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Citation: 2004TCC240
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Date: 20040414
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Docket: 2001-3800(IT)G
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BETWEEN:
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DONALD MARSHALL REAGH,
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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
Angers, J.
[1] These appeals are from two
assessments both dated June 6, 2000. The first assessment
numbered 17493 is in the amount of $30,000, and the second
assessment numbered 17494 is in the amount of $50,000. The
Minister of National Revenue (the Minister) assessed the
Appellant in respect of transfers of property to the Appellant
within the meaning of section 160 of the Income Tax
Act (the Act). In the first assessment, the property
transferred is a 1960 Austin Healy motor vehicle and in the
second, the property transferred is a 1989 Porsche 944 motor
vehicle. Both assessments are based on the value of the motor
vehicles at the time of transfer in February 1997. Both parties
have agreed that the value of the 1989 Porsche 944 at the
time of transfer was $10,000 instead of the $50,000 used for the
assessment.
[2] The Appellant is a retired former
CBC employee who lives with his wife in Burnaby, B.C. They have
two grown children. Their son Barry, who is 41 years old, is
the transferor of the two above-mentioned motor vehicles, which
are the subject of these appeals. As a hobby, the Appellant works
in car restoration and electronics.
[3] The Appellant's son was a
stockbroker in the early 1990s promoting Canadian companies in
British Columbia. He quit his job and moved to Arizona around
1995 in the hope that things would improve. The Appellant and his
wife began visiting their son in the fall of 1995 and every year
thereafter except in 1999. They rented a house in the first two
years they visited and eventually bought a house in September
1997 with the intention of spending more time there each
year.
[4] Barry started borrowing money from
the Appellant in 1993 and in 1994. The Appellant kept a mental
note of all these advances and in the fall of 1996, the total
advances had reached $16,000. Some advances were made in cash and
others were made to pay bills and particularly repair bills on
the two motor vehicles in question. One repair invoice on the
Porsche automobile in August 1995 was for $3,477 and the other
was for the Austin Healy for $1,091 in September 1996. Both
were paid by the Appellant. The Austin Healy repairs were
required to put the vehicle in working condition so Barry could
drive it down to Arizona, a four-day trip.
[5] To help pay back these advances,
the Appellant and Barry agreed that Barry would transfer
ownership of the Porsche to the Appellant. On January 6,
1997, with registration completed on February 12, 1997,
ownership of the Porsche was transferred to the Appellant. The
non-market value and tax exemption form states that the
consideration paid for the transfer of ownership consisted in
advances made to pay off mechanical bills. At the same time,
Barry transferred the Austin Healy to the Appellant and the
non-market value and tax exemption form stated that same was a
gift to his father. Both had agreed that the transfer would allow
the Appellant to have a project to work on when he visited in
Arizona.
[6] At the time of the transfer, both
vehicles were insured by the Appellant but, since they were kept
in Arizona and used by Barry, the principal driver indicated in
both policies was Barry. For insurance purposes, the Appellant
declared that the value of the Austin Healy was $30,000 expecting
it would be worth that amount after complete restoration.
However, he testified that, at the time of transfer, the value of
the Austin Healy was not more than $1,200.
[7] After the transfer, the
Austin Healy was driven back to Canada and extensive
bodywork was performed in the spring of 1997, as shown by the
photographs entered as exhibits. The Appellant paid $7,500 for
the bodywork and has personally put in 100 hours of his
time. The car was ultimately restored to between 80 and 90
percent upon completion by the Appellant. He worked an additional
200 hours and purchased parts for US $1,200. During the year
2000, the car was seriously damaged in an accident and is now
back in restoration.
[8] The Appellant had no knowledge of
his son's indebtedness to Revenue Canada when the transfers
took place. He knew his son was not paying all his bills but had
no idea how bad the situation may have been. It is only in June
2000 when the assessments were issued and when a person from
Revenue Canada showed up at his door that he became fully aware
of his son's indebtedness.
[9] Over the years, the Appellant
continued to make further cash advances to Barry. He had to cash
in his RRSPs for a number of years and borrowed money from a
neighbour to help both his children. At the time of trial,
advances made to Barry totalled $77,000. The Appellant never
recorded these advances since he never suspected they would reach
so high a figure. Again, most advances were made in cash, by
cheque or by payment of his son's bills. There were no
promissory notes, repayment schedules or interest charges on
these advances nor were there any payments by Barry to the
Appellant. The Appellant calls this a father and son
relationship.
[10] The Appellant was therefore assessed on
both of these transfers under section 160 of the Act.
Section 160 reads as follows:
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 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.
[11] In Williams v. Canada, [2000]
T.C.J. No. 459 (Q.L.), affirmed by the Federal Court of
Appeal [2002] F.C.J. No. 1402, Judge Hamlyn set out the
conditions that are necessary for subsection 160(1) to
apply. The Tax Court of Canada later confirmed these conditions
in Raphael v. Canada, 2000 DTC 2434, as did the Federal
Court of Appeal [2002] F.C.J. No. 82. In Beaudry v.
Canada, [2000] T.C.J. No. 531, the Federal Court also
confirmed these conditions, which are:
(i) there must be a transfer of
property;
(ii) the transferor and
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 Act in or in respect of the year when the
property was transferred or any preceding year.
[12] In these appeals, it is not disputed
that the two vehicles were transferred, that the transferor and
transferee were not dealing at arm's length and that Barry
was liable to pay tax under the Act in respect of the taxation
year in which the vehicles were transferred. I must therefore
address condition number three and determine whether there was
consideration flowing from the Appellant to his son Barry and
determine the value of the property transferred.
[13] Counsel for the Appellant argues that
the transfer of both motor vehicles was for valuable
consideration since at the time of transfer, Barry owed his
father $16,000 and the value of both motor vehicles was $11,200.
He relies on the Appellant's credibility to substantiate that
the Appellant made the advances of money. He further argues that
the transfer of both vehicles was not carried out to evade the
collection proceedings by Revenue Canada (now the Canada Customs
and Revenue Agency) against his son since the Appellant had no
knowledge of his son's indebtedness to Revenue Canada. The
transfer was to pay back part of the advances and the repair
bills the Appellant had paid. Counsel for the Respondent, on the
other hand, argues that there is no documentary evidence to
support these advances made. It is submitted that these advances
are presumed to be gifts rather than loans and that the
presumption of advancement is applicable in such circumstances
unless rebutted by the Appellant. The Appellant's conduct
does not indicate that he intended these advances to be loans
given the special father and son relationship.
Consideration
[14] Was there consideration flowing for the
transfer of both motor vehicles? The Appellant is a credible
witness and I have no reason to doubt the accuracy of the events
that led to the transfers. I have all the reasons to believe that
he made money advances to his son by cash and by cheque and that
he paid for repair bills for both motor vehicles. Although he
kept a mental note of all these advances, there are no documents
acknowledging any debt owing to him by Barry, and no repayment
schedules, and there was no interest to be paid. In fact, I doubt
that the Appellant made those advances honestly believing that
his son would actually pay him back anything until he realized
that the total advances had reached $16,000 before the transfers
were made. It is at that point that the Appellant had a serious
discussion with his son and that the transfer of the two motor
vehicles was considered. The Appellant was uncertain as to
whether the transfer constituted security or an outright partial
payment of the advance he had made. What he knew was that by
being the owner of the motor vehicles, he had the means to
eventually collect on some of the monies advanced to his son
despite the fact that his son was still using both vehicles.
[15] The information found in the
non-market value and tax exemption form that the Appellant
provided to the Ministry of Finance and Corporate Relations of
B.C. upon registering both vehicles best reflects what the
Appellant understood of these transfers (See Tabs 14 and
15). The Transfer form for the Porsche states that the reason it
was transferred below 90 percent of book value was to pay off
mechanical bills. On the Austin Healy Transfer form, it states
that the vehicle was a gift from son to father. It is therefore
very clear that there was no consideration for the transfer of
the Austin Healy. It would appear to be a simple gesture of
appreciation by Barry for his father's previous generosity
towards him.
[16] As for the transfer of the Porsche
motor vehicle, the Appellant was uncertain as to whether he
should treat the transfer as a partial payment or as security for
the advances. This uncertainty lends itself to the special father
and son relationship described by the Appellant in his evidence
and to the application of the presumption of advancement. The
evidence reveals that the Appellant made further advances beyond
the transfer date. Yet, other than the repayment of those repair
bills, no evidence was adduced enabling this Court to conclude on
a balance of probabilities that the Appellant's intention was
to collect these advances from his son. In fact, the
Appellant's intention on these advances was to benefit his
son, which would support the presumption of advancement rather
than rebut it. With this in mind, I find that the only
consideration that flowed to Barry on the transfer of the Porsche
motor vehicle was the value of the mechanical repairs referred to
in the non-market value and tax exemption form for that motor
vehicle. Both invoices total $4,568. I therefore find that the
actual consideration for that transfer was $4,568, leaving an
equity of $5,432, when I deduct the invoices from the agreed
value of $10,000 for the Porsche. The assessment against the
Appellant for the purposes of subsection 160(1) for the transfer
of the Porsche automobile is therefore reduced to $5,432.
[17] Having found that there was no
consideration for the transfer of the Austin Healy, I must now
determine its market value. Counsel for the Appellant submits
that the actual value of the Austin Healy at the time of transfer
was $1,200. That value is arrived at by the Appellant's
evidence that the car was in need of extensive repairs to bring
its value to what he believed would be $30,000 upon complete
restoration. Counsel for the Respondent relies on the
Appellant's own declared value of $30,000 when he insured the
car on transfer.
[18] The car in question is a 1960 Austin
Healy convertible described by the Appellant as a classic car.
According to the Appellant, it was in need of major repairs at
the time of transfer and it is obvious from the amount of work
that was done on the car after the transfer that this was the
case. Nevertheless, it was in working condition and the repairs
completed before the purchase made it possible to make a return
trip with the car from B.C. to Arizona. At the time of transfer,
it was far from fully restored and therefore far from its value
of $30,000 after full restoration as estimated by the Appellant.
On the other hand, considering that it was in working condition
and could be used to travel long distances, it was worth more
than the amount the Appellant estimated it to be, namely $1,200.
I find both values to be unreasonable.
[19] In order to restore the Austin Healy to
80 percent of its full restoration value, the Appellant worked
300 hours on it and incurred expenditures of $7,500 for body work
and U.S. $1,200 for parts. If I deduct these expenses from 80
percent of its restored value estimated by the Appellant and if I
allow about $30 an hour for his time, this results in a value of
approximately $5,000. Although arbitrarily assessed, I find that
the $5,000 is a reasonable value for the Austin Healy at the time
of the transfer. The assessment against the Appellant for the
purposes of subsection 160(1) is therefore reduced to $5,000.
[20] The appeals are allowed and the
assessments are referred back to the Minister for reconsideration
and reassessment in accordance with to the reasons herein. Costs
will be determined by this Court after both counsels provide
their written submission. The Appellant shall submit his position
no later than May 14, 2004 and the Respondent, no later than May
31, 2004.
Signed at Ottawa, Canada, this 14th day of April 2004.
Angers, J.
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