Algoa Trust v. R., [1998] 4 CTC 2001

Dussault T.C.J.:

The appellant is challenging an assessment in the amount of $25,278.60 made pursuant to s. 160 of the Income Tax Act (“the Act”), notice of which is dated December 21, 1995.

The appellant’s liability as the transferee of property through dividends in the amount of $78,000 was recognized in respect of an earlier assessment in a decision by Judge Rip of this Court on February 1, 1993.1[1] However, the debt of the transferor (Jaans Leasing Limited [“Jaans Leasing”]) for the years prior to the transfer had to be recalculated, in accordance with Judge Rip’s directions regarding the allocation of certain payments made by Jaans Leasing to reduce its debt. The appellant challenged the calculation done by Revenue Canada in arriving at the reassessment of December 21, 1995 following that decision.

The rule stated in s. 160 of the Act does not have the effect of creating a tax debt. The effect of the provision is not to create a second debt: there is only one tax debt. The wording of the Act is quite clear: the purpose of s. 160 is essentially to add another debtor who is jointly and severally liable with the transferor. This new debtor is called the transferee. There is thus no new debt created under the Act and the obligation arises not from the assessment but from the Act itself. Fundamentally, therefore, there is only one debt and only that debt can bear interest.

First, subsection (1) of s. 160 in fact states that the transferee is jointly and severally liable and that his or her liability is limited to the lesser of the two amounts mentioned in s. 160(1)(e)(i) and (ii), namely (i) the value of the property transferred less the consideration, and (ii) the total of all amounts which the transferor is liable to pay in or in respect of the year of the transfer or any preceding year, that is to say, for the year of the transfer and for any preceding years.

Secondly, s. 160(2) provides that the Minister of National Revenue (“the Minister”) may at any time make an assessment. This is also quite clear. However, the limit imposed in s. 160(1)(e) must be observed for each assessment.

Thirdly, I would say that there is no provision of the Act regarding interest that may be applicable to an assessment issued pursuant to s. 160 of the Act. This is logical, since there is no new tax debt and an assessment under s. 160 already incorporates the interest which the transferor owed in addition to the tax. The assessment may also incorporate penalties and interest thereon.

I shall now set out the facts which I regard as the most important in the instant case. First, there occurred in 1982 a transfer from Jaans Leasing to Algoa Trust of $78,000 by way of dividends, which was done in two payments, one of $40,000 and one of $38,000.

For 1982 and the preceding years Jaans Leasing owed $88,327.54, as established at November 20, 1989. Reference may be made here to Exhibit A-9, at page 233. There was another amount, which differed slightly ($88,244.82), as indicated on page 234 of the same document. In each case $20 in legal fees was added, which I believe was kept right to the end. In my opinion, this amount of $20 was improperly assessed. An assessment cannot include such an amount. An assessment may include three things: tax, interest and penalty, and nothing more.

There was thus an assessment in 1989 and in 1992. In 1992 explanations were simply added to comply with the Tax Court of Canada decision in Leung v. Minister of National Revenue[2] Later, as we know, that decision was reversed by the Federal Court Trial Division.[3]

It is thus clear from Exhibit A-9 that Jaans Leasing owed money for 1978, 1979, 1980, 1981 and 1982. The assessment of the transferee is limited to the lesser of the amounts indicated in s. 160(1)(e). Here this was $78,000, that is, the value of the property transferred.

There are two subsequent events that must be taken into account. The decision of Judge Rip dated February 1, 1993 established that the assessment was valid, but that the transferor’s debt should be recalculated in relation to six payments that should be allocated as indicated in that decision. In two paragraphs Judge Rip indicated, first (in (a)), that four payments should be allocated as indicated by the taxpayer, regardless of the alterations in the documents. Secondly, two other payments (in (b)), were to be allocated specifically to 1981. Counsel for the appellant disputed the allocation in particular regarding one of the payments of $1,600, but submitted no specific evidence that the allocation was contrary to the decision. I think it follows from that decision - this is clear to me - that if the Court took the trouble to say specifically that two payments related to 1981, the calculation should first be redone on that basis. Another payment was also applied to 1981. Then, the others were applied to the following years: two payments were for 1982 and remained applicable to that year, and one payment was applied to 1983.

Accordingly, no specific evidence was submitted to the Court that the allocation was contrary to the decision of Judge Rip. Mr. Gelinas of Revenue Canada explained in detail how he proceeded and I agree with the method he used. According to Mr. Gélinas, the overall effect was to establish Jaans Leasing’s tax debt in November 1989 at $64,495.66, although earlier calculations done by someone else had resulted in a debt of $60,585.68. The latter amount can be found inter alia in what is described as “Exhibit A” to the Reply to the Notice of Appeal. According to Mr. Gélinas there were also other errors, and in fact - why try to hide it? - several documents received by the appellant and entered in evidence by its counsel indicate that there was some confusion. The result of Mr. Gélinas’s calculations was that the assessment of December 21, 1995 should have been $26,810.36, not $25,278.60 as indicated in what is described as “Exhibit C” to the Reply to the Notice of Appeal. Whether the assessment amount is $25,000, or $26,000, or $27,000, or even $200,000, is of no significance in view of the limit imposed by s. 160(1 )(e) of the Act.

I now come to the second event, namely the payment of $57,387.14 by Algoa Trust on February 14, 1991. The payment was not acknowledged until 1993 and was applied to the reduction of the debt retroactive to February 14, 1991. Incidentally, Judge Rip’s decision does not mention this at all. Accordingly, this is a case in which the application of s. 1 60(3)(a) is appropriate. The payment was applied to reduce the transferee’s joint and several liability, since it reduced the transferor’s tax debt for 1978 and 1979 and for subsequent years, although when the initial assessment was made on November 20, 1989, no reference was made to the 1978 debt and there was only a partial reference to that of 1979, since the assessment had to be limited to $78,000, namely the value of the property transferred, and not to $88,244.82, that is, the amount of the transferor’s tax debt as determined earlier. This procedure is correct. The fact that the assessment was limited to $78,000 does not mean that the balance of the debt somehow miraculously disappeared. The 1978 debt and the 1979 total debt did not disappear simply because there was no need to refer to them since the limit set by s. 160(1 )(e) of the Act had already been reached.

Between November 20, 1989 (the date of the assessment) and February 14, 1991 the total debt increased because of interest, and subsequently the debt reduced by the payment of $57,387.14 continued to increase, reaching $26,810.36 by December 21, 1995 according to Mr. Gélinas’s calculations. It is now perhaps $32,000 or $33,000, but again this is not significant. If Algoa Trust were assessed now for the first time and a payment of $57,387.14 were received the same day, clearly Algoa Trust could not be held liable for an amount greater than $20,612.86 pursuant to s. 160(1)(e) and (3)(a), namely the difference between the amount established under s. 160(1)(e), that is, $78,000, and the amount already paid, namely $57,387.14. Even if nothing were recovered from Algoa Trust for 50 years, in my opinion no more than $20,612.86 could ever be recovered.

Accordingly, in conclusion, the appeal is allowed and the assessment of December 21, 1995 is reduced to $20,612.86.

The respondent will be entitled to taxed costs, but in the circumstances these may not exceed $1,000. If matters had been clearer and handled correctly at the outset, there would have been much less confusion and the parties would perhaps not have been in the same position today.

Appeal allowed.