[OFFICIAL ENGLISH TRANSLATION]
1999-1965(IT)G
1999-1749(IT)G
BETWEEN:
ANTHONY JURAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 20 and 21, 2001, at Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Louis-Frédéric Côté
Counsel for the Respondent: Valérie Tardif
JUDGMENT
The appeal bearing number 1999-1965(IT)G from the assessment made under section 160 of the Income Tax Act (the "Act"), notice of which is dated June 6, 1995, and bears number 28006, is allowed for the sole purpose of reducing the amount of the assessment to $144,222. Costs are awarded to the respondent.
The appeal bearing number 1999-1749(IT)G from the assessment made under section 160 of the Act, notice of which is dated June 6, 1995, and bears number 28005, is allowed. Costs are awarded to the appellant.
The whole in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 17th day of December 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011217
Dockets: 1999-1965(IT)G
1999-1749(IT)G
BETWEEN:
ANTHONY JURAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Louise Lamarre Proulx, J.T.C.C.
[1] These are appeals from assessments made by the Minister of National Revenue (the "Minister") under section 160 of the Income Tax Act (the "Act").
[2] The appeal bearing number 1999-1749(IT)G concerns the transfer of a property on September 16, 1991, by 151041 Canada Inc. ("151041") to the appellant at a price of $1,025,000, whereas, in the Minister's view, the market value was $1,252,500. The appellant was assessed on the basis of that value. The report of the Minister's expert states a value of $1,346,750.
[3] The appeal bearing number 1999-1965(IT)G concerns a remission of debt on August 6, 1992, on the balance of the selling price of that property. The balance was $428,405.48, including interest, and the amount paid was $251,025.
[4] With the appellant party's consent, the respondent filed a book of documents as Exhibit I-1 consisting of 35 tabs, with the exception of tabs 7, 8, 23 and 31, which were removed.
[5] Snazz Corporation ("SNAZZ") is owned by 151041. That last company's voting shares are held by Paulette Massicotte, who is the appellant's de facto spouse. It is admitted that the appellant, 151041, and SNAZZ are not dealing with each other at arm's length.
[6] In 1988, SNAZZ paid 151041 a $1,650,000 dividend. SNAZZ's assessment was not filed, but a certificate from the Minister dated October 26, 1990, declares the debt to be in the amount of $406,667.93 (tab 32 of Exhibit I-1). SNAZZ did not dispute its tax liability.
[7] In an assessment under section 160 of the Act dated November 23, 1993, the respondent assessed the amount of $291,057.45 against 151041 in respect of SNAZZ's tax liability (tab 10 of Exhibit I-1). The notice of assessment states that, under subsection 160(1), SNAZZ transferred property to 151041 by paying a dividend of $1,650,000 in the fiscal year ending on December 31, 1988. The company 151041 did not institute an appeal in this Court following the Minister's confirmation.
[8] The appellant was assessed under section 160 of the Act on June 6, 1995, (tabs 1 and 2 of Exhibit I-1) in respect of a transfer of property from 151041 to the appellant on September 16, 1991. The respondent party confirmed that the maximum amount claimed from the appellant was $291,057.45, that is, the amount of 151041's assessment.
[9] The property sold to the appellant by 151041 on September 16, 1991, was a house located at 558 Roslyn Avenue in Westmount, which had served as the family residence of the appellant and his family. The selling price of $1,025,000 was to be paid $625,000 in cash and the balance of $400,000 was payable seven years later, in September 1998, with interest computed at the rate of eight percent compounded annually.
[10] The Minister contended at the time of the assessment that the fair market value of the residence at September 16, 1991, was $1,252,500 and that the appellant had accordingly been granted a benefit of $227,500 (tab 2 of Exhibit I-1, assessment of June 6, 1995).
[11] The Minister contends that, in discharging a debt of $428,405.48 by paying an amount of $251,025 on August 6, 1992, the appellant gained a benefit of $177,380.48 (tab 1 of Exhibit I-1, assessment of June 6, 1995).
[12] As to the second appeal, respecting the fair market value of the debt as of August 6, 1992, the appellant party informed the Court that he had accepted the value of $395,245 reached by Duc Nguyen, the respondent's expert. Counsel for the respondent also informed the Court that, with respect to the appeal concerning the remission of debt, the amount of the assessment should be reduced to $144,222 since the respondent's expert had reduced the market value of that debt.
[13] At the start of the hearing, counsel for the appellant made an application under section 58 of the Tax Court of Canada Rules (General Procedure) (the "Rules"), which reads as follows:
58(1) A party may apply to the Court,
(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or
(b) to strike out a pleading because it discloses no reasonable grounds for appeal or for opposing the appeal,
and the Court may grant judgment accordingly.
(2) No evidence is admissible on an application,
(a) under paragraph (1)(a), except with leave of the Court or on consent of the parties, or
(b) under paragraph (1)(b).
(3) The respondent may apply to the Court to have an appeal dismissed on the ground that,
(a) the Court has no jurisdiction over the subject matter of an appeal,
(b) a condition precedent to instituting a valid appeal has not been met, or
(c) the appellant is without legal capacity to commence or continue the proceeding,
and the Court may grant judgment accordingly.
[14] Counsel for the appellant referred to the decision by Judge Tremblay of this Court in Nanini v. Canada, [1994] T.C.J. No. 426 (Q.L.), in which a corporation had paid a dividend to another corporation, which was assessed under section 160 of the Act. The shareholders of the second corporation were subsequently assessed under section 160 in respect of a dividend received from that second corporation. It was the judge's view that the first transferee could not himself become a transferor, rendering another transferee jointly and severally liable. According to counsel for the appellant, the facts of the instant case are identical in that they involve a cascading application of section 160. He referred to paragraphs 56, 57, 66 and 67 of the reasons for that decision:
. . .
56 As to whether the transferee in the first transfer may itself become a transferor rendering a new transferee liable, the Court was not convinced by the argument of counsel for the respondent that this mechanism is provided in the last lines of subsection 160(1):
. . . but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.
57 In reality, the Court quite simply does not see how this phrase can be interpreted to mean that a transferee may himself become a transferor, rendering another transferee jointly and severally liable and so on in a cascade effect.
. . .
66 Furthermore, section 160 in itself is already enough outside the scope of common law that if Parliament had wanted to do it in a cascading fashion, it would have specifically stated so.
67 In light of the conclusion which the Court has reached above, that is that there can be no cascading application of section 160, it is not necessary for me to rule on the other two points.
[15] Counsel for the appellant stated that, on the basis of this Court's decision in Nanini, SNAZZ, the transferor, transferred its debt to 151041, the transferee. Considering the way in which section 160 is drafted, the transferee cannot itself become a transferor within the meaning of section 160.
[16] Counsel for the respondent informed the Court that she had not been informed of this application and contended that an application had to be filed within the prescribed time period, that she did not see how a decision could be rendered in such circumstances or how that decision could substantially shorten the hearing or result in a substantial saving of costs.
[17] The application was denied because it had not been filed within the prescribed time period. The Court informed counsel for the appellant that he was of course not prohibited from arguing the merits of that decision.
[18] The appellant's first witness was Michel Bourassa, a chartered appraiser, who testified as an expert witness. In September 1991, he said that the property's fair market value was $1,017,000. For that appraisal, he had used the sales comparison method. He had estimated the value of the land at $45 a square foot and explained that the value of land in that part of Westmount, which is not upper Westmount, is lower. The market value of the 11,000 square foot lot would be $499,500 at a unit rate of $45 a square foot.
[19] As to the comparables considered by the respondent's appraiser, Mr. Bourassa stated that, with one exception, the properties used were located in upper Westmount. They were properties acquired for their views and located in an area where the properties are homogeneous. The exception was located on Holton Street and was roughly comparable. Its price was different from the price of the other properties.
[20] The building description did not vary from one expert to the other. It was a single-family residence with three floors and a basement. There was no attic. The quality of construction was excellent. The year of construction was 1907. The house had been renovated in the 1980s. The ground floor area was 2,118 square feet and there were 5,682 square feet of living space, excluding the basement. The building was in excellent condition. The appellant's appraiser described the additions and permanent features as follows: [TRANSLATION] "This property includes a games room with a projector and giant wall screen, cooktop, oven, built-in dishwasher and kitchen garburator, five fireplaces, central vacuum system, alarm system, sauna, whirlpool, automatic garage door opener, solarium, central air conditioning and skylights."
[21] Mr. Bourassa noted that his comparables were located close to the subject, whereas those of the Minister's expert were further away. As to the value of the land, he also noted that the Minister's appraiser had stated $40 a square foot for all his comparables.
[22] The appellant's appraiser explained that there were semi-detached properties in the area surrounding the property. Those properties have less prestige and reduce the value of the surrounding lots. If the properties located in upper Westmount were taken for comparison purposes, the value of the land would be higher. That factor must be taken into consideration or else the selling price of the building itself becomes too high. The value of the land must be taken as it is and, instead of stating $40 a square foot in all cases, its actual value, that is to say $60 or $80 per square foot depending on the site, must be used. That increases the value of the land and what remains from the selling price, excluding the market value of the lot, is the value attributable to the building. Since that value is lower, it also yields lower per square foot rates, which, once multiplied by the area of the property in question, yield a value that would be lower than the value determined by the Minister's appraiser. Mr. Bourrassa contended that, in 1991, the market had fallen, whereas it was at its peak in 1988 and 1989.
[23] The bigger the lot, the lower its unit value. A property is considered, the land value appraised, and there is a rate, a building and a residual value of the building. What is that residual value of the building on a per square foot basis? This is a very simple methodology to apply and the one that must be applied for residential properties. The Minister's expert, on the other hand, took the area of the building and lot, added them together and divided the selling price by the area to determine a unit rate of $300 per square foot. In Mr. Bourassa's view, the value of the land and value of the building should be considered for each of the transactions.
[24] The second witness was the appellant. When he acquired the property from 151041, he did not know that SNAZZ or 151041 were tax debtors. He explained how the remission of debt to $251,000 had come about. At his lawyer's suggestion, he met with an accounts officer at a bank and asked the officer what the actual value of a $400,000 loan at eight percent would be if it were immediately repaid. The answer apparently given him was that it would be worth $251,000. The company, which belonged to his wife, needed money. He told her that he would immediately pay her what the loan was worth.
[25] The appellant gave virtually the same reason to explain the purchase of the house. His wife had needed money for her business and, since he had money, he bought the house. He said he had paid what it was worth at the time: there were semi-detached houses opposite and around it, the river could be seen from the third floor, and on a large portion of that floor, a person could not stand erect since the roof angled downward.
[26] He explained that in 1989, his wife, Paulette Massicotte, had bought the house for $2,400,000. At the time, she was about to have a baby and he signed the document for her (tab 35, contract of purchase by Paulette Massicotte dated March 6, 1989). She subsequently transferred ownership of the house to 151041. Tab 5 contains the transfer from Paulette Massicotte to 151041 of the property located at 558 Roslyn Avenue dated April 11, 1990. The property is described as free and clear of any hypothec. The purchase price was $1.
[27] Tab 6 contains the contract of sale from 151041 to the appellant dated September 16, 1991. The property was still free of any hypothec, the price was $1,025,000, an amount of $625,000 was paid and there remained a balance of $400,000 payable seven years later with interest computed at a rate of eight percent per year. The purchaser granted the vendor a hypothec equal to 20 percent of the balance of the selling price.
[28] The appellant described the repairs they had made to the house: the roof was replaced and rooms repainted. The former owner, who had bought the house in 1985, had also made repairs. He had rebuilt the garage, the bathrooms and the kitchen. The house was in good condition at the time of the purchase in 1989. The vendor told him that he had made approximately $600,000 worth of repairs. However, when they began to live in the house, they found that the insulation in the walls had not been well done and that the heating bill was very high. A few years later, they wanted to install insulation, but they were told that it would be extremely difficult to do so. In discovery, he stated that the vendor told him he had spent $1,000,000 but, after taking a closer look at what he had done, the appellant found it hard to believe that this amount had not been inflated. There were four small bedrooms and a bathroom in the attic and three bedrooms on the second floor. There was one bathroom in the basement, one on the ground floor, two on the same floor as the bedrooms and one on the attic floor. The pool was already there when the house was purchased, and it had been installed by the previous owner. It had a vinyl bottom, which the appellant had to change after the purchase. The house was sold on April 2, 2001, for $2,350,000 to people who, like them, had fallen in love with it.
[29] Jean Martin, a chartered appraiser, testified for the respondent party. He has been a member of the Ordre des évaluateurs agréés since 1981. He explained at the outset that there were four bedrooms on the third floor, one of which had a fireplace and where one could very easily move about. They were good-sized bedrooms.
[30] He had used desirable and luxurious properties as comparables. He did not choose a property simply because it was on the same street or because it had been sold on a specific date. Mr. Martin said that if he had to make an adjustment to the price of the lot, in his mind, the value of the lot would be $40 a square foot, not $45, and the maximum in upper Westmount would probably be $60 per square foot, not $80.
[31] He had used two indicators: value per room and value per square foot of the building. The per-room value used was $61,800, that of the Holton Street property, which was the lowest of his comparables. The per-room value of the property in question is the result of $61,800 x 15 rooms, a value of $927,000.
[32] The per square foot value of the building is the result of the selling price divided by the building's area. Based on the comparable residences he had chosen, that average value was $300. The per square foot value of the property was thus $300 x 5,760 square feet, or $1,728,000.
[33] The average of those two results was $1,327,500, which was the market value of the property.
[34] In cross-examination, he said he had appraised the property at 558 Roslyn Avenue twice. The first time, he had come to the conclusion that it was worth $1,252,500 in September 1991 and, the second time, $1,346,000. The assessment of $227,500 is based on the first value.
Arguments
[35] Counsel for the appellant reiterated his argument concerning Nanini, supra, that cascading assessments cannot be made under section 160. In another argument, counsel for the appellant recalled that, in 1988, SNAZZ had paid 151041 a dividend. At the time that dividend was paid, SNAZZ had tax debts for the years from 1986 to 1988. The company 151041 was assessed during the 1994 taxation year. The sale of the house to the appellant by 151041 occurred in 1991 and the remission of debt in 1993. Counsel for the appellant thus argued that, when the appellant bought the house in 1991, 151041 had not yet been assessed. It was not assessed until two years later, in 1993, and therefore was not a tax debtor at the time of the transfer.
[36] Counsel for the respondent referred to two decisions by this Court, in which cascading assessments had been made and accepted as validly made: Zobay v. Canada, [1996] T.C.J. No. 1455 (Q.L.), and White v. Canada, [1994] T.C.J. No. 1042 (Q.L.). In this last decision, it is also explained in paragraph 17 that a tax debt exists before the assessment recognizing it is made.
Conclusion
[37] Subsection 160(1) of the Act reads as follows:
Section 160: Tax liability re property transferred not at arm's length
(1) 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 a person who has since become the person's spouse,
(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 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.
[38] With all due deference to Judge Tremblay, I cannot follow his decision in Nanini, supra. That interpretation has not been adopted by the judges of this Court. The transferee may himself become a transferor subject to subsection 160(1) of the Act if, at the time of the second transfer, he himself is a tax debtor liable either on his own account or jointly and severally with the first transferor.
[39] With respect to the second argument-that at the time of the sale of the property by 151041 in September 1991, 151041 had not yet been assessed and was thus not a tax debtor even though it had received a transfer from SNAZZ- it cannot be accepted either. It is a recognized principle in tax law that it is not the assessment that creates a tax liability, but the application of the Act. The assessment merely recognizes the debt. What counts is that, at the time 151041 made the transfer, it had received a transfer from SNAZZ, which itself was a tax debtor at the time of that transfer.
[40] I refer on this point to the comments by Judge Garon of this Court in Dauphinais v. Her majesty the Queen, 94 DTC 1148, at pages 1155 and 1156, where he describes the well-settled case law on this matter:
The case law shows that an assessment is merely an established procedural or administrative means for determining tax payable. The judgments in Parsons et al. v. M.N.R. (83 DTC 5329) . . . and Dominion of Canada General Insurance Company v. The Queen (84 DTC 6197) . . . clearly support this finding.
Furthermore, the decision of Judge Noël in Simard-Beaudry Inc. and Simard & Frères Cie Ltée ([1971] F.C. 396) goes further in one sense in that it establishes that the assessment does merely state the obligation to pay income tax because the tax liability itself is created by the Act. The following passage from Judge Noël's judgment is particularly apposite:
. . . it seems to me that . . . the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or re-assessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point. Here the re-assessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgment of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.
This principle was reiterated by the Federal Court of Appeal in Riendeau v. Her Majesty the Queen (91 DTC 5416). On behalf of that Court, Stone, J.A. wrote as follows:
As the cases and statutory provisions which were cited by Cullen, J. well show, liability for tax is created by the Income Tax Act, not by a notice of assessment. A taxpayer's liability to pay tax is just the same whether a notice of assessment is mistaken or is never sent at all.
It is indisputable, based on the preceding, that the assessment does not create the tax liability or debt. . . .
[41] I must conclude on the factual circumstances cited above that, at the time of the sale, 151041 was a tax debtor, even though it had not yet been assessed.
[42] Thus, the assessment in the appeal bearing number 1999-1965(IT)G shall be confirmed. For the reasons given in paragraph 12 of these reasons, the amount of the assessment shall be reduced to $144,222. The appeal is allowed on this basis with costs to the respondent.
[43] As to the fair market value of the property in September 1991, I find that the approach taken by the appellant's appraiser is the more appropriate in appraising residential properties. I do not believe one may rely exclusively on the desirability of a house but that the value of the land and surroundings must also be taken into account. The site will usually determine the value of the land. Homogeneity of environment will be a significant factor in the total value of residential property.
[44] The appeal bearing number 1999-1749(IT)G is allowed, with costs to the appellant.
Signed at Ottawa, Canada, this 17th day of December 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.