Madeleine Dubé Charrier v. Minister of National Revenue, [1989] 1 CTC 2214

Rip, T.CJ.:— The appellant, Mrs. Madeleine Dubé Charrier, appealed from a notice of assessment for the 1985 taxation year by which the Minister included the sum of $12,619.45 in her income pursuant to section 160 of the Income Tax Act ("the Act"), in connection with a building allegedly transferred to her by her husband while he owed the National Revenue Department money for previous taxation years. At the start of the hearing counsel for the Minister conceded that the amount owed by the husband on the date the property was transferred was $10,000, not $12,619.45, and that the assessment should be varied accordingly.

The facts in the case at bar can be summarized as follows. The appellant married Mr. Pierre Charrier on November 22, 1974 under the regime of separation of property. Husband and wife ceased to live together in 1978 and the appellant filed a petition for divorce on November 2, 1978 in the Superior Court of Quebec, Montréal District. An order for interim relief was made on June 29, 1979, requiring the appellant’s husband to pay her certain sums of money. The appellant's husband did not make the specified payments to his wife but transferred two properties to her, one on October 21, 1980 and the other on April 8, 1981.

In 1981, section 160 of the Act provided the following:

(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,

(a) to his spouse or to a person who has since become his spouse, or

(b) to a person who was under 18 years of age,

the following rules are applicable:

(d) the transferee and transferor are jointly and severally liable to pay the lesser of

(i) any amount that the transferor was liable to pay under this Act on the day of the transfer, and

(ii) a part of any amount that the transferor was so liable to pay equal to the value of the property so transferred . . .

In 1984 the legislator added to section 160 subsection (4), which provides:

Notwithstanding subsection (1), where at any time a taxpayer has transferred property to his spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement and, at that time, the taxpayer and his spouse were separated and living apart as a result of the breakdown of their marriage, the following rules apply:

(b) in respect of property so transferred before February 16, 1984, where the spouse would, but for this paragraph, be liable to pay an amount under this Act by virtue of subsection (1), the spouse's liability in respect of that amount shall be deemed to have been discharged on February 16,1984 . . .

The appellant cited the exception contained in subsection 160(4) of the Act. She said she had received no cash in payment of the obligations created by the interim relief order. She contended that the first transfer of property conferred no benefit on her because of the encumbrances to which it was subject. The appellant further said that the second property was transferred in payment of the obligations her husband had under the interim relief order, and the benefit she received from the transfer did not exceed those obligations.

Counsel for the Minister first submitted that husband and wife were not living apart, then that the property was not transferred pursuant to the order, and finally that the value of the property transferred exceeded the total of the husband's obligations under the order and of the amounts which he owed the National Revenue Department on the date of the transfer.

I should say at once that the Court is persuaded, on the basis of the appellant's testimony and that of a friend whom she called to testify, that the appellant and her husband were living apart at the time that concerns us.

Counsel for the parties submitted opposing arguments on the interpretation that should be given to subsection 160(1) of the Act, as it stood in the year in question.

Counsel for the respondent argued that subparagraph 160(1)(d)(ii) must be interpreted so as to impose on a taxpayer who receives property from his or her spouse liability for the latter's tax arrears up to the full value of the property transferred, without taking into account the consideration paid by the taxpayer to obtain the property.

Counsel for the appellant argued that, on the contrary, subparagraph 160(1)(d)(ii) should be interpreted to take into account the consideration paid by the taxpayer to his or her spouse in order to obtain the property. He maintained that the taxpayer is only liable to pay amounts owed by the spouse on the day of the transfer up to the amount of the benefit conferred on him by the transfer. In support of this argument, counsel noted that subparagraph 160(1)(d)(ii) was amended in 1982 to express the legislator's purpose more clearly. As amended by S.C. 1980-81-82, c. 140, s. 107(1), applicable to transfers of property occurring after November 12, 1981, this provision reads 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 section 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. . .

Counsel maintained that the amendment of the subparagraph confirms that the original version of the subparagraph should be interpreted to make its application consistent with that of the amended version.

Subsection 37(2) of the Interpretation Act, R.S.C. 1970, c. 1-23, clearly indicates that the amendment of an enactment cannot be used as a guide as to the real meaning of the original provision:

The amendment of an enactment shall not be deemed to be or to involve a declaration that the law under such enactment was or was considered by Parliament or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.

The fact remains, however, that the interpretation suggested by counsel for the appellant would seem to be the one which best reflects the legislators' intent. The purpose of section 160 is in fact to prevent a taxpayer from avoiding the payment of tax by transferring property to his or her spouse. Such a section, the purpose of which is to prevent tax evasion, should not be interpreted so as to tax a taxpayer on an amount which he did not in fact receive. The Court accordingly accepts counsel for the appellant's interpretation: the latter will only be liable for the payment of tax owed by her spouse up to the amount of the difference between the fair market value of the property transferred and the consideration paid by the appellant.

I should point out that the Court considered three decisions of the Tax Review Board cited by counsel for the respondent: Payette v. M.N.R., [1979] C.T.C. 3052; 79 D.T.C. 81; Fisher v. M.N.R., [1979] C.T.C. 2771; 79 D.T.C. 661; and Carrigan v. M.N.R., [1981] C.T.C. 2990; 81 D.T.C. 916.

In Payette, supra, the Tax Review Board did not deal with the question of consideration directly and we do not know what were the executory obligations contained in the marriage contract under which the transfer of property was made. The following may be found at page 82 of the report:

On October 15, 1961, the appellant entered into a marriage contract with her husband, Joseph W.L. Payette, pursuant to which he was allowed to transfer to her certain assets.

The judgment does not indicate to what extent the obligations were executory.

In Fisher, supra, the appeal was dismissed on the ground that the taxpayer did not show that the moneys paid by the appellant were paid in consideration of the transfer of property. The comments made by Mr. Tremblay of the Tax Review Board on interpretation of the word "transfer" are clearly obiter dicta.

Finally, in Carrigan, supra, the Tax Review Board dismissed the appeal because the appellant had not shown she paid any consideration for the property received from her husband. In that case the tribunal suggested clearly that proof of the payment of consideration would have had an impact on the outcome of the case.

In any event, the foregoing decisions are decisions of the Tax Review Board, and though very helpful in solving cases they are not binding on the Court. In Cooper v. M.N.R., [1987] 1 C.T.C. 2287; 87 D.T.C. 194 at 203, the Associate Chief Judge said:

While I do not consider myself bound under the doctrine of stare decisis by decisions of the Tax Appeal Board or its successor the Tax Review Board, my view is that I should not lightly depart from the reasons or principles upon which they have decided appeals. A large and useful body of precedents was created by these tribunals and much reliance has been placed on it. If, however, I am fully satisfied that what was said by a member of those tribunals is wrong, then I believe I must be guided by my judgment of what is correct.

Counsel for the respondent put forward the argument that the appellant cannot rely on the exception contained in subsection 160(4) of the Act because a transfer of property made as payment of an amount owed pursuant to a judgment is not property transferred to a spouse "by virtue of" a judgment within the meaning of the subsection. He based his argument on the Supreme Court of Canada's judgment in M.N.R. v. Armstrong, [1956] C.T.C. 93; 56 D.T.C. 1044. In that case the Court had to decide whether a lump sum payment by a taxpayer under an agreement designed to terminate his obligation to pay alimony under a decree was in fact an amount paid under a decree. The Supreme Court held that the payment was not made in accordance with the decree as the latter did not require the taxpayer to make a lump sum payment instead of the monthly payments specified in the decree. Counsel for the respondent relied in particular on the following passage from the reasons of Kellock, J. at page 1045 of the report:

If, for example, the respondent had agreed with his wife that he should purchase for her a house in return for a release of all further liability under the decree, the purchase price could not, by any stretch of language, be brought within the section. The same principle must equally apply to a lump sum paid directly to the wife to purchase the release. Such an outlay made in commutation of the periodic sums payable under the decree is in the nature of a capital payment to which the statute does not extend.

The observations of Kellock, J. cannot be used to support the respondent's argument, since they apply to a lump sum paid to terminate an obligation to pay alimony under a decree. In the case at bar, the transfer of property was made in order to pay off arrears and not to discharge future obligations.

The situation here more closely resembles that of The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096, and Helmer v. M.N.R., 32 Tax A.B.C. 250; 63 D.T.C. 532. In Sills the Federal Court of Appeal held that a total amount paid to clear off arrears of alimony covered by a written agreement was an amount paid pursuant to an agreement. The fact that the payments were made late and in a single amount did not in any way alter their nature. Applying this reasoning to the facts of the instant case, it would seem that the transfer of property to the appellant was a transfer made “ virtue of” the interim relief order within the meaning of subsection 160(4) of the Act, up to the amount of the arrears owed the appellant by Mr. Charrier under that order.

The question now is to what extent the value of the property transferred reflects the obligations imposed on the appellant's husband by the interim relief order.

In addition to two amounts of $3,000, one payable on August 1, 1979 and the other on October 1, 1979, the order provided for the payment of alimony of $135 a week until the appellant was given a car owned by her spouse. The appellant had possession of the car in question on October 31, 1979, as indicated by the bailiff’s report endorsed on the writ of possession dated October 31, 1979. Less than 18 weeks elapsed between the order for payment of the alimony and the handing over of the car. The appellant's spouse accordingly owed her less than $2,500 in alimony arrears. From this amount must be deducted the sum of $503.08 paid to the appellant as a result of the seizure after judgment by the appellant of Mr. Charrier's bank accounts, as indicated by the judgment validating the seizure, dated April 3, 1980. The total obligations of the appellant's spouse under the order thus amounted to less than $8,000. The interest on the arrears and legal costs incurred to collect the money, as it was not covered by an order, judgment or agreement, cannot be taken into account. It should also be noted that the sum of $4,000 payable at the time of the divorce decree, mentioned in the order, has never become due since the divorce has never been pronounced.

The deed of sale indicates that on October 22, 1980 the appellant's spouse transferred to her a piece of land on which was a house also used for the appellant's activities as a real estate broker. The appellant said that she had never received any benefit from the transfer of the property, due to the fact thqat it was subject to several encumbrances.

She said that she personally assumed a first hypothec, the original amount of which was $44,831.72 as shown on page 2 of the deed of sale, and a second hypothec in the original amount of $7,431.11. The exact balance of the hypothecs at the time the property was transferred was not established. The property in question was also subject to a third encumbrance, a judicial hypothec registered by the Hudson's Bay Company. The appellant set the amount of the hypothec at $8,101.42. The total of the encumbrances on the property at the time of the transfer was thus a maximum of $60,491.

The property in question was purchased by the appellant's husband in 1976 for $68,000. It was sold by the appellant in 1985 for $95,000. At the time the property was transferred to the appellant in 1981, its value was undoubtedly somewhere between these two amounts. Even assuming that the property was not worth more in 1981 than in 1976, the appellant still received a benefit from the transfer at least equal to her husband's obligation under the interim relief order.

The appellant also received a second property from her husband on April 8, 1981. This was a vacant piece of land consisting of nine lots. The expert witness’ report estimated the fair market value of all the lots at $39,000. Some of the lots were subject to a hypothec in the amount of $25,639.75. The appellant accordingly received a benefit of approximately $13,000 as a result of transfer of the property. This conclusion is confirmed by the fact that the appellant transferred four of the lots to the Caisse Populaire Sacré-Coeur of Hull on September 27, 1984 in payment of a hypothec, as indicated by the deed of transfer. The value of the lots retained amounted to $14,500 in 1981, according to the conclusions set out on page 13 of the expert witness' report.

Finally, in answer to the point at issue in the instant case, as to whether the appellant should be required to pay the tax owed by her husband under subsection 160(1) of the Act, the following conclusions must be drawn.

With regard to the first property transferred on October 21, 1980, the evidence disclosed that this transfer from the appellant's husband to her was made, up to the amount of $8,000 owed to the appellant by her husband, in accordance with an interim relief order dated June 29, 1979. This means that for the purposes of subsection 160(1), so far as the appellant's husband's debts to her ($8,000) are concerned, the appellant should not have been required to pay the tax owed by her husband on transfer of the first property, since that transfer was made in accordance with the provisions of subsection 160(4)of the Act.

With regard to the second property transferred on April 8, 1980 [sic], the evidence disclosed first that the appellant's husband did not owe the appellant anything under the order, since he had already paid his debt to her by transferring the first property, and second that the benefit conferred on the appellant by the transfer of the second property exceeded the amount owed to the National Revenue Department by her husband on April 8, 1981. It therefore appears that with regard to the transfer of the second property, the respondent was correct in holding the appellant liable for payment of the tax owed by her husband under subsection 160(1) of the Act.

The appeal is accordingly allowed without costs and the assessment referred back to the Minister for reconsideration and reassessment based on the fact that the amount owed to the appellant by her husband on the date of the aforementioned transfers was $10,000.

Appeal allowed.