Citation: 2010TCC535
Date: 20101019
Docket: 2008-1259(IT)G
BETWEEN:
CONSTANCE PICKARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1]
The Appellant, Constance Pickard,
is appealing the assessment of her 2002, 2003, 2004 and 2005 taxation years. Pursuant
to subsection 160(1) of the Income Tax Act, the Minister of National
Revenue assessed tax in respect of certain cheques which her husband, a tax
debtor, had directed to be deposited into her solely held bank account.
[2]
The relevant portions of
subsection 160(1) of the Act are set out below:
160(1) Tax
liability re property transferred not at arm's length. Where a person has… transferred
property … directly … by means of a trust or by any other means whatever, to
(a) the
person's spouse
…
the following
rules apply:
…
(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.
[3]
In Livingston v. R., the Federal Court of
Appeal enunciated four conditions necessary for the application of subsection
160(1); in the present matter, the only one in dispute is whether any
consideration was given by Mrs. Pickard in respect of her husband’s transfer of
the cheques to her:
In light of
the clear meaning of the words of section 160(1), the criteria to apply when
considering subsection 160(1) are self-evident:
1)
The transferor must be liable to pay tax under the Act at the time of
transfer;
2)
There must be a transfer of property, either directly or indirectly, by
means of a trust or by any other means whatever;
3)
The transferee must either be:
i. The
transferor’s spouse or common-law partner at the time of transfer or a person
who has since become the person’s spouse or common-law partner;
ii.
A person who was under 18 years of age at the time of transfer; or
iii.
A person with whom the transfer was not dealing at arm’s length.
4)
The fair market value of the property transferred must exceed the fair
market value for the consideration given by the transferee.
Facts
[4]
Constance and Monte Pickard have
been married for over 30 years. For most of that time, Mr. Pickard operated
various construction businesses and yet, never had a bank account. It also
happens that for most of that time, he had an outstanding tax debt. It was
still outstanding during the taxation years under appeal. From 2002 to 2005, he
caused certain cheques payable to him to be deposited directly into Mrs.
Pickard’s personal account: in April 2002, a GST credit of $1,074 and between
2003 and 2005, wages totalling $47,744.41. By 2006, Mr. Pickard’s tax debt
totalled some $62,000.
[5]
Mr. Pickard’s primary business
operation between 2003 and 2005 was a sole proprietorship (“M.B. Pickard Sole
Proprietorship”) involved in construction project management but he also had a holding
company, Montcom Holdings Inc. (“Montcom”); Montcom was a shareholder of yet
another of Mr. Pickard’s companies, Capital City Construction Ltd.
[6]
Because Mr. Pickard “was terrible
with paperwork”, it had been decided early on in their relationship
that Mrs. Pickard would look after paying their bills. She had no formal
training in bookkeeping or accounting and to her credit, learned to do by
doing. Throughout their marriage, Mrs. Pickard maintained her own personal bank
account; during the taxation years under appeal, she also had a joint line of
credit with Mr. Pickard. Funds from Mrs. Pickard’s personal account and the
joint line of credit were used for the couple’s personal financial needs as
well as for M.B. Pickard Sole Proprietorship, Montcom, and Capital City
Construction Ltd. Operating in this fashion made records-keeping much more
complicated than it would have been had separate accounts been established for
their personal use and for each of the business entities. Mrs. Pickard was
candid in her testimony that her records were not always current or complete.
[7]
In 2003, the construction business
was slow. As a result, Mr. Pickard took a job with Claridge Homes (“Claridge”).
When asked by Claridge to authorize the direct deposit of his wages into an
account, he inadvertently provided them with a blank cheque from Mrs. Pickard’s
personal bank account. When she noticed the deposit in her account of Mr.
Pickard’s first pay cheque, she spoke to her husband about correcting the
error; apparently because she would be the one paying his personal and business
bills, Mr. Pickard decided to leave things as they were. Thus, it was that from
November 2003 to February 2005, his employment income from Claridge of $47,744.71
was deposited into her personal account.
[8]
Mrs. Pickard repeated throughout
her testimony that it had always been agreed that any amounts Mr. Pickard caused
to be deposited into her account were to be used only in payment of his
personal and sole proprietorship expenses.
Appellant’s
Position
[9]
Counsel for the Appellant
submitted that there was ample evidence to support the finding that Mrs.
Pickard had given consideration for the amounts deposited in her account:
firstly, by having promised to pay his personal and sole proprietorship debts
and further, by having performed secretarial and bookkeeping services for M.B.
Pickard Sole Proprietorship, her income from such activities having been duly
reported in 2004 and 2005 as business income of $30,000 and $20,000,
respectively. The deposited amounts were held by Mrs. Pickard in trust for the
exclusive use of paying Mr. Pickard’s indebtedness to his business and personal
creditors. In these circumstances, counsel contended, it could not be said that
Mrs. Pickard had given no consideration for the amounts deposited in her
account between 2002 and 2005.
Respondent’s
Position
[10]
Counsel for the Respondent argued
that there was insufficient evidence of any consideration having been given for
the amounts deposited in Mrs. Pickard’s account and accordingly, the Minister
was justified in assessing under subsection 160(1). Counsel put in
question the credibility of the Appellant’s testimony and asked the Court to
draw a negative inference from the fact that Mr. Pickard had not been
called as a witness for the Appellant.
Analysis
[11]
In support of Mrs. Pickard’s
position, counsel for the Appellant made a thorough review of a series of cases
involving non-arm’s length transfers of property from a tax debtor.
In Livingston, Sexton, J.A. expressed the purpose of subsection 160(1)
as follows:
18 The
purpose of subsection 160(1) of the Act is especially crucial to inform the
application of these criteria. In Medland v. Canada … this Court
concluded that “the object and spirit of subsection 160(1), is to prevent a
taxpayer from transferring his property to his spouse … in order to thwart the
Minister’s efforts to collect the money which is owed to him”… More apposite to
this case, the Tax Court of Canada has held that the purpose of subsection
160(1) would be defeated where a transferor allows a transferee to use the
money to pay the debts of the transferor for the purpose of preferring certain
creditors over the Canada Revenue Agency (Raphael v. Canada 2000 D.T.C.
2434 … at paragraph 19).
[12]
The present matter is one which,
on its face, is caught by that statement of purpose: Mr. Pickard’s direction to
deposit his GST cheque and employment income directly into Mrs. Pickard’s
solely held account could have thwarted the Minister’ efforts to collect his
outstanding tax debt and allowed Mrs. Pickard to prefer certain other creditors
over the Canada Revenue Agency.
[13]
Within weeks of Livingston
came the decision of the Federal Court of Appeal in Waugh v. Her Majesty the
Queen, a case very similar on its facts to the case at bar. In Waugh,
the tax debtor husband had endorsed cheques payable to him which were then
deposited into his wife’s account. On appeal, the wife, like Mrs. Pickard,
argued that she had “provided consideration in exchange for the property that
was transferred to her by her husband by assisting him in the business venture”.
In rejecting this contention, Ryer, J.A. wrote:
[10] In Machtinger
v. Canada … this Court held that in the face of an assumption by the
Minister that no consideration has been provided for a transfer of property, as
contemplated by subsection 160(1) of the ITA, the transferee has the
burden of establishing the fair market value of any consideration that has
allegedly been provided in exchange for the transferred property.
[11] In
the circumstances before us, we are unable to conclude that Mrs. Waugh has
provided any evidence that would refute the Minister’s assumption that no
consideration was provided by her in exchange for any of the funds that were
deposited into her account by her husband. We note that if Mrs. Waugh had
performed services in respect of the new business venture, as consideration for
funds that were deposited into her account, such consideration would constitute
employment or business income to her. However, nowhere in the record is there
any evidence that any corresponding amount of employment or business
income has been reported by her in any tax return or returns for the period in
which funds were deposited into her account by her husband. [Emphasis added.]
[14]
In an earlier husband-wife
transfer case, Raphael v. Her Majesty the Queen,
the Federal Court of Appeal rejected the transferee’s argument that her promise
to pay out the monies received from her husband on his direction was valid
consideration under subsection 160(1):
[10] If
indeed the wife had made a legally enforceable promise to pay out monies
only on the husband’s direction to his creditors in amounts equal to the
monies transferred, this might well have constituted sufficient
consideration in order to avoid the application of subsection 160(1). However,
this was not the evidence nor was it the finding of the Tax Court Judge. The
Appellant when asked whether she had any legal obligation to pay bills as
directed by the husband agreed that she had no such legal obligation and that
it was only a moral obligation. She admitted further, that he could not
force her to pay bills which he wanted paid. If of course there was a legal
obligation based on a trust, he could have compelled such payment. This
evidence confirms that the Appellant really only felt a moral obligation and we
agree with the Tax Court judge that that is not sufficient consideration.
[11] It
is also noteworthy that all of the monies transferred did not go to payment of
the husband’s debts. The monies were used for other purposes as well. Thus,
this evidence does not support the alleged promise to use the husband’s funds
only for the payment of the husband’s creditors in amounts equal to the money
transferred. [Emphasis added.]
[15]
Applying the principles from Livingston,
Waugh and Raphael to the present case, the onus is on Mrs.
Pickard to establish the fair market value of the consideration given for the
amounts deposited in her account pursuant to a legally binding agreement and
further, that there is a correspondence between that value and the amounts
reported as income. That is a difficult onus to meet, especially in a non-arm’s
length transaction where one of the parties to the alleged agreement does not
testify, where there is an absence of corroborating documentary evidence and
where, to the extent records do exist, their accuracy is questionable.
[16]
It was against this background
that Mrs. Pickard testified. I regret to say her evidence left the impression
of having been pieced together after the fact to legitimize a course of conduct
which, on its face, looked somewhat suspicious. There is no dispute that Mrs.
Pickard had known for many years that her husband had an outstanding tax debt.
Without explaining why, Mrs. Pickard said that throughout their marriage, their
residence had been kept in her name only, as had been property taxes and
utility bills. Nor was there any reasonable explanation of why Mr. Pickard, an
experienced businessman with at least three commercial enterprises, would not
have followed the normal route of establishing a separate account for each business.
Equally unusual, a truck he used for his work through M.B. Pickard Sole
Proprietorship was registered to Capital City Construction Ltd. even though, according
to Mrs. Pickard, that company had not been actively in business for many years.
At the same time, Capital City Construction Ltd. continued to be named in invoices
as the purchaser of materials which had actually been ordered for and used by
M.B. Pickard Sole Proprietorship. Mrs. Pickard’s explanation for why this
“error” had not been corrected was that the suppliers persisted in using their
outdated billing records rather than the new information she had provided. While
perhaps not significant individually, these little facts combined to diminish
the overall credibility of the Appellant’s evidence.
[17]
Turning, then, to the question
posed in Raphael, was there a “legally enforceable promise” between Mrs.
Pickard and her husband? In my view, there was not. It is significant that
Mr. Pickard’s direction to Claridge to deposit his employment cheques in
his wife’s account was not deliberate; when searching for a blank cheque to
provide to his employer, he had mistakenly taken one of Mrs. Pickard’s personal
account cheques instead of the joint line of credit. At that time, Mrs. Pickard
was not even aware of her husband’s actions. Thus, it can hardly be said that
there was an agreement between them for the treatment of the deposited amounts
when the funds first appeared in her account.
[18]
It is also noteworthy that there
was no written agreement between Mrs. Pickard and her husband to document
their arrangement. In 1995 when they wished to clarify their understanding in
respect of their respective interests in Montcom (described by Mrs. Pickard as a
not very active holding company), that agreement was reduced to writing. Yet, when it came to the
terms upon which Mr. Pickard would place virtually all of his income for a
three-year period under his wife’s exclusive control, they had nothing more
than a “verbal understanding”. Although Mrs. Pickard recited many times that
her husband had deposited the amounts in her account with explicit directions
to use it only for the payment of his debts, far more credible was her description
of their arrangement that he would earn the income and she would pay the bills.
As she described it in the passage below, theirs was an “old-fashioned”
marriage:
Q. This arrangement that you had was more of a –- I think you
called it a "marital" thing, more than anything else.
A. It was a common understanding, yes, between -- I don't know
what marriages are like now, but we are sort of old‑fashioned.
Q. Yes. But it is more of an informal thing where you take care
of him and he takes care of you and that sort of thing? You are married and –
A. He used to say, “I will go out and earn the money, and you
look after the bills.” I was looking after his company.
Q. There wasn't any detailed book where you would say, “Monte, I
paid this for you, and I received this,” and some kind of balance?
A. I didn't keep a very good record of it. I used to just have
the cheques that were returned in my statement, so I would show him that I have
paid this, this, and this for him, and he owed me this much money. I didn’t
always get it.
Q. But you couldn't tell how much it was?
A. No. It was a lot.
Q. You can’t come up with an actual figure?
A. No, only what I have cheques for.
Q. Perhaps we can look at the Appellant's Book of Documents. At
tab 17, you spent some time on this.
A. Pardon me?
Q. Tab 17, please.
A. Yes.
Q. This is roughly what I had in mind when I said you don't keep
track. I think you agree that you didn't keep track. Right?
A. Not very good, no. I am not a graduate bookkeeper. I was taught
a little bit on the One‑[Write] System, and it is just sort of self‑taught.
I don’t know how to keep proper bookkeeping procedures the way a qualified
bookkeeper would.
Q. This starts in December 9, 2003, and it goes to
January 12, 2005. Right?
A. Yes.
Q. These are some payments that you made with respect to various
things. Right?
A. Yes.
Q. But you say that is not a comprehensive list?
A. It is not complete. I am sure I have missed a fair bit. I
thought I should try and keep some form of record of what I have been lending
out of my bank account so that I know what has gone out and for what.
[19]
Unlike the transferee in Raphael,
Mrs. Pickard did not explicitly concede that she had no legal obligation to
deal with the funds in her account according to her husband’s direction. Her
actions, however, speak louder than her words. As the sole account holder, the
fact is that only she could control the use of the funds deposited therein.
There was nothing in writing to have prevented her from dealing with the
amounts deposited in any manner she chose. This is indeed what happened: Mrs.
Pickard testified that as well as paying Mr. Pickard’s personal and
business expenses, she also used money from the account for her personal use,
for example, small purchases at Sears or Zellers, property taxes for the
residence and various utility bills which were in her name only. She also made
payments for Montcom and Capital City Construction Ltd. and towards their joint
line of credit. While there is nothing inherently wrong with Mrs. Pickard having
done so, such conduct is inconsistent with her testimony of an agreement whereby
all monies deposited by Mr. Pickard in her account were to be used exclusively
for the payment of his personal and sole proprietorship debts.
[20]
In addition to this weakness in
the Appellant’s case, as in Raphael, there is no clear link between the
amounts deposited and the bills paid. This has a lot to do with the Pickards’
fiscal management style of constantly moving money around between Mrs.
Pickard’s personal account, the joint line of credit and Montcom’s corporate
account and by not maintaining reliable records of such transactions. Further
complicating matters is the fact that in 2004 and 2005, M.B. Pickard Sole
Proprietorship was receiving payments from clients for various construction
projects. In 2004, for example, a certain Mr. Hum made at least one payment for
services rendered which apparently made its way into the joint line of credit.
Whether such amounts were intermingled with Mr. Pickard’s employment income in
Mrs. Pickard’s account and/or used to pay Mr. Pickard’s bills is simply not
clear.
[21]
It is equally unclear whether Mrs.
Pickard provided consideration for the deposit of the funds by performing bookkeeping
and secretarial services for her husband’s business. It seems more likely that the
provision of such services was simply part of their domestic marital
arrangement. Although unlike the transferee in Waugh Mrs. Pickard
reported income in each of the taxation years, the amounts reported bear little
correlation to the reality of her situation. Mrs. Pickard admitted that she had
no fixed salary. Her practice was simply to take what she needed from funds Mr. Pickard
deposited into her account or from the joint line of credit, depending on the
availability of funds at any given time. If there were insufficient funds in
one account, she would take money from another with a reminder to herself to
replace the funds taken when the other account was restored to health.
Sometimes she did; other times, not. While she tried to record these
transactions accurately and in a timely fashion, she was not always successful:
Q. If we take a look at tab 17, page 150, this is the document,
your honour, that counsel had some qualms about.
Can you tell us what this is?
A. I had this on a ledger sheet. I tried to keep track of the
things I had paid on Monte's behalf. I started‑‑ but I didn't do a
very good job of it because I didn't continue it‑‑ but I kept as
much as I could. Whenever I paid anything on his behalf, I would put it in as a
payment. Then when I got money, whether it be if I took money out of the line
of credit or from Claridge Homes or if he gave me a cheque from there, I would
mark it down as a payment towards ‑‑ not Claridge Homes, but like a
paycheque. Anyway, if Monte gave me back any money out of the line of credit, I
would mark it down and show that he paid that off or paid off a certain portion
of that balance that he owed. Then I continued it down.
…
Q. Again, why did you prepare this document?
A. So I would know how much he owed me because there was a lot I
didn't keep track of. I'm sure there is a lot out there that I don't even have
a record of what I have paid for.
[22]
At year’s end, her notes, together
with various invoices and bank statements, were turned over to her husband’s
accountant who used them in the preparation of her income tax returns. Mrs.
Pickard had no involvement in and could not explain the determination of the
income amounts shown; she merely accepted whatever amounts the accountant had
allocated to any particular source in any particular year. In these
circumstances, the amounts reported fall far short of evidence of being a “corresponding
amount of employment or business income” capable of establishing the fair market value of services rendered as
consideration for the funds deposited in Mrs. Pickard’s account.
[23]
As for the Appellant’s contention
regarding the deposited funds having been held in trust, the jurisprudence is
clear that subsection 160(1) applies to a transfer of property “by a trust”; in
any case, there is no evidence of any such trust agreement.
[24]
As Mrs. Pickard has failed to
refute the assumptions upon which the Minister’s assessment was based, the
appeals of the taxation years are dismissed, with costs to the Respondent.
Signed at Ottawa,
Canada, this 19th day of October, 2010.
“G.A. Sheridan”
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