January 27, 2012

Baljit K. Sandhu, Arwinder K. Sandhu and Sukhbir K. Sandhu (Appellants) v. Her Majesty the Queen (Respondent)

98 DTC 1889
Tax Court of Canada
May 8, 1998

(Court File Nos. 96-228(IT)G, 96-230(IT)G and 96-238(IT)G.)

Inclusions and deductions — Shareholder’s benefits — Rental losses — Taxpayers the shareholders of a corporation — Whether taxpayers having transferred assets at fair market value to the corporation, thus negating the possibility of any benefit to them from such transfer — In unrelated issue, taxpayers having acquired farm property with borrowed funds, and having subsequently rented such property to the said corporation — Whether taxpayers having used their borrowed funds to earn income from the said corporation, thus entitling them to the loss deductions claimed in respect of the farm property lease — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 9(1), 15(1), 18(1)(a) and 20(1)(c).

(1) The three taxpayers were all equal shareholders of B Ltd. In reassessing the taxpayers for 1990, the Minister included in their income a shareholder’s benefit of $44,200 allegedly received by them from B Ltd. under subsection 15(1) of the Act. The taxpayers alleged (a) that assets had been transferred by them to B Ltd. at a fair market value of $44,200, so that there could be no benefit; and (b) that such assets had been transferred in 1989 in any event, so that the assessment for 1990 was without foundation. (2) in an unrelated issue, two of the taxpayers had borrowed money by way of mortgage on certain farm property which they leased to B Ltd. in a “Commercial Lease” signed on December 1, 1989. In reassessing the taxpayers for 1991, the Minister disallowed loss deductions claimed by them in respect of such farm property lease. In respect of both issues, the taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were allowed in part. (1) On a balance of probabilities assets with a value of $44,200 had been transferred to B Ltd. in 1989. That ended the matter and, on this issue, the Minister was ordered to reassess accordingly. (2) The direct use of the borrowed funds in this case had been to purchase the farm property in question. The suggestion that the borrowed monies had been used to produce income from shares of B Ltd. was simply too remote. B Ltd. had leased the property from the taxpayers. On this issue, therefore, the Ministers reassessments were affirmed.