Ascot Enterprises v. R., [1996] 1 CTC 384, 96 DTC 6015

Décary J.A. (Hugesson and Robertson, J J. A., concurring): — This application for judicial review of a decision of the Tax Court of Canada raises the question, once again, of the applicability and effect of subsection 56(2) of the Income Tax Act (“the Act”). [1]

The relevant facts are not in dispute. The applicant was the sole shareholder and director of Ascot Enterprises Ltd. (“Ascot”). In July 1987, Ascot had bought a parcel of property (“the property”) at the request of Ron Jones, the applicant’s father (“Jones” or “father”). Jones wanted the property as part of a large development he was pursuing in order to create an “auto mall” — a major car sales centre. Jones had previously purchased several other properties to that end, and eventually assembled a nine acre parcel. He was unable to finance the purchase of the property at the time, so the applicant, through Ascot, bought it in order to ensure that it would not fall into the hands of an “outsider”. Jones had indicated to the applicant that he would eventually buy it from Ascot. The price paid by Ascot was $59,900.00.

On June 19, 1990, Ascot sold the property to Jones for $61,800.00. At the time of the sale the applicant was in possession of a British Columbia Assessment Authority notice for 1989 and 1990 that valued the property at a total of $59,750.00. He had also been advised by his real estate agent and by his father that the fair market value of the property was $61,800.00. The applicant believed that at a price of $61,800.00 Ascot was transferring the property at market value.

Ascot reported the disposition in its return of income for the 1991 taxation year, reporting no recaptured depreciation, a capital gain and a non-capital loss which it carried back to its 1990 taxation year. The Minister of National Revenue (“the Minister”) reassessed Ascot on the basis that the fair market value of the property was not less than $88,000.00.

As a result of the Minister’s assumption of fair market value at $88,000.00, the applicant was assessed an additional $26,200.00 on income account. This amount equalled the difference between the sale proceeds and the Minister’s assumption, as required by subsection 56(2).

Ascot and the applicant both appealed the Minister’s assessments to the Tax Court. The appeals were heard together on the basis of common evidence. With respect to Ascot’s appeal, the Tax Court upheld the Minister’s assessment based on a fair market value of $88,000.00; Ascot did not seek judicial review of that decision. With respect to the applicant’s appeal, the Tax Court found that the applicant was required to include in his income the sum of $26,200.00 on the ground that he desired to confer a benefit on his father by having Ascot transfer the property at the price of $61,800.00; this is the decision attacked in the present proceedings.

The Tax Court Judge gave the following reasons in dismissing the applicant’s appeal:

There is no doubt on the evidence that Scott Jones directed his corporation, Ascot, to transfer the property to his father. The act done to confer what was ultimately proven to have been a benefit, was a conscious one... However, there is no need for mens rea to be proven, in the sense that the directing mind of the corporation be aware that a benefit will result, only that the actus reus of the transferor, directly or carried out by someone under his direction and control, is one which can properly be found to be the conscious and deliberate act of that individual. In some situations, there would be room for a taxpayer to prove that the transfer of certain property to a third party was done without his knowledge or consent or under circumstances which would allow him to demonstrate that he did not intend the act to have been undertaken. The wording of the subsection does not require the transferor-payor be fixed with knowledge that an actual benefit is, at that instant, being conferred. It is enough that the act, by which the benefit is conferred upon a third party, is one which is the conscious act of the transferor or payor himself or of a corporation under his control. In such an event, the value of that resulting benefit to that third party is included in computing the transferor-payor’s income to the extent that it would be if the transfer or payment had been made to him. As a result of the combined operation of the provisions of subsections 56(2) and 15(1) of the Act, the transferor-payor now becomes “the taxpayer” within the wording of the legislation. The legislation is specifically designed to accomplish that purpose and in so doing leads to a departure from the general rule that double taxation is generally to be avoided.

Even if the question of intent were relevant, the evidence before me does not show that Scott Jones undertook a reasonable approach to determining the value of the property prior to having Ascot transfer it to his father. He did not obtain a recent appraisal and the advice as to current value obtained by him from a realtor and from his father, the transferee, was inadequate under the circumstances. In any event, that is not relevant for the purposes of this decision. It is clear that Scott Jones directed Ascot to transfer a certain property to Ronald Martin Jones at a price of $61,800. On the day of the transfer, June 19, 1990, that property had a fair market value of $88,000. Had Scott Jones transferred the property to himself at the price of $61,800, the corporation would have conferred a benefit on him in the sum of $26,200. The benefit accruing was not to him but to his father, but the wording of subsection 56(2) then brings it home to him and requires that the amount of that conferred benefit be included in his income.

[Reasons at 14-16.]

The applicant’s argument is two-fold.

His first submission is that the Tax Court Judge erred in having resort to “the combined operation of the provisions of subsection 56(2) and 15(1) of the Act”. Subsection 15(1) [2] , counsel argues, does not apply because the benefit is conferred on applicant’s father who is not a shareholder of Ascot, and subsection 56(2) does not apply because the taxpayer it refers to would be Ascot rather than the applicant. Counsel also suggests that the subsection is an anti-avoidance provision which should not be interpreted in such a way as to lead to double taxation. Since Ascot is already deemed under subparagraph 69(l)(b)((i) [3] to have received the difference between the sale price and the fair market value, the applicant should not also be found liable to taxation under subsection 56(2).

Second, he continues, the Tax Court Judge erred in finding evidence of a desire by the applicant to have a benefit conferred on his father.

It seems to me that these two arguments are very much linked to one another. Once it is recognized that the purpose of subsection 56(2), as summed up by Dickson C.J. in McClurg v. Canada, [1990] 3 S.C.R 1020 [1991] 1 C.T.C. 169, 91 D.T.C. 5001, at pages 1052-53 (C.T.C. 184, D.T.C. 5012), is to:

..ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an anti-avoidance technique....

and that one should be careful when interpreting that provision not to

...violate fundamental principles of corporate law and the realities of commercial practice and...“overshoot” the legislative purpose of the section.

It becomes evident that the “desire” to confer a benefit is a key element of the provision. On a plain reading, the section will not be applicable where there exists no intention by the taxpayer to avoid receipt of funds in his hands by arranging payments to be made without adequate consideration to third persons.

The use of the word “desire” in the Income Tax Act is exceptional. Its use in subsection 56(2) introduces a requirement of purpose. It carries a step further the requirement that the taxpayer participate in a leading way (“pursuant to the direction of”) or in a more passive way (“with the concurrence of”) in the decision to make the payment or transfer of property. This Court, in Smith v. Minister of National Revenue, [1993] 2 C.T.C. 257, 93 D.T.C. 5351 at page 261, (D.T.C. 5355) (F.C.A.) referred to “the taxpayer’s motive...”. It is indeed remarkable that in the other provisions where the phrase “as a benefit that the taxpayer desired to have conferred” is found, i.e. in paragraphs 51(2)(c), 85(l)(e.2) and 86(2)(b), it is preceded by the words “it is reasonable to regard any part [or portion] of such excess as...”, which indicates, in my view, that the test to be applied under these paragraphs is different from, and less subjective than, that applicable under subsection 56(2).

The Court has, therefore, to direct its attention to what it is that the taxpayer wanted to achieve. The test is subjective, but as always when assessing a subjective state of mind after the fact one may resort to inferences. It is not what the taxpayer says now but what he did then that counts. As noted in Smith, at page 262 (D.T.C. 5356), a judge most certainly can conclude that, on a balance of probabilities, a taxpayer has not disproved the assumptions upon which the Minister assessed him when the taxpayer relied solely on his ignorance. It is up to the taxpayer to explain why the transactions were made and why they have been handled as they were. There will be cases — some were enumerated in Smith, at page 261 (D.T.C. 5355) — where the nature of the benefit conferred or the circumstances of a transaction will speak for themselves and be such as to render obvious the purpose of the taxpayer.

In the case at bar, assuming at this stage that the applicant had the required “desire”, there would have been a transfer of property made by Ascot ‘pursuant to the direction of the applicant - the “taxpayer” to the applicant’s father as a benefit that the applicant desired to have conferred on his father. Had the transfer been made to the applicant himself rather than to his father, it would have been included in computing the applicant’s income by reason of the deeming provision of subsection 15(1). It is precisely because subsection 15(1) does not apply that subsection 56(2) would come into play. This, it seems to me, would be a classic application of subsection 56(2).

I do not agree with counsel that to apply subsection 56(2) would lead to double taxation. Double taxation exists where a single payment is taxed twice in the hands of the same taxpayer. See Perrault v. R., [1978] C.T.C. 395, 78 D.T.C. 6272 (F.C.A.). Here, the benefit would be taxed once in the hands of Ascot pursuant to subparagraph 69(l)(b)(i) and once in the hands of the applicant pursuant to subsection 56(2). It could also lead further down the line to another form of taxation, this time in the hands of the father: when disposing of the property the father, not having been taxed, would not be entitled to rely on subsection 52(1) of the Act for a consequential increase of his cost base for purposes of computing his future capital gain. But the fact that a single transaction generates income tax under different provisions in the hands of more than one taxpayer does not constitute double taxation. As was noted by Le Dain J.A. (as he then was) in Perrault Ibid, at page 402-03 (D.T.C. 6277-78):

It is once again the question whether, as a matter of principle, a single payment should be capable of being treated under different provisions of the Act as income in the hands of two taxpayers. Where the payment is received by one but has the effect of conferring a benefit on the other then it involves two distinct transfers or receipts, each of which may be subject to taxation on a separate basis. It is not being taxed twice in the hands of the same person. The appellant’s argument in essence is that the economy and spirit of the Act require that the payment be taxed once. I find nothing in the Act which dictates this result. The incidence of taxation depends on the manner in which a taxpayer arranges his affairs. Just as he may arrange them to attract as little taxation as possible, so he may unfortunately arrange them in such a manner as to attract more than is necessary.

The fact that the application of subsection 56(2) may lead to harsh consequences is an additional reason for the Court, when it assesses the evidence in a case where the motive is not obvious, not to infer too hastily that a taxpayer had evinced a desire such as to attract the application of the provision.

I now turn to the finding of the Tax Court Judge with respect to the “desire” of the applicant.

Counsel for the Crown conceded at the hearing that the Judge had applied the wrong test in suggesting that there was “no need for mens rea to be proven”. That concession is well taken, for reasons I have expressed earlier. That being conceded, however, counsel argued that this Court should not intervene because the Judge, having expressly contemplated the possibility that the approach he had taken was wrong in law, added, in obiter, that the applicant had not undertaken a reasonable approach in determining the value of the property prior to the transfer. That finding of fact, according to counsel, cannot be said to have been made “in a perverse or capricious manner or without regard for the material before” the Court within the meaning of paragraph 18. l(4)(d) of the Federal Court Act.

I do not agree with counsel.

First, that finding is not the one which subsection 56(2) mandates the Courts to make. It was not enough for the Judge to find that the applicant’s approach in determining the property value was unreasonable. He was required to find that such an approach amounted to a desire to have a benefit conferred. This, he failed to do.

Second, and more importantly, even if the Tax Court Judge had inferred a desire to confer a benefit from the approach used to determine the property value, I am of the view that there was no evidence from which such an inference could have been made.

The fact that the applicant did not take reasonable steps to ascertain the true value of the property does not and cannot in itself, in the circumstances of this case, lead to the conclusion that the applicant had the desire to confer a benefit to his father within the parameters of subsection 56(2). There is no indication whatsoever that the applicant knew or should have known that the property was worth more than the price originally paid for it, that he was doing his father a favour by selling the property at the price agreed upon or that he was seeking to avoid the fiscal consequences of the transaction. The evidence, on the contrary, is to the effect that the applicant genuinely believed that the property was sold at fair market value and that the transaction was handled in a way that does not suggest that the applicant should have known or suspected otherwise. The property had been bought by Ascot solely to prevent it from falling into the hands of an outsider and been sold to the father solely to enable him to pursue his auto mall project. The land was never held for speculation. The circumstances of the sale to the father were such that the Judge himself, not to mention the experts, had problems- determining the market value of the property (Reasons at 8):

It is apparent that the value of Lot 12 was not easy to determine, having regard to its size - below minimum standards for commercial development on its own - and its relationship to other properties owned and controlled by [the father]...

and (Reasons at 10)

It is obvious that appraising real property is not an exact science. By taking into account certain factors, discounting others, interpreting market indicia, weighing trends in commercial development or choosing to ignore particular transactions as being little more than aberrations, different figures emerge at the bottom line....

As it is simply impossible to infer from the applicant’s conduct that he “desired” to confer on his father a benefit within the meaning of subsec- tion 56(2), the intervention of this Court is warranted.

The application for judicial review should be allowed, the judgment of the Tax Court should be set aside and the matter should be remitted to the Tax Court for reconsideration on the basis that subsection 56(2) was wrongly invoked by the Minister in assessing the applicant for the 1991 taxation year.

Application allowed.