Ferracuti v. R., [1999] 1 CTC 2420, 99 DTC 194

McArthur T.C.J.:

This appeal is from an assessment made under section 160 of the Income Tax Act (the “Acr’) concerning the Appellant’s 1990, 1991, 1992, 1993 and 1994 taxation years. The assessment is based upon alleged transfers by the Appellant’s husband, John Ferracuti, in the amount of $136,695.02 between February 15, 1990 and June 9, 1994. It is not disputed that Mr. Ferracuti was, during the years in question, obligated to pay not less than $393,380.00 under the Act during the relevant years.

Mr. & Mrs. Ferracuti have been married over 25 years and have two sons, 16 and 28 years old. Mr. Ferracuti was in the construction business and was the substantial shareholder in several corporations. His businesses may have prospered during the 1980s but suffered during the economic recession years of the 1990s.

Mrs. Ferracuti was the registered owner of the family home in the City of Etobicoke in which she resided as a full-time homemaker with her husband and two children. In 1992, their oldest boy was severely injured in a car accident and she administered to his considerable needs during the last three relevant years.

Corporations in which the Appellant’s husband was a substantial shareholder made payments to a variety of third parties on the direction the Appellant’s husband throughout the period from February 15, 1990 to June 9, 1994, totalling as follows:

The Appellant admits that there was a transfer of $500.00 on March 23, 1990 to the Appellant within the meaning of section 160 of the Act. The Respondent did not wish to make submissions with respect to the Union Gas payment of $67.46 or the skiing fees and implied that these amounts may have been incorrectly assessed by the Minister.

Appellant’s Position (L2/R3986/T0/BT0) test_marked_paragraph_end (2332) 1.047 0597_5141_5307

The Appellant claims that her husband, John Ferracuti, made no payments to her and transferred no property to her during the period of February 15, 1990 to June 9, 1994. The Appellant further claims that the payments made by one or more of the corporations for the taxes paid to the City of Etobicoke, mortgage interest and home insurance constitute payments made on behalf of Mr. Ferracuti in the discharge of his responsibilities to provide shelter for his family. The Appellant owns the matrimonial home which is subject to a mortgage. Mr. Ferracuti is a guarantor on the mortgage. The Appellant claims that these payments also benefited Mr. Ferracuti as he was a member of the family. The Appellant further claims that the mortgage payments, principal and interest, made to London Life Insurance company with respect to the matrimonial home were made in satisfaction of the legal obligations of Mr. Ferracuti as a guarantor. It was Mr. Ferracuti who arranged for hydro through Etobicoke Hydro, therefore any payment to Etobicoke Hydro constituted a discharge of his personal liability to Etobicoke Hydro. Furthermore, the payments to McLean Hunter for cable service and to Norm’s Weed Control were made due to the fact that it was Mr. Ferracuti who arranged for these services.

Respondent’s Position (L0/R3848/T0/BT0) test_marked_paragraph_end (2092) 1.023 0598_1109_1279

The Minister relied on the following facts:

a) between February 1990 and June 1994, John Ferracuti (the “Transferor”) transferred not less than $136,695 (the “Property”) to the Appellant;

b) at all material times, the transferor was married to and residing with his spouse, the Appellant;

C) at all material times, Mr. Ferracuti and the Appellant were not dealing at arm’s length;

d) at the time of the transfers, the fair market value of the Property was not less than $136,695:

e) at the time of the transfers, the fair market value of the consideration given by the Appellant to Mr. Ferracuti for the Property was nil;

f) the aggregate of all amounts that the Transferor was liable to pay under the Act in or in respect of the taxation year in which the Property was transferred or any preceding taxation year was not less than $393,380.

Legislation (L4/R4728/T0/BT0) test_marked_paragraph_end (364) 1.023 0598_5381_5545

The relevant section of the Act reads:

160. Tax liability re property transferred not at arm’s length

(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 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.

Issue: (L19/R5134/T0/BT0) test_marked_paragraph_end (2706) 1.034 0599_4025_4157

Whether the Appellant is liable to pay the amount of $136,695 pursuant to section 160 of the Act in respect of a transfer of property to the Appellant?

Analysis (L13/R4926/T0/BT0) test_marked_paragraph_end (144) 1.030 0599_5151_5317

The Appellant puts great emphasis on the fact that no money was ever paid to the Appellant and that subsection 160(1) of the Act does not state “to or for the benefit of the person’s spouse.” Both counsel referred in their submissions to Actus Holdings Ltd. v. R. (1996), 97 D.T.C. 605 (T.C.C.), and the meaning of the word transfer as considered by Rouleau J. of the Federal Court Trial Division in Fluxgold v. R., [1990] 1 C.T.C. 176, 90 D.T.C. 6187 (Fed. T.D.). Rouleau J., stated at page 6189:

1 am satisfied that Mr. Justice Thurlow, in the Joseph B. Dunkelman v. Minister of National Revenue 59 DTC 1242, put the definition to rest when he wrote at page 1244:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result whether direct or circuitous, may properly be called a transfer.

Both counsel referred to the meaning of “transfer” as set out in Dunkelman v. Minister of National Revenue (1959), 59 D.T.C. 1242 (Can. Ex. Ct.).

With respect to the “benefit” argument put forth by the Appellant, the Federal Court of Appeal has recently dealt with this argument in Medland v. KR. (1998), 98 D.T.C. 6358 (Fed. C.A.). Desjardins J.A., stated at pages 6362 and 6363:

The words “indirectly ... by ... any other means” in subsection 160(1) of the Act refer to any circuitous way in which property of any kind passes from one person to another. In the case at bar, when Mr. Medland made the payments to the mortgagee, he specified that such money was to be attributed in diminution of the mortgage on the property on which he had no more interest. While it is true that subsection 160(1) of the Act does not contain the words “for the benefit of” or “on behalf of” as found in subsections 15(1) or 74.1(1) or paragraph 224( l . ] )(b) of the Act, the applicant does not deny that she became less indebted by the payments and her equity in the property increased. The means by which this result occurred were monies paid to the Bank which was then transferred by the Bank on the account of the mortgage of a house owned solely by the applicant. The payment to the Bank was simply a conduit through which the funds passed indirectly from her husband to her.

The payments made by the corporation to the third parties were charged to Mr. Ferracuti’s personal account in the corporations’ books. I find that the payment by the corporations, in which Mr. Ferracuti was a substantial shareholder, to the third parties is a “circuitous way in which property of any kind passes from one person to another”. The corporations were a mere conduit with respect to transfers made to the Appellant. The fact that subsection 160( 1 ) of the Act does not state “to or for the benefit of the person’s spouse” does not affect this finding.

With respect to the mortgage, the Appellant relies on a statement in Actus (supra) wherein Mr. Sinnott had guaranteed a mortgage for the Appellant, a corporate taxpayer. Mr. Sinnott advanced funds in order for the Appellant to pay the mortgage and at a later date the Appellant repaid part of the funds advanced. The Minister attempted to hold the Appellant vicariously liable under subsection 160(1) of the Act, by claiming that at the relevant time of the advance to the Appellant, Mr. Sinnott owed tax under the Act. In holding for the corporate taxpayer, Sobier, J.T.C.C. stated at page 606:

On two counts, I cannot characterize the payments as transfers. On the one hand. Mr. Sinnott had an obligation to pay the credit union, even if not called upon to do so, and secondly, I find that there was not a transfer in the sense referred to by Mr. Justice Thurlow, in Dunkelman (supra) the property in the funds was not vested absolutely in Actus but was a loan which was later repaid.

Sobier, J.T.C.C., found that there was not a transfer as within the meaning set out in Dunkelman (supra) and as stated per Thorson P. in Fasken Estate v. Minister of National Revenue (1948), 49 D.T.C. 491 (Can. Ex. Ct.), as a loan does not constitute a transfer. In the case at bar, the fact that Mr. Ferracuti guaranteed the mortgage does not make the payment his obligation. His obligation would arise if the principal, namely the Appellant, Mrs. Ferracuti, defaults on the loan and the mortgagee pursues a remedy against the guarantor of the loan. Even if Mr. Ferracuti was found to have an obligation to pay the mortgagee, any payment would have the effect of benefiting the Appellant as she is the sole owner of the mortgaged property. The Federal Court of Appeal in Medland (supra), found this is an indirect transfer and the Bank is merely a “conduit”.

The other argument put forth by the Appellant is that the husband is discharging his own obligations by causing his corporations to pay these bills. The Appellant submits that these obligations arose by the fact that Mr. Ferracuti contracted with third parties for the supply of services. The Appellant further claims that Mr. Ferracuti had a legal obligation to support his family under sections 30, 31 and 35 of the Ontario Family Law Act}. However, whether the obligation is imposed by contract or by statute does not change the outcome that a transfer was “indirectly” made to his spouse. It would be absurd to hold that a person could get around the definition of transfer set out in Fasken (supra) by entering into a contract whereby the transferor undertakes obligations that will benefit the transferee. It is possible that a payment to a third party could satisfy an obligation to that party as well as being considered a transfer of property to the transferee.

I conclude that there was a transfer of property.

For there to be a transfer within the meaning of section 160 of the Act, there must be a transfer without valuable consideration. There could be a transfer of property but if this transfer is for valuable consideration, then there is not a transfer within the meaning of section 160 of the Act.

Section 160 of the Act is similar to the concept of unjust enrichment. The transferee should not be unjustly enriched, especially to the detriment of the Crown, with respect to the transfer made by the transferor.

The concept of unjust enrichment was considered by the Supreme Court of Canada in Becker v. Pettkus, [1980] 2 S.C.R. 834 (S.C.C.). In holding for the Respondent, Ms. Becker, the Court considered the services provided by Ms. Becker and fashioned the remedy of constructive trust. The Court held at page 847 that “The principle of unjust enrichment lies at the heart of the constructive trust”. Dickson J. further stated at page 848:

In Rathwel I ventured to suggest there are three requirements to be satisfied before an unjust enrichment can be said to exist: an enrichment, a corresponding deprivation and absence of any juristic reason for the enrichment.

Mr. Ferracuti had a “juristic reason” to make some payments. He had a legal obligation to support his family as set out in sections 30, 31 and 35 of the Ontario Family Law Act. The relevant sections read:

30. Every spouse has an obligation to provide support for himself or herself and for the other spouse, in accordance with need, to the extent that he or she is capable of doing so.

31 (1) Every parent has an obligation to provide support, for his or her unmarried child who is a minor or is enrolled in a full time program of education, to the extent that the parent is capable of doing so.

l...]

33 (7) An order for the support of a child should.

(a) recognize that each parent has an obligation to provide support for the child:

[... I

(8) An order for the support of a spouse should,

(a) recognize the spouse’s contribution to the relationship and the economic consequences of the relationship for that spouse:

(b) share the economic burden of child support equitably;

[...]

(9) In determining the amount and duration, if any, of support for a spouse or parent in relation to need, the court shall consider all the circumstances of the parties, including,

° I...]

(c) the dependant’s capacity to contribute to his or her own support;

° [...]

(1) if the dependant is a spouse,

° [...]

(111) whether the spouse has undertaken the care of a child who is of the age of eighteen years or over an unable by reason of illness, disability or other cause to withdraw from the charge of his or her parents.

Lamarre Proulx, J.T.C.C., in Michaud c. R. (August 13, 1998), Doc. 97- 1312(IT)G (T.C.C.) at paragraph 19 and 20 stated:

I consider that when the appellant’s former spouse made the payments on the hypothec on the family house, which was the appellant’s property, he was only performing a legal obligation, that of providing for the needs of his family by obtaining the housing it required. The appellant could have made these payments on the hypothec herself and her husband could have paid what the appellant undertook to pay. However, that is not how the family expenses were naturally distributed in this couple. In any case, this monetary distribution of the family expenses is not essential to my decision. While this case concerns a couple in which both spouses earned money, my decision would have been the same if only one of the two spouses earned the family income: ayment a payment on a hypothec on a family residence is not in the nature of a transfer of property made without valuable consideration if the person making it does so in performing the legal obligation to provide for his or her family's needs.2

I should add that it is when the evidence discloses that the payment on the hypothec was made in performing the legal obligation to provide for the family’s requirements that it was made for valuable consideration within the meaning of s. 160(1) of the Act. If for example the husband in the instance case had paid his wife both rent and payments on the hypothec, it is unlikely that the payments on the hypothec would have been made in performing a legal obligation to provide for the family’s needs.

In the present case, I find that Mr. Ferracuti made the following payments in satisfaction of his legal obligation to support his family; namely the mortgage interest to London Life, the taxes, hydro and water paid to the city of Etobicoke and the home insurance paid to Valeroite Insurance. These payments do not constitute a transfer within the meaning of section 160 of the Act.

Mr. Ferracuti had a legal obligation to support and maintain his wife and two children. The Appellant was fulfilling her obligations by looking after her two sons. She transported her younger son to and from school and her injured son to hospitals and rehabilitation centers. Mr. Ferracuti had the legal and contractual obligation to provide shelter and he did so by paying the interest, taxes and insurance for the family home.

The appeal is therefore allowed, with costs. The assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to reduce the amount assessed against the Appellant under section 160 of the Act by (1) the total mortgage interest paid during the relevant years to London Life; (2) the taxes, hydro and water paid to the City of Etobicoke; and (3) the home insurance paid to Valeroite Insurance.

Appeal allowed.