Mullen v. MNR, 90 DTC 1551, [1990] 2 CTC 2141 (TCC)

Brule, T.C.J.:—The appellants appeal from income tax reassessments for the taxation years 1983 and 1984. At the opening of the hearing it was agreed that these appeals be heard on common evidence.

Facts

The important facts submitted in a memorandum by the appellants’ counsel and substantiated in oral evidence are essentially as follows:

Mullen Trucking Ltd., whose head office is in the Town of Aldersyde, Alberta, carries on the business of, inter alia, transporting general commodities and oilwell equipment by truck across Canada and throughout the United States of America. The company presently employs approximately 400 people and has revenues in excess of $40,000,000. At the material times the company had approximately 150 employees and gross revenues of approximately $15,000,000.

The company was founded by Roland Mullen in 1964. Mr. Mullen is the company's president and his wife, Leona, is its corporate secretary. Mr. and Mrs. Mullen have four sons, Murray, Bruce, David and Kevin, all of whom are employed by the company in various capacities.

Roland and Leona Mullen were the sole shareholders of the company until March 31, 1983. At that time they disposed of the Class "A" common shares to a holding company called Six-M Enterprises Ltd. the common shares of which are owned by Roland Mullen as to 51 per cent and by Leona Mullen as to 49 per cent. Six-M Enterprises Ltd. acquired the Mullen Trucking common shares in exchange for preferred shares and additional common shares pursuant to an estate freeze. On July 1, 1984 Six-M Enterprises exchanged its Class "A" common shares for Class "D" preferred shares and it acquired 52 per cent of the outstanding Class "C" common shares. At the same time each of the above referenced four sons became direct shareholders of Mullen Trucking, each as to 12 per cent of the outstanding Class "C" common shares.

Mullen Trucking Ltd. acquired a condominium at Indian Wells, California in the spring of 1983 to be used in the promotion of its oilfield trucking division. The condominium was equipped and ready for use on October 1, 1983.

Evidence was led to show that the condominium was used for business promotion purposes. Clients and prospective clients would either be entertained at the condominium or would have the use of it themselves. The condominium was also used personally by various employees of the company during 1983 and 1984.

When the condominium was not being used for business proposes, whether by clients or employees, it was available for such use.

The condominium was generally not available for use, whether for business promotion purposes or personal use of employees during the months of June, July, August and September given the extreme heat experienced in these months.

Any personal use of the condominium resulted in a taxable employment benefit to the user equal to $100 per day of use and the company issued T4 slips requiring each employee to recognize this benefit.

At all material times the Mullen family maintained a vacation property in Windermere, British Columbia which was used for vacation purposes only.

Use of the condominium for business promotion purposes was instrumental in generating business for the company in general and for the Specialty Hauling Division in particular. Examples of sales generated from companies whose representatives had been entertained at the condominium are as follows:

The condominium also directly cont ributed to generating significant growth in the gross revenues of the Specialized Hauling Division as follows:

As a percentage of sales the company's business promotion expense, in- eluding the costs associated with the condominium, are as follows:

For the purpose of the reassessments described below, Revenue Canada, Taxation's allocated the use of the condominium as follows:

Revenue Canada has allocated all of the idle days set out above to personal use on the basis that the condominium is not a business asset.

Mullen Trucking Ltd. deducted the following amounts from its income in the years under appeal.

By notice of reassessment dated June 19, 1987 Revenue Canada, Taxation allowed Mullen Trucking to deduct only $1,739.17 being 3 per cent of the total expenses claimed in 1983 and $10,659.19 being 17 per cent of the expenses incurred in 1984. The basis for the disallowance is that 97 per cent of the total number of days available in 1983 were not used for business purposes and 83 per cent of the total number of days available in 1984 were not used for business purposes. These percentages stem from Revenue Canada, Taxation's assertion that the condominium was acquired merely for the benefit of the shareholders of the company such that all idle days were allocated to personal use. The total amount disallowed is $108,274.91. The basis for the disallowance of the above referenced expenses in respect of the condominium is that they were not made for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Income Tax Act as set forth below:

18(1) In computing the income of the taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; . . .

Revenue Canada, Taxation also disallowed capital cost allowance on the furniture and fixtures in respect of the condominium in the amount of $11,115.66 in 1983 and $8,892.53 in 1984. Mullen Trucking Ltd. never submitted such claims for capital cost allowance.

Revenue Canada, Taxation also reassessed Roland and Leona Mullen by notices of reassessment all dated June 9, 1987 adding to their incomes the following amounts:

Roland Mullen

The above allocations in respect of idle time, utilities and food and entertainment were calculated by taking the total expense for each item (the idle time expense was calculated by using the figure of $100 per day), multiplied by the personal use portion of the days available for use (97 per cent in 1983 and 83 per cent in 1984), multiplied by 26 per cent shareholdings for each Roland and Leona Mullen.

The above amounts were included in income pursuant to the provisions of paragraph 15(1)(c) of the Income Tax Act which stated at the material times:

15(1) Where in a taxation year:

(c) a benefit or an advantage has been conferred on a shareholder by a corporation,

otherwise than . . .

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by Section 84 be included in computing the income of the shareholder for the year.

Appellants’ Position

Counsel for the appellants stated that the acquisition of the condominium at Indian Wells, California constituted the acquisition of an asset which was intended to be used for the purpose of gaining or producing income for the business of Mullen Trucking Ltd. The condominium was not acquired for the personal benefit of the shareholders of the company. As a business asset the expenses related to the condominium are deductible by Mullen Trucking in the taxation year in which they are incurred. The use of the condominium by employees, whether family members or not, was qua employee not qua shareholder. Allowing employees to use the condominium as part of their general compensation package constitutes a valid business use of the condominium with the result that no shareholder benefit should be attributed to any of the shareholders of the company in respect of their use of the condominium. The Minister has incorrectly assessed Roland and Leona Mullen as they were not shareholders of Mullen Trucking Ltd. during the taxation years under appeal.

It was stated that the evidence clearly establishes that there has been a significant increase in sales with respect to specific companies after representatives of that company have been entertained at the condominium in Indian Wells. While one can not be subjective about why a company increased its business with Mullen Trucking, the evidence indicates that the management believes the condominium as used contributed to the growth. These increases in sales in turn have contributed to the significant increases in gross revenues for the Specialty Hauling Division of Mullen Trucking. As well, it is clear that the condominium was by no means an extravagant promotion expense when regarded as a percentage of the total sales generated by the company during the years in issue.

Counsel reviewed the relevant law to these appeals and I shall deal in some detail with the cases cited.

Minister's Position

The Minister’s counsel alleged that the expenses of Mullen Trucking were excessive and were not made for the purpose of gaining or producing income. The expenses were personal to the members of the Mullen family and the condominium was purchased for their use. This is revealed in the comparative use for business and personal reasons. The two personal appellants were properly taxed under the provisions of paragraph 245(2)(a) of the Income Tax Act. There was clearly a benefit conferred by Mullen Trucking on Mr. & Mrs. Mullen. Accordingly the Court was told that the reassessments issued by Revenue Canada are correct. Certain authorities were put forth and these are dealt with below.

Analysis

Regarding the appeal of Mullen Trucking Ltd. the question is whether or not the condominium was acquired primarily for the purpose of promoting its business activities as maintained by appellant’s counsel. On the other hand the Minister reassessed the company on the basis that the property was not a business use asset, the expenses incurred were not laid out to earn income, and the condominium was acquired mainly for the benefit and recreation of the Mullen family.

In order for the appellant company to deduct the expenses relative to the condominium one must consider the provisions of section 9 and paragraph 18(1)(a) of the Income Tax Act.

Section 9 requires a taxpayer's profit from a business to be included in income. The term “profit” means net profit taking gross profit minus expenditures necessary to earn the profit. Such a meaning was defined by Lord Parker in the case of Usher's Wiltshire Brewery Ltd. v. Bruce, [1915] A.C. 433; 6 T.C. 399.

It is not necessary to show that expenditures actually resulted in income and this was set out in the case of Royal Trust Company v. M.N.R.., [1956-60] Ex. C.R. 70; [1957] C.T.C. 32; 57 D.T.C. 1055, wherein the Court at page 1062 sets out the following:

The essential limitation in the exception expressed in section 12(1)(a) [now 18(1)(a)] is that the outlay or expense should have been made by the taxpayer “for the purpose" of gaining or producing income “from the business”. It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income “from the business” in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes.

As to the Minister’s complaint that the expenses involved in maintaining the condominium one finds that the appellant's justification was that business was developed and this was shown in the evidence presented and reported above.

In the case of Gabco Ltd. v. M.N.R., [1968] 2 Ex. C.R. 511; [1968] C.T.C. 313; 68 D.T.C. 5210 Mr. Justice Cattanach of the then Exchequer Court said at page 320 (D.T.C. 5214):

The ultimate test as to when a payment is intra vires a company is when what is done is done bona tides, within the ordinary scope of the company's business and reasonably incidental to the carrying on of the company's business for the company's benefit and advantage.

At page 323 (D.T.C. 5216) it was said:

It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind.

I have no doubt in my mind that the acquisition of the condominium by the appellant company was for the purpose of promoting business activities and accordingly its appeal is allowed and all the idle time at the condominium and expenses in respect thereof are deductible business expenses of Mullen Trucking Ltd.

With respect to the appeals of Mr. and Mrs. Mullen and a plea that their appeals be disallowed the Minister's counsel made reference to the following:

Wilbour Lee Craddock v. M.N.R., [1969] 1 Ex. C.R. 23; [1969] C.T.C. 566; 69

D.T.C. 5369

Indalex Ltd. v. The Queen, [1986] 1 C.T.C. 219; 86 D.T.C. 6039 1984 Tax

Conference Report — Subsection 245(2), page 122

M.N.R. v. Didace Dufresne, [1967] 2 Ex. C.R. 128; [1967] C.T.C. 153; 67 D.T.C.

5105

Barry Marshall Boardman and Saskan Investments Ltd. v. The Queen,

[1986] 1 C.T.C. 103; 85 D.T.C. 5628

John C. Cakebread v. M.N.R., [1968] Tax A.B.C. 531; 68 D.T.C. 424

These cases and report dealt with subsection 245(2) of the Income Tax Act or its predecessor subsection 137(2). All were involved with the taxation of benefits conferred as individuals. The section in 1983 and 1984, the period under appeal, read as follows:

Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be (a) included in computing the taxpayer's income for the purpose of Part I.

The passages referred to the Court from the above references are quite sound and I have no difficulty in accepting them.

On the other hand counsel for the appellants agreed that Mr. and Mrs. Mullen, as well as other members of the family received benefits but [they] were assessed and the individuals paid tax on these benefits.

Originally it was alleged that benefits were received by the Mullens as shareholders of the company. The evidence showed that this was not the case. They were only shareholders of a holding company and as such did not receive any benefit as shareholders contemplated in subsection 15(1) of the Income Tax Act. The rationale for this position may be found in examining subsections 15(1) and 15(2).

The important wording of subsection 15(1) is as follows:

Where, in a taxation year, a benefit has been conferred on a shareholder, or a person in contemplation of his becoming a shareholder, by a corporation (. . .) the amount or value thereof shall (. . .) be included in computing the income of the shareholder for the year.

Although a liberal interpretation of the words “a shareholder of a corporation" could encompass on its scope the situation of a shareholder of a corporation connected to the one conferring the benefit, such an interpretation does not seem to be the appropriate one.

The basis of this conclusion lies in a simple argument; subsection 2 of the same section, which relates to a shareholder debt, uses express words to cover in its scope an indirect link between a shareholder and a corporation, that is the situation of a connected corporation.

Subsection 15(2) of the Income Tax Act reads:

Where a person (. . .) or a partnership (. . .) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation or is a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtness shall be included in computing the income for the year of the person or partnership . . .

I infer from this that the legislator, by not using express words as to cover the situation of a connected corporation, does not want 15(1) to encompass more than a direct link between shareholder and corporation. By its silence or omission, the legislator seems in fact to have meant that 15(1) should not cover any indirect link like the situation at bar.

The propriety of the benefit conferred then under subsection 245(2) or if it had been under subsection 15(1) was justifiable.Counsel said the fact that a person is both a shareholder and an employee of a company does not necessarily mean that any benefit received by such a person is received by that person in his or her capacity of shareholder. Where the conferral of the benefit is bona fide and not a device or arrangement for conferring benefits on shareholders qua shareholders, then there is no shareholder benefit. Indeed, in every case where a special privilege or status is given to a shareholder/ employee it is a question of fact whether the corporation's purpose was to confer a benefit or advantage on the shareholder or some purpose having to do with the corporation's business, such as compensating an employee.

In support of this statement the Court was referred to the cases of

M.N.R. v. Pillsbury Holdings Ltd., [1965] 1 Ex. C.R. 676; [1964] C.T.C. 294; 64

D.T.C. 5184

Singing Skies Farms Ltd. v. M.N.R., [1986] 2 C.T.C. 2146; 86 D.T.C. 1586

Usage of the condominium by family members occurred regardless of whether or not they were shareholders at any particular point in time. However, each of the family members were employees of the company during the material period and thus it is clear that any personal use of the condominium by them was qua employee and not qua shareholder. This conclusion is consistent with the fact that other non-family member employees were entitled to use the condominium when it wasn't otherwise being used for business promotion purposes. In all cases, the employee, whether a family member or a non-family member, was assessed an employment benefit of $100 per day for each day of personal use. This amount was not the subject of any dispute as to whether or not such was sufficient. The Minister did not argue the question of the benefit after the appellant's counsel, through evidence, justified the amount.

While each of the appellants, Mr. and Mrs. Mullen, did receive a benefit, the company showed such on T4 slips issued to them by the company. Thus any benefits received were taxed.

The result is that the appeals of Mr. and Mrs. Mullen as well as that of Mullen Trucking Ltd. are hereby allowed with costs and the matters are to be returned to the Minister for reconsideration and reassessment.

Appeals allowed.