Citation: 2013 TCC 17
Date: 20130121
Docket: 2011-2299(GST)I
BETWEEN:
ZT22 HOLDING INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from
an assessment dated May 20, 2009, and bearing the number PL2009-1013, made
under subsection 325(2) of the Excise Tax Act (the ETA) in respect
of the appellant, following a transfer of property on March 20, 2003,
owing to the tax liability of Antoine Tohme. Mr. Tohme and the appellant
are not dealing with each at arm’s length within the meaning of subsection 325(2)
of the ETA. The amount of the assessment is $18,879.44. The assessment was confirmed
by a decision on the objection rendered on August 27, 2009. Hence this appeal.
Factual Background
[2]
The appellant, ZT22
Holding Inc. (hereinafter ZT22) is a corporation, incorporated on January 21, 2003.
It operates a business in involving the lease of immovables. Antoine Tohme
was one of the appellant’s three shareholders. Moreover, he was registered with
the Registre des entreprises du Québec as secretary of ZT22. It is obvious that
he was a related person with respect to ZT22 within the meaning of
subsection 325(2) of the ETA and that he was not dealing with the
appellant at arm’s length.
[3]
On March, 20, 2003,
Antoine Tohme owed the Minister of National Revenue (the minister) the
amount of $34,576.21 under the ETA.
[4]
On February 10, 2003, Mr.
Tohme purchased condo unit number 508, located at 2555 Havre‑des Iles,
Laval, Quebec. The purchase price was $75,000. On that same day, he signed
two notarial acts with respect to said purchase. In the first deed, he is described
as being the condo’s purchaser (see Exhibit A‑2). The second
notarial act is an agreement between Mr. Tohme and ZT22 whereby Mr. Tohme
recognizes that he acts as mandatary on behalf of appellant ZT22 and that it is
the appellant who shall disburse all sums respecting the purchase and who assumes
the hypothec on the condo (see Exhibit A‑4).
[5]
On February 11, 2003, Mr.
Tohme purchased another condo, unit 1417, located at the same address. The
purchase price was $72,500. Again, on that day, he signed two notarial acts
with respect to that purchase; in the first deed, he is described as the
purchaser of the condo (see Exhibit A‑1). In the second notarial act,
Mr. Tohme again recognizes that he only acts as mandatary of the appellant ZT22,
and again, it is the appellant who shall disburse all sums respecting the
purchase and who assumes the hypothec on the condo (see Exhibit A‑3).
[6]
Indeed, by these two
notarial acts (Exhibits A‑3 and A‑4), Mr. Tohme states that he
borrowed from the Caisse Populaire de Chomedey the total amount of $100,625 for
the purchase of the two condos.
[7]
Paragraphs 3, 4
and 5 of the two deeds reveal the real reason for the purchase of the two condos.
The paragraphs read as follows:
[Translation]
3.
Despite the fact that the hypothecary loan is in
name of Antoine TOHME, the parties state that ZT22 HOLDING INC. is indeed
responsible for all sums already disbursed or sums to be disbursed.
4.
Despite the fact that the property was acquired by
the said Antoine TOHME, the parties state that the property was indeed
purchased by ZT22 HOLDING INC., the latter being responsible for all sums
already disbursed.
5.
Said Antoine TOHME undertakes and covenants to
transfer all the rights, titles and interest that he holds in the foregoing
property, upon the simple request of the officer of ZT22 HOLDING INC. for the
amount of ONE DOLLAR ($1.00) with the assumption of the hypothec.
[8]
As provided for in said
notarial acts, a month later, on March 20, 2003, Mr. Tohme transferred
the two condos to the appellant by notarial acts (see Exhibits A‑5 for
unit 1417 and Exhibit A‑6 for unit 508). In those third
notarial acts, as provided for, the transfer of the immovables was made in consideration
of one dollar and the assumption of the balance of the two hypothecary debts on
the condos, which totalled $110,416.68.
The appellant’s position
[9]
The appellant submits
that the assessment made against it should be vacated, as the value of the consideration
received by Mr. Tohme was equal to the fair market value of the property
transferred. The appellant submits that it assumed the obligations of the transferor
that were equal to the price paid for the property transferred.
The respondent’s position
[10]
The respondent submits
that Mr. Tohme sold the two immovables to the appellant for a consideration
that was less than their fair market value. The respondent submits that the condos
were purchased for a total of $147,500 and were sold to the appellant a
month later for $1 each. Furthermore, the appellant was to assume the two
hypothecs on the condos. The total balance of the two hypothecs was $110,414.78.
At the time of the transfer to the appellant, the fair market value of the two condos
was in fact the purchase price that had been paid by Mr. Tohme a month before. Thus,
the appellant purchased the condos for a consideration that was
$37,085.22 less than their fair market value.
[11]
As of March 20,
2003, Mr. Tohme owed the Minister $34,576.21 in duties, interest and penalties
under the ETA. Given that Mr. Tohme had a number of tax liabilities in 2003,
the Minister prorated the outstanding tax liabilities to make an assessment
under the ETA, which represented 51% of the tax liability. The respondent states
that the appellant is, therefore, jointly and severally liable for Mr. Tohme’s
tax liability under subsection 325(2) of the ETA up to the amount by which
the fair market value of the properties exceeds the consideration paid, which
is the assessed amount of $18,879.84.
[12]
The respondent submits
that all notarial deeds of purchase and sale are proof of their content. The
respondent submits that the counter letters (Exhibits A‑3 and A‑4) to
the effect that Mr. Tohme never was the real owner of the two condo units, but
that the appellant was the real owner, cannot be set up against her. The
respondent submits that she can avail herself of the “apparent contracts,” namely
the notarial deeds of purchase and sale, and that she can indeed ignore counter
letters, regardless of the real situation between Mr. Tohme and ZT22.
Statutory provisions
[13]
Relevant GST provisions
are set out in subsection 325(2) of the ETA. The relevant excerpts are as
follows:
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.
(1.1) For the purpose of this section, the fair market value at
any time of an undivided interest in a property, expressed as a proportionate
interest in that property, is, subject to subsection (4), deemed to be equal to
the same proportion of the fair market value of that property at that time.
(2) The
Minister may at any time assess a transferee in respect of any amount payable
by reason of this section, and the provisions of sections 296 to 311 apply,
with such modifications as the circumstances require.
(3) Where
a transferor and transferee have, by reason of subsection (1), become jointly
and severally liable in respect of part or all of the liability of the transferor
under this Part, the following rules apply:
(a) a payment by the transferee
on account of the transferee’s liability shall, to the extent thereof,
discharge the joint liability; and
(b) a payment by the
transferor on account of the transferor’s liability only discharges the
transferee’s liability to the extent that the payment operates to reduce the
transferor’s liability to an amount less than the amount in respect of which
the transferee was, by subsection (1), made jointly and severally liable.
. . .
(5) In
this section, “property” includes money.
[14]
Articles 1451 and
1452 of the Civil Code of Québec (C.C.Q.) provide as follows:
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 counter letter.
1452. Third persons in
good faith may, according to their interest, avail themselves of the apparent
contract or the counter letter; however, where conflicts of interest arise
between them, preference is given to the person who avails himself of the
apparent contract.
Analysis
[15]
I will begin my
analysis by accepting as a general principle the Supreme Court of Canada’s
statement, as articulated by Justice McLachlin, now Chief Justice, in Shell
Canada Ltd. v. Canada, [1999] 3 S.C.R. 622. At paragraph 39, Justice
McLachlin holds that, in tax cases, courts must be sensitive to the economic realities of a particular
transaction, regardless of what appears to be
its legal form, provided that it is not contrary to a specific provision of the Act and that it is not a
sham. The taxpayer’s legal relationships must be
respected by the courts in tax cases.
[16]
In the case at bar, the
respondent claims that, according to the apparent deeds of purchase and sale, there
was a transfer of immovable property from Mr. Tohme to ZT22 and, therefore,
the latter is jointly and severally liable for Mr. Tohme’s tax liability up to
the amount by which the fair market value of the condo exceeds the fair market
value of the consideration paid by ZT22 to Mr. Tohme for
the transfer of the properties. The respondent also submits that the counter
letters produced by the appellant (Exhibits A‑3 and A‑4) cannot
be set up against her and the Minister can, therefore, avail himself of the “apparent”
deeds of purchase and sale to the effect that Mr. Tohme was the owner of the
two condos and that he transferred them to the appellant. The respondent relies on article 1452 of the C.C.Q.
According to the respondent, all the conditions provided for in section 325
of the ETA are met and, therefore, the appellant is jointly and
severally liable for Mr. Tohme’s tax liability to the
extent determined by subsection 325(1) of the ETA.
The effect of a counter letter
[17]
A
counter letter is a private written agreement
whose purpose is to discover the real intention of the parties who stipulated otherwise in public. There are
two essential components to a counter letter: the material element and the element of intent. These elements
are well described by Professor Royer in La preuve civile, 2nd ed.,
Cowansville (QC), Yvon Blais, 1995 at No. 1568:
[Translation]
The material element consists
in the existence of two separate deeds, the apparent deed, which contains what
the parties want the third parties to believe and the secret deed, which
expresses the true agreement. If the latter is articulated in writing, it is
referred to as a counter letter.
The element of intent
consists in the willingness to deceive third parties about the existence or content
of an agreement.
[18]
Thus,
it would appear as though a counter letter is equivalent to somewhat of a sham.
A counter letter is a secret document that reflects the existence of a situation
or a relationship between the contracting parties which are different from the
ones expressed in the apparent contract. The secret or intentional element, to
want to deceive third parties, is an essential element of a counter letter. In Quebec case law, it is not necessary for a counter letter to be written; a verbal agreement
between the contracting parties is sufficient.
[19]
Articles 1451
and 1452 of the C.C.Q provide that counter letters are only
enforceable between the contracting parties and not against third parties. Third
persons in good faith are may rely on the apparent contract
even if no loss has resulted from the simulation. It is not necessary for
the simulation or subterfuge to be directed against the person relying on the
apparent contract: see Transport H. Cordeau Inc. v. The
Queen, 99 DTC 5765 (F.C.A.), at paragraph 20. It is not necessary
for the third parties to establish that the counter letter originally caused loss: it
will suffice if at the time it is set up against them they have an interest in
rejecting it:
see Transport H. Cordeau, supra, at paragraphs 21 and 23. It
is not necessary to want to deceive the Revenue Department for article 1452 of the C.C.Q to
apply. As stated by Justice Létourneau in Transport H. Cordeau at
paragraph 29:
[29] In
fact, under art. 1452 the third party in good faith has the option of relying
on the apparent contract or the counter-letter, depending on what is in his
interest. This is the penalty for simulation by counter-letter, for as the
writers Mazeaud, supra, mentioned at p. 925, even if the contracting
parties did not try to deceive the Revenue Department or their creditors by
their simulation, it should not be [TRANSLATION] "forgotten that the
parties did not confine themselves simply to not disclosing the contract; they
went further: to ensure the contract remained a secret they created a deceptive
appearance, they concluded an apparent contract which was incorrect; they
deceived everyone who had Encore, on knowledge of that simulated
contract". The legislature wished to protect third parties who relied on
the apparent contract after [TRANSLATION] "placing in appearances a trust
which should not have been deceived.
Again,
you can see that deceit or secrecy are part of a counter letter.
[20]
Although article 1452 of the C.C.Q. provides that a counter
letter is not enforceable on a third person, in the case law, a distinction has
been drawn between the role of the Minister (or Deputy Minister) of Revenue as
“tax assessor” and his role as “tax collector”. In Bolduc v. The Queen,
2003 DTC 221, Judge Archambault of this
Court ruled that when the Deputy Minister acts as “assessor”, the Deputy
Minister shall not be considered as a third person for the purposes of article 1452
of the C.C.Q. In such circumstances, the Deputy Minister must determine the
taxpayer’s liability based on the real situation. However, when the Deputy
Minister acts as “collector”, he shall be considered as a third person under article 1452
of the C.C.Q. The decisions rendered in Richelieu c. Québec (Sous‑ministre
du Revenu), [2001] J.Q. No. 8037,
[2002] R.D.F.Q. 303 (rés.) (C.Q.), Dussault‑Zaidi c. Québec (Sous‑ministre du
Revenu,) [1996] J.Q. No. 2969, [1996] R.D.F.Q. 73 (C.A. Québec) (Justice
Deschamps, dissenting), and Haeck c. Québec (Sous-ministre du Revenu),
[2001] J.Q. No. 8038, [2002] R.D.F.Q. 73 (C.Q.), are cited in support of
this argument. Moreover, Judge Archambault concluded that section 160 of
the Income Tax Act, which is equivalent to section 325 of the ETA, provides
for collection and not assessment action. Furthermore, it is not necessary, in
order for these collection actions to apply, that the transferee received a
benefit. All the statutory provisions provide is that
[Translation]
. . . the transferee’s
liability is limited to the amount by which the fair
market value of the property transferred exceeded the fair market value of the consideration
given by the transferee.
see Bolduc, supra, at
paragraph 13.
[21]
In Haeck c. Québec, supra, the issue involved
determining the amount of a capital loss resulting from the disposition of two
properties. The parties had agreed on the selling price of $175,000 in the
notarial contracts to allow the purchaser to obtain higher financing. However, in
a counter letter, the parties had agreed on the real selling price of $148,750.
The seller claimed a loss based on that amount. The Deputy Minister of Revenue
of Quebec (the Deputy Minister) relied on notarial contracts, therefore on the
price of $175,000, to disallow the loss claimed and a calculated the loss based
on that amount. The Deputy Minister objected to the evidence of the counter letter and stated that the counter letter could
not be used to contradict an authentic
deed and that it could not be set up against him given the terms of article 1452 of
the C.C.Q. Judge Coté
asked the following:
[Translation]
[1] Is
the Deputy Minister of Revenue obliged to assess taxpayers on the basis of
their real situation disclosed at the time of production of a counter letter or
can he avail himself of an apparent situation that is more beneficial to him?
Judge Côté held that, in his role as
“assessor”, the Deputy Minister had to ensure that there was a genuine legal relationship
between the parties and to assess accordingly, particularly in the event that
the purpose of the
taxpayer's actions was not to deceive Revenue Department. Thus, in her view, the
Deputy Minister’s sole interest was
that the tax be determined on the basis of taxpayers' actual, not fictitious
transactions. Moreover,
Judge Coté stated that, in his “collection role”, the Deputy Minister could not be prevented by a counter letter
from collecting the previously determined tax. She wrote as follows at paragraphs 30, 32 and 33 of her
decision:
[Translation]
[30] In the Court's view, the
deputy minister's role is not to choose those contracts that are likely to
enable him to collect the largest amount of tax possible, but rather to
establish the amount of tax actually owed on the basis of the transactions
conducted in good faith and proven in accordance with the requirements of the
law.
. . .
[32] Thus the deputy
minister's interest, where he acts in the role of assessor, is to determine the
actual legal relationship between the parties and to assess them accordingly.
[33] Furthermore, once the tax
owed has been determined, it is normal for the taxpayer not to be able to
enforce on the deputy minister a counter letter preventing him from collecting
that tax. The deputy minister is thus a third person who has an interest in
using the apparent deed to protect the right that he holds against the
taxpayer: the right to obtain, from the taxpayer's patrimony, payment of the
tax actually owed.
Thus, the Minister cannot rely on article 1452 of
the C.C.Q. in all instances. The Minister can only rely on it when he acts in
his role as collector.
[22]
However, the Quebec Court
of Appeal seems to attach little importance to the difference between
“assessor” and “collector” in the case of a verbal agreement similar to a
counter letter, between a father and his son. In Caplan c. Sous-ministre du
Revenu du Québec, [2006] J.Q. No. 11799, 2006 QCCA 1322 (CanLII)(QCA),
the taxpayer purchased a rental property in 1989, which was registered in his
son’s name. Therefore, his son was the apparent owner of the property. However,
the taxpayer was the true owner, whereas his son
acted as his agent. Even though the property was registered in his son’s name, it
is the taxpayer who financed and was responsible for the management and
administration of the building. He collected and personally declared the rental
income. The son, the apparent owner, never paid a penny for the
acquisition or expenses. On January 6, 1999, the property was resold at a loss.
In his income tax returns, the taxpayer claimed deductions for the losses
incurred in respect of the 1997 and 1998 taxation years as well the terminal
loss incurred in 1999. The notices of assessment issued by the Minister
disallowed the deductions because the property belonged to his son and not the
taxpayer. The taxpayer therefore appealed the assessments. The trial judge refused
to vacate the notices of assessment. He found that the Deputy Minister was a
third person in good faith within the meaning of article 1452 of the C.C.Q.
and, therefore, was not bound by any verbal agreement that may have existed
between the taxpayer and his son. The taxpayer appealed to the Quebec Court of
Appeal. The issues to be determined by the Court were as follows:
[Translation]
(1) Whether the trial judge erred in law in deciding that the
respondent should be considered as a third person in good faith who could rely
on the apparent deed?
(2) Whether the trial judge erred in law in not distinguishing
between the role of the Minister of Revenue as collector and his role as
assessor?
[23]
Justice
Dufresne of the Quebec Court of Appeal wrote as follows:
[Translation]
[30] The
answer to the first question, that is, whether the trial judge was correct in
finding that the respondent should be considered as a third person in good
faith who could rely on the apparent deed, suffices in the case at bar to
decide the appeal. The appellant contrasts the apparent deed with the verbal agreement
he had with his son which was similar to a counter letter.
. . .
[32] The
trial judge wrote the following with respect to the application of article 1452 C.C.Q.:
[22] In
this case, the respondent must be considered as a third person in good faith
and is not bound by the apparent contract that may exist between the applicant
and his son with respect to the property in question.
[24]
Justice Dufresne then
referred to the general principle set out by Justice McLachlin in Shell
Canada, supra, and continued as follows:
[Translation]
[35] If
indeed there was no counter letter in Shell Canada, supra, the
Supreme Court reiterated that absent
a specific provision of the Act to the contrary or a finding that they are a
sham, the taxpayer's legal relationships must be respected by the courts in tax
cases.
[36] Thus,
the respondent had to be sensitive to the appellant’s real situation, as the uncontradicted
evidence establishes that the appellant did not try to “play both sides” by making
a case to the tax authorities for first the apparent contract and then the counter
letter. The appellant’s son acted as his father’s agent and at no time did the appellant
or his son rely on the apparent contract to obtain any tax benefits.
[25]
Justice Dufresne
continued as follows at paragraphs 40 to 53:
[Translation]
[40] Unlike the situation in Zaidi, never, in the
case at bar, did the appellant’s son claim any tax benefits from his title on
the property, nor is there any evidence to suggest that the appellant and his
son played both sides.
[41] The trial judge notes from the evidence “that it is
clear and obvious that it is the applicant [appellant] who, for all intents and
purposes, financed not only the acquisition of said property but also its subsequent
maintenance”. The rent was also payable to the appellant. The evidence also
reveals that the appellant’s son was clearly the appellant’s agent.
[42] Moreover, the evidence does not show that they put the
property in the appellant’s son name to avoid paying taxes. The evidence rather
reveals that the appellant chose to proceed with the acquisition of the
property in his son’s name for practical reasons, such as his son was studying
in the Ontario area where the property in question was located. The son could
more easily take care of the property by residing nearby, whereas his father
lived in Montréal. The successive testimonies of the son and his parents in
that regard remained uncontradicted.
[43] Also, this is not a case where a transaction is a scam
which prejudices the respondent’s rights. . . .
. .
.
[45] . . . In short, he always acted towards the tax authorities as the true
owner of the building and did not at any time attempt to play both sides by
claiming the advantages the apparent contract may have offered and also those
of the counter letter. He always presented himself as the true owner to the
respondent, evidently by relying on the counter letter.
We must recall that additionally, all the costs and
expenses associated with keeping and maintaining the building were paid by the
appellant and not his son.
. .
.
[47] The balance of probabilities
shows that the appellant's intention to acquire the building through his son,
acting as his agent, is reflected in the counter letter and effectively
corresponds to the actual situation the appellant maintained at all times. In the case at bar, the sham theory does not apply
because there is no element of deceit in the manner in which the operation was
concluded.
[48] In the circumstances, it is
difficult to claim that the respondent has the required interest to invoke the
apparent contract when there is no prejudice to the respondent from the tax
treatment the appellant chose based on the counter letter. The respondent
simply chose the situation that was most beneficial for him.
[49] It would have been completely
different if the evidence had shown that the transaction was merely a sham or
that the taxpayer had sought an advantage from first the apparent contract,
then the counter letter. . . .
[50] If the evidence had shown the
slightest contradiction in the tax treatment by the taxpayer, the decision in
the appeal would have been completely different, but the appellant's evidence
in this case remained uncontradicted. Each
case is inevitably fact-specific: everything is based on the evidence submitted.
[51] In short, in the absence of a
sham or proven attempt that the taxpayer played both sides, the respondent
must, in accordance with Shell, supra, make an assessment based
on the actual legal situation between the parties, regardless of the content of
the apparent contract or counter letter.
[52] With all due respect to the trial judge, the judgment being
appealed was an error of law in the characterization of the relationship
between the parties: the true owner in the tax authorities’ view, given the proposition
set out above in Shell, supra, was the appellant, Howard Caplan.
By finding that he was not, the trial judge committed a determinative error of
law.
[53] It is not necessary, in view of the conclusion that I
have reached with respect to the first issue raised by the appeal, to address
the second.
[26]
Justice Dufresne did not find it necessary to decide
whether the trial judge erred
in not making the distinction between the role of the Minister of Revenue as
“collector” and his role of “assessor”. Justice Dufresne rather relied on the
key principle set out by Justice McLachlin in Shell Canada which I have
already mentioned. Therefore, it would appear as though the distinction between
“assessor” and “collector” is no more important than it was before.
[27]
The analysis of Justice
Dufresne yields a result that is fair and equitable between the tax authorities
and the taxpayer. As for me, the courts must be
sensitive, in tax cases, to the economic
realities between the taxpayers unless there is unlawfulness or deceit. In my
opinion, the analysis of Justice Dufresne should not be restricted to cases
where the Minister acts in his role as “assessor” . In my view, regardless
of the Minister’s role, as “assessor” or “collector”, the taxpayers’ legal
relationships must be respected by
the Courts and by the Minister
of Revenue in tax cases, unless there is unlawfulness or deceit that consequently
prejudices the interests of the Minister.
[28]
However, and despite my
opinion, the state of the case law is such that, in this case, the respondent must
be considered as a third person, who, acting
as a collector, may avail herself of the apparent deeds, that is to say, the notarial
acts dated February 10, 2003 (Exhibit A‑2), February 11, 2003 (Exhibit A‑1)
and also those dated March 20, 2003 (Exhibit s A‑6 and A‑5),
the latter being the notarial acts by which Mr. Tohme transferred the two condos
to the appellant. Seeing as there was a transfer of property and that there was
a non-arm’s length relationship between Mr. Tohme and ZT22, the conditions for
the application of section 325 of the ETA have all been met. Thus, ZT22 is jointly and severally liable, with Mr. Tohme, to pay the tax liability of Mr.
Tohme up to the amount by which the fair market value of the two condos exceeds the fair market value of the
consideration paid by ZT22.
Fair market value of the consideration
[29]
Having decided that the conditions for the application of section 325 have been met, the issue to
be determined in this case is the amount by which the fair market
value of the two condos exceeds the fair market value
of the consideration paid by ZT22.
[30]
It is undisputed that
the fair market value of the two condos at the time of the transfer was
$147,500, the total purchase price for the two condos in February 2003 when Mr.
Tohme purchased them. We must first determine the fair market value of the consideration paid by ZT22 for the two condos.
[31]
The respondent submits
that the fair market value of the consideration paid for
the condos is more or less the price indicated in the deeds of sale: $1 for
a each condo, and in addition, the transferee is responsible for payment of the
two hypothecs on the condos. Again, the respondent relies on article 1452
of the C.C.Q. and submits that the counter letters (Exhibits A‑3
and A‑4) cannot be set up against her to disprove the assessment. The
appellant submits for its part that it is the real value of the consideration, as
indicated in the counter letters, which must be taken into account.
[32]
It is important to note
that the appellant’s liability is limited the amount by which the fair market value of the condos exceeds the fair
market value of the consideration paid by the appellant for the transfer of the
condos. We must therefore ask what the expression “fair market value of the
consideration” found in paragraph 325(1)(a) of the
ETA means. The definition of “fair
market value” in subsection 123(1) of the
ETA reads as follows:
Fair market value of property or a service
supplied to a person means the fair market value of the property or service
without reference to any tax excluded by section 154 from the consideration for
the supply.
[33]
As noted by
Justice Lamarre-Proulx in 9004-5733 Québec Inc. v. The Queen, 2003 TCC 327 (CanLII),
this definition is of no help in understanding this legal concept.
[34]
The definition of “consideration”
in subsection 123(1) of the ETA is more specific. It reads as follows:
Consideration
includes any
amount that is payable for a supply by operation of law.
[Emphasis added.]
[35]
Thus, when determining
the adequacy or inadequacy of the consideration, it is necessary to consider “any
amount” that was paid. The term “consideration” in paragraph 325(1)(a)
of the ETA is qualified by the terms “fair value”. In my view, when
determining the adequacy of the consideration for the purpose of establishing
the amount by which the fair market value of a property exceeds the fair market
value of the consideration paid for the property, it is necessary to refer to “any
amount” paid and not only to the fictitious amount indicated in the deeds
of sale, which is what paragraph 325(1)(a) of the ETA requires us
to do.
[36]
In The Queen v. Livingston, 2008 FCA
89, 2008 DTC 6233 (Eng.) (F.C.A.), the Federal Court of Appeal held that
the intention of the parties to defraud the Canada Revenue Agency is of
relevance but
not determinative in gauging the adequacy of the consideration given. The absence of a deceitful intention, while relevant,
is not determinative.
[37]
In the case at bar, Exhibits
A‑3 and A‑4 are notarial acts and are, therefore, presumed to be
authentic (see article 2814 of the C.C.Q), as are the deeds of purchase
and sale. It is obvious that Mr. Tohme purchased the condos and transferred
them to the appellant shortly thereafter, barely one month later. According to
the deeds of sale, the appellant was entitled to the possession of condo No. 1417
as of February 11, 2003, the same date Mr. Tohme purchased it; and the
appellant was entitled to the possession of condo No. 508 as of March 10,
2003, well before the date on which the deeds of sale were executed. It is
obvious that this allowed the appellant to operate the condos as rental
properties as soon as possible. This is in line with an intention to acquire
the condos for the appellant’s commercial purposes. There is no evidence that
the appellant’s patrimony was enriched and there is no evidence that Mr. Tohme’s
patrimony was diminished in any way. There is no evidence that the appellant did
not derive any benefit from its acquisition of the condos. There is no evidence
that Mr. Tohme attempted
to move the property beyond the tax collector’s reach by transferring them. There
is no evidence that Mr.
Tohme or the appellant attempted to “play both sides” by seeking a tax advantage from first the
apparent contract and then the counter letter. There is no sham in this case
that prejudices the respondent’s rights. Exhibits A‑3 and A-4 simply confirm
ZT22 as being the source from which the amounts paid by Mr. Tohme at the
time of acquisition of the condos. By said notarial acts, the appellant admits that
it paid a sum to Mr. Tohme and that said payment was reported. I, therefore,
reach the conclusion that Mr. Tohme and the appellant had no intention of
deceiving the Minister. Mr. Tohme obtained the condos on behalf and as mandatary
of the appellant. Although this conclusion is not determinative, it is relevant
and fuels the following debate: what is the true consideration paid for the
purchase of the condos by the appellant?
[38]
In the case at bar, I
reach the conclusion that “fair market value of of the consideration paid”
or in other words “any amount paid” by the appellant for the two condos
is as indicated in Exhibits A‑3 and A‑4, and that ZT22 was
responsible for all sums already disbursed, and to be disbursed for the
acquisition by Mr. Tohme of the two condos. I find that the true consideration
paid by the appellant for the condos is equal to the fair market value of the
two condos and, therefore, “the amount by which the
fair market value of the properties at the time of the transfer exceeded the
fair market value of the consideration paid by the transferee for the transfer
of the property” is zero.
Conclusion
[39]
For these reasons, the
Court allows the appeal of
ZT22 Holding Inc., and vacates the notice of assessment, with costs against the
respondent.
.
Signed at Montréal, Quebec, this 21st day of January 2013.
“Rommel G. Masse”
Translation certified true
on this 5th day of March 2013
Daniela Guglietta,
Translator
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