Irene Garant v. Minister of National Revenue, [1983] CTC 2559

Roland St-Onge [TRANSLATION]:—The appeal of Mr Irenée Garant came before me on December 2, 1982 in Quebec City, province of Quebec.

It concerns a transfer of shares between husband and wife, on the dissolution of a community of property, with respect to the taxation years 1977, 1978 and 1979.

The facts of this appeal are stated in paragraph 2 of the reply to the notice of appeal. This paragraph reads as follows:

2. In assessing the appellant for his taxation years 1977, 1978 and 1979 the respondent relied, inter alia, on the following presumptions of fact:

(a) on October 20, 1977, the appellant transferred to his wife, Mrs Rose-Yvonne Garant, 152 ordinary shares of the capital stock of Garant Inc;

(b) on December 28, 1977, Mrs Rose-Yvonne Garant transferred to her son, Mr Gilbert Garant, twenty-six ordinary shares of the capital stock of Garant Inc, thereby realizing a capital gain of $13,000.00;

(c) on January 3, 1978, Mrs Rose-Yvonne Garant transferred to her son, Mr Gilbert Garant, twenty-six ordinary shares of the capital stock of Garant Inc, thereby realizing a capital gain of $13,000.00;

(d) during the taxation years 1977, 1978 and 1979, Mrs Rose-Yvonne Garant received as dividends payable on the ordinary shares which she held in Garant Inc the following amounts:

1977	1978	1979
$10,133.00	$7,500.00	$8,250.00

(e) during the taxation years at issue, the appellant’s wife received as interest on investments the following amounts:

1977	1978	1979
$5,520.00	$5,996.27	$7,100.36

(f) the income received by the appellant’s wife during the taxation years at issue came from property transferred by the appellant to his wife [and] property substituted therefore

(g) during the taxation years at issue, the appellant resided in Canada and was the husband of Dame Rose-Yvonne Garant.

The appellant’s argument was as follows, and I quote paragraphs 2 and 3 of the notice of appeal:

(2) Grounds of appeal

The appellant disagrees with the notices of reassessment, and considers that the amounts indicated in (1) are not taxable so far as he is concerned for the following reasons:

(a) the rules for appropriating capital gains and income (s 74(1) and 74(2) of the Income Tax Act) do not apply consecutively to a change of matrimonial regime from community of property to separation of property, because in order for those rules of appropriation to apply there must have been a transfer of the ownership of property, and this is impossible in the circumstances since, according to all the available precedents, the ownership of common property is indeterminate so long as the community exists;

(b) this argument is also that made by Mr Marc Jolin in an address to the annual meeting in Quebec (1979) of the Canadian Tax Foundation, titled “Aspects fixcaux des régimes matrimoniaux au Québec” [tax considerations in Quebec matrimonial regimes] (see p 43 of the address);

(c) this argument is also that made by Mr Pierre Dussault in an address given to the annual meeting (1974) of the Canadian Tax Foundation, titled “The taxation of spouses — A Quebec perspective” (see pp 348 to 350 of the address);

(d) the validity of these arguments was confirmed on June 22, 1979 by the action of the National Assembly of Quebec in tabling Bill 42, which among other things was designed to prohibit what had previously been possible, namely the splitting of income and capital gains by the technique of changing the matrimonial regime from community of property to separation of property. The specific purpose of this bill was to create a presumption of transfer of ownership which would otherwise not have existed. However, the provincial legislation contained in Bill 42 applies only to changes in matrimonial regimes subsequent to 1978, and the federal government as yet has no similar legislation on the matter.

(3) Conclusion

For all the foregoing reasons, the appellant considers that the splitting of the capital gains and income which resulted from his change of matrimonial regime, dating from December 1976, is quite legal, and he therefore asks the Minister of National Revenue to revise and amend the notices of reassessment for the taxation years 1977—1978 and 1979, having Nos 885559, 885555 and 885553 respectively.

Subsection 74(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, reads as follows:

Transfers to spouse

(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.

Mr Irenée Garant was the only witness heard in this case. He was married in 1943, without concluding any marriage contract; he therefore fell under the regime of community of property. On February 8, 1974, he concluded a marriage contract: he chose the regime of separation of property. On the same day, after this contract had been concluded, the property of the community was divided.

Counsel admitted that all the property on appeal was community property. Appellant chose separation of property so that he could have greater freedom to conduct his financial transactions. In fact, at December 31, 1980 he had made profits of nearly three-quarters of a million.

It was admitted that all the property in question in the case at bar came from the division of the community.

Counsel for the appellant argued that the spouses were co-owners of the community property, and that under MNR v The Estate of François Faure, [1975] CTC 136; 75 DTC 5076, and Frank Sura v MNR, [1962] CTC 1; 62 DTC 1005, there had been no transfer of ownership, but rather a division of property on dissolution of a community of property.

Counsel for the respondent maintained that section 74 of the Act is designed to avoid the fragmenting of income between spouses, and that this was not a transfer of the right of ownership, but of property; that under the definition of property, there does not have to be a change of ownership. It suffices that there is a change in control of the property, that Art 1292 of the Civil Code gives absolute control over community property to the husband, and that the Income Tax Act is designed to tax not ownership but rather the person who benefits from the property (James B McLeod v The Minister of Customs and Excise, [1917-27] CTC 290; 1 DTC 85, that before the division, the appellant enjoyed complete power over movable property, and that after the division, the wife had acquired powers which she did not have before.

In his submission, the husband gave up a right to dispose of income from the property: he performed an act, he took some action for the division to be made.

Under subsections 74 (1) and (2) of the Act, there is no mention of the right of ownership, but of a transfer of property to the spouse. The fact that the ownership of common property is indeterminate while the community exists in no way alters the nature of section 74 of the Act, which creates a presumption against the transferor. Furthermore, under the taxing sections of the Act, it is not ownership of property which is taxable but the taxpayer. Section 248 of the Act defines “property” as “a right of any kind whatever”.

On February 8, 1974 the appellant transferred to his wife a right of any kind whatever, by any other means whatever. During the community of property, the husband had a greater right than his wife, which in changing his matrimonial regime he transferred.

In support of this proposition, I quote extracts from the decision of the Supreme Court of Canada in Frank Sura (supra) at 4 and 5:

Nothing in the subsequent amendments to the Act alters 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, businesses, property or ownership provide to the person who is their legal beneficiary. As Mignault J stated in McLeod v Minister of Customs and Excise, [1917-27] CTC 290, at p 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 longer be questioned, nor can there be any hesitation in saying, without any reservation, that the only person who is required to pay income tax is whoever has absolute enjoyment of the property, subject to no restriction as to his freedom in disposing of it as he see fit (vide Robertson Ltd v MNR, [1944] Ex CR at p 180; [1944] CTC at p 75).

And at p 8:

Thus, if it is true as I think that a wife is the co-owner of common property, it is also true that she is not entitled to fully exercise the rights usually associated with ownership (Art 406 of the Civil Code). Her right is undefined, truncated, inferior even to that of one who has the bare ownership of property, the usufruct of which is held by another. It is stagnant, almost sterile, because it can produce nothing while the husband is alive. It is only when the community is dissolved that the wife is vested with the full exercise of her right of ownership, which comprises the jus utendi, fruendi et abutendi, and of which she had been temporarily deprived by her married status.

I would also refer to the decision already cited, in Estate of David Fasken v MNR, [1948] CTC 265; 50 DTC 491. This begins on p 277 [496] (vide also Spillers Ltd v Cardiff (Borough) Assessment Committee, per Lord Hewart, CJ, [1931] 2 KB 21, at 42):

The first thing to consider is whether what Mrs Fasken became entitled to under the declaration of trust was “property” within the meaning of the Act. The word “property” is a term of wide import. The New English Dictionary gives the following as one of its definitions:

2. That which one owns; a thing or things belonging to or owned by some person or persons; a possession (usually material) or possessions collectively; (one’s) wealth or goods.

And Webster’s New International Dictionary, Second Edition, puts it similarly as follows:

5. That to which a person has a legal title; thing owned; an estate; whether in lands, goods, money or intangible rights, such as copyright, patent rights, etc; anything, or those things collectively; in or to which a man has a right protected by law.

The Courts have also recognized the wide extent of the word. For example, in Jones v Skinner (1836) 5 LJ (NS) Ch 87 at 90, Lord Langdale MR said:

It is well known that the word “property” is the most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have.

Vide also Re Lunness (1919) 46 OLR 320 at 332, per Riddell J. What Mrs Fasken became entitled to is manifest from clause (5) of the declaration of trust, namely, the right to receive from the trustees one-half of the interest on the indebtedness that should come to their hands from time to time after the interest on Andrew Fasken’s claim had been paid. In my view, the word “property” as used in the Act is clearly wide enought in meaning to include such a right.

(Transfer of Property Effective)

The next question is whether there was a transfer of such property from David Fasken to his wife. The word “transfer” is another term of wide meaning. The New English Dictionary gives this meaning of it:

1. Law. To convey or make over (title, right or property) by deed or legal process.

And Webster’s New International Dictionary, Second Edition, says:

2. To make over the possession or control of, to make transfer of; to pass; to convey, as a right, from one person to another; as, title to land is transferred by deed.

In Gathercole v Smith (1880-81) 17 ch D 1 at 7, James LJ spoke of the word “transfer” as “one of the widest terms that can be used”, and Luch LJ said, at page 9:

The word “transferrable”, I agree with Lord Justice James, is a word of the widest import and includes every means by which the property may be passed from one person to another.

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. The plain fact in the present case is that the property to which Mrs Fasken became entitled under the declaration of trust, namely, the right to receive a portion of the interest on the indebtedness, passed to her from her husband who had previously owned the whole of the indebtedness out of which the right to receive a specified portion of the interest on it was carved. If David Fasken had conveyed this piece of property directly to his wife by a deed such conveyance would clearly have been a transfer. The fact that he brought about the same result by indirect or circuitous means, such as the novation referred to by counsel involving the intervention of trustees, cannot change the essential character of the fact that he caused property which had previously belonged to him to pass to his wife. In my opinion, there was a transfer of property from David Fasken to his wife within the meaning of the Act.

In James B McLeod (supra), it states:

It is not the ownership of a property which is taxable, but that the tax is levied on a taxpayer who is the legal beneficiary thereof.

During the community of property, appellant was the legal beneficiary of the community property. When it was dissolved, he transferred this right to his wife. There is therefore no doubt in my mind that section 74 of the Act applies in the case at bar, to prevent income being divided between the spouses.

The appeal is accordingly dismissed.

Appeal dismissed.