Linus Gosse v. Her Majesty the Queen, [1993] 2 CTC 2205, 93 DTC 1017

Sobier, T.C.C.J.:—The appellant appeals from the assessment by the Minister of National Revenue (the" Minister”), for his 1986 taxation year, whereby the Minister attributed to the appellant certain taxable dividends and interest received by the appellant's former spouse, and also attributed to him taxable capital gains received by her, all pursuant to subsections 74.1(1) and 74.2(1) respectively, of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The issue, simply stated is: "When did the appellant's former spouse, now Mrs. Joyce Peachey, acquire the shares of Jems Manufacturing Inc. ("Jems")? Were the shares acquired by her at the same time as the appellant acquired his shares, that is on the original purchase in 1984 from one Joseph Lamb, or were they subsequently transferred to her by the appellant, with the result that the attribution rules under the Act would be applicable? To be successful the appellant must establish that the shares were, at all times, her property and never his.

The appellant maintained that after he became bankrupt, which bankruptcy flowed from the bankruptcy of a corporation, P.V.S. Industries ("P.V.S."), of which he was a shareholder, he had an opportunity of associating himself with one Joseph Lamb, who controlled Jems. Jems was engaged in the same type of business as P.V.S. and the appellant had considerable expertise in that business.

According to the appellant, he had an arrangement with Mr. Lamb that, as soon as he was free from his bankruptcy, he would be given the opportunity to acquire an interest in Jems.

It was the appellant's evidence that, prior to his association with P.V.S., he and his former wife pooled their resources in order to have a down payment for a home. However, the opportunity to become involved as a shareholder in P.V.S. arose and the moneys were used to invest in P.V.S.

A family home was later jointly purchased by the appellant and his former wife. However, in order to attempt to save the failing P.V.S., the home was mortgaged in favour of P.V.S.’s bank and later was sold or foreclosed by the bank to satisfy the indebtedness of P.V.S., with the result that not only did the appellant lose his interest in the home, his former wife lost her interest as well.

During the difficult times of P.V.S. and later when he began to work at Jems, Mrs. Peachey was employed as a registered nurse and her earnings were pooled with the appellant’s. When he began at Jems, the appellant took a low salary in order to keep costs down. At all times the appellant and Mrs. Peachey maintained a joint chequing account at the bank, into which each deposited his or her earnings and from which household and other expenses were paid.

On or about June 15, 1984, after receiving his discharge from bankruptcy, the appellant purchased 40 of the 100 outstanding common shares of Jems from Mr. Lamb for a purchase price of $8,000. The shares purchased were registered in Mr. Gosse’s name. The funds to purchase the shares were provided by Jems to the appellant, by means of a loan to him. The loan was to be repaid to Jems by means of deductions from Mr. Gosse's salary. At the same time as the loan was made, the appellant's salary was increased by an amount equal to the monthly payments due to Jems. It is clear therefore that the funds provided to acquire the shares did not directly emanate from the joint bank account.

It was Mr. Gosse's evidence that he held 16 of his 40 shares, i.e., 40 per cent, in trust for his former spouse. To this end, the appellant stated that he executed a declaration of trust in her favour, stating that 16 of the 40 common shares were held in trust by him for his former spouse. Although he stated that he executed the declaration of trust contemporaneously with the purchase of the shares, no original declaration could be produced. The evidence revealed that at the time he was asked by Revenue Canada officials for evidence of the trust, he could not produce it and therefore he "reconstructed" a declaration of trust and delivered it to Revenue Canada without disclosing that it was not an original document.

Sharon McFall, a former employee of Jems, gave evidence that she typed such a declaration of trust in 1984. However, she was unable to state when the document was typed, only that she remembered that Mr. Gosse purchased the shares in 1984 and that this was a happy event.

Mr. Gosse's evidence did not make it clear when the document was executed. Although the reconstructed declaration is dated June 15, 1984, the evidence did not disclose that this date was the date of execution of the original.

Mrs. Peachey was not aware of exactly how many shares were to be hers. She believed that because having lost her home, having worked so that the appellant could take a lower salary and otherwise having contributed to the family finances, she was to receive some shares—perhaps one-half of Mr. Gosse's holdings. There was evidence that Mr. Lamb was unaware that the appellant was not the beneficial owner of all of the 40 shares purchased from him.

The appellant places a great deal of emphasis on the joint bank account and what is characterized as the pooling of assets, as well as the fact that Mrs. Peachey lost her interest in the home, as evidence of intention that she should be a shareholder of Jems.

The appellant's relationship with Mr. Lamb deteriorated near the end of 1985 or the beginning of 1986. Since there was a buy-sell agreement between the appellant and Mr. Lamb, discussions were held and it was decided that Mr. Lamb would purchase the interest of Mr. Gosse although not pursuant to the buy-sell agreement. A draft agreement of purchase and sale was prepared by Mr. Lamb's solicitors, which showed Mr. Gosse as the owner of the 40 shares, an indication that up to that time, Mr. Lamb did not know the trust arrangements. Whether Mr. Lamb knew of the arrangement well before this sale is of interest since on discovery Mr. Gosse stated that Mr. Lamb was aware of the fact around the time of the original purchase in 1984, whereas at the trial, he stated that Mr. Lamb was not aware of the arrangement at the time of the purchase.

Certain memoranda prepared by the appellant's tax advisers concerning the proposed sale, were offered in evidence, which mentions the 40 per cent/60 per cent relationship in Jems between Mrs. Peachey and Mr. Gosse. However, it was clear that the memoranda were prepared after it was decided to sell to Mr. Lamb, and from information provided by Mr. Gosse to the advisers at that time.

In the first draft of the agreement of purchase and sale, the transaction was structured as a purchase by Jems of Mr. Gosse's shares, and that Mr. Gosse was recited as being the owner of all of the shares being sold. However, in one of the agreements of purchase and sale which was eventually signed, Mr. Gosse and his former spouse were the vendors of five shares each, and Jems was the purchaser.

A second agreement was entered into, among Mrs. Peachey, Mr. Gosse and their daughter Vicki as vendors. In the case of the sale by Vicki, it was a sale to Jems for the purpose of cancellation, and in the case of the sale by Mr. Gosse and Mrs. Peachey, it was a sale of the remaining shares to a corporation controlled by Mr. Lamb.

The first agreement called for a total purchase price of $81,002 for the five common shares owned by each of Mr. Gosse and Mrs. Peachey, that is for $40,501, payable to each shareholder. However, in the agreement Mr. Gosse acknowledged that he was indebted to the company in the amount of $73,278 and that this debt was to be repaid upon closing. In a memorandum dated April 28, 1986, prepared by Mr. Gosse's tax advisers, it was stated that, in order to repay the debt to Jems, Mr. Gosse would use the proceeds of the sale to him and perhaps borrow the balance from Mrs. Peachey. However, no evidence was led to establish that this borrowing took place.

Although, at the closing of both purchases and sales, cheques or drafts were to be issued to each of the vendors representing the cash portion of the purchase price, the funds were deposited into an account owned by the appellant, from which account the moneys were later transferred to the joint account. From the funds in the joint account, which of course would include the $65,103 being the cash portion paid to Vicki, automobiles were purchased for Mrs. Peachey and Vicki, and a condominium was purchased in Mrs. Peachey's name. In addition, tuition for Vicki was paid and some of the funds were used for living expenses.

In addition to the cash paid on closing, interest-bearing promissory notes were issued to the vendors. The interest paid to Mrs. Peachey was attributed to the appellant as well as the capital gain on the shares sold by her.

Vicki's involvement in the transaction came about to allow her to acquire shares on a tax free roll over, under then subsection 73(5) of the Act. The shares sold by her were acquired ostensibly from her parents and are not the subject of this appeal. Only the dealings in the shares sold by Mrs. Peachey are in question.

The question of whether the shares were owned by Mrs. Peachey from the beginning or whether they were transferred must now be dealt with. The appellant's position is that because of the past consideration, i.e. losing her interest in the family home, and current consideration such as Mrs. Peachey working to help the family financially, coupled with the joint bank account and pooling, Mrs. Peachey acquired the shares directly and they were purchased on her behalf from funds provided by her from the joint account.

However, it was shown that the funds to purchase the shares were provided by Jems to Mr. Gosse alone. If one were to ask the question: "Who borrowed the money to purchase the shares?", the answer would be the appellant. The source of the funds to repay the loan was an increase in his salary. However, the appellant contends that if that extra salary were to have been deposited in the joint account and pooled and then withdrawn to repay the loan, it could be argued that the payment came from commingled funds, and therefore partly from Mrs. Peachey's share of those funds.

The debt repaid on closing came from funds which were paid to the appellant and Mrs. Peachey under the first agreement of purchase and sale. Mrs. Peachey was not liable to repay that debt, yet apparently funds payable to her were used for that purpose. There was no evidence that Mr. Gosse borrowed the money from Mrs. Peachey in order to repay the debt. On the contrary, the funds were deducted from the proceeds payable to both of them.

The fact that she lost her interest in the family home, as a result of the bankruptcy of P.V.S. is not evidence of who purchased the shares. The fact that she contributed to the family's finances is also not evidence of who purchased the shares.

The purchase price for the shares was paid by Mr. Gosse from his salary. It was his salary and he chose to use it to repay the loan from Jems. The inescapable conclusion which I must draw is that Mr. Gosse purchased the shares with funds borrowed from Jems, and repaid the loan from his own salary. Although there was an intention that Mrs. Peachey would have an interest in the shares, it was not demonstrated that they were hers from the beginning. In fact, she did not know what she owned. When Mrs. Peachey's lawyer wrote in 1991, he stated that Mrs. Peachey was“ unable to say just how or when she acquired ownership of those shares". The lawyer goes on to say that [presumably, it was from these pooled funds that the investment in Jems was made, although Mrs. Peachey has no specific recollection one way or another in this regard."

The recreation of the declaration of trust and holding it out as an original does nothing to enhance the appellant's credibility. Even if there was such a document, no evidence was given to show when it was actually executed. The best that can be said for the evidence of Sharon McFall was that Mr. Gosse purchased the shares sometime in 1984 and that he signed a declaration of trust in that year. This act is just as indicative of a transfer to Mrs. Peachey after he acquired the shares, as it is of his having purchased the shares for her ab initio.

As further evidence that Mrs. Peachey was unaware of what she owned, Mrs. Peachey stated that on the day the purchase and sale documents were executed, she left her workplace to attend the lawyer's office to sign. It was then that she learned that she did not have a one-half interest in the shares but only a 40 per cent interest.

The joint account was not in itself indicative of pooling of funds, but was just as indicative of a financial arrangement which spouses make between themselves.

The appellant has failed to discharge the onus placed upon him to show that his former spouse was at all material times the beneficial owner of the shares, sold by her to Mr. Lamb in 1986.

Accordingly, the appeal is dismissed.

Appeal dismissed.