Date: 20010213
Docket: 1999-1752-IT-G
BETWEEN:
MARIE-PAULE GARANT CHAMBERLAND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from an assessment made under section 160 of the Income Tax Act ("the Act"). The notice of assessment bears number 13118 and is dated November 3, 1998.
[2] Subsection 160(1) of the Act reads as follows:
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
(a) the person's spouse or common-law partner or a person who has since become the person's spouse or common-law partner,
(b) a person who was under 18 years 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 and 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.
[3] The witnesses in this case were Daniel Gagné and Martial Chamberland. They testified at the request of counsel for the appellant.
[4] Mr. Gagné has been the accountant of Mr. Chamberland, the transferor, since 1991. He is the one who prepared Mr. Chamberland's tax returns for 1991 to 1993, which he filed as Exhibit A-1. As Exhibit A-2, he filed the information he used to prepare the statement of rental income for 1993. That exhibit is a letter from the Mildev company, which managed Les Tours de Liesse, to Michel Guilbert of Planiservice de l'Estrie dealing with a group of 82 units in the Eastern Townships. The first two paragraphs read as follows:
[TRANSLATION]
With this letter, we are sending you a statement of income and expenses relating to the group of 82 units in the Eastern Townships for the period ending on December 31, 1993, for the property referred to above.
We have also included an operating profit distribution table for the 82 units. The table provides information on the legal fees paid out of our trust account and on the amount of municipal and school taxes paid either by the investors directly or by the mortgagee.
[5] The manager's operating revenue was $729,277.50 and its operating expenses $341,074.83, for an operating profit of $388,202.67. The operating expenses were as follows:
[TRANSLATION]
Operating expenses
Insurance $4,415.75
Condominium fees $154,421.85
Caretakers $11,535.30
Energy $4,202.53
Maintenance and replacement $41,144.36
Administrative expenses $77,100.69
Collection costs $2,660.21
Rental costs $28,262.67
Bad debts $17,331.47
Total: Operating expenses $341,074.83
[6] (It is difficult to understand why condominium fees were included in the manager's expenses. Their nature was not explained at the hearing.) For one condominium, Mr. Chamberland was entitled to a proportional share of 1.73 percent of the operating profit, or $4,553.60. The legal fees were $631.95, the municipal taxes were $1,181.52, and the school taxes were $132.90. Those taxes applied to two condominiums. For the other two, the municipal and school taxes were $1,208.08 and $135.89. The statement of rentals was prepared by Mr. Gagné for each of the four condominiums purchased by Mr. Chamberland as follows:
[TRANSLATION]
. . .
OPERATING PROFIT $4,554
EXPENSES:
Property taxes $1,344
Professional fees $1,533
Interest on 1st mortgage $6,686
Interest on 2nd mortgage $92
Developer's interest $1,350
Refinancing costs $1,510
$12,515
Net income (loss) $(7,961)
[7] In addition to the operating expenses, there were carrying charges. Exhibit A-2A is a letter setting out a statement of carrying charges issued by Les partenaires en immobilier Inc. It reads in part as follows:
[TRANSLATION]
. . .
The financial services expense of $17,850.00, the income guarantee expense of $5,950.00 and the expenditure guarantee expense of $5,950.00 — for a total of $29,750.00 — will be spread as follows over a five-year period in accordance with the law:
|
1991
$5,950 |
1992
$5,950 |
1993
$5,950 |
1994
$5,950 |
1995
$5,950 |
You can claim this deduction of $5,950.00 and all other carrying charges and interest paid to earn investment income in 1991. To claim the deduction, fill out Part IV of Schedule 5 of your federal return and Part D of Schedule E of your provincial return.
. . .
[8] Mr. Gagné ended his testimony by stressing that Mr. Chamberland had tried very hard to ensure that his investment would be profitable.
[9] Martial Chamberland explained that, at the time of the events in question, he held a fairly high-level position at Domtar Inc. His employment income was $88,164 in 1991 and $88,292 in 1992. He was thinking about his retirement, and he wanted to increase his retirement income. Mr. Chamberland was born on January 16, 1936, and is now retired.
[10] That was how the condominium investment project came into the picture. Promotion of the project in Sherbrooke was handled by Planiservice Estrie Inc., a financial and tax planning company that did business in that city. The project, which involved selling units in a real estate complex called Les Tours de Liesse, had been developed by Les partenaires en immobilier C.T. Inc. or Cousineau Inc. (investissements immobiliers), both of which were Montréal companies. The promotional material that led to the investment can be found at Tab 9 of Exhibit I-1 and in Exhibit A-3.
[11] It is interesting to read that promotional material, which was directed at people with savings who were thinking about the income they would have when they retired:
[TRANSLATION]
Les Tours de Liesse
"The future is something you have to prepare for. A steady job, a healthy level of savings . . . even if you can't avoid paying taxes. Property builds up over the years. However, funds are limited . . . An investment would be a viable solution, but how do you go about it? No time to take the necessary steps. No idea of what area might be appropriate."
Have you ever thought about real estate?
Why not invest in a unit in the Les Tours de Liesse real estate complex?
Why real estate?
Investing in real estate is the most profitable investment there is.
. . .
· It is an ideal tax shelter, since it gives you the greatest of benefits:
- all interest is tax deductible;
- you are taxed only when you resell.
· Stock market fluctuations have no effect on the real estate market.
Why invest now?
· The real estate market is a buyer's market. After the 1982-83 recession, the real estate market boomed. Those who invested in real estate at that time have made very handsome profits. Some areas now have surpluses, so prices are low. This means that it is one of the most likely times for you to take advantage of the situation.
But how can I buy without cash?
You can use your borrowing power.
· We are suggesting 100 percent financing to our investors. That way, you will have higher tax deductions.
· Say, for example, that the price of your unit is $119,000. Your total investment can be calculated as follows:
·
Unit price $119,000
Mortgage amount $78,000
Balance of sale $7,000
Developer's mortgage $15,000
Personal loan (including "working
capital" of $6,000) $25,000
Total investment $125,000
How can I pay for it all?
The net rental income, the working capital and the tax savings will contribute greatly to the repayment of your personal loan and the mortgage financing.
What is Les Tours de Liesse?
· Les Tours de Liesseis a real estate complex that has 177 condominiums. It was built by Le Groupe Immobilier Grilli. . . .
. . .
What if my condo isn't rented?
Cousineau looks after everything.
· If you wish, we can offer you the "income guarantee" option, which guarantees your income for five years.
[12] The cost and financing of the unit were set out on page 1 of a document entitled [TRANSLATION] "Financial Projections":
[TRANSLATION]
COST OF UNIT WITH GUARANTEES
Land and building 89,250
Financial services 17,850
Income guarantee (*) 5,950
Expenditure guarantee (*) 5,950
119,000
Working capital ( § ) 6,000
Total outlay 125,000
(*) These guarantees are optional.
FINANCING OF UNIT
Investor's outlay 0
1st mortgage 11.75% 78,000
Balance of sale 11.75% 7,000
Developer's mortgage 9% 15,000
Personal loan 15% ( § ) 25,000
Total financing 125,000
( § ) Includes working capital of $6,000.
[13] The forecast statement of losses for tax purposes on page 2 of the same document showed that, for a total outlay of $125,000, the tax loss ranged from $15,330 in 1991 to $12,504 in 1995, while the tax savings were 50 percent of those amounts.
[14] However, note 11 of the document entitled [TRANSLATION] "Project Description" read as follows:
[TRANSLATION]
11. Deductibility of rental losses
The financial projections take account of the fact that rental losses are deductible the year they are incurred; however, there is no guarantee as to the nature of the amount or as to the time when the expenses are deducted. Since each case is different, investors should consult their own financial advisors.
[15] It must be thought that Planiservice Estrie Inc. encouraged investors. It stated the following on page 3 of its promotional material:
[TRANSLATION]
Where such recommendations are made in a planning file, we provide proof of their relevance and defend their legitimacy in writing; in some cases, reference texts are attached.
Thus, while we wish to minimize a taxpayer's tax burden, this does not mean that our firm engages in any sleight of hand as regard taxes.
Of course, we are not shielded from the changes inherent in our governments' tax policies, but our intention is to update our files within a realistic timeframe.
[16] Mr. Chamberland purchased four condominiums in 1991, two on February 28 and two more on May 6. The purchase documents were filed jointly as Exhibit I-2. He purchased them from Groupe Immobilier Grilli Inc. for $119,000 each. At the same time, the purchaser signed an acknowledgement of debt for each property for $15,000, which represented the outstanding balance of the fees and the guarantee costs charged by the creditor to the debtor for the purchase of the property, the amount of which was included in the sale price. A mortgage for the same amount was granted on the property. Those documents can also be found in Exhibit I-2.
[17] The rental income and expenses for the four condominiums for 1993 were reported as follows, as set out in the Amended Reply to the Notice of Appeal:
[TRANSLATION]
Operating profit $18,216
Expenses:
Property taxes $5,376
Professional fees $6,132
Interest on 1st mortgage $26,744
Interest on 2nd mortgage $368
Developer's interest $5,400
Refinancing costs $6,040
($50,060)
Net loss ($31,844)
Carrying charges and interest expenses claimed for the condominiums:
$30,664
[18] According to the Reply, Mr. Chamberland claimed the following rental losses and carrying charges for the four condominiums for the 1991 to 1996 taxation years:
|
Year
|
Rental loss
|
Carrying charges
|
Total |
Total per condominium |
|
1991 |
$14,957 |
$31,313 |
$46,270 |
$11,568 |
|
1992 |
$29,120 |
$33,007 |
$62,127 |
$15,532 |
|
1993 |
$31,844 |
$30,664 |
$62,508 |
$15,627 |
|
1994 |
$21,436 |
$31,463 |
$52,899 |
$13,225 |
|
1995 |
$24,810 |
$32,284 |
$57,094 |
$14,274 |
|
1996 (8 months) |
$40,136 |
$1,817 |
$41,953 |
$10,488 |
[19] Despite those tax savings, the interest to be paid on the loans — mortgage and otherwise — became very burdensome. There was also dissatisfaction with the management of the dwelling units. An action was brought by all the Sherbrooke investors on October 4, 1993. The claim was filed as Exhibit A-4. The allegations made therein were directed against the Montréal group.
[20] The result was that, near the end of 1992, Mr. Chamberland began to fear that what had been presented to him as a source of future income would lead to financial disaster for him. As well, his mother had just died. He thought of planning his own succession. He and the appellant had gotten married on June 24, 1958. His wife was a homemaker who had devoted herself to her family. According to Mr. Chamberland, the house was rightfully his wife's. They had agreed verbally long before that time that the house belonged to her. On January 27, 1993, he transferred the family home at 194 Rue St-Paul in Windsor, Quebec, to the appellant. The fair market value of the house was no less than $81,000. The notarial deed was filed as Exhibit A-7.
[21] Mr. Chamberland said that, at the time of the transfer, he did not owe any taxes and his returns were being prepared by an accountant and filed on time. He explained that he was convinced that everything was in order, especially since an official of the Minister of National Revenue ("the Minister") authorized his employer to reduce the amount of tax withheld every year. The letters authorizing this reduction were filed jointly as Exhibit A-5. They were signed by the Director of Taxation of the Sherbrooke District Office. For 1991, an additional deduction of $31,741 was allowed. Nevertheless, in 1992 and the following years, a warning was given that the authorization did [TRANSLATION] "not as such constitute approval by this Department of the deductions you have claimed". In 1993, the amount allowed was $45,320.
[22] On May 5, 1997, the transferor was reassessed for 1993 to 1996. The Minister disallowed the deductions for rental losses and carrying charges for those years. For 1993, the assessment was for $22,005.30. That amount was made up of $15,400.89 in federal tax and $6,604.41 in interest, as can be seen from the notice of assessment of the appellant at Tab 2 of Exhibit I-1.
[23] Mr. Chamberland filed an assignment of his property on April 29, 1998. It was basically a bankruptcy due to tax liabilities: he owed Revenu Québec $69,000 and Revenue Canada $64,932. The bankruptcy-related documents were filed as Exhibit A-6. Questions 9, 10 and 15 read as follows:
|
9 - WITHIN THE LAST 12 MONTHS HAVE YOU ... DURANT LES 12 DERNIERS MOIS, AVEZ-VOUS ... |
|||||||||||
|
A-Disposed or transferred any of your assets - Vendu ou aliéné quelques-uns de vos biens? |
Yes Oui
|
No Non
X |
B-Made payments in excess of regular payments to a creditor - Fait des paiements en plus des remises ordinaires à vos créanciers? |
Yes Oui |
No Non
X |
C-Had any assets seized by any creditor - Subi des saisies de biens par vos créanciers? |
Yes Oui |
No Non
X |
|||
|
10 - WITHIN THE LAST 5 YEARS HAVE YOU ... DURANT LES 5 DERNIÈRES ANNÉES, AVEZ-VOUS ... |
|||||||||||
|
A-Sold, disposed of or transferred any real estate - Vendu ou aliéné quelques immeubles? |
Yes Oui
X
|
No Non
|
B-Made any gift to relatives or others in excess of $500 - Fait quelques dons supérieurs à 500 à des parents ou autres personnes? |
Yes Oui |
No Non
X |
||||||
. . .
15 - If answers to questions 8, 9, 10, 11, or 14 are positive, give details:
Si les réponses aux questions 8, 9, 10, 11, ou 14 sont affirmatives, expliquez :
[TRANSLATION]
10A - On December 10, 1996, the Bank of Montreal took in payment condominiums #506, #205, #204 and #505 at 2320-2330 Rue Ward, Ville St-Laurent.
. . .
[24] The proof of claim submitted by the Minister to the trustee was filed as Exhibit A-10. Paragraph 4 thereof is of interest:
[TRANSLATION]
4. (X) UNSECURED CLAIM of $69,690.97
That in respect of this debt, I do not hold any assets of the debtor as security and:
(X) Regarding the amount of $69,690.97, I do not claim a right to a priority.
[25] Answer 10A shows that the bank had taken the condominium properties through the giving-in-payment procedure. The family home had been transferred more than five years before the assignment in bankruptcy, which would explain why it was not mentioned. The judgment discharging the bankrupt is dated September 14, 1998. At the hearing, Mr. Chamberland said that he would have liked to talk with one of the Minister's representatives at the time of the bankruptcy, before he was discharged. However, that was not possible.
Arguments
[26] Given the circumstances of this case, counsel for the appellant raised the question of due dispatch as regards the Minister's reassessments. He argued that the letters from the Minister's official granting a reduction in the amount of tax withheld gave Mr. Chamberland false confidence and that, although the Minister acted within the statutory time limits, he took too long to inform the taxpayer.
[27] Counsel for the respondent argued that the Minister did not fail to act with dispatch and that he acted within the time allotted by Parliament. She referred to the Federal Court of Appeal's decision in Ginsberg v. Canada, [1996] 3 F.C. 334, according to which an assessment is valid even where the Minister fails to act with dispatch. In the case at bar, there was not even any evidence of a lack of dispatch: the transferor was initially assessed within the usual time. The Minister subsequently made the reassessments within the normal assessment period. The appellant was assessed less than two months after the discharge of the tax debtor and transferor.
[28] Counsel for the appellant raised a point with regard to interest. His view was that the appellant could be assessed only for the tax portion and not for the interest. He referred to the following passage from Judge Dussault's decision in Algoa Trust v. The Queen, T.C.C., No. 96-1186(IT)G, February 10, 1998 (98 DTC 1614):
[6] Thirdly, I would say that there is no provision of the Act regarding interest that may be applicable to an assessment issued pursuant to s. 160 of the Act. This is logical, since there is no new tax debt and an assessment under s. 160 already incorporates the interest which the transferor owed in addition to the tax. The assessment may also incorporate penalties and interest thereon.
[29] Counsel for the respondent explained that the decision in that case was that there cannot be any interest on the assessment of the transferee. Algoa Trust had received a market value of $78,000. It could not be assessed for more than that value.
[30] Counsel for the appellant referred to the Supreme Court of Canada's decision in Husky Oil Operations Ltd. v. M.N.R., [1995] 3 S.C.R. 453, a decision that established that the Bankruptcy and Insolvency Act prevails over provincial statutes. Counsel for the appellant argued that the Bankruptcy and Insolvency Act likewise prevails over the Income Tax Act.
[31] Counsel for the respondent referred to the Federal Court of Appeal's decision in Heavyside v. The Queen, [1996] F.C.J. No. 1608, and in particular to paragraphs 8, 9 and 10:
8 The object of section 160 is to prevent a taxpayer from avoiding his tax liability by simply transferring his assets to his or her spouse or to any other person described in this section. Section 160, in making the transferee personally liable for the tax due by the transferor, allows the Minister to seek payment from a taxpayer who is not the original taxpayer.
9 Once the conditions of subsection 160(1) are met, as they are in the present case, the transferee becomes personally liable to pay the tax determined under that subsection (here, $2,759.50). That liability arises at the moment of the transfer (here, June 6, 1989) and is joint and several with that of the transferor. The Minister may "at any time" thereafter assess the transferee (subsection 160(2)) and the transferee's joint liability will only disappear with a payment made by her or by the transferor in accordance with subsection 160(3)).
10 The moment chosen by the Minister to assess the transferee is of no consequence. It is trite law that liability for tax results from the Act and not from the assessment and that in the instant case it is the transfer that triggers the liability. The respondent, therefore, was personally liable, in her 1989 taxation year, for income tax in respect of the gains from the disposition of the property transferred and her liability being joint and several with that of her husband, it had a life of its own and survived the eventual extinguishment through bankruptcy, in 1994, of her husband's own tax liability. The fact that she was assessed only in 1994 and only after her husband's discharge is irrelevant as far as her own liability is concerned.
[32] Counsel for the appellant also argued that Mr. Chamberland had a reasonable expectation of profit.
[33] Counsel for the respondent referred to the Supreme Court of Canada's decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480, to the Federal Court of Appeal's decisions in Mastri v. Canada, [1998] 1 F.C. 66, Mohammad v. Canada, [1998] 1 F.C. 165, and Stewart v. Canada, [2000] F.C.J. No. 238, and to this Court's decision in Bisson v. Canada, [1999] T.C.J. No. 638. Mr. Bisson's appeal was dismissed. He too was an investor from Sherbrooke who participated in the same plan as Mr. Chamberland.
Conclusion
[34] First of all, it should be noted that the decisions in Stewart, supra, and in another case involving the reasonable expectation of profit concept, Walls and Buvyer v. The Queen, [1999] F.C.J. No. 1823, are under appeal to the Supreme Court of Canada. The appeals will probably be heard in 2001.
[35] Counsel for the appellant quite rightly did not suggest that the appellant could have had a right of ownership in the family home prior to its transfer. It seems to be clearly established in family law that the spouses' right to the family patrimony is not a right of ownership but rather a personal right that takes effect when an event creates a right to the partition of the patrimony (Lavery, de Billy, Législation sur le patrimoine familial annotée, 2nd ed. (Carswell), at page 9).
[36] I will discuss the tax debtor's reasonable expectation of profit first. With regard to that concept, I consider it relevant to look at the academic commentary, since the above-mentioned judgments have been analysed extensively. The following is stated on this point in Lord, Sasseville and Bruneau, Les Principes de l'imposition au Canada, 12th ed. (Wilson & Lafleur, 1999), at pages 176, 179-80 and 197-98:
[TRANSLATION]
5 TAX TREATMENT OF EXPENSES
The rules on the deductibility of expenses in computing business or property income are governed by three basic principles: (a) the expense must be reasonable; (b) it must have been incurred for the purpose of gaining or producing income; (c) it must not be of a capital nature.
. . .
5.2 Purpose of the expense: gaining or producing income
5.2.1 Principle
The second deductibility principle, which is expressly set out in paragraph 18(1)(a) of the Act, is that an outlay or expense is not deductible ". . . except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property". This general principle has been interpreted by the courts many times. Although it is not really possible to provide a summary because of the diversity of the cases, it may be helpful to consider a number of them.
. . .
5.2.2 Judicial interpretation
The Royal Trust Co. v. M.N.R. ([1957] CTC 32 (Ex. Ct)) is a classic case on this point, since it establishes that what must be assessed above all is the purpose of the expense, even if the expense does not necessarily result in a profit. . . .
That decision was reversed on appeal by Thorson P., who allowed the deduction while setting out the following rules:
· the first matter to be determined is whether the expense would be permissible under the recognized and accepted principles of commercial trading;
· second, it has to be ensured that the expense was incurred in accordance with the usual business practice of a trust company like the appellant's;
· third, the expense has to have been incurred for the purpose of gaining or producing business income, even if it did not necessarily result in a profit.
Royal Trust should be compared with Deputy Minister of Revenue of Quebec v. Lipson ([1979] 1 S.C.R. 833), in which the Supreme Court reversed the decisions of the Quebec Court of Appeal and the Provincial Court.
Pigeon J., who delivered the Supreme Court's judgment, stated that, to be deductible, an expense must have been incurred to make a profit and not merely to obtain gross income. Mr. Lipson was one of nine shareholders in a company incorporated for the purpose of owning and operating an apartment building. The company incurred a substantial loss in managing the building and, in 1962, the shareholders formed what was called a syndicate, to which they leased the building for three years with an option to renew the lease for two more years. However, the losses continued. In spite of that, the syndicate decided to take up its option for the stated purpose of enabling the shareholders to personally claim losses for tax purposes, losses that the company could not have absorbed because of a lack of income.
Pigeon J. stated the above-mentioned principle and noted that the syndicate did not expect to make a profit in renewing the lease. The purpose of the operation was not to make a profit but to improve the company's financial position by incurring a loss to its benefit rather than advancing capital to it.
. . .
7.2 Interest expense
Under paragraph 20(1)(c), interest on borrowed money is an admissible deduction in computing a taxpayer's income provided that the following criteria are met:
· there must be a legal obligation to pay interest;
· the interest must be lawful interest;
· the interest must be paid or payable in the taxation year to which it relates;
· the interest amount must be reasonable;
· the loan must not be used either to acquire property the income from which would be exempt or to acquire a life insurance policy; and
· the loan must be taken out for the purpose of earning business or property income.
[37] In my view, the evidence showed that the purpose of the expenses incurred by Mr. Chamberland was not to earn income from a business or property. Their purpose was to acquire capital property that was supposed to be paid for largely through tax savings. The plan proposed to the investors did not anticipate any rental profit. It anticipated only substantial rental losses that included the carrying charges. That was the plan that was accepted and followed by Mr. Chamberland. It is therefore my opinion that Mr. Chamberland's tax liability was correctly established in fact and in law under the Act.
[38] As regards due dispatch within the meaning of the Act, it cannot be concluded that the Minister failed to act with dispatch. The initial assessment did not take long, and the Minister subsequently acted within the statutory time limits. In any event, according to the Federal Court of Appeal's decision in Ginsberg, supra, even failure to act with dispatch does not make assessments void under the Act.
[39] Counsel for the appellant put the blame on the letters authorizing a reduction in the amount of tax withheld during the years at issue, which were filed as Exhibit A-5. However, those letters contained a warning. Would the Minister have refused to inform the taxpayer correctly if the taxpayer had specifically asked him the question? There was no evidence that the taxpayer had such a preventive attitude or that the project had the support of the tax authorities. Nor does the Minister appear to have taken any preventive action. It seems surprising that, at a time when such plans were being openly offered to the investing public and were causing so much damage to family patrimonies, there was no reaction from those responsible for administering the Act. Among those targeted were people nearing retirement age. Financial losses are all the more serious for such people because they have less time to restore their financial assets. However, that lack of preventive action has no effect on the validity of an assessment under the Act.
[40] With regard to the inclusion in the appellant's assessment of the interest owed by the transferor for 1993, it is my view that counsel for the respondent has correctly interpreted the case law. In an assessment made under section 160 of the Act, three amounts are involved: the transferor's tax liability, the market value of the transferred property and the consideration. In my opinion, the above-quoted paragraph 6 from Algoa Trust, supra, clearly explains Judge Dussault's position in that case. The transferee may not be assessed for more than the market value of the transferred property minus the consideration, but the transferee may be assessed for the transferor's entire tax liability, including penalties and interest, in the year the transfer occurred. The penalties and interest are those that have accrued against the transferor's tax liability at the time the transferee is assessed. As the Act states, the tax liability is made up of "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".
[41] With regard to whether the Bankruptcy and Insolvency Act prevails over the Act, three of this Court's decisions have tried to make the application of section 160 of the Act subject to the Bankruptcy and Insolvency Act, but they were overruled by the Federal Court of Appeal's decision in Heavyside, supra. That decision set aside one by Judge Beaubier of this Court but also, through the various notes in the decision, overruled this Court's decisions in Caplan v. The Queen, 95 DTC 709, and Gamache v. The Queen, 97 DTC 32.
[42] I am, of course, bound by the Federal Court of Appeal's decision in Heavyside because of the rule of stare decisis. That decision interpreted section 160 of the Act as a provision that applies as soon as there is a transfer between related persons.
[43] However, I can make the following observation concerning section 160 of the Act. That section, which is basically a collection provision and which concerns the legal relationship between a debtor and a creditor, takes on a surprising character because of its application conditions. I say surprising because the provision seems to cast aside the civil and statute law that has been codified or developed to govern the debtor-creditor relationship. It is therefore ironic that, in the proof of claim he submitted to the trustee in bankruptcy, as quoted in paragraph 24 of these Reasons, the Minister did not claim a priority. Section 160 of the Act gives him a creditor status that is out of the ordinary. Statutes concerning civil rights do not apply either. Prescription, status as a transferee and the transfer's effects are not determined on the basis of the conditions set out in those statutes. Thus, the transferee may be assessed at any time, and an intention to defraud need not be alleged.
[44] I understand that the Minister must have ways of collecting the tax he is entitled to levy. However, should this not be done under conditions more or less analogous to those of collections by other creditors under federal statutes and provincial laws governing the relationship between creditors and debtors? It should also be noted that subsection 92(13) of the Constitution Act, 1867 places property and civil rights under provincial jurisdiction. In any event, it seems to me that there is a legal vacuum concerning the application of section 160 of the Act.
[45] It is interesting to note that a provision similar to section 160 of the Act, namely section 6901 of the American Internal Revenue Code, has not been interpreted the same way. In Commissioner of Internal Revenue v. Stern, 357 U.S. 39, 45 [1 AFTR 2d 1899] (1958), the majority of the United States Supreme Court held that, since what was involved was not substantive law but a procedure for collecting taxes, it was preferable to continue to apply state law concerning the debtor-creditor relationship. That law is flexible and adapts to changing circumstances in society. The minority felt that it would be preferable to have a uniform federal law based solely on the transfer, the market value, the consideration and the transferor's tax liability. I must add that, under American bankruptcy legislation, not all tax claims are discharged by the debtor's bankruptcy.
[46] However, it is up to the Federal Court of Appeal to change the interpretation of section 160 of the Act that it adopted in Heavyside, supra, if it considers it appropriate to do so. As the law currently stands, and for all the reasons mentioned above, the appeal must be dismissed. Costs are awarded to the respondent.
Signed at Ottawa, Canada, this 13th day of February 2001.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
1999-1752(IT)G
BETWEEN:
MARIE-PAULE GARANT CHAMBERLAND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 31, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Christian Labonté
Counsel for the Respondent: Janie Payette
JUDGMENT
The appeal from the assessment made under section 160 of the Income Tax Act, notice of which bears number 13118 and is dated November 3, 1998, is dismissed in accordance with the attached Reasons for Judgment.
Costs are awarded to the respondent.
Signed at Ottawa, Canada, this 13th day of February 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.