Julie F. Ingrao v. Minister of National Revenue, [1989] 1 CTC 2052, 89 DTC 42

Bonner, T.C.J. [Orally]:—The appellant appeals from an assessment under section 160 of the Income Tax Act. The assessment was made July 31, 1986. The assessment was made on the basis that John Ingrao, spouse of the appellant, transferred property to her in or about the months of April or May of 1982. The property in question was as set forth in paragraph 17(b) of the reply to notice of appeal found or assumed on assessment to be . . . Mr. Ingrao's interest in the residence and his rights in the oral and written agreements regarding the residence”. Further the respondent assumed that throughout 1982 John Ingrao was liable to pay $70,637.39 under the Income Tax Act in relation to his 1981 taxation year.

It was the position of the appellant that :

(a) there was no transfer by Mr. Ingrao of the residence or of any interest therein to the appellant in May of 1982;

(b) the subparagraph 160(1)(e)(ii) amount was $0 (nil) at what was said to be the relevant time, July 31, 1986, the date on which the assessment in issue was made; and

(c) in the alternative only a half interest in the property was transferred in May of 1982.

The chain of events leading to the assessment in dispute is as follows. Late in 1980 the appellant’s employer Petersburg Holdings agreed to purchase the residence property in question, 8 Brucewood Circle, as a manager's residence for occupation by the appellant. At the beginning of 1981, Petersburg Holdings was placed in receivership. Mr. Ingrao himself had become bankrupt on March 5, 1980.

An acquaintance of Mr. Ingrao caused a company, 428723 Ontario Limited, which he controlled to complete the purchase. The company gave a $92,000 mortgage back to the vendors. The acquaintance, John Marquis, loaned $32,000 to 428723 Ontario Limited to provide the cash necessary to complete the purchase. In April of 1980 Mr. Ingrao entered into an agreement with 428723 Ontario Limited. By that agreement the company granted Mr. Ingrao a licence to occupy the property as a residence. In turn Mr. Ingrao became responsible to pay all taxes and carrying costs of the property including all payments under the mortgage to the vendors of the property and the mortgage to Mr. Marquis. The written agreement was entered in evidence. The agreement provided that 428723 Ontario Limited might require Mr. Ingrao to purchase the property for the primary amount outstanding on the second mortgage to Mr. Marquis. The written agreement contained no provision entitling Mr. Ingrao to purchase the property.

Mr. Ingrao stated that there were no other agreements between himself, his wife and 428723 Ontario Limited or Mr. Marquis. I will digress to note at this point that I do not believe this. Mr. Ingrao appeared to be evasive in giving evidence. Further his story is highly improbable, and it conflicts with what happened in April and May of 1982 and with the correspondence written at the time.

During the period from April 1980 to April 1982 Mr. Ingrao made payments on the first mortgage as set forth in paragraph 8 of the replay to notice of appeal. [1] It is noteworthy that Mr. Ingrao was discharged from the first bankruptcy on September 29, 1981, and that prior to his discharge he made two $15,500 principal payments. It is highly improbable that a person having nothing more than the rights and licence given to Mr. Ingrao by the April 25 agreement would be prepared to make payments of that magnitude. He would be likely to do so only if they had the effect of building his equity.

A conclusion that the written agreement of April 25, 1980, (Exhibit A-4) does not reflect the entire agreement between Mr. Ingrao to Mr. Marquis and his company, 428723 Ontario Limited, is further supported by:

(a) Exhibit A-5, the letter from Mr. Marquis’ solicitor, Mr. Udell to Mr. Ingrao of March 12, 1982. In it Mr. Udell said, inter alia:

I have discussed this matter with John Marquis and he advises that he is not in the mortgage business. We wish to remind you that this mortgage was originally given out to you as a courtesy to assist you in purchasing this property. You also undertook, at that time, to repay this mortgage in full by the due date.

[Emphasis added.]

(b) the letter of April 13, 1982, from Mr. Ingrao’s lawyer, Edmund Smith, to Mr. Udell in which he confirmed:

. . . that our client, John Ingrao, wishes to discharge the outstanding mortgage in favour of John E. Marquis on the above-named property and receive a conveyance of the property from 428723 Ontario Limited in accordance with the provisions of the agreement of April 25, 1980. In this regard, would you please prepare a draft deed for the property engrossed as follows:

“JULIE INGRAO, of the Town of Pelham, in the Regional Municipality of Niagara”.

(c) the letter dated April 26, 1982, from Mr. Udell to Mr. Smith.

In my view it is clear that 428723 Ontario Limited was caused to lend its name or serve as a disguise for Mr. Ingrao in the acquisition by him of a home at a time when he was an undischarged bankrupt.

I do not ignore the testimony of Mr. Smith to the effect that Exhibit A-4 reflects all the terms of the arrangement. However, I do not believe that his recollection in September 1988 of an April 1980 transaction is likely to be perfect. Further I note that in the April 13 and 26, 1982 letters he seems to have assumed that payment by Mr. Ingrao of the amount due to Mr. Marquis on the second mortgage entitled Mr. Ingrao to a conveyance of the Bruce- wood property (subject of course to the first mortgage).

The property was conveyed to the appellant by 428723 Ontario Limited by deed dated April 16, 1982, pursuant to the direction dated April 28, 1982, signed by Mr. Ingrao.

In argument counsel for the respondent referred to the following passage from the decision of Thorson, P. in Estate of David Fasken v. M.N.R., [1948] C.T.C. 265; 49 D.T.C. 491:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

It is clear that Mr. Ingrao possessed and that he transferred to the appellant his right to call for a conveyance of 8 Brucewood Circle, upon payment of the second mortgage.

The respondent's findings that the fair market value of the residence at the time (end of April 1982) was $135,000, that the first mortgage debt assumed was $49,500 and that the balance required to pay the second mortgage was $34,645.79 with the result that the value of the right transferred was $50,854.21 were not challenged. Paragraph 14 of the reply was also unchallenged.

The second argument of counsel for the appellant is that Mr. Ingrao was not liable to pay tax on July 31, 1986, the date of the assessment. He became bankrupt for a second time in August 1984. He has not yet been discharged. Accordingly by virtue of section 49 of the Bankruptcy Act, it can not be said that Mr. Ingrao's income tax liabilities were within the meaning of subparagraph 160(1)(e)(ii) of the Income Tax Act . . . amounts each of which is an amount that the transferor (Mr. Ingrao) is liable to pay . . . ”

Counsel pointed out that the statutory wording had been changed from the former subparagraph 160(1)(d)(i) ” . . . amount that the transferor was liable under this Act on the day of the transfer. . . ”

I cannot accept this argument. Section 49 of the Bankruptcy Act does not effect a discharge of the debts of the bankrupt. It simply stays proceedings. Until an order of discharge is made, the appellant remains liable to pay his tax. Furthermore, I am not persuaded that subparagraph 160(1)(e)(ii) looks to liability to pay on the date of assessment. The statute as reworded clearly discloses a legislative intent to impose liability on the transferee in respect of the year in which the transfer takes place. The time when the assessment happens to take place is a consideration irrelevant to the statutory scheme. It is the transfer that triggers liability.

The third argument advanced by counsel for the appellant was that if any property was transferred only a half interest therein was transferred. The result was said to follow from the following:

(a) the only property that could have been transferred was a right to gain title to 8 Brucewood Circle in payment of the amount owing on the second mortgage;

(b) Mr. Ingrao was incapable of borrowing the money necessary to pay the second mortgage;

(c) the appellant in fact borrowed the necessary money and thus breathed value into the right; and

(d) in consequence due to the law of instructive and resulting trusts the appellant earned or added value to the property.

The short answer to this is that the value of the right or property was what it was. That right did not gain value because the appellant was in a position to exercise it. The statute has regard to fair market value, not value to transferor. The appeal will therefore be dismissed.

Appeal dismissed.