Citation: 2008 TCC 674
Date: 20081212
Docket: 2007-1166(IT)G
BETWEEN:
ELIZABETH ANNE WARREN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1]
Elizabeth Warren
appeals an assessment pursuant to section 160 of the Income Tax Act,
whereby the Government assessed her as jointly and severally liable with her
husband, Dr. Frederick Warren, for his tax liability of $261,921.56. The Minister
of National Revenue invoked section 160 based on a transfer of the matrimonial home
from Dr. Warren to his wife in 1998. Mrs. Warren claims that notwithstanding that
Dr. Warren was the sole registered owner of the property, she had a
50% equity interest pursuant to a resulting trust, and that she paid Dr. Warren consideration equal to the fair market value of his
50% interest; consequently, section 160 of the Income Tax Act should not
apply. The following are the issues:
(i) What property
interest did Dr. Warren transfer to his wife? In this regard I must consider:
(a) Does this Court
have jurisdiction to consider whether a resulting trust existed for purposes of
a section 160 assessment? Yes it does.
(b) If so, was there
such a resulting trust in the circumstances before me? Yes, there was a
resulting trust.
(ii)
What were the Warrens’ respective interests in the matrimonial property? I
conclude Mrs. Warren and Dr. Warren had a one-third and two-thirds interest,
respectively, in the property.
(iii)
Did Mrs. Warren pay to
Dr. Warren consideration equal to the fair market value of such interest in the
property? No, Mrs. Warren paid to Dr. Warren less than the fair market value of
the property transferred ($55,333).
Facts
[2]
In November 1982, Dr.
Warren entered an agreement to acquire a lot in Manotick for $74,500 (the
“Manotick property”). The Warrens’ intention was to construct their
matrimonial home on this property. Prior to their move to Manotick, the Warrens lived in Ottawa (the “Elvaston
property”). They were registered as joint tenants on the Elvaston property,
though when initially acquired in 1974, it was in Mrs. Warren’s name, in
trust. It was later transferred into both their names. I find their joint
ownership of the Elvaston property reflected an equal interest in that
property.
[3]
In April 1983, the Warrens took out a mortgage on the Elvaston property
for $74,200. Also in April 1983, the Transfer of Land of the Manotick
property was registered in Dr. Warren’s name alone, indicating a consideration
of $74,500. He also granted a mortgage back of $37,250 to the Vendor of
the Manotick property. Mrs. Warren testified that she believed her husband
would look after her interest in the matrimonial property, for, as she put
it, they were married so they would share the home together.
[4]
In June 1984, the Warrens sold the Elvaston property for $133,000. The construction
of their home on the Manotick property was completed in 1984 and they
moved into that property, where they continue to reside to this day.
[5]
Mrs. Warren did not
know what the home in Manotick cost to build, other than it was more than
anticipated. Dr. Warren estimated the total cost of construction was
approximately $280,000. He suggested that funds were borrowed to pay for the
construction. He suggested the borrowed funds were paid off with income from
his chiropractic business. A mortgage was registered against this property to
the Royal Bank of Canada in 1989 for $280,000, several years after
construction had been completed.
[6]
There is a third
property that also comes into play in the Warrens’ story; a property on Woodroffe Avenue in Ottawa from which Dr. Warren carried
on his chiropractic clinic. Mrs. Warren testified this property was
held in a company, though the only documents presented at trial indicated
this property was, in 1976, in Mrs. Warren’s name (in trust), and in 1986
was transferred into her name alone. The transfer indicated consideration was “$2.00
- Transfer by Transferee to the beneficiary of the trust”. There was a mortgage
of $30,000 registered against this property in 1976 to the Royal Bank of Canada.
[7]
Mrs. Warren testified
that her husband paid the mortgage on the clinic property and on the Elvaston
property, and also on the Manotick property up until the time that she took
over ownership of the Manotick property in December 1997. She was unclear on
that latter point in cross-examination. Dr. Warren testified that both he and
his wife made payments on the Elvaston property. Mrs. Warren also testified
that she received income from the company that owned the clinic and that she
was a director of that company. I did not receive any documentary evidence
indicating a company owned the clinic, received rent or paid Mrs. Warren any salary.
She could not recall what rent the clinic paid, nor initially how much salary
she received though she later reflected it may have been around $37,000 a year.
She also made no mention of receiving salary for managing the clinic; indeed
she admitted she was not a businesswoman. Dr. Warren testified that Mrs. Warren
was the manager of the clinic and received a salary for that job, although
he acknowledged that she did not actually have to go to the clinic
to manage it. I describe this testimony as it has led me to the
conclusion that Mrs. Warren had little, if any, involvement in
arranging the couple’s financial situation. It is clear that it was Dr. Warren,
with the assistance of an accountant, a Mr. Savarin, who made the
arrangements. Mrs. Warren simply believed her husband would protect her. I am
satisfied she received income, though I am not sure exactly what she did to
earn it.
[8]
With that background, I
turn now to what occurred in December 1997. Dr. Warren
was in some financial straits. He needed to consolidate his debts and he turned
to Healthgroup Financial, a division of Newcourt Credit Group Inc. to do
so. As he testified, his accountant set up everything. He was not aware of any
tax obligations at this stage. His current accountant, Mr. Patterson, testified
that the former accountant had led Dr. Warren to believe he owed no taxes.
Dr. Warren in fact owed $261,921.56.
[9]
In December 1997, Dr.
Warren transferred the Manotick property to his wife. The transfer
documents show a transfer from Dr. Warren to his wife for $90,000 (the $90,000
being the assumption of the mortgage against the property). The property
had a fair market value of $425,000. Coincidentally, with the registration of
the transfer, a new mortgage was placed on the property (now in Mrs. Warren’s
name) in the amount of $168,000 showing Healthgroup as the lender, Mrs. Warren
as borrower, and Dr. Warren as guarantor. Also at the same time, a mortgage in
the amount of $206,000 was registered by Healthgroup against the clinic
property, again showing Dr. Warren as guarantor. This was all, according to Dr.
Warren, in connection with the consolidation of debts.
[10]
Clearly, Mrs. Warren
entered these arrangements on the advice of her husband. At one point in
testimony, she indicated she made the mortgage payments on the $168,000
mortgage, though in cross-examination she was less sure: she had no idea how
much the payments were. She also assumed that her husband made the
mortgage payments on the clinic property.
Appellant’s Position
[11]
The Appellant argues
that at the time Dr. Warren transferred the Manotick property to her in
December 1997, she already had a 50% interest in the property, arising from a
resulting trust. She was therefore only acquiring Dr. Warren’s 50% interest,
valued at $212,500, for which she assumed her share of the $90,000 mortgage
($45,000) and borrowed a further $168,000, which she argues formed part of the
consideration, as it went to Dr. Warren’s consolidation of debts arrangement.
There is therefore no inadequate consideration which would bring section 160 of
the Income Tax Act into play.
Respondent’s Position
[12]
The Respondent argues firstly
that the Court has no jurisdiction to consider the resulting trust, as the Tax
Court of Canada is not a Court of equity. Further, Mrs. Warren only paid
$90,000 for a property valued at $425,000, as the subsequent $168,000 mortgage
did not constitute part of the consideration paid to Dr. Warren. Section 160
of the Income Tax Act is therefore engaged, and Mrs. Warren
has been correctly assessed for her husband’s tax liability of $261,921.56.
Analysis
[13]
Subsection 160(1) reads
as follows:
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.
[14]
There are four elements
to the application of this provision in this case:
(i) There must be a
transfer of property from Dr. Warren to Mrs. Warren;
(ii) Dr. Warren and Mrs. Warren must
be spouses;
(iii)
There must be no
consideration (or inadequate consideration) flowing from Mrs. Warren to Dr.
Warren for the property transferred; and
(iv)
Dr. Warren must be
liable to pay an amount under the Act in or in respect of the year when
the property was transferred or in any preceding year.
[15]
Only the first and
third elements are at play before me. With respect to the requirement of the
transfer of property, there is no question Dr. Warren transferred property to
his wife in December 1997. The question, however, is what was the extent of his
interest in the property transferred? He was the sole registered owner of the
Manotick property, but the Appellant argues Dr. Warren only had
a 50% interest in that property to transfer to her, as she had a 50%
interest arising from her resulting trust.
[16]
The Respondent argues
that a finding of a resulting trust, as an equitable remedy, cannot be determined
by this Court as the Tax Court is not a Court of equity. Certainly,
Justice Webb concluded in the recent decision of Darte v. R. that a
constructive trust must be judicially declared, which had not happened in that
case. He neatly sidestepped this obstacle by finding that the Appellant had a
right to apply to a Court of equity for a declaration of constructive trust,
and that that right could be valued at the same amount as the actual beneficial
interest itself. The parties before me did not argue the constructive
trust: they focused on the resulting trust.
[17]
As pointed out by
Professor Waters in the Waters’ Law of Trusts in Canada:
The terms “implied”, “resulting” and “constructive” trusts have
caused a good deal of confusion in the law of trusts, … (page
454)
What is clear is that the resulting trust is
recognized as something separate from the constructive trust. The Respondent
argues that it is not open to the Tax Court to find Dr. Warren’s interests in the
Manotick property as anything other than a 100% interest, for purposes of
the application of section 160 of the Income Tax Act. The Crown
seeks support for this proposition in the judgment of Justice Webb in Darte,
and also the judgment of Justice Angers in Burns v. R. where
Justice Angers, in dealing also with a section 160 issue, stated:
25 In my opinion, the appellant cannot invoke these equitable
remedies to argue that the transfers amounted to a conveyance to her of the
interest she had in the properties at the time, when in fact she and McCarthy
were still living together and no apparent cause or need to remedy an economic
injustice existed between McCarthy and the appellant. See Blackman v.
Davison (1986), 2 B.C.L.R. (2d) 8 (B.C.S.C.). The transfer of the
properties was not done pursuant to a finding that the appellant had an
equitable interest in them.
[18]
In the recent decision of
Livingston v. R.,
the Federal Court of Appeal addressed the possibility of a resulting
trust in the context of a section 160 issue, and found that it was unnecessary
to consider that argument, however, the Court did not raise any concerns about
jurisdiction to consider such an equitable remedy. Further, in the case of Savoie
v. R.,
Former Chief Justice Bowman stated that the doctrine of constructive trust
could be invoked in determining the fair market value of a property transfer by
a tax debtor for purpose of the application of section 160 of the Income Tax
Act.
[19]
One purpose of section
160 is to prevent taxpayers from thwarting the Government’s ability to collect
tax by transferring property to a spouse. It is not intended to widen the
Government’s collection powers to seize property that never was beneficially owned
by the debtor taxpayer. To effectively turn a blind eye to the legal and
equitable realities, under the guise of some purported lack of authority, could
lead to not just a harsh result, but a result contrary to the very object and
spirit of the legislation in issue. Given Former Chief Justice Bowman’s view in
Savoie, given I have been referred to no definitive statement from the
Federal Court of Appeal or the Supreme Court of Canada as to the application of
a resulting trust in a section 160 assessment situation, and given my
colleague Justice Webb’s end-around to accomplish the same objective as a
finding of constructive trust, I am prepared to consider whether the
circumstances of the Warrens’ property holdings justify a conclusion of a
resulting trust for the purposes of determining exactly what property was
transferred by Dr. Warren to his wife.
[20]
In April 1983, at the
time Dr. Warren took title to the Manotick property (at that stage bare
land) in his name alone the following was the situation:
(i) Dr. Warren provided
a $37,250 mortgage back on the Manotick property to the Vendor.
(ii) Dr. Warren and
Mrs. Warren borrowed $74,200 from the Royal Bank secured by a mortgage
registered against the Elvaston property (held jointly).
(iii) Mrs. Warren’s
intention was that Dr. Warren would look after her interests.
[21]
For the several months
after the transfer, the following transpired:
(i) Costs were incurred
of approximately $280,000 for construction of the home on the Manotick
property.
(ii) In 1984, the
Elvaston property sold for $133,000 (equity of approximately $60,000) and,
according to Mrs. Warren, the proceeds went into construction of the house.
(iii) According to Dr.
Warren, the house was constructed with borrowed funds, though a review of the
documents provided show no further borrowing against the Manotick property
until 1989.
[22]
The concept of
resulting trust is not complicated. As Professor Waters asks in Waters Law
of Trusts in Canada, in his chapter on resulting trusts:
What is the position if two persons advance the money for the
purchase of certain property, which is taken in the name of one of them? If the
amount subscribed by each is determinable, it is clear that the transferee
holds on a proportionate resulting trust. …
(page 370)
[23]
I believe that is the
situation before me. Two people contributed to the Manotick property
notwithstanding title was put in Dr. Warren’s name alone. I have been
convinced it was intended that some part of the Manotick property was held for
Mrs. Warren. So, for purposes of the section 160 appeal, the property which the
Government can trace, now in Mrs. Warren’s name, is only that part of the
property to which she was not previously beneficially entitled.
[24]
What then is the extent
of the interest in the property held by Dr. Warren for his wife. The Warrens claim he held half the property for his wife. I am
not convinced that reflects Mrs. Warren’s real contribution. According to Dr.
Warren, the Manotick property cost $74,500 for the lot and approximately
$280,000 for the construction of the house for a total cost of $354,500. Of
that, $133,000 came from the Elvaston property, the former matrimonial home,
held jointly by Dr. Warren and his wife. In reviewing the history of that
property, the Elvaston property, I have been satisfied that joint
ownership reflects an equal ownership. A further $37,000 came from a mortgage
Dr. Warren gave back to the Vendor of the Manotick property, and for which Dr.
Warren made the mortgage payments. There remains approximately $184,500 to
account for, to cover the costs towards the construction of the Manotick
property. Dr. Warren testified this came from borrowing. Mrs. Warren did not
have a clear handle on the financial and business affairs to offer any insight
on this issue. I conclude that the source of the $184,500 could only have come
from the one source of revenue for the Warrens
and that was the clinic. The clinic was registered in Mrs. Warren’s name and
she claims to have received some rental income from it. Again, her testimony
was somewhat confusing on this point, as she suggested a company owned the
property and she got salary from the company. Dr. Warren testified that Mrs.
Warren received a salary as manager of the clinic and rent as owner of the
clinic. I accept that Mrs. Warren received some income from the clinic in
1983 and 1984 when funds were needed to put into the Manotick property. The
only evidence as to amount is the $37,000 per year Mrs. Warren suggested. I
find that such income was likely considerably less than what Dr. Warren was
taking from the clinic. Unfortunately, I heard little evidence on this
critical aspect of the source of funds for the Manotick property. Though Dr.
Warren suggested funds were borrowed for the construction costs, I have no
evidence of that. The only mortgage was long after the construction.
[25]
To find a resulting
trust, the amount contributed by the beneficiary must be readily determinable.
Dr. Warren and Mrs. Warren have made it difficult to make such a ready determination.
I am left to surmise from Mrs. Warren’s annual income, Dr. Warren’s control of
financial affairs and, granted, a presumption that he drew the lion’s share
from the clinic that of the $184,500 contributed to the construction of the
house, $50,000 at most may have been contributed by Mrs. Warren. This is, I would suggest, closer to the truth than a
finding that Mrs. Warren contributed none of it, half of it or all
of it.
[26]
In summary, of the $354,500
for the purchase of the lot and construction of the home, Mrs. Warren contributed
half of $133,000 plus $50,000 or a total of $116,500, compared to Dr. Warren’s
contribution of $238,000. I conclude that the interest held by Dr. Warren for
Mrs. Warren in the Manotick property was approximately a one-third interest.
Dr. Warren had a two-thirds interest. It was this two-thirds interest in the
property that he transferred to Mrs. Warren in January 1998. I wish to
emphasize that this analysis is not one of a constructive trust on the
breakdown of marriage. It is an analysis to determine the extent of Mrs.
Warren’s interest as a beneficiary of a resulting trust for purposes of the
application of section 160 of the Income Tax Act. I conclude Dr. Warren
did indeed transfer property to his wife, but the property transferred was a
two-thirds interest in the Manotick property, not the 50% interest as suggested
by the Appellant nor the 100% interest as suggested by the Respondent.
[27]
I now turn to the
second element of the section 160 analysis, and that is the adequacy of the
consideration Mrs. Warren provided to her husband for the two‑thirds interest.
There is no dispute that at the time of transfer the Manotick property was
valued at $425,000, with a $90,000 mortgage against it, leaving an equity of
$335,000. So what did Mrs. Warren pay to Dr. Warren for his two-thirds interest?
[28]
In the transfer
document the consideration is shown only as the $90,000 remaining balance of
the mortgage, and the purpose for the conveyance is stated as “conveyance from
husband to wife for natural love and affection”. Coincidentally with the
transfer a mortgage is registered against the property for $168,000 showing
Mrs. Warren as the chargor, Healthgroup Financial as the chargee and Dr. Warren
as the guarantor. The Respondent argues that the $168,000 was not part of the
consideration, firstly, as it was not registered against the property at the
time of the transfer, and secondly that there was no documentary evidence
indicating the funds went to Dr. Warren.
[29]
With respect to the
Respondent’s first position that the mortgage was subsequent to the transfer,
and therefore not part of the consideration, I refer to the Transfer/Deed of
Land which shows a registration date of January 6, 1998 at 11:40 a.m. and
the mortgage for $168,000 showing a registration date of January 6, 1998
at 11:41 a.m. While the transfer does not refer to the $168,000 mortgage as
part of the consideration, the timing is such that these events did take place
coincidentally. The Respondent appears to be suggesting that Mrs. Warren
only paid $90,000 for the property, then borrowed against the property to raise
$168,000 for whatever other purpose she may have intended. But that purpose was
to accommodate her husband’s consolidation of debt agenda. It is not the timing
of the registration of the mortgage that is conclusive, nor the statements in
the Transfer/Deed of Land itself, but whether in fact the $168,000 went from
Mrs. Warren to Dr. Warren to buy the property. This
leads to the consideration of the Respondent’s second point.
[30]
What evidence is there
that the $168,000 mortgage went to Dr. Warren as consideration for the Manotick
property. As already indicated, the Transfer does not recognize the $168,000 as
part of the consideration. The Charge/Mortgage of Land document registered with
the Land Registry Office does though show Dr. Warren
as a guarantor. I have already commented on Mrs. Warren’s limited knowledge of
the financial affairs: it was not her but Dr. Warren who, with the assistance
of an accountant, devised this plan to consolidate debts. As he testified, he
asked his wife to take out the $168,000 mortgage as he was consolidating debts
and needed the money for his business, presumably the clinic. When questioned
in cross‑examination about how much the mortgage payments were and who
made them, it was clear Mrs. Warren had no idea. This is not intended in any
way to be a criticism of Mrs. Warren: the financial arrangements were just not
her area of expertise. She was simply helping her husband.
[31]
Although there is no documentary
trace of exactly where the $168,000 went, I have been satisfied that it did not
go into Mrs. Warren’s pocket, but went directly or indirectly to the benefit of
her husband. There is no evidence to suggest otherwise. It really comes down to
whether Mrs. Warren gave her husband the money, or paid him the money to buy
his interest out. She never addressed her mind to how this was structured
legally. Dr. Warren needed money. If he simply borrowed the $168,000 against
the Manotick property, and the property remained in his name, he would have
reduced his wife’s equity in the property (whether she had a 50% resulting
trust interest, or as I have determined, a one-third interest). So, he protected
his wife’s interest by shifting the property into her name (presuming he, in
turn, retains no resulting trust interest in the property now in his wife’s
name ‑ this is not an avenue of analysis explored by either
side, for good reason ‑ the image of a dog chasing its tail
comes to mind). Tax impact aside, this objective was met whether the
$168,000 was consideration for the transfer or simply a subsequent loan, the
proceeds of which were for Dr. Warren’s benefit. While Mrs. Warren and Dr.
Warren may not have addressed their minds as to how the $168,000 was to be categorized,
it is clear that it went hand in hand with the transfer. It was clearly
prearranged so that it would be registered coincidentally with the transfer.
There is no doubt, as far as Dr. Warren was concerned, there would be no transfer
unless there was the Healthgroup mortgage. I conclude it was all part of the
same deal, and therefore, did constitute part of the consideration from Mrs.
Warren to her husband.
[32]
I have a concern with
respect to the value of the $168,000 mortgage Mrs. Warren took out to pay her husband. Firstly, she was unsure
whether she made the mortgage payments. Secondly, I am satisfied she had no
involvement in arranging the financing. Thirdly, Dr. Warren was guarantor and
may have been making the mortgage payments himself. No banking documents were
presented to indicate who made the payments. The Respondent did not raise these
matters to suggest that the $168,000 had a value of anything other than
$168,000. While I have concerns whether in these circumstances the
$168,000 is properly valued as $168,000 of consideration for the property, I do
not intend to engage in an exercise of actuarial and appraisal speculation,
when the Respondent has not led me there. I take the $168,000 at its face
value.
[33]
What really occurred
between Dr. Warren and Mrs. Warren was that by assuming the existing mortgage
and adding a further $168,000 mortgage, proceeds of which went to Dr. Warren’s
benefit, Mrs. Warren was effectively acquiring Dr. Warren’s equity in the property for $168,000. She argues
that Dr. Warren’s equity was $168,000 so she paid adequate consideration for
purposes of section 160. In that regard, she is mistaken. Dr. Warren’s
equity interest in the property was two-thirds of $335,000, or $223,333. She
therefore did not pay him fair market value. She fell short by $55,333, and it
is that amount for which she is exposed pursuant to section 160.
[34]
The appeal is allowed
and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that Mrs. Warren’s tax
liability pursuant to section 160 is to be limited to $55,333. Given the
limited success, I am making no award of costs in this matter.
Signed at Ottawa, Canada, this 12th day of December 2008.
“Campbell J. Miller”
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