Tax Court of Canada Judgments

Docket: 2002-3136(IT)I

BETWEEN:

OMAR H. GRINBLATS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on April 11, 2003, at Nelson, British Columbia

By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:	David K. Simpkin
Counsel for the Respondent:	Amy Francis

____________________________________________________________________

JUDGMENT

                The appeals from assessments of tax made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in each of the taxation years 1998, 1999 and 2000, the Appellant used the vehicle for a total of 11,086 kilometres, of which 10,620 kilometres was for business and 466 kilometres was for personal use, and that in each year all the conditions referred to in subparagraph 6(2) of the Act were satisfied. The Appellant is entitled to his costs.

Signed at Ottawa, Canada, this 12th day of August, 2003.

"E.A. Bowie"

Bowie J.

Citation: 2003TCC564

Date: 20030812

Docket: 2002-3136(IT)I

BETWEEN:

OMAR H. GRINBLATS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowie J.

[1]      Mr. Grinblats brings these appeals from reassessments under the Income Tax Act (the Act) for the taxation years 1998, 1999 and 2000. The reassessments were made following his objections filed in response to earlier reassessments which had added amounts to his income as shareholder benefits in connection with his personal use of a truck owned by Bartley Developments Ltd. (Bartley). The amounts added to his income by the initial reassessments, and by the subsequent reassessments, are:

                                                1998                             1999                             2000

Initial reassessment

Standby charge              $7,595                          $7,595                          $7,595

Operating charge                       $1,045                          $ 975                           $ 975

Total                                         $8,640                          $8,570                          $8,570

Following objection

Standby charge              $7,595                          $7,595                          $7,595

Operating charge                       $ 480                           $ 448                           $ 448

Total                                         $8,075                          $8,043                          $8,043

[2]      There are a number of facts that are not in dispute. The vehicle in question is a 1992 Ford F250 extended cab pickup truck. Bartley purchased it new in 1991. The Appellant is the only shareholder and the only employee of Bartley. He has a full-time job at Korpack Cement Products Co. Ltd. in Trail, B.C. He also operates the business of Bartley, which owns and rents three Bobcat excavating machines. He uses the truck to transport these to and from the premises of the customers, most of who rent them on a short-term basis. He also uses it to visit the premises of his customers while the Bobcats are there in order to refuel them, check the equipment, and make any necessary repairs. Mr. Grinblats accepts that he made some personal use of the truck during each of the years in question, but he says that it was minimal, and certainly much less than the amounts for which he was assessed. The only issue before me is the amount of that personal use.

[3]      Paragraphs 6(1)(e) and (k) of the Act provide for the inclusion of standby charges and operating expenses of a vehicle made available by an employer to an employee for personal use as an employment benefit. Subsection 15(5) makes these provisions applicable when a corporation makes a vehicle available for personal use by a shareholder. Subsection 6(2) contains complex provisions for computing the standby charge, but for present purposes it is sufficient to say that the standby charge is greatly reduced if three conditions are satisfied:

(i)       the taxpayer was required by the employer to use the automobile for the employer's business;

(ii)       all or substantially all of the distance travelled by the vehicle was in connection with or in the course of the taxpayer's office or employment; and

(iii)      the personal use did not exceed 12,000 kilometres (kms) for the year.

It is not disputed that the first and third of these requirements are met in this case. The Appellant says that the second one is met as well; the Respondent says that it is not. I should add that both parties proceeded before me on the assumption that the truck falls within the definition of an "automobile" found in subsection 248(1) of the Act, and I shall therefore decide the matter on that basis.

[4]      It is unfortunate that Mr. Grinblats did not keep a log recording his personal use of the truck in the years under appeal, as that would have negated the need for this litigation. That is not necessarily fatal to his position, however, although it does make it more difficult for him to discharge the burden of displacing the Minister's assumptions as to the use of the vehicle, as the Federal Court of Appeal has pointed out more than once.[1] In this case, the taxpayer and the Minister have both made estimates of the proportion of the use of the vehicle that was for the business of Bartley, and that which was personal use by the Appellant. My appreciation of the evidence leads me to believe that the Appellant's evidence, and his estimate, are the more reliable.

[5]      Julia Jennex is the Minister's auditor who raised the initial reassessments. She was given a very short time in which to do an audit of Bartley, and she looked primarily for shareholder benefits and in particular, use by Mr. Grinblats of the company's vehicle. Having established through an interview with the Appellant that he had made some personal use of the truck, and that he kept no log of that personal use, she set about estimating it. She started with an assumption, based on conversations with car sales people, that an average person drives about 15,000 kms per year. She added to this 10,000 kms for business use. She also seems to have decided that the use of the vehicle would be greater in more recent years. This led her to estimate that the total use of the truck in the years under appeal amounted to about 21,000 kms in 1998, 23,000 kms in 1999 and 25,000 kms in 2000. To make an estimate of the personal use by the Appellant, she looked at his bank statements for a six-month period and assumed that all the debit card purchases recorded there had been made by the Appellant. She measured the mileage from the Appellant's house to the various businesses where these purchases had been made. On that basis she formed a conclusion as to the distance that he had driven to make the purchases. She then made a similar estimate based on the joint bank account of Mr. Grinblats and his wife, and divided that in two, based on the assumption that they each made equal numbers of those debit card purchases. She extrapolated these to cover the entire three-year period under review, and then multiplied it by four, on the assumption that this would account for purchases made by credit card and cash. To this she added an amount for trips that she assumed he had made from his house to building supply stores in connection with renovations that he had made to his house in 1999. This was based on information extracted from the shareholder loan account of Bartley, which he used to purchase supplies for the renovation work. She also included in the estimate of annual personal mileage 1,500 kms for traveling to work and back, arbitrary amounts for visits to doctors, dentists, friends and family, and 2,000 kms for vacation travel. She presented these estimates to the Appellant, after which she made some arbitrary downward adjustments in reaction to his response to them. She halved the estimate for vacation travel; she reduced the factor for personal shopping by cash and credit card from four to two, and she made some allowance for the fact that the family had an Oldsmobile van and a car which were both available for use by the Appellant. Her estimates after making these adjustments were reduced to 11,692 kms for business use and 6,964 kms for personal use, a total of 18,656 kms for each of the three years.

[6]      From the foregoing, it is apparent that Ms. Jennex based her estimate of the Appellant's personal use of the truck on a great many arbitrary assumptions. These include: Mr. Grinblats travelled on personal errands only by using the Bartley truck; he used the truck to do much of the family shopping and errands, and when he did so, he always made a separate trip for each purchase and each errand; he drove the truck to work and back three days per week; he worked at the Korpack building on Wellington Avenue, which is five kms from his home; and he used the truck for family vacations each summer, driving it 1,000 kms.

[7]      The appeals officer, whose assessments are the ones under appeal, decreased the operating charges assessed as shown in paragraph 1 above. The record before me is silent as to the reasoning behind these changes, however, the second set of reassessments must have been founded to a large extent on the assumptions that Ms. Jennex had made. The Minister's assessors are, of course, entitled to rely on arbitrary assumptions when they assess, and often they must do so. In this case, Ms. Jennex had little alternative, in the absence of a log-recording business and personal use. The assumptions are only that, however, and as I have said, the Appellant is entitled to refute them.

[8]      Before turning to the Appellant's evidence, it is appropriate to comment upon the Reply filed by the Deputy Attorney General of Canada. The Deputy Attorney General has an obligation in any income tax appeal to set out both fully and accurately the assumptions of fact upon which the Minister's assessment is based. This is trite law, arising out of the special status that those assumptions have been given by the courts since early in the last century,[2] and out of the Rules[3] promulgated by the Rules Committee pursuant to section 20 of the Tax Court of Canada Act.[4] I can do no better than to quote what was recently said on this subject by Bowman A.C.J. in Shaughnessy v The Queen:[5]

12        Paragraphs (f), (g), (h) and (i) contain the usual boiler plate which is a familiar but essentially purposeless part of most REOP appeals. One pushes the appropriate button in the computer and it spews out paragraphs (f) to (i).

13        Paragraphs (m), (n) and (o) contain more of the same sort of verbiage. Paragraph (m) is of course the mandatory ritual incantation of the mantra REOP. Paragraphs (n) and (o) are simply tossed in for good measure. They have no basis in the evidence and were not argued. They are so far-fetched that they could not possibly have been the basis of the assessments. I presume that pushing a button on the computer to produce paragraphs (n) and (o) requires approximately the same amount of reflection and deliberation as were required to produce paragraphs (f) to (i). The simple fact is that these identical paragraphs appear in replies in virtually every REOP case that comes before this court. It is unacceptable that this type of unthinking regurgitation of stereotypical verbal formulae should appear in all replies in REOP cases. The pleading of assumptions involves a serious obligation on the part of the Crown to set out honestly and fully the actual assumptions upon which the Minister acted in making the assessment, whether they support the assessment or not. Pleading that the Minister assumed facts that he could not have assumed is not a fulfilment of that obligation. The court and the appellant should be entitled to rely upon the accuracy and completeness of the assumptions pleaded. Sadly, this is becoming increasingly difficult. The entire system developed in our courts relating to assumptions and onus of proof is in jeopardy if the respondent does not set out the actual assumptions on which the assessment is based with complete candour, fairness and honesty.

In this case, the only assumptions that are pleaded in relation to the one disputed issue are found in subparagraphs 10 g) and h) of the Reply:

10.        In so reassessing the Appellant, the Minister relied on the following assumptions of fact:

...

g)          the Truck was not used by the Appellant during the 1998, 1999 and 2000 taxation years substantially all of the time for travel on business for Bartley;

h)          the Appellant drove the Truck for personal use 3200 kilometers in each of the 1998, 1999 and 2000 taxation years; and ...

By no stretch of the imagination could these two assertions, the first of which involves a conclusion of law rather than a statement of fact, satisfy the requirement that the Deputy Attorney General plead fully, fairly and accurately the Minister's factual assumptions that underlie the assessments.

[8]      Mr. Grinblats and his wife, Samantha Grinblats, both testified. I was impressed by the candid and forthright way in which they gave their evidence. Their evidence differs substantially from that of Ms. Jennex in a number of critical elements; where it does, I prefer that of Mr. and Mrs. Grinblats. I do not mean to suggest that Ms. Jennex was a dishonest witness. No doubt she told what she believed to be the truth as she understood it. However, she obviously had been required to rush this audit, as I have said, and I believe that she drew some conclusions from her conversations with the Appellant that simply were not warranted. I think there was a communication problem between her and the Appellant, stemming in part from the use of language, and in part from a tendency on her part not to listen with sufficient care to what others say to her. Ms. Jennex testified that Mr. Grinblats told her that he and his family went on vacation in the Bartley truck. Mr. and Mrs. Grinblats were both emphatic in their evidence that they used the Oldsmobile Silhouette van for their vacation trips. Ms. Jennex said that Mr. Grinblats told her that the Oldsmobile van used diesel fuel and the truck used gasoline; in fact the opposite was true. Ms. Jennex said that Mr. Grinblats told her that he did half of the family shopping and errands; the Appellant and his wife both testified unequivocally that he did virtually no household shopping or errands. Not only were Mr. and Mrs. Grinblats consistent in their evidence, but where they disagreed with Ms. Jennex, their version of the events and the conversations were more inherently probable. For example, it would be unlikely that they would go on a family vacation with two young children in a diesel truck with a 100-gallon diesel fuel tank and a large tool box in the bed when they had a new Oldsmobile van in the driveway.

[9]      An example of the unwarranted assumptions which Ms. Jennex made concerns the mileage that she attributed to Mr. Grinblats driving the truck to work. She assumed that he worked at the Korpack building that she had seen on Wellington Avenue when driving into Trail, and so she measured the distance from there to his house, and decided that he drove the truck 10 kilometres to work and back three days per week and 50 weeks per year. In fact, Mr. Grinblats worked at the Korpack batching plant, a completely different location that was less than 2.5 kilometres from his house, and he testified that he drove the truck to work only occasionally, for example if he had to use it after work in connection with the business. More frequently he drove his wife's van, or sometimes her Chevelle, to work. While many of these discrepancies, taken individually, are relatively minor, when they are taken in the aggregate, they amount to significant error. More fundamentally, they demonstrate that Ms. Jennex was all too willing to make unwarranted assumptions that the facts simply did not justify.

[10]     The Appellant has successfully demolished the assumptions on which the assessments are founded. He also presented persuasive evidence to establish the actual total use and business use of the truck during the three years under appeal. It takes two forms. The total distance that the truck travelled in those three years can be deduced quite accurately from certain records that are found at tab 14 of Exhibit A-1. These consist of copies of pages from a notebook in which the Appellant recorded the dates and odometer readings when he and his father-in-law performed certain maintenance on the truck, a bill from a garage dated November 13, 1997, and the bill of sale dated January 20, 2001 when the truck was traded in. As the reassessments cover the period between January 1, 1998 and December 31, 2000, these last two documents show the use of the truck for a period that is only 37 days longer. The dates and odometer readings from these documents are:

March 8, 1997              102,166 kms

July 24, 1997                            106,905 kms

October 26, 1997                     110,355 kms

November 13, 1997                  111,420 kms

January 20, 2001                       146,758 kms

This data shows that the use of the truck was relatively steady throughout the period. It also shows that for the three years in question, the total distance travelled by the truck was (146,758 - 111,420) ÷ 38.25 × 36 = 33,259 kms, or 11,086 kms per year.

[11]     The other piece of evidence is a spreadsheet which Mr. Grinblats prepared not long before the hearing from a diary that he kept of the various visits that he made to customers and other places in connection with the Bobcat business. The spreadsheet was not made contemporaneously, and it did not record distances travelled. Nevertheless, I am satisfied that it is reliable. It was prepared from records that were kept contemporaneously with the events, and Mr. Grinblats described in his evidence how he established the distance for each trip. Ms. Francis cross-examined him vigorously on the document, but his evidence was not shaken. Moreover, Ms. Jennex said, both during her audit and in her evidence before me, that she accepted the Appellant's computation of the business use of the vehicle as being accurate. For this reason, I shall not go into further detail as to the methodology involved. The spreadsheet shows that the business use of the truck in the period from July 24, 1997 to January 20, 2001 amounted to 38,177.9 kms. The total use in the same period was 146,758 - 106,905 = 39,853 kms. Business use therefore made up 38,177.9 ÷ 39,853 x 100 = 95.8% of the total use. It is reasonable to infer from this data that the use of the vehicle for both business and personal use was the same in each of the three years in issue.

[12]     The appeals will be allowed and the assessments will be referred back to the Minister for reconsideration and reassessment on the basis that in each of the taxation years 1998, 1999 and 2000 the Appellant used the truck for a total of 11,086 kms, of which 10,620 kms was for business and 466 kms was personal use, and that in each year, all the conditions referred to in subparagraph 6(2) of the Act were satisfied. The Appellant is entitled to his costs.

Signed at Ottawa, Canada, this 12th day of August, 2003.

"E.A. Bowie"

Bowie J.

CITATION:

2003TCC564

COURT FILE NO.:

2002-3136(IT)I

STYLE OF CAUSE:

Omar H. Grinblats and Her Majesty the Queen

PLACE OF HEARING:

Nelson, British Columbia

DATE OF HEARING:

April 11, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:

August 12, 2003

APPEARANCES:

Counsel for the Appellant:

David K. Simpkin

Counsel for the Respondent:

Amy Francis

COUNSEL OF RECORD:

For the Appellant:

Name:

David K. Simpkin

Firm:

McEwan, Harrison & Co.

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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