Date: 20010811
Docket: 97-2121-IT-G
BETWEEN:
ISABEL WEBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Prince George, British Columbia on June 25, 2001. Counsel for both parties proceeded on the basis of an Agreed Statement of Facts, which reads as follows:
Action No. 97-2121 (IT)G
IN THE TAX COURT OF CANADA
IN RE: THE INCOME TAX ACT
BETWEEN:
ISABEL WEBER
APPELLANT
AND:
HER MAJESTY THE QUEEN
RESPONDENT
_____________________________________________________
AGREED STATEMENT OF FACTS
_____________________________________________________
The parties hereto by their respective solicitors admit the following facts, provided that the admission is made for the purpose of this action only and may not be used against either party on any other occasion.
1. In 1992 the Appellant realized a $75,699.11 capital gain from the sale of the right to remove timber from her farm land.
2. The Appellant did not report this capital gain in her tax return for her 1992 taxation year nor did she offset this capital gain with the capital gains exemption set out in subsection 110.6(3) of the Income Tax Act (Canada) (the "Act") applicable to the disposition of capital property other than shares of a qualified small business corporation and qualified farm property.
3. The Appellant's failure to report this capital gain in her tax return for her 1992 taxation year was not done knowingly or under circumstances amounting to gross negligence.
4. The Appellant filed her tax return for her 1994 taxation year on May 1st, 1995.
5. In preparing and filing her tax return for her 1994 taxation year the Appellant filed an election pursuant to subsection 110.6(19) of the Act with respect to "Timber" (the "Elected Property") wherein the Appellant elected proceeds of disposition of $90,000 such that a $90,000 capital gain was triggered, which capital gain the Appellant exempted from tax by claiming the capital gains exemption set out in subsection 110.6(3) of the Act applicable to the disposition of capital property other than shares of a qualified small business corporation and qualified farm property.
6. The Appellant is still the legal and beneficial owner of the Elected Property.
7. Pursuant to a Notice of Reassessment dated July 31st, 1995 the Respondent reassessed the Appellant to tax with respect to her 1992 taxation year by including in her income the net proceeds from the sale of the right to remove timber from her farm land as income from a business.
8. As a result of the Federal Court of Appeal's decision in Larsen v. The Queen, dated October 29th, 1999, the parties hereto now agree that the net proceeds received by the Appellant in 1992 from the sale of the right to remove timber from her farm land constituted a capital gain. The parties hereto disagree as to the ability of the appellant to offset this capital gain in her 1992 taxation year with the capital gains exemption set out in subsection 110.6(3) of the Act applicable to the disposition of capital property other than shares of a qualified small business corporation and qualified farm property
The parties hereto by their respective solicitors have by their signatures endorsed hereon agreed to the facts as cited above
"signature"
KENNETH R. HAUSER
Counsel for the Appellant
MORRIS A ROSENBERG
Deputy Attorney General of Canada
Solicitor for Respondent.
Per: "signature"
ERIC DOUGLAS
Counsel for the Respondent
Appellant's Counsel's Submissions
[2] The submissions of counsel for the Appellant in substance are reflected in the following extracts from counsel's Written Submissions:
It is respectfully submitted that in disposing of an appeal under subsection 171(1) of the Act, the Tax Court of Canada is charged with the task of determining whether or not tax is due for that taxation year. In carrying out this task the Tax Court of Canada should refer to the facts and the statutory provisions in existence during the year in question. In the present case this means that in determining the amount of tax payable by the Appellant in her 1992 taxation year the only relevant considerations are the facts in existence in 1992 and the provisions of the Act in existence in 1992.
... Given the essential nature of a self assessing system - that a taxpayer can only file her return based on the statutory provisions in existence during the year in question and based on the facts in existence during the year in question - this is the only basis upon which appeals of reassessments may be disposed of. In the present case, the only relevant facts in existence in 1992 are that the Appellant realized a $75,699.11 capital gain, the provisions of subsection 110.6(3) of the Act were still in existence, and the Appellant had the full amount of this capital gain exemption available to her.
The Appellant's ability to utilize her basic capital gain exemption set out in subsection 110.6(3) of the Act to offset the $75,699.11 capital gain which she realized in 1992 is also supported by the jurisprudence dealing with a taxpayer's ability to amend a return, make a late filed designation or claim an election on an appeal of a reassessment, especially in light of the provisions of subsection 110.6(6) of the Act. The leading case in this regard is the Federal Court of Appeal's decision in Nassau Walnut Investments Inc. v. The Queen 1996 CarswellNat 2329 (F.C.A.) dealing with late filed elections under paragraph 55(5)(f) of the Act.
In paragraphs 35 and 36 of that case, Robertson, J.A. distinguishes earlier cases such as Miller v. The Queen 1992 CarswellNat 452 (FCA) on the grounds that these cases only have application where a taxpayer is attempting to do retroactive tax planning.
35 In my view, there is little doubt that the restrictive approach adopted by the courts with respect to the Act's election provisions is prompted by the possibility of taxpayers engaging in retroactive tax planning. This is one of the rationales underlying the decision of this Court in Miller, supra, one of the principal cases relied on by the Minister. In that case, the taxpayer made a forward averaging election in respect of his 1982 taxation year. The Minister disallowed the taxpayer's RRSP deduction for the year but refused to increase the amount of income that the taxpayer had elected to forward average. At 5036, Mahoney J. A. writing for the Court (Linden and Robertson JJ.A. concurring), declined to accord to the taxpayer the advantage of hindsight in making a genuine election:
... the taxpayer was entitled to make the election on the basis of his circumstances as they existed, and as only he could know, at the time he filed his return. The Act did not contemplate the election being made on the basis of changed circumstances which might result from an assessment or reassessment of the return.
36 In the instant case, however, we are not faced with the problem of retroactive tax planning which arises as a result of a taxpayer's desire to "re-elect". On the contrary, the case at bar is more analogous to a situation in which a taxpayer seeks to amend his or her tax return for the purpose of taking a deduction to which he or she has some entitlement. In some respects, the designation requirement of paragraph 55(5)(f) of the Act is no different, for example, than the deduction provided for under subsection 112(1). The latter provision converts a taxable inter-corporate dividend into a non-taxable one. The corporate taxpayer, however, must deduct an amount equal to the dividend in order to bring about this result ["Where a corporation ... has received a taxable dividend ... an amount equal to the dividend may be deducted from the income ..."]. The only substantive difference between the two sections of the Act is that no calculation is required under subsection 112(1). One is simply required to make the deduction. Paragraph 55(5)(f), on the other hand, involves a calculation of safe income before the deduction can be made. It seems to me that the difference is one of degree, not kind.
In the present case, as in the Nassau Walnut case, the Appellant is not engaging in retroactive tax planning. She is merely taking a deduction to which she has some entitlement. It should also be noted that the election cases such as Miller dealt with provisions of the Act which specifically provided that the election must be made within a specified period of time. In the present case, given the provisions of subsection 110.6(6) of the Act, the ability to claim a capital gain exemption is only limited in certain circumstances. Where these circumstances do not exist, it is submitted that Parliament specifically contemplated the ability of a taxpayer to claim a capital gain exemption for a particular taxation year at a subsequent time.
In paragraph 37 of the Nassau Walnut case, Robertson, J.A. uses a hypothetical example to illustrate a circumstance where there is no attempt by a taxpayer to undertake retroactive tax planning:
37 With regard to section 55 of the Act, the difficulty arises of course in the event that the taxpayer fails in the first instance to seek relief under paragraph 55(5)(f) because it did not operate on the presumption that section 55(2) would apply. The issue may therefore be recast in the form of a hypothetical as follows: assume that the taxpayer calculates his income based on the application of provision "A"; the Minister then denies the applicability of provision "A" and instead invokes provision "B"; the taxpayer does not dispute that provision "B" may apply but notes that provision "B" permits a partial deduction if a designation is made; he therefore seeks to amend his return to take advantage of that deduction but is denied the opportunity to do so on the ground that he failed to make the requisite designation; the taxpayer counters by asking how he could have made the designation when he did not know that provision "B" would apply. In this scenario, modification of the original tax return does not raise the spectre of retroactive tax planning as in the election cases. That is, our hypothetical taxpayer did not previously weigh the risks relating to making the designation or abstaining therefrom, nor does he now seek to avoid bearing the downside of a decision he made consciously after due consideration.
It is submitted that the capital gain realized by the Appellant in her 1992 taxation year falls squarely within this hypothetical example. The Appellant calculated her 1992 income based on the application of provision "A" - that she did not have to include in her income the capital gain from the disposition of the right to remove timber from her farmland. The Minister then denied this treatment and instead invoked provision "B" - that proceeds from the disposition of the right to remove timber from farm land gives rise to a capital gain, three quarters of which must be included in income. The Appellant does not dispute this provision but notes that in 1992 capital gains of this nature could be exempt from tax by claiming the capital gain exemption set out in subsection 110.6(3) of the Act and therefor seeks to amend her return to take advantage of that deduction. How could the Appellant have claimed the 110.6(3) capital gain exemption when she did not know that she had a capital gain which needed exempting?
Given the foregoing reasons, it is respectfully submitted that in disposing of the Appellant's appeal of the reassessment of her 1992 taxation year she is entitled to offset the capital gain realized on the disposition of the right to remove timber from her farm land with the capital gain exemption set out in subsection 110.6(3) of the Act, despite the election which she made pursuant to subsection 110.6(19) in her 1994 taxation year.
Allowing the Appellant to offset the capital gain she realized in her 1992 taxation year with the capital gain exemption set out in subsection 110.6(3) of the Act in light of the fact that she claimed that same capital gain exemption in 1994 will not result in the Appellant getting the benefit of that provision twice. Instead, allowing the Appellant to offset the capital gain she realized in 1992 with the capital gain exemption set out in subsectin [sic] 110.6(3) of the Act results in the 1994 election being invalid and of no force and effect due to the interaction of clause 110.6(20)(a)(i)(A) of the Act and due to the jurisprudence dealing with carryforward of improper balances from previous taxation years.
... The most cogent discussion of these subparagraphs is contained in Carswell Publishing's Stikeman Analysis of the limitations imposed by subsection 110.6(20) of the Act on elections made under subsection 110.6(19) is as follows:
Limitations (subsec 110.6(20))
Subsection 110.6(20) sets out certain limits governing the application of an election under subsection 110.6(19). Paragraph 110.6(20)(a) applies in circumstances where the elector is an individual (other than a trust). In such circumstances, the subsection 110.6(19) election will only be effective if at least one of the following conditions is satisfied:
(i) the election would result in an increase in the $100,000 capital gains exemption available under subsection 110.6(3) that could be claimed by either the elector or the elector's spouse and the election would not result in the lesser of the annual gains limit and the cumulative gains limit (which exceed amounts deducted for the year under the $500,000 lifetime capital gains exemptions) exceeding the balance of the $100,000 exemption available to the elector or the elector's spouse;
(ii) where the amount designated in the election is in respect of a property of the elector, the amount designated exceeds 11/10 of the property's fair market value at the end of February 22, 1994; or
(iii) where the amount designated in the election is in respect of a business of the elector, the amount designated in the election is either $1 or exceeds 11/10 of the fair market value of all the eligible capital property owned at that time by the elector in respect of the business.
This provision ensures that a subsection 110.6(19) election is only effective if it, in fact, results in a capital gain to the elector or the elector's spouse which may be sheltered by the $100,000 lifetime capital gains exemption. The provision also ensures that an elector cannot avoid the adverse tax consequences associated with an elected amount in excess of 11/10 of the fair market value of the property or business as at February 22, 1994. (Emphasis Added)
Because none of the requirements set ou [sic] in subparagraphs 110.6(20)(a)(i), (ii) and (iii) of the Act are met, subsection 110.6(20) invalidates the election which the Appellant made in her 1994 taxation year under subsection 110.6(19) of the Act. As a result, the Elected Property does not have its adjusted cost base increased by $90,000 and a disposition of this property will give rise to the full accrued capital gain.
The Respondent is able to apply this analysis at the present time to deny the increase in adjusted cost base of the Elected Property intended by the 1994 election. The courts have consistently held that where the tax implications of a particular year are dependent upon a balance carried forward from a previous taxation year, in order to accurately determine whether or not tax is due and owing for that subsequent taxation year, the Minister can adjust balances carried forward from a previous year if those balances are incorrect in some regard. In the present case, this principle allows the Minister to treat the Appellant's 1994 capital gains election to be invalid on the grounds that the cumulative gains limit carried forward from the 1992 and 1993 taxation year need to be reduced by the gain exempted in her 1992 taxation year.
CCRA's ability to deny the use of this bumped up cost base is set out in numerous decisions of the Act. The most recent decision is that of the Federal court of Appeal in Bradley v. The Queen 1998 CarswellNat 1028. In that case, the Minister attempted to reassess the taxpayer's 1984 taxation year on the grounds that a portion of his charitable donations should not be allowed. The Tax Court of Canada concluded that, although a portion of the charitable donations were not legitimate, the 1984 taxation year was statute barred and the reassessment of that year failed accordingly. The Tax Court of Canada also found that the full amount of 1984 charitable donations could be carried forward to the 1985, 1986 and 1987 taxation years. The Minister appealed this latter finding to the Federal Court of Appeal. In deciding that the charitable donation carryforward for the 1985, 1986 and 1987 taxation years should only reflect the correct amount, Strayer, J, stated, at paragraph 6:
6 It appears to us that in, for example, an assessment made in respect of 1985 taxes the Minister is obliged, in considering the amount to be carried forward, to determine the aggregate of "gifts" made in previous years and this must in the context be confined to qualifying charitable gifts. In this case, the Tax Court Judge determined that the sum allegedly given to the Museum in 1984 (purportedly $98,867) was not a gift because there was no loan which could have been forgiven by the respondent. Therefore in calculating, for purposes of carry-forward in subsequent years, the aggregate of gifts made in 1984, as required by paragraph 110(1)(a), that aggregate cannot include the invalid amount of $98,867. This would leave an aggregate of $178,357.00 (the total reported) minus $98,867 (the invalid amount), that is $79,490.00 and not $178,357 assumed by the Tax Court Judge. As $111,237 was already deducted in 1984 there remains no balance to carry forward to subsequent years. We believe this result to be consistent with previous jurisprudence of the Federal Court and the Tax Court*. Unless statute-barred, the Minister is obliged to assess each year in accordance with the Act. (Emphasis added)
This was also the conclusion reached by Mr. Justice Bowman of the Tax Court of Canada in Coastal Construction & Excavating Ltd. v. The Queen 1996 CarswellNat 1811 (TCC). At paragraph 24 of that decision, Mr. Justice Bowman states:
24 Finally, the appellant contends that because the Minister, in prior years, had treated the operation as a "facility" as defined in the RDIA he was not entitled to change the investment tax credit carry-forward from those admittedly statute-barred years to affect the taxable income of a year that was not statute-barred to conform to his view that the property was qualified and not certified. This interpretation would involve a conclusion that a determination of the balance of a carry-forward of investment tax credits for a statute-barred year was tantamount to an assessment. I do not read section 152 of the Income Tax Act as supporting such a conclusion. The Minister is obliged to assess inaccordance [sic] with the law. If he assessed a prior year incorrectly and that year becomes statute-barred this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute-barred, even though it involves adjusting carry-forward balances from previous years, whetherthey [sic] be loss carry-forwards or balances of investment tax credits. ... (emphasis added)
Given the foregoing provisions of paragraph 110.6(20)(a) of the Act, and the jurisprudence dealing with the correction of carry forward balances, it is submitted that the adjusted cost base of the Elected Property is unchanged from its amount prior to the 1994 election and the full capital gain will be realized when the Appellant ultimately disposes of the asset in the future.
Submissions of Counsel for the Respondent
[3] The substance of counsel for the Respondent's submissions are reflected in the following extracts of his written submissions.
3. The Respondent submits that the Appellant's election to realize a deemed disposition in 1994 (the "Election") cannot now be amended or revoked under the Act. This disposition cannot be undone by the Appellant simply by changing the year in which she wishes to utilize her capital gains exemption. The Appellant's 1994 taxation year is now statute barred. Therefore, the effect of allowing her to utilize her capital gains exemption in 1992 would be to allow her to claim significant exemptions in both 1992 and 1994 which greatly exceed the total exemption allowable. As the Minister is no longer able to reassess the Appellant to disallow the exemption claimed in 1994, it is submitted that the Appellant is estopped from claiming the same exemption in 1992.
4. The Election had the effect of causing a deemed disposition of property on 22 February 1994. The Appellant therefore had a capital gain of $90,000 in that year. At the time of filing, the Appellant was of the view that she had a sufficient personal capital gains exemption to render the entire $90,000 gain exempt from tax. She chose to utilize this exemption on her 1994 return.
5. The Election can no longer be changed by the Appellant. Subsections 110.6(25) and 110.6(27) of the Act contain provisions which allow for the revocation or amendment of an election under subsection 110.6(19). Both subsections require that any changes to be made to an election must be made by filing the required documentation with the Minister "before 1998". The Appellant took no such steps.
6. Regardless of the occurrence of an audit and reassessment, the Minister has no power to amend an election where the Act makes no provision for it. In Miller v. The Queen (Respondent's authorities, Tab 3) the Federal Court of Appeal found as follows (at p. 4):
As for the taxpayer having the right to amend an election after assessment or reassessment of his relevant tax return, it is not, in my opinion, a question of a limitation period. There were, in 1982, several provisions for late elections in the Act. ... No such provision was made for a forward averaging election; it had to be made not later than the date on which the relevant tax return was required to be filed and it had to be filed with the return. The intention of Parliament is, in my view, clear; the taxpayer was entitled to make the election on the basis of his circumstances as they existed, and as only he could know, at the time he filed his return. The Act did not contemplate the election being made on the basis of changed circumstances which might result from an assessment or reassessment of the return.
To allow amendment of the election, either by the Minister as part of the assessment process or the taxpayer after assessment, would, in my opinion, require an inadmissible reading into the Act of words that were not there. I would allow the appeal and restore the assessment.
7. Unlike Miller, Parliament did make provision for the revocation or amendment of a subsection 110.6(19) election. It also, however, placed a time limit on such an amendment. That time limit is now long past. It is submitted that the intent of Parliament is as clear in respect of 110.6(19) elections as it was in the Miller case and that neither the Minister nor the Appellant now have the ability to alter the deemed disposition that occurred in 1994.
9. It is submitted that the above-noted legislative provisions and case law lead to the conclusion that the Appellant cannot now change her Election. This being the case, the Appellant had a capital gain of $75,699.11 in 1992 and a capital gain of $90,000 in 1994. The question then becomes, how is she entitled to apply her capital gains exemption?
10. As a result of the Minister's reassessment and the resulting inclusion of a capital gain in her income for 1992, the Appellant seeks to utilize her capital gains exemption in 1992 rather than 1994.
12. It is submitted, in considering the Appellant's request to amend her 1992 tax return in light of the Minister's reassessment, the key fact for this Honourable Court to keep in mind is that the Appellant has taken steps subsequent to 1992 which limit her entitlement to amend her 1992 return. In other words, the Appellant is estopped from arguing that she should be allowed to utilize her capital gains exemption in 1992 in light of the fact that she has already chosen to use that very exemption in 1994.
16. The essential elements of estoppel are as follows (Wilchar Construction, at p. 5):
a) A representation intended to induce a course of conduct on the part of the person to whom the representation is made;
b) An act resulting from the representation by the person to whom the representation was made; and
c) Detriment to such person as a consequence of the act.
18. The Respondent submits that the facts in Wilchar Construction, as set out above, closely mirror the facts of the case at bar. The Appellant filed her 1992 tax return and did not indicate that she had realized a capital gain in that year. Needless to say, she also did not indicate on her 1992 return that she intended to make use of any of her capital gains exemption. The appellant then filed her 1994 tax return, including the Election, and chose to utilize her capital gains exemption in the amount of $90,000. It is submitted that these facts lead to the conclusion that the elements of estoppel have been satisfied:
a) The representations contained in the Appellant's tax returns were all representations of fact made to the Minister and upon which the Appellant intended the Minister to rely. The Appellant took no steps to amend or revoke the Election or to amend her 1994 taxation year and thus perpetuated the representation;
b) The Minister accepted the filings of the Appellant and assessed her accordingly. In doing so he relied on the representations she made in respect of the utilization of her capital gains exemption in her returns for 1992 and 1994; and
c) This reliance has been to the detriment of the Minister as it is now beyond the normal reassessment period for the Appellant's 1994 taxation year. If the Appellant is permitted to use her capital gains exemption to offset the 1992 capital gain, she will have the benefit of this exemption in both 1992 and 1994, to the detriment of the Minister.
19. The comments of the Federal Court of Appeal in Jencan Ltd. are also relevant to the situation of the Appellant (Respondent's Authorities, Tab 10, at p. 215):
I am of the view that, in an appropriate case, the Minister may rely upon the doctrine of estoppel by representation where a claimant induces the Minister to rely on a state of affairs which no longer exists, thereby causing the Minister to make a determination based on inaccurate information.
Again, the situation envisioned by the Court of Appeal applies to the facts of the Appellant's case. The Minister was induced to rely on the fact that the Appellant had her entire capital gains exemption available for use in 1994. As a result, the Minister accepted the Election as filed and allowed her to apply her capital gain exemption against the capital gain realized by the deemed disposition. The Appellant now seeks to change her 1992 return, which will have the effect of changing her entitlement to the exemption in 1994. The Minister, however, is now powerless to deal with 1994. ...
20. ... The Minister has relied on statements made in the income tax returns of the Appellant. She now seeks to change those statements to the detriment of the Minister. It is submitted that the case law clearly supports the conclusion that she is estopped from doing so.
Analysis and Decision
[4] I am of the view that the submissions of counsel for the Appellant more accurately reflect the legal consequences arising from the facts in this appeal. I believe that we are not faced with an amendment or a revocation of an election because allowing the capital gains exemption to be applied with respect to the disposition in 1992 has the effect of invalidating the election made in 1994. The results of that election being invalid are that on a future disposition of the elected property the Appellant will not be entitled to the $90,000 deduction.
[5] I further believe that the doctrine of estoppel should not apply to the prejudice of the Appellant because, when she made her 1992 return not declaring the capital gain nor taking the capital gains exemption, she did so innocently and certainly without intent to defraud the Minister of National Revenue. This is not a case of retroactive tax planning as contemplated in some of the cases. Rather, when looking at the situation as it existed in 1992, the Appellant did not realize that she had a capital gain in 1992 which could be offset by her capital gains exemption available in that year. That was the situation that existed in 1992 and in my opinion that situation was not altered by the subsequent invalid election made in 1994. Moreover, in my opinion, the hypothetical analysis of Robertson, J.A. in Nassau Walnut was correct and is applicable to this appeal. It matters not that the 1994 year is statute barred. The Minister need not reassess that year because the Appellant, by claiming the exemption in the 1992 year after that year was reassessed in 1995, invalidates the 1994 election.
[6] For all of the above reasons the appeal is allowed with costs.
Signed at Ottawa, Canada, this 11th day of August, 2001.
"T. O'Connor"
J.T.C.C.
COURT FILE NO.: 97-2121(IT)G
STYLE OF CAUSE: Isabel Weber v. The Queen
PLACE OF HEARING: Prince George, British Columbia
DATE OF HEARING: June 25, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge Terrence O'Connor
DATE OF JUDGMENT: August 11, 2001
APPEARANCES:
Counsel for the Appellant: Kenneth R. Hauser
Counsel for the Respondent: Eric Douglas
COUNSEL OF RECORD:
For the Appellant:
Name: Kenneth R. Hauser
Firm: Kenneth R. Hauser Law Corporation
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
97-2121(IT)G
BETWEEN:
ISABEL WEBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 25, 2001 at Prince George, British Columbia, by
the Honourable Judge Terrence O'Connor
Appearances
Counsel for the Appellant: Kenneth R. Hauser
Counsel for the Respondent: Eric Douglas
JUDGMENT
The appeal from the reassessment made under Income Tax Act for the 1992 taxation year is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 11th day of August, 2001.
|
"T. O'Connor" |
J.T.C.C.