Date: 20000926
Docket: 98-2695-IT-G,
1999-490-IT-G
BETWEEN:
LAWRENCE RYCHJOHN,
RYCHJOHN INVESTMENTS LTD.
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasonsfor Judgment
Rip, J.
[1] Lawrence Rychjohn and Rychjohn Investments Ltd. ("Investments") appeal assessments of income tax for 1991 and 1992.[1]
[2] The issue for both years arise from the use by Mr. Rychjohn, a shareholder, director and officer of Investments, of a house built and owned by Investments in Kelowna, British Columbia. The Minister of National Revenue ("Minister") assessed Mr. Rychjohn pursuant to subsection 15(1) of the Income Tax Act ("Act") and sections 4300 and 4301 of the Regulations to the Act by adding to his income for 1991 and 1992 benefits conferred on him by Investments. The benefits represented the value of the property used by Mr. Rychjohn and expenses incurred by Investments in maintaining the house. For 1991 the Minister included the amount of $83,314.24 in Mr. Rychjohn's income, the amount being the aggregate of $69,875.01 as a benefit on the amount of $14,443.23 representing costs of operating the house paid by Investments, including insurance, utilities, repairs and a loan committal fee. The Minister added the amount of $59,618.44 in Mr. Rychjohn's income, representing a benefit of $48,720 and costs of operating the house of $10,868.44.
[3] The issue in Investments' appeals is whether the corporation is precluded from deducting, in computing its income, the amount of $4,858, being a loan commitment fee with respect to financing the house pursuant to paragraphs 18(1)(a) and 18(1)(h) of the Act. The parties agreed that the corporation's appeals would follow the result of Mr. Rychjohn's appeals.
[4] Mr. Rychjohn, a resident of Saskatoon, is president of Investments; he and his wife, Mrs. Rychjohn, each own 50 per cent of its issued shares. The Rychjohns reside in Saskatoon. The corporation carries on the business of developing and selling real estate property in Saskatoon and participating in joint ventures in Saskatchewan and Manitoba. At times relevant to these appeals, Investments built multi-unit residential buildings in the Kelowna area of British Columbia.
[5] Mr. Rychjohn is the "main player" in Investment's development business; Mrs. Rychjohn manages the corporation's card shops. Except for a small commercial centre in Kelowna called Creekside Plaza, Investments has sold everything it built. From about 1972 when he carried on the development business in his own name, to the time of trial, Mr. Rychjohn estimated he and Investments built approximately $200,000,000 worth of real estate. Investments' first project in Kelowna was in 1986, the construction of a block of 152 rental units. In 1988 Investments and Normandale Holdings Ltd. agreed to sell a development known as Mission View Estates in Kelowna and they used the sale proceeds to buy land for a 198-unit apartment condominium complex project in Kelowna called Bridgewater Estates. Normandale Holdings Ltd. ("Normandale") was owned by Mr. Robert Ian Van Norman, a Saskatoon neighbour, friend and business associate of Mr. Rychjohn.
[6] The residence in issue is located on prime lakeshore property, four miles south of downtown Kelowna, British Columbia. The property was encumbered by an easement and a creek meandered along the property. This required any house to be built back from the lake and this affected adversely the view of the lake from the house. The Normandale house did not have this problem. The lot on which the residence is built is referred to as Lot 5, Eldorado Court. Mr. Van Norman's house is on Lot 6. (The Rychjohn house is sometimes referred to as the "Eldorado house".)
[7] Mr. Rychjohn testified that the Eldorado house was built by Investments to test the high-end housing market in Kelowna. The homes Investments was building in Kelowna at the time were not "high-end". Since more than half of his time was attending to business in Kelowna, Mr. Rychjohn said he planned to make use of the house, rather than a hotel, when in Kelowna.
[8] Mr. Rychjohn said he first became interested in the Eldorado lot when it was brought to his attention by a water and sewer contractor at the time Investments was building the Bridgewater project. The contractor, Mr. Dan Nomis, told Mr. Rychjohn there were high-end lots for sale on Eldorado Court, that the developers were "short-financed" and "there was a deal to be had". Mr. Nomis had purchased a lot. Normandale and Investments purchased two contiguous lots, Lots 5 and 6, for $180,000 each. At trial, Mr. Rychjohn was of the view that the asking price per lot was $300,000 but he got a good deal because two lots were being purchased together and due to his ability to negotiate and haggle a lower price. Respondent's counsel suggested to Mr. Rychjohn that the price he paid for the Eldorado Court lots was the asking price; it was no bargain. Mr. Rychjohn persisted in his view that he did get a bargain. The evidence was that lots on Eldorado Court, without easements, sold for between $180,000 and $200,000. Mr. Rychjohn was surprised "to hear people got those same prices".
[9] Mr. Rychjohn described his thinking in acquiring the Eldorado lot for Investments:
Well, my intention was simply that if, lookit, if I can buy something for 180 grand and I think it's worth 300,000, right away, I have picked up 100 grand just on the lot. And I had the vision to see that and I knew there was that money to be made for sure, but the intention then became further enhanced that lookit, we are building Bridgewater Estates and we are negotiating major sub-trades, you know, $14,000,000 worth of sub-trades. There's a chance that maybe there's a further profit by building a house or two houses on these properties and I'm not ashamed to say it, I got some fabulous deals. I never got in free, but I got some fabulous deals in building the Eldorado homes via the Bridgewater Estates. So I thought there was another 100,000 or more and then I also could visualize that the market is - is going up. I mean, we're talking '88, '89, you know, I can see the markets going up and I was right, I was dead-on. The market was starting to fly high. So here I am, I'm a 100,000 to the good on the lot, I'm a 100,000 on the sub-trades, I'm already 220,000 ahead of the game without even doing anything. I just know I could flip it, but I also knew there was an appreciation coming and lakefront properties was pretty scarce and to be quite honest with you, I thought I was going to make a half million dollars on that particular job and I was proved wrong, but I - boy, I thought it was there.
[10] Mrs. Rychjohn was not aware of the purchase, Mr. Rychjohn testified, until he informed her. On or about November 2, 1988, he engaged the same architect who designed two of his other projects, including Bridgewater Estates, to design the Eldorado house. Mr. Rychjohn said he did not "pay attention" to the architect's description of the project, that it was "a single family residence for Mr. and Mrs. Lawrence Rychjohn". The only instructions he said he gave to the architect was to design a house to fit the lot within the boundary and easement. The eventual area of the house was 4,000 square feet. The appellant chose the exterior of the house to be clad in tyndelstone, which was described as "a unique feature", the hot tub, pool, dock and three-car garage, "everything you need for a million dollar house".
[11] According to Mr. Rychjohn, the houses on Eldorado Court were built "as part of the Bridgewater project". Also, in August 1990, Investments started construction of Creekside Villas, consisting of 264 condominium units, and Creekside Plaza, a shopping plaza; construction was completed in 1993. Mr. Rychjohn and Investments continued to be active in the Kelowna area well into the 1990s.
[12] Investments and Normandale entered into a joint venture agreement on March 13, 1989 for Bridgewater Estates which consisted of four paragraphs, two of which related specifically to construction of the two homes on Lots 5 and 6 on Eldorado Court: the homes would be built for the purpose of investment, Investments would be the development manager for no fee, each party would have its own title and all costs to the two homes would be borne equally up to a described finished stage; a common dock and boat facility for both lots would be built under the joint venture account.
[13] Lots 5 and 6 (including improvements) were transferred to the co-venturers in 1991, Lot 6 to Normandale and Lot 5 to Investments. In 1992 Normandale transferred ownership of Lot 6 to Mr. and Mrs. Van Norman. The Eldorado house was listed as a fixed (capital) asset in the joint venture statements included in the 1990 and 1991 tax returns of Investments as follows:
|
1990 Net Book Value |
1991 Net Book Value |
|
|
Land |
$181,573.00 |
$ NIL |
|
Land Improvements |
$ 450.00 |
$ NIL |
|
Subtotal |
$182,023.00 |
$ NIL |
|
Building |
$314,077.00 |
$ NIL |
|
Equipment |
$ 2,319.00 |
$ NIL |
|
Pool |
$ 13,899.00 |
$ NIL |
|
Dock |
$ 11,850.00 |
$ NIL |
|
Subtotal |
$342,145.00 |
$ NIL |
|
Total |
$524,168.00 |
$ NIL |
[14] The Eldorado house was completed in December 1990. An occupancy permit was obtained for the Eldorado house in March 1991 and the house was put up for sale with Mr. Colin Bull, a licensed realtor, in September 1991 for $795,000. Mr. Rychjohn stated Mr. Bull told him the "house should be anywhere from $750,000 to $900,000". According to Mr. Rychjohn, the house was a multiple listing, a sign was placed on the front yard and it was advertised in the newspapers. Mr. Rychjohn was not present at any "showing" of the house to prospective purchasers. He said he did "bug" Mr. Bull "a lot" but the house did not sell. He finally changed agents on or about June 14, 1994.
[15] The second real estate agent, Ms. Joan Marie Richter, according to Mr. Rychjohn, had a "fabulous reputation". She informed him the house was not a $1,000,000 house on a market that was starting to "crumble". He never reduced the price while the house was listed with Mr. Bull because the market was steadily rising and he thought someone would buy it.
[16] Mr. Bull had two offers to purchase, both verbal. The first offer included a trade and the second was for about $700,000 but was subject to the sale of the purchaser's home. Mr. Rychjohn did not consider these offers "appropriate".
[17] During the time the Eldorado house was listed for sale, Investments experienced financial difficulties with cost overruns on its projects. A mortgage was registered against the Eldorado house to secure a line of credit to Investments for $500,000 to fund its projects. The house was also used by Investments as security, to the extent of $150,000 for a letter of credit and bonding on a project.
[18] Mr. Rychjohn estimated he spent about a dozen days a month, on average, in Kelowna from 1986 on. Usually he would travel from Saskatoon by car; a trip took thirteen hours. On the way he would visit projects in North Battleford and Lloydminster and also attend at the architect's office in Calgary. In Kelowna, he recalled, he would usually stay at a hotel at a cost of $85 to $150 per night. All expenses were paid by Investments. When the Eldorado home was built he stayed on that property to save hotel costs, but also, at times, stayed at a hotel. Mr. Rychjohn could not produce logs of his travel to Kelowna or his stays at the Eldorado house.
[19] On a few occasions, when Mr. Rychjohn went skiing in the Kelowna area, he also stayed at the Eldorado house. To relax after work he would "unwind" on an "old" boat docked at the Eldorado house. The family did use the house from time to time. His son spent a week at the house in 1991 while working in Kelowna and a daughter stayed at the Eldorado house for several days subsequent to the years under appeal when her house was being built in Kelowna.
[20] The beneficiaries and owners described on the insurance policy for the Eldorado house were Mr. and Mrs. Rychjohn. This, Mr. Rychjohn testified, was a mistake. He could not say who paid the premiums for the policy.
[21] Invoices issued to Mr. Rychjohn for the house were paid by the project, he said. I assume he meant the Bridgewater joint venture.
[22] Mr. Rychjohn stated that he and Mrs. Rychjohn also built for resale two homes in Kelowna. One house was built in 1996 and sold for a substantial profit. The other house was built on Lot 12 in Eldorado Estates "as a show home" and was also sold at a profit. Mr. Rychjohn testified that these homes were owned by him and his wife due to the difficulties he was having with the tax authorities at the time.
[23] Mr. Rychjohn acknowledged that he had been convicted of tax evasion for the years 1989 to 1993 for failing to report income on money deposited in his and Mrs. Rychjohn's personal bank account by contractors for Creekside Villas and Creekside Plaza. In 1992 contractors paid Mr. Rychjohn $22,000 out of contracts it had with Investments. Respondent's counsel asked that I consider these convictions in assessing Mr. Rychjohn's credibility.
[24] Mr. Bull, the original realtor engaged by Mr. Rychjohn, was in semi-retirement at the time of trial. He testified he sold "primarily high-end residential" properties, but not exclusively high-end. Mr. Bull said "high-end" properties during the period 1980 to 1996 sold in the range of $250,000 to over $800,000, although he could not say whether any house in Kelowna sold in 1991 for $800,000. The listing price of $795,000, Mr. Bull recalled, "was probably Mr. Rychjohn's price but we didn't feel uncomfortable with the price . . . It was not out of line". Prices were "picking up".
[25] However, Mr. Bull could not sell the house notwithstanding that he showed the property on about 20 to 30 occasions during the 29 months the property was listed with him. No valuation or appraisal of the house had been prepared, as far as he was aware. Mr. Bull did not know that the property was appraised in 1991 at $650,000. According to Mr. Bull, only one offer for the property was made while he was listing agent, the offering price of which he could not recall.
[26] During the times Mr. Bull visited the property he rarely saw Mr. Rychjohn and saw only the "bare necessities" of furniture in the house. The family room contained a television set, coffee table and chesterfield and only two of the four bedrooms had a bed. The dining and living rooms were empty.
[27] Ms. Joan Marie Richter who replaced Mr. Bull as listing agent in June 1994, is one of the leading real estate agents in British Columbia. She impressed me as a very highly qualified, knowledgeable and aggressive agent, much more so than Mr. Bull. She showed Mr. Rychjohn sales of residential properties in the Kelowna area during the past year and she convinced Mr. Rychjohn that the listing price be reduced to $775,000. Ms. Richter acknowledged that she did not expect to receive an offer for the asking price; she anticipated receiving an offer of about $30,000 to $40,000 less.
[28] Ms. Richter noted that the house was made of brick and there are not many brick homes in Kelowna. The yard was "meticulous". She agreed with Mr. Bull that the house was sparsely furnished and that she rarely saw Mr. Rychjohn on her visits to the house; she would know he was in Kelowna when she would see his toiletries.
[29] Until 1993 housing prices in Kelowna were increasing in value. Between June 1994 and February 1995, the market was "dropping". Only in 1998-1999 did the market "settle out", she said. However, Ms. Richter was "grateful" to obtain the Eldorado house listing since "any lakeshore listing is a good listing". The listing was renewed with Ms. Richter in October 1994 but the listing price was reduced to $749,900 on her recommendation.
[30] At least two offers to purchase were received by Ms. Richter, one on November 28, 1994 for $650,000, which she considered low. The offer was eventually increased to $671,000, but then cancelled. The second offer was made on February 8, 1995 for $700,000. After a counter-offer was made by Investments, the prospective vendor and purchaser agreed on a price of $690,000, subject to the sale of the purchaser's home. Mr. Rychjohn would also have free use of the purchaser's home for two months after the sale and thereafter would pay rent. (Apparently, Investments was about to start construction at the time of a new development near Kelowna.) The transaction closed on March 31, 1995.
[31] Mrs. Rychjohn testified that she had absolutely no interest in moving from Saskatoon to Kelowna. She denied having "input" into the design or furnishings of the Eldorado house as she did, for example, for the family's main residence in Saskatoon and recreation residence at Turtle Lake. While she may have made some suggestions for wallpaper or landscaping, the layout of the house was not what she desired. For example, there was no eating area in the kitchen. As far as she was concerned, her husband built the house "to flip it and make money".
[32] When she visited Kelowna with her husband or for business - she managed Investment's card store in Kelowna - or to visit her daughter, Mrs. Rychjohn would stay at the Eldorado house only occasionally. Usually she would stay with her daughter. (I assume this would be after 1992.) She did not consider the Eldorado house her home.
[33] Mrs. Rychjohn did not enjoy being cross-examined by respondent's counsel. She could not confirm that her daughter had her own house only in 1993. She did confirm she travelled to Kelowna by air on about eight occasions between June 1991 and October 1992. At other times she drove with Mr. Rychjohn. She could not recall if she suggested a landscape design for the house. She could not recall if it was she who chose the moulding or the windows for the house. She remembered meeting an interior designer, Ms. Lisa Howard, to make the home more sellable but could not recall anything concerning design details.
[34] Lisa Howard operated an interior design business in Kelowna when she was visited in her studio by Mr. Rychjohn on November 19, 1989. She attended at the Eldorado property the next day. Mr. Rychjohn had told her he was building a house but there were design problems, in particular with the master bedroom and family room. She understood that she was engaged by Mr. Rychjohn to "correct architectural issues". Ms. Howard believed that he was building a vacation home. Mr. Rychjohn asked her to ensure various rooms "functioned well", that there was a view of the lake, that lighting, the television and the fireplace be properly placed in the family room. Mr. Rychjohn was specific with the changes he wanted.
[35] The Crown suggested through Ms. Howard's evidence, that Mr. Rychjohn's interest in the Eldorado property was personal. For example, the house exterior and the fireplace were made of tyndelstone, a stone native to Saskatchewan and not used in Kelowna. Ms. Howard declared she never worked with tyndelstone. She said she "completely redesigned" the ensuite bathroom. However, she had not yet met Mrs. Rychjohn. She said she had the "impression" Mrs. Rychjohn was involved "and her preferences were being considered". Ms. Howard recalled that Mr. Rychjohn made many references to Mrs. Rychjohn and "his and Pat's preferences". On some occasions, he told Ms. Howard he would defer to his wife. It was only on June 12, 1990, that she met with both Mr. and Mrs. Rychjohn to make final decisions and to receive final instructions.
[36] Ms. Howard's invoices for services, starting on January 1990, were sent to Mr. Rychjohn, although accompanying explanatory notes, also addressed to Mr. Rychjohn, referred to both Mr. and Mrs. Rychjohn or Mr. Rychjohn alone. Various proposed designs were also addressed to Mr. and Mrs. Rychjohn.
[37] Mrs. Rychjohn, according to Ms. Howard, had input with respect to colouring in the house. She chose the wallpaper, tiles, carpets and counter tops, for example. Ms. Howard prepared notes for Mrs. Rychjohn "asking for her input".
[38] Mr. Rychjohn met on several occasions with Ms. Howard and Ms. Howard said she had "one main meeting" with both Rychjohns. Ms. Howard's impression from the meetings was that the house was being built for use primarily as a vacation home for the Rychjohns.
[39] Ms. Howard did not recall Mr. Rychjohn ever informing her that the house was built to test the high-end market. She had previously designed homes built for speculation. In these cases the developer and she would generally discuss the target market and she would get a budget. She would never meet the developer's wife. In cross-examination she agreed that in the construction of a "principal residence" there is input from both husband and wife but with respect to the Eldorado residence, she conceded that input was "mainly from Mr. Rychjohn".
[40] Mr. Randall Rhode is a masonry contractor in Kelowna. He moved to Kelowna from Saskatoon in 1989 and started a business known as Cana Masonry ("Cana"). Mr. Rhode's father had done business with Mr. Rychjohn in Saskatoon and the appellant asked if he was interested in bidding for work on a condominium known as Creekside Villa being built by Investments and for the two houses on Lots 5 and 6 at Eldorado Court.
[41] Mr. Rhode originally was engaged to clad the exterior of the Eldorado Court residence in brick and install three masonry fireplaces. Later, extras were added. Mr. Rhode stated an all brick house was "not usual in Kelowna". He had done work on five other houses in Eldorado Court, but the brickwork was minor.
[42] The "extras" that were added included different size windows which Mr. Rhode believed, came from the Creekside Villa project since they were identical to the windows at the condominium project. Mr. Rychjohn also built the steps, sidewalk and driveway of the house with "rose" bricks. As Mr. Rhode made improvements, Mr. Rychjohn would ask him to do additional work on the house. Mr. Rychjohn told Mr. Rhode the house was to be his summer residence.
[43] Mr. Bruce Evans, a business auditor with Revenue Canada at the time, was assigned the appellants' files. He met Mr. Rychjohn in 1993 and reviewed the corporate records of Investments, including invoices. In reviewing certain invoices of January 12, 1990, Mr. Evans "took notice that the house was probably built for personal use". He investigated whether the house was transferred from the joint venture to Investments at fair market value. He observed that the appellant treated the Eldorado house in the same manner as the house at Turtle Lake. He also noted that Investments purchased a boat for $9,235.
[44] Mr. Evans testified that on September 23, 1993, Mr. Rychjohn informed him that he had plans to move to Kelowna since all his developments at the time were in Kelowna and Kelowna was "booming". However, Mr. Rychjohn did not say that the Eldorado house was the house he planned to live in when in Kelowna.
[45] Mr. Evans explained the benefits assessed to Mr. Rychjohn included an amount calculated using prescribed rates of interest on $650,000, the value of the property, and operating costs such as insurance, utilities, repairs and, for 1991, loan commitment fees.
[46] Lionel Lambie, a chartered accountant, is the accountant for both appellants. He confirmed that the Eldorado house was built as a joint venture and transferred to Investments in 1991 for about $525,000. The house was treated as a capital asset in the joint venture but treated as inventory when it was disposed of by Investments in 1995. According to a summary of Investments' tax return for its first year ending on December 31, 1991, the joint venture apparently deducted capital cost allowance with respect to the Eldorada house at December 31, 1989. Expenses on the Eldorado house and a vacation residence of the Rychjohns at Turtle Lake were paid by Investments. The Minister disallowed those deductions and added back the amounts deducted to income in 1991. These included costs of insurance, repairs and maintenance and taxes.
[47] Mr. Clifford Worman, a resident of Kelowna and a contractor, worked with Mr. Rychjohn since 1990 and was a Project Supervisor, reporting to Mr. Rychjohn, on a condominium project in Kelowna called Creekside Villas.
[48] In Mr. Worman's view, the Eldorado house was "poorly located" on its lot. The interior of the house was essentially empty with "student-like furnishings". At the "odd time" he saw Mrs. Rychjohn at the house and during one summer Ryan Rychjohn, one of Mr. Rychjohn's children, lived in the house.
[49] If I find that Mr. Rychjohn benefited personally from his use of the house, it is important that I determine the value of the house at a given date. Both parties led evidence as to the value of the Eldorado property in 1991. The Crown's valuation date is June 26, 1991. The appellant's witness appears to have considered the value of the property during the period of 1989 to 1991.
[50] Mr. Donald H. Gordon testified on behalf of the appellant. He is a residential real estate appraiser with Okanagan/Kootenay Property Services Inc. of Kelowna. His mandate was to assist me "in determining whether or not the previous recorded 1995 transaction of the subject property was reasonable under market conditions at that time". He was to review past appraisal reports completed by his firm on the Eldorado property and to re-examine the past market trends in the Kelowna area. He, himself, did not value the property. He opined that the market conditions at the time supported the listing prices and the recorded transaction. He had visited the site on January 14, 1991.
[51] According to Mr. Gordon, the property was listed for sale with Mr. Bull from December 15, 1992 to March 31, 1993 for $795,000 and then relisted from April 19, 1993 to October 31, 1993 and November 1, 1993 to February 28, 1994. He did not mention in his report that the property was listed for 14 months before December 1992 but did not sell.
[52] On June 9, 1989, Mr. Gordon reviewed, and apparently approved, an appraisal for mortgage financing of the Eldorado residence by Mr. Allan Ramsay of his firm, as at May 25, 1989, at $575,000. The appraiser wrote that the "only known sale to break the $500,000 mark" was one of the comparables he used in his report. The comparable was clearly a superior property due mostly to its area of 2.5 acres and 200 lineal feet waterfront. Nevertheless, he gave a range in value to the Eldorado property between $555,000 and $605,000, after adjustments. The appraiser did not mention that the property was subject to a substantial easement that, according to the respondent's expert witness, occupied 18.11 per cent of the property's area.
[53] In a letter to the Royal Bank of Canada on January 16, 1991, Mr. Gordon estimated the market value of the Eldorado property, two days earlier, at $650,000, using comparable sales.
[54] Two years later Mr. Gordon advised the Royal Bank of Canada that he estimated the market value of the property, as at December 17, 1992, "in the $800,000 + range". Mr. Gordon did not inspect the property at this time, viewing it only from the street. He compared the property to four other properties, one of which is on Eldorado Court and sold in January 1992 for $990,000 and in August of the same year for $907,000; this property is approximately 1,500 square feet larger than the Eldorado property and has a superior lot size (88 feet lake frontage). Mr. Gordon adjusted the Eldorado property for size to arrive at the value of $800,000. He also stated in his report that the property was listed for $795,000 and the listing broker, who I assume was Mr. Bull, advised that an offer of $720,000 was rejected earlier in the year. Mr. Bull could not recall such an offer.
[55] According to Mr. Gordon, selling prices of both average and medium homes in Kelowna increased between 1990 and June 1993 and then declined during the rest of 1993. Medium housing prices increased by over 30 per cent during the time the Eldorado house was listed for sale, according to a graph presented by Mr. Gordon, but the Eldorado did not sell. Mr. Gordon could not establish that the price of "high-end" residential properties was increasing at a similar rate to moderately priced residences.
[56] George Ward, a real estate appraisal co-ordinator for Canada Custom and Revenue Agency ("CCRA") testified as an expert for the Crown. His view was that the value of the Eldorado property as of June 26, 1991 was $625,000. Mr. Ward's report is dated April 25, 2000, however, he first inspected the property on December 7, 1993. According to Mr. Ward, real estate prices in Kelowna rose sharply in 1989 and activity became very strong until early 1990. Prices continued to rise during 1990, 1991 and into 1992, but at a slower pace than during the last half of 1989.
[57] Mr. Ward estimated the value of the land, after adjustments for the property's larger size to the comparable properties, and for the easement, at $4,275 per front foot, that is, $278,750 as vacant land. He added $358,800 for improvements (on a cost basis) to the vacant land for an aggregate value of $637,550. He also compared the sales of four other lots and after making adjustments to each comparable property for age, condition, location and lake frontage, concluded the value of the Eldorado property in 1991 was $625,000; the cost approach value of $637,550 was, in his view, the "upper-end of the residential market".
[58] Mr. Ward also filed a rebuttal to Mr. Gordan's report. He questioned Mr. Gordon (and Mr. Ramsay's) application of the easement and their lack of awareness of the listing of the property, among other things. Mr. Ward was of the opinion higher-end properties increased at a lower than average rate during the period January 1991 to December 1991 and that the 30 per cent increase in prices to the end of 1991 was too great.
[59] Mr. Ward also questioned Mr. Gordon's appreciation of the easement. In his May 8, 2000 report, Mr. Gordon referred to the easement as "the massive right-of-way impending development of the site" suggesting it covers two-thirds of the property. In a letter Mr. Gordon wrote to the Royal Bank of Canada on February 19, 1990, which he did not refer to in his report, he estimated the market value of Lots 5 and 6 were "in the $650,000 +range", provided the improvements are made in accordance with the submitted plans and specifications. The easement is not mentioned. In the subsequent letter of January 16, 1991, Mr. Gordon refers to the easement but minimizes its effect on value since it "does not interfere with the enjoyment of the [property]". Apparently, Mr. Gordon had a change of mind. I have more confidence in Mr. Ward's report and his evidence and I give his evidence and conclusions more weight than those of Mr. Gordon. I agree that the value of the Eldorado house on June 26, 1991, was in the range of $625,000 to $650,000 and that the value did not materially change from that time to the end of 1992.
[60] Subsection 15(1) provides that:
Where at any time in a taxation year a benefit is conferred on a shareholder . . . by a corporation . . . the amount or value thereof shall . . . be included in computing the income of the shareholder for the year.
[61] The respondent's position is that the Eldorado house was built not to test any high-end market, but as a vacation home for the family. Counsel referred to Mr. Rychjohn's acknowledgment that he could have acquired information about the high-end market from knowledgeable people in Kelowna.
[62] Mr. Rychjohn is a very confident, aggressive and dynamic individual, always on the move. I found him to be pleasant in Court; he constantly tried to advance his view of the appeals to ensure that I did not misunderstand his evidence or his position. While Mr. Rychjohn has had some problems with the fisc in the past, I do not believe it affected the tenor of his evidence before me. I believe that over the years - it is almost ten years between the years under appeal and the trial date, years in which he was dealing with the tax authorities on several matters - Mr. Rychjohn has succumbed to his own salesmanship and has accepted as fact certain things that I find difficult to accept.
[63] Firstly, I cannot find that the purpose of building the Eldorado house was to test the market for high-end homes in Kelowna. There are more economic ways, as Mr. Rychjohn acknowledged, to determine whether such a market exists. Investments depends very much on highly leveraging its construction activities; such a corporation normally would not utilize funds available to it to test a market in which it had no experience. There is no evidence that Investments tested a market in this manner before it since 1989. I infer that if this really was the intent of Mr. Rychjohn, he would have called Mr. Van Norman to testify as what, precisely, their intentions were with respect to Lots 5 and 6.
[64] It may well be - and there is no conclusive evidence before me - that Mr. Rychjohn did intend to build the Eldorado house for him and his family but met very strong resistance from Mrs. Rychjohn who wished to remain in Saskatoon. He then sought to dispose of the property at a price in excess of what could be expected based on market conditions at the time. His asking price while the property was listed with Mr. Bull was too high and I suspect he knew it. When he finally decided to sell the property he retained a knowledgeable real estate agent who knew the market.
[65] Whether Investments built the house to test the market for high-end homes or whether the house was built for personal use, the fact remains that during 1991 and 1992 Mr. Rychjohn and members of his family used the house for their personal enjoyment, although, at times, Mr. Rychjohn used the house because he was required to be in Kelowna for business. In both cases, whether the house was owned by Investments to test the market or owned by Investments for the personal use of a shareholder, the house was property owned by Investments and used by its shareholder. In both cases, the corporation has conferred a benefit on Mr. Rychjohn by allowing him to use corporate property for his own benefit and the amount or value of the personal benefit is to be included in his income in accordance with subsection 15(1) of the Act.
[66] Appellants' counsel argued that Mr. Rychjohn's use of the house was not a benefit since he was required to be in Kelowna to supervise the development and construction business of Investments. There was a business use to the house, unlike the situations in The Queen v. Fingold[2] and Youngman v. The Queen[3].
[67] The personal use of the Eldorado house by Mr. Rychjohn was more than incidental. In my view the primary purpose of acquiring Lot 5 and building the home was for personal use. Mr. Rychjohn's interest in the house, his input in changing design of the house, choosing colours, for example, indicates that the house was being prepared for him and his family's personal use and enjoyment. He used the house and members of his family used the house for non-business purposes. The house was available to them when they wished. This is not a situation where the corporate owner of property places very strict conditions on the use of the property and it ensures any use is for the benefit of the corporation.
[68] There is evidence however that on many occasions - the number is not in evidence - Mr. Rychjohn roomed at the house, rather than a hotel, when he was in Kelowna for business. Mr. Rychjohn estimated he spent about 12 days a month at the Eldorado house during the years in issue for the benefit of Investments, saving Investments the cost of his lodging at a hotel in Kelowna. There is no evidence as to cost of hotels in Kelowna in 1990 and 1991; Mr. Rychjohn estimated the cost at between $85 to $150 per night. Taking judicial notice of hotel rates during my travels in Canada over the years, I believe the high end of the rates Mr. Rychjohn estimated for 1991 and 1992 is excessive. I am prepared to value Investments' savings (and reduction in the benefit to Mr. Rychjohn) by having Mr. Rychjohn's stays at the Eldorado house be calculated at $85 per night at 10 nights a month for 10 months, that is, 100 days per year, or $8,500 in each of 1991 and 1992 (notwithstanding an occupancy permit was obtained in March 1991); I would therefore allow Mr. Rychjohn's appeals by referring the assessments back to the Minister for reconsideration and reassessment only to reduce the benefit in each year by $8,500.
[69] The appeals of Investments are dismissed.
[70] One set of costs for the four appeals is awarded to the respondent.
Signed at Ottawa, Canada, this 26th day of September 2001.
"Gerald J. Rip"
J.T.C.C.
COURT FILE NO.: 98-2695(IT)G and 1999-490(IT)G
STYLE OF CAUSE: Lawrence Rychjohn v. The Queen
Rychjohn Investments Ltd. v. The Queen
PLACE OF HEARING: Regina, Saskatchewan
DATE OF HEARING: December 12, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge Gerald J. Rip
DATE OF JUDGMENT: September 26, 2001
APPEARANCES:
Counsel for the Appellant: Reynold Robertson
Counsel for the Respondent: Elaine Lee
COUNSEL OF RECORD:
For the Appellant:
Name: Reynold Robertson
Firm: Robertson, Stromberg
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
98-2695(IT)G
BETWEEN:
LAWRENCE RYCHJOHN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Rychjohn Investments Ltd. 1999-490(IT)G on December 12, 2000, at Regina, Saskatchewan, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the Appellant: Reynold Robertson
Counsel for the Respondent: Elaine Lee
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1991 and 1992 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment only to reduce the benefit in each year by $8,500.
One set of costs for the appeals of Lawrence Rychjohn and Rychjohn Investments Ltd. is awarded to the respondent.
Signed at Ottawa, Canada, this 26th day of September 2001.
|
"Gerald J. Rip" |
J.T.C.C.
1999-490(IT)G
BETWEEN:
RYCHJOHN INVESTMENTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Lawrence Rychjohn 98-2695(IT)G on December 12, 2000, at Regina, Saskatchewan, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the Appellant: Reynold Robertson
Counsel for the Respondent: Elaine Lee
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1991 and 1992 taxation years are dismissed.
One set of costs for the appeals of Lawrence Rychjohn and Rychjohn Investments Ltd. is awarded to the respondent.
Signed at Ottawa, Canada, this 26th day of September 2001.
|
"Gerald J. Rip" |
J.T.C.C.