Date: 19991027
Dockets: 97-1460-IT-I; 97-1461-IT-I
BETWEEN:
BARBARA BLIZE, HAROLD BLIZE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered Orally from the Bench at Edmonton, Alberta, on Friday, September 24, 1999)
Margeson, J.T.C.C.
[1] The matters before the Court at this time for decision are those cases of Barbara Blize, 97-1460(IT)I and Harold Blize, 97-1461(IT)I versus Her Majesty the Queen.
[2] In these two appeals there remain only one issue outstanding in each case. The issue is as to the value of the benefit, if any, conferred upon the Appellants by Alsike General Store Ltd. (hereafter “Alsike”). The parties agreed that the maximum benefit conferred on Barbara Blize in the year in question, 1993, was $22,050.00, and the maximum benefit conferred upon Harold Blize was $22,950.00, if any, in each case.
[3] The benefits were allegedly conferred upon the Appellants by virtue of they being shareholders in Alsike. Barbara Blize held 49% of the shares in Alsike, and Harold Blize held 51% of the shares. The benefit allegedly resulted from the transfer of a cabin at Slave Lake from the Appellants to Alsike.
[4] Evidence was given in the matter by Harold Blize, and the parties agreed to three additional facts.
[5] The cabin was transferred to Alsike by the Appellants by way of adjusting entries dated December 31, 1993. The cabin was transferred in the books of Alsike and the Appellants for $45,000.00. The Appellants had expended $27,178.53 on construction of the cabin prior to its transfer.
[6] Relevant facts disclosed in the evidence showed that Alsike was a holding company which held real estate, rental units and did the bookkeeping for another company in which the Appellants were shareholders. The Appellants started building the cabin in the 1990s. It was not completed when the transfer took place. It had power but no water. It had been partly sided and was framed. It was habitable. The roof was in place and it had space heaters. The cabin was close to a marina and a recreational vehicle park.
[7] Alsike also had property adjacent to that site which was recreational land. It was developed over a period of four to five years. It is intended to have a nine hole golf course as well in the future. This is being worked upon at the present time. It is composed of 160 acres. The recreational vehicle lots are rented out on a yearly basis. The golf course is expected to be completed in three years time, with the driving range being completed in the year 2001.
[8] The land was acquired in 1995. The Appellants live 15 kilometres away in a 2400 square foot house located on a 160-acre lot. They have lived there for 10 to 11 years. It was stated by the witness that the property was transferred to Alsike because the Appellants lived so close to it that they would not use it. They believed that it would be a good rental unit for Alsike. It was acquired by Alsike as an investment and to make a profit when it would be sold and to obtain cabin rental fees from it until then. The witness said that it could be sold today for a profit. It was not sold up until now because the area has started to develop and in years to come it will have a higher value. Further, it would work out well with the development of the camp site and the golf course, which are one-quarter mile away. The cabin is on the edge of the marina.
[9] To date the cabin has never been rented out and it is still not completed. It has been used by the Appellants but rarely. This year they stayed there three nights, last year two to three nights while working on the siding for the cabin or on the other properties of Alsike. Since the conveyance they have stayed there seven to 14 days. It might be possible to rent out the cabin for 350 to $500.00 when finished during the summer season only. In the winter it would be possible to be rented, but not for that rate. The witness agreed that the value of the cabin today is $45,000.00, and this will increase in the future.
[10] In cross-examination he admitted that his son stayed in the cabin two nights on his own, and his niece stayed there one night this year. There are beds there and a few dishes. In 1997 and 1998 a surveyor stayed there while doing work for Alsike for three weeks. The witness admitted that the transfer was just a book entry. The two Appellants had been receiving money from Alsike before and the transfer reflected that. The witness did not know how it was set up in the company’s books. At the time of the transfer Alsike did not own any other land on the lake. The witness admitted that the cabin was built for personal use, although he could foresee rental income from it. Alsike had no business plan for the cabin at the time of the transfer. It had no time schedule. The cabin has been under construction for nine years. It is not a site that the company is pushing to develop for profit. Apart from a lot in Swan Hills, Alsike has no other rental income from the lots there. The Appellants have been in the rental business for some time. At the time of the transfer the witness had been keeping an eye on property values. He does the majority of the work on the property.
[11] When the cabin was started there were 106 sites developed in the area and they were in use. Fifty more were added and opened up this spring. The witness said that when the cabin is completed they will not make personal use of it, nor will his family. He stayed there while he was working on it after the transfer took place because he was working late and it was more convenient for him to do so than to return home, even though he only lived a short distance away. There is a good demand, according to this witness, for this type of rental, as Edmonton is only three hours away and the area is getting more popular each year. When he started the cabin there were 150 people on the waiting list for the lots there that had not been developed. Now there are no more sites available. He believed that it was worthwhile to hold the cabin until the golf course is developed. It will be ready to rent next spring.
Argument of the Appellant
[12] Counsel for the Appellant stated that the basis for the Minister’s assessment was his position that there was no business purpose for the acquisition by Alsike of the cabin, therefore there was a benefit to the Appellants jointly of $45,000.00 in proportion to their shareholdings. He argued that there was a business purpose to this transaction. It was to obtain rental income. It’s business was investment and rental units and development over the long-term. The witness in evidence said that it was suitable for rental income or for sale at a profit. This evidence was trustworthy and believable. Because a profit has not be realized it does not mean that the acquisition had a non-business purpose to it.
[13] Counsel referred to the case of Meeuse v. The Minister of National Revenue 92 D.T.C. 1551 in support of this position that the company had acquired the property for a business use and the only use made of it by the taxpayers was incidental or secondary to the business purpose. It was his position that this can be seen from the limited use made of the cabin by the Appellants and their family. If there was a benefit it should be calculated on the basis of $350.00 to $500.00 a week for three weeks, which was the amount of time that the Appellants used the cabin for.
Argument of the Respondent
[14] Counsel for the Respondent argued that under subsection 15(1) of the Income Tax Act there was a benefit conferred on the Appellants of $45,000.00. If not, then the benefit was at least that amount minus $27,178.53, which was the amount that the Appellants had expended on the construction of the cabin and in accordance with their percentage shareholdings the benefit should be calculated.
[15] Counsel distinguished this case from Meeuse supra in that in that case there was only a short turnaround period or short turnaround time and there was a business purpose shown for the purchase. In the case at bar there was no business purpose and the cabin was available for the use of the Appellants for the whole year. There was no interference with that right. There was no chance to obtain rental income for the property for some time in the future. The Appellants were experienced in the rental business, and yet did nothing to make the unit into a rental producing asset. There was not one week of rental income obtained for it, therefore the value of the benefit for the time the Appellants actually used it need not be calculated.
[16] To find that there was a business purpose to the acquisition by Alsike would be “stretching the bounds of credulity”. There was no plan to make the unit one that would produce income. There was no time schedule. The Appellants worked on the property to keep it available for themselves. It would not have been available for the Appellants if not for the fact that they were shareholders of Alsike.
[17] In rebuttal counsel for the Appellant said that it was indicated in evidence that the purpose of the purchase was rental and possible sale at a profit.
Analysis and Decision
[18] The parties in this case appear to accept, as the parties did in Meeuse supra, that there must be a business purpose established for the acquisition of the cabin by Alsike, or otherwise the whole amount of $45,000.00 is the basis for the benefit. In Meeuse supra the learned trial judge at page 1552 indicated that “the parties acknowledged that unless, as a question of fact, the Appellant established that the property in issue was acquired with a business purpose in mind, then the appeal would fail”. Then the Court made a determination that the Appellant had established on a balance of probabilities that the company had acquired the property for business reasons and then it was only a question as to whether the amount of $18,000.00 paid annually for rent was reasonable. The Court found that it was.
[19] In the case at bar the main issue is whether or not the Appellant had established on a balance of probabilities that the acquisition was for business reasons. This was not the issue in Lloyd Youngman v. Her Majesty the Queen [1990] 2 C.T.C. 10. The question in issue there was the value of the benefit. In the case at bar, although the Court finds that the evidence of Harold Blize was given forthrightly and that his evidence is credible, it falls far short of establishing on a balance of probabilities that Alsike acquired the property for business purposes.
[20] It is true that this witness indicated that Alsike had acquired the property as an investment to make a profit, but the Court is not convinced that this was the real purpose for its acquisition. If that were the case, surely a company in business for the purposes of earning a profit from such a property would have had a plan and a time schedule which would have enabled it to determine how, within what period of time and how much a profit could be realized. Otherwise, why would the company have purchased the property? It was admitted by Mr. Blize that there was no such plan or time schedule, that the property languished unfinished for years, with work only being done on it periodically, while all around it other similar properties were being developed, completed and rented and the demand was increasing. There must have been some reason why the company did not proceed to develop this unit and the only reason must have been to allow it to be available for the use of the Appellants.
[21] As argued by counsel for the Respondent, the right of the Appellants to the use of the property was continual, uninterrupted, and the keys to the property were always in their possession. It was within the power of the Appellants to show by acceptable evidence that the company had a real business purpose in acquiring the property from them, and that there were valid reasons why the development had not proceeded to the stage where the property was producing real income. But no such valid reasons were advanced in that regard by the evidence.
[22] Under the circumstances as disclosed here to merely say that there was a business purpose for the acquisition is insufficient. The Court finds that the value of the benefit conferred upon the Appellant Barbara Blize in the taxation year 1993 was $22,050.00 and the value of the benefit conferred upon the Appellant Harold Blize in the taxation year 1993 was $22,950.00.
Signed at Ottawa, Canada, this 27th day of October 1999.
"T.E. Margeson"
J.T.C.C.