Citation: 2011 TCC 415
Date: 20110923
Dockets: 2008-3627(IT)G
2008-3628(GST)G
BETWEEN:
EVA BANKS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
These appeals under the
General Procedure were heard on common evidence as the assessments made under
the Income Tax Act and the Excise Tax Act resulted from the same
transaction.
[2]
On February 20,
2008, the Minister of National Revenue (the “Minister”) assessed the appellant:
a)
for $91,961.86 in
respect of the transfer of property to her within the meaning of
section 160 of the Income Tax Act, R.S.C. 1985, c. 1
(5th Supp.) as amended (the “ITA”) and accordingly issued on that
date a notice of assessment bearing number 45367; and
b)
for $117,943.67 in
respect of the transfer of property to her within the meaning of
subsection 325(1) of Part IX of the Excise Tax Act, R.S.C. 1985,
c. E‑15, as amended (the “ETA”), and accordingly issued on
that date a notice of assessment bearing number A116569.
[3]
The transfer of
property referred to above was made on or about July 16, 2004, from James
Alexander Mitchell (“Mr. J. Mitchell”) in the form of a cheque for
$224,631.08 from Richard Mayhue, General Trust, made payable to the Mr. J. Mitchell
and deposited to the appellant’s account.
The Issue
[4]
The issue in these
appeals is whether the tax debtor, Mr. J. Mitchell, transferred
property to the appellant when he endorsed a cheque in the amount of $224,631.08
and gave it to her and if so, what was its value.
[5]
At the hearing, the
allegation that the appellant was acting only as a trustee has been abandoned
and the parties agreed that the appellant was not dealing at arm’s length with
Mr. J. Mitchell, and that the appellant was not living in a common
law relationship with Mr. J. Mitchell.
The Facts
[6]
Mr. J. Mitchell is an
accountant and businessman who resides in Sooke, British Columbia. Over the years, his business ventures have not been
successful and he had to borrow money from his family and friends, including
from Ms. Banks, to meet his financial obligations.
[7]
According to the
witness for the respondent, Mr. Monroe, a collection agent for the Canada
Revenue Agency, (“CRA”), many companies owned or controlled by
Mr. J. Mitchell have been delinquent in filing their income tax
returns and their Goods and Services Tax ("GST") returns, and failed
to make payroll deductions and GST remittances, but CRA has been entirely
unsuccessful in collecting any money directly from Mr. J. Mitchell.
[8]
As stated in the
appellant's trial brief, the following facts were established through the
testimony of the appellant and that of Mr. J. Mitchell:
549471 B.C. Ltd. (“549”)
(a)
In 1997, Mr. Mitchell and three of his business
partners and a third party, Gary Brooks, planned to purchase a certain parcel
of real estate in Port Renfrew (the “Port Renfrew Property”), for an
approximate price of $150,000.
(b)
Around 1998, Mr. Mitchell and his three partners
agreed to pay approximately 1/3 of the land purchase price by way of cash and Gary
Brooks agreed to pay the remaining 2/3. Mr. Mitchell and his three partners
were to hold an approximate 1/3 interest in the venture and Gary Brooks was to
hold an approximate 2/3 interest. The Port Renfrew Property was to be held by a
corporation named 549471 B.C. Ltd. (“549”), the shares of which were to be held
in proportions commensurate with each parties respective financial interest in
the venture.
(c)
Gary Brooks required a loan to fund his 2/3
portion of the purchase price, which he could not get without security. Mr.
Mitchell and his three partners permitted Mr. Brooks to mortgage the Port
Renfrew Property in order to secure his loan to purchase the Port Renfrew
Property.
(d)
In order to obtain this mortgage (the “1st
Mortgage”), the lender, Coast Capital Savings Credit Union, required title to
the Port Renfrew Property to be put into Mr. Brooks’ name. Mr. Mitchell and his
partners agreed to allow that on the condition that Mr. Brooks’ hold the Port
Renfrew Property in trust for 549, and not encumber it or otherwise deal with
it except in accordance with 549’s instructions.
(e)
In the succeeding years, Mr. Brooks failed
to make some of the payments on the 1st Mortgage and, in fact, further
encumbered the Port Renfrew Property with a second mortgage.
Jim Mitchell’s Early Inheritance
(f)
Jim Mitchell has one brother, Ross Mitchell,
and prior to 1998 expected to share equally in his parents’ estate.
(g)
By 1998, Jim Mitchell had received a significant
amount of money from his parents to help him fund his various business
expenses. In 1998, his father having already died, Mr. Mitchell’s mother
arranged for his brother, Ross, to inherit the bulk of her estate.
(h)
Accordingly, in 1998 Mrs. Mitchell transferred
her personal residence and her investment portfolio to joint ownership between
herself and Ross Mitchell.
(i)
The one material asset that was excluded from
this arrangement was a vacant lot, (the “Mitchlu Property”), owned by Mrs.
Mitchell that was located across the street from her residence. In 1998 Mrs.
Mitchell transferred this lot to a newly formed corporation, Mitchlu
Enterprises Inc., the shares of which were owned 50% by Jim Mitchell and 50% by
Ross Mitchell.
(j)
In the result, Jim Mitchell would no longer
inherit the bulk of his mother’s estate, but would still have an interest in
the vacant lot.
(k)
Jim Mitchell accepted this arrangement as fair
given the amount of money that he had already received.
(l)
In other words, by 1998 Jim Mitchell had
already used up his fair share of any expected inheritance, so his brother was
to receive the bulk of his mother’s property of material value when she died,
save a 50% interest in the Mitchlu Property, which he held through the
ownership of 50% of the shares of Mitchlu.
Foreclosure on Port Renfrew Property
(m)
In 2001, Coast Capital Savings Credit Union
intended to foreclose on the 1st Mortgage.
(n)
In order to prevent the proposed foreclosure,
549 would have to raise the funds to pay out the 1st Mortgage.
(o)
With his brother’s permission, Jim Mitchell
arranged to borrow against the Mitchlu Property and have Mitchlu use the
proceeds to fund a loan to 549 which, in turn, would use the proceeds to pay
out the 1st Mortgage.
(p)
Mitchlu’s proposed lender, the Royal Bank of Canada, would not grant a mortgage on a
property owned by Mitchlu and required that the Mitchlu property be put into an
individual’s name before the mortgage would be granted. In March of 2002,
Mitchlu transferred legal title to the Mitchlu Property to Jim Mitchell to hold
in trust for Mitchlu in order to obtain the mortgage. Jim Mitchell executed a
declaration of trust in this regard.
(q)
549’s real estate lawyer, Michael B. Ellis,
advised that it would be best for 549 to assume the 1st Mortgage
from Coast Capital Savings Credit Union rather than paying it out. The
rationale was that by assuming the 1st Mortgage, 549 would
retain its equity in the Port Renfrew Property owned by 549 up to the value of
the 1st Mortgage in priority to the lender who held the second mortgage
on the 549 Property.
(r)
Mr. Ellis further advised that 549 could not own
the 1st Mortgage in its own name without collapsing the 1st
Mortgage. Accordingly, 549 used Jim Mitchell as its nominee to assume the
1st Mortgage. Mr. Mitchell thus held the 1st
Mortgage as trustee for 549. Mr. Mitchell executed a declaration of trust
in this regard.
Eva Banks Helps Her Friend
(s)
Ms. Banks is a close personal friend of Jim
Mitchell and was a long time friend of his mother’s.
(t)
Ms. Banks used approximately $100,000 of
her own funds to support Mr. Mitchell’s business ventures up to 2003.
(u)
In 2003, Ms. Banks agreed to further help Jim
Mitchell by assuming ownership of his various business ventures. Since then
they have worked together to try to make the business ventures profitable.
(v)
Ross Mitchell lent to Ms. Banks
approximately $230,000 in March 2004 and approximately $230,000 in June 2004.
Ms Banks used the proceeds from these loans chiefly to fund the business
ventures that they were now both involved in. Ms. Banks also used some of
the funds to cover her personal expenses.
(w)
Ross Mitchell acquired the funds for these loans
from his disposition of his mother’s personal residence and investments that he
acquired by right of survivorship (joint tenancy) on his mother’s death. At
that time these assets belonged to Ross Mitchell and his loan to Ms. Banks
was made of his own accord and not pursuant to any legal obligation to
Ms. Banks or Jim Mitchell.
Eva Banks Seeks Security For
Her Loans
(x)
Certain of the funds that Ms. Banks had
forwarded to the various business entreprises were through her wholly‑owned
corporation, Future Finishing Ltd.
(y)
Ms. Banks was aware of the mortgages that
549 had granted in respect of the Port Renfrew Property and wanted 549 to
transfer the 1st Mortgage to Future Finishing Ltd. to secure
the loans that Future Finishing Ltd. was making to 549.
(z)
Jim Mitchell retained Richard Mayhue,
a real‑estate lawyer in Sooke, British Columbia to assist in
transferring the 1st Mortgage to Future Finishing Ltd.
(aa)
Future Finishing Ltd. transferred $225,137.28 to
Mr. Mayhue, who wrote a cheque from his trust account to Jim Mitchell
in the amount of $224,631.08. The difference between these amounts being
retained by Mr. Mayhue to cover his fees and disbursements.
(bb)
The amount of the cheque was based upon a
calculation of the precise amount of the 1st Mortgage
outstanding at that time.
(cc)
Jim Mitchell accepted the cheque, transferred
the 1st Mortgage to Future Finishing Ltd. and then endorsed the
cheque and delivered it to Ms. Banks, all on behalf of 549.
(dd)
Ms. Banks cashed the cheque and used the
proceeds to pay out various accounts on behalf of Future Finishing Ltd.
Position of the Appellant
[9]
The appellant alleged
that Mr. J. Mitchell did not transfer any property to her and that
the aforesaid cheque in the amount of $224,631.08 from Richard Mayhue
related to the balance owing on a mortgage assignment held by
Mr. J. Mitchell in trust for 549 and that Mr. J. Mitchell had no
interest whatsoever in the said funds. The said cheque was issued as
consideration for the transfer of the said mortgage from 549 to Future
Finishing Ltd. The appellant further alleged that Mr. J. Mitchell did
not divest himself of any funds whatsoever in endorsing the said cheque.
[10]
The appellant further
alleged that even if this Court was to determine that a legal interest in the
property has been transferred, this Court has to make a determination of the
value of this legal interest. In the situation, where only the legal title is
transferred, the full value of the beneficial interest remains with the
beneficiary, and thus the value of the legal interest is nil.
Position of the Respondent
[11]
The respondent contends
that there was a transfer of $224,631.08 from Mr. J. Mitchell to Ms. Banks
and alleged the fact that:
(i) no documentary
evidence has been submitted confirming the two loans of $230,000 each made by
Ross Mitchell to Ms. Eva Banks or to Sooke Office Services Ltd., a company in
which Ms. Eva Banks acts as nominee;
(ii) no documentary or
oral evidence has been submitted confirming the source of the funds used by
Ross Mitchell to make the loans to Ms. Eva Banks. The two cheques
represent approximately 50% of the residue of the estate of Mr. J. Mitchell's
mother; and
(iii) the transfer of
the mortgage from 549 to Future Finishing Ltd. has not been supported or
confirmed by any assignment agreement, corporate resolutions or accounting
records, except for the cheque made to Mr. Mayhue and the cheque made to
Mr. J. Mitchell and the testimonies of Ms. Eva Banks and Mr. J. Mitchell.
[12]
According to the respondent,
the purpose of the series of transactions was to defraud CRA and to allow Mr.
J. Mitchell to avoid paying the income tax and the GST that were due.
Review of the Documentary Evidence
[13]
The appellant submitted
a copy of the following documents:
(i) a letter dated
January 11, 2002, from Michael B. Ellis which confirms the intention of 549 to
pay out the 1st Mortgage held by Coast Capital Savings Credit Union;
(ii) a General Form of
Assignment dated March 6, 2002 executed by Coast Capital Savings Credit Union
by virtue of which all of its right, title and interest in and to claims
arising out from British Columbia Court action number 01-2469, in the Victoria
Registry, have been assigned to Mr. J. Mitchell in consideration of the sum of
$114,800 paid to it;
(iii)
a Land Title Act Form
27 respecting the transfer of the 1st Mortgage to Mr. J. Mitchell
executed on March 3, 2002;
(iv)
a declaration of trust
dated March 28, 2002, in respect of the 1st Mortgage
beneficially owned by 549 and held by Mr. J. Mitchell as trustee;
(v)
a Land Title Act Form A
dated March 28, 2002, respecting a transfer of the Mitchlu Property having a
market value of $134,000 from Mitchlu to Mr. J. Mitchell;
(vi)
a declaration of trust
dated March 28, 2002, in respect of the Mitchlu Property beneficially
owned by Mitchlu and held by Mr. J. Mitchell as trustee;
(vii)
a Land Transfer Act
Form A dated May 30, 2003 respecting a transfer of the Mitchlu Property from
Mr. J. Mitchell back to Mitchlu;
(viii)
a handwritten loan
account regarding a loan bearing an interest rate of 12% from Ms. Banks to 549
showing a balance of nil on April 14, 2004, with an annotation that the loan
has been paid by Future Finishing Ltd.;
(ix)
a bank statement of
Future Finishing Ltd. for the period from April 8, 2004 to May 10, 2004, showing, among other things, a loan
payment of $95,099.22 on April 13, 2004, and a cheque in the amount of
$19,453.59;
(x)
a payment slip dated
April 13, 2004, from the Royal Bank respecting the payment by Future Finishing
Ltd. in the amount of $95,099.22 against a mortgage registered against the Mitchlu
Property;
(xi)
a cheque dated April
14, 2004, made to the order of Ms. Eva Banks in the amount of
$19,453.19 respecting a loan that she made to 549;
(xii)
a handwritten
calculation of the outstanding amount ($224,336.88) of the 549 Mortgage as at
July 9, 2004;
(xiii)
a bank statement of
Sooke Office Services Ltd. for the period from June 30, 2004 to July 30, 2004, showing, among other things, a bank
draft in the amount of $225,137.28 dated July 12, 2004;
(xiv)
a bank draft dated July
12, 2004, of Sooke Office Services Ltd. made payable to the order of
"Richard Mayhue in trust";
(xv)
a handwritten
accounting of Ms. Eva Banks' use of proceeds of funds received from
"Richard Mayhue in trust";
(xvi)
a statement of
Investment Account of Ross Mitchell and Janet Helen Mitchell as joint
tenants for 1998;
(xvii) the Form A Freehold Transfer in respect of
Janet Helen Mitchell's vacant lot dated March 28, 2002;
(xviii) the Form A Freehold Transfer in respect of
Janet Helen Mitchell's residence dated April 18, 2002;
(xix)
a statement of
Investment Account of Ross Mitchell and Janet Helen Mitchell as joint tenants
for the period ending February
28, 2004; and
(xx)
an Electronic Land
Title Search in respect of the 549 Property dated November 18, 2009, showing,
among other things, the registration of a mortgage by Future Finishing Ltd. on September 23, 1998.
Legislative Provisions
[14]
Subsection 160(1) of
the ITA reads as follows:
Tax Liability re property transferred
not at arm's length — 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 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.
[15]
Subsection 325(1) of
the ETA reads as follows:
Tax liability re transfers not at arm's length — Where at any time a person
transfers property, either directly or indirectly, by means of a trust or by
any other means, to
(a) the transferor's spouse or common-law
partner or an individual who has since become the transferor's spouse or
common-law partner,
(b) an individual who was under eighteen
years of age, or
(c) another person with whom the
transferor was not dealing at arm's length,
(d) the amount
determined by the formula
A
— B
where
A is the amount, if any, by which the fair
market value of the property at that time exceeds the fair market value at that
time of the consideration given by the transferee for the transfer of the
property, and
B is the amount, if any, by which the amount assessed the
transferee under subsection 160(2) of the Income Tax Act in respect of
the property exceeds the amount paid by the transferor in respect of the amount
so assessed, and
(e) the total of all amounts each of which
is
(i) an amount that the transferor is
liable to pay or remit under this Part for the reporting period of the
transferor that includes that time or any preceding reporting period of the
transferor, or
(ii) interest or penalty for which the
transferor is liable as of that time,
but nothing in this subsection limits the liability of the
transferor under any provision of this Part.
[16]
For the purpose of
these appeals, the relevant language and law is the same between subsections 160(1)
of the ITA and 325(1) of the ETA. The following four conditions
must be met for subsections 160(1) of the ITA and 325(1) of the ETA
to apply:
(i)
there must be a
transfer of property;
(ii)
the transferor and the
transferee are not dealing at arm's length;
(iii)
there must be no
consideration (or inadequate consideration) flowing from the transferee to the
transferor; and
(iv)
the transferor must be
liable to pay an amount under the ITA or the ETA (as the case may
be) in or in respect of the year when the property was transferred or any
preceding year.
Only the first and third conditions are in
issue in these appeals.
[17]
The purpose of
subsections 160(1) of the ITA and 325(1) of the ETA is to provide
the CRA with a collection mechanism when tax debtors transfer assets to
non-arm's length parties where the fair market value of the assets transferred
exceed the fair market value of the consideration given by the transferee for
the transfer of the assets.
Analysis
Was there a transfer of property?
[18]
There is no doubt in my
mind that the $224,631.08 cheque endorsed by Mr. J. Mitchell and
delivered to the appellant constituted a transfer of property for the purposes
of subsections 160(1) of the ITA and 325(1) of the ETA.
[19]
The meaning of the word
“transfer” under the ITA has been examined by the federal courts on many
occasions. The following definition in David Fasken Estate v. Minister of
National Revenue, [1948] Ex. C.R. 580, is generally accepted:
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. …
[20]
The $224,631.08 cheque
was drawn from Richard Mayhue's trust account and was made payable to the
order of James Alexander Mitchell without any indication that the
cheque was not to be received in his personal capacity and without any
indication concerning the purpose or the reasons why the cheque was made.
Mr. J. Mitchell dealt with the cheque as if it was his own property.
He endorsed it and delivered it to Ms. Banks. Mr. J. Mitchell
knew very well why the cheque had been made to his order, for what purpose and
where the money was coming from.
[21]
In his testimony,
Mr. J. Mitchell did not give any plausible explanation as to why he
did not endorse the cheque in favour of 549 instead of endorsing it and
delivering it to Ms. Banks and as to why he did not comply with the terms
and conditions of the declaration of trust dated March 28, 2002. He was
the only signatory of that declaration of trust; he should have remembered its
existence.
[22]
Mr. Richard Mayhue,
the real estate lawyer retained by Mr. J. Mitchell to carry on the
transfer of the 1st mortgage from 549 to Future Finishing Ltd.
has suggested, according to Ms. Banks’ testimony, to use separate cheques
instead of only book entries. Mr. Mayhue, who knew all the facts
surrounding the said transaction, did not testify at the hearing. He could have
explained why the $224,631.08 cheque had been issued and why it had been made
to the order of Mr. J. Mitchell personally. More importantly, he
could have confirmed if the transfer of the 1st Mortgage from
549 to Future Finishing Ltd. had been executed as originally planned.
[23]
The only evidence filed
in Court concerning the transfer of the 1st Mortgage from 549
to Future Finishing Ltd. are:
(i)
the $225,137.28 cheque
from Sooke Office Services Ltd. (the cheque was not from Future Finishing Ltd.)
to Richard Mayhue in trust;
(ii)
the $224,631.08 cheque
referred to above;
(iii)
a bank statement of
Sooke Office Services Ltd.; and
(iv)
a handwritten
calculation of the outstanding amount of the 1st Mortgage as at
July 9, 2004.
This shows a clear lack of evidence. No corporate
resolutions, no accounting records, no general form of assignment and no
transfer of mortgage Form 27 have been filed. No witness confirmed the
actual date of the transfer. In these circumstances, I have a great difficulty
accepting the testimony of the witnesses, Mr. J. Mitchell and Ms. Eva Banks,
that the $224,631.08 cheque made payable to Mr. J. Mitchell was to
achieve a transfer of the 1st Mortgage from 549 to Future
Finishing Ltd. Furthermore, I do not see any connection between that cheque and
the declaration of trust.
Was there adequate consideration flowing from the
transferee to the transferor?
[24]
It has been admitted by
the parties that Ms. Banks deposited in her own bank account the
$224,631.08 cheque and that she used the proceeds to pay out personal expenses
and expenses of various companies in the group. She had full enjoyment of all
the proceeds. At the time of hearing, there was no evidence of any claims or
actions taken by 549 or any creditor of 549 against Ms. Eva Banks or
Mr. J. Mitchell for the recovery of funds transferred to Ms. Banks.
[25]
The alleged purpose of
the endorsement and delivery of the $224,631.08 cheque to Ms. Banks was to
repay funds that she had advanced. Here again, the evidence is not clear as to
what were the precise amounts advanced by Ms. Banks and to whom, to 549 or
to Mr. J. Mitchell directly? The evidence revealed that Ms. Banks
had, in the past, advanced funds to 549, namely $22,000 on March 28, 2002,
to avoid the foreclosure of the Port Renfrew Property. The outstanding
balance of that loan as of April 14, 2004 ($19,453.59) has been repaid in
full by Future Finishing Ltd., together with the balance of the Royal Bank
mortgage on the Mitchlu Property ($95,099.22). The funds used to make these
payments came from a loan of $120,000 from Sooke Office Services Ltd.
[26]
Even if I were to
accept the fact that Ms. Banks has advanced funds of her own and funds
coming from Ross Mitchell through Sooke Office Services Ltd. to support
Mr. J. Mitchell’s business ventures, there is no evidence how much
money was owed to Ms. Banks by 549 or by Mr. J. Mitchell when
the $224,631.08 cheque was endorsed by Mr. J. Mitchell and delivered
to her. Moreover, if funds were owed by 549 or by Mr. J. Mitchell, there
is no evidence to whom they were owed; whether it be to Ms. Banks, Future
Finishing Ltd. or to Sooke Office Services Ltd.?
[27]
Considering the
foregoing, I conclude that there was effectively a transfer from
Mr. J. Mitchell to the appellant and that there was no consideration
flowing from the appellant to Mr. J. Mitchell.
[28]
The appeals are
dismissed with costs.
Signed at Ottawa, Canada, this 23rd day of September 2011.
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