Citation: 2006TCC309
Date: 20060726
Docket: 2003-2172(IT)G
BETWEEN:
JOANNE BURNS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal from two notices of assessment dated September 4, 2002, and confirmed on January 17, 2003, whereby the appellant was assessed for amounts of $2,199 and $71,199 with respect to two transfers of property made to her by one Glen McCarthy. He is the former common-law spouse of the appellant, as they cohabited from 1982 to October 2002. The first transfer, made on June 2, 1998, involved timberland with a fair market value of $2,200, and the second transfer, made on July 20, 1999, was of a property consisting of a house and lot at civic address 884 South Cains River Roadwith a fair market value of $71,200. Neither fair market value is disputed by the appellant.
[2] At the time of both transfers, Glen McCarthy was indebted to the Canada Customs and Revenue Agency (CCRA) for at least $118,589.39 with respect to his 1992, 1993 and 1994 taxation years. That amount is not disputed by the appellant, nor is the fact that Glen McCarthy continued to live with the appellant in the aforementioned house after the transfer. The appellant also admitted that she was joint owner with Glen McCarthy of a property in Floridaand that he transfered ownership of a 1997 Dodge Ram truck to her in 1997 for no consideration other than the obtaining of liability insurance because Glen McCarthy was unable to do so.
[3] The issue is whether, as a result of the transfer of both properties, the appellant is liable pursuant to section 160 of the Income Tax Act (Act) to pay the amounts of $2,199 and $71,199 in respect of the tax debt of Glen McCarthy. The respondent submits that the appellant and Glen McCarthy were not dealing at arm's length and that the transfers were made for no consideration or inadequate consideration, namely $1.00, at a time when McCarthy was liable for unpaid taxes.
[4] The appellant relies on the provisions of subsection 160(4) of the Act for relief. In the alternative, the appellant argues that at the time the properties were transfered to her she had an equitable interest in both that far exceeded their fair market value, so that McCarthy actually had no interest to convey, and if he did have any, it was a partial one being at best a 50% interest. The appellant also alleges that she was owed wages for work she performed while working for McCarthy.
[5] The appellant and McCarthy were common-law partners from 1982 to October of 2002. They met in Brampton, Ontario, and were both working at the time. They had a joint bank account, out of which all their bills were paid. They purchased a home in Brampton, which may have been in McCarthy's name, but all expenses, including the mortgage, were paid out of their joint bank account. They later sold the property in Bramptonand purchased another in Caledon, Ontario, for $155,000, which was registered in McCarthy's name. All expenses were again paid out of their joint account.
[6] Although they only came back to New Brunswickin 1989, McCarthy purchased the Cains River Road property in 1987, for $10,000. The money for the purchase price came from their savings in Ontarioand related expenses were paid out of their joint account.
[7] McCarthy retired from his job in 1989 and the house in Caledonwas sold in August of that year for $305,000. The appellant was transferred to Saint-John, New Brunswick, in September 1989 and she left her job in December of that year.
[8] In the spring of 1990, the appellant and McCarthy started building a house on the Cains River Road property that McCarthy had bought in 1987. The appellant contributed her time and effort in helping build the house, the cost of which - about $80,000 - was paid out of the proceeds from the sale of the house in Caledon. They moved in in the fall of 1990.
[9] The appellant worked in the spring and summer of 1991. In 1992, the appellant and McCarthy bought a seasonal diner. They made renovations to it and built an addition, all of which were paid for with the remaining proceeds of the sale of the house in Caledon. The diner operated from May to October and the appellant testified that she ran it and McCarthy kept the books. She testified that she never received any money as salary but that she did declare salary income in her tax returns. She admits that she collected unemployment insurance benefits based on that income. According to the tax returns for the years 1994 to 1999, filed as exhibits, she worked at the diner in 1994 and 1995. The appellant testified that, although she was not paid, she in fact worked 16 hours a day.
[10] The diner was sold in 1997 for $100,000. She did not negotiate its sale nor did she receive any money from the sale. She suspects that McCarthy may have bought a house in Ontariowith the proceeds of the sale. It was in that same year, the appellant testified, that McCarthy wanted to transfer property to her in return for her having worked at building the house and running the diner and in payment of the salary that he owed her. He wanted to give her two motor vehicles and a property in Ontario. She refused those on the basis that he owed taxes and that she felt the $71,200 fair market value of the house was what she was entitled to. McCarthy bought another property in Ontarioin 2000, which he wanted to put in the appellant's name, but she refused.
[11] The 1997 Dodge Ram truck was put in the appellant's name as McCarthy could not get insurance for it. It was later damaged in a motor vehicle accident in which McCarthy was injured. The truck was a total loss and the appellant recovered nothing for it.
[12] The appellant and McCarthy separated in October 2002 and in August of 2004 McCarthy brought an action against the appellant claiming that he was the legal and beneficial owner of the two properties at issue and as such was entitled to a court order requiring that they be re-conveyed to him, or alternatively, granting damages or compensation on a quantum meruit basis. The appellant, in her statement of defence, denied that McCarthy was entitled to the relief claimed and further alleged that such equitable relief was not available to him due to his fraud consisting in the transfer of the said properties to the defendant for the purpose of avoiding the payment of his income taxes, as evidenced by a claim against the appellant based on the value of the properties. The appellant counterclaimed for an accounting of all the properties and assets disposed of by McCarthy during their cohabitation and a set-off of any amounts which the appellant would be entitled to as a result of a constructive or resulting trust arising out of the contributions she made towards McCarthy's businesses and properties, and out of the physical care she gave McCarthy when he was injured in the motor vehicle accident.
[13] On October 15, 2005, McCarthy discontinued his action against the appellant and the trial on the counterclaim by the appellant took place on November 1, 2005. Mr. Justice Thomas W. Riordon of the Court of Queen's Bench of New Brunswick concluded that the appellant had legal title to the properties in question by virtue of the conveyances to her and that she was also entitled to an equitable interest in the properties by reason of her contribution to the various businesses and to the activities in relation to the acquisition of the properties during her common-law relationship and cohabitation with McCarthy. He was unable though, on the evidence before him, to determine what that equitable interest should be.
[14] McCarthy made an assignment in bankruptcy on September 23, 2004, and was granted an unconditional discharge September 23, 2005. His debt with the CCRA had reached $159,000 at the time of the assignment.
[15] As mentioned earlier, the appellant's tax returns for the 1994 to 1999 taxation years were filed as exhibits. In the returns, the appellant never used the address at which she cohabited with McCarthy during those years. Instead, she used her mother's address or a post office box number. She either never checked any marital status box on the tax return or, if she did, she would check "single". The form spells out clearly, nonetheless, that a spouse includes a common-law partner. She applied for the goods and services tax credit and never indicated McCarthy's income in her application. With respect to the two tax returns filed as exhibits for years when she worked at the diner, she paid income tax on a salary for those years even though she did not actually receive any money. In addition, she spent her winters in Floridawhile collecting unemployment insurance benefits, knowing that to collect benefits she had to be in Canada, although she says she was available for work.
[16] McCarthy did not testify at the hearing of this appeal.
[17] The appellant was assessed under subsection 160(1) of the Act, which provides as follows:
160(1) Tax liability re property transferred not at arm's length - 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.
[18] In order for subsection 160(1) of the Act to apply, four conditions have to be met.:
1) there must be a transfer of property;
2) the transferor and transferee must not have been dealing at arm's length;
3) there must have been no consideration or inadequate consideration given by the transferee to the transferor; and
4) the transferor must be liable to pay an amount under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.
[19] On the evidence, conditions 1, 2 and 4 have been met in the fact situation here. There was a transfer of two properties; the transferor was liable to pay an amount under the Act in respect of the taxation year in which the properties were transferred; or preceding taxation years; and the transferor and transferee were not dealing at arm's length.
[20] Counsel for the appellant relies on subsection 160(4) of the Act. That subsection provides special rules in the case of a transfer to a spouse or common-law partner. Subsection 160(4) provides as follows:
160(4) Special rules re transfer of property to spouse - Notwithstanding subsection (1), where at any time a taxpayer has transferred property to the taxpayer's spouse or common-law partner 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 the spouse or common-law partner were separated and living apart as a result of the breakdown of their marriage or common-law partnership, the following rules apply:
(a) in respect of property so transferred after February 15, 1984,
(i) the spouse or common-law partner 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 or common-law partner would, but for this paragraph, be liable to pay an amount under this Act by virtue of subsection (1), the spouse's or common-law partner'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.
[21] In order for subsection 160(4) of the Act to apply, the transfer must be made pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement and, at that time, namely at the time of the transfer, the transferor and transferee must have been separated and living apart as a result of the breakdown of their marriage or common-law relationship. In such a case, the fair market value of the property transferred to a spouse or common-law partner is deemed to be nil. In the present case, the evidence before me does not disclose that the transfer of the two properties was done pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement. In fact, the taxpayer (McCarthy) and the appellant separated in October of 2002 and the transfers took place in June 1998 and on July 20, 1999. In addition, McCarthy and the appellant were not living separate and apart at the time of the transfers. Subsection 160(4) of the Act has therefore no application in this case.
[22] The appellant further argues that at the time of the transfers she had an equitable interest in both properties that far exceeded their fair market value, so that McCarthy had either no interest in the properties or only a partial interest that would have been at most 50%. Mr. Justice Riordon, in his decision of November 1, 2005, held that the appellant had made a significant contribution to the acquisition of the house and lot and to the businesses they jointly operated during the time they were in their relationship, but was unable to determine from the evidence what that equitable interest should be. On the evidence presented before me in this appeal, I am equally unable to determine what that equitable interest should be and particularly what it may have been at the time both transfers were made. Subparagraph 160(1)(e)(i) of the Act refers to the fair market value of the consideration given by the transferee at the time of the transfer. Justice Riordon's decision does not hold that McCarthy had no interest at all in the properties such that one could argue that there was no actual transfer of any interest of McCarthy's and that it was thus necessary to have the properties registered in the name of their rightful owner.
[23] Equitable remedies for unmarried partners are available at the time of their separation to address any inequities that may arise. That is how Mr. Justice Bastarache of the Supreme Court of Canada has approached this issue in Nova Scotia (Attorney General) v. Walsh, [2002] S.C.J. No. 84 (QL), where he stated the following:
61 For those couples who have not made arrangements regarding their property at the outset of their relationship, the law of constructive trust remains available to address inequities that may arise at the time of the dissolution. The law of constructive trust developed as a means of recognizing the contributions, both pecuniary and non-pecuniary, of one spouse to the family assets the title of which was vested wholly in the other spouse: Rathwell v. Rathwell, [1978] 2 S.C.R. 436; Pettkus, supra; Sorochan v. Sorochan, [1986] 2 S.C.R. 38; Peter, supra. After the enactment of the MPA, the law of constructive trust remained and remains as a recourse for unmarried partners who find themselves unfairly disadvantaged vis-à-vis their former partner. Those situations where the fact of economic interdependence of the couple arises over time are best addressed through the remedies like constructive trust as they are tailored to the parties' specific situation and grievances. In my view, where the multiplicity of benefits and protections are tailored to the particular needs and circumstances of the individuals, the essential human dignity of unmarried persons is not violated.
[24] Madam Justice Larlee of the New Brunswick Court of Appeal, in MacFarlane v. Smith, [2003] N.B.J. No. 30 (QL), has summarized these equitable remedy concepts as follows:
31 The concepts of constructive trust, resulting trust and quantum meruit are terms of legal art to describe remedies by which parties may be compensated for contribution to a relationship. In Peter v. Beblow, McLachlin J. discusses the two possible remedies in a case such as this: an award based on the value of services rendered, quantum meruit, and the other, title to property, based on a constructive trust. She summarizes the discussion at p. 999-1000:
To summarize, it seems to me that the first step in determining the proper remedy for unjust enrichment is to determine whether a monetary award is insufficient and whether the nexus between the contribution and the property described in Pettkus v. Becker has been made out. If these questions are answered in the affirmative the plaintiff is entitled to the proprietary remedy of constructive trust. In looking at whether a monetary award is insufficient the court may take into account the probability of the award's being paid as well as the special interest in the property acquired by the contributions: per La Forest J. in Lac Minerals. The value of that trust is to be determined on the basis of the actual value of the matrimonial property -- the "value survived" approach. It reflects the court's best estimate of what is fair having regard to the contribution which the claimant's services have made to the value surviving, bearing in mind the practical difficulty of calculating with mathematical precision the value of particular contributions to the family property.
[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. The transfer of the properties was not done pursuant to a finding that the appellant had an equitable interest in them.
[26] The appellant testified that the transfers were in return for her having worked at building the house and running the diner and in payment of wages owed her. No amount was actually advanced by the appellant as representing the value of her services, except that the fair market value of the transferred properties, namely $2,200 and $71,200, seemed to her to be adequate compensation. No documentary evidence was produced at trial to corroborate the appellant's evidence, nor was McCarthy called as a witness. Although the appellant appeared credible in admitting that she misrepresented certain facts in her income tax return and that she spent her winters in Florida while collecting unemployment insurance benefits, that testimony nevertheless clearly showed that the appellant, when need be, is willing to twist the facts so that she can take advantage of benefits that she may not otherwise be entitled to. If it is beneficial to her to be single, she declares herself to be single, and if it is beneficial not to be, then she presents herself as living in a common-law relationship. According to the appellant, she and McCarthy bought the diner. Yet, she worked there as an employee and was paid a salary she never collected. McCarthy deducted and remitted the social security taxes and income tax payable on her salary, all of which allowed her to qualify for unemployment insurance when she may not otherwise have been entitled thereto because of her part ownership of the diner or on account of the common-law relationship.
[27] The evidence does not disclose any reasons for the transfers at issue other than those given in the appellant's version. Although it may have been nothing more than allegation, I cannot ignore the position the appellant took in her defence in the McCarthy action, namely that the equitable remedy he claimed was not available to him as he did not come to court with clean hands, the transfers to her (the appellant) having been made for the fraudulent purpose of avoiding payment of his income taxes. To me, that seems to be the likely reason for the transfers. This is exactly the kind of transaction section 160 of the Act is intended to prevent. That section's purpose was well enunciated in Logiudice v. Canada, [1997] T.C.J. No. 742 (QL):
16 . . . The obvious purpose of section 160 is to prevent taxpayers from escaping their liability for tax, interest and penalties arising under the provisions of the Act by placing their exigible assets in the hands of relatives, or others with whom they are not at arms' length, and thus beyond the immediate reach of the tax collector. The limiting provision in subparagraph 160(1)(e)(i) of the Act is to protect genuine business transactions from the operation of the section, to the extent of the fair market value of the consideration given for the property transferred. It is apparent, therefore, that for a transferee to have the benefit of this saving provision she must be able to prove that the transfer of property to her was made pursuant to the terms of a genuine contractual arrangement.
[28] There is no evidence in this case to support a conclusion that there was a genuine contractual business transaction. The appeals are therefore dismissed with costs.
Signed at Edmundston, New Brunswick, this 26th day of July 2006.
"François Angers"
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