Roy Erickson v. Minister of National Revenue, [1988] 2 CTC 2380

Christie, A.C.J.T.C.: — On June 23, 1983 the respondent reassessed the appellant in respect of his 1980 taxation year by adding to his income a taxable capital gain of $1,800 plus recaptured capital cost allowance of $16,104. That ultimately culminated in this appeal.

The appellant is a resident of Fort Qu'Appelle, Saskatchewan. In 1970, he and his father closed their substantial mink ranch because of depressed prices for the pelts. The appellant then sought out other business opportunities in the course of which Mr. Mohl, the owner of a butcher shop in Fort Qu'Appelle suggested that he construct an abattoir and they would collaborate in the meat business. The appellant agreed. He borrowed funds and in May 1971 commenced construction. This was completed in August 1971 at which time he entered into a profit sharing arrangement with Mohl.

The appellant said it was not a partnership: "He owned his business, I owned mine and we just shared the profits". This continued until the spring of 1975 when their profit sharing relationship was severed. The appellant borrowed additional funds to expand his plant and he became involved in retailing meat products. The business which was called Erickson's Fine Meats prospered and a further plant expansion occurred in 1979.

The essential combined evidence of the appellant and his wife regarding her contribution to the business is this. They were married in 1965. Mrs. Erickson is a registered nurse and was employed on a full-time basis at the Fort Qu'Appelle Indian Hospital until the advent of their children who were born in 1967, 1968 and 1969. She resumed work on the same basis in the spring of 1970 and this continued until November of that year. In February 1971 she took employment with the T.B. League doing tubercular testing. Some of this employment was part-time and it went on until the sanatorium closed in 1973. She then returned to work in the hospital until some unspecified time in 1974 when she resigned in order to devote more time to the children. Mrs. Erickson’s resumption of work in 1970 and her work commencing in February 1971 coincided with the period in which the appellant was endeavouring to re-establish himself in business after the closing of the mink ranch. Her income went to support the family and this enabled the appellant to carry on the construction of the abattoir and do the other things necessary in respect of his meat business. When the business relationship with Mohl came to an end in 1975 she became directly involved in the appellant’s business. She took orders, wrapped meat, cut meat, ground hamburger, supervised and trained employees, etc. She also did some bookkeeping and banking, although this was primarily an area of the appellant's concern. This lasted for one year on a full-time basis. During the period 1976-78 Mrs. Erickson assisted in the business in a general way and, in particular, when there were shortages of staff and in the busy seasons which were the spring and fall. In 1979 she returned to hospital work part-time and was so employed at the date of hearing of this appeal. She has also continued to assist her husband in his business. No record was kept of the hours devoted to the business by Mrs. Erickson nor did she receive money or money's worth for it. It was simply regarded as a contribution by her to the common financial interests that she shared with her husband.

On May 11, 1979 the appellant and his wife entered into a line of credit agreement with Sherwood Credit Union Limited in the sum of up to $10,000. Among other things the appellant and his wife undertook to grant the Credit Union a mortgage on their home as collateral security. The line of credit was made available in relation to the appellant’s meat business. The mortgage agreement was entered into on June 1, 1979. On July 14, 1979 the appellant and his wife made application in writing for a loan to be secured by a mortgage in the amount of $114,000. The purpose of the loan is described in the application as: "To consolidate present mortgage. Allow for expansion of Erickson's Fine Meats". The loan was approved by the Regina office of the Credit Union on July 17, 1979. There is also in evidence a copy of a promissory note in favour of the Credit Union for $114,000 signed by the appellant as maker and his wife as co-maker. Also entered as exhibit is copy of a mortgage dated August 10, 1979 to secure the $114,000 loan. The mortgaged premises consist of the home of the appellant and his wife and the premises on which the abattoir was located. The latter premises were registered in the name of the appellant alone. All of these documents were placed in evidence through Mr. Norman Doucette who is the manager of the Fort Qu'Appelle branch of the Credit Union. He testified that he regarded the commitment made by the appellant's wife with respect to the loans as necessary to their having been made. He added that he was aware from personal observation that Mrs. Erickson worked with her husband in the meat business.

In the summer of 1979 the appellant's accountant, Mr. Sam McNaughton, C.A., advised him to incorporate a company and to transfer the business to it. This advice was accepted and on November 28,1979 Erickson's Fine Meats Limited was incorporated under the laws of Saskatchewan. The appellant was designated president and Mrs. Erickson was designated secretary-treasurer. Eighty common shares were issued to the appellant and 20 common shares to his wife. Neither the appellant nor his wife regarded the 20 shares or the assets they related to as a gift. She received what she was entitled to and had earned. The appellant said the 20 shares were: "For my wife to secure what she had earned, what was rightfully hers." On May 22, 1980 Erickson's Fine Meats Limited and the appellant made a joint election (T2057 Rev 79) which states, inter alia, that the appellant is the transferor to the corporation of certain land and depreciable property described therein for which he received 80 common voting shares of the corporation as consideration for the transferred property.

Subsection 85(1) of the Income Tax Act provides:

85(1) Where a taxpayer has, after May 6, 1974, disposed of any of his property that was a Capital property (other than real property or an option in respect thereof, owned by a non-resident), a property referred to in subsection 59(2), an eligible capital property or an inventory (other than real property) to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation, if the taxpayer and the corporation have jointly so elected in prescribed form and within the time referred to in subsection (6), the following rules apply.

The election by the appellant and the corporation was made under subsection 85(1). In reassessing the respondent applied the rules set out in paragraph 85(1)(e.2) of the Income Tax Act. It reads:

(e.2) where the fair market value of the property at the time of the disposition exceeds the greater of

(i) the fair market value at the time of the disposition of the consideration received by the taxpayer for the property disposed of by him, and

(ii) the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property, determined without reference to this paragraph and it is reasonable to regard any portion of such excess as a gift made by the taxpayer to or for the benefit of any other shareholder of the corporation, the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property shall, irrespective of the amount actually so agreed upon by them, be deemed (except for the purposes of paragraphs (g) and (h) to be an amount equal to the aggregate of

(iii) the amount referred to in subparagraph (ii), and

(iv) the portion of such excess that may reasonably be regarded as a gift made by the taxpayer to or for the benefit of any other shareholder of the corporation.

As indicated at the outset of these reasons the respondent added $1,800 to the appellant's income by way of taxable capital gain and a further $16,104 as recaptured capital cost allowance. The capital gain relates to the disposition of the land and the recapture to the disposition of depreciable property; namely, buildings, equipment and vehicles. Twenty per cent was employed in calculating the amounts to be added to the appellant’s income. This reflects the 20 of 100 common shares issued to the appellant's wife.

The fair market value of the property at the time of disposition exceeded the greater of subparagraphs 85(1)(e.2)(i) and (ii). There is no argument about this. The focus of the dispute between the litigants is whether it is reasonable to regard the excess just mentioned as a gift made by the appellant to or for the benefit of his wife. The appellant advances arguments based on two statutes and the law pertaining to constructive trusts in support of his position that there was no gift to Mrs. Erickson. The Married Persons' Property Act, R.S.S. 1978, c. M-6, was first enacted in 1907 and was repealed in 1985. The Matrimonial Property Act, S.S. 1979, c. M-6. 1 received Royal Assent on May 4, 1979. Section 61 provided: “This Act or any of the provisions of this Act come into force on a day or days to be fixed by proclamation of the Lieutenant-Governor." The Lieutenant-Governor fixed January 1, 1980 as the day on which the Act came into force. In essence the appellant contends that the effect of these enactments was to vest in Mrs. Erickson a prima facie entitlement to share in the business and that this negatives the concept of a gift. In my opinion the intention of The Married Persons' Property Act was not to automatically vest property rights, contingently or otherwise, in either party to a marriage. That legislation provided a mechanism for settling disputes between a husband and wife regarding the title to or possession or disposition of property. It vested a wide discretion in this regard in judges of the Court of Queen's Bench. They were authorized to make any order with respect to property in dispute that they considered "fair and equitable”. In my opinion this legislation does not assist the appellant.

On the other hand under The Matrimonial Property Act each spouse is entitled to an equal distribution of the matrimonial property [1] subject only to the existence of the exemptons and qualifications set out in the Act being established. This legislation may have operated in favour of the appellant if the transactions relevant to this appeal had occurred at a later date, but the shares had been issued to Mrs. Erickson and the property transferred to the corporation prior to January 1, 1980. The relevant substance of both Acts is set down in this passage from Matrimonial Property Law in Canada by Bissett-Johnson and Holland at pages s-8 to s-10:

The Matrimonial Property Act was introduced during the spring session of 1979 and came into force the first day of January, 1980. The Act resembles most closely the reform legislation of Alberta, The Matrimonial Property Act, S.A. 1978, c. 22, in that it establishes a presumption of equal ownership of a couple's matrimonial property.

The purpose of the Act is expressly stated to be as follows:

The purpose of this Act, and in particular of this Part, is to recognize that child care, household management and financial provision are the joint and mutual responsibilities of spouses and that inherent in the marital relationship there is joint contribution, whether financial or otherwise, by the spouses to the assumption of these responsibilities that entitles each spouse to an equal distribution of the matrimonial property, subject to the exceptions, exemptions and equitable considerations mentioned in this Act, S.S. 1979, c. M-6.1, s. 20.

The legislature, after stating the purpose of the Act, directs the court to order that the matrimonial property or its value be distributed equally between the spouses subject only to any exceptions, exemptions and equitable considerations mentioned in the Act. Thus, there appears to have been established a presumption of equal ownership of any matrimonial property which is not exempt under the Act. However, the court may, having regard to the factors listed in s. 21(2) of the Act move away from an equal distribution of the matrimonial property if the court is satisfied that it would be unfair and inequitable to make the said equal distribution.

The Matrimonial Property Act scheme for division of property is fundamentally different from that established by the provisions of s. 22 of the Married Persons’ Property Act.

McIntyre J., in Farr v. Farr (1984), 39 R.F.L. (2d) 1 at 7 (S.C.C.), compared the two schemes:

Dealing with the first issue, I must note at the outset that the Matrimonial Property Act, which came into force on 1st January 1980, fundamentally altered the régime for the distribution of matrimonial property upon the break-up of a marriage that had been established by the Married Women's Property Act, R.S.S. 1965, c. 340 [s. 22 (re-en. 1974-75, c. 29, s. 1); Act re-named Married Persons' Property Act, 1978, c. 36, s. 3; now R.S.S. 1978, c. M-6]. Section 22(2) of the previous Act permitted a judge to make any order with respect to property in dispute that he considered “fair and equitable”. In making a distribution order the judge was directed by s. 22(4) to take into account the respective contributions of the parties in the form of money, services, management, home and family care, or in any other form.

These features have been abandoned. The Act now presumes a joint contribution to the accumulation and maintenance of matrimonial assets, entitling each spouse to an equal distribution subject to certain specified exceptions, exemptions and equitable considerations, Ibid., p. 7.

Similarly, in Wildman v. Wildman (1980), 20 R.F.L. (2d) 255 (Q.B.), Dickson J. stated:

In my view, s. 20 expresses a different approach to the question of contribution than that expressed by the legislature in s. 22(4) of the Married Persons' Property Act. The court is no longer vested with the "very wide discretion" referred to by Brownridge J.A. The relative value of the respective contributions of the husband and wife is not to be assessed by the court. The legislature of this province now recognizes an equality of contribution in the discharge of the duties assumed by each spouse. A greater or lesser value is not to be assigned to the role of either. Therefore, it makes no difference if a farm-wife spent time in the fields or not. Her care of the children and her management of the household is acknowledged by the legislature in s. 20 to be equal in value to her husband's tending of the crops and management of the farm. This joint contribution entitles each spouse to an equal share of the matrimonial property. Having so expressed the purpose of the Act, the legislature then directs the court in ss. 21 and 22, to distribute the matrimonial property equally between the spouses unless there are relevant facts or circumstances that would make such distribution unfair and inequitable. Examples of the relevant facts and circumstances to be considered when distributing matrimonial property other than matrimonial home are set out in s. 21(2) of the Act. When distributing the matrimonial home the relevant facts and circumstances that the court may take into consideration are limited to the custody of the children and what the legislature refers to as “any extraordinary circumstance".

In Donkin v. Bugoy, [1985] 2 S.C.R. 85, Estey J., speaking on behalf of the majority of the Supreme Court of Canada, analyzed the Matrimonial Property Act distribution scheme in the following way:

The MPA is, as we have seen in s. 20, premised on the joint contribution of spouses in the marital relationship entitling each spouse to an equal distribution of matrimonial property . . . The Saskatchewan statute effectively puts an end to what was for so long in matrimonial litigation a wasteful and hopeless process of assessment of spousal contributions . . ., Ibid., p. 91.

Thus, under the regime for property distribution in the Matrimonial Property Act a spouse need no longer establish a right to share in property held by the other through evidence of “contribution”. The Matrimonial Property Act establishes a judicial presumption of joint contribution: See Howorko v. Howorko (1980), 20 R.F.L. (2d) 43 (Sask. U.F.C.); Patron v. Patron (1981), 7 Sask.R. 366 (Q.B.).

Turning now to constructive trusts. It is said in substance that the contributions made by Mrs. Erickson to her husband's business created a constructive trust of which she was the beneficiary in relation to sufficient of the assets to eliminate the notion of her having been the recipient of a gift as a alleged by the respondent. Differing views have been expressed regarding the true nature of a constructive trust. In J.G. Riddall's The Law of Trusts, 3rd (1987) ed. at page 359 the question in debate is put thus:

Should a constructive trust be regarded not as a substantive institution—a thing with its own existence —but rather as a remedy granted by the court, just as an injunction is not an institution, but merely a remedy?

If the correct view is that it is a remedy it follows, in my opinion, that it does not come into existence until it is granted by a court having jurisdiction. The learned author goes on at the same page to observe that the remedial view prevails in some quarters in the United States and quotes this passage from P.G. Haskell, Preface the Law of Trusts, p. 145:

The subject of constructive trusts is a part of the law of restitution.. The constructive trust is a remedial device that is employed to correct unjust enrichment. It has the effect of taking title to property from one person whose title unjustly enriches him, and transferring it to another person who has been unjustly deprived of it. . . To correct the injustice, the court of equity declares that the unjustly enriched person shall be a constructive trustee for the benefit of the unjustly deprived person, and the court directs that legal title be transferred by the unjustly enriched person to the unjustly deprived person. The constructive trustee is not regarded as a fiduciary with respect to the constructive trust property; his only function is to act to place the title where it belongs. The equity court merely uses the trust analogy to achieve a restitutional result.

At page 360 of Riddall’s work it is said that this view has been both supported and opposed in England. The conclusion arrived at by the author at page 362, after a detailed comparison between an express trust and constructive trust, Is:

It is because the consequences of the property being trust property are the same. whether the property is held under a constructive or an express trust that we are, it is submitted, correct to regard a constructive trust as a form of trust, and not merely as a form of remedy.

To my mind the language employed by Chief Justice Dickson in delivering the judgment of the Supreme Court of Canada in Sorochan v. Sorochan, [1986] 2 S.C.R. 38, leads to the conclusion that in Canada a constructive trust is to be regarded as a remedy and not a substantive institution. Sorochan and the decisions cited in the passages that follow from the reasons for judgment in that case are not referred to in The Law of Trusts by J. G. Riddall. The facts in Sorochan are set out by Dickson, C.J.C. at page 41:

Mary and Alex Sorochan lived together for forty-two years, between 1940 and 1982, on a farm in the Two Hills District of Alberta. During this time, they jointly worked a mixed farming operation and had six children. They never married. Mary Sorochan did all of the domestic labour associated with running the household and caring for the children. In addition, she worked long hours on the farm. The family lived in modest circumstances.

At the time the parties began living together, Alex Sorochan was the owner, along with his brother, of six one-quarter sections of farmland. In 1951, the land was divided between the two brothers and the respondent became the registered owner of three one-quarter sections. From 1942 to 1945, and from 1968 to 1982, the respondent worked as a travelling salesperson. During these periods, Mary Sorochan often assumed responsibility for doing all of the farm chores on her own. In 1982, due to the failing health of the appellant and the deteriorating relationship between the couple, Mary Sorochan moved to a senior citizen’s home. She subsequently commenced this legal action for an interest in the farm upon which she had worked for forty-two years.

In the result Mary Sorochan was awarded title to one-third of the farm property by way of constructive trust and in addition to the constructive trust remedy an order for monetary relief in the sum of $20,000 (to be reduced to $15,000 if paid within six months) was made in her favour. The Chief Justice said at page 43:

To ascertain whether a constructive trust should be imposed in this case, we must begin by examining the doctrine of unjust enrichment. As I had occasion to say in Rathwell v. Rathwell, [1978] 2 S.C.R. 436, at p. 444:

On the legal front, acceptance of the notion of restitution and unjust enrichment in Canadian jurisprudence (Deg/man v. Guaranty Trust Company, [1954] S.C.R. 725), has opened the way to recognition of the constructive trust as an available and useful remedial tool in resolving matrimonial property disputes. [2]

In Pettkus v. Becker, [1980] 2 S.C.R. 834, the Court stated at pp. 847-48:

The principle of unjust enrichment lies at the heart of the constructive trust. “Unjust enrichment" has played a role in Anglo-American legal writing for centuries. Lord Mansfield, in the case of Moses v. Macferlan (1760), 2 Burr. 1005, put the mater in these words: ”. . . the gist of this kind of action is that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money". It would be undesirable, and indeed impossible, to attempt to define all the circumstances in which an unjust enrichment might arise . . . The great advantage of ancient principles of equity is their flexibility: the judiciary is thus able to shape these malleable principles so as to accommodate the changing needs and mores of society, in order to achieve justice. The constructive trust has proven to be a useful tool in the judicial armoury. (Emphasis in original text)

At page 47 he says:

The constructive trust constitutes one important judicial means of remedying unjust enrichment. Other remedies, such as monetary damages, may also be available to rectify situations of unjust enrichment. We must, therefore, ask when and under what circumstances it is appropriate for a court to impose a constructive trust. (See discussions in Waters, supra, chapter 11; McClean, "Constructive and Resulting Trusts—Unjust Enrichment in a Common Law Relationship—Pettkus v. Becker" (1981), 16 U.B.C.L. Rev. 155, at pp. 171-74; Klippert, Unjust Enrichment (Toronto 1983), chapter 7; Goff & Jones, The Law of Restitution, 2nd ed. (London 1978), at pp. 60-63).

In the remainder of the reasons for judgment in Sorochan reference is made on several occasions by the Chief Justice to the imposition of a constructive trust and to its being a remedy.

A constructive trust not having been imposed by a court with jurisdiction to do so in respect of the assets of the appellant's business, I conclude that in the light of Sorochan no such trust existed for the benefit of Mrs. Erickson at any time relevant to this appeal. This does not, however, dispose of this matter.

The word "gift" is not defined in the Income Tax Act either generally or particularly in relation to paragraph 85(1)(e.2). To my mind there was no gift to Mrs. Erickson because I accept her evidence and that of the appellant regarding the contribution made over the years by the former to the latter's business. In my opinion, this contribution was such that it gave rise to a beneficial interest, in the sense of an enforceable right, in favour of the appellant's wife in respect of the assets of the business in an amount equal to or in excess of the value of the alleged gift. Setting aside for the moment the creation of Erickson's Fine Meats Limited and the transfer of the assets to it, I believe that Mrs. Erickson's contribution to the business was such that had a dispute arisen between her and her husband regarding those assets and consequently she had instituted proceedings in the Saskatchewan Court of Queen's Bench the evidence before me would authorize a finding that there had been an unjust enrichment justifying the imposition of the constructive trust remedy in relation to at least 20 per cent of the assets. In The Queen v. McBurney, [1985] 2 C.T.C. 214; 85 D.T.C. 5433 (F.C.A.), the issue was whether certain payments made to school associations were "gifts" within the meaning of subparagraph 110(1 )(a)(i) of the Income Tax Act. Mr. Justice Stone, who delivered the judgment of the Court, said at page 218 (D.T.C. 5435): "The word ‘gifts’ is not defined in the statute. I can find nothing in the context to suggest that it is used in a technical rather than in its ordinary sense." This applies equally to the word “gift” in paragraph 85 (1)(e.2) of the Act. In Shorter Oxford English Dictionary "Gift" is defined as: "A transfer of property in a thing, voluntarily and without any valuable consideration.” This does not describe what occurred in relation to any of the excess of the fair market value of the property at the time of its disposition to the corporation over the fair market value of the consideration received by the appellant for the property.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that a capital gain of $1,800 and recaptured capital cost allowance of $16,104 are not to be included in computing the appellant's income for his 1980 taxation year. The appellant is entitled to party-and-party costs.

Appeal allowed.