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Citation: 2003TCC76
Date: 20030314
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Dockets: 2000-530(IT)G
2000-531(IT)G
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BETWEEN:
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PETER KIRKWOOD,
PETER KIRKWOOD HOLDINGS LIMITED,
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Appellants,
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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 appeals were heard in London,
Ontario on common evidence.
[2] At the commencement of the hearing
the parties filed a Combined Partial Agreed Statement of Facts
which reads as follows:
1. The
Appellant Peter Kirkwood is a Canadian resident who resides at 15
Cherokee Road, London, Ontario and was at all material times
President, a director and sole shareholder of Peter Kirkwood
Holdings Limited ("Holdings").
2. The
Appellant Peter Kirkwood Holdings Limited ("Holdings")
is an Ontario Corporation incorporated on May 30, 1990.
3. In or about
September of 1990, Kirkwood Roussy Insurance Inc. ("KR
Insurance") sold its book of business consisting of
insurance clients (the "Book of Business") to Rowlands
Insurance Limited ("Rowlands") and ceased further
business operations.
4. At the time
of the sale of the Book of Business by KR Insurance to
Rowlands, Peter Kirkwood Holdings Limited ("Holdings")
owned all of the issued and outstanding share capital of KR
Insurance so that KR Insurance was a wholly owned subsidiary of
Holdings.
5. On or about
December 28, 1990, the Director of KR Insurance passed a
Resolution to declare a capital dividend out of its capital
dividend account in the amount of $94,000.00 to its sole
shareholder, Holdings. Form T2054 to elect under Section 83(2) of
the Income tax Act was prepared and filed together with a
certified copy of such resolution required pursuant to
Section 2101(b) of the Income Tax Regulations.
6. On December
28, 1990, the Director of Holdings passed a Resolution declaring
a capital dividend in the amount of $94,000.00 payable to its
sole shareholder, Peter Kirkwood. Form T2054 to elect under
Section 83(2) of the Income Tax Act was prepared and filed
together with a certified copy of such resolution required
pursuant to Section 2101(b) of the Income Tax
Regulations.
7. On December
31, 1990 a cheque was drawn on the bank account of KR Insurance
payable to Holdings in the amount of $94,000.00. On the same date
a cheque was issued on the bank account of Holdings in favour of
Peter Kirkwood in the amount of $94,000.00. On the same date,
December 31, 1990 a cheque was drawn on the personal account of
Peter Kirkwood in favour of KR Insurance in the amount of
$94,000.00. All three cheques were presented to the bank at the
same instant.
8. The fiscal
year end for KR Insurance was September 30. The fiscal year end
for Holdings was September 30.
9. For
accounting purposes, the cheque payable by Peter Kirkwood to
KR Insurance was credited against indebtedness owing by the
Appellant Peter Kirkwood to KR Insurance, which, on December
31, 1990, was greater than $94,000.00.
10. On or about October
10, 1995, the Minister reassessed (assessed) KR Insurance for the
fiscal period ending September 30, 1991) and determined
monies owing for tax, in the amount of $50,068.25 together with
interest and penalties.
11. As part of the
assessment for 1991, the Minister disallowed bad debt expenses
claimed by KR Insurance of $48,000.00.
12. On December 16, 1998
the Minister issued Notices of Reassessment against both
Appellants pursuant to subsection 160 of the Income Tax Act (the
"Act") in the amount of $94,000.00 each.
B. ISSUE
[3] The issues are:
(a) Whether each of the
Appellants is subject to tax on a joint and several basis under
section 160 of the Income Tax Act (the
"Act"); and
(b) Is KR Insurance ("KRI")
allowed to deduct a bad debt in the amount of $48,000.00 in
determining its tax liability for the 1991 taxation year?
C. ANALYSIS
[4] Section 160 of the Act
reads as follows:
160. (1) Where a person has, on or after the 1st day of
May, 1951, transferred property, either directly or indirectly,
by means of a trust or by any other means whatever, to
(a) his
spouse or a person who has since become his spouse,
(b) a person
who was under 18 years of age, or
(c) a person
with whom he 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 sections 74 to 75.1, in respect of any income from,
or gain from the disposition of, the property so transferred or
property substituted therefor, 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 aggregate
of all amounts each of which is an amount that the transferor is
liable to pay under this Act 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.
[5] Section 160 essentially provides
that if a taxpayer has a tax liability and that taxpayer
transfers property to a non-arm's length party the Minister
may reassess the transferee to recover the tax owing by the
original taxpayer but only to the maximum value of the amount
that was transferred.
[6] In order to determine if section
160 applies in this situation we must consider the following
questions:
(a) Was there a transfer of
property from KRI and if so, to whom?
(b) Did KRI owe tax at the time of the
transfer of the property?
(c) If there was a transfer of
property, was the transferee dealing at arm's length with the
transferor?
[7] With respect to whether there was
a transfer of property from KRI, counsel for the Appellant argued
that the transfer of the cheques in question represented nothing
more than a "shuffling of paper" where one cheque
covered the other and hence nothing really happened to constitute
a transfer.
[8] Counsel for the Appellant also
noted that the lack of funds in the accounts of KRI and Holdings
meant that the dividends that were declared could not be
realized.
[9] Because of the lack of funds in
the bank accounts of KRI and Holdings, counsel for the Appellants
maintained that there was "no value" to the
transaction. Counsel for the Appellants specifically noted that
since there were no funds in the bank accounts of KRI and
Holdings, there could be no transfer of funds.
[10] The above facts indicate that KRI sold
its Book of Business in 1990 for $390,000.00. The funds received
on the sale were added to the capital dividend account of KRI and
became the source of funds from which the dividend was taken. Mr.
Kirkwood said that his accountants determined that the sum of
$94,000.00 was the amount that should be declared as a capital
dividend.
[11] In my opinion it follows that there
was, in fact, value behind the dividend. I reject the
Appellants' argument that there was no value when the capital
dividend was declared by KRI.
[12] Counsel for the Respondent also argued
that any liability imposed by section 160 of the Act
must be reduced by the fair market value of any consideration
given for that transfer. In my opinion there was no consideration
provided on the transfer of the funds.
[13] In this situation there were three
transfers of funds:
1. Mr. Kirkwood deposited
$94,000.00 in the bank account of KRI;
2. KRI transferred
$94,000.00 to the bank account of Holdings; and
3. Holdings transferred
$94,000.00 to Mr. Kirkwood.
[14] Mr. Kirkwood owned all of the shares of
Holdings and Holdings owned all of the shares of KRI. It
therefore follows that Mr. Kirkwood was not dealing with KRI or
Holdings at arm's length. (See section 251 of the
Act.)
[15] Based on this analysis of the
transaction as outline above I believe that there was a transfer
within the meaning of section 160 of the Act.
[16] We must next determine if KRI had a tax
liability for the purpose of determining whether section 160
applies. According to the Notification of Confirmation issued by
the Minister on November 30, 1999 KRI was reassessed on October
10, 1995 and tax, interest and penalties were assessed as
follows:
Federal
Tax
$50,068.25
Interest
$49,758.20
Penalties
$8,511.60
[17] During the hearing counsel for the
Appellants suggested that Mr. Kirkwood should not be subject
to tax under section 160 because of the "cascading"
argument that had been referred to in other cases. Counsel for
the Appellants referred to the case of Nanini v. Canada,
[1994] T.C.J. No. 426 where Judge Tremblay found that the
automatic application of section 160 to transferees receiving
property after it has passed through another transferee creates a
"cascading effect" and section 160 should not apply to
the second transferee.
[18] I have also considered the case of
Jurak v. The Queen, 2002 DTC 1236. In that case
Madam Justice Lamarre Proulx of the Tax Court of Canada did
not follow Mr. Justice Tremblay's decision in Nanini.
She wrote in her decision:
Malgré toute la déférence que j'ai
pour le savant juge Tremblay, je ne peux le suivre dans sa
décision Nanini (supra). Cette interprétation
n'a pas été reprise par les juges de cette
Cour. Le bénéficiaire d'un transfert peut
devenir lui-même l'auteur d'un transfert sujet
à l'application du paragraphe 160(1) de la Loi si au
moment du deuxième transfert, il est lui-même
débiteur fiscal soit de son propre chef ou en tant que
débiteur solidaire avec le premier auteur.
[19] The Jurak decision is a recent
decision, and no official translation has been released. The
above paragraph can be translated as follows:
Despite all the respect I have for the learned Judge Tremblay,
I cannot follow his decision in Nanini (supra).
This interpretation has not been taken up by the judges of this
Court. The beneficiary of a transfer can become the author of a
transfer subject to the application of subsection 160(1) of
the Act if, at the moment of the second transfer, he is
liable for tax either of his own doing or as a result of joint
liability with the first author.
[20] I believe that Judge Lamarre Proulx in
Jurak has properly interpreted the wording of section 160
and I do not believe that Mr. Kirkwood can escape liability under
section 160 based upon the cascading argument.
[21] I have also considered the claim made
by counsel for the Appellant that KRI is entitled to deduct a bad
debt in determining its income for the 1991 taxation
year.
[22] At the hearing Graeme Sperryn, counsel
for the Appellant, stated that as far as bad debts of KRI were
concerned he could only provide evidence of bad debts totalling
$19,800.00 (not $48,000.00 as referred to in the Notice of
Appeal. (See page 39 of the transcript)
[23] Mr. Kirkwood testified that the figure
of $19,800.00 was a write-off of an account receivable by KRI. In
my opinion KRI should be allowed to deduct a bad debt in the
amount of $19,800.00 in determining its income for the 1991
taxation year.
[24] Justification for the reassessment of
KRI can be found in Thorsteinson v. MNR, 80 DTC 1369,
where the Court held that a taxpayer who was reassessed under
section 160 was entitled to have the Court consider the
underlying reassessment that gave use to the section 160
reassessment.
[25] The appeals of the Appellants are
allowed, without costs, and the Minister is to reassess the 1991
taxation year of KRI to allow a bad debt in the amount of
$19,800.00. The Minister is also to reassess the Appellants to
recognize the reduction in the tax liability.
[26] In determining the tax liability of Mr.
Kirkwood and Holdings under section 160 the Minister must
recognize that a section 160 reassessment does not create a tax
debt and therefore Mr. Kirkwood and Holdings should not be
assessed for interest after the date of the transfer (see
Algoa Trust v. The Queen, 98 DTC 1614).
Signed at Vancouver, British Columbia, this 14th day of March
2003.
J.T.C.C.
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