Roger Laporte v. Minister of National Revenue, [1984] CTC 2260, 84 DTC 1208

Tremblay, TCJ [TRANSLATION]:—This case was heard in the city of Montreal, Quebec.

1. Point at issue

The point is whether the appellant was correct in not including in his income for the 1976, 1977 and 1978 taxation years half the capital gain made on the sale of 63 ordinary shares in the capital stock of St-Lambert Drilling Co Ltd, and half the interest resulting from the said sale, made on or about April 30, 1976. The appellant based his argument on the fact that half the 63 shares belonged to his wife, since she had paid for half of them, and in any case the said shares were part of the community of property.

The respondent maintained that the shares, which are capital assets, were registered in the appellant’s name in the company’s minute book in 1976. The appellant transferred 31.5 of the said shares to his wife on or about April 30, 1976. He concluded from this that all the taxable capital gain and all the interest income resulting should be taxed in the hands of the appellant, the transferor, pursuant to section 74 of the Income Tax Act, SC 1970-71-72, c. 63, as amended.

2. Burden of proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from the a particular section of the Income Tax Act but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court considered that the assumed facts on which the respondent based his assessments should be deemed to be correct. The facts assumed by the respondent are described in subparagraphs (a) to (i) of paragraph 5 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

5. In assessing the appellant for the taxation years at issue the Minister of National Revenue relied, inter alia, on the following assumptions of fact:

(a) on April 30, 1976, the appellant was the registered owner of 62 ordinary shares of the capital stock of St-Lambert Drilling Co Ltd;

(b) on April 30, 1976 Mrs Colette Raymond-Laporte,the appellant’s wife, was the registered owner of one ordinary share of the capital stock of St-Lambert Drilling Co Ltd;

(c) on April 30, 1976 Mr Russell Laporte, the appellant’s brother, was the registered owner of one ordinary share of the capital stock of St-Lambert Drilling Co Ltd;

(d) on April 30, 1976 the authorized capital stock of St-Lambert Drilling Co Ltd consisted of 150 preferred 5% non-cumulative shares, redeemable at a par value of $100.00, none of which were issued and outstanding, and of 250 ordinary shares having a par value of $100.00 each, 64 of which were subscribed, issued and paid- up;

(e) on April 30, 1976 a contract of sale was made between Dame Colette Laporte, Raymond Laporte and Roger Charles Laporte (the “sellers”) and Russell Earl Laporte et al (the “buyers”) and Mr Renald Grondin, CA (the “trustee”), which speaks for itself;

(f) on or about April 30, 1976 the appellant transferred to Dame Colette Raymond-

Laporte 30.5 ordinary shares which he held in St-Lambert Drilling Co Ltd;

(g) during the period at issue, the appellant was the spouse of Dame Raymond- Laporte;

(h) the total capital gain realized on disposition of the 63 ordinary shares of the capital stock ot St-Lambert Drilling Co Ltd amounts to $110,742.50;

(i) during the 1977 and 1978 taxation years, the interest paid by the buyers on the selling price of the shares sold produced the following total interest:

1978 — $39,249.94

1977 — $63,875.26

3. Facts

3.01 In his examination-in-chief the appellant testified that:

(a) he was born at Howick, province of Quebec in 1928, and married Dame Colette Raymond in June 1949 (trans p 5);

(b) immediately before and after his marriage, he was domiciled in the province of Quebec (trans p 6);

(c) the spouses did not have a notarial contract of marriage made up before their marriage (trans p 6);

(d) the spouses did not alter their matrimonial regime until the end of 1978, the last year on appeal (trans p 6);

(e) on July 28, 1966 the appellant by a written contract (Exhibit A-1) bought all the ordinary shares, that is 63 shares, in St-Lambert Drilling Co Ltd (the “company”) for $80,000 from Dame Gilberte Turcotte of Thetford Mines; the immovable property owned by the company was declared to be free of all privileges and hypothecs;

(f) on the same day one share was transferred to Dame Colette Raymond- Laporte and one to John D Reilly, according to the company’s minutes (Exhibit A-2);

(g) also on that day, July 28, 1966, the shareholders mentioned in the minutes (Exhibit A-2) are:

(h) the sum of $15,000 was paid from a common fund of the appellant and his wife acquired after the marriage; the balance of $65,000 was paid from a loan by Crown Trust Company, payable by Roger Laporte and Colette Laporte (trans p 14);

(i) the debt owed to Crown Trust company was paid by the appellant and his wife out of salaries received from the company; the salary cheques were deposited in a joint account and a cheque was issued monthly by Mrs Laporte from this account to Crown Trust Company (trans pp 14 and 15); only one signature was needed for a cheque to be issued on the joint account (trans pp 21); Crown Trust Company had required that it hold 48 shares as security; when ten shares were paid for, they were returned to the appellant (trans p 24);

(j) the principal purpose of the company was mine drilling, using diamondbased crowns — known as “diamond drilling”; its clients were mining companies located, inter alia, in Thetford Mines, the Gaspé region, Chibougamau and so on (trans p 16);

(k) the appellant’s wife did 80 per cent of the office work herself; she worked eight to ten hours a day in the office and after office hours as well; she spoke English and was able to take telephone calls from customers who, for the most part, spoke only English; these calls were received at any time of the day or night; the appellant’s work consisted of going to sites, meeting with clients, preparing bills and collecting accounts; the appellant and his wife worked seven days a week; they each did 90-hour weeks (trans pp 17, 18 and 19);

(l) in 1966, they paid themselves salaries of $6,000 each; between 1967 and 1969, they paid themselves salaries of $12,000 each;

(m) on July 28, 1969 ten shares held in trust by Crown Trust Company were transferred to the appellant, Roger Laporte, and registered in his name (Exhibit A-2);

(n) on December 10, 1970, the entire debt was paid, and the remining 38 shares held by Crown Trust Company were transferred to and registered in the name of Roger Laporte (trans p 25);

(o) on April 30, 1976 a contract (Exhibit A-3) was concluded between Dame Colette Raymond-Laporte and Roger Charles Laporte, the “sellers”, and six individuals, the “buyers”: by this contract, 63 ordinary shares (31.5 from the appellant and 31.5 from his wife) in the company were bought by the buyers for $590,625, $100,000 in cash and the balance in twenty equal payments of $24,531.25, bearing interest at 8 per cent; the shares were placed as security with a trustee, Mr Renald Grondin, CA (trans pp 26-29);

(p) the minutes relating to the sale of the said shares were entered as evidence (Exhibit A-4); this was also done for the share certificates of the sellers (Exhibit A-5) and the company’s register of the share transfers (Exhibit A-6);

(q) the trustee, Mr Grondin, an accountant, received the payments from the buyers, paid the appropriate taxes and paid to the appellant and his wife 50 per cent of the balance each; each of them reported a taxable capital gain corresponding to the sale of half the shares (trans pp 36 and 37).

3.02 In his cross-examination, the appellant testified that:

(a) when the contract for the purchase of the company’s ordinary shares was concluded in 1966, it was Crown Trust Company, the lending institution, which decided that 62 shares would be credited to the appellant: . . . I had no control over that because I would have given 50 per cent of the shares to my wife at the beginning if I had had the authority . . . ” (trans p 40); the credit was made to him, for if he died the company would have failed; however, the wife also signed the loan contract, but according to the witness this was because of the community of property and not as a borrowing party (trans pp 50-51); no written documents were kept regarding the $65,000 loan;

(b) a dividend of $65 a share was paid at a meeting of company directors on December 14, 1970 (Exhibit A-7); he allegedly received $4,000 which was deposited in the joint account to pay the loans (trans pp 41-45); this account was also used to pay the family’ other expenses; additionally, from the beginning of the marriage there had always been a joint account (trans p 51);

(c) the joint bank account was used to deposit all salaries and dividends from the company; no other source of income could have been deposited in it, for there was none, and no inheritance was received (trans p 46);

(d) before buying St-Lambert Drilling Co Ltd in 1966, the appellant was manager for another drilling company, Boyle Brothers, which had its head office in Vancouver, but which had a branch in Port Arthur, Ontario; Mrs Turcotte, the owner of the shares in St-Lambert Drilling Co Ltd, had just lost her manager in 1965; she wanted the appellant to go to work for her, offering him the option of buying the shares two years later; then she had an accident and decided to sell everything at once; the appellant then obtained the loan from Crown Trust Company;

(e) his wife, who had been a housewife since they were married in 1949, worked for Boyle Brothers as a secretary for some months in 1965; she then worked for the company only (trans p 54); both the appellant and his wife worked for the company twelve months a year (trans p 53);

(f) the $15,000 instalment paid in 1966 to purchase the company’s shares came from savings from the appellant’s salary and from the sale of two houses bought after the marriage (trans pp 55, 56 and 64);

(g) in 1976, when the shares were sold, he thought it right to pay his wife half the value of the shares, since she had earned it by doing 50 per cent of the work (trans pp 60-61);

(h) in 1979, their property was separated after a judgment obtained by separation from bed and board.

3.03 In her examination-in-chief, Dame Colette Raymond-Laporte testified that:

(a) she was born at Rigaud in the province of Quebec; immediately before her marriage, she had her domicile in Quebec, at Rouyn-Noranda; there was no marriage contract; from the date of the marriage until the end of 1978, the matrimonial regime was not altered (trans pp 66, 67 and 68);

(b) her work for the company “was mail, typing, the payroll, which was very long . . .”; there were sites in Quebec, Newfoundland, Ontario and Manitoba; there were thirty to ninety contractors; there were bonuses, the telephone twenty-four hours a day, billing and so on (trans pp 68, 69 and 70);

(c) in 1966, between July and December, she was paid $6,000, and thereafter $12,000 a year until 1976; her husband had the same salary (trans p 70);

(d) she paid the loan obtained to buy the company’s shares out of the joint account; according to her, she thus paid for half of the shares; this is why when the sale took place in 1976, she sold half, or 31.5 shares; they had been transferred to her (trans pp 71-72).

3.04 In cross-examination, Dame Colette Raymond-Laporte testified that:

(a) from the beginning of the marriage,“. . . we were on a fifty-fifty basis . . .” (trans p 76);

(b) the loan payment was automatically deducted from the joint account; she was given a little blue slip to this effect by the bank each month.

3.05 In his examination-in-chief, Mr Renald Grondin, a chartered accountant in Thetford Mines, testified that:

(a) as trustee in the contract for sale of the shares in 1976, his principal duties were to hold the shares in trust, ensure that the provisions of the contract were observed, determine on December 15 of each year what were the capital amounts and interest in light of the bank of Canada discount rate, and collect the money (trans pp 82-83);

(b) the money was deposited in equal shares in two trust accounts, one in the appellant’s name and the other in the name of his wife (trans pp 83-84);

(c) he thereby observed the provisions of the contract (trans p 85);

(d) he gave money to whoever requested it by taking it from their respective accounts.

4. Act — Case law — Analysis

4.01 Act

Sections 73(1), 74(1), (2), (3) and (4) and 245(2) of the Income Tax Act are the principal statutory provisions involved in the case at bar. They will be cited in the analysis if necessary.

4.02 Case Law

The parties referred the Court to the following case law and legal theory:

A. Case Law

1. MNR v Frank, [1959] CTC 460; 59 DTC 1280; [1962] SCR 65; [1962] CTC 1; 62 DTC 1005;

2. Lungulescu (Dame) v Lungulescu, [1973] CS 70;

3. H A Fawcett & Son, Limited v The Queen, [1979] CTC 303; 79 DTC 5224; [1980] CTC 293; 80 DTC 6195;

4. Cantin v Dame Comeau, [1972] CA 523;

5. Estate of David Fasken v MNR, [1948] CTC 265; 49 DTC 491; 6. Danalan Investments Ltd v MNR, [1973] CTC 251; 73 DTC 5209;

7. The Royal Trust Company v Dame Barbara Tucker et al, [1982] Supreme Court of Canada;

8. The Queen v Fred E Poynton, [1972] CTC 411; 72 DTC 6329;

9. MNR v Estate of François Maure, 73 DTC 5236;

10. MNR v Dame Lucie Simon et al, [1975] CTC 136; 75 DTC 5076; [1977] CTC 340; 77 DTC 5228;

11. Joseph B Dunkelman v MNR, [1959] CTC 375; 59 DTC 1242;

12. Kenneth B S Robertson Ltd v MNR, [1944] CTC 75; 2 DTC 655;

13. James B McLeod v The Minister of Customs and Excise, [1917-27] CTC 290; 1 DTC 85.

B. Legal theory

14. Jean Pineau, “Un régime conventionnel: la communauté de meubles et acquêts, ancien régime légal”, Les régimes matrimoniaux, notions élémemtaires, 1972, p 88;

15. Mazeud and Mazeud, “Nature juridique des biens communs”, Leçons de droit civil, tome IV, 4th ed, Ed Montchrestien, Paris, p 133;

16. Planiol and Ripert, “Le régime de communauté”, Traite pratique de droit civil français, tome VIII, 2nd et, Ed Jean Boulanger, Paris, p 317;

17. Pierre R Dussault, “The taxation of spouses — A Quebec perspective”, An address given in 1974 to the annual meeting of the Canadian Tax Foundation, p 339 et seq of 1974 address;

18. P B Mignault, “Biens réservés de la femme mariée”, [1941] Revue de Barreau 30;

19. G Brière and Gaudreau, “La société d’acquets — la communauté de meubles et acquets — séparation de biens et contrats de mariage — litiges entre époux”, Courts du Barreau du Québec, 1980-81;

20. J Bernstein, “Marriage — a tax shelter”, 21 McGill Law Journal 631;

21. Margaret Cuddihy, “L’Application des lois fiscales aux régimes matrimoniaux”, La Revue du notariat, Vol 82, Nos 5-6, Jan-Feb 1980, p 241;

22. J G Castel, “Les régimes matrimoniaux”, Droit international privé québécois, Butterworths, pp 566-576;

23. P A Crépeau, Code Civil, 1866-1980, Edition historique et critique;

24. Y Renaud and J Smith, Droit québécois des corporations commerciales, Vol II, “L’Enregistrement des transferts”, pp 895-903;

25. P Raynaud, M Vanel, “Baux d’habitation et professionnels — Contrat de mariage”, Répertoire de droit civil, Tome II;

26. Germain Brière, “Les dispositions essentielles du Bill 10 sur les régimes matrimoniaux”, text published in Lois nouvelles II, by University of Montreal Press;

27. P A Crépeau, “Les principes fondamentaux de la réforme des régimes matrimoniaux”, text published in Lois Nouvelles II, by University of Montreal Press;

28. Rapport du Comité des régimes matrimoniaux, by the Civil Code Reform Commission, 1966;

29. Jean Pineau, Les Régimes Matrimoniaux, Les éditions Themis, pp 73-93.

4.03 Analysis

4.03.1 The tax question at issue is whether all of the capital gain and interest resulting from the sale of the shares of St-Lambert Drilling Co Ltd should be included in the appellant’s income, or part in the appellant’s income and part in that of his wife. It must first be determined who was owner of the said shares. To this end, as the appellant was married in the community of property and his wife also worked and earned income, it should first be determined whether some of the said shares were not bought using property reserved of the wife, in accordance with the Civil Code of the province of Quebec and the resulting legal theory.

This distinction is important because, though the wife’s reserved property is part of the community of property, the wife is entitled to complete administration of it during her lifetime.

Article 1425a of the Civil Code, as it read in 1949 when the appellant and his wife were married, is clear in this regard:

1425a. The proceeds of the personal work of the wife common as to property, the savings therefrom and the moveable or immoveable property she acquires by investing them, are, on pain of the nullity of any covenant to the contrary, reserved to the administration of the wife, and she has the enjoyment of free disposal of them.

Such reserved property shall not include the earnings from the joint work of the consorts.

The latter earnings, that 1s, those resulting from the joint work of the spouses, thus become “common” property and fall under the husband’s administration.

4.03.2 It seems clear from the evidence that the instalment of $15,000 paid in 1966 was paid with the husband’s money (para 3.02(f)), and thus with money from the community of property.

This amount constitutes 3/16 ($15,000 or $80,000) of the 63 shares bought, namely 12 shares. That leaves 51 shares (63-12-51), and so the question is whether the wife bought half of them with the proceeds of her work.

4.03.3 Let us assume,first, that the money of both spouses placed in the joint account cannot be considered as “earnings from the joint work of the consorts” within the meaning of the last paragraph of Art 1425a cited above (para 4.03.1). This money in fact derived from salaries paid by the company, which is a distinct entity from the shareholders and directors. It seems clear that the profits of the company from which the salaries were paid in fact resulted from good management and work by the employees, including the appellant and his wife. However, that does not make the wife’s salary, because it was placed in a joint account with that of her husband, earnings from the joint work of the spouses, and so “common” property falling under the husband’s administration.

Once again, only the husband’s salary is here part of the “common” property under Art 1272 of the Civil Code, from June 1949, the month of the marriage, to July 1, 1970, the date on which the new community of movables and acquests regime came into effect. That article reads as follows:

1272. The assets of the community consist:

1. Of the moveable property which the consorts possess on the day when the marriage is solemnized, and also of the moveable property which they afterwards acquire or which falls to them during the marriage, by succession, legacy or gift, if the donor or testator have not otherwise provided, as well as the fruits and revenues arising therefrom;

2. Of the proceeds of the work of the consorts during the marriage, subject to the provisions of section III of this chapter relating to reserved property;

3. Of the fruits and revenues arising from property remaining private to the consorts if they fall due or are received during the marriage, subject, however, to the provisions of article 1297;

4. Of the immoveables they acquire during the marriage.

4.03.4 According to the appellant’s testimony, the intention was for him and his wife to buy the shares equally: this is what was required by Crown Trust Company, which allegedly delayed the division of the shares at least temporarily. For such a statement to be admissible, it must be confirmed by other evidence. However, no contract could be produced regarding the $65,000 loan (para 3.02(a)).

The contract for the sale of the shares of St-Lambert Drilling (Exhibit A-l) on July 28, 1966, between Dame Gilberte Turcotte, the seller, and the appellant, the buyer, indicates that the appellant was the only buyer. There is even one fact which appears to contradict the appellant’s statement that it was Crown Trust Company which prevented him from putting 50 per cent of the shares in his wife’s name (para 3.02(a)). After the loan had been paid in full in December 1970, and the shares transferred by Crown Trust Company to the appellant, the latter did not then, on that day, transfer 50 per cent of the shares to his wife. On that day, he even paid himself a $4,000 dividend (para 3.02(b)). However, there was nothing to prevent him acting on his original intentions at that time, if they actually existed. It was not until six years later, at the resale of the said shares on April 30, 1976, that the appellant decided to make the division. However, the Court wishes to emphasize that the fact that the shares were registered in the appellant’s name in the transfer register is not proof on a juris et de jure presumption of the title of ownership, but only of the company in its relations with its shareholders. The said register can still be set up against the company, and sometimes even against third parties. In the case at bar, the existence of the right of ownership in favour of the wife was not established.

4.03.5 Since the evidence as to the equal acquisition of the shares is not clear in this regard, the Court must consider the other aspect of the evidence, that of the regime of community applicable to the appellant and his wife at the time the shares were paid for. If these shares were in fact half paid for with the wife’s reserved property, does she not own half of them?

In the case of Lungulescu (Dame) v Lungulescu, the Court held that savings bonds bought by the husband in his own name with money from his wife’s salary were the latter’s property, even though in fact the husband had administration of the money. In law, he did not have it. The wife was the only person earning income at that time. The money was accordingly her reserved property.

Let us consider the situation in the case at bar.

4.03.6 In Sura, cited by both parties, the Supreme court clearly held that:

.. . it is not the ownership of property which is taxable, but rather that the tax is imposed on a taxpayer, and is dtermined by the income which employment, businesses, property or ownership provide to the person who is their legal beneficiary.

The appellant’s argument is that 25.5 shares of St-Lambert Drilling were paid for out of his wife’s salary, and so out of reserved property which she administered, and of which she was “the legal beneficiary’’. Consequently, she was owner of the said shares and the sale of the said shares in 1976 constituted a capital gain for the wife.

However, the respondent argued that the money placed in the joint account of the appellant and his wife was used to pay off the husband’s loan, and not to buy the shares.

The conclusion arrived at by the Court in paras. 4.03.4 and 4.03.5 above, that the evidence is insufficient for it to hold that the appellant and his wife originally bought the shares jointly, compels it to accept the view of the respondent.

Once that original intent has not been proven (general statements such as ‘. . .we were on a fifty-fifty basis..at the beginning of the marriage (para 3.04(a)) or that “she earned 50 per cent of the shares by doing 50 per cent work’’ (para 3.02(g)) do not constitute sufficient evidence to confirm the intent to buy the shares jointly), the Court must consider that in fact on July 28, 1966 all the shares were paid-up, that the were in the name of the husband, who was the only buyer, and that as the result of a loan a debt of $65,000 was owed to Crown Trust Company by the appellant.

On the same day, July 28, 1966, 48 shares were delivered to Crown Trust Company: though this company appears as a shareholder (para 3.01(g)), there is no doubt that it was only a security transfer. The purchase contract (Exhibit A-1) clearly indicates that the appellant was the only buyer. There was no evidence that a contract of sale existed between the appellant and a Crown Trust Company.

It can be assumed that the wife’s salary placed in the joint account was used in part to repay the loan. There was no direct evidence of this. The joint account was also used to pay all the family’s expenses. In any case, the payment by the wife of a loan obtained by the husband to pay for the shares is not payment for the shares. It may be the basis of a claim for the amount paid, but not for ownership of the shares.

It is clear that the conclusion would be different if the evidence had been sufficient to show that the buyers of the shares were the appellant and his wife. Article 1273 CC must therefore be applied: “All property is deemed to be a joint acquest of the community if it be not proved that it is the private property of one of the consorts by the application of a provision of the law’’.

Accordingly, the Court concludes on this point that the shares paid for with a loan do not constitute property acquired with reserved property and are therefore common property, administered by the husband. Thus, all the shares are common property, that is twelve shares (para 4.03.2) for which $15,000 was paid (provided by the appellant — para 3.02(f)) and fifty-one shares for which $65,000 was paid (borrowed from Crown Trust Company — para 3.01(h)).

4.03.7 With regard to Art 1273 of the Civil Code, cited in the preceding paragraph, an argument may be made that the date on which this article came into effect is July 1, 1970, that is essentially at a time when nearly all the amount owed to Crown Trust Company had been paid. The payment of the latter was in fact terminated on December 10, 1970 (para. 3.01(n)).

It is necessary to emphasize here that the appellant and his wife were subject during the years at issue, that is 1976, 1977 and 1978, to the provisions relating to the community of movables and acquests.

The appellant and his wife, who were married in 1949 under the regime of community of property pursuant to Art 1272, as of July 1, 1970 were covered by the new provisions regarding the community of movables and acquests in accordance with para 3 of Art 1268 CC:

The provisions governing community of moveables and acquests are applicable to consorts who, on the 1st of July 1970, were married under the regime of legal community.

The key provisions of the Civil Code concerning the regime of community of movables and acquests at issue in the case at bar are Arts 1272, 1273, 1292, 1293 and 1425a:

1272. The assets of the community consist:

1. Of the moveable property which the consorts possess on the day when the marriage is solemnized, and also of the moveable property which they afterwards acquire or which falls to them during the marriage, by succession, legacy or gift, if the donor or testator have not otherwise provided, as well as the fruits and revenues arising therefrom;

2. Of the proceeds of the work of the consorts during the marriage, subject to the provisions of section III of this chapter relating to reserved property;

3. Of the fruits and revenues arising from property remaining private to the consorts if they fall due or are received during the marriage, subject, however, to the provisions of article 1297:

4. Of the immoveables they acquire during the marriage.

1273. All property is deemed to be a joint acquest of the community if it be not proved that it is the private property of one of the consorts by the application of a provision of the law.

The private nature of property is established as well between the consorts as with respect to third parties, according to the ordinary rules of the law.

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 h is 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. . .

If the thing have fallen into the share of the testator and be found in his succession the legatee has a right to the whole of it.

1425a. The proceeds of the personal work of the wife common as to property, the savings therefrom and the moveable or immoveable property she acquires by investing them, are, on pain of the nullity of any covenant to the contrary, reserved to the administration of the wife, and she has the enjoyment of free disposal of them.

The wife connot, however, alienate them by gratuitous title, nor alienate or hypothecate the immoveables, nor alienate or pledge the stocks in trade and the household furniture in use by the family, without the concurrence of her husband.

She may appear before the courts without authorization in any action or contestation relating to her reserved property.

Such reserved property shall not include their earnings from the joint work of the consorts.

This article does not limit the right of the wife 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 reserved property if the beneficiary or owner be the spouse or the children of either the wife or the spouse.

4.03.8 The respondent further argued that the appellant, by transferring 50 per cent of the shares to his wife in 1976, falls under subsection 74(1) of the Income Tax Act, with the result that the capital gain produced by the resale by the wife is presumed to be earned by the transferor.

4.03.9 The argument of the appellant (even admitting that the shares are part of the community and under the husband’s administration) is that in selling the said shares the appellant can only be taxed on 50 per cent of the taxable capital gain, and so on 25 per cent of the capital gain.

This conclusion is based on the two propositions summarized below:

1. The capital gain is taxable in the hands of the owner of the property which is the subject of a disposition of property subsections 39(1), 40(4), sections 42, 47, subsections 48(3) and (4), paragraphs 54(e), (f) and (i) and subsection 70(5)); the property which is part of the community of property is owned by the husband and the wife, even though the husband administers it;

2. If the concept of property is not controlling, then the rule in the Sura case should be applied, referring to Robertson'. “Whoever has an absolute right . . . under no restriction . . . as to . . . disposition of the common property”.

The Sura decision was made in 1962. The appellant argued that since that time, because of amendments to the Civil Code in 1964 and 1970, he is entitled to conclude that, in view of the significant limitations on the husband’s power to dispose of common property, there is no longer anyone who has an absolute right to the property under no restriction. Such a right would only exist when both spouses act together and accordingly both should be taxed equally.

4.03.10 Regarding the argument of the respondent summarized in para 4.03.8, as to subsection 74(1), it is clear that the evidence was that the appellant transferred half the company’s shares to his wife. The Court has concluded that all the company’s shares were common property before the sale (para 4.03.6 in fine). It therefore follows that these shares were under the appellant’s administration (he was the “legal beneficiary”: Sura). The fact that he transferred half the shares to his wife before the sale (it appears from the contract, Exhibit A-3 — para 3.0 l(o) — that the wife was one of the sellers), does not constitute simply a delivery of the said shares to a legal beneficiary, but an actual transfer to someone who was not the legal beneficiary, and so who did not have the administration of them. By selling the shares and retaining the selling price, nevertheless, the wife acted as legal beneficiary, as administrator. It thus appears at first sight that subsection 74(1) applies. It reads as follows:

74. (1) Where a person has, on or after August 1, 1917, transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income or a loss, as the case may be, of the transferor and not of the transferee.

4.03.11 However, assuming that the argument of the appellant described in para 4.03.9 is correct, and that accordingly half the taxable capital gain is taxable in the hands of the wife, can it be said that the appellant in transferring half the shares to his wife before the sale nevertheless falls under subsection 74(1)? As the Income Tax Act must be strictly interpreted, it seems to me that it must be so interpreted in the case at bar, with all the resulting consequences, namely affirming the assessment, though subject to para 4.03.12. It would have been otherwise if the appellant, without making a transfer, had himself sold all the shares and was then taxed only on half the taxable capital gain, leaving his wife to be taxed on the other half of the taxable capital gain, the whole obviously subject to the argument of the appellant described in para 4.03.9 being correct. At first sight, the Court is reluctant to tax a taxpayer merely on a technicality, namely the transfer of the shares before the sale rather than transfer of the money after the sale, unless that technicality represents a fundamental principle.

4.03.12 Despite the conclusions of the preceding paragraph, namely that the assessment should be upheld because of subsection 74(1), the Court considers that if the argument of the appellant described in No 2 of para 4.03.9 is correct, then not only is the conclusion of the preceding paragraph affected, but also that of para 4.03.6 that the appellant is sole administrator and legal beneficiary of the shares. According to that argument, if the court concluded that the wife is legal co-beneficiary and co-administrator with her husband of the company’s shares, the appellant would be entitled to transfer half the shares to her. For a clearer understanding of this second argument, summarized in para 4.03.9, it is necessary to cite at greater length a passage from the Sura judgment, at 4 and 5:

Nothing in the subsequent amendments to the Act alter the principle that it is not the ownership of property which is taxable, but rather that the tax is imposed on a taxpayer, and is determined by the income which employment, business, property or ownership provide to the person who is their legal beneificiary. As Mignault J stated in McLeod v Minister of Customs and Excise, [1917-27] CTC 290, at 296:

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.

This proposition can no more be doubted than there can be the slightest hesitation in admitting, without reservation, that the only person who is required to pay income tax is whoever has an absolute right to it, under no restriction . . . as to its disposition, use or enjoyment (vide Robertson Limited v MNR, [1944] Ex CR 180; [1944] CTC 75.)

Also, at p 8:

Thus if it is true, as I believe, that the wife is co-owner of the common property, it is also true that she does not have the exercise of all the rights usually conferred by ownership (Art 406 of the Civil Code). Her right is incomplete, truncated, less even than that of someone who has the bare ownership of property in which another has the usufruct. It is stagnant and almost sterile, because it is unproductive while her husband is alive. It is only when the community is dissolved that the wife will be invested with her complete right of ownership, comprising the jus utendi, fruendi et abutendi, which her marital status had temporarily deprived her of.

According to the appellant, because of the amendments made to the Civil Code in 1964 and 1970, and thus after the Sura judgment, rendered in 1962, significant limitations have been placed on the husband’s power of disposition. The latter was required to seek his wife’s assistance; an absolute right would only exist where the two spouses acted together, and so both were administrators and legal benficiaries, and should therefore be taxed equally.

If this argument is correct, it must nevertheless be applied to each item of property involved in each specific case. The case at bar concerns the shares of a company, which are movable property.

The articles of the Civil Code applicable to the sale in 1976 are cited above in para 4.03.7. Paragraph 2 of Art 1292 CC says clearly that the husband may sell or alienate movable property in the community without the concurrence of his wife. The other provisions of the Civil Code contained in Arts 1272, 1292, 1293 and 1425a do not amend the provision regarding movable property contained in para 2 of Art 1292 CC. Those articles are cited above (para 4.03.7).

The Court must therefore conclude that, so far as the sale of the company’s shares is concerned, the appellant’s second argument summarized in para 4.03.9 cannot be upheld.

4.03.13 With regard to the appellant’s first argument, summarized in para 4.03.9

— and of the provisions to which he refers, it is most important to cite the following provisions: 39(1), 40(4)(a) and 54(e) and (f), underlining the words which indicate the necessity of owning property for it to be taxed as a capital gain:

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 . . .

40. (4) Where a taxpayer has, after 1971, disposed of property to an individual who is deemed by subsection 70(6) or 73(1) to have acquired it for an amount equal to its adjusted cost base to the taxpayer immediately before the disposition, for the purposes of computing the individual’s gain from the disposition of the property under paragraph (2)(b) or (c), as the case may be,

(a) the individual shall be deemed to have owned the property throughout the period during which the taxpayer owned it;

54. In this subdivision,

(e) “listed personal property” of a taxpayer means his personal-use property that is all or any portion of, or any interest in or right to, any

(i) print, etching, drawing, painting, sculpture, or other similar work of art,

(ii) jewellery,

(iii) rare folio, rare manuscript, or rare book,

(iv) stamp, or

(v) coin;

(f) “personal-use property” of a taxpayer includes

(i) property owned by him that is used primarily for the personal use or enjoyment of the taxpayer or the personal use or enjoyment of one or more individuals each of whom is

(A) the taxpayer,

(B) a person related to the taxpayer, or

(C) where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary,

(ii) any debt owing to him in respect of the disposition of property that was his personal-use property, and

(iii) any property of the taxpayer that is an option to acquire property that

would, if he acquired it, be personal-use property of the taxpayer,

and “personal-use property” of a partnership includes any partnership property that is used primarily for the personal use or enjoyment of any member of the partnership or for the personal use or enjoyment of one or more individuals each of whom is a member of the partnership or a person related to such a member;

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).

Just as a person who is not an owner of property subject to depreciation cannot in calculating his income deduct the amount of depreciation calculated on the cost of the said property, so a person who is not the owner of property of which there was a disposition cannot be taxed on the profit as a capital gain.

The respondent further argued that in the Income Tax Act the basis of the taxation is subsection 2(1):

2. (1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

It is a person who is taxed, not capital.

Additionally, in the submission of the respondent, in determining taxable income paragraph 3(b) establishes that a capital gain is considered as income, just as any other. 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, pargraphs 39(1 )(a), 40(4)(a) and 54(e) 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.

4.03.14 At the end of para 4.03.11, after upholding the application of subsection 74(1), I commented that at first sight the Court would be reluctant to tax a taxpayer merely because of a technicality, that is the transfer of shares before the sale rather than the transfer of money after the sale.

Now, in view of the conclusion I arrived at in the preceding paragraph (para 4.03.13), namely that the ownership of property which was disposed of must be considered in determining the taxpayer who should be taxed, should the Court not consider the transfer of the shares to the co-owner’s wife before the sale in the case at bar as irrelevant to the application of subsection 74(1)? Is this in fact a relevant transfer, since the wife was already co-owner? — and does subsection 74(1), in saying “Where a person has . . . transferred property . . .” not mean “transferred ownership of property ? That seems obvious at first sight, but not only the ownership of property can be transferred: the usufruct and administration may be also. However, since the wife was already co-owner, it is not the ownership which was transferred by the appellant. It is in fact the usufruct, the administration and the right to dispose of the shares which was the subject of the transfer. This is how the wife was able to sell the said shares herself.

The respondent cited James B McLeod:

It is not the ownership of property which is taxable: the tax is imposed on the taxpayer who is the legal beneficiary of it.

As the shares were common property, the appellant was their legal beneficiary. In transferring this benefit to his wife, the respondent submitted that sub- sectiion 74(1) and (2) should be applied, even though under section 39 et seq the factor of ownership must be taken into account.

As emphasized above, this factor of ownership as a means of determining the taxpayer who must bear the tax burden is new in the Act, with the imposition of the capital gain. The Court considers that if the wife instead of selling the shares had kept them, the dividends received would have been taxable in the appellant’s hands because of the transfer and its consequences provided for in subsection 74(1). However, she did not keep them — she sold them: there was a capital gain.

Should the factor of ownership be considered? I think so. The respondent argued that because the transfer was prior to the sale, subsection 74(1) has priority over section 39(l)et seq. The Court agrees with this principle only in a case where the transferor also transferred ownership of the property; but where the transfer alo transferred ownership of the property; but where the transfer was of common property the ownership of which was already in the hands of the beneficiary of the tranfer, namely the wife, I think it is logical to take into account the ownership which was not the subject of the transfer, and subsection 74(1) cannot then have priority in deciding who is taxable for the said capital gain. The Court would accordingly allow the appeal.

5. Conclusion

The appeal is allowed and the whole referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.