Barbara J. Pitt v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2469

Margeson, T.C.C.J.:—This appeal was heard under the informal procedure.

The appeal is against an assessment by the Minister of National Revenue for the 1989 taxation year. In that year, the appellant was assessed for the amount of $7,500 pursuant to section 160 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in respect to a transfer of property to the appellant by the transferor at a time the transferor was liable to pay an amount under the Act in respect of the taxation year in which the transfer was made or any preceding year.

Facts

Exhibits A-1 to A-5 were admitted into evidence by agreement. Exhibit A-1 was a Registered Retirement Savings Plan tax receipt from the Bank of Montreal for $7,500 showing the appellant as the annuitant. The contributor was shown as David G. Pitt and he signed as such. It is this amount which is the subject matter of the appeal.

Exhibit A-2 is a personal loan service application, obviously filled out by a bank employee. It describes the primary applicant as David G. Pitt and refers to the appellant as "spouse". It also refers to a previous loan and sets out the repayment schedule and interest rate.

Exhibits A-3, A-4 and A-5 appear to be financial statements referable to the loan and refer to the customer as David and/or Barbara Pitt although Exhibit A-3 at the foot of the document shows the applicant as David Pitt and Barbara Pitt as the co-applicant.

Exhibit A-6 is a retirement investment certificate which was cashed in and although unrelated to the alleged transfer in question, was submitted by the appellant for the purpose of showing that another spousal plan had been instituted for the appellant by her spouse prior to the year in question.

Exhibit A-7 was the T1 general return of the appellant for the 1991 taxation year. This shows a claimed refund of $2,295.16 by the appellant and contains a T4RSP showing that amount of tax deducted from income received by the appellant when she cashed in the RRSP. This document also refers to David Pitt as the contributor/spouse in box 38.

The appellant testified that she and her spouse had a pattern of contributing to RRSPs in the years 1986, 1987, 1988 and 1989 and that it was on the bank’s advice that they put the RRSPs in both names.

In cross-examination the appellant admitted that Exhibit A-1 was the receipt for the $7,500 used to purchase the RRSP in 1989, by the husband, that he claimed the deduction for it and that the loan was paid by the husband. She also said that she did not work outside the home and that the RRSPs were cashed in and the funds were used to pay loans.

In the years in question the spouse did owe taxes to the Minister in excess of $7,500.

Issue

The sole issue in this appeal is whether or not the purchase of the $7,500 RRSP for the appellant by her spouse was a transfer of property to her contrary to section 160 of the Act.

Appellant’s position

On behalf of the appellant it was argued that there is no definition of transfer in section 160 of the Act and there must be a transfer to a person. Here there was no such transfer according to the appellant's argument but what happened was merely that the appellant was participating in a form of income splitting with her spouse and that is not a transfer as envisaged by subsection 160(1) of the Act.

The appellant submits that under the provisions of subsection 146(5.1) a taxpayer is allowed to deduct premiums paid into an RRSP of which his spouse is the annuitant and that is what the spouse did in this case. It is argued that the general result of paying premiums into a spousal plan is a permitted form of income splitting and not a transfer of an asset as envisaged under subsection 160(1) of the Act.

It is also pointed out that the appellant had no intention of withdrawing the funds at the time that they were paid into the RRSP and this occurred only because of financial difficulties which surfaced subsequently.

A further argument advanced by the appellant was that because there was a loan agreement signed with the bank by the appellant, there was valuable consideration for any transfer that was made and that the consideration for such transfer was $7,500. Therefore, there was no benefit to the appellant and therefore there would be no tax.

The appellant's agent submits that at the very worst the amount transferred would be one half of the $7,500 because the appellant was a co-applicant on the loan. It is immaterial according to this argument as to who paid back the loan.

It is further argued that section 160 of the Act is designed to counter tax evasion and is not meant to apply to a situation where a spouse makes a contribution to a spousal RRSP which is allowed by subsection 146(5.1). Section 160 is meant to cover such transfers as houses, boats, securities and other tangible property.

The provisions of sections 144 to 146 are special sections which allow deductions from income and it was never intended that such deductions could be attached under the provisions of section 160 insofar as the appellant's agent is concerned.

It is further argued that under paragraph 74.5(12)(a) since any income earned from the transferred property is not attributable to the taxpayer, as it normally would be under sections 74.1, 74.2 and 74.3 to the extent that the premium is deductible in computing the income of the taxpayer, but is included in the spouse's income when the distribution is made from the plan, it is clear that a payment into a spousal RRSP is therefore a permitted form of income splitting and is not meant to be caught by the provisions of subsection 160(1).

Respondent's position

The respondent says that the appellant is mixing apples with oranges. He says the sections referred to do permit income splitting but they have nothing to do with the provisions of section 160. On behalf of the respondent it is pointed out that paragraph 160(1)(d) does take attribution into account and reduces it, but just because it takes attribution into account that does not mean that such a transfer is not meant to be caught by the section.

The respondent argues that section 160 is a collection section and is very broad. It is true that there was an RRSP in force here and that the statute specifically allows certain deductions from the transferor's income but there still must be consideration for the transfer under the circumstances that exist here, or it violates section 160.

The respondent argues that section 160 is designed to prevent someone from transferring assets before he pays his income tax. It really says that you are not going to get the advantage of income splitting if at the time you made the transfer you owed taxes.

It is argued that there is no concept of mens rea under section 160 and the section can operate under very unjust circumstances. All that is required is that there be a transfer of property and that tax be owing for this section to become operative. Whether or not there is an RRSP in force has nothing whatsoever to do with the operation of the section. One section of the Act deals with the calculation of tax and the other section deals with collections. Here, the transferor is still entitled to his permitted deductions but the different sections provide for different schemes.

On the question of consideration the respondent argues that there was none. The appellant had no income, did not contemplate making the loan payments at the time the loan was obtained and did not make any loan payments. She received the benefit.

The argument is that the appellant was not the one who borrowed the money, even if she was sometimes referred to as the co-applicant. She gave no consideration. Insofar as the bank documentation is concerned, the respondent says it is confusing, inconsistent and inconclusive. The respondent argues there is no question that what took place here was a transfer of property and it is in violation of section 160 of the Act.

Analysis and decision

The Court is satisfied that the appellant was the annuitant of an RRSP in the year in question and the amount deposited to the RRSP was $7,500. Further, the RRSP in question was a spousal RRSP as contemplated by subsection 146(5.1) of the Act and that the appellant's spouse was entitled to the deductions permitted under that subsection for the premiums paid. The Court is further satisfied that because of the operation of paragraph 74.5(12)(a) any income from the RRSP is not attributable to the appellant’s spouse and to that extent the actions of the appellant and her spouse may be a form of income splitting contemplated by the Act.

However, I fail to see how the right of the taxpayers to avail themselves of those provisions have the effect of automatically making inapplicable the provisions of section 160 of the Act.

The availability of a deduction under those provisions cannot serve to characterize the nature of the funds used to pay the premium and that the characterization must come from consideration of all the facts surrounding the making of the payment.

The Court can see nothing in the wording of those sections which would indicate that their deductibility insures the inapplicability of section 160 to the transaction.

The appellant argues that there was no transfer from the spouse, but paragraph 74.5(12)(a) clearly indicates that Parliament regarded the payment of a premium under an RRSP by the husband (where the wife was the annuitant immediately after the payment) to be a transfer of property.

It is clear that money is property and thus there was a transfer of property. The Court agrees with the submission of Counsel for the respondent that the various provisions of the Act referred to operate independently of each other immaterial of whether their independent application might result in an apparent inconsistency.

Section 160 of the Act is a collection section designed primarily to prevent a transfer of property from a taxpayer to someone else, without proper consideration, when the taxpayer owes taxes. I cannot envisage why this intention should be thwarted just because another section of the statute permits taxpayers to deduct certain payments from their income and thus be doubly advantaged because he has the deduction and the transfer cannot be attacked.

There is no merit to the appellant’s argument that if there was a transfer of property it was only one half of the funds because the appellant was a coapplicant of the loan.

There is no evidence before this Court as to the legal effect of the appellant being referred to on Exhibit A-5 as the co-applicant. There is nothing from that document which satisfies the Court that she is responsible for 50 per cent of the loan and her spouse responsible for 50 per cent of the loan.

If the appellant was a guarantor, or a co-maker of a loan one would expect that she would be responsible for the whole amount if it was not paid back.

The appellant's agent argues that there was valuable consideration for the loan in that the appellant also signed the loan agreement, but again there was no evidence as to what her liability was, if any, because she was the coapplicant. That word has no specific meaning here and there is no evidence before the Court from which I can conclude that it was the equivalent of cosigner, co-guarantor, that there was joint and several liability or indeed that there was any legal effect to her signature so affixed.

The evidence is that the appellant never contemplated making the payments and indeed could not make the payments because she was unemployed. In cross-examination the appellant admitted that the husband bought the RRSP in 1989, that he claimed the deduction for income tax purposes and that he paid off the loan.

In light of this evidence and in light of the absence of evidence of actual consideration passing from the appellant to her husband, and in the absence of any credible evidence as to the legal liability of the appellant for the funds borrowed, I can only conclude that the husband was the borrower and that his payment of the RRSP premium for the appellant in 1989, was a transfer of property contemplated by section 160 of the Act and that the Minister was correct in assessing the appellant for the amount of $7,500 pursuant to that section.

The assessment is confirmed and the appeal is dismissed.

Appeal dismissed.