Robert W Savage v. Minister of National Revenue, [1980] CTC 2366, 80 DTC 1369, [1980] CTC 2415

D E Taylor:—This is an appeal heard in the City of Winnipeg on February 12 and 13, 1980, against the following income tax assessment:

Transfer of 1/2 interest in 72 Thatcher Drive from

transferor to transferee.

The respondent relied, inter alia, on sections 2, 3 and paragraph 160(1)(d) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Background

The appellant at all relevant times resided at 72 Thatcher Drive, in the City of Winnipeg, Manitoba (Thatcher), and was the spouse of Carl J Thor- steinson (C J T) who was himself assessed to additional income tax on September 12, 1977 with explanations relevant to this appeal as follows:

The amounts of additional tax assessed against C J T in the Sept 12/1977 assessments were:

Contentions

In view of the nature of this appeal, and the issues raised therein, the Board notes first, the position of the respondent:

— By transfer dated July 2, 1976 and registered in the Winnipeg Land Titles on July 9, 1976, C J T transferred his one-half interest in real property (“Thatcher”) in Winnipeg to the appellant;

—The transfer was made for a consideration in excess of $32,957.22;

—On the day of the transfer, C J T was liable to pay an amount not less than $32,957.22 under the Income Tax Act.

For the appellant:

—C J T conducted business through a limited company (Carlson Trailer Center Ltd—“Carlson” or the Company”) at the Pembina Highway address (Pembina).

— Due to business difficulties, C J T declared bankruptcy in 1977 and the Department of National Revenue was one of his creditors.

— The transfer by C J T of his interest in Thatcher was a mere substitution of property by the appellant commercially and bona fide undertaken and is not within the provisions of section 160 of the Income Tax Act (Canada).

—The purported liability of C J T at the relevant time is in any event questionable and any such liability did not have any foundation in fact or law.

—Section 160 of the Act is not applicable in the circumstances.

Further, it was the contention of counsel for the appellant that the nature and validity of any income tax assessment against C J T was a proper subject for attack by this appellant, even though the assessment was made under section 160 of the Act. This appellant could not be held liable for amounts for which C J T himself would not have been liable.

The view of counsel for the respondent on this point was that the assessments against C J T were not a subject for review by the Board, this appellant being held liable only to pay an amount which was properly determined under section 160 of the Act as a liability of C J T, and against which the time for appeal had expired.

Evidence

The facts brought out at the hearing included:

—The appellant in 1973 had acquired Pembina for $67,000 and derived rent therefrom upon its use by Carlson for business purposes.

—The above rental income was used by the appellant to pay the mortgage on the property.

—The appellant had taken out a loan for $21,000 from Carlson in order to purchase the property.

—The appellant reported the profit (loss) on this rental income in her income tax returns.

—On December 31,1974, the appellant transferred Pembina to C JT T personally for a stated amount of $142,000; C J T in turn transferred it to Carlson on the same day.

— In her 1975 income tax return, the appellant declared a taxable capital gain of $37,500 (50% of $142,000 - $67,000) with regard to the Pembina Sale.

It was the testimony of the appellant that she had obtained separate and independent legal advice during the above transactions and that:

—she had wished to build up a small equity of her own outside of the control of C J T;

—she has agreed to transfer Pembina to C J T in 1974 only on condition that Thatcher be transferred to her;

—she had declared capital gain on the transfer of Pembina and paid tax thereon in the appropriate year;

—due to unforeseen difficulties, this latter transfer had not occurred until 1976;

—on December 31,1974, however, she had accepted from C J T a demand note for $74,000 as security for the agreed upon transfer of his one-half interest in Thatcher. This note was part of the settlement for Thatcher when that was completed in 1976.

Argument

Counsel for the appellant dealt with the matter on the assumption that the appellant could challenge the validity of the assessments of C J T:

1973 and 1974—Since the evidence showed that during both years the appellant was the owner of Pembina, any income from rental or from the sale of the property is that of the appellant, as already declared by her in her tax returns.

1975—The appellant had completed her part of the responsibility for the transfer of Thatcher on December 31, 1974 and no matter what the determination of the balance of the appeal, she should not be held liable for any tax originally assessed against C J T for the period after that date, which she regarded as the date of transfer of Thatcher.

Counsel for the respondent supported the elimination of everything to do with the Pembina property from the appellant’s returns for the years involved, and including it in the income of C J T by proposing that at all times Pembina was the property of C J T and never that of the appellant. The major item of evidence upon which this conclusion was based was that the down payment of $21,000 for the purchase came from company funds—and when Pembina finally became the property of the Company, this amount ($21,000) was charged against the shareholders’ loan account of C J T. Counsel simply disagreed with any suggestion that the “transfer” of Thatcher took place in 1974 rather than in 1976.

Findings

In my view, the evidence indicates quite clearly that the property on Pembina (whatever its use, and from wherever its purchase was funded) belonged to the appellant from the time of its purchase in 1973 until its sale to C J T on December 31, 1974. It was in anticipation of proving this point (which the Board has accepted) that counsel for the appellant argued that subsection 160(2) should not be construed in such a way as to deny to this appellant the right to challenge the fundamental basis of the assessment now held to be her responsibility to pay. In effect, the appellant has always been willing to pay the tax associated with transactions relating to Pembina; she simply objects to paying it calculated in an improper process—that is flowing first to C J T as his liability, and then to herself under subsection 160(2).

This very point was touched upon in Maria Elizabeth Rafael v MNR, [1978] CTC 2398; 78 DTC 1300, but the Board was not called upon therein to make a specific decision on it. In Rafael (supra), the Board concluded that there had not been a transfer, and accordingly the Minister’s assessment under section 160 was ill founded. In the instant matter, however, the Board does not accept the argument of counsel for the appellant that the transfer of Thatcher took place on December 31,1974 rather than in 1976, as stated by the responent. There is certainly some limited physical evidence to support the contention of the appellant that the transfer to her from C JT T of Thatcher was the quid pro quo for the transfer from her to C J T of Pembina, but the simple fact is that it was not done, and what she received for the transfer of Pembina on December 31, 1974 was a promissory note for $74,000, not the transfer of Thatcher. Therefore, to whatever degree it may prove significant to the Minister’s position, there was a transfer of property having a value in excess of $32,957.22 from C J T to his spouse in 1976, at a time when according to the September 12, 1977 assessments against him, income tax of $32,957.22 was owning by C J T.

Both counsel proposed that while section 160 of the Act provided a method for the Minister to collect tax, the only mechanism open to him in order to do so was to issue an assessment under subsection (2) which reads:

The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provision of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

I would suggest, however, that a solid argument can be made that it is within the power of the Minister to proceed through normal legal channels to collect thereon, without issuing an assessment. Accordingly, as I see it, the Minister implicitly or explicitly elects either to proceed under subsection 160(1) through normal legal channels, or under subsection 160(2) by way of direct assessment against the alleged transferee. The assessment required by subsection 160(2) is precisely that—it is not simply a notice of assessment virtually demanding payment and no more, a process more Suitable under subsection 160(1). In issuing the notice of assessment dated January 20, 1978, the Minister “assessed” this appellant for an “amount payable” under subsection 160(2), which must have been equated to any amount that the transferor was liable to pay under this Act on the day of the transfer as detailed in subparagraph 160(1)(d)(i). It is interesting to note that the assessment contains no reference to particular taxation years, or even to the related assessments of C J T.

As noted earlier, it has been established to my satisfaction that on the day of the transfer, C CJ T was not liable to pay all of the amount in question in this appeal since the income upon which it was calculated (at a much later date as a liability of C J T) was not all income for which he was responsible. It was argued by counsel for the respondent that as of January 20, 1978, C J T was liable for the amount of tax in question since the period for appeal from his own September 12, 1977 assessments had elapsed—notwithstanding any proposal that he might have wrongly assessed. I fail to see, however, how such an incorrect assessment of a transferor (valid against him simply by virtue of the passage of time) can become a correct assessment by implication—subject to no challenge—against a transferee. In my view, the Minister does not fulfill the term “assess” by merely issuing a notice of assessment against a transferee, the Minister in fact must truly “assess” that party and, in so doing, make available to that party all the regular avenues for objection and appeal.

Summary

It is open to a transferee assessed under subsection 160(2) of the Act to challenge the bona fide of the Minister’s claim that the liability for tax of the transferor actually existed at a particular point in time. The assessed transferee has available all the rights of any taxpayer, including the opportunity, indeed the obligation, to dislodge the basis for the liability, not merely to challenge the mechanics of the assessment of the transferor. While the basis for the “Notice of Assessment’’ to a transferee may be the earlier “Notice of Assessment” to the transferor, the basis of an “assessment” of the transferee must be the actual, established and sustainable liability for the tax itself.

Decision

The appeal is allowed in part in order to delete that portion of the assessment related to the taxation years 1973 and 1974 arising from any transactions in connection with the Pembina Highway property. The matter is referred back to the respondent for reconsideration and reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.