A-61-96
Her Majesty the Queen (Appellant)
v.
Ron O. Adams (Respondent)
Indexed as: Canadav. Adams (C.A.)
Court of Appeal, Strayer, Décary and Robertson JJ.A. "Saskatoon, March 11; Ottawa, April 7, 1998.
Income tax — Income calculation — Taxpayer, employee of car dealership, provided with automobile under leasing agreement — Reassessed by MNR under Income Tax Act, s. 6 on basis of —reasonable standby charge— for use of car —made available— to him — Term —made available— in Act, s. 6(1)(e) not bearing restricted, narrow interpretation adopted by T.C.C. — Unrestricted use of automobile not condition precedent to imposition of standby charge — Act, s. 6(2) deeming employee to have made personal use of employer's automobile subject to minimal personal use exception — Standby provisions intended to promote certainty at expense of flexibility — Actual usage of car, for personal or business purposes, not required — —Fair market value— argument not valid — Lease of car tied to employer's business, not in ordinary course of business.
This was an appeal, heard together with six others, from a Tax Court of Canada decision holding that the Minister of National Revenue was not entitled to include in each of the taxpayer's income unreported automobile benefits. During the 1989 and 1990 taxation years, the taxpayer, an employee of a Saskatoon car dealership, was provided with an automobile under a leasing agreement for a monthly fee. The agreement provided a restricted use of the car in that, for example, the automobile had to be at the dealership during business hours and available for immediate sale. Under paragraph 6(1)(e) and subsections 6(2) and 6(2.1) of the Income Tax Act, the Minister reassessed the taxpayer on the basis of a "reasonable standby charge" for the use of the automobile "made available" to him by his employer during the taxation years in question. He did so by including in the taxpayer's income the difference between the higher reasonable standby charge and the lease payments made by him to his employer. On appeal to the Tax Court of Canada, the Tax Court Judge held that, as the taxpayer did not have "unrestricted use" of the automobile, it could not be said that it had been made available to him, and he concluded that the Minister had no legal right to impose a standby charge. Two issues were raised herein: 1) whether the Tax Court Judge erred in construing the term "made available" in paragragh 6(1)(e ) of the Act, and 2) whether the standby provisions have any application where an automobile is leased from an employer at "fair market value".
Held, the appeals should be allowed.
1) The term "made available" cannot bear the restricted interpretation adopted by the Tax Court Judge. The French and English versions of paragraph 6(1)(e ) of the Act share in common the use of broad language to describe the criterion which brings this provision into play, although the French version appears more precise, referring to an automobile which is at the "disposal" of an employee (à sa disposition ) and to an employee's "right to use" an employer's automobile (pour droit d'usage de l'automobile ). An automobile is made available to an employee if it is at his disposal and there is a concomitant right of usage. Actual usage by an employee, either for personal or business purposes, is not expressly required; a mere right of usage is sufficient. The broad and unqualified language found in both versions of paragraph 6(1)(e) reinforces the Minister's argument that unrestricted use of an automobile is not a condition precedent to the application of that provision. It is also clear from the wording of paragraph 6(1)(e) and its legislative history that the purpose for which the employer's automobile was made available is not a relevant consideration. Subsection 6(2) of the Act deems an employee to have made personal use of an employer's automobile, irrespective of whether this is so. The harsh consequences which flow from that deeming provision are tempered by the "minimal personal use" exception grafted on to subsection 6(2). The exception enables an employee to obtain a reduction in the amount of the standby charge, otherwise applicable, if certain conditions precedent are satisfied. The reduction is calculated on the basis of actual kilometres travelled in regard of both personal and business usage. Actual usage only becomes relevant within the context of the minimal personal use exception articulated in subsection 6(2). A final reason for rejecting the argument that unrestricted use of an employer's automobile is necessary before a standby charge may be imposed is that such an interpretation would effectively undermine the legislative efficacy of paragraph 6(1)(e ). The standby provisions were carefully crafted with the object of promoting certainty at the expense of flexibility.
2) The respondent argued that, where an automobile is leased from an employer at "fair market value", the standby provisions have no application. It may be true that the taxpayer paid a fair price for his lease having regard to the personal use restrictions imposed on usage of his employer's automobile, but, for tax purposes, what is a fair or reasonably standby charge has been predetermined by the Act. That which the marketplace regards as fair compensation cannot be substituted for the Act's understanding of what is a reasonable standby charge. The taxpayer's argument would have been persuasive had he leased his car at the same rate and on the same terms as are available to arm's length consumers. However, the lease of the automobile was tied to his employer's business and not in the ordinary course of its business. The "fair market value" argument could not succeed.
statutes and regulations judicially considered
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 6(1)(a),(e) (as am. by S.C. 1980-81-82-83, c. 140, s. 1), (2) (as am. by S.C. 1988, c. 55, s. 1), (2.1) (as enacted idem).
cases judicially considered
not followed:
R. v. Harman, [1980] 1 F.C. 811; [1980] CTC 83; (1980), 32 N.R. 181 (C.A.).
referred to:
Papa (T.) v. M.N.R., [1987] 2 C.T.C. 2209; (1987), 87 DTC 529 (T.C.C.); Finochio, J.A. v. The Queen (1994), 95 DTC 197 (T.C.C.).
APPEALS from a decision of the Tax Court of Canada ([1995] T.C.J. No. 1723 (QL)) holding that the Minister of National Revenue was not entitled to include in each of the taxpayer's income unreported automobile benefits. Appeals allowed.
counsel:
Dona C. Gilbertson for appellant.
John R. Beckman, Q.C., for respondent.
solicitors:
Deputy Attorney General of Canada for appellant.
McKercher, McKercher & Whitmore, Saskatoon, Saskatchewan, for respondent.
The following are the reasons for judgment rendered in English by
Robertson J.A.: This is one of seven appeals stemming from a decision of the Tax Court of Canada [[1995] T.C.J. No. 1723 (QL)]. Therein, it was held that the Minister of National Revenue was not entitled to include in each of the taxpayer's income, unreported automobile benefits. Pursuant to paragraph 6(1)(e) [as am. by S.C. 1980-81-82-83, c. 140, s. 1], and subsections 6(2) [as am. by S.C. 1988, c. 55, s. 1] and 6(2.1) [as enacted idem] of the Income Tax Act [S.C. 1970-71-72, c. 63], the Minister reassessed the taxpayers on the basis of a "reasonable standby charge" for the use of automobiles "made available" to them by their employer during the taxation years in question. Those provisions read as follows:
6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
. . .
(e) where his employer or a person related to the employer made an automobile available to him, or to a person related to him, in the year, the amount, if any, by which
(i) an amount that is a reasonable standby charge for the automobile for the aggregate number of days in the year during which it was made so available
exceeds
(ii) the aggregate of all amounts, each of which is an amount (other than an expense related to the operation of the automobile) paid in the year to the employer or the person related to the employer by the taxpayer or the person related to the taxpayer for the use of the automobile.
. . .
(2) For the purposes of paragraph (1)(e), a reasonable standby charge for an automobile for the aggregate number of days (in this subsection referred to as the "total available days") in a taxation year during which the automobile is made available to a taxpayer or to a person related to the taxpayer by the employer of the taxpayer or by a person related to the employer (both of whom are in this subsection referred to as the "employer") shall be deemed to be the amount determined by the formula
A x [2% x (C x D) + 2 x (E"F)]
B 3
where
A is the lesser of
(a) the aggregate number of kilometres that the automobile is driven (otherwise than in connection with or in the course of the taxpayer's office or employment) during the total available days, and
(b) the value determined for B for the year under this subsection in respect of the standby charge for the automobile during the total available days,
except that the amount determined under paragraph (a) shall be deemed to be equal to the amount determined under paragraph (b) unless
(c) the taxpayer is required by the employer to use the automobile in connection with or in the course of the office or employment, and
(d) all or substantially all of the distance travelled by the automobile in the total available days is in connection with or in the course of the office or employment;
B is the product obtained when 1,000 is multiplied by the quotient obtained by dividing the total available days by 30 and, if the quotient so obtained is not a whole number and exceeds one, by rounding it to the nearest whole number or, where that quotient is equidistant from two consecutive whole numbers, by rounding it to the lower thereof;
C is the cost of the automobile to the employer where the employer owns the vehicle at any time in the year;
D is the number obtained by dividing such of the total available days as are days when the employer owns the automobile by 30 and, if the quotient so obtained is not a whole number and exceeds one, by rounding it to the nearest whole number or, where that quotient is equidistant from two consecutive whole numbers, by rounding it to the lower thereof;
E is the aggregate of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer; and
F is the part of the amount determined for E that may reasonably be regarded as having been payable to the lessor in respect of all or part of the cost to the lessor of insuring against
(a) loss of, or damage to, the automobile, or
(b) liability resulting from the use or operation of the automobile.
(2.1) Where in a taxation year
During the 1989 and 1990 taxation years each of the taxpayers was a member of the sales staff of a Saskatoon car dealership, Merlin Motors. Each taxpayer was provided with an automobile under a leasing agreement in which they paid a monthly fee to Merlin. In turn, Merlin agreed to pay for the insurance, registration and licensing of the leased vehicles. The lease agreements also provided that the taxpayers were responsible for depreciation and that automobiles be available for immediate sale during the course of a business day. To this end, the leased cars were to be kept clean and free of personal items. The taxpayers were required to ensure that the vehicles were on the premises of Merlin commencing at 8:30 a.m till closing, from Monday to Saturday inclusive. Keys to the automobiles were to be made available to the management of Merlin during this time frame. Otherwise, the automobiles remained at the disposal of the taxpayers.
For the two taxation years in question, the Minister reassessed the taxpayers by including in income the difference between the higher reasonable standby charge and the lease payments made by the taxpayers to Merlin. Those calculations were made in accordance with subsections 6(2) and 6(2.1) of the Act. The taxpayers appealed the reassessments to the Tax Court. In that Court the issue turned on whether the automobiles were "made available" to the taxpayers within the meaning of paragraph 6(1)(e ). The Tax Court Judge held that as the taxpayers did not have "unrestricted use" of the automobiles it could not be said that they had been made available to them. Therefore, the Minister had no legal right to impose a standby charge. At page 68 of the Appeal Record the Tax Court Judge reasoned [at paragraph 13 of QL]:
The Appellant did not have unrestricted use of this vehicle during business hours six days a week. It was not available for use at his direction, whether by a member of his family or any other person. It was in Merlin's inventory and was subject to sale at any moment. A vehicle in such circumstances cannot be said to have been made available to the employee.
The Minister takes exception to the above reasoning and conclusion. Two issues were pursued on these appeals. The Minister argues that the learned Tax Court Judge erred in construing the term "made available" found with in paragraph 6(1)(e ) of the Act. Specifically, it is argued that the right to impose a standby charge is not dependent on whether a taxpayer has unrestricted or exclusive use of an employer's automobile. In support thereof, reliance is placed on two earlier decisions of the Tax Court which held that "exclusive use" of an employer's automobile is not required to trigger paragraph 6(1)(e ): see Papa (T.) v. M.N.R., [1987] 2 C.T.C. 2209 and Finochio, J.A. v. The Queen (1994), 95 DTC 197. For their part, the taxpayers argue that where an automobile is leased from an employer at "fair market value" the standby provisions have no application.
During the course of oral argument counsel for the taxpayers did not seek to counter the Minister's argument with respect to the interpretation issue, being content to advance the fair market value argument. I shall deal with both issues because of the precedential significance of the ruling below. This is only the second time in two decades that this Court has been asked to consider the standby provisions.
I agree with the Minister that the term "made available" cannot bear the restricted or narrow interpretation adopted by the learned Tax Court Judge. In the reasons that follow I offer four reasons in support of that conclusion. Briefly stated they are as follows. First, the idea that unrestricted use of an automobile is a condition precedent to the imposition of a standby charge is not supported by the broad language used in both linguistic versions of paragraph 6(1)(e ). Second, the legislative history of that provision does not support the restrictive interpretation adopted in the Court below. Third, a contextual analysis of both paragraph 6(1)(e) and subsection 6(2) reaffirms those conclusions. Finally, it is apparent that an interpretation which requires unrestricted use of an employer's automobile would effectively undermine the legislative efficacy of paragraph 6(1)(e). I shall deal with each of these points in turn.
It is one thing for a court to define a statutory phrase in terms of what it does not mean and quite another to articulate its precise scope. For purposes of deciding this appeal, however, it is unnecessary to pursue the latter task. At the same time, much can be gleaned by reference to both the English and French versions of paragraph 6(1)(e). The English version speaks of an automobile being "made available" to an employee and of an employee reimbursing an employer for "the use of" an automobile. The language chosen by the legislative draftsperson is undeniably broad. The same holds true with respect to the French version of paragraph 6(1)(e ). But, in my opinion, that version offers greater insight into the circumstances that trigger the right of the Minister to impose a standby charge. It read:
6. (1) Doivent être inclus dans le calcul du revenu d'un contribuable tiré, pour une année d'imposition, d'une charge ou d'un emploi, ceux des éléments appropriés suivants:
e) lorsque son employeur ou une personne liée à son employeur a mis dans l'année une automobile à sa disposition (ou à la disposition d'une personne qui lui est liée), l'excédent, si excédent il y a,
(i) de la somme qui représente les frais raisonnables pour droit d'usage de l'automobile pendant le nombre total de jours dans l'année durant lesquels elle a ainsi été disponible,
sur
(ii) le total de toutes les sommes dont chacune représente une somme (autre qu'une dépense liée au fonctionnement de l'automobile) payée dans l'année à l'employeur ou à la personne liée à l'employeur par le contribuable ou par la personne qui lui est liée pour l'usage de l'automobile; [Emphasis mine.]
What the French and English versions share in common is the use of broad language to describe the criterion which brings paragraph 6(1)(e) into play. At the same time, the French version appears more precise, referring to an automobile which is at the "disposal" of an employee (à sa disposition ) and to an employee's "right to use" an employer's automobile (pour droit d'usage de l'automobile ). In short, an automobile is made available to an employee if it is at his or her disposal and there is a concomitant right of usage. Indeed, actual usage by an employee, for either personal or business purposes, is not expressly required. A mere right of usage is sufficient, of which more will be said below. Within this context, it is clear to me that the broad and unqualified language found in both linguistic versions of paragraph 6(1)(e) reinforces the Minister's argument that unrestricted use of an automobile is not a condition precedent to the application of that provision. Further support for this understanding is found in the legislative history of that provision.
Prior to 1982, paragraph 6(1)(e) of the Act [S.C. 1970-71-72, c. 63] required that the automobile be made available to an employee "for his personal use". The earlier provision was interpreted by this Court in R. v. Harman , [1980] 1 F.C. 811 (C.A.). The precedential effect of that decision was to deny the Minister the right to impose a standby charge where a taxpayer could establish minimal personal use of an employer's automobile. Alternatively expressed, paragraph 6(1)(e) would not apply if the automobile had been used "predominantly" for business purposes. With respect to any minimal personal use, a taxable benefit would have to be assessed under paragraph 6(1)(a )], as it then read.
From an administrative view, Harman was bound to encourage litigation. First, there was the problem of what would amount to minimal personal use. Second, there would be difficulty in placing a monetary value on personal use which qualified as a taxable benefit. In response, Parliament amended paragraph 6(1)(e) [S.C. 1980-81-82-83, c. 140, s. 1] to apply to the 1982 and subsequent taxation years. The amendment removed all references to an automobile being made available for personal use. I take it for granted that the purpose of the amendment was to repeal the understanding established in Harman that minimal personal use of an automobile was sufficient to oust the application of paragraph 6(1)(e). In my view, if personal use by an employee is no longer a valid consideration with respect to the applicability of that paragraph so too is the fact that an employee's use of an employer's automobile is restricted. To hold otherwise would be tantamount to deciding these appeals be decided on the basis of the pre 1982 legislation and the reasoning in Harman. That we cannot do.
In my view, it is clear from the wording of paragraph 6(1)(e) and its legislative history that the purpose for which the employer's automobile was made available is not a relevant consideration. Admittedly, it would be unjust to require an employee to include in income a standby charge when in fact the vehicle had been used exclusively or substantially for business purposes. As will be explained shortly, following Harman subsection 6(2) was also amended by prescribing what I shall term a "minimal personal use exception" to the formula normally applied when calculating standby charges. I shall deal with this exception more fully below. As part of the contextual analysis, I turn now to subsection 6(2) which dictates the bases on which standby charges are to be calculated. It is my opinion that that provision also supports the Minister's position.
To the extent that paragraph 6(1)(e) refers to the imposition of a "reasonable standby charge" the legislation is simply misleading. The formula outlined in subsection 6(2) dictates the exact amount to be included in income. There is no room for the exercise of a discretion in determining what is reasonable. Moreover, the standby charge is calculated on the basis of two assumptions. The first assumption is that the employee made personal use of the automobile during the year. The second assumption is that personal usage amounts to 1000 km for every month the automobile is made available to the employee (12000 km per year). These two assumptions are imbedded in the formula set out in subsection 6(2). A brief explanation should suffice.
For purposes of deciding this appeal, the relevant portion of the formula is A/B x [1"% x (C x D)]. The A/B fraction represents the portion of personal use, C represents the cost of the automobile to the employer and D represents the number of months the automobile is made available to the employee. "A" is defined as the number of personal use kilometres driven by the taxpayer. "B" is defined as being equal to 1000 for each month the automobile was available to the employee (12000 per year). Subject to the "minimal personal use" exception, the A/B fraction is deemed equal to 1. Accordingly, subsection 6(2) deems an employee to have travelled 1000 personal use kilometres per month that the automobile was made available to the employee (12000 km per year).
Against this background, it is apparent that both paragraph 6(1)(e) and subsection 6(2) are unconcerned with whether in fact an employee made use of an employer's automobile. Paragraph 6(1)(e) makes no reference to the purposes for which the automobile is made available and, in particular, no longer makes reference to personal use by an employee. On the other hand, subsection 6(2) deems the employee to have made personal use of the automobile. Having regard to these considerations, it is clear to me that Parliament did not intend that the applicability of paragraph 6(1)(e) be dependent on whether an employee had unrestricted or exclusive use of an employer's automobile. A contextual analysis of the relevant provisions simply does not support that understanding. Nor does the "minimal personal use" exception outlined in subsection 6(2). Given the significance of this exception, an explanation is required.
The so-called "minimal personal use" exception is contained within the definition of "A" set out in subsection 6(2). Essentially, the exception enables an employee to obtain a reduction in the amount of the standby charge, otherwise applicable, if the following conditions precedent are satisfied. First, the employer must require the employee to use the automobile in the performance of his or her duties of employment. Second, "all or substantially all" of the distance travelled by the automobile during the time it was made available to the employee must be in connection with or in the course of his or her employment. In this regard, the Minister has adopted the policy that at least 90% of the automobile's use must be for employment purposes: see IT-63R4. Third, personal use of the automobile must be less than 12000 km per year. Thus, employees who use an employer's automobile exclusively for business purposes are not required to include in income a standby charge. This is so because "A" will equal zero. Employees who make personal use of their employer's automobile are entitled to a reduction in the standby charge, provided that such use is minimal; that is to say all three conditions precedent are met. The reduction comes about because the "A/B" quotient is no longer deemed to be "1". Rather it is a fraction thereof, which fraction varies depending on the number of personal use kilometres travelled. For purposes of deciding this appeal, it is important to note that the reduction is calculated on the basis of actual kilometres travelled in regard to both personal and business usage. It is actual usage which is of significance not whether an employee had unrestricted or exclusive use of an employer's automobile. It is also important to note that actual usage only becomes relevant within the context of the minimal personal use exception articulated in subsection 6(2).
My final reason for rejecting the belief that unrestricted use of an employer's automobile is necessary before a standby charge may be imposed is a pragmatic one. It is apparent to me that such an interpretation would effectively undermine the legislative efficacy of paragraph 6(1)(e). It is understandable that an employer might have legitimate reasons for imposing restrictions on an automobile's use. But in any one case it would not be difficult for an employer-employee to contract out of paragraph 6(1)(e) by agreeing to such restrictions. To some, this consideration might be a sufficient ground for rejecting the interpretation adopted in the Court below.
In summary, the broad wording used in both linguistic versions of paragraph 6(1)(e), coupled with its legislative history, support the Minister's position. In my respectful view, unrestricted or exclusive use of an employer's automobile is not a condition precedent to the imposition of a standby charge. Nor is actual usage required, whether it be for personal or business purposes. What is required is that an employer have made an automobile available to, or at the disposition of, an employee and, correlatively, that he or she have had a right to use it. This is only logical since subsection 6(2) deems an employee to have made personal use of an employer's automobile, irrespective of whether this is so. In my view, the standby provisions were carefully crafted with the object of promoting certainty at the expense of flexibility. That being said the harsh consequences which flow from a deeming provision are tempered by the "minimal personal use" exception grafted on to subsection 6(2) in response to this Court's decision in Harman . This is the point in time where actual usage and the purposes for which the automobile was made available become relevant considerations.
In conclusion, the Minister reassessed each of the taxpayers in a manner consistent with the above reasons. Moreover, the taxpayers did not lay claim to a reduced standby charge under the minimal personal use exception provided for in subsection 6(2). Therefore, all of the appeals must be allowed unless the "fair market value" argument is found to be valid. In my opinion, that argument cannot succeed.
Before this Court counsel debated whether the Minister had conceded, at trial, that the lease payments to Merlin were at "fair market value". The Tax Court Judge in his reasons for judgment did state at page 67 of the Appeal Record [at paragraph 12 of QL]: "Respondent's counsel stated that the fair market value of the rental was not in issue and that the above sections apply to every lease of a vehicle by an employer to an employee". Assuming without deciding that a concession was made, I cannot accede to the taxpayers' argument.
In truth, the taxpayers are arguing that they paid a fair price for their leases having regard to the personal use restrictions imposed on usage of their employer's automobiles. This may very well be true, but for tax purposes what is a fair or reasonable standby charge has been predetermined by the Act. In effect, the taxpayers ask us to substitute the Act's understanding of what is a reasonable standby charge with that which the marketplace regards as fair compensation. This we cannot do. Parliament has decided to promote certainty and predictability at the expense of flexibility. The reality is that a standby charge calculated in accordance with subsection 6(2) may actually exceed what is otherwise considered a fair price for an employee's personal use of an employer's automobile.
I hasten to acknowledge that the taxpayers' argument would have been persuasive had they leased their cars at the same rates and on the same terms as are available to arm's length consumers. It is within the realm of probability that a salesperson might lease an automobile from his or her employer, rather than leasing from a competitor. In such circumstances, the standby provisions would not come into play. A lease to an employee in the ordinary course of an employer's business and which is not tied to the employment contract cannot support the understanding that an employer has made an automobile available to an employee. The situation is no different than an outright sale of a car by an employer to employee. At best, a sale or lease at less than market rates would give rise to a taxable benefit under another provision of the Act. But that is not the case before us. Here the lease of the automobile is tied to Merlin's business and not in the ordinary course of its business.
It was agreed by the parties that these reasons would also apply to the related appeals: A-62-96, A-63-96, A-64-96, A-65-96, A-66-96 and A-67-96. Accordingly, the appeals must be allowed with one set of costs here and in the Tax Court. The judgments of the Tax Court of Canada dated December 14, 1995 should be set aside and the reassessments of the Minister affirmed.
Strayer J.A.: I agree.
Décary J.A.: I agree.