[OFFICIAL ENGLISH TRANSLATION]
Date: 20011217
Dockets: 1999-1965(IT)G
1999-1749(IT)G
BETWEEN:
ANTHONY JURAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Louise Lamarre Proulx, J.T.C.C.
[1] These are appeals from assessments
made by the Minister of National Revenue (the
"Minister") under section 160 of the Income Tax
Act (the "Act").
[2] The appeal bearing
number 1999-1749(IT)G concerns the transfer of a
property on September 16, 1991, by
151041 Canada Inc. ("151041") to the
appellant at a price of $1,025,000, whereas, in the
Minister's view, the market value was $1,252,500. The
appellant was assessed on the basis of that value. The report of
the Minister's expert states a value of $1,346,750.
[3] The appeal bearing
number 1999-1965(IT)G concerns a remission of debt on
August 6, 1992, on the balance of the selling price of that
property. The balance was $428,405.48, including interest, and
the amount paid was $251,025.
[4] With the appellant party's
consent, the respondent filed a book of documents as
Exhibit I-1 consisting of 35 tabs, with the
exception of tabs 7, 8, 23 and 31, which were removed.
[5] Snazz Corporation
("SNAZZ") is owned by 151041. That last company's
voting shares are held by Paulette Massicotte, who is the
appellant's de facto spouse. It is admitted that the
appellant, 151041, and SNAZZ are not dealing with each other at
arm's length.
[6] In 1988, SNAZZ paid 151041 a
$1,650,000 dividend. SNAZZ's assessment was not filed, but a
certificate from the Minister dated October 26, 1990,
declares the debt to be in the amount of $406,667.93 (tab 32
of Exhibit I-1). SNAZZ did not dispute its tax
liability.
[7] In an assessment under
section 160 of the Act dated November 23, 1993,
the respondent assessed the amount of $291,057.45 against 151041
in respect of SNAZZ's tax liability (tab 10 of
Exhibit I-1). The notice of assessment states that,
under subsection 160(1), SNAZZ transferred property to
151041 by paying a dividend of $1,650,000 in the fiscal year
ending on December 31, 1988. The company 151041 did not
institute an appeal in this Court following the Minister's
confirmation.
[8] The appellant was assessed under
section 160 of the Act on June 6, 1995,
(tabs 1 and 2 of Exhibit I-1) in respect of a
transfer of property from 151041 to the appellant on
September 16, 1991. The respondent party confirmed that the
maximum amount claimed from the appellant was $291,057.45, that
is, the amount of 151041's assessment.
[9] The property sold to the appellant
by 151041 on September 16, 1991, was a house located at
558 Roslyn Avenue in Westmount, which had served as the
family residence of the appellant and his family. The selling
price of $1,025,000 was to be paid $625,000 in cash and the
balance of $400,000 was payable seven years later, in
September 1998, with interest computed at the rate of
eight percent compounded annually.
[10] The Minister contended at the time of
the assessment that the fair market value of the residence at
September 16, 1991, was $1,252,500 and that the appellant
had accordingly been granted a benefit of $227,500 (tab 2 of
Exhibit I-1, assessment of June 6, 1995).
[11] The Minister contends that, in
discharging a debt of $428,405.48 by paying an amount of $251,025
on August 6, 1992, the appellant gained a benefit of
$177,380.48 (tab 1 of Exhibit I-1, assessment of
June 6, 1995).
[12] As to the second appeal, respecting the
fair market value of the debt as of August 6, 1992, the
appellant party informed the Court that he had accepted the value
of $395,245 reached by Duc Nguyen, the respondent's
expert. Counsel for the respondent also informed the Court that,
with respect to the appeal concerning the remission of debt, the
amount of the assessment should be reduced to $144,222 since the
respondent's expert had reduced the market value of that
debt.
[13] At the start of the hearing, counsel
for the appellant made an application under section 58 of
the Tax Court of Canada Rules (General Procedure) (the
"Rules"), which reads as follows:
58(1) A party may apply to the Court,
(a) for the
determination, before hearing, of a question of law raised by a
pleading in a proceeding where the determination of the question
may dispose of all or part of the proceeding, substantially
shorten the hearing or result in a substantial saving of costs,
or
(b) to strike
out a pleading because it discloses no reasonable grounds for
appeal or for opposing the appeal,
and the Court may grant judgment accordingly.
(2) No evidence is
admissible on an application,
(a) under
paragraph (1)(a), except with leave of the Court or
on consent of the parties, or
(b) under
paragraph (1)(b).
(3) The respondent
may apply to the Court to have an appeal dismissed on the ground
that,
(a) the Court
has no jurisdiction over the subject matter of an appeal,
(b) a
condition precedent to instituting a valid appeal has not been
met, or
(c) the
appellant is without legal capacity to commence or continue the
proceeding,
and the Court may grant judgment accordingly.
[14] Counsel for the appellant referred to
the decision by Judge Tremblay of this Court in
Nanini v. Canada, [1994] T.C.J. No. 426 (Q.L.),
in which a corporation had paid a dividend to another
corporation, which was assessed under section 160 of the
Act. The shareholders of the second corporation were
subsequently assessed under section 160 in respect of a
dividend received from that second corporation. It was the
judge's view that the first transferee could not himself
become a transferor, rendering another transferee jointly and
severally liable. According to counsel for the appellant, the
facts of the instant case are identical in that they involve a
cascading application of section 160. He referred to
paragraphs 56, 57, 66 and 67 of the reasons for that
decision:
. . .
56 As to whether the
transferee in the first transfer may itself become a transferor
rendering a new transferee liable, the Court was not convinced by
the argument of counsel for the respondent that this mechanism is
provided in the last lines of subsection 160(1):
. . . but nothing in this subsection shall be deemed
to limit the liability of the transferor under any other
provision of this Act.
57 In reality, the
Court quite simply does not see how this phrase can be
interpreted to mean that a transferee may himself become a
transferor, rendering another transferee jointly and severally
liable and so on in a cascade effect.
. . .
66 Furthermore,
section 160 in itself is already enough outside the scope of
common law that if Parliament had wanted to do it in a cascading
fashion, it would have specifically stated so.
67 In light of the
conclusion which the Court has reached above, that is that there
can be no cascading application of section 160, it is not
necessary for me to rule on the other two points.
[15] Counsel for the appellant stated that,
on the basis of this Court's decision in Nanini,
SNAZZ, the transferor, transferred its debt to 151041, the
transferee. Considering the way in which section 160 is
drafted, the transferee cannot itself become a transferor within
the meaning of section 160.
[16] Counsel for the respondent informed the
Court that she had not been informed of this application and
contended that an application had to be filed within the
prescribed time period, that she did not see how a decision could
be rendered in such circumstances or how that decision could
substantially shorten the hearing or result in a substantial
saving of costs.
[17] The application was denied because it
had not been filed within the prescribed time period. The Court
informed counsel for the appellant that he was of course not
prohibited from arguing the merits of that decision.
[18] The appellant's first witness was
Michel Bourassa, a chartered appraiser, who testified as an
expert witness. In September 1991, he said that the
property's fair market value was $1,017,000. For that
appraisal, he had used the sales comparison method. He had
estimated the value of the land at $45 a square foot and
explained that the value of land in that part of Westmount, which
is not upper Westmount, is lower. The market value of the 11,000
square foot lot would be $499,500 at a unit rate of $45 a square
foot.
[19] As to the comparables considered by the
respondent's appraiser, Mr. Bourassa stated that, with
one exception, the properties used were located in upper
Westmount. They were properties acquired for their views and
located in an area where the properties are homogeneous. The
exception was located on Holton Street and was roughly
comparable. Its price was different from the price of the other
properties.
[20] The building description did not vary
from one expert to the other. It was a single-family residence
with three floors and a basement. There was no attic. The quality
of construction was excellent. The year of construction was 1907.
The house had been renovated in the 1980s. The ground floor area
was 2,118 square feet and there were 5,682 square feet
of living space, excluding the basement. The building was in
excellent condition. The appellant's appraiser described the
additions and permanent features as follows: [TRANSLATION]
"This property includes a games room with a projector and
giant wall screen, cooktop, oven, built-in dishwasher and
kitchen garburator, five fireplaces, central vacuum system, alarm
system, sauna, whirlpool, automatic garage door opener, solarium,
central air conditioning and skylights."
[21] Mr. Bourassa noted that his
comparables were located close to the subject, whereas those of
the Minister's expert were further away. As to the value of
the land, he also noted that the Minister's appraiser had
stated $40 a square foot for all his comparables.
[22] The appellant's appraiser explained
that there were semi-detached properties in the area surrounding
the property. Those properties have less prestige and reduce the
value of the surrounding lots. If the properties located in upper
Westmount were taken for comparison purposes, the value of the
land would be higher. That factor must be taken into
consideration or else the selling price of the building itself
becomes too high. The value of the land must be taken as it is
and, instead of stating $40 a square foot in all cases, its
actual value, that is to say $60 or $80 per square foot depending
on the site, must be used. That increases the value of the land
and what remains from the selling price, excluding the market
value of the lot, is the value attributable to the building.
Since that value is lower, it also yields lower per square foot
rates, which, once multiplied by the area of the property in
question, yield a value that would be lower than the value
determined by the Minister's appraiser. Mr. Bourrassa
contended that, in 1991, the market had fallen, whereas it was at
its peak in 1988 and 1989.
[23] The bigger the lot, the lower its unit
value. A property is considered, the land value appraised, and
there is a rate, a building and a residual value of the building.
What is that residual value of the building on a per square foot
basis? This is a very simple methodology to apply and the one
that must be applied for residential properties. The
Minister's expert, on the other hand, took the area of the
building and lot, added them together and divided the selling
price by the area to determine a unit rate of $300 per square
foot. In Mr. Bourassa's view, the value of the land and
value of the building should be considered for each of the
transactions.
[24] The second witness was the appellant.
When he acquired the property from 151041, he did not know that
SNAZZ or 151041 were tax debtors. He explained how the remission
of debt to $251,000 had come about. At his lawyer's
suggestion, he met with an accounts officer at a bank and asked
the officer what the actual value of a $400,000 loan at
eight percent would be if it were immediately repaid. The
answer apparently given him was that it would be worth $251,000.
The company, which belonged to his wife, needed money. He told
her that he would immediately pay her what the loan was
worth.
[25] The appellant gave virtually the same
reason to explain the purchase of the house. His wife had needed
money for her business and, since he had money, he bought the
house. He said he had paid what it was worth at the time: there
were semi-detached houses opposite and around it, the river could
be seen from the third floor, and on a large portion of that
floor, a person could not stand erect since the roof angled
downward.
[26] He explained that in 1989, his wife,
Paulette Massicotte, had bought the house for $2,400,000. At
the time, she was about to have a baby and he signed the document
for her (tab 35, contract of purchase by
Paulette Massicotte dated March 6, 1989). She
subsequently transferred ownership of the house to 151041.
Tab 5 contains the transfer from Paulette Massicotte to
151041 of the property located at 558 Roslyn Avenue dated
April 11, 1990. The property is described as free and clear
of any hypothec. The purchase price was $1.
[27] Tab 6 contains the contract of
sale from 151041 to the appellant dated September 16, 1991.
The property was still free of any hypothec, the price was
$1,025,000, an amount of $625,000 was paid and there remained a
balance of $400,000 payable seven years later with interest
computed at a rate of eight percent per year. The purchaser
granted the vendor a hypothec equal to 20 percent of the
balance of the selling price.
[28] The appellant described the repairs
they had made to the house: the roof was replaced and rooms
repainted. The former owner, who had bought the house in 1985,
had also made repairs. He had rebuilt the garage, the bathrooms
and the kitchen. The house was in good condition at the time of
the purchase in 1989. The vendor told him that he had made
approximately $600,000 worth of repairs. However, when they began
to live in the house, they found that the insulation in the walls
had not been well done and that the heating bill was very high. A
few years later, they wanted to install insulation, but they were
told that it would be extremely difficult to do so. In discovery,
he stated that the vendor told him he had spent $1,000,000 but,
after taking a closer look at what he had done, the appellant
found it hard to believe that this amount had not been inflated.
There were four small bedrooms and a bathroom in the attic and
three bedrooms on the second floor. There was one bathroom in the
basement, one on the ground floor, two on the same floor as the
bedrooms and one on the attic floor. The pool was already there
when the house was purchased, and it had been installed by the
previous owner. It had a vinyl bottom, which the appellant had to
change after the purchase. The house was sold on April 2,
2001, for $2,350,000 to people who, like them, had fallen in love
with it.
[29] Jean Martin, a chartered
appraiser, testified for the respondent party. He has been a
member of the Ordre des évaluateurs agréés
since 1981. He explained at the outset that there were four
bedrooms on the third floor, one of which had a fireplace and
where one could very easily move about. They were good-sized
bedrooms.
[30] He had used desirable and luxurious
properties as comparables. He did not choose a property simply
because it was on the same street or because it had been sold on
a specific date. Mr. Martin said that if he had to make an
adjustment to the price of the lot, in his mind, the value of the
lot would be $40 a square foot, not $45, and the maximum in upper
Westmount would probably be $60 per square foot, not $80.
[31] He had used two indicators: value per
room and value per square foot of the building. The per-room
value used was $61,800, that of the Holton Street property, which
was the lowest of his comparables. The per-room value of the
property in question is the result of
$61,800 x 15 rooms, a value of $927,000.
[32] The per square foot value of the
building is the result of the selling price divided by the
building's area. Based on the comparable residences he had
chosen, that average value was $300. The per square foot value of
the property was thus $300 x 5,760 square feet, or
$1,728,000.
[33] The average of those two results was
$1,327,500, which was the market value of the property.
[34] In cross-examination, he said he had
appraised the property at 558 Roslyn Avenue twice. The first
time, he had come to the conclusion that it was worth $1,252,500
in September 1991 and, the second time, $1,346,000. The
assessment of $227,500 is based on the first value.
Arguments
[35] Counsel for the appellant reiterated
his argument concerning Nanini, supra, that
cascading assessments cannot be made under section 160. In
another argument, counsel for the appellant recalled that, in
1988, SNAZZ had paid 151041 a dividend. At the time that dividend
was paid, SNAZZ had tax debts for the years from 1986 to 1988.
The company 151041 was assessed during the 1994 taxation year.
The sale of the house to the appellant by 151041 occurred in 1991
and the remission of debt in 1993. Counsel for the appellant thus
argued that, when the appellant bought the house in 1991, 151041
had not yet been assessed. It was not assessed until
two years later, in 1993, and therefore was not a tax debtor
at the time of the transfer.
[36] Counsel for the respondent referred to
two decisions by this Court, in which cascading assessments had
been made and accepted as validly made: Zobay v.
Canada, [1996] T.C.J. No. 1455 (Q.L.), and
White v. Canada, [1994] T.C.J. No. 1042 (Q.L.).
In this last decision, it is also explained in paragraph 17
that a tax debt exists before the assessment recognizing it is
made.
Conclusion
[37] Subsection 160(1) of the
Act reads as follows:
Section 160: Tax liability re property transferred
not at arm's length
(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 a person who has since become the
person's spouse,
(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 sections 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 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 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.
[38] With all due deference to
Judge Tremblay, I cannot follow his decision in
Nanini, supra. That interpretation has not been
adopted by the judges of this Court. 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.
[39] With respect to the second
argument-that at the time of the sale of the property by 151041
in September 1991, 151041 had not yet been assessed and was thus
not a tax debtor even though it had received a transfer from
SNAZZ- it cannot be accepted either. It is a recognized principle
in tax law that it is not the assessment that creates a tax
liability, but the application of the Act. The assessment
merely recognizes the debt. What counts is that, at the time
151041 made the transfer, it had received a transfer from SNAZZ,
which itself was a tax debtor at the time of that transfer.
[40] I refer on this point to the comments
by Judge Garon of this Court in Dauphinais v. Her
majesty the Queen, 94 DTC 1148, at pages 1155 and
1156, where he describes the well-settled case law on this
matter:
The case law shows that an assessment is merely an established
procedural or administrative means for determining tax payable.
The judgments in Parsons et al. v. M.N.R.
(83 DTC 5329) . . . and Dominion of Canada
General Insurance Company v. The Queen (84 DTC
6197) . . . clearly support this finding.
Furthermore, the decision of Judge Noël in
Simard-Beaudry Inc. and Simard & Frères Cie
Ltée ([1971] F.C. 396) goes further in one sense in
that it establishes that the assessment does merely state the
obligation to pay income tax because the tax liability itself is
created by the Act. The following passage from
Judge Noël's judgment is particularly apposite:
. . . it seems to me that . . . the
general scheme of the Income Tax Act indicates that the
taxpayer's debt is created by his taxable income, not by an
assessment or re-assessment. In fact, the taxpayer's
liability results from the Act and not from the assessment. In
principle, the debt comes into existence the moment the income is
earned, and even if the assessment is made one or more years
after the taxable income is earned, the debt is supposed to
originate at that point. Here the re-assessments issued on
August 14, 1969, for income earned in previous years seem to
me to be at most a confirmation or acknowledgment of the amounts
owing for these earlier years. Indeed, in my opinion, the
assessment does not create the debt, but is at most a
confirmation of its existence.
This principle was reiterated by the Federal Court of Appeal
in Riendeau v. Her Majesty the Queen (91 DTC
5416). On behalf of that Court, Stone, J.A. wrote as
follows:
As the cases and statutory provisions which were cited by
Cullen, J. well show, liability for tax is created by the
Income Tax Act, not by a notice of assessment. A
taxpayer's liability to pay tax is just the same whether a
notice of assessment is mistaken or is never sent at all.
It is indisputable, based on the preceding, that the
assessment does not create the tax liability or debt. . . .
[41] I must conclude on the factual
circumstances cited above that, at the time of the sale, 151041
was a tax debtor, even though it had not yet been assessed.
[42] Thus, the assessment in the appeal
bearing number 1999-1965(IT)G shall be confirmed. For the reasons
given in paragraph 12 of these reasons, the amount of the
assessment shall be reduced to $144,222. The appeal is allowed on
this basis with costs to the respondent.
[43] As to the fair market value of the
property in September 1991, I find that the approach taken by the
appellant's appraiser is the more appropriate in appraising
residential properties. I do not believe one may rely exclusively
on the desirability of a house but that the value of the land and
surroundings must also be taken into account. The site will
usually determine the value of the land. Homogeneity of
environment will be a significant factor in the total value of
residential property.
[44] The appeal bearing
number 1999-1749(IT)G is allowed, with costs to the
appellant.
Signed at Ottawa, Canada, this 17th day of December 2001.
J.T.C.C.
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