MacDougall v. The Queen, docket 95-3798-IT-G

Date: 19980710

Docket: 95-3798-IT-G

BETWEEN:

BRIAN MacDOUGALL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, J.T.C.C.

[1]This appeal is from an assessment under section 160 of the Income Tax Act. By that assessment the Minister of National Revenue assessed the appellant in the amount of $72,923.61 on the basis that on July 9, 1990 the appellant’s spouse, Paula Wainberg, transferred to him for $1.00 her 50% ownership of the matrimonial home at a time when she owed tax for 1986 and 1988 in the amount of $73,187.77. The amount of Paula Wainberg’s tax liability is not disputed.

[2]In June 1983, the appellant and his spouse purchased 486 Argyle Avenue, Westmount, Quebec for $160,000. A payment of $40,000 was made on closing, a $100,000 mortgage was given to the Royal Trust Company and a second mortgage of $20,000 was taken back by the vendor. The second mortgage was to be paid in one year.

[3]At that time the appellant was earning about $80,000 per year as a stock broker with Merrill Lynch. His wife was earning about $18,000 per year with the Montreal General Hospital.

[4]The appellant testified that the $40,000 came out of savings and that Royal Trust requested that his spouse appear as both transferee on the deed of transfer and as mortgagor on the mortgage. She also signed the second mortgage to the vendors as borrower.

[5]In 1984, the appellant changed employment and moved from Merrill Lynch to Bache Securities Inc. As part of the employment package, Bache loaned the appellant $75,000, payable over 60 months. In the loan agreement the appellant was described as “first guarantor” or “debtor” and his wife was described as “joiner”. The house on Argyle Avenue was hypothecated as security for the loan. Although the hypothec refers to interest at 25% per annum, the appellant testified that it was interest free and that he was taxed in 1985, 1986, 1987, 1988 and 1989 on the deemed interest as a benefit from his employment. The monthly payments were deducted from his salary by Bache.

[6] A further provision of the loan by Bache was that the appellant would reduce the Royal Bank mortgage by $60,000 and would discharge the $20,000 second mortgage taken back by the vendors.

[7]In October 1985, the appellant and his wife borrowed $50,000 from the Canadian Imperial Bank of Commerce (“CIBC”) on a mortgage of the Argyle property. The evidence is not entirely clear on this, but the appellant stated that the CIBC loan was used to pay off the balance of the amount owing to Royal Trust. The mortgage to the CIBC appears to acknowledge the existence of the Bache and Royal Trust loans.

[8]On May 16, 1990, the appellant and his wife borrowed a further $90,000 from the CIBC. That mortgage refers to a hypothec in favour of Bache, CIBC and CIBC Mortgage Corporation.

[9]On July 9, 1990, Paula Wainberg transferred to the appellant all her right, title and interest in the Argyle property for “ONE DOLLAR ($1.00) and other good and valuable considerations” and “the Purchaser’s assuming to the complete exoneration of Vendor the existing hypothecs in favour of CIBC MORTGAGE CORPORATION registered at Montréal under No. 3368820 and CANADIAN IMPERIAL BANK OF COMMERCE registered at Montréal under No. 4279689”. Mortgage No. 3368820 was the Royal Trust Mortgage, and so I assume that it was taken over by CIBC Mortgage Corporation and was not discharged. Mortgage No. 4279689 was the $90,000 CIBC mortgage. It appears therefore that the proceeds of the CIBC mortgage of May 16, 1990 were not used to retire the earlier Royal Trust mortgage, which by then was owned by CIBC Mortgage Corporation.

[10]The deed of the property from Paula Wainberg further states that “The actual consideration is $150,000.”

[11]This amount was not paid by the appellant and I find as a fact that he paid no more than $1.00.

[12]On April 1, 1991 the appellant borrowed $110,000 from the CIBC Mortgage Corporation and gave as security a mortgage on the Argyle property. The mortgage provided that a first mortgage in favour of CIBC Mortgage Corporation would be discharged.

[13]In November 1991, the appellant’s spouse, Paula Wainberg, declared bankruptcy. It is not clear who the other creditors were, but certainly one of them was the Minister of National Revenue to the extent of about $73,000.

[14]On June 1, 1992, the appellant sold the Argyle property for $295,000.

[15]It is not disputed that the property at the date of transfer by Paula Wainberg had a fair market value of $300,000.

[16]The respondent’s position is simply that the appellant’s spouse transferred to her spouse her one-half interest in the property for $1.00, that her interest had a fair market value of $150,000 that this amount exceeded her liability to the Minister and therefore all of the ingredients necessary for the application of section 160 are present.

[17]Counsel for the appellant advances essentially three arguments.

[18]The first is that the appellant made all of the payments for the house, including all payments under the mortgage. There is evidence that would support this conclusion, although it is not as clear as it might be. The appellant stated that in the years when the payments were being made his wife had no income and so it was logical to conclude that it must have been he who was making the payments. The assertion that she had no income seems inconsistent with the fact that she was assessed tax for 1986 and 1988 of upwards of $70,000, indicating an income in those two years well in excess of $100,000.

[19]I need not make a definitive finding on this point because in the final analysis it does not matter. For the purpose of this branch of the argument I am prepared to proceed on the hypothesis that the appellant made all of the payments. On this hypothesis the appellant contends that he had the beneficial ownership of 100% of the property, based upon the decisions of this court in E. Linke v. Canada, [1994] 2 C.T.C. 2117 and Gardner v. M.N.R., 88 DTC 1649.

[20]In the first place it must be recognized that the separation of legal and beneficial ownership is a concept that is an important part of the law of England, the common law provinces and other jurisdictions throughout the world that have inherited the law of England, both common law and equity. It is not however part of the law of Quebec which is governed by the Civil Code. This distinction is clearly enunciated by Garon J. in D’Aoust v. M.N.R., 90 DTC 1257 where he said at page 1261:

Counsel for the appellant based his arguments on the decision of my brother, Judge Brulé, in Jane Gardner v. M.N.R., 88 DTC 1649. The following passage from the headnote of this judgment clearly sets out the substance of the relevant facts:

The taxpayer was joint tenant with her spouse of a house forming the subject of this appeal. The joint tenancy existed only because the taxpayer lacked any source of Income and had therefore been unable to obtain financing independent of her husband when the house was purchased in 1968. In 1980, the taxpayer sold the house and, as no further financing was necessary, her spouse removed himself from title by way of a quit claim deed. It was this act which the Minister submitted was a transfer of property. The taxpayer was assessed tax on the transaction under section 160 of the Act because her spouse was alleged to be the transferor under the meaning of this section. The taxpayer appealed to the Tax Court of Canada.

[Conclusion]

What distinguishes the appeal before us from the Gardner case is that Pierre D’Aoust had the same rights as a co-owner of the property, at the time of the sale by him of his share in the property to the appellant in January 1983, as had the appellant, while in the Gardner case the transferor held legal title to the property as a trustee but did not have beneficial interest in the property. Civil law does not recognize this division of property rights, which is a fundamental aspect of property law in common law. Judge Brulé decided, briefly, that section 160 did not apply when there was a simple transfer of legal titled to a property which was not accompanied by a transfer of the beneficial interest in the property. The following passage from the judgment of Judge Brulé appears to me to be clear on this point:

Ultimately, however, on the facts of this case, I cannot conclude that this prerequisite is met. While the Taxpayer held legal title to the residence; he did so solely as trustee for the Appellant. At no time did he have a beneficial interest in the property.

[21]Counsel for the appellant argued that the law should be applied in the same way throughout Canada and I agree that to the extent possible this is a desirable objective. However, one must take the law as one finds it in the province where a transaction giving rise to tax consequences takes place and one cannot simply import a system of law applicable in one province into the law of another province.

[22]Although it is not germane to the issue here it is of some passing interest that Parliament has attempted in subsection 248(3) to permit, for the purposes of the Act, such concepts as “trust” or “beneficial ownership” to have some meaning in the application of the Act to the province of Quebec. It is also interesting to note that in the definition of “disposition” in section 54 (which is not applicable in this case) the following appeared in the French version as late as 1993:

(v) tout transfert de biens, à la suite duquel il y a un changement dans le legal ownership du bien sans changement dans le beneficial ownership de ce bien, autre qu’un transfert par une fiducie résidant au Canada à une fiducie ne résidant pas au Canada et un transfert à une fiducie régie par ....

[23]By 1994, this subparagraph had become:

(e) un transfert de biens à la suite duquel il y a un changement dans la propriété légale du bien sans changement dans la propriété effective de ce bien, autre qu’un transfert par une fiducie résidant au Canada à une fiducie ne résidant pas au Canada et un transfert à une fiducie régie par:

[24]While the change may satisfy the linguistic purists it does little to clarify the conceptual problem arising from the fact that the distinction between “beneficial” and “legal” ownership is inapplicable under the Civil Code.

[25]Even if this case arose in a common law province I would have reached the same conclusion. The mere fact that a husband makes all the payments under a mortgage on a house that he and his wife own jointly does not mean that she is not a beneficial owner of her one-half. One needs very cogent evidence that a spouse who is shown as the legal owner of an interest in property is not also the beneficial owner. As the court said in Collins v. The Queen, 96 DTC 1034 at 1039 (aff’d F.C.A. 98 DTC 6281):

We are not, however, talking about the family farm. We are dealing with business assets the legal ownership of which has been carefully divided between the spouses to achieve an optimum tax and commercial result, based on the advice of skilled professional lawyers and accountants. No doubt some of the elements that impelled me to decide Savoie as I did exist here, but there is a world of difference between Mr. and Mrs. Savoie and Mr. and Mrs. Collins. The following two paragraphs at page 553 from Savoie [93 DTC 552] illustrate that difference:

Mr. and Mrs. Savoie are not educated persons. They did not go beyond the grade 9 level in school. Concepts of joint ownership, legal as opposed to beneficial ownership and trusts are foreign to them. What is clear beyond any doubt is that they were a team and what they acquired they acquired as a team and as a result of their joint efforts. Mrs. Savoie has, in the hard life she has led, contributed her all to common weal of the family and it would be unconscionable to say that her entitlement to her just share therein depended upon a form of conveyance the legal implications of which were not appreciated by her.

The situation here differs from that of spouses who, with a full appreciation of the legal consequences of what they are doing, choose that property be held jointly, or solely by one spouse or in any other of the variety of ways in which property can be owned. Such deliberate choices must be respected because the legal form is consistent with the economic reality and the informed intentions of the parties.

(The emphasis is mine.)

[26]The notarized deeds are evidence that Paula Wainberg was a one-half owner of the property and they carry an evidentiary presumption of the veracity of their contents. There is no evidence of any intention that she was to be a prête-nom.

[27]The appellant’s second argument is that the conveyance of her interest in the property by the appellant’s wife was merely a repayment of her obligation to him for his contribution to the price of the house. It is difficult to give effect to this argument when there is no evidence, documentary or otherwise, that would support a finding that Paula Wainberg was indebted to the appellant, or that she saw herself as indebted. She did not testify, although she could have.

[28]In any event, the argument does not hold water mathematically. Even if we assume that she was indebted to him for one-half of the price of $160,000, the value of her interest was at the time of transfer $150,000. This still leaves $70,000.

[29]The third argument is that Paula Wainberg, when she made the transfer, was making a partial payment of the compensatory allowance (prestation compensatoire) contemplated by articles 427 to 430 of the Civil Code. A compensatory allowance may be ordered by a court where a declaration of separation of bed and board, divorce or nullity of marriage is made. Mr. and Mrs. MacDougall are still married.

[30]Article 430 of the Civil Code reads:

430. One of the spouses may, during the marriage, agree with the other spouse to make partial payment of the compensatory allowance. The payment received shall be deducted when the time comes to fix the value of the compensatory allowance.

[31]There is no evidence that either spouse thought that the transfer of Mrs. MacDougall’s interest in the house was such a payment. The article contemplates an agreement between the spouses, and none is evident here.

[32]For these reasons, the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 10th day of July 1998.

"D.G.H. Bowman"

J.T.C.C.