Date: 20020301
Docket: A-48-01
Neutral citation: 2002 FCA 81
CORAM: STRAYER J.A.
SEXTON J.A.
SHARLOW J.A.
BETWEEN:
RONALD JAMES MILLER and
R.J. MILLER & ASSOCIATES (1986) LTD.
Appellants
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on January 29, 2002.
Judgment delivered at Ottawa, Ontario, March 1, 2002
REASONS FOR JUDGMENT OF THE COURT BY: SHARLOW J.A.
CONCURRED IN BY: STRAYER J.A.
SEXTON J.A.
[1] This is an appeal of the decision of a Tax Court Judge rendered on January 2, 2001, reported as Miller v. Canada, 2001 D.T.C. 136, [2001] 1 C.T.C. 2657 (T.C.C.). The Tax Court decision relates to two appeals heard together. One appeal was that of Ronald James Miller for 1992, 1993 and 1994. The other appeal was that of R. J. Miller & Associates (1986) Ltd. (the Corporation) for its taxation years ending February 28, 1992, 1993 and 1994. The Tax Court Judge allowed all of the appeals in part, except that the 1992 appeal of the Corporation was dismissed on the basis that no issue was raised with respect to it.
[2] Only two of the conclusions reached by the Tax Court Judge are in issue in this appeal. One is whether he was correct in confirming the 1993 and 1994 reassessments of the Corporation in so far as they were based on the assumption that the 1992 value of certain software was $100 rather than $100,000 as the appellants claimed. The other is whether the Tax Court Judge erred in awarding one set of costs to the Crown and no costs to the appellants despite their partial success on the remaining issues.
[3] I summarize as follows the facts relating to the software valuation issue. Mr. Miller is the sole shareholder and director of the Corporation. Starting in 1989 Mr. Miller and Mr. Webber, a computer programmer, worked to develop a software program intended to be used in law office management. By 1992, the software was used only in the law practice of Mr. Miller's wife. There was evidence that the program was subject to crashing at that time, which limited its usefulness. In December of 1992, Mr. Miller transferred to the Corporation his 50% interest in the software for an agreed purchase price of $100,000. The remaining 50% interest in the software was retained by Mr. Webber.
[4] The Corporation, in its income tax returns for the years ending February 18, 1993 and 1994, claimed capital cost allowance on the basis that its interest in the software was Class 12 property acquired at a cost of $100,000. After 1994 the undepreciated capital cost was a nominal $100.
[5] Further work was done on the software after 1992 to make it marketable. There is some evidence of third party sales of the enhanced software after 1993. On February 17, 1994, the Corporation and Mr. Webber transferred their respective 50% interests in the enhanced software to Simplexity Software Solutions Inc., which paid the Corporation $100 for its 50% interest and paid Mr. Webber $100,000 for his 50% interest.
[6] In reassessing the Corporation, the Crown took the position that for purposes of capital cost allowance, the Corporation's cost of the software acquired in 1992 was equal to its fair market value at the time of the transfer, which the Minister assumed to be $100. The Corporation's 1993 and 1994 income tax returns were reassessed to disallow the deductions claimed for capital cost allowance on the software.
[7] Although the pleadings are not completely clear on this point, it appears that paragraph 69(1)(a) of the Income Tax Act is the statutory basis for limiting the Corporation's cost of the software to its fair market value at the time of the 1992 acquisition. In any event the appellants do not argue that there is no statutory basis for limiting the cost as the Crown has done. Their position in the Tax Court was that the 1992 fair market value of the 50% interest acquired by the Corporation was not $100, but $100,000. The appellants took the same position in this Court. The Tax Court Judge held that the evidence was not sufficient to rebut the Minister's assumption that the 1992 value of the software, and thus its cost for capital cost allowance purposes, was $100. The Corporation challenges that conclusion.
[8] Counsel for the appellants says that the Tax Court Judge's reasons cite testimony of Mr. Webber in relation to the 1994 transaction between Mr. Webber and Simplexity, but Mr. Webber gave no evidence in the Tax Court. There is no doubt that the Tax Court Judge erred in naming the witness who attested to the facts relating to the 1994 transaction between Mr. Webber and Simplexity. The evidence incorrectly attributed to Mr. Webber was actually given by Mr. Miller. However, the Tax Court Judge did not err in describing the 1994 transaction. In fact, there is no dispute about the facts relating to the 1994 transaction. Having carefully reviewed the reasons and the record, I conclude that the error in naming the witness was not significant and does not justify any interference by this Court of the decision of the Tax Court Judge.
[9] Counsel for the appellants argued that the Revenue Canada auditor acted unreasonably or arbitrarily in reassessing on the basis of a $100 value. Such conduct on the part of the auditor cannot by itself establish that the reassessment is incorrect. However, assuming the conduct of the auditor is of some relevance, I am unable to conclude that there is evidence of unreasonable or arbitrary conduct on his part.
[10] The question of valuation arose late in the course of the audit. When it became apparent that the auditor wished to consider that question, the appellants went to some trouble to make arrangements for a Revenue Canada software expert to examine the software. Just prior to the examination, Mr. Miller insisted on being given a copy of the expert's report when it was done, but was told he could not have it. Mr. Miller then refused to permit the examination to occur. Within days it became apparent that Mr. Miller should have been told that he would be given a copy of the report, and he was offered apologies for the error. Nevertheless, the decision was made to reassess on the basis of a $100 valuation. There never was an expert investigation by Revenue Canada.
[11] Counsel for the appellants argues that Mr. Miller cannot be faulted for the breakdown of the arrangements for the expert examination, and that may be so. However, it does not follow that the auditor acted unreasonably. He was clearly entitled to enquire into the matter of the value of the software. He was aware of the various sales of the software as outlined above. Those transactions presented him with a situation that was, to say the least, ambiguous on the valuation question. In the circumstances, it was not unreasonable for the auditor to reassess the Corporation, even without an expert evaluation, on the basis that the 1992 value of a 50% interest in the software was $100, thus putting the onus on the appellants to establish what the value was.
[12] Far more important to the appellants' case is the evidence that finally came before the Tax Court Judge. The onus was on the Corporation to prove on a balance of probabilities that the 1992 value of a 50% interest in the software was $100,000, or in any event more than $100. No objective valuation evidence was offered. No evidence was offered by Mr. Webber, the computer programmer who worked on the development of the software for many years. No evidence was offered by Mr. Miller's wife, the only user of the software at the relevant time. The only valuation evidence adduced was the testimony of Mr. Miller, which was supported only by documents that he had prepared. In my view, the Tax Court Judge did not err in concluding that Mr. Miller's evidence did not rebut the Crown's assumption that the 1992 value of a 50% interest in the software was $100.
[13] I turn now to the question of costs. It is argued for the appellants that the Crown should not have been awarded costs because the appellant was substantially successful. In fact, the appellants were unsuccessful in the matter of the $100,000 capital cost allowance claim with respect to the software, and only partially successful on the other issues.
[14] Those other issues may be briefly described as follows. In its 1993 and 1994 taxation years, the Corporation had expended approximately $90,000 in what was referred to as its "Firearms Division", of which approximately $70,000 was said to be scientific research and experimental development that qualified for an investment tax credit. The Crown took the position that all of these expenditures were personal or living expenses of Mr. Miller. On that basis, the Corporation was reassessed to disallow these expenditures as business expenses, and to disallow the claimed investment tax credits. In addition, the amount of the expenditures were added to the income of Mr. Miller in 1992, 1993 and 1994 as shareholder benefits.
[15] The Tax Court Judge found that some but not all of the claimed expenditures were properly deductible by the Corporation and therefore were not taxable as shareholder benefits. He also found that the Corporation was engaged in scientific research and experimental development and that some but not all of the claimed expenditures qualified for the investment tax credit. In each case the Tax Court Judge described specifically which expenditures were deductible or eligible for the investment tax credit, as the case maybe, but the evidence was not detailed enough to permit the Tax Court Judge to quantify these items. He allowed the appeals in part, ordered reassessments on the basis of the reasons he gave, and awarded one set of costs to the Crown.
[16] Simply stated, the appellants seek to have the Tax Court Judge's award of costs reversed on the basis of an inadequate assessment of the quantum of success in the Tax Court. However, we are in no better position than the Tax Court Judge to quantify the degree of success on those issues. In this circumstances we have no basis for interfering with the award of costs.
[17] I would dismiss this appeal with costs.
"K. Sharlow"
____________________________
J.A.
"I agree
B.L. Strayer J.A."
"I agree
J. Edgar Sexton J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE NO.: A-48-01
STYLE OF CAUSE: Ronald James Miller and R. J. Miller & Associates (1986) Ltd. v. Her Majesty The Queen
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: January 29, 2002
REASONS FOR
JUDGMENT OF THE COURT: (Strayer, Sexton & Sharlow.J.J.A)
DATED: March l, 2002
APPEARANCES:
Mr. Wayne L. Alton FOR THE APPELLANT
Ms. Linda Bell FOR THE RESPONDENT
SOLICITORS OF RECORD:
Alton & Associates FOR THE APPELLANT Westbank, British Columbia
Morris Rosenberg FOR THE RESPONDENT Deputy Attorney General of Canada
Ottawa, Ontario
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