D’aoust v. R., [1998] 3 CTC 2309, 98 DTC 1344

Lamarre T.C.J.:

The appellant is appealing two assessments by the Minister of National Revenue (“the Minister”) made pursuant to s. 160 of the Income Tax Act (“the Act”) and dated August 9, 1994, the first assessment bearing No. 31139 and in the amount of $60,210.77, and the second assessment bearing No. 31140, in the amount of $49,690. In making these assessments the Minister relied on the following facts:

[TRANSLATION]

(a) Robert D’Aoust is the appellant’s husband;

(b) on or about June 30, 1975, Robert D’Aoust purchased a residence located at 201 Avenue du Grand Calumet in Lucerne for $50,450;

(c) on or about December 17, 1984, Robert D’Aoust transferred the said residence to the appellant without consideration;

(d) on or about October 17, 1985, Robert D’Aoust paid off a mortgage debt of $60,210.77 on the said residence without consideration, and without any provision being made therefor in an order, judgment or written separation agreement;

(e) on or about October 17, 1985, Robert D’Aoust was responsible for payment of an amount exceeding $60,210.77 pursuant to the Act;

(f) the appellant and Robert D’Aoust are jointly and severally liable for the payment pursuant to the Act of an amount equal to the value of the property which Robert D’Aoust transferred to the appellant, namely $60,210.77;

(g) on or about October 1, 1986, when the mortgage debt on the house was struck off, the appellant sold it for $120,000 and purchased a new residence at 533 Falwin Street for cash, paying $169,690;

(h) as the difference between the two transactions was $49,690, on or about October 1, 1986, Robert D’Aoust transferred $49,690 to the appellant without consideration so that the latter could purchase the new residence without any provision being made therefor in an order, judgment or separation agreement;

(i) on or about October 1, 1986 Robert D’ Aoust was responsible for the payment of an amount exceeding $49,690 pursuant to the Act;

(j) the appellant and Robert D’Aoust are jointly and severally liable for payment under the Act of an amount equal to the value of the property which Robert D’Aoust transferred to the appellant, namely $49,690;

(k) on or about October 29, 1991 Robert D’Aoust made an assignment in bankruptcy and the Minister of National Revenue, his sole creditor, filed a claim for $517,616.63.

The appellant admitted subparagraphs (a), (g), (i) and (k).

Section 160(1) of the Act, as applicable to the years at issue, reads as follows:

(l) 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 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 subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

With respect to the first assessment (bearing No. 31139) the appellant argued, first, that the residence located at 201 Avenue du Grand Calumet, purchased in 1975, always belonged to her and that there was thus no transfer of ownership on December 17, 1984, merely the rectification of the title to the property.

By a notarial deed dated June 30, 1975 (Exhibit I-2), Robert D’ Aoust purchased the Grand Calumet property for $50,450, $4,480 of which was paid in cash and the balance of $45,970 was a mortgage debt which Robert D’Aoust assumed personally. The balance of this debt became due and payable on July 1, 1980.

By a notarial deed dated December 17, 1984 (Exhibit 1-3), Robert D’Aoust transferred the Grand Calumet property to the appellant for a consideration of $25,000, representing the amount which Robert D’Aoust undertook to give the appellant under their marriage contract, executed before a notary on July 14, 1967 and registered on July 18, 1967, for which the appellant gave a full and final release. In that deed of transfer Robert D’Aoust acknowledged being the owner of the immovable property in question prior to the transfer.

None of these notarial deeds refers to the fact that it was the appellant who was the owner of the Grand Calumet property prior to December 17, 1984.1 therefore consider that this property was transferred to the appellant on that date in consideration of the sum of $25,000.

The deed of transfer clearly indicated that this sum represented an amount which Robert D’Aoust had undertaken to give the appellant by a marriage contract and that the appellant gave him a full and final release therefor by the deed of transfer. The appellant and her husband were married in the province of Quebec under the regime of separation of property. According to Quebec civil law, an inter vivos gift made by a marriage contract divests the donor of the property given at the time the marriage contract is executed and if the donor does not have immediate possession thereof, he becomes indebted therefor if there is no immediate delivery. Such a gift is accordingly characterized as an inter vivos gift of present property (see arts. 777 and 778 C.C.L.C. and arts. 1807 and 1818 C.C.Q.). Such a gift results in the transfer of given property on the date the marriage contract is executed (see the judgment of the Federal Court, Trial Division, in which Pinard J. dealt with this specific point, in Furfaro- Siconolfi v. R. (1989), 89 D.T.C. 5519 (Fed. T.D.)).

As the transfer of the amount took place at the time the marriage contract was entered into, Robert D’Aoust only paid his debt when he transferred ownership to the appellant. As the appellant had had a right of ownership over this amount since 1967, she may be regarded as having given consideration at least equal to the amount of the gift, namely $25,000 (see the judgment of the Quebec Court of Appeal in Importations Keystone Inc., Re (24 mai 1995), no C.A. Québec 200-09-000547-908 (C.A. Qué.)).

The respondent further argued that as the appellant had not filed the marriage contract, she could not prove the gift by marriage contract. I note here that although the marriage contract was not filed as such the deed of transfer entered in evidence, which is itself a notarized contract, referred expressly to the relevant terms of the marriage contract and to its registration number in the Montreal Division Registry Office. The deed of transfer therefore established the authenticity of the marriage contract (arts. 2817, 2818 and 2820 C.C.Q.).

Additionally, although there may have been a transfer of ownership to the appellant in 1984 the Minister, in his assessment and his submissions, relied instead on the fact that the appellant apparently received a benefit in the amount of $60,210.77 by the payment of a debt which Robert D’ Aoust had allegedly contracted to the Royal Bank in 1983 by giving a mortgage on the Grand Calumet property as security. The Minister maintained that this debt was repaid in 1985 when the property had already been transferred to the appellant.

The appellant argued that this debt was repaid before 1985. Robert D’Aoust testified that he was unable to recall the exact date of the repayment as the trustee had been in possession of all his documents since his bankruptcy in 1991. He also tried to find out the date of the final repayment of this mortgage debt to the Royal Bank, but was told that this information had been destroyed.

By a notarial deed before the notary Charles-Henri Rioux, Robert D’Aoust borrowed the sum of $61,500 from the Royal Bank on May 30, 1983 and mortgaged the Grand Calumet property as security (Exhibit 1-4). The loan bore interest at 11 percent per annum on the unpaid capital balance. By the loan deed Robert D’Aoust undertook to repay the bank in consecutive monthly payments of $592.24, the first payment to be made on July 1, 1983. The unpaid balance of principal and interest became payable under the loan deed on June 1, 1984.

The appellant intervened in the loan deed and consented to Robert D’Aoust mortgaging the property in question in accordance with the loan.

The borrower likewise undertook to obtain prior consent from the Bank in the event of the sale or transfer of the mortgaged property. He was required at the same time to ensure that a subsequent holder would personally assume the borrower’s obligations to the bank.

The respondent relied on a document dated September 17, 1985 (Exhibit 1-5), by which the Royal Bank gave a discharge and release of the mortgage created in the bank’s favour by the loan deed of May 30, 1983, arguing that Robert D’Aoust repaid the loan in question in 1985. In another document executed on October 15, 1985 the Royal Bank acknowledged before a notary that it had received from Robert D’Aoust [TRANSLATION] “prior to the execution hereof, any sum owed to it by the same” pursuant to the aforementioned mortgage deed.

It is not clear from these documents whether the debt was repaid in 1985 as the respondent maintained, or previously, as the appellant argued. In the deed of transfer of December 17, 1984, entered into before the same notary Rioux, in which Robert D’Aoust transferred the property to the appellant, no reference was made to the mortgage debt encumbering the property transferred to the appellant. The only clauses regarding titles to property were the following:

[TRANSLATION]

The transferor shall provide no other title than those transferred to the transferee.

The transferor hereby personally undertakes to clarify title to the immovable property transferred hereby, immediately upon request therefor by the aforementioned transferee, the same also being an essential condition of this transfer.

It may well be that at the time of the transfer Robert D’Aoust had already repaid the loan in question and (when he said he undertook [TRANSLATION] “to clarify title”) he was simply undertaking to obtain a release from the bank. This conclusion becomes all the more persuasive on reading the deed striking out the mortgage on October 17, 1985, which refers only to the loan deed of May 30, 1983 and to no other subsequent renewal of the loan. It is highly probable that if the mortgage debt of $61,500 had not been repaid on June 1, 1984 the Royal Bank would have renewed the initial mortgage given for a term of one year or would have made some other provision for repayment of the debt. In the latter event the notary would ordinarily have referred to this in the deed of transfer of December 17, 1984, and he did not do so.

It is true that the evidence before the Court is rather weak. However, the Court can understand it was difficult for the appellant to present evidence of the exact date on which the mortgage debt was repaid. The trustee is in possession of all Robert D’Aoust’s documents and the bank has destroyed the documents relating to those taxation years. In view of the documents entered in evidence and the fact that it was the same notary who processed the loan, the transfer and the striking out of the mortgage, I infer that if the notary made no reference to any mortgage debt in the transfer this was because it had probably been repaid at the time.

I therefore conclude that the weight of the evidence is that Robert D’Aoust did not pay the balance of the mortgage debt in 1985 and that the debt was extinguished at the time the property was transferred to the appellant. Moreover, this is consistent with the loan agreement, which stipulated that the balance of the debt became due and payable on June 1, 1984.

As in all probability the balance of the debt was repaid before the Grand Calumet property was transferred to the appellant, it cannot in my opinion be argued that Robert D’Aoust transferred property to the appellant worth $60,210.77.

At the same time, I consider I do not have to rule on the question of whether the property was transferred to the appellant for consideration less than the fair market value of the property in 1984, since the assessment pursuant to s. 160 was not made on the basis of that transfer and the pleadings do not expressly deal with this point (see Cooke v. R., [1997] 2 C.T.C. 254 (Fed. C.A.); Mohawk Oil Co. v. R., [1992] 2 F.C. 485 (Fed. C.A.)). In any case, the evidence in the record does not provide any basis for a ruling by the Court on this point.

With respect to the assessment bearing No. 31140, the respondent argued that Robert D’Aoust had transferred the sum of $49,690 to the appellant when the property located at 533 Falwin Crescent was purchased in October 1986.

The property on Falwin was purchased by the appellant for the sum of $169,690. The appellant sold the Grand Calumet property on September 26, 1986 for the sum of $120,000, while there was no privilege or hypothec on the property. The respondent maintained that the $49,690 difference came from a transfer of money made by Robert D’Aoust to the appellant.

Robert D’Aoust was the only one who testified on this point and he said that the appellant had personal savings, since she had worked for 32 years, and she was solely responsible for paying the difference to purchase the Falwin Crescent property.

The appellant, who was present at the hearing since she represented herself, did not testify on this point.

In this case the assessment refers clearly to a transfer of money between Robert D’Aoust and the appellant to purchase the property on Falwin and this was a presumption of fact on which the respondent relied in the Reply to the Notice of Appeal. I consider that the appellant has not shown on a balance of probabilities that her husband had not transferred $49,690 to her so she could purchase the property on Falwin Crescent. In the circumstances, her testimony and documents supporting a conclusion that she had paid this amount personally were necessary. Testimony by Robert D’Aoust, who accumulated a sizable tax debt between 1984 and 1991, the year of his bankruptcy, is not sufficient to persuade me that the assessment was wrong.

Moreover, the appellant argued that the respondent could no longer claim the amount of Robert D’Aoust’s tax debt since his bankruptcy had extinguished the debt. The Federal Court of Appeal ruled clearly on this point in Heavy side v. R., (1996), [1997] 2 C.T.C. 1 (Fed. C.A.). An order releasing a bankrupt does not extinguish the liability of the transferee created by s. 160 of the Act. This is what Décary J. said on this point:

But the order of discharge does not extinguish the debt; it is personal to the husband and does not affect the liability of the respondent [the transferee] who is jointly bound .<. Unless a payment be made under the terms of subsection 160(3) of the Act, the transferee’s liability remains, and a discharge under the Bankruptcy Act is simply not a payment under the terms of subsection 160(3). (See Heavyside, supra, para. [12].)

There is no evidence before this Court that a payment in accordance with s. 160(3) was made to reduce the appellant’s liability under s. 160(1) of the Act.

The appellant also challenged the assessments made against Robert D’Aoust. The respondent argued that the appellant could not challenge these assessments, as they had not been challenged by Robert D’Aoust himself. On this point, it has been held by this Court several times that the transferee may challenge the accuracy of the assessment imposed on the transferor, even if the latter has not done so (see Sarraf v. Minister of National Revenue (1994), 94 D.T.C. 1506 (T.C.C.); Thorsteinson v. Minister of National Revenue (1980), 80 D.T.C. 1369 (T.R.B.); Ramey v. R. (1993), 93 D.T.C. 791 (T.C.C.)).

Although the appellant has the right to challenge the validity of the assessment made against Robert D’ Aoust, she submitted no evidence which the Court could use to question the validity of that assessment. The statement signed by Robert D’Aoust at the time of the bankruptcy indicated that on October 25, 1991 he had a debt to Revenue Canada on the order of $526,000 (Exhibit I-1). The proof of claim made by the Department of National Revenue on March 15, 1994 indicated that Robert D’Aoust had a tax debt amounting to $517,616 on October 29, 1991. The schedule to this claim broke down the assessments made for each taxation year from 1984 to 1991. For 1986 and prior years, 1986 being the taxation year in which the property was transferred, the total tax, interest and penalties amounted to nearly $200,000.

The appellant presented no evidence that could dispute the accuracy of these assessments.

Accordingly, the appeal from the assessment, notice of which is bearing No. 31139, is allowed without costs and the assessment referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is not liable to pay the sum of $60,210.77 under s. 160 of the Act.

The appeal from the assessment, notice of which is bearing No. 31140, is dismissed without costs and the assessment establishing that the appellant is liable to pay the sum of $49,690 under s. 160 of the Act is affirmed.

Appeal dismissed.