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Citation: 2005TCC161
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Date: 20050225
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Docket:2004-2571(IT)I, 2004-2572(IT)I,
2004-2573(IT)I, 2004-2574(IT)I,
2004-2575(IT)I,
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BETWEEN:
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MATTHEW MERCHANT,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller J.
[1] Matthew Merchant appeals, by way
of the informal procedure, four assessments pursuant to
subsection 160(1) of the Income Tax Act (the Act).
The Minister of National Revenue (the Minister) claimed Matthew
Merchant was the recipient of certain transfers of property in
the form of cash payments from his father, Tony Merchant, to pay
Matthew Merchant's tax liabilities of $2,605, $3,541, $3,118
and $14,065 for the 1996, 1997, 1998 and 2001 taxation years. I
find that section 160 is not applicable as the payments by Tony
Merchant to cover his son Matthew's tax liabilities were not
transfers of property but were loans.
[2] Matthew Merchant also appeals the
assessment of his 1996 taxation year in which the Minister denied
claims for moving expenses of $3,509. The Minister also included
a benefit of $1,015 in Matthew Merchant's income. With
respect to the 1996 taxation year, I dismiss Matthew
Merchant's appeal.
[3] In 1995, at the age of 17, Matthew
Merchant enrolled in the LLB program at the University of Dundee
in Scotland. In 1998, he received his LLB degree, but needed
additional education to qualify to practice in Canada, so
attended the University of Ottawa for two years, from 1998 to
2000. In 2000, he commenced articles in Saskatchewan and was
called to the Bar in 2001, on the proviso that he obtain a
certificate from the National Accreditation Committee. This
required further study which he conducted at the University of
Victoria. He wrote three further exams in Calgary to obtain the
accreditation.
[4] Matthew Merchant financed his
education in a variety of ways. He had savings from his
pre-university years and evidently had some luck investing. He
drew income from the family businesses in the form of both
employment income, working at his father's law firm, Merchant
Law Group and at the family business, Merchant 2000 Ltd. He also
drew director's fees from Merchant 2000 Ltd. This company had
investments in a number of businesses, including a
one-third interest in a Fort McMurray gas station, as well
as considerable holdings in real estate. Matthew Merchant also
borrowed funds from his father, Tony Merchant. This was done
annually at the beginning of the academic year, based on
forecasts of the year's expenses, as well as on an ad
hoc basis as money was needed. Tony Merchant stated it was
his practice with all three sons to assist them through their
university education, as he felt he had a moral and even a legal
obligation to do so. His assistance was by lending necessary
funds and then, through his control of the family business,
declaring bonuses or directors' fees to the sons to assist in
repaying the loans.
[5] In the spring of 1997, 1998, 1999
and 2002, money was needed by Matthew to pay his tax liabilities
of $2,605, $3,541, $3,118 and $14,065. Matthew testified that at
the end of the academic year he was often low on funds. Tony
Merchant paid those amounts. In the spring of 2000 and 2001
Matthew had no tax liabilities.
[6] Matthew indicated that the
arrangement with his father was that such payments were loans to
be repaid. He described this as a formal arrangement, one of
which he believed his father kept track, although he, Matthew,
only kept track in his head. Matthew presented no ledgers or
banking documents evidencing the lending of the monies or the
repayment. He provided two handwritten documents, one evidencing
the repayment of $400, and the other evidencing a requirement to
repay the cost of a flight. He referred to his record-keeping as
not meticulous. Indeed, I find he simply did not keep
records.
[7] Tony Merchant produced a contract
between himself and his eldest son, Evatt, dated August 4, 1988.
On the back of that contract, Tony Merchant had recorded in
handwriting the amounts paid by him to cover all three of his
sons' tax liabilities from 1996 to 2002. The four payments at
issue today were so recorded. Tony Merchant explained that
because the tax arose primarily due to income that he would have
directed to the boys, he felt it was in order for him to cover
such taxes until the family business was in a financial position
to further fund the boys. He testified he recorded these tax
liabilities to evidence amounts still owed to him.
[8] Matthew Merchant's most
significant tax liability was for the 2001 taxation year. In the
spring of 2002, Tony Merchant paid Matthew's tax bill of
$14,065. Matthew worked as a lawyer in 2002 at a base wage of
$3,500 per month, plus 42% of his receipts. He recalled having
one major receipt of $16,000 of which he would have presumably
received approximately $7,000. He indicated he may have paid his
father as much as $5,000 from this amount. By early 2003 he
claimed he had fully repaid his father all debts owing.
[9] Tony Merchant provided a memo from
Matthew to him dated June 10, 2002. In it Matthew acknowledged he
still owed his father $9,500 for taxes, but that this should be
reduced by an amount of approximately $3,763, which father owed
son for services provided to the law firm. Tony Merchant
confirmed that by late 2002 or early 2003, he was pushing all
three sons to settle their debts with him, and that this was
accomplished in early 2003.
[10] Mr. Craig Peturson, an appeals officer
with Canada Revenue Agency (CRA) confirmed that according to
CRA's computer records, Tony Merchant owed the government
$23,921 in November 1997, $173,720 in June 1998, $18,910 in April
1999 and $13,717 in June 2002. Tony Merchant acknowledged he owed
CRA monies over the years, and that he knew they were attempting
to collect. Matthew Merchant was assessed on May 30, 2003,
pursuant to section 160 of the Act in connection with
the four payments by Tony Merchant to cover his son's tax
liabilities.
[11] With respect to the 1996 taxation year,
the moving expense claim of $3,509 represents the cost of
three-round trips from Dundee, Scotland to Regina. The first trip
would have been for one month around Easter, the second for the
summer and the third for the end of year Christmas break. Matthew
testified that on each of these returns he worked in Canada.
During the spring and winter break he would work in the family
business as well as at his father's law firm, handling
deliveries for example. In the summer he also worked a short
stint in Calgary in the typical summer student-type
employment.
[12] With respect to the benefit issue of
$1,015, this represents one-half the costs of Matthew's trip
to Mexico for Christmas 1995. The Merchant family held their
family company directors' meeting at that time, and Tony
Merchant allocated part of the expenses for business purposes.
Tony Merchant paid half the cost of Matthew's trip and
Merchant 2000 Ltd. paid the other half. Matthew was 17 at the
time and, as he put it, was not as active as the others - he
mainly listened. He believed several hours were spent in
meetings. Tony Merchant confirmed that formal meetings were only
two or three hours but there were several informal discussions
amongst the five family directors. He also acknowledged that the
trip was primarily a holiday.
Issues
[13] The three issues are:
(i) Did Matthew Merchant receive a $1,015
benefit in 1996 either as a shareholder or employee of Merchant
2000 Ltd.?
(ii) Is Matthew Merchant entitled to
moving expenses of $3,509 in 1996? and
(iii) Does section 160 of the Act apply
to the four payments by Tony Merchant to cover Matthew
Merchant's tax liabilities.
Analysis
[14] (i) Benefit: The week in
Mexico at Christmas time 1995 was primarily a family holiday with
a few hours of actual business meetings. Matthew was 17 at the
time. He described his role as a director and shareholder at the
directors' meeting as simply a listener. He did not pay for
this trip. His father paid for one-half and Merchant 2000
Ltd. paid for the other half. Matthew Merchant was in Mexico
almost exclusively for the purpose of holidaying: his business
involvement was insignificant. Under these circumstances, I find
Matthew, as a shareholder of Merchant 2000 Ltd., received a
benefit of $1,015 pursuant to subsection 15(1) of the Income
Tax Act, being an amount paid by the Company towards a
holiday.
[15] (ii)
Moving Expenses: Paragraphs 62(1)(a) and (b)
reads:
62(1) Where a taxpayer has, at any time,
commenced
(a) to
carry on a business or to be employed at a location in Canada (in
this subsection referred to as his "new work location"), or
(b) to be
a student in full-time attendance at an educational institution
(in this subsection referred to as his "new work location") that
is a university, college or other educational institution
providing courses at a post-secondary school level,
and by reason thereof has moved from the residence in Canada
at which, before the move, he ordinarily resided (in this section
referred to as his "old residence") to a residence in Canada at
which, after the move, he ordinarily resided (in this section
referred to as his "new residence"), so that the distance between
his old residence and his new work location is not less than 40
kilometres greater than the distance between his new residence
and his new work location, in computing his income for the
taxation year in which he moved from his old residence to his new
residence or for the immediately following taxation year, there
may be deducted amounts paid by him as or on account of moving
expenses incurred in the course of moving from his old residence
to his new residence, to the extent that
The scheme of subsection 62(1), as it read in 1996, is clear.
Moving expenses incurred for work-related moves within Canada are
deductible. Matthew is claiming moving expenses consisting of
three return flights between Scotland and Canada for purposes of
returning to Canada to work. Such expenses do not qualify under
paragraph 62(1)(a) as they are not moves from an ordinary
residence in Canada to another ordinary residence in Canada.
[16] Subsection 62(2) qualifies the
moving expense deduction for full-time students:
62(2) Where a taxpayer would, if
subsection (1) were read without reference to paragraph
(a) thereof and
(a) if the
reference therein to "moved from the residence in Canada at
which" were read as a reference to "moved from the
residence at which", or
(b) if the
reference therein to "to a residence in Canada at
which" were read as a reference to "to a residence at
which",
be entitled to deduct an amount by virtue of that subsection in
computing the taxpayer's income for a taxation year, that
amount my be deducted in computing the taxpayer's income for
the year.
This loosened the restriction in subsection 62(1) by allowing
the moving expenses deduction for a student who decides to study
outside Canada. The move must be by reason of commencement of
full-time study. Matthew Merchant claims the trips from Scotland
to Canada not by reason of commencing full-time study but by
commencing work. He has not attempted to rely on subsection
62(2).[1] Is that
provision, however, available to Matthew for any of the costs
between Scotland and Canada? The evidence was that he commenced
his full-time studies in Scotland in 1995. The three trips in
1996 were to return home for the extended academic breaks granted
by United Kingdom universities. Those trips were not by reason of
commencement of full-time studies in Scotland. That move occurred
in 1995. I find the cost of these trips home do not qualify. I
might add that had any portion of the cost qualified as a student
moving expense, such expenses are only deductible against
scholarships, bursaries or research grants received by Matthew
Merchant in 1996. Although there was some mention by
Tony Merchant of scholarship money, it was not referenced to
any particular year and I consequently have no evidence of any
income in 1995 against which Matthew could have deducted
expenses, if available.
[17] Matthew Merchant's appeal for
1996 is dismissed.
[18] (iii) Section 160.
Subsection 160(1) 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.
[19] The Appellant raises three
arguments:
(i) There was no transfer of property as
Tony Merchant's payment of Matthew's taxes was a
loan;
(ii) If there was a transfer of property,
the Minister has not proven that at the time Matthew was assessed
in 2003, Tony was liable to pay any tax in respect of the tax
years in which the property was transferred; and
(iii) Consideration in the form of a moral or
legal obligation of a parent to a child represents adequate
consideration, removing these payments by Tony on Matthew's
behalf from the application of section 160.
[20] (i) Transfer of property.
In the case of Tétrault v. The Queen,[2]
Justice Archambault addressed the issue of whether a loan
constitutes a transfer of property for purposes of section 160 of
the Act and concluded, based on the cases of Dunkelman
v. M.N.R.[3] and McVey v. The Queen[4] that it does not. I
agree with that conclusion. As Justice Archambault put it at
paragraph 39:
... The loan of money would not constitute a method of
thwarting the collection of the tax owed by the lender.
The question is, therefore, did Tony Merchant in fact lend
money to his son? The Minister's position is that the
payments made by Tony Merchant were not genuine; that, indeed,
they were incurred to thwart the collection of tax. The evidence
does not support the Crown's position.
[21] Both father and son testified
that these payments were always intended to be a loan; both sides
of the transaction realized that. Both father's and son's
actions subsequent to the payments are indicative of a
debtor-creditor relationship. Tony Merchant recorded the amounts
paid by him to cover each of his sons' tax liabilities. He
also offered a plausible explanation as to why he handled the
loans in this manner. Matthew Merchant wrote a memo to his father
clearly indicating that in June 2002 he still owed his father
$9,500, a figure which accords with his earlier explanation of
having made a lump-sum repayment of a few thousand dollars on the
$14,000 liability.
[22] The Crown suggests that the lack
of documentation and an intention on Tony's part to avoid
collection override the legitimacy of this loan arrangement. I
disagree. Firstly, in a family arrangement, where parents help
children further their education, I do not expect to see formal
ledgers of account. Indeed, by tracking payments in handwriting
on the back of a family contract, Tony Merchant has kept the very
type of record one might expect in a family arrangement. Lack of
further documentation does not sway me otherwise. Secondly, I
find no evidence of any intention on the part of Tony to thwart
collection of tax. The Crown points to the fact that Tony knew
CRA was looking to collect as somehow being indicative of an
intention to thwart such collection proceedings. Simply because
he knew this does not taint him with an intent that loans to his
sons were for the purpose of avoiding the tax liability. In 1998
for example, Tony Merchant owed $173,000. His evidence was that
he was paying $150,000 a year in taxes in the late 1990s. He paid
Matthew's tax liability of $3,500 and expected to be repaid:
this was in keeping with his modus operandi of funding his
sons' education over a number of years. These circumstances
are not consistent with an intention to thwart collection of tax.
I find there was a bona fide loan arrangement between Tony
Merchant and Matthew Merchant, and as such section 160 is not
applicable.
[23] It is unnecessary for me to deal
with the Appellant's other two arguments, which is
unfortunate as they raise intriguing and controversial issues.
Another day perhaps.
[24] In conclusion, Matthew
Merchant's appeal for the 1996 taxation is dismissed and his
appeals of the assessments pursuant to section 160 are allowed
and referred back to the Minister on the basis that section 160
does not apply to the loan payments made by Tony Merchant in
1997, 1998, 1999 and 2002.
Signed at Ottawa, Canada, this 25th day of February, 2005.
Miller J.
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