Date: 19980525
Docket: A-18-97
CORAM: STRAYER J.A.
| DESJARDINS J.A. |
| McDONALD J.A. |
BETWEEN:
SUSAN JANE MEDLAND
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, B.C., Tuesday, April 28, 1998.
Judgment delivered at Ottawa, Ontario, Monday, May 25, 1998.
REASONS FOR JUDGMENT BY: DESJARDINS J.A.
CONCURRED IN BY: STRAYER J.A.
McDONALD J.A.
Date: 19980525
Docket: A-18-97
CORAM: STRAYER J.A.
| DESJARDINS J.A. |
| McDONALD J.A. |
BETWEEN:
SUSAN JANE MEDLAND
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
DESJARDINS J.A.
[1] This is an application for judicial review of a decision of the Tax Court of Canada1 which dismissed an appeal from an assessment against the applicant made by the Minister of National Revenue (the "Minister") pursuant to subsection 160(1) of the Income Tax Act.2 At issue is whether the Tax Court judge erred when he concluded that the applicant's husband had transferred property indirectly to the applicant when the husband made mortgage payments on a house in which the applicant had become the sole owner, with the result that she has now become liable for a portion of taxes her husband owes to the respondent in respect of his 1990, 1991, 1992 and 1993 taxation years.
The facts
[2] The case proceeded by way of an agreed statement of facts.
[3] The applicant and her husband, Mr. John Medland, purchased a house in 1985 as joint tenants. The purchase was financed in part by way of a mortgage loan from the Toronto Dominion Bank. They were joint mortgagors. The mortgage, which was renewed a number of times, was secured by the property. On April 8, 1987, the applicant and her husband, as joint tenants, transferred the property to the applicant alone without any consideration being given. The husband then, alone, made all payments on the mortgage for a total sum of $39,979.74. The mortgage payments were made by Mr. Medland issuing cheques to the Toronto Dominion Bank from his personal and business accounts and directing that the funds from those cheques be used to make the mortgage payments. On June 10, 1994, the Minister assessed the applicant $38,857.48 pursuant to section 160 of the Income Tax Act representing the lesser of (a) Mr. Medland's unpaid liability under the Income Tax Act of British Columbia and section 36 of the Canada Pension Plan, and (b) the value of property allegedly transferred by Mr. Medland to the applicant. The applicant objected to the assessment. The Minister later reassessed the applicant thereby reducing the amount assessed to $15,219.56 on the basis that the value of the property allegedly transferred to the applicant was not more than the sum of the mortgage payments attributable to the principal, namely $13,321.69 plus $1,897.87 in interest. Mr. Medland is indebted to the Minister in excess of $49,000 as of June 10, 1994, in respect of his 1990, 1991, 1992 and 1993 taxation years, of which $24,288.83 was in respect of federal taxes.
The decision under review
[4] Before the Tax Court judge, the applicant submitted that her husband never transferred property to her, either directly or indirectly, pursuant to subsection 160(1) of the Income Tax Act. The mortgage payments were made directly to the Bank. Mr. Medland, she said, paid his own liability to the Bank. Following the transfer by the applicant and her husband of the property to the applicant alone on April 8, 1987, Mr. Medland remained fully liable to the Bank. His liability under the mortgage in question was joint and several with that of the applicant. Thus, she argued, there was no indirect transfer of property. If a benefit was conferred on the applicant, it was not covered by subsection 160(1) of the Income Tax Act.
[5] The Tax Court judge made the following observations:
| It is apparent that section 160 of the Income Tax Act is directed only at transfers of property. This section is not aimed at the conferral of benefits, as correctly pointed out by Counsel for the Appellant. In this regard, section 160 is unlike subsection 15(1) of the Act which requires the inclusion in a shareholder's income of any benefit he may receive from the corporation of which he is a shareholder. Section 160 deals with transfers of property like the present sections 74.1 and 74.2 which set out the attribution rules. The wording relating to the circumstances which trigger the application of section 160 is similar to some extent to the language used in sections 74.1 and 74.2 of the Income Tax Act. |
| Having regard to the foregoing observations respecting the Appellant's rights in the subject property and the ambit of section 160 of the Income Tax Act, I do not agree with the proposition advanced by the Appellant that a reduction in the Appellant's liability under the mortgage to the extent of $13,321.69 as a direct result of the payments made to the mortgagee by Mr. Medland does not constitute property. The examination of two hypothetical situations leads me to the conclusion that such reduction in the Appellant's liability amounts to an indirect transfer of property made by Mr. Medland to the Appellant. |
[6] He proceeded to examine two hypothetical situations:
| In the first situation, termed Example "A", I am assuming that Mr. Medland, instead of paying a little over $13,000 to the mortgage towards the principal of the mortgage, had made, with the agreement of the mortgagee, a balloon payment when he was indebted to the Government of Canada in respect of federal taxes and paid the full amount owing under the mortgage. In such an eventuality, there is no doubt that this payment would have constituted a transfer of property because the Appellant would have acquired the right to redeem the property because a "right of whatever kind" is property, according to the definition of the term "property" in section 248 of the Income Tax Act. |
| One can imagine another case, which I describe as Example "B", where a person in Mr. Medland's situation would have made just a few regular payments to the mortgagee, which payments happen to represent the last payments to be made under the mortgage. On this assumption, an individual like the Appellant would be entitled to redeem the property and would be left with an unhampered fee simple if, of course, there was no other encumbrance on the property. Again the right to redeem the mortgage would constitute property within the meaning of section 248 of the Income Tax Act, as I have just explained. |
| I don't see between Examples "A" and "B" on the one hand and the present case on the other hand any substantial difference. In each of these two examples, the situation is simply more apparent, more conspicuous because the right to redeem property and to secure full title is undoubtedly property having regard to the wide import of the term "property" in section 248 of the Act. It would be highly artificial, if not absurd, to conclude on the one hand that in Examples "A" and "B" the payments in question involve the transfer of property and on the other hand assert that the making of regular payments do not happen to include the last payment which gives rise to the right to redeem the property. Such a result would be clearly unintended. |
[7] He then concluded:
| The matter can be looked at in a very simple fashion. If Mr. Medland had made the regular payments directly to his wife out of his own moneys and if his wife had each time immediately thereafter, used these moneys to make payments directly to the mortgagee it could not be challenged that these payments would constitute a direct transfer of property to his wife. Mr. Medland, instead of making the regular payments owing under the mortgage to his wife, made them to the mortgagee at a time where his wife was the sole owner of equity of redemption. This in my view, constitutes an indirect transfer of property. |
| Looking at the overall situation, I am persuaded that the regular payments made by Mr. Medland to the mortgagee when the Appellant was the sole owner of the equity of redemption had a dual effect from the standpoint of Mr. Medland and the Appellant: a) Mr. Medland paid his own liability under the mortgage and b) Mr. Medland transferred property indirectly to his wife with respect to the portion of the payments that related to the principal of the mortgage. These two results are inextricably linked. In my view, the Appellant in submitting that Mr. Medland simply satisfied his own liability by making these payments is ignoring an important aspect of the situation, the other side of the coin, so to speak. There was a transfer of economic interest involving the equity of redemption in favour of his wife, as in the Kieboom decision. |
| I am therefore of the view that Mr. Medland had transferred property during the relevant period to the Appellant in an indirect way within the purview of section 160 of the Income Tax Act. Consequently, the assessment made by the Minister of National Revenue in respect of this transfer of property is confirmed. |
The applicant's submission
[8] In essence, the applicant submits that, given that she provided no consideration to Mr. Medland in exchange for his making the payments under the mortgage, subsection 160(1) of the Income Tax Act could only apply if Mr. Medland "transferred property either directly or indirectly "to her" by means of a trust or by any other means whatever". This, she says, did not happen.
[9] The applicant accepts the proposition that the more Mr. Medland made payments on the mortgage, the less indebted she found herself towards the mortgagee. She argues, however, that a reduction in the applicant's liability under the mortgage does not constitute "property" being transferred, even if the word "property" is of wide import.3 A reduction in the applicant's liability is a result, or an event, but is not a property being transferred. She submits that in order for a "transfer" to occur, Mr. Medland must have had divested himself of a particular property and that same property, under the decision of Fasken Estate v. M.N.R.,4 must have become vested in the applicant. Mr. Medland divested himself of money (something included in the word "property") but he made his payments directly to the mortgagee and not to the applicant.
[10] She submits that at all material times after April 8, 1987, the date upon which Mr. Medland transferred his interest in the property to her, she was the sole owner of the equity of redemption.5 The Tax Court judge erred, she says, when he stated, in both of his hypothetical situations, that the equity of redemption would have passed to her had a balloon payment or the last payment of the mortgage been made by the husband. The Tax Court judge was also in error, she claims, when he calculated that, by making the principal payments, "[t]here was a transfer of economic interest involving the equity of redemption in favour of his wife, as in the Kieboom6 decision". In that decision, she says, the transferor therein owned a specific portion or percentage of the "equity" of a corporation which he transferred to his spouse and children by compelling the corporation to issue some common shares to them, thereby diluting his interest in the corporation.
[11] In the present case, she says, when Mr. Medland divested himself of money by making the payments, the net value of the equity of redemption of the applicant in the house increased by the amount of the principal payments. That net value is expressed in money but is not money in itself. Had Parliament intended subsection 160(1) of the Income Tax Act to apply to the facts in issue, the word "amount" defined in subsection 248(1) of the Income Tax Act which includes "the value in terms of money of the right or thing",7 would have been used in subsection 160(1) instead of the word "property".
[12] In any event, she says, even if Mr. Medland made the payments on her behalf, that situation is not caught by subsection 160(1) of the Income Tax Act. The words "on behalf of" his spouse are not found in that section as they are found in paragraph 224(1.1)(b) of the Act. While it is clear that the applicant benefitted from Mr. Medland making the principal payments, she claims that conferring a benefit does not come within the purview of subsection 160(1) of the Act. Such language is to be found in subsections 15(1) and 74.1(1), but not in subsection 160(1).
Analysis
[13] As a preliminary comment, the respondent does not dispute the applicant's proposition that no "right to redeem the property" was transferred to the applicant as a direct consequence of the mortgage payments made by her spouse on the debt owing under the mortgage. That right existed earlier when she became the sole owner of the property. Perhaps, the first judge confused the "equity of redemption" and the "right to redeem" with the concept of "equity" itself. This should not deter us, however, from recognizing the correct direction he gave to this case.
[14] It is not disputed that the tax policy embodied in, or the object and spirit of subsection 160(1), is to prevent a taxpayer from transferring his property to his spouse in order to thwart the Minister's efforts to collect the money which is owned to him.8 The issue turns, however, on the proper meaning to be given to the terms used in subsection 160(1) of the Act, namely whether Mr. Medland "transferred property... indirectly by any other means" to his wife.
[15] In my view, the Tax Court judge was correct when he concluded that the applicant's spouse transferred property indirectly to the applicant to the extent of the portion of the mortgage payments that related to the principal of the mortgage.
[16] The word "property" in subsection 160(1) of the Act, which is defined as meaning "property of any kind", including "money", has been described by Lord Langdale9 as "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".
[17] The word "transfer" is not defined in the Act. It was commented upon in the Estate of David Fasken v. M.N.R.10 by President Thorson of the Exchequer Court of Canada in the following terms:
| 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. |
[18] The circumstances of that case ought not to be forgotten. The taxpayer had bought a farm in Texas by means of a corporation of which he originally owned nearly all the shares. The title to the farm was vested in the company subject to a lien indebtedness in his favour for the unpaid purchase price. In 1920, he transferred his shares to his son and was never, thereafter, a shareholder, director or officer of the company. He did, however, retain his rights against the company in respect of the unpaid purchase price of the farm and other advances. In 1924, the company executed an acknowledgement of indebtedness in favour of three trustees, one of them representing the wife of the taxpayer. What Mrs. Fasken became entitled to, under the declaration of trust, was the right to receive a portion of the interest on the indebtedness passed on to her from her husband who had previously owned the whole of the indebtedness out of which her right to receive a portion of the interest had been carved.
[19] By applying the phrases "transfer... of property..." of subsection 41(4) of the Income Tax Act of 1917 to that situation, Thorson P. indicated, in effect, that, contrary to the submission of the applicant in the case at bar, it is not necessary that, when a husband divest himself of a particular property, that same property must have become vested in his spouse.
[20] The words "indirectly... by... any other means" in subsection 160(1) of the Act refer to any circuitous way in which property of any kind passes from one person to another. In the case at bar, when Mr. Medland made the payments to the mortgagee, he specified that such money was to be attributed in diminution of the mortgage on the property on which he had no more interest. While it is true that subsection 160(1) of the Act does not contain the words "for the benefit of" or "on behalf of" as found in subsections 15(1) or 74.1(1) or paragraph 224(1.1)(b) of the Act, the applicant does not deny that she became less indebted by the payments and her equity in the property increased. The means by which this result occurred were monies paid to the Bank which was then transferred by the Bank on the account of the mortgage of a house owned solely by the applicant. The payment to the Bank was simply a conduit through which the funds passed indirectly from her husband to her.
[21] The applicant's submission, that no transfer of property occurred because what Mr. Medland divested himself was money which monies were never transferred [physically] to the applicant, is without merit. The present scheme, although different from that in Her Majesty the Queen v. Kieboom11 and White (D.P.) v. Canada,12 amounts to the same thing.
[22] I would dismiss this application for judicial review.
"Alice Desjardins"
J.A.
"I agree
| Barry L. Strayer, J.A." |
"I agree
| F. Joseph McDonald, J.A." |
__________________
1 The decision is reported under Medland v. Canada, [1997] 1 C.T.C. 2702.
2 R.S.C. 1985 (5th Supp). Subsection 160(1) read at the relevant time:
(1) Where a person has, on or after the 1st of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to (a) his spouse or a person who has since become his spouse,
(b) a person who was under 18 years of age, or
(c) a person with whom he was not dealing at arm's length,
the following rules apply:
(d) 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 sections 74 to 75.1, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and
(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,
but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.
3 The word "property" is defined in subsection 248(1) of the Income Tax Act, thus: "property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes (a) a right of any kind whatever, a share or a chose in action, (b) unless a contrary intention is evident, money, (c) a timber resource property, and (d) the work in progress of a business that is a profession.
5 See Sir Robert Megarry, The Law of Real Property, 5th ed. (London: Stevens & Sons Ltd., 1984) at 918-19.
6 The Queen v. Kieboom, 92 DTC 6382 (F.C.A.).
7 The term "amount" is thus defined in subsection 248(1) of the Income Tax Act:
"amount" means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing, except that,
(a) notwithstanding paragraph (b), in any case where subsection 112(2.1), (2.2) or (2.4), or section 187.2 or 187.3 or subsection 258(3) or (5) applies to a stock dividend, the "amount" of the stock dividend is the greater of
(i) the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend, and (ii) the fair market value of the share or shares paid as a stock dividend at the time of payment,
(b) in any case where section 191.1 applies to a stock dividend, the "amount" of the stock dividend for the purposes of Part VI.1 is the greater of
(i) the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend, and (ii) the fair market value of the share or shares paid as a stock dividend at the time of payment,and for any other purpose the amount referred to in subparagraph (i), and
(c) in any other case, the "amount" of any stock dividend is the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend;
8 Madeleine Charrier v. M.N.R. 89 DTC 108 at 110 (T.C.C.); Rose Fluxgold v. The Queen 90 DTC 6187 at 6191 (T.C.C.); Algoa Trust and 116488 Canada Inc. v. The Queen 93 DTC 405 at 411 (T.C.C.).
9 Jones v. Skinner (1836), 5 L.J. (N.S.) c. 87 at 90, cited in Estate of Fasken v. M.N.R. 49 DTC 491 at 496, The Queen v. Kieboom 92 DTC 6382 at 6386.