James A. Wink v. Minister of National Revenue, [1988] 2 CTC 2253, 88 DTC 1654

Brule, T.C.J.:—This is an appeal from the Minister of National Revenue's assessment of tax dated September 18, 1986, in the amount of $9,975, for the appellant's 1986 taxation year. The assessment was made, pursuant to section 160 of the Income Tax Act. This assessment was made on the basis that the appellant, James A. Wink, was a non-arm's length recipient of property transferred, without consideration, by a tax debtor.

The relevant facts of this case can be stated succinctly. Sometime early in February 1986, the appellant was approached by one of his co-workers and asked if he would assume title to a truck, belonging to a friend of the coworker. This friend, James Renda Jr., had an outstanding income tax liability of approximately $9,975, which amount was less than the fair market value of the truck. While no evidence on the point was adduced at trial, the purpose of the proposed transfer was undoubtedly to prevent the truck from being seized by Revenue Canada, in satisfaction of this liability. This was, however, unknown to the appellant and he somewhat naively agreed to the transfer.

The transfer was effected by signing the truck's ownership certificate over to the appellant although actual possession of the certificate was not retained by the appellant. Subsequent to this the truck was, on February 19, 1986, registered in the appellant's name. No other action commensurate with ownership, such as the issuance of new licence plates or the application for insurance, was undertaken. The truck itself was parked in the appellant's driveway for two or three weeks. At no time did the appellant ever drive the vehicle. The truck was then removed by James Renda Sr. and this was the last that the appellant saw of it. He later discovered, however, that it had been transferred out of his name and into that of one Daniel Thompson. The appellant has no knowledge of any Daniel Thompson and the signature on the transfer of ownership form is a forgery.

In order to succeed in his appeal, the appellant must remove himself from the ambit of section 160 of the Income Tax Act. The provisions of this section are fairly straightforward and read as follows:

(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 to 75.1, 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 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 of 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.

The appellant's argument is twofold: first that he and James Renda Jr. were never in a non-arm's length relationship and second, that the truck was never actually transferred to him. Turning to the latter position first, the word "transferred" is one of extremely wide meaning. In George A. Murphy v. The Queen, [1980] C.T.C. 386; 80 D.T.C. 6314, Cattanach, J. stated, in dealing with the similar provisions of subsection 74(1), that the word transferred was "not used in a technical sense and in its ordinary dictionary meaning it is to give or hand over property from one person to another”. Mr. Justice Cattanach then went on to conclude at page 395 (D.T.C. 6322) that:

All this calls for is a transferor and a transfer of property by him by any means. . . . It is not necessary, in order to fall within this wording, that all of the rights to property transferred became immediately or even eventually the property of the [transferee].

Clearly, to the extent that it envisages vesting in possession as opposed to interest, the appellant initially falls within the scope of this dicta. But, while it may not be necessary for all of the rights in the property to pass to the transferee, his possession must be something more than merely gratuitous. That is, there must be some legal right to his control over the property. As the appellant's rights in the truck flow exclusively from the fact that the ownership certificate was signed over to him, it becomes necessary to determine exactly what the legal effect of this was.

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 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 (see Yorkshire Railway Wagon Co. v. Maclure (16); Stoneleigh Finance, Ltd. v. Phillips (17), 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.

In addition to having been approved by numerous Canadian courts, this reasoning is echoed in M.N.R. v. Molson and National Trust Co., [1938-39] C.T.C. 20; 1 D.T.C. 350, where the Supreme Court of Canada stated:

I take it that the transfer of property means and contemplates a valid and real transfer.

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.

Having said this, it is unnecessary for me to determine whether the parties dealt with each other at arm's-length. By way of general comment, however, I am inclined to think that they did. While the fact that the transaction was not carried out at fair market value is initially indicative of a non-arm's length relationship, it is not conclusive and is outweighed by the other facts of the case. In particular, there was no evidence that the appellant and James Renda Jr. had a common intention. As well, the appellant was never given possession of the ownership certificate, thus ensuring that he had no ability to deal with the truck. Finally, someone forged the appellant's signature for the ultimate transfer. This last point clearly shows that James Renda Jr. did not feel that he could rely on the unequivocal co-operation of the appellant.

For these reasons, this appeal will be allowed with party-and-party costs to the [appellant] and the assessment vacated.

Appeal allowed.