Tax Court of Canada Judgments

Date: 19990630

Docket: 98-2423-IT-G

BETWEEN:

JOSEPHINE FILIPPAZZO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] This is an appeal from a Notice of Assessment dated September 11, 1996 assessing Josephine Filippazzo (the Appellant) regarding transfer of property from her husband, Carlogero Filippazzo.

[2] By Notice of Assessment dated September 11, 1996, the Appellant was assessed pursuant to section 160 of the Income Tax Act (the “Act”) in the amount of $75,000 in respect of a property in the Township of Innisfil, County of Simcoe, in the Province of Ontario. The Minister of National Revenue assumed that the amount of $75,000 was the fair market value of the property at the time of transfer.

AGREED STATEMENT OF FACTS

[3] “For the purposes of this appeal, the Appellant and the Respondent submitted the following agreed statement of facts.

FACTS

Background

1. At all material times, the Appellant was the spouse of Carlogero (or Carl) Filippazzo.

2. On August 14, 1990, the Minister of National Revenue (the “Minister”) assessed Carlogero Filippazzo in an amount of $105,378.73 under subsection 227.1(1) of the Income Tax Act (the “Act”) in respect of the 1987 and 1988 employee source deductions tax liability of Toronto Excavating and Sodding Ltd. A copy of the August 14, 1990 Notice of Assessment is located at Tab 1 of the Joint Book of Documents.

3. A certificate (the “Certificate”) for the amount of the liability of Toronto Excavating and Sodding Ltd. (the “Corporation”) had previously been registered in the Federal Court on March 30, 1990 and execution for the amount of the liability was returned unsatisfied on May 30, 1990. A copy of the Certificate is located at Tab 2 of the Joint Book of Documents.

4. On June 18, 1992, the Minister reassessed Carlogero Filippazzo to reduce the amount previously assessed under subsection 227.1(1) of the Act to $63,296.58. A copy of the Notice of Reassessment is located at Tab 3 of the Joint Book of Documents.

5. An application by Carlogero Filippazzo for an Order extending the time within which to serve a Notice of Objection to the June 18, 1992 subsection 227.1(1) reassessment was dismissed by this Court. A copy of the Order of the Honourable Judge Taylor signed November 9, 1994, is located at Tab 4 of the Joint Book of Documents.

6. The Appellant not dispute the correctness of the amounts of unremitted source deductions which were assessed against Toronto Excavating and Sodding Ltd.

7. On September 14, 1990, Carlogero Filippazzo received a Statement of Account indicating that the amount of $106,773.38 was owing to Revenue Canada, Taxation. A copy of the Statement of Account is located at Tab 5 of the Joint Book of Documents.

The Transfer of the Property

8. On August 2, 1989, Carlogero Filippazzo transferred property described as Parcel 101-1, Section M-15, being Lot 101, Plan M-15, Township of Innisfil, County of Simcoe (the “Innisfil Property”) to the Appellant for $2.00 and natural love and affection. A copy of the Transfer/Deed of Land and of the Parcel Register are found at Tabs 6 and 7, respectively, of the Joint Book of Documents.

The Assessment at Issue

9. On September 11, 1996, the Minister assessed the Appellant under subsection 160(1) of the Act in the amount of $75,000 in respect of the transfer of the Innisfil Property by Carlogero Filippazzo to the Appellant on or about August 2, 1989 for $2.00 and natural love and affection. A copy of the Notice of Assessment with the attached Reconciliation Schedule is located at Tab 8 of the Joint Book of Documents.

10. On June 18, 1998, the Minister confirmed the assessment of the Appellant. A copy of the Notification of Confirmation is located at Tab 9 of the Joint Book of Documents.

The Innisfil Property and Surrounding Properties

.....

17. For property tax purposes, the Innisfil Property and other properties listed below (the “Surrounding Properties”) were assessed at the following figures in 1989 and 1990:

LOCATION	1989	1990
Innisfil Property (lot 101)	$389	$389
1001 Corner Avenue	$247
1015 Corner Avenue	$247
1042 Gilmore Avenue	$168
1338 Killarney Beach Road (lot 105)	$211	$495
Lot 102	$211	$211
Lot 110	0	0

Lot 110 was exempt from assessment in 1989 because it was government owned but had it been assessed it would have been assessed with a value of $184.

A copy of a map setting out the locations of the above noted properties is found at Tab 10 of the Joint Book of Documents.

18. On August 1, 1995, a private connection to sewage works was made available to the Innisfil Property and the Surrounding Properties.”

ADDITIONAL EVIDENCE ADDUCED AT TRIAL

[4] Upon acquisition by the Appellant’s spouse, the subject property, because of surrounding terrain and drainage, was primarily under water. The Appellant’s spouse described the property as swampy and filled with trees and tree stumps. To make the property useful for the Appellant’s purposes, the Appellant, through her spouse, brought in an estimated one thousand loads of fill.

[5] Prior to this land reclamation (early 1980s) the Appellant’s spouse received an offer to purchase the property for $5,000. After reclamation, (1995), the Appellant received an offer to purchase the property for $13,000, and after municipal sewer and water service installation (1995-1996) the Appellant received another offer to purchase for $15,000.

[6] The Respondent called one witness who was qualified to express opinions as a real estate appraiser. This witness was employed by the Canada Customs and Revenue Agency as a senior appraiser. His estimate of market value of the subject property was $75,000 as of August 1989.

ISSUE

[7] The issue is whether or not the Appellant is liable to pay the amount of $75,000 pursuant to section 160 of the Act in respect of the transfer of the Innisfil Property to the Appellant.

THE APPELLANT’S POSITION AT TRIAL

[8] “Application of Subparagraph 160(1)(e)(ii) to the Facts in the Present Circumstances.[1]

The first question is whether Carlogero Filippazzo was liable to pay an amount under the Act “in” his 1989 taxation year or any preceding taxation year. Subsection 227.1(1) of the Act, which is set out in Tab 6 of the Appellant’s Book of Authorities, provides that where a corporation has failed to deduct or withhold an amount as required by section 153 of the Act, the directors of the corporation at the time the corporation was required to deduct, withhold or remit the amount are jointly and severally liable to pay such amount along with any related penalties or interest. The failure to deduct and remit source deductions in the present circumstances by Toronto Excavating & Sodding Ltd. apparently took place in the 1987 and 1988 taxation years and it is not disputed that Carlogero Filippazzo was a director of the corporation at such time.

Subsection 227.1(2) of the Act, however, provides that a director is not liable under subsection 227.1(1) of the Act unless one of the events described in any paragraphs 227.1(2)(a), (b), or (c) of the Act have occurred. In the present circumstances, the required events described under 227.1(2)(b) and (c) never did occur and the required events described under paragraph 227.1(2)(a) were only complete as of May 30, 1990. As a result, it is clear that Carlogero Filippazzo was not liable “in” a taxation year until the events described in paragraph 227.1(2)(a) were completed on May 30, 1990. Section 227.1 does not provide any type of language which would deem a director’s liability to be retroactive to the time of the failure to remit under section 153.

The second question to be answered is whether Carlogero Filippazzo was liable to pay any amount under the Act “in respect of” his 1989 taxation year or any preceding taxation year. As described above, the historical context of subsection 160(1) of the Act, the context from the existing provisions of the Act and the context provided from Revenue Canada’s assessment and collection documentation clearly support the position that the reference to “in respect of a taxation year or any preceding taxation year” in subparagraph 160(1)(e)(ii) of the Act is a reference to the tax payable on the income of the transferor for a particular taxation year that is assessed through the section 152 assessment procedure. No evidence has been presented in the present circumstances that Carlogero Filippazzo was ever liable for any amount other than in respect of the director’s liability assessments.”

THE RESPONDENT’S POSITION AT TRIAL

[9] Counsel for the Respondent argued that the Minister correctly assessed the Appellant in accordance with section 160 of the Act, as Carlogero Filippazzo transferred the Innisfil Property to the Appellant, with whom he was not dealing at arm’s length, for consideration that was below fair market value and Carlogero Filippazzo had an outstanding liability under the Act in the 1989 and preceding taxation years.

ANALYSIS

[10] Section 227.1 of the Act makes the directors of a corporation jointly and severally liable in specified circumstances for the withholding tax obligations imposed on the corporation. Subsection 227.1(2) of the Act requires certain steps to be taken by the Minister in respect of the corporation’s liability to pay an amount under subsection 227.1(1) of the Act in order for a director to become jointly and severally liable with the corporation. Section 227.1 of the Act reads as follows:

227.1 (1) Liability of directors for failure to deduct – Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

(2) Limitations on liability – A director is not liable under subsection (1), unless

(a) a certificate for the amount of the corporation’s liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;

(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation’s liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation’s liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.

[11] Where a transferor has transferred property to his spouse the transferor and transferee are jointly and severally liable for certain taxes for which the transferor would otherwise be liable.

[12] Subsection 160(1) of the Act provides:

160. (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

the person’s spouse or a person who has since become the person’s spouse,

a person who was under 18 years of age, or

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 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.

[13] Specifically, paragraph 160(1)(e) provides that in the case of any transfer of the type specified, the transferor and transferee are jointly and severally liable for the income tax liability of the transferor at the date of the transfer or for the portion thereof equal to the difference between the value of the property transferred and the consideration paid therefor, whichever is less. This joint liability extends to liability for any source deductions which the transferor is liable to remit in that or a preceding year. The following commentary is from Stikeman[2] and I conclude it accurately reflects the effect of subparagraph 160(1)(e)(ii) after the 1987 amendment.

“After November 12, 1981 but prior to December 17, 1987, the joint and several liability under subparagraph 160(1)(e)(ii) applied in respect of amounts which the transferor was liable to pay in respect of the taxation year in which the property was transferred or in respect of any preceding taxation year. Effective December 17, 1987, the joint and several liability also applies in respect of amounts which the transferor was liable to pay in the taxation year or in any preceding taxation year. This amendment appears to be intended to reach amounts such as deductions at source that a transferor was liable to remit in the year of the transfer or any preceding year.”

[14] I find subparagraph 160(1)(e)(ii) also encompasses the facts of this case. Carlogero Filippazzo, as a director of the corporation, had an outstanding liability under section 227.1 of the Act for the 1989 and preceding taxation years of not less than $63,296.59 (the “amount”) as of June 18, 1992. The time the liability of Carlogero Filippazzo arose on the date of the failure to remit source deductions as required by the Act in 1987 and 1988 and not the date the certificate was registered in the Federal Court. I also conclude, section 160 of the Act is intended to include the liability for failure to remit source deductions in the taxation year in which the property was transferred or any preceding taxation years. I therefore conclude Carlogero Filippazzo, the transferor, was liable to pay the amount under the Act in respect of the 1989 taxation year and the preceding taxation years. The Appellant is also liable for tax under paragraph 160(1)(e) of the Act as a transfer had been made to her as the spouse of the transferor.

VALUATION

[15] As to the property valuation at the date of transfer, after full cross-examination of the Respondent’s real estate appraiser, I conclude the witnesses’ appraisal was incomplete, superficial and flawed in respect of the subject property. In summary, the appraisal was strong on form and light in substance. In particular, registration documents in relation to one property used as a comparative disclosed significant evidence that was discarded in the appraisal leading the Court to the conclusion the comparable value used was in question.

[16] I have given little weight to the Respondent’s valuation appraisal. What the Court is left with is the evidence of Carlogero Filippazzo indicating in 1980 before the land reclamation the property was at least worth $5,000 but after the reclamation (1995, 1996) the property was worth between $13,000 and $15,000.

[17] On the evidence before the Court I therefore conclude and find the property had a fair market value of $10,000 as of August 2, 1989.[3]

CONCLUSION

[18] Carlogero Filippazzo, the Appellant’s spouse, as a director of the corporation, is liable for the unremitted source deductions of the corporation for 1987 and 1988 under section 227.1. At the time the subject property was transferred both the Appellant and her spouse became jointly and severally liable for the tax liability under subparagraph 160(1)(e) subject to the limitations as found in subsection 160(1).

DECISION

[19] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is liable under subparagraph 160(1)(e). However, the subject property transferred as of August 2, 1989 had a fair market value of $10,000.

[20] The Appellant is entitled to her costs.

Signed at Ottawa, Canada, this 30^th day of June 2000.

"D. Hamlyn"

J.T.C.C.

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