[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2002-3304(IT)G |
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BETWEEN: |
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RICHARD BEAUDIN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on May 17, 2004, at Matane, Quebec
Before: The Honourable Judge Alain Tardif
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Appearances: |
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Counsel for the Appellant: |
Jean Blouin |
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Counsel for the Respondent: |
Marie-Claude Landry |
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JUDGMENT
The appeal from the assessment made pursuant to subsection 160(1) of the Income Tax Act, for the 2000 taxation year, is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the fair market value of the building which was transferred subject to the provisions of section 160 of the Act was $60,000. The consideration paid by the appellant is set at $45,000, comprising $30,000 paid in cash and $15,000 in services, thus conferring an enrichment of $15,600 on the appellant, the whole without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 16th day of July, 2004.
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"Alain Tardif " |
Tardif J.
Certified true translation
Colette Beaulne
[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC469 |
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Date: 20040716 |
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Docket no.: 2002-3304(IT)G |
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BETWEEN: |
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RICHARD BEAUDIN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from a Notice of Assessment dated November 28, 2001. The assessment in question was made pursuant to the Income Tax Act ("Act") in respect of the 2000 taxation year following the transfer of property, namely a residence. The assessment was made pursuant to section 160 of the Act.
[2] All the presumptions of fact on which the assessment is based are described in the Notice of Appeal and at paragraph 5 of the Reply to the Notice of Appeal. They are reproduced below.
Notice of Appeal:
16. The sale of the house is due to the physical and psychological inability of the taxpayer's parents to look after the family residence located at 833, Bell Street, Gallix, in the event of problems with the residence;
17. This clearly shows that the transfer of the building did not have the aim of depriving the tax authorities of the amounts due to them;
18. For these reasons, the assessment of November 28, 2001, is unfounded in fact and in law.
Reply to the Notice of Appeal:
a) The appellant is the son of Eula Lainé Beaudin and Rodolphe Beaudin;
b) For the taxation years 1989, 1990 and 1993, the father of the appellant, Rodolphe Beaudin, was assessed in 1994 and following the reassessments, his tax debt amounted to approximately $334,915.03;
c) On May 10, 1990, by means of a notarized deed of conveyance, Rodolphe Beaudin and Eula Lainé acquired a joint residence at 833 Bell Street, Gallix for $50,000;
d) On January 3, 1995, by a notarized deed of conveyance, Rodolphe Beaudin sold his undivided half of the residence at 833 Bell Street, Gallix, to his wife Eula Lainé;
e) For the purposes of the 1995 transfer, the respondent had assessed the fair market value of the property at $58,000;
f) To this day, no evidence of a consideration paid by Eula Lainé to Rodolphe Beaudin has been provided to the Canada Customs and Revenue Agency;
g) On January 11, 2000, by a notarized deed of conveyance, Eula Lainé Beaudin sold the property at 833 Bell Street, Gallix, to her son, Richard Beaudin, for a consideration of $30,000, including notary's fees;
h) The assessment issued against the appellant is based on the joint liability of the appellant with his mother, Ms. Eula Lainé Beaudin, in view of an unpaid tax liability stemming from an assessment arising out of a transaction with his wife, who also had an unpaid tax liability in respect of prior years;
i) The notarized deed of conveyance between Ms. Eula Lainé Beaudin and her son, Richard Beaudin, makes no mention of any right of habitation for the parents of the appellant;
j) There is no declaration of residence at paragraph 11 on page 3 of the said deed of conveyance;
k) The appellant, Richard Beaudin, reported no rental income for the 2000 and 2001 taxation years;
l) The appellant provided no document to the Minister regarding the value of any right of habitation for his parents;
m) The Minister accordingly calculated the benefit conferred on the appellant, as follows:
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- market value at the time of the sale of the property on January 11, 2000: |
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$60,600.00 |
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- less consideration paid less notary's fees |
$30,000.00 ($957.05) |
($29,042.95) |
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- value of benefit conferred |
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$31,557.05 |
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n) The residence was transferred for an amount less than its fair market value, such that a benefit of $31,557.05 was conferred on the appellant;
o) The reason for the sale of the property given by the appellant, namely the state of his parents' health, is not grounds justifying vacation of the Minister's assessment.
[3] The appellant admitted paragraphs 5 a), b), c), d), h), i) and l.
[4] The Court must determine whether the sale of the residence, located at 833 Bell Street, by Eula Lainé Beaudin to the appellant constitutes a transfer within the meaning of section 160 of the Income Tax Act, whether the fair market value of the residence located on Bell Street, Gallix on January 11, 2000, is $60,000, and finally, whether the Minister of National Revenue (the "Minister") has correctly established the amount of the assessment at $31,557.05, namely the difference between the fair market value ($60,600) and the selling price ($30,000 - $957.05) of the residence located at 833 Bell Street, Gallix.
[5] The appellant acquired the building in question on January 11, 2000. The building was the residence in which his parents have lived permanently since 1994. They had acquired it in 1990 with the intention of using it as a cottage.
[6] As a consideration, the appellant paid an amount of $30,000, which he obtained as a loan from the Bank of Montreal (exhibit A-9), guaranteed by a mortgage.
[7] At the time of the acquisition, his mother and father were living in the building. The health of the instigators of the transfer was precarious. The father of the appellant, furthermore, died in August 2003.
[8] Mr. Rodolphe Beaudin, the father of the appellant, suffered from diabetes and had suffered a number of cardio-vascular incidents (C.V.A.). Ms. Eula Lainé Beaudin suffers from high blood pressure.
[9] Since the parents of the appellant were totally incapable of looking after their residence because of their health problems and were crippled with debt, they met with their son, the appellant, to discuss the problem and to try to find a solution.
[10] In the course of this meeting, they agreed to transfer their residence to their son in consideration of a payment of $30,000 that they needed to pay their debts, a right of habitation for life, the assumption of major maintenance expenses, and the payment of taxes and insurance. In fact, the appellant had to assume all the expenses related to the dwelling, except for the cost of heating and minor routine maintenance. The appellant agreed to the conditions and undertook to pay $30,000, which he was obliged to borrow from a financial institution.
[11] The evidence brought out a number of facts which are not in dispute, namely the following:
· The authors of the transfer had a tax debt.
· The beneficiary of the transfer is the son of the transferors.
· The beneficiary of the property that was transferred made an outlay of $30,000 derived from a loan guaranteed by a mortgage.
· The Fair Market Value (the "F.M.V.") of the building at the time of the transfer was $60,600.
[12] Since the assessment was presumed to be valid, the onus was on the incumbent to demonstrate that it was not justified. To this end, the appellant explained that he had taken over the mortgage payments, insurance, the school and municipal taxes, major repairs and maintenance. He did not indicate what these costs totalled per year. He produced the description of the payments made, which included the monthly mortgage payment. He did not indicate the rental value of the building. According to the appellant, assuming responsibility for the building and the inherent expenses meant that the consideration, for which he had assumed responsibility, was broadly equivalent to the F.M.V. of the building, if it did not exceed it.
[13] Although all the rights and obligations did not appear to create a problem for the appellant and his mother, it is apparent from the notarized document that sealed the transfer on January 11, 2000, that no mention was made of these rights and obligations of each of the signatories to the document.
[14] The appellant prepared and produced a description of the payments made from the acquisition of the building until 2004, which totalled $27,182.23 (exhibit A-11). He concluded that he had paid out a total of $57,182.23 to acquire the building from his parents. This argument has no merit, since the payments shown are essentially monthly repayments. In other words, the appellant counted the same amount twice by adding the monthly amounts for repayment of the loan to the amount of the loan itself.
[15] The appellant also maintained that his father's tax debt had been extinguished following his bankruptcy, as a result of which he was discharged from it. This argument fails, as this issue has already been addressed by a decision of the Federal Court of Appeal; the release of a bankrupt transferor of a property has no impact on the tax debt assessed on a transferee of the property, who is subject to section 160 of the Act.
[16] The appellant also asserted that section 160 of the Act could not apply to the transferee. He referred to Michel Nanini v. The Queen, [1994] T.C.J. No. 426 in support of his claim.
[17] Recently, on February 3, 2003, the Federal Court of Appeal put an end to this interpretation of Section 160. In Jurak v. The Queen, [2003] F.C.J. no 160, Létourneau J. stated
[unofficial translation]
Notwithstanding the laudable efforts of Mr. Côté, we are not persuaded that Lamarre-Proulx J. of the Tax Court of Canada erred in her interpretation of section 160 of the Income Tax Act, R.S.C. 1985 (5th Supp.), Chapter 1, as amended, and in her application of the facts to this case when she concluded at paragraph 38 of her decision that "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."
[18] Section 160 of the Act reads as follows:
Tax liability re property transferred not at arm's length
160. (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 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 section 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 therefore, 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 proceeding taxation year,
but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.
[My emphasis.]
[19] Although section 160 of the Act raises few interpretation issues, it is appropriate to recall that the ultimate aim of the legislator was to prevent debtors with a tax liability from impoverishing their inheritance by transferring it in whole or in part without an equivalent consideration to their spouse or partner or to a person to whom they are related.
[20] To that effect, it is relevant to recall excerpts from certain decisions. First, in the Algoa Trust v. Canada, [1993] T.C.J. No. 15 (Q.L.), Rip J. had the following to say at page 10:
[unofficial translation]
The purpose of section 160 is to block the attempt of a taxpayer who is required to pay a sum of money under the Act from avoiding tax by transferring property, which he could otherwise use to satisfy his liability, to a person who belongs to one of the three groups mentioned, including a person to whom he is related.
[21] In Biderman v. Canada, [2000] T.C.J. No. 194 (Q.L.), The Honourable Judge Létourneau of the Federal Court of Appeal said the following at paragraph 37:
[...] Section 160 of the Act is an anti-avoidance provision with respect to transfers. Its purpose "is to prevent a taxpayer from defeating the claim of the Minister to unpaid taxes by transferring his assets to a spouse, or certain other persons, for little or no consideration". [See Note 28 below].
[22] In Hewett v. The Queen, [1997] F.C.J. No. 1541 (Q.L.), The Honourable Judge Strayer had the following to say at paragraphs 1 and 2:
We are all of the view that this appeal should be dismissed.
We agree with the learned Tax Court judge that the purpose of section 160 of the Income Tax Act is to prevent a taxpayer from defeating the claim of the Minister to unpaid taxes by transferring his assets to a spouse, or certain other persons, for little or no consideration. In our view, this means that the "property" referred to in the section must be that property interest of the taxpayer that would have been available to the Minister for attachment had the transfer not taken place.
[23] The value of the property transferred must be the same in the patrimony of the transferor as in that of the transferee. In other words, the F.M.V. of the property being transferred subject to section 160 of the Act must be the same and cannot be changed.
[24] This is a fundamental requirement, since a seller could very well stipulate an entire series of clauses anticipating all types of hypotheses, rights, liabilities, servitudes, etc., the effect of all of which would be to render the property transferred valueless or to diminish its value considerably, thereby changing the F.M.V. of the property at the time of the transfer. The transferred property could then be deprived of all or part of its value, which is completely contrary to the aim of section 160 of the Act.
[25] On the other hand, section 160 of the Act does not oblige those with a tax liability to cease all economic activity, nor does it prevent them from engaging in transactions involving the property of which they are the owners. The legislator essentially wanted to prevent those with a tax liability from dissipating or reducing, in whole or in part, their patrimony to the detriment of the Crown by assigning or transferring property for a consideration, the value of which is less than that of the property transferred, to a person with whom the person was not at arm's length.
[26] In the instant case, the mother of the appellant could have sold, transferred her residence to one or more persons with whom she was dealing at arm's length for monetary consideration or under a joint formula that was partly monetary and partly made up of certain servitudes, such as a right of habitation, combined with the obligation to assume responsibility for all the expenses inherent in such a right.
[27] In other words, a person with a tax liability can sell or transfer all the property they wish to any person, including members of their family, on the condition that the consideration obtained corresponds exactly to the F.M.V. of the property being transferred.
[28] When a transfer of property occurs between persons who are dealing at arm's length, there is a very strong presumption that the consideration is that which corresponds to the F.M.V. of the property transferred. Consequently, in order to establish the F.M.V. of a property that is transferred between persons not at arm's length, it is essential to examine the transfer and to ask whether the transfer of the property in question could have taken place in the same circumstances and under the same conditions and with the same consideration if the parties or transfers had been at arm's length.
[29] The analysis must be based exclusively on the facts that could and must have existed between persons dealing with each other at arm's length. Family considerations are accordingly neither relevant nor welcome, since they can vitiate the analysis.
[30] It is important to raise the following issue: could such a transfer have taken place between persons who were dealing with each other at arm's length? The answer is in fact affirmative. However, the parties would then have assessed and analyzed all the possible impacts, including specifically interest rates, the condition of the premises, the amount of taxes, the state of the building, the health of the transferor, their age, etc. In other words, the parties to a transfer where the consideration is not exclusively monetary generally go through the exercise of assessing the value of the non-monetary portion, such as the right of habitation and all the other rights and obligations, such as taxes, insurance and maintenance, obviously as a function of the possible or probable duration of the right of habitation.
[31] In a transfer where a right of habitation for life is anticipated, together with certain undertakings, the ideal situation for the transferee is the death of the transferor in the months following the transfer. Conversely, the ideal situation for the transferor is to live to be over 100. The determination of the F.M.V. of such rights is a highly complex exercise that requires consideration of a multitude of factors.
[32] In the instant case, the appellant who bore the onus of proof essentially submitted the elements of the context which explained and justified the transfer. He also explained that the state of his parents' health, and specifically the health of his father, who died shortly after the transfer, was precarious and that they were simply no longer capable of looking after their building. The mother of the appellant confirmed this explanation.
[33] The idea of the transfer was then discussed and it appears that the consideration of $30,000 was set as a function of the indebtedness of the appellant's parents. With regard to their other obligations, it seems that the transferors retained only responsibility for heating the premises and for minor maintenance costs. All the rest, namely the taxes and major repairs, were the responsibility of the transferee, the appellant.
[34] None of this was set out in writing. The notarized contract makes no mention of rights and obligations subsequent to the transfer of property.
[35] The appellant submits that the consideration paid at the time of the transfer is reasonable and, above all, that he did not enrich himself at the expense of his parents. He stated that he had agreed to be a party to the transfer solely in order to allow his parents to remain in their house.
[36] Although this is a highly laudable and noble sentiment, I do not believe that it is sufficient to establish that the transfer took place in exchange for the payment of a consideration that corresponds to the F.M.V.. It would have been important to establish all the alleged facts and factors to determine the details of the agreement in a way that would have enabled the Court to appreciate that they were relevant and, above all, reasonable.
[37] The F.M.V. of the property transferred has not been disputed; it was established by the expert, Gaston Laberge, at $64,400, but the respondent identified $60,600 as the applicable F.M.V..
[38] At the time of the transfer, the applicant paid an amount of $30,000 by means of a loan guaranteed by a mortgage.
[39] In addition to the expenditure of $30,000, he undertook verbally to pay the insurance, municipal and school taxes, as well as major maintenance, and not to require his parents to pay rent; they retained only the responsibility for heating costs and minor running maintenance. I am not including the professional fees for the preparation of the notarized contract by the notary, which were apparently paid by the transferors, the appellant's parents.
[40] In the absence of adequate evidence to establish the F.M.V. of the benefits conferred on the transferors, in addition to the payment of $30,000, I establish the value at $15,000.
[41] The enrichment of the appellant subsequent to the transfer on January 11, 2000, is set at $15,600. This amount results from the following calculation:
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Value of the property transferred |
$60,600 |
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Consideration paid in the transfer |
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$30,000 |
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Value of the non-monetary benefits |
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$15,000 |
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Total consideration |
$-45,000 |
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Enrichment of the transferee |
$15,600 |
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[42] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reassessment on the basis that the F.M.V. of the building transferred subject to section 160 of the Act was $60,600. The consideration paid by the appellant is set at $45,000, comprising $30,000 paid in cash and $15,000 in services, thereby conferring an enrichment of $15,600 on the appellant, the whole without costs.
Signed at Ottawa, Canada, this 16th day of July, 2004.
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"Alain Tardif" |
Tardif J.
Certified true translation
Colette Beaulne
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CITATION: |
2004TCC469 |
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COURT FILE NO.: |
2002-3304(IT)G |
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STYLE OF CAUSE: |
Richard Beaudin and Her Majesty the Queen |
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PLACE OF HEARING: |
Matane, Quebec |
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DATE OF HEARING |
May 17, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Alain Tardif |
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DATE OF JUDGMENT: |
July 16, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
Jean Blouin |
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Counsel for the Respondent: |
Marie-Claude Landry |
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SOLICITOR OF RECORD: |
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For the Appellant: |
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Name: |
Jean Blouin |
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Firm: |
Rimouski, Quebec |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |