Jane Gardner v. Minister of National Revenue, [1988] 2 CTC 2285, 88 DTC 1649

Brulé, T.CJ.:—The appellant in this case, Jane Gardner, is appealing from notice of assessment no. 468004 dated November 4, 1982 and notice of reassessment no. 467989 dated October 28, 1981, issued by the respondent. These assessments were based on section 160 of the Income Tax Act, which reads 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 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; 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 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 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 person alleged to be the transferor, within the meaning of this section, is the appellant's husband, Bruce Gardner (hereinafter the "Taxpayer") and the property in question is the parties' matrimonial home (hereinafter the "residence").

In making his assessments, the Minister relied, inter alia, on the assumption that the appellant's husband had a beneficial interest in the residence by virtue of being the joint tenant thereof, with his wife. The Minister further maintains that this interest was transferred to the appellant with the result that the Taxpayer quit claimed his interest in the joint tenancy. There is no dispute that, at the time of the quit claim, the Taxpayer had a tax liability to Revenue Canada and that if the assumptions on which the Minister proceeded are correct, his assessments are likewise correct.

Before dealing with the actual transaction in question, it is first necessary to review some of the history of the parties’ relationship. The appellant and the Taxpayer were married in 1958 and in 1966 the appellant purchased a house for $33,000. The money for this was provided by way of a $2,000 downpayment from the appellant; a $22,000 first mortgage from the vendor; and a $9,500 second mortgage from the Taxpayer. Shortly after the purchase, the appellant conveyed ownership in the house to the Taxpayer and herself as joint tenants. The parties then severed the joint tenancy, by a deed of severance and, in so doing, created an additional lot to the one on which the house was situated. Upon severance, the Taxpayer took the newly created lot in full satisfaction of his second mortgage and the appellant became the sole owner of the house. In August 1968, she sold the house for $39,500, receiving net proceeds of $18,800.

Some months prior to this, the Taxpayer acting as trustee for the appellant, and so indicated on the offer, made an offer to purchase the residence which forms the subject of this appeal, for $32,300. This offer was accepted and, as the appellant had not yet sold the previous house, was financed entirely by way of mortgages: the first for $24,000 from a neighbour of the vendor, and the second for $8,300 from the Toronto-Dominion Bank. Because, however, the appellant had no source of income, one of the prerequisites for obtaining the first mortgage was that the Taxpayer be registered on title as a joint tenant with the appellant.

Once the appellant had received the proceeds from the sale of the previous house, she used the funds principally to renovate the new residence. Thus, as with the previous house, in the first instance, all of the equity in the residence was provided by the appellant. The joint tenancy existed only because the appellant lacked any source of income and was therefore unable to obtain financing independent of her husband.

Title to the residence remained in the names of both parties for the next 13 years. During this period several re-financings were undertaken: $35,000 in 1973; $50,000 in 1975; and $100,000 in 1977. Then, in 1980, the appellant decided to sell the residence. Accordingly, as no further financing was necessary, the Taxpayer removed himself from title by way of a quit claim deed. It is this act which the Minister submits was a transfer of property.

The scope of section 160 is extremely broad and extends to virtually every transaction by which an individual divests himself of any rights to property and at the same time vests such rights in someone with whom he does not deal at arms-length. Prima facie, in order for section 160 to be operative, the person alleged to be the transferor must have actually had an interest in the transferred property.

Ultimately, however, on the facts of this case, I cannot conclude that this prerequisite is met. While the Taxpayer held legal title to the residence; he did so solely as trustee for the appellant. At no time did he have a beneficial interest in the property.

In support of this, counsel for the appellant referred to the Saskatchewan Court of Appeal decision in Anderson v. Hervieux, 46 R.F.L. (2d) 320. The respondent in that case purchased a house entirely out of his own funds. However, he placed title to the property in the names of himself and his common law spouse, as joint tenants. When the parties separated, the respondent was successful in obtaining an order that title to the property be registered solely in his name.

In affirming this order, the Court of Appeal determined that the only reason for establishing the joint tenancy was to ensure that the property would pass to the appellant should the respondent die unexpectedly, while they were co-habitating. On this basis, they further concluded that there was no intention to make a gift to the appellant.

This is clearly analogous to the situation in the instant case. It was the uncontroverted evidence of both the appellant and the Taxpayer that they never intended that the Taxpayer have a beneficial interest in the residence and that he became a joint tenant solely because it was unnecessary [sic] in order to obtain mortgage financing. Similarly, the bulk of the equity in the residence was provided by the appellant. Admittedly, the Taxpayer made at least some contribution thereto, in the form of mortgage payments. But, approximately $100,000 in mortgages still outstanding in 1981 — versus $24,000 in 1968 — a substantial portion of this was extracted in the course of subsequent refinancings. Moreover, to the extent that this was not the case, I find that the contributions made by the Taxpayer were intended as a gift to the appellant. While this is primarily a determination of fact, the decision of the Hon. L.J. Cardin (as he then was) in LaMarch v. M.N.R., [1983] C.T.C. 2314; 83 D.T.C. 260 (T.R.B.), and Mr. Delmer Taylor, C.A. (as he then was) in Rafael v. M.N.R., [1978] C.T.C. 2398; 78 D.T.C. 1300 (T.R.B.) are both illustrative on this point.

To conclude, the Taxpayer's interest in the residence was strictly a legal one and was subject to a beneficial interest. Accordingly, even if the execution of the quit claim deed amounted to a transfer, which need not be considered, the value of the Taxpayer's interest in the residence was nil. This appeal is, therefore, allowed, with costs to the appellant.

Appeal allowed.