Hewett v. R., [1996] 2 CTC 2560, 97 DTC 561

McArthur J.T.C.C.: — This appeal was heard February 19, 1996, in Vancouver, British Columbia. The issues are whether the appellant is liable to pay the amount of $80,000 pursuant to section 160 of the Income Tax Act (the “Act”) in respect of the transfer of Mr. Hewett’s interest in the matrimonial home to the appellant, and whether section 160 of the Income Tax Act infringes upon the appellant’s rights under section 7 and subsection 15(1) of the Canadian Charter of Rights and Freedoms.

The applicant commenced by making a motion for an order of this Court dispensing with the requirement for seven days’ notice of the hearing of the motion, and that the requirement to serve notice in accordance with section 57 of the Federal Court Act at least ten days before the day in which the constitutional question is to be argued be reduced from ten days to one day.

I reserved my decision on the motion, directing the appellant counsel to proceed with the appeal in the order in which he chose, including the Charter submissions. Prior to rendering a decision on the Charter argument, I undertook to deal with the appellant’s motion.

Briefly, the appellant served notice on the Attorney General of Canada and the Attorney General of each province on February the 16th, 1996 of her intention of raising a question concerning the constitutionality of section 160 of the Act. The matter was scheduled to be heard February 19th and 20th, 1996.

Subsection 57(1) of the Federal Court Act requires that such notice be served on the Attorneys General, and this section provides, in part:

The Act or Regulations shall not be adjudged to be invalid, inapplicable or inoperable unless notice has been served on the Attorney General of Canada and the Attorney General of each province in accordance with subsection (2).

Subsection (2) provides:

Except where otherwise ordered by the court or the federal board commission, the notice referred to in subsection (1) shall be served at least ten days before the day in which the constitutional question described in the subsection is to be argued.

In light of my decision, which will follow, the motion to abridge the time is granted.

This Court has heard the appellant’s Charter argument and the respondent’s reply. For reasons set out later in this judgment, I do not find that section 160 is invalid, inapplicable or inoperable. Therefore, as I read section 57(1) of the Federal Court Act, no notice to the Attorneys General is necessary.

The notice is necessary, upon my reading of the Act, only if I find section 160 to be invalid, inapplicable or inoperable, which I do not.

In a further preliminary matter, the parties agreed that the fair market value of the matrimonial home was, on the relevant date, $160,000, reducing the amount claimed by the respondent from $85,500 to $80,000.

The relevant facts included the following, largely taken from the pleadings of both parties, and taken firstly from the notice of appeal.

The appellant resides at 434 Genoa Crescent, North Vancouver, which is described as the family home or “the home”.

During the years 1983 to 1987 the appellant resided with her husband at the family home, which was owned jointly by the appellant and her husband.

The appellant and her husband were married on the 5th of September, 1959, and cohabited as such until 1977 or 1978 when they were initially separated.

Although the marriage was troubled, they lived under the same roof, yet, they testified, in a manner in which honoured an oral separation agreement between them until 1989 when the husband moved out of the family home.

The appellant’s husband agreed in 1987 to transfer his joint interest in the family home to the appellant, and that transfer was registered January 22, 1988.

At the time of transfer, the appellant’s husband had no apparent financial problems. On the 4th of September, 1991, Mr. Hewett, the husband, made an assignment into bankruptcy, and he was subsequently discharged on the 31st of January, 1993. The Trustee in Bankruptcy made no claim against the appellant in respect of the family home. The appellant contributed equity to previous homes owned by her and her husband when she was employed.

In early 1988, the total value of the home was $160,000, as mentioned, agreed to by both parties. By assessment dated the 6th of October, 1992, the Minister assessed the appellant, in aggregate, an amount of $85,500, which was reduced to $80,000, on the grounds that the appellant’s husband transferred, directly or indirectly, to the appellant for no consideration his joint interest in the family home valued at this amount when he was indebted to Her Majesty in respect of unpaid taxes.

The following is taken from the reply. On January 10, 1988, Mr. Hewett transferred his half interest in the property to the appellant, which transfer was registered with the Land Title Office on or about January 22, 1988. The transfer of Mr. Hewett’s half interest in the property to the appellant was not made pursuant to a decree, order, or judgment of a competent tribunal, or pursuant to a written separation agreement.

Mr. Hewett filed his 1983 and 1985 income tax returns on February 22, 1991. His 1983 and 1985 taxation years were assessed on August 19, 1991, resulting in a tax liability of $58,192.67.

On the 4th of September, 1991, Mr. Hewett filed an assignment into bankruptcy.

On the 17th of June, 1991, Mr. Hewett filed his income tax returns for his 1986 and 1987 taxation years. He was assessed for his 1986 and 1987 taxation years on March 16, 1992, which resulted in a further tax liability of $105,020.

Mr. Hewett’s income tax returns for his 1983, 1985, 1986 and 1987 taxation years were assessed as filed, except for adjustments to some years for Registered Retirement Savings Plan premiums, for which official receipts had not been provided. None of the assessments in respect of Mr. Hewett’s 1983, 1985, 1986, 1987 taxation years were disputed.

Mr. Hewett received his automatic discharge of bankruptcy on January 31, 1993. As of January 22, 1988, the aggregate of all amounts that the appellant spouse was liable to pay under the Income Tax Act in or in respect of the taxation year in which the property was transferred, or any preceding taxation year was not less than $80,000.

The fair market value of the property as of January 22, 1988 was $160,000. No consideration was paid by the appellant to her husband, Mr. Hewett, for his half interest in the property.

The appellant and her spouse testified that their marriage had failed in 1978. Mr. Hewett lived in the lower level of the matrimonial home for a period from 1980 to late 1988 or early 1989 for economic reasons and to be close to his children, but separate and apart from his spouse.

They both stated that he transferred his interest in the home to his wife to carry out their earlier intentions. At the time of the transfer, the appellant occupied the home with two teenage daughters and a one-year-old granddaughter, Ashley, who was in the custody and care of the appellant.

They testified that this transfer gave effect to an oral separation agreement. Apparently there was no discussion prior to the transfer between the appellant and her husband regarding avoidance of tax liability or a similar motive.

Mr. Fred Lee, a highly qualified real estate appraiser, gave expert testimony. His testimony was to the effect that the fair market value of the appellant spouse’s 50 per cent interest in the house, when transferred in January 1988, should be substantially discounted.

He stated, in a report filed, in referring to what he considered a comparable situation: “The market value of a property was declared at $100,000 in the Land Title Office. There was a mortgage in the amount of $47,000, leaving an equity of $53,000. This equity sold for $35,000, which is a discount of 34 per cent. This transaction was registered on January the 3rd, 1995. We are advised that there were young children involved and the mother retained occupancy of the house. A partition action had commenced many years ago”.

Mr. Lee added “an investor or purchaser would discount the one-half interest quite heavily to arrive at a price to pay for such an investment”. In our opinion — (and that is the opinion of Mr. Fred Lee) — as of January 1988, the discounted value of a one-half interest in the (subject) property — is $39,557.17.

The appellant had paid the principal sum of $10,000 in reduction of the mortgage on the home in 1983. There was no mortgage owing as against the home on the date of transfer in 1988.

The position of the respondent, simply put, is that the appellant spouse was liable to pay not less than $80,000 in income tax when he transferred his interest in the home to the appellant. Pursuant to the provisions of section 160 of the Act, the Minister correctly assessed the appellant the amount of $80,000, and further, he submits that none of the appellant’s rights and freedoms, as guaranteed by the Canadian Charter of Rights and Freedoms have been infringed by the operation of the Income Tax Act.

Position of the appellant

Counsel for the appellant submitted, in part, the following substantially taken from the appellant’s written submissions.

In this case the Minister assessed a transfer of a property on January 22, 1988. At that date, the appellant’s husband had no interest in the property. He transferred his interest to the appellant on January 10, 1988, or in 1987. It’s like the Minister assessing the wrong year; therefore, the Minister’s assessment is invalid.

Section 160 is in the nature of a penal provision and should be strictly construed.

On the 22nd of January, 1988, Mr. Hewett had no interest in the home. He transferred his interest to the appellant no later than January 10, 1988. The assessment stated that the transfer was January 22, 1988; the act of registration did not effect a transfer of property.

The most effective position of the appellant, in the Court’s opinion, was the following; the reference in section 160 to market value is a reference to the classical definition. The term “fair market value” does not mean the value to the transferor.

Continuing with the appellant’s submissions, he submitted that a joint tenant can obtain an order for partition and sale unless justice requires that such an order not be made. If there are marital problems, partition is subject to the Family Relations Act. Each spouse is entitled to a 50 per cent interest in family assets upon the happening of certain events, including the making of a separation agreement. A separation agreement may be an oral agreement.

Alan Hewett, the appellant’s husband, and the appellant were separated, even though residing in the same home. Advances by wife to husband are presumed not to be gifts. Effectively, Alan Hewett owes $5,000 to the appellant.

With respect to his Charter argument, the appellant submitted subsections 160(1) applies where property has been transferred to the transferor’s spouse, or a person with whom the transferor was not dealing at arm’s length.

Legislation

Subparagraph 160( 1 )(e)(i) reads, in part:

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 section 15(1) of the Charter of Rights reads:

Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

Analysis

Dealing firstly with the Charter issue, I do not feel it serves a useful purpose to review the jurisprudence with regard to section 15 of the Charter. I agree with the following statement of Huggesen, J.A., in Smith, Kline & French Laboratories Ltd. v. Canada (A.G.), [1987] 2 F.C. 359, 78 N.R. 30 (C.A.) at 367-68 (N.R. 36): The rights which section 15 guarantees:

are not based on any concept of strict, numerical equality amongst all human beings. If they were, virtually all legislation, whose function it is, after all, to define, distinguish and make categories, would be in prima facie breach of section 15 and would require justification under section 1. This would be to turn the exception into the rule. Since courts would be obliged to look and find section 1 justification for most legislation, the alternative being anarchy, there is a real risk of paradox: the broader the reach given to section 15 the more likely it is that it will be deprived of any real content.

And at 371 (N.R. 38)

To succeed, the plaintiffs have to urge as they do that section 15 guarantees absolute equality to every individual in every conceivable circumstance and that every possible distinction that can result in one receiving a benefit or incurring a disadvantage which is not enjoyed or suffered by all can only be justified, if at all, under section 1. As I have attempted to indicate, that view seems to me to be untenable.

I conclude that by enacting section 160 of the Income Tax Act, parliament made a social, economic and political decision which does not infringe section 15 of the Charter. I find no merit in the appellant’s submission that the Minister’s assessment was invalid because it referred to the transfer of the home on January 22, 1988, which was the registration date rather than the transfer date, at which time the property was legally transferred, being January 10, 1988; January 10, 1988 being the date the transfer document was executed.

Subsection 160(1) refers to the transfer of property, and the respondent’s reply to the notice of appeal sets out the accurate dates of the transfer and registration of the document. I find no meaningful significance in the fact that the assessment documentation referred to the date of transfer as January 22, 1988, rather than January 10, 1988, and there is certainly no prejudice against the appellant.

I find that the appellant’s counsel’s submissions with respect to the Family Relations Act of B.C. do not assist the appellant’s position.

I have given careful consideration to the appellant’s counsel’s submissions with regard to the meaning of “fair market value” as it is contained in section 160. Is the fair market value to be interpreted as the fair market value of the property in the hands of the transferor or the transferee?

The fair market value of the grant of the home in the hands of the appellant is $80,000 as agreed by both parties. She then retains, after the transfer, 100 per cent ownership of the home, with a total fair market value of $160,000. If the words in section 160, “fair market value”, means the value of the asset to the husband at the time of the transfer, then, according to the evidence of Mr. Lee, which I accept, the value is $40,000.

To determine the intention of the legislature, it is of assistance to consider the purpose of paragraph 160(l)(e). The purpose of that section is to prevent a person, such as the husband in the present case, with substantial income tax liability from defeating the claim of the Minister by transferring his assets or his interest in property to a spouse at a low or nil consideration. The claim by the Minister was against the husband and not the appellant.

It flows from that that the Minister has a claim against the financial interest of the husband who transferred his equity in the home while indebted to the respondent.

In the present case, the marriage of the appellant and spouse was certainly troubled, if not at an end, with an oral separation arrangement. The appellant, at the time of the transfer, was unemployed, living in the matrimonial home and caring for two teenage daughters and a one-year-old granddaughter. Her husband spouse moved out of the home permanently within a year of the transfer and made maintenance payments to the appellant under an oral arrangement.

I am satisfied that there was a transfer from the appellant spouse without consideration at the time when the husband transferee had an income tax liability to the Minister of National Revenue in excess of $80,000. The question before me narrows down to whether to attribute a value of $40,000 or $80,000 to the property transferred to the appellant by the spouse.

As I interpret section 160 as applied to the present facts, the financial interest that the defaulting taxpayer had in the home is claimed by the Minister. What was that financial interest of the husband in January 1988? I find that it was the most probable price which he could have obtained in a competitive and open market under all conditions requisite to a fair sale.

A purchaser from him would have to take into consideration that he would obtain a 50 per cent interest as a joint tenant with the appellant in the matrimonial home which she occupied with two dependent children and a dependent grandchild. The purchase would be further clouded by the fact that the appellant may have had a greater interest in the home, given the troubled and inconclusive marriage relationship.

I find common sense dictates that the Minister should find himself with no greater financial interest than that of the appellant spouse at the time of the transfer. I accept the evidence of Mr. Lee that that amount was the discounted sum of $40,000 and not $80,000.

The appeal is allowed without costs and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is liable to pay the amount of $40,000 to the respondent pursuant to section 160 of the Income Tax Act.

Appeal was allowed as to the amount.