Allison Janet Craig v. Minister of National Revenue, [1973] CTC 2119, 73 DTC 116

The Assistant Chairman (orally):—The appellant appeals from an assessment dated February 17, 1971, wherein a tax in the sum of $21,762.53 was levied.

On March 14, 1955, the appellant engaged in a marriage contract with Norman Joseph Craig in which a donation of $50,000 was made by the latter to the appellant. According to the terms of the contract, the donation was to be paid upon the death of the husband but with the right reserved for the husband to pay the whole, or any part of the said sum, at any time during the marriage, in cash or by means of real estate or stocks and securities acceptable to his wife.

On November 26, 1964, Mr Craig borrowed $16,000 from the Manufacturers Life Insurance Company secured by a mortgage on his residence at 133 Riverview Road in Rosemere (Exhibit on file).

On December 10, 1964, Mr Craig secured the donation abovementioned by hypothecating a second mortgage on the same property at 133 Riverview Road, Rosemere — Mr and Mrs Craig’s residence.

On February 16, 1965, Mr Craig declared personal bankruptcy, and among the creditors was the Receiver General of Canada to whom an amount of approximately $44,613.54 was owing. Pursuant to section 15 [sic] of the Income Tax Act, the respondent claimed from the appellant the sum of $21,762.53. Counsel for the appellant maintained that the creation of a hypothec does not entail the transfer of property within the meaning of subsection 53(1) of the Income Tax Act. Secondly, the four-year limit in which the Minister can reassess had lapsed and since no allegation of misrepresentation or fraud was made by the respondent, he is precluded from reassessing under subsection 46(4) of the Income Tax Act. Thirdly, the method in which the assessment was made is incomprehensible and the evaluation made of the appellant’s residence was haphazard and did not take into account the existence of the $16,000 first mortgage on the property, and finally the Receiver General, having made a claim against Mr Craig’s bankruptcy, and having received his share of the tax from the bankruptcy funds, is not now justified in imposing further claims.

Counsel for the respondent maintained that the mortgage is a transfer of a real right on the property and within the meaning of subsection 53(1) of the Income Tax Act which reads in part:

Where a person has on or after the first day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatsoever,

Paragraph 139(1) (ag) defines property as

property of any kind whatsoever whether real or personal, or corporeal, or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action;

The transfer of property, either directly or indirectly, mentioned in subsection 53(1) of the Income Tax Act and the definition of property in paragraph 139(1) (ag) of the Income Tax Act makes it mandatory that the word “property” be given the widest interpretation which includes “a right”. Article 2016 of the Civil Code describes hypothec as “a real right upon immovables made liable for the fulfilment of an obligation”. In the light of the aforesaid sections of the Income Tax Act and the Civil Code, as well as case law to that effect, I am of the opinion that there was a transfer of property within the meaning of section 53 and that the appellant’s real right in the property transferred to her under the signature of the hypothec was, in part, payment of the donation included in the appellant’s marriage contract. It is, however, important to note that the appellant’s real right in the property was by way of a second mortgage only.

The appellant’s assessment for $21,762.53 was made by virtue of section 53 of the Income Tax Act whereby the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax. From evidence adduced, the property that was transferred to the appellant was, in fact, Mr Craig’s residence from which no income was derived. Section 53 deals with the tax on income from property transferred between husband and wife. Exhibit R-1 indicates that Mr Craig’s assessment for the years 1958, 1959, 1960, 1961 and 1964 amounted to $44,613.54 but there is no evidence whatsoever that any part of the income assessed was income from the property transferred to the appellant. It is on record, and uncontradicted, that the transferred property was Mr Craig’s residence and no income was derived from the said property. It is difficult under the circumstances to see how subsection 53(1) of the Income Tax Act could apply. Subsection 53(2) of the Income Tax Act permits the Minister to assess a transferee at any time and states that the provisions of this division of the Act are applicable mutatis mutandis in respect of an assessment as though it had been made under section 46 of the Income Tax Act. This section allows the Minister four years to make an assessment unless there is evidence of fraud or misrepresentation, or unless a waiver is filed with the Minister. Fraud or misrepresentation on the part of the appellant, or Mr Craig for that matter, was neither alleged nor proved by the respondent. It is true that the appellant’s assessment is not related to any particular taxation year but there must be some point of reference which can, under the circumstances, only be the date on which the property was transferred to the appellant on December 10, 1964.

If the property transferred were an income-producing property and the appellant was severally and jointly responsible for part of the transferor’s tax, then Mr Craig’s assessment could be validly claimed from the appellant but, in my opinion, such is not the case because, first, the transferred property is not revenue producing, and secondly, Mr Craig’s assessment amounting to $44,613.54 is based on revenue other than that derived from the appellant’s residence which does not, in fact, affect the appellant. Even if there were some grounds for reassessing the appellant for income personally received in December, 1964, the Minister would be precluded from doing so pursuant to section 46 of the Act because the Minister’s assessment was made after the expiry date provided in that section of the Act and no fraud or misrepresentation was alleged and no waiver was filed with the Minister within the allotted time. Exhibit R-2 is a memorandum whereby Mr Craig’s residence was evaluated at $29,000. Evidence given in that respect was to the effect that the evaluator walked around the property and obtained from the municipality dimensions of the land on which the property was built. The municipal evaluation of the property was $22,000 at that time. The existence of the first mortgage of $16,000 on the property was not taken into consideration and though the evaluation was $29,000, the assessment on the property was $21,762. The appellant has no indication as to whether the assessment is based roughly on half of the amount of $44,000 owing by Mr Craig to the Receiver General, whether the amounts received by the Receiver General from the bankruptcy funds were deducted, or whether the assessment was based on the value of the property transferred.

In my opinion, not only is the basis of the assessment, which the appellant has the right to know, vague and incomprehensible but the assessment itself, in my opinion, is not founded in law. For these reasons the appeal must be allowed and the matter referred back to the respondent for reassessment.

Appeal allowed.