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Docket: 2000-2628(IT)G |
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BETWEEN: |
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SUZANNE BEAUDRY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on December 9, 2002 and March 24, 2003
at Québec, Quebec
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Before: The Honourable Judge Alain Tardif |
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Appearances: |
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Counsel for the Appellant: |
Jocelyn Vézina |
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Counsel for the Respondent: |
Dominique Gallant |
____________________________________________________________________
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1999 taxation year is allowed and the assessment is referred back to the Minister for reconsideration and on the basis that the fair market value at the time of transfer, April 17, 1996, was $115,000, with costs to the respondent, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 31st day of July 2003.
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"Alain Tardif" |
Tardif, J.
Translation certified true
on this 22nd day of March 2004.
Gerald Woodard, Translator
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Citation: 2003TCC464 |
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Date: 20030731 |
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Docket: 2000-2628(IT)G |
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BETWEEN: |
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SUZANNE BEAUDRY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif, J.
[1] This is an appeal following Notice of Assessment No. 15979, dated August 18, 1999, issued under subsection 160(2) of the Income Tax Act (the "Act").
[2] The issue is whether the fair market value (the "FMV") at the time of the transfer that occurred on or about April 17, 1996 was at least $118,300.
[3] In making the reassessment, the Respondent made the following assumptions of fact:
(a) The appellant has been the spouse of Mr. Jean Déziel since before 1996;
(b) Mr. Jean Déziel owned a residence located at 82 Samuel Miller Avenue in Baie Comeau (the "property");
(c) On or about April 17, 1996, Mr. Jean Déziel transferred the property to the Appellant;
(d) Mr. Jean Déziel owed money to the Minister of National Revenue for the year of the transfer and a previous year totalling $99,096.55 at the time of the assessment on April 16, 1999.
(e) On April 16, 1999, the debt was made up of the following:
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Taxation year |
1995 |
1996 |
Total |
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Taxes |
$1,386.44 |
$56,577.22 |
$57,963.55 |
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Interest |
$ 356.19 |
$12,930.19 |
$13,286.38 |
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Penalties |
$ 0 |
$27,846.62 |
$27,846.62 |
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Total |
$1,742.52 |
$97,354.03 |
$99,096.55 |
(f) According to deed 184256 recorded at the Baie Comeau land registry office, the property was transferred in exchange for $83,921,94;
(g) The fair market value of the property on April 17, 1996 was at least $118,300.
[4] To support and prove the FMV, the Respondent called on an expert witness in her employ, Mr. Gaston Laberge, a chartered appraiser.
[5] For the purposes of the assessment, Mr. Laberge first appraised the property in question at $118,300.
[6] The evidence would seem to indicate that this appraisal was the result of a very summary analysis.
[7] Evidently, the municipal assessment was the determining factor in establishing an FMV of $118,300 to be used as a basis for the assessment.
[8] Following appeal of the assessment to this Court, the Respondent again asked the expert, Mr. Laberge, to conduct an in-depth appraisal by means of a more in-depth examination.
[9] Following this second request, the expert, Mr. Laberge, found that the value of the property was $124,800. He supported his finding with more in-depth work, based mainly on seven (7) comparable properties.
[10] The expert explained the process leading up to his finding. He admitted that he did not visit inside the house, and having conducted a rather summary examination of the exterior.
[11] A portion of his work was based on descriptive files used by the municipality for the municipal assessment, which indicated two permit applications for work carried out prior to the transfer date of April 17, 1996.
[12] Mr. Laberge, based on the descriptive files consulted at the municipality, assumed that the property had normal components, neither high-end nor low-end. He did not visit the property to confirm or disprove his view.
[13] This fault, added to the fact that Mr. Laberge was an employee of the Respondent, affects the quality of the work carried out. Simply being an employee of the person requesting preparation of an expert report does not, of itself, automatically disqualify the work.
[14] I believe, however, that it requires impeccable work. The expert report is often, as is the case here, the result of a second analysis. An initial appraisal to establish the notice of assessment had already been submitted based on very summary, even superficial, elements. The mandate to prepare an in-depth report undoubtedly stemmed from the Notice of Appeal before the Tax Court of Canada. Under the circumstances, he would have been wise to visit the property, as he had already submitted an initial appraisal that was poorly or not at all documented.
[15] As regards the expert opinion submitted by the Appellant, it raises other questions. The appraisal work of Mr. Gaétan Gagné was carried out in accordance with appraisal standards, as was that of the Respondent's expert, Mr. Laberge.
[16] I hasten to note, however, that appraisal is not an exact science and that the standards leave considerable room for subjective appraisals by experts, particularly regarding the choice of comparable properties, percentages of the various applicable deprecations, etc.
[17] Furthermore, expert appraisers have a multitude of factors or elements to justify the use or rejection of the data making up their appraisal.
[18] In the case at bar, the expert, Mr. Gagné, relied considerably on the representations of his client, the Appellant's spouse. This can be seen in several of his comments. He also admitted that he had not analyzed the municipal files. Such files would have informed him of the exact dates on which work was carried out. He also gave considerable importance to the fact that the level of the floor in the garage was much lower than that of the outside access. He emphasized certain defaults described by his client regarding the condition of the property, the fact that the fireplace could not be used in its original state and, finally, suggested that the quality of the materials was below standard as it was privately built.
[19] Having apparently found that the assessment was made from an FMV based on the municipal assessment, he identified properties for which the sale price was lower than the amount of the municipal assessment in an attempt to demonstrate that it was not a reliable reference.
[20] I found it quite strange that, in his appraisal, the expert hid certain residential transactions located on the same street as the property at issue in this appeal. The quality of a comparison is often related to location, as site is always an important element.
[21] This problem is particularly evident in the fact that the Appellant criticized the quality of the comparisons made by the Respondent. The Appellant's criticism is quite surprising when her own expert did not take into account available and relevant comparisons on the same street.
[22] Finally, the Appellant raised several grievances that could affect the Respondent's expert report. Believing that the burden of proving the fair market value of the property at the time of the transfer was on the Respondent, she thought that, to win the case, she simply needed to discredit the appraisal prepared by Mr. Laberge.
[23] There is no doubt, however, that the burden of proof is not on the Respondent, but on the Appellant.
[24] Since Johnston v. M.N.R., 3 DTC 1182, it is recognized that the onus is on the taxpayer to demolish to facts assumed by the Minister of National Revenue (the "Minister") in making the assessment.
[25] In Pollock v. Canada, [1994] 1 C.T.C. 3, 94 DTC 6050, [1993] F.C.J. No. 1055 (Q.L.), Hugessen J. explains the taxpayer's obligation to demolish the facts set forth in the Reply to the Notice of Appeal:
The special position of the assumptions made by the Minister in taxation litigation is another matter altogether. It is founded on the very nature of a self-reporting and self-assessing system in which the authorities are obliged to rely, as a rule, on the disclosures made to them by the taxpayer himself as to facts and matters which are peculiarly within his own knowledge. When assessing, the Minister may have to assume certain matters to be different from or additions to what the taxpayer has disclosed.
The burden cast on the taxpayer by assumptions made in the pleadings is by no means an unfair one: the taxpayer, as plaintiff, is contesting an assessment made in relation to his own affairs and he is the person in the best position to produce relevant evidence to show what the facts really were.
[26] There is an exception, and Archambault J. dealt with that exception in Gestion Yvan Drouin :
Since it is the Minister who takes measures against a third party to recover the tax owed to him by the tax debtor, it seems entirely reasonable to me that it should be incumbent on the Minister to provide prima facie evidence of the existence of the tax liability. To do this, the Minister usually has in his possession the tax debtor's tax return and, if he has carried out an audit, he may have copies of the source documents or other relevant documents supporting his assessment. He is therefore the one who is in the best position to establish the quantum of the tax liability. I thus conclude that the onus of providing prima facie evidence of the tax liability where an assessment has been made under subsection 160(1) of the Act generally falls on the Minister.
. . . As soon as the Minister has proved prima facie the existence of the tax liability, the onus is on the transferee to provide evidence to the contrary.
[27] As a result, during an appeal regarding subsection 160(1) of the Act, the Minister must generally prove the existence of the tax debt, as he is in the best position to establish the amount. Once the tax debt is established, the burden of proof shifts to the transferee taxpayer, the Appellant in the case at bar.
[28] The two appraisals submitted by the experts did not have the minimum accuracy to constitute reliable references. The appraisals were conducted within the broad and general parameters of professional standards, but are certainly not conclusive.
[29] Firstly, the Respondent's expert established the FMV by relying heavily on the municipal assessment. Although the process described was cloaked in diplomatic explanations and various justifications, I am convinced that the basis was the municipal assessment. That of itself is not unreasonable or arbitrary, as municipalities generally very meticulous. Through permits that they grant for construction, modification and renovation, they have at their disposal relevant data, including numerous transactions and the history of each property in their territory.
[30] The Respondent's expert was accused, and rightly so, of not having carefully examined the property, particularly inside the residence, which under the circumstances, is a justified grievance. For commercial purposes, an in-depth visit of the property is less important, as income is the basis of the FMV, which is not the case for a residential property, where interior design can have a major effect on the FMV.
[31] The Appellant's expert raised this failure while strongly criticizing the difference between the initial appraisal and a second appraisal submitted to the Court.
[32] As regards the Appellant's appraisal, it is not without fault. Having found that the initial appraisal coincided closely with the municipal assessment, he identified comparable sales where the sale price was less than the municipal assessment.
[33] Another weakness in the appraisal by Mr. Gaétan Gagné is at the same level as that of which the other party is accused, i.e., he did not conduct an in-depth visit of the property. In effect, Mr. Gagné visited the property in the company of the Appellant's spouse to determine the FMV.
[34] During that visit, the expert assumed a considerable amount of information and indications from a person with considerable interest in the result, thus diminishing the quality of the information.
[35] Furthermore, he admitted to not having consulted any descriptive files available from the municipality, which often include highly relevant objective information.
[36] He also applied a global depreciation rate of 39 per cent for a property that is only twenty years old. Nothing in the description of the property justifies such a high rate of depreciation other than the biased description by the Appellant's spouse.
[37] Finally, Mr. Gagné questioned the quality of the comparisons taken into consideration by the Respondent's expert. For his part, I have noted that his own data were quite peculiar in that the prices of certain sales were lower than the municipal assessment. How and why did the expert, in his report, hide properties located on the very same street in question in the appraisal? The evidence was devoid of any explanation of this question.
[38] In light of these findings, I conclude that neither appraisal provides any determining conclusions that can be relied upon. They are appraisals conducted for a specific purpose, that of coinciding with, supporting and justifying the theories presented.
[39] The evidence available does not permit absolute accuracy. I refer, in particular, to the biased explanations of the Appellant's spouse regarding the description of the property and the various subjective appraisals by the two experts.
[40] The Court therefore establishes the FMV based on the following information: comparable sales identified by both parties, the apparent quality of the exterior of the property, the size of the property, the appealing architecture and various other elements.
[41] As for the interior, the Appellant, by way of the testimony of her spouse, claimed that it was a very average private construction, the value of which was highly disputable as a result of certain construction defaults. It was important that this aspect not be neglected and that more in-depth evidence be submitted than just biased statements by the Appellant's spouse.
[42] First, a private construction does not mean less value because, on the contrary, quite often, those who build such a home, knowing that it is for themselves, tend to use high quality or even superior quality materials.
[43] In the case at bar, there was little evidence that leads to any conclusion. I do not believe that stating that the fireplace cannot be used and the garage floor is lower than the entrance is enough to conclude that the quality of construction is highly questionable, thus justifying a high rate of depreciation.
[44] Prior to the time of the transfer, the residence was financed with a mortgage guarantee. Lending institutions never grant mortgages for more than 75 per cent of the FMV unless there is a guarantee from the Canada Mortgage and Housing Corporation ("CMHC"), in which case they grant loans of up to 90 per cent or 95 per cent of the FMV.
[45] The loan obtained prior to the transfer is another element for determining an HMV higher than that attributed by the Appellant.
[46] It is not enough to state that the company's generally excellent financial situation explains the departure from the standard by which banks never lend more than 75 per cent of the HMV.
[47] Furthermore, at the time of the transfer, the lending institution had to intervene. The borrower then became the Appellant, not the company or the Appellant's spouse. As a result, the solid financial condition of the company and the Appellant's spouse had no bearing on the quality of the debt then due by the Appellant following the transfer. It would have been important and very interesting for the lender to come establish the specific circumstances of all these transactions if that were the situation.
[48] The Court also takes into account the municipal assessment, which is obviously not an absolute reference point, but mainly information that has some value. There can be specifics that escape those in charge of the municipal assessment role.
[49] The municipal assessment is the basis for calculating the amount that citizens pay in property taxes. The process allows citizens not satisfied with the amount attributed to their property to contest the amount of the assessment. In the case at bar, the evidence has shown that neither the Appellant nor her spouse nor the company that had previously owned the property had contested, leading one to believe that the municipal assessment of $118,300 was not exaggerated.
[50] For all these reasons, I set the FMV for the transferred property for which the reassessment was made at $115,000.
[51] Although this appeal regards solely the Appellant, she did not testify. Furthermore, in terms of opposition, the presentations were also prepared by the Appellant's spouse, obviously with her approval. On a few occasions, he spoke as thought the Appellant had acted essentially as a nominee.
[52] Apart from the matter of the appraisal, the Appellant, not present, indicated through her spouse's testimony that she had contributed considerably more than the amount set forth in the transfer in April 1996.
[53] Her spouse greatly emphasized the fact that the transfer took place in all good faith, as he was unaware of the eventual tax debt. He also added that he had no intention of avoiding it by means of the transfer.
[54] Intent to avoid obligations is not required for application of subsection 160(1) of the Act. Furthermore, being unaware of the tax debt of the third party cannot constitute a defence. In Nanini v. Canada (1994) T.C.J. No. 426, Tremblay J. states the following on this matter at paragraphs 52 and 53:
The Court wishes to emphasize that even though the appellant, as he contends, was not aware of Amusement Charlesbourg's tax liability when the $150,000 dividend was issued in 1987, that fact cannot constitute a defence.
The interpretation of paragraph 160(1)(e) of the Act is clear and confirmed by the case law, including Randall: "That the appellant did not know of the company's tax liability does not constitute a defence.".
[55] In Montreuil v. Canada, (1994) DTC 1821, at paragraph 21, Dussault J. states that the intent to avoid fiscal obligations is not required for application of section 160 of the Act.
[56] The Appellant also stated that she was not aware of the tax debt at the time of the transfer.
[57] For the purposes of section 160 of the Act, a taxpayer may incur responsibility for the year in which the transfer took place or any previous year if, at the end of one of those years, the person with whom the taxpayer is not dealing at arm's length has a tax debt.
[58] In Raphael v. Canada, (2000) T.C.J. No. 688, at paragraph 2, Mogan J. reiterates the application conditions set forth by Hamlyn J. in Doreen Williams v. The Queen, T.C.J. No. 98-1604, July 24, 2000 :
(i) there must be a transfer of property;
(ii) the transferor and transferee are not dealing at arm's length;
(iii) there must be no consideration (or inadequate consideration) flowing from the transferee to the transferor; and
(iv) the transferor must be liable to pay an amount under the Act in or in respect of the year when the property was transferred or any preceding year.
[59] The fourth condition clearly shows that, even though the tax debt is established after the transfer, but before the end of the taxation year, the taxpayer may incur responsibility. Furthermore, in the 1987 Technical Note, the Minister expressed the same opinion:
Joint Liability in the Event of a Transfer of Property Between Persons Not Dealing at Arm's Length ITA 160(1)
Section 52
Subsection 160(1) of the Act provides that the non-arm's length transferee of property is jointly and severally liable to pay the taxes of the transferor in respect of the taxation year in which the property is transferred or any preceding year of to the excess of the fair market value of the property over the consideration given for the property. Paragraph 160(1)(e)(ii) is amended to clarify that the joint liability applies not only to taxes payable on the income of the transferor but also to any liability for source deductions which the transferor is liable to remit in that or a preceding year.
[60] Doctrine[1] also provides a good summary of the application of Section 160 of the Act:
[translation]
In other words, if all other elements of section 160 ITA are present, but the transferor's tax debt is a debt that is payable for a taxation year after the year of transfer, section 160 ITA will not apply, as there was no tax debt for the taxation year in which the transfer occurred or for a previous year.
However, if in fact, a tax debt exists for the year of the transfer or a previous year, section 160 applies, no matter the date on which the transferor was assessed.
[61] It is thus clear that, under section 160 of the Act, the transferee is responsible for any debt due at the end of the taxation year in which the transfer took place, obviously up to the increased in that person's assets.
[62] Furthermore, I am not convinced of the pure and absolute good faith of the Appellant's spouse in this regard. After selling the business, he received large amounts of cash that completely disappeared, the transparency of which was not convincingly established.
[63] As regards the Appellant's contribution when acquiring the transferred residence, the burden of proof was on her. To meet such a burden, the vague oral statements of her spouse in this regard. The minimum would have been for the Appellant to testify regarding this aspect, particularly as no documentary evidence was submitted.
[64] As a result, the evidence regarding a higher contribution than that indicated in the notarial act was not at all sufficient and allows no conclusion to be drawn regarding the merits of this argument.
[65] The Appellant's spouse claimed that the Appellant had given consideration that largely coincided with the fair market value of the residence. He claimed that the consideration was approximately $110,000.
[66] In this regard, the evidence made no reference to any specific facts confirmed by sufficient documentary evidence. Vague and general statements are certainly not enough to meet the burden of proof that was on the Appellant.
[67] To succeed, the Appellant had to provide clear, coherent evidence supported by objective data and documents, such as copies of cheques, bank statements, etc. A transfer of property between spouses can have both fiscal and civil consequences and can be motivated by many valid and legitimate reasons. It can also decrease the person's assets to the detriment of creditors, hence the importance of being able to submit solid evidence.
[68] In the case at bar, the evidence submitted does not permit any conclusions to be drawn indicating that the Appellant provided consideration of some $110,000 for the residence. She did not testify and, furthermore, no objective evidence was submitted.
[69] The evidence submitted did not respect the minimum standards necessary for this Court to find that the Appellant met the burden of proof that was on her.
[70] The Court allows the appeal in that it sets the FMV of the transferred property at $115,000. The file shall be reassessed based on an FMV $115,000 at the time of the transfer, April 17, 1996, with costs to the Respondent, as it is a minor decrease in the amount used in making the assessment.
Signed at Ottawa, Canada this 31st day of July 2003.
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"Alain Tardif" |
Tardif, J.
Translation certified true
on this 22nd day of March 2004.
Gerald Woodard, Translator
[1] Joe Starnino et al., "Entreprise en difficulté financière avec le fisc: recours contre les tiers." (1999) APFF Convention 99 48:19.