Date: 19990611
Docket: 97-1713-IT-G
BETWEEN:
DONALD TAYLOR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This appeal arises from a Notice of Reassessment relating to the 1990 taxation year, in which the Minister of National Revenue (the "Minister") added management fees and shareholder's benefits, in the amount of $5,000 and $15,000 respectively. The Appellant objected to the reassessment in a Notice of Objection dated September 11, 1995. The objection was later confirmed by the Minister via a Notice of Confirmation.
FACTS
[2] A Partial Statement of Agreed Facts was filed. It reads:
The Appellant, Donald Taylor and the Respondent, Her Majesty the Queen, by her solicitor, agree to the following facts provided that:
1) such admissions are made for the purpose of these proceedings only; and
2) the parties are permitted to adduce additional evidence which is not contrary to these agreed facts:
a) at all times material hereto, the Appellant as a 50% shareholder and a Mr. Edward McKibbon was a 50% shareholder of Hall Industries Ltd., ("the Corporation");
b) in 1989 the shareholders and the Corporation agreed in principle to transfer ownership of 8 hectares of land, located at Lower Derby, New Brunswick and on or about September 25, 1990 the Corporation filed the appropriate documentation to transfer its ownership of 8 hectares of land, located at lower Derby, New Brunswick, to the following people:
- Jonathan Taylor (son of Appellant) 4 hectares
- Edward McKibbon (shareholder) 1 hectare
- Scott McKibbon (son of shareholder) 1 hectare
- Kim McKibbon (daughter of shareholder) 1 hectare
- Tammy McKibbon (daughter of shareholder) 1 hectare
c) the transfer of the land was at the direction of, or with the concurrence of the Appellant;
d) at all material times the Appellant and his son, Jonathan Taylor, were not dealing at arm's length;
e) in the 1990 taxation year the Corporation reported the transfer by showing deemed proceeds of $10,000.00 as the value of the land transferred;
f) in transferring the land the Corporation reported a Capital Loss of $31,000.00 and Management fees to the shareholders of $10,000.00;
g) of this $10,000.00 the Appellant received a $5,000.00 Management fee from the Corporation, as did Mr. McKibbon, for the transfer of the land; and
h) in the Appellant's return of income for the 1990 taxation year, the Appellant did not report or include in income the $5,000.00 Management fee.
[3] Hall Industries Ltd. ("Hall") was a corporation of which the Appellant was a 50% shareholder. On November 9, 1978, Hall purchased land located at Lower Derby, New Brunswick, which included two mill buildings, a warehouse and approximately eight hectares of land, for a purchase price of $41,000. All the buildings on the property were destroyed by two fires occurring in 1980 and 1986.
ISSUES
[4] The issues are:
1. what is the fair market value of the land in question at the time of the transfer? and
2. did Hall confer a benefit upon the Appellant in his capacity as a shareholder, pursuant to subsection 15(1) of the Act in the 1990 taxation year?
THE SUBMISSIONS
[5] The Appellant submits that Hall tried unsuccessfully to sell the property between 1986 and 1990. At that time, the land had remnants of the burned buildings and was overgrown with brush. In September of 1990, Hall subdivided the land and transferred the lots to various individuals, including the Appellant's son, Jonathan Taylor, who received four hectares of the land in question. The Appellant submits that he contacted appraisers who informed him that it would not be possible to determine the value of the land on the date of transfer, as it was impossible to determine the condition of the land for appraisal purposes. He also submitted that there was no comparable sales in the area.
[6] The Minister submits that the transfer of the land to Jonathan Taylor was at the direction or with the concurrence of the Appellant and that the Appellant and his son were not dealing at arm's length at the time of the transfer. Hall reported deemed proceeds in the amount of $10,000 in relation to this transfer and reported a capital loss of $31,000 in the 1990 taxation year. In addition, Hall reported management fees paid to the shareholders in the amount of $10,000. The Minister submits that at the time of the transfer the fair market value of the eight hectares of land was $68,900. It is submitted that the land transferred to the Appellant's son had a fair market value of no less than $15,000 and that no consideration was given by either the Appellant or his son in relation to this transaction. The Minister maintains that the true fair market value was $20,000. Consequently, the Minister submits that Hall conferred a shareholder's benefit upon the Appellant in the amount of $15,000 and that the Appellant received a management fee in relation to the transfer of the land from Hall in the amount of $5,000 in the 1990 taxation year.
ANALYSIS
FAIR MARKET VALUE
[7] The Minister submits that the fair market value of the land in question was at least $15,000 at the time it was transferred to the Appellant's son. The Appellant does not accept this contention and has put the fair market value of the property into issue.
[8] In an attempt to establish the fair market value, counsel for the Minister has filed an expert report from D.G. Stilwell, regarding the appraisal of the land. The Appellant, on the other hand, has submitted that he was unable to get an appraisal due to the difficulty in determining the condition of the land. In Ample Investments Ltd. al. v. M.N.R., 90 DTC 1748 (T.C.C.), Brulé J. addressed the difficulties which arise when different valuation methods are used to appraise property. He stated at page 1750 that:
In trying to account for the differences in valuations in addition to explanations given or omitted one must consider the source of the valuations.
[9] The Court is cognizant of the fact that the comparables are not exact and therefore adjustments have been made to account for the differences between the properties. The weight attributed to the appraiser's evaluation will depend on the techniques, factors and objective sources employed by the appraiser.
[10] The Appellant asserts the land in question could not be sold and the value of the land was diminished to zero because of the value of the site clean-up problems and costs. He specifically referred to concrete abutments and foundations not being capable of simple removal and other environmental concerns.
[11] The Minister's evidence was, as indicated, a qualified appraiser capable of giving expert opinion as to real estate appraisal value. The appraisal report used the comparable land sales method as the most reliable to determine an estimate of land value (at page 18):
Eight sales have been analyzed in order to arrive at an indication of market value for the subject property as of September 25, 1990.
[12] The appraiser's expert report put in evidence was:
As a result of the analysis and interpretation of the data gathered, my estimate of the retrospective market value of the subject property is as follows:
|
November 9, 1978 |
Nineteen Thousand Eight Hundred Dollars ($19,800) |
|
September 25, 1990 |
Ninety-Three Thousand Four Hundred Dollars ($93,400) |
[13] In essence, the Appellant states the appraisal is wrong, the appraiser did not allow for significant site development impediments.
[14] The onus is on the Appellant to show the Minister's assessment is in error. To simply assert the value was zero and site development problems existed in the absence of any other significant acceptable evidence does not dislodge the Minister's assumptions.
CONCLUSION
FAIR MARKET VALUE
[15] I conclude at the time of transfer the four hectares parcel of land transferred to the Appellant's son, Jonathan, had a fair market value of not less than $15,000 and that the Minister's assumption that in fact the parcel had a fair market value of $20,000 has not been dislodged.
INCOME INCLUSION, SUBSECTIONS 15(1) AND 56(2)
[16] Subsection 15(1) of the Act read as follows:
15(1) Where, in a taxation year, a benefit has been conferred on a shareholder, or on a person in contemplation of his becoming a shareholder, by a corporation otherwise than by
(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or on the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,
(b) the payment of a dividend or a stock dividend,
(c) conferring on all owners of common shares of the capital stock of the corporation a right to buy additional shares thereof, or
(d) an action described in paragraph 84(1)(c.1), (c.2) or (c.3),
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.
[17] And subsection 56(2) of the Act read:
56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
[18] The underlying purpose of subsection 56(2) is to ensure that a taxpayer cannot avoid being taxed on a benefit by directing that it be conferred on a third party. Hence, the provision is not applicable to benefits arising from bona fide business transactions in which there is adequate consideration.[1] According to the Supreme Court of Canada in Newman v. M.N.R., [1998] 1 S.C.R. 770, 98 DTC 6297 at page 6300, there are four prerequisites established in the wording of subsection 56(2):
1. an actual transfer or payment to a person other than the taxpayer;
2. the payment or transfer must be at the direction of or with the concurrence of the taxpayer;
3. the payment or transfer must be for the taxpayer's benefit or as a benefit he wished to confer on another; and
4. the payment or transfer would have been included in the taxpayer's income if it had been paid to him.
[19] A fifth requirement was introduced by the Federal Court of Appeal in Winter et al. v. The Queen, 90 DTC 6681, in which Marceau, J.A. stated at page 6684 that:
[T]the validity of an assessment under subsection 56(2) of the Act when the taxpayer had himself no entitlement to the payment made or the property transferred is subject to an implied condition, namely that the payee or transferee not be subject to tax on the benefit he received.
[20] In other words, the individual who receives the benefit must not be subject to tax. However, this prerequisite is qualified by the requirement that the taxpayer has no entitlement to the payment made or property transferred.
CONCLUSION
INCOME INCLUSION
[21] I conclude the fair market value of the land exceeded the amount the land was transferred for and a benefit was conferred upon the Appellant's son. The Appellant owned 50% of the shares of Hall and the Appellant's son received 50% of the land transferred. The transfer did occur under the direction of the Appellant. A benefit did exist and such a benefit would have otherwise been included in the Appellant's income as a shareholder's benefit pursuant to subsection 15(1) of the Act had the benefit been paid directly to him.
DECISION
[22] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 11th day of June 1999.
"D. Hamlyn"
J.T.C.C.