Joint Liability of Spouses Under Section 160

Thursday, January 17, 2013

Case Citation

Bashir v. The Queen (2013 TCC 6) [TCC] [CanLII]

Summary

As often happens in cases like this one, the facts are murky. The taxpayer was caught not paying taxes on cash sales of a restaurant business then appears to create a sham in an attempt to avoid paying the taxes he agreed were owing.

How to avoid paying the tax debt? Transfer property that is in his name to his spouse and say they are separated.

While this case dealt with section 325 of the Excise Tax Act, it is similar to section 160 of the Income Tax Act. Both provisions create a joint liability for tax debt when, in certain circumstances, property is transferred between non-arm’s length persons. As a matter of tax law, a taxpayer and spouse don’t deal at arm’s length.

Normally, the tax debts of each spouse are kept separate as each person files a separate tax return, that is to say, the government can’t go after property of one spouse to satisfy a tax debt of the other, but there are exceptions.

If a spouse transfers property to the other for consideration that is less than fair market value, the spouse receiving the property becomes jointly liable for certain tax debts of the other spouse.

But there are exceptions, including the situation where the taxpayer and spouse are separated and living apart. If they are truly separated, a transfer can happen at no consideration and no joint liability exists. This is what the taxpayer claims happened, but the judge didn’t agree.

Issue

[1] This is an appeal from an assessment dated September 17, 2009 and confirmed on July 28, 2010 whereby the appellant was assessed for an amount of $26,707.92 with respect to the transfer of various properties to her by her husband Bashir Munshi (the transferor). The assessment was issued under section 325 of the Excise Tax Act (ETA) on the basis that, at the time of the transfer of the various properties, the transferor was liable to pay the amount now assessed against the appellant and that, as a result of the said transfer, the appellant became jointly and severally liable with the transferor to pay that amount.

ITA / ETA

Excise Tax Act (ETA) section 325
ITA 160(1)—Tax liability re property transferred not at arm’s length
ITA 160(4)—Special rules re transfer of property to spouse or common-law partner

Cases Cited

Yates v. The Queen (2009 FCA 50) [FCA] [CanLII]

Analysis

[18] The appellant’s counsel submits that subsection 325(4) of the ETA is applicable in this case: the transfer of the four properties was made under a written separation agreement and the appellant and the transferor (the husband) were separated and living apart at the time as a result of the breakdown of their marriage. In the alternative, the appellant’s counsel argues that there was a consideration given by the appellant in that she renounced her right to child support for her children, who were four and ten years old at the time. Although this fact is not in evidence, counsel submits that child support for both children adds up to $25,000 a year and that it represents sufficient consideration for the transfer.

[19] The respondent’s counsel questions the timing of the separation agreement as it was signed one day before the transferor signed an agreement with Revenu Québec concerning his personal income tax and a little more than two months after he had signed another agreement with Revenu Québec respecting the GST amount he owed. Counsel for the respondent further argues that no mention of the separation is made in the deed of transfer of the four properties and that the address for both the appellant and the transferor is the same more than three months after they say they separated. As an alternative argument, counsel for the respondent submits that the only exception to the application of section 325 is found in subsection 325(4), and it is an exception with regard to any payments made for child support. One must therefore meet the requirements set out in subsection 325(4) if one is to avoid the application of section 325, and therefore the matter of the consideration given and of fair market value with respect to the transferred properties becomes irrelevant.

[20] There is no doubt that the facts of this case leave many questions unanswered. Many of the facts and situations referred to are questionable, particularly with regard to the sequence of events and the reasons given for what was done. It appears strange to me that the transferor never spoke to his wife about his tax problems at any time prior to the transfers; moreover, the appellant was never made aware of the audit taking place at her husband’s restaurant. Yet she testified that the four properties were mortgaged in January 2008 to pay her husband’s debts. She did not specify which debts and I suppose one could conclude that they did not include the tax debt as no tax debt payment was made. We do not know which debts needed to be paid. We do not know how the appellant was able to mortgage the four properties on January 22, 2008 when she in fact became their owner only on February 18, 2008, almost a month later.

[23] The other inconsistency that the existence of these four mortgages creates is that the appellant stated that she mortgaged the four properties so that the transferor could pay his debts, but the Agreement states that the transfer to her is made for child support. It seems to me that the amount that these four properties were mortgaged for leaves little room for child support in that the income from the rents would necessarily be applied to the mortgage payments and that, in the event of their sale, there would be hardly any equity in the four properties when one compares the mortgage amounts with their assessed value for property tax purposes.

[30] On considering all of the evidence and the many incongruities it contains, I find as well that the testimony of the transferor's sister and her husband is inconsistent with the documentary evidence and raises other unanswered questions; hence I cannot give any weight to their evidence.

[31] In order to meet her burden of proof, the appellant must, on a balance of probabilities, satisfy this Court that one of the exceptions stated in subsection 325(4) of the ETA exists here. I am not satisfied that the evidence adduced permits me to conclude that when the transfer occurred or when the Agreement was signed there had been a breakdown of the marriage in that the appellant and the transferor were living separate and apart, nor do I find that the deed of transfer was a logical extension of the Agreement.

Decision

[33] The appeal is dismissed with costs.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.