[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC469
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Date: 20040716
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Docket no.: 2002-3304(IT)G
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BETWEEN:
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RICHARD BEAUDIN,
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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
Tardif J.
[1] This is an appeal from a Notice of
Assessment dated November 28, 2001. The assessment in question
was made pursuant to the Income Tax Act ("Act")
in respect of the 2000 taxation year following the transfer of
property, namely a residence. The assessment was made pursuant to
section 160 of the Act.
[2] All the presumptions of fact on
which the assessment is based are described in the Notice of
Appeal and at paragraph 5 of the Reply to the Notice of Appeal.
They are reproduced below.
Notice
of Appeal:
16. The sale of the house
is due to the physical and psychological inability of the
taxpayer's parents to look after the family residence located
at 833, Bell Street, Gallix, in the event of problems with the
residence;
17. This clearly shows
that the transfer of the building did not have the aim of
depriving the tax authorities of the amounts due to them;
18. For these reasons, the
assessment of November 28, 2001, is unfounded in fact and in
law.
Reply
to the Notice of Appeal:
a) The
appellant is the son of Eula Lainé Beaudin and
Rodolphe Beaudin;
b) For the
taxation years 1989, 1990 and 1993, the father of the appellant,
Rodolphe Beaudin, was assessed in 1994 and following the
reassessments, his tax debt amounted to approximately
$334,915.03;
c) On May 10,
1990, by means of a notarized deed of conveyance,
Rodolphe Beaudin and Eula Lainé acquired a joint
residence at 833 Bell Street, Gallix for $50,000;
d) On January
3, 1995, by a notarized deed of conveyance, Rodolphe
Beaudin sold his undivided half of the residence at 833
Bell Street, Gallix, to his wife Eula Lainé;
e) For the
purposes of the 1995 transfer, the respondent had assessed the
fair market value of the property at $58,000;
f) To
this day, no evidence of a consideration paid by Eula
Lainé to Rodolphe Beaudin has been provided to the Canada
Customs and Revenue Agency;
g) On January
11, 2000, by a notarized deed of conveyance,
Eula Lainé Beaudin sold the property at 833 Bell
Street, Gallix, to her son, Richard Beaudin, for a consideration
of $30,000, including notary's fees;
h) The
assessment issued against the appellant is based on the joint
liability of the appellant with his mother, Ms.
Eula Lainé Beaudin, in view of an unpaid tax
liability stemming from an assessment arising out of a
transaction with his wife, who also had an unpaid tax liability
in respect of prior years;
i) The
notarized deed of conveyance between Ms. Eula Lainé
Beaudin and her son, Richard Beaudin, makes no mention of any
right of habitation for the parents of the appellant;
j) There
is no declaration of residence at paragraph 11 on page 3 of the
said deed of conveyance;
k) The
appellant, Richard Beaudin, reported no rental income for the
2000 and 2001 taxation years;
l) The
appellant provided no document to the Minister regarding the
value of any right of habitation for his parents;
m) The Minister
accordingly calculated the benefit conferred on the appellant, as
follows:
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- market value at the time of the sale of the property
on January 11, 2000:
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$60,600.00
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- less consideration paid
less
notary's fees
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$30,000.00
($957.05)
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($29,042.95)
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- value of benefit conferred
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$31,557.05
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n) The
residence was transferred for an amount less than its fair market
value, such that a benefit of $31,557.05 was conferred on the
appellant;
o) The reason
for the sale of the property given by the appellant, namely the
state of his parents' health, is not grounds justifying
vacation of the Minister's assessment.
[3] The appellant admitted paragraphs
5 a), b), c), d), h), i) and l.
[4] The Court must determine whether
the sale of the residence, located at 833 Bell Street, by Eula
Lainé Beaudin to the appellant constitutes a transfer
within the meaning of section 160 of the Income Tax Act,
whether the fair market value of the residence located on Bell
Street, Gallix on January 11, 2000, is $60,000, and finally,
whether the Minister of National Revenue (the
"Minister") has correctly established the amount of the
assessment at $31,557.05, namely the difference between the fair
market value ($60,600) and the selling price ($30,000 - $957.05)
of the residence located at 833 Bell Street, Gallix.
[5] The appellant acquired the
building in question on January 11, 2000. The building was the
residence in which his parents have lived permanently since 1994.
They had acquired it in 1990 with the intention of using it as a
cottage.
[6] As a consideration, the appellant
paid an amount of $30,000, which he obtained as a loan from the
Bank of Montreal (exhibit A-9), guaranteed by a mortgage.
[7] At the time of the acquisition,
his mother and father were living in the building. The health of
the instigators of the transfer was precarious. The father of the
appellant, furthermore, died in August 2003.
[8] Mr. Rodolphe Beaudin, the father
of the appellant, suffered from diabetes and had suffered a
number of cardio-vascular incidents (C.V.A.). Ms.
Eula Lainé Beaudin suffers from high blood
pressure.
[9] Since the parents of the appellant
were totally incapable of looking after their residence because
of their health problems and were crippled with debt, they met
with their son, the appellant, to discuss the problem and to try
to find a solution.
[10] In the course of this meeting, they
agreed to transfer their residence to their son in consideration
of a payment of $30,000 that they needed to pay their debts, a
right of habitation for life, the assumption of major maintenance
expenses, and the payment of taxes and insurance. In fact, the
appellant had to assume all the expenses related to the dwelling,
except for the cost of heating and minor routine maintenance. The
appellant agreed to the conditions and undertook to pay $30,000,
which he was obliged to borrow from a financial institution.
[11] The evidence brought out a number of
facts which are not in dispute, namely the following:
· The authors
of the transfer had a tax debt.
· The
beneficiary of the transfer is the son of the transferors.
· The
beneficiary of the property that was transferred made an outlay
of $30,000 derived from a loan guaranteed by a mortgage.
· The Fair
Market Value (the "F.M.V.") of the building at the time
of the transfer was $60,600.
[12] Since the assessment was presumed to be
valid, the onus was on the incumbent to demonstrate that it was
not justified. To this end, the appellant explained that he had
taken over the mortgage payments, insurance, the school and
municipal taxes, major repairs and maintenance. He did not
indicate what these costs totalled per year. He produced the
description of the payments made, which included the monthly
mortgage payment. He did not indicate the rental value of the
building. According to the appellant, assuming responsibility for
the building and the inherent expenses meant that the
consideration, for which he had assumed responsibility, was
broadly equivalent to the F.M.V. of the building, if it did not
exceed it.
[13] Although all the rights and obligations
did not appear to create a problem for the appellant and his
mother, it is apparent from the notarized document that sealed
the transfer on January 11, 2000, that no mention was made of
these rights and obligations of each of the signatories to the
document.
[14] The appellant prepared and produced a
description of the payments made from the acquisition of the
building until 2004, which totalled $27,182.23 (exhibit
A-11). He concluded that he had paid out a total of
$57,182.23 to acquire the building from his parents. This
argument has no merit, since the payments shown are essentially
monthly repayments. In other words, the appellant counted the
same amount twice by adding the monthly amounts for repayment of
the loan to the amount of the loan itself.
[15] The appellant also maintained that his
father's tax debt had been extinguished following his
bankruptcy, as a result of which he was discharged from it. This
argument fails, as this issue has already been addressed by a
decision of the Federal Court of Appeal; the release of a
bankrupt transferor of a property has no impact on the tax debt
assessed on a transferee of the property, who is subject to
section 160 of the Act.
[16] The appellant also asserted that
section 160 of the Act could not apply to the transferee.
He referred to Michel Nanini v. The Queen, [1994]
T.C.J. No. 426 in support of his claim.
[17] Recently, on February 3, 2003, the
Federal Court of Appeal put an end to this interpretation of
Section 160. In Jurak v. The Queen, [2003] F.C.J.
no 160, Létourneau J. stated
[unofficial translation]
Notwithstanding the laudable efforts of Mr. Côté,
we are not persuaded that Lamarre-Proulx J. of the Tax Court of
Canada erred in her interpretation of section 160 of the
Income Tax Act, R.S.C. 1985 (5th Supp.),
Chapter 1, as amended, and in her application of the facts to
this case when she concluded at paragraph 38 of her decision that
"the transferee may himself become a transferor subject to
subsection 160(1) of the Act if, at the time of the second
transfer, he himself is a tax debtor liable either on his own
account or jointly and severally with the first
transferor."
[18] Section 160 of the Act reads as
follows:
Tax liability re property transferred not at arm's length
160. (1) 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:
d) the transferee and transferor are
jointly and severally liable to pay a part of the
transferor's tax under this part for each taxation year equal
to the amount by which the tax for the year is greater than it
would have been if it were not for the operation of section 74.1
to 75.1 of this Act and section 74 of the Income Tax Act,
chapter 148 of the Revised Statutes of Canada, 1952, in respect
of any income from, or gain from the disposition of, the property
so transferred or property substituted therefore, and
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 proceeding
taxation year,
but nothing in this subsection shall be deemed to limit the
liability of the transferor under any other provision of this
Act.
[My emphasis.]
[19] Although section 160 of the Act
raises few interpretation issues, it is appropriate to recall
that the ultimate aim of the legislator was to prevent debtors
with a tax liability from impoverishing their inheritance by
transferring it in whole or in part without an equivalent
consideration to their spouse or partner or to a person to whom
they are related.
[20] To that effect, it is relevant to
recall excerpts from certain decisions. First, in the Algoa
Trust v. Canada, [1993] T.C.J. No. 15 (Q.L.), Rip J. had the
following to say at page 10:
[unofficial translation]
The purpose of section 160 is to block the attempt of a
taxpayer who is required to pay a sum of money under the
Act from avoiding tax by transferring property, which he
could otherwise use to satisfy his liability, to a person who
belongs to one of the three groups mentioned, including a person
to whom he is related.
[21] In Biderman v. Canada, [2000]
T.C.J. No. 194 (Q.L.), The Honourable Judge Létourneau of
the Federal Court of Appeal said the following at
paragraph 37:
[...]
Section 160 of the Act is an anti-avoidance provision with
respect to transfers. Its purpose "is to prevent a taxpayer
from defeating the claim of the Minister to unpaid taxes by
transferring his assets to a spouse, or certain other persons,
for little or no consideration". [See Note 28 below].
[22] In Hewett v. The Queen, [1997]
F.C.J. No. 1541 (Q.L.), The Honourable Judge Strayer had the
following to say at paragraphs 1 and 2:
We are
all of the view that this appeal should be dismissed.
We
agree with the learned Tax Court judge that the purpose of
section 160 of the Income Tax Act is to prevent a taxpayer
from defeating the claim of the Minister to unpaid taxes by
transferring his assets to a spouse, or certain other persons,
for little or no consideration. In our view, this means that the
"property" referred to in the section must be that
property interest of the taxpayer that would have been available
to the Minister for attachment had the transfer not taken
place.
[23] The value of the property transferred
must be the same in the patrimony of the transferor as in that of
the transferee. In other words, the F.M.V. of the property being
transferred subject to section 160 of the Act must be the
same and cannot be changed.
[24] This is a fundamental requirement,
since a seller could very well stipulate an entire series of
clauses anticipating all types of hypotheses, rights,
liabilities, servitudes, etc., the effect of all of which would
be to render the property transferred valueless or to diminish
its value considerably, thereby changing the F.M.V. of the
property at the time of the transfer. The transferred property
could then be deprived of all or part of its value, which is
completely contrary to the aim of section 160 of the
Act.
[25] On the other hand, section 160 of the
Act does not oblige those with a tax liability to cease
all economic activity, nor does it prevent them from engaging in
transactions involving the property of which they are the owners.
The legislator essentially wanted to prevent those with a tax
liability from dissipating or reducing, in whole or in part,
their patrimony to the detriment of the Crown by assigning or
transferring property for a consideration, the value of which is
less than that of the property transferred, to a person with whom
the person was not at arm's length.
[26] In the instant case, the mother of the
appellant could have sold, transferred her residence to one or
more persons with whom she was dealing at arm's length for
monetary consideration or under a joint formula that was partly
monetary and partly made up of certain servitudes, such as a
right of habitation, combined with the obligation to assume
responsibility for all the expenses inherent in such a right.
[27] In other words, a person with a tax
liability can sell or transfer all the property they wish to any
person, including members of their family, on the condition that
the consideration obtained corresponds exactly to the F.M.V. of
the property being transferred.
[28] When a transfer of property occurs
between persons who are dealing at arm's length, there is a
very strong presumption that the consideration is that which
corresponds to the F.M.V. of the property transferred.
Consequently, in order to establish the F.M.V. of a property that
is transferred between persons not at arm's length, it is
essential to examine the transfer and to ask whether the transfer
of the property in question could have taken place in the same
circumstances and under the same conditions and with the same
consideration if the parties or transfers had been at arm's
length.
[29] The analysis must be based exclusively
on the facts that could and must have existed between persons
dealing with each other at arm's length. Family
considerations are accordingly neither relevant nor welcome,
since they can vitiate the analysis.
[30] It is important to raise the following
issue: could such a transfer have taken place between persons who
were dealing with each other at arm's length? The answer is
in fact affirmative. However, the parties would then have
assessed and analyzed all the possible impacts, including
specifically interest rates, the condition of the premises, the
amount of taxes, the state of the building, the health of the
transferor, their age, etc. In other words, the parties to a
transfer where the consideration is not exclusively monetary
generally go through the exercise of assessing the value of the
non-monetary portion, such as the right of habitation and all the
other rights and obligations, such as taxes, insurance and
maintenance, obviously as a function of the possible or probable
duration of the right of habitation.
[31] In a transfer where a right of
habitation for life is anticipated, together with certain
undertakings, the ideal situation for the transferee is the death
of the transferor in the months following the transfer.
Conversely, the ideal situation for the transferor is to live to
be over 100. The determination of the F.M.V. of such rights is a
highly complex exercise that requires consideration of a
multitude of factors.
[32] In the instant case, the appellant who
bore the onus of proof essentially submitted the elements of the
context which explained and justified the transfer. He also
explained that the state of his parents' health, and
specifically the health of his father, who died shortly after the
transfer, was precarious and that they were simply no longer
capable of looking after their building. The mother of the
appellant confirmed this explanation.
[33] The idea of the transfer was then
discussed and it appears that the consideration of $30,000 was
set as a function of the indebtedness of the appellant's
parents. With regard to their other obligations, it seems that
the transferors retained only responsibility for heating the
premises and for minor maintenance costs. All the rest, namely
the taxes and major repairs, were the responsibility of the
transferee, the appellant.
[34] None of this was set out in writing.
The notarized contract makes no mention of rights and obligations
subsequent to the transfer of property.
[35] The appellant submits that the
consideration paid at the time of the transfer is reasonable and,
above all, that he did not enrich himself at the expense of his
parents. He stated that he had agreed to be a party to the
transfer solely in order to allow his parents to remain in their
house.
[36] Although this is a highly laudable and
noble sentiment, I do not believe that it is sufficient to
establish that the transfer took place in exchange for the
payment of a consideration that corresponds to the F.M.V.. It
would have been important to establish all the alleged facts and
factors to determine the details of the agreement in a way that
would have enabled the Court to appreciate that they were
relevant and, above all, reasonable.
[37] The F.M.V. of the property transferred
has not been disputed; it was established by the expert, Gaston
Laberge, at $64,400, but the respondent identified $60,600 as the
applicable F.M.V..
[38] At the time of the transfer, the
applicant paid an amount of $30,000 by means of a loan guaranteed
by a mortgage.
[39] In addition to the expenditure of
$30,000, he undertook verbally to pay the insurance, municipal
and school taxes, as well as major maintenance, and not to
require his parents to pay rent; they retained only the
responsibility for heating costs and minor running maintenance. I
am not including the professional fees for the preparation of the
notarized contract by the notary, which were apparently paid by
the transferors, the appellant's parents.
[40] In the absence of adequate evidence to
establish the F.M.V. of the benefits conferred on the
transferors, in addition to the payment of $30,000, I establish
the value at $15,000.
[41] The enrichment of the appellant
subsequent to the transfer on January 11, 2000, is set at
$15,600. This amount results from the following calculation:
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Value of the property transferred
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$60,600
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Consideration paid in the transfer
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$30,000
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Value of the non-monetary benefits
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$15,000
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Total consideration
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$-45,000
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Enrichment of the transferee
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$15,600
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[42] The appeal is allowed and the
assessment is referred back to the Minister of National Revenue
for reassessment on the basis that the F.M.V. of the building
transferred subject to section 160 of the Act was $60,600.
The consideration paid by the appellant is set at $45,000,
comprising $30,000 paid in cash and $15,000 in services, thereby
conferring an enrichment of $15,600 on the appellant, the whole
without costs.
Signed at Ottawa, Canada, this 16th day of July, 2004.
Tardif J.
Certified true translation
Colette Beaulne
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