Tax Court of Canada Judgments

Date: 20030106

Docket: 1999-2737-IT-G

BETWEEN:

CRAIG L. DOBBIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

McArthur J.

[1]            These are appeals from assessments of tax for the 1990 and 1991 taxation years. The Appellant had his Corporation, Beachy Cove Investments Ltd. (B.C.) build a home at a cost in excess of $2.7 million. It is situated near St. John's, Newfoundland, where Canadian Helicopter Corporation (CHC) has its head office and helicopter facilities. The Appellant was chairman and chief executive office of CHC and controlled Craig Dobbin Ltd. Following an Agreed Statement of Facts, I am asked to decide the amount of benefit received by the Appellant from B.C. and the amount of shareholder debt to be included in the Appellant's income pursuant to subsections 15(1) and 15(2) of the Income Tax Act.

[2]            Originally, the Appellant's position was that only 19% of the home was for his personal benefit and the remaining 81% was used as facilities "to conduct business on behalf of CHC and its related group of companies, to receive clients, bankers and high ranking personnel of companies".

[3]            In reassessing, the Minister of National Revenue included the following amounts as benefits in the Appellant's income:

(i)             under subsection 15(1), $262,329 in 1990 and $148,818 in 1991;

and

(ii)            under subsection 15(2), shareholder loan (Craig Dobbin Ltd.) $643,773 in 1990 and $822,150 in 1991.

[4]            Prior to the hearing of the appeals, the parties filed a Statement of Agreed Facts, which states:

1.              In 1987 and 1988, a dual purpose facility (house, according to the Respondent) was built at Beachy Cove, Newfoundland, at a total cost of approximately $2,700,000.00 (Beachy Cove);

2.              Beachy Cove Investments Limited, owned 100% by the Appellant, was created as the corporate vehicle for building and financing Beachy Cove;

3.              Artwork and antiques, valued at an amount of no less than $834,000.00, purchased and owned by the Appellant personally, were situated in Beachy Cove during the years in issue;

4.              Beachy Cove was available for use and was used for business and personal purposes in the following percentages, respectively:

Taxation Year	Business	Personal
1990	40%	60%
1991	40%	60%

5.              The following rent was charged by Beachy Cove Investments Limited to Craig Dobbin:

Taxation Year	Rent Charged
1990	$174,700.00
1991	$316,600.00

6.              Beachy Cove Investments Limited recorded the rent as an account receivable from the Appellant. The receivables resulting from the rent charged was assigned by Beachy Cove Investments Limited to Craig Dobbin Limited. Craig Dobbin Limited is a corporation wholly owned by the Appellant;

7.              Craig Dobbin Limited increased the year-end balance in the Appellant's shareholder loan account by the assigned amounts;

8.              By Notice of Reassessment dated November 8, 1994, the Respondent increased the year-end balance of the Appellant's shareholder account in Craig Dobbin Limited and included in the Appellant's income, under subsection 15(2) of the Income Tax Act, the following amounts:

Taxation Year	15(2) inclusion
1990	$643,773.00
1991	$882,150.00

9.              The 1990 and 1991 year-end balances used by the Respondent to so reassess the Appellant included the amounts of $174,700.00 and $316,600.00, respectively.

10.            The Appellant and the Respondent have agreed that, excluding the issue of the artwork and antiques, the value of the additional subsection 15(1) benefit flowing from Beach Cove Investments Limited to the Appellant in respect of Beachy Cove during the 1990 and 1991 taxation years was as follows:

Taxation Year	Section 15(1) benefit assessed	Actual 15(1) Benefit (excl. art & antiques)
1990	$230,166.00	$99,094.00
1991	$87, 696.00	See Revised Schedule "A"

11.            The Appellant and the Respondent have also agreed that in computing his income for the 1991 taxation year, the Appellant is entitled to claim a business investment loss of an amount of $275,000 under section 39 of the Act;

12.            Apart from the items described as "subsection 15(1) rental benefit", and "subsection 15(2) shareholder loan", the Appellant accepts the reassessed items described in Paragraph 8 of the Respondent's Rely to Notice of Appeal;

13.            Taking into account paragraph 10, 11 and 12, the only remaining issues before this Court are:

(a)            What is the value of the subsection 15(1) benefit received by the Appellant from Beachy Cove Investments Limited for the 1990 and 1991 taxation years;

(b)            What is the amount of the subsection 15(2) shareholder debt.

Revised Schedule "A"

Craig L. Dobbin

Use of Company-Owned Home

	1990	1991
Total Cost of Project	$2,817,006	$2,805,016
Less: Total Cost of Two Guest Houses	215,000	215,000
Total Cost of Main Houses	$2,602,006	$2,590,016
Less: First Mortgage on Land Portion of Guest Houses	105,261	104,665
Company's Equity in Property	$2,496,745	$2,485,315
Prescribed Interest Rate	13.5%	10.75%
	337,060	267,175
Add: Total Operating Expenses	$197,634	245,201
	$534,694	$512,376
Less: Guest House Operating Expenses	6,761	17,995
Mortgage Interest-Guest Houses	18,243	17,341
Depreciation	53,368	51,444
Total Benefit	$456,323	$425,596
Less: Business Portion of 40%	182,529	170,238
Total Benefit	$273,794	$255,358
Less: Rent Paid	174,700	316,600
Total	$99,094	($61,242)
Taxable Benefit	$99,094	NIL

[5]            The only witness on behalf of the Appellant was Keith Stanford who was the accountant for the Appellant and his related companies other than CHC. I was not asked to draw any inference from the fact that the Appellant did not attend. None is drawn.

[6]            The parties agreed that the value of the benefit conferred on the Appellant by B.C. be determined by the equity rate of return method as set out in Revised Schedule "A" of the Statement of Agreed Facts. The equity rate of return that B.C. could have received in 1990 with the $2.7 million it spent on the home was $273,794. The Appellant paid B.C. $174,794, leaving him with a subsection 15(1) taxable benefit of $99,094 in 1990. The equity rate of return that could have been received by B.C. with the money it spent on the home was $255,358 in 1991. The Appellant paid $316,000 in rent to B.C. in 1991 overpaying the benefit received by $61,242. There obviously was no subsection 15(1) benefit conferred in 1991.[1]

[7]            The Appellant submits that the additional benefit imposed by the Minister of $99,094 in 1990 be reduced by deducting a value for B.C.'s use of the Appellant's artwork and antiques ("art") situate in the home. The art was valued, by agreement, at $834,000.

[8]            The Respondent states that B.C. did not receive a benefit from the art. B.C. was created by the Appellant to build and finance a home for himself. It was not a business - how could it enjoy a benefit from the art?

[9]            The Appellant adds that his shareholder loan account in 1991 should be reduced by $61,242 to reflect his overpayment for the use of B.C.'s home.

[10]          The Respondent states that this does not accurately reflect what occurred in the 1991 taxation year, but rather what might have occurred. In 1991, B.C. made a rental profit.

Analysis

[11]          First dealing with the art, the facts narrow down to the following. B.C. owned the $2.7 million home. The parties agree that it was used 60% of the time for personal purposes and 40% for business purposes. They agree that the value of the subsection 15(1) rental benefit flowing from B.C. to the Appellant was $99,094 in 1990 and nil in 1991.

[12]          The Appellant's position is that the $99,094 should be offset by a proportionate share of the $834,000 in art. The art was owned by the Appellant personally and he states that the rental benefit B.C. is giving him should be reduced by the benefit he is giving B.C. by placing his art in B.C.'s house. Counsel for the Appellant submitted that the value of the art should be taken into account, to what extent to be determined by subsequent agreement between the parties. He states that it should be taken into account for the same reasons the non-charging of interest was taken into consideration in Youngman v. The Queen.[2]

[13]          The Respondent submits that subsection 15(1) was not intended to account for benefits flowing from a shareholder to a corporation. It deals with the reverse only, that is benefits flowing from the corporation to the shareholder.

[14]          Youngman involved a taxpayer who lived in a luxury house built for him and his family by a company in which he was the controlling shareholder. The Court held that the taxpayer received a taxable benefit from the company yet the company had free use of $100,000 loaned to it by the Appellant. But for this interest-free money, the company would have incurred a financing cost from its building of the home. The Federal Court of Appeal found that the interest-free loan should be taken into consideration in the determination of the amount of the benefit to be included in the shareholder's income. The Appellant asks to expand this reasoning to include an amount for the Appellant's art in B.C.'s home.

[15]          As stated, the question is should B.C. be charged by the Appellant for having received a benefit from his art? Obviously, no rental fee was paid by B.C. to the Appellant for the art. If this was an arm's length transaction, B.C. would pay a fair market value rental fee and the Appellant would declare this fee as income.[3] This is not what the Appellant seeks. He requests a personal credit from B.C. without including it in his personal income.

[16]          The present facts are readily distinguished from those in Youngman. In Youngman, interest on the $100,000 loan was an integral cost of building the home. In the present case, the value of this art is in no way factored into the cost of the home. The attributed rental of B.C.'s home to the Appellant is a completely separate and unconnected transaction from the art.

[17]          In Donovan v. The Queen,[4] at the taxpayer's direction, a family corporation took title to a Florida residence. Substantial interest-free advances were owing by the corporation to the taxpayer. The Minister of National Revenue included in the taxpayer's income a subsection 15(1) benefit in respect of his exclusive use of the residence. At the trial level, Judge Teskey rejected the taxpayer's argument that the non-interest bearing loans owing to him by the corporation negated the benefit he derived from the use of the residence. The taxpayer appealed and the Federal Court of Appeal agreed with Teskey J. stating at page 6086:

... the value of the benefit was not reduced by credit balances in the shareholders loan accounts for the years in question as there was no connection between the loan and the costs incurred in acquiring the property.

This conclusion in Donovan applies equally to the present case. There is no connection between the art and the costs incurred in acquiring the house. While it is not necessary to continue, I agree with the Respondent's position that if B.C. did receive a benefit from the art then B.C. should have a rental expense and the Appellant must declare a corresponding amount as rental income pursuant to sections 3 and 9 of the Income Tax Act following the reasoning in Donovan.

[18]          The following analogy mirrors the present situation. In an arm's length transaction, a taxpayer loans a landlord $800,000, interest-free, the market interest rate amounting to $4,000 monthly. The landlord in turn enters into a rent-free lease with the taxpayer for a residential property of equal value. Again, the market rental value being $4,000 monthly. There is a wash or offset. There is no exchange of money, yet at law, both parties must include $4,000 monthly in their incomes pursuant to sections 3 and 9.

[19]          The Appellant took issue with the Respondent introducing the offset argument because it was not raised in the Respondent's pleadings. It is not necessary to deal with the Appellant's objection because I have found that the Act does not recognize the benefit suggested by the Appellant. In addition, I agree with the Respondent's supplementary submissions. The Appellant did not plead offset in the Notice of Appeal and by raising the issue at hearing, the Respondent was forced to address it. Proceedings by the Appellant at the objection level are not considered pleadings before this Court.

[20]          I will now deal with the treatment of the 1991 overpayment by the Appellant to B.C. The Appellant submits that the subsection 15(2) loan inclusion[5] for 1991 must be reduced by the overpayment of rent by the Appellant to B.C. In 1991, the total benefit to the Appellant from B.C. for use of the home was $255,358. The Appellant is credited with payment of $316,600 in rent. He requested that his 1991 shareholder loan account be credited with the $61,242 overpayment. Obviously, there was an overcharge. I have no doubt that this was an error that should be corrected unless such is prohibited by the Act.

[21]          Subsection 15(2) reads as follows:

15(2)        Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is

(a)            a shareholder of a particular corporation,

(b)            connected with a shareholder of a particular corporation, or

(c)            a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation

and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnership, ...

[22]          The Respondent stated in argument that the Appellant requests a reduction in the shareholder loan account to reflect the overpayment and submitted that this does not accurately reflect what occurred. Counsel stated that it boils down to:

Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what he actually did, not based on what he could have done and certainly not based on what a less sophisticated taxpayer might have done.[6]

[23]          I accept that the Appellant intended to charge an amount equal to the benefit. Since B.C. included the overpayment in its revenue, the Appellant should be allowed to reduce his shareholder loan by the same amount.

[24]          As stated by McLaughlin C.J. in Shell: "Courts must be sensitive to the economic realities of a particular transaction rather than being bound to what first appears to be its legal form". She adds that there are at least two caveats to this rule, which I do not feel apply. There is no doubt that the Appellant intended that the 1991 overpayment be equal to the benefit.[7] Through no fault of the Appellant, the benefit in 1991 was overstated and should be corrected to reflect the economic realities of the transaction. By doing so, the taxpayer's bona fide legal relationship is not recharacterized.

[25]          The appeal from the assessment of tax for the 1990 taxation year is dismissed and the appeal for the 1991 taxation year is allowed only to reduce the shareholder loan by $61,242. No costs are awarded.

Signed at Ottawa, Canada, this 6th day of January, 2003.

"C.H. McArthur"

J.T.C.C.

COURT FILE NO.:                                                 1999-2737(IT)G

STYLE OF CAUSE:                                               Craig L. Dobbin and Her Majesty the Queen

PLACE OF HEARING:                                         Montréal, Québec

DATE OF HEARING:                                           September 5, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge C.H. McArthur

DATE OF JUDGMENT:                                       January 6, 2003

APPEARANCES:

Counsel for the Appellant: Pierre Barsalou and Danislan Saverimutha

Counsel for the Respondent:              John P. Bodurtha and Christa McKinnon

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Pierre Barsalou

Firm:                  Barsalou Lawson

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-2737(IT)G

BETWEEN:

CRAIG L. DOBBIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on September 5, 2002, at Montréal, Québec, by

the Honourable Judge C.H. McArthur

Appearances

Counsel for the Appellant: Pierre Barsalou and

                                                                                Danislan Saverimutha (Student-at-law)

Counsel for the Respondent:              John P. Bodurtha and Christa McKinnon

JUDGMENT

                The appeal from the assessment of tax made under the Income Tax Act for the 1990 taxation year is dismissed.

                The appeal from the assessment of tax made under the Act for the 1991 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant's shareholder loan account is reduced by $61,242.

                No costs are awarded.

Signed at Ottawa, Canada, this 6th day of January, 2003.

"C.H. McArthur"

J.T.C.C.