Huguette Lemieux-Brazeau, Diane Charron-Brazeau v. Minister of National Revenue, [1984] CTC 2955, 84 DTC 1847

Cardin, TCJ [TRANSLATION]:—Since the respondent’s assessments were based on the same assumptions of fact, the appeals of Diane Charron-Brazeau and Huguette Lemieux-Brazeau were heard on common evidence.

The issue in both appeals is whether there was a transfer of property between Gérald Brazeau and his wife Huguette Lemieux-Brazeau, and between Denis Brazeau and his wife Diane Charron-Brazeau, within the meaning of section 160 of the Income Tax Act, SC 1970-71-72, c 63, as amended (the Act).

Summary of the facts

Between 1974 and 1978, Gérald and Denis Brazeau and a brother (Ronald) were co-owners of certain immovables and some beauty salons, in which they were shareholders.

On October 13, 1978, Gérald and Denis Brazeau were the object of a special investigation by the Department of National Revenue. The undisputed evidence was that, following this investigation, Gérald and Denis Brazeau were subject to prosecution and conviction for income tax evasion. The respondent accordingly issued reassessments showing that Gérald and Denis Brazeau owed considerable amounts in unpaid taxes.

By a notice of assessment dated April 29, 1980, the respondent included in the income of the appellant Huguette Lemieux-Brazeau the sum of $28,117.34, representing the value of the property which had been transferred to her either directly or indirectly by her husband Gérald Brazeau; this amount is taxable in the hands of the appellant under the provisions of section 160 of the Act.

By a notice of assessment dated April 29, 1980, pursuant to section 160 of the Act, the respondent similarly and for the same reasons included in the income of Diane Charron-Brazeau the sum of $15,565.76, representing the value of property transferred to her either directly or indirectly by her husband Denis Brazeau.

On September 14, 1979, a covenant to modify the matrimonial regime and for the partition of property was entered into by Huguette Lemieux-Brazeau and her husband (married under the regime of community of property) in the presence of Mr Guy Trottier, notary. The modification to their matrimonial regime was homologated by the Superior Court on December 6, 1979 and registered on January 9, 1980 (Exhibit A-l).

On February 20, 1979, there was a covenant to modify the matrimonial regime between Dame Diane Charron-Brazeau and her husband Denis Brazeau (married under the regime of community of property) that was homologated on March 29, 1979 and registered on April 17, 1979 (Exhibit A-2).

In both appeals, the appellants contended that there could not have been a transfer between themselves and their husbands within the meaning of section 160 of the Act, since in accordance with the provisions of the Civil Code there had been a covenant to modify the matrimonial regime and for the partition of property that was homologated and registered before April 29, 1980, the date when the Department of National Revenue issued its assessment.

The respondent maintained, however, that the deed of partition signed by the appellants and their husbands was a sham, because some of the property included on the list of property to be partitioned did not belong to Gérald and Denis Brazeau. The respondent further alleged that some of the property of Gérald and Denis Brazeau that was to be transferred to the appellants by deed of partition had no market value.

The appellants* testimony indicates that they were not very well informed about their husbands’ business affairs. They stated that they were not aware that the Department of National Revenue had made a special investigation of their husbands or that the books and registers belonging to their husbands had been seized on October 13, 1978. They indicated that they were “just” housewives and mothers and that the partition of property between themselves and their husbands had been discussed long before the investigation. They categorically affirmed, however, that the special investigation of October 13, 1978 had no connection with the covenant for partition of September 14, 1979, something which seems unlikely to me in the circumstances.

I accept their testimony to the effect that the modification of matrimonial regime and the partition of property had been considered and discussed before the investigation took place on October 13, 1979. Furthermore, the notary, Mr Trottier, stated that the modification of the matrimonial regime had been discussed with him even before he became a notary in 1978.

Nonetheless, the reasons advanced by the appellants, their husbands and the notary to explain why the deed of partition had not been executed before September 14, 1979 are neither clear nor persuasive. I do not accept the statements of the appellants to the effect that there was no connection between the special investigation and the deed of partition.

Furthermore, with regard to the facts on which these appeals are based, counsel for the appellants, neither on direct nor on cross-examination, succeeded in definitely establishing the identity of the real owners of various immovables or the value of certain shares allegedly forming part of the September 14, 1979 partition and listed in Exhibits A-l and A-2.

Before addressing the interesting and important points of law relating to the meaning and application of the term “transfer” as it appears in section 160 of the Act and Arts 1266 and following of the Civil Code, it must be ascertained whether the intention of the appellants and their husbands to divide the property among themselves was a bona fide one as required by the Civil Code. If the evidence shows that the parties decided to use the provisions of the Civil Code to avoid having the respondent seize property belonging to Gérald and Denis Bra- zeau in payment of their tax obligations, the appeals of Huguette Lemieux- Brazeau and Diane Charron-Brazeau must be dismissed.

The first point to be determined is whether the property and shares listed in the deed of partition are legally assailable by a third person. There is no doubt that Exhibits A-l and A-2 are authentic documents homologated by the Quebec Superior Court. As a result of this covenant, there was a modification of the matrimonial regime of the appellants which may be set up against third parties, and which can be challenged only by showing that it was a forgery. The deed of partition, however — and in particular the statements contained therein — has a prima facie probative value, but may be challenged by the parties to the dispute or by third persons who present proof to the contrary.

In this regard, counsel for the respondent quoted St-Germain, J of the Supreme Court of Canada in Corporation de la Paroisse de St-Joseph de Coleraine v Colonial Chrome Co Ltd, [1933] SCR 13, at 20, in which the learned Judge said:

French jurisprudence and case law concerning Arts 1319 and 1320 of the Napoleonic Code, to which Arts 1210 and 1222 of the Quebec Civil Code correspond, have held that the statements and assertions contained in authentic deeds as well as those in private writings have probative value until proof to the contrary is offered, not only as between the parties, but also as against third persons.

Where, as in the case at bar, the appellant corporation has led no evidence to contradict such statements and assertions, these statements and assertions must be given full credence.

In the case at bar, the statements made by the parties in the deed of partition are, however, disputed by the respondent in the allegations contained in his reply to the notice of appeal.

An examination of the covenants to modify the matrimonial regime, filed as Exhibits A-1 and A-2, might perhaps lead to the conclusion that since the covenants had been homologated by the Quebec Superior Court, a modification in matrimonial regime of the appellants and their husbands did in fact take place. However, Article 1266 of the Civil Code requires the applicant to motify all his and his wife’s creditors of the date on which the motion for homologation is to be presented.

It is easy to understand why the Civil Code requires such notice, but it is less easy to understand why the appellants and their husbands did not find it necessary to notify the respondent, who was a major creditor of Gérald and Denis Brazeau.

It cannot be argued that, since the assessments of Gérald and Denis Brazeau had not yet been issued at the time of homologation, it was impossible for them to know that they were the respondent’s debtors.

It is now well-established law that it is not the respondent’s assessment which creates the obligation of a taxpayer to pay a certain amount of tax. The debt is created and exists automatically from the moment the taxpayer becomes liable for the payment of tax under some provision of the Act. This debt existed, therefore, prior to the respondent’s assessment, and the assessment only confirmed the existence of the debt.

There can be no doubt that Gérald and Denis Brazeau, who had both been the object of a special investigation and who had been visited on several occa- sions by an employee of the Minister of National Revenue, knew that they had not filed any tax returns for a number of years.

On the other hand, Articles 1354 and following of the Civil Code, in the chapter entitled “Of the partition of the community”, set out how the partition is to be effected between the spouses. Article 1361 of the Civil Code states:

After the pretakings have been effected and the debts have been paid out of the mass, the remainder is divided equally between the consorts aor their representatives.

The deeds of partition filed as Exhibits A-l and A-2 show that property having a greater value, such as the immovables whose value was established by professional appraisers, was transferred to the appellant wives. Gérald and Denis Brazeau mainly received the value of the shares of the three beauty salons.

There are some major anomalies in the values attributed to the shares listed in Exhibits A-1 and A-2. These show that Gérald Brazeau assigned a fair market value of $19,000 to 38 per cent or 38 shares of Studio 464 Inc; Denis Brazeau, on the other hand, set the fair market value on the same number of shares (38 per cent) in the same corporation, Studio 464 Inc, at $5,000.

Gérald Brazeau set the market value of 38 per cent of the shares of “249-280 Barbering Ltd” at $19,000; Denis Brazeau assigned a fair market value of $2,000 to the same number of shares in the same corporation. Gérald Brazeau valued 39 per cent of the shares of “Un Million de Cheveux-Samson Inc” at $1,900, while Denis Brazeau valued the same number of shares in the same corporation at $5,000.

There is no proof of the existence of “Un Million de Cheveux-Samson Inc”. There are no financial statements from this corporation and no tax returns filed for the years in question.

“249-280 Barbering Ltd”, whose tax returns for the years under scrutiny were filed as Exhibit R-5, was inactive, and the records show no financial statement or income.

The capitalization of “Studio 464 Inc” was only $100 for the taxation year ending on August 31, 1979, and the balance sheet shows a loss of $29,946.

Counsel for the appellants did not lead evidence of the value assigned to the transactions involving the beauty salons by Gérald and Denis Brazeau, and he was also unable to destroy the rebuttal evidence led by counsel for the respondent. Under these circumstances, it is difficult to see how any market value at all could be assigned to these shares.

Although the value of the immovables transferred to the wives was more realistic than the values assigned to the beauty salons, the transactions involving certain immovables that were supposedly transferred to the wives by deed of partition raise certain questions. According to the deed of partition:

1. Gérald and Denis Brazeau transferred to their wives all their interest in their common residences, furniture and household and personal effects;

2. Gérald and Denis Brazeau purportedly transferred to their wives (the appellants) their undivided half of a property located in the township of Ma- sham (the co-owners were Denis and Gérald Brazeau), described as lot No 38A (part 38A), Range 2 (Exhibit A-l, clause 1.12; Exhibit A-2, clause 1.12): however, on September 10, 1979, four days before the covenant to modify the matrimonial regime and the deed of partition were executed, this same property was sold by Gérald and Denis Brazeau to Dame Ginette Boneau (Exhibit R-3);

3. on September 1, 1980, Dame Huguette Lemieux-Brazeau sold to her husband Gérald a property in the municipality of La Pêche that was the undivided half (the co-owner was Denis Brazeau) of a property described as lot No 39 (part 39) in the second range, R 2, township of Masham, for $1 and other consideration: this property had been transferred by Gérald Brazeau to his wife by the deed of partition, and its value, for the purposes of partition, had been set at $23,000 (Exhibit R-2) (Exhibit A-l, clause 1.14).

Taken as a whole, the evidence did not convince me that the statements made in the deed of partition accompanying the covenant to modify the matrimonial regime were based on fact and on the actual values. It is my view that the deed of partition was drawn up in this manner so as to prevent the application of section 160 of the Act.

I find that there was no legal partition of the property between the appellants and their husbands within the meaning of Art 1354 and following of the Civil Code, but there was a transfer of property between Gérald Brazeau and Huguette Lemieux-Brazeau and between Denis Brazeau and Diane Charron- Brazeau within the meaning of section 160 of the Act. The respondent did not err in including in the income of each appellant an amount equivalent to the value of the goods transferred to each appellant.

The appeals are dismissed.

Appeals dismissed.