Jack Cuppel Oelbaum v. Minister of National Revenue, [1968] CTC 244, 68 DTC 5176

JACKETT, P.:—This is an appeal from the appellant’s assessment under Part I of the Income Tax Act for the 1963 taxation year.* [1] The sole question raised by the appeal is whether Section 21(1) of the Income Tax Act operates to require that an amount of $2,460.09 be deemed to be income of the appellant and not of his wife.

The facts can be stated shortly. The appellant is a man of means who, as a widower, was married in 1961 to his present wife who was, prior to their marriage, a widow. In 1953, his wife was asked whether she had funds available for investment through the agency of a lawyer, Maxwell Lewis, and she asked her husband to loan her the money that she needed to make that investment. He thereupon loaned her $150,000. The money was paid to her by cheque and, shortly thereafter, she executed three promissory notes payable on demand in favour of the appellant, each for $50,000. The loan, which bears no interest, is still outstanding.

With the money so loaned by the appellant to his wife, she made an investment or investments from which she had income for the taxation year 1963 in the sum of $2,460.09.

The question is whether that amount must be deemed to be income of the appellant by reason of Section 21(1) of the Income Tax Act, which reads as follows:

21. (1) Where a person has, on or after August 1, 1917, transferred property, either directly or indirectly, by means of a trust or by any other means whatsoever, to his spouse, or to a person who has since become his spouse; the income for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income of the transferor and: not of the transferee.

If the appellant had made a gift to his wife of the $150,000, instead of loaning it to her, and if all other facts had been the same, it is clear that Section 21(1) would have been applicable to require that the income of his wife from investments acquired with that amount be deemed to be income of the appellant.

The respondent’s reply to the Notice of Appeal does raise a question as to whether the appellant really loaned the money to his wife. Paragraph 6 of the Reply reads in part :

6. In making the re-assessments complained of, the Respondent acted on the following assumptions:

(g) THAT the three purported notes in the name of the wife of the Appellant as maker, in the total amount of $150,000.00, were never intended by the wife of the Appellant or the Appellant to be promissory notes.

It was not suggested that there is any doubt as to the appellant’s honesty in giving evidence before me. I accept his evidence, and, on the basis of that evidence, I find that the $150,000 was loaned by the appellant to his wife and was not given to her.

In these circumstances, the question that I have to decide is whether, when a husband has paid money to his wife by way of loan, he can be said to have transferred property ’ ’ to her within the meaning of those words as they are used in Section 21(1) of the Income Tax Act.

Precisely the same question arose in another case in this Court in 1959 with reference to the same words as they are used in Section 22(1) of the Income Tax Act, which reads as follows:

22. (1) Where a taxpayer has, since 1930, transferred property to a person who was under 19 years of age, either directly or indirectly by means of a trust or by any other means whatsoever, the income for a taxation year from the property or from property substituted therefor shall, during the lifetime of the taxpayer while he is resident in Canada, be deemed to be income of the taxpayer and not of the transferee unless the transferee has before the end of the year attained the age of 19 years.

In that case there was a loan by the taxpayer to trustees for his minor children. Mr. Justice Thurlow decided — see Dunkelman v. M.N.R., [1960] Ex.C.R. 73; [1959] C.T.C. 375, that Section 22(1) did not apply because, in the context in which they are used in that provision, the words “has . . . transferred property” did not apply to a loan transaction. At pages 81-2 [383-384] he said:

I do not think it can be denied that, by loaning money to the trustees, the appellant, in the technical sense, transferred money to them, even though he acquired in return a right to repayment of a like sum with interest and a mortgage on the Butterfield Block as security, or even though he has since then been repaid with interest. But, in my opinion, it requires an unusual and unnatural use of the words “has transferred property” to include the making of this loan. For who, having borrowed money and knowing he must repay it, would use such an expression to describe what the lender has done? Or what lender thinks or speaks of having transferred his property, when what he has done is to lend it? Or again, what casual observer would say that the lender, by lending, “has transferred property”? And, more particularly, who would so describe the lending where, as in this case, the transaction is such that the only purpose to which the money loaned could be turned was in acquiring a property to be immediately mortgaged to the lender? I venture to think, in the terms used by Lord Simonds, that no one, be he lawyer, business man, or man in the street, uses such language to describe such an act. I also think that, if Parliament had intended to include a loan transaction such as the present one, the words necessary to make that intention clear would have been added, and it would not have been left to an expression which, in its usual and natural meaning, does not clearly include such a transaction. To apply the test used by Lord Simonds, I do not think this transaction was one which the language of the subsection, according to its natural meaning, “fairly” or “squarely” hits. I am, accordingly, of the opinion that the making of the loan in question was not a transaction within the meaning of the expression “has transferred property” and that Section 22(1) does not apply.

With that reasoning, with respect, I entirely agree, and I think it applies equally to the interpretation of Section 21(1). Counsel for the respondent agreed that the reasoning in the Dunkelman decision applies to Section 21(1) just as much as it does to Section 22(1), but contended that it only applies where there was a more businesslike transaction than there is in the case at bar. He relied on the fact that, in the Dunkelman case, there was a mortgage to the taxpayer by way of security for his loan and contended that that made the facts distinguishable from this case where there is no written record of the loan except promissory notes. With all respect to that submission, I cannot see any possible distinction, from the point of view of the reasoning in the Dunkelman case, between the facts in that case and the facts in the present appeal.

The appeal is allowed with costs, and the apepllant’s assessment under Part I of the Income Tax Act for the 1963 taxation year is referred back to the respondent for re-assessment on the basis that Section 21(1) does not apply to the income of $2,460.09 from the appellant’s wife’s investments.

DR: EDWARD GORDON MURPHY, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Exchequer Court of Canada (Dumoulin, J.), May 3, 1968, on appeal from. a decision ‘of the Tax Appeal Board, reported [1967] Tax A.B.C. 132.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections 21(2), 137(1)—Husband and wife—Salary paid to spouse through intermediary corporation—Artificial transactions.

‘The appellant, a practising physician, was assisted in his office routine by his wife. In 1963, he entered into an arrangement whereby his wife would be employed by a corporate entity controlled by a chartered accountant, he would pay the corporation $500 per month to provide him with a receptionist and accounting, office management and stenographic services, and the corporation would hire his wife at $465 per month to perform those services. The Minister refused to allow the deduction of $6,000 claimed for the year on the grounds (1) that it represented remuneration paid by the appellant to his wife and as such was prohibited by Section 21(2) of the Act, and (2) that the payment was an artificial transaction the deduction of which was prohibited by Section 137(1).

HELD:

Section 137(1) fit to a nicety the matter at issue and the appeal was dismissed.

Wolfe D. Goodman and Arnold Cader, for the Appellant.

J. R. London, for the Respondent.

DUMOULIN, J.:—Dr. Edward Gordon Murphy, a Toronto medical practitioner, hereby appeals from a decision of the Tax Appeal Board, dated February 3, 1967 ( [1967] Tax A.B.C. 132), dismissing his initial appeal from an assessment made by the respondent, March 29, 1965, wherein, inter alia, an attempted income tax deduction of $6,000, for taxation year 1963, was disallowed.

The grounds alleged by appellant to justify the above-mentioned deduction are that, in January 1963, he commissioned a local organization, by the name and style of Nexus Corporate Services Limited, to provide his professional administrative requirements with regular receptionist, accounting, office management and stenographic services for a monthly fee of $500; that these ministrations, being duly procured during 1963, he paid Nexus the stipulated price of $6,000, deducting the said sum from his income returns as an expense of carrying on his medical practice’’. Respondent refused to countenance this claim for the reasons stated in paragraphs 8 and 9, hereafter quoted, of the Reply to the Notice of Appeal :

8. The Respondent submits that the sum of $6,000.00 paid to Nexus Corporate Services was remuneration for services performed by his wife as an employee of the Appellant and the deduction of which, in computing his income, was prohibited by subsection (2) of Section 21 of the Income Tax Act.

9. The Respondent further submits that the payment of the said sum of $6,000.00 to Nexus Corporate Services was a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the Appellant’s income and therefore, the deduction of the said sum in computing the Appellant’s income is prohibited by subsection

(1) of Section 137 of the Income Tax Act, R.S.C. 1952, Chapter 148.

The evidence adduced in Court revealed that, prior to 1963, as testified to by the appellant, Dr. Murphy, his wife, born Nadia Kamil, of Egyptian extraction, attended to his office needs as receptionist, performing also ‘‘a good deal of the bookkeeping work when at home’’. The Doctor adds, but rather unconvincingly, that ‘‘a regular receptionist was often employed to fill in the gap during his absence on calls at the hospital, a matter of some three hours daily’’. If so, I do not remember being given the names of any of those would-be ‘‘regular employees’’, and nothing dispelled my impression that Appellant’s wife fulfilled most of the daily tasks associated with a medical office for a nominal compensation of $250 per annum.

Dr. Murphy next procedes to explain that the agreement eventually concluded with Nexus Corporate Services, as outlined in Exhibit 1, a typewritten letter, dated November 26, 1962, on the above firm’s stationery, addressed to “Nadia” and signed “Ted”, “was an attempt to properly evaluate Mrs. Murphy’s services’’. At all events those services, after due consultation between the three persons concerned, to wit: Dr. Murphy, his wife Nadia Kamil Murphy, and Edward William Imrie, Chartered Accountant, owner of Nexus Corporate Services Limited, were set at no less than $500 per month to be paid by the Appellant to Nexus who, in turn paid back, each month, $465 to “Nadka Services’? a puerile effort to transmute Mrs. Murphy’s cheque-receiving hands into some sort of company cash register. Unincorporated, unregistered and unknown, the so-called ‘ Nadka Services’’ are devoid of all legal existence and, if I may slip into journalistic parlance, utterly fail to serve even as a mini-screen for Mrs. Murphy’s personality.

Reverting now to reality, the monthly sum of $35 retained by Nexus, out of each $500 instalment received from the appellant, compensated “Ted” Imrie for the preparation of Dr. Murphy’s income tax returns and some occasional accountancy work, as he was in the habit of doing for this client.

Edward William Imrie, a chartered accountant, the second witness heard, is, to all appearances, a close friend of the Murphys. He repeats, what we already knew, that Nexus Corporate Services had contracted to provide Dr. Murphy with receptionist, accounting, office management and stenographic services, at the above-stated remuneration of $500 monthly, entailing a corresponding refund of $465 to “Nadka Services’’.

This witness agrees he recommended the contract entered into by Nexus and Nadka Services “as a way or manner of avoiding income tax in connection with Dr. Murphy’s office services and administration ’ ’.

Most of this repetitious information appears in Exhibit 2, a letter of April 30, 1963.

This communication assumes a business style and is obviously meant to implement the innocuous scheme devised by the three participants. Its tone is formal, it is no longer addressed to “Nadia”, nor signed “Ted”; I quote:

Dr. E. G. Murphy,

3 Cumberland Drive,

Port Credit, Ontario.

Dear Dr. Murphy:

Pursuant to our verbal agreement of January, wherein Nexus Corporate Services Limited agreed to provide the following services :

Receptionist, accounting, office management and stenographic services

for your practice, the trial period discussed has been completed. I am satisfied that the work is being done properly by the agent (italics mine) we have contracted with to do the work. If you are satisfied with the arrangement would you be good enough to forward fees covering the trial period ($500 x 4 months).

Yours very truly,

Nexus Corporate Services Limited

E. W. Imrie,

President.

A single remark suffices to focus Ex. 2 in its appropriate light. After some probing, Dr. Murphy admitted that the expression “agent” in the text above, ‘‘could well qualify his wife, Nadia” ; and so it did.

For duty’s sake, I would note Dr. Murphy’s mention that, during 1963, his wife’s daily attendance at the office was more frequent and for longer periods than previously. Mrs. Murphy stated, in turn, that the sums reimbursed to her by Nexus were, eventually, turned over to her husband’s bank account “in order to avoid risk of double taxation’’, apparently in pardonable oblivion that Section 21(2) of the Act had thoughtfully averted all such duplication.

It now remains to cite the two sections of the pertinent law which, in keeping with the proven facts, superabundantly dispose of the case. Section 21(2) enacts that:

21. (1) . . .

(2) Where a person has received remuneration as an employee of his (or her) spouse, the amount thereof shall not be deducted in computing the spouse’s income and shall not be included in computing the employee’s income.

We know the roundabout workings of the little play: Nexus hires appellant’s wife to do administrative work in her husband’s office ; the latter performs the ostensible gesture, each month, of paying $500 to Nexus which, as regularly, pays back $465 to the “agent” wife, who, finally funnels back these refunds to her “spouse” Dr. Murphy.

And, lastly, Section 137(1), dealing with ‘‘Artificial Transactions”, fits to a nicety the matter at issue : it is as follows:

137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

For the reasons given, this appeal is dismissed with costs in favour of the respondent.