Rouleau, J.:—Mrs. Fluxgold is before the Court seeking an order setting aside a 1984 assessment by the Minister of National Revenue for the sum of $59,099.03. The plaintiff is a former equal shareholder with her husband in a company called Fluxgold Investments Ltd. (F.I.L.). After separation in 1978 and pursuant to an order of the Supreme Court of Ontario under the Family Law Reform Act, S.O. 1978, c. 2, pertaining to the division of family assets, she received certain funds from her estranged husband; the Minister determined that part of the moneys she received emanated from the family corporation which was in arrears for the taxation years 1978 and 1979, thereby giving rise to the assessment pursuant to section 160 of the Income Tax Act, S.C. 1970-71-72, C. 63.
Section 160 reads as follows:
160. (1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to
(a) his spouse or a person who has since become his spouse, (b) a person who was under 18 years of age, or
(c) a person with whom he 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 to 75.1, 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 aggregate 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 of 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.
MINISTER MAY ASSESS TRANSFEREE
(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.
RULES APPLICABLE
(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part of all of a liability of the transferor under this Act, the following rules are applicable:
(a) a payment by the transferee on account of his liability shall to the extent thereof discharge the joint liability; but
(b) a payment by the transferor on account of his liability only discharges the transferee's liability to the extent that the payment operates to reduce the transferor's liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.
SPECIAL RULES RE TRANSFER OF PROPERTY TO SPOUSE
(4) Notwithstanding subsection (1), where at any time a taxpayer has transferred property to his spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement and, at that time, the taxpayer and his spouse were separated and living apart as a result of the breakdown of their marriage, the following rules apply:
(a) in respect of property so transferred after February 15, 1984,
(i) the spouse shall not be liable under subsection (1) to pay any amount with respect to any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(ii) for the purposes of paragraph 1(e), the fair market value of the property at the time it was transferred shall be deemed to be nil,and
(b) in respect of property so transferred before February 16, 1984, where the spouse would, but for this paragraph, be liable to pay an amount under this Act by virtue of subsection (1), the spouse's liability in respect of that amount shall be deemed to have been discharged on February 16, 1984,
but nothing in this subsection shall operate to reduce the taxpayer's liability under any other provision of this Act.
The plaintiff married in 1940 and separated from her husband in August 1978. At the time she left the matrimonial home, she along with her husband each held 50 per cent of the outstanding and issued common shares of Fluxgold Investments Ltd. which had been incorporated in 1965. The plaintiff also held preference shares of a value of $36,000. The principal objects of the company were to acquire real estate, conduct repairs and resell. This activity had been discontinued some few years prior to the separation and only a few properties remained in the company.
In January of 1980, two years after the separation of the parties, a property known as 9-11 Southport was conveyed by Mr. Fluxgold. In July of 1982, a property known as 1458-40 Queen Street West in the City of Toronto, was also sold by Mr. Fluxgold. It is agreed by the parties that these two transactions, although concluded by Mr. Fluxgold personally, were properties in fact beneficially belonging to Fluxgold Investments Ltd. Upon their disposition, the proceeds were retained by Mr. Fluxgold personally. The plaintiff in no way was aware of the transactions, nor did she participate. Other mortgage transactions have been recorded by Mrs. Fluxgold personally and in some cases with her father, but these matters are not in issue.
Shortly after separation, proceedings were instituted in the Supreme Court of Ontario pursuant to the Family Law Reform Act. In May of 1980, Mr. Justice Labrosse ordered that Fluxgold Investments Ltd. be wound up pursuant to section 217 of the Business Corporations Act, R.S.O. 1970, c. 53, and, as a result, a professional liquidator was appointed. Though this order [was] issued, no action was ever taken until finally the Ministry dissolved the company in October of 1985 because of failure to comply with directives issued under the Business Corporations Act.
In June of 1980, Mr. Justice Labrosse further ordered that the division of family assets be referred to a family law commissioner for review and recommendation. Following a complex hearing, Commissioner McBride issued a lengthy report in September of 1981, followed by a supplemental report in October of 1982, recommending payment to the plaintiff of the sum of $118,914.40. This partition was slightly amended in the order of Mr. Justice Labrosse dated April 1983 in which he confirmed that the plaintiff should receive $113,360.48 from her husband, and ordered payment by Mr. Fluxgold. This amount was then reduced by the Ontario Court of Appeal in November of 1983 to $95,360.48; payment followed the final disposition, I would assume sometime during late 1983 or early 1984.
In May of 1984, the Minister of National Revenue assessed Mrs. Fluxgold for corporate taxes owing by Fluxgold Investments Ltd. for the years 1978 and 1979 pursuant to section 160 of the Income Tax Act; he also relied on the deeming provision section 251.
Counsel for the plaintiff contends firstly that the payment by the estranged husband to Mrs. Fluxgold was effected pursuant to a court order and therefore exempt under subsection 160(4) of the Act; in the alternative, that the payment of funds should not be considered “a transfer" within the meaning of section 160.
Counsel for the defendant argues that this was a transfer of property within the meaning of section 160. She submits that had the money realized from the sale of properties in 1980 and 1982 been properly deposited to the credit of the corporate account, the moneys owing for taxation would have been available to satisfy the Minister thereby reducing the entitlement to the plaintiff under the Family Law Reform Act; otherwise she has been unjustly enriched. Further, counsel relies on the decision of Mr. Justice Strayer of this Court in the case of Barry Marshall Boardman and Saskan Investments Ltd. v. The Queen, [1986] 1 C.T.C. 103; 85 D.T.C. 5628, wherein, she submits, it had been determined that transfers pursuant to section 160 could not defeat the tax owing by a transferor after property had been passed to a transferee.
As I review the facts in the present litigation, may I say at the outset that there is no evidence before me whatsoever to indicate which, if any of the assets possessed by the husband at the time of compliance with the court order, were funds derived from the transactions he conducted on behalf of the family corporation some years before. Though it is alleged that these funds rightfully belonged to the corporate body, there is no way of tracing; they may have been dissipated or replaced by other acquisitions.
The issue to be determined is whether or not moneys owing to the Minister by F.I.L. can and should be paid by the plaintiff; further, should the Minister be allowed to attach moneys the plaintiff received as a result of an order issued by the Supreme Court of Ontario resulting from the division of the family assets in an action brought pursuant to the Family Law Reform Act . Does the transfer pursuant to this order bring the plaintiff within the exception created by subsection 160(4) of the Income Tax Act And further, can it be said that moneys owed by a corporate body apparently illegally withheld by a transferor and purportedly advanced to satisfy a debt owing to a transferee, be subject to tax pursuant to section 160 of the Act.
Plaintiff's counsel attempted to argue that this was not a transfer as contemplated under section 160 of the Act. I am satisfied that Mr. Justice Thurlow, in the Joseph B. Dunkelman v. M.N.R., [1959] C.T.C. 375; 59 D.T.C. 1242, put the definition to rest when he wrote, at page 379 (D.T.C. 1244):
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.
I accept this definition and I conclude that there was in fact a transfer of assets, but the matter does not end here.
The defendant's counsel relied heavily on the Board man case, supra, and indicated that I should be guided by this decision. Boardman was also concerned with a division of assets resulting from a matrimonial dispute but a concise appreciation of the facts disclose obvious reasons to distinguish. First, it should be noted that the parties appealing the assessment were the transferor, Mr. Boardman, and his personal corporation Saskan Investments Ltd.; it was not the transferee. Two houses owned by Saskan Investments Ltd. were conveyed directly to the wife as ordered in the matrimonial dispute. This came about as a result of Dr. Boardman's counsel requesting the trial judge in the Saskatchewan Court to convey the properties directly from the corporation to Mrs. Boardman in order that he may preserve other personal assets. There is no doubt in my mind that the Minister of National Revenue was quite correct in assessing Dr. Boardman for having unjustly enriched himself by taking assets directly from the family corporation and using them personally to satisfy the division of the matrimonial assets. Second, it should also be noted that these reassessments were as a result of the transferor having appropriated to himself corporate property; pursuant to subsections 56(2) and 245(2) of the Act, it had been determined that compliance with the court order had created a taxable benefit to the transferor.
Unlike the Boardman case, this is not an assessment against the transferor but an assessment against the transferee pursuant to section 160. Though the origin of the claim, the corporate body, may in some way be parallel to the Boardman situation, it was not the issue in that litigation.
In the present case the Minister's assessment against the plaintiff must fail on a number of grounds and for a number of reasons.
As I commented earlier, there is no evidence whatsoever that the estranged husband may not have accumulated other assets subsequent to the disposition of the corporate property and his compliance with the court order some six years later. The tracing of the funds is impossible.
I am satisfied that the plaintiff falls within the exception created by subsection 160(4) of the Income Tax Act. This was dealt with in the case of Madeleine Charrier v. M.N.R., [1989] 1 C.T.C. 2214; 89 D.T.C. 108. Briefly, in the former case, the taxpayer's spouse, while indebted to Revenue Canada, transferred two properties to the estranged wife, one in 1980 and one in 1981. Those conveyances were concluded to make up arrears of alimony awarded in a matrimonial dispute. In 1985, the Minister attempted to tax Madeleine Charrier for the full value of the benefit conferred to her by the spouse, thereby attempting to satisfy outstanding tax owed by the husband. It was held that there was no doubt that the purpose of section 160 of the Act was to prevent a taxpayer from avoiding the payment of taxes by transferring property to his spouse. However, the Court found that any payment to a spouse concerning alimony or the division of family assets falls within the purview of the exception in subsection 160(4); further, it also held that so long as the amount paid did not exceed what was owing pursuant to a formal separation agreement or a court order, it could not be seized by the Minister of National Revenue for moneys owing by the transferor.
It should be underlined that the Minister has assessed Mrs. Fluxgold pursuant to section 160, and relies on section 251 concerning non-arm's length transactions, i.e. transfer to a spouse, or from a corporation to a controlling member. It is admitted, and I find as a fact, that the plaintiff did not participate in the two transactions which were concluded by Mr. Fluxgold on behalf of the corporation. She derived no direct or immediate benefit at the time of the sale. There is also no doubt that Commissioner McBride, in determining the quantum, took these two properties into account as being owned by the corporation. Nevertheless, I am satisfied that the Commissioner's responsibility was to look into quantum, and suggest a division of assets to the Court; I must confine the enquiry to the court order, not the Commissioner's report, in determining whether the transferor is F.I.L. or Mr. Fluxgold.
It is beyond any doubt that the order directing payment was against Mr. Fluxgold and not the corporate body. I must therefore conclude that the transferor is the husband, and not the party in arrears for taxation years 1978 and 1979.
The Minister argued that under paragraph 160(1)(c) and section 251 of the Act, it can be said that by operation of law transactions between spouses, or between a corporation and a controlling shareholder are deemed to be "nonarm's length”. There is evidently no transaction between the corporation and the plaintiff. I must therefore conclude that the Minister cannot succeed on this ground.
Let us now examine the purview of the exception under subsection 160(4). The wording in the statute is:
SPECIAL RULES RE TRANSFER OF PROPERTY TO SPOUSE
(4) Notwithstanding subsection (1), where at any time a taxpayer has transferred property to his spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement and, at that time, the taxpayer and his spouse were separated and living apart as a result of the breakdown of their marriage, the following rules apply:
(a) in respect of property so transferred after February 15, 1984,
(i) the spouse shall not be liable under subsection (1) to pay any amount with respect to any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(ii) for the purposes of paragraph 1(e), the fair market value of the property at the time it was transferred shall be deemed to be nil, and
(b) in respect of property so transferred before February 16, 1984, where the spouse would, but for this paragraph, be liable to pay an amount under this Act by virtue of subsection (1), the spouse's liability in respect of that amount shall be deemed to have been discharged on February 16, 1984,
but nothing in this subsection shall operate to reduce the taxpayer's liability under any other provision of this Act.
We are confronted with a transfer pursuant to a court order dividing family assets under the Family Law Reform Act, on marriage breakdown, which appears to exempt the transferee from liability for payment. It is my view that even had Mr. Fluxgold been the party in arrears, the plaintiff would be exempt as a result of the operation of the exception in subsection 160(4).
Section 160 has been specifically inserted into the Act to obviate tax avoidance schemes by means of transfer of property between certain enumerated categories. The legislators were prepared to recognize certain exceptions to this strict rule, and enacted subsection (4) to provide relief in circumstances of marriage breakdown. To support the Minister's contention would not fall within this rationale.
Admittedly, transfers between husband and wife are deemed to be at "nonarm's length", but in this factual situation, the passing of property was as a result of a court order under the Family Law Reform Act, and therefore exempt.
I am hereby setting aside the 1984 assessment by the Minister of National Revenue vis-a-vis this plaintiff.
I would like to briefly comment on the deeming provisions of section 251. This, as we know, is an irrebuttable presumption and all transfers of property between husband and wife are considered to be "not at arm's length".
The Income Tax Act does not define the expression "married" for the purposes of this section; it is obvious that only parties that are the subject of a solemnized marriage are included. The Income Tax Act fails to take into account "common-law" relationships, which are accepted as a part of every day life in modern society; these relationships are clearly recognized in most jurisdictions. Parties who co-habit, without the benefit of solemnized marriage, are acknowledged as having acquired certain rights as if a formal pro- nouncement of vows had been entered into; such parties would not be included within the deeming provisions of section 251. On the other hand, parties solemnly married, but having lived apart for several years, and not having pursued divorce or other legal remedies to declare the marriage at an end, are still presumed to be acting in concert. May I suggest that this deeming provision should, at the very least, be made rebuttable, and brought into conformity with current thinking and the prevailing family law. This archaic notion begs for amendment.
This appeal is allowed with costs.
Appeal allowed.