Tapani Nestor Valitalo, Jose Murillo v. Minister of National Revenue, [1979] CTC 2320, 79 DTC 327

The Chairman:—The issues being identical, the appeals of Messrs Tapani Nestor Valitalo and Jose Murillo from assessments in respect of the 1974 and 1975 taxation years were heard simultaneously.

Basically, the principal issues are whether the Minister of National Revenue properly added to each of the appellants’ incomes for the pertinent taxation years one-half of the income produced by a rental property in which each had a one-half interest, or whether, as claimed by the appellants, the Minister should have assessed each of the appellants for only one-quarter of the rental income and assessed each of the appellants’ spouses one-quarter of the said rental income in their quality as halfowners of their husbands’ respective one-half interest in the property.

Summary of the Facts

Messrs Tapani Valitalo and Jose Murillo, the appellants, as partners operated a business known as Tip Top Auto Collision (hereinafter referred to as “Tip Top’’) in rented premises at 3323 Danforth Avenue in Scarborough, Ontario.

On May 15, 1973, the appellants signed an agreement of purchase and sale (Exhibit A-1) for the building at 3323 Danforth Avenue at a cost of $180,000, which was closed on October 30, 1973.

The title to the building was registered in the name of Jose Murillo and his wife, Gloria, as joint tenants as to an undivided one-half interest, and in the name of Tapani Valitalo and his wife, Eeva, as joint tenants as to the remaining one-half interest in the 3323 Danforth Avenue property.

In order to meet the purchase price of $180,000, the purchasers (the appellants) assumed an existing first mortgage of some $89,000; the vendor agreed to take back a second mortgage of $52,000 (Exhibit A-2) and the real estate broker involved in the transaction, in order to close the deal, took a third mortgage for $9,000. One-hundred and fifty thousand dollars of the purchase price was covered by three mortgages secured by the Danforth Avenue property, leaving a cash payment of $30,000 to be made by the joint owners. Mr Murillo testified that in order to pay his share of the cash payment (ie, $15,000), he mortgaged his home at 21 Dunkirk Road. The home had been purchased in 1968 by Mr Murillo and his wife by making a loan of $2,000 from a bank. The property was owned jointly by Mr Murillo and his wife, Gloria. The evidence is that Gloria Murillo worked as a professional dressmaker in 1968, 1969 and 1970, earning $4,000 to $5,000 a year, and these earnings were deposited in a joint bank account and used, among other things, to repay the bank loan made for the purchase of the house. Mrs Murillo ceased working in 1970. In 1973, Mr Murillo and his wife mortgaged their home for $18,000. Having paid off the original mortgage on the home, there remained $6,000 to apply on their share of the downpayment ($15,000). It is alleged that of the $9,000 remaining to be paid, $3,500 was borrowed jointly by Mr Murillo and his wife and $5,500 was obtained from the operation of Tip Top. Mrs Murillo had no interest in the business. The evidence given by Mr Murillo was confirmed by Mrs Murillo’s testimony.

Mr Valitalo corroborated the evidence given by Mr Murillo as to the purchase of and the price paid for the Danforth Avenue property, and that his one-half interest in the property was registered in his and in his wife’s names. In order to meet his share of the downpayment ($15,000), Mr Valitalo mortgaged his home which was registered in his and his wife’s names for $26,000. Once the previous mortgages had been paid on the home, there remained $7,600 which was applied to his share of the $15,000 downpayment, leaving a balance of some $7,400 which was paid by means of a short-term loan from the bank signed by Mr Valitalo.

Mrs Valitalo testified that prior to coming to Canada she worked as a waitress in Finland for a period of 5 years. Shortly after being married, her husband bought the home in which they lived and opened up a joint bank account. Mrs Valitalo claims that she had some money when she arrived from Finland and alleges that she aided her husband financially when he was in need. The evidence in this respect was most vague, as indeed was the evidence that she could not divulge the source, the amount or the location of the money she claimed having. She had no other source of income and in fact never filed tax returns.

Submission by Appellants

The notices of appeal in the appeals of both Mr Murillo and Mr Valitalo are in substance identical except for the names, and read:

The Minister of National Revenue has assessed the taxpayer as the sole owner of a one-half interest in real estate located at 3323 Danforth Avenue, Scarborough, Ontario. The facts as set forth by the taxpayer are that the one-half interest in the property is owned by him and his wife, GLORIA MURILLO, equally, was purchased by them to be operated as a business venture to produce income and each contributed one-half of the original money paid on closing the transaction to acquire the title. The funds of the taxpayers which were contributed were their separate funds.

The taxpayer therefor appeals the above assessments on the basis that only one-half of the income produced by the one-half interest in the property owned by him and his wife should be included in his income for the taxation year and the other one-half produced by that one-half interest in that property should be assessed against his wife, GLORIS (sic) MURILLO.

The respondent, in support of the assessments in both appeals, states:

In reply to the Notice of Appeal herein dated the 7th day of September, 1978 and received the 8th day of September, 1978 with respect to the Appellant’s income tax assessments for the 1974 and 1975 taxation years, the Respondent, the Minister of National Revenue, says as follows:

A. Statement of Facts:

1. Except as specifically hereinafter set forth, he does not admit any of the allegations of fact expressed or implied in the said Notice of Appeal.

2. In filing his return of income for the 1974 taxation year, the Appellant sought to deduct as allowable deductions from his business income the sums of $4,685.70 and $3,800 in respect of repairs and maintenance, and rent, respectively.

3. By Notice of Re-assessment the Respondent disallowed the aforesaid deductions to the extent of $2,246.47 and $2,000, respectively and in addition, included in the computation of the Appellant’s income for tax purposes for the 1974 taxation year, rental income in the amount of $1,946.34.

4. In filing his return of income for the 1975 taxation year, the Appellant failed to include in his income for tax purposes rental income in the amount of $2,123.28.

5. By Notice of Re-assessment the Respondent included in the computation of the Appellant’s income for tax purposes for the 1975 taxation year rental income in the amount of $2,573.06.

6. In assessing tax as aforesaid, the Respondent relied upon the following findings or assumptions of fact:

(a) until January 31, 1974, the Appellant and Jose Murillo in partnership, operated a business under the firm name and style “Tip Top Auto Collision’’;

(b) the business operations of Tip Top Auto Collision were carried on in rented premises in a building located at 3323 Danforth Avenue, Scarborough, Ontario;

(c) on October 30, 1973 the Appellant and Jose Murillo purchased the building located at 3323 Danforth Avenue, Scarborough, Ontario and directed that the title of the aforesaid building be registered in the names of the Appellant and Eeva Valitalo, the spouse of the Appellant, as joint tenants, as to an undivided one half interest; and Jose Murillo and Gloria Murillo as joint tenants, as to an undivided one half interest;

(d) at the time of the aforesaid purchase of the aforesaid building, the amount which had been prepaid by Tip Top Auto Collision for rent to cover the period after October 30,1973 was deducted from the balance due by the purchasers on the closing of the aforesaid sale in the statement of adjustments dated October 30, 1973;

(e) in the 1974 taxation year Tip Top Auto Collision installed a heating furnace in the aforesaid building at a cost of $4,492.85;

(f) the last fiscal period of Tip Top Auto Collision ended on January 31, 1974;

(g) on February 1, 1974 the business Tip Top Auto Collision was incorporated to form Tip Top Auto Collision and Car Sales Limited;

(h) on February 1, 1974 the aforesaid building was leased to Tip Top Auto Collision and Car Sales Limited, which has remained to the present time as tenant of the aforesaid building;

(i) during the 1974 and 1975 taxation years, the aforesaid property produced rental income;

(j) the Appellant had, after August 1, 1917 (sic) transferred the property either directly or indirectly to his spouse.

B. Statutory provisions upon which the respondent relies and the reasons which he intends to submit:

7. The Respondent relies, inter alia, upon Sections 3, 9 and 160, and Subsection 74(1) and Paragraph 18(1)(b) of the Income Tax Act, SC 1970-71-72, c 63.

8. The Respondent submits that the Appellant has been properly assessed for tax for his 1974 and 1975 taxation years because the expense incurred by the Appellant for the installation of a new furnace was in respect of a capital outlay and because the rent paid by Tip Top Auto Collision for the 1974 fiscal year was reduced when the purchasers of the building were credited with the amount of rent that had been prepaid, and further, because he transferred property either directly or indirectly to his spouse with the consequence that any income from the property is properly attributed to the income of the Appellant and not to the income of his spouse pursuant to Subsection 74(1) of the Income Tax Act.

WHEREFORE, the Respondent respectfully submits that the appeal of the Appellant be dismissed.

Finding of Facts

At the hearing, no evidence was adduced by the appellants in respect of the expenses claimed in the 1974 taxation year for repairs and maintenance of the Danforth Avenue property in the amount of $4,685.70 and for rent in that year in the amount of $3,800. It is my understanding that the appellants no longer dispute that the installation of a furnace in the Danforth Avenue property constitutes a capital expense and that a certain portion of the prepaid rent claimed by the appellants in 1974 had been credited in the purchase price of the property and not deductible. The Minister, therefore, properly deducted the amounts of $2,246.47 and $2,000 from the maintenance expenditures and prepaid rent claimed respectively for the 1974 taxation year and the appeals, therefore, in respect of these claims, are dismissed.

The remaining issue to be determined has reference to the addition by the Minister of rental income in the amount of $1,946.34 and in the amount of $2,123.28 to the income of each of the appellants for the 1974 and 1975 taxation years respectively.

In my opinion, for the appellants to be successful in their respective appeals, they have to satisfy the onus of establishing not only that they and their wives were the registered joint and equal owners of the Danforth Avenue property, but they must establish what part of the consideration for the acquisition of the property was paid by the appellants’ wives.

The evidence is that both the appellants mortgaged their respective homes which were jointly owned in order to meet a $30,000 downpayment on a purchase price of $180,000. In both cases only approximately $6,000 of the loans on the mortgaged homes went towards the purchase of the property. It is not clear what contributions the wives made to the purchase of their respective homes and, consequently, their contributions towards the purchase of the Danforth Avenue property by mortgaging the homes becomes very nebulous. The evidence is that Mrs Murillo worked in 1968, 1969 and 1970, earning some $3,000 to $4,000 per year, and had a joint account with her husband, but there is no evidence of what monies, if any, went toward the payment of the mortgage on the home. Mrs Valitalo did not work but claims she had an undisclosed source of funds which she contributed to the household budget. No evidence as to what amounts she may have contributed to the mortgage on the home was given. Neither of the appellants’ wives worked at the time of purchasing the Danforth Avenue property, or afterwards, and the acceptable evidence is that they had no financial resources to pay their share of the three mortgages on the Danforth Avenue property.

A substantial part of the appellants’ shares of the downpayment for the Danforth Avenue property was taken from the operation of Tip Top in which the wives held no interest whatever. In the balance sheet accompanying the appellants’ 1974 tax returns, Mr Murillo and Mr Valitalo were equal partners in Tip Top and the fixed assets of the partnership for land and building at 3323 Danforth Avenue are indicated as being $182,220.50. In Mr Murillo’s and Mr Valitalo’s 1974 returns there is also a balance sheet as at February 1, 1974, the date at which Tip Top was incorporated, in which V & M Properties is also shown as having $182,220.50 as fixed assets in the land and buildings at 3323 Danforth Avenue. No evidence whatever was adduced to establish that in the transfer of property from the Tip Top partnership (which is shown as the owner of the property in January 1974) to V & M Properties (apparently the appellants’ and their wives’) that any consideration was paid for the property.

In cross-examination of the appellants and their wives, not one of them had even heard of or knew what V & M Properties was.

The appellants have not, in my opinion, succeeded in establishing that their wives had a credible and adequate source of funding which could have permitted them to contribute to the acquisition of the Danforth Avenue property and to meet their respective shares of the mortgage obligations on the purchase price.

I hold, therefore, that Messrs Murillo and Valitalo, in the transaction by which a one-quarter of undivided interest of their respective one-half interest in the Danforth Avenue property was assigned to each of their wives, effected a transfer of property to their spouses within the meaning of subsection 74(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The respondent therefore properly added to each of the appellants’ incomes for the taxation years 1974 and 1975 rental incomes of $1,946.34 and $2,123.28 respectively.

Decision

For these reasons the appeals are dismissed.

Appeal dismissed.