REASONS
FOR JUDGMENT
D'Arcy J.
[1]
The issue in this appeal is the application of
subsection 160(1) of the Income Tax Act to the transfer of a 2008
Cadillac Escalade by Mr. Henry Wetelainen to the Appellant. As I will
discuss, the determination of this issue is dependent on whether, at the time
of the transfer, the Appellant and Mr. Wetelainen were dealing at arm’s
length for the purposes of subsection 160(1).
[2]
I heard from three witnesses: the Appellant, Mr.
Wetelainen and Mr. Ken Lieske, a CRA resource officer/complex case
officer. The Appellant was the key witness. I did not find her to be a credible
witness. Her testimony was self-serving and was contradicted on numerous
occasions by the objective evidence before me and the testimony of Mr.
Wetelainen. My reasons for judgment provide numerous examples of the
contradicting evidence.
I. Summary
of Facts
[3]
The Appellant and Mr. Wetelainen have known each
other for a significant period of time. Mr. Wetelainen testified that he first
met the Appellant in 1986, when she was hired as an intern by the Ontario Métis
Aboriginal Association (the “Association”). Mr. Wetelainen was the president of the
Association in 1986, a position he has held for a significant period of time.
The Appellant worked for the Association for many years, earning approximately
$60,000 to $100,000 per year.
[4]
I heard testimony from both the Appellant and
Mr. Wetelainen that, as a result of an audit in 2005 by the Federal Government
and a subsequent investigation by the RCMP, the Association had to close its
offices across Ontario. As a result, the Appellant lost her job with the
Association.
[5]
Sometime prior to 2008, Mr. Wetelainen and the
Appellant became involved in the development of an iron ore mine in Bending
Lake, Ontario (the “Bending Lake Mine”). Mr. Wetelainen testified that three companies were
used to carry out the development of the Bending Lake mine.
[6]
A company called Turtle River Wilderness Lodge
held the property rights to the mine. Bending Lake Iron Ore Corporation (“Bending Lake Corp.”)
was incorporated to develop and promote the mine. Bending Lake Iron Group
Limited was incorporated to build and operate the mine.
[7]
At some point prior to July 18, 2008, Turtle
River Wilderness Lodge and Bending Lake Iron Group Limited amalgamated and
continued operating under the name Bending Lake Iron Group Limited (“Iron Group Ltd.”).
[8]
Bending Lake Corp. and Iron Group Ltd. used two
corporate addresses. One was the Appellant’s home address and the second was an
address in Thunder Bay where the corporations’ offices and warehouse were
located.
[9]
Mr. Wetelainen testified that he was the
founder, majority shareholder and president of all four corporations.
[10]
I heard conflicting evidence with respect to the
Appellant’s involvement in Bending Lake Corp. The Appellant testified that she
was employed by Bending Lake Corp. as a team leader to develop the Bending Lake
Mine. She reported to a Mr. Jay Mackie who was the project manager and a
director.
[11]
She denied being a director or shareholder of
Bending Lake Corp. She did not think directors were ever appointed or that
shares of Bending Lake Corp. were ever issued.
[12]
The Appellant’s testimony was contradicted by
Exhibits R-2 and R-8, the testimony of Mr. Wetelainen and the Respondent’s
Request to Admit.
[13]
Exhibit R-2, a corporate profile report for
Bending Lake Corp. issued by the Ontario Ministry of Government Services,
states that she was an officer of Bending Lake Corp. with the title of Chief
Administrative Officer. This contradicts her testimony that she was a “team leader”.
[14]
Mr. Wetelainen testified that the Appellant was
a shareholder of Bending Lake Corp. The evidence before me is that Bending Lake
Corp.’s corporate tax return for the taxation year beginning on May 1, 2008 and
ending on April 30, 2009, states that the Appellant owned 15% of the
shares of the corporation.
This contradicts the Appellant’s testimony that she was not a shareholder of
Bending Lake Corp.
[15]
The Respondent served a Request to Admit on the
Appellant. She was requested to admit 20 separate facts. She only admitted the
truth of the facts numbered 1, 2, 3, 6 and 7. Number 2 reads as follows: “Throughout the 2008 taxation year, the appellant was
a shareholder, a director, an officer and an employee of Bending Lake Iron Ore
Corporation (the “Corporation”) [Bending Lake Corp.].”
This contradicts her oral evidence and is consistent with Exhibit R‑2,
Exhibit R-8 and the testimony of Mr. Wetelainen.
[16]
In summary, the evidence before me is that,
during the relevant period, the Appellant was a shareholder, director, officer
and employee of Bending Lake Corp.
[17]
The Appellant was one of three persons with
signing authority for cheques issued by Bending Lake Corp. The other two were
Mr. Wetelainen and Bending Lake Corp.’s accountant, a Mr. Chris Bailey. Each
cheque issued by Bending Lake Corp. required two signatures. The Appellant
testified that it was “common, that we wouldn’t
sign our own cheques.”
[18]
The Appellant stated in her Notice of Appeal
that at all material times she was a shareholder, director, officer and
employee of Iron Group Ltd. The Respondent, in her Reply, admitted the truth of
this fact. The Appellant accepted that she was the chief administrative officer
for Iron Group Ltd.
[19]
As with Bending Lake Corp., the Appellant, Mr. Wetelainen
and Mr. Bailey were the three persons with signing authority on Iron Group
Ltd.’s bank account, with each cheque issued by Iron Group Ltd. requiring two
signatures.
[20]
On July 18, 2008, Iron Group Ltd. received $4.2
million through a private placement of its shares. Mr. Wetelainen testified
that, pursuant to a term sheet that formed part of the private placement, Iron
Group Ltd. paid $1.2 million of the $4.2 million to Bending Lake Corp. It
appears the $1.2 million was paid to cover costs incurred by Bending Lake Corp.
to develop and promote the Bending Lake Mine; Mr. Wetelainen referred to such costs as intellectual
property.
[21]
Mr. Wetelainen testified that, at the time of
the private placement, Bending Lake Corp. owed him somewhere between $500,000
and $1 million, for services he had previously rendered to the corporation.
[22]
It appears a portion of the amount owed by
Bending Lake Corp. to Mr. Wetelainen was used by Mr. Wetelainen to
purchase the Cadillac Escalade at issue in this appeal.
[23]
The Appellant testified that, after Mr. Wetelainen
purchased the Cadillac Escalade, he gave it to her as a birthday present (her
birthday was on August 11, 2008). On the basis of her testimony and the
documentary evidence before me I have concluded that the purchase by Mr.
Wetelainen and the transfer to the Appellant of the Cadillac Escalade occurred
as follows:
-
On August 13, 2008, Mr. Wetelainen attended a
Toronto car dealership and entered into a vehicle purchase agreement for a new
2008 Cadillac Escalade at a purchase price of $68,543.72. He gave the
dealership a $2,000 deposit, leaving a balance owing of $66,543.72.
-
On August 13, 2008, the Appellant, at the
request of Mr. Wetelainen,
instructed Mr. Bailey to prepare a cheque for $75,000 drawn on Bending Lake
Corp.’s bank account and payable to Mr. Wetelainen. Exhibit R-1, an August 14,
2008 memorandum from the Appellant to Mr. Bailey, evidences these instructions.
-
A $75,000 cheque dated August 14, 2008 was
prepared and signed by the Appellant and Mr. Bailey. The cheque was made payable to
Mr. Wetelainen and showed his address as being 402 Grand Point Road,
Thunder Bay, Ontario. This is the Appellant’s home address.
-
On August 15, 2008, the Appellant deposited the
$75,000 cheque into Mr. Wetelainen’s bank account at a TD Canada Trust
branch in Thunder Bay, Ontario.
-
Approximately 30 minutes later Mr. Wetelainen
had a TD Canada Trust branch in Toronto prepare a bank draft for $64,232.87 payable
to the Toronto car dealership.
-
Mr. Wetelainen paid the remainder of the
purchase price to complete the purchase of the Cadillac Escalade. He then
transferred title in the Cadillac Escalade to the Appellant.
-
The Appellant obtained car insurance for the
Cadillac Escalade. As evidenced by Exhibits R-4 to R-6, the insurance covered
two drivers: the Appellant and Mr. Wetelainen.
[24]
The Appellant testified that she personally paid
$8,000 of the purchase price for the car by providing a cheque for such amount
to the Toronto car dealership.
She said she provided that amount for the “licensing
registration and any other closing costs”. She did not provide a copy of
this cheque or any other documentary evidence to support her testimony.
[25]
The documentary evidence before me contradicts
her testimony on this point. As I noted previously, the vehicle purchase
agreement shows that Mr. Wetelainen provided a deposit of $2,000 on August
13, 2008, leaving a balance due of $66,543.72. He then provided a bank draft on
August 15 for $64,232.87, leaving a balance owing of $2,310.85. It is not clear
to me when this amount was paid, but it is far less than the $8,000 the
Appellant claims she paid in respect of the purchase price of the Cadillac
Escalade. In addition, the $68,543.72 purchase price includes a license fee, an
administration fee, an extended warranty, fuel and something called “Protector Plus”. In my
view, the $68,543.72 represents the total amount paid for the vehicle.
[26]
There is no reliable evidence before me to
support a factual finding that the Appellant paid any amount to the Toronto car
dealer.
[27]
Mr. Wetelainen’s testimony contradicted the
Appellant’s evidence on a key point: whether Mr. Wetelainen directed the
Appellant to have Mr. Bailey prepare the $75,000 cheque. Mr. Wetelainen’s
testimony, on cross-examination was as follows:
Q. Right.
And you directed Dawn McKay to give you a cheque for $75,000?
A. No, I
directed Chris Bailey to do it, and Dawn was a signature on that. And Chris was
our accountant, and he was in control of it. He could have said no, but he
didn't he signed it and he kept the cheque.
Q. You
didn't have a conversation with Dawn McKay?
A. No,
because I deal with Chris all the time.
Q. Okay,
and you--
A. He was
the controller.
Q. So you
directed Chris to give you a cheque for $75,000?
A. Against
my account.
[28]
This directly contradicts the Appellant’s
testimony that Mr. Wetelainen called her and directed her to have Mr. Bailey
prepare the cheque for $75,000. In this instance, I accept the testimony of the
Appellant. The documentary evidence before me, Exhibit R-1, supports her
testimony. Mr. Wetelainen’s testimony on this point seriously damaged his
credibility. In my view, his testimony was an attempt to mislead the Court with
respect to the Appellant’s involvement in obtaining the $75,000 cheque from
Bending Lake Corp.
[29]
Mr. Wetelainen testified that he lived at a
house he owned in Wabigoon, Ontario. Apparently, Wabigoon is a two-and-a-half
to three-hour drive from Bending Lake Corp.’s and Iron Group Ltd.’s offices in
Thunder Bay. The Association’s office was located in the same building in
Thunder Bay.
[30]
Mr. Wetelainen testified that he did not own a
car at the time he purchased the Cadillac Escalade. He was using his brother’s
truck. On cross-examination, he admitted that he had previously owned a
Cadillac Escalade; however it was repossessed by a bank in either 2006 or 2007.
[31]
Mr. Wetelainen testified that he gave the Cadillac
Escalade to the Appellant as a gift for all she had gone through during the
audit of the Association and the subsequent police investigation.
[32]
The evidence before me is that, at the time Mr.
Wetelainen purchased the Cadillac Escalade and transferred title to the
Appellant, he was liable to pay over $900,000 under the Income Tax Act.
II. The
Law
[33]
Subsection 160(1) 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, or
solidarily, 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 for it,
and
(e) the transferee and transferor are jointly and severally, or
solidarily, 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 (including, for greater certainty,
an amount that the transferor is liable to pay under this section, regardless
of whether the Minister has made an assessment under subsection (2) for that
amount) in or in respect of the taxation year in which the property was
transferred or any preceding taxation year,
but nothing in
this subsection limits the liability of the transferor under any other
provision of this Act or of the transferee for the interest that the transferee
is liable to pay under this Act on an assessment in respect of the amount that
the transferee is liable to pay because of this subsection.
[34]
The Federal Court of Appeal in The Queen v.
Livingston
stated that the following criteria should be applied when considering the application
of subsection 160(1):
1) The transferor must be liable to pay tax under the Act at the
time of transfer;
2) There must be a transfer of property, either directly or
indirectly, by means of a trust or by any other means whatever;
3) The transferee must either be:
i.
The transferor’s spouse or common-law partner at
the time of transfer or a person who has since become the person’s spouse or
common-law partner:
ii.
A person who was under 18 years of age at the
time of transfer; or
iii.
A person with whom the transferor was not
dealing at arm’s length.
4) The fair market value of the property transferred must exceed
the fair market value of the consideration given by the transferee.
[35]
If these conditions are satisfied then the
transferee (the Appellant) is liable to pay a part of the transferor’s (Mr.
Wetelainen’s) tax liability equal to the amount by which the fair market value
of the transferred property (the Cadillac Escalade) exceeds the fair market
value of the consideration given by the transferee.
[36]
It is accepted by the Appellant that Mr.
Wetelainen transferred the Cadillac Escalade to her in August 2008. The
evidence before me is that at the time of the transfer Mr. Wetelainen owed
taxes in excess of $900,000.
[37]
Exhibit A-4 evidences that the fair market value
of the Cadillac Escalade was $68,543.72 at the time of the transfer.
[38]
As noted previously, I have concluded, on the
evidence before me, that the Appellant did not pay any consideration for the
Cadillac Escalade.
[39]
Therefore subsection 160(1) will apply to the
transfer if the Appellant and Mr. Wetelainen were not dealing at arm’s length
at the time of the transfer. It will also apply if they lived in a common-law
relationship either at the time of the transfer or subsequently to the
transfer.
[40]
The Respondent argues in her Reply that, at all
material times, paragraph 251(1)(a) deemed the Appellant and Mr. Wetelainen not
to deal with each other at arm’s length. The Respondent argues that the
Appellant and Mr. Wetelainen lived in a common-law relationship and thus were related
persons under paragraph 251(2)(a) and thus deemed, under paragraph 251(1)(a),
not to deal with each other at arm’s length.
[41]
The Respondent also argues that, pursuant to
paragraph 251(1)(c), the Appellant and Mr. Wetelainen did not deal with
each other at arm’s length. This paragraph reads as follows:
For the purposes of this Act,
. . .
(c) in any other
case, it is a question of fact whether persons not related to each other are,
at a particular time, dealing with each other at arm’s length.
. . .
[42]
The learned authors Peter W. Hogg, Joanne E.
Magee and Jinyan Li in their book Principles of Canadian Income Tax
Law provide the following accurate summary of the law with respect to the
determination of whether two persons are, as a question of fact, dealing at
arm’s length:
. . . The criteria that courts generally use in
determining whether or not a transaction is at arm's length are as follows: (a)
was there a common mind which directs the bargaining for both parties to a
transaction, (b) were the parties to a transaction acting in concert without
separate interests, and (c) was there de facto control? In addition, the
courts may consider whether the terms of the transactions between the parties
reflect “ordinary commercial dealings”, but only to “reflect on the soundness”
of the conclusions after applying the three tests above.
[43]
The Federal Court
of Appeal in The Queen v. Remai Estate noted the following with respect to the criteria:
. . . As with any multi-factor legal test,
not all need be satisfied in every case. Some may assume particular importance
in some circumstances, and others less. Nor are the listed factors necessarily
exhaustive.
III. Application
of Law to the Facts
[44]
I will first address the issue of whether the
Appellant and Mr. Wetelainen lived in a common-law relationship. When assessing
the Appellant, the Minister did not assume that the Appellant and Mr.
Wetelainen lived in a common-law relationship. As a result, there is no
assumption for the Appellant to destroy.
[45]
I must base my decision on the evidence before
me. Both the Appellant and Mr. Wetelainen testified that they did not live in a
common-law relationship. Mr. Wetelainen testified that he lived in his
home in Wabigoon, Ontario, a two-and-a-half to three-hour drive away.
[46]
I did not find either witness to be a credible
witness; as a result I have placed no weight on their testimony on this point.
[47]
It is clear to me that the Appellant and Mr.
Wetelainen had a very close relationship. They have known each other professionally
and personally for a long period of time. The following evidence is consistent
with a finding that at some point in time this relationship developed into a
common-law relationship:
-
The $75,000 cheque issued by Bending Lake Corp.
to Mr. Wetelainen showed his address as being the home address of the
Appellant.
-
The Appellant insured Mr. Wetelainen as a driver
of the Cadillac Escalade.
-
The Appellant was aware of Mr. Wetelainen’s bank
account information. Since she deposited the $75,000 into his bank account, she
must have known the location of that account and the account number.
[48]
This evidence alone is not sufficient to support
a finding that the Appellant and Mr. Wetelainen lived in a common-law
relationship. However, when that is combined with Exhibit R-6, the evidence
before me does support such a finding.
[49]
Exhibit R-6 is the certificate of insurance for
the Cadillac Escalade for the period from August 15, 2011 to August 15, 2012.
Page 2 of Exhibit R-6 states that the Appellant and Mr. Wetelainen are living
in a common-law relationship. This represents a change from the certificates of
insurance for the two previous years (Exhibits R-4 and R-5), which identify
each as being single.
[50]
The Appellant testified that she does not know
why the change was made on the insurance certificate issued in 2011; she
claimed that she did not provide instructions to do so to the insurance
company. I do not accept the Appellant’s testimony on this point. She was the
named insured on the certificate of insurance. The insurance company would have
to have received instructions from the Appellant before making the change in
marital status on the certificate of insurance.
[51]
On the above evidence, I have concluded that at
some point in time prior to August 2011 the Appellant and Mr. Wetelainen were
living in a common-law relationship.
[52]
In addition, it is my view that, regardless of
whether the Appellant and Mr. Wetelainen were living in a common-law
relationship, they were not, as a question of fact, dealing at arm’s length at
the time the Cadillac Escalade was transferred by Mr. Wetelainen to the
Appellant.
[53]
I do not accept Mr. Wetelainen’s testimony that
he gave the Cadillac Escalade to the Appellant as a gift for all she had gone
through during the audit of the Association. The Appellant testified that she
was well compensated for her work at the Association, earning $60,000 to
$100,000 per year. In my view, based upon the evidence before me, Mr.
Wetelainen transferred title to the Cadillac Escalade in order to avoid the
collection efforts of the CRA.
[54]
As I have just discussed, Mr. Wetelainen and the
Appellant had a close personal relationship. Sometime prior to the summer of
2008, Mr. Wetelainen had lost his only vehicle, a Cadillac Escalade, as a
result of its repossession by the bank. He clearly required a vehicle to carry out
his duties as president of Bending Lake Corp. and Iron Group Ltd. The mine was
located over two and half hours from the corporations’ offices in Thunder Bay.
Faced with a tax debt of over $900,000, he had to find a way to obtain a
vehicle without it being subject to CRA collection actions.
[55]
In my view, based on the evidence before me, he
and the Appellant accomplished this goal by carrying out the transactions that
resulted in funds flowing from Bending Lake Corp. to the car dealership and
title to the new Cadillac Escalade ending up with the Appellant. The Appellant
then added Mr. Wetelainen as a driver on her insurance policy, thus
allowing him to use the vehicle on a regular basis.
[56]
In my view, Mr. Wetelainen was the controlling
mind behind all of these transactions. He and, at his direction, the Appellant
carried out the transactions in an attempt to remove an asset that Mr.
Wetelainen intended to use on a regular basis, the Cadillac Escalade, from the
collection efforts of the CRA. This is the very evil that subsection 160(1) is
intended to prevent from occurring.
[57]
For the foregoing reasons, the appeal is
dismissed; subsection 160(1) applied to the transfer of the Cadillac Escalade
by Mr. Wetelainen to the Appellant. The Respondent is awarded her costs.
Signed
at Ottawa, Canada, this 17th day of October 2016.
“S. D’Arcy”
Email this Content