October 07, 2011

Associated Fuels Limited (Appellant) v. Minister of National Revenue (Respondent)

68 DTC 728
Tax Appeal Board
September 24, 1968

Recapture of capital cost allowance — Depreciation claimed on apparent purchase price of property — Whether property acquired in non-arm’s length transaction — Control through nominees — Recapture of depreciation improperly claimed — Misrepresentation justifying reassessment beyond time limit — The 1948 Income Tax Act, s. 127(5) — Income Tax Act, R.S.C. 1952, ss. 20(1) and (4), 46(4) and 139(5).

The appellant company was incorporated in 1938 by R as a dealer in fuels of all kinds. In an apparent attempt to divest himself of his beneficial ownership of the controlling interest in the appellant company, R used a number of persons as successive nominees to hold the shares on his behalf. Extensive evidence was introduced to establish that R remained as the de facto controlling shareholder of the appellant at all material times Under a 1950 contract, the appellant company acquired from D Company two oil storage tanks and equipment at a cost of $275,000. D Company was alleged by the Minister (the allegation not having been disputed by the appellant) to have been controlled by R at the time of the contract through his ownership of an option to purchase all shares of D Company. The appellant proceeded to claim capital cost allowances on the $275,000 (a figure considerably higher than the capital cost to D Company) until 1961 when the assets were sold for $94,700. The Minister assessed the appellant for recaptured depreciation. According to the Minister, the provisions of section 20(4) applied because, having both been controlled by R, the appellant company and D Company did not deal at arm’s length with one another. The appellant argued that the 1950 contract was between parties at arm’s length because R did not control the appellant company. It was also submitted by the appellant that, even if the parties did not deal at arm’s length, the Minister could not tax amounts which had been allowed as deductions in years now closed to reassessment by the provisions of section 46(4).

Held: The appeal was dismissed. The Minister was well justified in assessing the appellant company under section 20(1) in connection with the deductions properly or improperly claimed by it as capital cost allowance during the period the property was held. On the basis of the evidence adduced at the hearing, it had to be concluded that R did continue to control the appellant at the time of the 1950 contract. The absence of R from the witness stand and lack of any documents which would prove the purported beneficial ownership of the appellant company’s shares by the various nominees described at the hearing strengthened the Board’s conclusion in this regard. Since R also controlled D Company at the time of the 1950 contract, it had to be found on the basis of the provisions of the Income Tax Act as they then stood (section 127(5) of the 1948 Act) that corporations controlled by the same person were deemed not to deal with each other at arm’s length. In the circumstances, the capital cost of the assets to the appellant company was the amount that was the capital cost to D Company. In view of the fact that the appellant, through R, its de facto controlling shareholder, misrepresented the true state of affairs to the Minister by having the controlling interest through the use of nominees, the Minister was entitled to reassess beyond the four-year period in accordance with section 46(4).