DePedrina v. The Queen, 2005 TCC 590

REASONS FOR JUDGMENT

(delivered orally from the Bench

on June 9, 2005 at Vancouver, British Columbia)

Woods J.

[1]      These are appeals by Bruno and Elaine DePedrina in respect of assessments made under the Income Tax Act for the 1998 taxation year. The question concerns the tax consequences resulting from the sale of a property that was formerly owned by Mr. DePedrina's parents.

[2]      The property that was sold is a five acre parcel of land in Langley, British Columbia on which Mr. DePedrina's parents resided. In 1978, the parents signed and registered a deed in respect of the property, prepared by a firm of solicitors. Under this document, the property was transferred to Mr. DePedrina, his brother and their respective wives, with a life interest reserved to the parents. The parents did not tell the DePedrinas about the transfer before signing the deed and simply told them afterwards that "their inheritance had been taken care of." Mr. DePedrina's brother constructed a home on the property and it became his principal residence along with the parents. Mr. DePedrina did not do this, out of deference to his parents.

[3]      Mr. DePedrina's father died in 1983 and his mother died in 1997. As a consequence, the life interest expired in 1997. In 1998, the children sold the property for a total consideration of $1,850,000.

[4]      The Minister of National Revenue issued assessments of tax to Mr. and Mrs. DePedrina in respect of the sale in 1998. Each was taxed in respect of a capital gain of $384,833. In the computation of the adjusted cost base, the Minister took into account the appraised value of the remainder interest in 1978.

[5]      At the commencement of the hearing, I asked counsel for the Crown to address section 43.1 of the Act which was not referred to in the Reply. After a short recess to review the file, the Crown agreed to a reduction in the capital gain for each of the taxpayers in the amount of $17,500 which was based on an appraised value of the life interest in 1978. Mr. and Mrs. DePedrina do not take issue with these calculations and as a result, it is not necessary that I consider them.

[6]      The argument of the taxpayers is simple. They submit that they should not be taxed on the gain that accrued prior to their becoming full owners of the property after the death of Mr. DePedrina's mother in 1997. The Crown, on the other hand, takes the position that Mr. and Mrs. DePedrina became owners of the property in 1978 and therefore they are properly taxed on the gain that arose after that time.

[7]      Before analyzing the arguments of the parties I would note at the outset that the circumstances of this case seem to be sympathetic. If the Crown's interpretation of the facts is correct, the effect of signing the deed in 1978 may have been to take away the benefit of the principal residence exemption that would have been available to the parents, at least on the part of the property that was used as a principal residence. Also, as Mrs. DePedrina noted, the effect of the Crown's position would be that she and her husband are taxed in respect of the gain on the property that arose during a period that they could not effectively exercise any ownership rights over the property.

[8]      The taxpayers are appealing to this Court mainly on grounds of fairness. Unfortunately for them, this Court has no power to give relief on this basis. It is the role of Parliament to enact tax legislation. This Court has jurisdiction to reduce tax assessments but only those that have not properly applied the legislation. If the assessments properly applied the law, the Court has no ability to provide relief even if the result is harsh.   

[9]      In this case, if the deed that the parents signed is effective, the taxpayers became owners of a remainder interest in the Langley property in 1978. The tax consequences that flow from this are clear. In fact, Parliament specifically contemplated this kind of situation by enacting section 43.1. It may seem harsh that persons would be taxed on a gain that accrued before they had possession of a property. However, that is the result that Parliament clearly contemplated.

[10]     The question that remains is whether the deed that was signed is effective. The parents were from Italy and did not speak or read English. The taxpayers suggest that the parents did not really know what they were signing and thought it was effectively a will. This was based on conversations that the taxpayers had with the parents over a number of years and from a document signed by the mother that was introduced into evidence.

[11]     The document signed by the mother is a caveat relating to the Langley property. It suggests that the mother had previously signed a document at the request of another of her children without understanding what the legal effect was. When the mother became concerned that she had given up rights to the Langley property that she did not intend to give up, the mother had her solicitors prepare and register a caveat in respect of the Langley property that reiterated that she had a life interest in the property.

[12]     In my analysis, the taxpayers' understanding of the parents' intent cannot override the legal effect of the deed that the parents signed. In any event, I am not able to conclude on the evidence that the parents did not understand that the deed resulted in a legal transfer of the property. The deed was prepared by solicitors who should have been satisfied that the parents understood what they were signing. Further, it is clear that the parents intended to provide an inheritance for the children and that is in effect what the deed did.

[13]     Mr. and Mrs. DePedrina suggest that the parents would not have signed the deed if they had known the tax consequences of doing so. That may be so but it does not follow that the parents did not intend to transfer the property when they signed the deed in 1978.

[14]     As a result, I cannot give the relief that the taxpayers seek except to agree to the reduction in the capital gain conceded by the Crown. This would result in a reduction in the capital gain to each taxpayer in the amount of $17,500. The appeals will be allowed to that extent. As for costs, I have concluded that it is not appropriate to order costs in this case.

Signed at Toronto, Ontario this 1^st day of September, 2005.

Woods J.