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Citation:2005TCC241
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Date: 20050408
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Docket: 2004-3895(IT)I
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BETWEEN:
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NAHLA BOURY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
AND BETWEEN:
2004-3894(IT)I
NRC CONSULTING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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REASONS FOR JUDGMENT
Sheridan, J.
[1] Nahla Boury and her solely owned
professional corporation, NRC Consulting Ltd., are appealing
the reassessments of their 2001 taxation years. In Ms.
Boury's case, the Minister of National Revenue reassessed a
shareholder benefit under subsection 15(1) of the Income Tax
Act in respect of a vehicle and artwork. In reassessing NRC,
the Minister disallowed, pursuant to subsection 18(1) of the
Act, amounts claimed as business expenses for these items.
The appeals were heard together. The issue common to both appeals
is the determination of what proportion of the total usage of the
vehicle can be attributed to Ms. Boury personally and what
proportion to NRC for its use in the business.
[2] Ms. Boury is a professional
engineer who provides through NRC, consulting services to the oil
and gas sector in Alberta. She is the sole shareholder of NRC. In
2001, NRC operated out of an office located in Ms. Boury's
residence. Ms. Boury used this office for NRC's
administrative and "desk" work and for some meetings,
but did not receive NRC clients there. Much of her work for the
company was done away from the office, either meeting with
clients at their offices, typically in downtown Calgary, or
working "in the field", within a 300-kilometres radius
of Calgary. To carry on the work of NRC, Ms. Boury had to
transport confidential files for her meetings and equipment for
field work, and therefore a vehicle was a necessary part of
NRC's business. In 2001, NRC used a Ford Escalade which had
been purchased in Ms. Boury's name. She drove the Ford
Escalade, which she described as a "movable office", a
total of approximately 20,000 kilometres in 2001. NRC paid
directly to GMAC monthly payments totalling $15,015; and to
suppliers, fuel and repair costs of $2,127 for the Ford Escalade;
NRC claimed these amounts as business expenses. There was no
evidence of NRC's ever having paid anything to Ms. Boury for
the use of the vehicle. NRC also claimed as a business expense
the purchase price of a painting on the basis that it was
displayed in the home office in 2001.
[3] Because of the blurring of the
lines between herself and her corporation, Ms. Boury now
finds herself at odds with the Minister in respect of the tax
liability of both entities. Her evidence was that in practice,
she had a "loose relationship" with NRC: for example,
if NRC needed money to cover expenses, she personally put money
into NRC's account. Similarly, from time to time, she took
money from NRC's account for her personal use. She caused
herself further difficulties by failing to keep adequate books
and records for herself and NRC. In addition to not having kept a
vehicle log, she testified that her bookkeeping practice was
simply to put all of her business-related papers in a file and
then, at year end, to take them to her accountant to sort
out.
1. Business Use
versus Personal Use of the Ford Escalade
[4] The first issue is the one common
to both appeals: what portion of the kilometres driven in the
Ford Escalade ought to be attributed to earning income and how
much to personal use? The Minister assumed[1] that it would be reasonable to
apportion 25% for business purposes and 75% for personal use but,
in light of new evidence presented by Ms. Boury, Crown
counsel expressed the view that the business was
"perhaps" more than that. For its part, although NRC
originally based its business expense deductions on a usage of
80% for business purposes, at the hearing, Ms. Boury allowed that
it might have been somewhat less than that. On this footing and
having considered the evidence of Ms. Boury and
Ms. Winsome Jarrett, the Canada Customs and Revenue
Agency auditor to whom these files were assigned, I am satisfied
that the right answer falls somewhere between the parties'
initial estimates.
[5] Ms. Boury put in evidence copies
of invoices as a sample of NRC's client base in support of
her claim that the Ford Escalade had been used for business
purposes: she was required to drive the 15-kilometre distance
between her home office and the downtown locations shown in the
clients' invoices. She described her work for NRC as
typically involving a 30-kilometre round trip, meeting with
clients and picking up materials from the Alberta Energy and
Utilities Board. As well, she averaged four field trips of not
more than 600 kilometres each in 2001. Based on a weekly total of
150 kilometres in Calgary plus a maximum of 2,400 field trip
kilometres, the business use total in 2001 would have been 10,200
kilometres, or approximately half of the 20,000 driven in 2001.
This does not strike me as unreasonable. Ms. Jarrett, whose
testimony I found both helpful and convincing, freely admitted
that when she submitted her final report, she had not been
provided with this information or shown documentation to justify
any allocation other than the 20% business use proposal
apparently accepted by Ms. Boury's accountant and upon
which she had quite understandably relied. On
cross-examination, Ms. Boury explained that while she
had written a letter[2] to Ms. Jarrett authorizing CCRA to discuss her
file with her accountant, not only had she not authorized her
accountant to agree to 20%, she was unaware that he had done so
until after the reassessment had been made on that basis. In view
of the above, I am satisfied on a balance of probabilities that
the Ford Escalade was used for NRC business purposes 50% of the
time, from which it follows that the personal use attributable to
Ms. Boury was also 50%.
2. NRC
Consulting Ltd. Appeal
[6] Having determined that the
business use of the Ford Escalade was 50%, the next step is to
consider NRC's appeal. The Minister disallowed the deduction
of any portion of the monthly payments and operating costs
NRC paid in respect of the Ford Escalade on the basis that it was
owned by Ms. Boury and was, therefore, exclusively for her
personal use. Because of the absence of a vehicle log, the
Minister calculated and allowed an automobile allowance based on
20% business use. The Minister also disallowed as a business
expense the amount paid by NRC for a painting which it claimed
was displayed in the home office in 2001.
(a) Ford Escalade
Expenses
[7] Pursuant to paragraph
18(1)(a) of the Act, in computing a taxpayer's
income from business, "... no deduction shall be made
in respect of an outlay or expense except to the extent it was
made or incurred by the taxpayer for the purpose of gaining or
producing income from the business...". Whether this is so
is a question of fact to be determined on the evidence in any
particular case. Having found that the Ford Escalade was used 50%
of the time for the purpose of gaining income in 2001 from
NRC's consulting work, it follows that NRC ought to be able
to deduct 50% of the amounts paid for the legitimate business use
of that vehicle. There was no evidence of NRC having paid any
amounts directly to Ms. Boury for the use of the vehicle owned by
her; instead, NRC paid directly to GMAC the amounts
Ms. Boury owed personally under the financing agreement. It
would have been unreasonable for NRC to have for its use at no
charge a new model vehicle necessary to the carrying on of its
business activities. By making the GMAC payments directly, NRC
was effectively paying Ms. Boury for the use of her vehicle, an
expense properly incurred by the company for the purpose of
earning income. The same logic applies to the fuel and repair
costs of the Ford Escalade. Accordingly, NRC is entitled to
deduct 50% of the amounts claimed in respect of the GMAC payments
and operating expenses in 2001.
(b) Artwork
[8] The Minister disallowed a
deduction claimed as a business expense by NRC in respect of the
purchase price of a painting. The Minister's assumption that
NRC purchased the painting[3] went unchallenged. While it appears that this
expenditure ought properly to have been dealt with as a capital
cost, in either case, the issue turns on whether the painting was
used for the purpose of earning income for the business. On the
evidence presented, I am not satisfied that the painting
fulfilled any business purpose. Ms. Boury testified that in 2001,
the painting was displayed in the home office; Ms. Jarrett's
evidence was that she did not see any artwork when she visited
that space to conduct her audit in 2002. In any event,
Ms. Boury admitted that she saw no clients at the home
office. The home office was used only for those she described as
"landmen, typists, [people doing] filing and other
consultants" whose services she relied on to perform
NRC's work for its clients. Even if there was a painting in
the home office in 2001, I can see no link between its presence
and the generation of NRC income. In my view, it was there for
Ms. Boury's personal use and accordingly, the Minister
was correct to have disallowed a business expense deduction for
its purchase.
3. Appeal of
Nahla Boury
[9] The issue in Ms. Boury's
appeal is whether the Minister properly assessed her 2001
taxation year to include a shareholder benefit of $13,053 in
respect of the Ford Escalade and for artwork in the amount of
$4,010.
(a) Ford Escalade
[10] In Servais v. Canada[4], a decision of
the Federal Court of Appeal, Sharlow, J.A. wrote at
paragraph 14 that "... any use by a shareholder of
corporate property is potentially subject to tax under subsection
15(1). The value of the benefit is determined in accordance with
the principles set out in the case law (see for example,
Youngman v. Canada (1990), 109 N.R. 276, 90 D.T.C. 6322,
[1990] 2 C.T.C. 10 (F.C.A.)) except to the extent that
the method of valuation is stipulated in the Income Tax
Act." The present case is a variation on the more
typical situation where the shareholder has the use of a vehicle
owned by the corporation; here, the shareholder Ms. Boury was the
owner of the Ford Escalade but the payments for that vehicle and
operating cost expenditures were made by NRC.
[11] Whether a shareholder benefit has been
conferred is a question of fact[5]. In considering the circumstances of any
particular case, the Court has as its guide the two-step process
described by the Federal Court of Appeal in Youngman (L.) v.
Canada[6] :
In order to assess the value of a benefit, for the purposes of
subsection [15(1)], it is first necessary to determine what that
benefit is or, in other words, what the company did for its
shareholder; second, it is necessary to find what price the
shareholder would have had to pay, in similar circumstances, to
get the same benefit from a company of which he was not a
shareholder.
Or, as succinctly put by Strayer, J.A. in Canada v.
Fingold[7], the Court must consider "...the
fundamental question of whether there was a shareholder benefit,
and if so, how much it was worth."
[12] What NRC did for Ms. Boury was to make
the monthly payments that she would otherwise have had to make
personally to GMAC, as well as to pay on her behalf, directly to
the suppliers thereof, the fuel and repair costs incurred for the
Ford Escalade. No company of which she was not a shareholder
would have been so generous; it was because of Ms. Boury's
casual approach to the legal boundaries between herself
personally and her corporate alter ego that the payments were
made in this fashion. In any event, it is clear that NRC provided
Ms. Boury with a benefit. The next step is to determine the value
of that benefit. In light of my earlier determination that 50% of
the use of the Ford Escalade is attributable to business
purposes, it follows that Ms. Boury benefited from only 50% of
the total usage of the vehicle in 2001. Thus, the value of the
shareholder benefit she received from NRC was 50% of the amounts
it paid in respect of GMAC payments and operating costs for that
taxation year.
(b) Artwork
[13] In view of my findings above that the
artwork was purchased by NRC and that it had no business
purposes, it follows that the corporation conferred a benefit on
Ms. Boury in respect of the painting. The value of the painting
was assumed by the Minister to be $4,010[8], an amount confirmed by Ms. Boury in
Exhibit R-1, "Certificate of Authenticity" for the
painting. Accordingly, the Minister properly included as income
the value of the painting pursuant to subsection 15(1) of the
Act.
[14] The appeals are allowed and referred
back to the Minister for reconsideration and reassessment on the
basis of the attached Reasons for Judgment.
Signed at Ottawa, Canada this 8th day of April, 2005.
Sheridan, J.
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