http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/127230/index.do
Foster v. The Queen (December 16, 2015 – 2015 TCC 334, Paris J.).
Précis: In 2006 Mr. Foster purchased equipment and licenses for his fishing business for an aggregate price of $215,000. The agreement of purchase and sale was in his name but he subsequently showed the assets in the name of a company of which he was the sole shareholder (KJF). He was reassessed a shareholder benefit in the amount of $70,000 on the basis that he had overcharged KJF for the equipment. He applied for a rectification order making KJF the original purchaser of both the equipment and the license. He obtained, with the consent of the Minister, a partial consent order that “the Appellant held the Equipment and Licences as bare trustee for the benefit of KJF”.
CRA then reassessed outside of the normal reassessment period reducing the benefit to $50,000 on the theory “that the excess of the amount paid by KJF to Vendor on the closing of the PSA ($200,000) over the fair market value of the Equipment was a contribution by KJF towards the Appellant’s purchase of the Licences” [para. 21]. Mr. Foster moved for a determination under section 58 of the Tax Court of Canada Rules (General Procedure) arguing that the new assessment was invalid in light of “152(5) of the ITA, which provides that a taxpayer may not be reassessed after the expiry of the normal reassessment period to include an amount in income that was not included by an assessment or reassessment made within the normal reassessment period” [para. 20].
The Court held that the second reassessment was not out of time because it arose out of the same set of facts and resulted from the rectification order obtained by Mr. Foster. Costs on the motion were left to the trial judge.
Decision: The facts of this decision bear repeating:
FACTS
[3] On May 2, 2007, the Appellant incorporated Kate and Jerr Fisheries Ltd. (“KJF” ) to operate a fishing business. The Appellant was the sole shareholder of KJF.
[4] On June 6, 2007, the Appellant entered into an Agreement of Purchase and Sale (the “PSA” ) with Brian Lord (“the Vendor” ) for the purchase of a fishing vessel and fishing equipment (together, the “Equipment” ), and fishing licences (the “Licences” ). The purchase price of the Equipment and Licences was $415,000. The PSA allocated $414,999 of the $415,000 purchase price to the fishing licenses and $1 to the Equipment.
[5] The Appellant also entered into a Purchase and Loan Agreement (the “PLA” ) with By the Water Shellfish Inc. (the “Lender” ) wherein the Lender agreed to provide financing to the Appellant for the acquisition of the Equipment and Licences.
[6] The Appellant intended to acquire the Equipment and Licences on behalf of KJF, although this was not reflected in the PSA or PLA.
[7] Upon the closing of the PSA, KJF paid $200,000 to the Vendor. The remainder of the purchase price was financed under a loan agreement entered into between the Appellant and another corporation.
[8] The Appellant filed his personal return for his 2007 taxation year and caused KJF to file its 2007 corporate tax return on the basis that KJF had acquired the Equipment and Licences, and on the basis that the cost of the Equipment was $200,000 and the cost of the Licences was $215,000.
[9] The Appellant was first assessed by the Minister on May 20, 2008 for his 2007 taxation year.
[10] On January 5, 2012, the Minister reassessed the Appellant to include in his income a shareholder benefit in the amount of $70,000. The reassessment was made beyond the normal reassessment period on the basis of a waiver filed by the Appellant on April 27, 2011.
[11] In reassessing the Appellant, the Minister assumed that the Appellant had acquired the Equipment and Licenses personally and that the fair market value of the Equipment was $130,000 and the fair market value of the Licenses was $285,000 at the time of acquisition.
[12] The Minister also assumed that after the Appellant acquired the Equipment and Licences, he transferred the Equipment to KJF for $200,000 (the “Assumed Transfer” ), thereby receiving a shareholder benefit equal to the excess of the amount paid by KJF for the Equipment over its fair market value.
[13] On January 30, 2012, the Appellant filed a Notice of Objection to the reassessment.
[14] On May 25, 2012, the Appellant commenced an application in the New Brunswick Court of Queen’s Bench (the “Court”) for rectification of the PSA and PLA to substitute KJF as the purchaser of the Equipment and Licences and the borrower of the funds.
[15] With the consent of the Minister, the Court issued a Partial Consent Order that on the closing of the PSA the Appellant held the Equipment and Licences as bare trustee for the benefit of KJF.
[16] Consequently, the parties agree that the Assumed Transfer did not occur.
[17] The Appellant filed a Notice of Revocation of Waiver on August 23, 2012.
[18] On May 23, 2014, the Minister reassessed the Appellant’s 2007 tax year reducing the amount of the Appellant’s shareholder benefit from $70,000 to $50,000.
[19] In reassessing, the Minister assumed that the fair market value of the Equipment was $150,000 at the time it was acquired by KJF and that the excess of the amount paid by KJF to Vendor on the closing of the PSA ($200,000) over the fair market value of the Equipment was a contribution by KJF towards the Appellant’s purchase of the Licences. Therefore the Minister found that KJF conferred a benefit on the Appellant in the amount of $50,000.
The Tax Court held that the second reassessment was not out of time:
[37] It must be determined, then, whether the transactions underlying the May 23, 2014 reassessment are the same as those on which the January 5, 2012 reassessment was based. In my view, they were.
[38] The key transactions in this case were the acquisition of the Equipment and Licences from the Vendor and the payment of $200,000 by KJF to the Vendor. Those transactions are common to both the January 5, 2012 reassessment and the May 23, 2014 reassessment. What changed between those reassessments was the Minister’s appreciation of the role of the Appellant and KFJ in those transactions, a change that was brought about as a result of the rectification order that the Appellant himself obtained.
[39] In my view, the crux of the Minister’s two reassessments is identical: KJF overpaid for fishing equipment, and the amount of the overpayment is a shareholder benefit to the Appellant. In the first reassessment, the Minister determined that KJF’s payment of $200,000 gave rise to an overpayment and a resulting shareholder benefit of $70,000, based on the fishing equipment having a value of $130,000. In the second reassessment, the Minister accepted that the value of the fishing equipment should be increased to $150,000, resulting in an overpayment by KJF of $50,000 and shareholder benefit to the Appellant of an equal amount. In each case, the transactions relied upon are between the Appellant, KJF, and Mr. Lord.
[40] For these reasons, I find that the Minister had the statutory authority to issue the reassessment dated May 23, 2014 in respect of the Appellant’s 2007 taxation year.
Thus Mr. Foster’s motion under Rule 58 was unsuccessful and costs were left to the trial judge.
Comment: This decision seems somewhat uncontroversial. That being said it is difficult to fathom the Minister’s logic behind the second reassessment. Where the equipment and licenses were acquired in an arm’s length transaction for $415,000 as a bare trustee for KJF and recorded at that cost in the books of KJF it is not clear from this decision how a shareholder benefit could be said to arise. Perhaps the Minister’s theory will emerge if this case proceeds to trial.