Loo J.:
This is an application by the respondent to set aside the 22 June 1998 ex parte order of Mr. Justice Burnyeat made pursuant to s. 225.2(2) of the Income Tax Act, commonly referred to as a jeopardy collection order. The order allowed the petitioner to obtain a judgment against the respondent in Federal Court - Trial Division for $267,474.51, plus interest. The judgment was obtained the same day the petitioner issued and mailed a notice of assessment to the respondent. Generally, the petitioner is prohibited from taking any steps to collect the assessed amount until 90 days after the mailing of the assessment unless it can establish under s. 225.2 that there are reasonable grounds for believing it will be jeopardized by any delay in collecting the assessed amount.
The Income Tax Act
The relevant provisions of the Income Tax Act are as follows:
225.1 (1) Collection restrictions - Where a taxpayer is liable for the payment of an amount assessed under this Act, the Minister shall not, for the purpose of collecting the amount,
(a) commence legal proceedings in a court,
(b) certify the amount under section 223,
(c) require a person to make a payment under subsection 224(1),
(d) require an institution or a person to make a payment under subsection 224(1.1),
(e) require the retention of the amount by way of deduction or set-off under section 224.1,
(f) require a person to turn over moneys under subsection 224.3(1), or
(g) give a notice, issue a certificate or make a direction under subsection 225(1)
until after the day that is 90 days after the day of the mailing of the notice of assessment.
A taxpayer who objects to an assessment has a number of avenues of appeal, ending in some circumstances when judgment has been delivered by the Supreme Court of Canada. During that time the petitioner is not allowed to take action to recover the assessed amount.
However, rather than waiting to collect the assessed amount, the petitioner may proceed under the jeopardy collection provisions of section 225.2(2) which provides:
225.2 (2) Authorization to proceed forthwith. Notwithstanding section 225.1, where, on ex parte application by the Minister, a judge is satisfied that there are reasonable grounds to believe that the collection of all or any part of an amount assessed in respect of a taxpayer would be jeopardized by a delay in the collection of that amount, the judge shall, on such terms as the judge considers reasonable in the circumstances, authorize the Minister to take forthwith any of the actions described in paragraphs 225.1 (l)(a) to (g) with respect to the amount.
The test to be applied under section 225.2(2) is set out in Danielson v. Canada (Deputy Attorney General), [1986] 2 C.T.C. 380 (Fed. T.D.) at page 381:
... the mere suspicion or concern that delay may jeopardize collection would not be sufficient per se. The test of “whether it may reasonably be considered” is susceptible of being reasonably translated into the test of whether the evidence on balance of probability is sufficient to lead to the conclusion that it is more likely than not that collection would be jeopardized by delay. ...
In my opinion, the issue is not whether the collection per se is in jeopardy, but rather whether the actual jeopardy arises from the likely delay in the collection thereof.
Background
The respondent Lily Mak, is a Canadian citizen who resided in Canada until July 1989. While she was in Canada, she was married to Gary Mak. In July 1988 the Maks incorporated 337923 B.C. Ltd. (“the company”) to hold title to real estate to be acquired. Fifty common shares in the company were issued each to Lily Mak and Gary Mak. In November 1998 they each contributed $200,000. to the company in exchange for 200 preferred shares. With the $400,000. the company purchased and held title to an apartment building on West 11th Avenue in Vancouver. The company employed caretakers to carry out the day-to-day business of the property.
In July 1989, the Make and their children moved to Houston, Texas as a result of an employment opportunity for Gary Mak. While in Texas the marriage deteriorated and the Make were divorced there on 10 January 1995. They agreed before the divorce that the West 11th Avenue property would be sold and the proceeds divided equally. This is reflected in the Agreed Final Decree of Divorce. On 5 February 1995 the apartment building was sold. On 8 February 1995, the Maks and the company entered into an indemnity agreement. The recital to that the agreement provides in paragraph F:
Gary and Lily have agreed that in the event that Revenue Canada should assess or re-assess the Company with respect to any taxes payable by the Company relating to the payments made by the Company pursuant to paragraphs (E)(1), (2) and (3) aforesaid, that they will indemnify and save harmless the Company from any such assessment or re-assessment and that they will be each severally liable for 50% of such assessment or re-assessment by Revenue Canada (hereinafter the “Indemnity”). I
On 9 February 1995, the company redeemed all of its preferred shares and $200,000. each was paid to Lily Mak and Gary Mak. This transaction did not attract tax as it was a return of capital. The balance of the sale proceeds was distributed based on professional advice received in both Canada and the United States, and reflected in special resolutions which provided that Lily Mak and Gary Mak were each to be paid a $247,680. management salary and a $79,914.50 dividend. The company paid withholding tax of $123,845., representing 25 per cent of the management salaries.
The petitioner reassessed the company. It maintained that the management fees totalling $495,360. were not properly deductible as an expense. The amount when added to the company’s income resulted in a liability under the Income Tax Act in the amount of $309,156.34 as at 22 June 1998.
The company no longer has any assets. The petitioner assessed Lily Mak under s. 160 of the Income Tax Act, as there are no assets in Canada in the name of Gary Mak. Lily Mak’s assets in Canada are a rental property on West 1st Avenue in Vancouver, B.C. She acquired it in October 1996 with a down payment of $335,000. of her own funds and $135,000. provided by her mother. The balance was financed by way of a mortgage.
Before issuing and mailing the assessment to Lily Mak, the petitioner obtained the 22 June 1998 ex parte order and a certificate of judgment in Federal Court which it registered against title to the property on West 1st Avenue.
Lily Mak intends to resume residence in Canada in the near future. Both of her parents are Canadian citizens and reside in Vancouver, B.C. They are both seventy-seven years old. As a result of their advancing age, Lily Mak has made increasingly frequent visits to Canada to care for them. She ac- quired the rental property on West 1st Avenue to generate rental income to support her when she retires. She has no intention of selling the property in the foreseeable future.
Lily Mak intends to object to the assessment. She has 90 days from 22 June 1998 to file the notice of objection. It is common ground that the 90 day period does not expire until 21 September 1998.
The petitioner says it will be jeopardized by any delay in collecting the assessed amount because it is clear that the actions of the company were all to avoid tax. It says that the reported management fee of $495,360. was not properly a management fee, but a dividend for the following reasons:
(a) the company’s sole asset was the property on West 11th Avenue in Vancouver B.C.;
(b) there were two property managers that handled all the rentals and other related duties;
(c) Lily Mak and Gary Mak are non-residents and live in the United States;
(d) the company’s lawyer advised the petitioner that the payment of the management fee was a means of distributing the profits from the sale of the property;
(e) the company has no other assets;
(f) there was no management services agreement in place; and
(g) Lily Mak and Gary Mak are both employed full-time in other jobs in the United States and did not provide any predetermined, non-dupli- cated managerial services to the company.
However, the petitioner concedes that it is not for this court on this application to decide whether the transaction is properly characterized as a management fee or a dividend. It is during the course of the reassessment and the appeal provisions provided in section 225.1 that the issue of whether the transaction is properly a management fee or dividend will be determined.
The petitioner says that the 8 February 1995 indemnity agreement between Gary Mak and Lily Mak is evidence that the Maks knew the transaction was a deliberate attempt to avoid tax. In my view, it was more likely that the indemnity agreement was entered into as stated by Lily Mak. The indemnity agreement was made not because the Maks anticipated a reas- sessment, but rather to protect themselves in the future. The agreement was made when the parties were being divorced and the company wound up.
There are no facts here to suggest that the respondent is considering a sale of her West 1st Avenue property or that a sale is imminent. The evidence is to the contrary. It may be that the petitioner is concerned that a sale could take place, however that alone does not provide reasonable grounds for believing that the respondent will waste, liquidate or otherwise transfer the property so as to make it unavailable to the petitioner. Mere suspicion or concern that delay may jeopardize collection is insufficient. The exceptional remedy of a jeopardy collection order will only be available where the evidence on a balance of probability leads to the conclusion that actual jeopardy will likely arise from any delay in collection. (R. v. Golbeck (1990), 90 D.T.C. 6575 (Fed. C.A.); Deputy Minister of National Revenue v. Medjuck (1996), 97 D.T.C. 5113 (B.C. S.C.))
The petitioner says that if the respondent has no plans to sell her property, then she will suffer no prejudice if the certificate of judgment is allowed to remain on title. The petitioner is prepared to take no further action on the certificate, without further leave of the court, until the respondent has exhausted the appeal process.
In my view, whether the respondent may be inconvenienced or prejudiced by the certificate registered against title to her property is not relevant.
The petitioner relies on the decision of Mr. Justice Warren in Deputy Minister of National Revenue v. Kung (April 7, 1998), Doc. A980102 (B.C. S.C.) which I find clearly distinguishable. There, the respondent had no intention of returning to reside in Canada, and was disposing of all of his assets in Canada without showing what had happened to the sale proceeds. Here, the respondent intends to return to Canada and intends to retain her assets in Canada.
I am not satisfied there are reasonable grounds for believing that the collection of all or some of the assessed amount will be jeopardized by a delay in collecting the assessed amount. The application of the respondent to set aside the ex parte order of Mr. Justice Burnyeat made 22 June 1998 is allowed. The Notice of Motion filed by the respondent does not seek an order that the certificate which has been filed against the respondent’s property be removed, but during the argument the petitioner sought an order that the lien be removed. Hopefully, the parties can agree on the terms of the order relating to the removal of the charge against the property.
The respondent will have her costs of this application.
Application granted and order set aside.
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