|
Citation: 2004TCC774
|
|
Date: 20041124
|
|
Docket: 2003-2160(IT)I
|
|
BETWEEN:
|
|
JOE SOLOMON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Sarchuk J.
[1] On February 1, 2002, the
Minister of National Revenue reassessed the Appellant for the
1998 and 1999 taxation years and in so doing, assessed a standby
charge in the amount of $7,571 in each year for the use of an
employer-leased automobile and added the amounts of $720
and $761 with respect to an employee benefit for the annual fees
paid by Specialty Construction Products Ltd. (Specialty) for a
membership at the Winnipeg Squash Club (the Club). The Appellant
has appealed these reassessments.
Automobile Standby Charges
[2] In reassessing the Appellant with
respect to this issue, the Minister relied on the following
assumptions:
(h) all or
substantially all of the distance travelled by the Vehicle during
the days the Vehicle was available to the Appellant were not made
in the course of the office or employment with the Specialty;
(i) the
Appellant did not maintain a log book detailing his kilometres
for personal and employment use in respect of the Vehicle in the
1998 and 1999 taxation years;
(j) the
Vehicle was driven for 12,000 personal kilometres during the days
available to the Appellant in each of the 1998 and 1999 taxation
years;
(k) all the costs of
operating the Vehicle were paid for by the Specialty;
(l) the
Appellant did not reimburse the Specialty for any portion of the
costs of operating the Vehicle;
(m) the Specialty did not
impose any restrictions with regards to the personal use of the
Vehicle;
[3] The Appellant is the owner and
president of Specialty which has carried on business in the
construction industry for a substantial period of time. More
specifically, it is a wholesale distributor for over 50
manufacturers and primarily deals with government agencies,
contractors and supplies them with products for use in concrete
construction. This includes items such as forming hardware,
waterproofing compounds, reinforcement for concrete, additives
for concrete, sealers and curers, grouting compounds, coatings,
etc. A wholly-owned subsidiary of Specialty, Concrete Restoration
Services Limited (Concrete), is a restoration company which
provides services primarily to government agencies on projects
throughout Manitoba and northwestern Ontario. Its principal
function is the repair of bridges, hydro dams, parking structures
and buildings and various other buildings.
[4] The Appellant described his role
as procuring business for the company. This requires him to call
on architects, engineers, and to visit government agencies to
introduce new products. During the taxation years in issue, he
travelled to various construction sites in order to make initial
contact with customers, provide estimates for work to be
performed, supervise the workers, inspect the quality of work
performed, address customer concerns, and for various other
purposes related to the completion of the contracts. Since the
manufacturers rely on Specialty to ensure that their products are
being utilized and applied properly, a further aspect of his role
was the need to, from time to time, visit various job sites where
those materials were being used to ensure that was being done.
All of this required the Appellant to travel extensively
throughout Winnipeg and elsewhere on a regular basis. It was
primarily for these reasons that for a number of years, Specialty
leased the vehicle which the Appellant used in the course of his
employment.
[5] The Appellant contends that during
the relevant taxation years, substantially all of the distance
travelled by the company vehicle was in connection with or in the
course of the performance of his duties as president of
Specialty. He testified that a typical workday commences at 6:00
a.m. when he leaves home and that as a rule, he rarely returns
before 7:30 or 8:00 p.m. Furthermore, the nature of the
business often required him to work "six-plus days a
week" and that was particularly so since much of the work
that was performed for their clients had to be done on weekends
when their plants were not operating. His regular routine began
each day with a trip to the Club where, he said, "I get
cleaned up and get ready to go to work. In a lot of cases, I meet
up with people at the Club that I have a coffee with and we will
talk about some upcoming business". Upon leaving the Club,
his usual practice was to drive to a job site or sites prior to
going to his office. This, he said, was necessary because as a
general rule during the summer season, he could have
"upwards to a couple of dozen projects going at any one
time". Furthermore, although business tended to slow down in
the winter season, there would be at least "four or five and
in some instances up to a dozen to two dozen in progress".
He also observed that during the winter more time was spent
promoting products by way of organizing seminars, calling on
architects, engineers and others to generate business. In
addition, the Appellant spent some time at the office attending
to routine business and discussing and reviewing estimates, etc.
with his superintendents but implied that these duties did not
form a large part of his daily routine.
[6] The Appellant testified that in
1998 and 1999, he was not aware of the existence of standby
charges and that a personal benefit would have to be reported in
his return. He said that he:
A. understood that
we had a certain allowance for personal use. And from years back,
I believe we allowed maybe 20% for personal use or something like
that.
Q. How did you keep
track of that?
A. I didn't keep
track of it. I think we just made that assumption in our
expenses.
(page 47, line 11)
In July 2001, the Appellant's accountants suggested that
he keep a one-month logbook.[1] He did so and the document submitted by him to
Revenue Canada indicated that the personal use of the vehicle
amounted to approximately 15%. A lengthy cross-examination of the
Appellant regarding the accuracy of his record-keeping made
it more than evident that the logbook was grossly inadequate in
detail. As he himself noted, "I was not keeping an accurate
log. You know, our accountants advised us that we should get some
information, record some information of what we're doing. So
he said, you know, 'record your mileage', and that
what's I did". He conceded that it was primarily based
on an estimate, as he noted, "in my view it was an average
of what I was doing every, every week kind of thing, so
that's what I provided". The Appellant went on to say
that "as a result of the fiasco" arising out of this
2001 record-keeping, he maintained a more accurate and detailed
record of his mileage and use of the vehicle in 2002,[2] the summary sheet of
which indicated 7.88% as personal use.
[7] It is the Appellant's position
that "if I'd kept the same logbook in 1998 and 1999,
I'd have this back to 1998 and 1999. The same type of log
sheet would be, would be very, very comparable. I haven't
changed my mode of work. It continues for the last umpteen years
of my business". Accordingly, the Appellant maintains that
all of the required conditions have been met and he is entitled
to a reduced standby charge. Counsel for the Respondent takes
issue with that conclusion and in particular argues that although
constituting an accurate report for that year, the 2002 logbook
which provided the sole basis for the Appellant's submission
is neither supportive nor can it be appropriately utilized as an
accurate report for the two taxation years in issue.
[8] The Appellant's testimony on
the whole was credible and for the most part uncontroverted. It
is clear that his employer required him to use the vehicle in the
performance of his duties and that all or substantially all of
the distance travelled by that vehicle during the time it was
made available to him was in connection with and in the course of
his employment. Furthermore, there is no evidence that the
vehicle was used at any time by the Appellant's spouse. It is
difficult to determine whether the Appellant's failure to
maintain a logbook in the taxation years in issue reflected his
perception of his accountant's advice as to what the
requirements were or whether he simply chose to do so. The latter
option seems to be the most likely and as a result, the Appellant
has only himself to blame for the conclusion reached by the
Respondent's auditors. His problems were no doubt exacerbated
by the inappropriate record-keeping of his 2001 mileage which he
himself described as a fiasco. Notwithstanding this, it appears
as though the message finally penetrated and the records kept in
2002 were detailed and do in fact form an accurate report of the
utilization of the vehicle for that year.
[9] The relevant provision of the
Income Tax Act is paragraph 6(1)(e). It provides
for a standby charge for an automobile that is made available to
a taxpayer by his employer in a given taxation year. The standby
charge brings into income the value of the benefit derived by the
taxpayer from a company car that is made available for the
personal use of that taxpayer. Subsection 6(2) of the Act
provides a formula for determining the value of such a benefit,
and more specifically, the definition of 'A' found in
that subsection provides for a reduction in the standby charge
that is to be included in the taxpayer's income if certain
conditions are met. In The Queen v. Adams,[3] Robertson J. of
the Federal Court of Appeal stated at page 6271:
15 The so-called
"minimal personal use" exception is contained within
the definition of "A" set out in subsection 6(2).
Essentially, the exception enables an employee to obtain a
reduction in the amount of the standby charge, otherwise
applicable, if the following conditions precedent are satisfied.
First, the employer must require the employee to use the
automobile in the performance of his or her duties of employment.
Second, "all or substantially all" of the distance
traveled by the automobile during the time it was made available
to the employee must be in connection with or in the course of
his or her employment. In this regard, the Minister has adopted
the policy that at least 90% of the automobile's use must be
for employment purposes: see IT-63R4. Third, personal use of the
automobile must be less than 12,000 km. per year. Thus, employees
who use an employer's automobile exclusively for business
purposes are not required to include in income a standby charge.
This is so because "A" will equal zero. Employees who
make personal use of their employer's automobile are entitled
to a reduction in the standby charge, provided that such use is
minimal; that is to say all three conditions precedent are met.
...
[10] There are a number of judgments in
which it has been held that although the departmental assessing
policy may be the "90% rule", the definition of
"all or substantially all" in subsection 6(2) of the
Act does not specify that 90% or more of the use of the
vehicle for employment purposes is mandatory. The subsequent
detailed log kept by the Appellant in 2002 demonstrated a 7.88%
personal use. Based primarily on the testimony of the Appellant
which I accept, I am satisfied that there has been virtually no
change in his method of carrying on his business in any of the
years referred to. I have therefore concluded that during the
taxation years in issue, the company car was used for personal
purposes within the range contemplated by the relevant statutory
provisions. Thus, the Appellant is entitled to the reduced
standby charge and corresponding adjustments to the operating
expense benefit assessed.
Club Expenses
[11] The second issue relates to the
Winnipeg Squash Club membership in respect of which the monthly
dues were paid by Specialty. The Appellant asserts that the
membership was used to promote new business, entertain clients
and for other purposes related to the Specialty's operation.
The Respondent's position is that the business-related
meetings amounted to less than 5% of the overall use of the club
and in assessing, the Minister allowed 25% as business use and on
this basis included the employee benefits in issue pursuant to
paragraph 6(1)(a) of the Income Tax Act.
[12] The payment by the Appellant's
employer of the annual club dues appears to have been treated by
the Appellant's accountants as having been incurred primarily
for the benefit of the employer. Although the Appellant's use
included a certain degree of business activity, the
accountant's conclusion is not supported by the evidence.
However, since the use of the Club involved a mixture of business
and pleasure an assessment of a taxable benefit to the Appellant
was quite appropriate. The sole issue, in my view, is whether the
25% "personal use" assessed was appropriate. I have
concluded given the totality of the Appellant's testimony
that the Minister's apportionment was more than
reasonable.
[13] The appeals for 1998 and 1999 are
allowed, with costs, and the reassessments are referred back to
the Minister for reconsideration and reassessment on the basis
that substantially all of the distance travelled by the
automobile in the total available days was in connection with the
Appellant's employment.
Signed at Ottawa, Canada, this 24th day of November, 2004.
Sarchuk J.
Email this Content