Anne E. Lawrick v. Minister of National Revenue, [1989] 1 CTC 2028, 89 DTC 14

Goetz, T.C.J.: —This is an appeal from the Minister of National Revenue's assessment of the appellant's 1981 taxation year. The assessment arose out of the sale, by the appellant’s husband, of certain farm properties legally described as NW'/4 and SE'/s of 14-5-2-W 3 , in the province of Saskatchewan. The property in question was sold for $117,000, of which $98,060.70 was determined by the respondent to be a capital gain. There is, however, no dispute over this. What is in dispute is how the capital gain should be allocated, as between the appellant and her husband.

Prior to the sale, the appellant and her husband had separated, pursuant to a written separation agreement. While the separation agreement is not explicit on the point, it appears, inter alia, to have been the parties' intention that the proceeds from the sale of the property were to be divided equally between them. Notwithstanding this, the appellant received the equivalent of only $55,153.53. This consisted of $48,153.53 in cash and the release of her husband's interest in the matrimonial home, valued at $7,000. The explanation for this short fall is rather convoluted and, as it is not particularly relevant to the issues in this appeal, I will not elaborate on it.

What is relevant is that, in addition to providing for the division of the family assets, the separation agreement also stated that "any capital gain incurred upon the sale of the farm properties shall be divided equally between the parties in any declarations for income tax purposes". On the basis of this, the Minister assessed the appellant for one-half of the capital gain arising from the sale, or $49,030.36. The appellant then appealed on the basis that, as she had not received half of the proceeds of disposition from the property, she should not be liable for half the capital gain. In the alternative she argued that any gain arising on the sale should be attributed to her husband, by virtue of subsection 74(2) of the Income Tax Act.

Whatever the validity of the appellant's position, there is a more fundamental flaw in the Minister's assessment. It would seem to me to be trite law that any assessment must ultimately be grounded in the Income Tax Act. In the instant case, the relevant provision is paragraph 39(1)(a) which reads as follows:

39.(1) For the purposes of this Act,

(a) a taxpayer's capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression "other than a taxable capital gain from the disposition of a property" in paragraph (a) thereof and without reference to paragraph

(b) thereof, be included in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer other than

Thus the apposite question is, did the appellant actually dispose of any property? The answer, I think, must be no. While the appellant had title, in joint ownership with her husband, to approximately one-half of the family farm, the property which forms the subject of this appeal was owned exclusively by her husband. His was the only name which appeared on the certificate of title and it was he who ultimately effected the sale. In the latter respect the appellant's role was restricted to making the declaration required by section 3 of the Homestead Act.

Admittedly, the appellant had certain rights under the Saskatchewan Matrimonial Property Act, S.S. 1979, c. M-6-1, and, by virtue of this, may have had an interest in the property. Any such interest was, however, purely contingent. Subsection 21(1) of the Matrimonial Property Act provides that:

21.(1) Upon application by a spouse for the distribution of matrimonial property, the Court shall, subject to any exceptions, exemptions and equitable considerations mentioned in this Act, order that the matrimonial property or its value be distributed equally between the spouses.

Thus the appellant's entitlement to the farm property was completely dependant on her making an application for a distribution of the parties' matrimonial property. As this was never done, it is impossible for this Court to conclude what interest in the property the appellant may or may not have obtained. Accordingly, any money received by the appellant must be seen as accruing not as a result of the disposition of the farm property, but rather in respect of waiving her nacent rights under the Matrimonial Property Act. In fact, this is explicitly stated in the separation agreement. That the quantum of any such receipt was to be determined by reference to the proceeds of disposition of the farm property is irrelevant. Similarly irrelevant (to return to my initial observation) is the parties' agreement to divide any capital gain arising from the sale equally between them. Whatever force this might have as between themselves, the parties are not free to determine how the capital gains are to be allocated for the purposes of the Income Tax Act. Rather, they belong in their entirety to the owner of the property, in this case the appellant's husband.

Accordingly, the appeal is allowed, with costs to the appellant, and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.