Citation: 2008 TCC 474
Date: 20080822
Dockets: 2006-765(IT)G
2006-766(IT)G
BETWEEN:
HARISH KADOLA
SLRENDER KADOLA,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1]
The issue raised in
these appeals is whether the Appellants are liable to pay $66,000 pursuant to
assessments made by the Minister of National Revenue under
subsection 160(1) of the Income Tax Act.
[2]
The Appellants Slrender
Kadola and Harish Kadola are mother and son. They were assessed on the basis
that Jagir Kadola (Slrender’s husband and Harish’s father) transferred property
with a fair market value of $66,000 to them for no consideration while he had
an unpaid income tax liability in excess of $93,000.
[3]
The Appellants take the
position that the transfers were made to the Appellants for consideration, in
part as repayment of a loan owing by Jagir to Slrender and in part as
payments made by Jagir to meet his statutory obligations to support his family.
[4]
Many of the facts in
the case are not in dispute. The Appellants admit that in 2002, 2003 and 2004
Jagir gave Slrender 37 cheques totalling $66,000, which she deposited in an
account at the CIBC that had been opened by Harish on December 14, 2000, when
he was 13 years old. In October 2003, Slrender added herself to the account as
a joint account‑holder with Harish. In 2002, 2003 and 2004, Slrender
withdrew the $66,000 from the bank account. It was also admitted that Jagir
owed not less than $93,578.53 under the Income Tax Act in each of those
years.
[5]
In 2002 Jagir and
Slrender lived with their four children and Jagir’s mother in a house owned by
Jagir’s mother. In February 2002, their eldest daughter Shawna got married and
moved out of the family home. She was 25 years old at the time. Their two other
daughters were 24 and 18 years old, respectively, in 2002 and Harish was 15
years old.
[6]
Shawna gave evidence
that her mother paid for her and her siblings’ expenses, and gave them spending
money, bought food for the family and paid for gas for the family car. She said
her father did not pay any of the children’s expenses.
[7]
She and Harish both
testified that their parents’ marriage had broken down, that their relationship
was “pretty well non-existent” and that they slept apart.
[8]
Harish also testified
that he opened the bank account into which the cheques in question were
deposited by his mother, but that he was unaware that she was using his account
or that she became a joint account‑holder. He said he was also unaware
that his mother was receiving cheques from his father in 2002, 2003 and 2004.
[9]
He said that he opened
the account in 2000 to deposit money he received as birthday gifts, but that he
stopped using the account after 6 months or a year.
[10]
Slrender testified that
she was married to Jagir in 1974 but that by 2002 their marriage had
deteriorated and they were sleeping apart. She said she did the cooking and
cleaning for the entire family, including her husband, although the family did
not eat together ever. During the years in issue she worked in a clothing
boutique and earned from $10 to $12/hour. She said that Jagir gave her money
for family expenses and that she also used her earnings to pay the household
bills. She estimated she spent $2,000/month on food, $4,000/year for her son’s
private school tuition, $25,000 for her daughter’s wedding in 2002. She drove a
2002 Mercedes automobile on which her husband made the down payment and she made
the monthly payments of approximately $800.
[11]
Slender testified that
she used the $66,000 from the cheques Jagir gave her for groceries, household
bills and items for her children and for her daughter’s wedding.
[12]
Slender admitted that after
June 18, 2002 she made all of the deposits and withdrawals from the CIBC bank
account that Harish had opened. She said that she knew all of the people who
worked in the CIBC branch at which the account was opened and they let her
deposit and withdraw funds from the account whenever she wanted. However, in
October 2003 a teller she did not know refused to let her use the account
unless she became a joint holder of the account, which she did. She said she
used her son’s account to deposit the cheques because her bank “gave her the
run around” when she tried to deposit them to her own account.
[13]
Most of the cheques
were certified and made out to J.Kadola but two were made payable to Damon
Consulting, which Slrender said was operated by her husband. A number of the
cheques were drawn on the account of Karnail Logistics Ltd. and the remainder
appear to be bank drafts where the payor is not shown. Slrender did not have
any knowledge of Karnail Logistics.
[14]
Slrender also
identified a document purporting to be a guarantee and promissory notes from
Jagir to her. She said it was written and signed by him on April 19, 2000.
That document reads:
To Slrender Kadola
This is a personal guarantee, and promissory note, if Vertex
Transportation does not pay back to Slrender Kadola, the sum of $40,000 plus
interest, I Jagir Kadola shall be fully responsible for the monies and
interest, and shall pay it back to Slrender Kadola.
[15]
The document also shows
the signature of two witnesses which Slrender said were friends of hers.
[16]
She also identified a
letter from a Vancouver law firm to Vertex Transportation (“Vertex”)
as a demand letter written on her instruction. That letter reads:
File No. 1900
June 7, 2000
PERSONAL & CONFIDENTIAL
Via
Courier
Vertex
Transportation Services Inc.
12640 Mitchell
Road
Richmond, B.C.
V6V 1M8
Attention:
Jerry Kadola
Dear Sir:
RE: Loan
Agreement Dated April 19th, 2000
We are
solicitors for Slrender Kadola who lent to you $40,000.00 with interest at 15%
per annum. Such loan is evidenced by a Demand Promissory Note and Loan
Agreement both dated April 19, 2000.
In accordance
with the terms of the Demand Promissory Note and Loan Agreement, we, on behalf
of our client, hereby demand immediate repayment of the principal amount of the
loan, $40,000.00 plus interest to the 10th of June, 2000, in the
amount of $854.79 for a total of $40,854.79, per diem interest after June 10,
2000 will be $16.44.
Yours truly,
KAMBAS GALBRAITH
Per:
Nick Kambas
NK/ml
cc Slrender
Kadola
[17]
No copy of the loan
agreement referred to in this letter was produced and Slrender admitted in
cross-examination that she had never lent any money to Vertex, and said that
Jagir gave her the guarantee after she threatened to divorce him if he did not
give her money she felt was due to her after thirty years of marriage. She said
she wanted something she could keep in her file so that she could get money from
of Jagir. Slrender said that when she would ask Jagir to give her money after
he gave her this document, he would say that he was paying it to her by giving
her money for the “house costs”.
Legislation
[18]
Subsection 160(1)
read as follows for the years in issue:
160(1) 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 74.1 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 therefore,
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 the 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.
Appellants’ Arguments
[19]
The Appellants take
issue only with the Minister’s determination that no consideration was given
for the transfers of the funds from Jagir to Slrender.
[20]
The Appellants’ counsel
argued that the transfers made by Jagir to Slrender in this case were made in
part as repayment of a loan. He said that the promissory note and lawyer’s
letter were evidence that Jagir and Slrender entered into a loan agreement, and
did so well before Jagir got into tax trouble, and that these documents showed
that Slrender had given valuable consideration for the payments from Jagir.
[21]
Counsel also contended
that the amounts transferred by Jagir to Slrender were made partly to meet
Jagir’s statutory obligation to support his spouse and children. He referred
to sections 88 and 89 of the Family Relations Act R.S.B.C. 1996 c.
128, which read as follows:
Obligation to support child
88
(1) Each parent of a child is responsible and liable for the reasonable
and necessary support and maintenance of the child.
(2) The making of an order against one
parent for the maintenance and support of a child does not affect the liability
of another parent for the maintenance and support of the child or bar the
making of an order against the other parent.
Obligation to support spouse
89
(1) A spouse is responsible and liable for the support and maintenance of
the other spouse having regard to the following:
(a) the role of each spouse in their
family;
(b) an express or implied agreement between
the spouses that one has the responsibility to support and maintain the other;
(c) custodial obligations respecting a
child;
(d) the ability and capacity of, and the
reasonable efforts made by, either or both spouses to support themselves;
(e) economic circumstances.
(2) Except as provided in subsection (1), a
spouse or former spouse is required to be self sufficient in relation to the
other spouse or former spouse.
[22]
Counsel said that
Slrender was unaware of Jagir’s tax problems when he made the payments to her
and there was no complicity in trying to defeat the Crown’s claims to Jagir’s
property. He said that the payments were no more than what was necessary to
support Jagir’s family and that they were made for good consideration according
to the provisions of the Family Relations Act.
[23]
Counsel relied on the
decisions of this Court in Michaud v. R. 99 DTC 43, Dupuis v. The
Queen 93 DTC 723 and Ferracuti v. R. 99 DTC 194 in which it
was held that payments made by one spouse to the other or for the other’s
benefit in order to fulfill a legal obligation to provide spousal or family support
were made for valuable consideration.
[24]
Counsel also brought to
my attention the decision of this Court in Raphael v. The Queen 2000 DTC 2434.
There, Mogan, J. held that no consideration was given by a spouse to whom
property was transferred by the other spouse pursuant to an obligation to
support his spouse. Although the case was appealed to the Federal Court of Appeal,
this point was not argued and the appeal was decided on other grounds. Counsel
said, however, that the Court distanced itself from the comments of the trial
judge relating to the issue of whether fulfillment of a family support
obligation constituted consideration and referred to the following comments at
paragraph 12 of the Reasons:
We do not wish to be taken however, as agreeing with all of the
comments of the Tax Court Judge relating to whether there can be a
consideration given between husband and wife so as to preclude the application
of section 160(1).
Analysis
[25]
With respect to the
Appellants’ first argument, I find that it has not been shown that part of the
amounts Slrender received from Jagir between 2002 and 2004 were repayments of a
loan. The Appellant admitted that she had not loaned any money to Vertex, and
there was no evidence produced to show that Jagir had personally borrowed money
from Slrender. While counsel maintained that the promissory note and demand
letter were written before Jagir became indebted for taxes, Jagir was first
assessed for director’s liability in 1998. In this light, a promise to repay a
loan that was admittedly never made in the first place is hightly suspect and is
by all appearances a sham.
[26]
Even if I were inclined
to accept Slrender’s explanation for the creation of the promissory note, her
explanation does not satisfy me that she gave any consideration for the note,
and any payments made pursuant to the note would therefore not have been made
for any consideration.
[27]
I am of the view that
the Appellant’s second argument cannot succeed either. I am aware of the
conflicting decisions in this Court on the point of whether payments of amounts
by one spouse to the other spouse or for the other spouse’s benefit as family
support are made for consideration. The relevant jurisprudence was fully
reviewed by Archambault, J. in Tétrault v. R. 2004 TCC 332, and I agree
with his conclusions at paragraphs 47 to 50 which read as follows:
[47] The contribution to the expenses of the marriage
is, in my opinion, in the nature of a donation by which a property is given
without any consideration.27 This analysis of the domestic
obligation concurs with that made by Judge Mogan in the Raphael
decision, where he says "[t]hose same domestic obligations, however,
cannot be 'consideration' within the meaning of section 160...."
(paragraph 27 of the decision). It also concurs with that in Logiudice,
where it is explained that "The word consideration, as it is used in the
context of section 160 of the Act, in its ordinary sense refers to the
consideration given by one party to a contract to the other party, in return
for the property transferred" and that "The limiting provision in
subparagraph 160(1)(e)(i) of the Act is to protect genuine business
transactions from the operation of the section" (paragraph 16 of the
decision). It is also consistent with the analysis made by Judge Sobier in Sinnott
v. The Queen, supra, at paragraph 19 (Q.L.), page 598 DTC:
The Appellant's counsel put a good deal of emphasis on
the argument that consideration was given for the transfer. But what was that
consideration? Can it be said that the paying of household expenses is
consideration for the transfers? Subparagraph 160(1)(e)(i) states that the
joint liability of the transferor and transferee is an amount equal to the lesser
of the amount 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. At the time the transfers were made, no
consideration was given.
[Emphasis added.]
[48] The absence of any consideration given in return
for the performance of the domestic obligation readily explains why it highly
problematic, if not impossible, to determine what the FMV would be of the
transferee's right to receive the property transferred by the transferor
pursuant to the latter's domestic obligation. Furthermore, as Judge Mogan said,
even if a FMV could be determined, this right would not constitute
"consideration given for the property".28
[49] Not only does this interpretation seem to me to be
in greater harmony with the language of section 160 of the Act, but it is
unavoidable in light of the interpretative presumption that the law is coherent
and systematic.29 Section 160 must be considered as a whole if we
are to determine its scope. Subsection 160(4)30 of the Act provides
that the paragraph 160(1)(e) rule is of no effect when a spouse
transfers property to the other spouse as a result of the breakdown of the
marriage. For the purposes of this rule, the FMV of the transferred property is
deemed to be nil. If the reasoning adopted in the Ferracuti, Michaud
and Dupuis decisions were adopted, one would have to conclude that
subsection 160(4) is of no use, for upon separation,31 the spouse's
right to receive a portion of the other spouse's domestic estate is recognized
by law, in this case the Civil Code, in particular in the rules
governing the partition of the family patrimony set out in articles 414 et seq.
of the Code. It then involves "a transfer of property ... in performing
[a] legal obligation".32 Furthermore, if the right to receive
this property under the Civil Code constituted consideration, the FMV of
which is equal to the FMV of the transferred property, it would not have been
necessary to enact that the FMV of the transferred property is nil. On the
contrary, I think Parliament assumed that such a transfer upon a separation
constitutes a transfer without consideration and, were it not for subsection
160(4) of the Act, the transferee could have been jointly and severally liable
for any tax debt of the transferor.
[50] Consequently, the conclusion is unavoidable: the
transfer of property under a legal obligation (as in the partition of the
family patrimony) constitutes a "transfer" for the purposes of
section 160 of the Act and is subject to that section. The mere right to be the
beneficiary of this obligation does not constitute a particular consideration.
Likewise, the transfer of property to the other spouse in performance of a
domestic obligation constitutes a transfer for which no consideration has been
given, and there is nothing in section 160 that would allow this Court to
exempt this transfer from its operation.33
_________________________________________________
27 Strictly
speaking, it can be argued that the liberality that is necessary for the
existence of a donation is missing here. However, most people who live together
would contribute quite voluntarily to the expenses of the marriage, even in the
absence of such a domestic obligation; it is generally during a separation or a
divorce that the situation becomes conflictual and the existence of this
obligation becomes significant.
28 Paragraph
27 of Raphael and subparagraph 160(1)(e)(i) of the Act.
29 See
in particular Pierre-André Côté, The Interpretation of Legislation in Canada,
3rd ed. (Toronto: Carswell, 2000), at pages 308 et seq.
30 This subsection
reads as follows:
(4) Special rules re transfer of property to
spouse - Notwithstanding subsection 160(1), where at any time a taxpayer
has transferred property to the taxpayer's spouse pursuant to a decree, order
or judgment of a competent tribunal or pursuant to a written separation agreement
and, at that time, the taxpayer and the spouse were separated and living apart
as a result of the breakdown of their marriage, the following rules apply:
(a) in respect of
property so transferred after February 15, 1984,
(i) the spouse
shall not be liable under subsection 160(1) to pay any amount with respect to
any income from, or gain from the disposition of, the property so transferred
or property substituted therefor, and
(ii) for the purposes of
paragraph 160(1)(e), the fair market value of the property at the time
it was transferred shall be deemed to be nil,
...
but nothing in this subsection shall operate to
reduce the taxpayer's liability under any other provision of this Act.
31 The
transfer after divorce is generally not subject to section 160 since the
transferee is no longer the spouse of the transferor.
32 To
use the words of the Michaud decision, paragraphs 19 and 20.
33 In
my opinion, an amendment to the Act, like the one enacted by S.C. 1984. c. 45,
subsection 65(1), applicable after February 15, 1984, for subsection 160(4),
would be needed to exempt from the operation of section 160 the property
transferred in performance of a domestic obligation. Parliament could draw on
provisions such as articles 552 et seq. of the Quebec Code of Civil Procedure,
which list the exemptions from seizure, such as "The food, fuel, linens
and clothing necessary for the life of the household".
[28]
Even if I had accepted
that payments made by a spouse pursuant to a legal obligation to pay his or her
share of family expenses were transfers made for consideration, it would still
not have been possible on the evidence before me to determine what portion of
the funds transferred to Slrender by Jagir were used by her for expenses that
Jagir was required to share under the Family Relations Act provisions.
[29]
I note firstly that
many of the expenses that she paid would appear to have benefited all members
of the household equally, including Slrender and Jagir’s adult children,
Jagir’s mother and Jagir himself. The Appellants’ counsel did not produce any
authority to show that Jagir’s support obligations extended to these
individuals. For the purposes of section 88 of the B.C. Family Relations Act
the term “child” is defined in section 87 as including “a person who is 19 years of age or older and, in
relation to the parents of the person, is unable, because of illness,
disability or other cause, to withdraw from their charge or to obtain the
necessaries of life.” Subsection 90(2) of that Act provides that a child is liable to maintain and support a parent where the
parent is dependent on an adult child because of age, illness or infirmity. In this
case, however, there was no evidence led to show that the adult children were
unable to withdraw from their parents’ charge or that Jagir’s mother was
dependent on him because of age, illness or infirmity.
[30]
Furthermore, only a few
of the household and family expenses paid by Slrender with the transferred
funds were quantified to any extent by her or corroborated by any other
evidence. Slrender estimated that she spent $2,000 a month on groceries, $4,000
a year on Harish’s private school fees, and $25,000 on Shawna’s wedding. As
well, some credit card statements that were put into evidence showed that her
monthly payments on the Mercedes-Benz car were about $800 a month. She did not
quantify any other expenses that she incurred or paid in 2002, 2003 or 2004
such as cable, hydro or gasoline. In cross‑examination, Slrender was
shown a withdrawal slip for the bank account in issue that indicated $2,000 was
used to purchase U.S. dollar travellers cheques. She said she had no
recollection of the transaction or what the funds were used for.
[31]
I am therefore left
without any means of determining what Jagir’s support obligations were or what portion
of the funds transferred by Jagir to Slrender would have related to those
support obligations.
[32]
With respect to Harish’s
appeal I would note that his lack of knowledge of the deposits to his bank
account would not preclude the application of subsection 160(1). The funds
deposited to his account were available to be withdrawn by him at any time and
no consideration was given by him. In the decision of the Federal Court of
Appeal in Livingston v. The Queen 2008 FCA 89 the Court made the
following comments concerning deposits into another person’s bank account:
21 The deposit of funds into
another person's account constitutes a transfer of property. To make the point
more emphatically, the deposit of funds by Ms. Davies into the account of the
respondent permitted the respondent to withdraw those funds herself anytime.
The property transferred was the right to require the bank to release all the
funds to the respondent. The value of the right was the total value of the
funds.
[33]
For all of these
reasons both of the appeals are dismissed, with costs.
Signed at Vancouver, British
Columbia, this 22nd day of August
2008.
“B.Paris”
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