REASONS FOR JUDGMENT
Paris J.
[1]
This is an appeal from an assessment established
by the Minister of National Revenue (the Minister) under subsection 160(1)
of the Income Tax Act (ITA). In this assessment, the Minister holds the appellant
and her commonlaw spouse, Denis Savard, jointly and severally, liable for Mr. Savard’s
tax debt of $178,024 owed under the ITA for the 2000 and 2001 taxation years.
[2]
Section 160 of the ITA allows the Minister
to recover a tax debt from a person other than the tax debtor if certain
conditions of the Act are met. Generally speaking, subsection 160(1) will
apply if the tax debtor makes a nonarm’s length transfer of property, and if
the consideration given for the property is less than the fair market value of
the property at the time of the transfer.
[3]
According to the respondent, on April 30,
2003, Mr. Savard transferred property to the appellant, specifically,
apartment 1209 at 15 rue des Émeraudes, in Repentigny, Quebec (the property) for
the sum of one dollar, when he had a tax debt of $2,009,293.73.
[4]
The only issues are whether the property was
transferred to the appellant and, if the answer is affirmative, what
consideration was given for the property.
Facts
[5]
The appellant and Mr. Savard have been in a
commonlaw relationship since 1999.
[6]
Mr. Savard acquired the property on
May 31, 2000, and, on June 14, 2001, Scotia Mortgage Corporation (Scotia) gave him
a $175,000 mortgage loan on this property.
[7]
In 2003, the appellant planned to open a massage
therapy centre called Laser Spa, financed, in part, by a small business loan (SBL). However,
she says that her financial records were not good enough for her to obtain the
SBL.
[8]
To help the appellant carry out her project,
Mr. Savard offered to sell her the property for one dollar, which would [translation]
“improve her financial
records,” thus allowing her to qualify for an SBL.
[9]
At the time, Mr. Savard had been about to
list the property for sale and the appellant testified that she and
Mr. Savard agreed that, if she sold it at a later date, she would give
Mr. Savard the full net value of the property.
[10]
Thus, on April 7, 2003, the
appellant and her spouse signed an agreement titled [translation]
“Condo
loan to finance Laser Spa.” The relevant stipulation reads as follows:
[translation]
1. On or before April 30, 2003, Manon Cawthorne may
purchase, for one dollar plus assumption of the $175,000 Scotia Bank mortgage,
the condo owned by Denis Savard located at 15 des Émeraudes, Apt. 1209,
Repentigny, Quebec;
2. When the condo is sold
or sufficient financing for Laser Spa is obtained, Manon Cawthorne will return
the full net equity of the condo to Denis Savard;
3. This loan is for a
maximum of three years;
4. This is an interestfree
loan.
[11]
On the same day, Mr. Savard put the
property up for sale.
[12]
On April 30, 2003, Mr. Savard
transferred the property to the appellant. This transfer was documented in a
notarial instrument of transfer, stipulating that the transfer was made for [translation] “the sum of one dollar and other good and valuable
considerations,” and subject to the condition that the appellant
assume the existing mortgage.
[13]
After the property was added to her assets, the
appellant submitted financial records listing her assets and liabilities to
obtain the SBL. The appellant’s obligation to return the net value of the
property to Mr. Savard does not appear anywhere on those records.
[14]
On May 1, 2003, the appellant incorporated her
company and began her operations.
[15]
Between April 30 and June 3, 2003,
Mr. Savard paid the mortgage and other fees associated with the property.
[16]
On June 3, 2003, the appellant sold the property
to third parties for $353,025.
[17]
In accordance with the commitment made to her
spouse, she gave Mr. Savard the proceeds of the sale after the mortgage of
$181,397.46 was paid off.
[18]
On April 30, 2003, Mr. Savard’s total tax
debt was $2,009,293.73, comprised of $1,915,140.72 in taxes, interest and
penalties for the 2000 taxation year, and $94,153.01 in taxes, interest and
penalties for the 2001 taxation year.
[19]
On June 13, 2013, the Minister assessed the
appellant for $178,024 under section 160 of the ITA, calculated as
follows:
|
Value of the building
 (Mortgage on the building)
|
$353,025
($175,000)
|
|
Net value of the building
 (Consideration)
|
$178,025
($1)
|
|
Surplus
|
$178,024
|
Appellant’s position
[20]
The appellant says that the property was not
transferred because the legal relationship between the appellant and
Mr. Savard in respect of the property was, in substance, in the form of a
mandate, as was the case in La Reine v. Lemire, 2013 FCA 242.
[21]
Alternatively, the appellant states that she
provided consideration equal to the property’s fair market value, for its
transfer. She states that the consideration given included her commitment to
return to Mr. Savard the full net value of the property at the time of its
sale. Therefore, the appellant asks that the Court dismiss the respondent’s
argument that the notarial contract was a simulation intended to deceive third
parties and that the agreement between the appellant and her spouse regarding
repayment of all proceeds of the sale constitutes a counterletter.
[22]
The appellant submits that the consideration
indicated in the instrument of transfer included [translation]
“other good
and valuable considerations” and that this phrase took into
account the appellant’s commitment to repay Mr. Savard the net value of
the property. The appellant asks the Court to consider Tanguay v. La Reine,
97 DTC 947, where the Court concluded, on the basis of facts similar to those
in this case, that there had been no simulation.
Respondent’s position
[23]
The respondent maintains that the Minister is
not bound by the agreement entitled [translation]
“Condo
loan” (Exhibit A3) between the appellant and Mr. Savard
because it was a counterletter and the transfer dated April 30, 2003
(Exhibit I1) whereby the property was transferred constitutes a simulation
within the meaning of section 1451 of the Civil Code of Québec,
R.S.Q. c. C1991 (C.C.Q.).
[24]
Counsel for the respondent also says that Lemire
is not applicable in this case because the taxpayer in that case was not part
of a simulation, as the appellant is here. Faced with simulation, the Minister
may consider the apparent instrument, i.e. the notarial transfer of the
property for one dollar and assumption of the existing mortgage, to be a
counterletter.
[25]
Finally, counsel for the respondent submits that
this notarial instrument makes no mention of another instrument or other
consideration that may have been provided by the parties and that the Court
must conclude that no consideration was given other than the sum of one dollar
and assumption of the existing mortgage.
Applicable Legislation
[26]
The relevant parts of subsection 160(1) of
the ITA and the C.C.Q. read 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 commonlaw 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 74.1 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 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.
1451. Simulation exists where the
parties agree to express their true intent, not in an apparent contract, but in
a secret contract, also called a counterletter.
Between the
parties, a counterletter prevails over an apparent contract.
1452. Third persons in good faith may,
according to their interest, avail themselves of the apparent contract or the
counterletter; however, where conflicts of interest arise between them,
preference is given to the person who avails himself of the apparent contract.
Analysis
[27]
To determine the nature of the legal relationship
between the appellant and Mr. Savard with respect to the property and any
consideration given to Mr. Savard by the appellant, the issue of
simulation must first be considered.
[28]
In my opinion, the evidence presented to the
Court clearly shows that the agreement dated April 8 concluded between the
appellant and Mr. Savard is a counterletter in which they expressed their
true intentions regarding the transfer of the property to the appellant, which
were contrary to the terms of the notarial instrument of transfer. According to
the appellant herself, she wanted to present a [translation]
“improved financial records” to the financial institution to
which she had applied for an SBL, by claiming to own the property, and that the
net value of the property, after deduction of the existing mortgage, belonged
to her. The document titled [translation] “Provisional
balance sheet at May 1, 2003,” which she admits to submitting to
the financial institution in her name, does not list under liabilities her
obligation to return the full net value of the property to Mr. Savard at a
later date. There is no doubt that the appellant wanted to create a false
impression of her net worth and that she attempted to do so by means of the
notarial instrument of transfer. It follows that the notarial instrument was a
simulation.
[29]
I do not accept the submission of counsel for
the appellant that the phrase [translation] “other good
and valuable considerations” included with the price set in the
notarial instrument of transfer refers to her commitment to give
Mr. Savard the full net value of the property because she wanted to give
the impression that this net value belonged to her and not to Mr. Savard.
It also contradicts the information in the balance sheet to which I previously
referred. In the light of all the evidence, it is my opinion that the agreement
titled [translation] “Condo loan”
was not a complement to the notarial instrument of transfer as the appellant
claims, but was, instead, a counterletter.
[30]
Given the counterletter and simulation, the
appellant’s case differs from that of the taxpayer in Tanguay, in which Mr. Justice
Dussault said at paragraph 22:
[translation]
Considering the
evidence presented, I do not believe that the notarial contract constitutes a
simulation intended to deceive third parties, or that the agreement between the
appellant and her spouse regarding repayment of her part of the property
constitutes a counterletter. . . .
[31]
Lemire, decided
by The Federal Court, is not applicable here for the same reason. The
Federal Court concluded that, on the basis of the evidence accepted by the
trial judge, Ms. Lemire [translation] “did not take
part in a simulation” (Lemire decision, paragraph 33).
[32]
Thus, faced with a simulation, the Minister may,
under section 1452 of the C.C.Q., make use of the apparent contract, to
the effect that property was transferred for the consideration of one dollar
and assumption of the existing mortgage.
[33]
For all these reasons, the appeal is dismissed
with costs to the respondent.
Signed at Ottawa, Canada, this 19th day of April 2016.
“B. Paris”
Translation
certified true
on this 4th day of August 2016.
François Brunet, Revisor
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