Citation: 2009 TCC 526
Date: 20091103
Docket: 2006-2851(IT)G
2006-3521(GST)G
BETWEEN:
CHRISTOPHER MICHAEL MARGETTS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Paris J.
[1] The Appellant is challenging four
assessments totalling $187,757.49 made by the Minister of National Revenue, two
under subsection 160(1) of the Income Tax Act (“ITA”) and two
under subsection 325(1) of the Excise Tax Act (“ETA”).
[2] The Appellant was assessed on the basis that
his father, Bruce Margetts, transferred a one-third interest in certain
property located in Halfmoon
Bay, British Columbia (the
“Property”) to him for no consideration while he, Bruce Margetts, had an unpaid
income tax liability of $53,700.62 and an unpaid GST liability of $134,056.87.
[3] It is the Appellant’s position that Bruce
Margetts was holding the one-third interest in the Property in trust, and
therefore only transferred a bare legal interest to the Appellant. He says that
this transfer was not sufficient to engage subsections 160(1) of the ITA
and 325(1) of the ETA.
[4] In the alternative, the Appellant says that
even if Bruce held a beneficial interest in the Property, he (the Appellant)
received the interest in his capacity as trustee of the Bruce Margetts Family
Trust, and that the transfer would fall outside the scope of subsections 160(1)
and 325(1).
[5] In the further alternative, the Appellant
says that if the interest he received from Bruce Margetts was a beneficial interest
in the Property, the fair market value of that interest should be reduced by
the amount outstanding on two mortgages against the property at the time of the
transfer.
Facts
[6] At some point in the early or mid-1980s,
the Appellant’s grandfather, Ronald Margetts, purchased vacant land in Halfmoon Bay, British
Columbia, to use as a recreational
property for his family. A house was moved onto the land, and improvements were
made to both the land and the house over time. According to the evidence,
Ronald’s wife Mabel and his children, Leigh, Catherine and Bruce, performed
some of this work. The Property was used by the entire family and later by the
families of Leigh, Catherine and Bruce.
[7] In 1989, Ronald died and Mabel inherited
the Property. There was a mortgage and a judgment against it at the time, and
Mabel was unable to make the mortgage payments. After lengthy discussions
between Mabel and her children, it was decided that Bruce and Leigh would each
pay one-half of the mortgage payments and the maintenance expenses. Catherine
was not required to contribute to the payments because she did not have the
financial means to do so. It was also agreed that Mabel would sell the Property
to Bruce, Leigh and Catherine for a purchase price of $200,000, less the amount
of the mortgages outstanding on the property. The sale was also made subject to
certain conditions which I will set out below.
[8] No written agreement regarding the sale of
the Property was prepared until several years later, possibly as late as 1997
when the parties executed two agreements, both dated “as of November 20, 1989”.
In the first agreement, entitled “Transfer of Beneficial Interest and Declaration
of Trust” (the “Transfer Agreement”) the parties acknowledged that Mabel had
agreed to sell the Property to Bruce, Leigh and Cathy and that they had agreed
to purchase it for $200,000 and that they had given a demand promissory note
for $200,000 to Mabel. Mabel also agreed that she was holding title to the Property
as agent of and in trust for Bruce, Leigh and Catherine until they registered
the transfer. Paragraphs 5 and 6 of the Transfer Agreement stated:
5 The Grantor does hereby grant, assign,
transfer and convey to the Grantees all of the beneficial estate, right, title,
interest, inheritance, trust, profit, claim and demand of the Grantor in and to
the Lands and every part and parcel thereof together with all the appurtenances
to the Grantees, which the Grantor agreed and intended to grant, assign,
transfer and convey in 1989.
6 The Grantor agrees and declares that she
holds the Lands as agent of and in trust for the Grantees.
Under paragraph 10(b) of the Transfer Agreement, Mabel
was given the use of the Property during her lifetime, in exchange for the
payment of property taxes and utilities:
10 The transfer herein contemplated is made expressly subject
to the following terms and conditions:
(b) The Grantees hereby covenant and agree
that the Grantor shall have, and hereby grant to the Grantor the use,
occupation and enjoyment of the Lands during her lifetime free of rent, she at
her own expense to pay for all taxes and insurance premiums, and all utilities
consumed in and about the Lands;
Under paragraph 10(e) of the Agreement, Bruce, Leigh
and Catherine agreed to enter into a further agreement:
(e) It is a condition of the granting of the
lands to the Grantees that they shall enter into an agreement in the form of
the draft which is attached hereto as Schedule “B”, and the Grantees covenant
and agree to enter into and agree to be bound by such agreement, each of the
Grantees acknowledging that the consideration flowing to the Grantor includes
in part the execution of such agreement by the Grantees;
[9] The preamble to the agreement (the “Second
Agreement”) referred to in paragraph 10(e) of the Transfer Agreement stated
that it was intended to deal with the parties’ “respective rights and
obligations with respect to the Lands, and the management and disposition
thereof both before and after the death of Mabel Margetts”. It set out, in
part, that Bruce, Leigh and Catherine would contribute equally to the upkeep of
the property, that Bruce and Leigh would pay the mortgage payments, and that, subject
to Mabel’s right of occupancy, Bruce, Leigh and Catherine would be entitled to
equal use of the property. The Second Agreement also stated at paragraph 7 that
Mabel intended the Property to remain a “family asset”:
7. Each of the parties acknowledges and
agrees that it is the intention of Mabel Margetts, the Covenantee, and of
the parties that the Lands shall become and remain a family asset to be enjoyed
by the issue of Ronald and Mabel Margetts, and to that end that they shall use
their best efforts to retain and maintain the Lands such that the issue of
Ronald and Mabel Margetts may use and enjoy the Lands as she intended.
[10] In March 2002, a transfer of the Property
from Mabel to Bruce, Leigh, and Catherine, as joint tenants, was registered in
the Land Titles Office. The evidence did not disclose why the title was
transferred at that time but it may have been necessary in order to place an
additional mortgage on the property which was done shortly thereafter, The new mortgage,
for $188,000, was signed by Bruce, Leigh and Catherine. Out of the mortgage
proceeds, $28,000 was used for repairs to the house and $160,000 went to Leigh
for use in his business. Leigh made payments in respect of the proceeds he
received, and Leigh and Bruce each paid one-half of the payments in respect of
the $28,000 used for repairs. Bruce and Leigh continued to split the payments
on the pre-existing mortgage.
[11] In April 2004, two corporations of which
Bruce was the sole director (Crane Force Ltd. and Crane Master Sales Ltd.) were
placed into bankruptcy. The liabilities of the corporations included unremitted
source deductions of income tax and unremitted GST.
[12] According to Bruce’s testimony, his mother
became concerned that as a result of the bankruptcy of the corporations, he
would not “be able to live up to his obligations” under the 1989 agreements
respecting the Property and sent him a letter dated April 23, 2004 which read:
April 23rd/04
2187 McMullen Ave.
Vancouver, BC V6L 3B3
Dear Bruce,
Due to your circumstances, I do not believe that you can live up to
your obligations per the agreement between Ronald & Mabel Margetts.
I would like the situation dealt with.
Sincerely,
Mabel Margetts
[13] On October 10, 2004, Mabel directed Bruce
to return his interest in the property to her on the basis that she had made a
demand on him to repay his share of the $200,000 promissory note given in
payment for the property, and that he had not complied with the demand. She
further directed Bruce to transfer his interest in the property to the
Appellant in satisfaction of her demand for the return of the interest to her.
These directions were contained in a document Mabel gave to Bruce at a family
gathering.
[14] On the same date, Mabel purported to set up
the Bruce Margetts Family Trust (the “Family Trust”) for the benefit of “Bruce
Margetts, his lawful spouse, his children and grandchildren and such others who
may be added from time to time”. According to the trust documents, the subject
matter of the trust was an undivided one-third interest in the Property. The
Appellant was appointed as trustee of the Family Trust.
[15] Also on October 10, 2004, Mabel, Bruce,
Leigh, Catherine and the Appellant executed an agreement entitled “Transfer of
Legal Interest and Assignment of Contracts Dated November 30, 1989”, whereby
Bruce agreed to transfer his interest in the Property, and all his rights and
obligations under the two 1989 agreements to the Appellant. The Appellant
agreed to perform all the obligations of Bruce Margetts contained in the 1989
agreements.
[16] On October 26, 2004, a transfer of Bruce’s
interest in the Property to the Appellant was registered in the Land Titles
Office.
[17] On November 4, 2006, Bruce was assessed by
the Minister under the director’s liability provisions of the ITA and
the ETA for the amounts of income tax source deductions and GST that his
two corporations had failed to remit, along with accrued interest. On September
12, 2005, the Appellant was assessed under subsection 160(1) of the Act and
subsection 325(1) of the ITA as a result of the transfer of the Property
to him by Bruce. Four notices of assessment were issued as follows:
- Assessment number 26011 for $25,446.10 in respect of the
director’s liability assessment of Bruce relating to the income tax remittance
debt of Crane Master Sales Ltd.
- Assessment number 26013 for $28,254.52 in respect of the
director’s liability assessment of Bruce relating to the income tax remittance
debt of Crane Force Ltd.
- Assessment number A106731 for $14,005.87 in respect of the
director’s liability assessment of Bruce relating to the GST debt of Crane
Master Sales Ltd.
- Assessment number A106732 for $120,054.87 in respect of the
director’s liability assessment of Bruce relating to the GST debt of Crane
Force Ltd.
At the hearing of these appeals, counsel for the
Respondent conceded that the subsection 160(1) assessment numbered 26011
against the Appellant should be reduced to $17,672.47.
Appellant’s position
[18] The Appellant submitted that, by virtue of
the 1989 Agreements, Bruce held a one-third interest in the Property in trust,
and therefore, all he had to transfer to the Appellant was a bare legal
interest. As a result, the Appellant says that subsection 160(1) of the Act
and subsection 325(1) of the ETA do not apply because there was no transfer
of property.
[19] The Appellant also said that, even if Bruce
received a beneficial interest in the property as a result of the 1989 Agreements,
Mabel became entitled to a return of that interest as a result of his failure
to comply with her demand for payment of the promissory note. At that point,
therefore, Mabel acquired the beneficial interest in the Property from Bruce. Therefore,
Bruce did not have the beneficial interest in the Property at the time he
transferred the Property to the Appellant. In other words, Mabel’s direction to
Bruce to transfer the Property to the Appellant amounted to a transfer of the
beneficial interest to the Appellant by her rather than by Bruce.
[20] In any event, the Appellant contended that,
regardless of who had the beneficial interest in the Property prior to the
transfer, he received legal title to the Property for the benefit of the trust
beneficiaries, and subsections 160(1) and 325(1) do not apply.
[21] Finally, the Appellant submitted that, if he
received a beneficial interest in the Property, the fair market value of that
interest was less than that assumed by the Minister because the Minister failed
to take into account the encumbrances against the property, which totalled at
least $285,000 at the time of the transfer.
Legislative Provisions
[22] Subsection 160(1) of the ITA reads
as follows:
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.
[23] Subsection 325(1) of the ETA reads
as follows:
325(1) 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,
the transferee and transferor are
jointly and severally liable to pay under this Part an amount equal to the
lesser of
(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.
[24] Four conditions must be met in order 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.
[25] The first question that must be answered is
whether Bruce received a beneficial interest in the property under the 1989
agreements. This will turn on the interpretation to be given to those
agreements.
[26] The Appellant suggests that those
agreements created a trust in respect of the Property. Counsel said that the
three certainties required for the creation of a trust – certainty of
intention, certainty of subject matter and certainty of objects, were present
in those agreements. He submitted that Mabel’s intention to establish a trust
for the benefit of her issue in respect of the property was clearly set out. She
intended the property to be held by her children and be maintained by them for
her use and the use of her extended family.
[27] I am unable to construe the 1989 agreements
as creating a trust in respect of the Property. I find that the language used
in the agreements as well as the actions of the parties do not show that Mabel
intended to create a trust. The Law of Trusts,
makes the following comments concerning the certainty of intention requirement
for a trust:
To satisfy the certainty of intention requirement, the Court must
find an intention that the trustee is placed under an imperative obligation to
hold property in trust for the benefit of another. Certainty of intention is a
question of construction; the intention is inferred from the nature and manner
of the disposition considered as a whole. The language employed must convey
more than a moral obligation or a mere wish as to what is to be done with
certain property. The language used need not be technical, so long as the
intention to create a trust can be found or inferred with certainty. The words
of the request, as well as the entire document as a whole, must be examined in
determining whether the request’s intention exists.
[28] The language of the 1989 agreements is more
consistent with an intention that the transaction be one of purchase and sale
of the Property than the creation of a trust. I refer, in particular, to
paragraphs 1, 2 and 5 of the Transfer Agreement, which are repeated here for
ease of reference:
1 The Grantees agreed to purchase in 1989
and the Grantor agreed to sell the Grantor’s interest in the Lands at a price
which was equal to the fair market value of $200,000.00 (the “purchase price”),
as determined by an appraisal; completed by Sechelt Real Estate Appraisal Services
Inc. dated the 28th day of April, 1989 and attached hereto for
reference as Schedule “A” upon and subject to those certain terms and
conditions hereafter set forth.
2 The Grantees have paid the purchase price
to the Grantor by creation, execution and delivery by the Grantees to the
Grantor of a Demand Promissory Note (“Note”) in the principal amount of
$200,000.00. The said Note does not bear any interest and is subject to
adjustment in respect of the balance of the mortgage on the Lands assumed by
the Grantees.
5 The Grantor does hereby grant, assign,
transfer and convey to the Grantees all of the beneficial estate, right, title,
interest, inheritance, trust profit, claim and demand of the Grantor in and to
the Lands and every part and parcel thereof together with all the appurtenances
to the Grantees, which the Grantor agreed and intended to grant, assign,
transfer and convey in 1989.
[29] While it is not necessary to use particular
language in order to create a trust, I note that the only mention of a trust is
found in the title of the Agreement (“Transfer of Beneficial Interest and
Declaration of Trust”) and at paragraph 6 thereof:
6 The Grantor agrees and declares that she
holds the Lands as agent of and in trust for the Grantees.
Both references are clearly to Mabel holding the Property
in trust for the three children until the transfer of the title to the Property
was completed, rather than the children holding the Property in trust.
[30] The characterization of the transaction as
one of purchase and sale rather than as the creation of a trust is also
supported by the language of the agreement entitled “Transfer of Legal Interest
and Assignment of Contracts Dated November 30, 1989”, entered into by the
parties on October 10, 2004. That agreement refers to the sale of the
Property to Bruce, Leigh and Catherine under the 1989 agreements.
[31] The evidence given by Leigh Margetts in
cross-examination is also consistent with the view that Mabel did not intend to
set up a trust in respect of the Property in 1989. Leigh said that he at no
time considered himself to hold his one-third interest in the Property as trustee,
and that he considered himself as owner of that interest. Given that Leigh was
party to the discussions with Mabel, Bruce and Catherine that led to the 1989
agreements, I infer that if Mabel had intended to create a trust, Bruce would
have been aware of such an intention.
[32] The factors relied upon by the Appellant as indicative of an intention to create a trust
fall short of showing a certainty of intention. Although the extent to which
the children were entitled to deal with the Property during Mabel’s lifetime
was circumscribed by the Second Agreement (i.e. Bruce, Leigh and Catherine had
no right to borrow against the Property or to sell it without the consent of
all parties), they had the right to dispose of their interests after Mabel’s
death. This would not be possible if they were holding them in trust. Finally,
the acknowledgement in paragraph 7 of the Second Agreement of Mabel’s intention
that the Property “remain a family asset” creates, at best, a moral obligation on Bruce, Leigh
and Catherine to keep the Property for the family’s use. The provision states
only that they agree to “use their best efforts” to maintain and retain the Property
for such use.
[33] While the Appellant’s counsel also
submitted that the actions of the parties subsequent to the signing of the 1989
agreements were not inconsistent with the existence of a trust, it appears to
me that mortgaging the property in 2002 to provide funds for Leigh’s business
would be inconsistent with the alleged trust in favour of all of Mabel’s
offspring. I also note that Leigh testified that he told the bank when applying
for the mortgage that he was a one-third owner of the Property.
[34] For these reasons, I conclude that Bruce
Margetts acquired both a legal and beneficial one-third interest in the Property
as a result of the 1989 agreements.
[35] The second issue is whether Bruce’s
beneficial interest in the Property was transferred directly by him to the
Appellant, or whether it passed first to Mabel following Bruce’s failure to pay
his share of the promissory note, as alleged by the Appellant.
[36] Although the promissory note was not produced
at the hearing, it was described in the 1989 Transfer Agreement as a “demand
promissory note” and I accept that Mabel was entitled to demand repayment
at any time. However, the evidence falls short of establishing that Mabel had
the right to demand repayment only from Bruce and not from Leigh and Catherine
at the same time, and in any event also falls short of establishing that she
made such a demand. The reference in the direction given to Bruce in October
2004 to a demand having been made does not constitute a demand, and given the
circumstances surrounding the transfer of the Property to the Family Trust, I
am not prepared to draw the inference that a demand was in fact made. It was
not disputed that the transfer was done because Mabel was concerned that the
Property would be at risk because of the bankruptcy of Bruce’s companies, and I
infer that it was done to put the property out of the reach of Bruce’s
creditors rather than to satisfy any obligation by Bruce to Mabel.
[37] Also, there was no evidence that the terms of
the note entitled Mabel to the return of Bruce’s interest upon failure by him to
pay the amount owing. One would not normally expect a promissory note to
contain such a term. Furthermore, nothing in the 1989 agreements gave Mabel the
right to the return of Bruce’s interest in the event that the promissory note
was not paid. Therefore, the Appellant has not shown any legal basis for the transfer
of Bruce’s interest to Mabel, and has not proven that the beneficial interest
in the Property passed to Mabel prior to the transfer of the Property to the
Appellant.
[38] The Appellant maintained that even if Bruce
transferred the beneficial interest in the Property to him, the transfer was
made to him in his capacity of trustee of the Bruce Margetts Family Trust, and
that he received no beneficial interest for himself. Therefore, the fair market
value of the interest he received was nil and the assessments must fail.
[39] In the Respondent’s submission, the Family
Trust never came into existence because it was not properly constituted. Counsel
said that Mabel did not own the property that was purportedly used to settle
the trust, and which caused the trust to fail, and that, as a result the
Appellant received both the legal title and beneficial interest in the Property.
[40] I accept the Respondent’s position on this
point. In order to properly constitute a trust, the settlor must transfer
property he or she owns to the trust, or cause property owned by him or her to
be transferred to the trust. A settlor cannot create a trust with property he
or she does not own. To create a valid trust, there must be certainty of
intention, which includes certainty to transfer the subject matter of the trust
to the trust. In my view, a person cannot have the requisite intention to transfer
property where he or she is not the owner of the property.
[41] The final issue to be decided is whether
the fair market value of the interest transferred by Bruce to the Appellant is
less than that assumed by the Minister because of the outstanding mortgages
against it at the time of the transfer. In determining the fair market value of
the interest the total of all of the encumbrances against the Property at the
time of the transfer must be taken into account.
[42] I accept the testimony of Leigh Margetts
that the balance of the mortgages outstanding against the entire Halfmoon Bay property was no less than $285,000 at the time of the
transfer. I find Leigh Margetts to have been a credible witness and his
evidence is consistent with the evidence of Bruce Margetts concerning the
original amounts of the mortgages when they were taken out. The existence of
the mortgages is also confirmed by the title certificates that were produced at
the hearing. Even though Leigh received more of the proceeds of the 2002
mortgage, all of the mortgages charged the interests of all three of the owners
jointly. Therefore, the fair market value of the one-third interest in the Property
transferred by Bruce to the Appellant, assumed by the Minister to be $248,000,
should be reduced by $95,000 which is one-third of the amount of the outstanding
mortgages. The resulting fair market value is $153,000.
[43] The total amount of all of the four
assessments in issue (taking into account the Respondent’s concession regarding
assessment number 26011) is $170,085.02. This exceeds the fair
market value of the Property by $17,085.02. The parties did not
make any representations on how a reduction to fair market value should be
applied to any particular assessment or assessments out of the four in issue,
and it does not appear to me that it will make any difference to which
assessment(s) I order the reduction to be made. Therefore, I will order that
the reduction be made to assessment number A106732 and for this reason, appeal no.
2006-3521(GST)G is allowed with respect to that assessment number. Appeal
no. 2006-2851(IT)G will be allowed to the extent of the Respondent’s
concession. Given the mixed success of each party, no costs will be awarded.
Signed at Ottawa, Canada, this 3rd day of November,
2009.
“B.Paris”
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