Roger Tremblay v. Minister of National Revenue, [1991] 1 CTC 2675, [1991] DTC 1009, [1991] 2 CTC 2147, [1991] DTC 1012

Lamarre Proulx, T.C.J.: —The appellant is appealing from reassessments by the respondent Minister of National Revenue for the 1984, 1985 and 1986 taxation years.

The issue is the extent of the benefit conferred by R.T. Coiffure Inc. (R.T.) on the appellant, as a shareholder, by placing at the appellant's disposal a condominium in Florida owned by R.T.

The facts on which the respondent relied in making his reassessments are described in paragraph 7 of the reply to the notice of appeal and are as follows:

[Translation]

In assessing the appellant for 1984, 1985 and 1986 the respondent Minister of National Revenue relied inter alia on the following presumptions of fact:

(a) during the 1984, 1985 and 1986 taxation years, the appellant was a shareholder in R.T. Coiffure Inc.;

(b) in 1983, R.T. Coiffure Inc. bought a condominium in Florida;

(c) the condominium was bought primarily for the appellant's benefit;

(d) the condominium was not rented on a regular basis;

(e) the appellant decided on renting of the condominium and could use the condominium as he wished, without telling anyone;

(f) the condominium was not rented on a commercial basis;

(g) no advertising was done for renting the condominium except for word of mouth;

(h) the appellant selected persons who rented the condominium from among customers of the Maxime Inc. hairdressing salon;

(i) the condominium was available primarily to the appellant throughout the 1984, 1985 and 1986 taxation years;

(j) renting the condominium was only incidental to the use made of it by the appellant;

(k) by having the condominium at his disposal, the appellant received a benefit which was worth $10,400 in 1984, $11,440 in 1985 and $12,480 in 1986.

In his notice of appeal the appellant gave the following version of the facts:

[Translation]

1. During the 1984 to 1986 taxation years the appellant was a shareholder in R.T. Coiffure Inc., which operated a hairdressing salon business and held real estate for rental purposes;

2. in 1983, R.T. Coiffure Inc. bought a condominium in Florida for investment and rental purposes;

3. from the time it was bought, the said condominium was always available for rental and was in fact offered for rental directly at the hairdressing salon and through travel agencies. In this regard R.T. Coiffure Inc. earned rental income of one thousand seven hundred dollars ($1,700), one thousand and fifty-five dollars ($1,055), two thousand four hundred dollars ($2,400) [1] and six thousand one hundred and eighty dollars ($6,180) for the taxation years 1984, 1985, 1986, 1987 and 1988 respectively [sic];

4. during the years 1984 to 1986, the appellant used the said condominium for personal purposes for ten-day periods during the following months: November 1984, March and November 1985 and February, April and October 1986;

10. the only benefit conferred on the appellant by R.T. Coiffure Inc. was allowing him to use its condominium for the ten-day periods mentioned above in paragraph 4, and so the only taxable benefit which should be added to the appellant's income is four hundred dollars ($400) in 1984, eight hundred and eighty ($880) in 1985 and one thousand four hundred and forty dollars ($1,440) in 1986.

The evidence disclosed that the appellant and his corporation respectively held rental property. It appeared that it was always the appellant who was responsible for renting the rental property located in Quebec. It is therefore not surprising that the appellant decided at the outset to look after the renting of the Florida condo himself. However, as he explained in his testimony, this did not prove to be feasible. Because of the distance involved, he was not able to check on things or to see that the rental condo was properly maintained.

The condo was bought when a new development was in the planning stages and all phases of the development were not completed on schedule. This led to other problems with rental, as the external appearance was not attractive. When the development was completed, the rental office was organized and the appellant instructed this office to rent the condo.

A study was initially made by the appellant's accountant showing that the rental income could easily exceed the condo charges: Exhibit a-6. It appears that this was true for all the years in question and especially now that the condo is rented by a rental office on the site. In the years in question the appellant tried to rent the condo himself because it was his practice and also for fear of having the condo damaged by irresponsible tenants. The appellant accordingly offered the condo to his customers and spoke to two travel agents as well, as indicated by Exhibits A-4 and A-5. He made the development rental office responsible for renting it in late 1986. The rental income was reported in tax returns.

I have reviewed the decisions to which I was referred by either party, and which are as follows: Mary Jane Soper v. M.N.R., [1987] 2 C.T.C. 2199; 87 D.T.C. 522; Sylvio Gendron v. M.N.R., [1989] 2 C.T.C. 2378; 89 D.T.C. 582; Youngman v. Canada, [1990] 2 C.T.C. 10; 90 D.T.C. 6322.

I consider that unlike Soper and Gendron, the evidence in the instant case indicated that the condo was not reserved for the appellant at all times and that his intention as a shareholder and director of R.T. has always been to use the condo only for certain periods in the year and rent it in other periods.

The evidence is not specific regarding the choice of periods of use. However, I do not think it is important for this choice to be made at the start of the vacation season or based on non-rented periods. What matters is that the appellant did not arrange his affairs so he could use the condo whenever he wanted. he intended only to use it for certain periods in the year and usually rent it. The fact that he initially thought he could rent it himself to people he knew cannot in my opinion be held against him. This was a mistake and when he realized it was not possible, he handed over rental of the condo to the development rental office.

There is no doubt that when a corporation buys a condo in Florida, it is natural to think in terms that a benefit was conferred on a shareholder; but it is also quite natural to think in terms of a profitable investment, since this is a place much sought after by vacationers. The appellant presented evidence that this is what he wanted: a real estate investment the value of which would increase and which could be rented in the meantime.

Youngman, supra, Was cited by counsel for the appellant with regard to determining the value of a benefit, and I quote the passage:

In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder. In the present case, the benefit or advantage conferred on the appellant was not merely the right to use or occupy a house for as long as he wished; it was the right to use or occupy for as long as he wished a house that the company, at his request, had built specially for him in accordance with his specifications. How much would the appellant have had to pay for the same advantage if he had not been a shareholder of the company? Certainly more than what the two experts referred to as the free market rental value since, in my view, the company would have then charged a rent sufficient to produce a decent return on its investment. It is impossible to determine with accuracy the amount of that rent. However, subject to one important reservation, I cannot say that it would have been less than what the Minister assumed it to be. That reservation is that if the appellant had been dealing with a company of which he was not a shareholder, consideration would certainly have been given, in determining the rent payable, to the fact that he had himself lent more than $100,000 without interest to the company in order to help to finance the construction of the house. As long as that loan remained outstanding, the rent otherwise payable would, in my view, have been reduced by an amount equal to the interest that should normally have been paid on the balance of the loan.

[Emphasis added.]

It is not necessarily easy to determine the correct way of calculating a benefit conferred on a shareholder through his corporation. In the event that I found that the condo was bought by R.T. to be placed solely at the disposal of the appellant, counsel for the appellant suggested that this benefit should be calculated only for the peak period of a condo in Florida, that is the five months of the Quebec winter, and that it was obviously excessive for the respondent to calculate the benefit for the entire year. It was, as a matter of fact, this five-month basis which was used by the accountant to estimate the rental income from the condo.

Since I have come to the conclusion that on the evidence before me the condo was bought for investment purposes, and that the appellant did not have exclusive use of the condo—on the contrary, his intention was to use the condo only for short periods, the other time being for rental—the benefit conferred by R.T. should be equivalent to the price the shareholder would have had to pay in similar circumstances to get the same benefit from a company of which he was not a shareholder. It must be admitted that the evidence in this regard was not very precise. In the circumstances, the amounts mentioned in paragraph 10 of the notice of appeal already referred to seem to be reasonable.

The appeal is accordingly allowed with costs, and the matter referred back to the respondent for reconsideration and reassessments on the basis that the benefits conferred on the appellant as an R.T. shareholder are those admitted by the appellant in paragraph 10 of the notice of appeal.

Appeal allowed.