Tax Court of Canada Judgments

Docket: 2002-4039(IT)I

BETWEEN:

CAROL A. TYMCHUK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard together with the appeals of Donald L. Tymchuk (2002-4040(IT)I)

on June 11, 2003, at Nanaimo, British Columbia,

By: The Honourable Justice C.H. McArthur
Appearances:
Agent for the Appellant:	Donald L. Tymchuk
Counsel for the Respondent:	Michael Taylor

____________________________________________________________________

JUDGMENT

          Whereas after the commencement of the hearing, the Agent for the Appellant informed the Court that the Appellant was withdrawing her appeals for the 1999 and 2000 taxation years;

The appeals from assessments of tax made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are dismissed.

Signed at Ottawa, Canada, this 26th day of September, 2003.

"C.H. McArthur"

McArthur J.

Docket: 2002-4040(IT)I

BETWEEN:

DONALD L. TYMCHUK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard together with the appeals of Carol A. Tymchuk (2002-4039(IT)I)

on June 11, 2003, at Nanaimo, British Columbia,

By: The Honourable Justice C.H. McArthur
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Michael Taylor

____________________________________________________________________

JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed.

Signed at Ottawa, Canada, this 26th day of September, 2003.

"C.H. McArthur"

McArthur J.

Citation: 2003TCC699

Date: 20030926

Docket: 2002-4039(IT)I

BETWEEN:

CAROL A. TYMCHUK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

Docket: 2002-4040(IT)I AND BETWEEN: DONALD L. TYMCHUK, Appellant, and HER MAJESTY THE QUEEN, Respondent.

REASONS FOR JUDGMENT

McArthur J.

[1]      These appeals were heard on common evidence with respect to Carol Tymchuk's ("Carol") 1998 taxation year and Donald Tymchuk's ("Donald") 1997 and 1998 taxation years. The issues are whether a benefit was conferred on Donald pursuant to subsection 15(1) of the Income Tax Act and if so, was that benefit earned income. If he received a benefit which is to be included in his income then Carol is not entitled to the spousal tax credit because Donald's net income would exceed the amount calculated under paragraph 118(1)(a) of the Act. Donald represented himself and his wife, Carol.

[2]      As agent for Carol, Donald withdrew her appeals with respect to the inclusion of interest in her income in the 1999 and 2000 taxation years. Therefore, her appeals for those years are dismissed.

[3]      Donald is a realtor who worked for his own corporation, New Way Realty Inc., of which he was the sole shareholder.[1] I believe he was also a certified general accountant. During 1997 and 1998, the corporation did not record any amounts paid to Donald on account of a salary, benefits or commission, nor did he report receiving any amounts from the corporation for the 1997 and 1998 taxation years. The corporation issued cheques to him and paid his Visa account. It expensed 100% of his car expenses and paid his life insurance premiums. The Respondent assessed Donald for benefits conferred on him by the corporation and included the amounts of $9,432 and $12,860 in his income for 1997 and 1998, respectively, pursuant to subsection 15(1) of the Act. The Respondent allocated 20% of the use of his car to personal use.

[4]      The Appellant submits that he used his car 100% for the corporation business. He stated that the amounts added to his income are expenses of the corporation and were paid for services rendered. He stated that the amounts are income in his hands under paragraph 12(1)(a) for services rendered or they should be credited as repayment of a portion of a shareholder's loan and not compensation for services rendered.

[5]      But for his car expenses, none of the amounts were challenged by the Appellant. His primary submission appears to be "monies reallocated at the audit should have been considered a payment to the shareholder for services rendered and not a benefit under section 15.[2] He added that if the advances in question are not allowable business expenses to the corporation then he is entitled to post them to the $100,000 loan account owed to him by the corporation.

[6]      The Respondent relies in part on the fact that this is not an instance where there was a bookkeeping error. The shareholder loan argument was put forward after the audit.

[7]      The first question is whether the amounts were a benefit pursuant to subsection 15(1). Over the relevant years, the Appellant had the corporation issue him cheques, pay his Visa account, pay 100% of his automobile expenses without declaring any of it as income or payment on account of his shareholder's loan.

[8]      Counsel for the Respondent referred to the decision of Mogan J. of this Court in Chopp v. The Queen, 95 DTC 527. In Chopp, the taxpayer owned 99% of C Ltd. While he was on vacation, his corporation advanced $28,500 to his personal benefit for the purchase of his home. This advance was erroneously recorded as corporation expenses rather than a reduction to his shareholder's loan account. The Minister of National Revenue disallowed it as an expense of the corporation and included it in the taxpayer's income under subsection 15(1). Mogan J. held that if the value of a benefit is to be included under subsection 15(1) in a shareholder's income, the benefit must be conferred with the knowledge or consent of the shareholder where it is reasonable to conclude that the shareholder ought to have known the benefit was conferred. I agree with this reasoning.

[9]      In these appeals, Donald did his own bookkeeping. The amounts were expended by the corporation, upon his initiative, unsupported as business expenses and not treated as shareholder loans or salary. A scrutiny of the items the auditor treated as a benefit is helpful.

(i)       Automobile benefit The corporation expensed Donald's automobile costs 100%. He kept no logs or other records. I accept the auditor's evidence. She reviewed all of the records provided and concluded that 20% was personal use which I find reasonable.

(ii)       Cheques       Donald had the corporation issue cheques to him personally and to his Visa account. The auditor testified that she was not satisfied that these amounts were deductible expenses of the corporation.[3] There was no evidence at the hearing to contradict her position. The Appellant did not report any income from the corporation. He received the undeclared benefits. He offered no proof but made the general statement that the cheques and Visa amounts were business expenses. The auditor provided worksheets (Exhibits R-1 and R-2) listing the cheques and invoices. Exhibit R-1 is a worksheet prepared for the corporation. The cheques to the Appellant or CIBC Visa were taken as shareholder benefits. The Appellant was given the opportunity, prior to the final assessment, to produce invoices showing that the cheques to him and his Visa account were to reimburse him for corporation business expenses. He did submit some invoices that were accepted by the Minister who reduced the proposed subsection 15(1) benefit amount for 1997 by $2,120.52. As indicated in paragraph 6 of the Reply to the Notice of Appeal, after receipt of Donald's objection, the Minister further reduced the 1997 and 1998 shareholder appropriation assessments by $2,397 and $822, respectively. Some of the receipts, invoices and vouchers supplied by Donald to reduce the amounts included in his income for 1997 and 1998 were dated for period before or after the 1997 and 1998 taxation years. Some of the amounts were already allowed to the corporation as expenses. Others were for personal clothing items. There were duplicate vouchers, one for the cash receipts and one for the Visa or Imperial Oil statements. He did not reimburse the corporation for the personal expenses paid on his behalf.

[10]     The Appellant was the only worker for the corporation. He worked without formal compensation. His compensation included the amounts at issue. It is unfortunate that the corporation's records did not reflect this.

[11]     The Respondent argues that it is too late at this stage to classify the amounts as anything but shareholder benefits. The corporation did not record the amounts as salary or anything else, nor did Donald declare them as such. They were only brought to light after an audit. Is it too late for Donald to reclassify them? I believe it. Obviously, he never intended recording payments as salary or as payments to the shareholder loan account. Donald is presenting what he could (or should) have done and not what he did in fact.

[12]     The taxpayer in Chopp was successful because the Court was satisfied that the taxpayer intended to put entries through the shareholder's loan account and through a mistake, it was not done. However, in this case, Donald was his own bookkeeper and I believe he was a certified general accountant. He had no intention of entering the amounts as shareholder loans or anything else until they were revealed in the audit. He had the opportunity and obligation to accurately record the corporation's payments. Having been caught by the audit, he now asks that he be permitted to do some retroactive tax planning. His actions were not an isolated mistake. He repeated the procedure over 50 times during a two-year period.

[13]     The Appellant is adamant that he did not receive a benefit. He argues that the corporation owed him $100,000 and what he received should be, retroactively, applied to reduce this indebtedness. Secondly, he adds that the corporation owed him a salary for his services. He was the only source of income for the corporation. He is asking for retroactive tax planning. He chose to operate his realty business through a corporation. Conceivably, he could have achieved considerable tax savings had he entered the amounts for what they were in the corporation records and in his own income.

[14]     In The Queen v. Friedberg, 92 DTC 6031, Justice Linden speaking for the Court at page 6032 stated:

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, 91 DTC 5106, per Mahoney J.A.) If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to 'correct' documents which clearly point in a particular direction.

This quote applies equally to the present situation.

[15]     To be successful in taking advantage of provisions under the Income Tax Act, the form of the transaction between the corporation and its shareholder must be operative. I find as a fact that Donald sought to show the amounts as expenses of the corporation and not declare them as having been received by him. After the audit, it is too late to restructure the transaction. Benefits were conferred on the Appellant as a shareholder. With regard to shareholders and double taxation, I agree with the following comments of Judge Mogan in Chopp at pages 529-530:

It has been held on many occasions that a benefit will be taxable under subsection 15(1) of the Income Tax Act (formerly subsection 8(1)) only if it is conferred on a shareholder in his capacity as a shareholder. See M.N.R. v. Pillsbury Holdings Limited, 64 DTC 5184. The relationship between a corporation and its shareholders is based on invested capital. That relationship is not, by itself, incidental to or connected with any business carried on by the corporation. Indeed, a corporation may not carry on a business or, if it does, the shareholders may not be involved in the business.

The relationship between a corporation and those individuals who work in the operation of the corporation's business is one of employer/employee. That employment relationship is, of course, incidental to and connected with the corporation's business. If a shareholder is also an employee of the corporation and receives a benefit in his capacity as employee, the value of that benefit would be taxed under paragraph 6(1)(a) of the Act. A corporation is ordinarily permitted to deduct as a business expense the cost of a benefit received or enjoyed by an employee qua employee. A corporation, however, is not permitted to deduct any amount with respect to a benefit conferred on a shareholder qua shareholder because the corporate/shareholder relationship is not incidental to the corporation's business. A shareholder benefit is more like a dividend and less like a business expense. Therefore, a benefit taxed under subsection 15(1) will usually result in some form of double taxation because the shareholder will be taxed on an amount which has not been deducted in computing the income of the corporation. In appropriate circumstances, this will be a harsh but necessary result.

[16]     The Appellant had the onus of establishing that the Minister's assumptions of fact and consequent assessments are wrong. That has not been done. Carol has been correctly assessed to disallow the spousal tax credit because her spouse's net income now exceeds the base amount calculated under paragraph 118(1)(a) of the Act.

[17]     Both appeals are dismissed.

Signed at Ottawa, Canada, this 26th day of September, 2003.

"C.H. McArthur"

McArthur J.

CITATION:                                        2003TCC699

COURT FILE NO.:                             2002-4039(IT)I and 2002-4040(IT)I

STYLE OF CAUSE:                           Carol A. Tymchuk and Donald L. Tymchuk and

Her Majesty the Queen

PLACE OF HEARING:                      Nanaimo, British Columbia

DATE OF HEARING:                        June 11, 2003

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

DATE OF JUDGMENT:                     September 26, 2003

APPEARANCES:

Agent for the Appellants:            Donald L. Tymchuk

Counsel for the Respondent:      Michael Taylor

COUNSEL OF RECORD:

For the Appellant:

Name:                 --

Firm:                  --

For the Respondent:                  Morris Rosenberg

                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

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