Deborah Mastronardi v. Minister of National Revenue, [1991] 1 CTC 2302, 91 DTC 341

Rip, T.C.J.:—The Minister of National Revenue, the respondent, by notice dated July 27, 1988 and bearing Number 554264, assessed Deborah Mastronardi, the appellant, the sum of $12,683.88 pursuant to subsections 160(1) and (2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") on the basis that on October 22, 1987 Armand Anthony Mastronardi, her spouse at the time, transferred his interest in real property owned by the appellant and Mr. Mastronardi as joint tenants to the appellant for no consideration when he was liable to pay an amount of $13,271.80 under the Act in respect of his 1986 taxation year. Mrs. Mastronardi does not deny her husband was indebted to the Receiver General for Canada. The respondent, on assessing, assumed that at the time of the transfer Mr. Mastronardi's interest in the real property, the family residence, had a market value of $12,683.88.

Mrs. Mastronardi claims that at the time Mr. Mastronardi’s interest in the property was transferred to her its value was nil since the property was encumbered by two charges, which were referred to as mortgages, the aggregate amount of which was in excess of the fair market value of the property. She argues in the alternative that the consideration for her "co-signing" a promissory note for her husband in favour of the Toronto Dominion Bank was his interest in the real property.

Subsections 160(1) and (2) read as follows:

(1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) his spouse or a person who has since become his spouse,

(b) a person who was under 18 years of age, or

(c) a person with whom he 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 section 74, 75 or 75.1, as the case may be, 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 aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in respect of the taxation year in which the property was transferred or of 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.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

Mr. Mastronardi was in the produce business. During the autumn of 1987, [1] according to the appellant, he decided to start a business selling grapefruit and oranges to schools in the area of Harrow, Ontario, near Windsor. Requiring money, he applied for a loan to his bank, the Toronto Dominion Bank. The bank agreed to lend money to Mr. Mastronardi but required security of a second mortgage on the family home and both Mr. and Mrs. Mastronardi to sign the promissory note in favour of the bank.

Mrs. Mastronardi testified she did not have much confidence in her husband's business acumen " because of his poor track record". She, herself, had nothing to do with any of his businesses and "wanted protection" in the event her husband defaulted. Mr. and Mrs. Mastronardi sat down to discuss the matter and he agreed to transfer his interest in their home to her.

Mrs. Mastronardi estimated the value of the family home in October 1977 to be between $60,000 to $65,000. In making the assessment the respondent assumed the value of the property to be $64,500 and this value was not disputed. The property was subject to a first mortgage in favour of the Toronto Dominion Bank. Mrs. Mastronardi said she " thinks" the amount of the mortgage outstanding on October 22, 1987 was $37,000. The respondent assumed in making the assessment that as of that date, $39,132.25 was owing on the mortgage.

The market value of Mr. Mastronardi’s interest in the property, $12,683.88, was calculated by the respondent to be the difference between one half of $64,500. (the value of the property) and one half of $39,132.25 (the amount of the first mortgage). The respondent's position is that when Mr. Mastronardi transferred his interest in the family home to the appellant only one mortgage existed on the property, the first mortgage in favour of the Toronto Dominion Bank, and consequently the market value of the property exceeded encumbrances on the property by the amount of $25,367.75.

The promissory note in favour of the Toronto Dominion Bank, signed by the Mastronardis, was executed on September 3, 1987. The amount of the note was for $31,000. and was payable on demand.

By transfer/deed of land executed on October 21, 1987 by Mr. Mastronardi and on October 22, 1987 by Mrs. Mastronardi, Mr. Mastronardi transferred his interest in the family home to the appellant for nominal consideration, that is, natural love and affection. The deed was registered in the Ontario Land Registry Office on November 9,1987 as instrument Number 1029351. [2]

A charge/mortgage of land for $50,000 in favour of the Toronto Dominion Bank was dated November 9, 1987 and was registered on November 9, 1987 as instrument Number 1029352.

The instrument relating to the transfer of Mr. Mastronardi's interest in the residence to the appellant was prepared by Mrs. Mastronardi's solicitor, Karl G. Melinz. The charge/mortgage of land was prepared by the bank. Mr. Melinz attended to the registration of both instruments. As well, Mr. Melinz filed Mrs. Mastronardi's notice of appeal to this Court from the assessment issued by the respondent. Mr. Melinz did not act for Mrs. Mastronardi as counsel at trial, electing instead to send Mr. James Martin, an articling student-at-law in his office.

The position taken by the appellant in her pleadings was that when Mr. Mastronardi transferred his interest to her there existed two mortgages in favour of the Toronto Dominion Bank on the property. The first for $38,897.17 and the second for $50,000. The total of the outstanding principal of these mortgages at the time of transfer, it was pleaded, was $88,897.17, an amount in excess of the market value of the property. Thus the market value of Mr. Mastronardi's interest in the property at the time of transfer was nil and no amount ought to have been assessed against Mrs. Mastronardi.

Mr. Martin repeated this argument, using the amounts of the first and second mortgages to be $39,000 and $31,000 respectively, and adopted the respondent's assumption of the property's market value at $64,500. He conceded his argument was valid only if one ignores the dates on the deeds and the registration certificates. Mr. Martin then raised the argument that the transfer deed dated October 22, 1987 was being held in escrow until the mortgage deed to the Toronto Dominion Bank was executed and only then was it intended to deliver the transfer deed to the transferee.

Because the escrow issue was raised for the first time only in closing argument and I was of the view it would be appropriate to deal with that issue, if possible, before this Court I adjourned the appeal to permit written arguments on this matter to be submitted to me for consideration. I have now reviewed the written submissions.

The submission on behalf of the appellant is signed by Mr. Melinz. I have great difficulty in agreeing with Mr. Melinz' argument that the transfer of Mr. Mastronardi's interest was subject to escrow. Mrs. Mastronardi replied to questions put to her in a clear and unambiguous manner, leaving no room for doubt. However, she was not asked all the questions necessary to clear the muddle. I do not agree with Mr. Melinz’ submission that Mrs. Mastronardi testified that the "Toronto Dominion Bank insisted on the execution of the second mortgage as a pre-condition to its consent, as mortgagee, to the transfer". I cannot conclude that her testimony as to the nature of the transaction as a whole was "that the second mortgage was executed prior to, or at least concurrent to, the transfer deed"; in fact the mortgage was executed two weeks after the transfer deed. She did not indicate the transfer of her husband's interest was subject to some other event. While execution in escrow need not be express, but rather can be constructively inferred from the circumstances, the circumstances in this case do not infer escrow: Alan Estates Ltd. v. W.G. Stones Ltd., [1981] 3 W.L.R. 892 (C.A.), Molsons Bank v. Cranston (1918), 45 D.L.R. 316; 44 O.L.R. 58 (Ont. S.C.A.D.).

Delivery of a deed is a matter of intention on the part of the grantor, which is to be determined from his acts or words. Manual delivery is not essential and an inference of delivery may be drawn from the fact of execution of the deed, provided that there is clear proof that the grantor intended to relinquish all dominion and control over the deed and to have it become effective immediately: Re Sammon (1979) 94 D.L.R. (3d) 594; 22 O.R. (2d) 721 (Ont. C.A.). See also Carson v. Wilson, [1961] O.R. 113; 26 D.L.R. (2d) 307 (C.A.) at 199. In the appeal at bar Mr. Mastronardi did not testify; the evidence of Mrs. Mastronardi was that her condition of signing the note to the bank was that Mr. Mastronardi would transfer his interest in the property to her. The note was signed on September 3 and Mr. Mastronardi's interest to the appellant was subsequently transferred. Mr. Mastronardi, the grantor, did deliver the deed to Mrs. Mastronardi on execution since he intended to relinquish all dominion and control over the deed and to have it become effective immediately, as agreed between him and the appellant. There is no evidence to indicate anything to the contrary.

No official of the Toronto Dominion Bank was called to testify if the bank insisted the second mortgage take effect prior to the transfer of Mr. Mastronardi's interest to the appellant. Mr. Melinz prepared both the transfer deed and attended to registration of both the transfer and mortgage instruments. He possesses knowledge of the instructions given to him and under which he acted. He did not see fit to represent the appellant, his client, as her counsel nor to testify on her behalf. As a witness Mr. Melinz would have been able to clarify, for example, why he retained the transfer deed until the mortgage was prepared. Was the transfer subject to the mortgage or was it merely convenient to him to hold the transfer deed until the mortgage was prepared and register both documents together? Who would Mrs. Mastronardi agree to execute the mortgage in favour of the bank if she " wanted protection”? Was she not aware she would lose the protection she so wanted once the property was further mortgaged? In Re Sammon, supra, Morden, J.A. noted, at page 604, that “ was open to the solicitor to give much more definitive evidence on the issue of fact to be resolved. I do not think it is right to fill unnecessary gaps in evidence by resorting to either presumptions or recognized inferences".

Morden, J. implied that the fact that the solicitor in that case was not called may be considered in weighing the evidence. He referred, at page 609, to the following passage from Blatch v. Archer (1774), 1 Cowp. 63 at 65; 98 E.R. 969: “It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted."

Mr. Melinz was available to testify at trial but for one reason or another he chose not to testify. I can only conclude such evidence would have been contrary to his client's interests.

There is no evidence to contradict the assumptions of fact made by the respondent in assessing. When the transfer instrument was executed, the transfer was perfectly valid between the transferor and transferee and at the time only one mortgage to the Toronto Dominion Bank existed on the property. I also note again that the transfer and mortgage were registered sequentially, the transfer being registered first. Thus, even when the transfer instrument was registered, the property had not yet been encumbered by the second mortgage. Accordingly, since the parties agree the market value of the residence on October 22, 1987 was $64,500 and I have found the only encumbrance on the property was for $39,132.25, the assessment in issue is correct.

The appellant appears to have abandoned her alternate argument that site received consideration for signing the promissory note. No evidence was adduced and no submissions were advanced on this argument.

Accordingly the appeal is dismissed.

Appeal dismissed.