Date: 19980813
Docket: 97-1312-IT-G
BETWEEN:
DENISE MICHAUD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from an assessment made by the Minister of National Revenue ("the Minister") pursuant to s. 160 of the Income Tax Act ("the Act").
[2] At the start of the hearing there was an application to amend the Notice of Appeal and the Reply to the Notice of Appeal to take account of a recent assessment by the Minister replacing the one in respect of which the Notice of Appeal was filed. That amendment was allowed pursuant to s. 165(7)(b) of the Act. The reassessment is dated February 10, 1997 and is in the amount of $26,520.36. The notice of this assessment is numbered 02843.
[3] The facts on which the Minister relied in assessing the appellant are set out as follows in paragraph 11 of the Reply to the Notice of Appeal:
[TRANSLATION]
(a) The appellant married Jocelyn Bérubé on June 26, 1978 and they were separated from bed and board on December 21, 1995;
(b) between January 1994 and November 1995 Jocelyn Bérubé transferred sums of money totalling $27,670 to the appellant's bank account;
(c) during the period from January 1994 to November 1995 the appellant owned her residence located at 541 Rue des Draveurs in Rimouski, Quebec;
(d) the transfers to the appellant's bank account described in subparagraph 11(b) were used to pay the hypothec on the appellant's residence referred to in subparagraph 11(c);
(e) the total of all the amounts owed by the transferor, Jocelyn Bérubé, pursuant to the Income Tax Act in the period from January 1994 to November 1995 was $26,520.36;
(f) the appellant is accordingly jointly and severally liable with the transferor, Jocelyn Bérubé, for payment of the aforementioned amount of $26,520.36.
[4] The facts and reasons in support of the Notice of Appeal are set out as follows in paragraphs 4 to 10, 13, 14, 18, 19, 20 and 25:
[TRANSLATION]
4. Denise Michaud, the appellant, and Jocelyn Bérubé were married in Rimouski on June 26, 1978, were separated de facto in November 1995 and obtained a divorce decree on February 6, 1996;
5. two children were born of the marriage of the parties, Jérôme (05.08.78) and Maxime (22.03.84);
6. accordingly, during the period from January 1994 to November 1995 covered by the Notice of Assessment dated June 6, 1996, Denise Michaud, the appellant, and Jocelyn Bérubé lived together as man and wife in the same house and at the same address with their two children;
7. although Mr. Bérubé had a bachelor suite in Ste-Foy which he used occasionally for business trips, he lived throughout that period at 541 Rue des Draveurs in Rimouski, which was his principal residence;
8. during that period, as throughout the period of the parties' marriage, that is, beginning in 1978, Mr. Bérubé and Ms. Michaud contributed equally and equitably to the family costs, sharing the related expenses;
9. Ms. Michaud paid some of the expenditures relating to food and to the couple’s clothing, as well as to clothing and other expenses of the two children;
10. Mr. Bérubé paid the amount of the hypothec on the principal residence, depositing a sum of about $650 monthly in the bank account, from which the payments on the hypothec were made by direct debit;
. . .
13. throughout this period Mr. Bérubé paid a total of about $16,000 in support of the family, paying for the principal residence by means of payments on the hypothec;
14. in this period Ms. Michaud paid at least $35,000 in support of the family, for food, clothing and so on, and for housing and feeding Mr. Bérubé;
. . .
18. the agreement between the spouses during this period for the division of expenses was quite equitable and was unrelated to the transfer of property between spouses within the meaning of the Income Tax Act;
19. further, it should be noted that the purpose of the Income Tax Act regarding the transfer of property between spouses is to avoid any situations in which a transferor transfers property to his or her spouse for consideration less than the property’s fair market value in order to avoid paying taxes, which is not the case here;
20. Mr. Bérubé did not pay this money in order to avoid paying his taxes, since he had an obligation to contribute to the family's needs;
. . .
25. finally, in the alternative, without admitting the validity of the Notice of Assessment, we maintain that the amounts claimed are completely excessive, since the Department of National Revenue alleges that a transfer of some $25,230.19 was made and claims the sum of $26,520.36, that is, an 82.5% taxation rate, from Ms. Michaud, and since the amount actually paid to the appellant by Mr. Bérubé was $16,000 . . . .
[5] The appellant and Jocelyn Bérubé, her former spouse, testified at the request of the appellant's counsel. Jocelyn Bérubé was not in the hearing room when the appellant testified. Their testimony as to the monetary division of the family expenses was consistent. They both contributed to the family expenses in accordance with a procedure which remained more or less the same throughout the years they lived together.
[6] The appellant is a nurse by profession and specializes in child psychiatry. Since 1982 she has had a full-time position in the Centre hospitalier régional de Rimouski. Her gross income was $43,000 in 1994 and $47,000 in 1995. (Her income was lower in 1994 because she was on sick leave for some months.) The appellant paid for purchasing food, clothing for the children, her own clothing and sometimes that of her husband. She also bought various articles for her children and accessories for the house. Her husband occasionally contributed to these expenses as well.
[7] According to paragraph 14 of the Notice of Appeal, the appellant contributed at least $35,000 to family expenses for 1994 and 1995. I consider that based on the documentary and oral evidence this amount is credible.
[8] Jocelyn Bérubé is a physician. His gross income is $140,000 and his net income about $110,000. In 1981 Mr. Bérubé purchased a house. It was the appellant who initially wanted this purchase to be made. She had obtained a loan of $10,000 from her mother which she repaid over the next few years. In 1983 the house was transferred into her name, but it was still Mr. Bérubé who paid the expenses relating to it. It was he who paid the house-related expenses such as payments on the hypothec, electricity, taxes, telephone, insurance and so on. According to Tab 6 of Exhibit I-1, payments on the hypothec amounted to $18,949.03 for the period from January 1994 to November 1995. In the appellant's submission, it was a comfortable house but could not be described as lavish. The municipal assessment was $90,000 and, again according to the appellant, the house might be worth less because there was some necessary maintenance work which had not been done.
[9] The appellant and her former spouse are the parents of two children, born in 1978 and 1984. In 1994 the children were 16 and 10 years old respectively. They all lived in the family house. Dr. Bérubé allegedly left the marital residence in the fall of 1995.
[10] Dr. Bérubé declared bankruptcy twice and taxes were the reason in both cases. The first time was in 1983 and the second in 1995. He was discharged in October 1996 subject only to an objection by Revenu Québec.
Analysis and conclusion
[11] Section 160(1) of the Act reads as follows:
160. (1) Tax liability re property transferred not at arm's length.
Where a person has, on or after May 1, 1951, 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) a person who was under 18 years of age, or
(c) a person with whom the person 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 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, 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 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.
[12] Section 160 lays down three conditions: the transferor must have had a tax debt at the time the property was transferred, the transferor and the transferee must not have been dealing at arm's length and the transfer must have been made without valuable consideration.
[13] Were the payments made by the appellant’s then husband transfers of property made without valuable consideration? Does this section cover the case of a payment made in performing a genuine obligation, such as that of providing one's family with a place to live? What is meant by valuable consideration?
[14] Section 160 of the Act corresponds to the concept of the action de in rem verso against unjust enrichment. This action and the unjust enrichment rule were described by the Quebec Court of Appeal as follows in Banque Canadienne Nationale, [1942] K.B. 496, at pp. 507-508:
[TRANSLATION]
An action de in rem verso based on the rule of equity that prohibits enrichment at another's expense must lie wherever one person's patrimony is increased without legitimate justification at the expense of the patrimony of another, and the latter has no action in contract, quasi-contract, delict or quasi-delict to get what he or she is owed.
. . .
However, the imbalance between the patrimonies of the two individuals referred to by the writers means an absence of justification, and in the final analysis this absence of justification is, after all, only the absence of a prestation or consideration.
In the case at bar, therefore, it is this concept of absence of a prestation or consideration by the bank which we must consider in determining whether this is a case of unjust enrichment.
In other words, the party enriched must not be able to rely on any juridical fact authorizing him or her to retain the enrichment . . . .
. . .
The enrichment is justified when the prestation or service was obtained pursuant to the provisions of a contract or in performing a legal or natural obligation. In such a case it is legitimately acquired.
[15] The new Civil Code of Quebec came into force on January 1, 1994. Before that date unjust enrichment was not codified in a specific provision of the Code although it was a concept in the civil law. Articles 1493 and 1494 C.C.Q. read as follows:
1493. A person who is enriched at the expense of another shall, to the extent of his enrichment, indemnify the other for his correlative impoverishment, if there is no justification for the enrichment or the impoverishment.
1494. Enrichment or impoverishment is justified where it results from the performance of an obligation, from the failure of the person impoverished to exercise a right of which he may avail himself or could have availed himself against the person enriched, or from an act performed by the person impoverished for his personal and exclusive interest or at his own risk and peril, or with a constant liberal intention.
[16] In his Traité de Droit Civil du Québec, volume 7-bis, Léon Faribault says the following in heads 61 and 64:
[TRANSLATION]
61. - For an action de in rem verso to be brought the fact that an enrichment and an impoverishment exist and are inter-related in causal terms will not suffice. The enrichment must also be unfair: that is why it is known as an unjust enrichment.
64. - The enrichment and impoverishment cannot be unjust when they are the result of the performance of a legal obligation, that is, an obligation imposed by the law. Obviously an enrichment cannot be unjust if it results from the performance of an act required or authorized by the law. This rule has been recognized by the courts on several occasions.
[17] Article 396 C.C.Q. reads as follows:
The spouses contribute towards the expenses of the marriage in proportion to their respective means.
The spouses may make their respective contributions by their activities within the home.
[18] In Dupuis v. M.N.R., 93 DTC 723, I indicated that the performance of a legal obligation does not constitute a transfer within the meaning of s. 160 of the Act:
On the third point, that is that the moneys received by the Appellant from her husband, were received for a valid consideration, I am of the view that the evidence showed that it is true. I find plausible that the payments were the Appellant's husband contributions towards the charges of the house and family, and in some occasions, were repayments of loans, or a way to obtain cash.
[19] I consider that when the appellant's former spouse made the payments on the hypothec on the family house, which was the appellant's property, he was only performing a legal obligation, that of providing for the needs of his family by obtaining the housing it required. The appellant could have made these payments on the hypothec herself and her husband could have paid what the appellant undertook to pay. However, that is not how the family expenses were naturally distributed in this couple. In any case, this monetary distribution of the family expenses is not essential to my decision. While this case concerns a couple in which both spouses earned money, my decision would have been the same if only one of the two spouses earned the family income: a payment on a hypothec on a family residence is 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.
[20] I should add that it is when the evidence discloses that the payment on the hypothec was made in performing the legal obligation to provide for the family's requirements that it was made for valuable consideration within the meaning of s. 160(1) of the Act. If for example the husband in the instant case had paid his wife both rent and payments on the hypothec, it is unlikely that the payments on the hypothec would have been made in performing a legal obligation to provide for the family's needs.
[21] The appeal is allowed with costs to the appellant.
Signed at Ottawa, Canada, August 13, 1998.
“Louise Lamarre Proulx”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true this 2nd day of September 1998.
Stephen Balogh, Revisor