Date: 20001117
Docket: 2000-1567-GST-I
BETWEEN:
SYLVIA HENDERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Thunder Bay, Ontario on October 16, 2000.
ISSUE
[2] The issue in this appeal is whether the Appellant, as the spouse of Brian Henderson ("Brian"), is, pursuant to subsection 325(1) of the Excise Tax Act ("Act"), liable to pay a certain amount of Goods and Services Tax ("GST") assessed against Brian because of certain transfers of real estate which Brian made to the Appellant.
FACTS
[3] The material facts are as follows.
1. The Appellant was at all material times an individual resident in Thunder Bay, Ontario and the spouse of Brian.
2. Brian Henderson's Wheel Alignment and Service Centre Limited ("Corporation") was at all material times a Corporation carrying on an Esso Dealership in Thunder Bay.
3. Brian, at all material times, was an individual resident in Thunder Bay, Ontario. He was the principal shareholder of the Corporation as well as its President and General Manager. He was certainly the controlling mind behind the Corporation and managed all aspects of the Corporation's business. He was also a director.
4. Prior to December 15, 1992 the Appellant and Brian owned two properties as joint tenants, namely, (a) real property located at 641 Thistle Crescent ("Thistle property"); and (b) real property located in the Township of Shuniah ("Shuniah property").
5. The Corporation was having financial difficulties in 1992 and also ran into a dispute with Esso. As a result of this dispute, Esso terminated the Dealership agreement and evicted the Corporation from its business premises on or about January 23, 1993.
6. Brian was assessed a director's liability in the amount of $73,718.82 by a Revenue Canada assessment dated August 21, 1997 pursuant to subsection 323(1) of the Act in respect of a failure by the Corporation to remit net tax as required under subsection 228(2) of the Act.
7. On December 9, 1992 Brian and the Appellant transferred the Thistle property to the Appellant solely (Exhibit A-1) and on the same day Brian and the Appellant transferred to the Appellant solely the Shuniah property (Exhibit A-3).
8. On or about March 5, 1998, the Minister issued a Notice of Assessment, Third Party, against the Appellant, for the amount of $68,575.96, stating the following particulars in the Assessment, allegedly calculated as of December 15, 1992:
(a) 641 Thistle Crescent Property
(i) property value $130,000.00
(ii) mortgage outstanding 101,189.12
(iii) consideration 2.00
(iv) benefit received by Appellant $ 14,403.44
(b) Shuniah Township Property
(i) property value $140,000.00
(ii) mortgage outstanding 22,288.90
(iii) consideration 2.00
(iv) benefit received by Appellant $ 58,853.55
8. At the hearing, counsel for the parties indicated that there was no longer any dispute with respect to the figures mentioned above with the exception of the value of the benefit received by the Appellant.
9. With respect to the Shuniah property, subsequent to the date of the transfer mentioned above, the Appellant placed a mortgage on the said property in an amount of $98,000.00 in favour of the Bank of Montreal.
APPELLANT'S SUBMISSIONS
[4] Counsel for the Appellant submits that in essence Brian had by various loans and mortgages placed on the two properties essentially exhausted his equity interest therein and that when the transfers were made on December 15, 1992 the Appellant received no benefit, the said loans having provided funds which were used to pay off the Corporation's indebtedness. In this regard counsel for the Appellant stated as follows:
Mr. and Mrs. Henderson are of the view that 50 per cent of the property is mine and 50 per cent of it's yours. My 50 per cent has gone in finance to keep this business afloat and, as a result, Mr. Henderson was of the view that his 50 per cent component, which had been mortgaged to the hilt, was necessarily of zero value and, as a result, he transferred it to his spouse as she indicated in testimony because of the threat that necessarily there was some disruption within the matrimonial home regarding his use of this particular property.
[5] Counsel stated further as follows:
The alternative argument, if Your Honour is not prepared to accept the notion that there is this equity component that exists outside of what would be viewed as some form of judicial notice of matrimonial property law and the spouses are equally entitled to all assets regardless of ownership at the outset, then certainly, Your Honour, the Family Law Act provides with respect to the consideration of jointly-owned family property, and I know, Your Honour, never do I like to introduce elements of provincial law when dealing with matters of federal law such as the Excise Tax Act and the Income Tax Act, but Section 4(1) of the Family Law Act does talk about net family property. It doesn't talk about who brings it into the marriage and it doesn't talk necessarily about who owns it at the end, because all it refers to is the appreciative and equal increase in value of property owned by each of the spouses, which necessarily is somewhat consistent with Mr. and Mrs. Henderson, the idea that 50 per cent of the equity is mine and 50 per cent of the equity is yours and mine has been mortgaged to finance the business and therefore I'm transferring my half interest to you, which necessarily is worth nothing in my mind, or in the mind of the transferor.
If Your Honour is not prepared to accept that argument, I would like to refer Your Honour to page 4 of the Notice of Appeal, which is page 9, and I would like to necessarily ask Your Honour to consider this one notion. With respect to paragraph (b) of paragraph 9 dealing with the so-called lake property, we had acceded to a property value of $140,000.00, and it is stipulated that at the time of the transfer the mortgage outstanding was $22,288.00. I think the alternative argument that Your Honour may be prepared to accept, if he is prepared to dismiss the equity component, is that within three months thereafter there is a mortgage on that property, on the lake property, which is reflected by Appellant's Exhibit A-4 of $98,000.00.
In other words, Your Honour, the true equity in respect of this lake property is not the difference between $140,000.00 and $22,00.00, but in fact it is reflecting that ... the actual equity in this particular property is about $42,000.00, the difference being the market value as stipulated of $140,000.00 minus the $98,000.00 mortgage that's registered on that property some three months after the date of the transfer. So the alternative argument that I would like Your Honour to consider is accepting the Thistle Crescent property, if you are prepared to dismiss the equity component, then I think that the numbers indicated in paragraph (a) are accurate, if you are prepared to dismiss the equity, Your Honour. That's subparagraph 9(a) and subparagraph (4) is benefit received by the taxpayer, and if Your Honour is prepared to dismiss the equity component, I believe that that number would be accurate insofar as this particular aspect of Section 325 of the Excise Tax Act is concerned.
...
My argument though in the alternative, Your Honour, is with respect to the lake property or the Shuniah Township property, and that is reflected in paragraph (b) of point 9, or paragraph 9, and I would submit to Your Honour that the property value as stipulated and as accepted is $140,000.00, but the mortgage outstanding has to take into account the $98,000.00 mortgage registered on the property three months after the fact, given the fact that Mrs. Henderson indicated that that was anticipated as part of the transaction as a whole, and with that situation, Your Honour, the mortgage outstanding should not be indicated as $22,288.90, but in fact should be reflective of the $98,000.00, which means that the difference or the benefit received by the taxpayer would be necessarily the difference between $140,000.00 and $98,000.00 which is $42,000.00 and of which one-half of that would be approximately $21,000.00.
So on page 5 the benefit received by the taxpayer, I submit, Your Honour, in the alternative is not $58,853.55, but approximately $21,000.00 on the basis that the mortgage registered in March of 1993 was contemplated as part of the transfer of property that took place on December 9th, 1992.
RESPONDENT'S SUBMISSIONS
[6] Counsel for the Respondent submits that there is no evidence to support the equity theory and the corollary thereof that no benefit was actually conferred. Counsel for the Respondent also submits that there was no marital property settlement as contemplated in subsection 325(4) of the Act and that the marital property deemed division argument cannot succeed. As to the Shuniah property and the argument related to the subsequent mortgage, counsel for the Respondent stated as follows:
My learned friend asks you to consider the mortgage that was subsequently rendered on the property. I submit after the transfer, the value of the mortgage and what that couple did with the property after the transfer is completely irrelevant. There is no case law that suggests – first of all, we are dealing with consideration, and what we are asking the Court to do is somehow make that consideration at the time of the transfer, even though it occurred after the transfer. So, some sort of document or charge that actually occurred after the transfer can't become part of the consideration and it can't become part of the consideration because it was afterwards, but, more importantly, I'm not exactly sure what that would establish in any event. The witness stated that the evidence was that the property or that the mortgage was jointly held. This was just another attempt to mortgage the property jointly, and it doesn't affect the value of the consideration given that frankly it's completely irrelevant.
ANALYSIS AND DECISION
[7] I cannot accept the equity argument of counsel for the Appellant. The mortgage debts were on the entire properties not on Brian's one-half. The evidence does not refute this. It may have been the understanding of the Appellant but it is simply not supported by the evidence especially by the written evidence.
[8] Further, I cannot accept the argument based upon division of matrimonial property as it is clear that the provisions of subsection 325(4) of the Act were not met.
[9] However I am prepared to accept that since the $98,000 mortgage placed on the Shuniah property was, according to the testimony, clearly contemplated at the time of the transfer, it should be taken into consideration in determining the benefit to the Appellant with respect to that property. Moreover the $98,000 was used to pay the Corporation's overdraft at the Bank of Montreal under a threat from said Bank to foreclose on the Thistle Property. Thus it partakes of the same nature as the mortgage owing on the Thistle property, which the Minister has allowed in arriving at the benefit received on that property. Consequently the benefit should be one-half of $140,000.00 less $98,000.00 less $2.00 namely $20,999. With respect to the Thistle property in my opinion the Minister has properly calculated the benefit received by the Appellant as $14,403.44.
[10] Consequently the appeal is allowed on the following basis. The benefit received by the Appellant on the Thistle property was $14,403.44 and the benefit received by the Appellant on the Shuniah property was $20,999.
[11] For various reasons, including in particular the fact that the results are mixed, there shall be no order as to costs.
Signed at Ottawa, Canada, this 17th day of November, 2000.
"T. O'Connor"
J.T.C.C.