Date: 20021129
Docket: 1999-3800-IT-G
BETWEEN:
MARY ANNE COULSON LAFRAMBOISE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] These are appeals from assessments made under section 160 of the Income Tax Act (the "Act"), the notices of which are dated November 24 and December 9, 1998. Through those assessments, the Minister of National Revenue (the "Minister") claimed the amounts of $71,894.59 and $90,196.18 respectively from the appellant.
[2] In making the assessments, the Minister assumed the facts stated in subparagraphs (a) to (e) of paragraph 15 of the Amended Reply to the Notice of Appeal (the "Reply"). Those subparagraphs read as follows:
[TRANSLATION]
(a) During the 1993 to 1997 taxation years, Dr. Guy Laframboise was the appellant's spouse.
(b) In the 1994, 1995, 1996 and 1997 taxation years, the Régie de l'assurance maladie du Québec deposited amounts earned by Dr. Guy Laframboise totalling $162,090.77 in the appellant's bank account, folio 001916, at the Luskville Caisse populaire Desjardins according to the following schedule:
|
In 1994: |
$37,062.25 |
|
From January 1 to June 20, 1995 |
$25,019.76 |
|
From June 30 to December 31, 1995 |
$30,896.51 |
|
From January 1 to December 31, 1996 |
$59,299.67 |
|
From January 14 to March 25, 1997 |
$9,812.58 |
(c) The appellant gave no consideration for these cash transfers.
(d) The total of all the amounts which the transferor, Dr. Guy Laframboise, was required to pay under the Income Tax Act during or in respect of the taxation years in which the funds were transferred or in any preceding taxation year, amounted, at December 31, 1997, to $254,544.93, allocated as follows:
|
Liability for 1993 |
$57,665.55 |
|
Liability for 1994 |
$64,464.65 |
|
Liability for 1995 |
$87,458.91 |
|
Liability for 1996 |
$41,811.56 |
|
Liability for 1997 |
$3,144.26 |
(e) The appellant and Dr. Guy Laframboise are jointly the severally liable to pay the amounts of $71,894.59 and $90,196.18, which are the lesser of the amount by which the fair market value of the funds transferred exceeds the fair market value of the consideration given for those funds and the total of the amounts that Dr. Laframboise was required to pay under the Income Tax Act during or in respect of the taxation years in which the funds were transferred or in any preceding taxation year.
[3] In 1998, the appellant was thus assessed a total amount of $162,090.77 under section 160 of the Act. That amount represents funds deposited by the Régie de l'assurance maladie du Québec ("RAMQ") in account number 1916 at the Luskville Caisse populaire Desjardins. These funds were amounts earned by the appellant's spouse, Dr. Guy Laframboise, as a physician in the years 1994 to 1997 inclusive.
[4] The total amount of the deposits was not disputed, nor was Dr. Laframboise's tax liability of $254,544.93 for the years from 1993 to 1997. Actually, that tax liability resulted from reassessments disallowing the business losses claimed by Dr. Laframboise in respect of the activities of a farm and an equestrian centre operated on the appellant's property in Luskville, Quebec.
[5] In May 1970, the appellant acquired a farm of approximately 190 acres in Luskville for $55,000. Dr. Laframboise paid $5,000 in cash, and the balance was financed by the vendor. The purchaser indicated in the contract is the appellant "in trust". In a notarial declaration dated August 9, 1979, the appellant stated that the purchase "in trust" had been made for herself personally and that she was the sole owner of the farm acquired in 1970.
[6] Shortly after the acquisition, the Coulson-Laframboise family moved to the farm and established there an equestrian centre operated under the name "Ferme de la Montagne - Farm of the Mountain". Its activities were directed by the appellant, who had good knowledge of horse breeding and the training of horses and riders for equestrian sports. These activities were financed out of the income produced from boarding horses and from the training. The losses were financed out of Dr. Laframboise's professional income.
[7] Over the years, there were a number of improvements, some renovations and the addition of buildings on the farm, financed at least in part through two loans which the appellant took out from a corporation owned by her family.
[8] Over more than 25 years, the activities of the farm and the equestrian centre did nothing but generate losses, which Dr. Laframboise claimed against the income from his medical practice. The losses for the years from 1993 to 1996 amounted to $55,151, $62,438, $51,040 and $55,643 respectively. However, the loss that Dr. Laframboise claimed in his income tax return for 1996 was only $8,750.
[9] Following an audit, the losses claimed for 1993 to 1997 were disallowed, which resulted in a tax liability for Dr. Laframboise of $254,544.93 as at December 31, 1997.
[10] Shortly after the assessments were made, Dr. Laframboise, being unable to discharge that liability, made an assignment of his property under the Bankruptcy and Insolvency Act on April 1, 1997.
[11] Although, at the time, the farm as a whole was worth over $880,000, no assets relating to it appear in Dr. Laframboise's statement of affairs, since the titles are in the appellant's name. Furthermore, while Dr. Laframboise claims to be the actual owner of the farm and although it was he who financed its losses over the years and claimed the operating losses in all those years, no document relating to the bankruptcy signed by Dr. Laframboise himself contains any reference whatever to the farm and the equestrian centre being operated by him (see Exhibit R-1, Tab 16). First of all, the statement of affairs signed and submitted by him is that of a non-business bankrupt and shows no assets related to the farm or equestrian centre. In the questionnaire attached to the statement, the question "Have you been self-employed in the last five years?" is answered "Yes", and the explanation given at the bottom of the page in relation to that affirmative answer is "As a medical doctor", and that is also what his occupation is described as being. As regards the monthly summary of revenue and expenditure, it contains no reference to anything whatever even remotely related to the farm or the equestrian centre.
[12] Furthermore, in his testimony, Dr. Laframboise stated the following concerning his inability to pay the tax liability arising from the reassessments:[1]
. . .
Q. Why you say that you cannot . . . you could not face the amount of the reassessment?
A. Pardon?
Q. Why weren't you able to pay for the amount claimed by . . .
A. Ah! I didn't have the money to pay for it.
Q. What about other assets?
A. I had no other assets, I had no other assets.
Q. But the building, the premises, the . . .
A. That was all on the farm, I had no other assets at all.
Q. And who owns the farm?
A. The farm is mine but it's in my wife's name on the advice of my accountants. Way back when we started.
. . .
[13] Discharged from his bankruptcy in February 1998 (see Exhibit R-1, Tab 24), Dr. Laframboise made a proposal to his creditors under the Bankruptcy and Insolvency Act in March 2001 (Exhibit R-1, Tab 26). Here again, in the statement of affairs of a non-business debtor, signed by him, Dr. Laframboise reported no assets relating in any way to the Farm of the Mountain. To the question as to whether he had "operated a business within the last 5 years", he answered "No". In addition, in the monthly budget showing income and expenses which he submitted, there is absolutely nothing relating to the Farm of the Mountain's activities.
[14] All the same, Dr. Laframboise himself claimed Farm of the Mountain's operating losses every year, and more particularly from 1993 to 1997. What is more, although he said he had no assets, he even claimed capital cost allowance, particularly in 1993, 1994 and 1995 (see Exhibit R-1, Tabs 18, 19 and 20). I note, however, that it was the appellant who claimed both the business loss and a restricted farm loss (Exhibit R-1, Tab 17) for 1998.
[15] In addition, a number of documents filed in evidence during the cross-examination of Dr. Laframboise and the appellant, and during the testimony of Pierrette Joanisse, director of member services at the Masham-Luskville Caisse populaire, and of Raymond Allard, a collection agent with the Canada Customs and Revenue Agency, contain significant indications that, legally, the appellant is and always was not only the owner of Farm of the Mountain but also sole proprietor of the business operated there.
[16] First, a document dated March 19, 1993, and entitled "Feuille de route - Dossier de compte courant" ("Record Sheet - Current Account File"), that is from the Luskville Caisse populaire Desjardins and in the name of Farm of the Mountain, states in relation to folio 1445 that the appellant was the sole proprietor of the equestrian centre, that she had been in business since April 1980 and that another account, folio 1916, was also open in relation to that business (Exhibit R-1, Tab 6).
[17] A personal balance sheet in the appellant's name, dated March 20, 1996, and provided to the same institution, states in relation to Farm of the Mountain that the appellant was its "sole owner" (Exhibit R-1, Tab 8). A loan application to the Caisse dated April 24, 1996, in the name of Farm of the Mountain indicates that the appellant was its 100 percent owner and that she had also taken out loans in January 1992, May 1993 and March 1996 (Exhibit R-1, Tab 7). In addition, a form completed by the appellant on April 9, 1996 and submitted to the Inspector General of Financial Institutions certifies that she was operating a sole proprietorship, namely a horse farm, under the name Farm of the Mountain of Pontiac (Exhibit R-1, Tab 5). Also among the documents filed by the respondent is one from Axa Boréal Assurances Agricoles Inc. referring to an insurance policy in the appellant's name covering not only all the farm buildings and equipment but also any interruption of the business's activities (Exhibit R-1, Tab 25).
[18] Although both the appellant and Dr. Laframboise attempted to downplay the significance and importance of the documents filed in evidence by the respondent through vague, confusing and often contradictory explanations, and in particular by shifting responsibility for the preparation of certain documents onto others, including their accountant and the trustee in bankruptcy, the whole of the evidence adduced leads to only one conclusion: that the appellant herself, not Dr. Laframboise, owned the equestrian farm and operated it under the name Farm of the Mountain.
[19] Let us look now at who held account 1916 at the Caisse populaire and at how the funds transferred by RAMQ in payment of professional fees earned by Dr. Laframboise during the period from January 1, 1994, to March 25, 1997, were used.
[20] First, it is important to note that the form or card opening account 1916 at the Caisse populaire was not filed in evidence. However, the preprinted cheques filed in evidence for 1994, 1995 and 1996 that were used in relation to that account show the two names GUY/MARY ANNE LAFRAMBOISE until approximately August 5, 1996, whereas the new series of cheques commencing with number 001 was in the name of "FARM OF THE MOUNTAIN - FERME DE LA MONTAGNE". Furthermore, the monthly transaction statements prepared by the Caisse populaire from 1994 to 1997 (Exhibit A-1) are also in the names of both Guy and M.A. Laframboise for 1994 and 1995 and until March 1996. For April 1996, the statement is in the name of "FARM OF THE MOUNTAIN - FERME DE LA MONTAGNE", and subsequently, until March 31, 1997, the statements are in the name of "FARM OF THE MOUNTAIN PONTIAC - FERME DE LA MONTAGNE PONTIAC".
[21] It can be seen from the testimony of Dr. Laframboise and the appellant that the latter handled everything: the management of the farm and the equestrian centre and of their domestic affairs as well. Furthermore, all or nearly all of the cheques filed in evidence in relation to account 1916 (see Exhibits A-2 to A-5) bear her signature. However, in her testimony, the appellant admitted that she kept no separate accounts with respect to the management of the commercial activities. A document presented as a cash disbursements journal for account 1916 at the Caisse populaire for each of the years 1994 to 1997, prepared by the appellant's accountant (Exhibits A-2 to A-5), moreover confirms that account 1916 was used to pay both expenses relating to the commercial operation and those of a purely personal nature such as food and clothing. It should be noted that, even after the name of the account holder was changed on April 1, 1996, the account was used to pay both the expenses relating to the farm's operation and the personal expenses of the Coulson-Laframboise household. In fact, in the document prepared by the appellant's accountant for each year, several hundreds of cheques, withdrawals and transfers are classified under some 10 headings, with a brief explanation of each transaction; these explanations are far from always being satisfactory with regard to the actual use of the funds. For example, for cash withdrawals, which are classified under the heading "Guy & M.A.", the explanation provided is simply [TRANSLATION] "Other joint expenses".
[22] In her testimony, the appellant said she agreed with these documents, which were apparently prepared by her accountant prior to discovery, clearly for the purpose of establishing a little order where there had been none and separating expenses relating to the operation of the equestrian farm from strictly personal expenses, namely the common expenses of the Coulson-Laframboise household, those of either of the spouses or those identified as relating to the house. In cross-examination, the appellant provided a few brief explanations regarding a limited number of points on which she had been examined; this did not allow of any serious challenge of a certain number of dubious expense items included in total personal expenses rather than in total expenses relating to the operation of the farm. Counsel for the appellant grouped together all the personal expenses classified under the headings [TRANSLATION] "House", "Guy & M.A.", "Guy" and "M.A." and characterized them as a whole as "living expenses". Moreover, it is important to note that the appellant was unable to reconcile in any way whatever the total expenses entered under the headings [TRANSLATION] "Barn" and [TRANSLATION] "Farm" as well as [TRANSLATION] "Transfer-Folio 1445" for each year with the total expenses claimed by Dr. Laframboise in respect of the operation of the farm in his income tax returns for the corresponding years.
[23] In his Notes and Authorities, at pages 5 and 6, counsel for the appellant summarizes his position as follows:
[TRANSLATION]
1. Until April 1996, the amounts were not transferred to Mrs. Laframboise by Dr. Laframboise but were kept by Dr. Laframboise as his exclusive property, with the exception of an amount of $55,352.33 for the period following April 1996, when the account ceased to be a joint account and became an open account of "Farm of the Mountain";
2. As to an amount of $129,663.82, it is an amount that was transferred in the discharge by Dr. Laframboise of his obligation under the Civil Code of Quebec to pay living expenses as the spouse of Mary Ann [sic] Laframboise, the whole constituting valuable consideration of a value equal to or greater than the said amount transferred;
3. As to the amounts disbursed for the operation of the farm business, they are amounts that were managed by Mrs. Laframboise as the person responsible for the operation of Dr. Laframboise's farm business, and she in no way benefited from the said amounts for personal purposes but rather was given the responsibility for the management of those amounts as manager of Dr. Laframboise's affairs, that is, of his farm business.
[24] The position of counsel for the respondent is summarized in the following submissions, which appear at pages 13 ff. of their written argument:
[TRANSLATION]
(A) Farm of the Mountain was the holder of account 1916 at the Caisse during the period from January 1, 1994, to March 31, 1997
. . .
(B) The appellant is the owner-operator of Farm of the Mountain
. . .
(C) The deposit of Dr. Laframboise's professional fees in account 1916 constituted a transfer of property to the appellant in accordance with section 160 of the Income Tax Act
. . .
(D) The appellant paid no consideration for the deposits made in account 1916.
[25] In fact, counsel for the appellant contends that Dr. Laframboise was the owner-operator of Farm of the Mountain and that the appellant was only its manager. In counsel's view, the deposit by RAMQ of amounts belonging to Dr. Laframboise was made into an account that was a joint account from January 1, 1994, to March 31, 1996, then, until March 1997, into an account of Farm of the Mountain that belonged to him. All the amounts thus paid were thus used by Dr. Laframboise either to pay the couple's "living expenses", in the performance of his obligations under the Civil Code of Quebec, or to operate his own farm business, which was merely managed by the appellant. In the circumstances, according to counsel, there was no transfer to the appellant without consideration and as a consequence section 160 of the Act is inapplicable in the instant case.
[26] Counsel for the respondent contend that Farm of the Mountain belonged to the appellant and that account 1916 at the Caisse populaire, of which Farm of the Mountain was the holder from 1994 to 1997, belonged to the appellant as well. As the account was used to finance the activities of the farm and the equestrian centre and since the appellant was unable to reconcile the total disbursements under the headings "Farm", "Barn" and "Transfer-Folio 1445" (that account also being associated with the operation of the business) with the expenses claimed by Dr. Laframboise in respect of the operation of Farm of the Mountain, they conclude at page 11, paragraph 42, of their written argument that [TRANSLATION] "the appellant has been unable to prove that a portion of the professional fees deposited into account 1916 represented Dr. Laframboise's contribution to family expenses."
[27] Analysis of the evidence adduced leads me to conclusions different from those argued for by counsel for the parties.
[28] First, contrary to the argument of counsel for the appellant, I find, for the reasons explained in detail above, that the evidence shows on a balance of probabilities that the appellant was the owner-operator of Farm of the Mountain during the period in issue. Second, contrary to the argument of counsel for the respondent, account 1916 at the Caisse populaire was not an account belonging exclusively to Farm of the Mountain and thus to the appellant; at least, prior to April 1, 1996, it was not. It was in fact a joint account of Dr. Laframboise and the appellant. In my view, it is only as of April 1, 1996, when the account changed holders and was put in the name of Farm of the Mountain, that it can be said to have belonged to the appellant.
[29] Third, contrary to what counsel for the respondent claim, evidence was in fact adduced that account 1916 was used, regardless of the period being considered (that is to say, in the period from 1994 to March 31, 1996, and subsequently in the period from April 1, 1996, to March 31, 1997), to pay both the expenses relating to the farm operation and those that may be characterized as living expenses of the Coulson-Laframboise household. All the documents filed as Exhibits A-2 to A-5 leave no doubt on this point, and although, as I have suggested above, the respondent could have specifically disputed the classification by the appellant's accountant of a certain number of specific expenses, she did not do so. Counsel for the respondent instead emphasized that the appellant was unable to reconcile all the expenses shown under the headings "Barn" and "Farm" and "Transfer-Folio 1445" with respect to account 1916 for each year with the total expenses claimed by Dr. Laframboise in respect of the operation of the farm for the corresponding years. I note here that it would have been difficult to do such a reconciliation with account 1916 alone, since the documents filed in evidence by the respondent established that another account, account 1445, was also used for the operation of the business, and no document from the Caisse populaire was filed in evidence to establish the deposits into and withdrawals from that account.
[30] It is difficult to claim that the deposit in a joint bank account of certain sums belonging to a taxpayer constitutes a transfer of property to the taxpayer's spouse, who is also a holder of the account, where these sums are used to pay the couple's living expenses, which may be characterized as "expenses of the marriage". The obligation of spouses to contribute towards those expenses in proportion to their respective means is clearly stated in article 396 of the Civil Code of Quebec. Where a joint bank account is used for a number of purposes or to pay a number of types of expenses, the problem is to identify correctly the expenses that may be considered as "expenses of the marriage". In the instant case, account 1916 at the Caisse populaire was a joint account during the period from January 1, 1994, to March 31, 1996. Despite the fact that the appellant's accountant classified the expenses under some 10 different headings, they in fact represent either expenses related to the operation of the farm or expenses which were personal or living expenses of the Coulson-Laframboise family. Despite the change that occurred on April 1, 1996, when account 1916 was put in the name of Farm of the Mountain, it continued to be used to pay those two types of expenses, and the problem here again is to determine correctly those that belong to one class rather than another. As I have mentioned above, the assignment of the expenses, taken individually, to one class rather than another or the fact that some may rightly be characterized as "living expenses" or "expenses of the marriage" were not disputed by the respondent.
[31] According to the documents filed in evidence by the appellant (Exhibits A-2 to A-5), total disbursements from account 1916 from January 1, 1994, to March 31, 1997, amounted to $457,321.41. Of that total, counsel for the appellant established that $129,663.82 or 28.35 percent represented "living expenses". The balance would thus be the total amount of expenses attributable to the operation of the farm.
[32] As neither party was able to establish the exact or even priority use of the $162,090.77 deposited by RAMQ in account 1916 at the Caisse populaire-that is, whether it was used for the operation of the farm or to pay the living expenses of the Coulson-Laframboise household-I find that 28.35 percent or $45,952.73 of the amounts so deposited was used to pay "living expenses" and that the balance of $116,138.04 went towards paying the operating expenses of the farm, which belonged to the appellant.
[33] As a consequence of the foregoing, I find that the total amount assessed of $162,090.77 should be reduced to $116,138.04. Having regard to the evidence adduced, this reduced amount, in my view, is the only amount that can be the subject of an assessment under section 160 of the Act as representing a transfer without consideration from Dr. Laframboise to the appellant for the operation of the farm belonging to the latter.
[34] The appeal is allowed and the assessments of November 24 and December 9, 1998, are referred back to the Minister for reconsideration and reassessment of a total amount of $116,138.04. As the assessments are in large part confirmed, the respondent is entitled to her costs.
Signed at Ottawa, Canada, this 29th day of November 2002.
|
"P. R. Dussault" |
J.T.C.C.
COURT FILE NO.: 1999-3800(IT)G
STYLE OF CAUSE: Mary Anne Coulson Laframboise
and The Queen
PLACE OF HEARING: Montreal, Québec
DATES :
HEARING: June 25, 2002
APPELLANT'S ARGUMENTS
AND AUTHORITIES: August 28, 2002
RESPONDENT'S WRITTEN
ARGUMENTS: October 2, 2002
REASONS FOR JUDGMENT BY: The Hon. Judge P.R. Dussault
DATE OF JUDGMENT: November 29, 2002
APPEARANCES:
Counsel for the Appellant: Serge Fournier
Counsel for the Respondent: Nathalie Labbé
Yannick Houle
COUNSEL OF RECORD:
For the Appellant:
Name: Serge Fournier
Firm: Brouillette, Charpentier, Fortin
Montreal, Québec
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3800(IT)G
BETWEEN:
MARY ANNE COULSON LAFRAMBOISE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 25, 2002, at Montreal, Quebec, by
the Honourable Judge P.R. Dussault
Appearances
Counsel for the Appellant: Serge Fournier
Counsel for the Respondent: Nathalie Labbé
Yanick Houle
JUDGMENT
The appeals from the assessments made under section 160 of the Income Tax Act, the notices of which are dated November 24 and December 9, 1998, are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment of a total amount of $116,138.04. As the assessments are in large part confirmed, the respondent is entitled to her costs, the whole in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of November 2002.
|
"P. R. Dussault" |
J.T.C.C.