Date: 20001005
Docket: 98-2777-IT-G
BETWEEN:
DEBRA RAPHAEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.T.C.C.
[1] The Appellant was assessed under subsection 160(1) of the Income Tax Act because the Minister of National Revenue concluded that property had been transferred to the Appellant by her husband at a time when the husband was liable to pay an amount under the Act. The Appellant has appealed from that assessment. The only issue is whether the Appellant has any liability under subsection 160(1) the relevant words of which are:
160(1) Where a person has ... transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person's spouse or ... a person who has since become the person's spouse ...
(b) ...
(c) ...
the following rules apply:
(d) ...
(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 total 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] In a recent decision of this Court (Doreen Williams v. The Queen; file no. 98-1604; July 24, 2000), Judge Hamlyn stated that there were four conditions to be met if subsection 160(1) were to apply:
(i) there must be a transfer of property;
(ii) the transferor and transferee are not dealing at arm's length;
(iii) there must be no consideration (or inadequate consideration) flowing from the transferee to the transferor; and
(iv) the transferor must be liable to pay an amount under the Act in or in respect of the year when the property was transferred or any preceding year.
[3] The Appellant married Ernest Raphael in May 1992. The alleged transfers occurred in 1993 and 1994 when the Appellant and Ernest were husband and wife. Both the Appellant and Ernest testified at the hearing of her appeal. In 1990, Ernest had been in the retail jewellery business for many years and had 44 stores across Canada. The stores were operated by one or more corporations in which Ernest was a shareholder. In the period 1991, 1992 and 1993, there was a serious recession in Canada. The jewellery business was hit particularly hard by the recession and Ernest's principal corporation became bankrupt. After the corporate bankruptcy, Ernest was personally at risk for several hundred thousand dollars because he had guaranteed certain corporate leases and loans. He was trying hard to avoid personal bankruptcy because he hoped to be in business again but he had few assets and many creditors.
[4] Ernest's bank advised him not to deposit any funds in his account because certain creditors had served garnishees on the bank and any funds so deposited would have been forfeited to creditors. Exhibits A-1 to A-5 are copies of statements of claim issued in the Ontario Superior Court by five different plaintiffs suing Ernest alone or together with a corporation concerning personal liabilities arising out of his corporation's bankruptcy. Four of these five claims were commenced in 1992. As a consequence of these and other claims, Ernest decided that he would not hold a bank account in his own name. At the same time, he wanted to pay certain creditors in order to avoid personal bankruptcy.
[5] At all relevant times, Ernest had a Registered Retirement Savings Plan ("RRSP") of which Mutual Life of Canada was the trustee. Ernest and the Appellant agreed that he would withdraw amounts from his RRSP; he would endorse the RRSP cheques in favour of the Appellant; she would deposit the RRSP cheques into her bank account; and she would pay out the RRSP amounts only upon Ernest's instructions to those persons whom he would designate. During 1993 and 1994, Ernest received $91,011.53 out of his RRSP (net of amounts that Mutual Life was required to withhold and remit). The RRSP cheques which were issued by Mutual Life payable to Ernest were endorsed by him to the Appellant and were deposited in her bank account. The following are the amounts which were so deposited in the Appellant's bank account:
|
1. March 29, 1993 |
$4,500.00 |
11. February 4, 1994 |
$4,500.00 |
|
2. April 1, 1993 |
$4,500.00 |
12. May 9, 1994 |
$4,500.00 |
|
3. August 6, 1993 |
$4,500.00 |
13. June 3, 1994 |
$4,500.00 |
|
4. November 16, 1993 |
$4,500.00 |
14. June 3, 1994 |
$4,500.00 |
|
5. November 24, 1996 |
$4,500.00 |
15. June 17, 1994 |
$4,500.00 |
|
6. December 6, 1993 |
$4,500.00 |
16. July 13, 1994 |
$4,500.00 |
|
7. December 9, 1993 |
$4,500.00 |
17. July 22, 1994 |
$4,500.00 |
|
8. December 17, 1993 |
$4,500.00 |
18. July 29, 1994 |
$4,500.00 |
|
9. December 17, 1993 |
$4,500.00 |
19. August 12, 1994 |
$4,500.00 |
|
10. December 23, 1993 |
$4,500.00 |
20. September 30, 1994 |
$4,500.00 |
|
21. October 11, 1994 |
$1,011.53 |
||
|
TOTAL |
$91,011.53 |
[6] When Ernest made the withdrawals from his RRSP and endorsed his cheques to the Appellant for deposit as reflected in the above table, he was liable to pay amounts under the Income Tax Act as listed in Schedule "A" to the Reply herein. The Appellant has not argued that Ernest's liability under the Act at the time of any endorsement of an RRSP cheque was less than the amount of that cheque. Accordingly, I will assume that, if the endorsement and delivery of an RRSP cheque by Ernest to the Appellant is a "transfer" within the meaning of subsection 160(1), Ernest was indebted under the Act for an amount exceeding any respective RRSP cheque at the time of its endorsement and delivery.
[7] Exhibit A-9 is a copy of the Appellant's passbook for her account no. 506014 at Canada Trust in Kitchener for the period December 1992 to July 1993. There are no deposits of RRSP cheques in this account but there are a number of automatic withdrawals of $513.52 at the end of each month to pay Ernest's premium on a Mutual Life policy which he was obliged to maintain for the benefit of his first wife. Exhibit A-8 is a copy of the Appellant's passbook for her account no. 1742 at the Toronto-Dominion Bank ("TD Bank") in Thornhill, Ontario (just north of Toronto) for the period June 1991 to March 1995. Many of the RRSP cheques for $4,500 can be identified as deposits to this TD Bank account. Also, the automatic withdrawals of $513.52 at the end of each month to pay Ernest's premium on his Mutual Life policy are continued in this account after the Canada Trust account was closed in July 1993.
[8] The Appellant was the only person authorized to write cheques or withdraw money from her TD Bank account no. 1742. The Appellant testified that she felt morally obligated to pay out money from the RRSP cheques only upon specific instruction from her husband, Ernest, because she regarded the funds as his. Also, she knew that he wanted them disbursed primarily to pay his creditors and hopefully to save him from personal bankruptcy.
[9] Exhibit A-6 is the Appellant's hand-written summary of the amounts she paid out in 1993 upon Ernest's instructions disbursing his RRSP cheques and other amounts. The total in Exhibit A-6 is $62,553. Exhibit A-7 is the Appellant's hand-written summary of the amounts she paid out in 1994 upon Ernest's instructions disbursing his RRSP cheques and other amounts. The total in Exhibit A-7 is $41,128. The aggregate of $103,682 for 1993 and 1994 exceeds the total amount of RRSP cheques listed in paragraph 5 above. Apparently, Ernest received unemployment insurance benefits in 1993 or 1994 and those UI cheques were also deposited in the Appellant's TD Bank account no. 1742. Therefore, the amounts in Exhibits A-6 and A-7 are not a precise reconciliation of the RRSP cheques deposited and the amounts paid out to particular creditors by the Appellant on Ernest's instructions. For example, Exhibit A-6 contains the following two entries:
Household Expenses 50% $1,560.00
Bell Canada, House Insurance.
Cable TV, cleaning lady
Food Expenses based on 50%
of an average food bill of $120/week $3,120.00
[10] The amounts in those two entries represent ordinary household expenses which the Appellant has simply allocated 50-50 as between herself and Ernest. I do not regard those amounts as paid to Ernest's creditors on his instructions. There are similar entries in Exhibit A-7. The Appellant explained that many of the amounts in Exhibits A-6 and A-7 were a consolidation of two or more amounts paid to a particular person.
[11] Coming back to Exhibit A-8, the passbook for the Appellant's account no. 1742 with the TD Bank, that account was not restricted to receiving RRSP cheques from Ernest. During 1993 and 1994, the Appellant was well employed as manager of a jewellery store earning a good salary. All of her salary cheques were deposited in account no. 1742 along with amounts she received from her father and other sources. It is apparent from examining Exhibit A-8 and listening to the Appellant's testimony that there was a blending of funds in account no. 1742: her salary cheques, amounts she received from other sources, RRSP cheques endorsed from Ernest, a few UI cheques endorsed from Ernest, etc. Similarly, there was a wide spectrum of persons paid out from that account including: certain creditors designated by Ernest, household expenses for the Appellant and Ernest, personal debts of the Appellant for clothing and credit cards, and some of Ernest's current expenses (e.g. dentist, renewal of driver's licence and vehicle plates, moving company to move Ernest from Kitchener to Toronto).
[12] In 1993 and 1994, the Appellant's employment as manager of a jewellery store provided the principal financial support for herself and Ernest. I believe the Appellant when she testifies that she felt a moral obligation to disburse amounts from Ernest's RRSP cheques only in accordance with his instructions. I also believe that she attempted to live up to that moral obligation. It is a fact, however, that the funds in account no. 1742 were so blended that it is not possible to trace the amounts from the RRSP cheques deposited in 1993 and 1994 to the payment of Ernest's creditors. Indeed, the entries in Exhibits A-6 and A-7 indicate that some amounts disbursed by the Appellant (i.e. household expenses) were used to pay Ernest's current expenses and not his creditors from the past. The last note in Exhibit A-6 states that certain other current expenses of Ernest (dry-cleaning, gasoline and car repairs) were paid by the Appellant in her capacity as principal family supporter.
[13] Having regard to the four conditions set out in paragraph 2 above, there is no doubt that the Appellant and Ernest as wife and husband were not dealing at arm's length under section 251 of the Act. Also, Ernest was liable to pay a significant amount under the Income Tax Act in respect of 1993, 1994 and prior years. Therefore, two of the conditions are satisfied. The remaining questions are whether there was a transfer of property; and if so, whether there was any consideration flowing from the Appellant to Ernest. Counsel for the Appellant argued that, with respect to the RRSP cheques, there was no transfer of property because the Appellant had a moral obligation to pay out those funds only upon Ernest's instructions. And if there was a transfer, the Appellant argued that there was consideration because Ernest had an obligation to support the family home and she, as the principal breadwinner, was being reimbursed for certain domestic expenses.
Was there a transfer? Was there consideration?
[14] When applying subsection 160(1) to particular circumstances, many judges have cited the Exchequer Court decision of Fasken Estate v. M.N.R., [1948] Ex. C.R. 580 in which Thorsen P. stated:
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 Appellant relies on a recent decision of this Court in Monique Leblanc v. The Queen, 99 DTC 410 in which Judge Hamlyn quoted the above passage from Fasken Estate. In Leblanc,the taxpayer's husband was diagnosed with a form of cancer in 1989 and, by 1993, he was unable to manage his affairs and required 24-hour care. From January to September 1993, cheques in the aggregate amount of $93,845 were paid out of an RRSP belonging to the husband and deposited in two bank accounts. The amount $84,933 was deposited in a joint account in the names of Monique Leblanc and her husband; and the amount $8,912 was deposited in an account in the name of Monique Leblanc alone. The Minister of National Revenue assessed Monique Leblanc under subsection 160(1) for the amount ($44,482) owing by her husband throughout 1993. She appealed. By the time her appeal was heard, her husband had died.
[15] Hamlyn J. accepted Monique Leblanc's argument that there was no transfer of money because she was an agent of necessity acting on behalf of her incapacitated husband; and because the money was used exclusively to discharge the husband's legal obligations. In the present case, Debra Raphael (the Appellant) was not an agent of necessity because Ernest was healthy. Also, the money from Ernest's RRSP cheques could not be traced exclusively to the discharge of his debts.
[16] Suppose that the money from Ernest's RRSP cheques could be traced exclusively to the payment of his pre-1993 creditors (i.e. no payments for current expenses). Would there be a "transfer of property" within the meaning of subsection 160(1)? To explore this question, I will assume a hypothetical situation in which (i) husband (H) tells wife (W) that he will endorse certain cheques to her only on condition that she deposit them in her new bank account and follow his instructions with respect to the disbursement of such funds; (ii) W accepts H's conditions; (iii) W opens a new bank account only for the purpose of receiving cheques from H; and (iv) many of H's cheques are so endorsed, deposited and disbursed. In that hypothetical situation, was there a transfer of property within the meaning of subsection 160(1)? If there was a transfer, was W's promise to accept H's conditions consideration for the transfer? Without that promise, H would not have endorsed any cheques to W.
[17] In the above hypothetical situation, I would conclude that there was a transfer of property from H to W "directly or indirectly, by means of a trust or by any other means whatever". The more interesting question is whether W's promise was consideration for the transfer. If it was, then any two persons not dealing at arm's length could avoid the operation of section 160 by establishing a similar situation. There is, however, something special about two persons who are not in fact dealing at arm's length. Between them, there are feelings of care, reliance, empathy, understanding, and often love which are implicit in the relationship. Such persons do not need formal agreements, written or oral, as strangers do. Such persons usually know and want to respond to each others wishes. Between such persons, it is difficult for a promise to be "consideration" as the open market knows consideration or as it is know between strangers. I would not regard W's promise to H as consideration within the meaning of subsection 160(1).
[18] Although I would not regard a compliant spousal promise as consideration, I think there can be valuable consideration passing between two persons who are not in fact dealing at arm's length. For example, a wife with truly independent financial resources lends to her husband a significant amount of money in circumstances which could be easily proved, and the husband promises to repay. If the husband later repays his wife's loan (a transfer of property) at a time when he owes money to the Minister under the Act, and if the Minister assesses the wife under section 160, I think that the proof of the wife's prior loan could be valuable consideration for her husband's subsequent transfer of property.
[19] In Medland v. The Queen, 98 DTC 6358, the Federal Court of Appeal stated (at page 6362) that the object and spirit of subsection 160(1) was to prevent a taxpayer from transferring property to his/her spouse in order to thwart the Minister's efforts to collect from the taxpayer. When applying subsection 160(1) to a particular situation, why should it make any difference how the property is used if it has been transferred to a spouse in accordance with the often cited test in Fasken Estate? If the transferee spouse uses the property (i.e. money) to pay the debts of the transferor, that use may reflect a private arrangement between the transferor and the transferee. Such private arrangement may also defeat the object and spirit of the subsection if the two spouses decide, as between themselves, which creditors will be paid and which will not.
[20] In Kathy A.D. White v. The Queen, 96 DTC 1552, Hamlyn J. described a situation similar to this appeal when he stated at page 1553:
The Appellant contends that the amounts which were deposited were not "transfers" within the normal usage of the word since the said amounts were not for her benefit, but were rather for the purpose of paying for her husband's business and personal bills as well as for certain living expenses for his family. The Appellant further contends that such bills were in fact always paid and that she never had any discretionary right to use these funds other than as described above.
Notwithstanding that claim by Kathy White, Hamlyn J. dismissed her appeal in the following words:
The Appellant argues that the money could not be spent at her discretion and had to be used to pay for her husband's business and personal bills as well as to pay for such expenses as food. I do not accept the Appellant's assertion. Moreover, this argument does not aid the Appellant's thesis to the effect there was no transfer under subsection 160(1) of the Act. Whatever agreement the parties may have had between them, in the absence of any proven grounds to bring the matter outside subsection 160(1) of the Act, has no bearing whatsoever on the Minister or any other third party to the transfer. That some of the money had to have been used to support the Appellant's husband's affairs only lends credence to the view that the transfer was designed to evade the payment of outstanding taxes.
In summary, I conclude from the evidence, the personal checking account of the Appellant was set up to avoid the potential seizure of funds by Revenue Canada. The nature and character of the transfers were absolute vesting control in the Appellant and without contractual consideration.
[21] In Fanny Fiederer v. The Queen, 96 DTC 1858, Bowman J. decided that, of $19,629.62 transferred to Mrs. Fiederer by her husband, the sum of $9,124.35 was a reimbursement of amounts paid by Mrs. Fiederer on her husband's behalf and, to that extent, consideration was given by Mrs. Fiederer for part of the transfer. Otherwise, Mrs. Fiederer's appeal was dismissed. In this appeal, Debra Raphael has not claimed that any precise amount is a reimbursement to her for a payment made on Ernest's behalf.
[22] Counsel for the Appellant argued that it is too simplistic to conclude that there was a transfer in law just because the transferee had sole legal control of the transferred property. Having regard to the often-cited description of "transfer" in Fasken Estate and the decision of the Federal Court of Appeal in Medland, I think it is not too simplistic. The decided cases persuade me that it is relatively easy for a court to determine that there was a transfer within the meaning of subsection 160(1). To put the transfer issue in plain language, a private arrangement between the Appellant and Ernest may impose a moral obligation on the Appellant but that moral obligation does not avoid or prevent the application of subsection 160(1). I find that the face value of Ernest's RRSP cheques was transferred to the Appellant in 1993 and 1994.
[23] The Appellant relies on two decisions of this Court to establish a form of consideration flowing from the Appellant to Ernest. In Diane Ferracuti v. The Queen, 99 DTC 194, the matrimonial home was owned by Diane but was subject to a mortgage held by London Life Insurance Company and guaranteed by her husband. From February 1990 to June 1994, certain corporations in which the husband was a substantial shareholder made payments to the mortgagee (London Life) and other persons on the husband's direction. The significant payments were:
London Life (mortgagee) $94,929
Etobicoke Hydro (home use) 11,416
Municipal Taxes (home) 4,398
Diane Ferracuti was assessed under subsection 160(1) with respect to all such payments made on her husband's direction. Payments on the mortgage increased Diane's equity in the matrimonial home, and payments for hydro and municipal taxes permitted continuous occupation of the home. Also, payments on the mortgage decreased the husband's risk as guarantor.
[24] Judge McArthur held that the payments made on Mr. Ferracuti's direction did result in a transfer of property to the wife, Diane. He then had to consider whether there was valuable consideration for the transfer. He referred to the decision of the Supreme Court of Canada in Pettkus v. Becker, [1980] 2 S.C.R. 834 and stated that section 160 is similar to the concept of unjust enrichment. After citing certain sections of the Ontario Family Law Act, he concluded that the husband's legal obligation to provide shelter for his family was a "juristic reason" for making payments with respect to the matrimonial home. Judge McArthur also relied on the decision of this Court in Denise Michaud v. The Queen (see below). Accordingly, Diane Ferracuti's appeal was allowed with respect to the three payments listed in paragraph 23 above.
[25] I would not invoke the principle of unjust enrichment when construing or applying section 160 of the Act. In Pettkus v. Becker, Ms. Becker claimed unjust enrichment after her 19-year relationship with Mr. Pettkus ended. There was a real dispute between Ms. Becker and Mr. Pettkus when the claim was made and there was at least the possibility of unjust enrichment. The Supreme Court of Canada recognized a constructive trust in order to grant some relief to Ms. Becker. A constructive trust is an equitable remedy. In this appeal, there is no dispute between the Appellant and Ernest. In fact, they were acting in concert in the endorsement, deposit and disbursement of his RRSP cheques. Their joint conduct permitted Ernest to choose which creditors would be paid and which would be left to wait.
[26] In Denise Michaud v. The Queen, 99 DTC 43, Denise and her husband separated in December 1995. Between January 1994 and November 1995, the husband transferred into Denise's bank account amounts totalling $27,000 when the husband was liable to pay an amount under the Act. Denise owned the family home and the amounts transferred ($27,000) were used to make the mortgage payments on the home. Denise was assessed under section 160 for the amount owing by her husband at the time of the transfers. When deciding the appeal by Denise Michaud, Judge Lamarre Proulx joined the concepts of transfer and consideration and held that a payment on a mortgage on a family home was "not in the nature of a transfer of property made without valuable consideration if the person making it does so in performing the legal obligation to provide for his or her family's needs". The facts in Michaud are easily distinguished from the RRSP cheques endorsed by Ernest to the Appellant.
[27] With respect to the decisions in Ferracuti and Michaud, the domestic obligations of a spouse or parent to provide necessities of life like food, clothing and shelter are very real in the sense that they are recognized in courts of law where such obligations are enforced. Those same domestic obligations, however, cannot be "consideration" within the meaning of section 160 because subparagraph 160(1)(e)(i) employs these specific words:
" ... the fair market value at the time of the consideration given for the property".
A domestic obligation may be quantified in a monetary amount for the purposes of enforcement but that monetary amount does not mean that the domestic obligation has a fair market value. And even if the domestic obligation did have a fair market value, it is not value "given" by the transferee "for the property".
[28] Domestic obligations arising out of a family relationship are intensely personal and should not be used as "consideration" to camouflage transfers of property. In particular, I would conclude that a payment by one spouse to reduce the principal amount of the mortgage on a family home owned by the other spouse is a transfer of property without valuable consideration within the meaning of subsection 160(1). In my opinion, the use of an equitable doctrine is not helpful (and perhaps is not permitted) when construing a taxing statute. In most insolvency statutes, there are restraints which prevent creditors from seizing food out of the hands of a hungry child. Such restraints are better left to insolvency law than to tax law.
[29] In this appeal, there was an effective transfer from Ernest to the Appellant, and there was no consideration flowing from the Appellant to Ernest. The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 5th day of October, 2000.
"M.A. Mogan"
J.T.C.C.