Citation: 2012TCC252
Date: 20120712
Docket: 2009-3124(IT)G
BETWEEN:
SYLVIA IMOLA BRAGG-SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
Introduction
[1]
This appeal is from an
assessment made by the Minister of National Revenue (the “Minister”) against
Sylvia Imola Bragg-Smith (the “Appellant”) under subsection 160(1) of the Income
Tax Act (Canada) (the “ITA”).
[2]
The issue is whether
the Appellant is liable to pay $43,157 on account of her father’s income tax
liability as a result of the assignment to her by her father of an identical
amount owed to him that was subsequently paid to the Appellant (the “Payment”).
[3]
The Appellant acknowledges
that she received the Payment at the direction of her father but she also alleges
that she paid the sum of $31,762.50 owed to a creditor by her father. That
creditor had supplied the goods that were the object of the transaction that
gave rise to the Payment.
[4]
As a result, according to
the Appellant, the assessment should be reduced to $11,394.50, being the excess
of the Payment received by her over the amount she paid as consideration for
the Payment.
[5]
The Respondent alleges
that the Appellant did not make a legally enforceable promise to pay her
father’s creditor the sum of $31,762.50. The amount was payable by the
Appellant to the creditor because of a moral obligation owed to her father.
According to the Respondent, the case law establishes that a moral obligation
does not constitute “consideration” for transferred property within the meaning
of subsection 160(1) of the ITA.
Factual Background
[6]
Timothy Bragg-Smith,
the Appellant’s father, operated a scrap metal business known as “Auro Metals
Environmental”. By 2007, Mr. Bragg‑Smith owed approximately $487,000
in taxes, interest and penalties in respect of prior taxation years.
[7]
On or about June 13,
2007, Cameron Habisreutinger, a Canada Revenue Agency (the “CRA”) collections
officer, commenced collection actions against Mr. Bragg‑Smith.
Mr. Habisreutinger testified that he sent to Mr. Bragg‑Smith’s customers
and the financial institutions that handled his banking arrangements information
requirements for third-party payment of his tax account. He also issued, in
March of 2008, an information requirement to one of those financial
institutions, the CIBC.
[8]
As a result of that
request, Mr. Habisreutinger discovered that the Appellant had opened a US
dollar account with the CIBC to receive the Payment from Umicore Optical
Materials USA, Inc. (“Umicore Optical”), a US corporation that acquired
approximately 113 kilograms of germanium contained in optical scrap/sludge
(the “germanium”). The shipment was arranged on or around September 10, 2007 by
the Appellant’s father and the optical scrap/sludge was shipped from Canada. An amount of $43,200 represented the first payment out of a total sales price of
$68,077.74 for the germanium.
[9]
According to the
Appellant, her father had arranged to supply Umicore Optical with approximately
175 kilograms of optical scrap/sludge at a unit cost of $600 per kilogram, for
a total purchase price of $105,000.
The terms and conditions of the transaction provided that the optical scrap/sludge
was to be processed by Umicore Optical to determine the exact amount of germanium
contained in the waste material. After processing, the quantity supplied worked
out to approximately 113.5 kilograms of germanium for a total amount owed by Umicore
Optical of $68,077.44. The purchase price was to be paid in two instalments of
$43,200 and $24,877.74 respectively.
[10]
The Appellant’s father
directed Umicore Optical to pay the first instalment into a US dollar bank
account opened by the Appellant in the name of Auro Metals ENV., a business
name registered to the Appellant.
[11]
According to the
Appellant, her father purchased the optical scrap/sludge from Elcan Optical
Technology (“Elcan Optical”), one of the few Canadian corporations dealing with
optical waste. He owed them $31,762.50 on account of the purchase price for the
waste material. The Appellant alleges that she agreed to pay the amount owed to
Elcan Optical as a condition of the transaction with her father. A bank draft in
the amount of $31,762.50 drawn on the Appellant’s CIBC US dollar account
and payable to Elcan Optical was produced as Exhibit R‑1, Tab 16.
This amount was paid three days after the Appellant had deposited the Payment
in her US dollar account.
Analysis
[12]
Subsection 160(1) of
the ITA reads as follows:
Tax liability re property
transferred not at arm’s length
160.(1) 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
therefor, 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.
The purpose of subsection 160(1) is to prevent a
taxpayer from avoiding the payment of tax by the transfer of property to a non-arm’s
length person that the taxpayer chooses to benefit. In many cases, the taxpayer
continues to derive benefit from the property. For example, in the absence of
this provision, a husband could transfer his interest in the family home to his
wife rather than forfeit it as a result of collection proceedings instituted by
the CRA. The couple could thus continue to reside in the premises. Subsection
160(1) discourages such transfers by making the transferee jointly and
severally liable with the transferor for tax owing by the transferor up to the
amount by which the fair market value of the transferred property exceeds the
fair market value of the consideration paid for the property.
[13]
In light of the
documentary evidence produced by the Respondent, the Respondent acknowledges
that the Appellant paid Elcan Optical $31,762 on account of an amount owed to that
entity by her father. However the Respondent denies that this constitutes
consideration for the Payment received by the Appellant from Umicore Optical at
the direction of her father.
[14]
First, the Respondent
alleges that there is no documentary evidence establishing the terms of the
agreement between the Appellant and her father. According to the Appellant, the
agreement with her father was an oral undertaking.
[15]
Furthermore, the
Respondent submits that the Court should not accept the Appellant’s testimony
on the terms and conditions of the transaction without independent third-party
corroboration because her version of the facts surrounding the transaction
differs significantly from her testimony on discovery. The Respondent points
out that on discovery the Appellant claimed that she and her father had agreed
to carry on a scrap metal business together. According to the Appellant’s
discovery testimony, the transaction under review was the first transaction
carried out by the daughter-father business partners.
[16]
The Appellant now
concedes that her father was the sole active participant in the transaction. He
arranged for the purchase and delivery of the goods to Umicore Optical. He was
present at Umicore Optical’s facility when the optical scrap/sludge was
processed and the germanium recovered. He sent banking instructions to Umicore
Optical to ensure that payment was made into his daughter’s bank account. All
of this was done because Mr. Bragg-Smith’s bank accounts were frozen as a
result of the collection activity undertaken by the CRA. Therefore, the Respondent
argues, I should attach no credibility to the Appellant’s testimony given at
trial.
[17]
I do not agree with the
Respondent that I should accord no credibility to the Appellant’s testimony.
Her testimony is corroborated by independent documentary evidence. The
Respondent produced a copy of the bank draft made payable to Elcan Optical. The
bank statements from the Appellant’s account show that the CIBC drew the funds for
the bank draft from the Appellant’s bank account. The Payment to Elcan Optical
was made on November 26, 2007, three days after the Appellant received the Payment
from Umicore Optical. A reasonable inference can be drawn that she had agreed
to pay this debt as part of her agreement with her father and that she waited
for clearance with respect to the funds deposited into her account before
making the Payment to Elcan Optical. This evidence corroborates the Appellant’s
testimony on this point. As a result, as a factual finding I conclude that the
Appellant made verbally a legally enforceable promise to pay Elcan Optical the
sum of $31,672 as consideration for the transfer of the Payment to her.
[18]
The Respondent, in her
written submissions, alleges that the amount paid to Elcan Optical does not
constitute “consideration” within the meaning of subsection 160(1) of the ITA
for the following reasons:
17. The Federal Court of Appeal has held that a transferee
paying a transferor’s bills is only valid consideration where the transferee
has made a legally enforceable promise to pay”. For instance, in Raphael v. R., the
transferor operated a number of jewellery stores that suffered during the
recession of the early 1990’s and ultimately went bankrupt.
18. At the time, the transferor had money in his RRSP plan and
wanted to use that money so that he could honour some of his debts and thus
have the possibility of continuing to carry on the jewellery business. However,
he knew that if the monies were deposited into an account in his name they
could be garnished. In order to avoid this happening, and still to accomplish
his plan, the transferor transferred the funds into the transferee’s bank
account. The transferee, was the transferor’s wife. She agreed to pay the money
out of her account on instructions from the transferor. The transferee was
subsequently assessed under section 160(1) of the Act.
19. One of the transferee’s arguments before the Federal Court
of Appeal was that she had given valid consideration in the form of her promise
to pay out monies only on the transferor’s direction. The
Court rejected the transferee’s argument. In his oral reasons, Justice Sexton
noted that if the transferee had made a legally enforceable promise to
pay out monies only on the transferor’s direction to his creditors in amounts
equal to the monies transferred, it might have constituted sufficient
consideration in order to avoid the application of section 160(1).
20. Justice Sexton contrasted a moral obligation to pay with a
legally enforceable obligation to pay. He ultimately found that the transferee
had not made a legally enforceable promise to pay the transferor’s bills. He
based this determination on the fact that the transferor could not force the
transferee to pay his bills and that if there was a legally enforceable
obligation on the transferee, he could have compelled such payment.
[19]
I note that the facts
of the Raphael decision are very different than the facts of this
appeal. In Raphael the amounts transferred to the transferee were part
of the transferor’s savings. In the instant case, the Payment resulted from the
completion of a sale where goods sourced from Elcan Optical were sold to
Umicore Optical. As a condition of the sale, Elcan Optical was entitled to
receive the price negotiated with the Appellant’s father.
[20]
The transaction was completed
and the Appellant remains liable for tax to the extent of the amount of the profit
from that transaction, being the difference between the amount of the Payment
and the amount paid by her to Elcan Optical. Secondly and more importantly, it
is clear from the above-quoted reasons of Justice Sexton that the evidence in Raphael
showed that there was no legally enforceable promise to pay that was given by
the transferee as consideration for the transfer by the transferor of his
property. In the instant case, however, the evidence shows on a balance of
probabilities that the Appellant verbally agreed to pay the amount owed to
Elcan Optical as consideration for the receipt of the payment.
[21]
For all of these
reasons, the appeal is allowed and the matter is referred back to the Minister
for reconsideration and reassessment in accordance with the terms of the above
reasons for judgment.
Signed at Ottawa, Canada, this 12th day of July 2012.
“Robert J. Hogan”
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