Her Majesty the Queen v. Marcel Dumais, [1990] 1 CTC 54, [1989] DTC 5543, [1990] 1 CTC 342

Dubé, J.:—This appeal seeks to reverse a decision of the Tax Court of Canada [1] , holding that the respondent only owed tax on half the taxable capital gain from the disposition in 1982 of real estate which was part of the common property under the Quebec matrimonial regime of community of moveables and acquests. [2]

In the appellant's submission, the respondent should be taxed on all the taxable capital gain.

The facts are not in dispute. The respondent was married in 1950 without a marriage contract, when the legal regime was that of community of property and acquests. This matrimonial regime has remained unchanged. In 1973, the respondent acquired with the proceeds of his work land part of which he resold in 1982, making a gain of $63,118 of which $31,559 was taxable. In computing his income for the 1982 taxation year, the respondent included only half this amount.

The appellant does not dispute that the land should be treated as common property. [3]

In the decision under appeal the Court considered that the respondent's wife had become co-owner of the land when it was purchased and still was at the time it was sold. She should then have been taxed on the other half of the taxable capital gain, in accordance with section 39 et seq. of the federal Income Tax Act [4] ("the Act").

Section 39(1)(a) in effect in 1982 read as follows:

39. (1) For the purposes of this Act,

(a) a taxpayer's capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression "other than a taxable capital gain from the disposition of a property" in paragraph (a) thereof and without reference to paragraph

(b) thereof, be included in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer other than

[Emphasis added.]

Paragraphs 40(4)(a) and 54(e) and (f) referred to by the decision also deal with the notions of capital gain and ownership.

Capital gains were not taxable before the new 1972 Act.

Essentially, the question is whether the concept of property in the Act in fact determines the outcome of the case, or whether the rules governing the community of property and acquests take priority over it. For these purposes the most important of these rules is included in art. 1292 C.C., which since 1974 [5] reads as follows:

1292. The husband alone administers the property of the community subject to the provisions of article 1293 and articles 1425a and following.

He cannot sell, alienate or hypothecate without the concurrence of his wife any immoveable property of the community but he can, without such concurrence, sell, alienate or pledge any moveable property other than a business or than household furniture in use by the family.

The husband cannot, without the concurrence of his wife, dispose by gratuitous title inter vivos of the property of the community, except small sums of money and customary presents.

This article does not limit the right of a husband to name an owner under article 2540 or to name a third person beneficiary of annuities, retirement pensions or life insurances, and no compensation is due by reason of the sums or premiums paid out of the property of the community if the beneficiary or owner be the spouse or the children of either the husband or the spouse.

[Emphasis added.]

The Supreme Court rendered the leading decision on this matter in Sura v. M.N.R., [6] which was quoted by both parties in support of their respective arguments.

In that case the question was whether, for tax purposes, the income from the community of moveables and acquests resulting from the taxpayer's salary and real estate rentals was the income only of the taxpayer, or whether half thé income was the taxpayer's and the other half belonged to his wife.

Speaking for the Court, Taschereau, J. revised the definition of the term "income" in the federal statute in effect at that time. He concluded (at D.T.C. page 1006 [English translation by CCH; French version at C.T.C. page 4]):

Nothing in subsequent amendments of the Act changes the rule that it is not ownership of property which is taxable, but that the tax is imposed on a taxpayer, and the tax is determined by the income received by the person who is the legal beneficiary from employment, businesses, property or ownership. As Mr. Justice Mignault stated in the case of McLeod v. Minister of Customs and Excise, (1917-27) C.T.C. 290, at page 296 [1 D.T.C. 85 at page 87]:

All of this is in accord with the general policy of the Act which imposes the Income Tax on the person and not on the property.

We can no more question this proposition than we can have the least hesitation in conceding without reservation that only he must pay income tax who has absolute enjoyment of the income, unfettered by any restriction on his freedom to dispose of the income as he sees fit. (Vide Robertson Ltd. v. M.N.R., [1944] Ex. C.R. 170, at page 180 [2 D.T.C. 655 at page 659].)

On the nature of the community of property, Taschereau, J. said (at 1007 (C.T.C. 5)):

This régime of community fixes the leading part played by the husband in the administration of property. As a result of the will of the Legislature (article 1292) the husband alone administers the property of the community. He can sell, alienate and mortgage the property without the concurrence of his wife.

He alone can dispose of this income, he alone has the unrestricted enjoyment of this income, and nothing can leave the common fund unless it results from the expression of his wish. He receives on his own account, and not at all as agent or fiduciary for the benefit of his wife. The latter withdraws no income and her benefit consists of the increase of the community property of which she is coproprietor and in which she has the contingent right to share in a future division.

The fact that the husband has a leading part to play does not give him a sole right of ownership over the community property. Indeed, Taschereau, J. expressly rejected this theory. [7] In common with various writers cited, he considered (at 1008 (C.T.C. 6)):

That the husband and wife are co-owners of the property of the community, cannot, it seems to me, be doubted by the jurists. In spite of the hesitations that certain authors may have entertained, I believe that it is now universally conceded that this in fact is the rule by which we must be governed.

If it were not so, and if the wife were not co-owner of the community property she would, when the community is dissolved, have to pay succession duties, for it would then be a matter of a transmission of property from her husband to her. But this is not the case, for there is no transmission, but a partition in which she takes the portion which is returned to her and which belonged to her since the marriage. What she receives does not come from the patrimony of her husband. See also the following authorities which are to the same effect:— LAURENT, Principes de Droit Civil, vol. 21, pp. 224-225; PLANIOL et RIPERT, (Boulanger) Traité Pratique de Droit Civil, 1957, vol. 8, pp. 328, 331, 704; JOSSERAND, Cours de Droit Civil, 1933, vol. 3, No. 14; HUC, Code Civil, 1896, vol. 9, No. 72; MARCADE, Droit Civil, 7th ed., vol. 5, p. 444; DURANTON, Cours de Droit Français, vol. 14, p. 105.

However, the fact that the wife was co-owner of the common property is not conclusive as to income from the community for income tax purposes. Taschereau, J. explained this apparent dichotomy as follows (pages 1008-1009 (C.T.C. 8)):

. . . it is also true that she does not have the exercise of the plenitude of the rights which ownership normally confers (406 C.C.). Her right is formless, dismembered, inferior even to the right of one who has bare ownership of property in which another has a life-interest. Her right is stagnant, nearly sterile, because it is unproductive for the duration of the life of the husband. It is only at the dissolution of the community that the wife will be vested with the plenitude of her rights of ownership, which brings with it the jus utendi, fruendi et abutendi, of which her married status has temporarily deprived her.

Thus she withdraws no income from the property of the community, of which the husband is the sole administrator (1292 C.C.), without being required, as a general rule, to obtain the concurrence of the wife. All income is his, he may dispose of it, he may alienate it, even gratuitously, except for the restriction imposed by the law (1292 C.C.). The result is that the wife receives no income from community property, that she has "no salary, wages and remuneration", that she “receives nothing from businesses, property, offices and employments". Now, this is precisely what is taxable.

As I have pointed out earlier, the Act does not address itself to capital or ownership of property. It addresses itself to the person and the amount of the tax is determined by the benefits the person receives.

According to counsel for the respondent, the conclusions in Sura were influenced by art. 1292 C.C., the version of which in effect in 1962 [8] provided that the husband was completely free to dispose of community property without the concurrence of his wife. These conclusions were limited by the amendment introduced in 1964, [9] which is included in the wording set out above, because the disposition of community property was made conditional on concurrence by the wife. He concluded that Sura accordingly only applies to income from property or a business, not to a capital gain.

Counsel also pointed out that when this judgment was rendered the concept of the right of ownership of property did not exist in the Act. Capital gains were not taxable. However, since 1972 federal tax legislation has clearly taxed the owner of a capital gain made on the sale of property disposed of. In his submission, concluding otherwise would deprive of all meaning the words “of the taxpayer" in paragraph 39(1)(a) and "acquire" throughout the part of the Act dealing with capital gains: it would therefore be wrong in law to argue that taxation of a capital gain is to be determined in accordance with the right to the proceeds of disposition of the property, rather than the right to ownership of the property.

In support of his arguments he cited Laporte v. M.N.Æ., [10] an earlier decision of the same judge of the Tax Court of Canada on which the decision which is the subject of the appeal at bar was based. In that case it was held that the shares on which the capital gain was made were common property and so jointly owned by husband and wife. After reviewing paragraph 39(1)(a) et seq. of the Act, the Court concluded (at page 2273 (D.T.C. 1218):

It seems clear from reading these provisions, and others not cited, that the taxpayer, in order to be subject to taxation for a capital gain, must be the owner of the property of which there was a disposition (real or presumed).

Additionally, in the submission of the respondent, in determining taxable income s. 3(b) establishes that a capital gain is considered as income, just as any other income. The respondent further alleged, relying on Sura and James B. McLeod, that the Income Tax Act does not seek to tax ownership, but the beneficiary of the property.

When in 1972 the legislator, in the new Income Tax Act, laid down as the fundamental rule for taxing a capital gain that the taxpayer must be the owner of the property which was disposed of, did he not lay down a sine qua non condition?—and should the Court not take this into account in interpreting the Act?

The Court is strictly bound by the wording of the Act, and must conclude that under these sections the capital gain resulting from the disposition of common property must be taxed in the hands of the owners of the property, that is the two spouses. Although paragraph 3(b) determines taxable income, paragraphs 39(1)(a), 40(4)(a) and 54(c) and (f) determine who should bear the burden of the tax, namely the owner. In fact, paragraph 3(b) assumes that the taxpayer who is taxed on a capital gain was the owner of the property which was disposed of. In interpreting paragraph 3(b), reference must be had to section 39 et seq., including the condition of ownership of the property.

Counsel for the respondent also quoted a scholarly article [11] which concludes that Sura is not applicable to a capital gain (at 420):

. . . The capital gain should be adjusted in accordance with the right of ownership as determined by the rules of the Civil Code. As Taschereau, J. very clearly stated that at that period husband and wife were already regarded as co-owners of the common property, it follows that the capital should be divided between them.

For all these reasons, he doubted that Taschereau J. would come to the same conclusions today as he did in 1962. He argued that the respondent should be given the benefit of the doubt and urged the Court to be cautious before applying Sura to the case at bar.

Counsel for the appellant, for his part, contended that the conclusions in Sura are as applicable now as they were in 1962. In the case at bar, as in Sura, the fact that the spouses may be designated co-owners of the common property is not conclusive. Further, not all courts have so designated them. [12] The point at issue is not whether there was co-ownership, but rather to determine who has the enjoyment of the property and can dispose of it.

In his submission, the change made to article 1292 C.C. in 1964 does not have the effect of reducing the husband's powers. The situation as to common property was only altered in relation to the disposition of real property. It is still the husband who has the right and power to sell common property and to administer income resulting from its sale by himself. It is still he who is the legal beneficiary in the sense mentioned in Sura.

As he saw it, the central point is whether the addition of capital gains to the Act altered the system of taxation existing at the time of Sura. He suggested that a negative answer may be inferred from the fact that the Act then in effect contained several provisions relating the concept of acquisition to the allocation of capital cost, depreciation and so on. By failing to divide the (presumed) depreciation between the spouses who were co-owners of the property, Sura implicitly recognized that income from the property belonged solely to the administrator of the community.

He considered that although paragraph 39(1)(a) speaks of property “of” the taxpayer, the most important aspect of the section is that the person who makes a capital gain is the one who derives benefit or gain from the sale. Further, as the respondent was at least co-owner of the property, it was his property within the meaning of paragraph 39(1)(a): 100 per cent of the gain made on the sale must accordingly be assessed, because he alone had the enjoyment and the free right to dispose of it.

The appellant referred also to a judgment of the Ontario Court of Appeal, The Queen v. Poynton, [13] where the Court had to determine whether money obtained by fraud was taxable as income. The Court concluded that the fraudulent party should be taxed. It gave the word "income" the following meaning (at 6332):

The question is what quality must be attached to a profit, gain or benefit before it can be characterized as “income” for the purpose of taxation? There is no doubt that the word "income" in the Income Tax Act is sufficiently wide to include money other than that received from bona fide transactions.

The same Court also held that it was not ownership of the income that was conclusive, but rather the enjoyment of it. Referring to Curlett, [14] a judgment of the Supreme Court of Canada, it noted (at page 418 (D.T.C. 6334):

. . . The Court in holding that the moneys constituted income in the hands of Curlett did so in the face of his defence that he was under a duty to account and that his entitlement was not absolute. The principle to be elicited from the judgment, as I apprehend it, is that strict legal ownership is not the exclusive test of taxability but that a Court in determining what is income for taxation purposes must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held.

The appellant contended that the reasoning in Poynton has been approved by the Supreme Court of Canada at least twice. [15] It should however be noted that the circumstances of these two cases and of Poynton are considerably different from those of the case at bar.

In my opinion, the question here is not as to whether there is income within the meaning of the Act. No one disputes that the capital gain is income. The issue is to determine who made this gain, and so who is taxable. In order to resolve this issue, it is not necessary to reopen the discussion of the right of ownership of common property. Even if it is true that this discussion is not entirely closed, [16] I think it is clear that the weight of judicial [17] and academic [18] authority concludes that there is co-ownership of common property. I see no need to reach a different conclusion, in view of the decision toward which I am heading.

As regards article 1292 C.C., I do not see the 1964 amendment as conclusive. I agree that when the Supreme Court of Canada handed down its judgment in Sura, the scope of the husband's power to dispose of common property was wider than it now is after that amendment. However, neither the amendment nor the original version dealt with the right of ownership. Quebec writers are agreed that the legislator's purpose was actually to remove the husband's leading role and to require that both spouses participate in the disposition of certain types of property, all in the interests of the community. [19]

Having said that, it is worth repeating the following observations of Taschereau, J., which convince me that the express introduction of the concept of ownership into tax legislation does not affect the application of his conclusions to capital gain. He said (at 1008 (C.T.C. 6)):

. . . the tax is imposed on a taxpayer, and the tax is determined by the income received by the person who is the legal beneficiary from employment, businesses, property or ownership.

. .. only he must pay income tax who has absolute enjoyment of the income, unfettered by any restriction on his freedom to dispose of the income as he sees fit.

He alone can dispose of this income, he alone has the unrestricted enjoyment of this income, and nothing can leave the common fund unless it results from the expression of his wish.

All income is his . . . The result is that the wife receives no income from community property, that she has "no salary, wages and remuneration", that she "receives nothing from businesses, property, offices and employments". Now this is precisely what is taxable.

[Emphasis added]

These remarks by the learned judge are directed in the clearest possible way at the legal beneficiary of the income, not the owner or owners of the property from which that income is derived. None of the amendments made to article 1292 C.C. has altered the identity of the person who has this function: it is still the husband who administers the community property, and it is therefore still the husband who has the unlimited enjoyment of the income produced by the community, including the capital gain. It follows that for a woman married in community of property, a capital gain cannot be taxed against her simply because she is co-owner of property, if she has no right to freely dispose of the income made at the time of sale.

This conclusion is strengthened by a close reading of paragraph 54(c) and (h) of the Act, which reads as follows:

54. (c) “disposition” of any property, except as expressly otherwise provided, includes

(i) any transaction or event entitling a taxpayer to proceeds of disposition of property . . .

(h) "proceeds of disposition” of property includes

(i) the sale price of property that has been sold . . .

It should be noted that in the community of property regime, article 1292 C.C. gives the husband the right to the proceeds of a disposition of property; and it is not the property that is subject to the tax, but the taxpayer, and in the case at bar, the person who has in his hand, the proceeds of disposition of the property.

Finally, these observations of Albert Mayrand taken from his "Commentaires" on Sura bear reproduction: [20]

. . . in Sura our courts and commentators were guided above all by a rule of equity: in a federation, the tax imposed by the central government should affect taxpayers in the various states or provinces equally, regardless of the special features of local legislation. This rule has already been stated by the Privy Council in Minister of Finance v. Cecil R. Smith:

Moreover, it is natural that the intention was to tax on the same principle throughout the whole of Canada, rather than to make the incidence of taxation depend on the varying and divergent laws of the particular provinces.

The Tax Appeal Board was more explicit in a recent case [No. 676 v. M.N.R., (1959) Tax A.B.C. 263]:

The judgment in the Sura case, decided in favour of the Minister, sets at rest any suggestion that certain taxpayers in the Province of Quebec, for instance, who are subject to the law of community of property, may be taxed differently from those in any other province.

Surely, it would be quite unfair for taxpayers in one province to be favoured by provincial legislation when dealing with the application of the Act, which should affect all Canadian taxpayers equally.

For these reasons, the appeal is allowed with costs.

Appeal allowed.