Renee Monette Gamache v. Her Majesty the Queen, [1996] 3 CTC 2597, 97 DTC 32

Lamarre Proulx J.T.C.C.: - The appellant is appealing from an assessment by the Minister of National Revenue (the “Minister”) made pursuant to section 160 of the Income Tax Act (the “Act”) and dated June 23, 1992.

The issues are as follows.

As the beneficiary of a transfer of the family property by her husband in 1991, is the appellant jointly and severally liable for the latter’s tax debt for 1990 and 1991, when he was discharged from this debt in March 1992 pursuant to the Bankruptcy and Insolvency Act?

If the first question is answered in the affirmative, was the transfer of the property made for a consideration less than the fair market value within the meaning of section 160 of the Act?

The appellant’s husband, Richard Gamache, the appellant and Mariette Cournoyer testified for the appellant. André Beaudet testified for the respondent as an expert witness on real estate appraisal.

The appellant Renée Monette and Richard Gamache were married in 1966. They had four children, two of whom were mentally handicapped and lived with them.

In 1976 Mr. Gamache, who is a programmer or computer technician, began a data processing business with a partner, Claude Carrière. Their business prospered and in 1984 it expanded into restaurants. Mr. Carrière managed this part of the business while Mr. and Mrs. Gamache were responsible for the computer side. Some time around 1983 the appellant began working with her husband.

However, around 1988 the business was not doing so well and on September 1, 1988 Mr. Gamache obtained an initial mortgage loan from the Fiducie du Québec in the amount of $50,000, mortgaging the family property (tab 11 of Exhibit A-1).

Some time in late 1989 the business relationship between Messrs. Carrière and Gamache soured. In late February 1990 the appellant and her husband signed an agreement with Mr. Carrière which completely excluded them from the business in which they were equal shareholders and they found themselves unemployed. The agreement was not filed.

On February 28, 1990 a brokerage agreement was signed between Mr. and Mrs. Gamache on the one hand and on the other Mariette Cournoyer, a real estate agent for Royal Lepage, for the sale of the family property located at 45 St-André, Longueuil. Ms. Cournoyer testified at the hearing. The asking price was $279,500. According to the witnesses Mr. Gamache was primarily responsible for determining the price and relied on the municipal valuation, which was $244,118.

The brokerage agreement was renewed on April 2, 1990, this time for a price of $265,000. The agreement was again renewed on May 28, 1990 with an expiry date of August 28, 1990.

On August 27, 1990 there was a purchase offer of $160,000. A counteroffer was made, signed by the couple, in the amount of $227,500. It expired without acceptance on the evening of August 29, 1990.

On August 20, 1990 Mr. Gamache obtained a second mortgage loan which was also secured on the family property. The lender was the Caisse populaire Carrefour Therrien and the amount of the loan was $100,000.

On December 19, 1990 Richard Gamache transferred the family property to the appellant, his wife. The contract of sale is tab 13 of Exhibit A-1. The price is described in three paragraphs: an initial paragraph and two paragraphs lettered (A) and (B). The latter two paragraphs reproduce the two mortgage undertakings. Their amount is $148,227.53. These undertakings are not in question.

The preliminary paragraph giving the description of the price reads as follows:

PRICE

This sale is further made for good and valid consideration which the Seller acknowledges having received from the Purchaser, giving release therefor, and in particular the release which the Purchaser gives the Seller hereby for all monies mentioned under clauses 4(A) and (B) of their marriage contract concluded before Jacques Boileau, notary, on June 15, 1966 and registered in the Montreal registry division office as No. 1921021, and the full and final release which the Purchaser gives the Seller for all monies which the latter owes or might owe him prior to that date, and further in consideration of the undertaking by the Purchaser to assume and save the Seller harmless for all amounts of capital and interest owed the mortgage creditors as follows....

[Translation.]

These amounts mentioned in clauses 4(A) and (B) of the marriage contract concern furniture having a value of $3,000 and a gift mortis causa in the amount of $5,000. In any case, it should be noted that the deed of sale included, in addition to real property, all furniture, movables, silverware, linen and ornaments.

As counsel for the respondent pointed out, it is also worth noting the part of this contract headed [Translation] “Statements required pursuant to section 9 of the Act to authorize municipalities to collect duties on transfers of immoveables”, in which the value of the consideration is set at $200,000:

The Seller and the Purchaser state the following:

(1) They set the value of the consideration at the sum of TWO HUNDRED THOUSAND DOLLARS;

(2) The transfer fee payable by the Purchaser is ONE THOUSAND FIFTY DOLLARS;

(3) Payment of the transfer fee is exempt under section 20(d) of the said Act;

(4) For the purposes of this statement it is hereby indicated that the address of the Transferee is as follows:

45 Rue St-André

Longueuil, Quebec

JAH 1K5

[Translation.]

On the same day the appellant signed the following notarized release (tab 18, Exhibit A-1):

No. 9950

RELEASE: On December nineteen,

BY: NINETEEN NINETY,

RENE MONETTE: BEFORE MICHEL TRUDEAU, notary,

TO: at Longueuil, province of Quebec.

RICHARD GAMACHE

APPEARED

RENÉE MONETTE, secretary, residing at 45 Rue St-André, Longueuil, J4H 1K5;

WHO hereby acknowledges receiving from her husband RICHARD GAMACHE by good and valid consideration all monies owed by him pursuant to their marriage contract concluded before Jacques Boileau, notary, on June 15, 1966 and registered in the Montrai registry division office as No. 1921021, and in particular pursuant to clauses 4(A) and (B) of the said marriage contract, AND GIVES FULL AND FINAL RELEASE THEREFOR.

Further, RENÉE MONETTE for good and valid consideration received hereby gives full and final release to her husband RICHARD GAMACHE for all monies which the latter owes or may owe her prior to that date.

The Appearer requests the Registrar of the Montréal registry division to append this deed of release to the aforesaid marriage contract registered as No. 1921021.

DONE at Longueuil as No. NINE THOUSAND NINE HUNDRED FIFTY.

READING HAVING BEEN MADE, the Appearer has signed before the undersigned notary.

(signed) RENE MONETTE

(signed) MICHEL TRUDEAU, notary

[Translation.]

Counsel for the respondent sought to rely on the value of the considera- tion received for the release given by the appellant to her husband [Translation] “for all monies which the latter owes or may owe her prior to that date” as a means of raising the amount of the consideration for the property transferred up to the market value set by the Minister.

On February 6, 1991 the house was again put up for sale by the real estate agency Montreal Trust (tab 21). The asking price was $249,000. The agreement was renewed on September 24, 1991 for a price of $239,739.

On January 6, 1992 there was a purchase offer for $150,000 and this was rejected on January 8, 1992.

On April 14, 1992 the family property was sold to third parties. The price was $200,000. The offer made for this sale was not submitted.

On May 29, 1991 Mr. Gamache made a voluntary assignment of his assets.

On January 29, 1992 the Department of National Revenue filed with the trustee its claim for Mr. Gamache’s tax debt for the years 1989 and 1990. It amounted to $19,154.48. For 1990 the tax payable came primarily from the repurchase of a Registered Retirement Savings Plan (RRSP). It was indicated in the claim that the priority of debts was sought under subsection 136( 1 )(j) of the Bankruptcy and Insolvency Act (Exhibit I-1). There was no mention of a transfer of the family property at a value below the market value.

On March 31, 1992, with a correction on June 23, 1992, the Superior Court, Bankruptcy Division, rendered a conditional judgment discharging the judgment debtor Richard Gamache. This judgment was conditional on the reassignment by the bankrupt’s wife of an RRSP with the Laurentian insurance company to be dealt with according to law in the hands of the trustee. This discharge judgment was conditional because of the existence of an application by the creditor Roynat Inc. for leave to bring an action as a consequence of the trustee’s refusal to act. This application was made on behalf of the creditor instead of the trustee and at his own expense pursuant to section 38 of the Bankruptcy and Insolvency Act to challenge the transfer of an RRSP made on February 7, 1991. The application was made on March 9, 1992 and was heard on March 30, 1992 (Exhibit 1-2).

The appellant signed a deed of reassignment of the RRSP on March 31, 1992.

On June 23, 1992 the appellant was assessed in the amount of $19,154.18. The assessment read as follows:

This assessment is made pursuant to the provisions of subsection 160(1) of the Income Tax Act and concerns the transfer of the immovable property located at 45 St-André, Longueuil, made on or about December 19, 1990 between Richard Gamache and Renée Monette Gamache.

[Translation.]

The objection was based on two grounds: the first was that the immovable property was transferred for consideration equal to the fair market value and the second that the proof of claim filed with the trustee made the appellant’s assessment inadmissible.

The Minister ratified the assessment as follows:

As your spouse, Richard Gamache, has transferred to you the immovable property located at 45 Rue St- André in Longueuil, and as on the day of the transfer the maker of the same had a tax debt to be paid pursuant to the Act, the Minister has duly set your assessment at $19,154.18, pursuant to the requirements of the provisions of subsections 160(1) and (2) of the Act.

[Translation.]

According to the Reply to the Notice of Appeal, the Minister assumed that the value of the property was $190,000.

The respondent filed the report of an expert witness on real estate appraisal and his conclusion was that based on the market valuation method the market value of the property at December 19, 1990 was $186,400.

The appellant did not call any expert witnesses. Ms. Cournoyer, who testified as to the facts when she was a real estate agent with Royal Lepage, said that she is no longer engaged in that profession and threw out all her documents when she changed her occupation. She said that the price asked in the first brokerage agreements had been set by Mr. Gamache. She did not mention the price she might have suggested after making a study of comparable sales. However, she noted that in 1990 the real estate market for houses of $200,000 and over was stagnant. She said that no more than five houses at that price or over were sold on the South Shore.

Arguments of parties

Counsel for the appellant submitted that the tax debt of the appellant’s husband was cancelled by the bankruptcy and his subsequent discharge.

She further noted that the property was transferred at its fair value even without taking into account the consideration pertaining to the appellant’s patrimonial rights to the property, and certainly for value received if that consideration is included.

Counsel for the respondent maintained that the tax debt of the appellant’s husband was not cancelled so far as the appellant’s liability as joint and several debtor was concerned, and in this connection he referred to section 179 of the Bankruptcy and Insolvency Act and to section 160 of the Act.

He further submitted that the property was not transferred at its fair market value and that proof of the monetary value of the consideration pertaining to the alleged assignment of patrimonial rights was not submitted.

Analysis

Subsection 160(1) of the Act reads as follows:

160(1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) the person’s spouse or a person who has since become the person’s spouse,

(b) a person who was under 18 years of age, or

(c) a person with whom the person 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 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, 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 the 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 total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subjection shall be deemed to limit the liability of the transferor under any other provision of this Act.

As will be seen below, in resolving this appeal the Court does not have to determine the fair market value of the property transferred, but as I have heard evidence on this point I will consider it briefly.

The analysis of the Minister’s expert was made by using comparable values and the market value of $186,400 at which he arrived is in my opinion the correct one. The market value could not be $150,000 as suggested by counsel for the appellant relying on the two offers of that amount made, since they were not accepted. The offer that was accepted ($200,000) is greater than the market value set by the Minister’s expert.

As mentioned by counsel for the respondent, no evidence was submitted as to the value of any amounts which the appellant’s husband owed or might have owed her prior to the transfer and for which the appellant gave a release by accepting the transfer.

To conclude this aspect of the matter, the appellant could not succeed on this point. That is not true with respect to the application of the Bankruptcy and Insolvency Act, which was the appellant’s main argument. Counsel for the appellant referred to the decision of this Court in Caplan v. Minister of National Revenue (sub nom. Caplan v. R.), [1995] 2 C.T.C. 2932, 95 D.T.C. 709 (T.C.C.), in which the beneficiary’s appeal was allowed because at the time she was assessed the maker of the transfer had been released from his tax debt and so no longer owed any money for taxes.! [1] I have also come to the conclusion that the appeal should be allowed, but by a different route.

The legal situation at issue in the instant appeal is within the purview of two statutes, the Bankruptcy and Insolvency Act and the Income Tax Act.

The purpose of the Bankruptcy and Insolvency Act is to allow a debtor who cannot meet his financial obligations to place his property at the disposal of his creditors, allow them to recover their debts in the order specified by the Act and subsequently to start over.

I refer to the judgment of the Supreme Court of Canada in Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 119, [1952] 3 D.L.R. 348, at page 120 (D.L.R. 348), where Estey J. said:

The purpose and object of the Bankruptcy Act is to equitably distribute the assets of the debtor and to permit of his rehabilitation as a citizen, unfettered by past debts.

La Loi sur la faillite a pour objet de distribuer équitablement les actifs du débiteur et de permettre sa réhabilitation comme citoyen, libre de toutes dettes antérieures.

[Translation.]

Section 179 of the Bankruptcy and Insolvency Act, referred to by counsel for the respondent, reads as follows:

An order of discharge does not release a person who at the date of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with him, or a person who was surety or in the nature of a surety for him.

Counsel for the respondent argued that under section 160(1) of the Act the transferee and the maker of the transfer were jointly and severally bound from the time the property was transferred below the market value if the maker of the transfer owed a tax debt at the time it was made. Counsel for the respondent accordingly argued that by virtue of the Act the transferee was jointly bound to pay the tax debt and so was not discharged from that debt although her husband was. That is what this Court said in Garland v. Minister of National Revenue, [1988] 1 C.T.C. 2398, 88 D.T.C. 1271 (T.C.C.). In Caplan, supra, the judge ruled otherwise on the ground that the wording of section 160 of the Act had been amended.

In Garland the judge applied precedents dealing with cases of the signature of promissory notes. There is clearly no question that cosignatories and endorsers of promissory notes are covered by the provision contained in section 179 of the Bankruptcy and Insolvency Act and are not discharged by the discharge of the principal debtor; but I am not sure that Parliament intended to include the recipient of a transfer who by the Act is made jointly and severally liable with the maker of the transfer, for the reasons that follow.

Section 160 of the Act is a collection provision. The Minister is in the position of a creditor. The purpose of the provision is not to determine the amount of tax owed by a taxpayer but to collect it. We are dealing with legal rules relating to the relations between debtors and creditors. The legislature, which is Parliament in the case of both statutes at issue, can give the Minister administering the Act collection authority in addition to that given to him by the Bankruptcy and Insolvency Act, but this must be made quite clear in that Act or in the Income Tax Act.

There are provisions in the Bankruptcy and Insolvency Act authorizing the cancellation of property transfers made by a bankrupt without adequate valuable consideration, in particular in the division of that Act titled “Settlements and Preferences”, sections 91 to 101.2.

Accordingly, Parliament has made provision in the Bankruptcy and Insolvency Act for the manner in which and time at which transfers not made at their fair market value should be challenged.

The ministerial employee who testified at the hearing explained that the Minister preferred to use his own legislation because it is more effective. That seems clear, but in so doing it would appear that he is acting contrary to the purpose of the Bankruptcy and Insolvency Act as indicated by the Supreme Court in the judgment quoted above and contrary to the provisions laid down by that Act.

For example, in the instant case the bankrupt supported the request of a creditor opposing a transfer made to his wife involving an RRSP. If he had known that another transfer made to his wife would subsequently be challenged he might have acted differently. In any case, the purpose of the Bankruptcy and Insolvency Act is that all such challenges should be made at the time specified by the Act so that the bankrupt may in due course be truly discharged and have an opportunity to recover himself and rebuild his finances.

When interpreting legislation the courts sometimes have to establish a priority as between two statutes which may be applicable. I refer in particular to Driedger on the Construction of Statutes, [2] in the chapter headed “Purposive Analysis to Establish Priority”, and I quote:

By examining overlapping provisions in their relevant legislative context, the courts are sometimes able to place them in a single scheme and assign them a ranking or priority based on their role in that scheme. Conflict is thus avoided by subordinating one provision to another in a way that gives effect to the dominant purpose of the legislature.

Lorsqu’ils examinent des dispositions qui se chevauchent dans leur cadre législatif pertinent, les tribunaux arrivent parfois à les placer dans un seul régime et à leur attribuer un rang ou un ordre de priorité en fonction de leur rôle dans ce régime. On évite ainsi leur incompatibilité en subordonnant l’une d’entre elles à l’autre de telle sorte qu’il puisse être donné effet à l’intention véritable du législateur.

[Translation.]

The writer refers to the British Columbia Court of Appeal judgment in Hongkong Bank of Canada v. Chef Ready Foods Ltd. (sub nom. Chef Ready Foods Ltd. v. Hongkong Bank of Canada) (1990), 51 B.C.L.R. (2d) 84, [1991] 2 W.W.R. 136 (C.A.). That case concerned the relationship between the Bank Act and the Companies' Creditors Arrangement Act. The Court examined the purpose of both statutes and determined that the Companies' Creditors Arrangement Act should have priority because of the importance of its function in the social order. [3]

It would appear that the judgments of the Federal Court of Appeal and the Supreme Court of Canada in Symes v. R. (sub nom Symes v. Canada), [1991] 2 C.T.C. 1, 91 D.T.C. 5397 (F.C.A.); affirmed (sub nom. Symes v. Canada), [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001, and Schwartz v. R., [1996] 1 C.T.C. 303, 96 D.T.C. 6103 (S.C.C.), are to the same effect, namely that when a legislative scheme is created governing the exercise of certain rights it is the specific provisions in that scheme which apply rather than the general legislative provisions.

So far as the relations between a bankrupt and a creditor are concerned, there is no doubt that the Bankruptcy and Insolvency Act is legislation which takes priority over other statutes unless Parliament clearly indicates the contrary. I have come to the conclusion that in the event of bankruptcy of the maker of a transfer section 160 of the Act does not apply and that the Minister must act in accordance with the scheme created by the Bankruptcy and Insolvency Act.

The appeal is allowed with costs.

Appeal allowed.