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Citation: 2007TCC494
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Date: 20070824
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Docket: 2005-438(IT)G
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BETWEEN:
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JENNIFER WAUGH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
I. FACTS
[1] At
all relevant times the Appellant was either the common law partner or the
spouse of Douglas Waugh.
[2] The
Appellant married Douglas Waugh on August 17, 2002.
[3] Between
February 28, 2002 and May 1, 2003 (the “Period”) Douglas Waugh was
indebted to the Canada Revenue Agency (the “CRA”) under Part I of the Income
Tax Act (the “Act”) in
the amount of $305,794.00. During this Period Douglas Waugh transferred
funds in the amount of $132,992.82 to the Appellant’s personal bank account,
for which she had sole signing authority. The funds were transferred via 14
transactions. On November 17, 2004 the Minister of National Revenue (the “Minister”)
reassessed the Appellant and included the amount of $132,992.82 in her income under
section 160 of the Act (the “Reassessment”).
[4] At
the outset of trial, the Minister conceded one transaction in the amount of
$350.00 relating to a cheque from Harry Trueman. The 14 transactions that were
dealt with in the Reassessment are as follows:
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Amount
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Date
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Cheque
From
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Cheque
To
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Relating
To
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$
20,000.00
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September
25, 2002
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 10,000.00
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November
4, 2002
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 10,000.00
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December
6, 2002
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 10,000.00
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January
22, 2003
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 10,000.00
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February
4, 2003
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 5,561.72
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February
10, 2003
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 10,000.00
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March
3, 2003
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Rodney
Schroeder
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Douglas
Waugh
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$75,000
Loan
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$ 75,561.72
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$ 25,000.00
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June
3, 2002
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Bruce
McDonald
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Jennifer
McDonald
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$30,000
Loan
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$ 2,000.00
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February
28, 2002
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Air Canada
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Douglas
Waugh
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Ms.
Hooper
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$ 561.10
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February
28, 2002
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Air Canada
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Douglas
Waugh
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Ms.
Hooper
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$ 1,540.00
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May
2, 2002
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Cycle City
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Douglas
Waugh
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Bike
Deposit Refund
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$ 14,000.00
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October
8, 2002
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CIBC
Draft
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Douglas
Waugh
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Boat
Sale
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$ 13,980.00
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May
1, 2003
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NWACU
Draft
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Jennifer
Waugh
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Sale of Gaming Equipment
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$ 132,642.82
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$ 350.00
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July
2, 2002
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Harry
Trueman
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Douglas
Waugh
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Amount
Conceded
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$ 132,992.82
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[5] During
the hearing counsel for the Appellant called five witnesses: the Appellant, Mr.
Waugh, Ms. Lynne Hooper (the Appellant’s mother), Mr. Bruce McDonald
(a family friend and business associate of the Appellant and her husband) and
Mr. Rodney Schroeder (a business associate).
[6] The
following summary represents a brief description of the Appellant’s version of
the transactions at issue:
1. The amount of $75,000.00
represented various loans from Mr. Schroeder to the Appellant’s husband to
enable him to pay expenses associated with the promotion of the Beaver Aircraft
Project.
2. The Beaver Aircraft Project was
an attempt by Mr. Waugh and Mr. Schroeder to “rectify, manufacture and
sell modern versions of the world-renowned Beaver and other utility airplanes
to the general commercial and military markets worldwide”. (see Exhibit A-1)
3. The amount of $30,000.00
represented a loan from Mr. McDonald to the Appellant and her husband to enable
them to pay their living expenses after the Appellant’s husband lost
significant sums of money in the Mexico Casino Project. (Note: The
Appellant and her husband each signed the note that was given to Mr. McDonald
when the loan was made.) (Exhibit A-2)
3. The amounts of $2,000.00 and
$561.10 represented amounts given to the Appellant by her mother, Ms. Hooper.
4. The amount of $1,540.00
represented a refund of a deposit on a bike.
5. The amount of $14,000.00
represented the proceeds received by Mr. Waugh on the sale of a boat.
6. The amount of $13,980.00 represented
the sale proceeds of gaming equipment that was sold by Mr. Waugh on behalf of a
third party.
[7] Counsel
for the Respondent called one witness, namely, Mr. Les Kromar, a collections
officer with the CRA.
II. ISSUE
[8] The issue in this appeal is whether subsection
160(1) of the Act applied to the transactions at issue.
III. ANALYSIS
[9] The purpose of section 160 is to prevent a
taxpayer from avoiding tax by transferring his or her property to certain
persons or non-arm’s length entities.
[10] In general
terms, subsection 160(1) is applicable to a direct or indirect “transfer” of
“property”, including a transfer of property by way of a trust, to a spouse or
“common-law partner”, minor, or non-arm’s length person.
[11] Subsection
160(1) of the Act provides as follows:
160. (1) Tax liability re property transferred not
at arm’s length -- Where a
person has, on or after May 1, 1951, transferred property, either
directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person’s spouse or
common-law partner or a person who has since become the person’s spouse or
common-law partner,
(b) a person who was under
18 years of age, or
(c) a person with whom the
person was not dealing at arm’s length,
the following rules apply:
[…]
(e) the transferee and
transferor are jointly and severally liable to pay under this Act an amount
equal to the lesser of
(i) the amount, if any, by which the fair
market value of the property at the time it was transferred exceeds the fair
market value at that time of the consideration given for the property, and
(ii) the total of all amounts each of which
is an amount that the transferor is liable to pay under this Act in or in
respect of the taxation year in which the property was transferred or any
preceding taxation year,
but nothing in this
subsection shall be deemed to limit the liability of the transferor under any
other provision of this Act. [emphasis added]
[12] The essence
of subsection 160(1) is found in paragraph (e): the transferee is liable for
the value of what was transferred, minus anything given in return, up to a
limit of the transferor’s tax liability as of the year of the transfer.
Defence
of Due Diligence
[13] Counsel for the
Appellant also noted that the Appellant was unaware of Mr. Waugh’s tax indebtedness.
In Caron v. The Queen, 2002 DTC 1736, Justice Dussault of the Tax Court
held that it was irrelevant whether the transferee was aware of the
transferor’s tax debt. Counsel for the Appellant relied upon section 2 of the Fraudulent
Conveyance Act of British Columbia, R.S.B.C. Chapter 163, which reads as
follows:
This Act does not apply
to a disposition of property for good consideration and in good faith lawfully
transferred to a person who, at the time of the transfer, has no notice of
knowledge of collision or fraud.
[14] It is important to note that section 160 of the Act
imposes absolute liability. There is no defence of due diligence in section
160 that is similar to the defence available for directors under subsection 227.1(3)
of the Act. In fact, the transferee does not even have to know about the
tax debt in order for subsection 160(1) to apply. In Wannan v. R.,
Sharlow J.A. states at paragraphs 2 to 3 as follows:
Section 160 is one of a number
of provisions in the Income Tax Act that create vicarious or secondary
liability for tax debts. Such provisions permit the Minister to collect a tax
debt from someone other than the tax debtor, provided certain statutory
conditions are met …
Section 160 of the Income
Tax Act is an important tax collection tool, because it thwarts attempts to
move money or other property beyond the tax collector’s reach by placing it in
presumably friendly hands. It is, however, a draconian provision. While not
every use of section 160 is unwarranted or unfair, there is always some
potential for an unjust result. There is no due diligence defence to the
application of section 160. It may apply to a transferee of property who has no
intention to assist the primary tax debtor to avoid the payment of tax. Indeed,
it may apply to a transferee who has no knowledge of the tax affairs of the
primary tax debtor. However, section 160 has been validly enacted as part
of the law of Canada. If the Crown seeks to rely on
section 160 in a particular case, it must be permitted to do so if the
statutory conditions are met. [emphasis added]
[15] Based on the
judicial analysis noted above, it follows that the Appellant’s evidence, that
she had no knowledge of her husband’s tax debt to CRA when she quit her job in
Toronto and moved to Vancouver to marry him, would not assist the Appellant under
a section 160 assessment.
Transfer
of Property
[16] The main issue in this appeal turns on whether
“property” was “transferred” under subsection 160(1) of the Act.
Although the term “transfer” is not defined in the Act, the term
“property” is defined in subsection 248(1) of the Act as follows:
“property” means property of any kind
whatever whether real or personal or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes,
(a)
a right of
any kind whatever, a share or a chose in action,
(b)
unless a
contrary intention is evident, money,
[…]
[17] The question
that I must decide is whether, by depositing the various amounts into the
Appellant’s bank account for her to pay family expenses, the Appellant’s
husband effectively “transferred” such “property” to the Appellant within the
meaning of subsection 160(1) of the Act.
[18] With respect to
the loan in the amount of $75,561.72 made by Mr. Schroeder to Mr. Waugh
and transferred by Mr. Waugh to the Appellant I believe that section 160 of the
Act applies.
[19] With respect to
the loan of $25,000.00 made to the Appellant and Mr. Waugh by Mr. Bruce
McDonald I have concluded that section 160 does not apply to this loan since
the Appellant was personally liable to repay the $30,000.00 to Mr. McDonald.
[20] The testimony
of Ms. Hooper (the Appellant’s mother) established that the amounts of $2,000.00
and $561.10 were, in fact, monies belonging to Mrs. Hooper which she
instructed Mr. Waugh to give to the Appellant. I do not believe that section
160 of the Act applies to the transfer of monies by Mrs. Hooper to
the Appellant since there is no evidence that Mrs. Hooper had any tax liability
during the Period.
[21] The evidence is also clear that Mr. Waugh was
retained to sell some used gaming equipment on behalf of a third party and
therefore, the proceeds of such sale rightfully belonged to Mr. Waugh. I have
concluded that subsection 160(1) of the Act would apply to the
transfer by Mr. Waugh of $13,980.00.00.
[22] The evidence indicates that the amount received
as a refund of a deposit ($1,540.00) was initially paid out by Mr. Waugh to purchase
a bike for his son from his first marriage. The refund was received by Mr.
Waugh. I have concluded that subsection 160(1) would apply to this transaction.
[23] The evidence
indicated that $14,000.00 was received by Mr. Waugh on the sale of a boat
and he then transferred this amount to the Appellant. I have concluded that subsection 160(1) would
apply to this transaction.
IV. CONCLUSION
[24] I have
concluded that section 160 applies to the loans totaling $75,561.72 from Mr.
Schroeder.
[25] I have
concluded that section 160 does not apply to the loan of $25,000.00 from Mr.
McDonald.
[26] I have
concluded that subsection 160 does not apply to the amounts of $2,000.00 and
$561.10 transferred to the Appellant by her mother.
[27] I have concluded that section 160 applies to the
funds received on the sale of the gaming equipment.
[28] I have concluded that subsection 160(1) would
apply to the deposit refund of $1,540.00 (i.e. the bicycle) and the $14,000.00
received by Mr. Waugh on the sale of the boat.
[29] The appeals are
allowed and the Minister is to reassess in the manner outlined above.
[30] Since success is divided between the parties, I am not prepared to
award costs.
Signed at Vancouver,
British Columbia, this 24th day of August 2007.
Little
J.
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