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Citation: 2004TCC212
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Date: 20040315
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Docket: 2001-1479(IT)G
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BETWEEN:
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NANCY APA,
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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
Bowman,
A.C.J.
[1] This
appeal is from an assessment made under section 227.1 of the Income Tax Act.
[2] The
appellant alleges that her spouse, Nicola Apa, was assessed $71,644.54.
The respondent says the amount was $73,559.49. The precise amount is not
relevant to this appeal. It was the unpaid deductions, interest and penalties
payable by Nicola Apa’s company A.P.A. Landscaping and Concrete Ltd. This
amount was assessed against Nicola Apa under section 227.1 of the Act.
[3] On
January 24, 1996, Mr. Apa transferred to the appellant his
interest in 51 Mayall Avenue, Downsview, Ontario. This had been their
matrimonial home until they separated in September of 1995.
[4] The
Minister of National Revenue assessed Mrs. Apa under subsection 160(1)
of the Act on the basis that Mr. Apa transferred to her, his
spouse, property (his half interest in the property on Mayall Avenue).
Therefore, in the Minister’s view of the matter, the appellant was jointly and
severally with her spouse liable to pay under the Act the lesser of the
transferor’s tax liability (over $70,000) and the excess of the fair market
value of the property transferred and the consideration given by the transferee
to the transferor. The respondent calculates this amount to be $37,498, as
follows:
Fair
market value of property $200,000.00
Mortgage
on property $125,000.00
Equity
available to the spouses $ 75,000.00
Mr. Apa’s
share of the equity $ 37,500.00
Consideration
paid by appellant $ 2.00
Value
of equity transferred $ 37,498.00
[5] The
appellant endeavoured unsuccessfully to raise as an issue the fair market value
of the property. The respondent had filed an expert witness report in which the
property was valued at $200,000. Two days before trial the appellant filed a
document signed by a real estate agent expressing the view, if I recollect
correctly, that the property was worth about $180,000. Counsel for the
respondent objected that the document had not been served and filed 30 days
before trial in accordance with section 145 of the Tax Court of Canada Rules
(General Procedure). I did not allow this document to be filed or the real
estate agent to be called. The court of course has a discretion to permit the
late filing of expert reports but there has to be an adequate reason and here I
could see none. The rules about filing expert witness reports have a purpose
and departures from them should be the exception and must be justified.
[6] I would not
have permitted expert testimony on valuation to have been called in any event.
Not only does section 145 of the Rules require the report of the expert
to be filed 30 days before the hearing, it also requires that the evidence be
relevant to an issue defined by the pleadings or by a written agreement of the
parties. Here the respondent pleaded as an assumption that the fair market
value of the property was not less than $200,000. The appellant stated in
paragraph 6 of the Notice of Appeal “The fair market value of the Mayall
Property was approximately $200,000 . . .” This concurrence of the parties on
the value of the property removes, in my view, the issue of valuation from the
table. Counsel for the appellant argued that the use of the word
“approximately” before $200,000 gave him the required room to manoeuvre and to
argue that the property was worth $180,000. I do not think so. If an appellant
wants to challenge the Minister’s assumption of value, it should be done
forthrightly and unambiguously.
[7] Before I
come to the main point in this appeal I shall deal briefly with another
argument raised by the appellant. The respondent’s position is that the
property was worth $200,000, and the equity (that amount less the mortgage) was
worth $75,000. Therefore, what Mr. Apa transferred was his half of the
equity or $37,500. Not so, says the appellant.
[8] In the
separation agreement, which I shall reproduce below, the appellant also assumed
Mr. Apa’s obligations under the mortgage. Since Mr. Apa’s obligation
under the mortgage was $62,500 this exceeded the value of the equity and
therefore the amount under subparagraph 160(1)(e)(i) is nil.
[9] With
respect, the mathematical reasoning behind this argument is fallacious.
Ignoring for the moment the fact that Mr. Apa remains liable on the
convenant and Mrs. Apa as a joint tenant was always liable for the full
amount of the mortgage, the fact remains that Mr. Apa did not simply
transfer to her his half interest in the equity of $75,000, or $37,500. He
transferred to her his interest in the property which is one half of $200,000,
or $100,000, subject to a mortgage. If we accept the premise that she assumed
an obligation of $62,500, she is still getting something worth $37,500.
[10] The
appellant is using the $62,500 obligation (one half the mortgage) twice – once
to bring the value down to the amount of the equity and once as consideration
for that equity. This, in my view, is double counting.
[11] I turn now
to the main point of the case and the one on which I propose to allow the
appeal. This is subsection 160(4) of the Act which reads:
(4) Notwithstanding
subsection (1), where at any time a taxpayer has transferred property to the
taxpayer’s spouse pursuant to a decree, order or judgment of a competent
tribunal or pursuant to a written separation agreement and, at that time, the
taxpayer and the spouse were separated and living apart as a result of the
breakdown of their marriage, the following rules apply:
(a) in respect of property
so transferred after February 15, 1984,
(i) the spouse
shall not be liable under subsection (1) to pay any amount with respect to any
income from, or gain from the disposition of, the property so transferred or
property substituted therefor, and
(ii)
for the
purposes of paragraph (1)(e), the fair market value of the property at
the time it was transferred shall be deemed to be nil, and
(b) in respect of property
so transferred before February 16, 1984, where the spouse would, but
for this paragraph, be liable to pay an amount under this Act by virtue of
subsection (1), the spouse’s liability in respect of that amount shall be
deemed to have been discharged on February 16, 1984,
but nothing in this subsection
shall operate to reduce the taxpayer’s liability under any other provision of
this Act.
[12] The
Minister assumed that the parties were not living separate and apart, that
there was no breakdown of their marriage and the property was not transferred
pursuant to a decree, order or judgment of a competent tribunal or pursuant to
a written agreement.
[13] Counsel for
the appellant called six witnesses — the appellant; her spouse,
Nicola Apa; her sister, Lucy Ussia; the daughter of the Apas,
Theresa Apa; the appellant’s brother-in-law, Vince Ussia; and
Ralph Middlebrook, in whose house Nicola Apa lived during the
separation. The following facts have been overwhelmingly and incontrovertibly
established through these witnesses.
[14] The Apas
were married in 1972 and had three children. Their marriage became increasingly
troubled and turbulent in the 1990s and broke down completely in
September 1995 when Nicola moved out and lived with his mother for several
months. He then moved into the basement of a home owned by his friend
Ralph Middlebrook until the time the spouses reconciled in 1998.
[15] On
October 10, 1995, they entered into a separation agreement with the
assistance of a friend, Giuseppe Graziano Monteleone. The agreement
was in three pages and was executed by the spouses and Mr. Monteleone as
witness. The handwritten parts were written in by the appellant. Mr. Monteleone
translated for Mr. Apa whose English is imperfect. Mr. Monteleone has
since died and therefore did not testify.
[16] The
agreement is as follows:
[17] The
evidence is clear that the spouses were living apart as the result of the
breakdown of their marriage at the time the separation agreement was executed
and at the time the property was transferred. There is no suggestion that the
separation or the agreement were shams or that they were simply contrived in
order to avoid the provisions of subsection 160(1) of the Income Tax Act.
Even if that were argued the evidence does not support it. The agreement and
the separation were genuine.
[18] The basic
assumption on which the assessment is founded, that the spouses were not
separated and living apart as the result of the breakdown of their marriage,
has been conclusively demolished.
[19] Counsel for
the respondent focused most of her argument on the proposition that the
transfer was not pursuant to a written agreement. Her argument is that the
agreement signed by the spouses on October 10, 1995 was not valid. A
number of arguments were advanced:
(a)
There was insufficient
disclosure of the parties’ financial condition.
(b)
There were some blanks left in
the agreement.
(c)
Mr. Apa did not fully
understand the agreement because he had an
insufficient
command of English. At trial he testified through an interpreter.
[20] From my
observation of Mr. Apa in the witness stand, it is obvious that he
understood very well just what the agreement meant. Mr. Monteleone
translated for Mr. Apa.
[21] Counsel for
the respondent relies upon subsection 56(4) of the Ontario Family Law Act which
reads
(4) A court may, on
application, set aside a domestic contract or a provision in it,
(a) if a party failed to
disclose to the other significant assets, or significant debts or other
liabilities, existing when the domestic contract was made;
(b) if a party did not understand
the nature or consequences of the domestic contract; or
(c) otherwise in accordance with
the law of contract.
[22] This
provision allows a court to set aside a domestic contract in whole or in part
if certain conditions are met and if one party applies for such relief. Neither
party to the agreement has done so and the contract remains valid and binding
until a court sets it aside. How the Attorney General of Canada or the Minister
of National Revenue can rely upon this provision to invalidate an otherwise
valid agreement is a mystery. In any event there is nothing in the evidence
that would justify a court setting the agreement aside. There was ample
financial disclosure. The parties knew quite well what their financial
situation was.
[23] So far as
the blanks in the form agreement are concerned the fact that a couple of words
are left out (in the province of _______; the matrimonial home at _______; the
matrimonial home with _______;) does not invalidate the agreement. Both parties
knew where they were married and what the matrimonial home was. The sentence
about monthly payments was deliberately left blank because no payments were
contemplated.
[24] I see no
merit in the respondent’s position. The transfer was pursuant to a valid
separation agreement and therefore subsection 160(4) applies. The appeal is
allowed with costs and the assessment is vacated.
[25] The appellant
was forced to spend two days in court in challenging an assessment that had no
merit and that should have been vacated at the objection level. I am fixing
costs in the amount of $5,000 for counsel, plus disbursements.
Signed at Ottawa, Canada, this 15th
day of March 2004.
Bowman,
A.C.J.
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