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Citation: 2006TCC25
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Date: 20060113
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Docket: 2002-1568(GST)I
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BETWEEN:
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EDITH MONIKA ISAAC,
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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.
A. FACTS:
[1] The Appellant is married to Christopher Isaac ("Christopher").
[2] Christopher incorporated Salmon Arm Jewellers Ltd. (the "Company") under the laws of British Columbia on July 10, 1990.
[3] The Company carried on a retail jewellery business in Salmon Arm, British Columbia.
[4] The Company was registered under Part IX of the Excise Tax Act (the "Act") effective January 1, 1991.
[5] The Minister of National Revenue (the "Minister") alleges that the Company was required and failed to remit net tax collected pursuant to subsection 228(2) of the Act.
[6] By Notice of Assessment - Third Party No. 64851, dated November 5, 1998, the Minister assessed Christopher under subsection 325(1) of the Act in respect of the failure of the Company to remit net tax pursuant to subsection 228(2) of the Act.
[7] Christopher filed an appeal of the Assessment to the Tax Court of Canada.
[8] On September 21, 2000, the Tax Court of Canada dismissed the appeal filed by Christopher.
[9] In June 1991, Christopher and the Appellant purchased as joint tenants a house located in Salmon Arm, British Columbia (the "Property").
[10] The Property was purchased for $90,255.00 and was partly financed by a mortgage in the amount of $82,000.00 from Royal Trust.
[11] As of July 1997, the British Columbia Assessment Authority valued the Property at $165,700.00.
[12] On or about September 7, 1997, Christopher transferred his one-half interest in the Property to the Appellant for consideration of $1.00.
[13] Christopher's outstanding tax liability under the Act at the time of the transfer was not less than $40,410.84.
[14] At the time of the transfer, the fair market value of the Property was not less than $165,700.00.
[15] At the time of the transfer, the outstanding encumbrances on the Property were $70,000.00.
[16] The Minister alleges that at the time of the transfer Christopher's one-half interest in the equity in the Property was not less than $47,850.00 [50% of ($165,700.00 - $70,000.00)].
[17] The Minister issued a Notice of Assessment against the Appellant in respect of the transfer of the Property from Christopher to the Appellant.
[18] The Appellant filed an appeal of the Assessment to the Tax Court of Canada.
History of Court Hearings
[19] In the first hearing at the Tax Court of Canada Justice Beaubier dismissed the Appellant's appeal finding that the Appellant must have known at some point in acquiring the Property that her spouse, Christopher, was on the title.[1]
[20] The Appellant filed an appeal to the Federal Court of Appeal.
[21] At the Federal Court of Appeal, Linden J.A., writing for the Court, held that the Appellant's appeal be allowed and that the matter be remitted to the Tax Court for another hearing before a different Judge to be based on all the documentary evidence and any oral evidence that the new Judge deems appropriate.[2] The Court indicated that the Reasons of Beaubier J. were deficient in failing to discuss adequately the documentary evidence which tended to show that the Appellant may well have been the sole owner of the Property at the relevant time. This current hearing arises from the decision of the Federal Court of Appeal.
[22] There is also a related judgment from the appeal of Christopher Isaac by Bell J. at the Tax Court of Canada dismissing Christopher's appeal but recommending that the Minister waive the interest and penalty.[3]
[23] Christopher applied to the Federal Court, Trial Division for judicial review of the Minister's decision not to waive the interest and penalty. Heneghan J. allowed the application and remitted the matter back to the Canada Revenue Agency ("CRA") for determination by another delegate of the Minister.[4] Following that decision the Minister reviewed the Assessment against Christopher and reduced the amount of the interest assessed against Christopher by $6,074.49.
B. ISSUE:
[24] Whether the Appellant is jointly and severally liable with Christopher, under subsection 325(1) of the Act in the amount of $40,410.84.
Overview of Section 325 of the Excise Tax Act
[25] Section 325 of the Act provides for a "third-party assessment". Section 325 makes a non-arm's length transferee liable for money or property transferred by a person who owes GST. Section 325 parallels section 160 of the Income Tax Act. The section prevents a tax debtor from simply transferring assets to a spouse or other relative, or a controlling shareholder, and then not having any assets with which to pay its debt to the CRA, while still possibly benefiting from the assets.[5]
[26] If the conditions in subsection 325(1) are met, paragraph (d) applies to make the transferee liable for the fair market value of what was transferred, minus the fair market value of anything given in return, and minus any amount assessed under section 160 of the Income Tax Act for the same transfer. The liability is then limited, under paragraph (e), to the total GST liability that the transferor is liable to pay or remit for the transferor's reporting period that includes the time of the transfer, or any earlier reporting period.
Background Facts
[27] There are additional facts that must be recounted because they help explain the Appellant's plight. The Appellant and Christopher formerly owned and lived in a house in Edmonton. Christopher used the Edmonton house as security to borrow $75,000.00 which was used by him to finance his business (this business was not Salmon Arm Jewellers Ltd.). A demand promissory note dated September 21, 1989 reflects the loan obtained by Christopher.
[28] Due to marital difficulty, a Separation Agreement dated August 5, 1990 was signed by the Appellant and Christopher in which Christopher agreed to transfer his interest in the matrimonial home, described as the home in Edmonton, to the Appellant so that she was its sole owner. (Note: This Separation Agreement was not filed with the Tax Court when the Appellant appeared before Justice Beaubier.)
[29] Christopher transferred his interest in the Edmonton property to the Appellant. A certificate of title dated August 23, 1990 shows the Appellant as the sole owner of the Edmonton property. The Separation Agreement also provided, among other things, that Christopher will continue to make all mortgage payments on the matrimonial home.
[30] Subsequently, the Appellant gave Christopher a power of attorney dated February 6, 1991 for the specific purpose of purchasing a house in Salmon Arm on her behalf. Christopher entered into a contract of purchase and sale on the Appellant's behalf dated March 15, 1991 in order to purchase the Salmon Arm Property. However, both the Appellant and Christopher were put on the title to the Salmon Arm Property. In September 1997, Christopher purportedly transferred his one-half interest in the Salmon Arm Property to the Appellant.
C. ANALYSIS:
[31] The Property in question is the Salmon Arm Property ("Salmon Arm Property"). At the first hearing before Justice Beaubier, the Appellant argued that Christopher's name was included on the title of the Property by mistake. That argument was rejected by Justice Beaubier. The Appellant now argues that she was the sole beneficial owner of the Property when it was acquired in 1991 and that this is supported by the evidence adduced at this hearing.
[32] For the reasons set out below, I have concluded that there was no transfer of property because the Appellant was the sole beneficial owner of the Salmon Arm Property when it was acquired. In the alternative, I have concluded that if there were a transfer of property, the transfer was in the nature of a loan repayment.
[33] This issue has been dealt with in the case law on section 325 of the Act and, more extensively, in the case law on section 160 of the Income Tax Act. Respondent's counsel cites the cases of Trinka Holdings Inc. v. Canada,[6] Taylor v. Canada,[7] and Zavos v. R.[8] in support of its strict application of section 325 to the alleged transfer of the Salmon Arm Property.
[34] Nevertheless, the Appellant may succeed in defending against the Assessment based upon the reasoning found in Splinter v. R.[9] Splinter was a case involving section 160 of the Income Tax Act. The key issue in that case was whether there was a transfer of property. The Appellant in that case was the widow of the transferor of the property. Mrs. Splinter stated that she owned outright the subject property since it was part of the family's personal property, there being a clear division between the family's personal property which she owned outright and the husband's business property which he owned outright. When Mrs. Splinter discovered that the subject property was not registered in her name, she maintained that she still owned the property and at that time the subject property was formally transferred to her. In the circumstances of that case, Hamlyn J. concluded that the purported transfer of the subject property was not a transfer of land within the meaning of section 160 as the appellant was the beneficial owner of the property. In reaching that conclusion, Hamlyn J. noted that there was no written trust declaration or agreement to show that the husband prior to the transfer held the property in trust for his wife. In spite of that fact, Hamlyn J. relied upon several other documents that led to the conclusion that the husband was holding the property in trust for his wife. As such, the appellant successfully defended against the assessment in that case.
[35] I have concluded that the evidence in this case supports a finding that the Appellant was the beneficial owner of the Salmon Arm Property. While the Respondent argues that the provincial legislation combined with the fact that the Appellant's spouse was registered on the title of the Property and identified as a purchaser and mortgagor on the documents provides conclusive evidence that he was an owner of a one-half interest, this does not displace the Appellant's sole beneficial interest. In particular, the Separation Agreement and Certificate of Title indicate that the Appellant was the sole owner of the matrimonial home in Edmonton. When the Salmon Arm Property was purchased, Christopher was included on the legal title to that property but the Appellant retained a 100% beneficial interest in the matrimonial home which was now located in Salmon Arm. The power of attorney and contract of purchase and sale for the Salmon Arm Property support the Appellant's contention that she and Christopher both believed that she was the sole beneficial owner of the Salmon Arm Property when it was acquired even though there was no written trust declaration or agreement. I also note that in Bouchard v. R. Mr. Justice Cattanach said that property may be held in trust without written evidence.[10] Furthermore, the oral evidence of the Appellant revealed that she and her children lived at the Salmon Arm Property while Christopher, for the most part, did not. Christopher simply held his legal interest in the Property in trust for the Appellant.
[36] In the alternative, I believe that it is open to the Court to conclude that the transfer was in the nature of a loan repayment as in the cases of Hooda v. R.[11] and Brown v. R.[12] Those two cases stand for the proposition that a transfer of property made as a repayment of a loan does not attract the application of section 325 where the money obtained from the loan can be viewed as fair market value consideration for the property.
[37] In the present case I believe that the evidence supports a finding that the transfer of the Salmon Arm Property was actually repayment for an amount owing by Christopher to the Appellant. A financial statement from Salmon Arm Jewellers Ltd. shows the amount of $72,505.71 owing to the Appellant. (Note: This document was not filed when the appeal was heard by Mr. Justice Beaubier.) Moreover, it is possible that the Appellant's father assigned his rights under the demand promissory note for the $75,000.00 loan to the Appellant so that Christopher owed her the money. The Appellant's oral testimony before Justice Beaubier simply stated that her father removed the caveat from the title to the Edmonton house without receiving any repayment of the loan from Christopher. A gift by the Appellant's father can be viewed as an assignment by the father of his rights under the note to the Appellant. In these circumstances, the purported transfer of property by Christopher to the Appellant can therefore be seen as a repayment of that debt owed by Christopher to the Appellant.
[38] It therefore follows that section 325 of the Act does not apply in this situation.
[39] The appeal is allowed, without costs.
Signed at Vancouver, British Columbia, this 13th day of January 2006.
Little J.
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