Joint Ownership of Shares In A Private Corporation

Someone online posed an interesting question: Could an individual and spouse jointly own shares of a private corporation?
I had never seen it in practice, never seen it discussed nor come across it in any case law. There are many instances where bank accounts and brokerage accounts are set up as joint accounts and real estate is often held jointly. Why not shares? There appears to be no reason why it can’t happen.
What does it mean to own the shares jointly?
If the couple jointly own the shares, the couple each owns a severable, equal interest in the shares. Thus, if they owned 100 shares, the title could be severed and each own 50 shares.
On death, the surviving spouse would own all the shares. The Ontario Business Corporations Act (RSO 1990, c B.16) addresses this matter in subsection 67(6).
Joint holders
(6) Where a security is issued to several persons as joint holders, upon satisfactory proof of the death of one joint holder, the corporation may treat the surviving joint holders as owner of the security. R.S.O. 1990, c. B.16, s. 67 (6); 2006, c. 8, s. 117 (5).
In this sense the owners are joint tenants with the right of survivorship (JTWROS).
Avoiding probate.
Since the transfer occurs without a will, the property is not subject to probate. In Ontario, probate fees for shares of a private corporation are normally avoided by having a secondary will, one that isn’t probated, or by using trusts.
Jointly owning shares could be a more cost effective method of reducing probate fees but should not be the primary objective for doing so.
Rollover on Death.
Normally, subsection 70(5) of the Income Tax Act deems an individual who dies to have disposed of all capital property at fair market value; however, since the these shares would pass to the individual’s spouse, subsection 70(6) provides an exclusion to the deemed disposition. The surviving spouse would be subject to tax on the unrealized gains of the shares.
Voting The Shares.
Section 102(4) of the OBCA deals with casting votes on jointly held shares.
(4) Unless the by-laws otherwise provide, where two or more persons hold shares jointly, one of those holders present at a meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons are present, in person or by proxy, they shall vote as one on the shares jointly held by them. R.S.O. 1990, c. B.16, s. 102 (4).
Where control of the corporation is an issue, an agreement between the spouses could explicitly state their intentions on how the shares should be voted.
Taxing Gains and Income.
The shares would be subject to the attribution rules for spouses and, depending on the circumstances, gains and income could be attributed back to one spouse and not taxed in the hands of the other.
Scenario one. If shares are are issued from treasury for a nominal amount and each spouse contributes their own funds to purchase the shares then the attribution rules would not apply.
Scenario two. An individual owns all the share of a corporation with a potential capital gain. The spouse could receive a joint interest in the shares by way of a gift and, provided no election is made under subsection 73(1), the transfer would happen at cost, that is, no capital gain; however, the attribution rules would apply.
Notes.
1. A reference to spouse includes a common-law partner as defined in the Income Tax Act.
2. Joint ownership of shares of a private corporation can be done with any two persons, however, from an estate planning point of view such an arrangement can result in any of a number of negative consequences.

What is an automobile?

Case Citation
Myrdan Investments Inc v. The Queen (2013 TCC 35) [TCC] [CanLII]
Summary
An individual used a corporate-owned pick-up truck in carrying out his duties as employee and shareholder of Myrdan Investments Inc. The appeal focuses on the issue of whether the truck meets the definition of an “automobile” in subsection 248(1) of the Income Tax Act (ITA).
The minister took the position the truck was an automobile and assessed a taxable benefit for an employer-provided automobile and classified the property in Class 10.1 instead of Class 10. In reviewing the facts, the court found the truck met the exceptions in paragraph (e) of the definition. Namely, the truck was used, all or substantially all, for the transportation of goods, equipment or passengers in the course of gaining or producing income (paragraph (e)(ii)) and used primarily for those purposes in remote locations (paragraph (e)(iii)). Meeting either condition is sufficient to exclude a vehicle from the definition of being an automobile.
As a result, the employment benefits were dismissed; however, there was a personal element to the use of the pick-up truck and the taxpayer was assessed a benefit as a shareholder under subsection 15(1). The court assessed the shareholder benefit based on personal-use kilometres and the rate set by the Department of Finance for use in calculating benefits under paragraph 6(1)(k). It did so since it seemed reasonable given there was no known or reliable fair market value for renting such a truck.
Further the truck was placed in the company’s Class 10 pool. Class 10.1 only applies to a “passenger vehicle”, which is defined to be an automobile purchased or leased after June 17, 1987, over a certain value.
The minister argued the vehicle was not used to transport goods or equipment or passengers. At times there were passengers and the judge viewed the safety equipment and first-aid kit carried in the truck and required for work in the oil-fields of Alberta were sufficient to meet the definition.
Myrdan Investments Inc. held various shares and interests in private businesses. The minister argued the test on the vehicle’s use in the course of gaining or producing income should be limited to activities related directly to Myrdan and exclude any activity done for its investments. In finding for the appellant, the judge referenced an Interpretation Bulletin that addresses the issue of non-interest bearing loans to subsidiary corporations. In Canadian Helicopters Ltd. (2002 FCA 30) the Federal Court of Appeal agreed with the Tax Court of Canada that interest incurred to make the non-interest bearing loan was deductible since it enabled the company to increase its capacity to pay dividends and hence was a source of income for the parent. In this case, providing services to a subsidiary enhanced its ability to pay dividends and thus the truck was used in the purpose of gaining income from property.
This case is a reminder that the phrase “all or substantially all” is not set in stone as to mean 90% or more. Similarly, the phrase “used primarily” is flexible. In the judge’s words,
“The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.”
And, in a case cited by the judge, the phrases were described as elastic.
Issue
[1] These appeals from reassessments for the taxation years of Myrdan Investments Inc. (“Myrdan” or the “corporate appellant”) ending October 31, 2006 and October 31, 2007 and for the 2007 taxation year of Daniel Halyk (the “appellant” or “Mr. Halyk”) involve the question of whether a pickup truck is an “automobile” within the meaning of that term as defined in subsection 248(1) of the Canada Income Tax Act (the “ITA”) or whether the vehicle falls within the exceptions in subparagraphs (ii) and (iii) of paragraph (e) of that definition.
[21] …The central issue remaining in these appeals is the use of the truck owned by Myrdan and operated by Mr. Halyk. An inquiry into the use of the truck will determine whether it is an “automobile” pursuant to the definition in subsection 248(1) of the ITA what method should be used to calculate the shareholder benefit to Mr. Halyk. If the truck was not an automobile, it was properly classified by the taxpayer as class 10 capital property. If the truck was an automobile, the Minister’s assessment on the basis that the truck was a “passenger vehicle” included in class 10.1 is correct. The definition of “passenger vehicle” includes an automobile. The appellant’s position is that the truck is not an automobile, since it falls within either or both of the following exclusions in subparagraphs (ii) and (iii) of paragraph (e) of the definition of “automobile”:…
[22] The respondent’s position is that the truck meets the requirements for neither of the above exclusions.
[23] In respect of Mr. Halyk’s appeal, the issue is whether he received a benefit taxable under subsection 15(1) of the ITA and, if so, what the value of that benefit was. If the truck was an automobile, the value of the shareholder benefit is calculated under subsection 6(2) of the ITA. If the truck was not an automobile, the value of the shareholder benefit must be determined by other means. In the reassessment for Mr. Halyk’s 2007 taxation year, the Minister assessed a shareholder benefit of $13,811 in respect of a passenger vehicle stand by charge and $3,872 in respect of passenger vehicle operating costs.
ITA / ETA
| 6(1)(e)—Standby charge for automobile |
| 6(1)(k)—Automobile operating expense benefit |
| 6(2)—Reasonable standby charge |
| 15(5)—Automobile benefit |
| 248(1) “automobile” |
| 248(1) “passenger vehicle” |
| Reg. Sch. II, Class 10, 10.1 |
Cases Cited
547931 Alberta Ltd. v. The Queen, 2003 TCC 170 (CanLII)
| Lyncorp International Ltd. v. Canada (2011 FCA 352) |
| Lyncorp International Ltd. v. The Queen (2010 TCC 532) |
| McHugh (B.J.) v. Canada ([1995] 1 C.T.C. 2652) |
| Pronovost v. The Queen (2003 TCC 139) |
Walsh v. The Queen, 2009 TCC 557 (CanLII)
| Canadian Helicopters Ltd. (2002 FCA 30) |
Analysis
[8] In order to fulfil his duties as CEO of Total Energy, Mr. Halyk was required to travel to a number of locations to perform business operations necessary for Total Energy. Total Energy entered into an agreement with Myrdan whereby Myrdan would receive management consulting fees and a monthly allowance for the operating expenses with respect to a vehicle that was suitable for Mr. Halyk’s purposes as CEO of Total Energy. The capital cost of the vehicle would be covered by Myrdan, and the expense involved in operating it for the purposes of Total Energy’s business would be covered by Total Energy.
3.2 Was the truck an automobile?
3.2.1 Was the appellant transporting “goods” or “equipment” in the course of gaining, earning or producing income?
3.2.2. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?
[29] The evidence shows that Mr. Halyk did use the equipment in question here on safety stand-down tours, for example and was required to wear the safety equipment in order to have access to work sites, besides which he had to set an example for the staff in the various businesses Myrdan and Total had invested in. These instances of the use of safety equipment had a clear income-producing purpose. My finding on this point is consistent with the Court’s finding in Pronovost v. The Queen[5] (also an informal procedure case), where equipment such as tools and first aid kits was kept in a truck at all times but was still “transported” for the purposes of the exclusion in the definition of “automobile”.
3.2.2[3]. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?
[31] The respondent submits that the tests for determining use of a vehicle in producing income can only apply to income earned for the owner of the vehicle, i.e., Myrdan. Therefore, Mr. Halyk’s use of the truck in the other businesses owned by Myrdan and Total Energy should not count in applying the use tests in subparagraphs (ii) and (iii) where the connection to income earned by Myrdan is too remote.
[34] The respondent relies on Lyncorp International Ltd. v. The Queen,[6] to exclude the kilometres travelled by Mr. Halyk to visit the Theo Halyk Company, a wholly owned subsidiary of Myrdan. In that case, Lyncorp, the appellant corporation was denied the deduction of expenses incurred by its owner for travel to businesses in which it had invested. Lyncorp paid the expenses for that individual’s travel to provide support services gratuitously to the businesses. The Court in Lyncorp held that the connection to Lyncorp’s income from business or property was too tenuous, since Lyncorp would only profit from these expenses by receiving future dividends from its investments in the business venture if they were profitable.
[35] The position adopted by the respondent with respect to travel to and from the Theo Halyk Company, is at odds with the CRA’s position concerning the application of paragraph 20(1)(c), which set out the requirement to be satisfied with respect, to the deduction of interest on borrowed money. The provision provides that the borrowed money must be used for the purpose of earning income from a business or property in order for interest to be deductible. The CRA accepts that interest on borrowed money used to make an interest-free loan is nonetheless deductible in the following context:
25. Interest expense on borrowed money used to make an interest-free loan is not generally deductible since the direct use is to acquire a property that cannot generate any income. However, where it can be shown that this direct use can nonetheless have an effect on the taxpayer’s income-earning capacity, the interest may be deductible. Such was the case in Canadian Helicopters where in the court found that there was a reasonable expectation on the part of the taxpayer of an income-earning capacity from the indirect use of the borrowed money directly used to make an interest-free loan. Generally, a deduction for interest would be allowed where borrowed money is used to make an interest-free loan to a wholly-owned corporation (or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings) and the proceeds have an effect on the corporation’s income-earning capacity, thereby increasing the potential dividends to be received. These comments are equally applicable to interest on borrowed money used to make a contribution of capital to a corporation of which the borrower is a shareholder (or to a partnership of which the borrower is a partner). A deduction for interest in other situations involving interest-free loans may also be warranted depending upon the particular facts of a given situation.[7]
It is reasonable to infer that the service provided by Mr. Halyk to the Theo Halyk Company enhanced that corporation’s ability to pay dividends to Myrdan. Moreover, Lyncorp is distinguishable on the basis that none of Lyncorp’s subsidiaries were wholly owned by it.
3.2.2[4] The “all or substantially all” test: use to transport goods, equipment or passengers in the course of gaining or producing income
[39] In Pronovost, Associate Chief Judge Bowman (as he then was) pointed out:
The 90% rule used by the CCRA has no statutory basis although it may be necessary that some sort of rigid criterion be applied administratively. That does not mean that the court must follow it . . . [9]
[40] In 547931 Alberta, Judge Bowie adopted a similar view:
. . . [i]f Parliament had intended that 90%, or any other fixed percentage, should govern, then it would have expressed that in the statute, rather than using what is obviously, as Judge Bowman put it in Ruhl v. Canada, an expression of some elasticity. . . [10]
[41] In Ruhl v. Canada, Judge Bowman (as he then was) discussed the flexibility that the courts are entitled to show in interpreting terms such as “primarily” and “substantially all”:
The terms “substantial” or “substantially all” are expressions of some elasticity. It has been said that they are an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole. They do not require a strictly proportional or quantitative determination.[11]
[42] In light of the above, the appellants have demonstrated that they have satisfied the “all or substantially all” test in subparagraph (e)(ii) of the definition of “automobile” in subsection 248(1) of the ITA.
3.2.5 The “used . . . primarily” test: use to transport goods, equipment or passengers in the course of earning or producing income in remote locations
[43] The appellants have also demonstrated that the use of the truck brings it within subparagraph 248(1)(e)(iii) of the definition, which requires use primarily for income-earning or -producing purposes in remote locations. The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.
[49] The respondent has argues that two other trips in Mr. Halyk’s summary chart should be excluded from the subparagraph (iii) calculation, on the basis that no passengers or equipment were transported. Specifically, they are the trips to Rocky Mountain House from January 22 to 26, 2007 (410 km) and to Lloydminster and Estevan on September 5 to 10, 2007 (2,630 km). Indeed, no passengers are recorded on the summary chart. However, as discussed above, the evidence shows that Mr. Halyk was at all times transporting equipment for use in earning or producing income.
4.1 Mr. Halyk’s benefit
[50] Because the truck is not an automobile, the automobile benefit provisions in subsection 15(5), paragraph 6(1)(e), subsection 6(2) and paragraph 6(1)(k) of the ITA do not apply.
[51] The respondent did not make any proposal with respect to how Mr. Halyk’s shareholder benefit should be calculated if, as I have concluded, the truck is not an automobile. The appellants’ position is that this Court should rely on the method described in McHugh (B.J.) v. Canada.[13] Where the personal use of property is incidental to the business purpose for which the property was acquired, McHugh suggests a valuation approach based on the “fair rental value” of the shareholder’s actual use of such property owned by the corporation.
[52] McHugh does not mandate a method for determining the fair rental value of a vehicle that is based on actual use. In the absence of market information about the fair rental value of a truck such as the one used by the appellant, it appears reasonable to apply the statutory rate that is used to calculate the employee benefit for personal use of a passenger vehicle. Applying the 22-cent rate to 4,320 personal use kilometres, the shareholder benefit works out to $950.40.
Decision
[53] For the reasons noted above and taking into account the Minutes of Settlement entered into by the parties and filed at the hearing, the appeals are allowed and the reassessments are referred back to the Minister for reconsideration and reassessment on the basis that:
Myrdan’s taxation year ending October 31, 2006
a. Myrdan did not carry on a personal services business.
b. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.
c. Myrdan is entitled to additional advertising expenses of $4,097.
d. Myrdan is entitled to additional insurance expenses of $746.
e. Myrdan is entitled to additional repairs and maintenance expenses of $1,147.
f. Myrdan is entitled to additional travel expenses of $3,217.
g. Myrdan is not entitled to any additional expenses other than those noted above.
Myrdan’s taxation year ending October 31, 2007
1. Myrdan did not carry on a personal services business.
2. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.
3. Myrdan is entitled to additional advertising expenses of $4,676.
4. Myrdan is entitled to additional insurance expenses of $1,044.
5. Myrdan is entitled to additional repair and maintenance expenses of $1,406.
6. Myrdan is entitled to additional travel expenses of $3,978.
7. The assessed capital cost allowance (“CCA”) with respect of the Motor Home of $12,000 shall remain as assessed;
8. Myrdan’s pickup truck is automotive equipment within class 10 of Schedule II to the Income Tax Regulations and is not a passenger vehicle within class 10.1.
Mr. Halyk’s 2007 taxation year
1. The assessed personal use benefit with respect to the Motor Home of $6,544 shall be removed from income.
2. The assessed operating costs with respect to the Motor Home of $1,785 shall be removed from income.
3. Mr. Halyk’s personal use of Myrdan’s (pickup truck) resulted in an aggregate taxable benefit of $950.54.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.





Exempt Service for GST

Case Citation
Keeler v. The Queen (2013 TCC 28) [TCC] [CanLII]
Summary
A taxpayer’s services did not meet the requirements of being an exempt service under Part II of Schedule V of the Excise Tax Act. The act sets out specifics requirements and the the trauma therapy service simply didn’t met them.
Issue
[1] This appeal concerns whether trauma therapy services provided by the appellant, Lyn Williams‑Keeler, are exempt from goods and services tax (GST). Ms. Williams-Keeler has been assessed under the Excise Tax Act on the basis that the services are taxable except to the extent that they are covered by provincial health insurance.
ITA / ETA
Part II of Schedule V
Cases Cited
None.
Analysis
[13] The Excise Tax Act provides exempt status to a great many health care services listed in Part II of Schedule V. Services by trauma therapists are not listed specifically, but Ms. Williams‑Keeler submits that her services are encompassed by the following exemptions:
(a) a supply by a medical practitioner (section 5);
(b) a supply by a practitioner of a psychological service (section 7(j)); and
(c) a supply of a health care service made on the order of a medical practitioner or practitioner (section 10).
[14] Despite the sympathetic circumstances of this appeal, I have concluded that the services provided by Ms. Williams‑Keeler are not encompassed by any of the above exemptions. My reasons follow.
Decision
[33] I would conclude that the exemptions relied on by Ms. Williams‑Keeler do not include the trauma therapy services that she provides. Although there may be good policy arguments in favour of exempting these services, this is a matter for Parliament and not the courts. The appeal will be dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

Unreported Income, Gross Negligence Penalty

Case Citation
Murugesu v. The Queen (2013 TCC 21) [TCC] [CanLII]
Summary
A taxpayer and his corporation were engaged in placing workers with a farm in southern Ontario. As an immigrant with limited knowledge of language, laws etc. he relied on an accountant to prepare his personal tax return and those of his corporation. In doing so, the reported amounts did not reflect the facts. CRA sought to assess him and the corporation for unreported income as well as apply the gross negligence penalty under 163(2) of the Income Tax Act.
Part of the confusion lies with the fact the corporation paid some workers in cash and thus while the revenue of the corporation was understated, its cash payments for wages was also understated—a fact lost on the CRA and hence this appeal.
To the extent any funds paid from the corporation to the taxpayer were not included in income, the respondent (CRA) did not provided sufficient evidence to refute the testimony of the taxpayer.
Since the judge found no unreported income with his personal tax return, there could be no gross negligence penalty. That was not the case for the corporation, a portion of the assessed amount was unreported but did the penalty apply?
The burden is on the government to show the taxpayer acted in a way that warrants the gross negligence penalty. They could not. The judge found the taxpayer was a credible witness who unknowingly relied on an incompetent accountant. Further, the notion the penalty was assessed primarily based on the quantum of the unreported income was not relevant in determining if a person “knowingly, or under circumstances amounting to gross negligence” made a false statement in a return.
It seems to me a more thorough investigation by the CRA would have avoided this appeal. It appears they made assumptions instead of gathering facts about the taxpayer’s situation.
Issue
[14] I will first consider the Corporation’s appeal with respect to its 2002 fiscal year. The sole issue before the Court is whether the Corporation incurred an expense for wages in excess of the $301,305 reported on its 2002 income tax return.
[29] As I noted previously, the Minister assumed that Mr. Murugesu appropriated all of the unreported income of the Corporation. As a result, she included the amount of the unreported income in his income under subsection 15(1) of the Act on the basis that the Corporation had conferred a benefit on Mr. Murugesu.
ITA / ETA
| 15(1)—Benefit conferred on shareholder |
| 163(2)—False statements or omissions |
Cases Cited
| Venne v. Canada ([1984] C.T.C. 223) |
Analysis
[11] Mr. Murugesu does not know why his accountant understated the Corporation’s gross revenue. He accepts that the Corporation did understate its gross revenue by $171,142 on its income tax return; however, he argues that the First Accountant also substantially understated the Corporation’s wage expense. As a result, the unreported income is substantially less than $171,142. He also argues that the Corporation should not be subject to a gross negligence penalty.
[12] The Minister assessed Mr. Murugesu personally in respect of the $171,142 of purported unreported income. She included in his taxable income a $171,142 shareholder benefit pursuant to subsection 15(1) of the Income Tax Act (the “Act”) and imposed a $22,560 gross negligence penalty.
[23] I have reviewed the numerous time cards for the workers paid in cash that are included in Exhibit A-1. I agree with counsel for the Respondent that the hourly rates shown on the time cards are lower than the hourly rates used to calculate the Corporation’s fees. This is consistent with Mr. Murugesu’s testimony. Further, in my view, it shows that the Corporation has not attempted to overstate the cash wages it paid to certain of its workers.
[27] Exhibit R-12 provides a breakdown of the $301,305 that the First Accountant reported on the Corporation’s 2002 income tax return as wages. This breakdown shows that $59,917 of the $301,305 was for cash wages. As a result, I have concluded that the Corporation understated by $88,856 the wages reported on its 2002 income tax return. This represents the difference between the actual cash wages of $148,773 and the amount reported by the accountant, $59,917.
[28] In summary, the Corporation understated its 2002 income by $82,286, that is, the difference between its unreported gross revenue of $171,142 and the $88,856 understatement of its cash wages.
[38] I do not find the schedule particularly helpful. It certainly does not support a finding that Mr. Murugesu appropriated the $82,286 of income that the Corporation failed to report on its income tax return.
[39] The withdrawals identified by Ms. Moore [CRA Investigator] would appear to consist of the wages paid to Mr. Murugesu ($52,182), whatever wages the Corporation paid to Mr. Murugesu’s spouse and a portion of the $148,773 in cash payments that the corporation made to its workers.
[40] It is my view that the objective evidence before me supports Mr. Murugesu’s testimony that he did not appropriate any amounts from the Corporation.
[41] The Minister levied gross negligence penalties in respect of Mr. Murugesu’s 2000, 2001 and 2002 taxation years. The Minister also levied a gross negligence penalty of $11,227 in respect of the Corporation’s 2002 taxation year.
[42] Since I have found that Mr. Murugesu did not receive a shareholder’s benefit in 2002, the penalty in respect of his 2002 taxation year will be removed.
[44] Pursuant to subsection 163(3), the burden of establishing the facts justifying the assessment of the penalty is on the Minister.
[45] As Justice Strayer stated in Venne v. The Queen, [1984] C.T.C. 223 (FCTD) at 234:
. . . “Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not . . . .
[46] Ms. Moore testified that she made the decision to levy the gross negligence penalties. She testified that she based her decision on the magnitude of the unreported amounts, the fact that Mr. Murugesu and the Corporation made cash withdrawals and the fact that Mr. Murugesu used some of the cash withdrawals to purchase a new condominium. She also referred to a “rough source and applications of funds” analysis. However, the Respondent did not provide the Court with the analysis.
[47] Ms. Moore testified that she never had a conversation with Mr. Murugesu or any employee of the Corporation. Notwithstanding the fact that Sargent Farms had provided her with the employees’ time sheets, she was not aware that the Corporation paid some of its employees in cash.
[48] After reviewing all of Ms Moore’s testimony, it appears to me that she based her decision to levy the gross negligence penalties primarily on the magnitude of the unreported income. This in my view is not a sufficient fact, in and of itself, to justify the imposition of the gross negligence penalties.
[49] Mr. Murugesu testified that, because of his very limited understanding of English and the Canadian taxation system, he relied on the First Accountant to properly prepare and file his tax returns. He had no idea that the tax returns filed by the First Accountant were incorrect.
[50] Once an official from the CRA came to his home to discuss the problems with regard to his tax returns he immediately fired the First Accountant and hired a new accountant.
[51] Counsel for the Respondent did not adduce any evidence either through Ms. Moore or through his cross-examination of Mr. Murugesu that would undermine Mr. Murugesu’s credibility. As I noted previously, I found Mr. Murugesu to be a credible witness.
Decision
[56] Accordingly, the Corporation’s appeal in respect of its 2002 taxation year is allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that the Corporation, when filing its income tax return, understated its income by $82,286. The subsection 163(2) gross negligence penalty will be vacated.
[57] Mr. Murugesu’s appeal in respect of his 2000, 2001 and 2002 taxation years is allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that no amount should be included in his income for the 2002 taxation year under subsection 15(1). All subsection 163(2) penalties will be vacated.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

For Lack of Evidence Allowable Business Investment Loss Denied

Case Citation
Stinson v. The Queen (2013 TCC 22) [TCC] [CanLII]
Summary
A taxpayer sought to deduct an allowable business investment loss (ABIL) and the deduction was disallowed. The case doesn’t revolve around the fine points of law concerning what is or isn’t an ABIL but the believability of the evidence (or lack of it) put forth by the plaintiff. While the judge did not use the word sham, he may have thought of it in dismissing the appeal.
I find it interesting to see how in one case a judge will discount a plaintiff’s testimony while accept others. The words of the decision can’t capture the court proceedings and the smell test one uses. Is this taxpayer earnest and forthright or cagy and deceitful? Many cases rest on this question.
If you are wondering what an ABIL is and why it matters, here goes.
For the most part, an investment in a corporation, through shares or debt, is usually considered capital property and any loss from its disposition results in a capital loss. Capital loss can only be applied against capital gains. Enter the ABIL—a special type of capital loss in that it can be used to reduce all sources of income not just capital gains.
What is an ABIL? It is one-half of one’s business investment loss (BIL). The one-half being the inclusion rate for capital gains or loss or a BIL.
So what is a BIL? Without getting bogged down in technical details, it’s a loss on shares or debt of a small business corporation (SBC). This leads into the definition of an SBC—a Canadian-controlled private corporation (CCPC) carrying on an active business.
The progression continues onto what is a CCPC or active business etc.
The point to remember is an ABIL is more beneficial in reducing taxes than a regular capital loss provided that is what happens and you have evidence to support your claim.
Issue
[1] The appellant, Deane Stinson, appeals an assessment made under the Income Tax Act that disallowed a deduction for an allowable business investment loss (ABIL) claimed in the 2008 taxation year.
[8] The issue in this appeal is whether the appellant incurred an ABIL on December 31, 2008 on the basis that his loans to Tille were uncollectible at that time.
ITA / ETA
| 39(1)(c) “business investment loss” | | 50(1)—Debts established to be bad debts and shares of bankrupt corporation | | 248(1) “small business corporation” |
Cases Cited
None.
Analysis
[10] The respondent submits that claim of the ABIL was properly disallowed on the basis of any one of the following:
(a) Tille was not a small business corporation at any time in 2008,
(b) the appellant had not made any loans to Tille, and
(c) the appellant has not established that any loans became bad debts in 2008.
[11] I would first comment that the appellant’s case depends in large part on his own self-interested testimony and on a limited number of documents that were within the appellant’s control. I have found that there is insufficient documentation to establish the ABIL, and that and (sic) the appellant’s testimony and some of the documents entered into evidence are not reliable.
[13] As for the documents that were entered into evidence, I have concluded that some of the key documents are not reliable. For example,
(a) The appellant provided to the Canada Revenue Agency (CRA) promissory notes evidencing the debt that were purportedly signed by one of the new owners of Tille. The reliability of the notes is doubtful because there are different versions of the notes that have different wording and also different signatures.
(b) The purported demand for payment made by the appellant (Ex. A-11) states an amount owing that does not correspond with the other evidence.
(c) The purported change of ownership on December 12 and 20, 2008 whereby shares were transferred to unrelated persons (evidenced by a hand-written shareholders’ ledger) is inconsistent with a statement made by the appellant in Tille’s corporate tax return for the year ended April 30, 2009 that his sons were the only shareholders. The ownership by the sons is also reflected in an ABIL questionnaire that was provided to the CRA on January 31, 2011.
(d) The appellant submitted a list of employees to the CRA which attempts to establish that Tille had at least five full time employees. The evidence surrounding these employment relationships was implausible.
[15] The problems with the evidence were so profound that the relevant facts regarding the ABIL claim cannot be determined.
Decision
[16] I would conclude that the appeal should be dismissed on the ground that the appellant has failed to establish, even on a prima facie basis, that any debts became bad in 2008. In particular, I am not satisfied that any shares of Tille were acquired by unrelated persons in 2008, or that any debts owing to the appellant in 2008 became uncollectible in that year.
[17] The appeal will be dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

GST New Housing Rebate

Case Citation
Wong v. The Queen (2013 TCC 23) [TCC] [CanLII]
Summary
An individual purchased a new condo and claimed a GST rebate under section 254 of the Excise Tax Act. One of the requirements for the rebate is the individual must acquire the property for “use as the primary place of residence.”
The court looked the facts concerning her residency and that of her son. She maintained a larger residence in the same city while owning this property. Her son, a university student, resided in the condo for a short period during the summer break. Further the condo was tiny compared to her existing residence.
The judge found it difficult to believe she intended this condo to be her primary place of residence and denied the GST rebate.
Issue
[1] Ms. Wong is appealing the disallowance of her claim for a GST/HST new housing rebate of $22,982.71 relating to the purchase by her and her spouse of unit 501-2550 Spruce Street in Vancouver (the “Property”).
[2] The Minister of National Revenue (the “Minister”) disallowed the rebate on the basis that Ms. and Mr. Wong did not acquire the Property for use as their primary place of residence or as the primary place of residence of a relation.
ITA / ETA
| 254(2)—New housing rebate |
Cases Cited
None.
Analysis
[3] Paragraph 254(2)(b) of the Excise Tax Act, R.S.C., 1985, c. E-15 sets out that the new housing rebate is available where, at the time the purchaser becomes liable or assumes liability under an agreement for purchase and sale of the unit, the purchaser intends to use the unit as a primary residence for him or herself or for a relative.
[11] At the hearing before me, Ms. Wong presented a number of household bills to show that she and her spouse had moved into the Property and were continuing to reside there and, at one point, she went so far as to say that she and her spouse moved into the Property in August 2011. I find it extremely unlikely that they did, because it was admitted that when they took possession in August 2011, their son moved in and stayed until the end of his summer break from university. It is implausible that Ms. and Mr. Wong and their son would all stay in the Property and leave the house on West 15th Avenue unoccupied. Furthermore, the floor area of the Property was just 631 square feet. The house had a floor area of 2200 square feet and contained an office that Mr. Wong used in the evening.
[12] Mr. Wong testified that they moved into the Property in February 2012. This is consistent with Ms. Wong’s evidence that they moved in after the rebate claim had been denied. I accept that they did, in fact, begin using the Property a great deal of the time from February 2012 on, despite the fact that the Property was much smaller than their house. However, the actual use of the Property by the Wongs is not relevant, in light of their own testimony that they did not intend to use the Property as their primary place of residence when they entered into the contract to purchase it.
[14] Given that the Wongs’ son was expected to spend the majority of his time away from Vancouver in 2011, 2012 and at least the early part of 2013, and that his subsequent plans were uncertain, I find that, in December 2009, the Wongs did not expect or intend that the Property would be his primary residence.
Decision
[15] For these reasons, I find that Ms. Wong is not entitled to the GST/HST rebate, and her appeal is dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

Defence of Director’s Liability, De facto Director?

Case Citation
Chell v. The Queen (2013 TCC 29) [TCC] [CanLII]
Summary
Section 227.1 of the Income Tax Act (“ITA”) and section 323 of the Excise Tax Act (“ETA”) deal with what is referred to as director liability. In essence, where a corporation fails to remit certain amounts (e.g., payroll taxes, Part XIII tax, GST) the director’s are personally liable for these amounts and the government will take action to collect debt from directors. This case deals with this scenario.
There are two defences: first, the individual is not a director and second the director exercised due diligence in managing the affairs of the business. This case addresses both these points.
On the question of being a director, it’s clear one must look to commercial law, the laws governing the corporation, to determine if the person is considered a director. This is referred to as a de jure director. In this case, the individual sent notice to resign as a director; however, subsequent to his resignation, he behaved in a manner consistent with being a director and hence was considered to be a de facto director.
Since, the judge concluded he was a director and the assessment was made within the two year time limits of ITA 227.1(4) and ETA 323(5), the next question to address was whether the individual exercised due diligence.
The judge’s opinion was no. Given the plaintiff knew about the financial difficulties of the business and it’s obligations to remit taxes to the government, a reasonable person would not use funds to support a failing business and neglect its remittance obligations.
Issue
[1] The appellant, Allan A. Chell, is appealing three director’s liability assessments issued against him on May 5, 2008. One assessment pertains to the failure of cDemo Inc.’s (“cDemo”) to remit payroll source deductions (“source deductions”) for its 2003, 2004 and 2005 taxation years. The assessed amount is $53,768.95. Another assessment relates to cDemo’s failure to remit goods and services tax (“GST”) amounts in 2005. The assessed amount is $3,289.39. The third assessment pertains to the failure of Global Autolink Corp. (“Global”) to remit payroll source deductions. The assessed amount is $239,838.42. These appeals were heard on common evidence.
[15] There are two issues in these appeals:
1. First, was the appellant either a de jure or de facto director of cDemo or Global within the two years preceding the assessments?
2. If so, can the appellant rely on the so-called due diligence defence under subsections 227.1(3) and 323(3) of the Income Tax Act (“ITA”) and Excise Tax Act (“ETA”) respectively?
ITA / ETA
| Section 227.1—Liability of directors for failure to deduct |
| 227.1(1)—Liability of directors for failure to deduct |
| 227.1(3)—Idem [Limitations on liability] |
| 227.1(4)—Limitation period |
| Section 323—Tax liability re transfers not at arm’s length |
| 323(1)—Liability of directors |
| 323(3)—Diligence |
| 323(5)—Time limit |
Cases Cited
| Aujla v. Canada (2008 FCA 304) |
| Bremner v. Canada (2009 FCA 146) |
| Buckingham v. Canada (2011 FCA 142) |
Analysis
[16] The appellant argues that he ceased to be a director of cDemo and Global on January 11, 2006, the date on which he posted his letter of resignation at the offices of the two corporations. The appellant submits that, consequently he is not liable for the unremitted source deductions and GST because his resignation occurred more than two years before the assessments. According to the appellant, his continued involvement with cDemo and Global was solely in the capacity of creditor and shareholder, and not as a director. Finally, in the event of a finding to the contrary, the appellant claims that he exercised due diligence to prevent cDemo and Global from failing to remit the source deductions and GST.
[17] In response, the Minister submits that the appellant did not cease to be a director of cDemo or Global more than two years before the assessments. Further, the Minister contends that the appellant did not exercise due diligence to prevent cDemo and Global from failing to remit the source deductions and GST. Therefore, he is liable for their payment.
[20] In the present appeals, it is therefore necessary to determine whether the appellant was a director within the two years preceding the assessments for director’s liability.
[21] Neither the ITA nor the ETA defines when an individual ceases to be a director for the purpose of the director’s liability provisions. Rather, the corporate law of the relevant jurisdiction is determinative: Aujla v. Canada, 2008 FCA 304, [2009] 3 F.C.R. 93, at paragraphs 23 to 25.
[22] A director may be a de jure director or a de facto director for the purpose of director’s liability under the ITA and ETA: see Mosier v. R., [2001] G.S.T.C. 124 (TCC), at paragraph 23. A de jure director is an individual who has been appointed as such pursuant to the corporate law of the jurisdiction in which the corporation was created or continued, as the case may be. A de facto director can exist in two forms. As Bowman A.C.J., as he then was, observed in Mosier, at paragraph 23, “de facto directors can be those who are ostensibly duly elected but who may lack some qualification under the relevant company law, and those who simply assume the role of director without any pretence of legal qualification”. Either de jure or de facto directorship can give rise to director’s liability.
[23] If the appellant was a de jure or de facto director within the two years preceding the assessments for director’s liability, then he is liable for the unremitted source deductions and GST. This is so unless he can rely on the due diligence defence available under both the ITA and ETA.
[27] By posting his letter of resignation at the offices of cDemo and Global on January 11, 2006, the appellant provided to the corporation’s proper notice of resign action under both Delaware and Alberta corporate law. Since he ceased to be a de jure director more than two years before the assessments, it is necessary to determine whether the appellant was a de facto director of cDemo and Global despite his legal resignation.
[28] Following his legal resignation as a director of cDemo, the appellant continued to be actively involved with that company. As discussed above, the appellant negotiated the sale of certain assets of cDemo, signing his name on the corresponding bill of sale. Only a director of cDemo could have authorized the sale of cDemo’s assets. Although this sale occurred May 16, 2007, de facto directorship “must be considered to endure at least as long as [the] person manages or supervises the management of the business and affairs of the corporation in question”: see Bremner v. The Queen, 2009 FCA 146, at paragraph 8.
[29] The appellant continued to act as a de facto director of cDemo until at least June 2006. As noted above, the appellant signed in that month a statutory declaration removing a fellow director from the Alberta Corporate Registry. Such a declaration is effective only if signed by a director. Although the appellant claimed at trial that he was unaware that he was signing in the capacity of director, it is difficult to accept that he thought he could have made that change in the capacity of creditor or shareholder. This evidence suggests that the appellant was a de facto director of cDemo until at least June 2006.
[32] By continuing to act on behalf of Global, the appellant created the impression that he was still a director of the corporation. In my view, the evidence demonstrates that the appellant was a de facto director of Global until at least October 2006, at which time he ceased attempting to conclude a long‑term contract with a prospective client of Global’s.
[36] In The Queen v. Buckingham, 2011 FCA 142, the Federal Court of Appeal confirmed that an objective standard must be used to determine whether a director has satisfied the conditions of the due diligence defence under subsections 227.1(3) of the ITA and 323(3) of the ETA. Mainville J.A. stated:
37 . . . I conclude that the standard of care, skill and diligence required under subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act is an objective standard . . . .
38 . . . Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction . . . .
39 An objective standard does not however entail that the particular circumstances of a director are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard. . . .
Clearly, subsections 227.1(3) of the ITA and 323(3) of the ETA entail a modified objective analysis which involves considering what a reasonable person would have done in the circumstances of the individual under assessment.
[37] To establish the defence, the director or former director must show that he or she took positive actions to prevent the corporation’s failure to remit the amounts in question. In Buckingham, the Federal Court of Appeal compared the aforementioned provisions with paragraph 122(1)(b) of the Canada Business Corporations Act, which requires directors and officers to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. Mainville J.A. wrote:
40 The focus of the inquiry under subsections 227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act will however be different than that under 122(1)(b) of the CBCA, since the former require that the director’s duty of care, diligence and skill be exercised to prevent failures to remit. In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.
[38] At trial, the appellant agreed that he was an inside director who was very familiar with the businesses of both cDemo and Global. The appellant also described his function with the two corporations as being to find new clients in order to develop new business. A reasonably prudent director with that level of familiarity with the businesses of cDemo and Global would have been aware of the significant financial difficulties facing the two corporations. The evidence shows that the appellant did not take any positive steps to ensure that the corporations continued to meet their remittance obligations. Instead, the source deductions and GST were diverted to fund the corporations’ failing businesses.
[40] The evidence shows that the appellant did not exercise “the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances”. A reasonable person in the appellant’s circumstances would have anticipated that the corporations’ financial difficulties could affect the remittance obligations of the two corporations and would have taken steps to prevent failures to remit. The appellant’s lack of oversight and his inaction cannot serve as the foundation of a due diligence defence.
Decision
[44] For all these reasons, the appeals are dismissed, with one set of costs to the respondent.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

Capital Gain Taxable, Tax Year Not Statute-Barred

Case Citation
Estate of the Late Catherine M. Roud v. The Queen (2013 TCC 36) [TCC] [CanLII]
Summary
A taxpayer owned shares in a public corporation. The company reorganized itself as a unit trust. As part of the reorganization shareholders received units of the trust in exchange for their shares. Such an exchange is a taxable event—there are no tax deferral provisions. The taxpayer did not report the capital gain on the shares and should have.
On a second matter, the return was not statute-barred as the judge found the failure to report the gain, “resulted in a misrepresentation in that return attributable to neglect or carelessness.” Given the amounts involved and the information circulars delivered to shareholders explaining the reorganization, it wasn’t reasonable for the taxpayer to take the position the event was not taxable.
Issue
[3] The issues to be decided are whether:
i) Ms. Roud realized a taxable capital gain when shares owned by her were the subject of an income trust conversion in 2006; and,
ii) Whether Ms. Roud’s 2006 year was statute-barred when the Canada Revenue Agency (“CRA”) reassessed her 2006 year to include the unreported gain.
ITA / ETA
| 152(4)—Assessment and reassessment |
Cases Cited
None.
Analysis
[8] It is the Appellant’s position that no capital gain should have been realized and taxed at that time because (i) the Aliant corporate shares were not sold for cash but merged into Bell Aliant Trust Units, or (ii) perhaps Aliant Inc. was merely renamed Bell Aliant.
[9] Unfortunately for Ms. Roud and for other individuals and taxable entities, income trust conversions did not qualify for tax deferred corporate rollover treatment under the Income Tax Act (the “Act”) even though such a rollover would have been available had shares been converted into or exchanged for shares of another corporation as was the case when her Newtel shares were exchanged for Aliant Inc. shares. The tax treatment of corporations and their shareholders under the Act differs significantly from the tax treatment of trusts and their unitholders. For this reason, Ms. Murphy’s argument can not succeed. Ms. Roud did dispose of her Aliant Inc. shares and received in exchange the Bell Aliant Trust units. The amount of proceeds she received for her Aliant Inc. shares is the fair market value of Bell Aliant Trust units she received. It does not matter that she did not receive cash.
[11] There is absolutely no suggestion that either Ms. Roud or Ms. Murphy intended to do anything wrong. Income trust conversions are complex but different from the earlier conversion of Ms. Roud’s Newfoundland Telephone Newtel shares into shares of Aliant Inc. in the 1990s. However, in these circumstances, I am satisfied that the failure to include the capital gain in Ms. Roud’s 2006 tax return resulted in a misrepresentation in that return attributable to neglect or carelessness. The result of this is that the normal three-year reassessment period did not apply and the 2006 year is not statute-barred with respect to this taxable capital gain.
Decision
[12] For these reasons this appeal must be dismissed. I would note as an aside that does not affect my decision that the CRA believes it overstated Ms. Roud’s adjusted cost base in her shares by more than $1,000. If so, this is to her favour as the CRA cannot seek to increase the reassessment in this appeal. Further, it appears that had Ms. Roud not exchanged her shares in 2006 for trust units, or even if there had been a tax-deferred rollover available, this capital gain would have been realized and taxable in 2007 upon her death in any event.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

No Donation Receipt, No Tax Credit

Case Citation
Sklodowski v. The Queen (2013 TCC 37) [TCC] [CanLII]
Summary
The taxpayer claimed tax credits for cash donations to two churches. There were two problems with the claims. First, the taxpayer had no receipt as required under subsection 118.1(2) of the Income Tax Act. Second, an audit of the churches showed receipts being issued for amounts far in excess of amounts received. In short, it appears there was a scam.
The court confirms a donation tax credit will not be allowed if the receipt does not meet the prescribed requirements as set out in Regulation 3501(1).
Issue
[16] Are Mr. Sklodowski and Mr. Ashbert entitled to tax credits based on charitable cash donations of $6,000 and $8,000 by Mr. Ashbert in 2006 and 2007 to The Redemption Power International Ministry and The Christ Healing Church respectively and of $9,250 by Mr. Sklodowski in 2007 to The Christ Healing Church?
ITA / ETA
| 118.1(2)—Proof of gift |
| 118.1(3)—Deduction by individuals for gifts |
| PART XXXV—GIFTS—3500 |
| PART XXXV—GIFTS—3501 |
Cases Cited
Afovia v. The Queen (2012 TCC 391) [TCC] [CanLII]
Analysis
[17] The Respondent argues that they are not entitled to such credits for two reasons:
a) first, the receipts provided by Mr. Sklodowski and Mr. Ashbert to support the credits do not contain the requisite prescribed information;
b) second, Mr. Sklodowski and Mr. Ashbert have not proven they made the cash donations.
[18] Section 118.1(2)(a) of the Income Tax Act (the "Act") reads:
118.1(2) A gift shall not be included in the total charitable gifts, total Crown gifts, total cultural gifts or total ecological gifts of an individual unless the making of the gift is proven by filing with the Minister
(a) a receipt for the gift that contains prescribed information;
[21] In the recent case of Afovia v. Her Majesty the Queen,[1] Justice Paris dealt with both these issues. He had this to say about the receipt requirements:
9. The question that must be decided by this Court is whether it is mandatory that a charitable donation receipt contain all of the information listed in subsection 3501(1) of the Regulations, including a serial number and the name and Internet website of the Canada Revenue Agency. On the basis of the clear wording of that provision, I find that all of the information listed there is mandatory. The material portion of the section states that “every official receipt issued by a registered organization . . . shall show clearly in such a manner that it cannot be readily altered . . .” the information listed in paragraphs (a) to (j).
14. The fact that the appellants were unaware of what information was required on a charitable receipt cannot relieve them of the obligation to support their claim for the charitable donation tax credits with official receipts that contain the prescribed information. This Court is bound by subsection 118.1(2) of the Act.
Decision
[25] Something is rotten in the state of Denmark, but I have insufficient evidence to pinpoint exactly what. I do, however, have enough evidence to find both that the receipts are deficient and also that Mr. Sklodowski and Mr. Ashbert did not make the cash donations claimed. The Appeals are therefore dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

Another Case of Unreported Income

Case Citation
Zhang v. The Queen (2013 TCC 19) [TCC] [CanLII]
Summary
Unreported income.
Issue
[1] Wen Zhang appeals assessments made under the Income Tax Act in which Mr. Zhang’s income was determined by what was referred to as an application of funds method. Under this method, the Minister assumed that Mr. Zhang’s personal expenditures were funded from unreported income to the extent that the expenditures exceeded other known sources of funds. Mr. Zhang submits that the assessed amounts were loans and not unreported income.
ITA / ETA
| 152(4)—Assessment and reassessment |
| 152(3.1)—Definition of “normal reassessment period” |
Cases Cited
None.
Analysis
[5] Mr. Zhang testified that when his brother and sister lost their jobs in China, he suggested that they start a business of selling crystal minerals on eBay.
[9] The eBay business earned annual revenues in the neighbourhood of $1,000,000 during the period at issue.
[11] The Canada Revenue Agency (CRA) became aware that Mr. Zhang had eBay accounts, and they contacted him for further information. In the initial call Mr. Zhang denied having eBay or PayPal accounts, but he acknowledged the accounts in a subsequent conversation. After further investigation, the CRA determined that Mr. Zhang had approximately 40 bank accounts associated with the eBay business to which significant deposits were made.
[12] The CRA was not provided with any business records to verify the reported income. Accordingly, income was determined using the “application of funds” method. The starting point was a determination of Mr. Zhang’s actual personal expenditures. These amounts were then reduced by known sources of funds, and the balance was assumed to be unreported income from the consulting business.
[16] The first issue is whether the assessed amounts are income or loans.
[17] One of the major difficulties that I have with Mr. Zhang’s position is that it depends largely on his own self-interested testimony. No business records were provided for either the eBay business or Mr. Zhang’s consulting business, and there was no contemporaneous supporting documentation regarding either the commissions or the loans.
[19] First, Mr. Zhang did not provide detailed testimony as to the assistance that he provided for the eBay business. For example, in the notice of appeal Mr. Zhang stated that he taught the brother and sister how to sell on eBay and that he opened eBay and PayPal accounts for them. However, it came out in cross-examination that Mr. Zhang opened a great many bank accounts for the business and managed the funds. This suggests that Mr. Zhang may have been quite involved in the day‑to-day business activity and may have earned more than the modest commission that was reported in the income tax returns.
[20] Second, there was no clear reconciliation between what Mr. Zhang said he earned as commission and what was reported in the income tax returns. Mr. Zhang provided some explanations but the explanations seem to raise more questions than answers.
[22] Further, if Mr. Zhang owed money to his sister and brother I find it implausible that he would not keep a record of these amounts.
[23] The lack of contemporaneous documentation is a serious problem in this case because there is nothing to corroborate Mr. Zhang’s self-interested testimony. Taxpayers are required to keep satisfactory records so that their income can be verified.
[26] A second issue concerns the assessment for the 2006 taxation year which was made beyond the normal reassessment period. The Crown submits that the assessment was properly made under s. 152(4) of the Act because the under‑reporting of income was willful.
[27] The Crown bears the burden to establish that the failure to report income was careless, negligent or willful. It has met this burden by establishing that Mr. Zhang withdrew more from the eBay business than what was reported, and that he attempted to hide this source of income from the CRA. A credible case has been made that Mr. Zhang knowingly under-reported the income, and Mr. Zhang has failed to provide reliable evidence to rebut this finding. I would conclude that the assessment for the 2006 taxation year is not statute barred.
Decision
[28] The appeal will be dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

ITC Denied on Car Allowance to Employees

Case Citation
I-D Foods Corporation v. The Queen (2013 TCC 15) [TCC] [CanLII]
Summary
In I-D Foods Corporation v. The Queen (2013 TCC 15) the court was asked to determine if the corporation was allowed a GST input tax credit (ITC) on car allowances paid to employees.
Under paragraph 174(c) the Excise Tax Act (ETA), an employer is allowed an ITC “if the allowance were a reasonable allowance for the purposes of that subparagraph.” The relevant subparagraph it refers to is subparagraph 6(1)(b)(v) of the Income Tax Act (ITA). Under paragraph 6(1)(b), a car allowance is not a taxable benefit if it is reasonable. Subparagraph 6(1)(b)(x) deems, for the purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1), an allowance is not reasonable if it is not based solely on the number of kilometres used.
In this case, for the purposes of determining if the amounts were taxable benefits under the ITA, the judge concluded the allowances were not reasonable since the amounts were, in large measure, based on estimates of what an employee would drive for a given territory and not on actual kilometres driven. For the purpose of the ITA, subparagraph 6(1)(b)(x) applied, but did it apply to the ETA?
The judge writes at paragraph 27,
“Although one could argue that subparagraph 6(1)(b)(x) of the ITA does not apply for the purposes of 174(c) of the ETA on the basis that paragraph 174(c) does not explicitly refer to it, I believe that the better view is that it does apply.”
And at paragraph 28,
“In my view, it makes sense to take into account subparagraph 6(1)(b)(x) in applying subparagraph 6(1)(b)(v) of the ITA for the purposes of section 174 of the ETA. It results in a more harmonious application of those two Acts…”
The harmonious application he refers to concerns deductions under the ITA in calculating income and GST credits or rebates. In essence, the person claiming the income deduction for car expenses should also be the one who claims the GST credit or rebate. In this case, the sales reps would claim car expenses, since the allowance is included in income, and would claim a GST rebate since they paid GST on their car expenses. The employer is denied a GST ITC since both can’t claim a credit or rebate for the same amount.
While I agree with the conclusion, I cannot fully support the reasoning since some employees receiving a car allowance won’t be eligible to deduct car expenses under ITA section 8 nor claim a GST rebate while the employer would not, based on this case, be eligible for a GST ITC.
In my view, ETA 174(c) states, “…a reasonable allowance for the purposes of that subparagraph.” To be reasonable for the purposes of “that paragraph”, in this case subparagraph 6(1)(b)(v), one is restrained by the conditions of subparagraph 6(1)(b)(x) with the phrase, “and for the purposes of subparagraphs 6(1)(b)(v)…” An allowance is reasonable if and only if it satisfies the requirements of subparagraph 6(1)(b)(x).
Issue
[1] I-D Foods Corporation (IDF) is appealing an assessment issued by the Deputy Minister of Revenue of Quebec on behalf of the Commissioner of Revenue of Canada (Minister) pursuant to the Excise Tax Act, R.S.C. 1985, c. E‑15 (ETA). The relevant period is January 1, 2005 to December 31, 2007. By that assessment, the Minister disallowed input tax credits (ITCs) for the relevant period aggregating $126,338.98 in respect of car allowances paid by IDF to its employees for the use of their cars in the course of the performance of their employment duties. The relevant section is section 174 of the ETA, which refers to subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the Income Tax Act, R.S.C. 1985 (5th supp.), c. 1 (ITA). In the end, the main issue raised by this appeal is more legal than factual and concerns the scope of the application of section 174 of the ETA. More specifically, the issue is whether subparagraph 6(1)(b)(x) of the ITA, as interpreted by the Federal Court of Appeal in Ville de Beauport v. Minister of National Revenue, 2001 FCA 198, [2002] 2 C.T.C. 161, must be taken into account in applying paragraph 174(c) of the ETA.
ITA / ETA
| Section 174—Travel and other allowances |
| Section 253—Employees and partners |
| 6(1)(b)—Personal or living expenses |
| 18(1)(r)—Certain automobile expenses |
Cases Cited
| Cat Bros. Oilfield Construction Ltd. v. M.N.R. (2010 TCC 287) |
| Melville Motors Ltd. v. The Queen (2003 TCC 444) |
| Ville de Beauport v. Canada (MNR) (2001 FCA 198) |
Analysis
[2] IDF has been carrying on a business of importing and distributing food products in Canada since 1948. Its annual sales approximated $85 million to $90 million per year during the relevant period. IDF had during that period approximately 80 employees (described as sales representatives) involved in distributing its products, and it paid their salaries every two weeks. According to the testimony of Mr. Domenic Nardolillo, his remuneration was in part fixed and in part based on the sales that he made. Besides the sales director, Mr. Nardolillo was the only sales representative to testify at the hearing. Each IDF sales representative was given an exclusive territory to service. The work was performed mostly on the road and involved visiting stores and collecting orders five days a week.
[3] The sales representatives had to use their own cars to carry out their duties, and IDF paid them a car allowance. According to Ms. Linda Ross, who was in charge of IDF’s payroll, this car allowance had three components: the cost of gas, the cost of insurance — up to a $1000 limit — as evidenced by an invoice, and the other costs for the car. IDF determined the amount of the allowance using its in‑depth knowledge of the number of kilometres to be travelled to cover a particular territory. According to Diane Dault, the person in charge of sales, who has been with the company for 29 years, the allowance is based on the kilometres having to be driven by a sales representative and on the sales target assigned to that sales representative. For instance, IDF took into account past experience with regard to that particular territory, for example, the number of kilometres driven in that territory in the preceding year. She also got daily and weekly sales reports in respect of each of her sales representatives, so she knew which clients had been visited in the territory.
[4] Once the estimate of the annual travelling costs for a particular territory was made, the total was divided by 26 and a flat-rate allowance was paid every two weeks along with the remuneration of the sales representatives. Certain sales representatives were allowed to use a company credit card to pay for their gas. However, the amount of such transactions was deducted from the car allowance (see Exhibit I-1, page 4.21). Furthermore, the flat-rate allowance paid biweekly could be adjusted every three months to take into account the actual cost of gas (see Exhibit I-1, page 4.20).
[7] Mr. Siino, an employee of the Minister who prepared the tables filed as Exhibits I-5 and I-6 and who wrote the portion entitled “Autres constatations” in the appeals officer’s report (Exhibit I-4), noted that some sales representatives had moreover received exactly the same car allowance, although they had not travelled the same number of kilometres.
[11] At the hearing and in IDF’s Notice of Appeal, IDF’s counsel as good as conceded that the car allowances were estimated.
[13] From this description, I conclude that IDF was paying an allowance which was based on an estimated number of kilometres to be travelled by a sales representative and not on the actual kilometres driven. The amount estimated represented in most cases a very good effort to fix a reasonable car allowance for the employees. However, the issue is whether that method meets the requirements of section 174 of the ETA. To paraphrase the argument made by IDF’s counsel, what must be determined is whether the estimate made by IDF of the kilometres to be travelled meets the requirements of section 174. More specifically, to use the wording of paragraph 174(c), the issue is whether the amount determined to be reasonable by the person (employer) can be considered reasonable for the purposes of subparagraph 6(1)(b)(v)[3] of the ITA.
[17] However, that view does not appear to be shared by IDF’s accountant, who maintained that the ITCs could be recovered by the sales representatives. This is what he wrote to Ms. Daviau on October 27, 2009 (Exhibit I-3) :
Furthermore, please note that deeming the automobile allowances unreasonable and therefore making them taxable would not benefit either the Minister or our client.
As clearly shown on the logs already submitted, the employees substantially use their automobiles for employment purposes and therefore would be entitled under section 63.1 of the Quebec Taxation Act to claim automobile expenses for the years in question.
This would result in having the Minister amend the 2005, 2006 and 2007 personal tax returns of all employees in order to allow employment expenses and GST/QST rebates.
Since there are approximately 110 employees that would be directly affected, the Minister would have to amend approximately 330 personal tax returns.
[18] The respondent’s counsel submits that the assessment should be confirmed because the allowances paid by IDF do not meet all the requirements of section 174 of the ETA. In order for an allowance to be reasonable for the purposes of paragraph 174(c), it is necessary that the measurement of the use of the vehicle be solely based on the number of kilometres for which the vehicle was used in connection with the employment, as required by subparagraph 6(1)(b)(x) of the ITA. In support of this position, counsel for the respondent relied on the decision Tri-Bec Inc. v. R., 2003 G.S.T.C. 75, 2003 G.T.C. 762, 2002 G.S.T.C. 27 (Fr.) at paragraph 19, where Judge Lamarre Proulx stated:
19 Subparagraph 6(1)(b)(x) of the Income Tax Act is clear in my view. Since section 174 of the Act refers to this statutory provision, a reasonable allowance for the use of a motor vehicle is one that is fixed on the basis of the number of kilometres travelled by the taxpayer in the performance of the office or employment.[5]
[19] In Beauport, where the application of subparagraph 6(1)(b)(x) of the ITA was considered, Justice Noël of the Federal Court of Appeal wrote, at paragraph 17:
17 In this instance, the scheme introduced by the applicant does not take into account the number of kilometres actually travelled by the employees during the period for which the allowances are paid but is based on an estimate determined by reference to the previous period. That is precisely the type of calculation that was excluded when subparagraph 6(1)(b)(x) was adopted and the Tax Court Judge's reading of that provision was in conformity with the statutory language and not incompatible in any way with the concept of an allowance.
[20] The relevant facts of that case are summarized at paragraph 5 of the reasons:
5 The evidence established that the applicant had introduced a "motor vehicle allowance policy" based on figures contained in a specialized publication prepared by the Quebec Automobile Club (CAA-Quebec). To calculate an amount per kilometre, the applicant together with the union tried to determine average operating costs that took into account fixed and variable costs for the use of a vehicle. It then applied that amount to a value representing the approximate annual kilometres driven that was extrapolated from the total kilometres actually driven by its employees during a three-month reference period.
[21] Here, as was done in Beauport , IDF determined the allowance on the basis of past experience. The measurement of the use of the vehicle was an estimated number of kilometres to be travelled in a particular territory. The allowance could be adjusted on a three-month basis to take into account the actual cost of gas. However, this adjustment could not, in my view, differentiate between use of the car for the performance of employment duties and use for personal purposes. Furthermore, at the end of the year, when the sales representatives reported the actual number of business kilometres for which they used their cars during the year, IDF did not adjust the allowance paid in the year. Here, the rate per kilometre which was determined by IDF’s accountant was useful to establish how reasonable the allowances paid were; however, the actual number of business kilometres travelled by a particular representative was not used in determining the actual allowance paid to the representative. Therefore, as I have concluded above, the allowances paid were based on an estimate of the kilometres to be travelled and not on the actual number of kilometres for which the vehicles were in fact used by the representatives in performing their duties during the relevant year.
[22] If the ITA were the only Act to be applied, the merit of IDF’s appeal would be easily determined, in light of the pronouncements of the Federal Court of appeal in Beauport, which confirmed the decision of Judge Dussault of this Court. However the issue to be determined is whether the car allowances paid to the representatives meet the requirements of paragraph 174 of the ETA. More particularly, it must be decided whether the determination made by IDF that it had paid a reasonable allowance is reasonable for the purposes of subparagraph 6(1)(b)(v) of the ITA.
[27] Although one could argue that subparagraph 6(1)(b)(x) of the ITA does not apply for the purposes of 174(c) of the ETA on the basis that paragraph 174(c) does not explicitly refer to it, I believe that the better view is that it does apply. Therefore, subparagraph 6(1)(b)(x) has to be taken into account to determine what constitutes a reasonable allowance for the purposes of subparagraph 6(1)(b)(v) of the ITA.
[28] In my view, it makes sense to take into account subparagraph 6(1)(b)(x) in applying subparagraph 6(1)(b)(v) of the ITA for the purposes of section 174 of the ETA. It results in a more harmonious application of those two Acts, which can be illustrated as follows in this particular case. Given that under the ITA, IDF sales representatives would have to include the car allowance in their income because it was not a reasonable one as a result of the application of subparagraph 6(1)(b)(x) of the ITA, IDF could deduct the allowance under paragraph 18(1)(r) of the ITA because it was included in the IDF representatives’ income from employment. Those representatives would normally deduct their car expenses under paragraph 8(1)(f) of the ITA[9] and claim the GST rebate under section 253 of the ETA. In that situation, the GST “credit” (i.e., ITC or rebate) is claimed by the person who deducts the car expenses. This is a logical result. Indeed, if one were to adopt the view taken by IDF, the odd result would be that IDF could claim the ITCs and the representatives could not, although they are the ones who would be deducting the car expenses. This would be so because IDF could not give the certification that is required by section 253 of the ETA in order for the representatives to be entitled to claim the GST rebate. The certification mechanism described in section 253 of the ETA prevents the employer and the employee from each getting ITCs and the rebate for the same expenses.
[29] Having concluded that the proper interpretation of paragraph 174(c) of the ETA requires that a determination of what constitutes a reasonable allowance under subparagraph 6(1)(b)(v) of the ITA must take into account the provisions of subparagraph 6(1)(b)(x) of the ITA as interpreted by the Federal Court of appeal in Beauport, and that the allowances paid by IDF were not determined by taking into account solely the number of kilometres for which the representatives used their cars, the inescapable consequence is, unfortunately for IDF, that the requirements of section 174 have not been met.
Decision
[30] For all of these reasons, the appeal by IDF is dismissed and costs are awarded to the respondent.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.