McCullough-Greiff v Canada Revenue Agency (Taxation), 2013 ABQB 464

Court of Queen ’ s Bench of Alberta Citation: McCullough-Greiff v Canada Revenue Agency (Taxation), 2013 ABQB 464 Date: 20130814 Docket: 1301 04656 Registry: Calgary Between: Rosalia McCullough-Greiff and Shelley McCullough Applicants - and - Canada Revenue Agency (Taxation) Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice Sal J. LoVecchio _______________________________________________________ Introduction [ 1 ] Shelley McCullough has been a generous mother and grandmother.

It is not in issue that she and her late husband provided substantial financial assistance to her formerly married daughter Rosalia McCullough-Grieff and Rosalia’s former spouse Caesar Greiff first to purchase and then to occupy their matrimonial home. [ 2 ] Mr. Greiff has not been quite as generous with the Canada Revenue Agency. Quite to the contrary, at the time of his divorce from Rosalia, he owed the tax department over $100,000 in back taxes. More precisely, the CRA Writ of Seizure registered by the CRA on the title to the matrimonial home sets that number at $106,851.

[ 3 ] In this Application, Shelley McCullough and Rosalia ask the Court to discharge the CRA Writ without any payment being required on the tax arrears of Caesar. Background [ 4 ] Except as will be specifically noted, substantially all of the facts in this case are not in dispute. Rosalia and Caesar were married on July 8, 2000. They have three children. Rosalia was a stay at home mom and Caesar has worked as a tile setter. [ 5 ] Rosalia and Caesar entered into a pre-nuptial agreement on June 27, 2000.

It provides in clause 16 that any gifted or inherited funds used to pay for a matrimonial home would not be part of a property division in the event the couple eventually separated. [ 6 ] When the matrimonial home was purchased in 2003, Rosalia’s parents Shelley McCullough and Daniel McCullough loaned the couple $35,600 to assist them in the purchase. At that time, Rosalia and Caesar signed a promissory note agreeing to repay the advance on demand. [ 7 ] Daniel and Shelley McCullough also went on title as Rosalia and Caesar did not qualify on their own for a mortgage.

Shortly thereafter, Daniel became ill and eventually died in 2006. After Daniel’s death, Shelley McCullough, Rosalia and Caesar remained on title as surviving joint tenants each having an undivided 1/3 interest. [ 8 ] It has not been directly argued that the funds advanced by Shelley McCullough and her late husband are exempt property as contemplated by the pre-nuptial agreement.

Rather, in the concluding paragraph of the brief filed by Counsel for Shelley McCullough, there is suggestion that should the Court find that the moneys advanced by Shelley McCullough were found by the Court to be a gift then these gifts would be exempt property as per clause 16 of the pre-nuptial agreement.

That being said, the Applicants have not really sought such a declaration and I can see why. [ 9 ] The Consent Judgment referred to below notes that Shelley McCullough “has advanced funds to the parties (being Rosalia and Caesar) and assumed responsibility for debt on the matrimonial home of approximately $347,000, leaving equity in the home of approximately $22,000". (The parenthetical is mine.) As a result, the Consent Judgement is predicated on the assumption these advances are to be considered as debt and not a gift or the equity would be much higher and Rosalia would have sought an exemption based on the pre-nuptial agreement.

I see no reason to derivate from that assumption. [ 10 ] As a factual matter, the CRA does not accept that the equity in the matrimonial home, as determined above, should govern the ultimate resolution of this Application and, as a result, I will return to that number later. [ 11 ] On September 15, 2011, Rosalia filed a Statement of Claim for Divorce and Division of Matrimonial Property. [ 12 ] On October 5, 2011, Rosalia had a Certificate of Lis Pendens registered on the title to the matrimonial home. [ 13 ] On November 16, 2011, Shelley McCullough caused a caveat to be registered on the title to the matrimonial home to protect her claim for reimbursement as the $35,600 promissory note for the down payment was still outstanding.

This filing should not be seen as indicating that Rosalia and Caesar were in default as it has not been suggested a demand for payment had been made. The action taken by Shelley McCullough was cautionary only. [ 14 ] While the divorce did not proceed without some issues arising, eventually Caesar and Rosalia entered into a Matrimonial Property Settlement Agreement. The MPSA became the object of a Consent Judgement of Justice Tilleman of this Court dated February 12, 2013. As part of the settlement, Caesar was to transfer his interest in the matrimonial home to Shelley McCullough and Rosalia.

In addition, the MPSA (and the Consent Judgement) contemplated that the TD Bank Line of Credit secured by a charge on the matrimonial home was to be repaid. It is common ground that the amount outstanding on this credit line is approximately $120,000.

The Issue [ 15 ] The MPSA (and the Consent Judgement) make no mention of the tax liability of Caesar or the CRA Writ and both Shelley McCullough and Rosalia have affirmed that they had no knowledge of either the tax liability or the CRA Writ until they were attempting to refinance the property. The refinancing attempt only occurred some time after Caesar had transferred his interest in the property to Shelley McCullough and Rosalia. [ 16 ] As is usually the case, the Rogue (also known as Caesar in this case) is not in a position to pay the CRA.

Unfortunately, even if she is obligated to pay the CRA (as the CRA seems to suggest in its brief) Rosalia really cannot pay the CRA, and Shelley McCullough, who probably could pay the CRA, for perfectly logical reasons does not want to pay the CRA. But she does want to refinance the property and accordingly wants the CRA Writ removed needless to say without paying the CRA. [ 17 ] In order for the CRA Writ to be removed, without a payment of at least part of the amount owing to the CRA, the Applicants must demonstrate to the Court that the Certificate of Lis Pendens takes priority over the CRA Writ.

Should they succeed? That is the $106, 851 question. The Position of the Parties The Applicants [ 18 ] The Argument of the Applicants is quite straight forward on what they say is the basic issue for me to decide. They submit the CLP predates the CRA Writ and in view of the MPSA (and the Consent Judgement) it trumps the CRA Writ. As authority for this proposition, the Applicants refer to the case of Markey v Revenue Canada (Taxation) [1] . This is a decision of my colleague Justice Kenny and her decision was affirmed by our Court of Appeal [2] .

The Respondent - CRA [ 19 ] The Argument of the Respondent is also quite straight forward. The Markey case is distinguishable and the CRA Writ, as a validly registered encumbrance on the property, trumps all but $35,600 of the loan claim of Shelley McCullough and the TD Bank Secured Line of Credit of approximately $120,000. Discussion and Analysis [ 20 ] A review of what transpired in the Markey case is necessary to resolve this conflict as to its application to this case. [ 21 ] At first blush, that case and this case are seemingly indistinguishable. [ 22 ] Ms.

Markey (rather than the mother of the divorcing party) sought a declaration that a Writ of Seizure filed by Revenue Canada (as the CRA was known at the time) against the title to a property now owned solely by her was invalid and unenforceable.

Shelley McCullough has a interest on title so that fact difference is of no aid to the CRA in distinguishing the Markey case. [ 23 ] In both cases, the property in question was the matrimonial home, the CLP was filed well before the writs, the claim of Revenue Canada in The Markey case (and the CRA in this case) was for unpaid taxes of the husband only, the writs were filed before the parties negotiated a settlement, the parties negotiated a settlement and that settlement was confirmed by a Consent Judgment of this Court.

In view of these similarities in the facts, the Applicants say the Markey case should end the argument. Is that submission correct?

[ 24 ]

Section 35 of the Matrimonial Property Act [3] indicates that any instrument registered against title to a property subsequent to a CLP is subject to the claim of the spouse who filed the CLP. (Emphasis added) [ 25 ] In the Markey case, the Markeys were joint owners and the settlement contemplated that Ms. Markey would become the sole owner. [ 26 ] At the time the CLP was filed, Rosalia had an undivided 1/3 interest in the property. The other two joint owners were Caesar and Shelley McCullough.

As a result of the implementation of the MPSA (and the Consent Judgement), the interest of Rosalia would increase to an undivided ½ interest with Shelley McCullough having the balance. [ 27 ] The CRA does not really question the circumstances just described. However, the CRA suggests a few additional facts should be considered and they make the Markey case distinguishable. What are they? [ 28 ] First, the settlement in the Markey case was negotiated with full knowledge of the Writ filed by Revenue Canada. Second, the tax liability of Mr. Markey was disclosed.

Third, the settlement provided that as between the parties he alone would be responsible for all of his debt owing to Revenue Canada. Finally, this was all brought to the attention of the Court and the Court approved the settlement. [ 29 ] In this case, these matters were neither part of the settlement nor before the Court and the CRA says that makes this case different. [ 30 ] In addition, the CRA has brought to the attention of the Court the case of Maroukis v Maroukis [4] .

While this is an Ontario case and the statutory provisions are a little different, the CRA suggests this decision is also of significant import to my analysis. Why? [ 31 ] Because it addresses the time at which the property right of a spouse vests. In the Maroukis case, the Supreme Court states that it is only at the time the Court issues its order (as opposed to the time of separation) that a property right exists.

The Court stated (at page 142) that: “The vesting in a spouse of the specific property making up his or her respective share takes place upon the date the court order is made, There is no authority in the Act for an order retrospectively vesting property in a spouse as the Appellant contends and as Judge Luchak ordered”. [ 32 ] The CRA says this same principle should apply to a determination of what claim is protected. The logic of that position would run as follows. The claim of Rosalia at the time the CLP was filed was a 1/3 interest in the property.

That was all she could seek to protect through the filing of the CLP. It was only with the implementation of the MPSA (and the Consent Judgement) that she could claim anything else. So says the CRA, where is the authority in the MPA to retrospectively protect a higher claim effectively wiping out the impact of the intervening CRA Writ? While I see this logic, the CRA has a problem. [ 33 ] Our Court of Appeal in the final paragraph of its decision in the Markey case said the Maroukis case was distinguishable as “the legislation at issue there did not appear to contain a provision similar to

Section 35 ". [ 34 ] Given the affirmation of our Court of Appeal, the Markey case is binding on me. By effectively retrospectively determining the claim of Ms. Markey had priority over the Writ of Revenue Canada, the Court has chosen to favour Ms. Markey over Revenue Canada respecting the equity of Mr. Markey in the matrimonial home and it did so with full knowledge of the Maroukis case. [ 35 ] The protection of at least some of the equity of an individual in their matrimonial home from the reach of their creditors is not

a foreign concept in our law. Quite to the contrary, in the case of the bankruptcy of an individual, an exemption is mandated for their residence which in our circumstances would be synonymous with the matrimonial home. [ 36 ] I would also generally favour the assistance of families in these circumstances over the tax department subject to an important caveat. That the Court was aware that is what it was doing. [ 37 ] Justice Kenny made a few observations that address this issue. First she said the Writ was filed subsequent to and with full knowledge of the CLP filed by Ms.

Markey, second, under the terms of their settlement Mr. Markey was to be solely responsible for his tax liability and third, the Consent Judgment of Justice Fruman indicated that the interest of Mr. Markey in the matrimonial home was to be transferred to Ms.

Markey free and clear subject only to certain encumbrances which did not include the Writ in question. [ 38 ] So the question becomes does the fact the MPSA (and the Consent Judgement) was negotiated on an important erroneous assumption and less than full knowledge of the circumstances make this case distinguishable from the Markey case as the CRA suggests? [ 39 ] The obvious response to that question by Shelley McCullough and Rosalia would be - it should not as we didn’t know about the tax liability so we are not responsible for any deficiency in the facts presented to the Court.

I have no reason to question the veracity of their assertion of a lack of knowledge. [ 40 ] But that leads to another question - should they have known? [ 41 ] The MPSA is essentially silent on the debt front other than saying “C to be removed from the LOC TD”. The Consent Judgement has only one provision relating to matrimonial debts. It is paragraph 11c. That paragraph states that the TD Bank Secured Line of Credit will be paid out and that Rosalia will indemnify Caesar fully and against all debts owing on the matrimonial home.

This seems to address the MPSA provision in slightly more eloquent terms plus add a little more detail. But it does not present a complete picture. [ 42 ] As already noted, the

preamble to the Consent Judgement suggests Shelley McCullough has advanced funds and assumed responsibility for the approximate amount of $347,000 which is how the equity of $22,000 was determined. There are no details provided in the MPSA or the Consent Judgement as to how this number has been determined.

That is problematic for the simple reason her Affidavit in support of this Application suggests that the advances and financing after the TD Bank Secured Line of Credit is paid out will be $374,448.74 which is some $27,000 higher. (See paragraph 12 of her Affidavit sworn June 7, 2013) [ 43 ] In fairness, her Affidavit does supply details as to how the number is arrived at but that was for this Application not the Consent Judgement . [ 44 ] Furthermore, neither the MPSA nor the Consent Judgement contains any general statement by the parties as to what comprises their matrimonial debts save the reference to the TD Bank Secured Line of Credit.

I suspect the lack of a general statement flows from an unstated assumption that there were none other than what will be owed to Shelley McCullough after the TD Bank is paid out and of course the debt of Caesar to the CRA which was not part of the equation because he didn’t tell them about it. [ 45 ] While I am satisfied that this debt should be seen as a matrimonial debt that does not make it a personal liability of Rosalia. That is quite a different thing.

However, its disclosure would very likely have changed the terms of the MPSA as it is hard to see Caesar receiving anything under the MPSA with this liability also part of the equation. [ 46 ] Quite to the contrary, when the tax liability is added to the equation (using the lower Shelley McCullough number) , Rosalia and Caesar have a combined negative net worth not equity in the matrimonial home of $22,000 as the

preamble to the Consent Judgement suggests.

[ 47 ] While I appreciate Caesar is a Rogue and it is perhaps likely the MPSA could be set aside for his lack of candour, that issue is not before me. What is before me is the CRA Writ. [ 48 ] It is acknowledged that the Registrar under the Land Titles Act would have sent a notice of the registration of the CRA Writ to Shelley McCullough and Rosalia as the other joint owners. It is likely that notice was sent to the address of the matrimonial home. At least that is what the Affidavit of Grant Dyck of the CRA filed in support of the contestation of the Application suggests.

Shelley McCullough and Rosalia suggest in their Affidavits filed in Support that Caesar likely removed it from the mail box. That may be so.

But that should not be the end of the matter. [ 49 ] It was known to Rosalia that Caesar was not the most responsible individual when it came to these matters and Shelley McCullough acknowledged in cross-examination on her Affidavit that she had in the past paid GST arrears on behalf of Caesar’s business. [ 50 ] It is my understanding registry searches are often conducted by Counsel as part of their due diligence when settlements are negotiated and real property is to be conveyed as part of the settlement. Such a search would have revealed the lack of candour by Caesar.

So who should bear the burden for the act of the Rogue in this case? [ 51 ] The Applicants say the CRA, the CRA says Shelley McCullough and Rosalia. I agree with the CRA. Why? [ 52 ] By retrospectively moving the equity of one of the parties to another in all situations you potentially open the door to abuse. This case would be a perfect example. Caesar’s lack of candour has netted him a MPSA benefit he never should have obtained.

The CRA was not part of the negotiations but is being asked to absorb the burden and the Court is in effect being asked to become a party to that shift in the burden without even being aware of the fact. The CRA did the only thing it could do in the circumstances to protect its claim. [ 53 ] In my view, Shelley McCullough and Rosalia did not.

I realize that, I am rubbing salt on the wound but the asking of a few questions and/or making of a routine check at the Land Titles Office before the MPSA was agreed would have most likely lead to a different MPSA and different representations to the Court for the purposes of the Consent Judgement . [ 54 ] The necessity for a more complete understanding is even more significant as the MPSA (and the Consent Judgement) contemplate that Rosalia will indemnify Caesar fully and against all debts owing on the matrimonial home. (See paragraph 11c. of the Consent Judgement) [ 55 ] In addition, with disclosure the approval order of this Court of the MPSA would then have the proper factual basis for the effect the Applicants seek and the Markey case has sanctioned. [ 56 ] This conclusion takes me to another issue.

The CRA Writ is for a tax liability of $106,851. [ 57 ] The CRA argues that the full amount of its claim should be protected as the liability arose while they were living together. That latter part of that assertion is correct. The first

part is a different question. [ 58 ] The CRA then suggests that as a result of this fact, the liability of Caesar should be seen as a matrimonial debt. Again, as I have already stated, I agree. As such, it would be relevant in determining the net value of their assets as part of the matrimonial property division process.

That is a huge step away from making Caesar’s debt to the CRA also a personal debt of Rosalia to the CRA, thereby making her equity, if any, in the matrimonial home subject to attachment for his debt. [ 59 ] In my view, by simply categorizing his debt as also a matrimonial debt without more does not make it a personal debt of Rosalia. The CRA Writ may only attach to his equity, if any, in the matrimonial home. What is that equity?

[ 60 ] Based on the Consent Judgement and the amounts Shelley McCullough has spent for the payment of expenses or advanced, the Applicants say Caesar has no equity in the matrimonial home so even if the CRA wins, by that I mean the CRA Writ is found to be valid, the CRA loses as there is nothing to attach. [ 61 ] The CRA suggests quite a different number. The CRA says in fact that it is fully secured. How does it get there? [ 62 ] The starting point for the CRA is the Consent Judgement which utilized the municipal valuation of the property of $369,500. That was also the number used in the MPSA.

Neither side introduced any evidence pointing me to another number. [ 63 ] The CRA then says the only permissible deductions from that amount are the TD Bank Secured Line of Credit in the amount of $120,000 and the caveat in the amount of $35,600 securing the promissory note for the down payment. The CRA says the amounts claimed by Shelley McCullough are all unsecured and, as such, are subordinate to the CRA Writ. [ 64 ] The CRA then says $369,500 less $120,000 less $35,600 leaves equity of $213,900 divided by three equals $71,300 per joint owner.

The CRA then says the equity of each of Rosalia and Caesar may be attached. [ 65 ] I agree with all of that except for the final submission about attachment of the equity of Rosalia. [ 66 ] The equity of Rosalia may not be attached unless the tax liability of Caesar is also seen as her personal liability. As I said, simply categorizing it as a matrimonial debt does not in the same breath make her jointly and severally liable to the CRA for it. [ 67 ] Nonetheless, that categorization is relevant in determining whether or not they have a positive or negative net worth.

In this case, its inclusion would likely put them in the negative category and as I said earlier make the MPSA ill advised. [ 68 ] To also make her personally liable, she would have to assume responsibility for it as part of their matrimonial property settlement which, as it was not on the table, she did not. As she did not, it remains his and only his indebtedness and the CRA may, if it chooses, continue to pursue him for it.

Conclusion [ 69 ] The Application to discharge the CRA Writ without any payment being made to the CRA is dismissed. [ 70 ] That being said, the declaration sought by the CRA that the CRA Writ secures the tax liability of Caesar to the extent of $106,851 is also dismissed. [ 71 ] In my view, the CRA Writ only protects the CRA to the extent of $71,300 and, on evidence of the payment of that amount to the CRA, only then should the CRA Writ be discharged. Costs [ 72 ] The matter of costs was not addressed specifically addressed at the hearing. In the conclusion of the Application, the Applicants seeks costs.

Success has been mixed. Unless either of the parties wishes to address the matter further in the next 30 days, I believe each should bear their own.

Heard on the 12th day of July, 2013. Dated at the City of Calgary, Alberta this 14th day of August, 2013. Sal J. LoVecchio J.C.Q.B.A. Appearances: Daunais McKay Harmes & Jones Patricia L. Daunais Q. C. for the Applicants Department of Justice Canada Jill L. Medhurst for the Respondent [1] (ABQB) [2] Markey v Revenue Canada (Taxation) 1997 ABCA 288 [3] R.S.A. 2000 c. M-8 [4] (SCC), [1984] 2 R.C.S. 137