Finley Mah v. Her Majesty the Queen, [1993] 1 CTC 422

Jerome, A.C.J.:—This is an appeal by the plaintiff from a decision of the Tax Court of Canada dated December 21, 1989, which dismissed Dr. Mah's appeals from two assessments issued by the Minister of National Revenue on June 21, 1985 and February 13, 1987, respectively.

Facts

The plaintiff is a dentist who practices in the City of Edmonton. From November 1973 until October 18, 1983, the plaintiff's parents, Richard Mah and Yee Ling Mah, were the registered owners, in joint tenancy, of the lands and house municipally described as 4136-108 Street, Edmonton, which they occupied, and continue to occupy, as their matrimonial home. Mr. and Mrs. Mah also operated a restaurant business and began experiencing financial problems in 1980. These escalated to critical dimensions between January 1983 and October 1984. The plaintiff frequently contributed funds toward the maintenance of his parents in a total amount of approximately $25,000.

Notwithstanding the monetary aid provided by their son, Mr. and Mrs. Mah's mortgage loans fell into arrears, and in January of 1983 foreclosure actions were commenced by the first and the second mortgagees. On October 18, 1983, in the hope they could prevent the loss of their matrimonial home, Mr. and Mrs. Mah executed a transfer of land transferring title in the property to the plaintiff. When his parents transferred their matrimonial home to him, they did so without the plaintiff's knowledge or consent. Indeed, the plaintiff did not become aware of the transfer of title into his name until April 17, 1984, at which time he was served with a statement of claim by the first mortgagee. Dr. Mah then contacted his father in order to ascertain what the situation was. He did not retain legal counsel, but spoke on an informal basis with a lawyer friend and he did not file a statement of defence. Approximately one week to ten days after he was served with the statement of claim, Dr. Mah was approached by the second mortgagees, an elderly couple, who suggested that the plaintiff quit claim the property back to them and then enter into an agreement to purchase the property in his own name. The plaintiff agreed to the proposal since it provided the means by which his parents' home could be preserved and they could continue to reside there. Dr. Mah purchased the property from the second mortgagee on October 10, 1984. At the present time, his parents live in the home, although arrangements have been made for a monthly rental charge to Mr. and Mrs. Mah, which the plaintiff now claims as income from rental property for tax purposes.

By notices of assessment dated June 21, 1985, the Minister of National Revenue assessed the plaintiff for the unpaid taxes owing by his parents for the 1981, 1982 and 1983 taxation years which were outstanding as of the date of the transfer of title to the subject property into Dr. Mah's name on October 18, 1983. The assessments, which were based on subsection 160(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") dealing with tax liability concerning property transferred in a non-arm's length transaction, were for $6,675.62 in respect of income taxes and interest allegedly owing by his mother, and $12,376.65 for income taxes and interest allegedly owing by his father. The plaintiff filed notices of objection and by notification dated February 13, 1987, the Minister confirmed the assessments, although the plaintiffs liability for the unpaid taxes of his father was reduced from $12,376.65 to 11,623.

Dr. Mah appealed to the Tax Court of Canada which dismissed his appeal for the following reasons:

In my opinion the conduct of the appellant, once he was aware of the situation facing him, confirmed for purposes of the Income Tax Act at least, that he accepted the proposition that the property had been transferred to him. In April of 1984 the appellant had the opportunity to disavow the transfer made in October, 1983 by Richard Mah to Finley Mah. I appreciate that to do so might have caused great difficulty. It might have been the last thing that Dr. Finley Mah would have wished to do. All those considerations taken into account, the decision clearly was made that he would complete the transfer and retain the property. It is perhaps to his disadvantage that he did not fully explore the difficulties which that might entail, including the legal and certainly the income tax disadvantages. I might even say he probably did not have the slightest idea that he could be assuming a third party income tax liability, but that does not matter at this time. He acted, in my view, whether out of consideration for his parents only or not, and perhaps without sufficient legal advice. But the results which flow are dictated by subsection 160(1) of the Act to make the transferee liable. The mortgage holders dealt with Dr. Finley Mah, the appellant, on the basis that they believed they could support a legal title and that beneficial interest was in his name. There is no basis in my mind upon which Dr. Finley Mah, the appellant, at that time at least did not also accept the liability put on him by the assessment notices I have indicated.

In my opinion, unfortunate as it is, the process embarked on by Richard Mah and Yee Ling Mah to divest themselves of the property did not succeed in divesting themselves of the income tax liability, and indeed that liability is shared jointly and severally now with the appellant, Dr. Finley Mah.

The plaintiff now appeals from that decision on the grounds that when his parents executed the transfer of land document on October 18, 1983, there was no transfer of property within the meaning of section 160 of the Act, since Dr. Mah, having no knowledge of the transfer nor granting his consent thereto, did not acquire any property or beneficial ownership in the subject property. It is the plaintiff's position that such beneficial ownership in the house was only acquired by him when he purchased it from the second mortgagee on October 10, 1984.

The defendant maintains that the plaintiff is jointly and severally liable to pay his parents' tax liability pursuant to subsection 160(1) of the Act, in that Richard and Yee Ling Mah had, on October 18, 1983, transferred property to Dr. Mah, a person with whom they were not dealing with at arm's length. Although, the plaintiff may not have been aware of the transfer of the property into his name at the time, the defendant argues that Dr. Mah's subsequent acts, of making mortgage payments and negotiating with the mortgage companies, were acts which served to ratify the unauthorized transfer document, thereby rendering it a valid transfer and establishing the plaintiff's acceptance of all the rights and liabilities of beneficial ownership in the property, including liability for his parents' unpaid taxes.

At the conclusion of the trial, I indicated to counsel that I accepted the evidence of Dr. Mah and his father concerning the execution of the transfer and therefore found as a fact that it did not repose beneficial ownership of the home in Dr. Mah. I then invited written submissions on the further legal question of whether section 160 could only be triggered by a valid transfer and whether this transfer in issue here met those requirements. The brief filed on behalf of the Minister accurately describes the basis of written argument as follows:

The ultimate issue to be addressed is whether the defendant is precluded from relying on the existence of the Transfer of Land in applying section 160 of the Income Tax Act. In approaching this issue the following facts are assumed based upon the comments of the Court as to findings of fact and the oral submissions made in argument.

(i) at the time of the execution and registration of the Transfer of Land, the plaintiff was not aware that the land was being transferred to him or that his father was purporting to act as his agent in executing the affidavit of transferee. The plaintiff did not become aware that the transfer had occurred until he was served with a statement of claim by a mortgagee in an action for foreclosure;

(ii) the plaintiff subsequently dealt with the property as if it were his own in negotiating with the mortgagees and executing a quit claim deed and transfer to a mortgagee. He ultimately claimed the property as a rental property for tax purposes.

Relevant statutory provisions

Subsection 160(1) of the Income Tax Act provides as follows:

160.(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 sections 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 or in respect of the taxation year in which the property was transferred or 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.

Jurisprudence

In Gardner v. M.N.R., [1988] 2 C.T.C. 2285, 88 D.T.C. 1649 (T.C.C.), the appellant held title to a home in joint tenancy with her spouse. The joint tenancy existed only because the appellant lacked any source of income and had therefore been unable to obtain financing independent of her husband when the house was purchased in 1968. In 1980 the appellant sold the house, and as no further financing was necessary, her spouse removed himself from title by way of a quit claim deed. The Minister assessed the appellant on the transaction under section 160 of the Act based on the assumption that the appellants husband had a beneficial interest in the residence by virtue of being the joint tenant thereof. It was further argued that this interest was transferred to the appellant with the result that her spouse quit claimed his interest in the joint tenancy. There was no dispute that, at the time of the quit claim deed, the appellants spouse had a tax liability to Revenue Canada. The Tax Court of Canada allowed the appeal from the assessment on the grounds that the appellants spouse did not have a beneficial interest in the property. Brulé, T.C.C.J. stated at pages 2287-88 (D.T.C. 1651):

The scope of section 160 is extremely broad and extends to virtually every transaction by which an individual divests himself of any rights to property and at the same time vests such rights in someone with whom he does not deal at arm's

length. Prima facie, in order for section 160 to be operative, the person alleged to be the transferor must have actually had an interest in the transferred property.

Ultimately, however, on the facts of this case, I cannot conclude that this prerequisite is met. While the taxpayer [appellant's spouse] held legal title to the residence, he did so solely as trustee for the appellant. At no time did he have a beneficial interest in the property.

In support of this, counsel for the appellant referred to the Saskatchewan Court of Appeal decision in Anderson v. Hervieux, 46 R.F.L. (2d) 320. The respondent in that case purchased a house entirely out of his own funds. However, he placed title to the property in the names of himself and his common law spouse, as joint tenants. When the parties separated, the respondent was successful in obtaining an order that title to the property be registered solely in his name.

In affirming this order, the Court of Appeal determined that the only reason for establishing the joint tenancy was to ensure that the property would pass to the appellant should the respondent die unexpectedly, while they were cohabiting. On this basis they further concluded that there was no intention to make a gift to the appellant.

This is clearly analogous to the situation in the instant case. /t was the uncontroverted evidence of both the appellant and the taxpayer that they never intended that the taxpayer have a beneficial interest in the residence and that he became a joint tenant solely because it was unnecessary in order to obtain mortgage financing, Similarly, the bulk of the equity in the residence was provided by the appellant. Admittedly, the taxpayer made at least some contribution thereto, in the form of mortgage payments. But, approximately $100,00 in mortgages still outstanding in 1981 — versus $24,000 in 1968 — a substantial portion of this was extracted in the course of subsequent refinancings. Moreover, to the extent that this was not the case, I find that the contributions made by the taxpayer were intended as a gift to the appellant.

[Emphasis added.]

In Wink v. M.N.R., [1988] 2 C.T.C. 2253, 88 D.T.C. 1654 (T.C.C.), the taxpayer was asked to assume title to a truck, the owner of which, Mr. James Renda, was indebted to Revenue Canada. The taxpayer did not retain the ownership certificate to the truck, nor did he use or deal with the truck in any way. He later discovered that the truck had been transferred out of his name and into that of another individual of whom he had no knowledge. The Minister assessed the taxpayer as liable for the tax debt of Mr. Renda. The Tax Court allowed the taxpayer's appeal for the following reasons as set out at pages 2253-54 (D.T.C. 1655-56):

Ultimately, I am unable to conclude that any legal rights were created as a result of this transaction. While the formalities associated with executing a transfer of the truck were complied with to at least some extent, it cannot be said that what was done was in substance a transfer. Indeed, this case is, in almost every respect, a classic example of a sham transaction. This was described by Lord Diplock, in Snook v. London & West Riding Investments Ltd., [1967] 1 All E.R. 518, at page 528 as follows:

As regards the contention of the plaintiff that the transactions between himself, Auto-Finance, Ltd. and the defendants were a "sham", it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities, that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.

Returning to the facts of the instant case, I find as a matter of fact that the parties to the transaction had no intention of effecting a valid transfer or creating any legally enforceable rights between them. Quite apart from anything else, if this had not been the case, I cannot imagine that the appellant would have acted with such equanimity to the “fraudulent transfer” of the truck out of his name. At the end of the day the appellant was nothing more than a temporary and gratuitous bailee of the truck. Accordingly, he falls outside the ambit of section 160.

[Emphasis added.]

Analysis

The resolution of this dispute must begin with an examination of the rationale behind section 160. It is to assist the Minister in situations in which a taxpayer's debt could be the subject of judgment or certificate and, in turn, registration or execution against the debtor's property. Should the defaulting taxpayer try to defeat such actions on the part of the Minister by transferring a property to a member of the family, section 160 comes into play. It does not set the transfer aside but preserves the taxpayer's liability and adds that of the transferee. I return to the opening sentence of my earlier quotation from the decision of Brulé, T.C.C.J. in Gardner, supra:

The scope of section 160 is extremely broad and extends to virtually every transaction by which an individual divests himself of any rights to property and at the same time vests such rights in someone with whom he does not deal at arm's length.

Can there be divestiture by Mr. and Mrs. Mah and vesting in Dr. Mah here? I think not. Surely a transaction done entirely without the plaintiff's knowledge or consent could not have that effect, nor do I understand why the Minister needs the assistance of section 160 unless the transfer is valid. In my view, on October 18, 1983, Mr. and Mrs. Mah were beneficial owners of the land and were liable to execution against it for their tax arrears. By their failed attempts to transfer, which I consider to be invalid, nothing jeopardized or reduced the Minister's security against their title. The effect of the Minister's claim pursuant to section 160 would be to add liability on the part of Dr. Mah when he had no knowledge of the transfer, much less of the debt. I fail to see how the interests of justice are served by such a claim at least until the time when Dr. Mah became aware of the intended transfer and acted upon it. Indeed, the plaintiff must acknowledge that only six months later in April of 1984, when he entered negotiations to resolve this crisis by a series of transactions, he became subject to the impact of section 160 whether he knew about it or not. On the particular facts of this case, therefore, it is not a question of whether he is subject to the provisions of section 160, but whether that occurred on October 18, 1983 or on April 17, 1984.

Conclusion

I therefore conclude that on October 18, 1983, no valid transfer of the title by this plaintiff's parents to him took place and that section 160 cannot operate in favour of the Minister against this plaintiff until he became aware of the intended transfer and took some steps with respect to it in April of 1984.

This appeal is therefore allowed with costs.

Appeal allowed.