Date: 20000724
Docket: 98-1604-IT-G
BETWEEN:
DOREEN WILLIAMS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This appeal arises from four assessments dated December 13, 1996 issued to the Appellant pursuant to subsection 160(1) of the Income Tax Act (the "Act").
[2] The parties at the commencement of the hearing filed the following Partial Agreed Statement of Facts:
Introductory Facts
1. The Appellant resides at 435 Georgian Bay Road, R.R.#1, Port Severn, Ontario, L0K 1S0.
2. By Notices of Assessment numbers 00318, 00319, 00320 and 00322, dated December 16, 1996 (the "Assessments"), the Minister of National Revenue (the "Minister") assessed the Appellant in the total amount of $332,669.67 pursuant to subsection 160(2) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the "Act").
3. The Minister confirmed the Assessments by Notice of Confirmation dated March 17, 1998.
4. The parties agree that the total amount for which the Appellant was assessed should be reduced by $124,669.67 which amount represents:
(a) a reimbursement of business expenses incurred by the Appellant on behalf of her spouse, Ronald Williams, and reimbursed to the Appellant by Environmental Technologies International Inc. ("ETI");
(b) payments to the Appellant from Broom Management Inc. ("Broom") on account of the Appellant's salary; and
(c) a repayment to the Appellant from Broom on account of a loan to Broom from the Appellant.
5. Accordingly, the total amount remaining in issue for the purposes of this appeal is $208,000.00 (the "Assigned Amount"). The parties agree the Assigned Amount is an amount to which Ronald Williams was entitled as compensation for services rendered by him to ETI on behalf of Cable Investments Ltd. ("Cable") or Broom. The cheques in respect of the Assigned Amount are listed in Schedule A attached hereto.
6. The parties further agree that the cheques listed in Schedule A were either paid by ETI directly to the Appellant and deposited in her bank account (the "Appellant's Account"), or paid by ETI to Ronald Williams, endorsed over to the Appellant and deposited in the Appellant's Account.
7. The parties agree that the aggregate of all amounts which Ronald Williams was liable to pay under the Act in or in respect of the taxation years in which the Assigned Amount was transferred by Ronald Williams to the Appellant or in any preceding taxation year was not less than $1,092,493.00, inclusive of federal tax, interest and penalties accrued thereon.
Facts
8. At all material times, the Appellant resided at 143 Princess Anne Crescent, Etobicoke, Ontario. The Appellant and Ronald Williams occupied a cottage residence from time to time during the 1991 to 1996 taxation years, which property is municipally known as 435 Georgian Bay Road, R.R.#1, Port Severn, Ontario.
9. At all material times, Ronald Williams was the spouse of the Appellant.
10. Between February 1990 and April 1996 (the "Transfer Period"), Ronald Williams provided management consulting services to ETI on behalf of Cable and subsequently on behalf of Broom as an employee of Cable and subsequently as an employee of Broom, as set out in further detail below.
11. During the Transfer Period, Ronald Williams did not maintain a personal bank account. He did, however, maintain a joint bank account with the Appellant (the "Joint Account").
12. Mortgage payments in respect of the residence occupied by the Appellant and Ronald Williams were withdrawn from the Joint Account.
13. During the Transfer Period, Ronald Williams used the Appellant's credit cards for his business purposes and personal financial needs.
14. At all material times, the Appellant was the legal and beneficial owner of the residence at 143 Princess Anne Crescent, Etobicoke, Ontario, in which she and her husband resided.
15. At all material times, ETI was a public corporation which was incorporated under the laws of the province of Ontario and was not controlled directly or indirectly by Ronald Williams.
16. At all material times, Ronald Williams was the Chairman and Chief Executive Officer of ETI.
17. Pursuant to a management agreement between ETI and Cable, dated July 1, 1991, Cable agreed to supply management services and the services of Ronald Williams to ETI. As a result of this agreement, Cable was entitled to be paid management fees by ETI and Ronald Williams was entitled to receive a salary from Cable, as Cable's employee. In practice, Ronald Williams' salary was paid directly by ETI to either Ronald Williams or the Appellant.
18. At all times during which Cable supplied management services to ETI, Ronald Williams owned all of the outstanding shares of Cable.
19. Pursuant to an agreement dated September 1, 1994, Cable assigned its management contract with ETI to Broom. Broom thereby undertook to supply management services and the services of Ronald Williams to ETI. As a result of this agreement, Broom was entitled to be paid management fees by ETI and Ronald Williams was entitled to receive a salary from Broom, as Broom's employee. In practice, Ronald Williams' salary was paid directly by ETI to either Ronald Williams or the Appellant.
20. At all times during which Broom supplied management services to ETI, the shareholders of Broom were the Appellant, her son David and her daughter Susan.
21. At all times during which Broom supplied management services to ETI, Ronald Williams was the President and sole Officer of Broom.
22. During the course of providing management services to ETI on behalf of Cable and Broom, Ronald Williams travelled extensively in Canada and abroad.
23. Ronald Williams directed ETI to make cheques on account of his salary from Cable and Broom payable to the Appellant.
24. The Assigned Amount was deposited to the Appellant's Account. The Appellant's Account was in the sole name of the Appellant. There were no restrictions, as between the Appellant and the financial institutions at which the Appellant's Account was held, which affected the Appellant's ability to exercise control over the funds in the Appellant's Account.
25. The Assigned Amount was paid by or on behalf of Ronald Williams for the support of the Appellant and expenses associated with the residences occupied by the Appellant and Ronald Williams during the Transfer Period.
26. The household expenses for the Ronald and Doreen Williams family were the following, as set out in the household budgets found at Tabs 6, 10, 17, 25 and 34 of the Joint Book of Documents: $64,832.29 for the 1990 taxation year; $108,302.44 for the 1991 taxation year; $94,500.53 for the 1992 taxation year; $114,965.75 for the 1993 taxation year; and $96,890.96 for the 1994 taxation year, being $474,941.01 in the aggregate.
27. The total income, deductions and taxable income of the Appellant in the 1990 to 1996 taxation years was as follows:
|
Year |
Total Income |
Deductions |
Taxable Income |
|
1990 |
$33,149.16 |
$ NIL |
$33,149.16 |
|
1991 |
$71,774.64 |
$65,615.43 |
$ 6,159.21 |
|
1992 |
$12,727.62 |
$ NIL |
$12,727.62 |
|
1993 |
$ 513.29 |
$ 588.50 |
$ NIL |
|
1994 |
$54,071.88 |
$42,173.82 |
$11,898.06 |
|
1995 |
$25,496.56 |
$ 2,734.58 |
$22,761.98 |
|
1996 |
$31,370.86 |
$ 1.00 |
$31,369.86 |
|
Total |
$229,104.01 |
$111,113.33 |
$118,065.89 |
28. The total taxable income of Ronald Williams in the 1990 to 1995 taxation years, as reported in his income tax returns, was $547,750.00.
AGREED STATEMENT
OF FACT
July 5, 2000
REVISED SCHEDULE A
Date Cheque Number Amount
February 2/90 0795 $ 3,500.00
March 9/90 0844 $ 6,000.00
August 3/90 0945 $ 3,000.00
August 3/90 0946 $10,500.00
September 7/90 1005 $ 6,000.00
January 28/91 0082 $ 1,500.00
February 1/91 0090 $ 6,000.00
April 30/91 0230 $30,000.00
May 9/91 0279 $ 6,500.00
June 21/91 0385 $ 8,000.00
August 2/91 0427 $ 4,000.00
August 22/91 0460 $ 4,000.00
August 31/91 0517 $ 8,000.00
September 24/91 0576 $ 8,000.00
December 3/91 0730 $ 8,000.00
December 23/91 0840 $ 8,000.00
January 30/92 0899 $10,000.00
May 4/92 1196 $10,000.00
September 16/92 1637 $10,000.00
December 23/92 1888 $ 3,000.00
April 28/93 2201 $10,000.00
May 27/93 2278 $10,000.00
June 24/93 2287 $10,000.00
July 30/93 2438 $10,000.00
October 27/93 2710 $10,000.00
December 4/95 3848 $ 700.00
TOTAL $204,700.00
March 1/95 3149 $ 550.00
April 1/95 3270 $ 550.00
August 1/95 3626 $ 550.00
September 1/95 3692 $ 550.00
October 1/95 3755 $ 550.00
December 1/95 3822 $ 550.00
Total $3,300.00
Aggregate total $208,000.00
SIGNIFICANT VIVA VOCE EVIDENCE AT TRIAL
[3] The Appellant stated she was dependent on her spouse for support in that she did not earn sufficient funds on her own to support herself. The domestic expenses (disbursements) were itemized for 1990, 1991, 1992, 1993 and 1994. The domestic expenses were not itemized for 1995 and 1996 but the expenses were comparable.
[4] The Appellant also stated her own income, as declared on her T-1, reflected in 1991 a retiring allowance received and rolled-over into a RRSP and in 1994 a notional capital gain to increase the cost base of a capital asset.
[5] The Appellant had one bank account in her own name. In this account, she deposited the cheques made out to herself or her spouse. Both the Appellant's own funds and her spouse's funds were intermingled in her account. The Appellant paid the household expenses from this account and also paid for some of her spouse's expenses. The Appellant and her spouse also had a joint bank account set up by a bank, solely for the purpose of paying the mortgage on both the home and cottage.
[6] On cross-examination, the Appellant stated her spouse forwarded cheques to her for car allowances from ETI and that she deposited same in her account and that she paid from her account his car lease payments. The Appellant stated she was under no contractual obligation to make the car lease payments.
THE APPELLANT'S POSITION
[7] The cheques comprising the assigned amount ($208,000) which were received as salary by Ronald Williams and paid to the Appellant were paid in satisfaction of a legal obligation to support his household and his spouse during the transfer period or were paid for valuable consideration. The payment of the assigned amount by or on behalf of Ronald Williams to the Appellant did not constitute a "transfer of property" within the meaning of subsection 160(1) of the Act.
THE RESPONDENT'S POSITION
[8] The transfer of funds to the Appellant in the amount of $208,000 (the assigned amount) constituted a transfer within the meaning of subsection 160(1) of the Act.
ANALYSIS
[9] The relevant subsection of the Act reads as follows:
Where a person has, on of 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 year 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.
[10] In order for subsection 160(1) of the Act to apply, four conditions need to be met. First, there has to be a non-arm's length dealing; second, a transfer of property must occur; third, there must be an absence of consideration from the person who receives the property and forth, the transferor must be liable for tax the year in which the property was transferred or any preceding year.
[11] On the meaning of the word "transfer", I refer to the Exchequer Court decision in Fasken v. Minister of National Revenue, 49 DTC 491, in which Thorson, P. said at page 497:
The word "transfer" is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.
[12] Since the Appellant received money in her bank account, it is difficult to conclude that no transfer occurred unless the Appellant was acting as agent for Ronald Williams and from the evidence I cannot come to that conclusion. In White v. The Queen, 96 DTC 1552, a decision which bares similarities to the case at bar, I rejected the argument that there was no transfer to the Appellant. In White, supra, the Appellant submitted that the amounts deposited in a personal checking account was for the purpose of paying for her husband's business and personal bills as well as for certain living expenses for his family. In dismissing the Appellant's argument and appeal, I stated at page 1554:
Whatever agreement the parties may have had between them, in the absence of any proven grounds to bring the matter outside subsection 160(1) of the Act1, has no bearing whatsoever on the Minister of any other third party to the transfer. That some of the money had to have been used to support the Appellant's husband's affairs only lends credence to the view that the transfer was designed to evade the payment of outstanding taxes.
In summary, I conclude from the evidence, the personal checking account of the Appellant was set up to avoid the potential seizure of funds by Revenue Canada. The nature and character of the transfers were absolute vesting control in the Appellant and without contractual consideration.
___________________
1 See Sarraf et al. v. M.N.R., 94 DTC 1506, Bowman, T.C.C.J. at page 1508.
On the evidence in this case, I conclude a transfer of property occurred.
[13] The next question is therefore what was the value of the consideration, if any, given by the Appellant. A transfer without valuable consideration under section 160 of the Act has been equated with the concept of "unjust enrichment" by several courts. McArthur, J. of this Court reviewed the concept of "unjust enrichment" and legal obligation of family law regarding section 160 of the Act in Ferracuti v. The Queen, 99 DTC 194, and stated at page 198:
[20] The concept of unjust enrichment was considered by the Supreme Court of Canada in Pettkus v. Becker, [1980] 2 S.C.R. 834. In holding for the Respondent, Ms. Becker, the Court considered the services provided by Ms. Becker and fashioned the remedy of constructive trust. The Court held at page 847 that "The principle of unjust enrichment lies at the heart of the constructive trust". Dickson, J. further stated at page 848:
In Rathwel I ventured to suggest there are three requirements to be satisfied before an unjust enrichment can be said to exist: an enrichment, a corresponding deprivation and absence of any juristic reason for the enrichment.
[14] Judge McArthur found in Ferracuti that Mr. Ferracuti had a "juristic reason" to make some payments, such as mortgage interest, taxes, hydro, water and insurance. He had a legal obligation to support his family as set out in sections 30, 31 and 35 of the Ontario Family Law Act.
[15] Lamarre Proulx, J. of this Court has discussed valuable consideration in terms of payment on a "hypothec on a family residence" in Michaud v. R., [1998] 4 C.T.C. 2675. At paragraphs 19 and 20 she stated:
19 I consider that when the appellant's former spouse made the payments on the hypothec on the family house, which was the appellant's property, he was only performing a legal obligation, that of providing for the needs of his family by obtaining the housing it required. The appellant could have made these payments on the hypothec herself and her husband could have paid what the appellant undertook to pay. However, that is not how the family expenses were naturally distributed in this couple. In any case, this monetary distribution of the family expenses is not essential to my decision. While this case concerns a couple in which both spouses earned money, my decision would have been the same if only one of the two spouses earned the family income: a payment on a hypothec on a family residence is not in the nature of a transfer of property made without valuable consideration if the person making it does so in performing the legal obligation to provide for his or her family's needs.
20 I should add that it is when the evidence discloses that the payment on the hypothec was made in performing the legal obligation to provide for the family's requirements that it was made for valuable consideration within the meaning of s. 160(1) of the Act.
[16] In this appeal, the spouse directed ETI to make all cheques on account of his salary from Cable and Broom payable to the Appellant. The assigned amount was deposited to the Appellant's account. The assigned amount was paid by the Appellant for the support of the Appellant and expenses associated with the Georgian Bay cottage and the urban Etobicoke home. Once transferred, the Appellant exercised complete control and discretion over the funds. The Appellant's spouse made no third party household expenses payments.
[17] The Appellant maintains because of a shortfall in her income she looked to her spouse to meet the outstanding domestic expenditures. The Appellant provided some documentary evidence to support the expenditures. The expenditures as characterized were generally in quantitative excess of and beyond what one would normally perceive to be average household need expenses.
[18] The Appellant relied on the Family Law Act of Ontario to bolster her argument that her spouse supported her through a legislative obligation to provide her with support as she was a dependant and in need. It is to be noted the Family Law Act of Ontario states every spouse's primary obligation is to provide support for himself or herself and to the other spouse in accordance with need, to the extent that he or she is capable of doing so.
[20] In this tax appeal for the years 1990 through to 1996, when the Appellant's spouse had a tax liability of over one million dollars the Appellant was in receipt of total income of $229,104.01 and the aggregate of the household expenses was $474,941.01 for the years 1990 through to 1994. I conclude the assigned amount as a quantification of support based on need is in reality a quantification of convenience based on lifestyle between spouses living together with adequate independent means to meet their individual needs. More particularly, given this conclusion, I find that the transfer of the assigned amount was not made in the juristic sense of a support obligation and as a consequence the "assigned amount" was transferred without valuable consideration.
[20] This conclusion of a quantification of convenience is even more compelling given the efforts by the Appellant's spouse to divert his salary compensation from ETI to the Appellant's account without passing through his hands. This was so even though the bank insisted that a joint account of the Appellant and her spouse be set up from which the mortgage payments were to be made to the bank. The circumstances of the transfer are indeed suspicious leading to alternative possible conclusions as to the Appellant's spouse's intent.
[21] I therefore conclude the transfer of the assigned amount ($208,000) to the Appellant less $3,300 paid to the Appellant's account for reimbursement of car allowance[1] on behalf of her spouse (leaving a balance of $204,700) constituted a transfer without consideration within the meaning of subsection 160(1) of the Act.
DECISION
[22] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis as set forth in paragraph number four of the Partial Agreed Statement of Facts herein and on the finding the assigned amount is further reduced by $3,300 leaving an outstanding assigned amount balance of $204,700.
[23] The Respondent is entitled to her costs.
Signed at Ottawa, Canada, this 24th day of July 2000.
"D. Hamlyn"
J.T.C.C.