Tax Court of Canada Judgments

Date: 19980309

Dockets: 96-1301-IT-G; 96-1398-IT-G

BETWEEN:

JOMANIC-CAN INC., GEORGES D’AOUST,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

Sarchuk, J.T.C.C.

[1] The appeals of Jomanic-Can Inc. (the corporation) and Georges D’Aoust (D’Aoust) from assessments of tax with respect to their 1991, 1992 and 1993 taxation years were heard together on common evidence.

[2] At all relevant times, D’Aoust was the sole shareholder of the corporation, the primary activity of which was the construction of commercial and residential projects throughout the Baffin region. For a number of years, the corporation maintained its office in a warehouse building (the warehouse) in Iqaluit, Northwest Territories. In 1991, the corporation completed the construction of a large complex adjoining the warehouse. This complex consisted of a luxury home for D’Aoust and four apartments (the corporate residence), an office area, a conference area and a garage. Concurrently, the warehouse was renovated and was connected to the new complex by way of an enclosed walkway. The total construction costs of the complex (including the renovations to the warehouse) amounted to $785,611.

[3] In 1991, D’Aoust lived in a two-bedroom apartment which formed part of the warehouse owned by the corporation. He paid no rent. In assessing D’Aoust for that taxation year, the Minister of National Revenue (Minister) included in income shareholder benefits with respect thereto in the amount of $5,556.

[4] In assessing D’Aoust for taxation years 1992 and 1993, the Minister included in income shareholder benefits in respect of use of the corporate residence in the amounts of $43,974 and $38,982, respectively, and an interest benefit in respect of utilities, heat and property taxes paid on the corporate residence in the amount of $17,879 in each of those years.

[5] In 1991, the corporation capitalized the total construction costs of $785,611 and capital cost allowance (CCA) was taken in each of 1991, 1992 and 1993. In reassessing, the Minister, inter alia, reduced the CCA (due to the removal of the corporate residence) in the amounts of $11,784, $23,097 and $22,173, respectively. In addition, the Minister by his reassessment removed 75% of the undepreciated capital cost of the complex (i.e. relating to the corporate residence and personal use of the apartments) in the amount of $589,208 in taxation year 1991. The Minister further disallowed as a business expense the amounts of $17,879 in each of 1992 and 1993 as representing the portion of utilities claimed in those years related to the corporate residence.[1]

[6] In assessing D’Aoust, the Minister relied, inter alia, on the following assumptions:

With respect to taxation year 1991:

1. D’Aoust resided in an apartment owned by the corporation and attached to the warehouse.

2. D’Aoust paid no rent to the corporation.

3. A reasonable estimate of the value of the benefit conferred on D’Aoust by the corporation in the 1991 taxation year was $5,556.

With respect to taxation years 1992 and 1993:

1. The luxury home consisted of living quarters and a swimming pool and trophy room.

2. Three of the apartments were occupied by D’Aoust’s nanny, D’Aoust’s son, the daughter of Labelle (Noella Labelle, the common-law spouse of D’Aoust); the fourth apartment was empty.

3. Not less than 75% of the construction costs related to the luxury home and four apartment suites.

4. In each of 1992 and 1993, the corporation credited D’Aoust’s shareholder loan account - $12,000 for use of the residence and for food expense.

5. In 1992 and 1993, an investor could expect rates of return at the prescribed rates per the Income Tax Act on an effectively risk-free investment.

6. A reasonable estimate of the value of the benefit, the use of the residence, conferred on D’Aoust by the corporation in the 1992 and 1993 taxation years was $43,974 and $38,082, respectively.

7. Not less than 50% of the heating and property taxes and the portion of utilities claimed in 1992 and 1993 related to the luxury home and four apartment suites.

8. A reasonable estimate of the benefit, of heating, property taxes and utilities in the 1992 and 1993 taxation years was $17,879 in each of both years.

[7] With respect to the corporation, the Minister’s assessment was based inter alia, on the assumptions that:

1. Not less than 75% of the construction costs relate to the luxury home and four apartment suites.

2. Not more than 25% of the total construction costs relate to property used for the purpose of gaining or producing income from a property of business.

3. Not more than 50% heating and property taxes and the portion of utilities claimed in 1992 and 1993 related to the luxury home and four apartment suites.

[8] A number of other issues were raised by the Appellants in their respective pleadings. All but the foregoing have been abandoned or settlements have been reached.

Evidence

[9] Mr. D’Aoust is a general contractor and has carried on that business for a number of years. He is knowledgeable in all phases of construction, project management and does most of the estimating for the corporation. The bulk of the corporation’s income is derived from government and municipal projects since there is not much in the way of private-sector construction in Iqaluit.

[10] The decision to construct the complex was taken in 1989. Concurrently, D’Aoust decided to renovate the warehouse and to convert his former living quarters and the corporate offices into rental apartments.[2] Building materials were ordered as early as 1989, construction began shortly thereafter and was completed towards the end of 1991. D’Aoust moved into his new residence as of the beginning of 1992.

[11] The Appellants maintain that the primary purpose for the construction of the complex was to provide new offices for the corporation, as well as accommodation for the engineers, architects, the accountant and others who had occasion to travel to Iqaluit to do business with the corporation. According to D’Aoust, alternative accommodation was scarce and expensive and this was important since the cost was often borne by the corporation.

[12] The Appellants contend that the Minister erred in assessing on the basis that 75% of the total construction costs related to D’Aoust’s residence and the four apartment suites. They asserted that the buildings (i.e. both complex and warehouse) were used primarily for the corporation’s business and that D’Aoust’s personal living area represented but a small portion of the total. They conceded that D’Aoust had the benefit of the use of the trophy room and pool area, but argued that these sections were used primarily for business meetings and gatherings. On this basis, the Appellants initially contended that 87% of the total area was dedicated to business use.

[13] At trial, counsel for the Appellant conceded that the pleadings understated D’Aoust’s personal living area and proposed a “use” calculation for the warehouse and complex combined, the result of which was to increase the personal use portion to 37%. Applying this to the total cost, he would reduce the construction cost to be allocated to personal use to $290,450. I do not propose to review this calculation in depth since in my view, there is simply no acceptable evidence to support it.[3]

[14] On the evidence, it is fair to say that the creation of a unique residence designed to accommodate D’Aoust’s personal requirements was the major factor in the construction of the complex.[4] The living area was well finished with oak trim and fittings, a spiral oak staircase to the second level and a mezzanine to the master bedroom which overlooked the pool. Initially, D’Aoust contended that the trophy room and pool area were used for business meetings as well as personally. However, in the course of his evidence, it became apparent that if there was any business use, it was minimal. The trophy room is some 1,200 square feet in size and is used by D’Aoust to display his hunting trophies which include approximately 100 mounted heads and a number of animals including a polar bear, a leopard, a lesser kudu and a muskox. Although he testified that these had relatively no value, in an asset statement prepared for a bonding company, the current value of the trophies was listed at $100,000. The evidence adduced provides little support for the Appellants’ assertion that there was some business purpose behind the construction of the trophy room and indeed, the pool area.

[15] I am also satisfied that the Minister was correct in treating the apartment units in the complex as personal assets in the taxation years in issue. At all relevant times, one of the one-bedroom apartments was used by the Appellant, D’Aoust, to house the housekeeper/nanny. The evidence is that D’Aoust’s son used one of the suites for the better part of 1993 and the daughter of Noella Labelle, D’Aoust’s spouse, used a bedroom unit for the better part of one year as well. The remaining suite and the bedroom unit were used variously by D’Aoust’s parents, other relatives, relatives of his spouse and friends. D’Aoust said that to the best of his recollection, the suites had also been utilized by architects and other individuals with whom he did business in the two taxation years. Unfortunately, his vague generalizations as to the nature and extent of such business activities in those years make it virtually impossible to reach any conclusion with respect to the extent of the use. D’Aoust did concede that none of the individuals who used the facilities in those years were ever charged or paid any rent, nor was any record whatsoever kept of their comings and goings.

[16] It is clear that the Minister’s assessments with respect to the corporate benefits to D’Aoust in 1992 and 1993 were based on the amount of $589,208 which was assumed to be the capitalized cost to construct the corporate residence.[5] It was the Appellants’ responsibility to demonstrate by way of acceptable evidence that this assumption was wrong. In my view, given the nature of the construction required for D’Aoust’s residence, the apartments, the trophy room and pool is difficult to accept D’Aoust’s attempts to justify his rule of thumb construction costs as being applicable equally to the warehouse renovations and to the construction of the complex.

[17] In the alternative, counsel argued that the amount of $237,000 representing the cost of the renovations to the warehouse, should be subtracted from the total construction cost and further adjustments should be made for the business use of the garage and apartment suites in the complex. This submission was premised on D’Aoust’s estimates of the cost of renovating the warehouse based on a general “rule of thumb”. It was conceded that since the renovation to the warehouse and the building of the complex was performed together, there was no way of being precise. Accordingly, D’Aoust applied his “rule of thumb” estimates with respect to the cost of various parts of the construction ranging from $36 per square foot to $72 per square foot.

Conclusion

[18] With respect to the alternative submission, I can say without equivocation that on the testimony before me, any attempt to calculate or otherwise determine the cost of the renovations to the warehouse would be an exercise in sheer speculation. I note that on several occasions, Revenue Canada asked the Appellants to provide “approximate costs” for each of the following areas of the complex: the corporate residence, the four apartments, the corporate office, the garage, the link to the warehouse, as well as for the warehouse renovations. The Appellants claimed that such details were not available and provided nothing more than a schedule of expenses broken down into categories such as wages, material, subcontracts, professional fees, etc. It is evident from D’Aoust’s testimony that no effort was made to allocate the cost of construction between the complex and the warehouse renovations or between personal and business use. Given the nature of the residence being constructed, it is hard to believe that this was inadvertent.

[19] Given that the cost of construction of the complex included the installation of a heated pool, a large Jacuzzi in the master bedroom, a feature fireplace in the trophy room and other touches, it is difficult to see how D’Aoust proposes to justify his comments that the costs of renovation and the costs of the building of the complex were relatively speaking the same.

[20] The major obstacle which the Appellants in these appeals face was created by their failure to distinguish, and more importantly, to keep proper track of business and personal expenses. The result is that today D’Aoust finds himself in the position of attempting to provide a best estimate of the allocation of building costs as between the old warehouse renovations and the construction of the new residence/office. Notwithstanding his experience in the construction business, I find that his testimony falls far short of establishing, on a balance of probabilities, that the Minister’s assessments were wrong.

[21] The Minister calculated an imputed interest benefit to D’Aoust for 1992 and 1993 based on the capitalized cost to construct the corporate residence. In so doing, the Minister utilized the prescribed rates set out in the Income Tax Act and reduced the benefit by $12,000 to reflect the charge to the shareholder loan account for personal use of the corporate residence in those years. Although counsel questioned the validity of the amounts, I am satisfied that there was no error on the part of the Minister in assessing as he did. As well, with respect to utilities, property taxes and heating that were assessed to the Appellant, D’Aoust, there is simply no evidence before me to demonstrate that any amount other than the amount assessed should be considered. Frankly, the Appellant, D’Aoust, has not discharged the onus upon him with respect to any of the foregoing submissions.

[22] As previously indicated, several issues have been settled between the parties. In result, the appeal of D’Aoust with respect to the 1991 taxation year is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that he is entitled to claim an advertising and promotion expense in the amount of $1,866. As well, the corporation had credited D’Aoust’s shareholder loan account for $5,000 in 1991 with respect to the use of the Appellant’s motor vehicle. This amount was treated by the Minister as a benefit from the corporation in his assessment. The parties now agree that no such benefit was received by D’Aoust. He is entitled to no other relief in that year. With respect to taxation years 1992 and 1993, the appeals are dismissed.

[23] The appeal of the corporation with respect to its 1992 taxation year will be allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to deduct a travel expense of $2,800. The corporation is entitled to no further relief in that taxation year. With respect to the taxation years 1991 and 1993, the appeals are dismissed.

[24] In these appeals, there will be one set of costs to the Respondent, to be taxed.

Signed at Ottawa, Canada, this 9th day of March, 1998.

"A.A. Sarchuk"

J.T.C.C.

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