Date: 20010109
Docket: 1999-3633-IT-I
BETWEEN:
SAMIR OSMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard at Edmonton, Alberta on December 15, 2000.
[2] So far as material, the Reply to the Notice of Appeal reads as follows:
7. In reassessing the Appellant for the 1995 and 1996 Taxation Years, the Minister of National Revenue (the "Minister") included an automobile standby charge and operating cost benefit in the amount of $11,556.00 and $11,556.00 respectively. Furthermore the Minister included an interest benefit in respect of an overdrawn shareholder's loan account for the 1995 and 1996 Taxation Years in the amount of $278.00 and $403.00 respectively.
8. In so reassessing the Appellant, the Minister made the following assumptions of fact:
(a) the Appellant is the 100% shareholder in 338806 Alberta Ltd. (the Company");
(b) the Appellant is an employee of the Company;
(c) the Appellant's spouse was not an employee or a shareholder of the Company;
(d) the Appellant and his spouse did not own any personal vehicles during the 1995 and 1996 Taxation Years;
(e) the Company provided various corporate vehicles for the Appellant for business and personal travel during the 1995 and 1996 Taxation Years;
(f) the Company owned a 1994 Dodge Caravan (the "Automobile");
(g) the Automobile cost the Company a total of $32,100.00 ($30,000.00 + (G.S.T.) $2,100.00);
(h) the Automobile was made available to the Appellant's spouse during the 1995 and 1996 Taxation Years;
(i) the Appellant or his spouse did not maintain a log to accurately detail personal and business use of the automobile;
(j) the Automobile was not used more than 90% for business purposes;
(k) the Company paid all operating costs of the Automobile;
(l) during the 1995 and 1996 Taxation Years the Appellant or his spouse did not pay any amounts to the Company or otherwise reimburse the Company for the use of the Automobile;
(m) the standby charge was calculated in both the 1995 ad 1996 Taxation Years as follows:
|
Standby charge |
|
|
Cost of the Automobile including G.S.T. |
$32,100.00 |
|
x 12 months |
|
|
x 2% |
|
|
$7,704.00 |
|
|
Plus Operating Cost Benefit |
|
|
Standby charge x ½ |
$ 3,852.00 |
|
Gross Benefit |
$11,556.00 |
(n) in the 1995 and 1996 Taxation Years the Company loaned funds to the Appellant throughout the year;
(o) throughout the 1995 and 1996 Taxation Years the shareholder loan account of the Appellant was in a debit position;
(p) the Appellant did not pay the Company any interest in respect of the borrowed funds throughout the 1995 and 1996 Taxation Years;
(q) in the 1995 and 1996 Taxation Years the Company conferred a benefit of $278.00 and $403.00 respectively on the Appellant in the capacity of shareholder.
[3] At the hearing of these appeals, the Appellant stated that he agreed with all of the facts set forth in the Reply as mentioned above but that he considered the 2% x 12 i.e. 24% rate for the calculation of the standby charge and the calculation of the operating cost benefit, based on that rate were excessive and usurious.
[4] The Appellant pointed to interest rates charged from time to time on the financing costs of new automobiles and attempted to compare that to the 24% rate for calculating the standby charge. The Auditor called by counsel for the Respondent stated that the Appellant was in effect comparing apples and oranges and that the standby charge was meant to quantify the value of the benefit obtained by the Appellant and/or his wife in having available to them for the entire two years a vehicle worth approximately $32,000.00. In other words there is little or no relationship between the standby charge rate and the interest charge on the financing of a car purchase.
ANALYSIS AND DECISION
[5] The relevant provisions of the Income Tax Act are as follows:
6(1) There shall be included in computing the income of a taxpayer in a taxation year as income from an office or employment such of the following amounts as are applicable:
6(1)(e) - where the taxpayer's employer ... made an automobile available to the taxpayer, or to a person related to the taxpayer, in the year, the amount, if any, by which
(i) an amount that is a reasonable standby charge for the automobile for the total number of days in the year during which it was made so available
exceeds
(ii) the total of all amounts, each of which is an amount (other than an expense related to the operation of the automobile) paid in the year to the employer or the person related to the employer by the taxpayer or the person related to the taxpayer for the use of the automobile;
...
6(1)(k) Automobile operating expense benefit - where
(i) an amount is determined under subparagraph (e)(i) in respect of an automobile in computing the taxpayer's income for the year,
(ii) amounts related to the operation (otherwise than in connection with or in the course of the taxpayer's office or employment) of the automobile for the period or periods in the year during which the automobile was made available to the taxpayer or a person related to the taxpayer are paid or payable by the taxpayer's employer or a person related to the taxpayer's employer (each of whom is in this paragraph referred to as the “payor”), and
(iii) the total of the amounts so paid or payable is not paid in the year or within 45 days after the end of the year to the payor by the taxpayer or by the person related to the taxpayer,
the amount in respect of the operation of the automobile determined by the formula
A - B
where
A is
(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
...
B is the total of all amounts in respect of the operation of the automobile in the year paid in the year or within 45 days after the end of the year to the payor by the taxpayer or by the person related to the taxpayer; and
...
6(2) Reasonable standby charge. For the purposes of paragraph (1)(e), a reasonable standby charge for an automobile for the total number of days (in this subsection referred to as the “total available days”) in a taxation year during which the automobile is made available to a taxpayer or to a person related to the taxpayer by the employer of the taxpayer or by a person related to the employer (both of whom are in this subsection referred to as the “employer”) shall be deemed to be the amount determined by the formula.
(There follows a formula which in simple terms provides that the reasonable standby charge is 2% of the cost of the car times the number of months the vehicle is made available.)
6(2.1) Where in a taxation year
(a) a taxpayer was employed principally in selling or leasing automobiles,
(b) an automobile owned by the taxpayer's employer was made available by the employer to the taxpayer or to a person related to the taxpayer, and
(c) the employer has acquired one or more automobiles,
the amount that would otherwise be determined under subsection (2) as a reasonable standby charge shall, at the option of the employer, be computed as if
(d) the reference in the formula in subsection (2) to “2%” were read as a reference to “11/2%”, and
(e) the cost to the employer of the automobile were the greater of
(i) the quotient obtained by dividing
(A) the cost to the employer of all new automobiles acquired by the employer in the year for sale or lease in the course of the employer's business
by
(B) the number of automobiles described in clause (A), and
(ii) the quotient obtained by dividing
(A) the cost to the employer of all automobiles acquired by the employer in the year for sale or lease in the course of the employer's business
by
(B) the number of automobiles described in clause (A).
[6] As I mentioned to the Appellant at the hearing of these Appeals, I am in no position to change the provisions of the Income Tax Act, even if I were to consider them usurious in certain aspects. The calculation is clear as set out in the above provisions and as applied by counsel for the Minister in the calculation made in the Reply.
[7] In other words, the Appellant in comparing the interest rate charged on the financing of the purchase of a new vehicle to the 24% rate was comparing apples to oranges. A comparison which is more reasonable would be between the 24% rate on a purchased vehicle and the rate charged on a leased vehicle. In this connection I quote from M. Tang and G. Katz, "Automobile Taxable Benefits and Expenses: Part 1" (1997), 45 Canadian Tax Journal 1150 at 1161.
MINIMIZATION OF THE STANDBY CHARGE
Lease Versus Buy
Although the federal government had intended that two-thirds of lease costs would generally be equal to 2 percent of the cost of an automobile, the standby charge for an employer-owned automobile is generally higher than for a comparable employer-leased automobile. The assumptions behind the legislation are that the monthly lease payments equal 3 percent of the cost of the automobile. However, this does not take into account the fact that the lease payments do not recover the entire cost of the automobile to the lessor; in other words, the lease payments assume that the vehicle has a residual value at the end of the lease term. The example set out in table 1 illustrates that the standby charge benefit on a $30,000 car is substantially less where the car is leased, rather than purchased. The lease payments would have to be $1,035 per month (including 15 percent sales taxes) in order for the standby charge to be equal to that for the purchased vehicle. This would be the case if the lease term were 36 months, the residual value were nil, and the interest rate were 6 percent.
[8] The only benefit I suggested that might be available to the Appellant was that provided in paragraph 6(2.1) of the Act, which in essence reduces the 2% per month rate to 1.5% with respect to automobile salesmen. However after due consideration, I believe the position of the Minister is correct. The reduction from 2% to 1.5% is at the option of the employer and the calculation is based upon automobiles acquired by the employer for sale or lease in the course of the employer's business. Those conditions were not present in these appeals. It was not the employer (or even the Appellant) who opted for the 1.5% rate and moreover the vehicle in question was not acquired by the employer for sale or lease in the course of the employer's business. The vehicle in fact was made available to the Appellant and his wife for the entire two years. It was not advertised for sale and was not part of the fleet of automobiles available for sale or lease.
[7] For the above reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 9th day of January, 2001.
"T. O'Connor"
J.T.C.C.