Citation: 2013 TCC 38
Date: 20130204
Docket: 2011-1635(IT)G
BETWEEN:
ELEANOR MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
This is an appeal by
the Appellant, Eleanor Martin, of a section 160 transferee liability assessment
in respect of transfers allegedly made to her without consideration by her late
husband at a time when he was in arrears in his taxes. Two appeals, that of the
Appellant and that of her late husband’s estate, were to be heard together over
two days. The parties filed a Partial Joint Statement of Facts which is
appended hereto. Early on the first day the parties communicated that the
estate’s appeal had been settled and consented to judgment in accordance with that
settlement. The hearing of the Appellant’s appeal did not require a full day.
[2]
Mrs. Martin is an
elderly woman at this stage. She holds a university degree. In spite of her age
and the long period of time to which her testimony related, I accept generally
that all of her evidence is correct to the best of her recollection of the
events and conversations she participated in, and what she was told. Her
credibility was not challenged, her version of the events is largely consistent
with the written evidence presented (especially on the significant issue of
having been told very clearly different things by the Canada Revenue Agency
(“CRA”) auditor in writing than orally on the material issue of the salary paid
to her as described below). I accept fully her version of the events.
[3]
It is the Appellant’s
position that the section 160 reassessment ignores the consideration she provided
for the amounts transferred in the form of services provided in his medical
practice, and of premises made available to his medical practice.
[4]
It is her position that
(i) she was owed for accrued unpaid work prior to the years of her husband’s
tax arrears and the transfers, and (ii) that she had been unpaid for certain
work, and underpaid for other years, during the years of her husband’s
transfers to her while he had unpaid tax debts. The CRA has recognized the
latter unpaid years at the Objections level for years during which her husband
made transfers to her. However, CRA has not made any comparable recognition for
her accrued unpaid work for prior years nor for the alleged underpaid work in
the latter years.
[5]
The unpaid and
underpaid employment work provided by Mrs. Martin to her husband’s medical practice
was argued as an accrued debt, as current consideration, as unjust enrichment
and on a constructive trust basis relying upon the decisions of Webb J., as he
then was, in Darte v. The Queen, 2008 TCC 66, and of Bowman J., as he
then was, in Savoie v. The Queen, 93 DTC 552. I do not need to deal with
the constructive trust arguments in the circumstances but have concerns that, unlike
unjust enrichment, constructive trust is an equitable in rem claim for an
interest in a property subject to the alleged trust and I fail to see how that
fits the facts before me relating to unpaid services.
[6]
The second
consideration for the transfers put forward by the Appellant is in respect of
unpaid rent for the Fenwick property of which she was the sole registered
owner, had made significant financial contributions for its purchase, and which
she claimed was beneficially owned only by her prior to the year in which her
husband’s accrued unpaid tax debts arose. She claims her husband gifted his
interest in the property long prior to any tax arrears and that her
husband’s share of the mortgage repayments in his pre-tax debt period reflected
his use of the property in those years for his professional practice.
[7]
The only consideration
for the transfers put forward by the Appellant are these two distinct items for
services genuinely rendered to, and premises genuinely made available and used
by, her husband’s medical practice.
Mrs. Martin’s Professional Services:
[8]
Mrs. Martin was able to
describe in her testimony and in her written summary her daily work duties in
the years in question in considerable detail. I accept that to be entirely
factual and without question. The only issue is what would have been a
reasonable salary for her to have been paid for that work.
[9]
This is made easier by
the facts that (i) prior to the years in question, her husband had paid her a
salary, some of those payments were challenged by CRA on audit, and CRA set out
in a letter following its audit what it felt the reasonable arm’s length value
for the services rendered was, and (ii) in two of the six years in question Dr.
Martin paid his wife a salary.
[10]
CRA’s written audit
letter sets the arm’s length value of Mrs. Martin’s services at $30,000 for the
year 1989 rising by $2,000 per year to $36,000 for 1992. The salary set by Dr.
Martin, deducted by him and included in Mrs. Martin’s income in 2001 and 2002
was $25,000 and $24,700.
[11]
I do not accept that
the more recent $25,000 or $24,700 number should govern. It is not at all
unusual within family businesses for salaries to be lowered to below market to
reflect the then current capital needs, cash flows, or other financial
performance or realities of the business. Also, it undoubtedly reflected a
balancing of CRA wrongly telling them nothing was deductible and their
accountant then telling them that CRA was wrong.
[12]
Judicial determination
after the fact based on evidence available and presented can not be expected to
fix an entirely accurate and correct amount. After considering the evidence
before me, including the possible explanations for both sets of numbers, the
services rendered, Mrs. Martin’s accrued experience before 1995 in managing her
husband’s practice, the effects of inflation on salaries, et cetera, I find
that for each year in the period 1995 to 2004 the reasonable amount of salary
which would have been paid in an arm’s length relationship would have been
$38,000 annually.
[13]
Dr. Martin made
transfers to his wife while he had an unpaid tax liability during the six years
1999 to 2004. For the years 1999, 2000, 2003 and 2004, the Respondent only
recognized consideration of $100,000 ($25,000 annually). I therefore find
additional unrecognized consideration from her to him of $52,000 during this
period.
[14]
For the 2001 and 2002
years in which she was paid $25,000 and $24,700 annually during this period I
similarly find additional consideration of $26,300.
[15]
With respect to the
prior unpaid years I find that, in the four years (1995 to 1998) prior to the
husband’s transfers to her while he had tax arrears, that she had provided
services to him worth $38,000 annually and that she was therefore owed $152,000
by him at the time of the transfer. The Respondent’s position was that the
accrued amount for unpaid services for the prior period was not relevant since
it pre-dated the years the husband had tax arrears and made transfers. For this
reason it did not give any credit or assign any recognizable value to this.
There is no apparent reason for this inconsistency. Had Mrs. Martin loaned Dr.
Martin money in the period, that was settled by the later transfers, that would
be valuable consideration for section 160 purposes. I see no reason to treat
her unpaid services during the years immediately preceding the transfers any
differently than her unpaid services in the years that the transfers occurred.
Nor when pressed, could counsel for the Respondent articulate one to the Court.
CRA had correctly reassessed her following her Objection to allow this for the
later years; this was done on a principled basis and not as a settlement. At
the time Dr. Martin transferred money to her, she had a claim for unpaid
services she had performed for his business. That amount was four years at
$38,000 or $152,000 which should also be recognized.
Fenwick Property Rentals:
[16]
I find on the evidence
presented that Mrs. Martin paid at least 25% of the Fenwick property
acquisition cost. The proceeds of the sale of the Australian home which they
owned jointly and for which she paid at least one-half of the mortgage was used
to finance the Fenwick property down payment. Mrs. Martin had also gone back to
work in the years 1986 through 1988 while they were still living in the Fenwick
property so that the family could save money to repay the mortgage on the
Fenwick property on an accelerated basis. Mrs. Martin was the sole registered
owner of the house and I therefore find that she had at least a 25% ownership
of the house. Rent paid in years prior to 1995 had also been the subject of the
earlier CRA audits of Dr. and Mrs. Martin. It can be noted that in the CRA
audit previously discussed, the CRA’s final position was described as her
having a 25% ownership in the property and not the 100% ownership previously
claimed. I do not need to decide if she was the 100% beneficial owner in order
to vacate this assessment.
[17]
The house was used
entirely by her husband as a medical office in all of the relevant years.
[18]
There is little
evidence available to me regarding the fair market value rent which should have
been paid in the years in question. The amount of rent previously paid to a
commercial landlord for her husband’s medical practice was approximately $2,500
a month. This is the amount that was paid and deducted in those prior years.
[19]
Being conservative to
account for possible differences between the commercially rented premises and
the converted home as to size, services included, utilities included and the
like, I can conservatively estimate that the fair market rental value of the
Fenwick property in the years in question was at least half of the approximately
$30,000 annually that had until then been paid to the commercial landlord for
nearby premises for a similar use. Her share of the unpaid rent assuming only a
25% ownership would be $3,750 per year over the ten unpaid rental years in
question (being 1995 through 2004). This amounts to a further $37,500 of
consideration from her for the transfers by her husband. This would be the
total unpaid rents owing to her for the years 1995 through 1998 before he fell
into tax arrears and for the years 1999 through 2004 during the period he made transfers
to her.
[20]
In total I have found
at least an additional $267,800 of consideration from Mrs. Martin to Dr. Martin
for the transfers. That is sufficient to allow the appeal and to vacate the
assessment.
[21]
As mentioned above
there is some considerable concern raised by the CRA correspondence with Dr.
Martin and the Appellant in relation to the 1994 resolution of the prior audit
of 1990 to 1992. There is a shocking difference between what CRA communicated
in writing regarding the acceptable reasonable arm’s length salary to be paid
to Mrs. Martin for her work at her husband’s dermatology practice, and what has
now been confirmed by CRA to have been told to the Martins by that CRA auditor.
This is not a case of a CRA auditor writing something incorrect or stating
something incorrectly. It appears that it can only be considered to have been
intentionally deceitful. Such actions by public servants are entirely
inexcusable. The Court is very surprised that the CRA would in these
circumstances have pursued its section 160 case against Mrs. Martin with such
vigour given that the deceit related precisely to the most significant issue in
this case being the worth of Mrs. Martin’s services to her husband’s practice.
The Court has accepted Mrs. Martin’s version that in 1994 the auditor told them
in relation to the resolution of both her and her husband’s audits that he
could no longer deduct any portion of any salary he chose to pay her. The CRA
has since acknowledged in writing that in fact that was what they were told,
notwithstanding what the same auditor wrote. According to the Appellant this is
what led her to continuing to work for her husband but to not be paid for the
years prior to the years of her husband’s tax arrears and transfers to her, and
to be paid a much lesser amount in some of the later years after her husband’s
business accountant advised them that a reasonable salary was in fact properly
deductible and always had been. I accept this explanation fully and believe this
reinforces overall Mrs. Martin’s credibility.
[22]
The appeal is allowed
and the assessment is vacated.
[23]
I will allow 30 days to
receive written submissions from the parties on costs. I would ask to be told by
the Appellant what the total amount of Mrs. Martin’s legal costs have been in
this appeal. I would ask to be told by the Respondent what the date was of
CRA’s confirmation (referred to in the Report on Objection dated June 20, 2008)
that the Martins were clearly misled at the conclusion of the 1994 audit.
Signed at Montréal, Québec this 4th
day of February 2013.
"Patrick Boyle"
Email this Content