Ashworth v. R. – TCC: Taxpayer paid down husband’s corporate line of credit thus providing consideration for transfer of husband’s share of home to her – Subsection 160(1)

Ashworth v. R. – TCC:  Taxpayer paid down husband’s corporate line of credit thus providing consideration for transfer of husband’s share of home to her – Subsection 160(1)

Ashworth v. The Queen (April 19, 2018 – 2018 TCC 76, Graham J.).

Précis:   Ms. Ashworth’s husband transferred his half of the family home to her at a time when he had outstanding tax liability.  The Crown agreed that Ms. Ashworth had provided consideration in the form of assuming 50% of the mortgage on the property.  The issue was whether paying down the line of credit of her husband’s corporation was also consideration.  The Crown argued that since she was a signatory on that line of credit only 50% (i.e., her husband’s share) was consideration for the transfer of the home.  The Tax Court rejected the Crown’s position and allowed the appeal except to the extent of $6,730 (relating to some credit card transactions).  There was no order as to costs.

Decision:   This is a very pithy decision that was issued from the Bench:

[9]  Given the choice between the Respondent's characterization of what happened and Ms. Ashworth's characterization, it is clear to me what must have happened. Ms. Ashworth knew that the company was in financial trouble. She also knew that Mr. Ashworth was in financial trouble. The whole point of the transaction was to protect the house from that trouble. The only way for Ms. Ashworth to do that would be to ensure that she paid fair market value for the house and ensure that the collateral mortgage was discharged. She could achieve those goals by paying Mr. Ashworth the $103,904 as partial consideration for the purchase and insisting that he use the funds to pay off the line of credit and discharge the collateral mortgage.

[10]  The Respondent would have me believe that Ms. Ashworth instead chose to fail to pay Mr. Ashworth an appropriate purchase price and then borrowed money from Scotiabank on her own to lend to the company to pay off the collateral mortgage. What possible reason could she have for choosing the second alternative? Why would she possibly want to be both a party to a fraudulent conveyance and at the same time make a loan to a company that had no hope of repaying it? She gains nothing from this second alternative. She exposes herself to fraudulent conveyance issues and section 160 issues and, in return, gets nothing but a worthless loan receivable. Given the choice between two conceivable transactions that both fit the documentary evidence, I prefer the one that makes logical sense to have been implemented.

[11]  The transaction was completed after Mr. Ashworth consulted with both a bankruptcy trustee and a lawyer. He testified that he accepted the plan proposed by the trustee and then the lawyer executed it.

[12]  The theory put forward by the Respondent amounts to Mr. Ashworth having committed a fraudulent conveyance. It seems unlikely to me that the bankruptcy trustee would have advised him to commit such an offence or that a lawyer would knowingly have participated in such a plan. It seems far more likely that the plan proposed and implemented is the one described by Mr. Ashworth, a plan specifically designed not to be a fraudulent conveyance.

[13]  The key to my conclusion is the fact that I view the collateral mortgage as being security that Ms. Ashworth granted for the purpose of helping her husband. Ms. Ashworth was not a shareholder of the company. Mr. Ashworth was the sole shareholder. Thus, the security granted would have been for his benefit, not hers. It may have indirectly had the benefit or the potential to increase the family's wealth, but it was nonetheless his investment. Had the company defaulted on the line of credit and had TD Bank then realized on the collateral mortgage, I find that while the bank could have legally seized Ms. Ashworth's interest in the home, as between Mr. Ashworth and Ms. Ashworth, the seizure would have come from his share of the equity as security had been granted for his benefit.

[14]  This is not a theoretical allocation of the debt between Ms. Ashworth and Mr. Ashworth. There was sufficient equity in the home at the time of the transaction that this allocation would have been possible. My view of the transaction may have been very different if there had been insufficient equity for Mr. Ashworth to have assumed all of the obligation. In that situation, the portion that could not have been assumed would clearly have been Ms. Ashworth's debt.

Although this was a general procedure appeal there was no order as to costs.