CaseNotes for February, 2020

  • Robitaille v. The Queen, 2019 TCC 200 by Jason Lau

    Facts

    • During 2016, Mr. Robitaille received a $40,000 cheque from his wholly-owned corporation, and Mr. Robitaille intended this amount to be a management fee includable in his income.
    • On July 21, 2016, Mr. Robitaille went to an automated teller machine to deposit the cheque. In his haste to get the matter over with, Mr. Robitaille inadvertently selected his TFSA as the recipient account.
    • The error went unnoticed until June 14, 2017, when a CRA official notified Mr. Robitaille that his TFSA was in an over-contributed state by $39,500 and that a withdrawal of $29,000 would have to be made in order to bring the account into compliance.
    • Robitaille immediately withdrew $29,000 from the TFSA the same day.
    • The Minister issued an assessment in respect of Mr. Robitaille’s 2016 taxation year for $2,370 on the over-contribution amount under Part XI.01 of the Act.

    Issue

    Was the Minister correct in issuing an assessment to Mr. Robitaille under Part XI.01 of the Act in respect of the TFSA over-contribution, even though it was inadvertent and the amount was withdrawn immediately after the error was discovered?

    Decision

    The court found in favour of the Minister, and Mr. Robitaille’s claim was dismissed.

    Ratio

    Mr. Robitaille’s inadvertent deposit to his TFSA caused him to have an “excess TFSA amount” as defined under subsection 207.01(1) of the Act. Section 207.02 of the Act imposes a 1% tax on the highest excess amount of the month, per month, until the excess amounts are withdrawn from the account.

    The Minister’s assessment of Part XI.01 tax was purely mechanical in nature. As none of the facts of the case were in dispute, nor was the Minister’s application of the Act called into question, the court had no choice but to dismiss Mr. Robitaille’s claim.

    Takeaway

    As noted by the Minister’s counsel, the Tax Court of Canada had no ability to provide relief in respect of the Part XI.01 assessment. Mr. Robitaille’s correct avenue of recourse would have been to apply for a cancellation of tax under subsection 207.06(1) of the Act.

    Subsection 207.06(1) of the Act allows for the Minister to provide administrative relief and waive or cancel taxes assessed under Part XI.01 if the taxpayer can demonstrate i) the tax liability arose “as a consequence of a reasonable error” and ii) the excess amounts were withdrawn from the TFSA without delay. Note that if a person applies for relief under subsection 207.06(1) of the Act and is denied by the Minister, they may then apply to the Federal Court of Canada for judicial review of the decision. 

    However, it is best to avoid this mess altogether by being careful not to over-contribute to registered plans from the start.   

  • Muth Estate, 2019 ABQB 922 by Jeanne Posey

    In this Alberta Court of Queen’s Bench decision, the Court was asked to rule on whether an executor may seek indemnification from beneficiaries for the income tax liability of an estate.

    Facts

    • Morley Muth (the “Deceased”) signed a will (the “Will”) in 1970.
    • The Deceased was married to Freda Muth, (the “Executor”) who was named the Executor of the estate (the “Estate”). The Will left everything to the Executor if she survived him by 30 days.
    • The Deceased and the Executor separated in 1978 but never divorced. The Executor signed a Release and Waiver of any claims in the Estate, but this was not sufficient to remove her from the Will, as confirmed in a trial with the nieces and nephews of the Deceased (the “Respondents”).
    • In 2011, in a mediated settlement, the Respondents and the Executor reached an agreement (the “2011 Settlement Agreement”) whereby the Executor and the Respondents would receive 55 percent and 45 percent of the Estate respectively.
    • in December 2011, the Executor retained an accountant to prepare a final income tax return for the Estate and to estimate the tax liability. The accountant advised the Executor that a $25,000 holdback was sufficient. Based on this advice, the Executor distributed the balance of the Estate in the proportions agreed upon in the 2011 Settlement Agreement.
    • The first accountant failed to file the Deceased’s final income tax return. A second accountant was retained in November 2012 at which time the second accountant determined that the $25,000 holdback was insufficient.
    • The Executor claims she now out-of-pocket $35,772.19 in the aggregate for the Deceased’s unknown tax liability and professional fees.

    The Executor seeks repayment from the Respondents for their proportionate share of the re-calculated tax liability, which she calculates to be $16,097.19.

    Issues

    1. Is this case suitable for summary judgement.
    2. If so, are the Respondents obligated to indemnify the Executor?

    Analysis

    1. Is this case suitable for summary judgement?

    A summary judgement is a motion brought by one party against another to have a case decided summarily, without having to go to trial. The motions judge may be asked to decide on specific issues of a case, or the merits of an entire case. Either way, the party bringing the application must persuade the judge that there is no genuine issue that requires a full trial. The leading case that sets out the test for summary judgement is Weir Jones Technical Services Incorporated v Purolator Courier Ltd. 2019 ABCA 49, and the test is summarized as follows:

    1. Is it possible to resolve the dispute on a summary basis, or do uncertainties in the facts, the record or law reveal a genuine issue requiring a trial?
    2. Has the moving party met the burden on it to show that there is either “no merit” or “no defense” and that there is no genuine issue requiring a trial?
    3. If the moving party has met its burden, the resisting party must put its best foot forward and demonstrate from the record that there is a genuine issue requiring trial. If there is a genuine issue requiring a trial, summary disposition is not available.
    4. In any event, the presiding judge must be left with sufficient confidence in the state of the record such that he or she is prepared to exercise the judicial discretion to summarily resolve the dispute.

    Based on the evidence submitted, the Court concluded that summary judgment was available.

    1. Are the Respondents obligated to indemnify the Executor?

    The 2011 Settlement Agreement does not specifically deal with indemnity. It dealt with three costs:

    1. The Respondents would pay half of the cost of the mediation;
    2. Each of the Respondents and the Executor would pay their own legal costs to date; and
    3. The Respondents and the Executor would each split the cost of an Alternative Dispute Resolution chambers session.

    The Respondents referred to section 159 of the Income Tax Act which requires that a personal representative obtain a clearance certificate before distribution and imposes personal liability for the tax liability of the estate on those who do not do so. The Respondents further referred to the Alberta Surrogate Rules (AR 130/1995, Schedule 1, Part 1, Section 9, Table No. 16) as requiring a personal representative as part of his or her duties to pay any tax owing and obtain clearance certificates before distributing estate property.

    The Court considered whether there had been a “breach of trust” by the Executor and said “to the extent that the term “breach of trust” has connotations of intentional wrongdoing, there is no evidence of that here. However, the Court found that the Executor had a statutory obligation to obtain a clearance certificate and failed to do so.”

    The Court also referred to the Trustee Act, RSA 2000, c T-8, s.26, which specifically provides that a trustee may be entitled to indemnification by a beneficiary who instigates or requests a breach of trust.  The natural corollary of this principle is that if a beneficiary does not instigate or request a breach, they cannot be obligated to indemnify the trustee.

    The Court ultimately held that, as between the two parties, one had an obligation to perform a duty and failed, and one had neither an obligation nor the means to satisfy it. It was the former who the Court found should bear the consequences of the action or inaction.

    Takeaways

    An invariable practice of an executor should be to receive a clearance certificate prior to distributing any assets of an estate. In rare cases, where an estate must distribute assets prior to a clearance certificate being received, a very generous hold-back along with a tax indemnity should be requested by the executor in order to protect the executor from personal liability.

  • White v. The Queen, 2020 TCC 22 by Jas Sangra

    Facts

    • Pursuant to section 227.1 of the Income Tax Act(the “ITA”) and subsection 323(1) of the Excise Tax Act (the “ETA”), the Taxpayer’s husband (“Mr. White”) had been assessed by way of director liability for unremitted net GST and source deductions as one of the directors of a company which ceased to carry on business in 2006.
    • The Taxpayer and Mr. White shared a joint bank account (the “Joint Bank Account”). The couple used the Joint Bank Account to pay for their personal and family expenses.
    • Between March 2013 and March 2014 (the “Period”), Mr. White deposited his payroll deposits in the amount of $89,806.72 into the Joint Bank Account.
    • Throughout the Period, various amounts were transferred from the Joint Bank Account to the Taxpayer’s personal bank account (the “Transfers”)
    • The Taxpayer was the sole owner of the family home, and mortgage payments for the family home were paid out of the Joint Bank Account (the “Mortgage Payments”)
    • On March 1, 2016, the Taxpayer was assessed $49,962.45 under section 160 of the ITA and $90,886.35 under section 325 of the ETA.

    Issue

    Do Mr. White’s payroll deposits into the Joint Bank Account constitute “transfers” of “property, directly or indirectly” for the purposes of section 160 of the ITA and/or section 325 of the ETA?

    Analysis

    Section 160 of the ITA states:

    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:

                […]

    (e) the transferee and transferor are jointly and severally, or solidarily, 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 (including, for greater certainty, an amount that the transferor is liable to pay under this section, regardless of whether the Minister has made an assessment under subsection (2) for that amount) in or in respect of the taxation year in which the property was transferred or any preceding taxation year, but nothing in this subsection limits the liability of the transferor under any other provision of this Act or of the transferee for the interest that the transferee is liable to pay under this Act on an assessment in respect of the amount that the transferee is liable to pay because of this subsection.

    Subsection 325(1) of the ETA states:

    Where at any time a person transfers property, either directly or indirectly, by means of a trust or by any other means, to

    (a) the transferor’s spouse or common-law partner or an individual who has since become the transferor’s spouse or common-law partner,

    (b) an individual who was under eighteen years of age, or

    (c) another person with whom the transferor was not dealing at arm’s length, the transferee and transferor are jointly and severally, or solidarily, liable to pay under this Part an amount equal to the lesser of

    (d) the amount determined by the formula

    A – B

    where

    A is the amount, if any, by which the fair market value of the property at that time exceeds the fair market value at that time of the consideration given by the transferee for the transfer of the property, and

    B is the amount, if any, by which the amount assessed the transferee under subsection 160(2) of the Income Tax Act in respect of the property exceeds the amount paid by the transferor in respect of the amount so assessed, and

    (e) the total of all amounts each of which is

    (i) an amount that the transferor is liable to pay or remit under this Part for the reporting period of the transferor that includes that time or any preceding reporting period of the transferor, or

    (ii) interest or penalty for which the transferor is liable as of that time, but nothing in this subsection limits the liability of the transferor under any provision of this Part.

    In Fasken Estate v. Minister of National Revenue[1], the Court stated:

    The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

    In White v The Queen[2], the Court held that funds deposited by a husband into a bank account held jointly with his spouse was not a transfer of property, as contemplated by section 160 of the ITA. However, the court in that case found that a transfer had occurred when the spouse used the deposited funds to pay for a mortgage on a home that she owned alone.

    In Yates v Canada[3], the Federal Court of Appeal upheld the Tax Court of Canada’s finding that Mr. Yates had divested himself of property when he removed his name from a joint bank account. Justice D’Arcy concluded that the implication of this finding was that “a transfer did not occur when Mr. Yates deposited amounts into the joint bank accounts, but rather only occurred when he subsequently divested himself of the right to the money in the bank accounts by removing his name from those joint bank accounts”.

    Holding

    Justice D’Arcy found that Mr. White’s payroll deposits to the Joint Bank Account themselves were not “transfers” of “property, directly or indirectly” for the purposes of section 160 of the ITA and/or section 325 of the ETA because:

    1. “The mere placing of funds in a joint bank account does not constitute a transfer. Mr. White did not divest himself of the funds when he deposited them into the Joint Bank Account. He continued to have full access to the funds in the account.”
    2. “Mr. White did not defeat or in any way hinder the Minister’s efforts to collect any tax he owed by placing his remuneration in the Joint Bank Account. The Minister could have taken collection action with respect to funds in the Joint Bank Account.”

    However, the Court found that a transfer had occurred when the Taxpayer “removed the funds from the account” by virtue of the Transfers and the Mortgage Payments and assessed a tax liability of $34,052 pursuant to subsection 325(1) of the ETA. The assessment pursuant to section 160 of the ITA was vacated.

    Takeaway

    While the court held the Minister “could have taken collection action with respect to funds in the Joint Bank Account”, joint bank accounts cannot typically be garnished where a claim is made against only one of the joint account holders.[4]

    As with most other types of tax liability, liability pursuant to section 160 of the ITA or section 325 of the ETA is not always straightforward. Those with tax debts should be wary of what constitutes a “transfer” of property before making payment to, or on behalf of, someone else. It is also notable that while the taxpayer generally has the burden to demolish the Minister’s assumptions, this case seems to place an additional burden on the CRA when assessing third-party liability pursuant to section 160 of the ITA or section 325 of the ETA against a joint account holder by forcing the CRA to establish how much of the amount(s) deposited into a joint bank account were “transferred” to the joint account holder.

    [1] [1948] C.T.C. 265 at 279.

    [2] 95 D.T.C. 877.

    [3] 2009 FCA 50.

    [4] See: 238344 B.C. Ltd. v. Patriquin, 1984 CanLII 301 (BCCA). Note: In some cases, where a creditor is able to establish the amount of a debtor’s interest in a joint bank account, a garnishment of that amount may be upheld by the courts (for example, see: Smith v. Schaffner, 2007 NSSC 210).

  • Yellow Point Lodge Ltd. v. the Queen 2019 TCC 178 by Sarah Ykema

    Facts

    • Yellow Point Lodge Ltd. (the “taxpayer”) donated ecologically sensitive land to two registered charities in 2008 but did not receive the Minister’s “Certificate of Ecologically Sensitive Land” until 2009. The donation receipt was issued subsequently in 2010 (after the 2008 tax returns were originally filed)
    • The Taxpayer claimed a donation tax credit under paragraph 110.1(1)(d);
    • The Taxpayer amended their 2008 tax returns to claim the donation tax credit and proceeded to claim the allowable portions on the following four-year ends. The Taxpayer then tried to claim the donation tax credit in 2014, the year in issue for this case.

    Issue

    1. Does the donation carryforward start the year the donation is made or the year that the donation receipt is received?

    Discussion

    Under the rules for corporate donations at the time of this case, ecological land donations can be claimed in the year or carried forward up to five years. For a gift of ecological land made after February 10, 2014, the carryforward for the donation is ten years, rather than five years.

    The rules for claiming the ecological land donation are as follows:

    • Fair market value must be certified by the Minister of the Environment
    • The land is certified by that Minister to be ecologically sensitive land important to the preservation of Canada’s environmental heritage
    • The gift was made by the corporation in the year, or any of the ten preceding years (previously this was five) to a qualified donee.

    The taxpayer tried to interpret the donation provisions to try to get one more year of deductibility out of the otherwise expiring credits by claiming that the donation was made in 2009 when the donation receipt was received. Since it was clear that the gift was made in 2008 when the land was gifted, and not in 2009 when the taxpayer received the certifications from the Minister, the five-year period to claim the donation started in 2008.

    Per Visser J at paragraph 19 of his decision:

    As noted above, the Appellant has argued that a textual, contextual and purposive analysis of paragraph 110.1(1)(d) of the Act supports its conclusion that its gift of the Covenant to TLC and NALT was not “made” for the purpose of paragraph 110.1(1)(d) until 2009. In my view, the Appellant’s position in this Appeal (and its interpretation of paragraph 110.1(1)(d)) is without merit. In my view, the wording of paragraph 110.1(1)(d) is very clear and functions as Parliament intended. It is also my view that the position proffered by the Appellant in this case, if adopted by this Court, would create a great deal of uncertainty with respect to the application of paragraph 110.1(1)(d) and therefore potentially frustrate the purposes and policies intended by Parliament in enacting paragraph 110.1(1)(d) of the Act.

    Takeaways

    Appropriate planning should be done before undertaking large donations to ensure that the tax benefit can be maximized within the allowable carryforward limit.

  • Jagwinder Singh v. Her Majesty the Queen, 2019-TCC283 by Dallas Kleckner

    In this Tax Court of Canada decision, the Court was tasked with determining whether the Minister pursuant to a net worth audit (the “Audit”), had discharged her burden of proof in (i) reassessing Jagwinder Singh (the “Taxpayer”) outside of the normal three year reassessment period, and (ii) issuing a gross negligence penalty.

    Facts

    • On January 5, 2016, the Minister issued two Notices of Reassessment (the “Reassessments”) to the Taxpayer in respect of his 2008 and 2009 taxation years.
    • The Minister alleged the Taxpayer had failed to report amounts received from 1494453 Ontario Inc. (“149 Ont.”), a banquet hall business in which the Taxpayer held a 50 percent ownership interest. The alleged unreported amounts totaled $99,166 in 2009 and $88,473 in 2010.
    • The Taxpayer appealed the Reassessments on the basis that the amounts received were shareholder loan repayments from 2158357 Ontario Ltd. (“215 Ont”), a motel business in which the Taxpayer held a 50 percent ownership interest, and as such did not constitute income. The Taxpayer did admit that on two occasions he had sold jewelry and received cash payments totaling $24,950 which he had not reported.

    Issues

    1. Did the Taxpayer fail to report income in his 2009 and 2010 taxation years?
    2. Were the circumstances such that the Reassessments could be issued beyond the normal reassessment period of three years?
    3. Do the circumstances permit the application of the gross negligence penalty?

    Held

    The Court held in favour of the Minister with respect to the three issues raised.  By establishing that the Taxpayer, on a balance of probabilities, had substantially underreported his income due to a misstatement attributable to negligence, carelessness or willful default, the Minister had discharged her burden. On the same grounds, the Court found that the circumstances were such that the gross negligence penalty was appropriately assessed.

    Analysis

    In its analysis, the Court reviewed the 2008 federal court of appeal decision of LaCroix v. R., 2008 FCA 241, and at paragraph 4 reproduced the following:

    “… in determining whether there is unreported income as ascertained by a net worth reassessment for a presumptively statute-barred taxation year, and whether an accompanying gross negligence penalty has been rightly imposed:

    i. the first step is to consider, on the basis of direct evidence adduced by the [Minister] and or cross-examination of the Appellant taxpayer (and or of any other taxpayer witnesses), whether on a balance of probabilities there was unreported income; 

    ii. assuming there is a finding of unreported income and in the absence of a credible explanation for same, the Respondent has met its onus of proof for purposes of both the subparagraph 152(4)(a)(i) statute-barred issue and the subsection 163(2) penalty issue.”

    Referring to the first step, the Court reviewed the CRA audit working paper detailing the Taxpayer’s assets which included a shareholder loan balance owing to him from each of 149 Ont. and 215 Ont. Per the working paper, the Taxpayer’s shareholder loan balance from 149 Ont. remained unchanged during the two taxation years in issue and was corroborated by financial statements. In respect of the Taxpayer’s shareholder loan balance owing from 215 Ont., the amounts the Taxpayer claims to have received  were not supported by financial statements, and rather, disclosed the balance owing to the Taxpayer as increasing by approximately $98,000 between December 31, 2008 and December 31, 2009, and then decreasing by $16,000 between December 31, 2009 and December 31, 2010. The Court logically concluded that any repayment of the shareholder loan would have decreased the balance owing to him by a corresponding amount, and therefore, the Taxpayer’s explanation was not credible.

    In his submission, the Taxpayer referred the Court to a “basic” computer-generated table and a collection of relatively unofficial handwritten receipts from 215 Ont., which were annotated as “owner drawing” or “owner advance”. None of the records provided to the Court reconciled with the available records of 215 Ont. The Court took further issue with the fact that the Taxpayer could not explain why 215 Ont., a motel business, would have such considerable amounts of cash.

    Given that the amounts in issue were substantially in excess of the amounts reported, the Court concluded that a misrepresentation was made attributable to negligence, carelessness or willful default, permitting a reassessment beyond the normal three-year period. In addition, having found the Taxpayer’s explanation not to be creditable, the Minister was justified in assessing the gross negligence penalty.

    Takeaways

    This decision provides a good example of how a Court may approach the issues of: (i) finding unreported income, (ii) reassessing taxation years that are statute barred, and (iii) the application of the gross negligence penalty.  

    More significantly, this case demonstrates the importance of good, coherent record keeping when appealing a reassessment.  Here, the credibility of the Taxpayer was diminished by the poor records and accounting of 215 Ont. In addition, the Court lost further confidence in the Taxpayer when he could not provide a plausible explanation for the considerable quantities of cash that 215 Ont. held.  Had the Taxpayer provided the Court with records that corroborated his story and had plausible answers for questions that would most certainly be asked, the outcome would likely have been more favourable to the Taxpayer.