Doris P. White v. Her Majesty the Queen, [1995] 1 CTC 2538, 95 DTC 877

Mogan J.T.C.C.:-By notice of assessment No. 525310 dated May 21, 1987 the Minister of National Revenue imposed a liability of $126,037.74 on the appellant under subsection 160(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act”) with respect to the transfer of a mortgage payment from Howard White to the appellant on or about March 6, 1984. The issue in this appeal is whether the appellant is liable under subsection 160(1) of the Act with respect to that transfer of property to her in 1984. The relevant words in section 160 are 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) his spouse or a person who has since become his spouse,

the following rules apply:

(d) ...

(e) the transferee and transferor are jointly and severally 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 aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in respect of the taxation year in which the property was transferred or of any preceding taxation year....

160(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

The appellant is now a resident of the United States of America but at all times relevant to this appeal she resided in Toronto, Ontario. On or about October 30, 1979, the appellant and Howard White purchased a house in Toronto at a cost of $172,750. The municipal address of the house was 61 Shalimar Boulevard. At that time, the appellant and Howard White were in a common-law spousal relationship. In order to purchase the house, a mortgage in the amount of $123,000 was taken out by the appellant and Howard White. After October 1979, the appellant and Howard White were married; and the house was transferred to her name alone in or about 1981. The mortgage remained on title with both the appellant and Howard White as mortgagors and subject to the covenants therein.

The appellant and Howard White maintained a joint account (No. 260846) at a branch of the Toronto-Dominion Bank near their house at 61 Shallmar Boulevard. On March 5, 1984, Howard White deposited into that joint account a cheque in the amount of $126,000 payable to himself from his company, Howard S. White Ltd. (herein referred to as the "White corporation"). On March 5, 1984, the appellant issued a certified cheque in the amount of $126,037.74 out of that joint account to discharge the mortgage on the house at 61 Shalimar Boulevard. A notice of discharge was registered on or about March 16, 1984. It is this transaction: the contribution of funds by Howard White to the joint account, and the use of those funds to pay off the mortgage on the house owned by the appellant alone which resulted in the assessment under appeal.

The White corporation made certain designations under section 194 of the Income Tax Act with respect to obtaining scientific research tax credits (SRTC). Those designations were on prescribed forms and dated February 27, February 29 and March 5, 1984. The so-called SRTC Program was a federal tax policy which resulted in many sordid transactions having no bona fide business purpose.

On May 6, 1986, the Department of National Revenue filed a certificate in the Federal Court of Canada against the White corporation in the amount of $1,715,000 plus interest of $363,622; and filed a request for a writ of fi fa against the White corporation for the same amount. A writ of fi fa dated May 6, 1986 was issued for the same amount by the Federal Court of Canada directed to the sheriff of the judicial district of York. The writ of fi fa was returned unsatisfied in whole on May 13, 1987.

By notice of assessment dated March 11, 1987, the Minister of National Revenue assessed tax of $1,715,000 plus interest of $522,766.88 against the White corporation pursuant to subsections 194(1) and 195(2) of the Income Tax Act. By notice of assessment dated May 11, 1987, the Minister assessed a balance of $2,258,537.81 against Howard White under subsection 227.1(1) of the Income Tax Act "being the amount of the unpaid Part VIII tax, interest and penalties payable by H.S.W. Controls Ltd. in respect of a notice of assessment dated March 11, 1987". It appears that the White corporation had changed its name sometime after March 1984 to "H.S.W. Controls Ltd.".

A writ of execution numbered ITA 1618-87 was filed by Revenue Canada against the property at 61 Shalimar Boulevard. A payment was made to Revenue Canada in the amount of $126,870.31 on June 19, 1987 in order to have the writ lifted.

I will review subsection 160(1) to determine whether the three conditions have been met which may impose vicarious liability upon the transferee of property. First, under paragraph 160(l)(a) the appellant was the spouse of Howard White throughout 1984. Second, did Howard White transfer property to the appellant on March 5, 1984 when he deposited the cheque (Exhibit A-2) for $126,000 payable to himself into their joint bank account number 260846 (Exhibit A-3)? The appellant issued a certified cheque for $126,037.74 out of that joint account on March 5, 1984 relying upon and using up all of the funds represented by Howard White’s cheque (Exhibit A-2). The appellant’s certified cheque was payable to the Toronto- Dominion Bank (or its mortgage affiliate) and was used to discharge the mortgage which the bank held on the house at 61 Shallmar Boulevard which, in turn, was owned by the appellant alone. If I were simply to trace the funds, I could easily conclude that Howard White provided the money required to pay off the mortgage on his wife’s house. The answer may not be so simple, however, because Howard White’s cheque was deposited in a joint account.

Counsel for the appellant argued that Howard White’s deposit of his cheque into the joint account was not necessarily a transfer of property to his wife. In Tevine v. Tevine, [1953] 2 D.L.R. 125, 8 W.W.R. (N.S.) 130 (B.C.S.C.), MacFarlane J. quoted from a U.K. decision (Jones v. Maynard) in which it was said at page 132 (D.L.R. 127):

I take the view that when spouses have a common purse and a pool of their resources, the husband’s remuneration is earned on behalf of them both and the idea that years afterward one can dissect the contents of the pool by taking an elaborate account as to how much was paid in by the husband and how much by the wife is not consistent with the original fundamental idea of a joint purse or a common pool. When the money goes into the pool it is there as joint property.

Earlier, Middleton J. had made a similar statement in Re Hodgson (1921), 67 D.L.R. 252, 50 O.L.R. 531 at page 254 (O.L.R. 533).

Where real or personal property is voluntarily placed in the name of the owner and another there will be a resulting trust in favour of the transferor if the other is a stranger, but this presumption is changed where the other is the wife or a child. It is then presumed that the intention was to create a joint tenancy and that the survivor would take beneficially, this being the ordinary incident of the joint interest created. The affection presumed takes the place of a money consideration.

And in Banff Park Savings & Credit Union Ltd. v. Rose et al. (1982), 139 D.L.R. (3d) 764, 22 Alta. L.R. (2d) 81, the Alberta Court of Appeal held that judgment creditor cannot attach a joint debt where the judgment is against only one joint obligee. In other words, the funds deposited by Howard White did not necessarily become the property of the appellant.

If the transaction had ended with the deposit of the cheque for $126,000, I would be inclined to apply the above authorities and hold that there was no transfer of property from Howard White to the appellant; but the transaction did not end with the deposit and the conduct of the parties leads me to a different conclusion. At the opening of business on March 5, 1984, the balance in the joint account was only $7,500. On that one day, Howard White deposited a cheque for $126,000 payable to himself, and the appellant immediately issued a cheque for $126,037.74 to pay off the mortgage on the house which she owned alone. In Fasken Estate v. M.N.R., [1948] C.T.C. 265, 49 D.T.C. 491 (Ex. Ct.), Thorson P. said at page 279 (D.T.C. 497):

The word "transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

Applying the Fasken decision to the facts of this case, Howard White divested himself of $126,000 and that amount vested in the appellant (his wife) as the sole owner of the house at 61 Shalimar Boulevard. Also, the words of subsection 160(1) are very broad concerning the transfer of property "either directly or indirectly, by means of a trust or by any other means whatever". In my opinion, and having regard to the circumstances of the transaction, there was a transfer of property (1.e., $126,000) from Howard White to the appellant in 1984 within the meaning of subsection 160(1).

When issuing the assessment to the appellant, the Minister apparently assumed that the payment from Howard White on March 5, 1984 went directly to the Toronto-Dominion Bank and did not go through the joint account. That assumption was, of course, not true. Counsel for the appellant attempted to capitalize on the Minister’s erroneous assumption but, in the view which I take of both the law and the transaction, it does not make any difference whether the payment went directly to the bank or through the joint account. The joint account was simply a conduct through which the funds passed.

The third condition for vicarious liability in subsection 160(1) is whether the transferor was liable to pay an amount under the Income Tax Act in or in respect of the taxation year in which the property was transferred. There is no doubt that the property was transferred in March 1984. Was Howard White liable to pay any amount in or in respect of 1984? The following facts were either admitted in the pleadings or proven at the hearing: (i) Howard White was a principal shareholder and director of the White corporation; (ii) the White corporation made designations under section 194 of the Income Tax Act during February 1984; (iii) as a consequence of those designations, the White corporation was liable to pay certain tax on March 31, 1984 pursuant to the provisions of Part VIII of the Act; (iv) after March 31, 1984 and before 1986, the White corporation changed its name to "H.S.W. Controls Ltd."; (v) on May 6, 1986, the Minister of National Revenue registered a certificate in the Federal Court of Canada under section 223 of the Act against "H.S.W. Controls Ltd." in the amounts of $1,715,000 for tax plus $363,622 for interest; (vi) on May 7, 1987, a sheriffs officer for the judicial district of York (Ontario) delivered to a representative of the Minister of National Revenue a verbal "Nulla Bona" report with respect to the White corporation; (vii) by notice of assessment (Exhibit A-6) dated March 11, 1987 and issued to the White corporation, the Minister assessed tax of $1,715,000 under sections 194 and 195 of the Income Tax Act with respect to the 1984 taxation year; and (viii) by notice of assessment (Exhibit A-7) dated May 11, 1987 and issued to Howard S. White, the Minister assessed the amount of $2,258,537 as a liability under subsection 227.1(1) of the Act being the amount of unpaid Part VIII tax, interest and penalties payable by the White corporation.

There was no evidence in this case concerning the 1984 income of Howard White or his liability, if any, for tax under Part I of the Income Tax Act. And the appellant is not liable to pay any amount under subsection 160(1) unless there is "an amount that the transferor is liable to pay under this Act in or in respect of the taxation year" when the property was transferred. The only evidence of Howard White’s liability under the Act in respect of 1984 is the notice of assessment dated May 11, 1987 (Exhibit A-7) referred to above. The relevant provisions of section 227.1 are as follows:

227.1(1) Where a corporation...has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to...pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

227.1(2) A director 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 of Canada under subsection 223(2) and execution for such amount has been returned unsatisfied in whole or in part;

The notice of assessment dated March 11, 1987 (Exhibit A-6) issued to the White corporation shows a liability of $1,715,000 for tax in 1984 under sections 194 and 195 of the Income Tax Act. Sections 194 and 195 are in Part VIII of the Act. A director of a corporation may be liable under subsection 227.1(1) of the Act if that corporation has failed to pay an amount of tax for a taxation year "as required under Part VIII". There was no evidence in this case that the assessment (Exhibit A-6) against the White corporation had been appealed or withdrawn. Under subsection 152(8), an assessment is deemed to be valid and binding. And under subsection 195(8), section 152 is applicable to Part VIII.

I conclude from Exhibit A-6 and the above statutory provisions that there was a valid assessment against the White corporation for Part VIII tax for 1984. I conclude from Exhibit A-5 (the certificate registered by the Minister in the Federal Court of Canada under section 223) that the Part VIII tax assessed against the White corporation for 1984 was not paid on May 6, 1986. And I conclude from the verbal "nulla bona" report of the sheriffs officer (Exhibit A-8) on May 7, 1987 that no amount had been paid by or recovered from the White corporation with respect to its Part VIII tax liability.

Howard White, as a director of the White corporation in 1984, could be liable for its unpaid Part VIII tax under subsection 227.1(1) if the conditions in subsection 227.1(2) are satisfied. There are only two conditions. Exhibit A-5 proves that the Minister registered in the Federal Court of Canada a certificate for the amount of the White corporation’s liability for Part VIII tax. And Exhibit A-8 proves that execution for such amount was returned verbally unsatisfied in whole or in part on May 7, 1987. Counsel for the appellant questioned whether the verbal report of the sheriff’s officer on May 7, 1987 was adequate because the sheriff did not provide a written report until May 13, 1987 (two days after the notice of assessment in Exhibit A-7 to Howard White). There is nothing in subsection 227.1(2) which requires that ’’execution for such amount" be returned in writing. There are circumstances in which the Act will require a "written agreement" as in paragraph 60(b) but, having regard to the purpose of section 227.1 which is included within the collection provisions of Part XV, I should think that if execution for the amount is to be returned unsatisfied in whole or in part, a verbal communication of the "nulla bona" report from a sheriff or similar responsible person would be adequate to facilitate the next step in a collection proceeding. In the absence of any statutory requirement that the sheriff’s report on the execution be in writing, I am of the view that the verbal "nulla bona" report referred to in Exhibit A-8 was sufficient to satisfy the second condition in subsection 227.1(2).

Because the two conditions in subsection 227.1(2) were satisfied by May 7, 1987, I hold that Howard White was liable under subsection 227.1(1) for the unpaid Part VIII tax of the White corporation when the notice of assessment was sent to him on May 11, 1987 (see Exhibit A-7). If I should be wrong in accepting the date (May 7, 1987) of the verbal "nulla bona" report as the date when the second condition in subsection 227.1(2) was satisfied, then Howard White was liable from and after May 13, 1987 when the sheriffs written report was issued. Subsection 227.1(1) simply states: "the directors of the corporation...are jointly and severally liable". The liability of a director under subsection 227.1(1) does not depend upon the sending of a notice of assessment but only upon the satisfaction of the two conditions in subsection 227.1(2). In other words, the notice of assessment (Exhibit A-7) which was actually sent to Howard White on May 11, 1987 is not relevant in determining whether he was liable under section 227.1 from and after May 13, 1987 if the conditions in subsection 227.1(2) have been satisfied.

Returning to subparagraph 160(1 )(e)(ii), I am of the opinion that Howard White was liable to pay an amount under the Income Tax Act in or in respect of the 1984 taxation year being the year in which the property was transferred. The Minister’s right against a transferee under section 160 is always derived from his right against the transferor. This case became complicated because the Minister’s right against the transferor was in turn derived from his right against the White corporation. Relying on the facts admitted in the pleadings or proved at hearing, I am satisfied (i) that the White corporation had a significant liability in 1984 under Part VIII of the Act; (ii) that Howard White as a director of the White corporation and as transferor had a matching liability in 1984 under section 227.1 of the Act; and (iii) that the appellant as the transferee of property transferred in 1984 is liable under section 160. The appeal is dismissed with costs.

Appeal dismissed with costs.