REASONS
FOR JUDGMENT
Ouimet J.
I. Introduction
[1]
This is an appeal from an
assessment made by the Minister of National Revenue (the “Minister”) under section
160 of the Income Tax Act (the “ITA”). This assessment relates to a
transfer of property between Mr. Theodore H. Konyi (“Mr. Konyi”) and Ms. Faye
Marie Konyi (“Ms. Konyi”) that happened on October 31, 2006. The Minister found
that Ms. Konyi and Mr. Konyi were jointly and severally liable for the
payment of $405,778 on account of Mr. Konyi’s tax liability for the 1993 taxation
year. The amount of $405,778 represents the fair market value of the property transferred
to Ms. Konyi by Mr. Konyi.
[2]
Testifying for the
Appellant, Ms. Konyi, at trial were Ms. Konyi herself and Mr. Konyi. The Respondent
called no witnesses.
II. Issue
[3]
The issue in this appeal is
the following:
Is Ms. Konyi jointly and severally
liable with Mr. Konyi for the payment of $405,778 with respect to Mr. Konyi’s
tax liability for his 1993 taxation year?
[4]
In answering this question,
I will conduct an analysis to determine whether Ms. Konyi and Mr. Konyi entered
into an agreement pursuant to which a fair market value consideration of
$405,778 was given to Mr. Konyi for the property transferred on October 31,
2006.
III. Relevant
Legislative Provision
[5]
The relevant provision of
the ITA is 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,
. .
.
(e) the
transferee and transferor are jointly and severally, or solidarily, 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 (including, for greater certainty, an amount that the
transferor is liable to pay under this section, regardless of whether the
Minister has made an assessment under subsection (2) for that amount) in or in
respect of the taxation year in which the property was transferred or any
preceding taxation year,
. . .
IV. Relevant
Contextual Facts
[6]
Before October 31, 2006, Ms.
Konyi and her spouse, Mr. Konyi, each owned 50 percent of a property
located in Delta, British Columbia (the “Property”). On October 31, 2006, Mr.
Konyi transferred his one-half interest in the Property (the “Transferred
Property”) to Ms. Konyi for a fair market consideration of $402 000.
[7]
According to Ms. Konyi and
Mr. Konyi, the registration of the Property in joint title on its acquisition in
1994 was an oversight on their part as they had initially intended the Property
to be in Ms. Konyi’s name. Since the acquisition of the Property, a friend of Mr.
Konyi who was an accountant had repeatedly urged them to transfer Mr. Konyi’s
half-interest in the Property to Ms. Konyi in order to protect it from Mr.
Konyi’s creditors. Ms. Konyi and Mr. Konyi stated at trial that it was an
issue they had needed to address for a long time but that they procrastinated
in doing so. In addition, Mr. Konyi’s friend had always specified that in order
for the transfer to achieve its purpose, which was to protect the Property from
Mr. Konyi’s creditors, it had to be done for a fair market value consideration.
Ms. Konyi and Mr. Konyi both said that they had discussed the possibility of
entering into an arrangement many times over the years and that they both knew
that the transfer had to involve consideration in order to achieve its purpose.
[8]
In late 2005 or early 2006,
Ms. Konyi and Mr. Konyi decided to undertake the transfer. At that time, Mr.
Konyi considered that Ms. Konyi’s dividend income from the family trust and her
investments would be such during the course of 2006 that Ms. Konyi could pay
the fair market value consideration. At that time, Ms. Konyi was earning income
through dividends from a family trust and other investments. The family trust’s
source of income was Maxwell Mercantile. Mr. Konyi was the CEO of Maxwell
Mercantile. Ms. Konyi and Mr. Konyi testified that, when they agreed
to do the transfer, they entered into a verbal agreement pursuant to which the
consideration to be given to Mr. Konyi would reflect the fair market value
of the Transferred Property, which they knew was around $400,000. However, they
did not know the exact amount at that time. They also agreed that the payment
of the consideration should be completed by the end of 2006.
[9]
An appraisal by a bank dated
October 5, 2006 showed the fair market value of the Transferred Property to be
$750,000. At the time of the transfer, there was an outstanding mortgage on the
Transferred Property of $345,000. Therefore, the net fair market value of the
Transferred Property, according to the parties, was $402,000.
[10]
Pursuant to the verbal
agreement, between April 19 and May 31 2006 a number of payments were made
before the transfer took place. The evidence adduced at trial established that
the consideration given by Ms. Konyi to Mr. Konyi was paid in various
instalments, as follows:
|
Date (2006)
|
Payer’s Account
|
Payee’s Account
|
Amount
|
|
April 19
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)
|
$50,000
|
|
May 2
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)[3]
|
$30,000
|
|
May 5
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)[4]
|
$20,000
|
|
May 16
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)
|
$18,000
|
|
May 29
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)
|
$60,000
|
|
May 31
|
Bank of Montreal
(personal account)
|
Royal Bank
(joint account)
|
$20,000
|
|
December 6
|
Envision Credit Union
(personal line of credit)[6]
|
Envision Credit Union
(personal account)
|
$100,000
|
|
December 15
|
Envision Credit Union
(personal line of credit)[7]
|
Envision Credit Union
(personal account)
|
$102,000
|
|
|
|
|
|
[11]
On October 31, 2006, in
accordance with what they had previously agreed upon, Mr. Konyi transferred his
half-interest in the Property to Ms. Konyi. The conveyancing documents
registered in the land titles office indicate that the consideration for the
transfer was $1. According to Ms. Konyi and Mr. Konyi, the lawyer handling
the conveyance advised them to set the consideration for the Transferred Property
at $1 in order to avoid the property transfer tax. The same lawyer was also representing
the bank with respect to the transfer and therefore the bank had the same
information as he did. Ms. Konyi and Mr. Konyi never informed the lawyer or the
bank about the oral agreement between them or about the promissory note. They
indicated at the hearing that they simply did not think it was worth
mentioning.
V. Positions
of the Parties
A. Ms. Konyi’s Position
[12]
Ms. Konyi submitted that she
save Mr. Konyi fair market value consideration in exchange for the Transferred
Property. Ms. Konyi testified that she entered into a verbal agreement with Mr.
Konyi pursuant to which he made the transfer in exchange for a consideration representing
the fair market value of the Transferred Property, that is, $402,000. That
consideration was to be paid before the end of 2006.
[13]
Ms. Konyi alleged that, in
addition to this agreement, there was a promissory note that was issued to Mr.
Konyi in 2006. This promissory note stated that she owed Mr. Konyi $402,000 as
consideration for the Transferred Property. The payment of $400,000, and not
$402,000, was made in various instalments from April to December 2006.
B. Respondent’s Position
[14]
The Respondent argued that,
in the present case, the focus under subparagraph 160(1)(e)(i) is the
time of the transfer and the consideration given by Ms. Konyi to Mr. Konyi
on October 31, 2006. The Respondent argued that the consideration given by Ms.
Konyi on that day was $1, the same amount as that shown in the land transfer
documentation.
[15]
According to the Respondent,
Ms. Konyi did not enter into any agreement with Mr. Konyi and no promissory
note was issued on the date of the transfer.
[16]
In addition, the Respondent
puts in issue whether there was any valid payment made by Ms. Konyi to Mr.
Konyi relating to the Transferred Property.
VI. Analysis
[17]
In Livingston,
the Federal Court of Appeal (the “FCA”) stated that four conditions must be met
in order for section 160 of the ITA to be applicable. These conditions are as follows:
(i) There must be a
transfer of property.
(ii) The parties
must not be dealing at arm’s length.
(iii) The transferor
must be liable to pay tax under the ITA at the time of the transfer.
(iv) The fair market
value of the property transferred must exceed the fair market value of the
consideration given by the transferee.
[18]
In this appeal, only the
fourth condition is in dispute. As the fair market value of the Property was
agreed upon by the parties, only the fair market value of the consideration
given in exchange for the Transferred Property is at issue in this appeal.
[19]
In Logiudice v. The Queen, this Court stated
that, in order for section 160 of the ITA not to apply, the transferee must
prove that the transfer was made pursuant to the terms of a genuine contractual
arrangement. In The
Law of Contract in Canada,
G.H.L. Fridman explains that a contract can only arise if the parties intended
to enter into a legal relation. Therefore, the parties must establish that they
entered into an agreement:
Agreement is at the basis of any legally
enforceable contract. There must be a consensus ad idem. Without
a meeting of the minds of the parties there can be no contrat.
. . .
Constantly reiterated in the judgments is the
idea that the test of agreement for legal purposes is whether parties have
indicated to the outside world, in the form of the objective reasonable bystander,
their intention to contract and the terms of such contract.
. . .
Sometimes it is a simple matter to decide what the parties have
manifested to each other, and consequently, whether they have agreed, and if
so, upon what.
[20]
In order for it to be
possible to conclude that there was an agreement between Ms. Konyi and Mr. Konyi,
the evidence had to show that they entered into an agreement that contained all
the essential terms relating to the transfer of the Transferred Property,
including the consideration to be paid and the terms of payment. The
consideration did not necessarily have to be given at the time of the transfer;
it could have been given at a future date. This
timing principle is consistent with the law of contracts in Canada, under which
the consideration provided at the time the agreement is entered into or the
promise given at that time to provide such consideration in the future constitutes
genuine consideration:
The point at issue here is that, if there is to be a valid, enforceable
contract, the promises, or the promise and the act, must have been exchanged in
return for each other. If something is done first and then there is a promise
relating to such act or performance, the two are not tied together by the
notion of agreement. One thing has not necessarily been done in consideration
of the other. In consequence, anything promised as a result of the past
performance of the act in question is simply promised gratuitously not in a
binding contractual way. There is no mutuality between the act of performance
and the subsequent promise from the recipient of the benefit of the act of
performance. The detriment suffered by the performer of the act was not
suffered in return for anything, or the promise of anything, from the other
party. There may have been a hope of something; even, possibly, the expectation
of something. But there was no promise of anything.. . .
[21]
Pursuant to these principles,
Ms. Konyi had to prove on the balance of probability that she entered into an
agreement with Mr. Konyi under which she was required to pay a fair market
value consideration for the Transferred Property either at the time of the
transfer or at a future date.
[22]
Relying on what I believe to
have been credible testimony by Mr. Konyi and Ms. Konyi, I find on the
balance of probability that, at the time of the transfer, an agreement existed.
Mr. Konyi and Ms. Konyi had agreed to transfer the Transferred Property in
exchange for fair market value consideration to be paid before the end of 2006.
Accordingly, they reached an agreement when they formed a mutual intention to
enter into the agreement with each other, which agreement included all
essential terms.
[23]
The Respondent argued that
no agreement was reached as Mr. Konyi and Ms. Konyi did not agree on all essential
terms of their agreement. Specifically, there was no agreement with respect to
terms of payment and the amount of the consideration.
[24]
With respect to terms of
payment, the Respondent relies on the Madsen decision, in
which this Court concluded that the terms relating to payment were too vague
and uncertain to be accepted as consideration within the meaning of subsection
160(1):
28 I have carefully reviewed the evidence of the Appellant
regarding the transfer by her husband of a one-half interest in the Lazy A
Property in 1989 and I have concluded that the suggestion that she would pay
her husband the fair market value of the Lazy A Property “when she had funds”
was nothing more than a vague and uncertain promise with no specific terms.
There was nothing in writing to confirm this arrangement and the document that
was used to transfer the Property was not prepared by a lawyer. Furthermore,
there was no evidence presented to the Court to confirm the Appellant's
self-serving testimony. In my opinion the “vague promise” that the Appellant
would pay her husband fair market value cannot be accepted as consideration
sufficient to prevent the application of section 160.
[25]
The facts in the present appeal
can be distinguished from those in Madsen. In Madsen, the
taxpayer and her spouse vaguely agreed that consideration would be given when
the taxpayer had the funds. In the present case, the terms of the agreement
relating to payment are clear: the consideration was to be paid before the end of
2006.
[26]
As for the amount of the
consideration, the Respondent argued that it was undetermined at the time that
the verbal agreement was entered into as there was a lack of certainty as to
what the amount was. I do not accept the Respondent’s contention. The agreement
fixed the consideration at the “fair market value” of the Transferred Property,
which I believe is a valid term of the agreement, as was determined in Barnabe
Estate:
In my view, by fixing the consideration at “fair market value”, the
price term was sufficiently clear to be accepted as a valid term of the
contract. It is settled law that it is possible to have a binding agreement of
purchase and sale where the price is set at the fair market value. The price
need not be actually identified in a specific amount. In this connection, I
refer to the remarks made by Major J., when rendering the unanimous judgment of
the Supreme Court in Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada:
The parties had
previously agreed that the option exercise price was to be the “reasonable fair
market value” of the helicopters. That price is not uncertain. It is not
subject to further negotiation; it is not an “agreement to agree”. The price
has been set to be the reasonable fair market value. As noted by the British
Columbia Court of Appeal in Re Nishi, an option to purchase at “fair
market value” is enforceable. This is not a situation where the price or some
other material term of the option has yet to be agreed upon. The law recognizes
that agreements to purchase property in the future at a “reasonable price” or
at “fair market value” are valid and enforceable.
[27]
I also believe that Mr.
Konyi’s accountant advised him to undertake the transfer of property for fair
market value consideration and that Mr. Konyi and Ms. Konyi followed the advice
that was given to them. Even though contemporaneous documentation indicates
that the consideration provided was in the amount of $1, the evidence shows
that this was not an accurate reflection of what was agreed to by the parties.
[28]
According to the evidence,
payments were made by Ms. Konyi to Mr. Konyi. This supports the
existence of an agreement between them. With respect to those payments by Ms.
Konyi to Mr. Konyi, the Respondent emphasized the fact that most of the
payments were deposited to their joint bank account. As for the use of a joint
account into which to deposit the payments, the case law is clear in
establishing that the existence of a joint bank account does not imply that the
money in that account belongs to both holders of the account. Thus, in Obadia, this Court stated
the following:
27 To begin with, it has been clearly
established by the courts that the existence of a joint account does not
make the co-signatories of the account joint owners of the money shown in the
account. One should look instead at the original agreement made when the
account was opened.
28 The following comments by Phelan J. of the
Quebec Superior Court in Desrosiers c. Laroche (Succession de)
are quite clear on this point:
A review of the authorities relating to the nature of joint
bank accounts indicates that the existence of such an account is not, in
itself, indicative that each co-depositor has a proprietary interest in the
funds of the account. As noted by Perrault:
[TRANSLATION]
To determine the mutual rights of depositors reference must
be made to the original agreement, the agreement concluded when the joint
account was opened. Did they intend to make the sum of money so deposited their
joint property? Did one of them intend to make the other depositor his agent or
mandatary, whether for consideration or gratuitously? Did he or she intend a
gift? In each case it is necessary to look at the intent of the parties and
apply the general rules of the civil law on mandate, gift or a stipulation for
a third party.
And Falconbridge:
The instructions given to the bank, however, are of course
not conclusive of the actual title to the debt represented by the account.
The presumption may be rebutted and the real ownership of
the debt must be determined upon all the facts.
It may turn out that the debt really belongs to the estate
of the deceased depositor.
. . .
However in each jurisdiction it appears accepted
that the proprietorship of the funds in a joint account must be determined upon
the facts in each case and the intention of the parties in entering into the
arrangement.
29 It follows from the foregoing that in the instant case the money
deposited in the joint account from the appellant's personal account is the
appellant's property, as no agreement was entered in evidence establishing any
special arrangement between the appellant and Mr. Obadia as to the ownership of
this money when the joint account was opened and subsequently.
[My
emphasis.]
[29]
Before Ms. Konyi and Mr.
Konyi entered into the verbal agreement, they had only joint bank accounts.
When they entered into the verbal agreement, they decided that Ms. Konyi should
open her own bank account at the Bank of Montreal, which she did on April 7,
2006. By doing so, she would be able to write cheques for amounts coming
directly from her own income in order to pay Mr. Konyi pursuant to their
agreement. The evidence is that every payment made by Ms. Konyi was made from
her personal bank accounts. As for Mr. Konyi, prior to December 6, 2006, he did
not have a personal bank account. Ms. Konyi and Mr. Konyi had been using a
Royal Bank joint account. This bank account was primarily used for household
expenses but was also used to support the different businesses that Mr. Konyi
was involved in and to pay any obligations he might have. Therefore, every
payment received by Mr. Konyi prior to December 2006 was deposited in this
joint account. On December 6, 2006, Mr. Konyi opened a personal bank account at
the Envision Credit Union. The payments he received as of December 2006 were
deposited in this account.
[30]
The Respondent also
submitted that only the $100,000 cheque dated December 6, 2006 had on
it a notation that the payment was made in relation to the Transferred
Property. Accordingly, the Respondent puts in issue the purpose of the other
payments because the cheques did not have the same notation.
[31]
Mr. Konyi could not recall
why, specifically, he put a notation on this particular cheque and not on other
cheques issued for the same “partial house payment” purpose, but he explained
that sometimes he thought of putting a notation on cheques and sometimes he did
not. However, I do not make much of this as there is no requirement to put a
notation on cheques. The fact that there was a “partial house payment” notation
on one cheque and not on the others does not convince me that the other
payments made by cheque were for some other purpose.
[32]
As for the purpose of these
payments, Ms. Konyi and Mr. Konyi testified that all of them related
specifically to the transfer of the Transferred Property and were issued pursuant
to their agreement. In fact, according to Ms. Konyi, the only reason she would have
written a personal cheque to Mr. Konyi would have been for the specific purpose
of paying the consideration for the Transferred Property. Otherwise, Ms. Konyi testified,
she would have transferred the funds directly from one account to the other
without issuing a cheque to Mr. Konyi. The cheques were their method of
recording the transaction and keeping track of the payments: the cheques made
out in Mr. Konyi’s name were specifically for this transaction.
[33]
I found Ms. Konyi and Mr.
Konyi to be credible witnesses and the evidence has convinced me that the
payments at issue were made by Ms. Konyi to Mr. Konyi in accordance
with their verbal agreement regarding the Transferred Property.
[34]
However, the total amount of
money transferred by Ms. Konyi to Mr. Konyi was $400,000. Ms. Konyi
admitted that there is a $2,000 discrepancy between the total amount paid to
Mr. Konyi and the consideration agreed upon. She testified that she believed
this discrepancy was based on a miscalculation. At trial, Mr. Konyi indicated
that the amount of $402,000 had been paid to him by Ms. Konyi (he could not
explain the $2,000 difference). The Respondent tried to undermine Ms. Konyi’s
and Mr. Konyi’s credibility with this circumstantial evidence. I believe that it
was an honest mistake on their part and it has not caused me to change my
opinion with respect to their testimony; they were credible witnesses.
[35]
The Respondent also tried to
question the credibility Ms. Konyi’s testimony by saying that she had had sufficient
funds in the years prior to 2006, when they entered into the verbal agreement,
to pay for the transfer, thereby implying that this was in contradiction to her
previous statement that they had decided to go ahead with the transfer in 2006
because she would have sufficient funds at that time. The Respondent argued
that if Ms. Konyi’s real intention had been to carry out the transfer in
exchange for fair market value consideration, she could have done it long
before she actually did so. Ms. Konyi testified that she required funds for
other purposes such as to pay for stock purchases and other investments and to
pay household expenses. I fail to see any contradiction in Ms. Konyi’s
testimony on this point.
[36]
Finally, with respect to the
promissory note that was lost and that Ms. Konyi and Mr. Konyi allegedly
drafted and signed on the date of the transfer, the Respondent pointed out that
it was curious that some of the documentation relating to the transfer was not
lost, but that the promissory note was. The Respondent also pointed out that
the promissory note drafted by the Konyis in 2012 to replace the first one once
they realized it had gone missing makes no mention of any prior payments made,
though the evidence suggests that a number of payments were in fact made before
October 31, 2006. Moreover, the promissory note did not specify on what dates
or in what form the payments were to be made, but it did indicate that the consideration
was $402,000. While making a replica of the original promissory note might not
have been the appropriate thing to do, I believe it was done simply because the
original had been lost and not with the intent of misleading anyone. In any
event, as I have concluded that there was an agreement between Ms. Konyi and
Mr. Konyi, the existence or non-existence of a promissory note is not relevant,
except as regards its use by the Respondent to undermine Ms. Konyi’s credibility,
which it failed to do.
VII. Conclusion
[37]
I have come to the
conclusion that, on the balance of probability, an agreement existed between Ms.
Konyi and Mr. Konyi in respect of the Transferred Property. Under the terms of
the agreement, Mr. Konyi was to transfer his half‑interest in the
Property in exchange for fair market value consideration before the end of
2006. I find that, pursuant to the terms of the agreement, fair market
consideration was given to Mr. Konyi at the time of the transfer. Therefore, Ms. Konyi
is not jointly and severally liable with Mr. Konyi under section 160 of the ITA
for Mr. Konyi’s 1993 taxation year tax liability.
[38]
The appeal is allowed, with
costs.
Signed at Ottawa, Canada, this 8th day
of September 2017.
“Sylvain Ouimet”
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