Date: 19980709
Docket: 96-2688-IT-I; 96-2829-IT-G
BETWEEN:
COLOMBE MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Guy Tremblay, J.T.C.C.
Point at issue
[1] According to the Notices of Appeal and the Replies to the Notices of Appeal, the question is whether under ss. 160(1) and160(2) of the Income Tax Act ("the Act") the appellant is jointly and severally liable for a debt of $3,341.65 owed by Les Placements Gaber Inc. for non-remitted source deductions (case 96-2688(IT)I), and whether she is also responsible for a tax debt of $20,685.06 owed by Les Placements Gaber Inc., the whole as a consequence of a transfer on November 12, 1993 of a property located at 3145 Route du Lac Ouest in Alma, Quebec, whose a value according to the respondent was $71,500, while the appellant claims to have only paid $22,000 for the property.
[2] However, the appellant argued that she had assumed a number of the transferor company's liabilities and that this should be taken into account.
Burden of proof
[3] The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue.[1]
[4] In that judgment the Supreme Court held that the facts assumed by the respondent in support of the assessments or reassessments are presumed to be true in the absence of proof to the contrary. In the instant case the facts assumed by the respondent are set out in subparagraphs (a) to (g) of paragraph 8 of the Reply to the Notice of Appeal. That paragraph reads as follows:
[TRANSLATION]
8. In making assessment No. 08 720 of May 2, 1995 pursuant to s. 160 of the Income Tax Act, the Minister of National Revenue assumed inter alia the following facts:
(a) on or about November 12, 1993, by notarial deed, Les Placements Gaber Inc. transferred [denied] to the appellant a property located at 3145 Route du Lac Ouest in Alma; [admitted as to the remainder]
(b) the said notarial deed stipulated that the consideration given by the appellant to the transferor ["transfer" denied], Les Placements Gaber Inc., was $22,000; [admitted as to the remainder]
(c) the fair market value of the said property on November 12, 1993 was not less than $71,500; [denied]
(d) the transfer [denied] on November 12, 1993 of the property located at 3145 Route du Lac Ouest in Alma conferred on the appellant a benefit of at least $20,685.06; [denied]
(e) the appellant is the spouse of Ghislain Bergeron, who is the brother of Gaétan Bergeron, the sole shareholder in Les Placements Gaber Inc., the transferor [denied]; [relationship admitted]
(f) on May 2, 1995, the date of assessment No. 08 720 issued to the appellant pursuant to s. 160 of the Income Tax Act, Les Placements Gaber Inc. had a tax liability of $20,685.06 for the taxation years 1986 to 1988 and 1990, as confirmed by Notices of Assessment in 1991 and 1993; [admitted]
(g) on May 2, 1995, the date of assessment No. 08 720 issued to the appellant pursuant to s. 160 of the Income Tax Act, Les Placements Gaber Inc. had a tax liability of $3,341.65 from non-remitted source deductions . . . . [denied]
[5] The respondent admitted that following the bankruptcy of Les Placements Gaber Inc., the trustee paid the respondent the sum of $1,811.19. A balance of $1,530.46 remained in case No. 96-2688(IT)I. The balance remained unchanged at $20,685.06 in case No. 96-2829(IT)G.
[6] The respondent filed as Exhibit I-1 a book of 16 exhibits, including contracts, judgments and so on, which will be referred to below.
[7] The real estate appraisal report on the property located at 3145 Route du Lac Ouest in Alma, Quebec, was filed as Exhibit I-2. The value arrived at by the chartered appraiser Gaston Laberge was $69,000 at November 11, 1993. The appellant admitted this was the property's value on that date.
[8] Following the foregoing admissions ([5], [6] and [7]), the evidence was completed by the testimony of Ghislain Bergeron, the appellant's husband, of Gaétan Bergeron, the appellant's brother-in-law, and of the appellant Colombe Martel Bergeron herself.
[9] The appellant's husband Ghislain Bergeron, a fur salesman for 35 years, testified that in 1978, together with his wife, he bought the land (Exhibit I-1, tab 6) on which the building whose civic number is 3145 Route du Lac Ouest, Alma, was built, the whole for the sum of $40,000. At that time he had to borrow $37,875 from the Caisse de Dépôt et Placement du Québec (Exhibit I-1, tab 7).
[10] On November 28, 1988, for the purpose of paying certain tax and other liabilities, Ghislain Bergeron and the appellant borrowed from Les Placements Gaber Inc. the sum of $22,000 at 14½%, repayable in periodic, equal and consecutive instalments of $512.82 on the first day of each month starting on January 1, 1989, until payment was made in full (Exhibit I-1, tab 9).
[11] A series of 22 cheques or receipts for $512 each was filed as Exhibit A-1. They are dated from January 7, 1992 to December 20, 1993, the cheques being made out to Gaétan Bergeron and the receipts signed by Gaétan Bergeron.
[12] Gaétan Bergeron is the sole owner of the shares in Les Placements Gaber Inc.
[13] A series of photocopies of three drafts and a cheque for $535.40 each, all payable to General Trust of Canada, all signed by Ghislain and Colombe Bergeron and debited to their account, was filed as Exhibit A-2. These documents were dated September 5, October 1, November 1 and December 1, 1992. They were repayments to the National Bank on the loan taken out on the residence. The merger of General Trust and the National Bank and others brought about the change in the payee.
[14] A request to the Town of Alma for information as to the amounts paid in school and municipal taxes from August 1992 to the end of November 1993 was filed as Exhibit A-3. Those amounts came to $1,300.09.
[15] A document from Martin & Gagnon, Assurances générales, in Alma, was filed as Exhibit A-4. It showed that a total of $419.66 in monthly premiums of $27.98 had been paid from August 31, 1992 to November 31, 1993.
[16] The April 29, 1993 Hydro Quebec bill for the residence, in the amount of $573.90, payable on May 20, 1993 and paid on May 26, 1993, was filed as Exhibit A-5.
[17] The statements with respect to the appellant's account at the Caisse populaire St-Luc d'Alma for the period from October 20, 1992 to November 30, 1993 were filed as Exhibit A-6. They showed that each month the sum of $535.40 was transferred to General Trust of Canada. This was the monthly payment on the loan on the house.
[18] According to the witness Ghislain Bergeron, whose testimony was confirmed by that of his brother Gaétan, the loan payments to Les Placements Gaber Inc. were made on time in the first years. However, in late 1991 and early 1992 payments were made two months late. On August 27, 1981 the National Bank of Canada had registered a deed of mortgage in the amount of $15,000 between the bank and Ghislain Bergeron with respect to the property in question (Exhibit I-1, tab 8). Further, in 1989 it had registered a mortgage surety deed with an "event of default" clause (Exhibit I-1, tab 10) on the residence. Finally, as a legal mortgage in the amount of $12,715.48 (Exhibit I-1, tab 11) had also been registered by the Quebec Department of Revenue, Les Placements Gaber Inc., in order to protect its rights, decided to register the 60-day notice with respect to the property in question on January 31, 1992.
[19] On August 12, 1995 a giving in payment judgment by the Quebec Superior Court declared Les Placements Gaber Inc. to be the owner of the property located at 3145 Route du Lac Ouest, Alma (Exhibit I-1, tab 13):
[TRANSLATION]
DECLARES the plaintiff Les Placements Gaber Inc. to have absolute and indefeasible ownership by giving in payment retroactive to November 29, 1988, free of all charges, liens and mortgages registered after November 29, 1988, of the following immovable property:
A piece of land or site known and designated as subdivision ONE of original lot THIRTY-ONE B (31 B-1) in range EIGHT (rg VIII) in the official land register of the Township of Sinaï, Registry Division of Lac St-Jean Est.
With buildings constructed thereon and appurtenances, including the building whose civic number is 3145 Route du Lac in Alma.
DECLARES the plaintiff Les Placements Gaber Inc. owner of the said immovable free of any liabilities with respect to improvements, upkeep or moneys paid as instalments on principal;
DIRECTS the Registrar of the Lac St-Jean Est Registry Division to strike and delete the registration of the debt to the plaintiff registered under No. 178349 as a charge against the aforesaid immovable, in view of the fact that the owner of and the creditor with respect to the said immovable are to become one;
DIRECTS the Registrar of the Lac St-Jean Est Registry Division to strike and delete the registration of the 60-day notice given pursuant to art. 1040a C.C. and registered against the aforesaid immovable under No. 191738;
DIRECTS the Registrar of the Lac St-Jean Est Registry Division to strike and delete the registration of the legal mortgage registered by the mis-en-cause the Quebec Department of Revenue against the aforesaid immovable under No. 187849;
DIRECTS the Registrar of the mis-en-cause Registry Division to register this judgment in the Index to Immovables and wherever else may be necessary;
DIRECTS the defendants to vacate the said immovable within 15 days of service of this judgment, failing which the plaintiff shall be put in possession by officers of the Court . . . .
[20] According to the testimony of Gaétan Bergeron, Ghislain Bergeron and the appellant, there was a verbal agreement between them that when the appellant and her husband had paid all of the debt and interest to Les Placements Gaber Inc. the immovable would be returned to them.
[21] On November 11, 1993, Les Placements Gaber Inc. sold the immovable in question to Colombe Martel (Exhibit I-1, tab 14). The clauses regarding the price read as follows:
[TRANSLATION]
This sale is made subject to the purchaser paying any balance owed on the existing mortgage with the Caisse de Dépôt et Placement du Québec, registered on June 23, 1978 as No. 130-916, with which the purchaser states she is fully familiar as she herself granted it in 1978 and has continued to make the payments thereon since the judgment.
The purchaser therefore takes back ownership of the immovable without having first obtained details of the amounts owed to the Caisse de Dépôt et Placement du Québec, since she was herself making the payments and prior authorization from the said lender was not necessary for the transfer of the immovable.
This sale is also made in consideration of the repayment of money owed to the vendor, which the said vendor acknowledges having received prior to this agreement, and general and final release is given therefor.
[22] A resolution of Les Placements Gaber Inc. on October 22, 1993 to sell the immovable to Colombe Martel stipulated [TRANSLATION] "that the selling price shall be the assumption of the mortgage granted to the Caisse de Dépôt et Placement du Québec pursuant to a deed registered on June 23, 1978 under No. 130-916, and the repayment of the amounts owed to the vendor" (Exhibit I-1, tab 15).
[23] Ghislain Bergeron testified that the reason the appellant alone acquired the house was that he felt he was not entitled to it because he had declared bankruptcy in 1992.
[24] On April 26, 1994, as a result of the economic situation, Les Placements Gaber Inc. declared bankruptcy as did Gaétan Bergeron.
Legislation
[25] The provisions of the Income Tax Act involved in the instant case are ss. 160(1), 160(2), 160(3) and 160(4). Reference was also made to the provisions of the Civil Code of Lower Canada, arts. 1212 and 1234, and arts. 1451, 1452 and 2863 of the new Civil Code of Quebec. These legal provisions read as follows:
Income Tax Act
160. Tax liability re property transferred not at arm's length.
(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, 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.
(2) Minister may assess transferee.
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) Rules applicable.
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) Special rules re transfer of property to spouse.
Notwithstanding subsection (1), where at any time a taxpayer has transferred property to his spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement and, at that time, the taxpayer and his spouse were separated and living apart as a result of the breakdown of their marriage, the following rules apply:
(a) in respect of property so transferred after February 15, 1984,
(i) the spouse shall not be liable under subsection (1) to pay any amount with respect to any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(ii) for the purposes of paragraph (1)(e), the fair market value of the property at the time it was transferred shall be deemed to be nil, and
(b) in respect of property so transferred before February 16, 1984, where the spouse would, but for this paragraph, be liable to pay an amount under this Act by virtue of subsection (1), the spouse's liability in respect of that amount shall be deemed to have been discharged on February 16, 1984,
but nothing in this subsection shall operate to reduce the taxpayer's liability under any other provision of this Act.
Civil Code of Lower Canada
Art. 1212. Counter-letters have effect between the parties to them only; they do not make proof against third persons.
Art. 1234. Testimony cannot in any case, be received to contradict or vary the terms of a valid written instrument.
New Civil Code of Quebec
1451. Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. . . .
1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract.
2863. The parties to a juridical act set forth in a writing may not contradict or vary the terms of the writing by testimony unless there is a commencement of proof.
[26] It was admitted by the appellant that throughout the period of the transfer no rental was paid to Les Placements Gaber Inc.
Case law
[27] The case law cited by the parties is the following:
1- Marlow Enteprises Ltd. v. M.N.R., 67 DTC 26;
2- Angela Savoie v. Her Majesty the Queen, 93 DTC 552 (T.C.C. 91-372(IT));
3- Mervin Holizki v. Her Majesty the Queen, 95 DTC 5591 (F.C. T-2296-89);
4- Céline Delisle v. Her Majesty the Queen, 95 DTC 650 (T.C.C. 94-505(IT)I);
5- 106443 Canada Inc. v. Her Majesty the Queen, 94 DTC 1663 (T.C.C. 91-1911(IT)G);
6- Pierre Montreuil, Nicole Montreuil, Claire Montreuil and Benoit Montreuil, Jr. v. Her Majesty the Queen, 94 DTC 1821 (T.C.C. 91-2684(IT)G, 91-2685(IT)G, 91-2686(IT)G and 91-2687(IT)G);
7- Liliane Fournier Jennewein v. The Minister of National Revenue, 91 DTC 600 (T.C.C. 87-1560(IT)).
Analysis
[28] Counsel for the appellant argued that essentially there was a verbal agreement between Les Placements Gaber Inc. (the lender) and the appellant (the borrower) that when the debt was completely repaid, with interest, the immovable property would be returned to the borrower. This contention was confirmed by the testimony of the three witnesses ([20]). Additionally, the resolution by Les Placements Gaber Inc. ([22]) of October 22, 1993 (Exhibit I-1, tab 15) and the clauses of the contract regarding the selling price (Exhibit I-1, tab 14) confirm the testimony of the witnesses.
[29] Counsel for the appellant argued that there had not been a real transfer between the appellant and Les Placements Gaber Inc., and vice versa. In the submission of counsel for the appellant, what should be considered is the intent of the parties - this was a sale with an intention to repurchase or a sale with a right of redemption. In 106443 Canada Inc. ([27] 5-) at page 1665 this Court said the following:
The transferor must not have the intention of absolutely giving up ownership to the property transferred. He must retain the power of recovery. It must be possible to infer from the circumstances of the transfer of ownership that the transferor's intention was not to give up the ownership of property and that he only gave it up temporarily and in order to provide security for a loan.
According to counsel for the appellant, in taxation matters substance prevails over form.
[30] However, there is nothing in the registration of the mortgage and the transfer of the immovable to Les Placements Gaber Inc., as ordered in the Superior Court judgment, to indicate the possibility of repurchase upon payment of the mortgage in full.
The passage from the judgment cited above in paragraph [19] is clear. There was a full and final transfer making Les Placements Gaber Inc. the sole owner, striking out other mortgages and directing the defendants to vacate the immovable within 15 days.
[31] As the repurchase agreement was relied on by the parties it may be regarded as a counter-letter.
A counter-letter is a private writing for the purpose of recording the true intent of parties who have indicated a different intent to the public. In the instant case, there is no indication in the deed of transfer to Les Placements Gaber Inc. of such a repurchase agreement clause. That intent appears in the resolutions of Les Placements Gaber Inc. and is not apparent to the public, namely third parties ([28]).
[32] As Parliament has been so strict in protecting the rights of third parties against a counter-letter, which is a writing, the Court must a fortiori protect third parties against a mere verbal agreement, which is in any case regarded as a counter-letter by legal writers.
Articles 1212 of the Civil Code of Lower Canada and 1451 and 1452 of the Civil Code of Quebec provide that counter-letters have effect between the parties to them only - that is, in the present case, between Les Placements Gaber Inc. and the appellant -, and not against third parties. The respondent claims to be a third party - which is not in dispute - as already established by this Court in Liliane Fournier Jennewein ([27] 7-). The basis of the rule in art. 1234 of the Civil Code is, inter alia, the need for legal stability, and hence economic and social stability, in contractual relations.
Article 1212 of the Civil Code of Lower Canada and arts. 1451 and 1452 of the Civil Code of Quebec are the counterparts of art. 1321 of the Code Napoléon. The latter reads as follows:
[TRANSLATION]
Counter-letters can only be effective between the contracting parties: they have no effect against third parties.
[33] In Liliane Fournier Jennewein, in paragraph 4.03.5, the Court referred to the following comment by Beaudry-Lacantinerie:
[TRANSLATION]
However, the purpose of the lawmakers in art. 1321 was to prevent possible prejudice to the general public from the application of an unknown counter-letter, so their provision protects not only those against whom the act is directed with a fraudulent intention but also all those whose interests, assessed from the point of view of the apparent situation of the author, it happens to infringe.
[34] This purpose of protection enables third parties to rely on the effects of the apparent contract. The holder of the rights recognized in the counter-letter, namely the appellant, acted in good faith but must suffer the tax consequences of the simulated transaction and the indebtedness of Les Placements Gaber Inc. to the respondent.
[35] The terms of ss. 160(1), 160(2) and 160(3) of the Income Tax Act are clear. Any transfer of property between two persons not dealing at arm's length, when one of those persons owes tax, makes them jointly and severally liable for the amount owed to the Department of National Revenue.
As the notarial deeds are proof of their contents in the instant case and establish the transfer of the immovable from the appellant to Les Placements Gaber Inc., the appellant is liable for payment of the $22,215.52 ($1,530.46 + $20,685.06) ([5]) in tax owed by Les Placements Gaber Inc.
[36] It may be asked whether, if the facts here had occurred in another province where the Civil Code and counter-letters did not exist, the appeal would have been allowed. The answer is no, because the theory of estoppel by representation would be applied.
Conclusion
[37] The appeal is dismissed for the foregoing reasons.
Signed at Québec, Quebec, this 9th day of July, 1998.
"Guy Tremblay"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 30th day of December 1998.
Erich Klein, Revisor