Date: 19980508
Docket: 96-1627-IT-G
BETWEEN:
MARY CHRISTENSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the Appellant is, pursuant to the provisions of subsection 160(1) of the Income Tax Act ("Act"), liable for the amount that High-line Drilling (International) Inc. ("High-line") is liable to pay under the Act in respect of her 1989 taxation year by virtue of the transfer to her of property described as 151 Wathaman Terrace ("property").
[2] Appellant's counsel said that the above issue raised three more focused issues, namely,
(a) Was it High-line who transferred the property to the Appellant?
(b) If the answer to (a) is yes, was the Appellant dealing not at arm's length with High-line; and
(c) If the answers to (a) and (b) are yes, was the fair market value of the property greater than the consideration given and, alternatively, was the liability of High-line as stated by the Minister of National Revenue ("Minister") correct?
FACTS:
[3] By virtue of admission in the pleadings, a company known as Albert Ethier Holdings Ltd. ("Holdings") was the sole shareholder of High-line. Albert Ethier ("Albert") was the sole shareholder of Holdings at all relevant times. Albert controlled Holdings and High-line at all relevant times. On March 5, 1982 High-line Airways Inc. ("Airways") became the registered owner of the property. The name of Airways was changed to High-line on June 29, 1987.
[4] The Appellant was and is a bookkeeper. She was married to Ed Christensen from 1959 to 1989, having separated from and having ceased to live with him in 1982. Her two sons resided with her. She was never a shareholder or director of High-line and had no beneficial interest in it. She was never a shareholder or director of Holdings and had no beneficial interest in it.
[5] The Appellant met Albert in 1980 and became involved in a relationship. She moved from Prince Albert to Saskatoon in 1982 and moved into the property, her children living with her. Albert moved into the property in 1983. High-line owned the property. The Appellant worked for High-line.
[6] A copy of a Certificate of Title dated March 5, 1982 showed the property registered in the name of High-line Airways Inc. An endorsement on the Certificate shows that the title was transferred on June 16, 1989 to the Appellant. The document of transfer was dated May 26, 1989 and shows a transfer of the land from High-line Drilling (International) Inc. for $1.00 and other valuable consideration to the Appellant. The Affidavit of Value on this document states that the value of the building and improvements, in the opinion of Albert, was $131,000.
[7] The Appellant said that she and Albert had lived together from 1982 to 1989 and she felt that if anything happened to him and if he had remained married, as he did, she would be without a home for her and her children. She asked him to transfer title to her. She stated that Albert had said that he had no problem with that suggestion and that he would have the title transferred and that he had enough money due to him from High-line, as shareholder loans, to look after the transfer. The Appellant said that she prepared the transfer with some assistance from Albert and a telephone conversation she had with a lawyer, Mr. Simonot ("Simonot"). She said that she had one telephone conversation with the lawyer, Albert having called him when she was at the typewriter preparing the document. She stated that Albert had not told her how title would be transferred and that Albert talked to Simonot. She stated that she remembered the land could be transferred from High-line to her to save costs at the Land Titles Office. She said that there was no mortgage on the property, but there were arrears of taxes, taxes not having been paid at any time during her residence at the property. The Appellant stated that the original price of the house was $131,000 and that she sold it in 1994 for $126,000.
[8] The Notice of Reassessment for 1988 for High-line mailed on November 18, 1991 showed FEDERAL TAX $25792.77, OTHER PENALTIES $9297.91, PROVINCIAL TAX AND PENALTY $2553.24, INSTALMENT INTEREST $1580.36, ARREARS INTEREST $21616.72, REFUND INTEREST $342.36 and BALANCE UNPAID $61183.36.
[9] Appellant's counsel produced a Notice of Reassessment for 1989 for High-line mailed on November 18, 1991 showing "nil" in the squares entitled FEDERAL TAX, INSTALMENT INTEREST, REFUNDABLE DIVIDEND TAX, ADJUSTMENT TO LATE FILING PENALTY, DIVIDEND REFUND and TOTAL REFUND. The Notice also showed OTHER PENALTIES of $3015.06, PROVINCIAL TAX AND PENALTY of $287.72 and ADJUSTMENT TO ARREARS INTEREST $1187.72 and BALANCE UNPAID of $4490.50.
[10] Notices of Objection were filed to these reassessments and negotiations took place resulting in the issue of new Notices of Reassessment for the 1988 and 1989 taxation years[1] mailed on April 27, 1993. The 1988 reassessment showed nil for FEDERAL TAX, ADJUSTMENT TO LATE FILING PENALTY, DIVIDEND REFUND and BALANCE UNPAID. It showed OTHER PENALTIES of $7575.50, PROVINCIAL TAX AND PENALTY of $551.00, INSTALMENT INTEREST of $376.57, ARREARS INTEREST of $19888.62, REFUND INTEREST of $342.36, REFUNDABLE DIVIDEND TAX of $176.87 DR and TOTAL REFUND of $49440.25.
[11] The Notice of Reassessment for the 1989 taxation year showed nil FEDERAL TAX, ADJUSTMENT TO LATE FILING PENALTY, DIVIDEND REFUND, INSTALMENT INTEREST, REFUND INTEREST, REFUNDABLE DIVIDEND TAX and BALANCE UNPAID. It showed OTHER PENALTIES of $2854.00, PROVINCIAL TAX AND PENALTY of $272.00, ARREARS INTEREST of $99.45 and TOTAL REFUND of $276.23. No statement of account showing an amount owing by High-line was produced.
[12] The Appellant said that she first became aware of the Notices of Reassessment in 1994. She said that she received a letter from Revenue Canada respecting the transfer of her home. She then contacted Mr. Schneider of Deloitte & Touche respecting this matter. A Notice of Assessment mailed on April 27, 1995 to the Appellant showing a total amount assessed of $29,685.79 had the following notation:
The liability under subsection 160(1) of the Income Tax Act and section 19 of the Income Tax Act - Saskatchewan, in the amount of $29,685.79, in respect of a transfer on or about June 16, 1989 from High-line Drilling (International) Inc. to Mary Christensen of the property located at 151 Wathaman Terrace, Saskatoon, Saskatchewan.
The Appellant stated that she ceased cohabiting with Albert in 1993, never having been married to him.
[13] On cross-examination the Appellant stated that she had not paid more than $1.00 for the property. She stated that she started working for Albert's company and that her hours were flexible when her boys were young. She said that Albert fixed her salary and that she was given raises in pay from time to time. She said if she needed more money to make ends meet she would "confront him" and he would pay. She was paid by High-line. She said that Albert remained married throughout their relationship. She said that she paid most of the household expenses but that if there was anything major Albert would pay. She paid for all groceries. She stated that they were sleeping together and that no one other than her two sons lived with them. She also said that they gave each other gifts on special occasions, that if they were ill they would help each other, and that she prepared all meals. She did all washing and ironing, including Albert's clothes. They went out together on occasion and they attended family functions. She took two trips with Albert, one to Palm Springs and one to Amsterdam where he paid the expenses. She stated that Albert bought some of the bigger items of furniture when they moved into the property. She said that they did not make decisions together, that they lived under the same roof, but that Albert did what he wanted to do and that she never knew where he would come from or where he was going. His children came to the property to visit occasionally.
[14] The transfer of land from High-line to the Appellant was signed by Albert on behalf of High-line. On cross-examination she reiterated that Albert told her they could save money on the transfer of land. She said that Albert and Simonot were talking about that and that she did not understand it all. The Appellant also said that she regarded her position as a job and that she had been a bookkeeper before.
[15] Mr. Mervin Schneider ("Schneider"), Chartered Accountant and partner of Deloitte & Touche, was in charge of the audit and income tax preparation of High-line, Holdings and Albert. He said that he prepared the income tax returns for 1988, 1989 and 1990 along with the financial statements. He received his instructions from Albert. He stated that there were substantial losses as a result of the 1989 return, namely $673,808. Of this sum, the amount of $330,325 was carried back to the prior year and the amount of $343,480 was available for carry forward to subsequent years. He said that there was no tax liability for 1988, 1989 and 1990. He said that the debit to Albert's shareholder loan was not included in the 1989 return because he did not know about that. He also said that he discussed said with Albert, in the spring of 1991, how to record that transaction and that they could correct the error on the financial statements by including it in the 1990 financial statements describing it as a current transaction in that year. He stated that Albert had told Mary that he had a shareholder's loan which would look after the transfer of the property. He also said that he had discussed with Albert the consequences of High-line owning the house. He referred to a document which was the working paper showing the amount due to shareholder by Holdings, that amount at March 31, 1990 being $297,610.61 owing to Albert. He also referred to a working paper of High-line respecting shareholder loans showing the balance owing to Albert at March 31, 1989 as $112,696.21 and at March 31, 1990 as $71,647.75. Schneider also said that because the companies were in bad financial shape there was no money to pay his firm for further work and that no further work, including the debit to Albert's shareholder account, was done.
[16] On cross-examination Schneider said that the original reassessments came about as a result of an audit conducted by the Department of National Revenue. On re-examination, Schneider reiterated that, after 1982 and before 1989 he had discussed with Albert the effects of the company owning this house and advised him that the company could transfer the house and charge his shareholder loan.
[17] Respondent's counsel produced one Bill Laing, a payroll examiner for Revenue Canada, as a witness. He stated that High-line was liable to pay to Revenue Canada the amount of $29,685.79 at the time the property was transferred to the Appellant.
ANALYSIS AND CONCLUSION:
[18] In his Memorandum of Fact and Law, Appellant's counsel stated the issues as follows:
13. The Appellant submits the issues are as follows:
(i) Did High-line transfer property to Mary Christensen, directly or indirectly, as contemplated by subsection 160(1) of the Act?
(ii) If the answer to 13(i) is in the affirmative, was Mary Christensen a person with whom High-line was not dealing at arm's-length at the time of the transfer of 151 Wathaman Terrace? In determining such issue, the following sub-issues arise:
(a) Was Mary Christensen related to High-line for purposes of the Act (Canada) at the time of the transfer of 151 Wathaman Terrace; and
(b) If Mary Christensen was not related to High-line, were Mary Christensen and High-line dealing with each other at arm's-length at the time of the transfer of 151 Wathaman Terrace?
(iii) If both 13(i) and 13(ii) are answered in the affirmative, was the fair market value of 151 Wathaman Terrace greater than the consideration given for 151 Wathaman Terrace at the time of the transfer of 151 Wathaman Terrace? Alternatively, for what amount was High-line liable to pay under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year?
[19] My conclusion with respect to the query in (i) is that High-line did transfer the property to the Appellant, directly or indirectly, as contemplated by subsection 160(1). As indicated in the Appellant's argument, it is alleged that the transfer of property would be from High-line to Holdings and then from Holdings to Albert with his shareholder loan due from Holdings being debited in the amount of the value of the property, namely $131,000, and then to the Appellant. This, allegedly, was to avoid land titles costs in carrying out three separate transfers of title instead of one. Conveyances in this manner were standard practice but there is no documentation here to evidence the fact that this took place. There is not even an entry in the accounting records of Holdings to support the contention that such transfers of beneficial interest were made. In addition, Albert was not called to give evidence as to whether he had intended the beneficial ownership to be transferred to Holdings, then to him, and then to the Appellant. There was some evidence by the Appellant about Albert having had a conversation with the lawyer while she was typing the Transfer of Land document. That lawyer was not called to present evidence. No explanation for the absence of either Albert or the lawyer was made. I refer to Sedelnick Estate v. M.N.R., 86 DTC 1563 where, at page 1565, the Court said
It brings to mind this passage from Evidence in Civil Cases, by Sopinka and Lederman at pages 535-6:
In Blatch v. Archer, ((1774), 1 Cowp. 63 at p. 65) Lord Mansfield stated:
“It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.”
The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed. In the case of a plaintiff who has the evidentiary burden of establishing an issue, the effect of such an inference may be that the evidence led will be insufficient to discharge the burden.
And similar language is found in the case of Markakis, 86 DTC 1237, and comments at 1241
I have difficulty in accepting Mr. Markakis’ evidence he had to go to Chicago to convert Greek funds to Canadian currency, and the absence of Mrs. Tsimiklis’ testimony in respect of the $10,800 leads me to infer that her evidence would have been unfavourable to Mr. Markakis.
And he goes on to say
Mr. Markakis has not convinced me that Revenue Canada has erroneously added $10,800 to his income. ...
Mr. Giannoukos was not called as a witness, and this too has caused me some concern.
My conclusion on this issue is, in part, shaped by the absence of two witnesses who could, if the Appellant's testimony is accurate, and if their evidence was confirmatory, have substantially assisted the Court.
[20] The question posed by (ii) is whether the Appellant was dealing at arm's length with High-line. Although the Appellant's counsel made submissions with respect to the Appellant and Albert not being related, it is not necessary for me to review those because that relationship did not exist. The expression "at arm's length" was considered by Bonner, J. in McNichol et al. v. The Queen, 97 DTC 111 where, at pages 117 and 118, he discussed the concept as follows:
Three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length. They are:
(a) the existence of a common mind which directs the bargaining for both parties to the transaction,
(b) parties to a transaction acting in concert without separate interests, and
(c) "de facto" control.
[21] It is clear that Albert was not at arm's length with High-line. Albert may or may not have been at arm's length with the Appellant. There is an inference that they would not be dealing at arm's length in the circumstances above described. However, even if that were the case, where does that lead? The question is whether the Appellant is at arm's length with High-line. Shortly stated, the Appellant wanted the property. For reasons not made known to the Court, Albert decided that the property should be transferred to her and caused High-line to transfer same. There is no evidence that anyone knew of any liability of High-line under the Income Tax Act at the time of transfer. Accordingly, no tax avoidance motive can be attributed to either Albert or the Appellant.
[22] There was no existence of a common mind directing the bargaining for both parties to the transfer of land. Simply stated, the Appellant sought conveyance of the property to her and Albert caused High-line so to transfer such property. The Appellant's interest, as outlined above, in having the property transferred to her was to have a residence for her and her sons in the event that something happened to Albert. One can only surmise what influenced Albert to cause High-line to transfer that property. There appears clearly not to be any acting in concert with a common interest in this case.
[23] The pertinent portions of section 160 of the Act read as follows:
Where a person has ... transferred property ... to a person with whom the person was not dealing at arm's length,
certain rules apply. Because I have concluded that the Appellant and High-line were dealing at arm's length, section 160 has no application in this case. Accordingly, no response need be made to the question in (iii).
[24] The appeal is allowed, with costs.
Signed at Ottawa, Canada this 8th day of May, 1998.
"R.D. Bell"
J.T.C.C.