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Citation: 2003TCC699
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Date: 20030926
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Docket: 2002-4039(IT)I
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BETWEEN:
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CAROL A. TYMCHUK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2002-4040(IT)I
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AND BETWEEN:
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DONALD L. TYMCHUK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
McArthur J.
[1] These appeals were heard on common
evidence with respect to Carol Tymchuk's ("Carol")
1998 taxation year and Donald Tymchuk's ("Donald")
1997 and 1998 taxation years. The issues are whether a benefit
was conferred on Donald pursuant to subsection 15(1) of the
Income Tax Act and if so, was that benefit earned income.
If he received a benefit which is to be included in his income
then Carol is not entitled to the spousal tax credit because
Donald's net income would exceed the amount calculated under
paragraph 118(1)(a) of the Act. Donald represented
himself and his wife, Carol.
[2] As agent for Carol, Donald
withdrew her appeals with respect to the inclusion of interest in
her income in the 1999 and 2000 taxation years. Therefore, her
appeals for those years are dismissed.
[3] Donald is a realtor who worked for
his own corporation, New Way Realty Inc., of which he was the
sole shareholder.[1] I believe he was also a certified general accountant.
During 1997 and 1998, the corporation did not record any amounts
paid to Donald on account of a salary, benefits or commission,
nor did he report receiving any amounts from the corporation for
the 1997 and 1998 taxation years. The corporation issued cheques
to him and paid his Visa account. It expensed 100% of his car
expenses and paid his life insurance premiums. The Respondent
assessed Donald for benefits conferred on him by the corporation
and included the amounts of $9,432 and $12,860 in his income for
1997 and 1998, respectively, pursuant to subsection 15(1) of the
Act. The Respondent allocated 20% of the use of his car to
personal use.
[4] The Appellant submits that he used
his car 100% for the corporation business. He stated that the
amounts added to his income are expenses of the corporation and
were paid for services rendered. He stated that the amounts are
income in his hands under paragraph 12(1)(a) for services
rendered or they should be credited as repayment of a portion of
a shareholder's loan and not compensation for services
rendered.
[5] But for his car expenses, none of
the amounts were challenged by the Appellant. His primary
submission appears to be "monies reallocated at the audit
should have been considered a payment to the shareholder for
services rendered and not a benefit under section 15.[2] He added that if the
advances in question are not allowable business expenses to the
corporation then he is entitled to post them to the $100,000 loan
account owed to him by the corporation.
[6] The Respondent relies in part on
the fact that this is not an instance where there was a
bookkeeping error. The shareholder loan argument was put forward
after the audit.
[7] The first question is whether the
amounts were a benefit pursuant to subsection 15(1). Over the
relevant years, the Appellant had the corporation issue him
cheques, pay his Visa account, pay 100% of his automobile
expenses without declaring any of it as income or payment on
account of his shareholder's loan.
[8] Counsel for the Respondent
referred to the decision of Mogan J. of this Court in Chopp v.
The Queen, 95 DTC 527. In Chopp, the taxpayer owned
99% of C Ltd. While he was on vacation, his corporation advanced
$28,500 to his personal benefit for the purchase of his home.
This advance was erroneously recorded as corporation expenses
rather than a reduction to his shareholder's loan account.
The Minister of National Revenue disallowed it as an expense of
the corporation and included it in the taxpayer's income
under subsection 15(1). Mogan J. held that if the value of a
benefit is to be included under subsection 15(1) in a
shareholder's income, the benefit must be conferred with the
knowledge or consent of the shareholder where it is reasonable to
conclude that the shareholder ought to have known the benefit was
conferred. I agree with this reasoning.
[9] In these appeals, Donald did his
own bookkeeping. The amounts were expended by the corporation,
upon his initiative, unsupported as business expenses and not
treated as shareholder loans or salary. A scrutiny of the items
the auditor treated as a benefit is helpful.
(i) Automobile benefit
The corporation expensed Donald's automobile costs 100%. He
kept no logs or other records. I accept the auditor's
evidence. She reviewed all of the records provided and concluded
that 20% was personal use which I find reasonable.
(ii)
Cheques Donald had the
corporation issue cheques to him personally and to his Visa
account. The auditor testified that she was not satisfied that
these amounts were deductible expenses of the corporation.[3] There was no
evidence at the hearing to contradict her position. The Appellant
did not report any income from the corporation. He received the
undeclared benefits. He offered no proof but made the general
statement that the cheques and Visa amounts were business
expenses. The auditor provided worksheets (Exhibits R-1 and R-2)
listing the cheques and invoices. Exhibit R-1 is a worksheet
prepared for the corporation. The cheques to the Appellant or
CIBC Visa were taken as shareholder benefits. The Appellant was
given the opportunity, prior to the final assessment, to produce
invoices showing that the cheques to him and his Visa account
were to reimburse him for corporation business expenses. He did
submit some invoices that were accepted by the Minister who
reduced the proposed subsection 15(1) benefit amount for 1997 by
$2,120.52. As indicated in paragraph 6 of the Reply to the Notice
of Appeal, after receipt of Donald's objection, the Minister
further reduced the 1997 and 1998 shareholder appropriation
assessments by $2,397 and $822, respectively. Some of the
receipts, invoices and vouchers supplied by Donald to reduce the
amounts included in his income for 1997 and 1998 were dated for
period before or after the 1997 and 1998 taxation years. Some of
the amounts were already allowed to the corporation as expenses.
Others were for personal clothing items. There were duplicate
vouchers, one for the cash receipts and one for the Visa or
Imperial Oil statements. He did not reimburse the corporation for
the personal expenses paid on his behalf.
[10] The Appellant was the only worker for
the corporation. He worked without formal compensation. His
compensation included the amounts at issue. It is unfortunate
that the corporation's records did not reflect this.
[11] The Respondent argues that it is too
late at this stage to classify the amounts as anything but
shareholder benefits. The corporation did not record the amounts
as salary or anything else, nor did Donald declare them as such.
They were only brought to light after an audit. Is it too late
for Donald to reclassify them? I believe it. Obviously, he never
intended recording payments as salary or as payments to the
shareholder loan account. Donald is presenting what he could (or
should) have done and not what he did in fact.
[12] The taxpayer in Chopp was
successful because the Court was satisfied that the taxpayer
intended to put entries through the shareholder's loan
account and through a mistake, it was not done. However, in this
case, Donald was his own bookkeeper and I believe he was a
certified general accountant. He had no intention of entering the
amounts as shareholder loans or anything else until they were
revealed in the audit. He had the opportunity and obligation to
accurately record the corporation's payments. Having been
caught by the audit, he now asks that he be permitted to do some
retroactive tax planning. His actions were not an isolated
mistake. He repeated the procedure over 50 times during a
two-year period.
[13] The Appellant is adamant that he did
not receive a benefit. He argues that the corporation owed him
$100,000 and what he received should be, retroactively, applied
to reduce this indebtedness. Secondly, he adds that the
corporation owed him a salary for his services. He was the only
source of income for the corporation. He is asking for
retroactive tax planning. He chose to operate his realty business
through a corporation. Conceivably, he could have achieved
considerable tax savings had he entered the amounts for what they
were in the corporation records and in his own income.
[14] In The Queen v. Friedberg, 92
DTC 6031, Justice Linden speaking for the Court at page 6032
stated:
In tax law, form matters. A mere subjective intention,
here as elsewhere in the tax field, is not by itself sufficient
to alter the characterization of a transaction for tax purposes.
If a taxpayer arranges his affairs in certain formal ways,
enormous tax advantages can be obtained, even though the main
reason for these arrangements may be to save tax (see The
Queen v. Irving Oil, 91 DTC 5106, per Mahoney J.A.) If a
taxpayer fails to take the correct formal steps, however, tax may
have to be paid. If this were not so, Revenue Canada and the
courts would be engaged in endless exercises to determine the
true intentions behind certain transactions. Taxpayers and the
Crown would seek to restructure dealings after the fact so as to
take advantage of the tax law or to make taxpayers pay tax that
they might otherwise not have to pay. While evidence of intention
may be used by the Courts on occasion to clarify dealings, it is
rarely determinative. In sum, evidence of subjective intention
cannot be used to 'correct' documents which clearly point
in a particular direction.
This quote applies equally to the present situation.
[15] To be successful in taking advantage of
provisions under the Income Tax Act, the form of the
transaction between the corporation and its shareholder must be
operative. I find as a fact that Donald sought to show the
amounts as expenses of the corporation and not declare them as
having been received by him. After the audit, it is too late to
restructure the transaction. Benefits were conferred on the
Appellant as a shareholder. With regard to shareholders and
double taxation, I agree with the following comments of Judge
Mogan in Chopp at pages 529-530:
It has been held on many occasions that a benefit will be
taxable under subsection 15(1) of the Income Tax Act
(formerly subsection 8(1)) only if it is conferred on a
shareholder in his capacity as a shareholder. See M.N.R. v.
Pillsbury Holdings Limited, 64 DTC 5184. The relationship
between a corporation and its shareholders is based on invested
capital. That relationship is not, by itself, incidental to or
connected with any business carried on by the corporation.
Indeed, a corporation may not carry on a business or, if it does,
the shareholders may not be involved in the business.
The relationship between a corporation and those individuals
who work in the operation of the corporation's business is
one of employer/employee. That employment relationship is, of
course, incidental to and connected with the corporation's
business. If a shareholder is also an employee of the corporation
and receives a benefit in his capacity as employee, the value of
that benefit would be taxed under paragraph 6(1)(a) of the
Act. A corporation is ordinarily permitted to deduct as a
business expense the cost of a benefit received or enjoyed by an
employee qua employee. A corporation, however, is not permitted
to deduct any amount with respect to a benefit conferred on a
shareholder qua shareholder because the corporate/shareholder
relationship is not incidental to the corporation's business.
A shareholder benefit is more like a dividend and less like a
business expense. Therefore, a benefit taxed under subsection
15(1) will usually result in some form of double taxation because
the shareholder will be taxed on an amount which has not been
deducted in computing the income of the corporation. In
appropriate circumstances, this will be a harsh but necessary
result.
[16] The Appellant had the onus of
establishing that the Minister's assumptions of fact and
consequent assessments are wrong. That has not been done. Carol
has been correctly assessed to disallow the spousal tax credit
because her spouse's net income now exceeds the base amount
calculated under paragraph 118(1)(a) of the
Act.
[17] Both appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of September,
2003.
McArthur J.
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