Citation:2007TCC498
Date: 20070827
Docket: 2005-1970(IT)G
BETWEEN:
DEBRA YATES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] These appeals are
from three reassessments made by the Minister of National Revenue, pursuant to
subsection 160(1) of the Income Tax Act, on September 13, 2004. The
issue is whether the Appellant is liable to pay $61,784 of her husband’s income
tax liability, and the specific questions to be determined are whether there
was a transfer from Mr. Yates, the Appellant’s spouse, to her, and if so, was
there adequate consideration rendered by the Appellant to Mr. Yates.
[2] The three reassessments
refer to three bank accounts, and the basic facts, for the most part, are not
disputed. The problem arises upon the dealings with three bank accounts.
[3] Mr. Yates had an
outstanding tax liability, at all relevant times, in excess of $485,000. On
December 23, 2002, he released his joint interest in two bank accounts to
the Appellant. They included what was referred to as a Canadian account and an
American account. The Canadian account was used primarily for general day-to-day
expenditures, and the American account was used to pay expenses for a Florida condominium. Mr. Yates effectively
transferred to the Appellant, $4,972.30 and $2,406.45 being his 50% interest in
each account, without regard to his motivation. I have no difficulty finding
that there was a transfer without adequate consideration for these two small
amounts.
[4] The primary issue
concerns the Canadian account after Mr. Yates transferred his interest. As of
December 23, 2002, and throughout 2003, the Appellant was the sole signing
authority and owner of the Canadian account. However, from January 2, 2003 to
October 9, 2003, Mr. Yates deposited into this account a total of $54,460.20,
while he was indebted to Canada Revenue Agency.
[5] This account had been
used by both the Appellant and Mr. Yates to pay their household expenses for
many years prior to December 23, 2002. The Appellant customarily took care of these
expenses. Between December 23, 2002 and October 31, 2003, the total
household expenses set out by the Appellant were as follows:
(i) mortgage $42,768.00
(ii) taxes and
utilities $24,032.17
(iii) food $8,141.18
(iv) other misc. $22,807.18
(v) VISA bills $1,169.55
(vi) Cash $21,405.00
(vii) Transfers to Line $5,725.00
(viii) GMAC savings $25,200.00
Total: $151,248.08
The mortgage amount of $42,768 was
for a $600,000 building lot. The
$25,200 in savings was for the Appellant for a rainy day.
[6] Mr. Yates was once the
owner of a successful trucking company known as CJ Rush until the fall of 2003.
He earned the following income from 1999 to 2002:
|
1999
|
$469,156
|
|
2000
|
$553,751
|
|
2001
|
$268,488
|
|
2002
|
$963,433
|
[7] The Appellant also earned
a significant income during this time-frame owning and working for
International Tire Corporation which provided services to, among other firms, CJ
Rush. Her income in this period was approximately:
|
1999
|
$56,207
|
|
2000
|
$121,116
|
|
2001
|
$162,812
|
|
2002
|
$131,762
|
In effect, the Appellant could have
paid the bulk of the household expenses from her own income. She alone has
owned the approximately 4,000 square feet matrimonial home since 1989, and she
also was the sole owner of the $600,000 property purchased in 2000, upon which
she and Mr. Yates intended to build a new “dream home”.
[8] In October 2003, CJ Rush
was petitioned into bankruptcy by the Royal Bank of Canada, one of its largest creditors. Mr.
Yates filed a personal assignment in bankruptcy on February 16, 2004. He
remains an undischarged bankrupt to the present date.
[9] The Respondent submits
that the removal of Mr. Yates’ name from the two bank accounts and the payment
of funds into the Appellant’s Canadian account constitute transfers of property
under subsection 160(1) of the Act and the Appellant is liable to pay
the transferred amounts to CRA.
[10] The Appellant’s position
is that there was no transfer of funds and that payments made pursuant to a
legal obligation of Mr. Yates to support his family are not captured by section
160. Counsel for the Appellant further added that there was no evidence that
Mr. Yates or the Appellant knew of any tax liability at the time of the
purported transfers.
[11] Section 160, so far as
it is relevant, reads:
160(1) Where a person has … transferred property, either
directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person’s spouse …
the following rules apply:
…
(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 aggregate
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.
[12] Four requirements must
be satisfied under subsection 160(1), however,
in these appeals, only two are in question:
(i) There must be a
transfer of property; and
(ii) There
must be no or inadequate consideration flowing from the transferee to the
transferor.
[13] The Appellant submits
that there was no transfer, but that should I find there was, then there was
adequate consideration flowing from the Appellant to Mr. Yates.
[14] I will first deal with
the question of transfer. The word “transfer” was defined in David Fasken
Estate v. M.N.R.
wherein Thorson P. stated:
The word “transfer” is not a term of art
and has not a technical meaning. It is not necessary to a transfer of property
from a husband to his wife that it should be made in any particular form or
that it should be made directly. All that is required is that the husband
should so deal with the property as to divest himself of it and vest it in his
wife, that is to say, pass the property from himself to her. The means by which
he accomplishes this result whether direct or circuitous, may properly be
called a transfer.
This definition has been accepted
by this Court in recent years including in the decision in Tetrault v. R., where at paragraph 39, Archambault, J.
stated:
… in order for there to be a transfer of property for the
purposes of the attribution rules, it is essential that the transferor be
divested of his ownership and that the property has vested in the transferee.
[15] With this in mind, I
have no difficulty in concluding there was a transfer of the two joint accounts.
The uncontradicted evidence was that Mr. Yates divested himself of his one-half
interest in the joint accounts when he signed them over to his wife, the
Appellant, on December 23, 2002. And from January 2003 to October 2003, Mr.
Yates divested himself of his bi-weekly pay cheques to the Appellant. He simply
turned over the cheques that were payable to him and they were deposited into his
wife’s bank account over which she had complete control.
[16] The more difficult issue
is whether there was consideration rendered by the Appellant for these
transfers from Mr. Yates. This boils down to whether these transfers were
merely his satisfying his legal obligation to support his wife and family. If
so, then the payments in certain restricted circumstances are not subject to
section 160 liability. To find in the Appellant’s favour, I must find there was
adequate consideration flowing from her to Mr. Yates. I agree with the
Appellant that there is a legal obligation for support under the Family Law
Act of Ontario. The greatest disparity
between the submission of counsel for the Appellant and the present case law is
latitude given to the legal obligation.
[17] There are two lines of
authorities in this area of the law. The first, which is the Respondent’s
position, concludes that the contributions of spouses to the expenses of the
marriage are given without consideration. The second is that some payments made
from one spouse to another in satisfaction of a legal obligation to support his
or her family are beyond the reach of section 160.
[18] In Logiudice v. R. Justice Bowie
stated at paragraph 16:
The word consideration, as it is used
in the context of section 160 of the Act, in its ordinary sense refers to the
consideration given by one party to a contract to the other party, in return
for the property transferred. The obvious purpose of section 160 is to
prevent taxpayers from escaping their liability for tax, interest and penalties
arising under the provisions of the Act by placing their exigible assets in the
hands of relatives, or others with whom they are not at arms' length, and thus
beyond the immediate reach of the tax collector. The limiting provision in
subparagraph 160(1)(e)(i) of the Act is to protect genuine business
transactions from the operation of the section, to the extent of the fair
market value of the consideration given for the property transferred. It is
apparent, therefore, that for a transferee to have the benefit of this saving
provision she must be able to prove that the transfer of property to her was
made pursuant to the terms of a genuine contractual arrangement. [emphasis
added]
Further, in Tetrault v. Canada, Justice
Archambault approved the finding of Justice Bowie in Logiudice, and
stated:
[23] The contribution to the expenses of the marriage is, in my
opinion, in the nature of a donation by which property is given without any
consideration. This analysis of the domestic obligation concurs with that made
by Justice Mogan in the Raphael decision, where he says, [t]hose same
domestic obligations, however, cannot be ‘consideration’ within the meaning of
section 160 …”. [paragraph 27 of the Raphael decision.].
[19] I accept the second approach to the effect that certain
limited payments made for some household expenses by a spouse, who is obligated
to support his or her family, are not subject to subsection 160(1). I believe these
expenditures should be for daily living necessities as opposed to permitting an
accustomed lavish standard of living. The Appellant cited the following cases which
support this: Michaud v. Canada,
Ferracuti v. Canada,
Laframboise v. Canada
and Ducharme v. Canada.
[20] In Michaud, the Appellant’s former husband made
mortgage payments in performance of his legal obligation to provide for his
family’s needs. Justice Lamarre Proulx made the narrow finding that when
mortgage payments are made by a spouse under legal obligation to provide for
the family’s requirements, then that constitutes “consideration” within the
meaning of subsection 160(1). She stated in part:
I consider that when the appellant’s former spouse made the payments
on the hypothec on the family house, which was the appellant’s property, he was
only performing a legal obligation, that of providing for the needs of his
family by obtaining the housing required.
… a payment of a hypothec on a family residence is not in the nature
of a transfer of property made without valuable consideration if the person
making it does so in performing the legal obligation to provide for his or her
family’s needs.
[21] In Laframboise, the Appellant was assessed over
$160,000 pursuant to section 160, which amount consisted of deposits made by
her husband to her bank account. Dussault J. reduced the assessments finding
that 28.35% of the deposits were used to pay living expenses which were not
subject to an assessment under section 160. The Court found that even though
legal ownership of the account changed from joint account of husband and wife
to a business account, those payments that were taken from the account to pay
household or living expenses were not captured by section 160.
[22] In Ducharme, the Appellant was assessed $61,878
for transfers of property made to her from her common-law husband. Beaubier, J.
allowed the appeal adopting the reasoning in Michaud. The Court found
that the spouse’s payments were akin to rent for his use of the matrimonial home.
The Federal Court of Appeal upheld this decision without discussion of the
various Tax Court positions in previous cases. Recognizing the value of
domestic services, the Federal Court of Appeal found, as did the trial judge,
that Ms. Ducharme gave more consideration, to her common-law husband than she received.
[23] In Ferracuti, I followed a more liberal
interpretation of subsection 160(1) in finding that a spouse’s legal obligation
to make mortgage payments on a family residence, and to pay basic family living
expenses, are not subject to the provisions of section 160. These living
expenses are not without consideration.
[24] At the outset, I would like to clarify a comment made
in the Ferracuti decision. During argument in these appeals, much was made
over my statement at paragraph 18 in Ferracuti, which reads as follows:
For there to be
a transfer within the meaning of section 160 of the Act, there must be a
transfer without valuable consideration. There could be a transfer of property
but if this transfer is for valuable consideration, then there is not a
transfer within the meaning of section 160 of the Act.
[25] This statement was seized upon by the Appellant as the
basis for the argument that where there is any consideration given for the handing
over of property, there is no “transfer” as required by section 160. This is
not correct. Section 160 is clear that the liability of the transferee is equal
to the difference between the value of the property transferred and the fair market
value of the consideration given in return. The existence of consideration
flowing from the transferee to the transferor does not defeat the operation of
section 160 on the basis that no “transfer” can be said to have taken place. Section
160 operates even where consideration has been given, but that the liability is
limited to the difference in value.
[26] In Michaud, the Court was concerned with
determining whether section 160 applied to payments made in performing a
genuine obligation, such as providing one’s family with a place to live. The
Court’s holding in that case was narrow: a payment on a hypothec (mortgage) on
a family residence is not in the nature of a transfer of property made without
valuable consideration if the person making it does so in performing the legal
obligation to provide for his or her family’s needs.
[27] In Ferracuti, I applied the finding in Michaud
to a situation where there had not been a marriage breakdown. In that case, the
Appellant was a homemaker with no income. She spent considerable time tending
to the needs of their oldest son, who had been severely injured in a car
accident. The matrimonial home was in her name. Her husband ran a group of
corporations and had transferred to her certain amounts, some which were used
to pay the mortgage and utilities for the home. In these ways Michaud and
Ferracuti are distinguishable on their facts.
[28] The Appellant argued that based on my finding in Ferracuti
that the household expenses are beyond the reach of a section 160 assessment
because such expenses are paid in satisfaction of a legal obligation. The
Appellant further claimed that any and all expenses of the household fall into
this category and that it is not this Court’s place to consider the
reasonableness of those household expenses. The Appellant cited the recent
Ontario Court of Appeal decision in Martin v. Martin, in which the Court
refused to question the lifestyle choices of high-income earning families in
the context of determining spousal support.
[29] I agree that the function of this Court under section
160 is not to parse a taxpayer’s grocery bills in order to determine which food
items are reasonable and which are not. Each case must be considered on its own
merits. The Court must examine the evidence of the taxpayer with respect to
household expenditures to determine which expenses, if any, are the vital
household expenses that may be excluded from the reach of section 160. I say
this because section 160 is a far‑reaching collection tool in the Act.
It has been described as draconian and Parliament drafted it as such.
Accordingly, the exceptions to the reach of this section are narrow. In Ferracuti,
I attempted to determine which expenditures were made in satisfaction of the
person’s legal obligation to support his family.
[30] Also, in Ferracuti, I stated that such an
obligation did not extend to expenses in respect of phone bills, cable television
bills and lawn maintenance. This is important. Presently the Appellant is
trying to stretch the policy in the Michaud link of cases far beyond
their conclusions. The Appellant presented evidence that the total household
expenses for the period of December 23, 2002 to October 31, 2003 amounted to
$151,248.08. Of this amount, $42,768 was for mortgage payments on a second
property, and $25,200 was for payment into a savings account. These claims are not
only unreasonable, but outrageous. They are not the vital household expenses
envisaged in the cases quoted. For the balance of the household expenses of
$83,280.08, there was evidence that some of it was in fact for phone bills,
cable bills, property and lawn maintenance, liquor, spa treatments, utilities
for the second property, and various unexplained cash withdrawals, some of
which might have been for expenses incurred in respect of a condominium in
Florida owned by the Appellant. Perhaps this amount could be said to be for
vital household expenses. I do not believe the Appellant was having difficulty
meeting such expenses. In 2003, she earned $117,788. I cannot accept that she
was unable to pay for the household expenses from her income. The Appellant’s
spouse owed CRA a large amount of tax arrears and he had declared bankruptcy,
probably eliminating his liability. It is absurd to ignore the Minister of
National Revenue to permit a lavish lifestyle. This is not a matrimonial asset
division case. For this reason alone, it cannot be said that the pay cheques of
Mr. Yates were required for household expenses.
[31] The appeals are
dismissed, with costs.
Signed at Ottawa, Canada, this 27th day of August, 2007.
“C.H. McArthur”
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