Madeline Dubois v. Minister of National Revenue, [1982] CTC 2588, 82 DTC 1585

Guy Tremblay (TRANSLATION):—This case was heard at Montreal, Quebec on March 30, 1982.

1. Issue

It is necessary to determine whether the appellant, who received gifts totalling $20,000 from her husband in 1971 and 1972 is still jointly and severally liable under subsections 160(1) and (3) of the Income Tax Act for tax owing by her husband of $9,496.45 for 1970 and 1971, although the husband made payments of $11,937.18 to the respondent during the years from 1975 to 1978. The appellant contended that under article 1161 of the Civil Code of the Province of Quebec the said payments should be applied against the oldest debts, namely, those of 1971 and 1972, and that accordingly, when the assessment of March 26, 1980, in which she was made jointly and severally liable for the debt of $9,496.45, was issued, the said debt was already extinguished and she could therefore no longer be jointly and severally liable for it.

The respondent, on the other hand, contended that the rule in subsection 160(3) of the Income Tax Act for applying payments takes precedence in this case over the general rule in the Civil Code. According to the respondent’s construction, this rule in subsection 160(3) provides for the application of payments made by the husband first against a debt that is not joint and several and only subsequently against a debt for which the wife is jointly and severally liable.

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 a single section of the Act but from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 This theory of the burden of proof on the facts does not apply in the instant case, because all the facts were admitted by both parties and the issue involves merely the construction of subsection 160(3) of the Income Tax Act.

3. Facts

Facts admitted by both parties

3.01 The agreement on the facts submitted by the parties at the hearing reads as follows:

AGREEMENT ON THE FACTS

The parties hereto through the undersigned counsel agree on the following for the purposes of this appeal; no other evidence will be adduced by either side for the purposes of this appeal.

1. During the taxation years in question the appellant was the spouse separated as to property from Mr Claude Dubois:

2. During the taxation years in question, Mr Claude Dubois earned income from various sources;

3. Following the filing of his returns of income, Mr Claude Dubois was assessed with respect to the 1970 to 1978 taxation years inclusive; notices of initial assessment were sent to him on the following dates:

	Date on which
Taxation	notices of initial
year	assessment mailed
1970	November 29, 1974
1971	November 29, 1974
1972	November 29, 1974
1973	November 29, 1974
1974	June 27, 1975
1975	July 15, 1977
1976	July 15, 1977
1977	September 22, 1978
1978	June 12, 1979

4. Following the filing of financial statements, Mr Claude Dubois was reassessed for the 1970 to 1977 taxation years inclusive; notices of reassessment were sent to him for this purpose on April 11, 1979;

A copy of the financial statements mentioned above is attached to this agreement on the facts as Appendix “A” and forms an integral part thereof;

A copy of the notices of reassessment dated April 11, 1979 is attached to this agreement on the facts as Appendix “B” and forms an integral part thereof;

5. Mr Claude Dubois did not object to, appeal from or dispute the assessments and reassessments issued to him for the 1970 to 1978 taxation years inclusive;

6. The tax, penalties and interest for the 1970 to 1978 taxation years inclusive of Mr Claude Dubois and the payments made with respect to these by Mr Claude Dubois as of April 28, 1980 are described in the table prepared by Mr A Pizzardi of the Collections, Section, Department of National Revenue; a copy of the said table is attached to this agreement on the facts as Appendix “C” and forms an integral part thereof;

7. During the 1971 and 1972 taxation years Mr Claude Dubois gave the appellant sums of $10,000 and $10,000 respectively, as appears from Mr Claude Dubois’s financial statements (Appendix “A”) and from the appellant’s financial statements, a copy of which is attached to this agreement on the facts as Appendix “D” and forms an integral part thereof;

8. As of December 31, 1970, the tax owed by Mr Claude Dubois on income earned during the 1970 taxation year was $4,611.77, made up as follows:

1970 taxation year	Income tax	Penalty	Interest	TOTAL
Tax owed as of
December 31, 1970	$3,859.30	$752.47	Nil	$4,611.77

9. As of December 31, 1971 the tax owed by Mr Claude Dubois on income earned during the 1971 taxation year was $4,884.68, the said sum of $4,884.68 being separate from and in addition to the sum of $4,611.77 mentioned in paragraph 8:

1971 taxation year	Income Tax	Penalty	Interest	TOTAL
Tax owed as of
December 31, 1971	$3,976.97	$743.69	$164.02	$4,884.68

10. On March 26, 1980 the Department of National Revenue assessed the appellant on the basis of section 160 of the Income Tax Act for the said sums of $4,611.77 and $4,884.88, whence the amount of $9,496.45 is in dispute. A copy of the document entitled “Notice of Assessment” is attached to this agreement on the facts as Appendix “E” and should be regarded as if set out in full.

3.02 The tax, penalties and interest for the 1970 to 1978 taxation years inclusive, to which reference is made in paragraph 6 of the joint statement of facts, were as follows, according to the document filed as Exhibit C-2:

According to the same document filed as Exhibit C-2 the payments made by the appellant’s spouse from June 10, 1975 to October 30, 1979 were as follows:

Thus the balance as of April 28, 1980 was $40,292.71 ($53,429.89 - $13,137.18).

4. Act, Case Law, Analysis

4.01 Act

The principal provision of the Income Tax Act involved in this case is section 160, which reads as follows:

160. (1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever,

(a) to his spouse or to a person who has since become his spouse, or

(b) to a person who was under 18 years of age,

the following rules are applicable:

(c) the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of section 74 or section 75, as the case may be, in respect of income from the property so transferred or from property substituted therefor;

and

(d) the transferee and transferor are jointly and severally liable to pay the lesser of

(i) any amount that the transferor was liable to pay under this Act on the day of the transfer, and

(ii) a part of any amount that the transferor was so liable to pay equal to the value of the property so transferred;

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules are applicable:

(a) a payment by the transferee on account of his liability shall to the extent thereof discharge the joint liability; but

(b) a payment by the transferor on account of his liability only discharges the transferee’s liability to the extent that the payment operates to reduce the transferor’s liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.

The parties referred to article 1161 of the Civil Code of the Province of Quebec and to section 11 of the Interpretation Act. These two provisions read as follows:

Article 1161 of the Civil Code of the Province of Quebec

When the receipt makes no special imputation, the payment must be imputed in discharge of the debt actually payable which the debtor has at the time the greater interest in paying. If of several debts one alone be actually payable, the payment must be imputed in discharge of such debt although it be less burdensome than those which are not actually payable.

If the debts be of like nature and equally burdensome, the imputation is made upon the oldest.

All things being equal, it is made proportionally on each.

Section 11 of the Interpretation Act

Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

4.02 Case law

Counsel for the parties referred the Board to the judgments rendered in the following cases:

(a) Construction of section 160

1. Les Produits Alimentaires Anco (1961) Inc v MNR, [1979] CTC 2669; 79 DTC 573;

2. Allison Janet Craig v MNR, [1973] CTC 2119; 73 DTC 116;

3. Kathleen Gayle Thorsteinson v MNR, [1980] CTC 2415; 80 DTC 1369;

4. Aneda Fisher v MNR, [1979] CTC 2771; 79 DTC 661;

5. Dorrine L Payette v MNR, [1979] CTC 2052; 79 DTC 81;

6. No 605 v MNR, 21 Tax ABC 317; 59 DTC 159;

7. Margaret T Carrigan v MNR, [1981] CTC 2990; 81 DTC 916;

(b) Existence of the debt

8. The Queen v Simard-Beaudry Inc, 71 DTC 5511;

9. The Queen v Charles Vernon Myers, [1977] CTC 507; 77 DTC 5278;

10. MNR v Les Meubles de Maskinongé Inc, [1978] CTC 2285; 78 DTC 1235.

4.03 Analysis

4.03.1 The sole remaining issue is the construction to be placed on subsection 160(3) of the Income Tax Act. It may be worthwhile to reproduce it again:

(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules are applicable:

(a) a payment by the transferee on account of his liability shall to the extent thereof discharge the joint liability; but

(b) a payment by the transferor on account of his liability only discharges the transferee’s liability to the extent that the payment operates to reduce the transferor’s liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.

4.03.2 The appellant’s submission was that when the assessment of the appellant dated March 26, 1980 was issued, the debt of $9,496.45 was already extinguished by the payment of $11,937.18 (para 3.02). According to the appellant, it was necessary to apply the rule governing the application of payments laid down in article 1161 of the Civil Code of the Province of Quebec, quoted supra, according to which payments apply first to the oldest debt. Section 11 of the Interpretation Act, quoted supra, and the legislative intent embodied therein justify the application of this article of the Civil Code, according to the appellant.

4.03.3 According to counsel for the appellant, if this rule did not apply, it would be tantamount to saying that the Department of National Revenue could reassess a taxpayer’s spouse ten, fifteen or twenty years after the date of the transfer and hold the transferee jointly and severally liable for the debt as of the date of the transfer and as long as any tax subsequent to that date had not been paid by the spouse. According to counsel, such a construction would, in short, be unthinkable because of the inequity it would cause.

4.03.4 It should first be stated that except in cases of fraud, the Department of National Revenue cannot reassess more than four years beyond the date on which the initial assessment is issued for a given year, and this makes this example highly improbable; if, however, an assessment could reach back so far because of fraud by the transferor, it would be quite possible that the fraud was the reason for the transfer. Would it not then be fair for the transferee to be held liable for the tax owing by the transferor at the date of the transfer?

4.03.5 As was stressed by counsel for the respondent, in matters of statutory construction a specific provision always takes precedence over a general provision. Article 1161 of the Civil Code is the general rule that applies if there is not a specific rule. It is precisely in tax questions involving transfers that subsection 160(3) is the existing specific rule and must accordingly be applied.

How, then, should we construe the said section?

4.03.6 First it is clear that subsection (1) of section 160 made the transferee liable for an amount of $9,496.45 (see paragraph 10 of the agreement cited in paragraph 3.01 of the facts).

It is now necessary to construe paragraph 160(3)(bj, because paragraph 160(3)(a) requires no explanation.

This paragraph 160(3)(b) should be cited again:

(3) Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules are applicable:

(b) a payment by the transferor on account of his liability only discharges the transferee’s liability to the extent that the payment operates to reduce the transferor’s liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.

We should now apply the said paragraph, mutatis mutandis, to the facts in the instant case:

The payment of $13,137.18 (para 3.02 of the facts) made by the transferor (the appellant’s spouse) discharges the liability of the transferee (the appellant) for the sum of $9,496.45 only to the extent that the payment ($13,137.18) reduces the transferor’s liability for the sum of $53,429.89 (see para 3.02 of the facts) to an amount less than $9,496.45, for which the transferee is made liable by the transfer.

The debt of the transferor (the appellants’ spouse) of $53,429.89 reduced by $13,137.18 is $40,292.71 and therefore not less than $9,496.45. It must accordingly be concluded that the transferee (the appellant) still remains liable for the total amount, namely, $9,496.45 for which she is made jointly and severally liable by subsection (1).

The Income Tax Act must be construed strictly. There is no doubt in my view that this strict construction in the instant case and the conclusions it entails are in keeping with the legislative intent of the drafters of section 160 of the said Act. The respondent’s reassessment must accordingly be upheld.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.