Barbara May Garland v. Minister of National Revenue, [1988] 1 CTC 2398, 88 DTC 1271

Sarchuk, T.C.J.:—The appeal of Barbara May Garland is from a reassessment of income tax for her 1981 taxation year.

The facts which led to the reassessment are not in dispute. Prior to March 12, 1981 the appellant and her husband, Walter Garland, each owned a one- half interest in a home situated at 7720 Sunnymede Crescent in Richmond, British Columbia. On March 12, 1981 the appellant's husband transferred his one-half interest to her for no consideration. On the date of the transfer the value of the appellant’s husband's interest in the property was $118,500. Subsequently on June 3, 1983 Mr. Garland was reassessed for his 1977,1978 and 1979 taxation years and on January 8, 1985 for his 1981 taxation year.

It is the respondent's position that on March 12, 1981, the date of the transfer of land, Mr. Garland's tax liability was $18,819.46. Accordingly the respondent reassessed the appellant on the basis that she was liable, pursuant to subsection 160(2) of the Income Tax Act, for taxes owing by her husband in the amount of $18,819.46, which liability arose as a result of the transfer of property by the appellant's husband to her which property had a value of $118,500.

Both the taxpayer and her husband, Walter Garland, testified. In brief, in 1981 and in prior years Mr. Garland was the Vice-President of a lumber wholesale firm. To the best of his recollection there were no amounts of tax owing for the 1981 or prior taxation years since he had paid all of the taxes due upon filing his returns. Early in 1983 problems arose with Revenue Canada, Taxation, as to the valuation of certain shares transferred to Mr. Garland's holding company in the 1977, 1978 and 1979 taxation years. It is Mr. Garland's understanding that his accountants made an error in the completion of certain election forms, which error ultimately led to reassessments of tax for the 1977, 1978 and 1979 taxation years dated June 3, 1983 and to a reassessment of tax for taxation year 1981 dated January 8, 1985. Objections were taken by Mr. Garland and although some changes to the reassessments were made the end result was that he owed tax for these years in the amount of approximately $61,000. It is not disputed that of the taxes owing, $24,000 was the amount of tax and interest attributable to the 1977, 1978, 1979 and 1980 taxation years.

Mr. Garland sought legal advice with respect to a lawsuit against his accountants but for a number of reasons chose not to pursue that course of action. Concurrently he attempted to make arrangements with Revenue Canada for an orderly program of payments with respect to the taxes due and owing. Certain proposals made by him were rejected by officials in the Collections Section. As a result on November 4, 1986 he declared personal bankruptcy.

By way of an absolute order of discharge dated August 28, 1987 the appellant's husband was discharged as a bankrupt (Exhibit A-1).

Counsel for the appellant contended that her client is entitled to succeed in this appeal on two distinct and separate grounds. The first ground is based on the provisions of subsections 160(1), 160(2) and 248(2) of the Income Tax Act which read :

160 (1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever,

(a) to his spouse or to a person who has since become his spouse, or

the following rules are applicable:

(d) the transferee and transferor are jointly and severally liable to pay the lesser of

(i) any amount that the transferor was liable to pay under this Act on the day of the transfer, and

(ii) a part of any amount that the transferor was so liable to pay equal to the value of the property so transferred;

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

(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.

248 (2) In this Act, the tax payable by a taxpayer under any Part of this Act by or under which provision is made for the assessment of tax means the tax payable by him as fixed by assessment or reassessment subject to variation on objection or on appeal, if any, in accordance with the provisions of that Part.

It was contended that as the appellant’s husband, Walter Garland, was not liable to pay any tax under the Act on the day of the transfer of the family residence, his subsequent tax liability should not in law be included in a reassessment of the appellant. Counsel directed the Court's attention to the language of subsection 160(1) of the Act as it read at the relevant time and which differs in a fundamental respect from the present wording. Counsel emphasizing that the subparagraph created liability in the following terms:

160 (1) (d) the transferee and transferor are jointly and severally liable to pay the lesser of

(i) any amount that the transferor was liable to pay under this Act on the day of the transfer

[Emphasis added.]

and argued that on the day of the transfer Mr. Garland had not been assessed for any tax. Therefore he had no tax liability at the relevant time with the result that no liabilty could attach to the appellant under the provisions of section 160 of the Act. Counsel further argued that the rationale in the decision of The Queen v. Simard-Beaudry Inc. et al., [1971] F.C. 396; 71 D.T.C. 5511, did not apply, stating:

But if the legislators had in mind the Simard-Beaudry case and that line of jurisprudence, it would have been unnecessary to include the words, "on the day of the transfer" . . . If the legislators had intended to rely on the Simard-Beaudry line of cases and the provision in the Act which says that liability for tax exists whether or not the assessment is erroneous or even made, it would have been unnecessary to include the words, on the day of the transfer . . . They are simply saying that no liability which was incurred, which is a debt which came into existence after the date of the transfer. That's all it means. What it’s saying is that every debt that came into existence prior to the transfer is included . . .

In further support of this argument counsel relied upon the provisions of subsection 248(2) and in particular the words "the tax payable by a taxpayer under any Part of this Act . . . means the tax payable by him as fixed by assessment or reassessment". She contended that subsection 248(2) being an interpretation provision was applicable to the whole of the Act and that subparagraph 160(1)(d)(i) of the Act must be read in a manner consistent with its provisions. The proposition advanced is that there is no liability to pay tax, or in other words, no tax debt until that tax is fixed by assessment.

A judgment of the Federal Court, Trial Division, Subsidiaries Holding Co. Ltd. v. The Queen, [1956] C.T.C. 240; 56 D.T.C. 1141, was cited as authority for the proposition that the term "tax payable" is used interchangeably with the phrase "tax liability” and that "tax liability means the tax that is fixed by assessment". Although conceding that the decision in Subsidiaries Holding (supra) preceded the decision of the Federal Court of Appeal in The Queen v. Simard-Beaudry Inc. et al., (supra) and was inconsistent with it, counsel nonetheless urged this Court to accept the rationale expressed in Subsidiaries Holding as being more apt and appropriate in the circumstances of this case.

I am unable to accept this submission. The liability of a taxpayer to pay tax under the Income Tax Act has been considered in a number of cases. The reasons of the Federal Court of Canada in The Queen v. Simard-Beaudry (supra) are clear and unequivocal. Noël, A.C.J. concluded that tax liability exists as soon as income is earned. He stated at page 403 (D.T.C. 5515):

As to his second argument, namely that the debt arising from reassessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or reassessment.

In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point. Here the reassessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgement of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.

[Emphasis added.]

In G.R. Block Research & Development (1981) Corporation and G.R. Block Research & Development Corporation v. M.N.R., [1987] 1 C.T.C. 253; 87 D.T.C. 5137, the Federal Court, considering a motion to quash an assessment, held that it could not entertain the application because the liability to pay tax arose before any assessment had been made.

In Oneil Lambert v. The Queen, [1976] C.T.C. 611; 76 D.T.C. 6373 the Federal Court of Appeal was called upon to consider whether a certificate of judgment for unpaid tax was nullified by a subsequent reassessment. In the course of its decision the Chief Justice stated, at page 614 (D.T.C. 6375):

As appears from our review of the provisions of the Act, there is a difference between

(a) a liability under the Act to pay tax, and

(b) an "assessment" (including a reassessment or a further assessment), which is a determination or calculation of the tax liability.

Furthermore I am satisfied that subsection 248(2) of the Act does not apply to the provisions of subparagraph 160(1 )(d)(i) and that the definition of "tax payable" in subsection 248(2) of the Act relates only to the tax payable by a taxpayer following an assessment and has no bearing on original tax liability.

In this context reference should be made to The Queen v. Charles Vernon Myers and Interpublishing Company Ltd. et al., [1977] C.T.C. 507; 77 D.T.C. 5278. Although this was a case involving a prosecution for tax evasion the Court considered the meaning to be attributed to the provisions of subsection 248(2) of the Act. At page 522 (D.T.C. 5288-89) Holmes, D.C.J. stated:

Upon careful consideration of subsection 248(2), I have concluded that the subsection is really a definition of the expression, "tax payable by a taxpayer", or simply "tax payable”, which is clearly qualified in application by that part of the subsection which reads, ”. . . under any Part of this Act by or which provision is made for the assessment of tax . . .” Accordingly, it applies only to those provisions of the Act which relate to the specific term, "tax payable by a taxpayer”, or to, "tax payable” in connection with the assessment of income tax.

In summing up Holmes, J. stated, “In my view, a tax is imposed whether or not an assessment is made.”

The fact that subsection 152(3) of the Act provides that liability for tax is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made, adds further support to my conclusion that the amount of tax Mr. Garland was liable to pay on March 12, 1981 was not just an amount fixed by an assessment made on or prior to that date. The subsequent assessments made by the Minister confirmed the existence of a tax liability which existed on or before the date of the transfer. I find that Mr. Garland, the transferor was, on the day of the transfer, liable under the Act to pay taxes in the amounts assessed by the respondent and that in such circumstances it Was proper for the respondent to assess the appellant/ transferee pursuant to the provisions of subsection 160(2) of the Act.

The appellant's second argument is based upon a novel interpretation of the rules applicable to these cases, in particular paragraph 160(3)(b) of the Act which provides:

(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules are applicable:

(a) a payment by the transferee on account of his liability shall to the extent thereof discharge the joint liability; but

(b) a payment by the transferor on account of his 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.

According to counsel, this paragraph, coupled with subsection 148(2) of the Bankruptcy Act, 1970 R.S.C., c. B-3, which provides that an order of discharge releases the bankrupt from all other claims proveable in bankruptcy, when applied to the facts before the Court has the effect of reducing the appellant's liability to nil.

It is not disputed that Mr. Garland was granted an absolute order of discharge in the bankruptcy proceedings. It is also a fact that the respondent had been a preferred creditor for an amount of some $61,000, $24,000 of which related to the taxation year in issue and to prior years. Since some funds were paid over to the respondent by the Trustee,* [1] that distribution was, according to counsel, a "payment" as contemplated by subsection 160(3). This "payment", albeit made pursuant to a bankruptcy proceeding, "operates" to reduce Mr. Garland's liability and in the circumstances of this case operated to eliminate the totality of his tax liability for all of his taxation years. Counsel submitted that, as required by subsection 160(3) of the Act this "payment" was effectively a payment by the transferor, Mr. Garland, and it was made on account of his tax liability. By virtue of paragraph 160(3)(a) when such a payment is made by a transferor it goes first to that part of his tax debt which is not joint and several with the transferee, and then pursuant to paragraph 160(3)(b) if there is anything left over it discharges the joint and several liability shared by the transferor and transferee to the extent of the payment. In this case since the "payment" had the effect of reducing Mr. Garland's liability to the respondent to nil, counsel submitted that subsection 160(3) must also operate to concurrently reduce Mrs. Garland's liability to nil.

The respondent's position is that although Mr. Garland's liability is extinguished by virtue of his bankruptcy and the absolute order of discharge releases him from any further claim by the respondent, that occurrence has no effect on the liability of the appellant. Since that liability is joint and several, the appellant, in the normal course, continues to be liable for the amount for which she was assessed. Any other interpretation would defeat the purpose of the section because the husband could transfer property to his wife, declare bankruptcy and know that as soon as he was discharged his wife's liability which arises out of the operation of the relevant statute, would also be extinguished. The result would be that the property transferred would have been put out of the reach of creditors, in this case the respondent. Counsel submitted that the payment made by the Trustee on account of Mr. Garland's tax liability would only operate to reduce the appellant's liability once the amount of Mr. Garland's tax liability that was not joint and several was paid. That did not occur in this case.

I am of the view that the appellant's position can not be maintained. Subsections 148(1) and (2) of the Bankruptcy Act provide:

148. (1) An order of discharge does not release the bankrupt from

(a) any fine or penalty imposed by a court or any debt arising out of a recognizance or bail bond;

(b) any debt or liability for alimony;

(c) any debt or liability under a maintenance or affiliation order or under an agreement for maintenance and support of a spouse or child living apart from the bankrupt;

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while the acting in a fiduciary capacity;

(e) any debt or liability for obtaining property by false pretences or fraudulent misrepresentation;

(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless such creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim; or

(g) any debt or liability for goods supplied as necessaries of life and the court

may make such order for payment thereof as it deems just or expedient;

(2) An order of discharge releases the bankrupt from all other claims proveable in bankruptcy.

[Emphasis added.]

The release of Mr. Garland through operation of law from all other claims proveable in bankruptcy does not extinguish the debt. The order of discharge granted to him is personal and does not affect the liability of the appellant who is jointly bound. It is abundantly clear that the Bankruptcy Act did not intend that a joint debtor of the bankrupt be released by the discharge of the bankrupt. Section 149 of that Act provides:

149. An order of discharge does not release a person who at the date of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with him, or a person who was surety or in the nature of a surety for him.

[Emphasis added.]

In General Printers Employees (Oshawa) Credit Union v. Kemp (1976), 8 O.R. (2d) 129; 57 D.L.R. (3d) 321 (C.A.), the Court was required to consider the following facts. Messrs. Giroux and Kemp signed a promissory note in favour of the credit union whereby they were jointly and severally liable, Kemp signing as an accommodation party. Giroux having become bankrupt and having been subsequently discharged, Kemp argued that his own liability was extinguished. At trial the learned judge acceded to this argument and held that the debt was discharged by bankruptcy and since there was no outstanding debt there could be no claim against Kemp as a co-maker of the note.

The Court of Appeal held that the learned trial judge was in error in the conclusion reached by him. Section 149 of the Bankruptcy Act does not relieve a co-signer of a note from the obligation to pay even though the maker had received a discharge in bankruptcy and was free from his personal obligation. Evans, J.A., speaking for the Court, referred to Gagnon v. Gobin (1944), 26 C.B.R. 127, in which case it was held by Savard, J. that an endorser of a promissory note will not avoid payment because the maker of the note was declared bankrupt and afterwards was discharged of all his debts by the Bankruptcy Court. A discharge granted to a debtor is personal and does not affect the endorser of the promissory note. The same conclusion was reached in Banque Can. Nat. v. Dufour (1979), 31 C.B.R. (N.S.) 300 (Québec S.C.).

There is nothing in the provisions of subsection 160(3) of the Income Tax Act that would lead me to reject the rationale expressed in these cases. Assuming for the sake of argument that the distribution made by the Trustee is a "payment by the transferor" on account of his liability, that "payment" only reduces the tax debt to the extent of the payment and no more. The balance of the tax debt remains. The fact that the respondent is precluded by the provisions of subsection 148(2), of the Bankruptcy Act from making any further claim against Mr. Garland is a separate and distinct matter. In my view only the respondent's right to "collect" that debt from Mr. Garland has been “extinguished”, the tax debt continues to exist and the appellant remains liable to pay it as assessed.

For the foregoing reasons the appeal of Barbara May Garland is dismissed.

Appeal dismissed.