Bouchard v. R., [1999] 3 CTC 2519

St-Onge T.C.J. (orally):

The appeals of Alain and Sylvain Bouchard were heard on common evidence on October 29, 1998, in the city of Québec in the province of Quebec. The issue is whether the respondent can claim $33,469.13 from the appellants under section 160 of the Income Tax Act by reason of the transfer of an assignment of an account receivable to them.

In the Reply to the Notice of Appeal in each case, the respondent alleges the following:

[TRANSLATION]

2. By notice of assessment no. 02767 sent to the appellant on October 3, 1996, the Minister of National Revenue (“the Minister”) claimed $33,469.13 from the appellant under section 160 of the Income Tax Act (“the Act”) in connection with the transfer of an assignment of an account receivable to the appellant.

3. On or about December 11, 1996, a notice of objection was served against assessment no. 02767 of October 3, 1996.

4. By notice of reassessment no. 00916 sent to the appellant on December 22, 1997, the Minister of National Revenue (“the Minister”) revised under section 160 of the Income Tax Act (“the Act”) assessment no. 02767 of October 3, 1996 by claiming from the appellant the following amount in connection with the transfer of an assignment of an account receivable to the appellant:

Revised assessment of Oct. 30, 1996	19,850.00
Interest from Oct. 30, 1996 to Dec. 22, 1997	2,030.88
Total amount of assessment	21,880.88

5. In making the assessment, the Minister considered the following facts, inter alia, to be true:

(a) Francis Bouchard, the appellant’s father, had a tax liability of $22,691.91 from the 1984, 1985, 1986 and 1987 taxation years;

(b) On February 12, 1987, Francis Bouchard and his two sons, namely the appellant and Sylvain Bouchard, signed an agreement under which the father transferred 30 of his common shares in Garage Francis Bouchard Inc. to his above-mentioned two sons for a total consideration of $93,000;

(c) on the same date, the father then assigned the said sale price of $93,000 to his two sons, namely the appellant and Sylvain Bouchard, as a gift;

(d) on February 12, 1987, the father, Francis Bouchard (“the transferor”), transferred an assignment of an account receivable of $93,000 to the appellant and his brother Sylvain;

(e) at all relevant times, the appellant and the transferor were not at arm’s length;

(f) at the time of the transfer, it was specified that the value of the transferred portion was $19,850 for the appellant:

(g) at the time of the transfer, the fair market value of the consideration given by the appellant in respect of the property was nil;

(h) the total of all amounts that the transferor was liable to pay under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year was $22,691.91;

(i) Francis Bouchard made an assignment of his property on April 3, 1992.

6. At this point in the proceedings, the Minister is of the view that the total amount of the assessment of December 22, 1997, should be revised to $19,850.

B. Issue to be Decided

7. The issue to be decided is whether the appellant is liable to pay $19,850 under section 160 of the Act in connection with the transfer of property to him.

C. Statutory Provisions, Reasons Relied on and Relief Sought

8. He is relying, inter alia, on sections 160 and 251 and subsection 248(1) of the Act as amended and applicable.

9. He submits that the Minister is rightly claiming from the appellant an amount to be paid and to be revised to $19,850, the whole in accordance with the provisions of section 160 of the Act.

At the hearing, the appellants admitted paragraphs 2 to 9 and all nine subparagraphs and filed the agreement dated February 12, 1987.

[TRANSLATION]

Agreement

AGREEMENT ENTERED INTO AT LA MALBAIE on February 12, 1987.

Present: Francis Bouchard

Alain Bouchard

Sylvain Bouchard

The above-mentioned parties, being involved in Garage Francis Bouchard Inc. as Shareholders or employees, agree as follows:

Francis Bouchard shall transfer to Alain Bouchard and Sylvain Bouchard 30 common shares of the capital stock he holds in Garage Francis Bouchard Inc. for a total consideration of $93,000. The shares shall be distributed as follows:

		Number of
	Sale price	common shares	Total
Alain Bouchard	$3,100	15	$46,500
Sylvain Bouchard	3,100		46,500
		15
	$6,200	30	$93,000

Francis Bouchard shall assign to Alain Bouchard and Sylvain Bouchard the amount of the sale price, namely $93,000, as a gift on the date of this agreement.

The Vendor and the Purchaser declare that they intend these transactions to be at fair market value, and to that end they have made an assessment, which they consider fair and reasonable, of the value of the company’s shares being sold hereunder. However, in the event that taxes are assessed by the competent authority or if a presumption under a taxing statute applies on the basis that the fair market value of the shares sold differed from that determined by the parties when this agreement was signed, the parties agree and undertake to adjust the sale price of the shares accordingly and agree that such adjustment shall be effected by increasing or decreasing the value of the common shares. It is understood that a final determination of the fair market value of the shares sold may be made by the courts following a challenge to the assessment, provided, however, that if there is a difference between the federal and provincial assessments, the above-mentioned adjustment shall be made on the basis of the higher of the amounts established following an uncontested assessment or by a final judgment, if any.

The parties now agree and undertake to amend this agreement, if need be, to give full effect to the adjustment of the sale price provided for above and undertake to sign any document and take any action that is necessary or useful for that purpose.

Francis Bouchard undertakes to take the necessary steps to tell the company’s secretary to enter in the company’s records the transactions relating to this agreement.

AND WE HAVE SIGNED AT LA M ALB AIE this 12th day of February 1987.

Counsel for the appellants summarized the facts by explaining that the appellants had each received 15 shares worth $3,100 each, for a total of $93,000.

He argued that it is simply a matter of interpreting section 160 of the Income Tax Act.

Tax liability re property transferred not at arm’s length. Section 160(1)(d):

[T]he transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year....

According to the pleadings, it is acknowledged that the father’s liability for the 1984, 1985, 1986 and 1987 taxation years was $22,691.91. Counsel argued that the appellants are liable for only a part of the tax owed at the time of the transaction, which occurred on February 12, 1987.

In their Notice of Appeal the appellants relied on the following reasons:

[TRANSLATION]

6. The reasons we intend to rely on are as follows:

Section 160( 1 )(J) of the Income Tax Act states that the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax under this Part for each taxation year in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor.

In the situation we are dealing with, paragraph 160(1)(d) of the Income Tax Act should be read and understood in the following sense:

Sylvain Bouchard is liable for the part of the tax owed by his father, Francis Bouchard, that results from the transaction by which his father’s shares were transferred. In this case, his father did not have to pay any taxes when he transferred the shares, as he benefited from a capital gains exemption.

Therefore, as can be seen from the Act, this statutory provision applies only in so far as the father does not pay the taxes relating to the transfer of property to his sons.

Moreover, section 160(1)(e) of the Income Tax Act refers to a limit on the liability of the transferee and transferor, namely the amount of the difference between the fair market value and the price paid, the limit being the lesser of the amount of the tax calculated under paragraph 160( !)(</) or the fair market value of the property less the price paid.

Thus, in this case, since Francis Bouchard’s son is an adult, sections 74.1 to 75.1 of the Income Tax Act do not apply in the circumstances; only the disposition of the property should be considered under paragraph 160( 1 )(J) and in reading subparagraph 160( l )(e)(ii) we should take into account the taxation year in which the property was transferred.

Sylvain Bouchard is, of course, not liable for all the taxes, but only for a part of the taxes for the taxation year on transfer, and more specifically the year in which the transfer of the property occurred. Accordingly, under paragraph 160(1)(d) of the Income Tax Act, Revenue Canada must require the payment of the tax payable by the father, Francis Bouchard, when he transferred the shares to his two sons. In this situation, therefore, since the tax payable at the time of the disposition was nil, no notice of assessment should have been issued against Sylvain Bouchard.

Counsel for the respondent argued that the father’s liability on February 12, 1987, was $22,691.91 for the 1984, 1985, 1986 and 1987 taxation years and that, at the time of the transfer, it was specified that the value of the transferred portion was $19,950 for each appellant. He then referred the Court to the case law in making the following arguments. First, on the basis of Montreuil v. R (1994), 95 D.T.C. 138 (Eng.) (T.C.C.):

That a simple transfer is sufficient and that it does not have to be proved that they were trying to evade their tax obligations.

Second, on the basis of Boisselle v. Minister of National Revenue (1988), 89 D.T.C. 279 (Eng.) (T.C.C.):

There is no time limit in the case of section 160. The Minister can make an assessment at any time.

Third, on the basis of Garland v. Minister of National Revenue (1988), 88 D.T.C. 1271 (T.C.C.):

Two things: (a) an assessment against the transferor is not a precondition for section 160 to apply; (b) the transferor's bankruptcy does not extinguish the transferee's liability. The same principle is set out in Donna Mae Heavyside, Federal Court of Appeal (A-237-96).

Although the Court asked counsel for the appellants what the amount of a part of the transferor’s tax was, it did not receive an answer.

Based on the evidence, it would seem that it is $19,850 for each appellant.

Counsel for the appellants did not adduce any evidence or provide any case law concerning the allegations made in paragraph 6 of the appellants’ Notice of Appeal. The burden was on the appellants to refute the allegations in the Reply to the Notice of Appeal, and they admitted all of them. Accordingly, the Court finds that the appellants are liable to pay $19,850 each under section 160 of the Act in connection with the transfer of property to them. The appeals are therefore dismissed.

Appeals dismissed.