Heavyside v. R., 97 DTC 5026, [1997] 2 CTC 1 (FCA)

Décary J A.:

This application for judicial review of a Tax Court decision deals with the respective tax liabilities of a husband and a wife under subsection 160(1) of the Income Tax Act (“the Act”) when the husband becomes bankrupt and is eventually discharged.

The facts are not disputed. On June 6, 1989, the respondent’s husband transferred his 50% ownership interest in a property to the respondent, who, as a result of the transfer, became the sole owner of the property and received a benefit in the amount of $2,759.50. At the date of the transfer, her husband was liable to pay under the Act in or in respect of the taxation year in which the property was transferred or in any preceding year the amount of $26,783.02.

On October 27, 1993, the husband made an assignment in bankruptcy and on August 2, 1994, he was discharged as a bankrupt.

By notice of assessment dated September 26, 1994, the Minister of National Revenue (“the Minister”) assessed the respondent, pursuant to section 160 of the Act, in an amount of $4,986,57, subsequently reduced to $2,759.50.

The respondent appealed this assessment and the Tax Court allowed her appeal, essentially on the basis that the respondent’s joint and several liability as a transferee existed only to the extent that her husband, the transferor, remained liable to pay the income tax in question, and that as the bankrupt husband was no longer liable because of his discharge, there was no longer any tax debt for which she could be liable.

We do not agree with the Tax Court.

Subsections 160(1) to (3) of the Act read as follows at the relevant time, i.e. in 1989:

(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 [...] in respect of any [...] gain from the disposition of, the property so transferred [...] 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 venue 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.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules are applicable:

(a) a payment by the transferee on account of his liability shall to the extent thereof discharge the joint liability; but

(b) a payment by the transferor on account of his liability only discharges the transferee’s liability to the extent that the payment operates to reduce the transferor’s liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.

160. (1) Lorsqu’une personne a, [...] transféré des biens [...]

a) à son conjoint [...]

les règles suivantes s’appliquent:

d) le bénéficiaire et l’auteur du transfert sont conjointement et 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 [...] à l’égard de [...] tout gain tiré de la disposition de tels biens, et

e) le bénéficiaire et l’auteur du transfert sont conjointement et solidairement responsables du paiement en vertu de la présente loi d’un montant égal au moins élevé des deux montants suivants:

(i) la fraction, si fraction il y a, de la juste valeur marchande des biens à la date du transfert qui est en sus de la juste valeur marchande à cette date de la contrepartie donnée pour le bien, et

(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,

mais aucune disposition du présent paragraphe n’est réputée limiter la responsabilité de l’auteur du transfert en vertu de toute autre disposition de la présente loi.

(2) Le Ministre peut, à une date quelconque, cotiser un bénéficiaire du transfert à l’égard de toute somme payable en vertu du présent article et les dispositions de la présente section s’appliquent mutatis mutandis à une cotisation faite en vertu du présent article comme si elle avait été faite en vertu de l’article 152.

(3) L’orsqu’un auteur et un bénéficiaire du transfert sont devenus, en vertu du paragraphe (1), solidairement responsables de tout ou partie d’une obligation de l’auteur du transfert en vertu de la présente loi, les règles suivantes s’appliquent:

a) tout paiement fait par le bénéficiaire du transfert au titre de son obligation éteint d’autant l’obligation solidaire; mais

b) tout paiement fait par l’auteur du transfert au titre de son obligation n’éteint l’obligation du bénéficiaire du transfert que dans la mesure où le paiement sert à réduire l’obligation de l’auteur du transfert à une somme inférieure à celle dont le paragraphe (1) a rendu le bénéficiaire du transfert solidairement responsable.

The object of section 160 is to prevent a taxpayer from avoiding his tax liability by simply transferring his assets to his or her spouse or to any other person described in this section [1] . Section 160, in making the transferee personally liable for the tax due by the transferor, allows the Minister to seek payment from a taxpayer who is not the original taxpayer.

Once the conditions of subsection 160(1) are met, as they are in the present case, the transferee becomes personally liable to pay the tax determined under that subsection (here, $2,759.50). That liability arises at the moment of the transfer (here, June 6, 1989) 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)).

The moment chosen by the Minister to assess the transferee is of no consequence. It is trite law that liability for tax results from the Act and not from the assessment [2] and that in the instant case it is the transfer that triggers the liability [3] . The respondent, therefore, was personally liable, in her 1989 taxation year, for income tax in respect of the gains from the disposition of the property transferred and her liability being joint and several with that of her husband, it had a life of its own and survived the eventual extinguishment through bankruptcy, in 1994, of her husband’s own tax liability. The fact that she was assessed only in 1994 and only after her husband’s discharge is irrelevant as far as her own liability is concerned.

There seems to have been some confusion in the case law, as illustrated by the impugned decision, in regard to the impact of the provisions of the Bankruptcy Act (as it was known in 1989) on the application of section 160 of the Income Tax Act\ [4]

There is no doubt that the husband’s discharge from bankruptcy relieves him from paying the Minister the amount due by him under section 160 of the Income Tax Act; this is made clear by subsection 178(2) of the Bankruptcy Act. But the order of discharge does not extinguish the debt; it is personal to the husband and does not affect the liability of the respondent who is jointly bound. As noted by Sarchuk T.C.J. in Garland^, [5] when referring to section 179 of the Bankruptcy Act®, [6] it is clear that the Bankruptcy Act did not intend a person who was “jointly bound” with the bankrupt to be released by the discharge of the bankrupt. Unless a payment be made under the terms of subsection 160(3) of the Act, the transferee’s liability remains, and a discharge under the Bankruptcy Act is simply not a payment under the terms of subsection 160(3).

Once it is realized that the transferee’s liability dated back to June 6, 1989, and is not affected by the transferor’s eventual discharge from bankruptcy, the debate in the Tax Court as to the significance of the replacement of the words “was liable” in previous legislation by the words “is liable” in the actual legislation has no relevance. The triggering date being that of the transfer and not that of the assessment, it does not matter whether the word used is “was” or “is”, for at the relevant time, i.e. on June 6, 1989, the transferor’s liability was unquestioned.

To allow the respondent to escape her tax liability in the present case because of her husband’s discharge from bankruptcy would be to allow what Parliament precisely sought to prevent by the adoption of section 160.

The application for judicial review will be allowed, the judgment of the Tax Court will be set aside and the matter will be referred back to the Tax Court for determination on the basis that the Minister’s assessment, reduced by agreement to $2,759.50, should be confirmed. Pursuant to section 18.25 of the Tax Court of Canada Act, the respondent will recover her reasonable and proper costs.

Application allowed.