Date: 20020517
Docket: 2001-1577-IT-I, 2001-1578-IT-I,
2001-1782-IT-I, 2001-2651-GST-I, 2001-2746-IT-I
BETWEEN:
PHYLLIS SERVAIS, SHAWN SERVAIS, DONALD SERVAIS, and
SERVAIS SHEET METAL LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Miller, J.
[1] The appeals by Servais Sheet Metal Ltd. (the Company) both under the Income Tax Act and the Excise Tax Act, and the income tax appeals by Donald Servais, Phyllis Servais and Shawn Servais under the informal procedure were heard on common evidence. All three Servais testified, as did both the auditor and the appeals officer from Canada Customs and Revenue Agency (CCRA). The main issues in the individuals' appeals relate to the determination of the automobile benefits in 1996, 1997 and 1998 and the correctness of inclusions in the Servais' income of certain cash payments in 1996 and 1997. The Company's goods and services tax (GST) issue hinges on the finding of the amount of the automobile benefits. The Company's income tax issue relates to the deductibility of interest and insurance expenses, as well as vehicle operating expenses and certain purchases in 1996 and 1997.
[2] The Company operated a heating and air conditioning business in the Pembroke area for many years before the years in question. Only recently has it ceased to operate. Donald Servais held 60% of the shares of the Company and worked full time in the business. His son, Shawn Servais, held 40% of the shares and worked in the business when the workload required. Don's wife, Phyllis, was not a shareholder but worked in the office, again as the work demanded. I will deal with the circumstances surrounding each individual's work arrangements with the Company in turn.
[3] Shawn Servais lived with his parents only until 1996; thereafter he lived in Pembroke. He did not own a vehicle, but indicated that in the years in question he was able to rely on his girlfriend's vehicle for personal use. He was also able to get a ride to work with a friend.
[4] He was qualified as a sheet metal worker, and when he worked for the Company he did estimating, installing and service calls. In his work for the Company he used a 1993 Ford Ranger pickup truck. The truck was described as having two seats in the front and two fold-out seats behind, where Shawn stored computer boards and small equipment. There was a roof rack on the truck for a ladder, which remained on the truck when not in use. Shawn used the truck to go to and from home, when he needed it readily available for the purposes of handling service calls. Shawn admitted that he used the truck occasionally for personal use, but only when he was working for the Company.
[5] The evidence regarding his hours of work for the Company was somewhat confusing. He maintained that he would make ten emergency service calls a night, every night, while he was employed with the Company. Phyllis testified that a service call would take one hour. She also indicated that she kept records of such calls though none were produced. Phyllis indicated that Shawn only worked 168 hours in 1996. Records produced at trial showed that Shawn worked twenty-six 40-hour weeks in 1997 (July to December), with some other irregular hourly work from March to June. The 1998 records, which were sketchy, suggested full-time work from January to May, then again in August, but otherwise sporadic.
[6] The Company had three major contracts with the Government of Canada; two with Department of Defence (Defence Construction and Canadian Forces Housing) and one with Supply and Services. Copies of documents evidencing such contracts were produced but related to periods other than the years in question. I do accept, however, that the Company had such contracts and that one or two of them required emergency services. One contract related to the servicing of 1,700 units.
[7] The 1993 Ford Ranger was owned by the Company and all expenses, including insurance, were paid for by it. No logs were kept for the use of the 1993 Ford Ranger.
[8] The Minister of National Revenue (the Minister) assessed a shareholder benefit pursuant to subsection 15(1) of the Act for each of 1996, 1997 and 1998, on the basis that the truck was used 75% of the time for the personal use of Shawn. The Minister's calculation was 75% of the estimated operating costs, plus insurance expenses and loan payments for the Ranger, resulting in benefits of $8,110, $8,623 and $2,213, respectively, for 1996, 1997 and 1998.
[9] Turning next to Phyllis Servais, she was in charge of most of the paperwork of the Company. She would type and deliver the invoices, attend to the banking, handle receipt of service calls and dispatch her husband or son accordingly, deal with the Company's accountant, handle payroll and keep the books. She made quarterly trips to the accountant for a review of the bookkeeping. She worked both from home and the Company's offices. Her evidence was that she only worked part of the year, as work demanded, but acknowledged that even when she was not on the payroll, she would accept and deal with emergency calls. When she was fully employed with the Company she worked 40-hour weeks.
[10] Phyllis Servais used a 1995 Mercury Sable Station Wagon in the performance of her duties. This vehicle was owned by the Company, and all the expenses in connection with it were covered by the Company. She acknowledged that she would have the keys to the Sable even when she was laid off, though would use it seldom for personal purposes. The Sable would occasionally be used to go to Ottawa (an example she gave was for the purposes of collecting bad debts), though her husband would normally be the person to drive on such occasions. Two repair invoices were produced dated April 1, 1996 and December 3, 1996 indicating a change in the odometer of the Sable of approximately 18,000 kilometres over the eight months. Phyllis Servais maintained that she relied on her husband's 1980 Cadillac for most of her personal outings.
[11] The Minister assessed Phyllis Servais for 1997 and 1998 pursuant to section 6 of the Income Tax Act, by including in her income a standby charge, GST and operating expense benefits totalling $9,798 for each year. The standby charge and GST were based on an undisputed capital cost of $25,513. The operating cost benefit was determined pursuant to paragraph 6(1)(k) of the Income Tax Act at 50% of the standby charge and GST. The total of $9,798 was amended at hearing by the Respondent to $9,184.
[12] With respect to Don Servais' use of vehicles, there were several at his disposal. He drove the Sable to Ottawa on occasion. He owned personally a 1981 Ford ½-ton truck which he maintained was his primary recreational vehicle for fishing, going to the bush and trips downtown (Pembroke). He also owned a 1994 Ford Enforcer, bought new in 1994, though all payments for this vehicle, including all operating costs, were made by the Company. The reason this truck was put in his name was because the bank insisted on this arrangement, according to Don Servais, for financing purposes. The appeals officer described this truck as a nice-looking truck.
[13] Don Servais testified that he seldom drove this vehicle, but that it was used by other employees primarily for taking men and materials to jobs. Heavier equipment and tools were kept in this truck. Although both Don and Shawn Servais referred to three other employees, there was no clear evidence of how many employees, other than the Servais, the Company had throughout the years in question.
[14] The vehicle used by Don Servais in the business was a 1992 Ford ¼-ton truck which had a fifth-wheel attached for the purposes of hauling a trailer. Mr. Servais used this truck in fulfilling his functions which he described as pricing, tendering, laying the jobs out, making the duct work up, ordering parts and materials, installing and providing service work. The auditor from CCRA indicated that she understood from Mr. Servais, when he was first asked, that this truck was not a business truck. Mr. Servais' testimony at trial was to the contrary.
[15] With respect to the trailer, Mr. Servais testified that this fully-furnished trailer, which could sleep four to six, was acquired to accommodate employees on out-of-town work. There was again some confusion in the testimony as to whether the use of a trailer for unionized employees was permissible. From the excerpt of the Collective Agreement, and the evidence of the appeals officer, it appeared that trailers were only allowed if no other accommodation was available. The Servais testified, however, that only Don and Shawn Servais were unionized.
[16] There was no document of any contract that might have required such out-of-town accommodation in the form of the trailer. The only example given of a possible business use related to one night on a reserve, but the circumstances were not satisfactory, and the trailer was returned to Pembroke. The trailer was used on two or three occasions for recreational purposes. It was eventually sold at the same price for which it was acquired and in the same condition in which it was acquired, that is, virtually new, with plastic coverings still on the furnishings.
[17] No log books were kept for any of the vehicles. The Minister assessed Mr. Don Servais pursuant to section 15 in connection with the Ford Enforcer, based on including 100% of the operating costs, insurance, loan payments and GST. The benefits so calculated were $4,781, $8,508 and $2,203 in 1996, 1997 and 1998, respectively. The Minister assessed Mr. Don Servais pursuant to section 15 in connection with the 1992 Ford truck and trailer based on including 100% of the principal and interest payments made for the truck and trailer. The benefits so calculated were $9,683, $8,816 and $2,126 for 1996, 1997 and 1998, respectively.
[18] As well as the automobile benefits, Mr. Don Servais was assessed under subsection 15(1) a benefit for certain cash payments made to him and his wife, the latter assessment arising pursuant to subsection 56(2). The auditor attributed the cash payments from Don Servais on the basis of the Company's fiscal year, which ran from April to March. The appeals officer adjusted the payments such that only the payments received by the Servais in a calendar year constituted benefits for that year. This had the effect of deleting any 1995 payments from the 1996 benefit, and moving some 1997 payments into 1996. This ultimately resulted in an increase of the 1996 benefit by the appeals officer, and it was on this basis the reassessment was issued on March 16, 2001.
[19] Finally, with respect to the Company, a number of expenses claimed were disallowed. These included the following:
|
|
1996 |
1997
|
|
Interest on Ford Ranger |
Nil |
$100 |
|
Interest expense on Ford truck and trailer |
$2,399 |
$1,400 |
|
Interest expense on Ford Enforcer |
$1,255 |
$647 |
|
(Adjustment for interest on Sable, not claimed) |
($595) |
($616) |
|
Insurance: Ford Enforcer and Ford truck and trailer |
$4,025 |
$2,795 |
|
Ford Enforcer operating expenses |
$2,681 |
$2,017 |
|
Log Splitter operating cost |
$2,160 |
|
|
Purchases |
$6,471 |
$9,269 |
[20] The purchases consisted of payments made directly to the Servais personally, which were not substantiated as business expenses, as well as payments to Cashway of $1,276 and $1,550 for 1996 and 1997, respectively. The Minister determined these latter payments pertained to the Servais' rental property business and not the Company's business. The Appellants acknowledged such payments related to the revenue property, and at trial sought deductions personally from their rental property income.
[21] From a review of the above, it appears that certain vehicle expenses were allowed, including operating expenses for the Ranger, the truck and trailer and the Sable. There is no dispute as to the log splitter operating costs, nor the amount of the purchases.
[22] With respect to the Company's GST appeal, the only issue raised by the Appellant is the need to adjust the GST arising from the automobile benefits, should I find that any of the automobile benefits had been overstated.
[23] This is a situation which is certainly not uncommon in small family-run businesses in Canada. Little regard is given to the line between business and personal expenses. The business is an integral part of the lives of the owner/manager family and any attempt to distinguish in any orderly manner between the business activities and personal activities is simply foreign to them. Thus it was with the Servais. They had an abundance of vehicles, certainly greater than what the business could possibly need: personal vehicles were used in the business and business vehicles were used personally. While this is understandable, it does not make the task of an auditor or appeals officer, in applying the rules pertaining to automobile benefits, an easy one. It was also clear to me that the government's explanation of these rules to the Servais family was not fully appreciated by them. The Servais' agent expressed this tension between the auditor and the taxpayer as tantamount to being malicious on the auditor's side. I did not perceive anything of the sort. My impression was of a family business, unfamiliar with the rules, honestly unappreciative of the need for detailed records, certainly when it came to logs, and quite unsophisticated generally. I have no difficulty in appreciating how they might react to an auditor's legitimate attempts to invoke rules based on sketchy information, when such rules were foreign to how they carried on their business.
[24] Before first addressing Mr. Shawn Servais' appeal, I need to step back and look at the whole picture vis-à-vis the Servais' surplus vehicles. If you include Shawn's access to his girlfriend's vehicle, the Servais had available to them for their business and personal use seven vehicles. In assessing the Servais, the Minister in effect concluded that the primary use of all seven vehicles was for personal purposes. This leads to an overly harsh result.
[25] In turning now to Shawn Servais appeal, the Appellant argued that the Ford Ranger was not an automobile as defined in the Act. The definition reads:
248(1) In this Act,
"automobile" means
(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,
but does not include
(b) an ambulance,
(c) a motor vehicle acquired primarily for use as a taxi, a bus used in a business of transporting passengers or a hearse used in the course of a business of arranging or managing funerals,
(d) except for the purposes of section 6, a motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting or leasing motor vehicles or a motor vehicle used for the purpose of transporting passengers in the course of carrying on a business of arranging or managing funerals, and
(e) a motor vehicle of a type commonly called a van or pick-up truck or a similar vehicle
(i) that has a seating capacity for not more than the driver and 2 passengers and that, in the taxation year in which it is acquired, is used primarily for the transportation of goods or equipment in the course of gaining or producing income, or
(ii) the use of which, in the taxation year in which it is acquired, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income;
[26] Given the limited space behind the driver in the Ford Ranger, and given that the vehicle was used primarily for business, I find that this is the type of van that falls under the exception in paragraph (e) above of the definition of automobile. As such, it is unnecessary to calculate a standby charge in accordance with paragraph 6(1)(e), but simply to determine what is the correct percentage of personal use. I accept the Respondent's determination of the operating costs, insurance and loan payments, but I do not accept the 75% allocation to personal use. While I believe Shawn was driven to some hyperbole in his estimate of ten emergency calls every night, I am satisfied that this truck, when in use, was used primarily for business purposes. Without logs, I am faced with the same dilemma as the auditor as to what is the most accurate guestimate of the personal versus business use. I tip the scales to something over 50% business use. I find a personal use of 45% and, therefore, the benefit to Shawn, pursuant to subsection 15(1), for the three years should be $4,866, $5,173 and $1,327 in 1996, 1997 and 1998, respectively.
[27] With respect to Phyllis Servais, there is no question she used the Sable personally on occasion. As she was not a shareholder, her assessment arose as an employee through the application of paragraphs 6(1)(e) and (k). The Minister found she was not entitled to a reduced standby charge as the business use was less than 90%. I agree. Mrs. Servais' evidence suggested to me her personal use was something greater than 10%, though I only place it at approximately 25%. This is because she had the Cadillac available for personal use. Her evidence also revealed that she made many trips in the Sable to the Forces Housing Development, as well as making the occasional trip to Ottawa. Repair invoices confirmed that 18,000 kilometres were put on the Sable over an eight-month period. This would extrapolate to approximately 27,000 kilometres a year. With no better evidence, I am prepared to assign 25% of 27,000 kilometres or 6,750 kilometres as the personal kilometres of Mrs. Servais for 1996 and 1997.
[28] The Minister assessed operating costs against Mrs. Servais based on the application of subparagraph 6(1)(k)(iv), which reads:
6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
...
(k) Automobile operating expense benefit
where
(iv) where the automobile is used primarily in the performance of the duties of the taxpayer's office or employment during the period or periods referred to in subparagraph (ii) and the taxpayer notifies the employer in writing before the end of the year of the taxpayer's intention to have this subparagraph apply, 1/2 of the amount determined under subparagraph (e)(i) in respect of the automobile in computing the taxpayer's income for the year, and
That provision was not available to the Minister to apply as there was no requisite written notification from Mrs. Servais to the Company. Subparagraph 6(1)(k)(v) should apply, resulting in operating costs of 0.12 ¢ per kilometre multiplied by the 6,750 kilometres personal use, or $810 a year. I allow Mrs. Servais' appeals for 1996 and 1997 to the extent of reducing her operating expense benefits from $3,266 each year to $810 each year.
[29] With respect to Don Servais, I accept his evidence notwithstanding the 1994 Ford Enforcer was registered in his name, that he personally hardly ever used this truck either for business or pleasure. He had an older truck available to him personally as well as the Cadillac. He also confirmed that he mainly used the 1992 Ford truck. I find he derived no personal benefit from the Enforcer as either a shareholder or employee.
[30] With respect to the 1992 truck and trailer, I am satisfied these vehicles were used as much personally (and in the case of the trailer, more so personally) as they were for business purposes. While there was some evidence of the trailer once being used for an overnight job, the preponderance of evidence was that the trailer was not used in the business, and that the truck was used by Don Servais for both business and recreation. The Respondent calculated the benefit based solely on the principal and interest payments on the truck and trailer. No benefit was determined based on operating costs or insurance. I heard nothing in the Servais' evidence to rebut the Minister's presumption that the calculation fairly represented the value of the benefit arising pursuant to subsection 15(1). I recognize that the truck was used by Don Servais for business purposes, as well as being available personally, yet by not including any operating costs or insurance as a personal benefit, I am recognizing his business use of the vehicle.
[31] The Appellant relied on the Exchequer Court of Canada decision in the Pillsbury[1] case to argue that only benefits to a shareholder "as a shareholder" are caught by subsection 15(1), and that in Mr. Servais' case any automobile benefit arising from the truck and trailer arose to him as an employee, not as a shareholder and, therefore, the benefit should be struck down. The principle flowing from the Pillsbury case does not extend to an automobile benefit to someone who is both an employee and a shareholder. In Pillsbury, the relationship of creditor/debtor clearly governed the consequences. In Mr. Servais case, the benefit cannot be so closely aligned to just the employment status to preclude the application of subsection 15(1).
[32] With respect to the cash payments to the Servais in 1996, 1997 and 1998, the Appellants' agent did not quarrel with the total amounts, but maintained that once the auditor established the amount of such a benefit (erroneously based on the Company's fiscal year as opposed to the calendar year of the individual), it was not open to the appeals officer to amend such, if it had the result of increasing the tax liability. There is a well-established principle that once an assessment or reassessment is issued, the Respondent cannot, on an appeal, attempt to increase a tax liability. I am not aware of any law that prohibits an appeals officer to amend an auditor's findings prior to issuing a reassessment. The Appellant's agent referred me to none and I do not accept the agent's passionate claim of injustice in such circumstances.
[33] I allow Mr. Don Servais' appeal to the extent only of eliminating any benefit arising from the 1994 Ford Enforcer.
[34] With respect to the Company's income tax appeal, given my findings regarding the Ford Enforcer, I would allow the appeal to the extent of allowing the Company to deduct interest, operating and insurance expenses pertaining to the Ford Enforcer.
[35] Finally, with respect to the Company's GST appeal, the appeal is allowed to the extent of any adjustments required by the reduction of the automobile benefits to Shawn, Phyllis and Don Servais as set forth in these Reasons.
[36] Although the Appellants' agent argued for an entitlement to agent's costs, I do not find that the rules contemplate such to someone who is not a lawyer. In any event, these informal cases do not justify any award of costs.
[37] The appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis:
i) In Phyllis Servais' appeal, her operating costs benefit only, is reduced from $3,266 in each year to $810 in each year;
ii) In Shawn Servais' appeal, his benefit is reduced to $4,866, $5,173 and $1,327 for 1996, 1997 and 1998 respectively;
iii) In Donald Servais' appeal, his benefit arising from the Ford Enforcer is eliminated;
iv) In the Company's income tax appeal the interest, operating and insurance expenses relating to the Ford Enforcer are allowed as deductible expenses; and
v) In the Company's GST appeal, the GST of $2,315 pertaining to the automobile benefits is to be reduced to reflect the downward adjustments of such benefits to Shawn, Phyllis and Don Servais.
Signed at Ottawa, Canada, this 17th day of May, 2002.
"C.J. Miller"
J.T.C.C.
COURT FILE NO.: 2001-1577(IT)I, 2001-1578(IT)I,
2001-1782(IT)I, 2001-2651(GST)I and 2001-2746(IT)I
STYLE OF CAUSE: Phyllis Servais, Shawn Servais,
Donald Servais and Servais Sheet Metal Ltd. and Her Majesty the Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: May 7 and 8, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge C.J. Miller
DATE OF JUDGMENT: May 17, 2002
APPEARANCES:
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1577(IT)I
BETWEEN:
PHYLLIS SERVAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on May 7 and 8, 2002 at Ottawa, Ontario by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
JUDGMENT
The appeals from reassessments of tax made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant's operating costs benefit only, is reduced from $3,266 in each year to $810 in each year.
Signed at Ottawa, Canada, this 17th day of May, 2002.
|
"C.J. Miller" |
J.T.C.C.
2001-1578(IT)I
BETWEEN:
SHAWN SERVAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on May 7 and 8, 2002 at Ottawa, Ontario by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
JUDGMENT
The appeals from reassessments of tax made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant's benefit is reduced to $4,866 for 1996, $5,173 for 1997 and $1,327 for 1998.
Signed at Ottawa, Canada, this 17th day of May, 2002.
|
"C.J. Miller" |
J.T.C.C.
2001-1782(IT)I
BETWEEN:
DONALD SERVAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on May 7 and 8, 2002 at Ottawa, Ontario, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
JUDGMENT
The appeals from reassessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant's benefit in each taxation year arising from the Ford Enforcer is eliminated.
Signed at Ottawa, Canada, this 17th day of May, 2002.
|
"C.J. Miller" |
J.T.C.C.
2001-2651(GST)I
BETWEEN:
SERVAIS SHEET METAL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 7 and 8, 2002 at Ottawa, Ontario, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated October 6, 1999, and bears number 00000002091 is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the goods and services tax of $2,315 pertaining to the automobile benefits is to be reduced to reflect the downward adjustments of such benefits to Shawn, Phyllis and Donald Servais.
Signed at Ottawa, Canada, this 17th day of May, 2002.
|
"C.J. Miller" |
J.T.C.C.
2001-2746(IT)I
BETWEEN:
SERVAIS SHEET METAL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on May 7 and 8, 2002 at Ottawa, Ontario, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Wayne M. Lynn
Counsel for the Respondent: Marlyse Dumel
JUDGMENT
The appeals from reassessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the interest, operating and insurance expenses relating to the Ford Enforcer are allowed as deductible expenses.
Signed at Ottawa, Canada, this 17th day of May, 2002.
|
"C.J. Miller" |
J.T.C.C.