Doherty v. The Queen, docket 98-559-IT-G

Date: 19991220

Docket: 98-559-IT-G

BETWEEN:

DOUGLAS W. DOHERTY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bell, J.T.C.C.

ISSUE

[1] The issue is whether the Appellant received a benefit of $27,771 from New World Marble Products Limited ("the Corporation") in his capacity as shareholder in his 1992 taxation year.

FACTS

[2] The Appellant was the major shareholder and manager of the Corporation.

[3] The Appellant testified that the Corporation's first venture was to produce fibreglass lobster tanks. By 1998 he said that the Corporation was looking for new products to make and sell. He said that the Corporation did research on small craft, including costing and market study.

[4] He stated that from 1989 to 1991 he was in contact with a raw material plastics supplier and discussed the type of products that could be produced in cooperation with that supplier. He described plastic columns and fascia for buildings that were produced by the company. He also testified that he had worked successfully on a mall and that he travelled to Fredericton regarding a prospective mall exterior upgrade project, took measurements, had discussions and submitted a bid for the job.

[5] He said that he became interested in manufacturing boats and that before pursuing that direction, spent quite some time in the early winter of 1991 discussing fibreglass ski coffins.[1] He travelled to the U.S.A. to examine availability of ski coffins, did research on cars used at ski resorts, et cetera. He also visited the coast to see how boat hulls were priced. He said that there was a repossession depot in Maine where he saw a boat for which he made an offer. His plan was to copy the hull and then sell the boat. He returned home after making the offer but went back to the U.S.A. to purchase the boat when the offer was accepted. He said that the boat arrived at his home about eight weeks later. He then said that the company allotted a $15,000 bonus to him which was shown on his 1992 T4 slip. He said that he did not withdraw that money from the company, it being left there for some entrepreneurial purpose.

[6] In the spring he made repairs to the boat and tested same. He stated that his contact who was to assist with the development of the plastic hull was injured and was unable to work. He then said that the boat was placed on the "back burner" and was pulled from the water. He also said that he put the boat into a sponsored "poker run" under the company name and, in so doing, became familiar with other boat owners. He said that over 200 hours were put on the boat since 1992. He said that he used the boat at the beginning to find out what it would do. He described it as being liveable, it having bunks, toilets, showers and other facilities.

[7] He also said that when he was in the U.S.A. he was looking at different products to manufacture but that he spent a great deal of time at different ski shops looking at lots of coffins.

[8] On cross examination he stated that the boat was shown in the company's inventory. He said that the boat was purchased in his name, was insured in his name and that the company did not pay the insurance premiums.

[9] When asked whether the boat had generated any business income for the Corporation he responded affirmatively saying that the poker run was good public relations. When asked whether he used the boat personally he stated that 90% of the time he was becoming familiar with the boat, that he enjoyed it and that he was considering the merits of it.

[10] He stated further, on cross-examination, that the Corporation did not make a mould because it had changed directions. He said that it had expanded into the retail area. He said further that he was disheartened by not being able to obtain big projects which he had pursued. He reiterated that he was saddened by the loss of the potential partner who would have been able to produce the fibreglass hulls. He stated that the Corporation's accountant had asked him for a list of materials in inventory and he produced a list which did not include the boat. He said that he had lost his records by virtue of a computer having been stolen on a break-in of the Corporation's premises. He said that other employees of the Corporation did not use the boat other than when taken by him.

[11] One Ron Duykers, an auditor with Canada Customs & Revenue Agency[2], gave evidence as to the total cost of the boat amounting to $27,771. In arriving at this figure, he set forth in a letter written to the Appellant that the inventory value of the boat was $23,361. He set out that the trip to the United States cost $2,012 and that auto expenses claimed in the amount of $2,398 were added to the boat cost. This totalled $27,771.

ANALYSIS AND CONCLUSION

[12] I formed the impression, listening to the Appellant's evidence, that he was unsophisticated, as was his accountant, with respect to the ownership of the boat and the appropriate accounting entries and legal steps to effect a conclusion as to the true ownership of the boat.

[13] Unfortunately, all evidence points to the ownership personally by the Appellant and I can find little, if any, evidence to support a different conclusion.

[14] However, I accept the Appellant's evidence with respect to the expenses in travelling to Fredericton and the expenses in travelling to the United States to explore ski coffins and boat hulls for the purpose of the Corporation's business. I reject the suggestion of Respondent's counsel that he was going to the United States for personal ski trips.

[15] Subsection 15(1) of the Income Tax Act ("Act") states that:

Where in a taxation year ... a benefit or advantage has been conferred on a shareholder by a corporation

otherwise than in certain enumerated circumstances that do not apply in this case:

... the amount or value thereof shall ... be included in computing the income of the shareholder for the year.

[16] The Corporation having supplied the funds for the boat which was registered, licensed and insured in the Appellant's name, the Appellant received a benefit from the Corporation and his appeal fails to the extent of $23,361. However, I accept the Appellant's evidence respecting the purpose of his trips and I have concluded that the travel costs in the sum of $4,410 were legitimately incurred for the Corporation's business. That amount will not be included in the benefit to the Appellant under the foregoing provision.

Signed at Ottawa, Canada this 20^th day of December 1999.

"R.D. Bell"

J.T.C.C.

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