Hamlyn T.C.J.:
1 Both appeals involve common facts and were therefore heard together.
Facts
2 On March 11, 1992, David Brown transferred ownership of his home to his mother Betty Brown (the Appellant) for no consideration. Pursuant to section 160 of the Income Tax Act (the “ITA”), the Appellant was assessed as being liable to pay $23,200.11 representing federal and provincial income taxes and Canada Pension Plan contributions owing by the transferor, David Brown. The Respondent states that at the time of the transfer of the property the transferor had equity in the property of not less than $23,200.11. The Appellant was also assessed as being liable for $3,717.96 in respect of the transfer of the property pursuant to section 325 of the Excise Tax Act (the “ETA”). This figure comprised of $2,219.30 in net taxes owing (GST) plus $717.16 in accrued interest and $781.50 in accrued penalties.
3 The Appellant argues that she paid for the entirety of the house. In her Notice of Appeal she provides that the home was purchased for $156,000.00 on November 15, 1990. The Appellant put approximately $25,000.00 down as a down payment and a mortgage for the balance of $125,891.00 was assumed by the transferor. The transferor also assumed a vendor-take-back mortgage for $6,000.00. The Appellant provided all of the payments on the mortgage from the date of purchase until the property was transferred to her name. When the property was transferred to the Appellant she also assumed the remainder of the first mortgage on the property and paid in full the second mortgage owing on the property.
Significant Evidence and Admissions at Trial
4 At the time of the transfer, the fair market value of the property was not less than $156,000.00.
5 The Appellant now is a 73 year old widow who over the years advanced some monies and loaned other monies to her son. The loans were without benefit of any written agreement or contract and loaned on the basis that he (the son) would repay when he could.
6 In relation to the subject property the Appellant's position was the monies were all loaned by the Appellant to her son.
7 While on other occasions she gifted monies to her son (see exhibit A-5), she stated overall her intention at the time of this property purchase was to loan monies and not gift monies to her son to purchase the property as a home; she said he was to repay those sums. Moreover, at the time of the purchase, she believed he had the capacity to repay the monies.
8 She further confirmed she made all the mortgage payments throughout her son's period of ownership of title.
9 During the period of time her son's title ownership, her son was experiencing significant financial difficulties and the Appellant became concerned about her investment in the subject property in that she believed the property was hers because she put all the money into it. As a consequence, she saw a lawyer and had her son transfer the property to her.
10 Throughout the period the property was in the title of her son, the son paid the Appellant back $3,000.00 to $4,000.00.
Issue
11 The Appellant only ‘takes issue’ with the assessment pursuant to section 160 of the ITA and section 325 of the ETA in respect of the transfer of the property.
12 Did the Appellant have part or all of the equitable interest in the property so that only bare legal title without value was transferred to her by her son David Brown?
Analysis
13 Paragraph 160 of the ITA prevents taxpayers from making themselves ‘judgment proof’ by transferring their property to non-arm's length persons. Where a taxpayer with tax liability has transferred property in a non-arm's length transfer, the transferee is liable for the taxes owed by the transferor. The transferee's liability is only up to the amount of the gift portion of the value of the property which they received (i.e. fair market value - consideration given) or the actual tax liability of the transferor, whichever is less.
14 In Trinka Holdings Inc. v. R., [1996] G.S.T.C. 10 (T.C.C.), Bowman J. explained the purpose of section 325 of the ETA as follows at page 10-2:
Section 325 of the Excise Tax Act performs essentially the same function under that Act as that performed by section 160 under the Income Tax Act. Where a non-arm's length transfer of property is made the transferee becomes jointly and severally liable with the transferor for the latter's liability under the Excise Tax Act for the reporting period that includes the date of transfer and for any prior reporting period of the transferor, to the extent of the value of the property transferred less any consideration given for it and less any amounts assessed against the transferor and owing under subsec. 160(2) of the Income Tax Act in respect of the same transfer.
15 The Appellant is not challenging the assessments made against her son - the transferor - for taxes owing. The Appellant is only arguing that the transferor had no equity in the property, therefore the transfer was only in respect of the bare legal title which in itself had no value. Thus, the Appellant did not receive any value from the transferee and therefore should not be liable for the transferor's tax owing.
Legislation
16 The relevant sections of the Income Tax Act are:
251(1) Arm's length — For the purposes of this Act,(a) related persons shall be deemed not to deal with each other at arm's length; and
(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.
and160(1) Tax liability re property transferred not at arm's length — 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(c) a person with whom the person was not dealing at arm's length,
(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.
17 The relevant sections of the Excise Tax Act (GST portions) are:
126(1) Arms' length — For the purposes of this Part, related persons shall be deemed not to deal with each other at arm's length and it is a question of fact whether persons not related to each other were, at any particular time, dealing with each other at arm's length.
and325(1) Tax liability re transfers not at arm's length — Where at any time a person transfers property, either directly or indirectly, by means of a trust or by any other means, to
(c) another person with whom the transferor was not dealing at arm's length, the transferee and transferor are jointly and severally liable to pay under this Part an amount equal to the lesser of
(d) the amount determined by the formulaA-B
whereA is the amount, if any, by which the fair market value of the property at that time exceeds the fair market value at that time of the consideration given by the transferee for the transfer of the property, and
B is the amount, if any, by which the amount assessed the transferee under subsection 160(2) of the Income Tax Act in respect of the property exceeds the amount paid by the transferor in respect of the amount so assessed, and
(e) the total of all amounts each of which is(i) an amount that the transferor is liable to pay or remit under this Part for the reporting period of the transferor that includes that time or any preceding reporting period of the transferor, or
(ii) interest or penalty for which the transferor is liable as of that time,
Conclusion
18 The Appellant loaned the purchase money to her son to buy the property in question.
19 The Appellant received, during the period the son was in title, $3,000.00 to $4,000.00 on account of funds loaned to the son to purchase the property.
20 From this evidence at the time of transfer by the son to the Appellant, I find the son's equity in the property was $4,000.00, that is, monies paid back to him on the loan.
Decision
21 Both appeals are allowed and referred back to the Minister for reconsideration and reassessment on the basis that at the time of the transfer of the property the transferor had equity in the property of $4,000.00 and the consideration given by the Appellant for this equity was nil.
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