REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from an assessment, notice of
which is dated July 13, 2012, and bears number F-038521, made under section 325
of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the ETA), with
respect to a transfer of property made by Ahuva Malnik Kroch Benaroch to the
appellant, her husband, even though she owed $67,424.15 under the ETA.
[2]
At the hearing, counsel for the appellant
informed the Court that the assessment made under the ETA with respect to the corporation
4158831 Canada Inc., dated March 30, 2005, for the June 1, 2003,
to August 31, 2004, period was not being challenged.
[3]
Counsel for the appellant further stated that
the event chronology was no longer being disputed. Consequently, the facts on
which Quebec’s Minister of Revenue (the Minister) relied to assess the
appellant are admitted. These facts are as follows:
(a)
The appellant and Ms. Benaroch have been
married since February 13, 1979;
(b)
In 2005, Ms. Benaroch owed $67,424.15 under
the ETA;
(c)
On May 26, 1988, the appellant and Ms. Benaroch
bought a condominium at 307 Samson in Laval (hereafter the condominium);
(d)
The appellant and Ms. Benaroch were equal
co-owners of the condominium;
(e)
On May 25, 2005, the appellant purchased a
house (hereafter the house) at 964 Place D’Alençon in Laval for $277,500;
(f)
The appellant was the sole purchaser of the
house;
(g)
To purchase the house, the appellant took out
two loans: a bridge loan for $60,000 and a hypothecary loan for
$160,000 with TD Bank;
(h)
The balance of the purchase price, $57,500, was
paid for with money that Ms. Benaroch’s parents gave to the appellant;
(i)
On June 27, 2005, the appellant and Ms. Benaroch
sold the condominium to third parties;
(j)
The condominium was sold for $137,000;
(k)
The notary handling the sale was Nicolas
Polyzos;
(l)
The appellant and Ms. Benaroch were paid
for the condominium in two installments;
(m)
On June 28, 2005, the appellant and Ms. Benaroch
received a first payment of $70,920.92.
(n)
On June 30, 2005, the appellant deposited
the cheque in his personal bank account;
(o)
The appellant and Ms. Benaroch also
received the second payment, $60,000, on June 28, 2005;
(p)
Both cheques were deposited in the appellant’s
bank account number 6280605;
(q)
The appellant used the money to pay off the
loans he used to purchase the house, of which he is the sole owner.
(r)
The two cheques, of $70,920.92 and $60,000
($130,920.92 in total), represent the net selling price of the condominium;
(s)
Ms. Benaroch transferred $65,460.46
($130,920.92 x 50%) to the appellant even though she owed $67,424.15 in
taxes.
(t)
The appellant did not provide a consideration
for the $65,460.46 he received from Ms. Benaroch;
[4]
Finally, counsel for the appellant admitted that
the balance of the net tax of 4158831 Canada Inc. has always been positive and
that, consequently, the corporation has always had to pay net tax rather than
being entitled to a net tax refund.
[5]
On the basis of the admissions described above,
the issues are (1) the validity of the assessment made with respect to Ms. Benaroch
as a director of 4158831 Canada Inc., and (2) the validity of the underlying
assessment made with respect to the appellant following the property transfer
made by his wife.
[6]
The assessment of Ms. Benaroch is dated March 28,
2007, and numbered PL2006-451. Ms. Benaroch was the director in office on
the dates on which 4158831 Canada Inc. failed to remit amounts it was required
to pay under the ETA for the audited period; consequently, she became
solidarily liable, together with 4158831 Canada Inc., to pay the amounts owed
to the Minister and any interest on, or penalties relating to, these amounts.
The amount claimed under the assessment is $67,424.15.
[7]
Subsection 325(1) of the ETA reads as
follows:
Non arm’s length’s
transfer liability
325. (1) Where at any time a person transfers property, either directly
or indirectly, by means of a trust or by any other means, to
(a)
the transferor’s spouse or common-law partner or an individual who has since
become the transferor’s spouse or common-law partner,
(b)
an individual who was under eighteen years of age, or
(c)
another person with whom the transferor was not dealing at arm’s length,
the transferee
and transferor are jointly and severally liable to pay under this Part an
amount equal to the lesser of
(d)
the amount determined by the formula
A – B
where
A is the amount,
if any, by which the fair market value of the property at that time exceeds the
fair market value at that time of the consideration given by the transferee for
the transfer of the property, and
B is the amount,
if any, by which the amount assessed the transferee under subsection 160(2)
of the Income Tax Act in respect of the property exceeds the amount paid
by the transferor in respect of the amount so assessed, and
(e)
the total of all amounts each of which is
(i) an
amount that the transferor is liable to pay or remit under this Part for the
reporting period of the transferor that includes that time or any preceding
reporting period of the transferor, or
(ii)
interest or penalty for which the transferor is liable as of that time,
but nothing in
this subsection limits the liability of the transferor under any provision
of this Part.
[8]
Subsections 323(1) and (2) of the ETA read as
follows:
Liability of
directors
323. (1) If a corporation fails to remit an amount of net tax as
required under subsection 228(2) or (2.3) or to pay an amount as required
under section 230.1 that was paid to, or was applied to the liability
of, the corporation as a net tax refund, the directors of the corporation at
the time the corporation was required to remit or pay, as the case may be, the
amount are jointly and severally, or solidarily, liable, together with the
corporation, to pay the amount and any interest on, or penalties relating to,
the amount.
Limitations
(2) A
director of a corporation 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 316 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 subsection (1)
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 bankruptcy 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 subsection (1) has been proved within six months
after the date of the assignment or bankruptcy order.
[9]
At paragraph 36 of the Notice of Appeal,
the appellant asked that the respondent establish that the conditions for section 323
of the ETA had been met. At the hearing, the question whether counsel for the
respondent could prove that Quebec’s Minister of Revenue had complied with paragraph 323(2)(a),
that is, whether execution of the writ of seizure and sale was returned
unsatisfied, was raised.
[10]
Counsel for the respondent had in his possession
the certificate registered with the Federal Court, the writ of seizure and sale,
and the bailiff’s return of nulla bona, but he did not adduce these
documents into evidence. The bailiff’s return of nulla bona was not
included in the respondent’s list of documents, and counsel for the respondent
did not call any witnesses who had personal knowledge of the fact that execution
of the writ was returned unsatisfied.
[11]
The purpose of paragraph 323(2)(a)
is to require the Minister to exhaust his remedies against the debtor
corporation before permitting him the extraordinary remedy of assessing a third
party, its director.
[12]
The evidence showing that the Minister satisfied
the conditions set out in paragraph 323(2)(a) is essential for
making a director liable. Here, the Minister has produced no evidence to show
that the execution of the writ of seizure and sale was returned unsatisfied.
Consequently, the director of 4158831 Canada Inc. cannot be held solidarily
liable for the amounts owed to the Minister by this corporation and the
assessment on which this liability is based cannot be considered to be valid.
[13]
In a notice of motion filed with the Court on
October 17, 2014, that is, the following day, counsel for the respondent
attempted to remedy the default and asked the Court to issue an order to allow
it to adduce the following documents by affidavit:
(a)
the certificate registered with the Federal Court under section 316 of the
ETA;
(b)
the writ of seizure and sale dated February 27, 2007;
(c) the return of nulla
bona dated February 28, 2007.
[14]
Counsel for the appellant opposed the production
of these documents, and the motion was heard on March 31, 2015. After
hearing the parties, the Court dismissed the motion in an order dated April 16,
2015.
[15]
Given that the Minister did not prove that
execution of the writ of seizure and sale was returned unsatisfied in whole or
in part, as required by paragraph 323(2)(a) of the ETA, the
assessment made with respect to Ms. Benaroch must be vacated. This
decision is to the same effect as the decision rendered by Justice Sheridan of
this Court in Roy Walsh (appellant) and Her Majesty the Queen
(respondent), 2009 TCC 557, regarding paragraph 227.1(2)(a) of
the Income Tax Act, which is the equivalent of paragraph 323(2)(a)
of the ETA.
[16]
As Ms. Benaroch does not owe any taxes
under the ETA, the appellant cannot be held solidarily liable to pay any amount
whatsoever with respect to Ms. Benaroch’s tax debt.
[17]
For all the above reasons, the appeal is allowed
with costs, and the assessment is vacated.
Signed at Montréal, Quebec, this 16th day of April 2015.
“Réal Favreau”
Translation certified true
On this 14th day of August 2015
François
Brunet, Revisor
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