http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/107927/index.do
Loates v. The Queen (February 6, 2015 – 2015 TCC 30, Bocock J.).
Précis: Mr. Loates’ spouse, Ms. Somerville, owned two properties, one in Whitby, Ontario (the “Cochrane Property”) and one in Howe Island, Gananoque, Ontario. In 2005 Ms. Somerville transferred the Howe Island property to Mr. Loates. The alleged consideration was his release of his marital claims to the Cochrane Property. In addition, at the date of the transfer, the Howe Island property was subject to a second collateral mortgage to provide additional security for a second mortgage Ms. Somerville put on the Cochrane Property. Mr. Loates was assessed pursuant to subsection 160(1) of the
Income Tax Act (“ITA”) in 2010 in respect of Ms. Somerville’s outstanding income tax debts at the date of the transfer of the Howe Island property to him. The Tax Court rejected Mr. Loates’ evidence of funds he borrowed to advance funds to Ms. Somerville which he alleged formed additional consideration for the Howe Island property (the “Offset Loans”). The Court held that the transfer of his inchoate interest in the Cochrane Property did not constitute consideration paid by him for the Howe Island property. Similarly the collateral second mortgage did not constitute consideration paid by him for the Howe Island property since the second mortgage to the Cochrane Property, to which it was collateral security, had been discharged in full
Decision: The facts behind this subsection 160(1) assessment were somewhat convoluted:
[5] From 2004 to 2006, the Mr. Loates asserts he made three loans to Ms. Somerville totalling approximately $294,600.00 (the “Loans”). In early 2005, Ms. Somerville wished to take out a second mortgage on the Cochrane Property, in order to obtain capital for her business. Mr. Loates disagreed. The Cochrane Property was valued at $1,000,000.00, and had an existing mortgage of $448,054.89 registered on title.
[6] Mr. Loates testified that on March 2, 2005 he and Ms. Somerville came to an understanding. A “division of property” agreement was executed by the Mr. Loates and Ms. Somerville, in their own handwriting (the “Division Agreement”). The agreement provided that:
(a) Mr. Loates would consent to the second mortgage on the Cochrane Property, in return for Ms. Somerville transferring title to the Howe Island Property to Mr. Loates;
(b) Mr. Loates would have “no claim” on the Cochrane Property;
(c) Ms. Somerville would have “no claim” on the Howe Island property; and,
(d) Ms. Somerville was to sell the Cochrane Property and pay her taxes and other debts.
[7] On March 3, 2005, Ms. Somerville gave a second mortgage against the Cochrane Property in the amount of $315,000.00 (the “Cochrane Second Mortgage”).
[8] As further collateral security for the Cochrane Second Mortgage, a collateral mortgage was registered against title to the Howe Island Property on the same date in the amount of $311,850.00 (the “Howe Island Collateral Mortgage”).
[9] On March 15, 2005, the Transfer Date, Ms. Somerville transferred ownership of the Howe Island Property to Mr. Loates.
[10] At trial, the parties agreed that at the Transfer Date the fair market value of the Howe Island Property was $700,000.00, coincidentally the assumed value of the Minister. The parties further agreed that the balance of the first mortgage remaining on the Howe Island Property at the Transfer Date was $414,735.11.
[11] In January of 2006, the Cochrane Property was sold for $800,000.00 by Ms. Somerville. After satisfying the mortgages, approximately $20,228.14 remained and was remitted to the CRA in respect of Ms. Somerville’s tax debt.
The Court rejected Mr. Loates’ evidence that he had borrowed funds to loan to Ms. Somerville which formed additional consideration for the Howe Island property:
[24] Mr. Loates, as noted from the facts above, firstly asserts that he received no benefit with respect to the transferred property because there existed loans advanced by him to Ms. Somerville in the aggregate of $294,600.00. These funds were, in turn, obtained by Mr. Loates who borrowed $248,000.00 from a business associate, one Mr. Burke, and his sale of works of art totalling $46,600.00.
[25] With respect to the Offset Loans made to Ms. Somerville and with respect to Mr. Loates’ source of the loaned amounts, there is simply no evidence. Neither Ms. Somerville nor Mr. Burke testified and no bank records, cancelled cheques nor promissory notes were produced at trial. Mr. Neeteson testified that Mr. Loates had never raised the Offset Loans during their audit dealings. Perhaps as telling is the handwritten Division Agreement, which according to Mr. Loates settled the outstanding credits, debits, and transfer of property between the parties, but it made no mention of the deemed repayment of the Offset Loans.
The Court also rejected Mr. Loates’ argument that his release of his marital interest in the Cochrane Property was consideration for the Howe Island property:
[20] In
Yates v. Canada, 2009 FCA 50, 2009 DTC 5062 (“Yates”), the language of section 160 was considered by the Federal Court of Appeal, in relation to family law. Justice Desjardins at paragraphs 12 and 16 called section 160 of the Act “unquestionably a draconian measure”, but, nonetheless, a correct reading of section 160 makes it clear the only exception to subsection 160(1) of the Act is provided for in subsection 4. Justice Blais, concurring, stated at paragraph 67 that “A plain language interpretation of subsection 160(1) does not allow for a family law exception …”. Justice Nadon, also concurring, stated at paragraph 39 that the nature of the transfer is not relevant in determining whether an individual is subject to subsection 160(1) of the Act.
…
[30] Lastly, the Division Agreement itself does not reference values, specific release of rights, or outline the underlying purpose, even briefly, of the transfers. As well, the statutory requirement under subsection 55(1) of the Family Law Act that any domestic contract be witnessed was not fulfilled. While this requirement is not essential for the Division Agreement’s admission as evidence at this tax appeal, the absence of same goes to the timeliness, weight, and purpose to be given to such a document. Moreover, there was no evidence that such a lump sum transfer was reflective of a recurring, vital, subsisting legal obligation or payment pursuant to a court order or a matrimonial division case: Yates, supra at paragraph 30. As such, there is no exemption from the application of section 160 to the transfer on the basis of the Exchanged Property consideration, even if the inconsistencies of a genuine contractual agreement contained then present releases and identifiable consideration tendered:
Allen, supra at paragraph 35.
Finally the Court held that the collateral second mortgage on the Howe Island property did not constitute additional consideration for the transfer since it was never called on:
[38] As stated, the value of the Cochrane Property at the Transfer Date was, based upon Mr. Loates’ admission and the subsequent sale price, at least $800,000.00. Such a value was greater than all registered encumbrances including the full extent of the Cochrane Second Mortgage (to which the Howe Island Collateral Mortgage was collateral). On this basis, at the Transfer Date, any diminishment to the Howe Island Property value by registration of the Howe Island Collateral Mortgage was notional at best. As such, the Minister’s assumption that Mr. Loates received a benefit, for which consideration was not paid, of not less than the amount of the Tax Debt ($158,058.27) remains intact. The Howe Island Property had an assumed fair market value of $700,000.00 and registered, quantifiable, and realizable debt of some $414,000.00. Consistent with
Livingston, it is the value of the benefit at the time of transfer which matters and not the value of a possible realizable security at a future date should related property values change and inchoate rights of enforcement become choate. In short, the Howe Island Collateral Mortgage did not diminish the value of the Howe Island Property because the Cochrane Property had more than sufficient equity at the Transfer Date to satisfy all security registered against it.
As a result the appeal was dismissed with costs.