Jake Harms v. Minister of National Revenue, [1990] 1 CTC 2010, 89 DTC 705

Taylor, T.C.J.:—These are appeals heard in Winnipeg, Manitoba, on October 6, 1989, against income tax assessments for the years 1981, 1982, 1983 and 1984 in which the Minister of National Revenue increased the reported income of the appellant by amounts reported by his wife as her income. The essence of the notice of appeal read as follows:

— During each of the 1981, 1982, 1983 and 1984 taxation years the Appellant was the beneficial owner of a one-half interest in certain farmlands, namely E '/2 11-3-21 WPM and N12 12-3-21 WPM (herein collectively referred to as the "Farm") and the beneficial owner of the other one-half interest therein was the wife of the Appellant.

— In reporting his income for each of the said taxation years the Appellant included one-half of the net rental income from the Farm, two-thirds of the interest income earned on bank accounts held in the joint names of the Appellant and his wife and one-half of the interest income earned on loans made by the Appellant and his wife to their children.

— The Appellant's wife, in reporting her income for each of the said taxation years, included the other half of the net rental income from the Farm, the remaining one-third of the interest income earned on bank accounts held in their joint names and the other half of the interest income earned on the loans to their children.

The amounts included in the Appellant's wife in reporting her income for each of the said taxation years are set out as follows:

	1981	1982	1983	1984
Farm Rental Income	$3,279.14	$6,955.79	$4,911.16	$5,829.46
Interest Income	1,227.17	1,160.11	1,529.03	1,163.86
TOTAL	$4,506.31	$8,115.90	$6,440.35	$6,993.32

— In reassessing the Appellant for his 1981, 1982, 1983 and 1984 taxation years the Minister of National Revenue added to the Appellant's income the amounts included by the Appellant's wife in reporting her income for such year as detailed in paragraph 3 thereof.

— The Appellant submits that he is not required to include in the computation of his income for each of his 1981, 1982, 1983 and 1984 taxation years the portion of the net rental income from the Farm in each of those years which was earned by his wife on the half interest in the Farm beneficially owned by her. The Appellant says that the half interest in the Farm beneficially owned by his wife was not acquired by her from the Appellant.

— The Appellant submits that he is not required to include in his income for each of his 1981, 1982, 1983 and 1984 taxation years the portion of the interest income earned on the bank accounts held in the joint names of the Appellant and his wife and on the loans to their children that was included by the Appellant's wife in reporting her income for the said taxation years. That portion of the interest income can reasonably be said to have been earned on monies contributed by the Appellant's wife to the said bank accounts and loans from monies earned by her from the Farm rental income and other sources of income.

For the respondent in the reply to notice of appeal, the situation was:

— In reassessing the Appellant for the 1981 to 1984 taxation years to include in his income all of the rental income from the Farm and all of the interest income from the bank accounts and the loans to the children, the Minister of National Revenue assumed, among others, the following facts:

— The Appellant and his wife ("Anne") were married in 1950, and owned few assets at that time.

— Between 1951 and 1954, the Appellant and Anne farmed on a rented farm.

— In 1955, the Appellant arranged to purchase a farm known as E /z 11-3-21 WPM from Anne's parents.

— Anne was born and brought up on the farm referred to in paragraph 5(c)*, and lived there until she married.

— Under the arrangement referred to in paragraph 5(c)*, the purchase price was $16,000, with a 3% annual interest on the unpaid balance. Payments were to be made from the farm revenues, and title was to remain with the vendors until the full purchase price was paid.

—** In 1966, an adjacent farm known as N 1/2 12-3-21 WPM became available, and the appellant arranged to purchase it.

— The Appellant obtained financing from the Farm Credit Corporation, and borrowed sufficient money to purchase the farm referred to in paragraph 5(f)** and to pay the balance owing to Anne's parents for the farm referred to in paragraph 5(c)*.

— In 1966, the title to the farms referred to in paragraphs 5(c)* and 5(f)** (collectively the "Farm") was registered in the name of the Appellant.

— Throughout the period from 1951 to 1966, Anne worked with the Appellant and played an active role in the farming operation.

— In 1971, the Appellant stopped farming. He and Anne moved to Winnipeg where he obtained employment as a church Minister.

— From 1951 to 1971, all farming income was reported by the Appellant alone. At no time did Anne file a tax return declaring farming income.

— After moving to Winnipeg, the Appellant rented the Farm and received rental income.

— From 1971 to 1981, the rental income from the Farm was reported by the Appellant alone as farming income. At no time prior to 1982 did Anne file a tax return declaring rental or farming income from the Farm.

— In March 1983, the Appellant wrote to Revenue Canada, Taxation asking that the rental income from the Farm be split between himself and Anne for the years 1978 to 1981. At the same time, he and Anne filed tax returns for 1982 showing the rental and investment income split between them.

— At all material times, the Appellant was the sole owner of the Farm.

— At all material times, the Appellant was the sole owner of the assets that produced the interest income.

— At all material times, Anne had no interest in the Farm, and she had no assets capable of producing interest income.

— If Anne had assets capable of producing interest income, they were property transferred to her by the Appellant, and the income therefrom is deemed to be the income of the Appellant.

— At all material times, no partnership existed between the Appellant and Anne.

— At all material times, there was no breakdown of the marriage of the Appellant and Anne.

— The respondent relied upon, among others, sections 3, 9, 12, 74 and 248 of the Income Tax Act, as amended for the 1981 to 1984 taxation years, and subsection 6(1) of the Marital Property Act of the Province of Manitoba.

Evidence

Both Reverend Harms and his wife testified regarding the purchase and operation of the farm and the degree of cooperation, common decision making, and trust between them over all the years from the marriage to date. The evidence was that they had discussed and agreed upon the purchase of both parcels of property noted above, and operated in complete harmony and accord during the relevant period of time, accumulating the assets — property, bank accounts, etc. —in their view on a common basis. Documentation was filed which detailed the various transactions and events which were recounted in the reply to notice of appeal, supra, but there did not appear to be anything of serious conflict with regard to the facts of the case. Both Reverend Harms and his wife were direct and complete in their explanations of events and in recounting why and how they arrived at the conclusion that they were entitled to report the income at issue in the manner they did. That decision was largely based on advice from their son who was a lawyer himself.

Counsel for the appellant argued that the situation and structure detailed for the Court created a “resulting trust" for Mrs. Harms, under which Reverend Harms was entitled to divide the income as indicated above.

Analysis

The key to this matter is that Mrs. Harms did not at any time up until 1985 realize that she, in her own right, was not listed on any deeds or relevant documents as one of the legal owners of the property. When she did realize this it came as a shock to her. Nevertheless, she did nothing even then to rectify the situation. Instead she participated in writing a letter to Revenue Canada which could only result in costing her income tax, although by then she knew she had no legal title. On the other side Reverend Harms did absolutely nothing to provide Mrs. Harms with legal assurance that some kind of trust existed. He acted at all times as if he was the sole owner of the farm, which I am satisfied he was in fact and in law, and more importantly in his own mind. It was the "custom of the community” to which Reverend and Mrs. Harms belonged that property be held in the name of the husband. I am not sure why it should have been such a shock to Mrs. Harms in 1985 to find out that this included legal title and thereby effective ownership, and matters flowing therefrom. For example, simply put, had the mortgages against the farm not been paid, the Farm Credit Corporation could have acted to seize the property from him without any interference. Mrs. Harms' protests that she was half owner of the farm would have been of no avail.

I am satisfied that at all times Reverend Harms was considerate of his wife and conscious of her contribution towards the family economy, including paying off the farm purchase obligations, and I am sure that he would not have knowingly harmed her in any way financially. But that was always at his discretion and remains so to this day. That does not create a legally binding trust of any description, in my view, between two people, let alone as it may affect a third party. It may be sufficient with respect to internal and personal matters, particularly uninterrupted matrimonial affairs, but it is not effective against a claim by a third interested party—in this case Revenue Canada, the position of which would be prejudiced if the appellant’s position was accepted by this Court.

The appeals are dismissed.

Appeals dismissed.