Elizabeth Linke v. Her Majesty the Queen, [1994] 2 CTC 2117, 94 DTC 1549

Christie, A.C.J.T.C.C.:—This appeal is from a reassessment by the Minister of National Revenue under subsection 160(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in respect of an amount alleged to be payable by the appellant under subsection 160(1) of the Act.

What is germane to this appeal in subsection 160(1) of the Act provides that where a person has, on or after May 1, 1951, transferred property to his spouse the transferee and transferor are jointly and severally liable to pay an amount equal to the lesser of the amount 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 the aggregate of all amounts that the transferor is liable to pay under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.

On April 27, 1984, the appellant’s spouse Walter Linke transferred his interest in 8219-24th Avenue, Edmonton ("the 24th Ave. property") to the appellant. At the outset of the trial the Court was informed that the litigants agreed that the fair market value of that property at the date of the transfer was $95,000. [1]

Sorting out the evidence in this appeal into some kind of a comprehensible pattern is not easy. But the fundamental position of the appellant is clear. It is that at all relevant times she was the sole beneficial owner of the 24th Ave. property. Walter Linke appeared on the title as a joint tenant merely for the purpose of facilitating the borrowing of funds on the security of that property. [2]

Perhaps the best starting point for these reasons is 1973. On June 25 of that year the appellants mother-in-law, Johanna Linke, purchased 3780 Bargen Drive, Richmond, British Columbia, ("the Bargen property") for $19,000. At this time the appellant and her husband ("the Linkes") had a rental property called Carmen Manor at 107th Street and 86th Avenue, Edmonton, and another apartment a block away called Quiliam Manor at 107th Street and 85th Avenue. This property was registered in the name of the Linkes and Mr. Quiliam. Both rental properties were nine suite apartments. Carmen Manor was sold in the Fall of 1971 or Spring of 1972. The sale price was over $100,000. The appellant could not recall the net proceeds of disposition or what was done with the money. Quiliam Manor was sold at some unspecified date in 1972. Again the sale price was "over $100,000”. The appellant could not recall what the net proceeds of disposition were, but most of the proceeds went into Pinnacle Homes Ltd., a British Columbia corporation the shares of which were owned by her husband. Its business was modular homes. There was also a residence in Riverbend, Alberta. It was registered in the name of the Linkes. Prior to June 25, 1973, the residence was sold.

On May 13, 1975, Johanna Linke mortgaged the Bargen property to secure a loan of $52,000 made by Dulam Finance Ltd. The appellant's husband is a party to the mortgage agreement as guarantor. At this time the Linkes and Johanna Linke resided on the Bargen property. The payments of $650 per month on the mortgage were made by Johanna Linke with help from the appellant.

Another construction company, By Lane Construction Ltd., is another business venture with which the appellant’s husband was involved in 1975. In 1976 he was also involved in Pioneer Trailers Inns.

On September 24, 1975, the Linkes entered into an agreement to purchase the Bargen property from Johanna Linke and on November 7, 1975, a certificate of indefeasible title was issued to them. The evidence, including what was said by the appellant on her examination for discovery, is confusing about whether $60,000 was paid to Johanna Linke for the Bargen property and, if so, when. It was said at trial that the $60,000 was paid at the time of the sale or the issuance of certificate of indefeasible title and the source was the proceeds on the sale of the Riverbend residence plus over $20,000 that the appellant received from her parents. When confronted with her examination for discovery the appellant was not certain when the $60,000 was paid. There was placed in evidence as Exhibit R-10 a statement entitled "Money received from parents Otto & Emma Ferchoff Estate.” It was prepared by the appellant and entered as Exhibit D-2 at the examination for discovery of the appellant. The total is $20,800. Five hundred dollars was received in 1970, $2,000 in 1975, $1,000 in 1977 and the rest between April 8, 1978 and December 21, 1982. Later the appellant said she paid $60,000 to Johanna Linke when she received the funds from her parents. It was also suggested to her that Johanna Linke purchased the Bargen property in 1973 because the Linkes did not have any money at that time and that it was purchased for them. The appellant replied that it could very well be possible.

On February 5, 1976, the Linkes entered into a mortgage agreement regarding the Bargen property with Heather Equipment Ltd. to secure a loan of $68,000. Interest was 16 per cent per annum and the term of the mortgage was until November 1, 1976. It was guaranteed by Britco Developments Ltd., Linco Devel-

Walter Linke appearing as co-owner of real estate would facilitate the borrowing of funds. The real estate would be available to realize payment of a delinquent loan even if title thereto was only in the name of the appellant. If Walter Linke’s personal covenant was required by a lender, that could be achieved by making him a party to the mortgage agreement as guarantor. This, as will be seen, occurred on two occasions. Nevertheless what has been said in this footnote does not preclude the existence of an honest belief that Walter Linke appearing on the title as joint tenant would assist in raising the money.

opments Ltd. ("Linco") [3] and Henry G. Schuette, a construction manager. He was involved with the appellant’s husband in business in relation to By Lane Construction Ltd. and Pioneer Trailers Inns. The appellant said that payments due under the agreement were made by her with assistance from Johanna Linke. When asked if she had any bank statement to corroborate this she said: "No, I don't have anything at all, not even cheques, no.” Proceeds of this mortgage retired the debt due to Dulam Finance Ltd. There is in evidence an appraisal report dated March 10, 1976, which indicates that the construction of the home on the Bargen property was substantially completed on that date. The Bargen property was then appraised at $87,000.

On or about December 3, 1976, Spools Lumber & Building Supply Ltd. claimed a mechanics’ lien against the Bargen property for $847 for materials delivered during the months of May to September and November 1976. The appellant said the material was actually for By Lane Construction Ltd. and the lien was discharged by Mr. Schuette. On April 13, 1977, a mortgage agreement was entered into by the Linkes and the Canada Trust Company respecting the Bargen property. It was to secure a loan of $65,000. The loan by Heather Equipment was retired. Payments of $581 per month were to be made under the mortgage agreement. The appellant said she made these payments from her Canadian Imperial Bank of Commerce personal account in Richmond and 50 per cent was contributed by Johanna Linke who was still living at the Bargen property. Her husband made no contribution because he had no money.

On August 24, 1977, Walter Linke conveyed his interest in the Bargen property to his wife and on September 1, 1977, a certificate of indefeasible title was issued to her. On June 23, 1981, the appellant entered into a mortgage agreement with Richmond Savings Credit Union with reference to the Bargen property. This mortgage was subject to the Canada Trust mortgage and it was to secure a running account not to exceed $70,000. Her husband was party to the agreement as covenantor and in that capacity covenanted that the amount of loan and interest would be paid. Funds from this loan were used in relation to both the 24th Ave. property and real estate at 10712-64th Avenue, Edmonton ("the 64th Ave. property").

The appellant moved to Edmonton in 1981 but returned to Richmond frequently. The children were still there. This went on until 1984. When the appellant took up residence in Edmonton Johanna Linke, who was still living at the Bargen property, made the payments on the mortgage.

Counsel for the respondent introduced cancelled cheques in evidence indicating that on November 6, 1980, Walter Linke signed a cheque drawn on the Linco account in favour of Canada Trust in the amount of $838 and it is noted thereon that the payment pertains to the mortgage on the Bargen property; there is a similar che ue drawn on Linco's account that is dated December 2, 1980. Counsel had about 14 other cancelled cheques ranging in time from January 8, 1981 to March 8, 1982, to the same effect. The making of these payments was acknowledged by the appellant. The change in the amount from $581 to $838 related to refinancing the debt secured by the mortgage.

Counsel for the respondent placed in evidence a certificate of Lis Pendens registered on March 26, 1980, against the Bargen property, together with a copy of a writ of summons and statement of claim with respect to an action in the Supreme Court of British Columbia between Columbia Concrete Products Ltd. and the Linkes. They related to building materials sold to Walter Linke on April 3 and July 9, 1976, in the sum of $2,628. Paragraphs 6 to 9 of the statement of claim read:

6. The said defendant(s) did not pay the monies owing to the plaintiff, and on or about March 7, 1977, the plaintiff commenced action in the County Court of Westminster against the said defendant and others under action number 00540-77.

7. On or about February 3, 1978 the defendant, Walter Linke, made a partial payment to the plaintiff and judgment was obtained against the said defendant by the plaintiff on or about May 30, 1978 in the amount of $2,421.06, including prejudgment interest and costs.

8. Since that date, no further payments have been made by the defendant in satisfaction of the Judgment although the plaintiff has demanded payment on numerous occasions through its solicitors.

9. On or about September 1, 1977, the defendant, Walter Linke, transferred his interest in the subject lands and premises to the defendant, Elisabeth Linke. This transfer of the subject lands and premises was not in good faith and was for the purpose of defrauding and frustrating the plaintiff and/or other creditors in its attempt to obtain payment for those moneys justly owing to the plaintiff by the defendant, Walter Linke.

The Linkes had a history of serious marital difficulties. She said they were still together in 1976, “but it was unbelievable”. Later she added that through his business ventures he lost a lot of money “and that is why our whole marriage just fell apart." As a result of these difficulties Walter Linke moved to Edmonton in 1978. He got involved there with a development company called Condor Development. In 1992 he made an assignment in bankruptcy.

On January 12, 1979, the appellant entered into an agreement with the Royal Bank granting it a mortgage on the Bargen property by way of continuing collateral security in respect of her guaranteeing payment of debts incurred by the Linkes up to $15,000 plus interest.

On February 12, 1981, the City of Edmonton sent a letter to Linco at 10741-72 Avenue, Edmonton, which is a private home then occupied by the Linkes. It was regarding the 24th Ave. property. It reads in part:

The option agreements for this property are now ready for your signature.

You are requested to visit our office on or before to sign and seal the options and make the necessary $1000 Option payment, by certified cheque or money order, made payable to The City of Edmonton.

On March 20, 1981, the city wrote Linco at the same address. The letter reads in part:

Enclosed please find your copy of the option agreement and receipt number 20190 covering the Option payment for this property.

Under the terms of the option agreement you are required to have obtained a development permit, have a building permit ready to be picked up and be in a position to enter into the agreement for sale on or before the expiry date of May 31, 1981.

A copy of the agreement for sale and buy-back option agreement are also enclosed for your information. DO NOT SIGN (AND SEAL) these documents, but bring them to the office together with a certified cheque for $7,400 being the remainder owing of the required down payment when you come in to execute the agreement for sale.

The option agreement was signed by the appellant for Linco and Linco's cheque for $1,000 was signed by Walter Linke as was the $7,400 certified cheque. On March 25 the appellant signed a development application on behalf of Linco to the City of Edmonton with reference to the 24th Ave. property. It was to construct a single detached house with an attached garage and a fireplace.

On May 28, 1981, the Linkes signed a promissory note for $58,000 at 18'/2 per cent in favour of the Toronto-Dominion Bank. This appears to relate to establishing a line of credit. The note, on the face of it, states that it is a five-year consumer loan note.

On October 20, 1981, the city transferred the 24th Ave. property to Linco. The consideration was $37,000. On April 20, 1982, Linco transferred this property to the Linkes as joint tenants. On April 19, 1982, they had entered into a mortgage agreement with reference thereto with National Trust Co. to secure a loan of $52,000. Monthly payments were $786.27. Interest was 18.25 per cent per annum. The balance due to the city was paid from this loan. On June 28, 1982, the Linkes entered into a mortgage agreement with the Toronto-Dominion Bank with respect to the 24th Ave. property relating to a guarantee by the Linkes in regard to $30,000 owed to the bank by Quality Electric Ltd. The shares of this corporation were held by Walter Linke.

In answer to an undertaking given on her examination for discovery the appellant said with reference to who made the payment for this mortgage: "Elisabeth Linke made the payments. Plus see attached bank statements of undertaking No. 16”. The attached bank statements, however, indicate some payment on the mortgage having been made from a joint personal checking account in the name of the Linkes.

In a letter dated February 11, 1992, to Revenue Canada, Carl D. Rusnell, C.A., who was acting for the appellant regarding the assessment now under appeal said in part:

The costs expended in 1981 (for construction on the 24th Ave. property) of $47,462.03 resulted in our question as to where the funds were derived from in 1981 to pay out about $26,000 more than was available from the initial cash flow estimates which we presented to you. We are advised that these funds were made up from a combination of sources as follows:

1. Some savings were kept at the Credit Union in British Columbia, but they have been unable to find the records on this.

2. Elisabeth borrowed temporary funds from several places:

(a) B.C. Credit Union

(b) Elisabeth’s brother-in-law, Art Javorsky

(c) Mr. Henry Schuette

3. Some of the invoices dated 1981 were unpaid until the mortgage funds were received in 1982.

On February 16, 1992, Mr. Schuette signed a document addressed "To whom it may concern". It reads:

I hereby state, that I was a director and shareholder of Pioneer Trailer Inns Ltd. from January 1977 until 1983 and as such I have had personal knowledge of the company’s every day dealings. In the summer of 1981 the company provided a construction loan of $16,350 to Elisabeth Linke for the construction of a residence in Edmonton, Alberta. The loan was repaid in 1982.

The following exchange between counsel for the respondent and the appellant relates to this:

Q. Now, I understand the loan was taken out from Pioneer Trailers Inns, is that correct? That's what the letter says. The company provided a construction loan, is that correct?

A. Yes, that’s right.

Q. Okay. Now, was it payable by way of cheque or was it cash?

A. I don’t think he gave us the whole amount in cash. I don’t think so.

Q. Okay, when you say “he gave us" —

A. Partially, partially. He gave a cheque to us. I think I still might have it laying somewhere there at home, and the rest was I think cash.

Q. Did you ever enter into any written agreements with him?

A. No.

Q. Anything signed?

A. No.

Q. What were the terms of the loan?

A. The terms of the loan was when we were available — you know, to pay it back, we would do so and he would know that.

Q. Okay, was there interest on the loan?

A. No, not really.

Q. Not really?

A. No.

Q. There was no interest?

A. No. He did not take any interest off us.

Q. When you say “we would pay it back”, was the loan payable — was the cheque made out to you and Walter Linke?

A. I really can’t answer at this moment, I don't know.

Q. So there was no promissory note. Whose bank account was this deposited into?

A. I cannot even remember that even right now.

Q. Who repaid the loan? It indicates that the loan was repaid in 1982.

A. I cannot recall at this time.

Arthur Javorsky is the appellant’s brother-in-law. On February 13, 1992, he signed a document addressed "To whom it may concern". It reads:

Regarding: Loan to Elisabeth Linke of 8219-24 Avenue, Edmonton, AB T6K 2W2

I hereby state, that I provided a loan of $10,000 to Elisabeth Linke in 1981. The loan was repaid within a period of six months in 1982.

This loan plus $600 interest was repaid by Linco by cheque dated May 30, 1981, signed by Walter Linke.

In June 1981 the Linkes acquired a second property in Edmonton (the 64th Ave. property) for $95,000. A certificate of title dated August 20, 1981, shows them as joint tenants. On August 18, 1981, the Linkes entered into a mortgage agreement respecting this property with the Toronto-Dominion Bank to secure a $20,000 line of credit. On the same date the Linkes entered into an agreement for a second mortgage with Slavica Marjanovich regarding the 64th Ave. property to secure a loan of $34,738. It appears that this property was transferred by the Linkes to Quality Electric Ltd. and subsequently transferred to the appellant only by Quality Electric. There is in evidence a certificate of title dated October 25, 1984, showing the appellant as the sole owner of the 64th Ave. property.

Walter Linke resided at the 64th Ave. property for a while and his wife joined him there for a few months. It was then renovated and rented.

Counsel for the respondent placed in evidence a document prepared by Walter Linke that records deposits and withdrawals from Linco's bank account during the period October 1980 to December 1982. Linco never had any income from business conducted by it nor did it file income tax returns. Deposits made by the appellant were on December 15, 1981 of $1,500 and on December 18, 1981 of $1,000. The second sum was funds received from the estate. There is a deposit of $1,500 on January 15, 1982, that is identified with the Richmond Credit Union. Another deposit of $300 was made on February 9, 1982. The final deposit made by the appellant was on May 12, 1982, in the amount of $1,545. There were numerous deposits made that were not identified with a source. The appellant could not recall the sources of these funds.

On April 2, 1984, the appellant sold the Bargen property to Kwoon Kau Chan and his wife for $168,000, the balance of proceeds after paying the mortgage debt was $41,875 and this was deposited on April 12, 1984 to a personal account of the appellant in Edmonton with the C.I.B.C. Some of it was used to pay bills regarding the 24th Avenue property and the appellant said that it was very possible that some was used to pay the debt to the Toronto-Dominion Bank owed by Quality Electric that was secured by the mortgage of June 28, 1982 on that property.

The appellant was unable to say precisely why her husband's interest in the 24th Avenue property was transferred to her on the date that it was transferred, namely, April 27, 1984.

In respect of 1984 Walter Linke claimed a significant business investment loss which was disallowed on reassessment.

Mr. Brent L. Aylesworth, a designated appeals officer with Revenue Canada, testified on behalf of the respondent. His evidence was basically criticism of things said on behalf of the appellant by Mr. Rusnell in a letter to Revenue dated July 2, 1991, to the attention of the witness. For example, the first paragraph of the letter reads:

1. In 1973, Elizabeth purchased a lot in British Columbia for the purpose of building a home. Elizabeth had inherited funds from her parents and this provided the capital tor the purpose. For mortgaging purposes, the title to the property was registered in Walter and Elizabeth’s names. A mortgage of $65,000 was obtained. When complete the appraised value was $87,000 and accordingly an equity was shown of about $22,000 although the appraisal, a copy of which is enclosed, was in 1976.

The witness correctly points out that the property was purchased in 1973 by Johanna Linke and that a mortgage to secure a loan of $65,000 was entered into on April 13, 1977. The appraisal report indicates substantial completion of the home on the Bargen property by March 10, 1976.

Reference was also made to a letter dated February 11, 1992, by Mr. Rusnell to Revenue Canada to the attention of Mr. Aylesworth. The witness had comments to make about this letter, but I do not believe it is necessary to reiterate them for the purposes of this appeal.

In Youngman v. The Queen, [1990] 2 C.T.C. 10, 90 D.T.C. 6322 (F.C.A.), Pratte, J.A., speaking for the Court, said at pages 13-14 (D.T.C. 6325):

I will deal first with the question of onus of proof. The rule is well known. When the Minister has, in his pleadings, disclosed the assumptions of facts on which the assessment was made, and when, as is the case here, it is not contested that the assessment was in fact based on those assumptions, the taxpayer has the onus of disproving the Minister’s assumptions.

There is no allegation in this appeal that the reassessment was not based on the assumptions set out in the reply to the amended notice of appeal. The onus on the taxpayer can be discharged on a balance of probability.

The evidence-in-chief of the appellant consists of 8'/2 pages of transcript. She was without counsel and under considerable stress. Cross-examination of the appellant went on for 131 pages. The evidence of Walter Linke is seven pages of transcript and cross-examination is 13 pages. Of the 14 exhibits placed in evidence, all but the promissory note in favour of the Toronto-Dominion Bank for $58,000 were tendered by counsel for the respondent. Also some of the detailed history of this case relates back some 20 years which raised problems of recollection.

First, I observe that the appellant impressed me as being an honest witness, although the lapse of time and the multiplicity of transactions referred to during the course of her giving evidence made a good deal of it obscure. I think it has been established, however, that funds of hers were invested in the 24th Ave. property. In this regard it is noted that by August 24, 1977, the appellant was the sole registered owner of the Bargen property. This is over four years prior to the acquisition of the 24th Ave. property. On the other hand there is no clear evidence about what, if anything, can be regarded as a financial contribution to that property by Walter Linke. He has a lengthy and unfortunate financial record. I do not regard the fact that he was signing cheques drawn on the bank account of Linco as showing that he was making a contribution of the kind just mentioned.

While this appeal is close to the line I have come to the conclusion, on the whole of the evidence, that it has been established on a balance of probability that on April 27, 1984, Walter Linke did not have an interest in the 24th Ave. property. It follows that the appellant is entitled to succeed.

Appeal allowed.