BETWEEN:
and
REASONS FOR JUDGMENT
(delivered orally from the Bench
on August 18, 2006 at Nanaimo, British Columbia)
Woods J.
[1] These are reasons in the appeal of Erik Andersen and Her Majesty the Queen. The issue concerns the tax consequences from shares received from Kenrich Elkay Mining Corporation received by Mr. Andersen in 2003.
[2] The main question is whether the income received in connection with the share transaction is employment income or business income and in either case the amount of the income that is attributable to the transaction.
[3] The CRA treated the income as employment income and allowed the deduction permitted under para. 110(1)(d) for one-half of the benefit. As for the amount of the income, the CRA issued the assessment on the basis of the amount reported by Kenrich in a T4 issued in connection with the share transaction. The CRA also disallowed business expenses that Mr. Andersen claimed on the basis that he was an employee.
[4] I have concluded that the arrangement was an independent contractor arrangement and not an employee relationship. That was the form of the relationship that was agreed to by the principal of Kenrich and Moon Bay Consulting and the facts are consistent with that arrangement. I note in particular that Mr. Andersen had to incur the expenses in relation to the contract if Kenrich was not able to pay them. And I note that it appears that Kenrich was not able to pay them.
[5] What are the tax consequences of the share transaction then? The tax consequences are that Mr. Andersen is required to include in income the value of the shares when received in 2003. The best evidence we have of this value is the T4 slip issued by Kenrich. The benefit reported is $35,000.
[6] According to the evidence, Kenrich is a company listed on the Canadian Ventures Exchange. There was no evidence as to what the market price was at the time and Mr. Andersen testified that he would not be able to sell this large number of shares at the market price. The shares were sold in 2004 over a period from January to November for proceeds after commissions of approximately $25,000.
[7] Even if I accept Mr. Andersen's evidence that in order to maximize the proceeds from the shares, he would have to sell them over a period of time, there is not sufficient evidence for me to conclude that the value was less than the $35,000 that was reported on the T4.
[8] Mr. Andersen testified that Kenrich reported $35,000 on the T4 because this was the option price. He also testified that Kenrich received legal and accounting advice to the effect that this transaction had to be reported as employment income on a T4 slip. Mr. Andersen speculated that this may have been for regulatory reasons.
[9] Without evidence from Kenrich, I am not able to accept this explanation for the computation of the benefit reported on the T4. It is more likely that this was Kenrich's estimate of the value of the benefit that Mr. Andersen received.
[10] Mr. Andersen has not provided sufficient evidence for me to accept a different value. The price at which the shares were sold in 2004 is some evidence of value at the time the shares were received but it is not sufficient in this case. I note in particular that Mr. Andersen did not provide documentation to support the date on which he received the shares and he did not provide details of the market prices around the time of the acquisition.
[11] In summary, there is not sufficient evidence for me to accept a lesser value than was reported on the T4 slip. That would mean that the income from the share transaction should be $35,000.
[12] I now turn to the business expenses. One of the expenses claimed was a business loss from the disposition of the shares. There is no basis to claim this loss in 2003 because the shares were not sold until 2004.
[13] Where are we then? Mr. Andersen has $35,000 of income from the receipt of the Kenrich shares. He has claimed various business expenses in addition to the loss on the sale of the shares. Assuming that these business expenses are deductible, Mr. Andersen would have a net income inclusion of $18,273.64 which is greater than the income that was assessed by the CRA, which was $17,500. It is not necessary, then, to consider whether the other business expenses are deductible.
[14] Mr. Andersen argues that he should not be taxed on the value of the shares because it does not represent cash. Taxpayers are subject to tax not only on cash but also on the value of property received. The fact that the shares could not be sold immediately certainly affects their value, and could affect the value significantly. Unfortunately, though, there was not sufficient evidence provided that would assist in coming to an appropriate valuation. That is particularly the case when Kenrich made their own assessment of the benefit at $35,000 and no one from Kenrich testified to explain how that figure was arrived at.
[15] On this basis, I see no reason to reduce the income that was assessed and the appeal must be dismissed.
Signed at Toronto, Ontario, this 29th day of September, 2006.
STYLE OF CAUSE: Erik Andersen and Her Majesty the Queen
PLACE OF HEARING: Nanaimo, British Columbia
DATE OF HEARING: August 18, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Judith Woods
DATE OF JUDGMENT: August 29, 2006
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Pavanjit Mahil
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada