Citation: 2008 TCC 415
Date: 20080721
Docket: 2006-3212(IT)G
BETWEEN:
MICHAEL JARJOURA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
For the Appellant: The Appellant himself
Counsel for the
Respondent: David Besler
REASONS FOR JUDGMENT
(Delivered
orally from the Bench
on May 29, 2008, in Calgary, Alberta)
Miller J.
[1]
The Minister of National Revenue assessed
Mr. Jarjoura for the 1997 and 1998 taxation years to include in his income
the following:
(i) $34,162 and $36,164,
respectively, as automobile benefits received as a shareholder of Uniserve
International Products Inc.;
(ii) $3,900 and $4,300,
respectively, as home rental benefits;
(iii)
$8,768 and $16,916, respectively,
as repair and maintenance benefits related to the home; and
(iv)
$78,000 and $162,000, respectively,
as business income arising from an invalid subsection 85(1) Income Tax Act
election.
[2]
Regrettably the parties did not
hold a pre-hearing conference as this case, frankly, called out for settlement.
[3]
Firstly, the facts with respect to
the automobiles. In 1997, Uniserve, a company engaged in the manufacturing of
stationery, and employing over 40 employees, owned at least four automobiles.
The ones in question are a 1996 Ford Explorer, a 1996 Lincoln Town Car that was
sold in September of that year, a 1995 Windstar wagon that was sold at the end
of November, and a 1998 Ford Explorer that was bought at the end of November.
[4]
In 1998, Uniserve owned the
following: the 1996 Ford Explorer that it sold in March, the 1998 Ford Explorer
that it still owned, a 1998 Lincoln Town Car that it acquired in March, and a
1998 Ford Windstar that it acquired in May.
[5]
Effectively, the company had two
or three of these cars at any one time. The Lincolns were driven minimally
200 to 300 kilometres per month. According to Mr. Jarjoura, they were used
exclusively for business purposes, primarily taking customers out, or
entertaining bank managers or other professional advisors.
[6]
The Ford Explorers were for
Mr. Jarjoura's main use. He indicated he traveled approximately 8,000
kilometres per year personally, going to and from work and traveling with
family. The average monthly kilometres for these vehicles was estimated by
Canada Revenue Agency as just over 1,000. As there were only three months where
the ownership of these vehicles overlapped, I accept that the total usage was
probably 12,000 kilometres.
[7]
With respect to the Windstar
wagon, Mr. Jarjoura's evidence was that several employees had use of these
vehicles for business purposes. Uniserve had Wal-Mart and Zellers as major
clients. There were always requirements to deliver product or pick up supplies.
[8]
The company also had an Econoline
van used for business purposes. I, however, heard no evidence of personal
use. Cars were stored at Mr. Jarjoura's home, but the home was also owned
by Uniserve.
[9]
Next, the facts with respect to
the rental benefits. Mr. Jarjoura had his home built in 1986, and sold it
to Uniserve in 1995. It was a 2,400 square-foot home sitting on a large
landscaped property. Mr. Jarjoura paid the company rent of $1,150 per
month from January 1997 to April 1998, and $1,250 per month thereafter.
[10]
The Respondent obtained a
market-rent analysis, which was based on seven direct comparables, and it
estimated the fair market value rent at $1,475 per month in 1997, and $1,570
per month in 1998. Mr. Jarjoura indicated his property was costly to
maintain, and would thus reduce the rent any family would be prepared to pay.
[11]
Next, the facts with respect to
the repairs and maintenance benefits. The repairs and maintenance of
approximately $26,000 over the two years went to some kitchen refurbishing,
patio work, window coverings, security system, replacing a barbecue gas line
and barbecue, and some landscaping. The nature of the work appears to be what
would be required to maintain a 10 to 15-year-old executive home in good
condition.
[12]
The Minister allowed approximately
$1,500 as representing what the Minister believed would be a reasonable amount
a landlord would pay for an arm's‑length tenant.
[13]
Next, the facts with respect to
the business income. Mr. Jarjoura spent countless hours working on
perfecting machines that manufactured coin wrappers. Uniserve paid for the cost
of the parts for the machines and provided the workspace and machine shop where
they were assembled. Mr. Jarjoura provided the know‑how and
developed the machines to the point they went from requiring three people to
two people to one person to supervise them, to ultimately no supervision at
all. They generated considerable income in August 1997 and March 1998.
Mr. Jarjoura invoiced Uniserve $78,000 and $162,000 for the fabrication of
three and six machines, respectively.
[14]
He obtained the advice of Bennett
Jones and Deloitte & Touche, and a rollover agreement and election pursuant
to subsection 85(1) of the Income Tax Act was prepared for this
transaction. The rollover attributed all but a dollar to the machines
themselves with a dollar to Mr. Jarjoura's intellectual property. This was
determined to be in error. The value Mr. Jarjoura was to transfer was his know‑how,
not the hard tangible asset of the machines.
[15]
There were discussions with Canada
Revenue Agency officials regarding amending the election. Mr. Jarjoura
explained that Canada Revenue Agency had been prepared to not bring the $240,000
into business income, so amended forms were never filed. When it was clear no
final agreement could be reached on all tax matters in issue, the $240,000
remained to be included in income, and no amended return was ever filed. The
company had, by this time, gone into bankruptcy. Those are how I perceive the
facts.
[16]
So how is Mr. Jarjoura to be taxed
on each of these issues?
[17]
First, the automobile benefits.
There is both a standby charge and operating expense benefit at issue. A
standby charge, in accordance with subsection 6(2) of the Act is reduced
to zero if the car is driven exclusively for business. I take, from
Mr. Jarjoura's evidence, which I accept, that the Lincoln Town Cars and
the Windstar wagon were only used for business by him or other employees. No benefit
arises from such use.
[18]
It is only then the Explorers,
which Mr. Jarjoura acknowledged he drove personally, which are subject to
any automobile standby charge or operating expense benefit. As indicated
earlier, I find Mr. Jarjoura's personal use was approximately two-thirds
of the total use, one-third being for business purposes. The standby charge
formula works such that no reduction is available unless the car is used
substantially all of the time for business purposes. Substantially all of the
time means approximately 90 percent. As Mr. Jarjoura only used the
Explorers one‑third of the time for business, he is subjected to the full
standby charge. No reduction is in order.
[19]
In summary, Mr. Jarjoura is
subject to an automobile benefit in 1997 of $13,162 on the 1996 Explorer, and
$1,155 on the 1998 Explorer, for a total benefit of $14,317 pursuant to subsection
15(5), and in 1998, he is subject to an automobile benefit of $2,193 on the 1996
Explorer, and $13,869 on the 1998 Explorer, for a total of $16,062
benefit.
[20]
Next, the repairs and maintenance
benefit. I find that the repairs and maintenance as described by
Mr. Jarjoura, and as outlined in the auditor's papers, reflect work
required to keep an executive home looking like an executive home. The repairs
did not add any major new element to the premises but kept them to the standard
at the time that Mr. Jarjoura sold the property to Uniserve.
[21]
The Respondent argues the
expenditures went well beyond what a reasonable landlord would provide to an
arm's-length tenant. There are no facts or expert evidence to substantiate this
assertion, and it is certainly not worthy of judicial notice. Indeed, a tenant
renting a superior executive home may well expect a certain standard to be
maintained.
[22]
I further find that the Respondent
appears to want to double up on this benefit. If the Respondent has correctly
estimated the fair market value rent of a superior property, then capital
expenditures to maintain that property should be factored into that rental
benefit. It strikes me as seeking to find a benefit from the value of the tree
as well as from the fruit of the tree. You do not value both, you choose one or
the other. I conclude that Mr. Jarjoura received no taxable benefit from
the repairs and maintenance.
[23]
With respect to the rental
benefit, Mr. Jarjoura paid $1,150 and $1,250 per month during the period
in question. The Minister obtained an appraisal of $1,475 and $1,575 a month
from the appraiser, David Jang. He based his appraisal on seven comparables. Mr. Jarjoura
maintained that due to the large property and necessary increased maintenance
costs, the appraisal was unrealistic. This is purely speculation on
Mr. Jarjoura's part. He has provided no concrete evidence, expert or
otherwise, to convince me the appraisal report is incorrect. Mr. Jarjoura
is therefore subject to a rental benefit of $3,900 in 1997 and $4,300 in 1998.
[24]
Finally, the business income. I
accept Mr. Jarjoura's testimony that what he was really transferring to
the company was his know-how. I recognize that the machines were valued based
on an appraisal he obtained from American Appraisal Canada Inc., and that that
appraisal was simply for the machines, yet he did not have the hard assets -
the machines to transfer. The company bought the materials and built them, but
could not have done so without Mr. Jarjoura's know-how.
[25]
The Respondent argues that we have
no true reliable appraisal to determine the value of the know-how. Frankly, it
does not matter. If I accept, as I do, that whatever Mr. Jarjoura was
transferring into the company was done on a roll-over basis and was eligible
for such a transfer, no tax consequences arise in the year of the rollover. When the shares
are sold or redeemed this question necessarily has to be answered, but for
purposes of this appeal, I am satisfied there was a non-taxable transaction. Given
the company has gone bankrupt, any subsequent sale or redemption becomes purely
academic.
[26]
I am strengthened in my view that
Mr. Jarjoura did not receive any income on this transaction by the fact
that he held nothing more of value after the transfer than before. He was a 100%
owner of Uniserve before the transaction and a 100% owner of Uniserve
after the transaction, now holding two types of shares instead of one. His
worth was not increased one penny, and subjecting him to tax on $240,000 is
entirely inappropriate.
[27]
In summary, I allow the appeal and
I refer the matter back to the Minister for reconsideration on the following
basis.
(i) Mr. Jarjoura has automobile benefits of $14,317
in 1997, and $16,062 in 1998.
(ii) Mr. Jarjoura
has rental benefits of $3,900 in 1997 and $4,300 in 1998.
(iii) Mr. Jarjoura
does not have business income of $78,000 and $162,000 in 1997 and 1998.
(iv) Mr. Jarjoura does
not have any repairs and maintenance benefit.
[28]
I would like to comment that it
appears Mr. Jarjoura and the auditor did not see eye to eye. I have only heard
Mr. Jarjoura's version, but I would hope that leaving an assessment open
for several years when it appears clear tax has been paid – I am referring
to the bonus here -- simply because a settlement cannot be reached on all
issues, is not a practice to be encouraged. It creates ill will, and does
little to strengthen taxpayers' confidence in their taxation system.
[29]
I am prepared to award costs, and
Mr. Jarjoura, I would like to hear from you sir, and from Mr. Besler,
as to what you are seeking in that regard, taking into account what settlement
offers were on the table. Mr. Jarjoura, would you like to make some
comments with respect to any costs you might be seeking?
Appellant: My Lord, I am not a
solicitor, and I really have no idea, all that I know is it cost me thousands
of dollars initially, but I still have an outstanding remaining balance to my
lawyers who acted on behalf for the amount, I believe, $7,000. I leave
that decision entirely up to Your Lordship. My Lord, I do not have any
specific amount in mind. I am not familiar with costs. I know I spent lots of
hours, lots of time over and above what had transpired in the last six and a
half years, so I will accept whatever Your Lordship awards in that regard. In regard
to the offer, I had stated all along that I take full responsibility of any
assessment of the vehicle I personally used, and I have no objection toward
that, My Lord. That is the extent of my offer to them except that they offered
me to reduce the rental benefit to half, and I accepted that on the basis that
they accepted half of the reduction on the personal use of one vehicle, that is
where the offer was then.
Respondent: Just sort of to advise you, I guess, in fairness to
Mr. Jarjoura, the offers went back and forth. If we look at the
Minister's last offer on an issue-by-issue basis, we would have -- the
auto benefit was similar to what the Minister had offered, the rental benefit
was actually, the Minister came out ahead on that one. The business income, of
course, the Minister, that was one of the sticking points in settlement, and
the Minister had suggested allowing a capital loss in the year the company went
bankrupt, so in terms of dollars ‑straight dollars,
Mr. Jarjoura has come quite ahead of what the Minister had proposed, and
again, with repairs and benefits, the Minister had reduced them, but not that
much, so Mr. Jarjoura has come out ahead on that, so, you know, the Minister
was, actually, was ahead on two in offering, but in terms of total dollars,
Mr. Jarjoura has come out ahead of what the Minister had proposed.
[30]
I will take that into account. I have
also heard a very frustrated taxpayer. Again, I have not heard the auditor's
side of it, but it appears there was some lengthy delay where only one issue
was outstanding. Going to Court and spending a full day in Court is an
expensive proposition. I would rather set a lump sum, than detailing a bill of
costs. Mr. Jarjoura, I am going to set costs at $5,000.
Signed at Ottawa, Canada, this 21st
day of July 2008.
“Campbell J. Miller”
Email this Content