Citation: 2008TCC242
Date: 20080509
Dockets: 2005-1246(IT)G
2005-4051(GST)G
BETWEEN:
RÉJEANNE LEBLANC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal filed under the
general procedure from an assessment made pursuant to section 160 of the Income
Tax Act (the "Act") for the 1999 taxation year.
[2]
The notice of assessment was sent
on January 15, 2004; the Appellant objected to the assessment on February 13,
2004. The Minister confirmed the
assessment on January 17, 2005.
[3]
Most of the
facts assumed were admitted by the Appellant. They are the following:
[TRANSLATION]
a) the Appellant
and André L'Écuyer have been married since 1993;
b) as at December
17, 2003, Mr. L'Écuyer owed the following amounts to the Minister of
National Revenue pursuant to the ITA in respect of his 1998 and 1999 taxation
years:
|
Federal income
tax:
Penalties:
Interest:
|
$15,529.15
$ 0
$11,228.57
|
|
|
$26,757.72
|
c) prior to September 15, 1999, the couple's family residence,
located at 664 Sacré‑Cœur, Alma, Quebec, had been the exclusive
property of Mr. L'Écuyer; the hypothec charged on the
residence, with the Royal Bank of Canada, had been in Mr. L'Écuyer's name
and he alone had made the payments on it;
d) on September 15, 1999, Mr. L'Écuyer
transferred the family residence to the Appellant;
e) as at that date, the residence's fair
market value, based on its municipal assessment, was $104,000;
f) the sales contract provided as
consideration for the sale, among other things, the extinguishment of a loan of
$60,000 made by the Appellant to Mr. L'Écuyer in March 1999;
g) the sales contract also provided that the
Appellant would take over the balance of the hypothecary loan with the Royal
Bank of Canada, then in the
amount of $35,412.18.
[4]
Paragraphs
(h), (i) and (j), the facts not admitted by the Appellant that served as the
basis for the assessment appealed, read as follows:
[TRANSLATION]
h) however,
following the sale, the hypothec remained in Mr. L'Écuyer's name and
Mr. L'Écuyer continued to be the sole person to make payments toward the
outstanding balance;
i) the difference
between the fair market value of the property transferred, $104,000, and the
fair market value of the consideration paid, $60,000, is therefore $44,000;
j) the lesser of
this difference ($44,000) and the amount of Mr. L'Écuyer's liability
($26,757.72) is $26,757.72.
[5]
The Appellant denied
the content of paragraphs (i) and (j), but admitted that André L'Écuyer had
made the payments on the amount secured by hypothec.
Issue
[6]
The issue is whether the Appellant
must be held jointly and severally liable for her spouse's tax liability in the
amount of $26,757.72, pursuant to section 160 of the Act.
Appellant's arguments
[7]
The Appellant argues that she paid
sufficient consideration for the transfer to her name of the principal
residence formerly owned by her spouse. According to the deed of assignment of
the property, the loan of $60,000 that she had made to Mr. L'Écuyer in
March 1999 was extinguished and she took over the hypothec with the Royal Bank
of Canada on the principal residence (Exhibit A‑2). In her view, this
was adequate valuable consideration for the property.
[8]
Under the terms
of the notarial act, the Appellant assumed the debt secured by a hypothec held
by the bank. However, the monthly payments were made by her spouse, the tax
debtor in respect of whom the assessment was made pursuant to section 160
of the Act.
[9]
She submits that the only reason
Mr. L'Écuyer made the payments was that the parties had not wanted to
change the way they handled family expenses.
[10]
In fact, although the hypothec
payments came directly from Mr. L'Écuyer's bank account, the Appellant
provided her spouse with consideration of at least equivalent, if not higher,
value by covering other family expenses.
[11]
The Appellant maintains that the hypothec
payments corresponded to the amounts her spouse was required to contribute
toward covering family expenses. She, on the other hand, contributed a higher
proportion to the payment of those same expenses. This arrangement was based on
an informal agreement arrived at on the basis of the parties' expectations,
each having a great deal of experience with managing family finances.
Respondent's arguments
[12]
The Respondent argues,
first, that, since the principal residence was transferred to the Appellant
without sufficient consideration, the provisions of section 160 of the Act
should apply.
[13]
The Respondent in fact maintains that the Appellant's assumption of
the hypothec on the principal residence in the amount of $35,412.18 and the
extinguishment of the debt obligation in the amount of $60,000 was not valuable
consideration for the transfer since Mr. L'Écuyer continued to make the hypothec
payments and to act as though he owned the residence. The Respondent further
argues that the Appellant did not actually take over the hypothec.
[14]
In the alternative, the Respondent
submits that, if the Court were to find that the property was transferred for
valuable consideration, it would still have to affirm the merit of the
assessment, given that the Appellant did not assume the hypothec on the
principal residence transferred to her, since Mr. L'Écuyer continued to
make the hypothec payments to the bank, thereby making transfers without
valuable consideration within the meaning of section 160 of the Act.
[15]
The Respondent submits that the
payments made in performance of the obligation to pay a portion of family
expenses proportional to each spouse's ability to pay did not constitute
valuable consideration for the transfers made by Mr. L'Écuyer.
[16]
The Respondent adds that, in
analyzing the facts, it is necessary to bear in mind that Mr. L'Écuyer not
only continued to make the hypothec payments, but also continued to cover other
family expenses.
Testimony
[17]
Only the
Appellant and André L'Écuyer testified. They described how they had met. After
living together for a time, they had married. Having been married previously,
Mr. L'Écuyer had two children at the time; the Appellant was the mother of
one disabled child.
[18]
The L'Écuyer‑Leblanc
family was a blended family. Both spouses had experience with a failed family
life. The Appellant’s experience had made her want to avoid another difficult
situation.
[19]
The couple
managed family finances using two completely separate personal bank accounts,
each of which could not be touched by the other spouse. They did not have a
joint account. Each spouse had specific obligations and responsibilities and
nothing was taken for granted.
[20]
The
explanations given by the Appellant, such as the fact that Mr. L'Écuyer
paid the cable bill because she felt it was an unnecessary expense, showed not
only the extent to which responsibility for family money matters was shared,
but also the fact that responsibilities were clearly defined. Each spouse was
independent and payments were not made from a joint account to which both
spouses contributed indiscriminately.
[21]
After marrying
in 1993, Mr. L'Écuyer and Ms. Leblanc had three more children, one of whom
also has a disability.
[22]
From the very
beginning of their relationship, the Appellant remained financially
independent. Her job in a financial institution meant she knew how to handle
her finances and was responsible for a significant portion of the household
expenses of the new family unit.
[23]
Very
disciplined and methodical with regard to finances, the Appellant managed her
personal affairs very carefully and strictly. She even managed to set aside
savings of about $100,000 over the years.
[24]
On
March 30, 1999, the Appellant made a loan to her spouse to help him with his
business affairs; the interest rate was set at the base rate plus 1 per
cent per annum; the loan was secured by a hypothec ranking third on the family
residence.
[25]
Having learned
from her previous marital experience to be careful with finances and having
been warned by a family member about possible problems in recovering the money
she had loaned her spouse, the Appellant reached an agreement with her spouse
for the family residence to be transferred to her in consideration of the
extinguishment of his liability to her. The Appellant also assumed the hypothec
on the property.
[26]
At the time of
the transfer, on September 15, 1999, accrued interest totalled $2,400.
[27]
Before the
transaction was carried out, the Appellant stubbornly insisted that she wanted
to prepay the amount owing on the hypothec. She did not want to be in debt. In
fact, the Appellant stated that she abhorred debt. That was why she always paid
bills as soon as she received them.
[28]
Her
husband talked her out of paying off the hypothec that she had agreed to take
over, pointing out that they had enjoyed years of harmony in the sharing of family
expenses. The Appellant alone dealt with the many routine household expenses,
while he, who was ill-disciplined and not careful, had only one major payment
to make, tremendously simplifying the extent and management of his obligations
toward the family.
[29]
The Appellant
stated that she had for many years been using her own assets and income to
cover all routine household expenses for food, clothing and recreation, medical
costs, and so on.
[30]
Her husband, on
the other hand, paid one large sum to cover the housing costs, freeing him from
all the hassle of managing the multiple expenses related to running any
household.
[31]
This
way of doing things worked for them and kept the peace with regard to their
respective financial responsibilities for the family. The Appellant stated that
she did not like to carry any debt and so paid off any amounts due as quickly
as possible.
[32]
The
Appellant submitted that, following the transfer of the property, she had
wanted to pay off the hypothec, but her husband had convinced her that it would
be best to stick to what worked for them. She had reluctantly agreed.
[33]
The
Appellant thus went along with her husband's suggestion, and he continued to
make the monthly payments on the hypothec for which the Appellant had become
liable following the transfer of the title to the property.
[34]
The
Appellant and her husband stated that the hypothec payment was the husband's
only contribution toward paying household expenses. The property encumbered with the hypothec
was the family residence. It was not income property.
[35]
The spouse
confirmed that the Appellant was in the habit of always paying bills as soon as
she received them and not leaving any outstanding balances. He explained that
he had suggested they keep doings things as they always had, feeling that it
was easier to handle matters that way. It meant that he paid the hydro and
cable bills and made the hypothec payments, and the Appellant dealt with all
the other family expenses, including clothing, food and school-related costs,
telephone charges, and dental and medical expenses.
[36]
To support the
explanations given, the Appellant managed to find spending record entries for
the expenses she covered, showing her very real attention to detail and,
especially, her thorough knowledge of financial responsibilities related to
family.
[37]
Her
testimony was brief, reasonable and credible. This was clearly not a person who
attempts to make up all kinds of explanations to suit a situation after the
fact.
[38]
The Appellant's
financial participation in covering household expenses was not only real, but
also substantial. As regards the amount of the monthly hypothec payment, it was
not disproportionate, but rather a more than reasonable amount that could
easily correspond to the spouse's minimum liability for household expenses,
falling under the heading of housing, a basic and essential part of the
expenses of any family unit. However, no evidence was provided as to the market
value of the housing.
[39]
In
this type of matter, it is often necessary to seek out the truth, as the
circumstances unfortunately make concealing the facts very tempting. The
explanations in this case were reasonable and, more importantly, very
plausible.
[40]
Since, in tax
matters, the rule of preponderance of evidence always applies, the Court must
analyze the facts based on the evidence adduced. The matters of a non-arm's
length relationship and of tax liability, two key questions for the application
of section 160 of the Act, are not at issue.
[41]
The
Court must first determine whether the extinguishment of the $60,000 loan made
to Mr. L'Écuyer by the Appellant in March 1999, which the Respondent did
not challenge, and the assumption of the hypothec by the Appellant constituted
sufficient consideration for the transfer of the principal residence.
[42]
If so, the Court must
then decide whether the payments made by Mr. L'Écuyer following the
transfer of the title to the house to the Appellant constitute transfers
without consideration within the meaning of section 160 of the Act.
[43]
The Court must thus decide whether
the Appellant's payment of the household expenses constitutes good and valuable
consideration for those payments.
[44]
The Respondent considers
the transfer of the property irrelevant, given that it did not actually change
anything. This interpretation of the facts disclosed by the evidence shows the
degree to which the Respondent disregarded the notarial act.
[45]
The notarial
act is decisive proof that a transfer did indeed take place and also that consideration
was given, in the form of the claim held by the Appellant against the
transferor and the Appellant's assumption of the balance outstanding on the hypothec
with the Royal Bank.
[46]
If the
Respondent believed this to be a fake transaction, the Respondent should have
challenged the quality of the notarial act by means of an action of improbation,
which it did not do. Consequently, the notarial act is proof of the facts it
asserts, and the argument that nothing changed between the spouses is somewhat ludicrous
and, certainly, unfounded.
[47]
Subsection 160(1)
of the Act reads as follows:
SECTION 160
(1) Where a
person has, on or after May 1, 1951, transferred property, either directly or
indirectly, by means of a trust or by any other means whatever, to
(a)
the person’s spouse or common-law partner or a person who has since become the
person’s spouse or common- law partner,
(b) a person who was under 18 years of age, or
(c) a person with whom the person was not dealing at arm’s length,
the following rules apply:
(d)
the transferee and transferor are jointly and severally liable to pay a part of
the transferor’s tax under this Part for each taxation year equal to the amount
by which the tax for the year is greater than it would have been if it were not
for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income
Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of
any income from, or gain from the disposition of, the property so transferred
or property substituted therefor, and
(e)
the transferee and transferor are jointly and severally liable to pay under
this Act an amount equal to the lesser of
(i) the
amount, if any, by which the fair market value of the property at the time it
was transferred exceeds the fair market value at that time of the consideration
given for the property, and
(ii) the
total of all amounts each of which is an amount that the transferor is liable
to pay under this Act in or in respect of the taxation year in which the
property was transferred or any preceding taxation year,
but nothing in this subsection shall be deemed to limit
the liability of the transferor under any other provision of this Act.
[48]
Section 160 of the
Act has been the subject of a number of decisions since its coming into effect
and the conditions for its application were recently reiterated in a decision of
the Tax Court of Canada, Raphael v. Canada, and reaffirmed
by the Federal Court of Appeal:
The Tax Court Judge set out four
conditions to be met in order for subsection 160(1) to apply and in so
doing he was following a decision of the Tax Court, Doreen Williams v.
The Queen, File No. 98-1604, July 4, 2000. Those conditions were:
1) There must be a transfer
of property;
2) The transferor and
transferee are not dealing at arm's length;
3) There must be no
consideration or inadequate consideration flowing from the transferee to the
transferor; and
4) The transferor must
be liable to pay an amount under the Act in or in respect of the year
when the property was transferred or any preceding year.
[Emphasis added.]
[49]
The Appellant admitted to not dealing with
Mr. L'Écuyer at arm's length. She also acknowledged that
he was a tax debtor by admitting paragraphs 7(a) and (b) of the Reply to the
Notice of Appeal submitted by the Respondent. Consequently, two of the four
conditions are not at issue. As for the transfer, it was adequately established
by the notarial act.
[50]
Did the extinguishment
of the $60,000 loan made to Mr. L'Écuyer by the Appellant in March 1999
and the assumption of the hypothec constitute sufficient consideration for the
transfer of the property formalized by notarial act?
[51]
Secondly, did the payments made by
Mr. L'Écuyer following the transfer of the property to the Appellant
constitute transfers without consideration within the meaning of
section 160 of the Act?
[52]
The evidence established that, on
September 15, 1999, Mr. L'Écuyer agreed, by means of a notarial act, to
transfer to the Appellant his ownership rights in the principal residence,
which he alone owned. This transaction was confirmed by an authentic act, which
may be contested only according to strict rules.
[53]
The mere argument that the
Appellant and her husband made no changes in the way they lived or managed
their personal affairs is not sufficient proof for a finding that there was no
valuable consideration for the transfer. The Court must therefore set aside
this argument and thus finds that the transfer was made for valuable
consideration.
[54]
Having ruled out
the Respondent's first argument, that the transfer was made without true
consideration of equivalent value, the Court must consider whether the payments
made by Mr. L'Écuyer in exchange for
the transfer of ownership were appropriate consideration.
[55]
The Respondent has argued that,
when the Appellant's spouse made the hypothec payments in question in her
stead, after she assumed responsibility for the payments on the residence
transferred, the payments were made without consideration. In other words, he made
periodic transfers without consideration that were subject to the provisions of
section 160 of the Act.
[56]
In this case,
there is no question as to the payer, since the Appellant admitted that her
spouse had made the payments. However, she was quick to add that the payments
had not been made gratuitously or without consideration, maintaining that a
distinction had to be made between form and substance.
[57]
Were such payments transfers
between Mr. L'Écuyer and his spouse within the meaning of section 160
of the Act?
[58]
In Yates v. The
Queen,
Mr. Justice McArthur stated the following:
[…] The word "transfer" was defined in Fasken Estate v.
Minister of National Revenue [reference omitted] wherein Thorson P. stated:
The word "transfer" is not a term of art and
has not a technical meaning. It is not necessary to a transfer of property from
a husband to his wife that it should be made in any particular form or that it
should be made directly. All that is required is that the husband should so
deal with the property as to divest himself of it and vest it in his wife, that
is to say, pass the property from himself to her. The means by which he
accomplishes this result whether direct or circuitous, may properly be called a
transfer.
This definition has been accepted by this Court in
recent years including in the decision in Tétrault v. R. [reference
omitted], where at paragraph 39, Archambault, J. stated:
... in order for there to be a transfer of property for
the purposes of the attribution rules, it is essential that the transferor be
divested of his ownership and that the property has vested in the transferee.
[59]
The notion of transfer is very
broad, even including situations where a person pays one of the spouse's
creditors instead of giving money directly to the spouse. In other words, the
fact that a transfer is made indirectly does not invalidate or lessen the extent
of the transfer.
[60]
Accepting that the payments made
by Mr. L'Écuyer were a transfer, the Court must decide whether they were
made with or without consideration.
[61]
The Appellant submitted
to the Court two decisions, Michaud v. Canada by Madam Justice
Lamarre Proulx and Ferracuti v. Canada by McArthur J.,
in which the Court found that, when payments are made to fulfill a legal
obligation related to family expenses, such transfers may be deemed transfers
with consideration within the meaning of section 160 of the Act.
[62]
The Respondent has argued
that this position was rejected by Mr. Justice Archambault in Tétrault v.
Canada
and Mr. Justice Bédard, who concurred with the reasons for that decision, in Mathieu
v. Canada. The Respondent has stated that those two
judgments were more in line with the provisions of section 160 of the Income
Tax Act.
[63]
In fact, after lengthy analysis of
the jurisprudence, Archambault J. found that fulfilling family obligations
constituted a transfer without consideration within the meaning of
section 160 of the Act for the recipient.
[64]
Thus, according to those
judgments, transfers made by one spouse to the other in fulfillment of a legal
obligation to meet the needs of the family were deemed to have been made
without consideration within the meaning of section 160 of the Act.
[65]
There appear to
be two different lines of authorities at the Tax Court of Canada.
[66]
The
decision of Archambault J. in Tétrault,
supra, merits analysis. In it, he explains why he is of the view that the performance of a domestic
obligation cannot be consideration:
The
contribution to the expenses of the marriage is, in my opinion, in the nature
of a donation by which a property is given without any consideration.
[Reference omitted.] This analysis of the domestic obligation concurs with that
made by Judge Mogan in the Raphael decision, where he says "[t]hose
same domestic obligations, however, cannot be 'consideration' within the
meaning of section 160...." (paragraph 27 of the decision). It also
concurs with that in Logiudice, where it is explained that "The
word consideration, as it is used in the context of section 160 of the
Act, in its ordinary sense refers to the consideration given by one party to a
contract to the other party, in return for the property transferred" and
that "The limiting provision in subparagraph 160(1)(e)(i) of the
Act is to protect genuine business transactions from the operation of the
section" (paragraph 16 of the decision). It is also consistent with the
analysis made by Judge Sobier in Sinnott v. The Queen, supra, at
paragraph 19 (Q.L.), page 598 DTC:
The
Appellant's counsel put a good deal of emphasis on the argument that consideration
was given for the transfer. But what was that consideration? Can it be said
that the paying of household expenses is consideration for the transfers?
Subparagraph 160(1)(e)(i) states that the joint liability of the
transferor and transferee is an amount equal to the lesser of the amount by
which the fair market value of the property at the time it was transferred
exceeds the fair market value at that time of the consideration given for the
property. At the time the transfers were made, no consideration was given.
The
absence of any consideration given in return for the performance of the
domestic obligation readily explains why it [sic–Tr] highly problematic,
if not impossible, to determine what the FMV would be of the transferee's right
to receive the property transferred by the transferor pursuant to the latter's
domestic obligation. Furthermore, as Judge Mogan said, even if a FMV could be
determined, this right would not constitute "consideration given for the
property". [Reference omitted.]
Not
only does this interpretation seem to me to be in greater harmony with the
language of section 160 of the Act, but it is unavoidable in light of the
interpretative presumption that the law is coherent and systematic. [Reference omitted.] Section 160 must be considered
as a whole if we are to determine its scope. Subsection 160(4) [reference omitted] of the Act provides that the
paragraph 160(1)(e) rule is of no effect when a spouse transfers
property to the other spouse as a result of the breakdown of the marriage. For
the purposes of this rule, the FMV of the transferred property is deemed to be
nil. If the reasoning adopted in the Ferracuti, Michaud and Dupuis
decisions were adopted, one would have to conclude that subsection 160(4)
is of no use, for upon separation [reference
omitted], the spouse's right to receive a portion of the other
spouse's domestic estate is recognized by law, in this case the Civil Code,
in particular in the rules governing the partition of the family patrimony set
out in articles 414 et seq. of the Code. It then involves "a transfer of
property ... in performing [a] legal obligation".
[Reference omitted.] Furthermore, if the right to receive this property
under the Civil Code constituted consideration, the FMV of which is
equal to the FMV of the transferred property, it would not have been necessary
to enact that the FMV of the transferred property is nil. On the contrary, I
think Parliament assumed that such a transfer upon a separation constitutes a
transfer without consideration and, were it not for subsection 160(4) of
the Act, the transferee could have been jointly and severally liable for any
tax debt of the transferor.
Consequently, the conclusion is unavoidable: the
transfer of property under a legal obligation (as in the partition of the
family patrimony) constitutes a "transfer" for the purposes of
section 160 of the Act and is subject to that section. The mere right to be
the beneficiary of this obligation does not constitute a particular
consideration. Likewise, the transfer of property to the other spouse in
performance of a domestic obligation constitutes a transfer for which no
consideration has been given, and there is nothing in section 160 that
would allow this Court to exempt this transfer from its operation. [Reference
omitted.]
[Emphasis
added.]
[67]
It is
reasonable to believe that subsection 160(4) was included in the Act to
take into account situations such as a separation where there may be a transfer
of property without valuable consideration. Parliament wanted to ensure that
the transfer of property in fulfilment of legal obligations rather than as an
attempt by the taxpayer to avoid tax obligations would not be subject to the provisions
of section 160.
[68]
The principle
underlying section 160 was expounded by Mr. Justice Desjardins of the
Federal Court of Appeal in Medland v. Canada, as follows:
It is not
disputed that the tax policy embodied in, or the object and spirit of
subsection 160(1), is to prevent a taxpayer from transferring his property
to his spouse in order to thwart the Minister's efforts to collect the money
which is owned to him. [67] The issue turns, however, on
the proper meaning to be given to the terms used in subsection 160(1) of
the Act, namely whether Mr. Medland "transferred property...
indirectly by any other means" to his wife.
[69]
Subsection 160(4) is intended to ensure that a person who becomes
the lawful owner of property as a result of a separation or divorce is not
obligated to pay the tax liabilities of the transferor, since the transfer is
in performance of legal obligations. This subsection does not rule out the possibility
of consideration associated with domestic obligations.
[70]
In this case,
it was shown that the Appellant required that the principal residence be
transferred to her for her own protection. Although
the intent is not relevant in this matter, it can nevertheless be seen that
title was transferred to the Appellant not to enable Mr. L'Écuyer to shirk
his obligations to the Department (in other words, to shield his assets from
taxation), but, rather, to protect the Appellant financially.
[71]
It
is quite possible for payments made in performance of legal obligations to be
subject to the provisions of section 160; however, it is also possible for
payments for family expenses to constitute consideration in respect of a
transfer.
[72]
In support of this
position, in addition to Michaud and Ferracuti, supra, the
Court refers to the recent decision by McArthur J. in Yates v. The Queen,
supra, in particular the following extract:
I accept the second approach to the effect that certain
limited payments made for some household expenses by a
spouse, who is obligated to support his or her family, are not subject to
subsection 160(1). I believe these expenditures should be for daily living
necessities as opposed to permitting an accustomed lavish standard of living.
The Appellant cited the following cases which support this: Michaud c. R.
[reference omitted], Ferracuti v. R., [reference omitted] Laframboise
v. R. [reference omitted] and Ducharme v. R. [reference omitted].
…
I agree that the function of this Court under
section 160 is not to parse a taxpayer's grocery bills in order to
determine which food items are reasonable and which are not. Each case must be
considered on its own merits. The Court must examine the evidence of the
taxpayer with respect to household expenditures to determine which expenses, if
any, are the vital household expenses that may be excluded from the reach of
section 160. I say this because section 160 is a far-reaching
collection tool in the Act. It has been described as draconian and
Parliament drafted it as such. Accordingly, the exceptions to the reach of this
section are narrow. In Ferracuti, I attempted to determine which
expenditures were made in satisfaction of the person's legal obligation to
support his family.
[73]
The Appellant, whose
credibility is not in question, stated that the consideration she gave for the hypothec
payments was much greater than her contribution to household expenses.
[74]
The Appellant’s
testimony, backed by the spending records, shows that her payments in respect
of family expenses were higher than the payments made by her spouse.
[75]
Citing
the decisions in Tétrault v. Canada, 2004 TCC 332, and Mathieu
v. Canada, 2004 TCC 135, the Respondent has argued that the
amounts paid by the Appellant’s spouse in fulfilment of his responsibility for
household expenses were not valuable consideration for the transfer, hence the
position that the provisions of section 160 apply to the transfer.
[76]
The Court notes
that the facts in this matter are different from those in Tétrault, in
that the consideration provided by the Appellant is higher than the amounts
paid by Mr. L'Écuyer to cover the hypothec payments.
[77]
The facts tend
to support the Respondent’s view if one accepts the suggestion that the
analysis of the facts must take into account only the form or method used, and
not the context, the circumstances.
[78]
The
fact that nothing changed in how the spouses conducted their family affairs has
been admitted and acknowledged. Should this automatically lead to the
conclusion that what was involved was payment without consideration? If things
were that simple, the
Respondent would be correct in stating that a transfer without consideration took
place, since the Appellant and her spouse continued to live in the building
that was transferred. In other words, does the fact that the Appellant and her
spouse continued to live in the residence not contradict the notarial act, in
that nothing changed, from a day-to-day perspective? The Court thinks not.
[79]
As for the
monthly payments which the Appellant agreed to handle, she and her spouse reached
an arrangement that worked for them while complying with the substance of the
notarial act.
[80]
In Ferracuti, supra,
McArthur J. stated:
[21] Mr.
Ferracuti had a "juristic reason" to make some payments. He had a
legal obligation to support his family as set out in sections 30, 31 and 35 of
the Ontario Family Law Act.
[81]
By analogy to the
obligations provided for in the Civil Code of Québec, the Court finds
that Mr. L'Écuyer had "a
legal obligation to support" his family.
[82]
Moreover, in Michaud,
Lamarre Proulx J. stated:
I
consider that when the appellant's former spouse made the payments on the
hypothec on the family house, which was the appellant's property, he was only
performing a legal obligation, that of providing for the needs of his family by
obtaining the housing it required. The appellant could have made these payments
on the hypothec herself and her husband could have paid what the appellant
undertook to pay. However, that is not how the family expenses were naturally
distributed in this couple. In any case, this monetary distribution of the
family expenses is not essential to my decision. While this case concerns a
couple in which both spouses earned money, my decision would have been the same
if only one of the two spouses earned the family income: a payment on a
hypothec on a family residence is not in the nature of a transfer of property
made without valuable consideration if the person making it does so in
performing the legal obligation to provide for his or her family's needs.
I should add that it is when the
evidence discloses that the payment on the hypothec was made in performing the
legal obligation to provide for the family's requirements that it was made for
valuable consideration within the meaning of s. 160(1) of the Act. If for
example the husband in the instant case had paid his wife both rent and
payments on the hypothec, it is unlikely that the payments on the hypothec
would have been made in performing a legal obligation to provide for the
family's needs.
[83]
The decision of the
Federal Court of Appeal in Ducharme v. Canada also supports the
Appellant’s position in that the hypothec payments can also be deemed
consideration by way of and in addition to the payment of rent. The reasons for this finding are as follows:
Almost all of the amount in issue
involved five and a half years of mortgage payments of approximately $500 per
month. I will assume, without deciding, that the entirety of the mortgage
payments were transferred to Ms. Ducharme by Mr. Vienneau as that assumption is
most favourable to the Minister. Over the relevant period of time, Mr. Vienneau
was either living in the mortgaged premises or, when he was away at work, had
access to the premises at any time he wanted. The Tax Court judge found as a
fact that at the time of the subject mortgage payments "rent for an
equivalent (and apparently, average) house for the family in Fort St. John ranged between $1,200 and $1,500 per month"
(at paragraph 6). The amounts paid by Mr. Vienneau were less than half of these
monthly rentals.
It is a reasonable inference to
draw from these facts that Ms. Ducharme gave to Mr. Vienneau the availability
and use of her house in consideration for his payments on the mortgage. The
amounts paid by Mr. Vienneau were tantamount to rent. The amounts paid were
well under what appeared to be the fair market rental value of Ms. Ducharme's
house and it cannot reasonably be said that the "rent" paid by Mr.
Vienneau by way of making monthly mortgage payments on Ms. Ducharme's mortgage
exceeded the fair market value of the consideration given by Ms. Ducharme to
Mr. Vienneau.
Identifying the amounts paid by
Mr. Vienneau as rent is not a re-characterization of the legal effect of
transactions. It is simply a way of explaining that Mr. Vienneau received
consideration equivalent to or greater than the amounts he transferred to Ms.
Ducharme.
In view of this conclusion, it
is not necessary to address Ms. Ducharme's other arguments based on valuing
domestic services or "domestic obligations" of spouses.
[84]
In that judgment, the Court of
Appeal thus supported the position that, where a transfer occurs as a result of
hypothec payments made by a spouse for the residence of the other spouse, there
may be consideration received by the person making the payments.
[85]
According to that
position, it is necessary to determine the value of such consideration by
determining the value of the rent a person would have to pay to live in the
residence. In other words, the fact of not having to pay rent to live in the
home of the other spouse is the consideration received.
[86]
Given the
specifics in this case, the Court accepts the Appellant’s explanations that the
transfer of the family residence was made for sufficient consideration.
[87]
Reaching an opposite conclusion
would be absurd since
the issue would probably not have arisen had André L’Écuyer assumed responsibility for other expenses and the
Appellant handled the hypothec payments.
[88]
The payments were indeed
transfers, but not without consideration. Should the Appellant be penalized for
previously paying more than her share? Should she be penalized for wanting the domestic
arrangements that suited the couple best?
[89]
The Appellant
could have obtained a judgment for non-payment of the $60,000 claim against her
spouse and obtained title to the property as consideration. Instead, she chose
an approach that would foster harmony in her relations with her spouse. Should
she be penalized for not wanting to take legal action against her spouse?
[90]
The Respondent is
asking the Court to disregard the notarial act between the Appellant and her
spouse, the tax debtor, but does not dispute the fact that the Appellant had a
$60,000 claim against her spouse. The Respondent also maintains that the
payments made periodically by the Appellant’s spouse were made gratuitously,
without any consideration, and consequently were subject to the operation of
section 160 of the Act.
[91]
Yet the
arguments, explanations and evidence of the Appellant were as reasonable as and
certainly better founded than those submitted by the Respondent in suggesting
that the Court negate an authentic instrument.
[92]
In
this case, the facts before the Court are straightforward and revealing; they
could have taken a completely different form.
[93]
A number of
scenarios come to mind, including one where the Appellant would have paid off
the balance owing to the Royal Bank by means of a prepayment and then set the
spouse’s contribution at an equivalent amount.
[94]
Her spouse
could quite simply have paid the Appellant the equivalent amount each month and
let her make the hypothec payments from her own bank account.
[95]
The Respondent
would have the Court completely disregard the notarial act in analyzing this
case and give precedence to form rather than substance in interpreting the
facts. The Respondent suggests that the Court reject the Appellant’s
explanations, which are credible and reasonable in the context and the
circumstances.
[96]
It
is true that the couple's arrangement raises some questions and leaves the door
open to speculation. However, the Court considers that those same facts reveal
a lack of intent to use one or more transactions to avoid tax liability.
Moreover, in tax matters, a key principle is that the Act applies to actions
taken, not to actions that taxpayers may have intended to take.
[97]
The Court does
not believe that it is flouting this basic principle in this case by accepting
the Appellant’s claims; an agreement was indeed reached between the Appellant
and her spouse at a given point in their lives because they had separate assets
and, more importantly, their own past experiences.
[98]
This
agreement involved two steps, the first being the signing of a notarial act,
the content of which cannot be impugned based on the evidence before the Court.
[99]
As for the
second step, involving the repayment of the amount outstanding to the Royal
Bank, the Appellant formally assumed liability in this regard.
[100]
The manner in
which the obligation was fulfilled does raise some questions or at least supports
the Respondent’s contention that the Appellant did not assume her obligations.
[101]
The Court
agrees that, in terms of form, the Appellant’s way of doings things might
support the Respondent’s arguments. However, the explanations given to the
Court and the context in this case lead the Court to find that the Appellant in
all likelihood assumed the obligations flowing from the notarial act. There is accordingly
no need to consider the Respondent’s ill-considered suggestion and disregard
the notarial act.
[102]
It is true that
the couple's arrangement was questionable, even clumsy, but not so much so that
certain facts in the case or the Appellant’s arguments should be dismissed out
of hand, especially since it would have been very easy for the Appellant to
manage her personal affairs in such a manner as to make everything seamless and
unassailable.
[103]
For these
reasons, the appeals are allowed, with costs to the Appellant.
Signed at Ottawa,
Canada, this 9th day of May 2008.
"Alain Tardif"
Translation
certified true
on this 16th day
of June 2008.
Carole Chamberlin,
Translator
Email this Content