Citation: 2010 TCC 410
Date: 20100823
Dockets: 2009-3689(IT)I
2009-3690(GST)I
BETWEEN:
SUSAN CLAUSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Mrs. Clause has
appealed from assessments issued by the Canada Revenue Agency (“CRA”) under the
non‑arm’s length transferee preference provisions of section 160 of
the Income Tax Act and section 325 of the Excise Tax Act in
respect of her husband’s income tax and goods and services tax (“GST”)
liabilities. The income tax and GST liabilities of her husband at the time that
his joint interest in their home was transferred to and registered in
Mrs. Clause’s name as sole owner is not in dispute. Each of her appeals is
under the Court’s informal procedures. Her husband’s tax liabilities for which
she was assessed as at the time of the transfer were approximately $17,000 of
income tax and $8,000 of GST.
[2]
Mrs. Clause has
advanced three grounds in support of her appeal. Firstly, she maintains that
the house’s value in 2004 was less than the $240,000 assumed by the CRA, which
assumed value formed the basis and beginning point of the CRA’s valuation of
the husband’s interest in the home. The husband’s interest was assumed to be
one‑half of the couple’s equity in the home being the difference between
its assumed $240,000 value and the amount of the mortgage on the home. This
significantly exceeded the approximately $25,000 total tax liability of the
husband for which Mrs. Clause has been assessed. The stated assumptions
set out in the reply include that the value of the home was $240,000 at the
time of the transfer in 2004. While Mrs. Clause disputes that, she has
produced no corroborating documentation nor provided any specific or detailed information
in her testimony. In her notice of appeal she says she believes the 2006
municipal property tax assessment valued at $187,000. At the hearing she
acknowledged she was unable to substantiate that recollection but did not go on
to say she had sought to obtain a duplicate copy from the municipal property
appraisal agency.
[3]
At the time of the
transfer in January 2004, she put on a new mortgage in excess of $176,000,
in part to refinance the existing mortgage as well as to secure an equity line
of credit facility. The financial institution would have obtained an evaluation
of the property before providing such a mortgage and she explained that she
only recently asked for a copy and was not able to receive it before the
hearing. Since this mortgage was not just to refinance the existing mortgage
but included an increase in credit extended, and since there was no mention of
the cost of the form of mortgage insurance required for low equity mortgages, the
Court does not accept as adequate Mrs. Clause’s vague recollection that
the bank’s appraisal was approximately $187,000 or thereabouts and loaned in
excess of $176,000 on its security. Mrs. Clause did not so much as tell
the Court what other townhouses in her neighbourhood and surrounding
communities had sold for.
[4]
Mrs. Clause is a
successful public servant at a managerial level or higher. It is clear she is
sharp and articulate. She contested the Crown’s motion to introduce expert
evidence on the value of her home after the time for doing so had expired.
Mrs. Clause has not introduced evidence sufficient to even bring into
question the correctness of the Minister’s assumed $240,000 value.
[5]
Mrs. Clause’s
second ground in support of her appeal is that she did provide value to her
husband for his interest in the home to the extent of approximately $15,000.
This was comprised of two amounts. In 2008 she gave her husband approximately
$10,000 of money she had borrowed on the equity line of credit secured on her
home in order to permit him to pay off his accepted proposal under the Bankruptcy
and Insolvency Act (the “BIA”). This was not provided for nor
contemplated at the time of the January 2004 transfer of the home
interest. As described below, the particular BIA proposal for which she
gave him this money had not yet been proposed at the time of the transfer of
the home. She gave Mr. Clause this money more than four years after the
transfer. In such circumstances the Court is entirely unable to conclude that the
money was paid to Mr. Clause for the transfer of his interest in the home.
[6]
The other $5,000 of value
she put forward was that she provided that amount to Mr. Clause to buy
five Corvette automobiles. No documentation whatsoever was provided to
corroborate the existence of the advance of the money or the purchase of the
cars. Both Mr. and Mrs. Clause appear to agree that she borrowed the
$5,000 on the new secured equity line of credit she had in place on the
transfer in January 2004. At that time, Mr. Clause was in default on
what will be described below as his first BIA proposal and it had been
annulled as a result. At that time, Mr. Clause had not yet made what will
be described as his second BIA proposal. Mrs. Clause described this
car purchase transaction as part of her husband’s car sales business.
Mr. Clause went out of his way to clarify that this was simply a personal
activity in which he bought and sold the cars. At least one of the Corvettes
was kept by the Clauses and not resold. Given the absence of any evidence other
than Mr. and Mrs. Clause’s testimony that would connect her giving him
this $5,000 to acquire his interest in the home, and given the absence of
corroborating written evidence that the transaction occurred or even that
Mrs. Clause borrowed $5,000 at that time on her line of credit, there is
simply insufficient evidence to satisfy the Court on a balance of probabilities
that she paid him this $5,000 to acquire from him his interest in home.
[7]
Mrs. Clause’s
third ground in support of her appeal is that the CRA should not be allowed to
issue section 160 and section 325 assessments since the CRA had voted
in favour of Mr. Clause’s BIA proposal. The CRA voted in favour the
first proposal, being the proposal prior to the transfer in 2004 of
Mr. Clause’s joint interest in the home. The proposal showed a net value
in the home of approximately $25,000. That proposal did not allow any of the
unsecured creditors, including the CRA, any claim against the house or its
value or any claim in excess of its pro rata participation (approximately 25%)
in the $300 monthly payments to be made for 60 months for a total of
$18,000.
[8]
After the 2003 proposal
was in default, it was annulled. The legal result of this under the BIA is
that it is deemed to have never existed and Mr. Clause’s liabilities
compromised by the first proposal were fully reinstated, including the CRA’s
income tax and GST claims.
[9]
Mrs. Clause
maintains that although the January 2004 transfer occurred after the first
proposal was in default and had been annulled such that the liabilities had
been fully reinstated, the second proposal made and accepted with the support
of the CRA in 2006 simply reinstated the remaining $300 monthly payments until
such time as $18,000 had in fact being paid for the benefit of the unsecured
creditors. He had defaulted on three payments to the extent of $900 in total at
the time the first proposal was annulled. Mrs. Clause’s position is that
it is manifestly unfair that, as a result of $900 of default which was fully
made up in the second proposal, the CRA should even be technically entitled to
collect an additional $25,000 in respect of the tax debts of Mr. Clause
since under the first proposal, which the CRA had accepted when it was aware of
his interest in the home and which proposal was effectively reinstated in the
2006 proposal, the CRA was only to receive less than $5,000 as its pro rata
share of the sixty $300 monthly payments and had no rights against his interest
in the home.
[10]
Section 160 is a
provision that has been drafted intentionally in the CRA’s favour to allow the
CRA to collect amounts of unpaid taxes in circumstances where the transfer by
the tax debtor to a non‑arm’s length person for less than fair value
could otherwise impair the CRA’s ability to collect the amount of the tax debt.
The Federal Court of Appeal has said that the results of the application of the
broad language of this section can result in unjust, unfair and unwarranted applications
of the provision. See Wannan v. The Queen, 2003 FCA 423, 2003 DTC 5715.
However, the Federal Court of Appeal went on to say that Parliament had the
power to enact such a broad provision and the fact that its application in
particular circumstances may be unfair, unjust or unwarranted does not preclude
the CRA from relying upon it nevertheless.
[11]
There have been several
court decisions which have confirmed that the effect of a bankruptcy order in
respect of a proposal or a discharge is only to preclude the CRA from
collecting any further amount from the tax debtor and it does not preclude the
CRA from relying upon a section 160 transferee liability assessment where
the transfer was made prior to the bankruptcy or BIA proposal. See for
example The Queen v. Heavyside, 97 DTC 5026 (FCA) and Bergeron et al.
v. The Queen, 2003 TCC 286, 2003 DTC 1491.
[12]
However
Mrs. Clause has raised an argument which does not appear to have been directly
considered before. In this case, the CRA voted in favour of the 2003 proposal,
aware of Mr. Clause’s interest in the house, and under that 2003 proposal the
CRA would receive only its pro rata share of sixty $300 monthly payments or
approximately $5,000 over five years. Mr. Clause went into default for
three months ($900) under the 2003 proposal. As a result of this default, the
2003 proposal was annulled and deemed to be revoked in accordance with section 66.31(1)
of the BIA. This is evidenced by a notice to creditors dated July 24, 2006
which confirmed that the BIA provides that as a result of such a
revocation and annulment, the debts are fully reinstated and not in any way
compromised. After Mr. Clause’s 2003 proposal was in default and deemed
cancelled, the January 2004 transfer of his interest in the home occurred.
Subsequently, Mr. Clause made the second proposal, the 2006 proposal, the
sole effect of which was to reinstate the remaining scheduled monthly payments.
The CRA had initially voted against the second proposal and in its ballot
indicated it would vote in favour of the second proposal if it was amended to
provide for some additional $300 monthly payments. However, the CRA’s proposed
amended second proposal was not accepted by the remaining creditors. As a
result, the CRA changed its vote and supported the 2006 proposal whereupon it
was accepted by the creditors. Mr. Clause has since satisfied the
requirements of the 2006 proposal.
[13]
The 2006 proposal
materials filed by the BIA receiver with the Ontario Court making the
proposal, twice described it as a reinstatement of the first proposal. However,
the materials go on to specify the terms of the second proposal in detail such
that it could be a separate stand‑alone proposal. The second proposal
materials do not require that the intervening months’ missed payments be caught
up in a lump sum but provide for monthly payments to begin afresh until such
time as a total of sixty payments have been made under the first proposal and
the second proposal. The BIA does have provisions for a debtor or his
receiver reviving a defaulted proposal with his creditors, however those were
not the provisions used in respect of the second proposal. It is clearly a
second proposal and a court order was needed and obtained under
section 66.32 of the BIA in order for a second proposal to even be
made. It appears possible that a revival of the defaulted proposal could, as a
matter of law, reinstate the defaulted proposal retroactively and if that were
the case here, the January 2004 transfer of the interest in the home may
be protected from section 160 and section 325 assessments. The Court
does not have to decide that unless this is a revived proposal and not a
distinct second proposal in 2006.
[14]
On these facts and
based upon my reading of the relevant provisions of the BIA, this Court
is unable to conclude that this second proposal in 2006 constituted a revival
of the 2003 proposal.
[15]
Since the 2006 proposal
was a stand‑alone proposal distinct from the 2003 proposal which was
annulled as a result of the default prior to the January 2004 transfer of
the interest in the home, the law as drafted and enacted by Parliament and
interpreted by the Federal Court of Appeal requires the Court to conclude that
the 2003 proposal does not preclude the section 160 and section 325
transferee assessments since that first proposal was annulled before the
January 2004 transfer of the home. Nor does the second proposal preclude
the assessments against Mrs. Clause since the second proposal was only
proposed after the January 2004 transfer of the home and therefore only
affected the CRA’s rights to proceed against Mr. Clause who did not own an
interest in the home at the time the second proposal was made and thus the CRA
could not be considered to have compromised its claim against the home to
collect Mr. Clause’s tax debts.
[16]
The Court is very
sympathetic to the fact that Mrs. Clause feels the result of these
assessments against her interest in the home, in circumstances where the CRA
could not have proceeded against it at all but for a temporary default by
Mr. Clause in making the proposed payments, has a result that is unfair,
unjust and unwarranted since it is harsh to see how the CRA’s rights to collect
Mr. Clause’s tax debts have really been compromised by the transfer. The
Court asked the CRA appeals officer if she was able to explain how
Mrs. Clause should be expected to think the result of the assessments, if
upheld, was fair; she could not. In argument, the Court asked the respondent’s
counsel if she could suggest how the Court might be able to explain to
Mrs. Clause that upholding these assessments as legally permitted could
possibly be fair; she could not either. This Court remains at a loss to be able
to explain how this particular result is fair given that, at the time of the
transfer of Mr. Clause’s interest in the home, the CRA had already agreed
not to look to Mr. Clause’s interest in the home for collection of the
debt, and the CRA had already agreed to accept less than $5,000 in total in
respect of his debt over five years and it has received all of that money under
the two proposals albeit over a somewhat longer period. The fact that the Court
could not explain that the result is fair does not preclude the Court
affirming, as it must, that the provisions enacted by Parliament permit the CRA
to issue the assessments against Mrs. Clause notwithstanding that the CRA
may be seen to be acting unfairly or opportunistically, and notwithstanding
that such assessments may not have been able to have been issued had Mr. Clause’s
BIA receiver proceeded with a revival of the failed first proposal
instead of proceeding with the second proposal each of which would have
provided for the same total payments to the CRA and the other unsecured
creditors. While the Court is not satisfied or comfortable that the result of
these assessments is fair or just to either Mr. Clause or Mrs. Clause
in these circumstances, the Court is satisfied that it is required as a matter
of law to uphold them.
[17]
This Court has no power
to revise the law as enacted by Parliament and interpreted by the Federal Court
of Appeal. These appeals are dismissed.
[18]
The CRA’s behaviour is
seen by the Clauses as opportunistic. It may well be that many Canadians,
including Mr. and Mrs. Clause, may think that the CRA has confused what it had
the right to do with what would have been the right thing to do.
Signed at Ottawa, Canada, this 23rd day of August 2010.
"Patrick Boyle"
Email this Content