Novak v. The Queen, 2004 TCC 129 (Informal Procedure)

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For the Appellant: The Appellant herself

Counsel for the Respondent: Lesley King

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REASONS FOR JUDGMENT

(Delivered orally from the Bench at

Toronto, Ontario, on January 22, 2004)

Miller J.

[1]      Ms. Novak appeals by way of the informal procedure the assessment of her 1999 and 2000 taxation years. Canada Customs and Revenue Agency (CCRA), included in Ms. Novak's 1999 and 2000 income shareholder benefits from Jan D. Novak Holdings Ltd. (the "Company"), of approximately $31,000 and 2,800, respectively, benefits relating to the use of a car of $6,122 and $9,889, respectively, and imputed interest on a $300,000 loan from the company of $7,500 and $636, respectively. Ms. Novak maintains, first, the shareholder benefits were, in fact, support payments; second, the car was to have been transferred to her and therefore no automobile benefit is appropriate; and, third, the loan on the principal residence was discharged in April 1999 and not in January 2000.

[2]      This case points out the difficulty and the trauma that results when care is not taken to separate family matters from business matters on a marriage breakdown. Regrettably for Ms. Novak the two got interwoven, such that her understanding of what was to transpire on the family front is not what legally unfolded on the business front.

[3]      Ms. Novak and her former husband were owners of the Company on a 49%-51% basis. The Company operated a Canadian Tire store. In June 1998, the Novaks, in accordance with Canadian Tire policy, borrowed $300,000 on an interest-free basis for the purchase of a principal residence. The Company in turn borrowed the funds from the Canadian Imperial Bank of Commerce (CIBC) to lend the Novaks. Although the Company's financial statements indicated this loan as an employee loan, this classification was done at Canadian Tire's insistence. It was clear from the evidence of the Company's independent accountant, Mr. Mark Fraser Jefferson, that this was a shareholder loan and was treated as such by the Novaks. They recognized that to avoid the loan falling into their income, it would need to be repaid by the end of January 2000, the Company's next fiscal year end. Mr. Jefferson testified it was repaid at that time. Ms. Novak suggested there was some confusion as to exactly when the loan was repaid, as the company had several dealings with CIBC. She provided no documentary evidence to refute Mr. Jefferson's reliable contention that the corporate loan was repaid in early 2000. Indeed, Ms. Novak provided a letter from CIBC's lawyers confirming the indebtedness to the bank switched from the company to the Novaks personally in February 2000. This supports Mr. Jefferson's position.

[4]      The Novaks separated in March 1999. Ms. Novak indicated that she and Mr. Novak had a "gentleman's agreement", as she put it, that she would receive certain payments until all the family issues were settled. She did in fact receive payments of approximately $1,200 every second week in 1999 for a total of approximately $31,000. She also received $2,796 in 2000. She acknowledged receiving these amounts from the Company, though she described them as being in the nature of support payments. She did not work for the Company while she received these payments, though the payments were run through the Company's payroll: source deductions were made. She never received any dividends as a shareholder during this period.

[5]      Ms. Novak believed she was to receive the Company's Volvo in 1999 as part of her separation arrangement with her husband. This vehicle was not transferred to her until 2002, although she had the exclusive personal use of it after her separation; that is, for most of 1999 and all of 2000. Ms. Novak does not object to how the standby charge was calculated for 1999 and 2000. She simply maintains the car was meant to be part of the separation arrangement.

[6]      Ms. Novak believes she has been thwarted in her efforts as a minority shareholder to obtain information from the Company and from CIBC to establish her position. Such information may assist Ms. Novak in her unfortunate acrimonious proceedings on the family front with Mr. Novak. However, nothing she related at trial in this Court convinces me that any further documentation would assist her tax position. And although I may and do sympathize with someone who is clearly struggling to obtain what she believes she is rightfully entitled to in her family affairs, this does not sway me to effectively legally ignore the arrangement of her business affairs.

[7]      There are three areas of dispute: first, the imputed interest pursuant to section 80.4 of the Income Tax Act on the $300,000 corporate loan; second, the benefit arising from the use of the corporate owned Volvo; third, the monies paid by the company to Ms. Novak of approximately $31,000 and $2,800 in 1999 and 2000, respectively.

[8]      First, regarding the imputed interest, section 80.4 imputes a benefit to a shareholder of interest at the prescribed rate on a shareholder loan less interest paid. Ms. Novak does not dispute that imputed interest would be $7,500 in 1999 and $636 in 2000 if the loan had been outstanding until the end of January 2000. She does not deny that she and her ex-husband took the loan out in 1998 to acquire a principal residence. She maintains, however, that the loan was altered in April 1999 by some other arrangement with CIBC and that the imputed interest should stop running at that point. There is no evidence that anything happened in April 1999 to alter this outstanding indebtedness. The testimony of Mr. Jefferson and the supporting financial statements and the correspondence from CIBC's lawyer supports the fact that the loan remained outstanding until late January 2000, when it had to be repaid to avoid more dire tax consequences. Ms. Novak lived in the property for which the loan was made throughout this period. She was a shareholder of the company throughout this period. Section 80.4, subsections 15(1) and 15(9) operate to deem the $7,500 and $636 in 1999 and 2000 to be taxable benefits to Ms. Novak.

[9]      Second, regarding the Volvo, again Ms. Novak does not dispute the numbers. She simply holds that the car was intended to be part of the separation arrangement. There was, however, no evidence as to how a car corporately owned was going to end up in her hands. A simple transfer of the car by the Company to Ms. Novak may have resulted in a significantly higher benefit than the calculation of the standby charge. Yet, Ms. Novak was not an employee during this period and therefore the standby charge inclusion in section 6 is not applicable. However, she was a shareholder, and she did have the benefit of the Volvo during 1999 and 2000. Pursuant to subsection 15(1), the amount or value of that benefit is to be included in income. The only value put forward, and indeed accepted by Ms. Novak, is the standby charge. I have no other evidence to suggest the value of the benefit is anything other than the $6,122 in 1999 and $9,889 in 2000, and I therefore accept those figures as the appropriate amount of the shareholder benefit for the use of the car.

[10]     Turning, finally, to the monies paid by the company to Ms. Novak in 1999 and 2000, she acknowledges receipt of the monies. She was a shareholder throughout that period. Subsection 15(1) reads and I am paraphrasing: where at any time in a taxation year a benefit is conferred on a shareholder, the amount or value thereof shall be included in computing the income of the shareholder for the year. Do these monies represent a benefit conferred on Ms. Novak by the Company? Certainly the Company paid the monies. The monies were not a loan but were for Ms. Novak's benefit. Are they less a benefit if presumed to have been paid at the direction of the controlling shareholder, her husband, intending that the payments were to represent support for Ms. Novak? To accept that possibility would open the further possibility of the application of subsection 56(2), which reads and again I am paraphrasing: a payment made pursuant to the direction of a taxpayer to some other person for the benefit of the taxpayer, or as a benefit that the taxpayer desires to have conferred on the other person, shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer. Had Ms. Novak not been a shareholder and had there been evidence to suggest that Mr. Novak directed the Company to make the payments, it may be that Mr. Novak would face the inclusion of these monies in his income pursuant to subsection 56(2). We have no evidence of Mr. Novak's involvement. We do know Ms. Novak was a shareholder and did benefit from these monies. The indirect payment possibility was not argued.

[11]     On balance, I find the payments were shareholder benefits to Ms. Novak on the plain and ordinary meaning of the words of subsection 15(1).

[12]     Ms. Novak, clearly the unfortunate circumstances of your marriage breakdown have complicated your situation. I hope that you can achieve some satisfaction in Family Court on that front, but for tax purposes you received monies and benefits in 1999 and 2000 that were taxable, and I must therefore dismiss your appeals.

Signed at Ottawa, Canada, this 10th day of February, 2004.

Miller J.