Giselle Marie Miller v. Minister of National Revenue, [1988] 2 CTC 2106, 88 DTC 1488

Taylor, T.C.J.: —This is an appeal heard in Edmonton, Alberta, on January 12, 1988, against an income tax notice of assessment for an amount $48,829.49, in which notice the Minister of National Revenue provided the following explanation:

This assessment is issued pursuant to the provisions of subsection 160(2) of the Income Tax Act and is in respect of a transfer on or about December 22,1982 from Michael Kraychy to Giselle Marie Miller also known as Giselle Marie Kraychy of property Plan 1869 H.W., Lot K, Thorhild SE 6-60-21 W 4th.

The notice of appeal, in its particularly critical parts read (with the specific "paragraph numbers" indicated thereon):

Notice of Appeal

2. On or about the 29th day of July, 1975, Andrew Kraychy (the "Father-in-Law") transferred legal title to property described as Plan 1869 H. W., Lot K (Thorhild S.E. 6-60-21-W4th) (the "Property") to Michael Kraychy (the "Husband") to be held in trust by the Husband for the benefit of the Father-in-Law pursuant to a Trust Agreement made in writing on or about the 29th day of July, 1975.

3. On December 22, 1982, the Appellant entered into a pre-marriage contract (the "Pre-Marriage Contract") with the Husband pursuant to section 37 of the Matrimonial Property Act, R.S.A. 1980, c. M-9, as amended.

4. Article 2 of the Pre-Marriage Contract provided that legal title to the Property was to be transferred from the Husband into the name of the Appellant to be held by her in trust for the Husband and to be returned by the Appellant to the Husband at his demand. The Pre-Marriage Contract further provided that the transfer of legal title was not intended as a gift and that a Transfer of Land of the Property back to the Husband was deposited with the Husband for his benefit and use without notice to the Appellant.

5. On or about January 14, 1983, legal title to the Property was transferred from the Husband to the Appellant.

6. On January 22, 1983, the Appellant and the Husband were married.

7. The Respondent issued the Assessment dated November 29, 1984 to the Appellant pursuant to the provisions of subsection 160(2) of the Act in respect of the aforesaid transfer of legal title to the Property from the Husband to the Appellant.

8. On or about the 13th day of December, 1984, the Father-in-Law filed a Caveat against the Property to protect his beneficial interest in the Property relating to the transfer of legal title from the Father-in-Law to the Husband made on or about the 29th day of July, 1975.

B-2. The Appellant says that she was a mere trustee in respect of the transfer of legal title to the Property from the Husband to the Appellant and that she received no beneficial interest in the Property whatsoever. Therefore, the fair market value received by her was nil and accordingly any liability which she may have pursuant to paragraph 160(1)(e) of the Act is nil.

B-3. The Appellant also says that since the Husband had no beneficial interest in the Property, she received nothing of value since he had nothing of value to give her.

In response thereto, the Minister of National Revenue stated:

2. He admits the facts as set forth in paragraphs 1, 3, 6, 7, 9 and 10 of the Notice of Appeal.

3. With respect to the facts as set forth in paragraph 2 of the Notice of Appeal he says that by Matrimonial Property Agreement between the Appellant and Michael Kraychy, Michael Kraychy transferred property legally described as Plan 1869 H.W. Lot (K) Thorhild — S.E. 6-60-21-W4th (hereinafter referred to as the property) to the Appellant and that pursuant to paragraph 2(b) of that Agreement, the property was held in trust for Michael Kraychy and shall be returned to Michael Kraychy on demand.

4. With respect to the facts as set forth in paragraph 4 of the Notice of Appeal, he says that the Matrimonial Property Agreement entered into by the Appellant and Michael Kraychy included, inter alia, the following provisions:

2(b) The husband will transfer to the wife for a consideration of One ($1.00) Property known as Plan 1869 H.W., Lot K (Thorhild S.E. 6-60 21-W.4th) of Thorhild, Alberta and that such property is to be held in trust for the first part and shall be returned to the first part upon demand.

(c) The second part acknowledges that this transfer is not intended as a gift to the second part.

(d) The second part acknowledges that she holds the property in trust for the husband and that she has deposited with the first part a transfer of land respecting the said property which may be used by the husband (party of the first part) without notice to the second part.

5. With respect to the facts set out in paragraph 8 of the Notice of Appeal, he admits the words commencing with "On or about” and ending with “against the property" and adds that the caveat states that Andrew Kraychy transferred the property to Michael Kraychy on the undertaking that Michael Kraychy would hold the lands in trust for Cindy Kraychy.

6-(b) on the day he transferred the property to the Appellant, Michael Kraychy was

liable to pay taxes for his 1979, 1980 and 1981 taxation years, pursuant to the Income Tax Act, in the amount of $48,829.49;

(c) Michael Kraychy transferred the property to the Appellant on December 22, 1982; and

(d) the fair market value of the property at the date of transfer was $50,500.00.

B-7. The Respondent relies, inter alia, upon Sections 3 and 160 of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1 applicable to this Appeal.

B-8. He submits that he properly assessed the Appellant pursuant to S. 160 of the Act as Michael Kraychy transferred the property to the Appellant and Michael Kraychy was liable to pay taxes in the amount of $48,829.49 on the day of transfer.

The matter is complicated, involving as it does perhaps two trusts, (or alleged trusts), a marriage contract, one or more "caveats" on title, an unborn child, the prospect of reversion of the assets involved in the trust(s) to an original owner, and overriding all of this the impact of unpaid income taxes. In addition, a court order, under the Income Tax Act, for the amount of $48,829.49 (plus $2,434.64 interest) had been issued on May 7, 1985 by the Federal Court of Canada which (and I quote):

. . . which Certificate, when registered, has the same force and effect as if it were a judgment obtained in the above named Court for a debt of the amount specified in the Certificate.

After listening to representations made by counsel on this writ, I have reached the conclusion that it should not interfere with the jurisdiction of the Tax Court of Canada to hear the merits of the appeal against the assessment itself.

In testimony, relevant to the particular issue before the Court, there were the appellant herself, her husband Michael Kraychy, and Michael's father Andrew Kraychy. The general base of information and facts available to the Court was not greatly expanded by any of this testimony and it would serve little purpose to review the apparent inconsistencies and incomplete rationales presented by the witnesses in an effort to support the contention of the appellant. I would however point out that it was the impression of the Court from the testimony of the appellant that she accepted her responsibility to turn over whatever interest she had in the property involved to her first born child, unless Michael Kraychy took it back (according to the terms of the matrimonial property agreement) before such a transfer took place.

Dealing first with the matrimonial property agreement — filed as Exhibit A-6, and a "Trust Agreement", filed as Exhibit A-2, the wording of both of these is so unusual, that major portions should be quoted in this judgment:

THIS AGREEMENT made this 22 day of December, A.D. 1982

BETWEEN:

MICHAEL KRAYCHY

(hereinafter referred to as the party of the first part)

OF THE FIRST PART,

— and —

GISELLE MILLER

(hereinafter referred to as the party of the second part)

OF THE SECOND PART,

MATRIMONIAL PROPERTY AGREEMENT

WHEREAS the parties hereto are contemplating a marriage of the 22nd day of January, A.D. 1983 between them:

AND WHEREAS the parties hereto are desirous of entering into an agreement of providing for the distribution and division of property presently and future property acquired during the course of their marriage;

AND WHEREAS the parties hereto are desirous of entering into an Agreement pursuant to section 37 of the Matrimonial Properties Act;

IN CONSIDERATION of One ($1.00) dollar and the mutual covenants herein the parties hereto agree:

1. DEFINITIONS

a) Property Owned Solely:

shall mean property owned by a party at the time of their marriage; acquired by that party during the marriage: earning and appreciation on property owned by a party during the marriage;

b) Jointly:

shall include all household furnishings; and property acquired by mutual contributions of the parties regardless of amount contributed by either party;

2. AGREEMENT

a) That upon the parties being married, this agreement shall take effect and the distribution of the property existing and future property acquired during the marriage shall be distributed as hereafter provided:

b) The husband will transfer to the wife for a consideration of One ($1.00) Property known as Plan 1869 H.W., Lot K (Thorhild S.E. 6-60 21-W.4th) of Thorhild, Alberta and that such property is to be held in trust for the first part and shall be returned to the first part upon demand.

c) The second part acknowledges that this transfer is not intended as a gift to the second part.

d) The second part acknowledges that she holds the property in trust for the husband and that she has desposited with the first part a transfer of land respecting the said property which may be used by the husband (party of the first part) without notice to the second part.

3. The second part acknowledges that she makes no claim to any of the property of the first part's presently owned by the first part and acknowledges that the first part is the sole owner, legal and equitable of the foregoing properties;

Property:	a) 11232 - 66 Street, Edmonton
	b) 11236 - 66 Street, Edmonton
	c) 11240 - 66 Street, Edmonton
	d) 12135 - 95 Street, Edmonton
	e) 12409 - 77 Street, Edmonton
Personal:	a) 1979 Corvette (Blue)
	b) 1979 Chev '/2 ton (Green)
	c) Any vehicles registered to the name of Michael Kraychy
	d) Mickey’s Auto Ltd.

4. The parties hereto mutually agree that they are the sole owners and shall have the sole rights to receive all earnings and benefits on the property owned by them and acquired by them during the course of their marriage and that neither party shall make a claim of right either legally or equitable upon the property of the other.

5. The parties mutually agree that property acquired jointly shall be distributed and belong to them equally.

6. The parties mutually agree that they will not make a claim and shall not have any ownership in property acquired by inheritance of the other party.

7. The parties hereto agree that this agreement takes effect upon marriage of the parties hereto.

Trust Agreement — Exhibit A-2* [1]

I Andrew Kraychy, transfer to my son Micheal Kraychy, the said following property;

Plan 1869 H.W.

Lot K (Thorhild S.E. 6-60-21-W.4th)

Thorhild, Alberta.

for the sum of one dollar ($1.00) and this said property is to be held in trust by Michael Kraychy and is to be given to his first born child.

I, Andrew Kraychy, can demand the above said property, be transferred back to my name, or to who I choose at (sic) any time.

I, Michael Kraychy, understand that this transfer is in trust and not intended as a gift and that I will not sell or mortgage the property, in any way.

Dated this 29 day of July, 1975.

SIGNED: Andrew Kraychy

WITNESS: signed

SIGNED: Michael Kraychy

Two "Transfer of Land" certificates were also filed — one from Andrew Kraychy to Michael Kraychy dated July 24, 1975, — Exhibit A-1, and the other from Michael Kraychy to Giselle Marie Miller dated December 22, 1982 — Exhibit A-5. Both of these described the transfer as “all my estate and interest in the said piece of land”. A "caveat" dated March 10, 1983 was filed on the title by Henry Kraychyt, [2] referring to a "Lease Agreement with Giselle Marie Miller".

For the appellant, the fundamental position of counsel was reflected in:

It is submitted with respect to the transfer of the property into the name of the Appellant that this intention is very very clear. It's stated right . . . on the Transfer of Land, that the transfer was in trust. It refers to the trust conditions contained in the Matrimonial Property Agreement. All of these are clear on the face of the Transfer of Land, expressing this intention.

We have the Matrimonial Property Agreement. It's very clear in there, the expressed intention that the property was being transferred to the Appellant in trust and was not intended to be a gift.

. . . in the Matrimonial Property Agreement, it states clearly that the transferee, being the person, the Appellant, receiving the legal registered title is to hold in trust for Michael Kraychy, the husband.

This trust agreement is clear that the beneficiary of this particular trust between Michael Kraychy and Giselle Miller, Michael Kraychy is the beneficiary of that.

Loue. it is submitted . . . that the Appellant was . . . a trustee holding property in trust.

. . . and because the transfer was so limited, and an expression contained therein, that the only thing that he did transfer was legal title and not his beneficial interest.

. . . the beneficial interest is not being tranferred, . .. Michael Kraychy was not divesting himself of whatever interest he did have in the property.

I should note at this point, that comments were made by the parties regarding the possible effect of the Torrens System of Land Registration and Title in Alberta and how it could be interperted in this appeal — but in my view the impact of the Torrens System does not impinge directly on the determination of this issue before the Court.

In furtherance of his contention, counsel for the Minister stated in argument:

. . . the property was tranferred before this Matrimonial Property Agreement came into effect. The Matrimonial Property Agreement includes this supposed trust agreement. It is my submission that this trust agreement was not in effect at the time that the property was transferred. At the time the property was transferred the Transfer documents should speak for themselves, because this agreement was not in effect, did not come into effect until a month later.

As I have indicated, the Transfer documents themselves state that Michael Kraychy is the owner in fee simple and transfers all his estate and interest in the property. There was no caveat registered against the title. So therefore, as I have indicated, it’s the Minister’s submission that the property which transferred was the full property, the full amount.

First Exhibit A-2, — only very little reference was made in argument by counsel for the appellant to it, as follows. The reference made to it by counsel for the respondent is also noted.

From counsel for the appellant:

. . . The fact that Michael Kraychy in turn was holding that in trust was not disclosed in the Matrimonial Property Agreement. However, his trust obligations cannot be imposed on another trustee, it is submitted.

This trust agreement is clear that the beneficiary of this particular trust between Michael Kraychy and Giselle Miller, Michael Kraychy is the beneficiary of that. The fact that he has underlying trust obligations of his own cannot be imposed on a subsequent trustee. That is, one trustee cannot impose his or her trust conditions on a further trustee, and so therefore the certainty of objects with respect to the trust that it is submitted was created between Michael Kraychy and Giselle Miller, he was the beneficiary of that trust. He had further trust obligations himself in which he was liable for any actions that may result to beneficiaries of that further trust.

For the respondent:

. . . and I would submit that this was a transfer of property, to fall within the parameters of Section 160.

The main issue in this case, as I see it, is what was actually transferred. The Appellant contends that it was just the bare legal title, and that this is effective as against the Minister.

In reviewing the evidence, the first Transfer of Land from Henry Kraychy to Michael Kraychy this was entered as Exhibit A-1, and it begins by using the name Andrew Kraychy, and it says,

". . . being registered owner of an estate in fee simple . . ."

It goes on to describe the land, and then when it describes the consideration given for the transfer of the land, it says,

". . . ONE DOLLAR ($1.00) in discharge of a trust condition .. . .”

When it goes on to describe what was actually transferred, it states,

". . . all my estate and interest in the said piece of land.”

The title which was issued lists the estate — or lists the fee simple, it lists Michael Kraychy as the owner in fee simple. There was no caveat filed by the father at that time.

Counsel for the appellant concentrated on urging upon the Court that the documents between Michael Kraychy and the appellant supported a contention that the transfer was of “legal title" only and not of the beneficial interest in the land. Counsel also stressed that any transfer to the appellant was under a trust agreement from Michael Kraychy.

Analysis

Obviously Michael Kraychy could not transfer to the appellant that which he did not have. This follows the legal maxim of "Nemo dat qui non habet". I am aware from my reading of Exhibit A-2 that the restrictions regarding transfer back to Andrew Kraychy, the beneficiary to be an unborn child, and the barring of selling and debarring of selling and mortgaging could serve to leave highly questionable the "trust" itself — but that argument was not made at the hearing. It could also be argued that to the degree Exhibit A-2 does represent a trust document, that trust might be in favour of Andrew Kraychy, equally as much as it could be read in favour of the yet unborn "first born child”. But even allowing for all these inconsistencies and queries, the point at issue remains — did Michael Kraychy transfer property to the appellant? In my view that must be answered in the negative.

The Minister’s counsel did not successfully attack Exhibit A-2 which I regard as the crucial document. As noted earlier, there are many questions which are raised about it — but it must either be acceptd as a "Trust Document", or rejected as such. Andrew Kraychy gave testimony personally and in general stayed with the import of this document at the hearing. According to Exhibit A-2, as I read it, Michael Kraychy could only receive “legal title” — and I find no reason for the Court to determine precisely what that would mean under the circumstances. He did not receive "benefi- cial interest", and could not pass that on to the appellant. Michael Kraychy was a "bare trustee", and in turn so was Giselle Miller. I am not convinced by the argument of counsel for the Minister that such a transaction (between Michael Kraychy and the appellant) can be termed a transfer of property, and accordingly as I see it, it does not fall within the authority of the Minister to assess against the appellant under subsection 160(2) of the Act.

The appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment. The appellant is entitled to party-and- party costs.

Appeal allowed.