|
Citation: 2004TCC418
|
|
Date: 20040610
|
|
Docket: 2003-4133(IT)I
2003-4134(IT)I
|
|
BETWEEN:
|
|
NORMAN THERRIEN and
NORLUX CONSTRUCTION LTD.,
|
|
Appellants,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Sarchuk J.
[1] The appeals of Norman Therrien and
Norlux Construction Ltd. were heard sequentially with certain
common evidence applying to both appeals.
Norlux
[2] The Appellant, Norlux Construction
Ltd., was incorporated on March 5, 1985. Its business included
both the construction of new homes as well as renovations and
additions. Norman Therrien was the sole shareholder, director and
president of Norlux.
[3] In computing income for the 2000
and 2001 taxation years, Norlux (i) deducted the amount of
$2,545.86 with respect to the write-off of a loan recorded as
owing by Barbara Therrien, mother of the Appellant, Norman
Therrien; and (ii) deducted wages for Brittany and Cody, the
children of its shareholder, Therrien, plus related worker's
compensation payments and employment insurance premiums totalling
$13,193 and $13,038, respectively. Both deductions were denied by
the Minister of National Revenue.
Barbara's Debt
[4] In 2001, Barbara Therrien had an
outstanding balance of $3,945.86 with Holt Renfrew. By cheque
dated January 9, 2001, Norlux paid the Holt Renfrew account at
the direction of the shareholder, Therrien. Norlux recorded the
payment of this balance as a receivable from her. Seven payments
totalling $1,400 were made by her towards the outstanding amount
of the debt. Barbara Therrien passed away on September 7,
2001 and in that year, Therrien directed Norlux to write off the
outstanding amount as a bad debt. This was done on December 31,
2001. No effort was made by Norlux at any time to collect the
balance due and owing.
[5] Norlux's position is that, in
addition to its construction business, it carried on a
money-lending business and that the loan to Barbara Therrien was
made in the ordinary course of its business. Therrien produced
the following list of all of the loan transactions of Norlux:
(a) a loan of $150,0000 secured
by a promissory note in 1990 which was repaid in 1994;
(b) a $120,000 loan to a Mr. Evans
secured by a first mortgage. This loan appears to have been paid
in 1995;
(c) a $103,000 loan to a numbered B.C.
company secured by a first mortgage. This loan was paid in 2003;
and
(d) a $60,000 loan to A & R Allder
secured by a first mortgage. This loan was repaid in 2003.
The only other item in this schedule was the purported $3,950
loan to B. Therrien, with the following comment:
"interest at prime with payments of principal only payable
monthly".
Analysis
[6] Is Norlux entitled to deduct
Barbara Therrien's debt? Paragraph 20(1)(p) of the
Income Tax Act provides for the deduction of losses
incurred through the uncollectibility of accounts or loans
receivable which arose in the ordinary conduct of a
taxpayer's business. In Whitland Construction Company
Limited v. The Queen.,[1] the Court set out the following elements
that must be satisfied to permit deductibility under paragraph
(20)(1)(p):
4 It is
common ground for the requirements of this provision that the
following four conditions must be satisfied:
1. There must
be a loan;
2. The loan
must have been made "in the ordinary course of
business";
3. By a
taxpayer (who was an insurer or) "whose ordinary business
included the lending of money";
and
4. The loan
must be established by the taxpayer to have become uncollectible
in the year.
[7] Therrien testified that Norlux
benefited from the loan to his mother in that he intended to
charge her interest at commercial rates. However this was not
done. Furthermore, the evidence is clear that Norlux and Barbara
Therrien did not document any terms of the loan and there is no
evidence that the receivable generated any income for the
Appellant and inadequate evidence to establish that the debt was
uncollectible. Accordingly, it cannot be said that the funds were
laid out by it for the purpose of earning income. It is not
possible on the facts before me to conclude that the ordinary
business of Norlux included the lending of money and that this
particular debt was acquired in the ordinary course of that
business. There is a substantial difference between carrying on
business as a money lender and investing in the occasional
mortgage loan for the purpose of earning income.
[8] I have therefore concluded that
Norlux conferred the benefit of Barbara Therrien's debt
on her at the Appellant Therrien's direction and as a result,
Norlux cannot deduct this amount under paragraph 20(1)(p)
of the Act.
Wage amounts paid to children
[9] These amounts were paid by Norlux
for duties which were described by Therrien as sweeping and
cleaning Norlux's construction sites, loading and unloading
tools from Therrien's vehicle, washing the vehicle, attending
to mail runs and assisting in the filing of documents and so
forth. Most of these duties were carried out at Norlux's
construction sites and as a result, it would appear that the
provincial statutes necessitated that there be constant parental
supervision of the children. On December 31 in each of 2000 and
2001, Cody and Brittany were each paid $6,000 by the Appellant.[2] The evidence also
discloses that the cheque issued to both children for the 2000
taxation year was not deposited in the children's bank
accounts until June 25, 2001.
[10] Brittany was born on September 12, 1990
and was ten years old in the taxation year in issue. Cody turned
eight on December 28, 2000. Therrien testified that he maintained
a record of the hours the children worked. However, it became
apparent that the list produced, while it may have been more or
less accurate with respect to the days, was a reconstruction by
Therrien of the number of hours purportedly worked.[3] According to Therrien,
the wages paid were consistent with the approximately $10 per
hour Norlux would have had to pay to an arm's length employee
performing similar duties.
Relevant Legislation
[11] Section 67 provides:
67 In computing
income, no deduction shall be made in respect of an outlay or
expense in respect of which any amount is otherwise deductible
under this Act, except to the extent that the outlay or
expense was reasonable in the circumstances.
The test has generally been described to be whether a
reasonable businessman having only the business consideration of
the Appellant in mind would have contracted to pay such an
amount. The onus is on the Appellant to establish reasonableness.
I accept that the children performed various duties and provided
assistance to Norlux under the supervision of their father.
However, the Court is left to speculate as to the precise
quantity, and quality, of work done, the value of such work and
the value of all of the benefits received by the children such as
transportation to and from the worksites, meals, etc. I note that
the Appellant did not make a contemporaneous record of the work
performed by the children, the hours claimed were totally
unsupported and the estimate subsequently prepared by Therrien
was at best marginally acceptable. These are not the type of
records which would readily permit the Court to do much more than
speculate as to the basis upon which the wages were calculated.
On the evidence before me, I am unable to conclude that the
amounts paid to the children were in any shape or form
commensurate with the services purportedly rendered by them. In
my view, they were in substantial excess of the amounts that
would have been reasonable to pay the parties had the parties
been acting at arm's length.
[12] The Appellant Norlux had also sought
interest relief on the basis of what it asserted to be
double-taxation. During the course of the hearing, Therrien on
behalf of Norlux, conceded that such relief may only be granted
by the Minister pursuant to the provisions of subsection 220(3.1)
of the Act.
Norman Therrien
[13] Therrien's appeal from the
assessment of tax with respect to his 2001 taxation year relates
to three items:
(a) a taxable benefit of $2,546
(referred to as Barbara Therrien's debt);
(b) standby charge of $4,588; and
(c) an interest benefit on shareholder
loan of $323.
[14] As indicated in the Norlux reasons, the
company wrote off the amount of $2,546 owing to it by Barbara
Therrien as a bad debt. This benefit was conferred by Norlux at
the Appellant Therrien's direction. Therrien disputes the
inclusion of this amount on the grounds that Norlux was not
permitted a deduction for the amount of the business loss which
he said resulted during the normal course of its business. He
further argued that if Norlux was not permitted the benefit of a
deduction, the assessment of him personally effectively results
in double taxation and is unfair.
[15] The Respondent's position is that
this debt was properly included in computing Therrien's
income for the taxation year in issue pursuant to subsections
15(1) and 56(2) of the Act since the reasons that the
payment of the Holt Renfrew balance and the write off of the
payment by Norlux was made pursuant to the direction of Therrien
as a benefit that he desired to have conferred on his mother,
Barbara Therrien.
[16] Subsection 56(2) of the Act
invokes the principle of "constructive receipt"
imputing to the taxpayer income diverted at his instance to
someone else. This subsection provided that payments made to some
other person at the direction or with the concurrence of the
taxpayer are to be included in the taxpayer's income where
such payments are for the benefit of the taxpayer or as a benefit
that the taxpayer desires to have conferred on that other
person.
[17] The provisions of subsection 56(2)
read:
56(2) A payment or transfer of property made
pursuant to the direction of, or with the concurrence of, a
taxpayer to some other person for the benefit of the taxpayer or
as a benefit that the taxpayer desired to have conferred on the
other person (other than by an assignment of any portion of a
retirement pension pursuant to section 65.1 of the Canada
Pension Plan or a comparable provision of a provincial
pension plan as defined in section 3 of that Act or of a
prescribed provincial pension plan) 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.
In Fraser Companies, Limited v. The Queen,[4] Cattanach J. set out
the following four preconditions that must be satisfied in order
for subsection 56(2) to apply:
(i) there must be a payment or
transfer of property to a person other than the taxpayer;
(ii) the payment or transfer is
pursuant to or with the concurrence of the taxpayer;
(iii) the payment or transfer must be
for the taxpayer's own benefit or for the benefit of some
other person on whom the taxpayer desired to have the benefit
conferred; and
(iv) the payment or transfer would
have been included in computing the taxpayer's income if it
had been received by him instead of the other person.
The four elements necessary to invoke the above subsection
have been satisfied in the present case because Therrien directed
Norlux to write off the outstanding amount of Barbara's debt
as a bad debt and thereby Norlux conferred the benefit of
Barbara's debt on Barbara at Therrien's direction. The
relevant provision of the Act clearly invokes the
principal of constructive receipt in subsection 56(2) and
accordingly, the benefit was properly imputed back to the
Appellant Therrien.
Standby Charge
[18] On January 10, 2001, Therrien's
wife Sylvia entered into an contract to purchase a 2000 GMC Jimmy
(the vehicle) for $32,879. She traded in her own 1991 Nissan for
the purchase of the vehicle. By cheque dated January 10, 2001,
Norlux paid $29,505.57 towards the purchase of the vehicle. By
agreement dated January 11, 2001 between Sylvia and Norlux,
Sylvia assigned her interest as the purchaser of the vehicle to
Norlux. On January 12, 2001, Sylvia and Norlux executed a lease
agreement for the vehicle to her. The monthly payments payable
for the lease were $345.54 plus goods and services tax of $24.19.
At all relevant times, the vehicle was used by Sylvia for her own
proprietorship and not for Norlux, and she paid costs incurred
for its operation.
[19] In assessing the Appellant in taxation
year 2001, a standby charge respecting the vehicle in the amount
of $4,588.32 was calculated on the following basis:
|
Purchase Price
|
$32,879.00
|
|
Taxes and fees
|
2,105.68
|
|
Documentation fees
|
99.00
|
|
Undercoat/hitch
|
1,410.26
|
|
Total cost
|
$36,493.94
|
|
Standby charges $36,493.94 x 2% x 12 months
|
$8,734.80
|
|
Less: lease from Sylvia Therrien for the year
|
4,146.48
|
|
Standby charges for the year
|
$4,588.32
|
[20] The Respondent's position is that
the standby charge was properly included in computing
Therrien's income for the 2001 taxation year pursuant to
subsections 15(1) and 15(5) of the Act on the basis that
Norlux provided the vehicle to Sylvia, a person related to the
Appellant, a shareholder of Norlux. The relevant subsections
state:
15(1) Where at any time in a taxation year a
benefit is conferred on a shareholder, or on a person in
contemplation of the person becoming a shareholder, by a
corporation otherwise than by
(a) the reduction of
the paid-up capital, the redemption, cancellation or acquisition
by the corporation of shares of its capital stock or on the
winding-up, discontinuance or reorganization of its business, or
otherwise by way of a transaction to which section 88
applies,
(b) the payment of a
dividend or a stock dividend,
(c) conferring, on
all owners of common shares of the capital stock of the
corporation at that time, a right in respect of each common
share, that is identical to every other right conferred at that
time in respect of each other such share, to acquire additional
shares of the capital stock of the corporation, and, for the
purpose of this paragraph,
(i) where
(A) the voting rights
attached to a particular class of common shares of the capital
stock of a corporation differ from the voting rights attached to
another class of common shares of the capital stock of the
corporation, and
(B) there are no other
differences between the terms and conditions of the classes of
shares that could cause the fair market value of a share of the
particular class to differ materially from the fair market value
of a share of the other class,
the shares of the particular class shall be deemed to be
property that is identical to the shares of the other class,
and
(ii) rights are not
considered identical if the cost of acquiring the rights differs,
or
(d) an action
described in paragraph 84(1)(c.1), (c.2) or
(c.3),
the amount or value thereof shall, except to the extent that
it is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
15(5) For the purposes of subsection (1),
the value of the benefit to be included in computing a
shareholder's income for a taxation year with respect to an
automobile made available to the shareholder, or a person related
to the shareholder, by a corporation shall (except where an
amount is determined under subparagraph 6(1)(e)(i) in
respect of the automobile in
computing the shareholder's income for the year) be
computed on the assumption that subsections 6(1), (1.1), (2) and
(7) apply, with such modifications as the circumstances require,
and as though the references therein to "the employer of the
taxpayer", "the taxpayer's employer" and "the employer" were
read as "the corporation".
[21] Subsection 15(1) deals with what may be
considered to be a distribution to a shareholder of part of the
accumulated assets of a corporation. It requires the amount or
value of any benefit conferred by the corporation on its
shareholder to be included in computing the income tax of the
shareholder, subject to certain exceptions which do not apply
here. The purpose of subsection 15(5) is to impute a taxable
benefit in respect of an automobile made available by a
corporation to its shareholder or a person related to such
shareholder. Subsection 15(5) provides that the rules applicable
to employees for purposes of calculating the taxable benefit
derived from the personal use of an employer-provided
automobile are applicable to a shareholder where the latter is
provided with an automobile by a corporation. On balance, I
conclude that Norlux did in fact confer a benefit on the
Appellant in respect of the automobile standby charges in
operating costs and for that reason, the Appellant cannot succeed
on this issue.
Interest Cancellation
[22] The Appellant Therrien also seeks an
order directing that interest charges in the amount of $178.44 be
waived. He maintains that the reassessments including interest
were paid when requested even though all of the amounts are under
dispute. The plain answer to that request is that the Court
cannot provide the interest relief sought by the Appellant as
only the Minister may, in his discretion, waive or cancel all or
any portion of any interest otherwise payable under subsection
220(3.1) of the Act.
Signed at Toronto, Ontario, this 10th of June, 2004.
Sarchuk J.
Email this Content