McVey v. R., [1996] 2 CTC 2157, 96 DTC 1225

Rip J.T.C.C.: — Each of David McVey and Heather Perkins-McVey, husband and wife respectively, have appealed assessments for income tax levied under subsection 160(1) of the Income Tax Act (“Act”). The notices of assessment, dated September 30, 1992, state the liability for tax 1s:

in respect of a transfer on or about June 30, 1988 from Perkins Realty Limited to (each appellant) of funds in the amount of $40,000.

Subsection 160(1) of the Act provides that:

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

(c) a person with whom he was not dealing at arm’s length,

the following rules apply:

(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 in or in respect of thetaxation 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.

In his replies to the notices of appeal the Deputy Attorney General of Canada said that in assessing the appellants, the Minister of National Revenue (“Minister”) made the following assumptions of fact:

(a) on or about June 30, 1988, Perkins Realty Ltd. (the “Transferor”) transferred funds in the amount of $40,000 (the “Property”) to the Appellant and her spouse;

(b) the Appellant is the granddaughter of Joseph A. Perkins, who owned a 1/3 interest in Perkins Motors Ltd. which owned 100% of Perkins Realty Ltd; [1]

(c) at all material times, the Appellant and the transferor were not dealing at arms length;

(d) at the time of transfer, the fair market value of the Property was $40,000;

(e) at the time of transfer, the fair market value of the consideration given by the Appellant for the Property was nil;

(f) the aggregate of all amounts that the Transferor was liable to pay under the Act in or in respect of the taxation year in which the Property was transferred or any preceding taxation year was $41,058;

(g) financial statements of Perkins Realty Ltd. for the year ended June 30, 1988 indicated a note receivable of $40,000 from the Appellant and her spouse;

(h) the note became payable on June 30, 1991 ;

(i) a Receiver for Perkins Realty Ltd. was appointed July 18, 1991;

(j) on November 1, 1991, Revenue Canada Taxation issued a “requirement to pay” based on the assumption that the $40,000 transfer was a loan;

(k) the Appellant and her spouse refused to comply with the “requirement to pay” and made representations that the $40,000 transfer was a gift;

(l) based on the Appellant’s representations that the $40,000 transfer was a gift, not a loan, the Respondent issued the s. 160 reassessment presently at issue;

(m) the Respondent has relied on the Appellant’s representations to his detri- ment;

(n) the $40,000 transfer was a gift.

The issues before me are:

(a) whether in fact there was a transfer of $40,000, from Perkins Realty Ltd. (“Realty”) to the appellants within the meaning of section 160; and

(b) in the event I find that the payment of $40,000 was a loan and not a gift, whether the appellants are liable to pay the amount assessed pursuant to subsections 224(1) and (4) and subsection 227(10) notwithstanding the assessments were issued pursuant to section 160 of the Act.

The appeals were heard on common evidence.

Evidence

Heather Perkins-McVey was called as a witness by the respondent. David McVey did not testify. [2] The appellant recalled that she had been called to the Ontario Bar in 1988 and she and her husband were looking to purchase a home in Ottawa. She had discussed a loan with her bank and mentioned this to her grandfather, Joseph Perkins, who controlled several businesses. Perkins told her he would help her out. The appellant stated she did not specifically ask her grandfather for money; rather, he made an unsolicited offer to assist.

The appellant prepared a document headed “Personal Loan Agreement” between herself, her husband and Realty and provided for Realty to lend to her and her husband “the sum of $40,000 at the interest rate of 10 3/4 per cent”. The agreement was undated, although it referred to the year 1988. The agreement appears to have never been signed. The appellant believes her husband may have signed the agreement but she never saw his signature. The appellant said her grandfather told her “Don’t worry about the agreement”. Apparently he had helped others in the family and told her “he’d do the same for us”. She described her grandfather as a private person who did not want to discuss money. Perkins-McVey testified her grandfather never asked for any payment of the $40,000 during his lifetime. He never said anything “outright”, she stated. She recalled he told her he would talk to his accountant and “see what would happen”. He died in 1990. The appellant could not recall any further discussions with her grandfather concerning the matter.

Perkins-McVey stated that her grandfather had taken care of “everything” and kept things private. He apparently died without a will. She stated nobody had access to his documents and that the family is still looking for a will. Realty and the group of companies it owned were placed in receivership in 1991 and “all of a sudden” doors to the business were locked. The business was taken over by Price Waterhouse as Receiver-Manager and no one in the family knew what was happening. The appellant had never been involved in any company business but because she was a lawyer “all was thrust” on her.

William E. Perkins, the son of Joseph Perkins and uncle of Heather Perkins-McVey, worked for the Perkins group of companies in Montreal and Perth, Ontario from 1963 to 1991. On his father’s death on August 20, 1990, he became President and Chief Executive Officer of the Perkins group of companies and ceased to be employed by the Perkins group of companies on July 17, 1991 when the Royal Bank of Canada “moved in on the security” and Price Waterhouse became Receiver-Manager.

William Perkins reviewed the financial statements of Realty for the years ending June 30, 1987, 1988 and 1989. The 1987 financial statements record no loan from Realty in the amount of $40,000. Note two to the financial statements for 1988 record a “Note receivable, non- interest bearing, with no specified terms of repayment - $40,000”. Note two to the financial statements for 1989 state a Realty investment of a “10.75% note receivable, with no specified terms of repayment - $40,000”.

The financial statements of Realty for the years ending June 30, 1951 through June 30, 1989 were approved by Realty’s shareholders on September 26, 1990.

An extract from the General Ledger of Realty for June 1988 indicates a loan of $40,000 to “H. McVey”. The cheque register of Realty’s “Special Bank Account” records cheque, dated June 30, 1988, payable to “Dave and Heather McVeigh (sic)”.

William Perkins testified his father kept a ledger book in his office. This ledger book related to several companies and personal matters. Joseph Perkins was the only person who made entries in this ledger. He kept the ledger to himself and made William Perkins aware of it shortly before his death. William Perkins believed Realty’s auditors knew about the ledger “because other people’s handwriting is in the book”. Copies of three pages from this ledger were produced at trial. The evidence of William Perkins, Herbert Terris, who worked with Joseph Perkins for over thirty years, and Phil Gerard Dresch, C.A., who worked for the auditing firm of the Perkins group of companies, identified the relevant writing on the copies as that of Joseph Perkins. The following entries appear on a summary sheet:

McVey (L.) $40,000 + interest

Heather: 39.69

On a ledger headed David McVey appears the following entry:

June 30, 1988 — Loan: $40,000

Dresch made the following notation on this page: “included under Perkins Realty”.

On Perkins-McVey’s ledger is the following entry:

July 14, 1988: OK: o/c 7111495: Re appliances 396900 Ruddy

In August, 1990, William Perkins recalled, the Perkins group of companies was in poor financial condition and it was apparent the “Royal Bank was going to send in people”. Joseph Perkins was in the hospital. The Royal Bank “sent in people on August 20 ... the day father died ...”. The bank wanted a meeting immediately, said William Perkins. “It was bad timing but they insisted ... (and we) ... met after the funeral ...”. A meeting was held in Toronto. “We were lining up a buyer in Chicago” for one of the businesses but the “Royal Bank wanted us to give up the company and give them the keys ... We refused ...”. At the time, Williams Perkins said, he was aware of the general ledger and of the money advanced to the appellants. However it was “probably around May 1992 that he became aware” of the problem the appellants were having with Revenue Canada. The appellants visited him in Perth, where he resided, and Perkins-McVey mentioned her problem with Revenue Canada. He mentioned the ledger indicated Realty made a loan to her and her husband. He testified he does not believe Perkins-McVey was aware of the actual transaction, or indeed the ledger, until then.

Dresch testified that in preparing Realty’s financial statements he reviewed the company’s bank accounts and transactions “to see what’s payable or receivable in the company”. He saw a cheque of $40,000 from the company. He stated he entered an interest rate of 10 3/4 per cent on the loan because “probably a loan agreement ... had been prepared”, although he acknowledged the agreement had not been executed.

Dresch also recalled the personal ledger of Joseph Perkins was “kept in a locked cabinet in Perkins’ office ...”. He stated each company in the group had its own books of account but that the copies of the three pages from the ledger were “not from any company’s records” but from Joseph Perkins’ ledger book. This was “how he did business and his accountants were not informed what he did .... Only at the end of the year would we review” the transactions, said Dresch.

Andrew Davis is Perkins-McVey’s law partner. He acted on behalf of the appellants when Revenue Canada first brought this problem to their attention. He originally represented to Revenue Canada that the $40,000 was a gift to the appellants. Indeed, he prepared an affidavit for Joseph Perkins’ widow to sign in which she declared that because of his close relationship with Perkins-McVey the $40,000 had to have been a gift. This affidavit was sent to Revenue Canada on December 2, 1991.

Davis testified that in December 1991 he did not know Realty treated the $40,000 as a loan, although he conceded he was aware, as indicated in his letter of December 22, 1991 to Revenue Canada, that Realty’s financial statements classified the payment as a loan.

Davis knew the Receiver considered the payment a loan. Price Waterhouse had written the appellant on several occasions that she owed $40,000 to Realty. The position of Price Waterhouse was based on the unsigned loan agreement which stated that payments on the loan were to be deferred for three years. The three year period expired on June 30, 1991, according to Price Waterhouse, and after that date they insisted on payment. Davis replied to Price Waterhouse the payment was a gift.

Davis stated that when Perkins-McVey advised him her grandfather’s ledger book classified the payment as a loan he had her fax her uncle for a copy of the relevant pages and wrote Revenue Canada advising of the entry in the ledger. This letter, dated May 13, 1993, was preceded by a telephone call to Revenue Canada. The letter advised Revenue Canada the ledger was discovered in the fall of 1992 and the appellants had since entered into discussions with the Receiver-Manager of Realty to resolve the indebtedness. Revenue Canada confirmed the assessments on December 22, 1993.

Francine St. Claire works in the Collections Section of Revenue Canada. In September 1992 she took over another officer’s inventory of files, including that of Realty. She confirmed assessments were issued under section 160 of the Act.

Realty owed Revenue Canada approximately $59,000 as of June 1991, when a writ was obtained in the Federal Court of Canada. Since the appellants purportedly owed $40,000 to Realty, Revenue Canada issued to each appellant in November 1991 a Requirement to Pay under subsection 224(1) of the Act. St. Claire stated the appellants replied through Davis that the $40,000 was a gift.

Revenue Canada then forwarded (date not in evidence) a Request for Information, pursuant to section 231.2 of the Act to Price Waterhouse. Price Waterhouse sent Revenue Canada extracts from the ledger and cheque book of Realty, copies of Realty’s financial statements for 1987, 1988 and 1989 which indicated the advance as a loan. Revenue Canada again wrote the appellants advising of its position but the appellants still insisted the money was a gift.

Revenue Canada then had to make a decision, St. Claire said, whether to assess the appellants under section 160 or section 227. Notwithstanding the corporate records that the money was a loan, Revenue Canada decided to rely on the representations of the appellants at the time and assessed pursuant to section 160 on the basis the money was a gift.

Submissions

By Appellant

Appellants’ counsel, Mr. Rotenberg, submitted that the evidence established that money was advanced by Realty to the appellants as a loan and therefore the assessments before me, issued pursuant to subsection 160(1) of the Act, are bad. Realty did not make any gifts to the appellants.

In support of his submission counsel relied on the testimony of William Perkins, Terris and Dresch that Joseph Perkins made entries in Realty’s General Ledger that the $40,000 was a loan to Perkins-McVey and that Realty’s financial statements for its 1988 and 1989 fiscal years indicate a note receivable of $40,000 from the appellants. He referred to Revenue Canada Interpretation Bulletin IT-209R, at paragraph 3, for the definition of “gifts”:

A gift is generally defined as a voluntary transfer of property without consideration. The essential requisites of a gift are: intention and capacity of the donor to make the gift; completed delivery to a donee; and acceptance of the gift by the donee.

and concluded that since there was no intention by Joseph Perkins, and hence Realty, to make a gift of $40,000 no gift was made to the McVeys. See also Burns v. Minister of National Revenue, [1988] 1 C.T.C. 201 (sub nom. R. v. Burns), 88 D.T.C. 6101 at page 207 (D.T.C. 6105).

Counsel conceded his clients had represented to Revenue Canada prior to the assessment that Realty made a gift to them. The appellants sincerely believed that was the situation. However, he said, prior to Revenue Canada confirming the assessments, the appellants advised the taxing authority that new information had come to their attention and that Realty had loaned them the money. Therefore, counsel argued, Revenue Canada had sufficient time to issue a new assessment based on subsections 224(1) and 224(4) of the Act. Instead, Revenue Canada confirmed the original assessment. The Minister, counsel said, could also have assessed Joseph Perkins in accordance with subsection 15(1), based on Minister of National Revenue v. Bronfman, [1965] C.T.C. 378, 65 D.T.C. 5235 (Exch).

Since the Minister did not issue new assessments she sanctioned wrong assessments, counsel contended. This is not similar to the appeal of R. v. Riendeau (sub nom. Riendeau v. Minister of National Revenue), [1991] 2 C.T.C. 64, (sub nom. Riendeau v. R.), 91 D.T.C. 5416 (F.C.A.) where the assessment was based on erroneous facts but was corrected on confirmation. According to counsel, Riendeau is authority for the proposition the Minister may correct an assessment but does not stand for the proposition the Minister may ignore facts and cavalier about how she assesses. The Minister cannot hide behind provisions of the Act: she cannot assess one way or another relying on Riendeau. An assessment based on a derivative form of liability must be more stringent: R. v. Leung (sub nom. Leung v. Minister of National Revenue), [1993] 2 C.T.C. 284, 93 D.T.C. 5467 at page 292 (D.T.C. 5473) (F.C.T.D.).

Therefore, counsel concluded, the assessments in issue are not good assessments since they are based on a provision of the Act, section 160, which is not supported by the evidence.

Appellants’ counsel also argued that Realty’s banker was a secured creditor of Realty and, as such, had claim prior to that of the Crown: see, for example, Royal Bank v. R., [1984] C.T.C. 573, 84 D.T.C. 6439 (F.C.T.D.). He appeared to suggest that if I find Realty made a gift to the appellants that would somehow affect Realty’s erstwhile banker. I do not think so. Section 160 does not give the Crown any priority over a secured creditor. If the bank is of the view it is adversely affected by such action, it is always free to take care of itself. The bank does not require the appel- lants’ help at this stage.

By Respondent

Respondent’s counsel stated that on the facts the assessment is valid. Revenue Canada had issued to the appellants a Requirement to Pay but the appellants refused to honour the Requirement on the basis the money was a gift. They made similar representations to the Receiver- Manager of Realty. Based on such representation, Revenue Canada issued assessments pursuant to section 160.

Mr. Bourgeois, counsel for Respondent, disputes Realty loaned the money to the appellants. The loan agreement prepared by Perkins- McVey was not executed. After telling Perkins-McVey to “leave it with me”, Joseph Perkins never informed her or her husband that Realty’s intention was to loan the money. Neither of the McVeys could be said to have agreed to have borrowed the money from Realty. A loan was entered in Realty’s books but that was all. Nobody confirmed the arrangement with the appellants. Revenue Canada was correct in assessing in the manner it did.

Counsel also submitted that the assessments are valid even if I find the arrangement between Realty and the appellants was a loan. Counsel relied on Minister of National Revenue v. Minden, [1962] C.T.C. 79, 62 D.T.C. 1044 (Ex. Ct.) at page 89 (D.T.C. 1050) per Thorson P. for the proposition that an assessment may be valid although the reasons assigned by the Minister for making it may be erroneous. Mr. Bourgeois did acknowledge, however, that in accordance with the reasons in Leung, supra, the Respondent would then have the onus of proving the facts on which a valid assessment is based. In the peculiar situation at bar, Mr. Bourgeois task was made simple by the position taken by the appellants.

Analysis

The Federal Court of Appeal in Riendeau, supra, restated the principle that the Minister’s reasoning in making an assessment cannot affect a taxpayer’s liability to pay tax imposed by the Act itself: Ludco Enterprises Ltd. v. R., (sub nom. Ludco Enterprises v. Canada), [1994] 1 C.T.C. 368, (sub nom. Entreprises Ludco Ltée v. R.), 94 D.T.C. 6221 (F.C.T.D.), at page 372 (D.T.C. 6223). It should not be forgotten that it is the Act that creates a liability for tax, not the Minister and not a paper called a notice of assessment.

In the appeals at bar the appellants are liable for tax either under section 160 because they received a gift, or under subsection 224(4), because they failed to comply with a requirement under subsection 224(1) [3] . An assessment as, counsel for respondent submitted, may be valid for reasons other than those advanced by the Minister: Minden, supra. After all,

An assessment to only the ascertainment and fixation of liability. Federal Commissioner of Taxation v. Clarke, (1927) 40 C.L.R. 246 at 277, per Isaacs, A.C.J., cited by Thorson P. in Pure Spring Co. v. Minister of National Revenue, 2 D.T.C. 844 at 857.

Thorson P. explained that

It is the opinion as formed, and not the material on which it was based, that is one of the circumstances relevant to the assessment. The assessment, as I see it, is the summation of all the factors representing tax liability, ascertained in a variety of ways, and the fixation of the total after all the necessary computations have been made. Pure Spring Co. Ltd. v. Minister of National Revenue, supra, at page 857.

An assessment, then, is the Minister’s opinion of a taxpayer’s tax liability. The material on which the assessment is based is not necessarily relevant to the assessment.

In the appeals at bar each appellant was assessed $40,000. The reason given for the assessments on the notices of assessment is that Realty made a gift to the appellants of $40,000 when it was liable for tax under the Act in excess of $40,000. Pursuant to subsection 160(1) of the Act the donee is liable for taxes owed by the donor at the time the gift was made up to the value of the gift.

The Minister was also of the view the $40,000 may have been a loan to the appellants. That is why the Minister had written the appellants pursuant to subsection 224(1) requiring them to pay to the Receiver General of Canada amounts owed to Realty. On receipt of the “requirement” the appellants informed the Minister they were not indebted to Realty and therefore did not comply with the requirement. If the appellants were indebted to Realty when they failed to comply with the requirement, they are, pursuant to subsection 224(4), liable to the Crown for an amount equal to the amount they were required to pay under subsection 224(1). Subsection 227(10) authorizes the Minister to assess the appellants for any amount payable by that person under subsection 224(4), that is, $40,000.

The Minister’s position is that if the assessments are no good because there was no gift by Realty to the appellants, the assessments are good because the $40,000 is an amount payable by the appellants under subsection 224(4).

At this point it may be appropriate for me to comment on the relationship of Realty and the appellants.

Joseph Perkins built several businesses that had been successful during his lifetime. He no doubt was concerned with his family’s welfare and apparently was seen by his children and grandchildren as the pater familias. It was no surprise to his granddaughter that he offered to help her and her husband purchase a home. The appellant prepared a loan agreement but he refused to consider it at the time. He said he would talk to his accountant but never informed the appellants of the accountant’s advice. And at no time during his lifetime did Realty demand any interest from the appellants. So it was not unreasonable for the appellants to assume Realty had gifted them the money.

At all times relevant to the payment of the $40,000 the appellants, I am sure, were willing to accept any relationship, borrower or donee, with Realty requested by Joseph Perkins. Without informing the appellants, Joseph Perkins recorded in his ledger that Realty loaned the $40,000 to the appellants.

Mogan T.C.C.J. referred to the following definition of a “loan” in Bradley v. R., [1996] 1 C.T.C. 2237, (sub nom. Bradley v. Canada) [1995] T.C.J. No. 4:

In law, a loan has been defined as follows:

A “loan” is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows.

A “loan” within the law of usury is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use.

To constitute a “loan”, there must be an express or implied agreement whereby one person advances money to another, who agrees to repay it on such terms as to time and rate of interest, as parties may agree. [Words and Phrases, Permanent Edition, Vol. 25A, page 79]

Christie A.C.J.T.C., stated in A.C. Simmonds & Sons Ltd. v. Minister of National Revenue. [1990] 1 C.T.C. 2087, 89 D.T.C. 707, at page 2089 (D.T.C. 709):

Definitions of a loan of money are to be found in a number of publications, but to my mind this definition in Black’s Law Dictionary, 5th (1979) ed. is as useful as any: “Delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest.” This is not, in my opinion, descriptive of the transactions involving letters of credit that are under consideration in this appeal. In Minister of National Revenue v. T.E. McCool Ltd., [1949] C.T.C. 395; 4 D.T.C. 700 (S.C.C.) Mr. Justice Estey said at page 413 (D.T.C. 708) with reference to the relationship of lender and borrower that: “It is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction.”

The Civil Code of Quebec, for example, defines a loan in the following manner:

2314. A simple loan is a contract by which the lender hands over a certain quantity of money or other property that is consumed by the use made of it, to the borrower, who binds himself to return a like quantity of the same kind and quality to the lender after a certain time.

2315. A simple loan is presumed to be made by gratuitous title unless otherwise stipulated or unless it is a loan of money, in which case it is presumed to be made by onerous title.

The meaning of the word “loan” appears to be the same in both legal systems.

It is quite clear the appellants never agreed to repay the $40,000 during Joseph Perkins’ lifetime since they did not know they had borrowed the money. The facts of these appeals are unusual, to say the least. It may well be that Joseph Perkins had made gifts to family and his widow relied on these gifts when she made her affidavit. I prefer the view that Realty loaned the money to the appellants: Joseph Perkins, acting on behalf of Realty, and the appellants agreed to delay defining the legal relationship between Realty and the appellants and the appellants, by their conduct, obviously intended to agree to whatever relationship with Realty that their grandfather requested.

In Simmons v. Clarke, (1983), 40 NFLD. & P.E.I.R. 446, Riche D.C.J. of the Newfoundland District Court at the time, stated:

In the case before me there is a very casual relationship between the parties which is admitted by both parties as being “just friends”. Even if parties were involved in a love relationship, or living common law no presumption of advancement would arise. There is no doubt that the money was paid and received. That being so the burden passes to Clarke to show the monies were a gift. [Page 449]

Persons who obtain substantial sums of money from friends should be careful to ensure that if there is no intention to repay the money that this is evidenced satisfactorily so that there can be no doubt. Public policy demands that such casual passing of monies should be repayable unless there is satisfactory evidence to show that it was not intended by both parties to be repaid. [Page 450]

[Emphasis added.]

Our tax system is a self-assessing one. It is the taxpayer, who, almost to exclusivity, has personal knowledge of the facts. The Minister must rely on the representations of taxpayers and it is reasonable for the taxing authority to prepare assessments in accordance with information given to her by taxpayers. Where the taxpayer subsequently learns he or she has misinformed the Minister, the taxpayer owes a duty to advise the Minister and that is what was done by the appellants. If the Minister in the meantime has assessed the taxpayers on erroneous information that assessment may still be a good assessment if the new information supports the amount assessed. This is the case here.

The assessments at bar are valid assessments. The appellants are liable for payment of $40,000 under subsection 160(1) if they received a gift from Realty and under subsection 224(4) if they received a loan from Realty. The assessments before me are for $40,000. That is the amount owed by the appellants under the provisions of the Act, either subsection 160(1) or subsection 224(4). I have found the appellants are liable under subsection 224(4) of the Act. The ascertainment and fixation of their tax liability under that provision is $40,000, the amount assessed.

The appeals are dismissed with costs.

Appeals dismissed.