Minister did not take mortgage into consideration in absence of adequate evidence as to outstanding amount

Tax court of Canada | Tax | Income tax | Tax avoidance

Taxpayer, her husband, her brother and his wife all purchased motel together but eventually taxpayer’s brother pursued different business interests although he maintained his ownership interest in motel. Family friend also lent $60,000 to taxpayer’s husband and brother secured by second mortgage on property. Taxpayer’s brother borrowed $50,000 from sister but as this was family loan it was not formally documented and few years later, brother borrowed another $20,000 from sister. Subsequently, brother transferred his half share in motel to sister for consideration in amount of $70,000. Taxpayer’s brother owed tax debt in amount of $270,000 to Canada Revenue Agency. Minister reassessed taxpayer per subsection 160 (2) of Income Tax Act in respect of non-arm’s length transfer of property. Taxpayer appealed. Appeal allowed. Evidence was that Minister did not take second mortgage into consideration, because there was no adequate evidence if there was outstanding amount. Nobody, who had first had knowledge of what amount was outstanding on second mortgage, was called to testify on behalf of taxpayer, and amount outstanding was still unknown. It was accepted, based on taxpayer’s testimony, that some of $50,000 loan to brother was sourced by her and remainder was sourced through motel operations. As it was family loan, lack of corroborating documentation was not unusual. Accordingly, $25,000 was recognized as being sourced by taxpayer, and was therefore forgiven by subsequent conveyance by brother to her of his interest in motel.

Sarkaria v. The Queen (2018), 2018 CarswellNat 4099, 2018 TCC 159, B. Russell J. (T.C.C. [General Procedure]).

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