[1] The Appellant's husband, through a company owned by him operated a large number of jewellery stores in Canada. During the recession in the early 90's, the jewellery business suffered greatly and the husband's company went bankrupt. The husband had guaranteed several hundred thousand dollars of leases and loans for which the company was liable. As a result, the husband's bank alerted him to the fact that a number of his creditors had served garnishees on his bank accounts and that any funds in his accounts with the bank would have to be given to those creditors.

[2] At the time, the husband had money in his RRSP plan and he desired to use those monies so that he could honour some of his debts and thus have the possibility of continuing to carry on the jewellery business. However, he knew that if these monies were deposited into an account in his name they could be garnisheed by his creditors. In order to avoid this happening and still to accomplish his plan, the husband and the Appellant agreed that he would deposit the monies in her account and that she would pay out money from that account on instructions from her husband, as she wished to save him from personal bankruptcy. The monies were duly paid into her account and she in turn in fact paid out monies to a great many of the husband's creditors pursuant to his instructions but as well, paid money out on account of personal expenses for the two of them. Only approximately half of the husband's monies went to pay off existing debts of the husband. His monies in the account were blended along with hers making an accounting somewhat difficult, and the Tax Court Judge concluded that it was not possible to trace the husband's monies to payment of his creditors.

[3] In addition to his other creditors, the husband also owed income tax which was not paid. When the income tax authorities became aware of the transfer of the funds into the wife's account, the Appellant was assessed under section 160(1) of the Income Tax Act. It provided as follows:

(1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) the person's spouse or common-law partner or a person who has since become the person's spouse or common- law partner,

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

(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and

(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, and

(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act. [Emphasis added].

[4] The Tax Court Judge set out four conditions to be met in order for subsection 160(1) to apply and in so doing he was following a decision of the Tax Court, Doreen Williams v. The Queen, File No. 98-1604, July 4, 2000. Those conditions were:

1) There must be a transfer of property;

2) The transferor and transferee are not dealing at arm's length

3) There must be no consideration or inadequate consideration flowing from the transferee to the transferor; and

4) The transferor must be liable to pay an amount under the Act in or in respect of the year when the property was transferred or any preceding year.

[5] The Tax Court judge found that there had been a transfer of property by reason of the fact that the funds were transferred into the wife's bank account. He also held that the husband and wife were not dealing at arm's length. In dealing with the third condition, he held that the wife's stated moral obligation to pay out the monies according to his instructions did not amount to consideration. He said:

To put the transfer issue in plain language, a private arrangement between the Appellant and Ernest (the husband) may impose a moral obligation on the Appellant but that moral obligation does not avoid or prevent the application of section 160(1).

[6] The Tax Court Judge therefore dismissed the wife's appeal.

[7] Before us it was argued by the Appellant that there was no transfer of the monies within the meaning of section 160(1) of the Act. The Appellant argued that given the Appellant's evidence that she believed she had a moral obligation to use the funds as her husband directed, which evidence was accepted by the learned Tax Judge, coupled with the evidence that in fact she used the funds to pay amounts which he directed, there was not a transfer of funds within the meaning of subsection 160(1).

[8] The Appellant argued, as well, that a trust had been created for her husband so that there was no transfer of property. However, the intention of the husband and wife in the present case to put the husband's funds where they would be secure from his creditors in not consistent with the creation of a trust. If indeed a trust was established then the husband would be beneficially entitled to those funds and they would not be immune from garnishment proceedings at the instance of his creditors. Thus, clearly the intention of the parties was not to set up an arrangement whereby the funds remained beneficially owned by the husband. Thus no trust was created.

[9] The stronger argument put by the Appellant was that there had been valid consideration given by the wife in the form of her promise to pay out monies only on his direction. If there was valid consideration equal in value to the property transferred, then section 160(1) does not apply.

[10] If indeed the wife had made a legally enforceable promise to pay out monies only on the husband's direction to his creditors in amounts equal to the monies transferred, this might well have constituted sufficient consideration in order to avoid the application of section 160(1). However, this was not the evidence nor was it the finding of the Tax Court Judge. The Appellant when asked whether she had any legal obligation to pay bills as directed by the husband agreed that she had no such legal obligation and that it was only a moral obligation. She admitted further, that he could not force her to pay bills which he wanted paid. If of course there was a legal obligation based on a trust, he could have compelled such payment. This evidence confirms that the Appellant really only felt a moral obligation and we agree with the Tax Court Judge that that is not sufficient consideration.

[11] It is also noteworthy that all of the monies transferred did not go to payment of the husband's debts. The monies were used for other purposes as well. Thus, this evidence does not support the alleged promise to use the husband's funds only for the payment of the husband's creditors in amounts equal to the money transferred.

[12] We do not wish to be taken however, as agreeing with all of the comments of the Tax Court Judge relating to whether there can be a consideration given between husband and wife so as to preclude the application of section 160(1).

[13] We therefore are of the view that there was a transfer of property within the meaning of section 160(1) and that consideration was not proven.

[14] For all of these reasons, we would dismiss this appeal with costs.

"J. E. Sexton"

J.A.

FEDERAL COURT OF CANADA

Names of Counsel and Solicitors of Record

DOCKET: A-691-00

STYLE OF CAUSE: DEBRA RAPHAEL

Appellant

- and -

HER MAJESTY THE QUEEN

Respondent

DATE OF HEARING: THURSDAY, JANUARY 17, 2002

PLACE OF HEARING: TORONTO, ONTARIO

REASONS FOR JUDGMENT

OF THE COURT BY: SEXTON J.A.

DELIVERED FROM THE BENCH AT TORONTO, ONTARIO ON THURSDAY, JANUARY 17, 2002.

APPEARANCES BY: Ms. Evelyn Schusheim

For the Appellant

Ms. Christine Mohr, and

Ms. Sointula Kirkpatrick

For the Respondent

SOLICITORS OF RECORD: Cummings, Cooper, Schusheim, Berliner

Barristers & Solicitors

Suite 510

4110 Yonge Street

North York, Ontairo

M2P 2B7

For the Appellant

Morris Rosenberg

Deputy Attorney General of Canada

For the Respondent

FEDERAL COURT OF APPEAL

Date: 20020117

Docket: A-691-00

BETWEEN:

DEBRA RAPHAEL

Appellant

- and -

HER MAJESTY THE QUEEN

Respondent

REASONS FOR JUDGMENT

OF THE COURT

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Raphael v. Canada, 2002 FCA 23

Citations2002 FCA 23

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2002 FCA 23