Citation: 2011TCC394
Date: 20110825
Docket: 2009-3035(IT)G
BETWEEN:
TERRENCE GUILBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The Appellant, Terrence
Guilbault, is appealing the reassessment by the Minister of National Revenue which included $264,065 in his 2005 income for artwork
which, according to the Minister, was transferred from a corporation owned by
the Appellant to his former spouse in satisfaction of his liability to her
under their divorce settlement. In these circumstances, the value of the
artwork represented a benefit to the Appellant and was properly included in his
income under subsection 56(2) or alternatively, under subsection 15(1) of the Income
Tax Act.
[2]
With the exception of
subparagraphs 15(f), (g) and (h) of the Reply to the Notice of Appeal, the assumptions of fact upon which the Minister’s
reassessment was based are not generally in dispute:
a)
on August 30,
1991 Canril Investments Inc. [“Canril Investments”] purchased artwork composed
of a number of pieces of art (the “Artwork”) from the Appellant and Mrs. Susan
Riley, his spouse at the time [“Former Spouse”];
b)
at all relevant
times, the Appellant was the sole shareholder, director and controlling mind of
Canril Investments;
c)
as of the date of
purchase in 1991, the Artwork was kept at the Appellant and Mrs. Riley’s
residence [the “Matrimonial Home”];
d)
in 1995, the
Appellant left the Matrimonial Home for matrimonial reasons, leaving the
Artwork with his Former Spouse at the Matrimonial Home;
e)
the Artwork
remained in possession of his Former Spouse at the Matrimonial Home at least
until June 10, 2005 when minutes of settlement (the “Minutes of Settlement”)
were entered into between the Appellant and his Former Spouse relating to their
divorce;
f)
pursuant to the
Minutes of Settlement, the Appellant’s Former Spouse became entitled to retain,
as her sole and only property free from any claim, possession and ownership of
the Artwork in her possession on June 10, 2005. These Minutes of Settlement
were made in full satisfaction of the Former Spouse’s claims for equalization
of net family property and spousal support and the release by the Appellant in
the Matrimonial Home;
g)
the transfer of
the Artwork from Canril Investments to his Former Spouse on June 10, 2005 was
part of the Appellant’s obligation resulting from his divorce settlement with
his Former Spouse;
h)
until the
transfer to his Former Spouse on June 10, 2005, Canril Investments remained the
sole owner of the Artwork since its acquisition on August 30, 1991;
i)
the value of the
Artwork at the time of the transfer to his Former Spouse on June 10, 2005, was
at least in the amount of $264,065.
Background
[3]
As is often the case in
tax matters arising out of marital breakdown, this bare recital of facts does not begin to tell the story. In 1991, the Appellant and his Former
Spouse transferred the Artwork to Canril Investments.
Contrary to assumption 15(c), the Artwork was not kept exclusively in the
Matrimonial Home; as there was not enough room for the entire collection at the
offices of Canril Investments, individual pieces were rotated from time to time
between the office and the Matrimonial Home. It was not until 1993 when Canril
Investments moved its business premises that all of the Artwork was temporarily
relocated to the Matrimonial Home during renovations of the new space.
[4]
One night in January 1995, the
Appellant returned from work to find himself locked out of the Matrimonial
Home. He immediately moved to other accommodations. Again, contrary to the
implication in assumption 15(d) that the Appellant willingly left the Artwork
with his Former Spouse, it is more accurate to say that it happened to be
located at the Matrimonial Home the night he was barred from re-entry. Divorce
proceedings quickly ensued but because of the contentious nature of their
relationship, every issue became a battle: the custody of their two sons,
spousal and child support, disposition of the Matrimonial Home, and division of
matrimonial property. None of this is particularly relevant to the present
matter except insofar as it spilled onto the Appellant’s corporate holdings, in
particular, the Artwork owned by Canril Investments. Their decade-long dispute
generated a flurry of documents only some of which were before the Court: court
orders, offers and counter-offers, correspondence and the Minutes of Settlement
which finally brought hostilities to an end.
Appellant’s Position
[5]
Briefly stated, the
Appellant’s position is that the Minutes of Settlement did not effect a
transfer of the Artwork owned by Canril Investments to the Appellant’s Former
Spouse. Given that the Artwork remained the property of Canril Investments at
the time the Minutes of Settlement were executed, the lack of any reference to
it in the very detailed list of items in Clause 2.1 of Schedule ‘A’ and the
release in Paragraph 4 of the agreement supports the conclusion that the
parties did not intend the transfer of the Artwork as part of the matrimonial
property. Any ambiguity in the Minutes of Settlement must be resolved in the
context of the surrounding circumstances, including documentation predating its
execution, and the nature of the relationship between the Appellant and his
Former Spouse from 1991 to 2005.
Respondent’s
Position
[6]
Not surprisingly, the Minister
takes the opposite view, arguing that it is clear on the face of the Minutes of
Settlement, in particular, Clause 2.1 of Schedule ‘A’ thereto, that the
Artwork owned by Canril Investments was transferred to the Appellant’s Former
Spouse in partial satisfaction of his liability to her under that agreement.
There being no ambiguity in the Minutes of Settlement, there is no need to look
beyond it for its interpretation. But even if there were, counsel contended,
the Appellant’s actions are consistent with the Artwork having been
transferred; most notably, his failure to protect Canril Investments interest
in the Artwork by gaining possession of it at his earliest opportunity. In
these circumstances, the transfer constitutes a benefit to the Appellant under
either subsections 56(2) or 15(1) of the Act.
Legislation
[7]
Beginning first with the legislative
provisions, the relevant portions of subsection 15(1) of the Act provide
that:
15. (1) Where
at any time in a taxation year a benefit is conferred on a shareholder … by a
corporation otherwise than
…
the amount or
value thereof shall … be included in computing the income of the shareholder
for the year.
[8]
The relevant
portions of subsection 56(2) of the Act read as follows:
56. (2) A …
transfer of property made pursuant to the direction of, or with the concurrence
of, a taxpayer to some other person for the benefit of the taxpayer or as a
benefit that the taxpayer desired to have conferred on the other person … shall
be included in computing the taxpayer’s income to the extent that it would be
if the … transfer had been made to the taxpayer.
[9]
For subsection 56(2) to apply, all
of the four “pre-conditions” identified by the Supreme Court of Canada in Neuman
v. Minister of National Revenue, [1998] 1 S.C.R. 770, must be
satisfied:
(1) the
payment must be to a person other than the reassessed taxpayer;
(2) the
allocation must be at the direction or with the concurrence of the reassessed
taxpayer;
(3) the
payment must be for the benefit of the reassessed taxpayer or for the benefit
of another person whom the reassessed taxpayer wished to benefit; and
(4) the
payment would have been included in the reassessed taxpayer’s income if it had
been received by him or her.
Issues
[10]
The only real question for consideration
is whether, on a proper interpretation of the Minutes of Settlement and the
surrounding circumstances, there was a transfer of the Artwork from Canril
Investments to the Appellant’s Former Spouse. Counsel for the Appellant
conceded condition 4; had the Appellant transferred Canril Investments’ Artwork
directly to himself, it certainly would have been a benefit taxable in his
hands. I agree with counsel’s further comment in argument that if a transfer were
found to have occurred, it would have been a benefit to the Appellant under the
first prong of condition 3 as it would have satisfied, in part, his obligations
to his Former Spouse under the Minutes of Settlement. Furthermore, as a
signatory to the Minutes of Settlement, the Appellant would have, if not
directed, at least concurred in that transfer within the meaning of condition
2. In these circumstances, the Appellant would have received a benefit under
either subsection 56(2) or subsection 15(1) of the Act.
Credibility
[11]
Before considering the legal
issues, it is important to say a few words about the Appellant’s credibility.
He was the only witness to testify. It might have been helpful to have heard
from his Former Spouse but, given the hostile nature of their relationship,
that is not necessarily so. Perhaps that is why she was not called by either
party. Nor did the Court hear from any of the Canada Revenue Agency officials involved
in the Appellant’s files over the years. As a result, the decision in this case
hinged to a large degree on the reliability of the Appellant’s evidence.
[12]
Notwithstanding the skillful efforts
of counsel for the Respondent to diminish the force of the Appellant’s evidence,
I found him, on balance, to be a convincing witness. He struck me as a genuine
sort of fellow who has worked hard all his life to make a success of himself.
As one would expect under our adversarial system, the Appellant put his best
foot forward in presenting his testimony; he did not, however, pretend to be a
model of perfection in either personal or business matters. His answers to
questions about transactions, audits and assessments involving several
different companies engaged in a range of enterprises and which had occurred
years ago (and were not necessarily relevant to the present matter) were
straight-forward and sensible, especially given the passage of time and the
diverse and complex nature of his businesses.
[13]
I found the Appellant similarly
credible in his response to counsel for the Respondent’s suggestion that during
the years leading up to the execution of the Minutes of Settlement, he could
have asserted and enforced Canril Investments’ right to the Artwork. In a
perfect world, I would agree. But the notional taxpayer who inhabits the pages
of the Income Tax Act is blissfully unencumbered by the day-to-day concerns
that afflict his human counterparts. In the Appellant’s case, gaining possession
of Canril Investments’ Artwork was but a dim ember on a horizon ablaze with
more pressing concerns. I mention this not to relieve the Appellant of his
obligations under the Act but to inject a note of reality into the facts
as perceived by the Minister.
[14]
While more will be said about this
aspect of the appeal below, the following exchange between counsel for the
Respondent and the Appellant illustrates the candour with which he answered
questions as to why he had not taken action on behalf of Canril Investments to
recover the Artwork, especially since during that same period, he had
gone to court to have released certain other corporate assets from a general
restraining order his Former Spouse had obtained against him and his companies
on February 15, 1996 (“1996 Restraining Order”);
… by the time [the
Minutes of Settlement] were signed by you and [the Former Spouse], you were at
the end of your tether, were you not?
A.
Well, yes, I would agree that -- if I understand the meaning of the word “tether”
I was pretty fed up with the whole thing, absolutely, yes.
Q.
And you wanted to end the divorce?
A.
I wanted to end the divorce before it even started.
Q.
And you had every opportunity between the ten years to go into court to
permanently vacate the 1996 Order with respect to the Artwork, don’t you agree?
A.
Well, yes, I guess -- I think I understand the question. I am just thinking
through it.
So
I guess what you are saying is I could have asked my lawyers to prepare a
motion in court to ask for release so I could sell the art, for example,
because I would not have wanted it back, I don’t think. I would have sold it
and raised money for the company.
But
–
Q.
You are expanding on my question.
A.
I am trying to figure out why -- I am trying to answer your question in a sense
that to show you that it would not have made any sense to ask for such a
request.
You
see, my business is real estate, okay.
And
I mean, the Artwork is nice to hang on the walls to make your office look good,
and I am a real avid of anything that is Canadian.
So
-- but the reason we went for orders when we had to, because if we had sales or
financing that had to be done in the general course of business, we went for
one.
But
we would not have bothered going and -- first of all, they [going to court] are
extremely expensive. Some of these processes cost 50, 60, $70,000.
We
would not have fought that fight over the Artwork as long as my sons were still
telling me it was still all at the house.
If
it disappeared, I might have.
So
yes, I guess I could have, but to go to court to fight over that when I was
fighting for my very survival and existence of my company and trying to raise
my children because they were with me, after arriving on my doorstep … I had my
hands full.
So
I only went to court on really priority items.
In
other words, if I had to raise money to buy a piece of property or I had to
sell a piece of property because of this court order, which all my other
lawyers agreed was poorly written and we shouldn’t have agreed to, but there
would not -- it would not -- it was not something that had to be dealt with at
that time.
So
it was not immediate, you know.
First
of all, of course she would have fought it. It would have gone on and on and
on. It just would not have been a rational thing to do after. It would have
inflamed her anger even more.
…
So
it was too close and too personal and not in an ownership chance, but it was
just too much. I wouldn’t have gone there. I only went to court on matters of
pure, immediate and necessary business.
Q.
So Mr. Guilbault –
A.
Could I have gone? Yes.
Why
I did not go, I have offered you that explanation of why I did not go.
Q.
Mr. Guilbault, you were in court four times and you could have had, at no extra
cost to those applications by referring to the Artwork, is that correct?
A.
No. No extra cost, that’s a nice statement to make.
If
you could -- if this Court would agree to loan me a quarter of a million
dollars to pursue that Artwork now, I would be more than willing to pursue it.
But
no, it’s not that simple.
You
add on only the Artwork, you are not going to jeopardize your whole family --
don’t forget, she depended on my money and my children depended on my money.
Am
I going to add Artwork which is going to drive her bananas …
…
So
there was no way I was going to get the -- so you say add it on. So let’s --
you suggest add it on, so let’s explore that.
So
I add it in there.
I’m
trying to get a multi-million dollar loan done, or in this case, a 36 million
dollar sale done, and I add in oh, by the way, I want those paintings.
Oh
my God!
I
mean, it would not make any logical business sense to do that.
[15]
It was clear from the Appellant’s
testimony and the questions posed by counsel for the Respondent that over the
years, a raft of Canada Revenue Agency officials had been involved with the
Appellant’s files. Perhaps some of them could have provided the Court with a
more balanced picture of events. But the appeal must be decided on what is, not
what might have been. As will be further described below, all in all, I found
the Appellant’s evidence sufficiently credible to shift to the Respondent the
onus of proving the assumptions underlying the reassessment.
Analysis
[16]
Turning, then, to the issues at
hand, a word need be said about the 1996 Restraining Order mentioned above.
Approximately a year after the Appellant’s exclusion from the Matrimonial Home,
the Appellant’s Former Spouse applied for and was granted, on consent, an
order:
… that the
[Appellant] shall be restrained from dissipating, depleting, transferring,
selling, disposing of or encumbering any assets in which he has an interest,
directly or indirectly, or any assets which he may control in any capacity,
directly or indirectly, PROVIDED that the [Appellant] shall be at liberty to
act in a commercially reasonable manner for the purpose of preserving the
assets, SUBJECT to such further agreement of the [Appellant] and [his
Former Spouse] or Order of this Court.
[Emphasis added.]
[17]
It
is common ground that the Artwork was caught by the 1996 Restraining Order.
Counsel for the Respondent contended that key to the determination as to
whether there had been a transfer of the Artwork were the two alternative means
contemplated by the 1996 Restraining Order for releasing corporate assets from
its ambit: either by “further agreement” or a court “Order”. Counsel for the
Respondent emphasized that although on two occasions the Appellant had gone to
court to have certain corporate assets vacated from the 1996 Restraining Order
i.e., an Order of the Ontario Court (General Division) dated January 20, 1999 and an Order of the
Ontario Superior Court of Justice dated March 19, 2003, he admitted he had
taken no such action in respect of the Artwork. Accordingly, because at the
time the Minutes of Settlement were signed the Former Spouse (probably) had
physical possession of the Artwork, counsel submitted that the Minutes of
Settlement represented a “further agreement” the effect of which was to
transfer to her the Artwork from Canril Investments. In support of this contention,
counsel noted
that Clause 2.1 is identical to a provision in the settlement offer made just
prior to the Minutes of Settlement, the “Respondent’s Offer to Settle” dated
March 24, 2005 (“March 2005 Settlement
Offer”). In these circumstances, counsel for the Respondent submitted, “[t]he
only reasonable conclusion is that the parties came to an agreement that was
the [Minutes of Settlement] whereunder [the Appellant’s Former Spouse] received
the Artwork from [Canril Investments], as stated by paragraph 1 of the 1996
Restraining Order: ‘subject to such further agreement of the Husband and Wife’”.
[18]
The relevant portions of the
Minutes of Settlement are Paragraphs 1 and 4 of the main text of the Minutes of
Settlement and Clauses 2.1 and 2.2 of Schedule ‘A’ thereto:
And Whereas the parties hereby agree to settle
all matters in this action as follows:
1. In full satisfaction of the claims for equalization of net family
property and spousal support and the release by the Respondent in the former
matrimonial home, 18 Blenheim Road, Rockcliffe Park, Ottawa, the Respondent,
Terrence Guilbault, (hereinafter referred to as the “husband”) hereby agrees to
pay to the Applicant, Susan Riley (hereinafter referred to as the “wife”) the
sum of ONE MILLION, SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS ($1,750,000.00) by
cheque, as directed, to the Applicant’s solicitors, Cooligan, Ryan, in trust,
upon the terms and conditions set forth in Schedule “A” hereto and as set forth
below:
…
4. The wife will forthwith vacate or
dismiss any and all claims, security documents and Court Orders against the
husband and any company and property in which he has an interest.
…
Schedule
A
...
2.0 PROPERTY AND OTHER DEBTS
2.1
Except as otherwise specifically provided in these Minutes, the parties
will each be entitled to retain as their sole and only property free from any
claim by the other, possession and ownership of all property of any kind owned
or controlled by him or her or now in his or her name or possession, including
but not exclusive of all, cash, stocks, bonds, securities, GICs, registered
retirement savings plans, mutual funds, business interests, shares in privately-held
corporations, professional practices or licenses, real estate, pensions,
severance pay and other employment‑related benefits, bank accounts,
jewellery, vehicles, or assets in any other form. Except as otherwise
specifically provided in these Minutes, the parties shall each be free to
deal with any and all such assets he or she now owns or possesses free from any
claim by the other and in such manner as he or she may choose. [Emphasis
added.]
2.2
Each party hereby releases any and all interest in the property of the
other.
[19]
Despite the very able submissions
of counsel for the Respondent, I am not persuaded by the Crown’s argument.
First of all, it is important to distinguish the purposes of the 1996
Restraining Order and the Minutes of Settlement. The 1996 Restraining Order was
meant merely to protect anything that might constitute matrimonial property
pending its lawful distribution either by agreement or court order; unlike the
Minutes of Settlement, it was not geared at making any final determination of
either party’s rights thereto. The 1996 Restraining Order was a blunt
instrument; the Minutes of Settlement, a scalpel. It is against this background
that their respective provisions must be considered. I note, however, that even
from the time of the 1996 Restraining Order, a distinction was made between art
owned by the Appellant personally and the Artwork owned by Canril Investments: the
former in Schedule ‘A’ to the 1996 Restraining Order and the latter, in Schedule
‘B’ thereof.
[20]
Turning, then, to the Respondent’s
contention that the Appellant ought to have taken legal action to have the
Artwork vacated from the 1996 Restraining Order, as mentioned above, I found
the Appellant’s explanation entirely reasonable. In the context of his marital
breakdown, the Appellant had to choose his battles. He was responsible for paying
child and spousal support as well as maintaining the businesses he had spent a
lifetime establishing. Given the fragility of their negotiations and the value
of the Artwork relative to his commercial enterprises, I am unable to conclude
that in making the viability of his companies a priority, the Appellant meant
to transfer Canril Investments’ interest in the Artwork to his Former Spouse. Deferring
the enforcement of a right to a more opportune moment is not proof positive of
its abandonment and even less so, of its transfer to another.
[21]
As for the Respondent’s argument
in respect of Clause 2.1 of the Minutes of Settlement, I am unable to see how the
fact that it remained the same in both the March 2005 Settlement Offer and the
Minutes of Settlement leads inevitably to the conclusion that the parties intended
to transfer the Artwork from Canril Investments to the Former Spouse. The best
that can be said is that the provision is equally ambiguous in both documents;
its reiteration in the Minutes of Settlement, in itself, does nothing to render
it less so.
[22]
The Respondent’s argument also
overlooks the fact that while Clause 2.1 may have remained the same, there were
other significant differences between the March 2005 Settlement Offer and the
Minutes of Settlement. Notably, under Paragraph 1, the Former Spouse gained a
substantial increase in the lump sum amount payable by the Appellant: $1.75
million, up from the $1.2 million he had initially proposed. As counsel for the
Respondent herself noted in cross‑examination, “… [the Former Spouse] had
negotiated very carefully to increase the amount for not very good reason
…” [Emphasis added.]. The evidence shows this to have
been typical of the Former Spouse’s negotiating style throughout the decade of
litigation following the Appellant’s exclusion from the Matrimonial Home in January
1995. Nothing in the evidence leads me to believe the Appellant’s Former Spouse
was a shrinking violet. She was at all times represented by counsel. From this
I infer that had the parties intended the Artwork to have been transferred to
her under the Minutes of Settlement, it is more likely than not that it would
have been expressly included in the grocery list of items set out in Clause
2.1.
[23]
I find further support for this
conclusion in the changes to the release provisions in the March 2005
Settlement Offer and the Minutes of Settlement. In the March 2005 Settlement
Offer, there was no provision specifically addressing the
release of corporate assets; in the Minutes of Settlement, however, Paragraph 4
was added to provide that “[the Former Spouse] will forthwith vacate or dismiss
any and all claims, security documents and Court Orders against [the Appellant]
and any company and property in which he has an interest”. This provision is echoed in Clause 2.2 of Schedule “A”: “Each party
hereby releases any and all interest in the property of the other.”, which had
also been present in the March 2005 Settlement Offer.
[24]
In my view, the combined effect of
these provisions, together with absence of any reference to the Artwork in the
list of assets in Clause 2.1, counters the submission of counsel for the
Respondent that Clause 2.1 represented the “further agreement of the parties”
to include the Artwork in the property transferred to the Former Spouse under
the Minutes of Settlement. As I read that document, the parties intended to
limit the application of the Minutes of Settlement to property in their
possession to which each had legal entitlement at the time the agreement was
executed. The mere fact that the Former Spouse may have had possession of the
Artwork (which the Minister admits was, at all times prior to the Minutes of
Settlement, the property of Canril Investments) does not lead inexorably to the
inference that it was to be transferred to her as part of the matrimonial
property distribution. Such a conclusion is at odds, not only with the clear
wording of Paragraph 4 and Clause 2.2, but also with the stance consistently
taken by the Appellant on behalf of Canril Investments well before the
reassessment under appeal could have been contemplated. These documents are
considered below.
[25]
First, in a director’s resolution
dated December 20, 1994 (approximately a year before the marriage breakdown),
Canril Investments authorized the pledging of an Alex Colville painting, part
of the collection that would later be known as the Artwork, to the Canada
Revenue Agency to secure the Appellant’s outstanding tax debt. In May 1996, the
painting was sold by Sotheby’s and the proceeds were duly applied in accordance
with that resolution. While counsel for the Respondent argued that this showed the
Appellant’s predilection to appropriating corporate assets for his personal
benefit, there was insufficient evidence before me to conclude that there was
anything untoward in his tax treatment of this transaction, especially given the
attention which Canada Revenue Agency officials seem to have devoted to his and
his companies’ files during the decade under consideration in this appeal.
[26]
In the same vein, a letter written
by the Appellant on behalf of Canril Investments dated July 3, 1996 informed the Canada Revenue Agency that the Artwork belonged to Canril
Investments and that it ought to be returned to the company.
[27]
Some three years later, the
Appellant’s then divorce lawyer proposed a settlement to his Former Spouse’s
counsel in a letter dated April 7, 1999 (“Epstein Offer 1999”). At that time, the Appellant
was prepared to offer, among other things, a lump sum payment of $1 million and
the Matrimonial Home; at paragraph 7 of that document, Mr. Epstein went on
to assert that:
The paintings in the house [the
Artwork] belong to my client’s company [Canril Investments]. They were the
subject matter of a transaction in August 31, 1991, where the total value of
the paintings was listed at $343,000.00, for which your client received a
capital gain in 1991 on her income tax return. Both parties received a capital
gains exemption for selling the paintings to the company and, unless this
transaction is completed as was set out many years ago, both parties would be
hit with a Revenue Canada capital gains assessment. Accordingly, the paintings
must stay with my client’s company, but otherwise, your client may have the
balance of the contents in the home, provided the rest of the terms are
acceptable. There are some personal effects belonging to Mr. Guilbault that he
will want out of the home.
[28]
Here, it can be seen that in
addition to maintaining his position that the Artwork was the property of the
Canril Investments, the Appellant also continued to distinguish between the
Artwork on the one hand and on the other, the contents of the Matrimonial Home and
his personal possessions.
[29]
Counsel for the Respondent
characterized the Epstein Offer 1999 as “vastly different” negotiations from
those giving rise to the March 2005 Settlement Offer and the Minutes of
Settlement. With respect, I am not persuaded this is so. The Epstein Offer 1999
was part of one continuous negotiation spanning 1995 and 2005; over that
10-year period, for example, the lump sum amount payable to the Appellant’s
Former Spouse made its way from $1 million in the Epstein Offer 1999 to $1.2
million in the March 2005 Settlement Offer and finally, to $1.75 million in the
Minutes of Settlement.
[30]
Counsel also sought to discredit
the Epstein Offer 1999 as “inaccurate” and by inference, unreliable, because of
the misstatement of the value of the Artwork as $343,000. While I commend
counsel for a valiant effort, for the purposes Mr. Epstein’s letter was
intended, I do not see as substantively significant his having failed to reduce
the Artwork’s initial value by the amount generated from the sale of the Colville
painting in 1996. And as counsel for the Appellant respectfully noted after
commenting on Mr. Epstein’s capital gains analysis in the above passage, his
specialty was divorce, not tax.
[31]
Finally, from the time the
Appellant and his Former Spouse transferred the Artwork to Canril Investments
in 1991 until the year following the execution of the Minutes of Settlement in
2005, the Artwork was consistently shown as a capital asset in Canril
Investments’ financial statements. It was not until 2006, on the advice of its
accountants, that Canril Investments finally wrote off the Artwork:
Q. And is it your position that the Artwork disappeared from the 2006
financial statements of Canril Corporation at the time?
A. Yes.
Q. Because you no longer had possession of it?
A. That was a decision made by my accountant, Rick Watson.
My understanding was that he felt that he could not in good faith keep
them as an asset in the corporation because of the fact that they were in
someone else’s hands and not withstanding it was my wife’s and notwithstanding
we might still have a claim against it, it could be very expensive to get back.
So he could not honestly say that the full value was there.
So that’s why he recommended writing it off and taking a loss.
[32]
While counsel for the Respondent
cross-examined the Appellant on its “disappearance” from the company’s books in
2006, his motives were not challenged in argument nor was there any suggestion
that the removal of the Artwork had resulted from its transfer to the Appellant’s
Former Spouse under the Minutes of Settlement. And in any event, the taxation
year under appeal is 2005; at that time and in all the relevant years prior
thereto, there is no question that the Artwork was shown as an asset in the
corporation’s financial records.
[33]
In all the circumstances, then, I
am unable to conclude that the Minutes of Settlement transferred the Artwork
owned by Canril Investments to his Former Spouse in satisfaction of the
Appellant’s obligations under the Minutes of Settlement. As both counsel noted
in their submissions, the word “transfer” is not a term of art and has no
technical meaning; Fasken Estate v. Minister of National Revenue, [1948]
C.T.C.265. The issue in Fasken Estate was the interpretation of a
document to determine whether certain property had been transferred from a
husband to his wife. The Exchequer Court ultimately concluded that it had, summing up the
approach to be taken in such an inquiry as follows:
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. The plain fact in the present case is
that the property to which Mrs. Fasken became entitled under the declaration of
trust, namely, the right to receive a portion of the interest on the
indebtedness, passed to her from her husband who had previously owned the whole
of the indebtedness out of which the right to receive a specified portion of
the interest on it was carved. If David Fasken had conveyed this piece
of property directly to his wife by a deed such a conveyance would clearly have
been a transfer. The fact that he brought about the same result by indirect
or circuitous means, such as the novation referred to by counsel involving the
intervention of trustees, cannot change the essential character of the fact
that he caused property which had previously belonged to him to pass to his
wife. In my opinion, there was a transfer of property from David Fasken to
his wife within the meaning of the Act.
[Emphasis added.]
[34]
A review of the jurisprudence
dealing with subsections 56(2) reveals that the present matter differs from the
more typical case in that its focus is the determination of the existence of a transfer
rather than whether it occurred at the taxpayer’s direction or with his
concurrence (judicially interpreted to include “acquiescence”) and if so,
whether he benefited from the transfer or desired that the transferee benefit
from it: Boardman v. The Queen, 85 D.T.C. 5628 (FCTD); Outerbridge
(Winter) v. Canada, [1991] 1 C.T.C. 113 (F.C.A.); Smith v.
Minister of National Revenue, [1993] 2 C.T.C. 257 (F.C.A.); Scott Jones
and Ascot Enterprises Ltd. v. R., [1996] 1 C.T.C. 384 (F.C.A.); similarly, in
regard to subsection 15(1), see Broitman v. Minister of National Revenue,
[1986] 2 C.T.C. 2283 (T.C.C.); Kondrat v. The Queen, [1995] 1 C.T.C.
2630 (T.C.C.); Osadchuk v. The Queen, [1995] 1 C.T.C. 2067, (T.C.C.).
[35]
However, one aspect in the two latter
cases cited above, Osadchuk and Kondrat, is instructive in the
present matter: in determining whether a benefit had been conferred on the
taxpayers under subsection 15(1), the Court took into account whether the
taxpayer’s company had been a party to the marriage settlement agreement. In Osadchuk,
the Court found that taxpayer’s corporations were signatories to the agreement between
him and his former spouse. Because the payments made by the corporations were
in satisfaction of the taxpayer’s obligations under that agreement, a benefit was
held to have been conferred on him. In the present matter, it is common ground
that Canril Investments was not a party to the Minutes of Settlement between
the Appellant and his Former Spouse. In this regard, it is more akin to Kondrat
in which the Court rejected the taxpayer’s argument that his company had paid
an amount to his ex-wife for its own benefit:
37 The
rights Mrs. Kondrat sought in her action against Kondrat are rights borne of
their marriage. The corporation is not a party to the action. It is not unusual
for an action in law against a majority shareholder of a corporation to
indirectly affect the corporation. However, the corporation in the appeal at
bar, for example, has no obligation to the plaintiff spouse and any payment by
the corporation to the plaintiff is a payment made for the benefit of the
spouse who is its shareholder. In such circumstances the corporation confers a
benefit on its shareholder: ….
[36]
Similarly, Canril Investments was
under no obligation to the Appellant’s Former Spouse. Considered in light of Fasken
Estate, the evidence does not support the conclusion that the Minutes of
Settlement divested Canril Investments of its interest in the Artwork or caused
it to pass to the Appellant’s Former Spouse. I agree with counsel for the
Appellant that if, subsequent to the execution of the Minutes of Settlement in
June 2005, a third party had acquired Canril Investments, the Minutes of
Settlement would not have prevented the new owner from asserting the company’s
rights to the Artwork.
[37]
Finally, in considering the evidence
in the present case, I am guided, in part, by the words of Décary, J.A. in Scott
Jones and Ascot Enterprises Ltd. v. R. In making the following comment
the learned appellate judge was specifically considering whether the taxpayer
had “desired” to transfer the property in question but logically, such judicial
restraint would seem to apply equally to the analysis of the evidence in
respect of the other conditions under subsection 56(2):
16 The
fact that the application of subsection 56(2) may lead to harsh consequences is
an additional reason for the Court, when it assesses the evidence in a case
where the motive is not obvious, not to infer too hastily that a taxpayer has
evinced a desire such as to attract the application of the provision.
[38]
For all the reasons set out above,
the Appellant has persuaded me on a balance of probabilities that there was no
transfer of the Artwork to his Former Spouse under the Minutes of Settlement.
The requirements of condition 1 of subsection 56(2) not having been met,
that provision is without application to the Appellant’s situation. Similarly, there
having been no transfer of the Artwork to the Former Spouse, no benefit was
conferred on the Appellant within the meaning of subsection 15(1) of the Act.
The appeal is allowed, with costs, and the reassessment by the Minister of
National Revenue of the Appellant’s 2005 taxation year is vacated.
Signed at Ottawa, Canada, this
25th day of August, 2011.
“G. A. Sheridan”
Email this Content