Date: 20010213
Docket: 2000-2763-IT-I; 2000-3576-IT-I; 2000-3577-IT-I
BETWEEN:
MARIANNE MINTENKO, RICHARD MINTENKO, MINTENKO AND CO HOLDINGS LTD.
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] These appeals pursuant to the Informal Procedure were heard together on common evidence by consent of the parties at Prince George, British Columbia on January 24, 2001. Richard Mintenko testified and called Mark Duthie, Dean McDonald, Russell Weller and Wayne Denluck. The Respondent called Daniel Doyle, the auditor on the file. There are two issues in dispute, from which all appeals follow. They are described in paragraph 3 of the Reply to Richard Mintenko's Notice of Appeal.
[2] Paragraphs 1 to 7 of this Reply read:
1. In respect of the allegations of fact contained in the Notice of Appeal, he admits that Revenue Canada has not accepted that Mintenko and Co Holdings Ltd. (the "Company") operated a Charter Boat business with an expectation of profit.
2. He denies all the other allegations of fact contained in the Notice of Appeal.
3. In reporting his income for the 1996 and 1997 taxation years, the appellant did not include any amount in respect of benefits for the use of a yacht owned by the Company and interest payments he caused to be credited to his children's shareholder loan accounts.
4. By way of Notices of Reassessment dated May 31, 2000, the Minister of National Revenue (the "Minister") included amounts of $21,570.00 and $20,173.00, respectively, in the appellant's income for the 1996 and 1997 taxation years.
5. In so reassessing the appellant, the Minister relied on the following assumptions of fact:
a) in 1996 and 1997, was a shareholder of the Company;
b) the Company is a corporation with a year end of February 28 and its shareholders are as follows:
1) the appellant,
2) Marianne Mintenko ("Marianne"), the appellant's spouse,
3) Geoffrey Mintenko ("Geoffrey"), the son of the appellant and Marianne, born December 25, 1983,
4) Christina Mintenko ("Christina"), the daughter of the appellant and Marianne, born May 27, 1985, and
5) Kim Mintenko ("Kim"), the daughter of the appellant and Marianne, born June 3, 1988;
c) in the years in question, the Company operated a logging business and an accounting business;
d) in 1996, the Company traded in a 24 foot yacht, which it owned, for a 26 foot 1996 Bayliner Cierra Express Yacht (the "Yacht");
e) in 1996, the Company began a boat charter activity (the "Activity");
f) before starting the Activity, the Company prepared no business plan to determine if it would be profitable;
g) the Yacht was only used for 20 days in 1996, 25 days in 1997 and 13 days in 1998;
h) the Activity can only be carried on for part of the year;
i) the Yacht is stored in Prince George, where the Company's shareholders live, and the Activity takes place in Prince Rupert, which is a 13 hour drive towing the Yacht;
j) the trip from Prince George to Prince Rupert costs $250.00 in fuel;
k) the Company does not advertise the Activity;
l) all charters in the period under review have been to family members and friends of the appellant;
m) the rates charged by the Company are lower than market rates;
n) the appellant is the sole operator of the Yacht and also is in charge of operating the accounting business in Prince George, as well as all the other businesses carried on by the Company;
o) the expenses of each trip are divided by the number of persons onboard, including the appellant, and then the Company invoices each person for that amount, which is reported as revenue to the Company;
p) the revenue from the Activity is not sufficient to cover the interest expenses of the Yacht;
q) the Company does not plan any material changes to the Activity in the near future;
r) the Company did not have a reasonable expectation of profit from the Activity during the 1996 and 1997 taxation years;
(r) the expenses claimed in relation to the Activity were personal or living expenses of the appellant;
(s) in 1991, the appellant caused an amount totalling $11,602.32 to be taken out of the trust accounts of Geoffrey, Christina and Kim to be used by the Company to buy a skidder for its logging operation;
(t) credits of $5,363.68, $4,218.79 and $2,019.85, respectively, were made to the shareholder loan accounts of Geoffrey, Christina and Kim in accordance with the sum that had come out of their account;
(u) promissory notes, dated December 31, 1991 and signed by the appellant on behalf of the Company, were issued to Geoffrey, Christina and Kim for the amounts taken from their accounts;
(v) the promissory notes had a 5 year term, expiring on December 31, 1996 (at which time a new note was to be issued) with interest at the rate of 12 percent per annum payable on December 31 of every year;
(w) interest was credited to the shareholders loan accounts of Geoffrey, Christina and Kim at December 31 of each year from 1991 to 1996;
(x) the skidder was sold in 1993 and the profit was not reinvested in the Company but was debited to Marianne's shareholder loan account;
(y) the Company has never repaid the loans and new promissory notes were never issued;
(z) the Company claimed interest expense in the amount of $5,922.00 in 1997 in respect of interest credited to the shareholder loans of Geoffrey, Christina and Kim in that fiscal year;
(aa) the interest expense was not incurred to earn income from a business or property; and
(bb) the Company conferred the following benefits on the appellant in his capacity of shareholder of the Company:
i) $15,648.00 and $20,173.00 in respect of the use of the Yacht in 1996 and 1997, respectively, and
ii) $5,922.00 in respect of amounts he caused the Company to credit to the shareholder loan accounts of Geoffrey, Christina and Kim in the 1996 taxation year.
B. ISSUES TO BE DECIDED
6. The issue is whether the Appellant received the benefits totalling $21,570.00 in 1996 and $20,173.00 in 1997 from the Company in the capacity of shareholder, or, alternatively, in the capacity of employee.
C. STATUTORY PROVISIONS RELIED ON
7. He relies on section 9 and subsections 6(1), 15(1), 15(2) and 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").
[3] The evidence did not refute assumptions 5(a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (l), (m), (n), (o), (p), (s), (t), (u), (v), (w), (x), (y) and (z). Assumptions r) and (rr) and (aa) and (bb) are the subjects of dispute.
[4] Assumption (k) was disputed because Richard and his witnesses testified that he keeps a two foot by two foot notice board in his professional accounting office (where he has conducted an accounting and income tax practice for years) advertising the fishing charters. However, Mr. Doyle, the auditor, did not see it there when he conducted the audit and no one testified to the dates it was there. As a result, the Court finds that the notice board was not on display during the years in dispute, and that the Company did not advertise the activity until after Revenue Canada's audit began. Since the audit the Company has endeavoured to attract foreign tourists to its charters by word of mouth through Richard's acquaintances but, in all other respects, (q) was not refuted.
[5] Assumptions (s) and (x) respecting the interest benefit assessed, require some expansion from the evidence. Marianne was the trustee. No trust agreement was filed. Richard referred generally to the trusts as "bare trusts", but there is no evidence as to what he thinks this means. However, on the evidence, the transfer of the infant children's trust money to the Company by Marianne as trustee, was in violation of the Trustee Act of British Columbia (R.S.B.C. Cap 464, s. 15), since they did not constitute authorized trust investments. In these circumstances, the first money that the Company paid back to Marianne should clearly be applied, both in law and in fact, to the infant children's trusts and invested by her into lawful trustee investments for the children's trusts and benefit.
[6] Marianne and the Company both knowingly used the funds Marianne held in the children's trusts to purchase the skidder. The payment to the Company and purchase of the skidder constituted a wrongful use of the children's trust funds. Marianne received promissory notes for the payments. When the skidder was sold, the Company paid Marianne's shareholder account the proceeds of the sale. On the evidence, that amount was more than enough to satisfy the promissory notes issued for the trust investments. By this means, the Company disposed of the traceable trust monies to the original trustee, Marianne, and those trust monies were gone from the Company. (See Waters, Law of Trusts in Canada, 2nd Ed., pp. 1037 et seq.)
[7] On the evidence, the Court finds that the entire series of transactions with the children's trust monies was accomplished and directed by Richard, the accountant and directing mind of the business affairs of his family and the Company. Richard continued to record interest payable from the Company to the children's trusts on the Company records after Marianne was paid. Revenue Canada disallowed these deductions and treated them as a benefit conferred on Richard.
[8] The Company knew the entire series of transactions as did Richard. The Company paid the traceable trust money from the sale of the skidder to Marianne and Richard and the Company knew that. On Richard's direction the Company continued to claim an interest expense respecting these funds and credited the children's shareholder loan accounts accordingly. The only directing mind that then knew and understood this was Richard's. He knew what had happened, but he persisted in doing this. But Richard never received the funds or realized any benefit. The Company falsely book-entered the interest to the children's benefit and retained the funds itself for its own benefit. Similarly, the debit to Marianne's account was a book entry. It should be noted that Richard did all the books. In Ed Sinclair Construction & Supplies Ltd. et al v. M.N.R., 92 DTC 1163 at 1167, Bowman, J. said:
...
Management bonuses
In 1979, 1980 and 1981 the Appellant made a number of book entries accruing bonuses to management. In subsequent years it reversed some of these bonuses. The Minister disallowed them on the basis that they were contingent liabilities or reserves and were not allocated to any specific individual.
I have seen no evidence that they were liabilities at all. The Appellant or its accountant seems to have followed the practice of "accruing" and deducting bonuses as at the end of the fiscal period and reversing them in a later year, apparently in an attempt to comply with subsection 78(3) of the Act as it read in those years.
The determination of income must have its foundation in economic reality and genuine transactions. It cannot be based upon journal entries made after the event at the discretion of accountants where there is no intention of creating genuine legal relationships.
...
That is the case here. Therefore, the Company is not entitled to deduct the interest expense in 1997. But Richards appeal is allowed because the Company did not confer a benefit on him of the $5,922.00 in respect of amounts he caused the Company to credit to shareholder accounts on account of Geoffrey, Christina and Kim in the 1996 taxation year. He did not receive, nor did he benefit.
[9] Richard had a personal boat and fished for personal enjoyment and then had the 24 foot yacht and fished for personal enjoyment before he purchased the 26 foot yacht in question for around $120,000. His wife and children did not enjoy this hobby, but he did and does. He keeps the 26 foot yacht in his yard in Prince George and services and maintains it himself. Thus, it is a personal pursuit or hobby within the meaning described in Tonn et al. v. Her Majesty the Queen (F.C.A.) 96 DTC 6001. Richard testified that during the years in dispute he was just starting the charter business and that he deliberately charged fees below cost to attract business and to create a market. However, at the maximum, he operates the charters for three months per year when his accounting business is slow, whereas Mr. Doyle testified that professional charters from Prince Rupert (where Richard charters) operate for at least six months per year in order to realize a profit.
[10] Therefore the evidence is that, using the criteria set out by Dickson, J. in William Moldowan v. Her Majesty the Queen (S.C.C.) 1978, 1 S.C.R. 480, Richard had fished, but had no training or experience in the charter business; he had no plan, despite the fact that he holds himself out as an accountant; he made no profit projections until after the audit began; and he has not, to this date, ever shown a profit after charging capital cost allowance.
[11] Richard submitted Exhibit A-2 projecting a profit for the charter activity in 2000 based upon charging no capital cost allowance, and based upon maintenance and repair expenses of $131 in 2000 and a maximum thereafter of $250 per annum; the $250 maximum for the $120,000 yacht borders on the ridiculous. His hauling charge of fuel only made no allowance for the real cost of hauling the yacht back and forth from Prince George to Prince Rupert including maintenance and repairs of the haul truck. For these reasons, the projections are "pie in the sky". Similarly he projects further income at $16,000 per annum in 2001 and $20,000 per annum thereafter with no real evidence to support the projections after four years of alleged operations.
[12] In these circumstances, the following quotation from Tonn at pages 6009 and 6010 is applicable:
"A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. The cases in which the "reasonable expectation of profit" test is employed can be placed into two groups. One group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Such activities have included horse farms,30 Hawaii and Florida condominium rentals,31 ski chalet rentals,32 yacht operations,33 dog kennel operations,34 and so forth. Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a "pious wish" or "fanciful dream".35 It is only a secondary motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure."
That is the case here as well.
[13] For these reasons:
(a) The Company's appeals are dismissed.
(b) Richard's appeal is allowed respecting the benefit assessed of $5,922 in the 1996 taxation year.
(c) Marianne's appeal is allowed insofar as the appeal granted to Richard for 1996 might affect her assessments.
Signed at Ottawa, Canada, this 13th day of February, 2001.
"D.W. Beaubier"
J.T.C.C.