Margaret Van Gastel v. Minister of National Revenue, [1983] CTC 2486, 83 DTC 376

D E Taylor:—This is an appeal heard in Toronto, Ontario, on May 18 and 19, 1983, against an income tax assessment for the year 1979. It is based upon the following grounds:

— that the Honourable Minister erred in considering that there was a transfer of property to the Appellant from any person;

— that at the time of any transfer of any property to the Appellant, which transfer is not admitted but is denied, there were no amounts owing under the Income Tax Act by the Transferor.

— that this amount did not arise as the result of a transfer of property to the Appellant.

The Minister in assessing assumed:

(a) that at all times relevant to this appeal, the Appellant was married to one John Van Gastel;

(b) by instrument number A205901 dated July 27, 1977, the said John Van Gastel purchased land and premises (“the property”) in the Town of Paris, Ontario, as John Van Gastel in Trust;

(c) by instrument number A233952 dated February 6, 1979 and registered July 24, 1979, the said John Van Gastel, as John Van Gastel in Trust, transferred a portion of the property to the Appellant;

(d) the amount of equity in the property so transferred to the Appellant was not less than $60,000.00;

(e) on the day of the said transfer, the said John Van Gastel, transferor, was liable to pay not less than $60,000.00 under the Income Tax Act.

The respondent relied, inter alia, upon subsections 160(1) and 160(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

To approach this issue properly, in my view, one must put down in the simplest possible way that upon which the Minister is basing his claim against the appellant for income tax owing by another party. Section 160 of the Act does not include a clause shifting to the Minister the onus for proving the assessment or the facts upon which it is based, as for example one finds in section 163 of the Act. However, it appears to me that if any critical segment of the logic (facts and assumptions) upon which the Minister struck the assessment is successfully attacked by the appellant, the assessment must surely fail.

In this matter counsel for the appellant has not attacked any of clauses (a), (b), (d) or (e) from the reply to the notice of appeal quoted earlier. Indeed, it is a fundamental part of the appellant’s primary position that clause (d) is correct, at least to the degree that there was equity in the property allegedly transferred. The point of separation for the parties is that the Minister claims the equity was that of John Van Gastel (John), while the appellant’s position is that such equity was already hers, before the legal documentation described as “Instrument Number A233952” above came into effect. The testimony of both Margaret Van Gastel (Margaret) and John is that the “in trust” designation in Instrument Number A205901 above was to indicate that he (John) held the property in trust for Margaret during the acquisition of the larger block of property while her portion was being severed, up to and including the formality of finally requesting the transfer of title of July 24, 1979 (Instrument Number A233952).

Since about 1960 John had been in the real estate development business. This matter is further complicated by a long series of transactions dating back to 1966 when John acquired in Galt, Ontario, a 7.75-acre parcel of property for some $70,000 (Part of Subdivision lot 1, Blair Road), financed that acquisition by a mortgage (or mortgages) on the property, and then later transferred all but a small portion of the 7.75-acre parcel into one or more of his business operations. The balance was retained as the “family residence” in Margaret’s name. About 1968 John’s businesses lost the business portion of the land during attempts to subdivide and develop it (mortgages were forceclosed) but Margaret retained in her own name the “family residence” portion consisting of about one acre and a house (Lot 16 Registered Plan 1252). There remained on Lot 16 (the “family residence”) the balance of a “Canada Permanent” mortgage taken out in 1966 which mortgage had been originally for $25,000. It was the testimony of Margaret that on acquisition of the Galt property in 1966, she had insisted on having and retaining in her own name the portion designated eventually as Lot 16 — the family residence. She had wanted that much in the way of security, primarily because John’s business ventures were becoming increasingly large and more risky. She had married John in 1957 under a “Marriage Contract” (a copy of which she presented), and she indicated her clear understanding of its purpose in segregating and protecting assets held in her name. John testified that this indeed was the reason for special identity for Lot 16 — the security Margaret insisted upon in her own right for the family home (the couple by 1966 had three children). During the succeeding years Margaret placed several different mortgages on Lot 16, notably one referred to as the “Wunder” mortgage in 1974 for $60,000 and the “Pax” mortgage in 1975 for $40,000. John was the guarantor, and it was common ground that the funds went into his business operations. Margaret considered these amounts as her “loans” to John, she trusted him and signed whatever paper he required

— after he had explained the documents to her. She had no idea at any one time how much she had “loaned” to John. John made all or virtually all of the mortgage payments — including the Canada Permanent mortgage. John testified that he maintained a business office in the family residence.

On June 15, 1977, Margaret as Vendor signed an agreement of purchase and sale with WIRA Holdings Ltd as purchaser, for Lot 16 Galt, in the amount of $145,000. Consideration was to be $30,000 in cash (2 cheques of $15,000 each) and a mortgage back of $80,000 and a further mortgage back of $35,000. Immediately before that date, the approximate balances of the known mortgages outstanding on Lot 16 were: “Canada Permanent” $10,000, “Wunder” $58,000 and “Pax” $38,000 — a total of $106,000. By some process which was not totally clear to the Board and to which we shall return, the “Wunder” and “Pax” mortgages were discharged from the Galt Property — (to permit the sale) — and they reappeared, almost immediately, as Obligations against the Paris property. The Paris property (the entire parcel acquired by John “in trust”) cost $155,000. It was about 12 acres in size and included a large stone house, a “coach house” and another smaller building. John’s brother-in-law Paul Barel, an architect, had been brought into the Paris property purchase by John, and had agreed that he would take over for some $35,000 the centre strip of the property consisting of about two (2) acres, which would then leave two remaining portions, one on each side of the Barel property. Mr Barel testified that he was sure that John was acquiring the above strip of property “in trust” for him, Barel; and Mr Barel also asserted that it was his impression that John was acquiring one of the above remaining portions (a landlocked portion) for his own land development purposes, and the other one of the remaining portions which contained the large stone house “in trust” for Margaret. John eventually was required by the municipality to dispose of the land-locked property to the abutting owners and so his development plan did not materialize. It was noted tha one of the affidavits attached to certain legal documents by which Mr Barel acquired the strip of property did indicate that John had acquired the property “in trust” for him (Mr Barel), but it was noted that title to the strip of property was taken in the name of Mrs Barel, the wife of Mr Paul Barel. The term “in trust” was a somewhat uncertain term even in this third party transaction.

A Mr H Leonard Miller, QC, of Kitchener, Ontario, had acted for John in the transactions related to the sale of the Galt Property and the purchase of the Paris property. Mr Miller testified that he had also been the lawyer for the principals holding the “Wunder” mortgage and the “Pax” mortgage. In the Galt sale, Mr Miller took back both the $80,000 and the $35,000 mortgages from WIRA “in trust”, and the notation “/ held the mortgage in trust for John Van Gastel. The said John Van Gastel had directed me to assign the said mortgage to the Trustee Board of the Presbyterian Church in Canada" appeared on an affidavit signed by Mr Miller. It was Mr Miller’s testimony that this affidavit which he had signed was in error — it had been a mistake since he knew in 1977 that he was holding the said mortgages “in trust” for Margaret. Again I would note the lack of specific and lasting definition for the term “in trust”.

A Mr Gary Hunter, lawyer from Paris, Ontario, acted for the Bank of Montreal in arranging financing for the purchase of the Paris property. That financing took the form of a mortgage to the bank for $75,000 dated July 20, 1977, collateral security to a promissory note of even date signed by John Van Gastel due January 25, 1978. Mr Hunter testified that he had understood that one part of the Galt property (when it could be severed) was to belong to Margaret. It was also his recollection that the delay in connection with the transfer of document A233952 from February 6, 1979 when it was prepared, until July 24, 1979 when it was registered, resulted from a local committee of adjustment technicality which he had not been able to clear up before that date. In sum, therefore, the Paris property was acquired by John “in trust” by payment of the $75,000 noted above and the assignment from Mr Miller “in trust” of the $80,000 WIRA mortgage on the Galt property.

The one portion of the Paris property (forming the basis of this issue) came into the name of Margaret as a result of the registration and transfer noted earlier on July 24, 1979. It was then conveyed from Margaret to Alron Industries Limited (Alron), by registration on July 25, 1979. The indenture bore the date of 4 July, 1979, and listed John merely as “Spouse of the said Grantor” — the grantor being Margaret. The selling price was $215,000, paid $104,570.29 in cash, and as recorded on the land transfer tax appendix to the registered document, by acceptance of a mortgage in the amount of $110,429.71. It was the testimony of Margaret and John that the total of $104,570.29 had not been received — rather it had been necessary to take back from Alron several other properties, the value of which was about $63,000 to bring the transaction to completion. Margaret knew little, if anything, about these other properties, but John testified that they had been turned over to a son, Andrew Van Gastel who, by 1979, was in the real estate development business himself. According to John, Andrew had given Margaret notes setting out his obligations to her for this amount. Again according to John, Andrew had lost these properties in his own business dealings, but still acknowledged his debt to Margaret. Neither Andrew nor any documents relevant to such transactions were produced at the hearing. It also developed that in September 1979, Margaret bought a property in Brantford from Andrew, which property had earlier been acquired by Andrew in December 1978 for $135,000. She then apparently paid off obligations related to its acquisition by Andrew, lived in the Brantford house a matter of months, and sold that property. Details of that particular transaction were rather sketchy at the hearing, but it seemed to be common ground that the net proceeds — apparently to Margaret — from the sale of the Brantford property amounted to about $60,000, which amount had been seized by the Minister, provoking the action related to this appeal.

What happened since 1979 to the Alron mortgage in the original amount of $110,429.71 is not clear, and it is not clear which funds were used by Margaret, and how, to acquire the Brantford property from Andrew. The situation is further complicated by the fact that on February 13, 1979, Mar- garet as “Guarantor” did guarantee an amount of $120,000 to the Bank of Montreal, Paris, Ontario, with respect to debts and obligations of John and, as mortgagor in the same document, gave as security the Paris property. It was explained to the Board by John that this $120,000 had included the original $75,000 obtained from the same bank for the purchase of the Paris property.

The Minister, in argument, contended that John’s unfettered access to and use of funds which could be generated from using the Galt property as security, together with the nonchalant attitude taken by Margaret in permitting such dealing with the property, rendered it such that the Board should decide it to have been in the name of Margaret, but “in trust” for John. Alternatively, the Galt property was so highly mortgaged at the date of sale (taking into consideration the Canada Permanent, Wunder and Pax mortgages) that there was no net equity whatsoever with which Margaret could claim she had acquired the Paris property.

Counsel for the appellant, in argument, contended that indeed the Galt property had been properly and beneficially that of Margaret. That equity from Galt had flowed into the Paris property and eventually to the Brantford property. On the last two properties, that equity had in fact been damaged, resulting in the fact that there remained only some $60,000 — which was the amount in dispute. Counsel contended that for the Board to determine anything different, it would be necessary to disbelieve the testimony of not only John and Margaret, but also Mr Miller, Mr Barel and Mr Hunter.

It is tempting indeed to speculate on the primary position put forward by counsel for the respondent and to conclude that no matter in whose name the Galt property rested during the period 1966 to 1977, it was held in trust for John, and put, at his discretion, to his own uses. There is a considerable body of evidence which would tend to support such a conclusion. But I suggest that argument leaves the Minister in the same difficult position as the appellant — vulnerable to the allegation of treating the term “in trust” in a relatively unimportant manner. I am satisfied that Margaret was sincere in 1966 in wanting a home — separate and distinct in title (her name) from that of her husband’s ventures. Her attention and devotion to preserving any control of the property leave a great deal to be desired. However, up to the time of sale of the Galt property, I must conclude that Margaret, by physical evidence and her testimony, has established her right to be considered as both the legal and the beneficial owner of that property.

But it is at the point of sale that I start having a problem. I am satisfied that the property was encumbered to something more than $100,000 (probably much more), an amount only marginally less than its realizable value. I would suggest that the evidence supports a view that the sale produced (even after legal and transfer costs, discharge of the Canada Permanent mortgage, and sale of the $35,000 WIRA mortgage) only some net $10,000 or $15,000 in cash to Margaret (or John). There remained then the $80,000 WIRA mortgage — barely equal to the total of the Wunder and Pax mortgages. It was agreed between counsel that Mr Miller played a vital role in bringing about the sale of the Galt property and the purchase of the Paris property, and that this was only accomplished by some process of holding all of the cards together at one time, thereby controlling “in trust” the two properties and all of the mortgages related to them. In my view, the transactions were entirely too complicated for the understanding or ability of Margaret, and could only have been devised and completed under the aegis of John. Margaret herself, during testimony, admitted quite freely that she stayed out of the business affairs and left them up to John. I am therefore quite satisfied that the critical statement on the affidavit attached to the absolutely essential $80,000 WIRA mortgage describes accurately the relationship between John Van Gastel and J Leonard M Miller as at 26 July 1977. I am sure that Margaret stated the situation correctly as she recalled it — she would only agree to sell Galt property if she could get the Paris property (at least her roughly / of it) in return. She even pointed out to the Board that she had agreed to pay $85,000 for her portion of the Paris property (although how she was to do this, I do not know), just as Mr Barel had agreed to pay $35,000 for his portion. It is difficult to make a direct relationship between the alleged “cost” of Margaret’s portion of the Paris property ($85,000) and the obligations against the property — $75,000 to the Bank of Montreal, $58,000 Wunder mortgage, and $38,000 Pax mortgage ($171,000). In any event, it became clear to John, shortly after the purchase, that the “development” land was more a liability than an asset. It is doubtful that Mr Barel would leave any residual encumbrance on his “strip” after he acquired it from John. Therefore, the major impact of any encumbrances must have been oriented toward the remaining portion to which Margaret eventually acquired legal title on July 24, 1979.

Taking into account Margaret’s acknowledged lack of interest and comprehension of the business and financial transactions undertaken at the instigation of John, it is not so much a question of disbelieving either one, as it is a matter of trying to fill in the blanks between the testimony and evidence. Whether through the good offices of Mr Miller as intermediary or by some other procedure devised or understood by John, at some point in time (a “scintilla” of time, to use the expression of counsel for the appellant), the encumbrances on the Galt property represented by the “Wunder” and the “Pax” mortgages had been lifted from that property. In fact and in law, during this moment in time the Board is asked by the appellant to accept that Margaret had a net realized equity at least equal to the $80,000 WIRA mortgage, which equity she then used to acquire the Paris property. The Board is asked to ignore the fact that a moment later, in theory at least, the Paris property was encumbered by both the Wunder and Pax mortgages. Essentially that comes down to a proposition that someone, in some way, took responsibility for “Wunder” and “Pax”, and left Margaret free to act and use her alleged $80,000 “equity” in the Paris purchase. There was no evidence presented to indicate how John could have provided separate security for the Wunder and Pax mortgages, and the evidence would tend to support a conclusion that during this “scintilla” of time he had no separate assets or net worth. The only viable asset evidenced was the WIRA mortgage for $80,000, and the only reasonable evidence the Board has is that it was controlled “in trust” by John (see comments re Miller affidavit earlier). That situation would accord with the only process I can visualize which would permit of the transactions under examination. I am satisfied that John lifted the “Wunder” and “Pax” encumbrances from Margaret’s Galt property immediately prior to, or coincident with the sale of that property, and I can only assume that he did so by using as security the asset value of the WIRA mortgage. I would be prepared to agree that whatever net realizable value resulted from the Galt property during the moment after Margaret had assigned or entrusted the WIRA mortgage to John (she must have done something like that) and while she was no longer liable for the Wunder and Pax mortgages, would be equity she could claim in her own name and right. The problem for the appellant is that the evidence would point to a conclusion that there remained little, if any, such net equity at that moment. Therefore, just as I have rejected the primary contention of the respondent that the Galt property was held in trust by Margaret for John, so I must reject the basic proposition of counsel for the appellant that there remained, at the date of sale, any equity for Margaret in the Galt property which could be translated into equity in the Paris property.

Accordingly, at the moment of purchase of the Paris property, John (not Margaret) copntrolled and, as I see it, he was solely in possession of the only asset available which could be used as the down payment for the new property — the WIRA mortgage. It cannot be said that he was acting “in trust” for Margaret now — if he wanted to act for “Margaret in trust”, he could have left “Wunder”, “Pax” and WIRA all untouched. Indeed, Margaret could have simply acted at all times in her own name. The viable evidence is that he gave instructions to Mr Miller to use the WIRA mortgage as partial down payment on the Paris property, he borrowed $75,000 from the Bank of Montreal in his own name, and he took title to the property in his own name

— certainly not in the name of Margaret, or Margaret in Trust. As for any “in trust” designation on the documents provided, I am of the view that it can only be extended to include his obligations to Mr Paul Barel regarding the two-acre “strip” of property, (supra). John may have thought of transferring to Margaret some part of the paris property at some time in the future when everything was back in place. Indeed, it would be logical to assume that she might have extracted such a commitment from him. But that is vastly different than the proposition made to the Board that Margaret was acquiring the Paris property, with her own funds, and that John was only holding it during an interim period “in trust” for her. It should not be forgotten that John’s main original personal interest in the Paris property was in using a certain portion of the land which would remain for development purposes. Presumably he could foresee in this venture an opportunity for gain. That it did not turn out that way is perhaps unfortunate, but that mistaken business judgment is not relevant to the determination of this issue.

As for the net equity from the Paris property which, in some manner, was used to acquire the Brantford property (the ultimate sale of which produced the funds at issue in this hearing), it is my opinion that such equity developed during tenure by John and is to be credited to him. As indicated above, there was no net equity in the Paris property at acquisition, and I can think of no reason why the equity which developed or accrued during tenure should belong to Margaret. Finally, I heard no argument which would indicate that such net equity held by John in the Paris property at the date of legal transfer to Margaret (July 24, 1979) was less than $60,000.00 or that the net result of the involvement with the Brantford property affected that situation at all. I would also note with interest that this appeal would also have difficulty based upon the rationale in Darlene LaMarche v MNR, [1983] CTC 2314; 83 DTC 260, a very recent decision of this Board. The Minister’s position has not been attacked in any way.

The appeal is dismissed.

Appeal dismissed.