Date: 20041027
Docket: A-461-03
Citation: 2004 FCA 364
CORAM: NOËL J.A.
EVANS J.A.
PELLETIER J.A.
BETWEEN:
GEORGE DENNIS DALLAS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on October 21, 2004.
Judgment delivered at Ottawa, Ontario, on October 27, 2004.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: EVANS J.A.
PELLETIER J.A.
Date: 20041027
Docket: A-461-03
Citation: 2004 FCA 364
CORAM: NOËL J.A.
EVANS J.A.
PELLETIER J.A.
BETWEEN:
GEORGE DENNIS DALLAS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal from a Judgment of the Tax Court of Canada upholding a reassessment issued by the Minister whereby a taxable capital gain in the amount of $493,533.00 was included in the computation of the appellant's income for his 1996 taxation year.
Background
[2] The reassessment results from the refusal by the Minister to treat as "replacement property" shares of a private corporation which the appellant had acquired in 1996 with part of the proceeds of disposition of property sold under threat of expropriation. Subsection 44(5) provides:
| 44(5) Replacement of property- For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if
(a) it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(a.1) it was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property;
(b) where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose;
(c) where the former property was a taxable Canadian property (other than treaty-protected property) of the taxpayer, the particular capital property is a taxable Canadian property (other than treaty-protected property) of the taxpayer; and
(d) where the former property was a taxable Canadian property (other than treaty-protected property) of the taxpayer, the particular capital property is a taxable Canadian property (other than treaty-protected property) of the taxpayer.
|
44(5) Bien de remplacement. Pour l'application du présent article, une immobilisation d'un contribuable est un bien servant de remplacement à un ancien bien dont il était propriétaire si les conditions suivantes sont réunies :
a) il est raisonnable de conclure qu'il l'a acquise en remplacement de l'ancien bien ;
a.1) elle a été acquise par lui et est utilisée par lui, ou par une personne qui lui est liée, pour un usage identique ou semblable à celui qu'il a fait de l'ancien bien ou qu'une telle personne en a fait ;
b) dans le cas où le contribuable ou une personne qui lui est liée utilisait l'ancien bien en vue de tirer un revenu d'une entreprise, l'immobilisation a été acquise en vue de tirer un revenu de cette entreprise ou d'une entreprise semblable ou pour qu'une personne liée au contribuable l'utilise à cette fin ;
c) si l'ancien bien était un bien canadien imposable, l'immobilisation en est un ;
d) si l'ancien bien était un bien canadien imposable (sauf un bien protégé par traité), l'immobilisation en est un (sauf un bien protégé par traité).
|
[3] Section 44 entitles a taxpayer who reinvests the proceeds of disposition of certain capital property in a replacement property within a certain period of time (two years in the case of expropriation) to defer tax on the gain and to avoid immediate recapture (subsection 13(4)) subject to certain conditions.
[4] The appellant and a partner owned property situated in Vancouver from which they derived rental income (the "former property"). The former property was sold to the City of Vancouver under threat of expropriation on October 11, 1996. The appellant's portion of the proceeds was $2,627,225.
[5] The record reveals that the appellant used the sale proceeds as follows:
a) in October 1996, he purchased property in Vancouver at a cost of $735,563.11;
b) in December 1996, he purchased from his former law partner, 150 shares of a private corporation, which owned property in Vancouver and at Brook Cove and a one half interest in another property at Brook Cove for $475,000, thereby acquiring sole control of the corporation;
c) in January 1997, he purchased property on Bowen Island at a cost of $1,273,461.45.
[6] In filing his tax return for his 1996 taxation year, on April 30, 1997, the appellant indicated that he had acquired the Vancouver property and the Bowen Island property as replacement property at a combined cost of $1,973,000 and elected to have both properties treated as "replacement properties" (Appeal Book, Vo. 1, p. 143 and 144). No mention was made of the shares or their cost.
[7] Although a significant taxable capital gain remained to be recognized on the sale of the former property, the tax return filed by the appellant reported a nil gain on the basis that the cost of these two properties exceeded the gain resulting from the sale of the former property (Appeal Book vol. 1, p. 48).
[8] It is significant that at that time the treatment of shares of a real estate company as replacement property for directly held land was uncertain. There was no case law directly on point but the well reasoned decision of the Tax Court in Edwynn Holdings Ltd. v. The Minister of National Revenue 89 D.T.C. 720 suggested that shares did not qualify.
[9] Some three years after the return was filed, the Minister advised the appellant that an error had been identified in the return. The letter was accompanied by calculations computed by reference to the cost of the two replacement properties which the appellant had elected and concluded that tax on a taxable capital gain in the amount of $493,583.00 was exigible. An assessment reflecting that amount ensued.
[10] The appellant objected claiming that the shares were replacement property. Upon the assessment being confirmed he brought the matter before the Tax Court.
Decision of the Tax Court Judge
[11] The appellant attempted to explain before the Tax Court Judge why he did not elect to treat the shares as replacement property in the tax return. He testified that he acted on the advice of his accountant, who would have suggested that this could be done at the objection stage.
[12] The Tax Court Judge rejected this explanation outright. He held that the appellant was not being truthful in explaining why the shares were ignored. He concluded that the appellant did not have the intention the treat the shares as replacement property at the time.
[13] The specific finding of the Tax Court Judge appears at paragraph 9 of his reasons:
The Appellant claims that he and his accountant discussed the additional purchases described in paragraph 8 above and the accountant said it would be done at the objection stage. I reject his outright. I do not believe any accountant or a solicitor would take this position. If the inclusion of the share purchase and the one half interest in Lot 20 was intended to be replacement property, the only sensible position would be to file an amended T1 tax return in early May of 1997. I specifically find that no such conversation took place and no such intention existed. Furthermore, there would be no objection stage, as the Appellant's T1 tax return would be accepted as filed.
[14] The Tax Court Judge went on to hold that, in any event, the shares did not qualify as replacement property.
Analysis and Decision
[15] The appellant argues that the Tax Court Judge erred in making an adverse finding of credibility and in rejecting his testimony about the discussion which he had with his accountant. He suggests that sufficient reasons were not provided by the Tax Court Judge to reach such a conclusion and invites the Court to reverse this finding (R. v. Shepperd [2002] 1 S.C.R. 869 at 873).
[16] In my view, sufficient reasons were provided by the Tax Court Judge. It would have made no sense for the accountant to advise his client not to treat the shares as replacement property if the shares were purchased to replace the former property and the intention was that they be treated as such.
[17] In making his finding, the Tax Court Judge must also have been mindful of the appellant's failure to call his accountant as a witness to corroborate his testimony on this crucial point. I note that counsel for the appellant was unable to suggest any reason why the accountant was not called.
[18] The Tax Court Judge appeared to be of the view that in filing as he did, the appellant attempted to escape tax altogether without raising a red flag by alluding to the shares. That, it seems, is the only rational explanation for the appellant's failure to extend the election to the shares. Counsel for the appellant was unable to offer any other explanation.
[19] In my view, the Tax Court Judge was on solid ground when he held that the appellant had no intention to treat the shares as replacement property.
[20] Counsel for the appellant argues in the alternative that such intention is irrelevant in determining whether the shares qualify as replacement property. It is undisputed that the appellant did in fact purchase the shares within the prescribed time, using the proceeds from the sale of the former property. Hence, according to the appellant, the only question which the Tax Court Judge had to address is whether the shares qualify.
[21] While the question whether the appellant did use the proceeds of the former property to buy another property is one of fact, the treatment of this property as "replacement property" requires that an election be made in the tax return for the year in question (see subsection 44(1)). It follows that property which otherwise qualifies is not "replacement property" unless the taxpayer chooses to treat it as such.
[22] To that extent, intention does matter. In this case, the election did not extend to the shares and there is no suggestion that an application was made at any time to amend or revoke the original election (see subsection 230(3.2)).
[23] It follows that the conclusion by the Tax Court Judge that the appellant did not intend to treat the shares as replacement property, was both relevant and warranted. In the absence of this intent, the shares cannot qualify.
[24] This is sufficient to dispose of the appeal. I express no opinion with respect to the Tax Court Judge's alternative conclusion that in any event the shares were not capable of qualifying as replacement property.
[25] I would dismiss the appeal with costs.
"Marc Noël"
J.A.
"I agree.
John M. Evans J.A."
I agree.
J.D.Denis Pelletier J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-461-03
STYLE OF CAUSE: George Dennis Dallas v Her Majesty The Queen
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: October 21st, 2004
REASONS FOR JUDGMENT BY:NOEL J.A.
CONCURRED IN BY:EVANS J.A.
PELLETIER J.A.
DATED:October 27, 2004
APPEARANCES:
Mr. Meldon Ellis FOR THE APPELLANT
Mr. I. Thomas Torrie FOR THE RESPONDENT
SOLICITORS OF RECORD:
Ellis Business Lawyers FOR THE APPELLANT
Vancouver BC
Mr. Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General for Canada