Dussault T.C.J.:
1 The appellant is disputing an assessment made under section 160 of the Income Tax Act (the “Act”), the notice of which, dated July 22, 1994, bears number 29835. This assessment is for an amount of $13,057.50 representing the difference between the value of her spouse's share in a residence situated at 9 Boréal Street in Magog, Quebec, which was transferred to the appellant on May 30, 1991, and the value of the consideration which the Minister of National Revenue (the “Minister”) considers to have been given by her at the time of the transfer.
2 In assessing the appellant, the Minister made the following assumptions of fact in subparagraphs 13(a) to (g) of the Reply to the Notice of Appeal, which read as follows:
[TRANSLATION](a) on June 4, 1991, Claude Hamel transferred to Brigitte Tanguay, the appellant, by notarial deed dated May 30, 1991, and registered on June 4, 1991, under number 401070, his share, that is one-half of an immovable situated at 9 Boréal Street in the Township of Orford;
(b) the said notarial deed stipulates that, in consideration thereof, the appellant undertakes to assume the mortgaged debt owed to the Caisse populaire Sherbrooke-Est;
(c) on the date of the transfer, the balance of the mortgaged debt owed to the Caisse populaire Sherbrooke-Est was $83,885;
(d) the fair market value of the said immovable was not less than $110,000 on the date of the transfer;
(e) as a result of the sale of the immovable situated at 9 Boréal Street in the Township of Orford, the appellant received a benefit of at least $13,007.50;
(f) the appellant is the spouse of Claude Hamel, the transferor;
(g) on June 29, 1992, the Minister of National Revenue issued an assessment in respect of Claude Hamel's 1991 taxation year for $19,922,86 plus interest of $2,229.09 (it should be noted that no penalty was included in the total account).
3 At the time of the transfer, the appellant's spouse Claude Hamel had a tax liability of more than $20,000. This point is not disputed, nor is the value of the immovable transferred. The respondent contends that the assessment is valid in that it is limited to the amount of the benefit received by the appellant at the time of the transfer, assuming that the consideration given, as the appellant assumed half of the mortgaged debt of $83,885, that is an amount of $41,942.50, is worth $13,057.50 less than half of the value of $110,000 assigned to the property transferred, that is an amount of $55,000.
4 Claude Hamel assigned his assets on July 7, 1993, and was automatically discharged from this first bankruptcy on April 7, 1994.
5 Counsel for the appellant claimed first that the undertaking to assume her spouse's portion of the mortgaged debt at the time the residence was transferred was not the only consideration given by the appellant at the time of the transfer. I will return to this point below.
6 Counsel for the appellant also claimed that the assessment was ill-founded on the ground that the discharge from bankruptcy extinguished Claude Hamel's tax liability and, consequently, that the appellant, as transferee, cannot be assessed under section 160 of the Act if the transferor no longer has a tax liability.
7 This claim is based on the recent decisions by this Court in Caplan, Gamacheand Heavyside.Each of these judgments has been appealed separately before the Federal Court.
8 On December 9, 1996, the Federal Court of Appeal heard Heavyside and on the same day rendered judgment allowing the application for judicial review and setting aside the judgment of the Tax Court of Canada.The Court, per Décary J.A., reiterated the principle that a taxpayer's tax liability results from the Act and not from the assessment and that the transferee's liability in respect of a property transfer contemplated by section 160 is triggered at the time of the transfer, not that of the assessment. Referring to the Tax Court of Canada decision in Garland,he stated that, under section 179 of the Bankruptcy Act, an order of discharge someone from bankruptcy does not release a person who is jointly bound with him. Unless a payment is made under subsection 160(3) of the Act, the transferee remains liable under section 160 of the Act.
9 As the facts of the instant care are similar to those in Heavyside, supra, the claim by counsel for the appellant is thus dismissed on this point.
10 I now return to the first point raised against the assessment, that is the value of the consideration given for the transfer.
11 Both the appellant and her spouse stated that the purpose of the transfer of one-half of the property and the appellant's assumption of half of the mortgaged debt was to make it easier for the spouse to obtain a mortgaged loan for a new residence which he was preparing to build. It was explained that, to the extent that a person's total borrowings do not exceed $150,000.00, approval for a loan may be given by the authorized officer of the Caisse populaire de Sherbrooke-Est (the “Caisse”) without the approval of the Fédération des Caisses being necessary. Mr. Hamel was already indebted under a personal loan of approximately $16,000 and a variable credit contract in addition to the loan secured by the mortgage on the property. At the suggestion of Robert Aubé, the Caisse's business manager at the time, he transferred the property to the appellant and she assumed the mortgaged loan. By proceeding in this manner, Claude Hamel was able to obtain a new mortgaged loan of $123,000 on the new residence. Mr. Aubé, who was also called as a witness, confirmed these facts.
12 The appellant and her spouse thus proceeded with the aforementioned transactions, stating however that it was agreed that the appellant would hand over to Mr. Hamel his share of the property once the property was sold and the loan repaid. If it were not sold within a certain time period, around February of the following year, the appellant and her spouse had agreed that she would apply for an additional loan secured by a second mortgage on the property so as to enable her spouse to repay his personal debts to the Caisse.
13 At the time of the transfer to the appellant, it appears that the property had already been put up for sale or that it was put up for sale in the months that followed.
14 In February 1992, the property still had not been sold by the appellant. She then applied for and obtained from the Caisse an additional $20,000 loan secured by a second mortgage on the property. The proceeds deposited by the appellant in a joint bank account were in fact used to repay Mr. Hamel's personal loans to the Caisse. All the documentation in support of these transactions was entered in evidence and confirms the version of the appellant and her spouse.
15 Lastly, let us note that, following the transfer of the property to the appellant, Mr. Hamel nevertheless continued to make the monthly hypothec payments until the property was sold, in accordance with the agreement between the spouses on the distribution of household expenses. The sale took place on May 28, 1992 and, following that transaction, the appellant stated that she turned over to her spouse all of the proceeds once the loans had been repaid.
16 Counsel for the appellant thus maintained that the consideration paid by the appellant at the time of the transfer did not consist solely in her agreeing to assume a mortgaged debt of $41,942.50, but also in her undertaking to hand over to her spouse his net share of the property when it was sold to a third party or, failing that, to borrow an amount sufficient to enable him to repay his personal loans of approximately $16,000. Thus, he said, the total value of the consideration for the transfer exceeded the value of the half of the property transferred so that section 160 of the Act did not apply in the circumstances.
17 Counsel for the appellant claimed that the agreement between the parties on this matter did not constitute a counter-letter since there was no simulation as to the nature of the transaction. Although the agreement was not mentioned in the notarized contract witnessing the transfer, in his view, it nevertheless completed the contract since it was supported by commencement of proof in writing of the additional loan taken out by the appellant and the payment of her spouse's personal debts to the Caisse.
18 Counsel for the respondent claimed for his part that there was indeed a simulation as to the consideration for the transfer of one-half of the property by Mr. Hamel to the appellant since the notarized contract, the apparent deed, did not witness the agreement between the parties as to the appellant's undertaking to repay Mr. Hamel for his share of the property at the time of an eventual disposition to a third party or, failing that, her undertaking to borrow an additional amount to enable him to repay his personal debts.
19 According to counsel for the respondent, this agreement constituted a counter-letter which, according to article 1212 of the Civil Code of Lower Canada, has effect only between the parties thereto. As this same provision stipulates that counter-letters do not make proof against third persons, including the Minister, counsel for the respondent felt that the assessment based on the notarial deed that represented the apparent contract was well founded.
20 There is no doubt that the purpose of the transfer of one-half of the property by Mr. Hamel to the appellant and the latter's undertaking to assume one-half of the mortgaged debt was essentially to enable Mr. Hamel to obtain a mortgaged loan from the Caisse for the new residence which he was preparing to build and that the transaction was conducted in such a way as to satisfy the Caisse authorities in this regard. This did not exclude any other agreement between the appellant and her spouse as to her undertaking to repay Mr. Hamel for his share of the property upon an eventual disposition or, failing that, to borrow an amount necessary to enable him to discharge his personal debts.
21 The documents filed in evidence support the testimony heard respecting the circumstances of the transfer of the property and the nature of the total consideration agreed upon between the parties.
22 Having regard to the evidence adduced, I do not believe that the notarized contract constituted a simulation designed to deceive third parties or that the agreement between the appellant and her spouse respecting the repayment for his share of the property constituted a counter-letter. I find that the Minister cannot assess by disregarding this agreement the existence of which, in my view, the appellant proved on the balance of evidence as she was at liberty to do so in the absence of any restriction on giving testimony on this point. This evidence moreover was completed by the filing of documents supporting the probability of such an agreement. I will simply take the liberty of adding that the prohibition enacted by article 1234 of the Civil Code of Lower Canada against testimony for the purpose of contradicting the terms of a valid written instrument does not apply in tax matters.
23 This restriction is applicable only in respect of the contracting parties and not in respect of a third party such as the Minister of National Revenue.
24 The appeal is allowed with costs and the assessment is vacated.
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