Wannan v. The Queen, docket 2001-1349(IT)G

Date: 20021210

Docket: 2001-1349-IT-G

BETWEEN:

NANCY JO WANNAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1]            The issues in these appeals are:

               

                (i)             Whether the Appellant, by reason of section 160 of the Income Tax Act (the "Act") is liable for certain income taxes owed by her husband, Dr. Barry Winston Wannan, ("Dr. Wannan") by reason of certain transfers made by Dr. Wannan to the Appellant's Spousal RRSP ("the Spousal RRSP") in the years 1989 through 1995;

                (ii)            If so, is this liability enforceable against the Appellant following the discharge of Dr. Wannan from bankruptcy;

                (iii)           If so, whether joint and several liabilities for tax arising out of a spousal transfer extends to contributions made to the Spousal RRSP;

                (iv)           Are the assessments against Dr. Wannan and against the Appellant statute-barred; and

                (v)            Do the dividends paid by the Trustee in Bankruptcy out of the bankrupt estate of Dr. Wannan operate to discharge the liability of the Appellant.

[2]            It should be noted that the Notice of Appeal raised the issue of whether contributions to a Spousal RRSP can be considered as transfers under section 160 of the Act and also raised the issue that the value of the contribution should be reduced by any tax payable by the Appellant to collapse the Spousal RRSP. Counsel for the Appellant did not argue these two issues and rather argued an issue not raised in the Notice of Appeal, namely, the issue of whether the dividends paid out of the bankrupt estate of Dr. Wannan operated to discharge the liability of the Appellant.

[3]            The Respondent submits that in respect of the 1988 and 1989 taxation years Dr. Wannan was liable to pay under the Act an amount of $26,333.27 and that from January 1, 1989 to December 31, 1994 he contributed $50,850 to the Spousal RRSP. I find as a fact that the figure $26,333.27 is correct.

[4]            Counsel for the Appellant concedes that during the period of January 1, 1989 to December 31, 1994 Dr. Wannan contributed to the Spousal RRSP something in excess of $26,333.27.

[5]            Further, on September 16, 1996 the Minister of National Revenue (the "Minister") assessed Dr. Wannan in respect of the 1995 taxation year tax in an amount of $150,607.60 and from January 1, 1995 to December 31, 1995 Dr. Wannan contributed $7,500 to the Spousal RRSP.

[6]            Counsel for the Respondent at first contended that the contribution amounted to $13,125 but at the hearing agreed that the figure $7,500 was correct.

SUBMISSIONS OF COUNSEL FOR THE APPELLANT

[7]            Counsel for the Appellant submitted the following in writing:

6.              Dr. Wannan properly filed his income tax return for 1995 taxation year. Pending assessment of Dr. Wannan's 1995 tax returns, Dr. Wannan made a voluntary assignment in bankruptcy. The relevant dates and facts relating to the bankruptcy proceedings and Section 160 assessment are as follows:

(a)          January 10, 1996: Dr. Wannan made the voluntary assignment in bankruptcy.

(b)         October 10, 1996: Automatic discharge of Dr. Wannan under the Bankruptcy and Insolvency Act.

(c)          October 23, 1996: The Minister submitted to the Trustee a proof of claim as unsecured creditor:

                  Tax:                                                    $161,227.92

                  Penalties & Interests:                          16,847.02

                  Total Claim:                                       $178,074.94

(d)         CCRA received dividends from the Trustee as follows:

                  (i)          Interim Payment:                   $45,752.51

                  (ii)         Final Payment:                         26,261.37 *

                                               Total Dividend:                     $72,013.88

                  Note: * To be paid after 15 days from date of taxation, if any, or from October 8, 2002.

e)           On February 8, 1999, almost three (3) years from bankruptcy discharge, the assessment pursuant to Section 160 in the amount of $39,458.27 was made.

(f)          August 6, 2002: Notice of Motion under Section 39(5) of the Bankruptcy and Insolvency Act, together with a final Dividend Sheet (prepared pursuant to Section 152 of the Act) was filed in the Bankruptcy Court.

(g)         October 8, 2002: Hearing on Trustees Report etc., including Discharge of the Trustee (pursuant to Section 41 of the Act)

PART III: Submission of the Appellant

A.             Summary of Submissions

7.              The Submissions of the Appellant relate to matters of law.

They are as follows:

(a)          After the discharge in bankruptcy of Dr. Wannan, the tax debt that may be assessed against the Appellant is NIL pursuant to Section 160(1)(e).

(b)         The tax liability of the transferor for which the transferee is made jointly and severally liable under Section 160 must exist at the time of the transfer of the property.

(c)          The payment by way of dividend receipt from the Trustee in Bankruptcy, namely, $72,013.88, discharges earliest tax liability of the transferor and to that extent the Appellant is discharged from the joint liability pursuant to Section 160(3).

(d)         The Section 160 assessment is, in any event, statute-barred, having been made in 1999.

B.             Discussion of Submissions

                (i)             After the Discharge of Dr. Wannan the Assessment that can be made against the Appellant is NIL

8.               This case relates to a Section 160 assessment made almost three (3) years after the bankruptcy discharge of the tax debtor.

9.               The bankruptcy discharge of Dr. Wannan on October 10, 1996, discharges the tax debt from that date.

10.             The Appellant submits the assessment that can be made pursuant to Section 160 on February 8, 1999 must be nil.

Section 178(2) Bankruptcy and Insolvency Act; Gamache v. Canada [1966] T.C.J. No. 512; Caplan v. Canada [1995] T.C.J. 862

(ii)         The Tax Liability of the Transferor Must Exist on the Date of the Transfer

11.             The Appellant submits that the liability of the Appellant, as transferee, extends only to the tax liability owing by the transferor at the date of the transfer.

See Section 160(1)(e) which expressly states "in or in respect of the taxation year in which the property was transferred or any preceding taxation year"

12.             The purpose of Section 160 is obvious: to prevent a taxpayer from depleting his assets in order to evade the payment of his tax and to preclude a party from allowing himself to be used as a vehicle in this scheme.

                Mah v. The Queen 93 D.T.C 5267 (T.C.C.)

13.             Accordingly, the contributions made before the tax liability of Dr. Wannan in taxation year 1995 may not be collected in this case against the Appellant by way of an assessment under Section 160 of the Income Tax Act.

Achtem v Canada [1995] T.C.J. No. 289; [1995] 1 C.T.C. 2941 (T.C.C.)

(iii)        The Dividend of $72,013.88 in the Bankruptcy Proceeding Extinguishes the Tax Debt Existing on the Dates of the Relevant Transfers.

14.             Any valid assessment under Section 160 against the Appellant, assuming that the tax debts have not been rendered NIL by the bankruptcy discharge of Dr. Wannan, have, nonetheless, been extinguished by payment pursuant to Section 160(3).

15.             The Appellant submits that the sum of $72,013.88 received by CCRA as dividend payment from the Trustee, being an involuntary payment, constitutes payment that should be applied on the "first money in, first money out" basis, as recognized in Clayton's Case as the common-law rule. Further Dr. Wannan may designate to the Minister before receipt of the final dividend how the dividend payments may be applied..

Devaynes v. Noble; Clayton's Case (1816), 1 Mer. 572, 35 E.R. 781. For a recognition of the existence of this rule in Canada, see: Polish Combatants' Association Credit Union Ltd. v. Moge (1984), 9 D.L.R. (4th) 60; Greymac Trust Co. v. Ontario, [1988] 2 S.C.R. 172; Canada v. Union Gas Ltd., [1987] F.C.J. No. 528 (F.C.T.D.)

16.             Accordingly, even assuming that there are existing tax debts of Dr. Wannan after his bankruptcy discharge and the Section 160 assessment against the Appellant is valid, the tax debts for which the Appellant could be validly assessed have been discharged by payment and no collection may be enforced against the Appellant.

(iv)        The Assessment is Statute-Barred

17.             Section 160(2) authorizes the assessment made against the Appellant in this case. This provision authorizes that the provision of Division I, of Part I, apply "with any modifications that circumstances require, in respect of an assessment made under this section as though it [the assessment] had been made under Section 152."

18.             The Appellant submits that the "modification" that circumstances require are as follows:

             (a)         The limitation period provided in Section 152(4) applies to an assessment made under Section 160;

(b)         The three (3) year period is to be calculated from the date of the transfer, or, in other words, the normal reassessment period, defined in Section 152(3.1), for the purposes of Section 160, as the period that ends three (3) years after the transfer;

19.             Accordingly, as provided in Section 152(5) and as modified in computing the liability of the Appellant for the purpose of an assessment pursuant to Section 160, any transfer earlier than three (3) years from the date of assessment may not be included in the Section 160 assessment.

20.             To construe the provision of Section 160(2) differently is to create a liability of the transferee without a period of limitation. The transferee, compared to the transferor-tax debtor, is under the spectre of perpetual liability. Such a result is unfair and it creates an uncertainty that is anathema to the legal order as a whole, and to the integrity of transactions generally.

SUBMISSIONS OF COUNSEL FOR THE RESPONDENT

[11]          Counsel for the Respondent analyzed the relevant parts of subsection 160(1) of the Act and concluded that all the issues are to be resolved in favour of the Respondent. Namely, that there were transfers at a time when tax was owing. That there is no doubt that contributions to the Spousal RRSP constitute transfers of property as contemplated in subsection 160(1). That there is no question of any assessment being statute-barred and that the discharge of Dr. Wannan from bankruptcy and the payment of the dividends out of the bankruptcy estate do not operate to discharge the liability of the Appellant.

ANALYSIS

[12]          The relevant parts of subsection 160(1) read as follows:

(1)            Where a person has...transferred property... to

               

                (a)            the person's spouse...

                the following rules apply:

(d)            the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax...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 [transfer to the spouse], in respect of any income from...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 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.

[13]          Subsection 160(1) makes it clear that joint and several liability arises for the tax owing by a taxpayer's spouse as a result of a transfer of property from the spouse to the taxpayer. Although it might seem somewhat elementary, I turn to whether the two conditions of a) a transfer and, b) of property were satisfied in this case.

[14]          With respect to the question of whether there was a transfer from the taxpayer's spouse to the taxpayer in the case at bar, I note that the Appellant uses the term "transfer" almost begrudgingly in her factum. The term is not defined under subsection 248(1) of the Act. In Black's Law Dictionary, Sixth Edition, the definition "transfer" begins "[a]n act of the parties, or of the law, by which the title to property is conveyed from one person to another; specifically, to change over the possession or control... To sell or give".

[15]          It seems quite obvious that a transfer did take place in the case at bar. The Appellant's spouse made contributions to her RRSP. Presumably, once in the RRSP, these funds were solely under her control and therefore, given the apparent absence of any other stipulations, in her possession. The case law treats acts similar to the one in question automatically as transfers.

[16]          With regards to the second condition, the Appellant argued that "the context of section 160 makes clear [that] "property" within the meaning of Section 160 does not include money".

[17]          The definition of "property" in the Act reads as follows:

Section 248(1): Definitions

"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes...

(b) unless a contrary intention is evident, money,...

[18]          There is no evidence of such a contrary intention in section 160 of the Act; "property" is inclusive of money. Moreover, the case law finds the concept so self-evident, that it does not bother to make a distinction between transfers of real property or transfers of money.

[19]          To summarize, since there was a transfer of property from the taxpayer's spouse to the taxpayer, the taxpayer would be joint and severally liable for tax owing by her spouse. The limits on her liability are discussed below.

[20]          The Appellant argues her spouse did not know about the Minister's assessment in respect of the 1988 and 1989 taxation years until 1993, and consequently contributions prior to this date should not be considered in calculating the Appellant's joint and several liability. However, it is well-founded that tax liability arises from taxable income, not from an assessment or reassessment.

[21]          In paragraph 5 of Heavyside v. Canada, [1996] T.C.J. No. 170 (T.C.C.) Beaubier, J. stated:

It has been established that a taxpayer's debt is created by his taxable income, not by an assessment or reassessment (The Queen v. Simard-Beaudry Inc. et al, 71 D.T.C. 5511). The result is that a taxpayer is liable for tax in respect of a taxation year even though the Minister of National Revenue has not assessed it.

[22]          The taxable income in this case arose from the 1988 and 1989 taxation years. Although it was the taxable income of her husband, and it was his responsibility to pay the subsequent tax owing, the Appellant became joint and severally liable for that tax owing by virtue of the RRSP contributions.

[23]          The Appellant argues that the assessments in this case, both as to the original assessment of the Appellant taxpayer's spouse and to her own, joint and several liability, are statute-barred. Although there do exist statutory provisions for the timing of assessments by the Minister, specifically in section 152, subsection 160(2)

(at that time) stated:

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, with such modifications as the circumstances require, in respect of an assessment made under this section as though it had been made under section 152.

[24]          It is clear that subsection 160(2) stipulates that the Minister may 'at any time' assess the transferee in respect of the tax owing by the transferor at the time of the transfer. The oddity that arises in this case is that the RRSP contributions in question were periodic transfers. Hence, subsection 160(2) allows the Minister to assess the Appellant for tax owing each and every year that a contribution was made.

[25]          Furthermore, according to paragraph 22,780 of the CCH Commentary, subsection 160(2) provides that the Minister may assess each taxpayer that is jointly and severally liable under section 160 and that such an assessment will have the same effect as an assessment under section 152.

[26]          In summary, the liability for tax resulting from a transfer is triggered at the time of that transfer, but extends to amounts owing from preceding years. Since Dr. Wannan owed tax at the time he made the RRSP contributions, the Appellant became jointly and severally liable for those amounts beginning in 1989, even if the tax owing arose from 1988 or before.

[27]          Paragraph 160(1)(e) means that the amount for which the taxpayer is liable is 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,

[28]          In this case, the property in question was the contributions to the spousal RRSP. There was no consideration paid for this transfer. Therefore the fair market value of the property transferred was the dollar amount of the actual contributions.

[29]          Dr. Wannan was assessed in 1993 for tax owing in respect of the 1988 and 1989 taxation years. Despite owing this amount, it is not contested that Dr. Wannan made contributions from January 1, 1989 to December 31, 1994 which exceeded this amount.

[30]          The lesser of the amount of the contributions and the total tax owing by the spouse in respect of the 1988 and 1989 taxation years is therefore the total amount of tax owing by Dr. Wannan.

[31]          The Appellant argues that the tax liability for 1988 is not covered by this case as the transfer of property occurred in 1989 and thereafter. Paragraph 160(1)(e), however, explicitly states that the Appellant's liability extends to tax owing by her spouse in the year of the transfer or any preceding year. As a result, the Appellant is liable for tax owing by her spouse for the 1988 taxation year.

[32]          The Federal Court of Appeal in Heavyside v. Canada 1996 F.C.J. No. 1608 (F.C.A.), set aside all previous decisions which associated the discharge from bankruptcy to a person's debt rather than to a person. At paragraph 12, it reads:

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 [See Note 5 below], when referring to section 179 of the Bankruptcy Act [See Note 6 below], 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).   

Note 6: Section 179 of The Bankruptcy Act, R.S.C. 1985, c. B-3 reads as follows:

s. 179. An order of discharge does not release a person who at the date of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with him, or a person who was surety or in the nature of a surety for him.

[33]          In paragraph 10 of Heavyside, Décary, J. noted that even if a taxpayer is assessed after the taxpayer's spouse is discharged from bankruptcy, it is "irrelevant as far as her own liability is concerned."

[34]          I am also satisfied that the amounts transferred should not be reduced by reason of the fact that the Appellant theoretically might have been required had she collapsed the Spousal RRSP to pay tax. It was open to her to use other assets than the Spousal RRSP and thus avoid the tax.

SPECIFIC AMOUNTS FOR WHICH THE APPELLANT IS LIABLE

[35]          Given the above reasoning, I can now put specific figures on the Appellant's liability.

[36]          The amount of tax owing by Dr. Wannan for the 1988 and 1989 taxation years was $26,333.27. Both the Appellant and the Respondent have indicated that the contributions to the Appellant's RRSP from Dr. Wannan for the years 1989 to 1994 exceeded this amount. According to subsection 160(1) of the Act, the Appellant is therefore liable for the lesser of these amounts, namely $26,333.27, in respect of tax owing by Dr. Wannan for the 1988 and 1989 taxation years.

[37]          The amount of tax owing by Dr. Wannan for the 1995 taxation year was $150,607.60. The Appellant contends that the contributions to her RRSP from Dr. Wannan for the 1995 taxation year totalled $7,500 and the Respondent accepts this figure. Therefore, the Appellant's total liability will be $33,833.27 ($26,333.27 + $7,500).

CONCLUSION

[38]          In my opinion for the following principle reasons the appeals cannot succeed:

1.              Subsection 160(1) of the Act is applicable to render the Appellant liable as transferee and subsection 160(2) states the Minister may assess a transferee at any time.

2.              The decision of the Federal Court of Appeal in Heavyside makes it clear that the discharge of a bankrupt does not release the transferee from her liability.

3.              The assessments in question are not statute barred.

4.              The Gamache and Caplan decisions were wrongly decided.

5.              I do not agree that in the circumstances presented in these appeals the principle of first-in, first-out applies. Nor can the debtor choose what debts are discharged by the bankruptcy dividends. The bankruptcy dividends of $72,013.88 (even including in that calculation the late payment contemplated in the Submission of the Appellant) reduce the total claim by the Minister against the bankrupt estate from $178,074.94 to $106,061.06. Thus, the total indebtedness not paid was $106,061.06. This amount greatly exceeds the amount for which the Appellant is liable namely $33,833.27. To permit the Appellant or Dr. Wannan to be able to apply the $72,013.88 against the indebtedness of $33,833.27 is to defeat the whole purpose of subsection 160(1).

[39]          Moreover, even if Dr. Wannan could have allocated the $72,013.88 against the $33,833.27, which I don't believe he legally could, he did not do so. In any event the payment was made by the Trustee in bankruptcy who acts in the interest of the creditors, not the bankrupt nor a person jointly and severally liable with the bankrupt.

[40]          For all the above reasons the appeals are dismissed with costs.

               

Signed at Ottawa, Canada, this 10th day of December, 2002.

"T. O'Connor"

J.T.C.C.COURT FILE NO.:                                                   2001-1349(IT)G

STYLE OF CAUSE:                                                               Nancy Jo Wannan v. HMTQ                             

PLACE OF HEARING:                                                         Ottawa, Canada

DATE OF HEARING:                                                           October 7, 2002

REASONS FOR JUDGMENT BY:                      The Honourable Judge T. O'Connor

DATE OF JUDGMENT:                                                       December 10, 2002

APPEARANCES:

Counsel for the Appellant:                  Emilo S. Binavince

Counsel for the Respondent:                              Charles Camirand

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1349(IT)G

BETWEEN:

NANCY JO WANNAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on October 7, 2002 at Ottawa, Canada

by the Honourable Judge Terrence O'Connor

Appearances

Counsel for the Appellant: Emilo S. Binavince

Counsel for the Respondent:              Charles Camirand

JUDGMENT

                The appeals from the reassessments made under the Income Tax Act for the 1989, 1990, 1991, 1992, 1993, 1994 and 1995 taxation years are dismissed with costs.

Signed at Ottawa, Canada, this 10th day of December 2002.

"T. O'Connor"

J.T.C.C.