Schafer v. The Queen, docket 95-1730-GST-G

Date: 19980116

Docket: 95-1730-GST-G

BETWEEN:

ADELE SCHAFER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan, J.T.C.C.

[1] The legislation enacting the goods and services tax (GST) is contained in Part IX of the Excise Tax Act (the “Act”). Any reference to a statutory provision in these reasons for judgment will be a reference to the relevant GST provisions of that Act unless otherwise specified. The Appellant has been assessed as a transferee under section 325 which states:

325(1) Where at any time a person transfers property, either directly or indirectly, by means of a trust or by any other means, to

(a) the transferor’s spouse or an individual who has since become the transferor’s spouse,

(b) an individual who was under eighteen years of age, or

(c) another person with whom the transferor was not dealing at arm’s length,

the transferee and transferor are jointly and severally liable to pay under this Part an amount equal to the lesser of

(d) the amount determined by the formula

A - B

where

A is the amount, if any, by which the fair market value of the property at that time exceeds the fair market value at that time of the consideration given by the transferee for the transfer of the property, and

B is the amount, if any, by which the amount assessed the transferee under subsection 160(2) of the Income Tax Act in respect of the property exceeds the amount paid by the transferor in respect of the amount so assessed, and

(e) the total of all amounts each of which is

(i) an amount that the transferor is liable to pay or remit under this Part for the reporting period of the transferor that includes that time or any preceding reporting period of the transferor, or

(ii) interest or penalty for which the transferor is liable as of that time,

but nothing in this subsection limits the liability of the transferor under any provision of this Part.

325(2) The Minister may at any time assess a transferee in respect of any amount payable by reason of this section, and the provisions of sections 296 to 311 apply, with such modifications as the circumstances require.

[2] Section 325 above is similar to section 160 of the Income Tax Act. A person assessed as a transferee under section 325 is not primarily liable for the amount assessed but becomes liable (subject to any objection or appeal) only by reason of receiving a transfer of property without consideration from a non-arm’s length person who was liable at the time of the transfer. The transferee’s liability is derived from the transferor. Assessments under section 325 are sometimes referred to as derivative assessments. All of the assessments under appeal are derivative assessments under section 325 and require a brief history of how the liability descended to the Appellant through one or more other taxpayers.

[3] The Appellant and Respondent admitted certain facts in their pleadings and agreed to certain other facts at the commencement of the hearing. Those agreed facts include:

At all relevant times, the Appellant was the spouse of Reginald Schafer.

At all relevant times, Reginald Schafer was a director of Willows Golf Corporation (“Willows”) and Willows Golf Course Inc. (“Golf Inc.”).

At all relevant times, Reginald Schafer controlled Willows and Golf Inc.

[4] The definition of “arm’s length” is contained in section 126 which incorporates by reference section 251 of the Income Tax Act. Under the consolidated definition of “arm’s length”, I have concluded that the Appellant did not deal at arm’s length with Reginald Schafer or with Willows or with Golf Inc. See the Income Tax Act: section 251, paragraphs (6)(b) and (2)(a), subparagraphs (2)(b)(i) and (iii), and paragraph (1)(a).

[5] There were a series of GST assessments issued to Willows and entered as Exhibits A-1 to A-6 inclusive. The pertinent details of those assessments are as follows:

Exhibit	Date	Assessment No.	Period	Amount
A-3	June 18/92	1992-094S-452	Jan. 1/91 - Jan. 31/91	$347.85
A-2	July 27/92	1992-09FS-561	Jan. 1/92 - Jan. 31/92	250.27
A-1	July 27/92	1992-09FS-562	Feb.1/92 - Apr.30/92	250.27
A-4	Sept. 3/92	94S3175	Jan. 1/91 - July 31/92	60,352.02
A-5	Nov. 25/92	9FS6074	Aug.1/92 - Oct.31/92	45,000.00
A-6	Apr. 22/93	DSS469	Nov.2/92 - Jan.31/93	25,467.67

In the above list of assessments, only Exhibits A-4 and A-5 are identified as notices of reassessment. Willows did not pay any of the amounts assessed in Exhibits A-1 to A-6. On July 23, 1993, a notice of assessment in the amount of $116,033.30 was issued to Reginald Schafer as a director of Willows under subsection 323(1) which states:

323(1) Where a corporation fails to remit an amount of net tax as required under subsection 228(2), the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.

The notice of assessment to Reginald Schafer is Exhibit A-7 and it states in part:

This Notice of Assessment is issued in respect of the liability under subsection 323(1) of the Excise Tax Act in the amount of $116,033.30 being the amount of unpaid tax, interest and penalty, payable by Willows Golf Corporation in respect of notices of assessment described in Schedule “A” attached.

In Schedule “A” attached to the notice of assessment in Exhibit A-7, there is a list of the six notices of assessment to Willows which are Exhibits A-1 to A-6 herein. There is no evidence of any assessment being issued to Reginald Schafer as a director of Willows under section 323 other than Exhibit A-7. None of the assessments evidenced by the notices in Exhibits A-1 to A-7 inclusive was appealed. Willows did not appeal from Exhibits A-1 to A-6 and Reginald Schafer did not appeal from Exhibit A-7. Therefore, the liability of Reginald Schafer as a director of Willows appears to have a maximum limit of $116,033.30.

[6] I now turn to the notices of assessment which were issued to the Appellant under section 325 as a transferee. From August 1993 to January 1995, there were six notices of assessment issued to the Appellant. All of them were entered as exhibits herein and the pertinent details are as follows:

Exhibit	Date	Assessment No.	Period	Amount
A-8(a)	Aug. 24/93	15936	Apr. 5/93	$2,854.49
A-9(a)	Aug. 24/93	15937	Jan. 21/91 - May 6/93	80,147.19
A-35	Sept. 2/93	15938	Jan. 1/91 - May 6/93	33,031.62
A-10(a)	June 21/94	16406	March 9/92	20,000.00
A-11(a)	Aug. 22/94	15993	Sept.11/92 - Nov.30/92	4,935.51
A-9(c)	Jan. 27/95	26549	Jan. 21/91 - May 6/93	55,211.68

[7] There are three important facts with respect to the above six assessments. First, for whatever reason, the Appellant did not object to or appeal from assessment 15938 dated September 2, 1993 (Exhibit A-35). The Appellant acknowledges that she is liable for $33,031.30 under assessment 15938. Second, assessment 26549 dated January 27, 1995 was issued as a notice of reassessment to replace assessment 15937 dated August 24, 1993. In other words, the Minster of National Revenue (the “Minister”) by assessment 26549 reduced the Appellant’s liability by $24,935.51 from $80,147.19 to $55,211.68. And third, the only four assessments under appeal are the following: 15936 dated August 24, 1993; 16406 dated June 21, 1994; 15993 dated August 22, 1994; and 26549 dated January 27, 1995.

[8] On the face of each notice of assessment, there is a statement identifying the source of the transfer of property as to whether it came to the Appellant by transfer from her husband, Reginald Schafer, or from Willows. Set out below, in the same order as they appear in the table in paragraph 6 above, are the statements as to source which were typed on the face of the six respective notices of assessment.

Assessment 15936, August 24, 1993, Exhibit A-8(a)

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $2,854.49 in respect of a transfer on or about April 5, 1993 from Willows Golf Corporation to Adele Schafer of cash.

Assessment 15937, August 24, 1993, Exhibit A-9(a)

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $80,147.19 in respect of transfers during the period January 21, 1991 to May 6, 1993, from Reginald Schafer to Adele Schafer of cash.

Assessment 15938, September 2, 1993, Exhibit A-35

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $33,031.62, in respect of transfers during the period January 1, 1991 to May 6, 1993, from Reginald Schafer to Adele Schafer of cash.

Assessment 16406, June 21, 1994, Exhibit A-10(a)

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $20,000.00 in respect of a transfer on or about March 9, 1992 from Willows Golf Corporation to Adele Schafer of cash.

Assessment 15993, August 22, 1994, Exhibit A-11(a)

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $4,935.51 in respect of a transfer during the period September 11, 1992 to November 30, 1992 from Willows Golf Corporation to Adele Schafer of cash.

Assessment 26549, January 27, 1995, Exhibit A-9(c)

This notice of assessment is issued in respect of the liability under subsection 325(1) of the Excise Tax Act in the amount of $55,211.68 in respect of transfers during the period January 21, 1991 to May 6, 1993, from Reginald Schafer to Adele Schafer of property.

[9] This appeal was argued by both counsel on the assumption that the Appellant could not be assessed as a transferee for more than $116,033.30 because that is the only amount which was assessed against her husband as a director of Willows under section 323. See the reference to Exhibit A-7 in paragraph 5 above. The six notices of assessment issued against the Appellant as a transferee indicate that Revenue Canada also assumed that it had the same maximum amount of $116,033.30 which could be assessed against her. For example, the first three assessments 15936, 15937 and 15938 issued on August 24 and September 2, 1993 add up to exactly $116,033.30. And then later, in assessments 16406 and 15993 issued on June 21 and August 22, 1994, the Minister assessed an additional $24,935.51; but on January 27, 1995, in assessment 26549, the Minister reduced the Appellant’s liability in assessment 15937 by exactly $24,935.51 from $80,147.19 to $55,211.68. The net result is that the four assessments under appeal (15936,16404, 15993 and 26549) add up to $83,001.68; and assessment 15938 which is not under appeal is for $33,031.62. The total of these assessments in the table below demonstrates the Revenue Canada assumption that it had a maximum limit of $116,033.30 to assess against the Appellant.

Assessment 15936 (appealed)    $2,854.49

Assessment 16406 (appealed)    20,000.00

Assessment 15993 (appealed) 4,935.51

Assessment 26549 (appealed)    55,211.68

   83,001.68

Assessment 15938 (not appealed) 33,031.62

$116,033.30

[10] Counsel for the Appellant argued that assessments 16406 and 15993 issued on June 21 and August 22, 1994, respectively, are void or voidable because the aggregate amount ($24,935.51) assessed in those two assessments exceeded the maximum amount of $116,033.30 which had already been assessed in assessments 15936, 15937 and 15938. If the Appellant is right in arguing that assessments 16406 and 15993 are void, then the only valid assessments under appeal would be 15936 and 26549. Alternatively, if assessments 16406 and 15993 are only voidable because they assess amounts in excess of the assumed maximum limit of $116,033.30, then those assessments could have become valid on January 27, 1995 when the Minister issued a fresh reassessment 26549 replacing the earlier assessment 15937 and reducing the Appellant’s liability in that earlier assessment by $24,935.51 from $80,147.19 to $55,211.68.

[11] I do not accept the Appellant’s argument with respect to void or voidable assessments. Subsection 325(1) serves two purposes: it sets out conditions in paragraphs (a), (b) and (c) under which a transferee and transferor may be jointly liable; and it places a limit in paragraphs (d) and (e) on the transferee’s liability. The validity of the assessments under appeal depends on transfers of property and the liability of the transferors at the time of transfer. It does not depend on some assumed maximum amount above which the Appellant cannot be assessed. In other words, each assessment must be examined to see if it satisfies the conditions in section 325 and the primary condition is a non-arm’s length transfer of property. In my view, the Minister could issue a dozen assessments under section 325 adding up to $1,000,000 and they could all be valid assessments if there were adequate transfers of property and the other conditions in paragraphs 325(1)(a), (b) and (c) were satisfied. Viewing all assessments together, however, if the aggregate of amounts for which the Appellant might otherwise be liable under many assessments exceeds the maximum amount for which one or more transferors was liable within the meaning of paragraph 325(1)(e), then certain assessments would have to be sent back to the Minister in order to reduce the amounts assessed against the Appellant so that her maximum liability under all assessments would not exceed the maximum liability of one or more transferors. All of the assessments under appeal are valid if they satisfy the conditions in section 325. If they are all valid, then the Appellant’s aggregate liability in respect of all assessments may have to be reduced to the aggregate liability of one or more transferors or some lesser amount depending on the circumstances. In my opinion, the Appellant’s argument as to void or voidable assessments is misconceived and has no bearing on the outcome of these appeals.

[12] Even if there were merit in the Appellant’s argument with respect to void or voidable assessments, I conclude that there was not a maximum amount of $116,033.30 in respect of which the Appellant could be assessed. Revenue Canada and both counsel appear to have been hypnotized by the only assessment (Exhibit A-7) which was issued to Reginald Schafer as a director of Willows. That assessment was in the amount of $116,033.30. If Reginald Schafer were the only person who had transferred property to the Appellant, then the Appellant’s liability as a transferee under section 325 would have had a maximum limit of $116,033.30. According to the evidence, however, there were some transfers of property directly from Willows to the Appellant. In my opinion, the Appellant at all relevant times was not at arm’s length with Willows. Therefore, a transfer of property directly from Willows to the Appellant could impose a liability on the Appellant under section 325 based on the amount which Willows (and not Reginald Schafer) was liable to pay under Part IX of the Excise Tax Act.

[13] The question of when a corporation and an individual are “related persons” is determined by paragraph 251(2)(b) of the Income Tax Act. In particular, under subparagraph (i) Reginald Schafer and Willows are related persons because Reginald Schafer controlled Willows. Under subparagraph (iii), the Appellant is related to Willows because she is related to Reginald as her husband under paragraph 251(6)(b). Therefore, Adele Schafer is related to Willows; she is not at arm’s length with Willows; and she can be liable under section 325 as a result of any transfer of property directly from Willows to her. In the four assessments under appeal and assessment 15938 (not appealed), the transferors are stated on the respective notices of assessment to be as follows:

Assessment No. Transferor Amount

15936 Willows $2,854.49

16406 Willows 20,000.00

15993 Willows 4,935.51

26549 Reginald Schafer 55,211.68

15938 Reginald Schafer 33,031.62

[14] The six GST assessments issued to Willows and not appealed are listed in paragraph 5 above. According to those assessments, the aggregate liability of Willows is $131,668.08. Therefore, the maximum liability of Reginald Schafer as a director of Willows was $131,668.08 although he was assessed as a director (Exhibit A-7) for only $116,033.30. Similarly, the maximum liability of the Appellant as a non-arm’s length transferee of property from Reginald Schafer and Willows was $131,668.08 although she has been assessed for only $116,033.30. There appears to be an additional amount of $15,634.78 in respect of which the Appellant could have been assessed as a transferee from Reginald Schafer or Willows if there were adequate transfers of property and if the assessments against Willows (Exhibits A-1 to A-6) were not paid and are cumulative as the parties herein have assumed.

[15] Two of the assessments issued to Willows were for estimated amounts of tax based on the gross revenue of Willows without regard to possible input tax credits. Exhibit A-5 is an assessment of $45,000 for the period August 1 to October 31, 1992. Exhibit A-6 is an assessment of $25,000 (excluding interest and penalty) for the period November 2, 1992 to January 31, 1993. Counsel for the Appellant attempted to prove that the amounts assessed in Exhibits A-5 and A-6 were excessive in the circumstances of the Willows operation. I question whether a person who has been assessed as a transferee under section 325 of the GST legislation (or section 160 of the Income Tax Act) can challenge the underlying assessments against the transferor if those underlying assessments were not challenged by the transferor himself.

[16] In Thorsteinson v. M.N.R., 80 DTC 1369, it was assumed without discussion by the presiding member of the Tax Review Board that the transferee (under section 160 of the Income Tax Act) could contest the underlying assessment against the transferor. In Ramey v. The Queen, 93 DTC 791, a son was assessed with respect to transfers from his father. My colleague, Bowman J., allowed the appeal in part because the assessments against the father were under appeal; and Revenue Canada admitted that those assessments against the father would have to be reduced. In Sarraf v. The Queen, 94 DTC 1506, Bowman J. dismissed the appeal but stated “It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so ... ”. In Acton v. The Queen, 95 DTC 107, there was a transfer of property from husband to wife. The wife appealed and was represented in court by her husband who also testified concerning his prior troubles with Revenue Canada. Bowman J. allowed the appeal after accepting the husband’s evidence with respect to his own liability (or lack thereof) for income tax. The Acton judgment was delivered orally under the Informal Procedure. In other decided cases, Bell J. in Route Canada Real Estate v. The Queen, 95 DTC 502 and Sobier J. in Kraychy v. The Queen, 96 DTC 1479 held that the transferee had the right to challenge the underlying assessment against the transferor.

[17] Left to myself, I should have thought that a transferee cannot attack the underlying assessment against a transferor if the transferor himself has not objected or appealed. The GST legislation provides in section 299:

299(3) An assessment, subject to being vacated on an objection or appeal under this Part and subject to a reassessment, shall be deemed to be valid and binding.

299(4) An assessment shall, subject to being reassessed or vacated as a result of an objection or appeal under this Part, be deemed to be valid and binding, notwithstanding any error, defect or omission therein or in any proceeding under this Part relating thereto.

See also subsection 152(8) of the Income Tax Act. If a transferor of property has not objected to or appealed from his own assessment, that assessment is “deemed to be valid and binding”. On what basis can a transferee attack a valid and binding assessment issued to a transferor? At first blush, one may think that a transferee, not primarily liable, ought to have some equitable right to attack the liability of the transferor. In my view, however, the transfer of property without consideration and the non-arm’s length relationship between transferor and transferee (both of which are required by the statute) diminish any such equity that may otherwise run in favour of the transferee.

[18] There are other problems in allowing the transferee to attack the liability of the transferor. I will assume the following facts: (a) a transferor husband does not appeal his own assessment; (b) the transferee wife appeals her assessment and persuades a judge of this Court that the amount assessed against her transferor husband should be reduced; (c) Revenue Canada cannot collect all of the reduced amount from the transferee wife; and (d) the transferor husband wins a huge lottery just after the judgment of this Court allowing in part the appeal of the transferee wife. Under section 325, the husband is still jointly and severally liable. How much can Revenue Canada attempt to collect from the husband? If the husband’s own assessment was not appealed and is therefore valid and binding, can Revenue Canada collect the full amount assessed against the husband? Can the husband defend any collection action by Revenue Canada on the basis that his liability has been reduced as a result of the judgment in his wife’s appeal? If the transferee can attack the underlying assessment against the transferor, does any resulting reduction in the liability of the transferor accrue only to the benefit of the transferee? If a husband has failed to appeal his own assessment, should he be encouraged to avoid payment of the tax and to transfer all of his property to his wife so that so that she can attack his assessment in her appeal as a transferee?

[19] Notwithstanding the views of my colleagues in the decided cases cited about, I conclude that it is not open to a transferee, in an appeal from an assessment issued under section 325, to attack the assessment issued to the transferor. It is unfortunate that we in this Court do not have the benefit of a decision by a higher court on this question. Because I may be wrong in my conclusion, I propose to review briefly the evidence relied on by the Appellant to attack the two “estimated” assessments (Exhibits A-5 and A-6) issued to Willows.

[20] Willows operated a new golf club which was developed in the period 1989 to 1991. It officially opened for business on July 1, 1991. At all relevant times, Willows was controlled by Reginald Schafer (the Appellant’s husband); and the only directors of Willows were Reginald Schafer and Sandra Zapshala. By an order of the Saskatchewan Court of Queen’s Bench dated November 2, 1992 (Ex. A-29), Coopers & Lybrand Limited was appointed Trustee of the rents and profits accruing to Willows. The Court Order was obtained upon the application of certain creditors. By a further order of the same Court dated May 6, 1993 (Exhibit A-30) Jeffrey Pinder & Associates Inc. was appointed “Interim Receiver” in the bankruptcy of Willows. Mr. Pinder was a witness at the hearing of these appeals by Adele Schafer from her four GST assessments.

[21] Mr. Pinder was a very credible witness. He stated that his mandate was to operate the Willows Golf Club from and after May 6, 1993 until it could be sold. The Club was in fact sold in the spring of 1994. He stated that Willows Golf Club had almost no financial records for any period prior to November 2, 1992 when Coppers & Lybrand Limited was appointed Trustee for creditors. He concluded that Reginald Schafer had managed the Golf Club in the period before his (Pinder’s) appointment as Interim Receiver. This conclusion is supported by certain statements of Wedge J. of the Saskatchewan Court of Queen’s Bench in Bankruptcy (June 17, 1994) in an application by Coopers & Lybrand Limited to recover all of its billed fees. Those fees were reduced partly because Wedge J. found that Reginald Schafer was permitted to continue to manage the Golf Club after the appointment of Coopers & Lybrand Limited on November 2, 1992. See 122 S.R., page 75. On appeal, the order of Wedge J. was varied but affirmed in substance. See [1995] 9 W.W.R. 1.

[22] The real question put by counsel for the Appellant is whether the estimated amounts of $45,000 (Exhibit A-5) and $25,000 (Exhibit A-6) can be sustained. The $45,000 in GST is for the three-month period August 1 to October 31, 1992. Wade Hudyma (a witness called by the Appellant) was Director of Golf at the Willows Golf Club from the date when it opened on July 1, 1991 up to the hearing of these appeals. He was responsible for all golfing operations at Willows including maintenance and management of the two 18-hole courses, the driving range and the pro shop. He had no accounting or bookkeeping functions for Willows but the pro shop was responsible for collecting the green fees. According to Mr. Hudyma, there were only about 100 members in 1991 and 1992 who would have paid an annual fee of $1,200 for membership. The green fee of $32 in 1992 included a golf cart but in 1993 there were two rates: $24 for a golfer who walked and $32 for golf and cart. The rounds of golf increased at Willows in 1993 over 1991 and 1992.

[23] Ronald Gilewicz, an employee of Reveue Canada, was called as a witness by the Appellant. Mr. Gilewicz was familiar with the files of the Appellant, her husband and Willows. Also, Mr. Gilewicz was a director of the Saskatoon Golf and Country Club in 1988-1989-1990 and was familiar with the new operation at Willows. He stated that Reginald Schafer had told him that Willows had put through about 70,000 rounds of golf at its two 18-hole courses in 1992. Mr. Gilewicz stated that, from his own experience at his own club, that number was not unreasonable because there were 150 days in the five best golf months (May to September). An 18-hole course averaging 200 rounds per day would have 30,000 rounds in those five months alone. On that basis, 35,000 rounds would be reasonable for a whole season and 70,000 rounds for two 18-hole courses would also be reasonable. At an average rate of $30 per round, 70,000 rounds would produce gross green fees of $2,100,000. Even if the aggregate green fees for 1992 were only one-half that amount (i.e. $1,050,000), they would produce a GST liability of $73,500 at 7%.

[24] The rough computations in the preceding paragraph do not take into account any sales in the pro shop or the restaurant. I am not able to conclude that the estimated assessment of $45,000 for the period August 1 to October 31, 1992 (Exhibit A-5) was in error or not reasonable. The same can be said for the estimated assessment of $25,000 for the period November 2, 1992 to January 31, 1993 (Exhibit A-6). One could reasonably infer that no golf was played in Saskatoon in the months of November, December and January but there was evidence that the restaurant operated all through the winter. Counsel for the Appellant pointed out that a GST liability of $25,000 would require transactions with value of $350,000. That is quite true as a matter of common sense but, with respect to evidence, I am left in the dark concerning what actually happened at Willows from November 2, 1992 to January 31, 1993.

[25] Mr. Gilewicz stated that Willows filed GST returns for only the three periods ending January 1, April 30 and July 31, 1991. In those returns, Willows reported no tax but claimed input tax credits. There were no returns filed for any part of 1992 or the first three months of 1993. The failure of the Appellant to call Reginald Schafer as a witness is, in my opinion, fatal to the Appellant’s attack on the estimated assessments (Exhibits A-5 and A-6). Counsel for the Appellant acknowledged in argument that Mr. Schafer was in court and had been in court with his wife (the Appellant) since the commencement of the hearing.

[26] It is Mr. Pinder’s understanding that Mr. Schafer managed the Willows Golf Club in the period immediately preceding his (Pinder’s) appointment as Receiver on May 6, 1993. Also, Mr. Pinder concluded that a significant amount of membership fees paid after the appointment of Coopers & Lybrand Limited as Trustee on November 2, 1992 but before his own appointment on May 6, 1993 were in fact collected and retained by Mr. Schafer, and not put through the books and records of Willows. The Appellant’s counsel wants me to conclude that the estimated assessments of $45,000 and $25,000 are not reasonable and should be set aside or reduced but he offers as a basis for that conclusion only innuendo and inference from Messrs. Pinder and Hudyma while Mr. Schafer, the man who managed the Willows Golf Club in the periods of estimated assessments (August 1992 to January 1993), sat silent in the courtroom.

[27] There is a well-recognized rule that the failure of a party or a witness to give evidence, which was in the power of the party or witness to give and by which the facts might have been elucidated, justifies a court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed. See: Murray v. Saskatoon, [1952] 2 D.L.R. 499 at 505-506; and “The Law of Evidence in Civil Cases” at page 535 by Sopinka and Lederman, Butterworths, 1974. I attribute to the Appellant the failure to call her husband as a witness; and I infer that his evidence would have been unfavourable to the Appellant with respect to the real GST liability of Willows in the period August 1992 to January 1993.

[28] In summary, the evidence relied on by the Appellant to attack the two estimated assessments does not persuade me to vary those assessments at all. I repeat by basic conclusion, however, that it is not open to a transferee, when appealing from an assessment issued under section 325, to attack the underlying assessment against the transferor.

[29] Apart from arguments concerning voidable assessments and the underlying liability of Willows, the Appellant has attacked a number of specific amounts assessed against her. Assessment 16406 issued on June 21, 1994 in the amount of $20,000 is based on a transfer from Willows to the Appellant on or about March 9, 1992. Exhibit 34(e) is a copy of a cheque dated March 9, 1992 in the amount of $20,000 issued by Willows (signed by Reginald Schafer) and payable to the Appellant. The second page of Exhibit 34(e) shows that the Appellant deposited the $20,000 cheque in her own bank account on March 9, 1992.

[30] The Appellant stated that prior to the opening of the Willows Golf Club, when there was a shortage of funds, she had purchased certain furnishings and supplies on her own account for use in the Golf Club or in the pro shop. Exhibit A-36 is a copy of a credit card showing certain purchases in Scottsdale, Arizona in May 1991. She stated that she and another person went to Scottsdale to buy these things for the Golf Club and the cheque for $20,000 on March 9, 1992 was to reimburse her. The amount of $15,000 was reimbursement for her out-of-pocket costs and the remaining $5,000 was a fee for her services. She admitted that she did not report the fee in 1992 for income tax purposes.

[31] There are no invoices in evidence to support the alleged purchases of $15,000. There was no evidence as to how the purchases in Arizona were imported into Canada. There was no evidence as to why the Appellant was buying supplies in Arizona when the US dollar was at a 16% premium (see Exhibit A-36) and whether such supplies were intended for resale in the pro shop in Canadian dollars. There was no evidence as to whether the Appellant or Willows had done any price analysis to determine whether certain products could be purchased more effectively in Canada or in the US. There was no evidence as to what instructions the Appellant received from Willows (i.e. her husband) when she embarked upon this shopping expedition, or how her alleged fee of $5,000 was determined.

[32] I find that the Appellant’s evidence with respect to this $20,000 is simply not believable. I do not believe that she purchased on her own account any furnishings or supplies for Willows; that there ever were any invoices; or that she waited 10 months (May 1991 to March 1992) to be reimbursed. I find that the Appellant gave no consideration for the $20,000 and that it was a gratuitous transfer of funds from Willows to her. The Appellant did not discharge the onus of proof with respect to the $20,000. Her husband did not testify on this matter.

[33] The Appellant argues that certain payments made to the Royal Bank of Canada by Reginald Schafer or a corporation which he controlled were intended to discharge the joint and several obligations of Reginald Schafer and the Appellant to the Royal Bank evidenced by the promissory note in Exhibit A-23. In 1981, the Appellant and Reginald Schafer were the registered owners of their home at 118 Lakeshore Terrace in Saskatoon. At that time, there were two mortgages in the aggregate amount of $150,000 registered against the home in the name of Bank of Nova Scotia. In December 1981, the Appellant and her husband borrowed $250,000 from the Royal Bank and delivered to the Bank a promissory note (Exhibit A-23) as evidence of their debt. They used the proceeds from the Royal Bank loan to pay off the mortgages ($150,000) held by the Bank of Nova Scotia; to pay for certain construction costs ($50,000) on their home; and to pay a debt of approximately $50,000 in connection with Reginald Schafer’s farming operation. The Appellant and her husband granted to the Royal Bank a mortgage (Exhibit A-24) on their home at 118 Lakeshore Terrace as security for the $250,000 loan. At all relevant times subsequent to December 1981, the Appellant and Reginald Schafer remained jointly and severally liable to the Royal Bank with respect to the amount owing on the promissory note.

[34] In May 1984, ownership of the Schafer family home was registered in the name of the Appellant alone; and Reginald Schafer ceased to be on title as a co-owner. See Exhibits A-28 and A-27. The Royal Bank continued to hold a mortgage on the home as security for the promissory note (Exhibit A-23) on which both the Appellant and Reginald Schafer continued to be jointly and severally liable. There were entered in evidence 10 cheques all payable to the royal Bank and each in the amount of $2,854.49. See Exhibits A-34(f), (g), (i), (q), (r), (t), (v), (x), (y) and (bb). Each cheque was issued by Reginald Schafer on a company which he controlled and was a monthly payment with respect to the promissory note.

[35] The Appellant argues that she and her husband are both principal debtors on the promissory note. Reginald Schafer remained a principal debtor on the note even after the family home was transferred to the Appellant alone in May 1984. Therefore, any payment which Reginald Schafer (or one of his companies) made to the Royal Bank with respect to the promissory note was a payment made by him as principal debtor and was not a transfer of property to the Appellant. The mortgage on the family home is only security for the debt evidenced by the promissory note.

[36] It is a fact that Reginald Schafer remained a principal debtor on the promissory note so long as any part of the debt evidenced by that note remained unpaid. According to the evidence, the only property held by the Royal Bank as security for the debt was the mortgage on the Schafer family home; and after May 1984, the Appellant was the sole owner of that home. Therefore, the Appellant’s property at 118 Lakeshore Terrace was encumbered by the mortgage to the Royal Bank, and her equity in that property was reduced by the amount owing on the debt evidenced by the promissory note. Conversely, every payment made to the Royal Bank with respect to the promissory note reduced the debt and increased the Appellant’s equity in her property.

[37] I do not accept the Appellant’s argument that any payment made to the Royal Bank by Reginald Schafer or one of his companies was a payment as principal debtor and not a transfer of property. Only the Appellant’s property was at risk if the debt were not paid. Her equity in her property at 118 Lakeshore Terrace was increased by every payment to the Royal Bank. Subsection 325(1) described a person who “transfers property, either directly or indirectly, by means of a trust or by any other means ...”. Those words have a very broad meaning. In my opinion, when a wife has mortgaged her property to secure the debt of her husband and only her property is at risk, a payment by the husband on his own debt may be regarded as a transfer of property within the meaning of subsection 325(1).

[38] I considered a similar situation in Doris White v. The Queen, 95 DTC 877 where a wife and husband maintained a joint bank account. The relevant part of my decision in White appears at page 880:

... At the opening of business on March 5, 1984, the balance in the joint account was only $7,500. On that one day, Howard White deposited a cheque for $126,000 payable to himself, and the Appellant immediately issued a cheque for $126,037.74 to pay off the mortgage on the house which she owned alone. In Fasken Estate v. M.N.R., 49 DTC 491, Thorson. P. said at page 497:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

Applying the Fasken decision to the facts of this case, Howard White divested himself of $126,000 and that amount vested in the Appellant (his wife) as the sole owner of the house at 61 Shallmar Boulevard. Also, the words of subsection 160(1) are very broad concerning the transfer of property “either directly or indirectly, by means of a trust or by any other means whatever”. In my opinion, and having regard to the circumstances of the transaction, there was a transfer of property (i.e. $126,000) from Howard White to the Appellant in 1984 within the meaning of subsection 160(1).

[39] The facts in White are obviously different but, by analogy, every payment by Reginald Schafer (or one of his companies) to the Royal Bank was a transfer of money to the Bank which directly increased the Appellant’s equity in her property.

[40] Exhibit A-34(x) is a cheque issued by Willows to the Royal Bank. It is the basis for assessment 15936 (Exhibit A-9(c)). If I should be wrong in my conclusion with respect to the other cheques paid to the Royal Bank, assessment 15936 would still be upheld because (i) Willows was not a principal debtor on the promissory note; (ii) the Appellant was a principal debtor on the promissory note; and (iii) the Appellant was not at arm’s length with Willows.

[41] The Appellant argues that three specific amounts included in her assessment were not transfers from Reginald Schafer or from Willows. Exhibit A-34(l) is a deposit slip for the Appellant’s own account at the Toronto-Dominion Bank showing that on August 3, 1992, she deposited $7,900 in cash. This amount was included in assessment 26549 (Exhibit A-9(c)) as a transfer from Reginald Schafer. The Appellant’s uncontradicted evidence is that she won the amount $7,900 at the Marquis Downs Racetrack in Saskatoon by holding a “triactor” ticket on a horse named “Joshua’s Hero”. Her evidence was supported by Mr. Dwayne Yuzik, the paramutual manager at Marquis Downs who stated that he was at the track on the day in question; he knew there was great excitement because a patron held a winning triactor ticket; he knew that Mr. and Mrs. Schafer were regular patrons; and he understood that the winning ticket was held by Mr. and Mrs. Schafer. I accept the Appellant’s evidence and will reduce assessment 26549 by $7,900.

[42] Exhibit A-34(n) is a deposit slip showing that the Appellant deposited $715 in her own account at the Toronto-Dominion Bank on October 15, 1992. I accept

the Appellant’s evidence that part of this amount was a gift from her mother because it is close to a wedding anniversary date. I will reduce assessment 26549 by a further $200.

[43] Assessment 15993 in the amount of $4,935.51 issued on August 22, 1994 (Exhibit A-11(a)) was based on certain merchant credits from Willows being applied to personal credit cards. The Appellant admits that between August 1 and October 31, 1992, there was a transfer of $1,200 from Willows to her personal credit card. She challenges the balance of $3,735.51 because it represents transfers from Willows to credit cards which she held jointly with Reginald Schafer and she claims that such cards were used almost exclusively by Reginald Schafer. The evidence is that the Appellant and Reginald Schafer were jointly and severally liable for amounts owing on these credit cards. Also, Mr. Gilewicz stated that when Revenue Canada was assessing the Appellant with respect to various transfers of merchant credits from Willows to credit cards held jointly by the Appellant and her husband, Revenue Canada used only 50% of the merchant credits applied by Willows. In my view, the Appellant has not discharged the burden of proof. I will not vary assessment 15993.

[44] The remaining argument is whether certain amounts included in assessment 26549 issued on January 27, 1995 for $55,211.68 had already been included in assessment 15938 (not appealed) issued on September 2, 1993 for $33,031.62. Exhibit A-45 is an analysis of deposits to the Appellant’s bank account from her husband, companies he controlled or persons acting as his agent. Such deposits total $55,211.68 and are the basis for assessment 26549. Before the hearing, the Respondent had not provided a list of the transfers which Revenue Canada had relied on when issuing assessment 15938 although the Respondent had given an undertaking to do so. At the hearing, Mr. Gilewicz produced Exhibit R-17 which purports to be a list of amounts relied upon by Revenue Canada for assessment 15938. Mr. Gilewicz stated that Exhibit R-17 proves that Revenue Canada could have assessed more than $33,031.62 on September 2, 1993 but for the perceived limit of $116,033.30. Under cross-examination, however, Mr. Gilewicz admitted that the following amounts in Exhibit R-17 also appear in Exhibit A-45:

April 15, 1992 cash deposit $1,500

September 12, 1992 cash deposit 1,200

October 15, 1992 cash deposit 650

TOTAL $3,350

I will reduce assessment 26549 by this further amount of $3,350.

[45] In summary, the appeals from assessments 15936, 16406 and 15993 are dismissed. The appeal from assessment 26549 is allowed so that the amount assessed will be reduced by $7,900 (won at the race track) and the above duplicated amount of $3,350. I note that the duplicated amount of $650 on October 15, 1992 includes the $200 wedding anniversary amount allowed for different reasons.

[46] I would ordinarily allow costs to the Respondent because the assessments are substantially upheld. I note, however, that the Respondent undertook on discovery to provide the supporting transfers for assessment 15938 (not appealed) but failed to do so until the evidence was almost concluded. Production of that information before the hearing may have shortened the trial. Accordingly, I will allow to the Respondent only one-half of its party and party costs.

Signed at Ottawa, Canada, this 16th day of January, 1998.

"M.A. Mogan"

J.T.C.C.