Francine D’aoust v. Minister of National Revenue, [1990] 1 CTC 2360, 90 DTC 1257

Garon, T.C.J.: —This is an appeal from an income tax assessment issued by the respondent on January 19, 1984.

In this assessment the respondent established the amount of income tax payable by the appellant at $20,480 as the result of the sale on January 13, 1983, by Pierre D'Aoust to the appellant of his undivided share of a property situated in St-Pierre-de-Wakefield, in the municipality of Val-des-Monts in the province of Quebec. This assessment expressly stated that it was issued under the authority of section 160 of the Income Tax Act.

The appellant and Pierre D'Aoust were married in Ontario on May 1, 1976, under the regime of separation of property pursuant to the laws of the Province of Ontario, without entering into a marriage contract.

On November 21, 1978, the appellant and her then husband purchased the property referred to below for the sum of $32,500. The acquisition was financed, according to the appellant's testimony, as follows: when the offer was accepted, a cheque was written by the appellant in the amount of $500; another cheque was drawn on the appellant's bank account in the amount of $4,500; $5,000, borrowed from the appellant's brother, was also paid by the appellant; and finally, funds that the appellant and Pierre D'Aoust had borrowed from the Kinross Mortgage Company in the amount of $22,500 were advanced at the time the contract of purchase was signed. All together, these amount to $32,500, which was the purchase price of the property. The loan in question by the Kinross Mortgage Company for $22,500 was set down in a notarized document dated August 31, 1978, and registered on September 8, 1978. Repayment of the loan was secured by a mortgage on the property purchased by the appellant and Pierre D'Aoust. This contract provides for monthly payments of $297.81, including capital and interest at a rate of 10.25 per cent per annum.

On January 13, 1983, or a little more than four years after the acquisition of the above-mentioned property, Pierre D'Aoust conveyed his undivided share of the property in question to the appellant for the sum of $1, and the grantee, the appellant herein, undertook [Translation] "to assume responsibility for sums owing under the terms . . .” of the mortgage loan contract dated August 31, 1978. The following clause also appears:

[Translation] The grantee shall fulfill all the obligations of the grantor under the said obligation contract, which he states has been communicated to him, and he acknowledges that he is personally a debtor of the Kinross Mortgage Company, and undertakes accordingly to comply with all the obligations and conditions set out therein, and more specifically to pay the amount owing under the terms of the said document registered in the registry division of Gatineau on September 8, 1976, as No. 158-565.

On February 27, 1984, the appellant, who was then the sole owner, sold the same property to her husband's brother, Michel D'Aoust for the sum of $68,000. The new purchaser assumed the mortgage on the property, which then amounted to $13,461.08.

As is set out in, a judgment of the Superior Court, District of Hull, dated June 11, 1986, a decree nisi divorce was issued following the filing of a petition for divorce by the appellant against Pierre D'Aoust in April 1986. This decree nisi was followed by a decree absolute of divorce on October 29, 1986.

During 1984 an interim seizure order, and thereafter a final seizure order, were issued against Michel D'Aoust requiring him to pay to the Government of Canada moneys owing to the appellant pursuant to the contract of sale of February 27, 1984, referred to above. These measures had been taken to execute against these moneys in order to recover the debt owing to the Government as set out in the assessment at issue in this appeal. During 1986 the property was seized for this same tax debt.

On January 6, 1987, nearly three years later, the appellant again purchased the property from Michel D'Aoust for [Translation] "the sum of $1 and other good and valuable consideration”. In clause 2 of the contract the vendor states (Translation) "that he has defaulted on payments to the purchaser, Francine Rochon, according to the terms and conditions set out in the said deed of sale set out above, of capital and interest on the balance of the sale price, and on payments to the CIBC Mortgage Company on the mortgage done and signed before Daniel Lauzon, Notary, on August 31, 1978, as No. 812 of his minutes, and registered at the office of the registry division of Gatineau on September 8, 1978, as No. 158-658, and on payments of property taxes." The appellant explained that she was still paying the monthly mortgage payments herself. These payments in a way took the place of rent, since the appellant had continued to live on the property that she had sold to Michel D'Aoust. In October 1987 the appellant sold the property in question. The appellant testified that the monthly payments provided in the mortgage contract dated November 21, 1978 had been paid by the appellant alone during this period of a little more than four years, while the appellant and her former spouse were coowners of the mortgaged property. The loan taken out by the appellant from her brother was also repaid entirely by the appellant. During this period, the appellant’s spouse had been incarcerated at various times; he was also employed by his brother during part of this period, in a hotel. The appellant also made all the payments for repairs that the house might have needed, and for maintenance expenses. In addition, she paid the property taxes for the property. The appellant stated categorically that her former spouse made no financial contribution in respect of this property during the period when they were co-owners of the property in question. It also emerged from the evidence that her husband was unemployed during part of this period and that when he was working for his brother he received an annual income of $8,000 to $9,000. The appellant also stated that at the time the property in question was purchased in November 1978 the agreement between her husband and herself

[Translation] was that at the beginning, from the outset, that house was mine. That is why I was the one who paid from the very beginning. At that time it was logical that at some point he would sign his share over to me. The only reason he was there was that to get the mortgage we needed two signatures because of the incomes. So that is the reason why both our names were on the house.

It therefore appears that her former husband joined with her in acquiring this property in order to obtain the loan from the lending company; they could then show a higher income. She also stated that she had asked her then husband to sign his share over several times in the five or six months preceding the transfer of the property in January 1983.

We must also add that one of the respondent's submissions in support of the assessment with which we are concerned states that in an assessment dated August 3, 1983 the respondent [Translation] "assessed the appellant's spouse for the amount of $133,363.10 as income tax for his 1981 taxation year."

The appellant's former husband, Pierre D'Aoust, did not testify at the hearing of this appeal. I was told that despite efforts by or on behalf of the appellant over a period of several weeks, Pierre D'Aoust could not be contacted or served with a summons to appear for this trial.

In light of these facts, we must determine whether the conveyance by Pierre D'Aoust to the appellant of his undivided share of the property with which we are concerned at a time when she was his spouse can result in application of section 160 of the Income Tax Act.

Analysis

If section 160 is to apply, the two following conditions must be met:

1. There must have been a transfer of property.

2. The transfer must have been to a person who falls within one of the categories set out in paragraphs (a), (b) or (c) of subsection 160(1) of the Income Tax Act.

There is no doubt here that Pierre D'Aoust transferred his share of the property in question. We must deduce that his share was equal to that of the appellant, in the absence of any provision establishing an unequal division in either the contract of purchase dated November 21, 1978, or the conveyance dated January 13, 1983. Counsel for the appellant does not dispute that a transfer of property was effected on January 13, 1983, by the conveyance of that date.

It is not argued on behalf of the appellant that Pierre D'Aoust was acting, for example, only as a stand-in at the time of the purchase of the above-mentioned property on November 21, 1978.

This transfer was indeed made by Pierre D'Aoust to the appellant, who was at that time his spouse. This is the category covered by paragraph (a) of subsection 160(1). It is therefore indisputable that these two basic conditions for the application of subsection 160(1) were satisfied in the case at bar.

Subsection 160(1) sets out the rules that apply to such a situation. Paragraph (d) of this subsection deals with cases in which there is income or a gain from the disposition of the property. In the situation that concerns us, the property that was transferred to the appellant during the period before the assessment of January 19, 1984, and after the assessment of January 13, 1983, did not produce income because the appellant and her former husband lived in it. Nor was there any disposition of the property during this period of time. Paragraph

(d) therefore cannot apply in this case.

If the assessment in this case is correct it must necessarily be based on paragraph (e) of subsection 160(1). Paragraph (e) provides specifically that the transferee and transferor are jointly and severally liable to the extent indicated to pay the income tax payable by the transferor under the Income Tax Act in respect of the taxation year in which the property was transferred or of any preceding taxation year. This obligation on the transferee is limited, however, to the amount, if any, by which the fair market value of the property that was so transferred exceeds the consideration given by the transferee.

In other words, if paragraph 160(1)(e) is to apply, the transferor must have been impoverished by the transfer, and the transferee correspondingly enriched, and the transferor must owe income tax in respect of the taxation year in which the transfer took place or of an earlier taxation year.

It appears from the preceding that ‘he issue is the fair market value on the date of the transfer of the consideration given by the appellant for the acquisition of the undivided share of her former spouse in the property in question.

It is also admitted by the parties that at the date of the transfer the property had a fair market value of $55,461. The fair market value of the undivided share of Pierre D'Aoust which was transferred to the appellant was therefore $27,730.50. The conveyance provides, as set out therein, that the appellant assumed responsibility for amounts owing under the terms of the mortgage loan contract of August 31, 1978, pursuant to which the sum of $22,500 was advanced by the Kinross Mortgage Company to the appellant and Pierre D'Aoust for the purchase of the property in question. The uncontested submission of the respondent established that the balance of the mortgage debt was $14,500 at the time of the conveyance to the appellant by Pierre D'Aoust, on January 13, 1983. The respondent acknowledges that the assumption by the appellant of Pierre D'Aoust's share of the mortgage debt—equal to one half, or $7,250—is part of the consideration referred to in paragraph (e)(1) since before the conveyance of January 13, 1983 the appellant and Pierre D'Aoust were both required to repay the balance of the principal and interest.

Counsel for the appellant argued that at the very least half the payments made by the appellant should be included in the consideration referred to in paragraph (e)(i). Counsel for the appellant stressed the fact that the appellant used entirely her own funds, or money that she alone borrowed, in the purchase of the property, with the obvious exception of the money borrowed jointly by the appellant and Pierre D'Aoust from the Kinross Mortgage Company. The appellant therefore advanced a total of $10,000, half of which amount represents Pierre D'Aoust's share. It is possible, and even probable, that the appellant had a claim against Pierre D'Aoust for half of the money she put up at the time of the purchase of the property in question on November 21, 1978, and of the monthly payments she made during the period from November 21, 1978 to January 13, 1983, unless there were specific arrangements between the former spouses, and no evidence was submitted to this effect. If the conveyance of January 13,1983 had specified that the appellant abandoned her right to claim against Pierre D'Aoust or to take any action against him with respect to the money she had advanced at the time of the acquisition of the property and to the monthly mortgage payments that she subsequently made, it would be clear to me that the fair market value of the right to make such a claim should be included in the consideration referred to in paragraph 160(1)(e) of the Act. There is no reference in the conveyance to the right to make such a claim or to the fact that the appellant alone advanced funds when the property was acquired and subsequently, with the exception of the reference to the loan of $22,500 from the Kinross Mortgage Company. There was no evidence that the undivided half of the property was transferred by Pierre D'Aoust specifically on condition that his wife abandon any action that she might have been able to take against him.

Counsel for the appellant based his arguments on the decision of my brother, Judge Brulé, in Jane Gardner v. M.N.R., [1989] 2 C.T.C. 2285; 88 D.T.C. 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 s 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.

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 title 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.

I therefore find on all of the evidence that the respondent was correct in taking into account, in establishing the fair market value of the consideration given by the appellant for the transfer to her of Pierre D'Aoust's share in the above- mentioned property, only the amount of $1 referred to in the conveyance of January 13, 1983 and half the mortgage debt owing on January 13, 1983.

For these reasons, the appeal is dismissed.

Appeal dismissed.