal of the appeal of Pleasure Valley, as I see it, has been to establish the transfer value of the property at $42,500 rather than $34,380, and indeed there was no indication from Emery in this appeal that he disagreed with that valuation. Under that set of circumstances, it cannot be contended that any benefit was conferred by Emery by Pleasure Valley at the date of transfer. It might be argued that Emery should have paid, or should now pay, Pleasure Valley $42,500 rather than $34,380 for the property, and that Pleasure Valley could have an action against him for the difference, but that is not the issue before the Board.

Summary

In the circumstances of this case, the amount in question should not be considered as a shareholder benefit conferred upon Emery in order that he be taxed accordingly.

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.