REASONS
FOR JUDGMENT
Hogan J.
I. Overview
[1]
The issue in these appeals is whether the
Appellants, Gurcharanjit Budwal (“G. Budwal”) and Paramjit Budwal (“P.
Budwal”), husband and wife, were correctly assessed under subsection 160(1) of
the Income Tax Act (the “Act”) with respect to an unpaid tax liability
of $110,052.45 of Budwal Investments Ltd. (“Budwal Investments”) in the
circumstances described below.
[2]
The appeals were heard on common evidence.
II. Factual Background
[3]
Budwal Investments carried on a business in
residential construction and real estate, primarily in Victoria, British Columbia.
[4]
G. Budwal and P. Budwal owned respectively 60%
and 40% of the shares of Budwal Investments.
[5]
In 2002, Budwal Investments purchased a parcel
of land on Blackberry Road in Victoria, British Columbia, for the purpose of developing
a four-unit townhouse project (the “Blackberry Project”).
[6]
Budwal Investments sold the first two units of
the Blackberry Project during its taxation year ending October 31, 2003.
[7]
Budwal Investments then sold the last two units
of the Blackberry Project (the “2004 Properties”) during its taxation year
ending October 31, 2004. The company failed to report its net profit from
these two sales in its income tax return for the 2004 taxation year. As a
result, it was reassessed for unreported income in the amount of $149,054. The
company did not succeed in its challenge of this reassessment.
[8]
On March 26, 2008, the Minister of National
Revenue (the “Minister”) assessed the Appellants under subsection 15(1) of the
Act on the ground that they appropriated the net profit of $149,054 that Budwal
Investments had failed to report. The amount that was added to the income of each
of the Appellants’ under subsection 15(1) of the Act was based on their
respective shareholdings.
[9]
Although the Appellants filed notices of
objection to challenge those assessments, they did not appeal the matter to the
Tax Court of Canada upon receiving a notice of confirmation. While an issue
arises as to whether the benefit that is the object of the assessments against
the Appellants should be reduced by the amount of their liability, if any,
under section 160 of the Act, the question is moot because that matter is
not before me in the present appeal.
[10]
On May 19, 2011, the Minister assessed the
Appellants under subsection 160(1) of the Act with respect to Budwal
Investments’ unpaid tax liability of $110,052.45, using the same methodology as
that used to establish the amount of their respective shareholder’s
appropriations. The assessment issued was in the amount of $89,432 for G.
Budwal and $59,622 for P. Budwal in respect of the alleged transfer of property
referred to in paragraph 8 above.
III. Positions of the
Parties
[11]
The essence of the Appellants’ position is that
there was an outstanding shareholders’ loan balance that was repaid by Budwal
Investments with the pre‑tax profit earned from the sale of the 2004 Properties.
In other words, the Appellants gave valuable consideration for the funds that
Budwal Investments transferred to them.
[12]
The Respondent’s position is that the
Appellants’ shareholders’ loan account was negative when they withdrew the full
pre-tax profit earned from the sale of the 2004 Properties.
[13]
The Respondent points out that Budwal Investments
had no assets and an unpaid tax bill of $110,052.45, which the Appellants do
not deny. The Appellants offered no reasonable explanation as to how
Budwal Investments could have found itself in that position. The Respondent
points out that the Appellants do not dispute that Budwal Investments was
profitable. Therefore, unless Budwal Investments subsequently lost money, which
the Appellants have not alleged, it should have had sufficient assets to repay
what it owed on its shareholders’ loan account and satisfy its unpaid tax
liability in full.
IV. Analysis
[14]
The relevant parts of section 160 of the Act
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 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 74.1 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.
[15]
The purpose of this section is to prevent a
taxpayer from avoiding paying tax by way of a transfer of property to a non-arm’s
length party. Accordingly, if the transferee fails to give consideration equal
to the fair market value of the transferred property, the transferee becomes
jointly and severally liable with the transferor for the payment of the transferor’s
liability up to an amount equal to the shortfall in the consideration paid to
acquire the property. This aforementioned purpose, as well as the conditions
that give rise to the application of the provision, were summarized by the
Federal Court of Appeal in Canada v. Livingston:
17 In light of the
clear meaning of the words of subsection 160(1), the criteria to apply when
considering subsection 160(1) are self-evident:
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.
18 The purpose of
subsection 160(1) of the Act is especially crucial to inform the application of
these criteria. In Medland v. Canada 98 DTC 6358 (F.C.A.) (“Medland”)
this Court concluded that “the object and spirit of subsection 160(1), is to
prevent a taxpayer from transferring his property to his spouse [or to a minor
or non-arm’s length individual] in order to thwart the Minister’s efforts to
collect the money which is owed
to him.” See also Heavyside v. Canada [1996]
F.C.J. No. 1608 (C.A.) (QL) (“Heavyside”) at paragraph 10. More apposite
to this case, the Tax Court of Canada has held that the purpose of subsection
160(1) would be defeated where a transferor allows a transferee to use the
money to pay the debts of the transferor for the purpose of preferring certain
creditors over the CRA (Raphael v. Canada 2000 D.T.C. 2434 (T.C.C.) at
paragraph 19).
19 As will be
explained below, given the purpose of subsection 160(1), the intention of the
parties to defraud the CRA as a creditor can be of relevance in gauging the
adequacy of the consideration given. However, I do not wish to be taken as
suggesting there must be an intention to defraud the CRA in order for
subsection 160(1) to apply. The provision can apply to a transferee of property
who has no intention to assist the primary tax debtor to avoid the payment of
tax: see Wannan v. Canada 2003 FCA 423 at paragraph 3.
[16]
The Appellants argue that the evidence shows
that they received the transferred funds in repayment of amounts Budwal
Investments owed to them. I disagree.
[17]
First, the evidence shows that Budwal
Investments reported that it had a negative shareholders’ loan balance of $27,752
when it filed its T2 income tax return for its taxation year ending October 31,
2003.
According to this information, the Appellants owed Budwal Investments $27,752 when
they allegedly appropriated Budwal Investments’ pre-tax profit earned from the
sale of the 2004 Properties. While the Appellants attempted to prove that this
was a mistake, I find that the evidence that they presented fell well
short of the mark.
[18]
Mr. McCoy, the Appellants’ accountant and Budwal Investments’ external accountant, testified
on behalf of the Appellants. The financial information that he presented at the
hearing was substantially different than the information he had previously
provided to the Minister at the objection stage. I found this evidence to be
neither reliable nor credible. He offered no plausible explanation to justify
his latest calculations. In addition, he could not explain how Budwal
Investments could have ended up with an unpaid tax liability of $110,052.45 and
no assets to satisfy this liability. He acknowledged that the Blackberry
Project was a profitable venture, as did G. Budwal during his examination
in chief. Therefore, Budwal Investments should have had sufficient funds to
repay its shareholders’ loan and satisfy its income tax liability in full.
[19]
Budwal Investments could only have ended up with
a deficit for one of two reasons: either it incurred losses or funds were
appropriated by its shareholders. There is no evidence to show that Budwal
Investments incurred losses. I surmise that if such had been the case, Budwal
Investments would have filed tax returns to report the losses and would have
carried those losses back in order to reduce or eliminate its earlier income
tax liability. I conclude that the Minister’s assumption that Budwal
Investments’ pre‑tax profit was appropriated is correct.
[20]
There is one issue that remains for me to
determine. The Minister assumed that Budwal Investments’ pre-tax profit was
appropriated on a 60/40 basis. This mirrors the Appellants’ shareholdings in
Budwal Investments. However, the evidence presented at the hearing rebuts
the Minister’s assumption that P. Budwal appropriated 40% of the
funds.
[21]
At the hearing, Mr. McCoy testified that
$100,000 transited from Budwal Investments to 587667 B.C. Ltd. (“B.C.
Ltd.”) and then on to G. Budwal. His testimony on this point was corroborated
by bank statements showing the deposit in B.C. Ltd.’s bank account and two
cheques from B.C. Ltd. to G. Budwal, each in the same amount of $50,000. Since these transfers occurred
within a few days of the sale of the 2004 Properties, it is reasonable to infer
that these amounts were paid out of Budwal Investments’ profit earned from
those sales. It is clear from the evidence that P. Budwal was a passive
shareholder and that her husband controlled all of Budwal Investments’
operations. Considering as a whole the evidence submitted, I conclude that G.
Budwal was the only person who appropriated funds from Budwal Investments. At
the very least, P. Budwal has presented a prima facie case that she did
not appropriate the funds that the Minister alleged she did.
[22]
For all of these reasons, the appeal of G.
Budwal is dismissed and the section 160 assessment made against him is
confirmed.
[23]
For the same reasons, the appeal of P. Budwal is
allowed and the section 160 assessment made against her is vacated.
Signed at Ottawa, Canada, this 19th day of December 2014.
“Robert J. Hogan”
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