Date: 19981002
Docket: 96-770-IT-G
BETWEEN:
DIANE FERRACUTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] This appeal is from an assessment made under
section 160 of the Income Tax Act (the
"Act") concerning the Appellant’s 1990,
1991, 1992, 1993 and 1994 taxation years. The assessment is based
upon alleged transfers by the Appellant’s husband,
John Ferracuti, in the amount of $136,695.02 between
February 15, 1990 and June 9, 1994. It is not
disputed that Mr. Ferracuti was, during the years in
question, obligated to pay not less than $393,380.00 under the
Act during the relevant years.
[2] Mr. & Mrs. Ferracuti have been married over
25 years and have two sons, 16 and 28 years old.
Mr. Ferracuti was in the construction business and was the
substantial shareholder in several corporations. His businesses
may have prospered during the 1980s but suffered during the
economic recession years of the 1990s.
[3] Mrs. Ferracuti was the registered owner of the family
home in the City of Etobicoke in which she resided as a
full-time homemaker with her husband and two children. In
1992, their oldest boy was severely injured in a car accident and
she administered to his considerable needs during the last three
relevant years.
[4] Corporations in which the Appellant’s husband was a
substantial shareholder made payments to a variety of third
parties on the direction the Appellant’s husband throughout
the period from February 15, 1990 to
June 9, 1994, totalling as follows:
Bell Canada $ 7,046.36
City of Etobicoke 4,398.81
Etobicoke Hydro 11,416.31
London Life 94,929.51
McLean Hunter 1,328.82
Norm’s Weed Control 33.17
Valeroite Insurance 2,139.16
[5] The Appellant admits that there was a transfer of $500.00
on March 23, 1990 to the Appellant within the meaning
of section 160 of the Act. The Respondent did not
wish to make submissions with respect to the Union Gas payment of
$67.46 or the skiing fees and implied that these amounts may have
been incorrectly assessed by the Minister.
Appellant's Position
[6] The Appellant claims that her husband,
John Ferracuti, made no payments to her and transferred no
property to her during the period of February 15, 1990
to June 9, 1994. The Appellant further claims that the
payments made by one or more of the corporations for the taxes
paid to the City of Etobicoke, mortgage interest and home
insurance constitute payments made on behalf of
Mr. Ferracuti in the discharge of his responsibilities to
provide shelter for his family. The Appellant owns the
matrimonial home which is subject to a mortgage.
Mr. Ferracuti is a guarantor on the mortgage. The Appellant
claims that these payments also benefited Mr. Ferracuti as
he was a member of the family. The Appellant further claims that
the mortgage payments, principal and interest, made to London
Life Insurance company with respect to the matrimonial home were
made in satisfaction of the legal obligations of
Mr. Ferracuti as a guarantor. It was Mr. Ferracuti who
arranged for hydro through Etobicoke Hydro, therefore any payment
to Etobicoke Hydro constituted a discharge of his personal
liability to Etobicoke Hydro. Furthermore, the payments to
McLean Hunter for cable service and to Norm’s Weed
Control were made due to the fact that it was Mr. Ferracuti
who arranged for these services.
Respondent's Position
[7] The Minister relied on the following facts:
a) between February 1990 and June 1994, John Ferracuti
(the "Transferor") transferred not less than $136,695
(the "Property") to the Appellant;
b) at all material times, the transferor was married to and
residing with his spouse, the Appellant;
c) at all material times, Mr. Ferracuti and the Appellant
were not dealing at arm’s length;
d) at the time of the transfers, the fair market value of the
Property was not less than $136,695;
e) at the time of the transfers, the fair market value of the
consideration given by the Appellant to Mr. Ferracuti for
the Property was nil;
f) the aggregate of all amounts that the Transferor was liable
to pay under the Act in or in respect of the taxation year
in which the Property was transferred or any preceding taxation
year was not less than $393,380.
Legislation
[8] The relevant section of the Act reads:
160. Tax liability re property transferred not at arm’s
length
(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 a person who has since become
the person’s spouse,
(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.
Issue:
[9] Whether the Appellant is liable to pay the amount of
$136,695 pursuant to section 160 of the Act in respect of
a transfer of property to the Appellant?
Analysis
[10] The Appellant puts great emphasis on the fact that no
money was ever paid to the Appellant and that
subsection 160(1) of the Act does not state "to
or for the benefit of the person’s spouse." Both
counsel referred in their submissions to Actus Holdings
Limited v. The Queen 97 DTC 605, and the
meaning of the word transfer as considered by Rouleau J. of the
Federal Court Trial Division in Fluxgold v. Canada
[1990] 1 C.T.C. 176, 90 DTC 6187.
Rouleau J., stated at page 6189:
I am satisfied that Mr. Justice Thurlow, in the
Joseph B. Dunkelman v. Minister of National
Revenue, 59 DTC 1242, put the definition to rest
when he wrote at page 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.
[11] Both counsel referred to the meaning of
"transfer" as set out in Dunkelman.
[12] With respect to the "benefit" argument put
forth by the Appellant, the Federal Court of Appeal has recently
dealt with this argument in Medland v. The Queen,
98 DTC 6358. Desjardins J.A., stated at
pages 6362 and 6363:
The words "indirectly ... by ... any other means" in
subsection 160(1) of the Act refer to any circuitous way
in which property of any kind passes from one person to another.
In the case at bar, when Mr. Medland made the payments to
the mortgagee, he specified that such money was to be attributed
in diminution of the mortgage on the property on which he had no
more interest. While it is true that subsection 160(1) of
the Act does not contain the words "for the benefit
of" or "on behalf of" as found in
subsections 15(1) or 74.1(1) or
paragraph 224(1.1)(b) of the Act, the applicant does
not deny that she became less indebted by the payments and her
equity in the property increased. The means by which this result
occurred were monies paid to the Bank which was then transferred
by the Bank on the account of the mortgage of a house owned
solely by the applicant. The payment to the Bank was simply a
conduit through which the funds passed indirectly from her
husband to her.
[13] The payments made by the corporation to the third parties
were charged to Mr. Ferracuti’s personal account in
the corporations’ books. I find that the payment by the
corporations, in which Mr. Ferracuti was a substantial
shareholder, to the third parties is a "circuitous way in
which property of any kind passes from one person to
another". The corporations were a mere conduit with respect
to transfers made to the Appellant. The fact that
subsection 160(1) of the Act does not state "to
or for the benefit of the person’s spouse" does not
affect this finding.
[14] With respect to the mortgage, the Appellant relies on a
statement in Actus (supra) wherein Mr. Sinnott had
guaranteed a mortgage for the Appellant, a corporate taxpayer.
Mr. Sinnott advanced funds in order for the Appellant to pay
the mortgage and at a later date the Appellant repaid part of the
funds advanced. The Minister attempted to hold the Appellant
vicariously liable under subsection 160(1) of the
Act, by claiming that at the relevant time of the advance
to the Appellant, Mr. Sinnott owed tax under the Act.
In holding for the corporate taxpayer, Sobier, J.T.C.C. stated at
page 606:
On two counts, I cannot characterize the payments as
transfers. On the one hand, Mr. Sinnott had an obligation to
pay the credit union, even if not called upon to do so, and
secondly, I find that there was not a transfer in the sense
referred to by Mr. Justice Thurlow, in Dunkelman
(supra) the property in the funds was not vested
absolutely in Actus but was a loan which was later
repaid.
[15] Sobier, J.T.C.C., found that there was not a transfer as
within the meaning set out in Dunkelman (supra) and
as stated per Thorson P. in Estate of David Fasken
v. Minister of National Revenue, 49 DTC 491, as a
loan does not constitute a transfer. In the case at bar, the fact
that Mr. Ferracuti guaranteed the mortgage does not make the
payment his obligation. His obligation would arise if the
principal, namely the Appellant, Mrs. Ferracuti, defaults on
the loan and the mortgagee pursues a remedy against the guarantor
of the loan. Even if Mr. Ferracuti was found to have an
obligation to pay the mortgagee, any payment would have the
effect of benefiting the Appellant as she is the sole owner of
the mortgaged property. The Federal Court of Appeal in Medland
(supra), found this is an indirect transfer and the Bank is
merely a "conduit".
[16] The other argument put forth by the Appellant is that the
husband is discharging his own obligations by causing his
corporations to pay these bills. The Appellant submits that these
obligations arose by the fact that Mr. Ferracuti contracted
with third parties for the supply of services. The Appellant
further claims that Mr. Ferracuti had a legal obligation to
support his family under sections 30, 31 and 35 of the
Ontario Family Law Act[1]. However, whether the obligation is imposed by
contract or by statute does not change the outcome that a
transfer was "indirectly" made to his spouse. It would
be absurd to hold that a person could get around the definition
of transfer set out in Fasken (supra) by entering into a
contract whereby the transferor undertakes obligations that will
benefit the transferee. It is possible that a payment to a third
party could satisfy an obligation to that party as well as being
considered a transfer of property to the transferee.
[17] I conclude that there was a transfer of property.
[18] For there to be a transfer within the meaning of
section 160 of the Act, there must be a transfer
without valuable consideration. There could be a transfer of
property but if this transfer is for valuable consideration, then
there is not a transfer within the meaning of section 160 of
the Act.
[19] Section 160 of the Act is similar to the
concept of unjust enrichment. The transferee should not be
unjustly enriched, especially to the detriment of the Crown, with
respect to the transfer made by the transferor.
[20] The concept of unjust enrichment was considered by the
Supreme Court of Canada in Pettkus v. Becker,
[1980] 2 S.C.R. 834. In holding for the Respondent,
Ms. Becker, the Court considered the services provided by
Ms. Becker and fashioned the remedy of constructive trust.
The Court held at page 847 that “The principle of unjust
enrichment lies at the heart of the constructive trust”.
Dickson J. further stated at page 848:
In Rathwel I ventured to suggest there are three
requirements to be satisfied before an unjust enrichment can be
said to exist: an enrichment, a corresponding deprivation and
absence of any juristic reason for the enrichment.
[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. The relevant sections read:
30. Every spouse has an obligation to provide support for
himself or herself and for the other spouse, in accordance with
need, to the extent that he or she is capable of doing so.
31(1) Every parent has an obligation to provide support, for
his or her unmarried child who is a minor or is enrolled in a
full time program of education, to the extent that the parent is
capable of doing so.
[...]
33 (7) An order for the support of a child should,
(a) recognize that each parent has an obligation to provide
support for the child;
[...]
(8) An order for the support of a spouse should,
(a) recognize the spouse’s contribution to the
relationship and the economic consequences of the relationship
for that spouse;
(b) share the economic burden of child support equitably;
[...]
(9) In determining the amount and duration, if any, of support
for a spouse or parent in relation to need, the court shall
consider all the circumstances of the parties, including,
[...]
(c) the dependant’s capacity to contribute to his or her
own support;
[...]
(l) if the dependant is a spouse,
[...]
(iii) whether the spouse has undertaken the care of a child
who is of the age of eighteen years or over an unable by reason
of illness, disability or other cause to withdraw from the charge
of his or her parents.
[22] Lamarre Proulx, J.T.C.C., in Michaud v. The
Queen (13 August 1998), Quebec 97-1312(IT)G (T.C.C.)
[unreported] at paragraph 19 and 20 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 instance
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.
[23] In the present case, I find that Mr. Ferracuti made
the following payments in satisfaction of his legal obligation to
support his family; namely the mortgage interest to London Life,
the taxes, hydro and water paid to the city of Etobicoke and the
home insurance paid to Valeroite Insurance. These payments do not
constitute a transfer within the meaning of section 160 of
the Act.
[24] Mr. Ferracuti had a legal obligation to support and
maintain his wife and two children. The Appellant was fulfilling
her obligations by looking after her two sons. She transported
her younger son to and from school and her injured son to
hospitals and rehabilitation centers. Mr. Ferracuti had the
legal and contractual obligation to provide shelter and he did so
by paying the interest, taxes and insurance for the family
home.
[25] The appeal is therefore allowed, with costs. The
assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment to reduce the amount
assessed against the Appellant under section 160 of the
Act by (1) the total mortgage interest paid during the
relevant years to London Life; (2) the taxes, hydro and
water paid to the City of Etobicoke; and (3) the home insurance
paid to Valeroite Insurance.
Signed at Ottawa, Canada, this 2nd of October 1998.
" C.H. McArthur "
J.T.C.C.