Kostiuk v. The Queen, 93 DTC 5511, [1993] 1 CTC 31 (FCTD)

Strayer, J.:—The plaintiff appeals against a reassessment against her of income taxes owed by her father Peter Bodnarchuk in respect of his 1978-81 taxation years. This assessment was made against her pursuant to subsection 160(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") on the basis that her father had transferred to her a property, namely one-half section of land in Saskatchewan, for a consideration less than its fair market value.

Facts

In 1980 Peter Bodnarchuk was farming 14 quarter sections of land of which he owned 13. He had been married to Olga Bodnarchuk since 1948, and they had two daughters, Shirley Siba and Barbara Zadorozniak (now Barbara Ko- stiuk, the plaintiff). Marital differences having arisen between Peter and Olga Bodnarchuk, she commenced action on September 26, 1980 in the Unified Family Court at Saskatoon. She sought an order for exclusive possession of their Saskatoon house and an order excluding her husband from entering that property, together with an order for the division of all other property. She also sought interim maintenance. There then ensued lengthy negotiations between the parties, both of whom were represented by lawyers. By August 7, 1991 a trial date had been fixed for November 3 of that year. Negotiations came to a successful conclusion, however, when on September 8 a separation agreement was executed between the parties. Among the recitations in the preamble to that agreement were the following paragraphs:

AND WHEREAS the parties hereto are desirous of gifting a half section of their farmland to each of their daughters, as well as selling another quarter section of land to their daughter and son-in-law, Shirley and Roland Siba, for a sale price of $100,000;

AND WHEREAS the Husband agrees to execute registerable transfers thus transferring to Shirley Siba the West Half of Section 33, Township 41, Range 28, West of the 2nd Meridian and to Barbara Zadorozniak the South Half of Section 21, Township 41, Range 28, West of the 2nd Meridian, and thereby placing the daughters in a position where Barbara Zadorozniak can execute a registerable first mortgage in the amount of $50,000 and Shirley Siba can execute a registerable second mortgage in the amount of $50,000, each mortgage to be in favour of their mother. . . .

The agreement provided in part:

10. The Wife agrees to relinquish her Homestead Rights insofar as is necessary to give effect to the Farm Credit Corporation Mortgage application made by Shirley and Roland Siba, and the wife will cause her solicitor to remove any encumbrances she has registered against the West Half of Section 33, Township 41, Range 28, West of the 2nd Meridian, so as to permit the Farm Credit Corporation mortgage to register as a first charge against the said lands, forthwith upon receipt by her solicitor of a registerable Transfer executed by the Husband, transferring to their daughter, Barbara Zadorozniak the South Half of Section 21, in Township 41, in Range 28, West of the 2nd Meridian.

11. The Husband and the Wife agree that they will from time to time and at all times hereafter upon every reasonable request and at the cost of the other of them, execute and do all further assurances and things for the purpose of giving full effect to the covenants, agreements and provisions herein

The agreement dealt in a comprehensive way with the division of property, most of which was then in the name of the husband. It provided for substantial payments of money to or on behalf of his wife by Peter Bodnarchuk.

The evidence is that at about this time Peter discussed with his daughter Barbara, the plaintiff, an arrangement whereby he would become lessee of the half section of farmland which the separation agreement contemplated she was to get. There was evidence that he had discussed this lease with his solicitor on September 21. On October 2 Peter Bodnarchuk signed a transfer to Barbara of that half section, namely the south 1/2 of section 21, Township 41, Range 28, West of the 2nd Meridian. This transfer was sent to Olga's solicitor on October 6, 1981, but without the duplicate certificate of title which would be required to register the transfer. On October 16 Peter signed the transfer of the land which was to go to their daughter Shirley and her husband, also as contemplated by the separation agreement. (It appears that the transfer to Shirley and her husband was completed at that time). In his 1981 income tax return, Peter reported the disposition of these two parcels of land during that year.

It appears that various steps were being taken in the meantime to carry out the terms of the separation agreement. On February 18, 1982 Olga completed the homestead declaration in respect of the transfer to Barbara of the south 1/2 of 21-41-28-W 2nd. This was required to make the transfer registerable. On the same day Peter and Barbara signed a lease of that land from her to him, effective January 1, 1982 for a period of five years. Also that day an order of the Unified Family Court was issued confirming or replacing parts of the separation agreement but specifically preserving the requirements of paragraph 10 as quoted above. On February 19 the solicitor for Peter sent to Olga's solicitor a cheque for $105,897.34 being the sum provided for in the court order together with the duplicate certificate of title to the south 1/2 of 21-41-28-W 2nd. The transfer of this land, previously signed by Peter on October 2, 1981 was then presented for registration at the land titles office and was rejected because of various typographical errors and omissions. He executed a new transfer on March 17. Olga completed the homestead declaration on that transfer on March 19. This transfer was registered on March 23, 1982 and title issued to Barbara. Shortly thereafter Olga withdrew various caveats which she had registered against this land to protect her matrimonial interests, as she had agreed to do in the separation agreement. Also on March 26 Barbara executed a mortgage for $50,000 in favour of her mother, secured on this land, also as contemplated by the separation agreement.

Peter Bodnarchuk being indebted to the defendant in respect of income tax for the years 1978-81, the defendant took enforcement action against Barbara purportedly under subsection 160(1) of the Act. The relevant parts of this subsection provide as follows:

160.(1) 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 whatever, to

(a) his spouse or a person who has since become his spouse,

(b) a person who was under 18 years of age, or

(c) a person with whom he was not dealing at arms's length,

the following rules apply:

(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. .. .

Paragraph 160(1)(c) was added in 1983 (S.C. 1980-81-82-83, c. 140, section 107) and is only applicable with respect to transfers of property effected after November 12, 1981.

The plaintiff appealed the assessment against her to the Tax Court of Canada and her appeal was dismissed (Kostiuk v. M.N.R., [1989] 2 C.T.C. 2362, 89 D.T.C. 548). As I understand that decision, the main issues for determination before that Court were as to what constituted the consideration if any given for the transfer of the property from Peter to Barbara, whether that consideration represented the fair market value, and whether the land was still Peter's to "transfer" within the meaning of subsection 160(1) of the Income Tax Act once Olga had commenced her action in the Unified Family Court for division of family assets. The learned Tax Court judge found against the plaintiff on these issues.

In the present appeal the parties agree that there is only one issue for my determination: as to whether there was a transfer of the property from Peter to Barbara prior to November 12, 1981. That is, it is agreed that this was a transfer to a person with whom the transferor-taxpayer was not dealing at arm's length. It is assumed that until paragraph 160(1)(c) was added, section 160 did not make a person in Barbara's situation liable for the transferor's taxes but that she would be in respect of transfers effected after November 12, 1981. It is also apparently assumed that this transfer otherwise comes within subsection 160(1) so as to make the plaintiff liable for her father's taxes and that the fair market value of the property was greater than the consideration given for it.

Issue

It is agreed that the sole issue is: was the south 1/2 of 21-41-28-W 2nd "transferred" to the plaintiff by Peter Bodnarchuk on or before November 12, 1981 or thereafter?

Conclusions

Essentially the plaintiff argues that as of September 8, 1981, when the separation agreement was signed by Peter Bodnarchuk agreeing to transfer this land to Barbara, or at the very latest by the time he executed a transfer on October 2, 1981 the land was "transferred" within the meaning of subsection 160(1). It is argued that his obligations under the agreement required him to do this and that although he remained registered owner of the land until March 26, 1982, he had legal title only and that he had divested himself of any equitable interest in the land. It is further argued that during this period he held the land as a "bare trustee".

Counsel for the Minister argues instead that the separation agreement imposed a number of conditions before the land ultimately became transferable to the plaintiff. It required performance of various acts in a certain order. In particular it is argued that the transfer to Barbara was conditional on her executing a mortgage in favour of her mother, which she did not do until March 26, 1982.

This is not an issue which appears to have been before the learned Tax Court judge and I am unable to discern that he found it necessary to reach any conclusion on this point.

In dealing with this issue it is of fundamental importance to keep in mind the opening words of subsection 160(1) which refers to the transfer of property "either directly or indirectly, by means of a trust or by any other means whatever . . . .” If I can find that a "transfer" within this broad definition occurred before November 12, 1981 then I must find for the plaintiff.

I have concluded that for the purposes of subsection 160(1) Peter Bod- narchuk transferred this land to the plaintiff when he executed the separation agreement on September 8, 1981. That agreement, in my view, created numerous legally binding obligations on the respective parties. I do not interpret its obligations to be conditional upon certain future events. It is true that the agreement requires specific acts to be done by both parties, sometimes in a certain order. But it appears to me that if either party could demonstrate his or her willingness to perform the agreement he or she could legally require the other party to perform. Although the legal requirements of a trust were not analyzed in any detail in argument, it appears to me that Peter could also be said to hold the land on a resulting trust after signing the separation agreement. The important thing is that as of the execution of the separation agreement Peter had given up his beneficial interest in the half-section because he had done everything necessary to bind himself legally to divest himself of it. His intention — and this is quite relevant to establishing a resulting trust — to convey the beneficial ownership to Barbara is evidenced by his discussions with her in the early fall of 1981 and with his solicitor concerning the leasing back of the land by Barbara to him. Further, on October 2 he signed a transfer which as far as he was concerned was all that was required of him to turn over legal title to her. I therefore think that the separation agreement was the means by which he legally obliged himself in this respect and that it was therefore a transfer “either . . . indirectly, by means of a trust or by any other means whatever . . .” as referred to in subsection 160(1), his intention in this respect being objectively demonstrated by the evidence.

While my attention has not been drawn to any jurisprudence directly on point, I find the decision of the Exchequer Court in Estate of D. Fasken v. M.N.R., [1948] Ex. C.R. 580, [1948] C.T.C. 265, 49 D.T.C. 491, [1949] 1 D.L.R. 810, supportive of my conclusion. In that case the question was whether a husband had transferred property to his wife on or after January 1, 1925. If he had, he would be liable for tax on income derived from that property. A company which owed money to the husband had declared on December 31, 1924 that it was indebted to certain trustees in respect of an amount which the Court presumed represented the company's debt to the husband. On the same day the trustees issued a declaration of the trust upon which they held the entitlement to this indebtedness, which trust included the payment of interest on much of the money in question to the wife. Thereafter the company in fact made direct payments to her, which the trustees chose to treat as payments to them under the indebtedness of the company and as remissions by them to the wife in accordance with the trust declaration. The Court was prepared to presume that the husband, prior to December 31, 1924 had given instructions accordingly for his entitlement as creditor of the company to be placed in this trust in favour of his wife and therefore he had transferred the money prior to January 1, 1925. 1 believe that in the present case I can equally find an intention on the part of Peter Bodnarchuk to transfer this property to his daughter and here I have the benefit of not only an agreement signed by Peter but also a transfer of the property signed by him. For these purposes it is irrelevant that the transfer of legal title turned out to be un registrable and had to be replaced later.

In support of the proposition that Peter might be regarded as a trustee of the property on behalf of his daughter the decision of this Court in Bouchard v. The Queen, [1983] C.T.C. 173, 83 D.T.C. 5193 (F.C.T.D.) is helpful. There a house which a young couple could not afford to buy was purchased by the husband's father and mother and registered in the parents' names. The house was occupied by the son and daughter-in-law. The evidence indicated an understanding that when the son and daughter-in-law were in a position to purchase the house and the full original price was paid to the parents, the house would be transferred to them. This was not reduced to writing until eight years after the original purchase. When in 1976, five years after the written agreement, the couple paid for the house and it was transferred to them, this was held not to be a “disposition” because it was held that the house had always been held in trust for the son and daughter-in-law by his parents. I believe the evidence in the present case equally entitles me to conclude that as of the signing of the separation agreement on September 8, 1981 Peter held the south 1/2 of 21-41-28-W 2nd in trust for the plaintiff.

Therefore the property was transferred prior to November 12, 1981 and the plaintiff must succeed in this appeal.

Appeal allowed.