Date:
20080307
Docket: A-213-07
Citation: 2008 FCA 89
CORAM: LÉTOURNEAU
J.A.
SEXTON
J.A.
PELLETIER
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JEAN LIVINGSTON
Respondent
REASONS FOR JUDGMENT
SEXTON J.A.
[1]
The power
to tax means little without the power to collect. As a result, the Income
Tax Act R.S.C. 1985, c. 1 (5th Supp.) (the “Act”) provides for a
myriad of powers to collect taxes owed that would otherwise not be obtainable
when taxpayers attempt to evade their creditors. These powers must be
interpreted in light of their intended purpose and within the contexts of the
factual situations to which they are applied.
[2]
This is an
appeal by Her Majesty the Queen (the “appellant”) of the judgment of Tax Court
Justice Beaubier (the “Tax Court Judge”) who held that section 160 of the Act had
not been engaged when Jean Livingston (the “respondent”) accepted a taxpayer’s
funds in order to defeat the Crown as a creditor for unpaid taxes.
[3]
For the
reasons that follow, I would allow the appeal.
FACTS
[4]
The
respondent and Michele Davies (“Ms. Davies”) have been friends for 11 years.
Ms. Davies personally owed around $80,000 in taxes, and was potentially liable
for over $700,000 in taxes and various remittances and interest as director of
various corporations. When the Canada Revenue Agency (the “CRA”) began
attempting to collect Ms. Davies’ tax debt, no funds could be collected. Ms.
Davies repeatedly transferred funds into new banking and brokerage accounts
before the CRA could locate and collect the money owed. The respondent
was well-aware of Ms. Davies’ collection problems. After numerous discussions,
the respondent opened a bank account in her name only at a branch of CIBC. The
respondent was the sole account holder and signatory with respect to the
account.
[5]
The
account was used only by Ms. Davies, however. Ms. Davies would deposit cheques
into the account, and also direct other parties to pay amounts owed to her into
the respondent’s account. The respondent provided Ms. Davies with the only
debit card in order to allow Ms. Davies to make withdrawals from the account.
The respondent had also signed blank cheques on the account which Ms. Davies could
use. The respondent had the ability to take money from the account at any time;
she also had the ability to close the account. All bank statements, however,
were sent to Ms. Davies and not the respondent.
[6]
During
the period from October 16, 2001 to April 28, 2003, funds totalling $36,650.82
were deposited into the bank account. However, bank records seem to indicate
that there was never more than $9,000 in the account at any one time. The funds
included money withdrawn from Ms. Davies’ RRSP, Canada Child Tax Benefit and
GST Credit cheques, welfare cheques payable to Ms. Davies and spousal support
seized from Ms. Davies’ ex-spouse by the British Columbia Family Maintenance
Enforcement Program.
[7]
On
April 30, 2003, Ms. Davies declared bankruptcy. When her estate was
distributed, the CRA received $233 in satisfaction of the $80,000 tax debt. Ms.
Davies did not disclose in her sworn statement in bankruptcy that she was the
beneficiary of trust funds, despite the fact that on and around the date her
statement was sworn, there was around $1,000.00 in the respondent’s account.
[8]
The
respondent was assessed for the total amount of money that had been deposited
into the account between October 16, 2001 to April 28, 2003, namely $36,650.82.
DECISION BELOW
[9]
The
Tax Court Judge determined
that in order for subsection 160(1) of the Act to apply, the following four
criteria must be met:
1) There must be a transfer of
property;
2) The parties must not be
dealing at arm’s length;
3) There must be no consideration
or inadequate consideration flowing from the transferee to the transferor (I
would note that the trial judge considered the test to be “No consideration or
inadequate consideration flowing from the transferor to the transferee”
[emphasis added]: this is a mistaken quotation of the test as cited in Raphael
v. Canada 2002 FCA 23.); and
4) The transferor must be liable
to pay tax under the Act at that time.
[10]
The Tax
Court Judge found that the first, second and fourth criteria had been
fulfilled. However, he found that there had been consideration flowing from the
respondent to Ms. Davies. Specifically, he concluded the following (at
paragraphs 3 & 5):
The deposit
by Ms. Davies of funds into Ms. Livingston’s name and the delivery by Ms.
Livingston to Ms. Davies of a bank debit card and signed blank cheques on the
Account constitute an exchange of consideration. As a result, there was a form
of contractual agreement between the parties.
[…]
At all the
times that Ms. Davies made the transfers of each sum, Ms. Davies had the
ability to take each sum in full by using a signed blank cheque from the
Appellant or by using the bank debit card. Ms. Davies even got the bank account
statements so she, and not Mrs. Livingston, was the person who knew what was in
the Account, although Ms. Livingston also had the power to find that out and to
take anything in the Account at any time. But, in any event, these findings
establish that at all times Ms. Livingston provided adequate consideration to
Ms. Davies for the deposit of these funds by Ms. Davies.
The Tax Court Judge also emphasized that the respondent did
not obtain any benefit from the bank account.
[11]
However, the
Tax Court Judge rejected the respondent’s contention that the respondent was a
bare trustee of the funds in question. He found that the Court will not favour
a transferor where property is transferred with the intention of prejudicing a
creditor. Nevertheless, as the third criterion had not been fulfilled, subsection
160(1) did not apply to the respondent.
[12]
The
Tax Court Judge made a number of findings of fact that are crucial for the
purposes of this appeal. He found that the respondent’s purpose in opening the
bank account was to enable Ms. Davies to place her funds beyond the reach of
creditors, including the CRA. He even went so far as to conclude that both
parties conspired to prejudice the CRA (at paragraph 6). He also found that Ms.
Davies was the only person who used the account; that is, the respondent
never deposited into, nor withdrew funds from the account.
ISSUES
[13]
Broadly
speaking, there is only one issue in this appeal: was subsection 160(1) engaged
when Ms. Davies made numerous transfers to the respondent’s bank account? More
specifically there are three areas of analysis to explore in this appeal:
1) What is the test for the
application of subsection 160(1) of the Act?
2) Was there a transfer of
property?
3) Was there adequate
consideration flowing from the transferee to the transferor?
STANDARD OF REVIEW
[14]
In
appellate review, the standard of review is governed by the nature of the
question at issue. Questions of law are generally reviewed on a standard of
correctness, while findings of fact or mixed fact and law will be set aside
only if the trial judge has made an overriding and palpable error: see Housen
v. Nikolaisen, [2002] 2 S.C.R. 235.
ANALYSIS
Interpreting Subsection 160(1)
[15]
The
Supreme Court of Canada’s preferred approach to statutory interpretation remains
Dreidger’s modern principle (Elmer A. Driedger, The Construction of Statutes
(Toronto: Butterworths, 1974) at 67):
Today there
is only one principle or approach, namely, the words of an Act are to be read
in their entire context, in their grammatical and ordinary sense harmoniously
with the scheme of the Act, the object of the Act, and the intention of Parliament.
See Re Rizzo and
Rizzo Shoes Ltd. [1998] 1 S.C.R. 27 at 41; Bell ExpressVu Limited
Partnership v. Rex, 2002 SCC 42 at paragraph 26.
[16]
Subsection
160(1) of the Act provides as follows:
|
Where a
person has, on or after May 1, 1951, transferred property, either directly or
indirectly, by means of a trust or by any other means whatever, to
(a)
the person’s spouse or common-law partner or a person who has since become
the person’s spouse or common-law partner,
(b)
a person who was under 18 years of age, or
(c)
a person with whom the person was not dealing at arm’s length,
the
following rules apply:
(d)
the transferee and transferor are jointly and severally liable to pay a part
of the transferor’s tax under this Part for each taxation year equal to the
amount by which the tax for the year is greater than it would have been if it
were not for the operation of sections 74.1 to 75.1 of this Act and section
74 of the Income Tax Act, chapter 148 of the Revised Statutes of
Canada, 1952, in respect of any income from, or gain from the disposition of,
the property so transferred or property substituted therefore, and
(e)
the transferee and transferor are jointly and severally liable to pay under
this Act an amount equal to the lesser of
(i)
the amount, if any, by which the fair market value of the property at the
time it was transferred exceeds the fair market value at that time of the
consideration given for the property, and
(ii)
the total of all amounts each of which is an amount that the transferor is
liable to pay under this Act in or in respect of the taxation year in which
the property was transferred or any preceding taxation year,
but nothing
in this subsection shall be deemed to limit the liability of the transferor
under any other provision of this Act.
|
Lorsqu'une personne a,
depuis le 1er mai 1951, transféré des biens, directement ou
indirectement, au moyen d'une fiducie ou de toute autre façon à l'une des
personnes suivantes:
a) son époux ou conjoint de fait ou une
personne devenue depuis son époux ou conjoint de fait;
b) une
personne qui était âgée de moins de 18 ans;
c) une
personne avec laquelle elle avait un lien de dépendance,
les règles suivantes
s'appliquent :
d) le
bénéficiaire et l'auteur du transfert sont solidairement responsables du
paiement d'une partie de l'impôt de l'auteur du transfert en vertu de la
présente partie pour chaque année d'imposition égale à l'excédent de l'impôt
pour l'année sur ce que cet impôt aurait été sans l'application des articles
74.1 à 75.1 de la présente loi et de l'article 74 de la Loi de l'impôt sur
le revenu, chapitre 148 des Statuts revisés du Canada de 1952, à l'égard
de tout revenu tiré des biens ainsi transférés ou des biens y substitués ou à
l'égard de tout gain tiré de la disposition de tels biens;
e) le
bénéficiaire et l'auteur du transfert sont solidairement responsables du
paiement en vertu de la présente loi d'un montant égal au moins élevé des
montants suivants :
(i) l'excédent
éventuel de la juste valeur marchande des biens au moment du transfert sur la
juste valeur marchande à ce moment de la contrepartie donnée pour le bien,
(ii) le total des
montants dont chacun représente un montant que l'auteur du transfert doit
payer en vertu de la présente loi au cours de l'année d'imposition dans
laquelle les biens ont été transférés ou d'une année d'imposition antérieure
ou pour une de ces années;
aucune disposition du
présent paragraphe n'est toutefois réputée limiter la responsabilité de
l'auteur du transfert en vertu de quelque autre disposition de la présente
loi.
|
[17]
In light
of the clear meaning of the words of subsection 160(1), the criteria to apply
when considering subsection 160(1) are self-evident:
1) The transferor must be liable
to pay tax under the Act at the time of transfer;
2) There must be a transfer of
property, either directly or indirectly, by means of a trust or by any other
means whatever;
3) The transferee must either be:
i.
The
transferor’s spouse or common-law partner at the time of transfer or a person
who has since become the person’s spouse or common-law partner;
ii.
A person
who was under 18 years of age at the time of transfer; or
iii.
A person
with whom the transferor was not dealing at arm’s length.
4) The fair market value of the
property transferred must exceed the fair market value of the consideration
given by the transferee.
[18]
The
purpose of subsection 160(1) of the Act is especially crucial to inform the
application of these criteria. In Medland v. Canada 98 DTC 6358 (F.C.A.)
(“Medland”) this Court concluded that “the object and spirit of
subsection 160(1), is to prevent a taxpayer from transferring his property to
his spouse [or to a minor or non-arm’s length individual] in order to thwart
the Minister’s efforts to collect the money which is owned to him.” See also Heavyside
v. Canada [1996] F.C.J. No. 1608 (C.A.)
(QL) (“Heavyside”) at paragraph 10. More apposite to this case, the Tax
Court of Canada has held that the purpose of subsection 160(1) would be
defeated where a transferor allows a transferee to use the money to pay the debts
of the transferor for the purpose of preferring certain creditors over the CRA
(Raphael v. Canada 2000 D.T.C. 2434 (T.C.C.) at paragraph 19).
[19]
As will be
explained below, given the purpose of subsection 160(1), the intention of the
parties to defraud the CRA as a creditor can be of relevance in gauging the
adequacy of the consideration given. However, I do not wish to be taken as
suggesting as there must be an intention to defraud the CRA in order for subsection
160(1) to apply. The provision can apply to a transferee of property
who has no intention to assist the primary tax debtor to avoid the payment of
tax: see Wannan
v. Canada 2003 FCA 423 at paragraph 3.
Was There A Transfer of Property?
[20]
The Tax
Court Judge concluded that Ms. Davies’ deposits to the respondent’s bank
account constituted a transfer of property. The respondent argues that
depositing funds into a bank account is not, in and of itself, a transfer of
property to the account holder. Rather, there must also be a divesting by the
transferor of the funds deposited into the bank account, which, it is
submitted, never occurred. As a result, claims the respondent, there was no
transfer of property, and the beneficial title to the funds remained with Ms.
Davies, and not the respondent. The respondent therefore asks the Court to find
a resulting trust to Ms. Davies. I do not find this argument at all convincing.
[21]
The
deposit of funds into another person’s account constitutes a transfer of
property. To make the point more emphatically, the deposit of funds by Ms.
Davies into the account of the respondent permitted the respondent to withdraw
those funds herself anytime. The property transferred was the right to require
the bank to release all the funds to the respondent. The value of the right
was the total value of the funds.
[22]
In
addition, there is a transfer of property for the purposes of section 160 even
when beneficial ownership has not been transferred. Subsection 160(1) applies
to any transfer of property – “by means of a trust or by any other means
whatever”. Thus, subsection 160(1) categorizes a transfer to a trust as a
transfer of property. Certainly, even where the transferor is the beneficiary
under the trust, nevertheless, legal title has been transferred to the trustee.
Obviously, this constitutes a transfer of property for the purposes of
subsection 160(1) which, after all, is designed, inter alia, to prevent
the transferor from hiding his or her assets, including behind the veil of a
trust, in order to prevent the CRA from attaching the asset. Therefore it is
unnecessary to consider the respondent’s argument that beneficial title to the funds remained
with Ms. Davies.
[23]
The
respondent cites the Tax Court of Canada’s decision in Leblanc v. The Queen
99 DTC 410 (T.C.C.). In that case, Tax Court Justice Hamlyn found that
following a deposit into a jointly held bank account the property did not vest
in or pass to the wife as the wife was acting as agent for her ill husband. That
finding in and of itself is suspect: there was certainly a transfer of
property. Because Justice Hamlyn concluded that there was no transfer of
property, he did not consider whether the wife had provided consideration.
[24]
The trial
judge emphasized in his reasons that the respondent ultimately received no
monetary benefit. The respondent argues that this is a critical factor in
considering whether there has been a transfer of property. In my opinion it is
irrelevant whether or not the respondent ultimately received a “benefit.” It
does not matter that the funds went back to Ms. Davies. The respondent certainly
received property at the time of transfer which is the relevant time for
the purposes of subsection 160(1). That the money happened to go back to Ms.
Davies in the end is not sufficient to reverse the triggering of the provision.
As was stated by this Court in Heavyside, supra at paragraph 9:
Once the
conditions of subsection 160(1) are met… the transferee becomes personally
liable to pay the tax determined under that subsection … That liability
arises at the moment of the transfer … and is joint and several with that of
the transferor. The Minister may “at any time” thereafter assess the transferee
(subsection 160(2)) and the transferee’s joint liability will only disappear
with a payment made by her or by the transferor in accordance with subsection
160(3)). [Emphasis
added.]
[25]
For the
reasons above, I find there was a transfer of property.
Was There Adequate Consideration Flowing
from the Transferee to the Transferor?
[26]
As outlined
above, the Tax Court Judge concluded that there was adequate consideration
flowing from the respondent to Ms. Davies by way of the respondent giving Ms.
Davies the ability to take each sum in full by using a signed blank cheque from
the respondent or by using the bank debit card. The respondent, in the
alternative, argues that the forbearance of the respondent from seizing the
monies in the account constituted consideration. In my opinion, both the Tax
Court Judge and the respondent are in error.
[27]
Under subsection
160(1), a transferee of property will be liable to the CRA to the extent that
the fair market value of the consideration given for the property falls short of
the fair market value of that property. The very purpose of subsection 160(1)
is to preserve the value of the existing assets in the taxpayer for collection
by the CRA. Where those assets are entirely divested, subsection 160(1)
provides that the CRA’s rights to those assets can be exercised against the
transferee of the property. However, subsection 160(1) will not apply where an
amount equivalent in value to the original property transferred was given to
the transferor at the time of transfer: that is, fair market value
consideration. This is because after such a transaction, the CRA has not been
prejudiced as a creditor. Applying such principles to the case at bar, it is
clear that the transaction between Ms. Davies and the respondent left Ms.
Davies without anything equivalent to the property transferred that could be
collected by the CRA, and thus there couldn’t possibly be consideration.
[28]
The Tax
Court Judge erred in law by failing to conduct any analysis of the fair
market value of the consideration. He simply concluded that it was “adequate.”
I fail to see how the fair market value of the consideration, if any did exist,
would be equivalent to the funds deposited. Why would Ms. Davies give an amount
of money to the respondent in consideration for the ability to withdraw the
money, when the respondent retains the power to take the money? No prudent,
arm’s length purchaser not motivated by the prospect of evading collection of
their tax debt would pay the full value of funds in exchange for the right of
access that Ms. Davies received. There was no evidence on which the Tax Court
Judge could conclude that what was provided by the respondent was equal to the
fair market value of the money put into the account.
[29]
Nor am I
convinced that the respondent’s failure to seize the money constituted
consideration for the moneys deposited. While forbearance – the act of
refraining from enforcing a right, obligation, or debt – can act as
consideration for a promise given in return (S.M. Waddams, The Law of
Contracts, 5th ed., at paragraph 121), in my opinion there was
no legal forbearance in this case. Indeed, contrary to the finding of the Tax
Court Judge, there was no contract. Rather, it is my opinion that the
respondent simply acted out of a sense of moral obligation to Ms. Davies. Such
an action does not constitute a binding agreement: Raphael v. Canada 2002 FCA 23 at paragraph 10. This is
supported by cross-examination of the respondent at trial:
Q: And
why did you agree?
A: Why
did I agree to do this bank account for Ms. Davies?
Q: You
wanted to help her.
A: That’s
right and her four children.
Q: And
you were her friend.
A: That’s
correct.
[30]
For the
reasons above, the Tax Court Judge erred in finding that there had been fair
market value consideration.
CONCLUSION
[31]
The Tax
Court Judge made a palpable and overriding error by concluding that adequate
consideration had been given. I would allow the appeal with costs and set aside
the decision of the Tax Court. Proceeding to render the decision that should
have been rendered, I would dismiss with costs the respondent’s appeal to the
Tax Court of Canada.
"J.
Edgar Sexton"
"I
agree
Gilles Létourneau J.A."
"I agree
J.D. Denis
Pelletier J.A."
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