Edith D’argys v. Minister of National Revenue, [1992] 2 CTC 2778

Tremblay, T.C.C.J.:—This appeal was heard on February 20 and May 9, 1991, in Montreal, Quebec.

1. Point at issue

The point at issue is whether the appellant has to pay the respondent the amount of $27,177.72 for taxes due by Mr. Paul Pouliot on February 4, 1983. The appellant, who was not yet Mr. Pouliot’s wife on that date, since they were married in January, 1986, had acquired from Mr. Pouliot a property for the amount of $57,000. Of this amount, $27,177.72 was paid by compensation of part of the amount of $50,000 in capital due by Mr. Pouliot to the appellant since September, 1977.

In addition to this amount of $27,177.72, the appellant assumed two mortgages totalling $29,822.28.

On January 19, 1987, Mr. Pouliot went personally bankrupt and on May 16, 1988, an order of discharge was made, under which he was released, among other things, from a debt of $54,249,09 to Revenue Canada.

However, the respondent alleges that, on February 4, 1983, at the time of sale of the property, Mr. Pouliot owed him $31,772, under the provisions of 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"), and claims that the appellant owed him $27,177.72, i.e., an amount equal to the transfer made by Mr. Pouliot to the appellant in February, 1983.

The respondent submits that, after the time of transfer, the transferor and the transferee were married, and that the assessment was therefore properly made pursuant to the provisions of section 160 of the Income Tax Act.

2. Burden of proof

2.01 The burden of proof is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments or reassessments were also presumed to be correct, until there is evidence to the contrary. In the instant case, the facts assumed by the respondent are described in subparagraphs (a) to (d) of paragraph 5 of his reply to the notice of appeal. At the outset of the inquiry, Counsel for the appellant admitted some of these facts and denied others. This paragraph reads as follows:

5. In assessing the appellant under subsection 160(2), the respondent relied, inter alia, upon the following assumptions of facts:

(a) on February 4, 1983, Mr. Paul Pouliot had transferred a property located on Hortie Street to Mrs. Edith D'Argys; [admitted]

(b) at the time of this transaction, Paul Pouliot owed the amount of $31,772.51 to the Department of National Revenue; [admitted]

(c) Mrs. Edith D'Argys became Mr. Paul Pouliot’s wife on January 6, 1986; [admitted]

(d) the assessment has been made as follows:

Market value of the property	$57,000.00
Less: Mortgages assumed	29,822.28
Amount assessing [sic] under	$27,177.72
subsection 160(2)
	[admitted]

3. Facts

3.01 The appellant has admitted in substance the material facts assumed by the respondent and described above (2.02).

3.02 The following facts have been established from the testimony of the appellant and of Mr. Pouliot, her spouse.

In 1968, the appellant and her first husband bought a property on Colbert Street opposite Mr. Pouliot's residence.

In the course of casual, neighbourly conversation, they both realized that they had a common interest in gardening and horticulture. This interest led them to become better acquainted. In fact, the appellant had a very large garden. Mr. Pouliot, for his part, had written nine books on horticulture and regularly provided information on the subject on television and in the local newspapers.

3.03 According to the appellant, between 1970 and 1977, she lent Mr. Pouliot various amounts of money totalling $50,000.

3.04 These loans apparently fulfilled needs in both parties. As the evidence shows, Mr. Pouliots first wife was, among other things, excessively fond of spending money and had thus caused a difficult and unstable economic situation in their home. Mr. Pouliot was thus overburdened with debts. It also appears that the appellant was likely encountering the same problem with her husband, who seems to have had very costly hobbies.

3.05 The appellant, who comes from Germany, kept in touch with her family, who are still living in Germany. She told them about her marital problems.

Given her difficult situation and for the sake of her future financial security, her parents gave the appellant money on trips that she made to Germany, and also sent her money by mail; she did not deposit those funds at the bank, fearing that her husband might find out about her financial resources from letters sent by that institution.

3.06 Aware of the difficult economic circumstances in which Mr. Pouliot found himself, the appellant saw a definite advantage in lending him the money she had. In fact, she states in her testimony that she considered Mr. Pouliot as" her bank” [translation] (S.N., page 90).

3.07 According to the appellant, Mr. Pouliot had offered her to give her receipts for each loan. However, since she did not want to have in her possession any document that might make her husband suspicious about her financial assets, the appellant chose not to accept any acknowledgement of debt.

3.08 In 1977, the appellant divorced her husband. On September 15 of that year, at her request, Mr. Pouliot signed a promissory note for $50,000 in consideration of the amounts of money he had borrowed (Exhibit A-1).

3.09 The subsequent facts are those assumed by the respondent in his reply to the notice of appeal and quoted above (2.02).

3.10 It must be added, however, that, on May 16, 1988, Mr. Pouliot obtained a judgment releasing him from his debts under the Bankruptcy Act, R.S.C. 1985,

c. B-3, including, inter alia, a debt to the Department of National Revenue for the amount of $54,249.09 (Exhibit A-6) in respect of the transfer made on February 4, 1983 by Mr. Pouliot to the appellant.

4. Law—case law and doctrine—analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant appeal are subsections 160(1) and (2), which read 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,

the following rules apply:

(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 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.

4.02 Case Law and Doctrine

The case law and the doctrine cited by the parties are as follows:

1. Boisselle v. M.N.R., [1989] 1 C.T.C. 2385, 89 D.T.C. 269 (T.C.C.);

2. Gentile v. The Queen, [1988] 1 C.T.C. 253, 88 D.T.C. 6105 (F.C.T.D.); 3. Garland v. M.N.R., [1988] 1 C.T.C. 2398, 88 D.T.C. 1271 (T.C.C.);

4. Sanat Paul and Star of India Restaurant Inc. v. M.N.R., [1982] C.T.C. 2737, 82 D.T.C. 1738 (T.R.B.);

5. Ingrao v. M.N.R., [1989] 1 C.T.C. 2052, 89 D.T.C. 42 (T.C.C.);

6. Ducharme, Léo, Précis de la preuve, (3rd Ed.), Montréal: Wilson et Lafleur Ltée.

4.03 Analysis

4.03.1 It is important, first, to clearly clarify the object of section 160 of the Income Tax Act. The assessment allowed under section 160 is an exception to the rule under which a taxpayer is to be taxed on his/her own income.

It seems to be well established that the object of this provision is to prevent a situation in which a taxpayer owing a substantial amount of money to the Department of National Revenue could escape his tax liability by simply transferring his assets to his spouse or any other individual described under this section.

As I have mentioned in Boisselle v. M.N.R. (4.02(1)), the exception provided for in section 160 of the Act is intended to make a taxpayer liable for the tax due by another person, in this case the spouse. In fact, the spouse, having transferred his assets to the taxpayer, then becomes unable to pay his taxes. In this case, the transferee spouse will have to pay the taxes due by the transferor at the time of the said transfer.

4.03.2 Counsel for the appellant argued, inter alia, that, since the tax assessment, for which the respondent holds the taxpayer liable, was made after the transfer itself or the transfer deed made in 1983, the debt was non-existent at the time of the said transfer (Exhibit A-2).

The actual existence of the debt is clearly not created by the assessment per se, but rather from the moment a taxable income is earned.

I agree with the comments made by Noël, J., in The Queen v. Simard- Beaudry, quoted among others in the Garland case (4.02(3)), where it is said at page 2401 (D.T.C. 1273):

As to his second argument, namely that the debt arising from reassessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or.reassess- ment. In fact, the taxpayer’s liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point. Here the reassessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgement of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.

The confirmation of this argument is that, in fact, a tax is imposed on earned income, regardless of whether an assessment has been made or not.

4.03.3 Counsel for the appellant suggested as a second step that an order of discharge made under the Bankruptcy Act (3.10) (Exhibit A-6) in favour of Mr. Pouliot would also apply in respect of the appellant.

In this respect, he submits that section 160 of the Act follows the principal, the principal being the debt.

Therefore, if Mr. Pouliot is no longer liable for his debt to the respondent because he has been released from it, the spouse whom the respondent would like to hold liable under section 160 of the Act cannot possibly be assessed or held liable for a debt which is now non-existent. According to counsel for the appellant, the order of discharge made under the Bankruptcy Act is enforceable against everyone.

With respect, the Court cannot concur in this argument. On the contrary, the Court concurs with Counsel for the respondent when he submits that such a discharge applies only to the bankrupt.

He refers us to the judgment rendered by this Court in the Garland case (4.02(3)), in which Mr. Justice Sarchuk comments on page 2403 (D.T.C. 1275):

The release of Mr. Garland through operation of law from all other claims provable in bankruptcy does not extinguish the debt. The Order of Discharge granted to him is personal and does not affect the liability of the appellant who is jointly bound. It is abundantly clear that the Bankruptcy Act did not intend that a joint debtor of the bankrupt be released by the discharge of the bankrupt.

Section 149, now section 179 of the Bankruptcy Act, clearly expresses the idea described by Mr. Justice Sarchuk. It reads as follows:

An order of discharge does not release a person who at the date of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with him, or a person who was surety or in the nature of a surety for him.

Moreover, the assessment imposed on the taxpayer under section 160 of the Act seems to have to be regarded as an independent assessment, specific to this taxpayer, because, otherwise, the object of section 160 could not be fully met.

In fact, it appears that the very purpose of section 160 of the Act requires that the assessment imposed on the spouse be independent of the real original debtor’s assessment. Where the circumstances legally permit the respondent to assess the spouse under the said section, it follows that the original debtor can no longer be relied upon to honour the debt. The assessment is caused by the action of this real debtor, but is independent from him when it is acted upon in order to meet the purpose of the said section.

4.03.4 It is also important to specify that the fact that the appellant married Mr. Pouliot after the said events (3.01 to 3.07) does not affect the right of the respondent to assess the appellant, since section 160 of the Act does provide for this possibility in paragraph 160(1)(a) (4.01).

However, the sequence of events may have a definite impact on the credibility of the real intent of the parties at the time of the said transfer.

4.03.5 In fact, counsel for the appellant submits that the chronology of events, from the first loan in 1971 until the wedding in 1986, does demonstrate that the real intent of the parties was not, in any way, to divert a sum of money otherwise belonging to the respondent.

He contends that the transfer deed made between the appellant and Mr. Pouliot is the conclusion of several loans made by the appellant to the latter between 1970 and 1977 (3.03, 3.04) and that the consideration paid by the appellant to Mr. Pouliot for the property does represent its fair market value at time of transfer.

Counsel for the appellant submits that section 160 of the Act is not applicable in the circumstances, since the transfer deed has not conferred any undue benefits.

4.03.6 However, according to counsel for the respondent, the point revolves around the transfer deed, which reads as follows, on pages 1 and 9 respectively:

IN THE YEAR NINETEEN HUNDRED AND EIGHTY-THREE, on this fourth day of February.

BEFORE Mtre DANIEL VEZINA, Notary at Dollard-des-Ormeaux, Province of Quebec, Canada.

APPEARED:

JOSEPH H. PAUL POULIOT, residing and domiciled at 615 Kleber Avenue, Duver- nay, Laval, Quebec, H7E 3T3.

Hereinafter called "THE TRANSFEROR"

AND

Dame EDYTH [sic] D'ARGYS, businesswoman, residing and domiciled at 1420 Jonquière, Duvernay, Laval, Quebec, H7E 3P7.

Hereinafter called "THE TRANSFEREE"

WHICH PARTIES have agreed as follows:

— The transferor does hereby transfer and cede all of his rights, titles and interest in the immoveable property hereinafter described, unto the transferee herein, hereto present and accepting, namely:

DESCRIPTION

— An immoveable property situated on Hortie Street in the City of Pierrefonds, known and described as lot number TWENTY-EIGHT of the official subdivision of the original lot number TWENTY-ONE (21-28) according to the official plan and book of reference of Ste-Geneviève Parish.

The present transfer is thus made for FIFTY FOUR THOUSAND DOLLARS ($54,000). The amount of the transfer duty is ONE HUNDRED AND SEVENTY-FOUR DOLLARS ($174).

WHEREOF ACTE, at Dollard-des-Ormeaux, under number ONE THOUSAND EIGHT HUNDRED AND EIGHTY-THREE (1883).

AND AFTER DUE READING, the parties have signed in the presence of the undersigned notary.

[Translation.]

Counsel for the respondent submits that nothing in the deed suggests any link between the debt of $50,000 due by Mr. Pouliot to the appellant and the transfer deed per se. According to him, there is nothing that would allow one to believe in the real existence of this debt, and there is no tangible evidence proving that the object of this transfer was in effect to compensate a purported debt of $50,000.

He adds, moreover, that the transfer deed prepared by notary Vézina is not likely to reflect in any way the real intent the parties would like to see in it. The notarized deed being presumed to reflect the parties' intent, the transfer deed has to be interpreted, according to Counsel, strictly according to its content.

Counsel for the respondent refers to this specific passage of the Précis de la preuve by Léo Ducharme, page 42, where it says:

2) DUTY OF THE NOTARY TO RECORD IN THE DEED ALL THE POINTS WHICH THE PARTIES WISH IT TO CONTAIN.

71. It is the duty of the notary to record in the deed what the parties want it to

contain. There is therefore a presumption that the deed is an accurate and comprehensive rendering of the agreement desired by the parties.

[Translation; Emphasis added.]

First of all, it is important to specify that, in his testimony, Notary Vézina has indicated that the transfer deed made between the parties was not strictly limited to the transfer deed itself (Exhibit A-2), but that it also included, according to him, two main appendices. The first appendix is a promissory note referring to the $50,000 debt owed by Mr. Pouliot to the appellant (Exhibit A-1).

The second appendix consists of handwritten notes establishing Mr. Pouliots liability respecting mortgage payments. It seems relevant to reproduce here a short excerpt of Notary Vézina's testimony specifically concerning those handwritten notes (Exhibit A-8) appended to the transfer deed (S.N., pages 15-16):

Q. Where is the original copy of this document now?

A. It is appended to my contract 1883.

Q. Was there any particular reason not to date this document, or was the date simply inadvertently omitted?

A. No, it is simply because it's somewhere in the text, you are going to see, I refer to my minute 1883, which is dated February 4, 1989, just simply.

Q. Was it signed by the parties?

A. Yes.

Q. Could you please read it out loud and slowly so that we can understand it?

Ms. Marie Bélanger: Your Honour, I believe that the document speaks for itself. I don't see any point in reading it out loud.

Louis Lemire, Esq.: I do see a point.

The Judge: I do too. I do not want to suggest that it is poorly written and not understandable. No, no. Go ahead, Maître. It is because the substance is important, we will hear it and then. . . Go ahead.

The Witness: Okay. At the beginning, it goes like this: “J.H.P. Pouliot to Mrs. D'Argys, re: Transaction 4957, Ortie [sic] in Pierrefonds. The transferor will continue to pay taxes until October 1, 1983, when the transferor and the transferee will make adjustments between them on October 1, 1983 only”. Notwithstanding what is mentioned in the deed, the transfer made this day before Mtre D. Vézina, Notary, in his minute 1883—that's where the date is the seller/transferor, Mr. Pouliot, will continue to pay both mortgages assumed by the buyer/transferee until their respective terms expire and on that date, Mr. Pouliot will discharge the said mortgages, Mrs. D'Argys being whereof quit in full. The said transfer is made because of a debt remittance of $50,100 from the transferee to the transferor this day, this being the equity in the transferred property, as established by the parties and the value of the movable property transferred as mentioned in the inventory.

[Translation.]

The respondent disputes the legal validity of this appendix, in addition to some other handwritten documents (Exhibits A-4 and A-5) called “domestic papers" [translation], filed by the appellant.

Moreover, he criticizes the fact that nothing in the deed refers to the appendices being supposedly part of this deed, according to Notary Vézina and the appellant (Exhibits A-1 and A-8).

4.03.7 Respecting the actual existence of a $50,000 debt, the Court is of the opinion that this is clearly established by the promissory note (Exhibit A-l). The note reads as follows:

I, the undersigned, promise to repay Mrs. Edith D'Argys, within five years, that is by September 15, 1982, the sum of fifty thousand dollars ($50,000), plus compound interest of ten per cent (10 per annum, either in legal tender of Canada, or in easily marketable securities which she may then wish to accept as repayment of my loan, or with movable, immoveable property or any other assets that she may consider acceptable as repayment.

[Translation.]

This note establishes Mr. Pouliot's liability toward the appellant and is proof of the nature of this liability. Moreover, when the parties signed the transfer deed before notary Vézina in February 1983, the latter required the parties to sign it again on February 4, 1983, in order to use the note as an appendix and a supplementary document to the contract. It appears from an examination of the note that it was in fact signed a first time in 1977 and a second time on February 4, 1983, when the transfer deed was executed.

Respecting the legal validity of the documents (Exhibits A-4, A-5 and A-8) presented by counsel for the appellant and strongly disputed by the respondent, it is useful to note some observations made in the Précis de la preuve by Léo Ducharme, at page 42, where, after some definitions, the author concludes:

In principle, domestic records and papers cannot be used as evidence by their author against third parties, as results from sections 1227 and 1229 of the Civil Code. This principle means, in other words, that nobody can create an instrument for use against third parties.

[Translation.]

Ducharme continues as follows, at page 91:

It is, however, admitted in the case law that domestic records and papers may be used to corroborate and even to supplement other evidence.

[Translation.]

It is in fact the position of this Court that the non-instrumental documents presented by counsel for the appellant serve to corroborate the evidence presented by the appellant, that is, among other things, the testimony of the notary explaining contract A-2.

Obviously, this Court could not reach the same conclusion if the documents adduced in evidence would have been domestic papers. It is in the context of all the evidence that the probative force of such papers has to be assessed.

4.03.8 On the other hand, it is safe to say, as pointed out by counsel for the respondent, that a notarized document is presumed to reflect the true intent of the parties. The transfer deed prepared by notary Vézina does not seem, at first glance, to express clearly the intent that the parties testified as having had. However, presumption must be assessed on the basis of the facts and the evidence adduced. Consequently, the Court is of the view that the testimonies have reversed this presumption. It would be a mistake to give too much weight to a presumption against one or more other elements of proof. That is where the power of analysis comes into play. Moreover, based on this confirmation and on all the facts, the credibility of the witnesses is not at all in question.

It is true that the burden of proof lies on the appellant, and it is always according to this basic principle that this Court has to analyze the arguments of the parties. It should be also borne in mind that the presumption involved here is only a juris tantum and not a juris et de jure presumption. Despite the respondent's argument that the evidence adduced by the appellant is ambiguous and improbable, the whole of the evidence enables this Court to conclude that the respondent [sic] has de facto reversed the burden that was placed upon him [sic].

5. Conclusion

The appeal is allowed with costs for the above reasons.

Appeal allowed.