Susan Jane Medland v. Her Majesty the Queen, [1997] 1 CTC 2702 (Informal Procedure)

Garon J.T.C.C.: — This is an appeal from an assessment dated December 22, 1995 issued by the Minister of National Revenue pursuant to section 160 of the Income Tax Act. By this assessment, the Minister of National Revenue assessed tax for the sum of $13,321.69 and interest in the amount of $1,897.87 in respect of transfers of property made by Mr. John Medland, the Appellant’s spouse. These transfers of property were in the nature of payments made by Mr. Medland to the mortgagee from September 28, 1990 to August 31, 1993 in respect of the principal of a mortgage on the Appellant’s residence.

A “Statement of Agreed Facts”, to which various documents were appended, together with a document entitled “Statement of Agreed Facts (Addendum)” were filed at the hearing of this appeal.

The body of both the Statement of Agreed Facts and of the Statement of Agreed Facts (Addendum) reads as follows:

STATEMENT OF AGREED FACTS

For the purposes of this action, the parties hereto, by their undersigned solicitors, agree to the following facts:

1. The Appellant, Susan Jane Medland, and her spouse John Medland (“Mr. Medland”), reside in Surrey, British Columbia.

2. On September 18th ,1985, the Appellant and Mr. Medland purchased a residence at 14582 — 18th Avenue, Surrey, British Columbia (the “Property”) for a purchase price of $115,000.00. A copy of the Agreement of Purchase and Sale is attached as Tab I hereto.

3. At all material times, from September 18th, 1985 until April 8th, 1987, the Appellant and Mr. Medland held the Property as joint tenants. A copy of the Transfer of an Estate in Fee Simple is attached as Tab 2.

4. The purchase of the Property was financed, in part, using the proceeds of a mortgage loan of $102,500.00 granted by the Toronto-Dominion Bank to the Appellant and Mr. Medland as joint mortgagors for a term of one year. The mortgage was secured by the Property. A copy of the mortgage is attached as Tab 3.

5. The Appellant and Mr. Medland renewed the mortgage for a series of one-year terms for the periods October 1st to September 30th, 1986-7, 1987-8, and 1988-9. Copies of the Mortgage Renewal Agreements for those three renewal periods are attached as Tabs 4, 5 and 6, respectively.

6. In 1989 and 1992, the Appellant and Mr. Medland renewed the mortgage for three and five year terms, respectively. Copies of the Mortgage Renewal Agreements for those renewal periods are attached as Tabs 7 and 8, respectively.

7. On April 8, 1987, the Appellant and Mr. Medland, as joint tenants, transferred the property to the Appellant alone. At all material times thereafter, the Appellant, alone, held title of the property. A copy of the Transfer of an Estate in Fee Simple is attached as Tab 9.

8. Mr. Medland made all mortgage payments in the years in question. The sum of the mortgage payments made by Mr. Medland by cheque from September 28, 1990 to August 31, 1993 was $39,979.74 as set out in the schedule in Tab 10.

9. The sum of the mortgage payments made by Mr. Medland from September 28, 1990 to August 31, 1993 that were attributable to the principal of the mortgage was $13,321.69 as set out in the schedule in tab 10.

10. Mr. Medland filed his 1990, 1991, 1992 and 1993 taxation returns but did not pay the full amount of his tax liability set out therein. The Minister of National Revenue (the “Minister”) assessed the said returns as set out in tab 11. Mr. Medland did not object to nor appeal the assessments for those taxation years.

11. On June 10, 1994 the Minister assessed the Appellant $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, the Income Tax

Act-British Columbia and section 36 of the Canada Pension Plan, and

b) the value of property allegedly transferred by Mr. Medland to the Appellant when he made the mortgage payments referred to in paragraph 8 herein without consideration paid by the Appellant to Mr. Medland.

A copy of the notice of assessment is attached at Tab 12.

12. By notice dated September 4, 1994, the Appellant objected to the assessment (tab 13) and by notice dated December 22, 1995 the Minister reassessed the Appellant thereby reducing the amount assessed from $38,857.48 to $15,219.56 on the basis that the value of the property allegedly transferred to the Appellant by Mr. Medland without consideration was not more that the sum of the mortgage payments attributable to the principal, namely $13,321.69. A copy of the reassessment is attached as tab 14.

13. For the purposes of subsection 160(l)(e) the Appellant agrees that she provided no consideration to Mr. Medland.

14, At no time did the Mortgagee make a demand for payment or advise the Appellant or Mr. Medland that the mortgage was in default.

Statement of Agreed Facts (Addendum)

For the purposes of this Appeal, the parties hereto, by their undersigned solicitors, agree to this addendum to the Agreed Statement of Facts.

1. Mr. Medland has been the spouse of the Appellant at all relevant times in this Appeal.

2. Mr. Medland is indebted to the Minister in excess of $49,000.00 as of June 10, 1994, in respect of his 1990, 1991, 1992 and 1993 taxation years, of which $24,288.83 of this amount was in respect of federal taxes.

3. 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.

4. The Minister of National Revenue assessed Mr. Medland’s income tax returns as filed for the years 1990, 1991, 1992 and 1993.

Appellant’s submissions

It was submitted that Mr. Medland did not transfer property to the Appellant. The mortgage payments were made by Mr. Medland directly to the Bank, the mortgagee. Also, Mr. Medland paid his own liability to the Bank. Thus, there was no indirect transfer.

Counsel for the Appellant stressed that following the transfer by the Appellant and Mr. Medland of the subject property to the Appellant alone on April 8, 1987, Mr. Medland remained fully liable to the Mortgagee, as appears from the mortgage renewal agreements in the same way as he was under the original mortgage agreement dated September 18, 1985. Mr. Medland’s liability under the mortgage in question is joint and several with the Appellant.

Counsel for the Appellant pointed out that as result of the mortgage payments made during the period referred to earlier by Mr. Medland to the Bank, no additional property vested in her; she already was the sole owner of the equity of redemption of the subject property. Nor was there a transfer of the economic interest in the property to the Appellant. In the same vein, it was further argued that if a benefit was conferred on the Appellant, it was not covered by section 160 of the Income Tax Act because there was no property transferred to the Appellant, not even indirectly.

Counsel for the Appellant referred the Court to the definition of the terms “property” and “amount” in section 248 of the Income Tax Act and pointed out that in section 160 of the Income Tax Act reference is made to the transfer of “property” and not to the transfer of an “amount”. In this connection, he contended that the additional value of the Appellant’s equity of redemption is not property in itself.

Counsel for the Appellant submitted that, in his view, the transfer referred to in section 160 must be of the same property. He even suggested that Mr. Medland in effecting the mortgage payments has not conferred a benefit on the Appellant but simply discharged his own liability.

Respondent's submissions

Counsel for the Respondent began by pointing out that the principal of the mortgage was reduced by the portion of the mortgage payments that was on account of the said principal. The Appellant’s liability to the mortgagee was therefore reduced to that extent. Mr. Medland by making the payments in question divested himself of money.

As a result of mortgage payments made by Mr. Medland, it was contended on behalf of the Respondent that the value of the Appellant’s equity of redemption has increased. Consequently, he said, there has been a change in the Appellant’s rights and in the value of her estate in land. In this connection, Counsel for the Respondent advanced the broad proposi- tion that anything of value is property. In this context, he added, a change in value involves a transfer of property.

It was also submitted on behalf of the Respondent that section 160 would be rendered ineffective if the potential liability on the part of the person making the transfer to a third party could be raised as a ground for defence. In brief, he suggested that the transferor’s potential liability to a third party is not relevant to the application of section 160.

ANALYSIS

The question in issue in general terms is whether or not Mr. Medland has transferred property to the Appellant within the purview of section 160 of the Income Tax Act.

For the present purposes, it is sufficient to refer to subsection 160(1) of the Act which reads thus:

(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.

It is necessary to determine what is encompassed within the concept of transfer of property referred to in the opening portion of subsection 160(1).

First, the term property is given a wide import by section 248 of the

Act; it is defined as follows:

“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.

The concepts of “property” and “transfer” were carefully considered in the leading decision of President Thorson of the Exchequer Court of Canada involving the Income War Tax Act in the case of Fasken v. Minister of National Revenue^ [1]

In that case, certain property was transferred by a husband to a trust of which the wife was a beneficiary. One of the issues was whether or not that constituted a transfer of property.

With respect to the meaning of property, President Thorson referred to the case of Jones v. Skinner (1836), 5 L.J. Ch. 87, where Lord Langdale M.R. said:

It is well-known, that the word “property” is 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.

Regarding the meaning of the word “transfer” in the context of a transfer of property, President Thorson commented as follows, at page 497:

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.

Later on he added the following observations, at the same page:

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.

The concept of “transfer of property” in the attribution rule set out in subsection 74(1), as it then read before its repeal in 1986, was examined in a decision of the Federal Court of Appeal in the case of Kieboom v. Minister of National Revenue?' [2]

The taxpayer in that case incorporated a company which issued shares to the taxpayer and his wife. Following an increase in the authorized capital, the company issued further shares so that the equity position of the taxpayer and his wife changed from 90% and 10% respectively to 50% for each. Later on, the company issued more shares to the children of the taxpayer and his wife with the result that at the end of the operation the taxpayer and his wife each owned 21.5% and each of his three children owned 19% of the shares. One of the two questions in issue was whether there was a transfer of property so as to bring into play the attribution provisions of subsection 74(1) of the Income Tax Act. Justice Linden, speaking for the Court, made the following observations, at pages 65-6 (D.T.C. 6386):

In this case, therefore, the taxpayer transferred property to his wife, that is, he gave a portion of his ownership of the equity in his company to his wife. The 40% capital interest in his company which he gave to his wife was clearly property. His beneficial interest in his company was reduced by 40% and hers was increased by 40%. The fact that this transfer of property was accomplished through causing his company to issue shares makes no difference. Subsection 74(1) covers transfers that are made “directly or indirectly” and “by any other means whatever.” The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision of the Act, as was erroneously concluded by the Tax Court judge. By this transfer of property to his wife, he divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer.

The present case is similar to some extent to White v. R? [3] In the latter case, the taxpayer and his common law spouse purchased a house in Toronto at a cost of $172,750. In order to purchase this house, a mortgage in the amount of $123,000 was taken out by the taxpayer and his spouse. Some time after the taxpayer and the common law spouse were married, the house was transferred into the taxpayer’s name alone. The mortgage remained on title with both the taxpayer and her husband as mortgagors and subject to the covenants therein. On March 5, 1984, the taxpayer’s spouse deposited into the couple’s joint account a cheque in the amount of $126,000 payable to himself from his company. On the same day, the taxpayer issued a certified cheque in the amount of $126,037.74 out of the joint account to discharge the mortgage on the house which she owned alone. It is not mentioned in this judgment if the liability to the mortgagee of the taxpayer and his wife was joint or joint and several. In that case, Judge Mogan of this Court expressed himself as follows, at page 2542:

Applying the Fasken decision to the facts of this case, Howard White divested himself of $126,000 and that amount vested in the appellant (his wife) as the sole owner of the house at 61 Shalimar Boulevard. Also, the words of subsection 160(1) are very broad concerning the transfer of property “either directly or indirectly, by means of a trust or by any other means whatever”. In my opinion, and having regard to the circumstances of the transaction, there was a transfer of property (i.e., $126,000) from Howard White to the appellant in 1984 within the meaning of subsection 160(1).

When issuing the assessment to the appellant, the Minister apparently assumed that the payment from Howard White on March 5, 1984 went directly to the Toronto-Dominion Bank and did not go through the joint account. That assumption was, of course, not true. Counsel for the appellant attempted to capitalize on the Minister’s erroneous assumption but, in the view which I take of both the law and the transaction, it does not make any difference whether the payment went directly to the bank or through the joint account. The joint account was simply a conduct through which the funds passed.

In the present case, it is beyond dispute that there was no direct transfer of property to the Appellant made by Mr. Medland. The latter made his payments directly to the mortgagee, the Bank. No payments were made to the Appellant.

It remains to examine if in light of the case law referred to above there was, having regard to the circumstances of the present case, an indirect transfer of property to the Appellant made by Mr. Medland within the meaning of section 160 of the Income Tax Act.

From the agreed facts, it is common ground that the Appellant’s liability to the Bank was reduced by the portion of the payments made by Mr. Medland that was attributable to the principal of the debt. It was agreed that no consideration was given by the Appellant in relation to the payments made by Mr. Medland. The bundle of rights that the Appellant had in that property is known as the equity of redemption. In his book entitled The law of Real Property, Sir Robert Megarry^ [4] says that “equity of redemption is an equitable interest in the land consisting of the sum total of the mortgagor’s rights in the property”. There is no dispute here that the Appellant was the sole owner of the equity of redemption as from April 8, 1987. Speaking generally, it is equally clear that a mortgagor has the right to redeem the encumbered property after the day fixed by the mortgage. If the mortgage goes into default, there is a redemption period and the mortgagor has a right to redeem the property. On making the last payment, the mortgagor has the right to have title conveyed to him. The Appellant had all these rights. In equity she was the owner of the subject land, subject to the mortgage. Also, because the mortgagor’s equity of redemption is an interest in land, it can be disposed of like any other interests in land. Obviously, these rights possessed by the Appellant in the property in question constitute property since the definition of property in section 248 of the Income Tax Act includes “a right of any kind whatever”.

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 a reduction in the Appellant’s liability amounts to an indirect transfer of property made by Mr. Medland to the Appellant.

In the first situation, termed Example “A”, I am assuming that Mr. Medland, instead of paying a little over $13,000 to the mortgagee 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 do not 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 owing under a mortgage over a given period is not property because these 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.

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.

For these reasons, the appeal is dismissed.

Appeal dismissed.