Singing Skies Farms Limited v. Minister of National Revenue, [1986] 2 CTC 2146, 86 DTC 1586

Brulé, T.C.J.:—The basis of this appeal is that the appellant corporation was reassessed for its 1979 to 1982 taxation years in respect to certain costs with reference to a residence located on its property.

This residence was occupied by Arthur W. Smith and his family since 1978. Mr. Smith is the beneficial owner of all of the issued and outstanding shares in the capital of the appellant and is its only director. He is the president of the Company and his wife is the secretary.

Issue

The only issue in this appeal is whether or not the appellant company provided the residence to Mr. Smith because he was the sole shareholder or because he and his wife were the chief employees rendering services to the company.

Facts

The appellant corporation carries on a grape-growing farm operation in the Niagara District of Ontario. On the farm is a residence in which Mr. Smith and his family reside. The premises also have a portion used for office purposes. At times the corporation employs as many as 30 to 40 persons but the average labour force is 6 or 7 persons. The company director Mr. Smith, his wife and one other were the only full-time direct farm labourers during the taxation years in question. In each of the years in question, Mr. Smith's wife provided direct farm labour to the appellant at various times, and small amounts of direct farm labour were provided to the appellant by the oldest of Mr. Smith's children.

During the taxation years in question, Mr. Smith did not pay the appellant any rent for the occupation of the residence but the appellant and the respondent agreed on certain amounts as benefits derived by Mr. Smith during the said period.

The appellant sought to deduct the following amounts:

1979 — $6,635.94

1980 — 5,212.53

1981 — 9,331.60

1982 — 9,508.64

The Minister disallowed 90 per cent of these or in dollar terms:

1979 — $5,972.35

1980 — 4,691.28

1981 — 8,398.44

1982 — 8,557.78

These latter amounts are those under appeal.

Appellant’s Position

Evidence given by Mr. Smith supported certain statements made in the notice of appeal, among which were as follows:

The proper operation of the business of the Appellant requires a full-time attendance of an on-site employee to deal with emergency drainage needs, prevent vandalism and thievery and deal with other emergencies.

The fact that Arthur W. Smith and his wife reside at the farm property permits certain farm chores to be accomplished without delays in transporting the employee to and from the farm and, in particular, permits both Arthur W. Smith and Constance Smith to provide farm labour at intermittent intervals, such as on evenings and weekends.

The Appellant further states that it is the invariable practice of grape farmers in the Regional Municipality of Niagara to have a residence located on any large grape farm and to have that residence occupied on a full-time basis by the owner of the farm or one of his or its employees.

The Appellant states that the occupation of the residence by Arthur W. Smith constitutes a benefit to the occupants but that such benefit was provided to the occupants for the purpose of advancing the business interests of the Appellant and that such benefits were conferred upon Arthur W. Smith in his capacity as an employee of the Appellant and not in his capacity as a shareholder of the Appellant.

In support of the appellant’s position expert evidence was offered by a Robert Wilcox, a consultant in orchard and vineyard management. He indicated to the Court that invariably either the owner or the manager of a vineyard enterprise in Ontario occupies an on-site residence. As he said in his reporting letter:

This is not only for convenience but has many economic advantages for making managerial decisions, which leads me into comments regarding the maximization of revenue and the minimization of expenses.

All of the cultural and harvesting operations in a vineyard are weather related. Weather, which includes temperature, sunshine, precipitation (amount and duration), drying index, wind velocity and direction, vary tremendously from area to area in the Niagara Peninsula. Precipitation particularly can vary within one-half a kilometer or less from farm to farm. Wind direction and velocity can be just as variable. Precipitation amounts and duration greatly affect the workability of the soil and the condition of the floor of the vineyard for operations that are carried out year round.

Daily inspections of the vineyard enterprise from early spring to harvest time are important for the owner or manager of the vineyard. It is not unusual to make these inspections after supper on Sundays and other times when no other activity is going on. Inspection includes a number of items including condition of soil, stages of growth, effectiveness of pest control (weeds, insects and diseases) and the need for further control practices. Many management decisions are made as a result of these inspections to arrange help for the next morning.

I cannot over-emphasize the timeliness of operations in a vineyard on a year round basis in order to maximize revenue and minimize expenses. A good vineyard manager should be observing his vineyard on a regular basis, very often daily, looking for blocked drains, excessive flooding, damaged trellises, rodent injury and many other problems that large property owners have and more particularly when the property is planted to vineyard and orchards.

Minister's Position

Counsel for the Minister indicated that certain expenses were incurred in maintaining the residence on the property and in addition there were relatively large capital expenditures during the years in question both for renovating and enlarging the residence. In the reply to notice of appeal it was said:

. . . no more than ten per cent (10%) of the above-described expenses related to the business of the Appellant, and the remaining ninety per cent (90%) of such expenses were not incurred for the purpose of gaining or producing income from a business or property but rather to confer a benefit on Smith in his capacity as shareholder of the Appellant;

It was suggested that the respondent correctly disallowed 90 per cent of the expenses during the relevant period by virtue of paragraph 18(1)(a) of the Income Tax Act.

Analysis

Was Mr. Smith receiving a benefit qua shareholder or as a bona fide employee of the appellant? There is no question that the residence was provided for Mr. Smith and his family but was such necessary for the purpose of farm management and security and to be able to readily deal with emergencies?

In M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184, Cattanach, J. said at 300 (D.T.C. 5187):

Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation’s purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation’s business .. .

The test to be applied is that the Court must make a positive finding that the expenses were incurred for the purpose of gaining or producing income.

In the case of Canim Lake Sawmills Limited v. M.N.R., [1961] C.T.C. 25; 61 D.T.C. 1035, the test was applied and the Court held that the expenses incurred and capital cost allowance claimed were justified with respect to an aircraft purchased by the company and piloted by the company's president and sales manager.

The opposite result obtained in the cases of M.N.R. v. Alfred Gordon, [1966] C.T.C. 722; 66 D.T.C. 5445; Rural Stores Limited v. M.N.R., 37 Tax A.B.C. 102; 64 D.T.C. 819 and Lionel Clapham v. M.N.R., [1970] Tax A.B.C. 23; 70 D.T.C. 1012. In all these cases a shareholder was deemed to be receiving a benefit with respect to residential properties and the Court held in each case that they were not for the purpose of gaining or producing income.

In the present case I do not have any doubt that the appellant has successfully rebutted the presumption made by the respondent. Mr. Smith did receive a benefit but I hold this to be as an employee and not as a shareholder. The evidence by him and also by the expert clearly set out the necessity in the type of operation carried on by the appellant that the presence of someone on the property was practically essential. No better person than Mr. Smith with the assistance of his wife and sometimes his family could have performed this function. Mr. Smith was taxed in agreement with the Minister as receiving a benefit and the expenses and capital cost allowance claimed by the appellant were not out of line with the operation. This includes not only the ten per cent allowed prior to this appeal but also the remaining 90 per cent being sought by the appellant.

The end result is that this appeal is allowed and the matter will be referred back to the Minister for reconsideration and reassessment and costs are awarded to the appellant on a party and party basis.

Appeal allowed.