Date: 19990630
Docket: 98-2423-IT-G
BETWEEN:
JOSEPHINE FILIPPAZZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal from a Notice of Assessment dated
September 11, 1996 assessing Josephine Filippazzo (the Appellant)
regarding transfer of property from her husband, Carlogero
Filippazzo.
[2] By Notice of Assessment dated September 11, 1996, the
Appellant was assessed pursuant to section 160 of the Income
Tax Act (the “Act”) in the amount of
$75,000 in respect of a property in the Township of Innisfil,
County of Simcoe, in the Province of Ontario. The Minister of
National Revenue assumed that the amount of $75,000 was the fair
market value of the property at the time of transfer.
AGREED STATEMENT OF FACTS
[3] “For the purposes of this appeal, the Appellant and
the Respondent submitted the following agreed statement of
facts.
FACTS
Background
1. At all material times, the Appellant was the spouse of
Carlogero (or Carl) Filippazzo.
2. On August 14, 1990, the Minister of National Revenue (the
“Minister”) assessed Carlogero Filippazzo in an
amount of $105,378.73 under subsection 227.1(1) of the
Income Tax Act (the “Act”) in respect
of the 1987 and 1988 employee source deductions tax liability of
Toronto Excavating and Sodding Ltd. A copy of the August 14, 1990
Notice of Assessment is located at Tab 1 of the Joint Book of
Documents.
3. A certificate (the “Certificate”) for the
amount of the liability of Toronto Excavating and Sodding Ltd.
(the “Corporation”) had previously been registered in
the Federal Court on March 30, 1990 and execution for the amount
of the liability was returned unsatisfied on May 30, 1990. A
copy of the Certificate is located at Tab 2 of the Joint Book of
Documents.
4. On June 18, 1992, the Minister reassessed
Carlogero Filippazzo to reduce the amount previously
assessed under subsection 227.1(1) of the Act to
$63,296.58. A copy of the Notice of Reassessment is located at
Tab 3 of the Joint Book of Documents.
5. An application by Carlogero Filippazzo for an Order
extending the time within which to serve a Notice of Objection to
the June 18, 1992 subsection 227.1(1) reassessment was dismissed
by this Court. A copy of the Order of the Honourable
Judge Taylor signed November 9, 1994, is located at Tab 4 of
the Joint Book of Documents.
6. The Appellant not dispute the correctness of the amounts of
unremitted source deductions which were assessed against Toronto
Excavating and Sodding Ltd.
7. On September 14, 1990, Carlogero Filippazzo received a
Statement of Account indicating that the amount of $106,773.38
was owing to Revenue Canada, Taxation. A copy of the Statement of
Account is located at Tab 5 of the Joint Book of Documents.
The Transfer of the Property
8. On August 2, 1989, Carlogero Filippazzo transferred
property described as Parcel 101-1, Section M-15, being Lot 101,
Plan M-15, Township of Innisfil, County of Simcoe (the
“Innisfil Property”) to the Appellant for $2.00 and
natural love and affection. A copy of the Transfer/Deed of Land
and of the Parcel Register are found at Tabs 6 and 7,
respectively, of the Joint Book of Documents.
The Assessment at Issue
9. On September 11, 1996, the Minister assessed the Appellant
under subsection 160(1) of the Act in the amount of
$75,000 in respect of the transfer of the Innisfil Property by
Carlogero Filippazzo to the Appellant on or about August 2,
1989 for $2.00 and natural love and affection. A copy of the
Notice of Assessment with the attached Reconciliation Schedule is
located at Tab 8 of the Joint Book of Documents.
10. On June 18, 1998, the Minister confirmed the assessment of
the Appellant. A copy of the Notification of Confirmation is
located at Tab 9 of the Joint Book of Documents.
The Innisfil Property and Surrounding
Properties
.....
17. For property tax purposes, the Innisfil Property and other
properties listed below (the “Surrounding
Properties”) were assessed at the following figures in 1989
and 1990:
|
LOCATION
|
1989
|
1990
|
|
Innisfil Property (lot 101)
|
$389
|
$389
|
|
1001 Corner Avenue
|
$247
|
|
|
1015 Corner Avenue
|
$247
|
|
|
1042 Gilmore Avenue
|
$168
|
|
|
1338 Killarney Beach Road (lot 105)
|
$211
|
$495
|
|
Lot 102
|
$211
|
$211
|
|
Lot 110
|
0
|
0
|
Lot 110 was exempt from assessment in 1989 because it was
government owned but had it been assessed it would have been
assessed with a value of $184.
A copy of a map setting out the locations of the above noted
properties is found at Tab 10 of the Joint Book of Documents.
18. On August 1, 1995, a private connection to sewage works
was made available to the Innisfil Property and the Surrounding
Properties.”
ADDITIONAL EVIDENCE ADDUCED AT TRIAL
[4] Upon acquisition by the Appellant’s spouse, the
subject property, because of surrounding terrain and drainage,
was primarily under water. The Appellant’s spouse described
the property as swampy and filled with trees and tree stumps. To
make the property useful for the Appellant’s purposes, the
Appellant, through her spouse, brought in an estimated one
thousand loads of fill.
[5] Prior to this land reclamation (early 1980s) the
Appellant’s spouse received an offer to purchase the
property for $5,000. After reclamation, (1995), the Appellant
received an offer to purchase the property for $13,000, and after
municipal sewer and water service installation (1995-1996) the
Appellant received another offer to purchase for $15,000.
[6] The Respondent called one witness who was qualified to
express opinions as a real estate appraiser. This witness was
employed by the Canada Customs and Revenue Agency as a senior
appraiser. His estimate of market value of the subject property
was $75,000 as of August 1989.
ISSUE
[7] The issue is whether or not the Appellant is liable to pay
the amount of $75,000 pursuant to section 160 of the Act
in respect of the transfer of the Innisfil Property to the
Appellant.
THE APPELLANT’S POSITION AT TRIAL
[8] “Application of Subparagraph 160(1)(e)(ii) to
the Facts in the Present Circumstances.[1]
The first question is whether Carlogero Filippazzo was liable
to pay an amount under the Act “in” his 1989
taxation year or any preceding taxation year. Subsection 227.1(1)
of the Act, which is set out in Tab 6 of the
Appellant’s Book of Authorities, provides that where a
corporation has failed to deduct or withhold an amount as
required by section 153 of the Act, the directors of the
corporation at the time the corporation was required to deduct,
withhold or remit the amount are jointly and severally liable to
pay such amount along with any related penalties or interest. The
failure to deduct and remit source deductions in the present
circumstances by Toronto Excavating & Sodding Ltd. apparently
took place in the 1987 and 1988 taxation years and it is not
disputed that Carlogero Filippazzo was a director of the
corporation at such time.
Subsection 227.1(2) of the Act, however, provides that
a director is not liable under subsection 227.1(1) of the
Act unless one of the events described in any paragraphs
227.1(2)(a), (b), or (c) of the Act have occurred.
In the present circumstances, the required events described under
227.1(2)(b) and (c) never did occur and the required events
described under paragraph 227.1(2)(a) were only complete as of
May 30, 1990. As a result, it is clear that
Carlogero Filippazzo was not liable “in” a
taxation year until the events described in paragraph 227.1(2)(a)
were completed on May 30, 1990. Section 227.1 does not provide
any type of language which would deem a director’s
liability to be retroactive to the time of the failure to remit
under section 153.
The second question to be answered is whether
Carlogero Filippazzo was liable to pay any amount under the
Act “in respect of” his 1989 taxation year or
any preceding taxation year. As described above, the historical
context of subsection 160(1) of the Act, the context from
the existing provisions of the Act and the context
provided from Revenue Canada’s assessment and collection
documentation clearly support the position that the reference to
“in respect of a taxation year or any preceding taxation
year” in subparagraph 160(1)(e)(ii) of the Act is a
reference to the tax payable on the income of the transferor for
a particular taxation year that is assessed through the section
152 assessment procedure. No evidence has been presented in the
present circumstances that Carlogero Filippazzo was ever liable
for any amount other than in respect of the director’s
liability assessments.”
THE RESPONDENT’S POSITION AT TRIAL
[9] Counsel for the Respondent argued that the Minister
correctly assessed the Appellant in accordance with section 160
of the Act, as Carlogero Filippazzo transferred the
Innisfil Property to the Appellant, with whom he was not dealing
at arm’s length, for consideration that was below fair
market value and Carlogero Filippazzo had an outstanding
liability under the Act in the 1989 and preceding taxation
years.
ANALYSIS
[10] Section 227.1 of the Act makes the directors of a
corporation jointly and severally liable in specified
circumstances for the withholding tax obligations imposed on the
corporation. Subsection 227.1(2) of the Act requires
certain steps to be taken by the Minister in respect of the
corporation’s liability to pay an amount under subsection
227.1(1) of the Act in order for a director to become
jointly and severally liable with the corporation. Section 227.1
of the Act reads as follows:
227.1 (1) Liability of directors for failure to deduct
– Where a corporation has failed to deduct or withhold
an amount as required by subsection 135(3) or section 153 or 215,
has failed to remit such an amount or has failed to pay an amount
of tax for a taxation year as required under Part VII or VIII,
the directors of the corporation at the time the corporation was
required to deduct, withhold, remit or pay the amount are jointly
and severally liable, together with the corporation, to pay that
amount and any interest or penalties relating thereto.
(2) Limitations on liability – A director is not
liable under subsection (1), unless
(a) a certificate for the amount of the corporation’s
liability referred to in that subsection has been registered in
the Federal Court under section 223 and execution for that amount
has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution
proceedings or has been dissolved and a claim for the amount of
the corporation’s liability referred to in that subsection
has been proved within six months after the earlier of the date
of commencement of the proceedings and the date of dissolution;
or
(c) the corporation has made an assignment or a receiving
order has been made against it under the Bankruptcy and
Insolvency Act and a claim for the amount of the
corporation’s liability referred to in that subsection has
been proved within six months after the date of the assignment or
receiving order.
[11] Where a transferor has transferred property to his spouse
the transferor and transferee are jointly and severally liable
for certain taxes for which the transferor would otherwise be
liable.
[12] Subsection 160(1) of the Act provides:
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
the person’s spouse or a person who has since become the
person’s spouse,
a person who was under 18 years of age, or
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 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.
[13] Specifically, paragraph 160(1)(e) provides that in
the case of any transfer of the type specified, the transferor
and transferee are jointly and severally liable for the income
tax liability of the transferor at the date of the transfer or
for the portion thereof equal to the difference between the value
of the property transferred and the consideration paid therefor,
whichever is less. This joint liability extends to liability for
any source deductions which the transferor is liable to remit in
that or a preceding year. The following commentary is from
Stikeman[2] and I
conclude it accurately reflects the effect of
subparagraph 160(1)(e)(ii) after the 1987
amendment.
“After November 12, 1981 but prior to December 17, 1987,
the joint and several liability under subparagraph
160(1)(e)(ii) applied in respect of amounts which the
transferor was liable to pay in respect of the taxation
year in which the property was transferred or in respect of any
preceding taxation year. Effective December 17, 1987, the joint
and several liability also applies in respect of amounts which
the transferor was liable to pay in the taxation year or
in any preceding taxation year. This amendment appears to
be intended to reach amounts such as deductions at source that a
transferor was liable to remit in the year of the transfer or any
preceding year.”
[14] I find subparagraph 160(1)(e)(ii) also encompasses
the facts of this case. Carlogero Filippazzo, as a director
of the corporation, had an outstanding liability under section
227.1 of the Act for the 1989 and preceding taxation years
of not less than $63,296.59 (the “amount”) as of June
18, 1992. The time the liability of Carlogero Filippazzo arose on
the date of the failure to remit source deductions as required by
the Act in 1987 and 1988 and not the date the certificate
was registered in the Federal Court. I also conclude, section 160
of the Act is intended to include the liability for
failure to remit source deductions in the taxation year in which
the property was transferred or any preceding taxation years. I
therefore conclude Carlogero Filippazzo, the transferor, was
liable to pay the amount under the Act in respect of the
1989 taxation year and the preceding taxation years. The
Appellant is also liable for tax under paragraph 160(1)(e)
of the Act as a transfer had been made to her as the
spouse of the transferor.
VALUATION
[15] As to the property valuation at the date of transfer,
after full cross-examination of the Respondent’s real
estate appraiser, I conclude the witnesses’ appraisal was
incomplete, superficial and flawed in respect of the subject
property. In summary, the appraisal was strong on form and light
in substance. In particular, registration documents in relation
to one property used as a comparative disclosed significant
evidence that was discarded in the appraisal leading the Court to
the conclusion the comparable value used was in question.
[16] I have given little weight to the Respondent’s
valuation appraisal. What the Court is left with is the evidence
of Carlogero Filippazzo indicating in 1980 before the land
reclamation the property was at least worth $5,000 but after the
reclamation (1995, 1996) the property was worth between $13,000
and $15,000.
[17] On the evidence before the Court I therefore conclude and
find the property had a fair market value of $10,000 as of August
2, 1989.[3]
CONCLUSION
[18] Carlogero Filippazzo, the Appellant’s spouse, as a
director of the corporation, is liable for the unremitted source
deductions of the corporation for 1987 and 1988 under
section 227.1. At the time the subject property was
transferred both the Appellant and her spouse became jointly and
severally liable for the tax liability under subparagraph
160(1)(e) subject to the limitations as found in
subsection 160(1).
DECISION
[19] The appeal is allowed and the assessment is referred back
to the Minister of National Revenue for reconsideration and
reassessment on the basis that the Appellant is liable under
subparagraph 160(1)(e). However, the subject property
transferred as of August 2, 1989 had a fair market value of
$10,000.
[20] The Appellant is entitled to her costs.
Signed at Ottawa, Canada, this 30th day of June
2000.
"D. Hamlyn"
J.T.C.C.
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