Date: 20001219

Docket: 1999-3908-IT-I

BETWEEN:

JEAN-GUY GERVAIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Delivered orally from the bench on

July 13, 2000, at Sherbrooke, Quebec, and

subsequently amended for greater clarity.)

Pierre Archambault, J.T.C.C.

[1]      Jean-Guy Gervais is challenging assessments made by the Minister of National Revenue (Minister) for the 1995 and 1996 taxation years. The Minister included amounts in Mr. Gervais's income as taxable benefits resulting from the use of a car provided to him by a corporation (2634) in which he was the majority shareholder. The amounts in question are $10,702 for 1995 and $5,351 for 1996.

[2]      In paragraph 5 of his Reply to the Notice of Appeal, the Minister sets out the facts on which he relied in making his assessments. They are as follows:

[TRANSLATION]

(a)                the appellant is a doctor;

(b)                during the years at issue, the appellant was the majority shareholder in 2634-3376 Québec inc., whose fiscal years ended on February 28, 1995, February 29, 1996 and February 28, 1997;

(c)                 during the years at issue, 2634-3376 Québec inc.'s main activity was the purchase, repair and sale of used luxury automobiles;

(d)                during the period at issue, 2634-3376 Québec inc. owned, inter alia, the following vehicle:

Vehicle Cost Period

(i) 1994 Mercedes $37,919 28/12/94 to 21/06/96;

(e)                 in the Minister's view, during the years at issue, the corporation made the vehicle referred to in subparagraph (d) available to the appellant in his capacity as a shareholder;

(f)                  the yearly taxable benefit for each of the years at issue from the use by the appellant, as a shareholder, and/or by one or more persons related to him, of a vehicle belonging to 2634-3376 Québec inc. was determined to be $10,702 and $5,351 respectively.

When the hearing began, Mr. Gervais admitted subparagraph 5(a), (b) and (c).

Facts

[3]      The evidence showed that Mr. Gervais was interested in purchasing a Mercedes for his own use and that he purchased the car through 2634 to reduce the amount of Quebec sales tax (QST) to be paid. The purchase price was $25,000, plus $1,750 in GST, for the total of $26,750, and Mr. Gervais advanced to 2634 the amount needed to pay that price by depositing $27,000[1] in the corporation's account on August 15, 1994, the date the car was purchased by 2634.

[4]      Since the Mercedes was damaged, repair work had to be done by a garage. The repairs cost $12,519 ($11,700 + $819 GST), which amount was paid by 2634 once the work was completed on December 22, 1994. Taking the same approach as he had in reimbursing the car's purchase price, Mr. Gervais paid back to 2634 the cost of the repairs on January 3, 1995, by depositing $17,000[2] in its bank account. The extra $4,481 was an advance by Mr. Gervais to the corporation.

[5]      By contract dated December 28, 1994, 2634 transferred the Mercedes to Mr. Gervais for $36,700, which was the total of the initial $25,000 purchase price and the $11,700 repair costs. In exchange, Mr. Gervais transferred his two cars, an Acura and a Saab, to 2634. According to Mr. Gervais, this approach made it possible to calculate the amount of QST on the difference between the price of the Mercedes and the total price of the other two cars. However, the registration of the cars was not immediately changed, since 2634 first had to find buyers for the Acura and the Saab.

[6]      Mr. Gervais testified that he personally paid all the expenses incurred as of December 28, 1994, to maintain the Mercedes.

[7]      Mr. Gingras, the garage operator who did the repair work, was interested in purchasing the Acura but did not have the money to pay the full price of the car, namely about $9,500. He purchased it in July 1995, but the registration was not transferred to his name until June 1996, when the price of the Acura was paid in full.[3]

[8]      The Mercedes was not registered in Mr. Gervais's name until June 1996. It is therefore not surprising that the Minister determined, under section 15 of the Income Tax Act (Act), that Mr. Gervais had received a tax benefit from the use of the Mercedes for a period of 18 months, from the date it was purchased until the time it was registered in his name in June 1996.

Analysis

[9]      In including the benefit resulting from the use of the Mercedes provided by 2634 in Mr. Gervais's income, the Minister assumed that the car was actually owned by 2634. The purchase contract in 2634's name and the fact that the car's purchase price and the cost of the major repairs were paid by 2634 supported the Minister's conclusion in this regard. The amounts paid by Mr. Gervais were shown in 2634's accounting records as advances: $27,000 on August 15, 1994, and $17,000 on January 3, 1995.

[10]           However, the evidence I have heard shows instead that 2634 was used as a prête-nom to obtain a reduction in the QST. The fact that he personally paid all the expenses incurred for the Mercedes confirms Mr. Gervais's claim that the car was actually his. There is also the contract of December 28, 1994, that made the situation official.

[11]     In the circumstances, it is difficult to conclude that 2634 conferred a benefit on Mr. Gervais as a shareholder, since he was the one who, with his own money, financed the purchase of the car and paid the entire cost of major repairs and of maintenance for the car. No tax benefit should be added to Mr. Gervais's income under section 15.

[12]     On the other hand, it is important that Mr. Gervais follow up on his undertaking to have 2634's accounting records changed so as to properly show that the $27,000 and $12,519 were paid to 2634 as a repayment of expenses rather than as advances. Without that change, the amount of advances shown in 2634's accounting records could be higher than the amount that 2634 actually owes Mr. Gervais. If 2634 were to repay Mr. Gervais more than it owes him, that amount could constitute an appropriation of the corporation's funds by Mr. Gervais and the taxable as his income.

[13]     For all these reasons, Mr. Gervais's appeal is allowed and the assessments for 1995 and 1996 are referred back to the Minister for reconsideration and
reassessment on the basis that the amounts of $10,702 and $5,351 must be deducted from Mr. Gervais's income, the whole without costs.

Signed at Ottawa, Canada, this 19th day of December 2000.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 6th day of February 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

1999-3908(IT)I

BETWEEN:

JEAN-GUY GERVAIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on July 13, 2000, at Sherbrooke, Quebec, by

The Honourable Judge Pierre Archambault

Appearances

          For the Appellant:                                  The Appellant himself

          Counsel for the Respondent:           Anne-Marie Desgens

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed without costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of $10,702 for the 1995 taxation year and $5,351 for the 1996 taxation year are not taxable benefits.

Signed at Magog, Quebec, this 24th day of July 2000.

"Pierre Archambault"

         J.T.C.C.

Translation certified true

on this 6th day of February 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

---