Tax Court of Canada Judgments

Docket: 2004-3895(IT)I

BETWEEN:

NAHLA BOURY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of

NRC Consulting Ltd. 2004-3894(IT)I

on February 24, 2005 at Calgary, Alberta

Before: The Honourable Justice G. Sheridan
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Lesley Akst

JUDGMENT

          The appeal from the reassessment made under the Income Tax Act for the 2001 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada this 8th day of April, 2005.

"G. Sheridan"

Sheridan, J.

Docket: 2004-3894(IT)I

BETWEEN:

NRC CONSULTING LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of

Nahla Boury 2004-3895(IT)I

on February 24, 2005 at Calgary, Alberta

Before: The Honourable Justice G. Sheridan
Appearances:
Agent for the Appellant:	Nahla Boury
Counsel for the Respondent:	Lesley Akst

JUDGMENT

          The appeal from the reassessment made under the Income Tax Act for the 2001 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada this 8th day of April, 2005.

"G. Sheridan"

Sheridan, J.

Citation:2005TCC241

Date: 20050408

Docket: 2004-3895(IT)I

BETWEEN:

NAHLA BOURY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent, AND BETWEEN: 2004-3894(IT)I NRC CONSULTING LTD., Appellant, and HER MAJESTY THE QUEEN, Respondent.

REASONS FOR JUDGMENT

Sheridan, J.

[1]      Nahla Boury and her solely owned professional corporation, NRC Consulting Ltd., are appealing the reassessments of their 2001 taxation years. In Ms. Boury's case, the Minister of National Revenue reassessed a shareholder benefit under subsection 15(1) of the Income Tax Act in respect of a vehicle and artwork. In reassessing NRC, the Minister disallowed, pursuant to subsection 18(1) of the Act, amounts claimed as business expenses for these items. The appeals were heard together. The issue common to both appeals is the determination of what proportion of the total usage of the vehicle can be attributed to Ms. Boury personally and what proportion to NRC for its use in the business.

[2]      Ms. Boury is a professional engineer who provides through NRC, consulting services to the oil and gas sector in Alberta. She is the sole shareholder of NRC. In 2001, NRC operated out of an office located in Ms. Boury's residence. Ms. Boury used this office for NRC's administrative and "desk" work and for some meetings, but did not receive NRC clients there. Much of her work for the company was done away from the office, either meeting with clients at their offices, typically in downtown Calgary, or working "in the field", within a 300-kilometres radius of Calgary. To carry on the work of NRC, Ms. Boury had to transport confidential files for her meetings and equipment for field work, and therefore a vehicle was a necessary part of NRC's business. In 2001, NRC used a Ford Escalade which had been purchased in Ms. Boury's name. She drove the Ford Escalade, which she described as a "movable office", a total of approximately 20,000 kilometres in 2001. NRC paid directly to GMAC monthly payments totalling $15,015; and to suppliers, fuel and repair costs of $2,127 for the Ford Escalade; NRC claimed these amounts as business expenses. There was no evidence of NRC's ever having paid anything to Ms. Boury for the use of the vehicle. NRC also claimed as a business expense the purchase price of a painting on the basis that it was displayed in the home office in 2001.

[3]      Because of the blurring of the lines between herself and her corporation, Ms. Boury now finds herself at odds with the Minister in respect of the tax liability of both entities. Her evidence was that in practice, she had a "loose relationship" with NRC: for example, if NRC needed money to cover expenses, she personally put money into NRC's account. Similarly, from time to time, she took money from NRC's account for her personal use. She caused herself further difficulties by failing to keep adequate books and records for herself and NRC. In addition to not having kept a vehicle log, she testified that her bookkeeping practice was simply to put all of her business-related papers in a file and then, at year end, to take them to her accountant to sort out.

1.        Business Use versus Personal Use of the Ford Escalade

[4]      The first issue is the one common to both appeals: what portion of the kilometres driven in the Ford Escalade ought to be attributed to earning income and how much to personal use? The Minister assumed[1] that it would be reasonable to apportion 25% for business purposes and 75% for personal use but, in light of new evidence presented by Ms. Boury, Crown counsel expressed the view that the business was "perhaps" more than that. For its part, although NRC originally based its business expense deductions on a usage of 80% for business purposes, at the hearing, Ms. Boury allowed that it might have been somewhat less than that. On this footing and having considered the evidence of Ms. Boury and Ms. Winsome Jarrett, the Canada Customs and Revenue Agency auditor to whom these files were assigned, I am satisfied that the right answer falls somewhere between the parties' initial estimates.

[5]      Ms. Boury put in evidence copies of invoices as a sample of NRC's client base in support of her claim that the Ford Escalade had been used for business purposes: she was required to drive the 15-kilometre distance between her home office and the downtown locations shown in the clients' invoices. She described her work for NRC as typically involving a 30-kilometre round trip, meeting with clients and picking up materials from the Alberta Energy and Utilities Board. As well, she averaged four field trips of not more than 600 kilometres each in 2001. Based on a weekly total of 150 kilometres in Calgary plus a maximum of 2,400 field trip kilometres, the business use total in 2001 would have been 10,200 kilometres, or approximately half of the 20,000 driven in 2001. This does not strike me as unreasonable. Ms. Jarrett, whose testimony I found both helpful and convincing, freely admitted that when she submitted her final report, she had not been provided with this information or shown documentation to justify any allocation other than the 20% business use proposal apparently accepted by Ms. Boury's accountant and upon which she had quite understandably relied. On cross-examination, Ms. Boury explained that while she had written a letter[2] to Ms. Jarrett authorizing CCRA to discuss her file with her accountant, not only had she not authorized her accountant to agree to 20%, she was unaware that he had done so until after the reassessment had been made on that basis. In view of the above, I am satisfied on a balance of probabilities that the Ford Escalade was used for NRC business purposes 50% of the time, from which it follows that the personal use attributable to Ms. Boury was also 50%.

2.        NRC Consulting Ltd. Appeal

[6]      Having determined that the business use of the Ford Escalade was 50%, the next step is to consider NRC's appeal. The Minister disallowed the deduction of any portion of the monthly payments and operating costs NRC paid in respect of the Ford Escalade on the basis that it was owned by Ms. Boury and was, therefore, exclusively for her personal use. Because of the absence of a vehicle log, the Minister calculated and allowed an automobile allowance based on 20% business use. The Minister also disallowed as a business expense the amount paid by NRC for a painting which it claimed was displayed in the home office in 2001.

(a)      Ford Escalade Expenses

[7]      Pursuant to paragraph 18(1)(a) of the Act, in computing a taxpayer's income from business, "... no deduction shall be made in respect of an outlay or expense except to the extent it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business...". Whether this is so is a question of fact to be determined on the evidence in any particular case. Having found that the Ford Escalade was used 50% of the time for the purpose of gaining income in 2001 from NRC's consulting work, it follows that NRC ought to be able to deduct 50% of the amounts paid for the legitimate business use of that vehicle. There was no evidence of NRC having paid any amounts directly to Ms. Boury for the use of the vehicle owned by her; instead, NRC paid directly to GMAC the amounts Ms. Boury owed personally under the financing agreement. It would have been unreasonable for NRC to have for its use at no charge a new model vehicle necessary to the carrying on of its business activities. By making the GMAC payments directly, NRC was effectively paying Ms. Boury for the use of her vehicle, an expense properly incurred by the company for the purpose of earning income. The same logic applies to the fuel and repair costs of the Ford Escalade. Accordingly, NRC is entitled to deduct 50% of the amounts claimed in respect of the GMAC payments and operating expenses in 2001.

(b)      Artwork

[8]      The Minister disallowed a deduction claimed as a business expense by NRC in respect of the purchase price of a painting. The Minister's assumption that NRC purchased the painting[3] went unchallenged. While it appears that this expenditure ought properly to have been dealt with as a capital cost, in either case, the issue turns on whether the painting was used for the purpose of earning income for the business. On the evidence presented, I am not satisfied that the painting fulfilled any business purpose. Ms. Boury testified that in 2001, the painting was displayed in the home office; Ms. Jarrett's evidence was that she did not see any artwork when she visited that space to conduct her audit in 2002. In any event, Ms. Boury admitted that she saw no clients at the home office. The home office was used only for those she described as "landmen, typists, [people doing] filing and other consultants" whose services she relied on to perform NRC's work for its clients. Even if there was a painting in the home office in 2001, I can see no link between its presence and the generation of NRC income. In my view, it was there for Ms. Boury's personal use and accordingly, the Minister was correct to have disallowed a business expense deduction for its purchase.

3.        Appeal of Nahla Boury

[9]      The issue in Ms. Boury's appeal is whether the Minister properly assessed her 2001 taxation year to include a shareholder benefit of $13,053 in respect of the Ford Escalade and for artwork in the amount of $4,010.

(a)      Ford Escalade

[10]     In Servais v. Canada[4], a decision of the Federal Court of Appeal, Sharlow, J.A. wrote at paragraph 14 that "... any use by a shareholder of corporate property is potentially subject to tax under subsection 15(1). The value of the benefit is determined in accordance with the principles set out in the case law (see for example, Youngman v. Canada (1990), 109 N.R. 276, 90 D.T.C. 6322, [1990] 2 C.T.C. 10 (F.C.A.)) except to the extent that the method of valuation is stipulated in the Income Tax Act." The present case is a variation on the more typical situation where the shareholder has the use of a vehicle owned by the corporation; here, the shareholder Ms. Boury was the owner of the Ford Escalade but the payments for that vehicle and operating cost expenditures were made by NRC.

[11]     Whether a shareholder benefit has been conferred is a question of fact[5]. In considering the circumstances of any particular case, the Court has as its guide the two-step process described by the Federal Court of Appeal in Youngman (L.) v. Canada[6] :

In order to assess the value of a benefit, for the purposes of subsection [15(1)], it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.

Or, as succinctly put by Strayer, J.A. in Canada v. Fingold[7], the Court must consider "...the fundamental question of whether there was a shareholder benefit, and if so, how much it was worth."

[12]     What NRC did for Ms. Boury was to make the monthly payments that she would otherwise have had to make personally to GMAC, as well as to pay on her behalf, directly to the suppliers thereof, the fuel and repair costs incurred for the Ford Escalade. No company of which she was not a shareholder would have been so generous; it was because of Ms. Boury's casual approach to the legal boundaries between herself personally and her corporate alter ego that the payments were made in this fashion. In any event, it is clear that NRC provided Ms. Boury with a benefit. The next step is to determine the value of that benefit. In light of my earlier determination that 50% of the use of the Ford Escalade is attributable to business purposes, it follows that Ms. Boury benefited from only 50% of the total usage of the vehicle in 2001. Thus, the value of the shareholder benefit she received from NRC was 50% of the amounts it paid in respect of GMAC payments and operating costs for that taxation year.

(b)      Artwork

[13]     In view of my findings above that the artwork was purchased by NRC and that it had no business purposes, it follows that the corporation conferred a benefit on Ms. Boury in respect of the painting. The value of the painting was assumed by the Minister to be $4,010[8], an amount confirmed by Ms. Boury in Exhibit R-1, "Certificate of Authenticity" for the painting. Accordingly, the Minister properly included as income the value of the painting pursuant to subsection 15(1) of the Act.

[14]     The appeals are allowed and referred back to the Minister for reconsideration and reassessment on the basis of the attached Reasons for Judgment.

Signed at Ottawa, Canada this 8th day of April, 2005.

"G. Sheridan"

Sheridan, J.

CITATION:

2005TCC241

COURT FILE NOS.:

2004-3895(IT)I and 2004-3894(IT)I

STYLE OF CAUSE:

Nahla Boury v. H.M.Q. NRC Consulting Ltd. v. H.M.Q.

PLACE OF HEARING:

Calgary, Alberta

DATE OF HEARING:

February 24, 2005

REASONS FOR JUDGMENT BY:

The Honourable Justice G. Sheridan

DATE OF JUDGMENT:

April 8, 2005

APPEARANCES:

Agent for the Appellant:

Nahla Boury

Counsel for the Respondent:

Lesley Akst

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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