Date: 20000418
Dockets: 98-1432-IT-I; 98-1437-IT-I
BETWEEN:
RÉAL BERNIER, AGENCE J.W.E.R. BERNIER LTÉE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
(Delivered orally from the bench on August 17, 1999, at Montréal, Quebec, and modified at Ottawa, Ontario, on April 18, 2000)
Lamarre, J.T.C.C.
[1] These are appeals heard under the informal procedure from assessments made by the Minister of National Revenue ("Minister") pursuant to the Income Tax Act ("Act") for the 1993, 1994 and 1995 taxation years. The appeals of Réal Bernier and Agence J.W.E.R. Bernier Ltée ("Agence") were heard on common evidence.
[2] By the assessments, the Minister disallowed expenses of $72,570 in 1993, $51,672 in 1994 and $47,285 in 1995 that Agence had claimed against its commission income. They were disallowed on the basis that they were either personal expenses of Réal Bernier, Agence's majority shareholder, or expenses considered to be unreasonable given the income generated by Agence. The Minister also disallowed all expenses relating to the operation of a bus on the ground that the bus was used only for Mr. Bernier's travel to the United States and that Agence had been unable to prove it had clients there. A taxable capital gain of $118,278 (75 percent x $157,704) was also added to Agence's income for the 1995 taxation year following a judgment by the Quebec Court of Appeal in April 1995 awarding Agence compensation from Ultramar Canada Inc. ("Ultramar") for loss of rent, for repairs and for lost profits in respect of immovable property that Agence had owned in the early 1980s and been obliged to dispose of for $1 in 1984.
[3] Agence is contesting the assessments on the ground that most of the disallowed expenses were incurred to produce business income. It acknowledges the existence of a $157,704 capital gain but submits that, even though it received that amount in 1995, the gain is taxable in 1997 since it was not until 1997 that all its remedies before the courts were exhausted. Agence also contends that the capital gain results from compensation for profit it should have made on the sale of the property, which was supposed to occur in 1981 but which was cancelled because of problems caused by a leak in the property's oil tank, for which Ultramar was subsequently held liable. According to Agence, the amount received from Ultramar in 1995 pursuant to the Quebec Court of Appeal's judgment should be taxed at only 50 percent, the capital gains tax rate applicable in 1981, and not 75 percent, the rate applicable in 1995.
[4] As regards Réal Bernier, the Minister disallowed, on the basis that they were his personal expenses or were unreasonable, expenses of $19,979 in 1993, $17,258 in 1994 and $7,591 in 1995 claimed by Mr. Bernier against his commission income. The Minister also added to Mr. Bernier's income, as shareholder benefits under subsection 15(1) of the Act, the expenses claimed by Agence for the use of the bus and certain expenses paid by Agence that the Minister considered to be Mr. Bernier's personal expenses. The amounts thus added as a shareholder benefit add up to $37,902 in 1993, $38,350 in 1994 and $31,781 in 1995. Mr. Bernier is contesting the disallowance of the expenses on the ground that they were incurred for the purpose of earning business income, and he submits that he used the bus only for business purposes. He is therefore contesting the taxation of the shareholder benefit.
[5] I have heard the testimony of Réal Bernier and Sonia Borin, who was a Revenue Canada appeals officer at the relevant time. Mr. Bernier is a financial planner who enters into insurance contracts with various clients inside and outside the province of Quebec on behalf of the Great-West Life Assurance Company, from which he receives commissions and bonuses.
[6] Mr. Bernier has also worked for Agence, which acts as an insurance broker. According to him, Agence contracts with various clients in Canada and the United States. He did not want to provide a list of Agence's clients in the United States on the ground that the list was confidential. According to Mr. Bernier, all his trips for Agence were made by bus. The bus was equipped with a computer and facilities that enabled him to travel outside Montréal, where he lives, without having to find accommodation.
[7] Agence reported gross commission income of $132,007 in 1993, $78,256 in 1994 and $46,632 in 1995. Mr. Bernier reported gross commission income of $47,693 in 1993, $41,719 in 1994 and $51,967 in 1995.
[8] The bus expenses claimed by Agence were $38,969 in 1993, $38,960 in 1994 and $33,771 in 1995. The respondent disallowed all of those expenses on the ground that Mr. Bernier could not prove the existence of clients in the United States. However, Mr. Bernier testified that almost all his trips over 75 miles (120 km) from Montréal were by bus. He filed a list of documents showing that he had a number of clients in Canada outside Montréal. The evidence also showed that Mr. Bernier travelled to the United States a number of times. However, he did not want to disclose the names of any clients there. The evidence is decidedly insufficient to enable me to conclude that Mr. Bernier went there for business purposes.
[9] I accept Mr. Bernier's testimony that he used the bus partly for business purposes in Canada. The respondent has already proposed to Mr. Bernier (at the objection stage) that Agence be allowed 50 percent of the bus expenses, which I consider reasonable in the circumstances. I therefore allow 50 percent of the expenses claimed by Agence for the bus. As regards the shareholder benefit resulting from the use of the bus, it is my view that 50 percent of Mr. Bernier's use of the bus was for personal reasons, and I reduce the shareholder benefit as calculated by the Minister by half.
[10] As for the other expenses, it is my opinion that those incurred by Mr. Bernier or Agence to repay premiums to certain clients in order to maintain bonuses from Great-West are expenses incurred for the purpose of earning income and as such are deductible. The expenses involved are those attributed to Ghislaine Duval and Roland Gagnon.
[11] All the additional disallowed expenses relating to the operation of the bus that are not of a capital nature and that are supported by vouchers are also 50 percent deductible.
[12] In conclusion, I am of the opinion that Agence should be allowed to deduct the following additional expenses from its income:
For the bus Other acceptable expenses
1993 $20,000 $2,000
1994 $20,000 $3,000
1995 $15,000 $1,500
[13] In other words, the total disallowed expenses for Agence will be reduced from $72,570 to $50,570 in 1993, from $51,671 to $28,671 in 1994 and from $47,284 to $30,784 in 1995.
[14] As for Mr. Bernier, I believe that the taxable benefit he received from using the bus was $17,500 rather than the $37,902 assessed for 1993, $17,500 rather than the $38,350 assessed for 1994 and $14,500 rather than the $31,781 assessed for 1995. That reduction of over 50 percent in the shareholder benefit as calculated by the Minister takes into account the half of the bus expenses that I consider deductible and the other expenses judged acceptable.
[15] With regard to the capital gain issue, I note that the property was sold in 1984 for $1. It was in 1984 that Agence disposed of the property for $1. Agence instituted proceedings against Ultramar in 1981, holding it responsible for the cancellation of the sale that was supposed to take place that year. That sale was not completed because of damage caused by an oil tank owned by Ultramar. Agence held Ultramar responsible for the lost profit on the property, which it assessed at $124,000. After the proceedings were instituted, the property was assigned to Agence's mortgagees for $1. The Superior Court of Quebec awarded Agence some $20,000 in damages for loss of rent and for repairs. The Quebec Court of Appeal awarded $124,000 in additional compensation for the lost profit on the property. The Court of Appeal rendered its judgment in April 1995. Following that judgment, Ultramar placed $366,864 at Agence's disposal as a tender and deposit. That amount was divided up as follows:
$137,746 principal
$91,988 interest
$137,130 additional indemnity under article 1078.1 of the $366,864 Civil Code of Lower Canada
[16] Agence tried to have the additional indemnity increased by an additional amount of interest in the Superior Court of Quebec. Its appeal was dismissed on September 6, 1996, and the Court of Appeal affirmed that decision on November 20, 1996. The Supreme Court of Canada refused leave to appeal on May 29, 1997, and Mr. Bernier's counsel were notified of this on July 16, 1997.
[17] The Minister established that Agence had a taxable capital gain for the year ending on July 31, 1995. He calculated that taxable capital gain as follows:
(i) Amount of compensation $366,864
(ii) Minus: portion applicable as interest $91,988
(iii) Capital gain $274,876
(iv) Minus: prior reserves and excess amount $117,172
(already reported by Agence)
(v) Revised capital gain $157,704
(vi) Taxable capital gain: 75% of this amount $118,278
[18] As I see it, in assessing the amount received as a capital gain, the Minister could rely only on the definition of "disposition " in subparagraph 54(b)(ii) of the Act, which reads as follows:
"disposition" of any property, except as expressly otherwise provided, includes
. . .
b) any transaction or event by which
. . .
(ii) any debt owing to a taxpayer or any other right of a taxpayer to receive an amount is settled or cancelled.
(See Wise et al. v. The Queen, 86 DTC 6023 (F.C.A.)
[19] The capital gain would result from Ultramar's payment of the debt it owed Agence. The capital gain cannot result from the transfer of the property, since it was sold in 1984 for $1.
[20] Ultramar's payment of $366,864 would in this case correspond to a disposition. To establish the capital gain, Agence had to show what the adjusted cost base of the property so disposed of was. Obviously, the Minister set that adjusted cost base at nil. I cannot conclude from the evidence that the property's adjusted cost base was anything else. Nor does Mr. Bernier seem to be contesting it, since he admits the existence of a capital gain of $157,704. I therefore conclude that the capital gain resulting from the payment of the debt must be set at $157,704. Under the definition of "disposition" found in paragraph 54(b)(ii) of the Act, a disposition occurs when a debt is settled or cancelled. According to the notice of tender declaration, the amount in question was placed at Agence's disposal on April 26, 1995. I therefore consider that the disposition occurred in the 1995 taxation year and that the capital gain was realized the same year. That gain ought not to have been included in the 1997 taxation year as was done by Agence. The Minister will have to cancel that gain for 1997. The taxable capital gain is therefore $118,278, that is, 75 percent of the capital gain as determined by the Minister, since the applicable rates are those of the year of disposition, namely the 1995 taxation year.
[21] The appeals are therefore allowed solely as regards the portion of the expenses that I have accepted and the portion of the shareholder benefit that I have set aside. The assessments are confirmed in all other respects. While the appeals were filed under the informal procedure without the appellants limiting the amounts of tax in issue in their appeals to $12,000, it is my view that, even though the tax decrease resulting from the amounts I have granted the appellants exceeds $12,000 for each year, the amount of the excess does not justify a re-hearing in accordance with the general procedure, taking into account the inconvenience and expense that would result to the parties and the interests of justice and fairness, as provided in section 18.13 of the Act.
Signed at Ottawa, Canada, this 18th day of April 2000.
"Lucie Lamarre"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 20th day of December 2000.
Erich Klein, Revisor