Gervais v. The Queen, 85 DTC 5004, [1984] CTC 661 (FCTD)

Walsh, J;—This action concerns recaptured capital cost allowance added back by the Minister in reassessing plaintiff for his 1976 taxation year during which he sold to the city of Montreal certain property bearing Nos 5290 to 5298 Henri- Julien Street for a price of $235,000 of which $170,328 was attributable to the buildings, the balance being attributable to the land. He had acquired the said properties by a deed of sale from his father the late Jean B Gervais on September 5, 1968 for a price of $80,200 at which time the market value of the property was $230,000. The Minister contends that the difference of $149,800 did not represent a gift. The vendor Jean B Gervais died on August 8, 1969 but it is not contended that the low sale price at which he sold the properties to his son constituted a gift in contemplation of death with respect to the balance of the value of the property subject to the prohibition of Article 762 of the Quebec Civil Code.

The father Jean B Gervais had claimed $5,221.67 as capital cost allowance on the said properties before 1949, said capital cost allowance not being subject to recapture prior to that date. Plaintiff claimed additional capital cost allowance amounting to $25,699.11 from the date of his acquisition in 1968 to the sale in 1976, which he added back as income for that year as recovered capital cost allowance. In a reassessment on July 10, 1980, the Minister of National Revenue included in plaintiffs income an amount of $72,739 as capital cost allowance claimed by the late Jean B Gervais during the period that he was the owner of the properties. In the pleadings the Minister disputes this stating that the date of the reassessment was September 19, 1980 and that the amount added back was $65,674.49. The reassessment also dealt with a property on Rosemount Boulevard acquired by plaintiff in 1967 and sold in 1976 with recaptured cost allowance on same, which accounts for some discrepancy in the figure which is no longer a concern in the present proceedings in view of the agreed statement of fact submitted by the parties which concludes that in the event that the Court should arrive at the conclusion that the property in question was acquired by means of a gift the appeal should be allowed and if the Court concludes no gift was involved then plaintiffs appeal shall be maintained only for the amount of $5,221.67, the amount of capital cost allowance which had been claimed by the late Jean B Gervais prior to 1949 but dismissed with respect to the balance.

The legal issue involved is whether the deed transferring the title of the property in 1968 from his father Jean B Gervais to plaintiff, which was of course not an arm’s length transaction, represented a gift to the extent of the difference between market value of the property and the actual price paid and should be governed by subsection 20(4) of the Act or by paragraph 20(6)(c) which sections read at the time as follows:

20 (4) Where depreciable property did, at any time after the commencement of 1949, belong to a person (hereinafter referred to as the original owner) and has, by one or more transactions between persons not dealing at arm’s length, become vested in a taxpayer, the following rules are, notwithstanding section 17, applicable for the purposes of this section and regulations made under paragraph (a) of subsection (1) of section 11:

(a) the capital cost of the property to the taxpayer shall be deemed to be the

amount that was the capital cost of the property to the original owner;

(b) where the capital cost of the property to the original owner exceeds the actual capital cost of the property to the taxpayer, the excess shall be deemed to have been allowed to the taxpayer in respect of the property under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for taxation years before the acquisition thereof by the taxpayer.

20 (6)(c) where a taxpayer has acquired property by gift, bequest or inheritance, the capital cost to him shall be deemed to have been the fair market value thereof at the time he so acquired it.

Reference was also made by defendant to subsection 20(1.3) of the Income Tax Application Rules in the new Act which reads as follows:

20 (1.3) Without restricting the generality of section 18, where any depreciable property has been transferred before 1972 in circumstances such that subsection 20(4) of the former Act would, if that provision were applicable to transfers of property made in the 1972 taxation year, be applicable, paragraph 69(l)(b) of the amended Act is not applicable to the transfer and subsection 20(4) of the former Act is applicable thereto.

Before deciding whether section 20(4) or 20(6)(c) applies in the light of the extensive jurisprudence to which the Court was referred a secondary argument raised by plaintiff can be disposed of. When the estate of the late Jean Gervais was assessed for estate tax pursuant to the Estate Tax Act in effect at the time the value was increased by adding back the amount of $149,800 being the difference between market value and the sale price of the property and plaintiff contends that this constituted an admission by the Minister that a gift was made of this amount. Defendant denies this however stating that it was assessed under section 3 of the Estate Tax Act, RSC 1970, c E-9, paragraph 3(l)(g) of that Act dealing with “property disposed of by the deceased under any disposition made within three years prior to his death for partial consideration in money or money’s worth paid or agreed to be paid to him, to the extent that the value of such property as of the date of such disposition exceeds the amount of the consideration so paid or agreed to be paid’’ would seem to cover this without determining the question whether this excess was a gift or not and I do not believe therefore that defendant is estopped in the present case from contending that the difference between the market value and the sum paid does not constitute a gift within the meaning of paragraph 20(6)(c) of the Act in effect at the time of the transfer. Defendant does not deny that a benefit of this amount was conferred by the late Jean Gervais on the taxpayer Yvon Gervais but contends that it is subsection 20(4) which must apply, the capital cost to the vendor having been reduced by the capital cost allowance claimed by him from 1949 to 1968 which was subject to recapture when plaintiff sold the property in 1976, and not merely the capital cost claimed by him from 1968 to 1976 which he did add back to his tax return for that year.

The transfer of title to the property from father to son was made by a notarial deed of sale. While gifts of immovable property in Quebec must be made in notarial form (Article 776 Civil Code) so that, in so far as form is concerned the transfer would have been valid as a gift, this does not help plaintiff as the deed does not purport to be a deed of gift but is clearly a deed of sale. While plaintiff referred to extensive jurisprudence most of it can be distinguished on the facts or is [sic] decisions of the Tax Appeal Board. The Tax Appeal Board case of Estate of Delphina D Gagnon v MNR (1960), 24 Tax ABC 309; 60 DTC 347, levied gift tax on the difference between the sale price of a farm by a widow to her sons for $40,000 and the value fixed on it by an expert of $75,000 when it was resold by them a few months later. In the Quebec Superior Court case of Tetreault v Desserres, [1941], R de J 156 it was held that simulated contracts are perfectly legal and have their effect between the contracting parties so that an onerous donation or a loan entered into in the form of a contract of sale is valid. In the present case there is no suggestion that the deed of sale was not what it was represented to be or was in any way simulated so as to disguise a gift. A decision to the same effect was made in the Quebec Court of Appeal in the case of Brault v Perras et al (1939), 66 BR 110, in which it is stated at page 115 that although a notarial deed reported to sell the property it was really clearly and simply a gift but this simulation did not render illegal.

In the case of St Jean et al v Berthiaume, [1973] CA 1029 it was found that a forgiveness of debt or discharge contained in a contract of sale is nevertheless a gift, although indirect. In that case however it was decided that it was not a gift inter vivos but rather one in contemplation of death and hence illegal as being contrary to Article 758 of the Quebec Civil Code.

Plaintiff relies especially on the Quebec Court of Appeal case of Charlebois v Charlebois, [1974] CA 99 in which the facts are almost identical to those in the present case. Charlebois sold to his son-in-law for $15,000 a farm having a fair market value of $47,300. At page 100 the judgment points out that the amount paid was not a negligible sum but consideration should be given as to whether there was not at the same time a gift or benefit in favour of the defendants. The case dealt with the application of Article 712 of the Quebec Civil Code which reads as follows:

Every heir, even the beneficiary heir, coming to a succession, must return to the general mass all that he has received from the deceased by gift inter vivos, directly or indirectly; he cannot retain the gifts made nor claim the legacies bequeathed by the deceased, unless such gifts and legacies have been given him expressly by preference and beyond his share, or with an exemption from return.

It was held that a return had to be made. The case is authority however for the proposition that a gift can be disguised and form part of a contract of sale. As in the present case it concerned a sale of immovable property in the province of Quebec.

Defendant relies mainly o the case of The Queen v Edmund Littler Sr, [1978] CTC 235; 78 DTC 6179. In that case the taxpayer sold shares of Lowney’s Limited to his sons for $24 per share which was the quoted price on the Montreal Stock Exchange at the time. At the same time however he was negotiating with a purchaser for the sale of a controlling block of the shares, and a month after the transfer the purchaser offered to purchase 67 per cent of the shares of the company for $68.22. The sons sold their shares at that price. The issue was whether gift tax was due under Part IV of the former Act on the difference between $24 per share and $68.22 per share. At the applicable time section 111 of the Act dealing with gift tax read as follows:

111.(1) A tax shall be paid as hereinafter required upon the gifts made in a taxation year by an individual resident in Canada or a personal corporation.

(2) For the purpose of this section, “gift” includes a transfer, assignment or other disposition of property (whether situate inside or outside Canada) by way of gift, and without limiting the generality of the foregoing, includes

(a) the creation of a trust of, or an interest in, property by way of gift, and

(b) a transaction or transactions whereby a person disposes of property directly or indirectly by way of gift.

[Emphasis added]

It was held with one dissent that although the sale of the shares at a low price resulted in a benefit being conferred on the sons the taxpayer had not made a gift of the shares to the sons within the meaning of subsection 111(2) of the Act since a contract of sale cannot be a gift, which is by definition a disposition of property without consideration, so that the sale of the shares for less than their value did not result in a gift being made to the sons.

In rendering the judgment of the Court Chief Justice Jackett stated at 239 [6181 I:

In my view, no question having been raised at trial as to the bona fides of the contracts of sale — ie it being conceded that they were not shams — there was no “gift” of the shares or any disposition of them “by way of gift” as required to bring them within section 111(2). A contract of sale, which is, by definition, a transfer of property for a consideration, cannot be a gift, which is, by definition, a disposition of property without consideration.

The appellant’s submission is, however, as I understood it, that, although the sales of the shares were not gifts of the shares, having been made at an undervaluation with an intention to confer a gratuitous benefit, each of them falls within section 11 l(2)(b) as being “a transaction . . . whereby a person disposes of property . . . indirectly by way of “gift”. The short answer to this, in my view, is that the only “property” disposed of was the shares and they were sold and not disposed of by way of gift. While, speaking loosely, one might say that a gift was made by way of sale at an undervaluation (the gift being the benefit so conferred), in my view, the word gift in a taxing statute must be taken as referring to what is known to the law as a gift, namely, the gratuitous transfer of property and the difference between value and price is not “property” and is not something that can be transferred.

At 239 [6182] he discusses the Charlebois case, (supra), stating:

I have not overlooked the decision of the Quebec Court of Appeal in Charlebois v. Charlebois, 1974 C.A. 99, on which the appellant relies. As it seems to me, however, if that decision does hold that a sale at an undervaluation was an indirect gift for the purpose of Article 712 of the Civil Code, it should not be taken to extend the application of section 111 of the Income Tax Act in the Province of Quebec beyond what it would be in another province. Apart from that decision, I should have no doubt that a disposition “of property . . . indirectly by way of gift” referred to a gratuitous disposition of “property” by a circuitous route and does not include a direct “sale” at an undervaluation.

Justice LeDain stated at 241 [6183]:

I agree with the Chief Justice that the word “property” in s. 111(2)(b) excludes the interpretation contended for by the appellant. The advantage or benefit which the respondent conferred by the sale of the shares was not property and could not, therefore, be the subject of a gift contemplated by s. 111.

In the present case defendant admits that a benefit was conferred on plaintiff but points out that it was depreciable immovable property which was sold to plaintiff, the benefit being the sum represented by the difference between the sale price and market value, as such. This is similar to the distinction made by Justice Jackett, as he then was, in the Littler case.

Plaintiff contends however that the Littler case must be distinguished since the $24 paid for the shares was the price on the stock market at the time so that, the price paid, being the full market value, there could be no question of a gift. This may well be so but the decision in the Littler case did not depend on the value of the benefit, if any conferred, but rather on the form of the contract.

In the present case we are dealing with a taxing statute which must be applied in the same manner throughout Canada and as the former Chief Justice Jackett stated, in dealing with different sections of the Income Tax Act even if the sale at an undervaluation constituted an indirect gift for the purposes of Article 712 of the Quebec Civil Code this should not be taken to extend the application of section 111 of the Income Tax Act in a litigation in that case in the province of Quebec beyond what it would be in another province. I believe the same must apply to the interpretation given to paragraph 20(6)(c) of the Act in effect at the time in the present case and that I am governed by the decision in the Littler case. Although the benefit conferred by the deed of sale would probably be considered as a gift in Quebec law, for income tax purposes in which the law must be interpreted consistently throughout Canada, the word “gift” in paragraph 20(6)(c) of the Act must be given the strict and narrow interpretation given to it in the Littler case, for income tax purposes.

I conclude that since the property was not acquired in the present case by way of gift paragraph 20(6)(c) of the Income Tax Act in effect at the time has no application and it is subsection 20(4) which applies as defendant contends.

For the above reason plaintiffs appeal is dismissed save for the amount of $5,221.67 representing the capital cost allowance claimed by the late Jean B Gervais before 1949 which defendant agrees should be allowed. Since plaintiff has succeeded but only to a limited extent in his appeal which is dismissed on the only issue remaining in dispute there will be no costs or [sic] to either party.

Appeal dismissed.