Greer v. HMK: Shareholder Benefit from Transfer of Real Property Upheld
Summary
The two main issues to be resolved by the Tax Court of Canada (Tax Court) were a) was the Appellant Michale Greer (Appellant) required to include a shareholder benefit in 2005 following the receipt of real properties worth over $2.4mil from a corporation owned by his late father’s estate and b) was the Minister even allowed to reassess 2005. The Tax Court answered both in the affirmative.
Background
The Appellant is a New Brunswick resident. His parents were Hedley and Violetta. Hedley operated H. Greer & Son Ltd. (HGSL) which was involved in property development and sales. Hedley died in 1998. Violetta became the executrix of his estate.
In October of 2005, HGSL transferred four properties to the Appellant for no consideration. The Appellant then sold some of the properties in the following two years and transferred the remaining properties to his own company H. Greer & Son (2006) Ltd. The Appellant was a shareholder of HGSL (but he disputed this at trial).
Reassessments
The Minister reassessed the Appellant’s 2005 taxation year to include an additional $2,846,200 in computing his income under a combination of subsections 15(1) and 15(2) of the Income Tax Act (Act). The Minister included a shareholder benefit of $1,584,200 under subsection 15(1) of the and a shareholder loan of $1,262,000 under subsection 15(2) of the Act. The Minister’s assessment of a shareholder benefit of $1,584,200 under subsection 15(1) reflected the difference between the price the Minister assumed the Appellant paid for the properties in question. The Minister’s reassessment of a shareholder loan of $1,262,000 under subsection 15(2) reflected a loan the Minister assumed was made by HGSL to the Appellant to allow him to purchase those properties from HGSL.
Law
Subsections 15(1) and 15(2) of the Act:
15(1) Where at any time in a taxation year a benefit is conferred on a shareholder … by a corporation … the amount or value thereof shall … be included in computing the income of the shareholder for the year.
15(2) Where a person … is
(a) a shareholder of a particular corporation, …
and the person … has in a taxation year received a loan from or has become indebted to the particular corporation, … the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership.
Decision & Analysis
The Court was left with four questions to answer, namely:
Was there a shareholder loan? Was the Appellant a shareholder of HSGL? What was the fair market value of the transferred property? Was there a misrepresentation attributable to neglect or carelessness in respect of the Appellant’s 2005 tax return?
The Court found that there was no loan, and that subsection 15(2) had therefore been improperly pleaded. Based on the Appellant’s testimony, the Court found that the Appellant rationalized the transfers as a distribution from his late father’s estate. To the Court, this meant that he did not intend to purchase the properties at the time of transfer.
The Court found that the Appellant was a shareholder of HGSL, despite the Appellant denying this at trial, on three bases. Justice Spiro found the Appellant’s testimony to be unreliable. For example, he indicated to the Court that he was not at all involved with HGSL (the transferor corporation). But later in cross-examination, he admitted he was president, vice-president, and director of HGSL and carried out transactions on behalf of HGSL. At this point, the Court likely stopped believing him altogether. Furthermore, his name appeared in the shareholder as owning a single share as of 1996. Finally, a provision in the relevant Corporations Act included a presumption that an entry in a share register is, in the absence of evidence to the contrary, proof that the holder shown in the register is the owner of the share. The Court relied on this presumption.
Fair market value was determined by expert evidence. The Crown and the Appellant both presented real estate appraisers who gave their opinions on the fair market value of each of the four properties. The parties were able to agree on the first two properties but disagreed on the last two. The Court ultimately accepted the evidence of the Crown’s expert, for several reasons. The Appellant’s expert was unclear and omitted relevant evidence. The Crown’s expert:
- provided detailed explanations
- performed extensive research and used aerial photographs
- considered factors Appellant expert did not, including the 2004 announcement of the Trans-Canada Highway interchange and the general growth trend in the development of the relevant area
- used an additional valuation method
- considered events not considered by his counterpart
- weighted comparables in a better way
- he quantified and explained costs that would have been incurred by an owner before selling certain portions of the property
Thus, the fair market value as expressed by the Crown’s expert was accepted by the Court.
According to the Court, there indeed was a misrepresentation attributable to neglect or carelessness and determining whether one exists is a two-step process, namely, a) is there a misrepresentation and b) if so, was it attributable to neglect, carelessness or willful default.
In the Court’s view, failing to report the shareholder benefit was a misrepresentation, given that the Appellant knew he did not acquire the properties from the estate because he knew the estate did not own the properties. He knew that he did not get the properties from Violetta because he knew she also did not own the properties. The Court found that the Appellant knew that HGSL owned the properties and that they were transferred to him for no consideration. Lastly, he knew or ought to have known he was a shareholder of HGSL.
The misrepresentation was attributable to neglect because he did not consult a tax professional before his 2005 filing. That failure reflected a lack of reasonable care and was therefore negligent.
