Steve Dudelzak v. Minister of National Revenue, [1987] 2 CTC 2195, 87 DTC 525

Brulé, T.C.J.:— The present appeals heard in Calgary, Alberta, on the 23rd day of June, 1987, are from reassessments in respect of the 1977, 1978 and 1979 taxation years, by which the Minister of National Revenue added to the appellant's income for those years respectively, the sums of $1,200, $15,142 and $15,852 as an imputed benefit to the appellant as a shareholder arising out of the use of a dwelling house and by which the Minister treated as a shareholder's benefit the sum of $25,000 credited to the appellant's shareholder account.

Facts

The appellant is a businessman with considerable business interests in both Canada and the United States of America. In 1969, he became a permanent resident of Canada and moved to Calgary from Europe. From then until 1977, the appellant lived in a dwelling (the first dwelling) owned by Stellar Enterprises Ltd. (hereinafter referred to as "the company") a corporation of which the appellant was a shareholder. The appellant made substantial improvements to the home for which he paid personally. After the first dwelling was sold the company credited $25,000 to the appellant's shareholder loan account which the appellant claims was a reimbursement for the improvements he made to the home. The Minister first considered the amount of $25,000 as a taxable capital gain then, in the 1984 reassessment, he considered the said amount as a shareholder benefit.

In 1977 the appellant moved into another dwelling (the second dwelling) also owned by the company. A $1,000 a month rent was paid by the appellant for his occupation of the home. At the time both parties agreed this represented fair market value rent for the dwelling. By his 1984 reassessment the Minister calculated the benefit imputed to the appellant from his occupation of the dwelling house as consisting of all maintenance costs incurred by the company and a return on the higher of the cost or fair market value of the property. The Minister therefore added to the appellant's income the benefit so calculated minus the rent paid by the appellant.

Analysis

The Minister’s assumptions, dealing with the $25,000 sum credited to the appellant's shareholder account, as they appeared in the reply to the notice of appeal read as follows:

5. By Notices of Reassessment dated January 12, 1984 the Respondent reassessed the income tax liability of the Appellant for the 1977, 1978 and 1979 taxation years, inter alia, as follows:

(b) for the 1977 taxation year, treated the $25,000.00 re the credit made to the Appellant’s shareholders' loan account as income pursuant to section 15(1) of the Income Tax Act rather than as a capital gain as in the November 12, 1982 Notice of Reassessment;

6. In so reassessing in January, 1984, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) during the taxation years at issue the Appellant was a shareholder in Stellar Enterprises Ltd. (hereinafter referred to as 'the Company');

(d) during the 1977 taxation year the company credited $25,000.00 to the Appellant's shareholder loan account;

9. He submits, subject to the change of position outlined in sub-paragraph 7, that pursuant to subsection 15(1) of the Income Tax Act he properly reassessed the Appellant and added to the Appellant's income the amounts as set out in paragraphs 5(b) and 6 above; as the Appellant qua shareholder received benefits from the corporation of those values during the taxation years at issue.

The appellant's counsel argued that the assumptions made by the Minister concerning the amount credited were insufficient to support the reassessments. He submitted that since the Minister made no assumptions concerning the reimbursement by the company for improvements made by the appellant and no assumption that such a reimbursement constituted a device to confer an advantage to the appellant qua shareholder, the appellant had no obligation to establish either the existence of reimbursement or the absence of a device conferring an advantage, upon himself qua shareholder Counsel submitted the failure by the Minister in assuming these facts places a different burden of proof on the appellant. The appellant's counsel argued that the appellant needed only to submit a reasonable explanation to the Court as to the origin of the amount credited.

In the decision of Kit-Win Holdings (1973) Limited v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030, Cattanach, J. at page 54 (D.T.C. 5038), described the Minister’s obligation with regards to tax assessments in the following way:

Thus the obligation is on the Crown to plead those facts which bring the taxpayer sought to be made liable precisely within the Statute.

At the same page he reiterates:

Thus the obligation is on the Minister to plead facts which bring the assessment within the four corners of the taxing provision. The Minister then rests on the assessment.

As for the taxpayer's obligation, Mr. Justice Cattanach states at the same page:

In Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182, Rand, J. took the view that the proceeding was "an appeal from taxation”. Since taxation was on the basis of “certain facts’ and “certain provisions" of law the appellant taxpayer must be taken to be challenging either these facts or the application of the law.

This opinion has been interpreted and relied upon as authority for the proposition that a taxpayer has the onus of proof with respect only to the findings or assumptions made by the Minister or his assessors on his behalf at the time that the assessment was made. The Minister's assessment is based upon the assumptions made by him and the effective manner by which the taxpayer can establish error in the assessment made upon him is 'to demolish the basic fact upon which’ the assessment was made.

If he shows that the facts assessed by the Minister did not exist and even if they did exist those facts do not bring the taxpayer within the operation of the taxing provision relied upon the assessment must fail.

Mr. Justice Rand also made it clear at page 490 that there is a duty to have fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy. That is one of the few remaining rights accorded to the taxpayer in the legislation the preponderance of which imposes obligations.

The Court is satisfied the Minister’s assumptions as they read in the reply to the notice of appeal were sufficient to support the reassessments.

Strictly speaking, it would be impossible for the appellant to prove that there did not exist a device or arrangement to confer a benefit on the appellant qua shareholder. One cannot disprove a non-existent fact. In the words of Sarchuk, T.C.J. in the case of Doreen del Valle v. M.N.R., [1986] 1 C.T.C. 2288 at 2290; 86 D.T.C. 1235 at 1237:

. . . There is no onus on the appellant to disprove a phantom or non-existent fact or an assumption not made by the respondent.

In the case at bar the burden was on the appellant to establish on the balance of probabilities that there was a reason, other than that of conferring a benefit on a shareholder, for the crediting of the amount.

The Court is satisfied that the appellant has established on the balance of probabilities that in excess of $25,000 of improvements were made by the appellant to the first residence and were paid by the appellant personally. He established that the amount credited by the company, after the sale of the first dwelling was in fact a reimbursement of sums spent by the appellant for the improvements.

In doing so the appellant has discharged the burden of proof placed upon him by the Minister's assumptions underlying the reassessments.

The appeal must therefore succeed on this point.

With regards to the benefit received by the appellant in relation to the second dwelling house, the Minister's assumptions in the reply to the notice of appeal read as follows:

6. In so reassessing in January, 1984, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) during the taxation years at issue the Appellant was a shareholder in Stellar Enterprises Ltd. (hereinafter referred to as "the Company");

(b) during the taxation years at issue in this Appeal, the Appellant, qua shareholder resided, in dwelling #1 which was owned by the company;

(c) the benefit imputed to the Appellant arising from his residing in dwelling #1, during the taxation years at issue consists of two amounts:

(i) All maintenance costs incurred by the company, and;

(ii) A return on the higher of cost or fair market value of the property, the return being the rate prescribed by Section 80.4 of the Income Tax Act calculated as follows:

(e) the amounts added to the Appellant's income, as set on in (c) and (d) above, were benefits conferred on the Appellant, qua shareholder by the corporation.

The calculation of the benefit derived by a shareholder using a corporation's asset depends upon the corporation's purpose in acquiring the asset and the use it makes of it. In M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184, Cattanach, J. said at page 300 (D.T.C. 5187):

. . . in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder. For example, Parliament could never have intended to tax the benefit or advantage that accrues to a customer of a corporation, merely because the particular customer happens to be a shareholder of the corporation, if that benefit or advantage is the benefit or advantage accruing to the shareholder in his capacity as a customer of the corporation. It could not be intended that the Court go behind a bona fide business transaction between a corporation and a customer who happens to be a shareholder and try to evaluate the benefit or advantage accruing from the transaction to the customer.

After reviewing the jurisprudence on the subject McNair, J. stated, in the case of Lloyd Youngman v. The Queen, [1986] 2 C.T.C. 475 at 480; 86 D.T.C. 6584 at 6588:

The case of The Queen v. Houle, [1983] C.T.C. 406; 83 D.T.C. 5430, held that a taxpayer who used his company's yacht partly for business and partly for personal use did not receive a benefit from capital expended for personal use on the ground that the yacht was purchased by the corporation for business reasons and the personal use was only incidental.

He added at the same page:

Clearly, the countervailing factors of business purpose or personal use must play a significant role in determining as a question of fact whether the particular corporate transaction is a bona fide business transaction in the sense of something that might normally accrue to an outsider in the ordinary course of business of the corporation or whether it was an inside arrangement designed primarily to benefit a shareholder.

Counsel for the defendant concedes, on the strength of the Houle case, that if it is found that the house on Shadow Drive was built for a business purpose and for use as a business asset so that any use of the house by the shareholders was only incidental thereto then the Minister’s assessment was incorrect. Otherwise, the assessment is valid.

Counsel for the appellant argued that the Minister had failed to allege, as a fact relied on to reassess, that the second dwelling was bought without a business purpose. This, for the appellant's counsel, places the onus of proving the absence of business purpose on the Minister. If he fails to meet this onus counsel submits the reassessments must be struck down.

The Court cannot accept the arguments of counsel for the appellant on this point. The Minister, by the assumptions made in the reply to the notice of appeal, brought the appellant within the taxing statute. Clearly the use of the dwelling house did constitute a benefit for the appellant. The onus of proving it was not a device to constitute a benefit on the appellant qua shareholder or of proving that the Minister’s calculation of the value of the benefit was inaccurate rests on the appellant. Proving on the balance of probabilities that the corporation purchased the second dwelling for business purposes is part of the onus resting on the appellant.

I would quote the words of McNair, J. in Youngman (supra) at page 481 (D.T.C. 6589):

I must now decide the issue as to the amount or value of the benefit on the basis of whether the Minister's assessment was reasonable or not in the circumstances. It goes without saying that the onus of establishing that the Minister’s assumptions in this regard are erroneous rest on the plaintiff.

As stated, the plaintiff argues that the value of the benefit to him must be measured by the actual rental value of the house and not its cost. While the value of a benefit may not necessarily be the same as its cost in any and all circumstances, it does not automatically follow that such value may not equate with cost in an appropriate case. The words of paragraph 15(1)(c) of the Act are capable of the broadest interpretation and this applies perforce to the words "the amount or value thereof" as used therein. In fact, the word "amount" is substantially defined by subsection 248(1) to mean "money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing". Taken in context, the words "amount" and "value" appear to be used synonymously and interchangeably. According to standard dictionary usage, the word "value" standing alone is generally taken to mean the materiai or monetary worth of a thing or the fair equivalent thereof.

The appellant did, in any event adduce evidence showing the acquisition by the company of the second dwelling was motivated by business considerations and that the home was used extensively by the appellant for business purposes both as an office and for hosting potential investors. On the weight of the evidence adduced, the Court is satisfied that the rent paid by the appellant for the years under appeal represented in the present case the benefit conferred on the appellant in relation to the use of the dwelling.

For these reasons, the appeals must succeed on this point also.

The appeals are allowed, with costs on a party and party basis, and the matter referred back to the respondent for reconsideration and reassessment.

Appeals allowed.