Anthony A. Ramey v. Her Majesty the Queen, [1993] 2 CTC 2119, 93 DTC 791

Bowman, T.C.C.J.:—This appeal is from assessments made under section 160 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). In 1987 and 1989 Allan Ramey, who died on November 9,1992 at the age of 89, transferred real estate and bank certificates to his son Anthony, the appellant, at a time when he was indebted to Her Majesty the Queen as the result of net worth assessments for his 1982, 1983, 1984, 1985, 1986, 1987 and 1988 taxation years.

The appellant challenges the assessments on two grounds:

(a) He contends that the net worth assessments made against his late father are incorrect; and

(b) He contends that the properties transferred to him. did not belong beneficially to his father but were held on trust, in the case of the real estate, for him and, in the case of the bank certificates, for his daughter Jodi.

The net worth assessments made against the appellant's father for 1982, 1983 and 1984 are the subject of an appeal to this court and counsel for both parties agreed that whatever other disposition might be made of the matters in issue the appeal from the appellant's assessments should be allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment to make such adjustments, if any, to the appellant's liability under section 160 as might result from the ultimate disposition of his late father's appeal from the assessments for 1982,1983 and 1984.

As to the net worth assessments made for Allan Ramey's 1985, 1986 and 1987 taxation years [1] , Mr. Boudreau, the official of the Department of National Revenue who made those assessments, stated that the computation of Allan Ramey's net worth for 1986 would have to be adjusted downwards by $44,632.92 and for 1987 by $66,211.92 to take into account Mr. Allan Ramey's increased liability in respect of a transaction involving the Madawaska Amusement Arcade. Moreover, he agreed that Mr. Ramey's net worth for 1987 should be reduced by $25,000 being the untaxed portion of the proceeds from the sale of Mr. Ramey's business attributable to goodwill. The appeal will therefore be allowed to permit these adjustments to be made.

Counsel for the appellant challenged the net worth assessments made against his father on five additional grounds:

(a) The net worth statement for 1984 shows among Mr. Ramey's properties unidentified “land and building" with a cost of $29,000 and $27,050 respectively. Mr. Boudreau, under cross-examination by counsel for the appellant, agreed that he accepted the accuracy of the 1984 net worth statement which had been prepared by someone else. He also agreed that he was unable to identify which property, of the several owned by Mr. Ramey, was the land and building referred to. On the basis of this, Mr. Rouse suggested that the amount of land and building should remain on the net worth statement for 1984 but should be deleted from the statement for 1985, thereby reducing the increase in Mr. Ramey's net worth between the end of 1984 and 1985. I do not believe that this is an acceptable position. The figure for land and building is either accurate or it is not. If it is to be deleted from the 1985 statement it should be deleted from 1984 as well in which case Mr. Ramey's increase in net worth for 1985 will be unaffected. The figures evidently came from a financial statement for 1980 provided by Mr. Ramey. They are obviously not a figment of the assessor's imagination.

(b) DVA Payments

Mr. Allan Ramey was receiving a pension from the Department of Veterans Affairs in respect of his military service during World War II. Such pensions are tax free. In preparing the net worth statements for 1985, 1986 and 1987 Mr. Boudreau included the amounts received in "reported income”. The designation is perhaps inaccurate because the veteran's pension was not reported as income, but it achieved the correct result as it reduces the discrepancy between the reported income and the increase in net worth which is ultimately subjected to tax.

The problem here is that Mr. Ramey, a widower, was receiving the pension appropriate for a married person and the Department of Veterans Affairs now claims over $10,000 back from him in respect of the overpayments in those years. Counsel suggested that the overpayments should be treated as liabilities that would reduce his net worth. The argument is superficially attractive but I do not accept it. To treat the overpayment as a liability would require a corresponding decrease in "reported income" and accordingly there would be no net change.

(c) Payment of $19,300 to Central Trust

Mr. Boudreau treated this amount as a personal expenditure which he added to Mr. Ramey's increase in net worth to arrive at his apparent income. Counsel for the appellant argued that this might have been a repayment of a loan which would have represented an additional liability. The short answer is that we are completely in the dark about this payment. It is therefore left to conjecture what effect it might have had on Mr. Ramey's net worth if its purpose had been known.

(d) Payments to Banks and Billiards — $5,633 and $10,923

These payments were treated as well by Mr. Boudreau as personal expenditures. It was contended that these might have been expenses relating to a prior liability of the business that Mr. Ramey had carried on. Once again we are faced with an absence of evidence as to their nature and in any event, given the nature of a net worth assessment, it is doubtful whether the type of expenditure would have made any difference to the final result.

(e) Capital Cost Allowance

In 1986 and 1987 Allan Ramey's net worth statement shows machinery having a cost of $85,000. It was contended that this would entitle Mr. Ramey to capital cost allowance thereby reducing his income for the year. We are faced again with an absence of evidence. We do not know what the machinery was, or the use, if any, to which it was put. Moreover it is possible that he did claim capital cost allowance on it. A statement of business income for 1987 was filed showing a claim for capital cost allowance in the amount of $14,500. No CCA schedule was filed with the return.

I am not unappreciative of the enormous, indeed virtually insuperable, difficulties facing the appellant and his counsel in seeking to challenge net worth assessments of a deceased taxpayer. The net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer's income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer's net worth, i.e., the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer's income for a year. A taxpayer whose business records and method of reporting income are in such a state of disarray that a net worth assessment is required is frequently the author of his or her own misfortunes. Mr. Boudreau stated that Mr. Allan Ramey's records were inadequate, that he had a history for years prior to 1981 of being assessed on a net worth basis and that his business, that of owning coin operated machines, such as pinball machines and slot machines of various types, was cash based and was therefore difficult to audit. The Minister had no alternative but to proceed as he did. While I have sympathy for someone in the position of the appellant whose liability for his father’s tax is secondary, I can see no basis for adjusting the assessments made against his father to any greater degree than that to which the respondent has already agreed.

I turn now to the second ground of challenge to the appellant's assessments. The transfers of property fall into three categories:

(a) On March 6, 1989 Allan Ramey transferred to the appellant 5 Lloyds Bank Canada Mortgage Corporation Action Bank Investment certificates in the aggregate principal amount of $95,000. The Minister assumed a fair market value of $100,190.94 which I presume included accrued interest and this figure was not disputed.

(b) On September 23, 1987 Allan Ramey transferred to the appellant parcels of land at 559-561 Union Street, 565 Union Street and 111 Crerar Street in Fredericton.

(c) On May 4,1989 Allan Ramey transferred to the appellant three parcels of land at Cork Station, Waterborough and Barony, New Brunswick.

The fair market value at the time of transfer is not disputed. The transfers of the certificates took place for no consideration and the affidavits of transfer of the real property show the consideration to have been one dollar.

I have concluded on the evidence, and notwithstanding Mr. Rouse's exceptionally able presentation of the case, that at no time prior to the transfers did Mr. Allan Ramey, the appellant's father, ever relinquish beneficial ownership of the properties or hold them in trust for the appellant in the case of the real estate, or for his granddaughter Jodi in the case of the bank certificates, with one exception.

I shall deal first with the bank certificates. Jodi seems to have been a child of whom her grandfather was very fond. I accept that the deceased had stated from time to time that he was putting some money aside for her. He did not tell her how much and he told her father only when he transferred the certificates to his name. When he did so he did not require his son to sign any declaration of trust or any document indicating that the property was being transferred to him in trust. The certificates originally were registered in the names of" Ramey, Allan A. and/or Ramey, Jodi, joint tenants with right of survivorship” except for one certificate for $10,000 which was registered in the name of "Ramey, A. Allen in trust for Jodie Ramey". The joint tenancy form of registration may have been adopted because an official of the bank informed him that the bank would not recognize the trust.

The certificates when transferred to the appellant bore no indication of any alleged trust. When the certificates matured the money was not put in a trust account nor was it treated as trustee would treat it. It was used in part for the downpayment on a house which the appellant bought in his own name with no mention of a trust and for which he personally assumed a substantial mortgage — unusual conduct for a trustee. It was also used to buy furniture for the house in which the appellant resides with his daughter. The remainder was used to buy a four-wheel drive vehicle — a Ford Explorer as I recall the evidence — allegedly "for Jodi". There was some disagreement between the appellant and counsel for the Minister as to whether it was a truck or an automobile. It was very likely a station-wagon but whatever it might be called it is a most peculiar sort of thing for a responsible trustee to buy for a sixteen year old.

Mr. Rouse suggested that even if the appellant in spending the money as he did was in breach of his duties as a trustee this could not detract from the fact that the certificates were impressed with a trust in favour of the appellant's daughter. I think that the whole course of conduct of the appellant and his father indicate something more: that it was never intended that beneficial title to the property ever be in Jodi. The most that can be said was that the grandfather wished to bestow some largesse of indeterminate magnitude on his granddaughter — indeed she is named as a substantial beneficiary in his will — but he intended to retain control of and ownership of the property up to the moment at which he transferred the certificates to his son who thereafter treated the moneys as his own, notwithstanding his statements that he was buying the house, furniture and automobile "for Jodi". Parents frequently make such statements without any intention that their doing so will create any kind of legally effective trust. The form of joint ownership with a right of survivorship in which the certificates were registered indicates a general intent ultimately to benefit the daughter but it falls short of a specific and legally binding declaration of trust. With considerable hesitation I am prepared to give the benefit of the doubt to the taxpayer in the case of the one $10,000 certificate registered in the name of Allan Ramey in trust for Jodi Ramey. There is a reasonable chance that such a specific declaration would be effective.

The allegation of trust in the case of the real estate fails for substantially the same reasons. There was evidence that the appellant's father said from time to time that the property at 559-561 Union Street and 111 Crerar Street was "Tony's" (i.e., the appellant's). A number of witnesses testified to this effect. The appellant seems to have paid municipal taxes on it and he also did some repairs. 565 Union Street was bought by the appellant's father from the estate of his sister. The appellant wanted to acquire 565 Union Street but the uncle, who was executor of the estate, refused to sell it to him because the appellant wanted to tear it down. Therefore the father bought it. The appellant stated that he paid $15,000 in cash to his father to enable him to buy the property. A receipt in this amount was put in evidence indicating $15,000 had been paid by the father to the uncle. I am uncertain whether the $15,000 cash allegedly paid for the property came out of cash held by the father or the appellant. It seems that both father and son often transacted their business in cash, and I formed the strong impression that monetary matters and cash flow between them were somewhat fluid. The appellant started working for his father in the late 1940's and was paid by tips and a small allowance. He assisted his father in the coin machine business beginning in 1953. Ultimately he embarked on a similar coin machine business himself, using coin machines that his father had no further use for. His father supplied him with the machines. He fixed them up and placed them in various locations. He stated that he never earned more than $100 per week from his father and that he never filed an income tax return before 1987. If he paid his father $15,000 in cash to acquire the property on Union Street, it is unclear where the money came from.

I do not think that vague statements that the properties owned by the father were "Tony's" amount to a declaration of trust. For a declaration of trust to be effective there must be a degree of certainty and specificity that is lacking here.

As to the other properties which were transferred in 1989 the appellant's case was put somewhat differently. Counsel did not allege an actual declaration of trust but contended rather that there was a resulting trust or a constructive trust in favour of the appellant of the type described in the Supreme Court decisions of Pettkus v. Becker, [1980] 2 S.C.R. 834, 117 D.L.R. (3d) 257 or Palachik v. Kiss (1983), 33 R.F.L. (2d) 225, and Sorochan v. Sorochan, [1986] 2 S.C.R. 38, 2 R.F.L. (3d) 225, based on the fact that the appellant had allegedly worked for his father for many years for minimal wages. I do not think that the facts warrant the application of such doctrines.

Looked at broadly we have here an aging patriarch who maintained his control over his family by keeping control and ownership of his property almost up to the very end. The situation was very fluid and he retained the right to decide where any property would go. Cash seemed to flow freely and while the children had a reasonable hope and expectation of getting whatever properties he had designated he still could change his mind and indeed did so on at least one occasion.

With the exception of the one $10,000 certificate I do not think that any of the properties transferred to the appellant were ever impressed with a trust in his father's hands.

I had occasion to consider the doctrines of resulting and constructive trust in another case released concurrently with this one, Savoie v. Canada (file 91-372(IT)). The compelling evidence that led me to conclude in that case that the surviving spouse held a 50 per cent beneficial interest in the properties transferred to her by her deceased husband simply does not exist here. The statements supporting the alleged declarations of trust with respect to the property on Union and Crerar Streets are at best equivocal and would not support a claim by the appellant to have the property conveyed to him had his father refused to do so. They amount to no more than a general statement of intent that he would transfer the property to his son or such other member of the family if and when he chose to do so. As to the other three pieces of real estate I do not see any room for the doctrine of constructive trust. The father does not appear to have been unjustly enriched at the expense of the son and I see no particular causal connection between the father's ownership of the properties and his son's efforts. To apply the doctrine of constructive trust to those properties would be to extend it to a point not even remotely envisaged by the Supreme Court of Canada in its recent decisions to which I referred above.

The appeals are allowed and the assessments referred back to the Minister of National Revenue solely for the purpose of making such adjustments thereto as may result from the concessions made by the Minister with respect to the assessments of the 1985, 1986 and 1987 taxation years of the appellant's father and such further adjustments as may ultimately be made to the assessments for the appellant's father's 1982, 1983 and 1984 taxation years on the ultimate disposition of the appeals from those assessments to this court and for the further purpose of deducting from the assumed value of the bank certificates of $100,190.94 transferred to the appellant that the Minister has treated as subject to section 160 of the Income Tax Act the value, including accrued interest, of the $10,000 certificate originally registered in the name of Allan A. Ramey in trust for Jodi Ramey.

The respondent is entitled to her costs.

Appeal allowed in part.