Citation: 2007TCC692
Date: 20071121
Docket: 2004-2960(IT)G
BETWEEN:
ROSS WINSOR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this
case is whether one-half of the amount that the Appellant received from the
Federal Government in 2000 for the surrender of his fishing licences should be
included in his income either pursuant to section 14 of the Income Tax Act (“Act”)
as income from his business or pursuant to section 38 of the Act as a taxable
capital gain, or not at all.
[2] The Appellant lives
in Embree, Newfoundland and started
fishing over 30 years ago when he acquired his first lobster licence. The
fishing industry in the east coast is an industry that has been subjected to an
increasing level of control as the fish stocks have been depleted. There was a
time when an individual did not need a licence to fish but this is certainly
not the case today. Today, the Federal Government controls many aspects of the
fishing industry including limiting the number of licences, the type of boat
and gear that may be used, the species that may be caught and when fishing may
be done.
[3] In 1998 the Federal
Government determined that it needed to reduce the number of individuals who
were carrying on a groundfish fishing business and commenced a voluntary program
(the Atlantic Groundfish Licence Retirement Program (“AGLRP”)) under which the Federal
Government requested that individual licence holders submit bids to the Federal
Government for the sale by these individuals of their licences to the Federal Government.
The Federal Government would review the bids and evaluate them with the
objective of reducing the greatest amount of landed fish at the least cost. There
were different rounds that were held for the submission of bids. There was no
evidence concerning the total number of individuals who sold their licences to
the Federal Government under this program but in the Information Circular
for Round eight it is stated that:
Round seven of the AGLRP concluded on
June 2, 2000. A total of 627 bids were submitted by groundfish licence holders in
the Newfoundland Region in the seventh round. Of these, 101 bids valued at
$10.7 million were accepted by the Department of Fisheries and Oceans.
[4] In 2000 the
Appellant submitted a bid for his licences under Round eight of the AGLRP. His
bid was successful and he received, based on his bid, an offer dated October
27, 2000 from the Department of Fisheries and Oceans (“DFO”) to retire his
licences. There were two aspects to the offer - one was the purchase of all of
the licences held by the Appellant and the second was his agreement to
permanently exit the commercial fishery. The Appellant accepted this offer.
[5] The total amount
that was paid to the Appellant was $120,000. The Appellant and the Respondent
have agreed that this amount should be allocated equally between the amount
paid for the licences and the amount paid to the Appellant for his agreement to
permanently leave the commercial fishery. This appeal is related to the $60,000
that was allocated to the licences.
[6] The amount of
$30,000 (which is one-half of the amount that was allocated to the licences) was
included in the income of the Appellant under subsection 14(1) of the Act
as there were no amounts determined for A to D in the definition of “cumulative
eligible capital” in subsection 14(5) of the Act in this case. An amount
would only be included under subsection 14(1) of the Act if there is an
“excess” as determined under subsection 14(1) of the Act.
[7] In determining
whether there was an “excess” for the purpose of subsection 14(1) of the Act
for 2000, it is necessary to determine the amount that would have been
calculated in 2000 for E in the definition of “cumulative eligible capital” in
subsection 14(5) of the Act. The rule for determining this amount (prior
to the recent amendments to the description of E in the definition of “cumulative
eligible capital”) has been commonly referred to as the “mirror image rule”.
This description of E in the definition of “cumulative eligible capital” for
the year in question was as follows:
E is the total of all
amounts each of which is 3/4 of the amount, if any, by which
(a) an amount which, as a result of a
disposition occurring after the taxpayer’s adjustment time and before that
time, the taxpayer has or may become entitled to receive, in respect of the
business carried on or formerly carried on by the taxpayer where the
consideration given by the taxpayer therefor was such that, if any payment had
been by the taxpayer after 1971 for that consideration, the payment would
have been an eligible capital expenditure of the taxpayer in respect of the
business
exceeds
(b) all outlays and expenses to the
extent that they were not otherwise deductible in computing the taxpayer’s
income and were made or incurred by the taxpayer for the purpose of giving that
consideration…
[8] There was no
evidence of any outlays or expenses incurred by the taxpayer in relation to the
disposition of the fishing licences to the Federal Government.
[9] The amounts that
the Appellant received in relation to his licences were for the groundfish,
lobster and other licences that he held. The Federal Government, under the
AGLRP, required the Appellant (and any other successful bidder) to surrender all
of the licences that he held and not just his groundfish licence. While it is
clear that the purpose of the program was to reduce the amount of groundfish
being caught (and therefore the groundfish licences were extinguished and were
not reissued) it is not clear whether the other licences were subsequently
reissued to other individuals. However, it is clear that the Federal Government
was not acquiring any of the licences so that it could carry on any fishing
business.
[10] The Federal Court of
Appeal in The Queen v. Toronto Refiners and Smelters Limited, 2002 FCA
476, 2003 DTC 5002, [2003] 1 C.T.C. 365 dealt with the application of section
14 of the Act in a situation where the City of Toronto was acquiring
goodwill of a company in circumstances where the City of Toronto would not be
carrying on the business to which the goodwill related. Sharlow J.A. on behalf
of the Federal Court of Appeal made the following comments:
Question 4 — the mirror image rule: If Toronto Refiners had paid $9 million for the same
consideration that it gave the City of Toronto, would that payment have been an
eligible capital expenditure of Toronto Refiners?
15 As this Court said in Goodwin
Johnson, supra, this question cannot be asked in a vacuum. Rather, it is
necessary to assume that the circumstances of the hypothetical payment by
Toronto Refiners are the same as the circumstances of the actual payment by the
City of Toronto. In other words, Toronto Refiners must
be placed notionally in the situation of the City of Toronto.
16 I would state the
hypothetical facts as follows. Toronto Refiners is an expropriating authority
that wishes to acquire certain land for a civic purpose. There is no actual
expropriation but the land is transferred to Toronto Refiners by agreement,
with the landowner reserving its right of recourse to the OMB. The business of
the landowner terminates and cannot be relocated, and thus the goodwill of the
business is destroyed. It is finally agreed that the appropriate compensation
under subsection 19(2) of the Expropriations Act, in effect the value of
the goodwill of the business, is $9 million. Accordingly, in 1992, $9
million is paid as compensation under subsection 19(2). Given those
hypothetical facts, would the $9 million payment have been an “eligible capital
expenditure” of Toronto Refiners?
17 Counsel for the Crown
argued that the hypothetical facts should not be stated in this way. Rather, he
argued that it is necessary to hypothesize simply that Toronto Refiners pays a
sum of money to another person for giving up its business, and that $9 million
of the payment is allocated to goodwill. He suggested that such a scenario
might occur if Toronto Refiners were acquiring a competitor, or simply causing
another business to terminate for some other business reason.
18 In my view there are two
problems with the approach suggested by counsel for the Crown. One is that it
is not consistent with the decision of this Court in Goodwin Johnson.
The Court in that case said that the hypothetical circumstances of the payment
must be the same as the actual circumstances of the payment. Counsel for the
Crown wishes to hypothesize a commercial, profit motivated transaction where
there is none. In this case, there was a termination of a business for a civic
purpose, with statutory compensation being payable as a result. Those real
circumstances must form the basis of the hypothetical questions asked by the
mirror image rule.
...
22 I return now to the
hypothetical facts, to consider where they lead. The question at this stage of
the analysis is whether the hypothetical $9 million payment by Toronto
Refining meets the definition of “eligible capital expenditure” in paragraph 14(5)(b)
(as it read in 1992).
23 There are a number of
conditions that must be met under that definition. The first condition, found
in the opening words of paragraph 14(5)(b), is that the payment must have been
an outlay or expense made or incurred on account of capital for the purpose of
gaining or producing income from a business. In my view, that condition is not
met. The hypothetical expropriation, like the real expropriation, had a civic
purpose. It had no income earning purpose, and certainly no purpose of gaining
or producing income from a business.
[11] The principle that is derived
from the Toronto Refiners and Smelters Limited case is that in applying the mirror
image rule the circumstances related to the hypothetical payment must be the
same as the actual circumstances related to the payment of the amount received
by the Appellant and if the person making the actual payment has no business
purpose in making such payment, then no business purpose can be imputed to the
hypothetical payment. In this particular case the Federal Government was not
acquiring the fishing licences for any business or any profit motive and, in
particular, the purpose of the AGLRP was to extinguish the groundfish licences
so that they would not be used in any business. Counsel for the Respondent
argued extensively that the Toronto Refiners and Smelters Limited case should not be
followed. However the principle of stare decisis is very clear. Rothstein
J.A. (as he then was) in Commissioner of Competition v. Superior
Propane Inc. et al. (2003), 223 D.L.R. (4th) 55 described this
principle as follows:
[54] The principle of stare decisis is, of
course, well known to lawyers and judges. Lower courts must follow the law as
interpreted by a higher coordinate court. They cannot refuse to follow it: Re
Canada Temperance Act; Re Constitutional Questions Act; Re Consolidated Rules
of Practice, [1939] 4 D.L.R. 14 (Ont. C.A.) at 33, affirmed [1946] 2 D.L.R. 1 (P.C.); Woods Manufacturing Co. v.
Canada (Attorney General), [1951] S.C.R. 504 at 515, [1951] 2
D.L.R. 465.
[12] Therefore the Toronto
Refiners and Smelters Limited case is binding on me and I find that, based on the Toronto
Refiners and Smelters Limited case, since the Federal Government was
acquiring these licences for a non-commercial purpose no part of the amount
received by the Appellant for his fishing licences would be included in
determining E in the definition of “cumulative eligible capital” and hence no
amount would be included in the Appellant’s income under section 14 of the Act
in relation to the amount received by the Appellant for his fishing licences.
[13] The next issue raised relates
to whether one-half of the amount received would be a taxable capital gain
under section 38 of the Act. This would result in the same amount being
included in the income of the Appellant (i.e. $30,000) as there was no evidence
of any amount that should be included in determining the adjusted cost base of the
licences held by the Appellant. Counsel for the Appellant abandoned his
argument in relation to a late filed capital gains election under subsection
110.6(19) of the Act that the Appellant had attempted to file on June 5,
2002.
[14] The Appellant would only have a
taxable capital gain under section 38 of the Act if he had a
capital gain under section 39 of the Act. Paragraph 39(1)(a) of the Act
provides “that a taxpayer’s capital gain for a taxation year from a disposition
of any property is the amount that the taxpayer’s gain for the year ...”.
[15] Therefore in order for the
Appellant to have a capital gain he must have disposed of property.
[16] The status of fishing licences
as property for other purposes has been the subject of litigation in the courts
of the Atlantic
Provinces.
The issue arises because section 16 of the Fishery (General) Regulations
(which are the Regulations that relate to the fishing licences held by
the Appellant) provides that:
16. (1) A document is a property of the Crown and
is not transferable.
(2) The issuance of a document of any type to
any person does not imply or confer any future right or privilege for that
person to be issued a document of the same type or any other type.
[17] A document is
defined in these Regulations as including a licence that grants a legal
privilege to engage in fishing. Licences are granted for a one year period. As
well the granting of licences is subject to the discretion of the Minister of
Fisheries. What rights, if any, that any holder of a fishing licence may have
is determined by the law while the value of any such “right” is determined by
the marketplace.
[18] Notwithstanding
these very restrictive provisions fishing licences have been traded for
substantial amounts of money. In the present case the amount allocated to the
licences was $60,000. The Appellant surrendered his licences in 2000 after all
of the fishing seasons to which his licences related for 2000 were over.
Therefore the Appellant had fished during all of the available time periods in
2000. His gross income for 2000 from his fishing business (excluding the amount
received for his licences) was $27,182 and his net income was $19,719. The
amount allocated to the licences was more than double his gross income for one
year and more than three times his net income for one year.
[19] In the recent
decision of the Supreme Court of Newfoundland and Labrador, Trial Division in Green
v. Harnum, 2007 NLTD 23, Handrigan J. made the following comments
in relation to the commercial activity related to the buying and selling of
fishing licences:
[16] The Department of Fisheries and Oceans (Canada) takes
great pains to ensure that it is clearly understood that a fishing license
confers on the license holder no more than a “privilege” and not a “right” to
fish. In fact, DFO will not even acknowledge that a license can be
“transferred”: it insists that a license which is “issued” to replace a license
that has been “relinquished” has not been transferred between license holders,
even where the new license is identical to the one that has been relinquished
and was issued to a person designated by the surrenderer.
[17] But there is, despite DFO’s position that
licenses are not transferable an active trade in them between fish harvesters
and, in some cases, persons who are not fish harvesters but who are involved in
the industry through trust agreements. Licenses are “sold” in many cases for
large sums of money so it is not surprising that some of these transactions
falter and the parties end up in court asking to enforce their agreements; or,
as in this case, looking for a share of the value of the licenses.
. . .
[20] It should also be noted that
fishing licences are regularly bought and sold. Dwight Saunders works with
Tri-Nav Consultants Inc. in its St. John’s, NL
office. Tri-Nav was established in 1994 and holds itself out as “largest license
and ship brokerage firm operating in Atlantic Canada offering over 50 years
combined experience in the marine and fishing industry”.
[21] Mr. Saunders has been with the
company since 1998 and describes himself as a “marine broker”. Saunders said
his firm offers the same services to the fishing industry that agents offer to
buyers and sellers of real estate. He acknowledged that he has been involved in
the purchase or sale of over 200 fishing enterprises, including their
licences, since he started with Tri-Nav.
[22] Tri-Nav charges a 5% commission,
for which it lists and markets the fishing enterprise, brings the parties
together through an agreement of purchase and sale and acts as an intermediary
with DFO to relinquish and re-issue fishing licenses. Mr. Saunders said he
knows that that are other persons who act as marine brokers besides Tri-Nav;
and that some fishing enterprises and licenses are bought and sold by fish
harvesters themselves without help from brokers.
[20] In Green v.
Harnum, supra, the court noted the value of the fishing licences in that
case was between $400,000 and $500,000 and ordered that the licences be listed
for sale and the proceeds split between the parties.
[21] Ken Carew, who is
the chief of policy and economic analysis with DFO, testified during the
hearing. He confirmed that DFO is aware of the trading of fishing licences
notwithstanding the provisions of the Fishery (General) Regulations that provide that the
licences are not transferable. He also stated that it is DFO’s policy that the
holder of the licence has the right to renew the fishing licence provided that
the holder applies for the renewal, pays the renewal fee and is not in
violation of any terms of the licence. This, however, is contrary to the Fishery (General) Regulations and particularly
subsection 16(2) which clearly states that the issuance of a document (which
would include a fishing licence) does not imply or confer any future right or
privilege for that person to be issued a document of the same type or any other
type. The policy of DFO with respect to the rights of individuals to renew
their fishing licences cannot change the legal limitations as set out in the Fishery (General) Regulations.
[22] The Nova Scotia
Court of Appeal in the recent case of Royal Bank of Canada v. Saulnier,
[2006] N.S.J. 307, 2006 N.S.C.A. 91, dealt with the issue of what property
right, if any, existed in fishing licences for the purposes of paragraph
67(1)(c) of the Bankruptcy and Insolvency Act (“BIA”). Subsection 67(1)
of the BIA provides that:
67. (1) The
property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any other
person,
(b) any property that as against the bankrupt is exempt
from execution or seizure under any laws applicable in the province within
which the property is situated and within which the bankrupt resides, or
(b.1) such goods and services tax credit payments and
prescribed payments relating to the essential needs of an individual as are
made in prescribed circumstances and are not property referred to in paragraph
(a) or (b),
but it shall comprise
(c) all property wherever situated of the bankrupt at the
date of his bankruptcy or that may be acquired by or devolve on him before his
discharge, and
(d) such powers in or over or in respect of the property as
might have been exercised by the bankrupt for his own benefit.
[23] The Nova Scotia
Court of Appeal reviewed the Fisheries Act and Fishery (General) Regulations as well as the
jurisprudence related to the issue of whether a person has any property when
they hold a discretionary licence. The Nova Scotia Court of Appeal stated their
conclusions as follows in relation to the issue of whether Mr. Saulnier held
any property for the purposes of the BIA in relation to his fishing
licences:
[53] Returning to s. 67(1)(c) of the
BIA, my conclusions are the following:
(a) Mr. Saulnier
had a right that his request for renewal of his licence or a reissuance to his
designate not be denied arbitrarily, in bad faith, or based on irrelevant
considerations. This formulation may translate to one of the standards of
review, depending on the circumstances, as a pragmatic and functional approach.
(b) Mr. Saulnier’s
right is not “transitory or ephemeral” whether it is a limited “legal right” or
a “beneficial interest”. It is intangible property within s. 2 of the BIA,
and passes to the administration of the trustee under s. 67(1)(c).
. . .
[55] I conclude that Mr. Saulnier’s
rights to apply for, and resist an arbitrary denial of, a renewal or reissuance
of his licence are “property” passing to the trustees under each of ss.
67(1)(c) and 67(1)(d) of the BIA.
[24] In the BIA “property”
is defined as follows:
Property means any type of property,
whether situated in Canada or elsewhere, and includes money, goods, things in
action, land and every description of property, whether real or personal, legal
or equitable, as well as obligations, easements and every description of
estate, interest and profit, present or future, vested or contingent, in,
arising out of or incident to property.
[25] In the Act “property”
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.
[26] Therefore in my
opinion since any person who has a licence under the Fishery (General)
Regulations has a right “to apply for, and resist an arbitrary denial of,
renewal or reissuance of his licence”, this right would not only constitute
property for the purpose of the BIA but would also be property for the
purposes of the Act. The definition of property under the Act is
very broad and includes any right. This right of the Appellant, as described
above, tenuous though it may be, is therefore property for the purposes of the Act.
[27] Subparagraph
39(1)(a)(i) of the Act provides that the Appellant would not realize a
capital gain if the property that he disposed of is an eligible capital
property. “Eligible capital property” is defined in section 54 of the Act
as follows:
Eligible capital property of a taxpayer
means any property, a part of the consideration for the disposition of which
would, if the taxpayer disposed of the property, be an eligible capital amount
in respect of a business.
[28] Eligible capital
amount is defined in subsection 14(1) of the Act which provides in part
as follows:
Where, at the end of a
taxation year, the total of all amounts each of which is an amount determined, in
respect of a business of a taxpayer, for E in the definition “cumulative
eligible capital” in subsection (5) (in this section referred to as an
“eligible capital amount”) ...
[29] As a result of the
provisions of subsection 248(1) of the Act, the meaning assigned to
eligible capital amount by subsection 14(1) of the Act is applicable for
the purposes of the Act and not just section 14 of the Act.
[30] Since, as noted
above, the amount received by the Appellant from the Federal Government in 2000
for the licences is not included in paragraph E in the definition of
“cumulative eligible capital” in subsection 14(5) of the Act in respect
of a business of the Appellant, the amount received by the Appellant in 2000 for
the licences is not an eligible capital amount in respect of a business. As a
result, in these circumstances, since the Appellant has disposed of the
property and the amount received is not an eligible capital amount in respect
of a business, the licences are not eligible capital property of the Appellant.
Therefore the gain arising from the disposition of the licences is a capital
gain of the Appellant and one‑half of that amount is a taxable capital
gain of the Appellant.
[31] This does not change
the amount that should be included in the income of the Appellant for 2000 nor
does it change the amount of the taxes payable by the Appellant. The
classification of the amount included in income as a taxable capital gain,
instead of business income under section 14 of the Act, will give rise
to other consequences which are not in issue. As a taxable capital gain, if the
Appellant would have had any allowable capital losses that would have been
available for deduction in 2000, then any such available allowable capital
losses could have been deducted against the taxable capital gain (which they
could not if the amount was business income under section 14 of the Act).
There was no evidence of any available allowable capital losses of the
Appellant in this case. The change in the classification of the amount included
in income as a taxable capital gain instead of business income will result in a
reduction of the earned income of the Appellant for RRSP purposes but this does
not affect the amount of taxes payable by the Appellant for 2000.
[32] The appeal to this
Court is from an assessment of taxes. In The Queen v. Anchor Pointe
Energy Ltd. 2007 FCA 188, [2007] 4 C.T.C. 5, 2007 DTC 5379, Létourneau J.A. on behalf of the Federal Court of Appeal made
the following comments:
32 Second, while it
is true that assessment, reassessment and confirmation refer to three specific
actions by the Minister under the Act in the process of determining the tax
liability of a taxpayer, the word “assessment” also refers to the product of
that process. Hugessen J.A. nicely described the two meanings of the word in
Consumers' Gas Co. v. R. (1986), [1987] 2 F.C. 60 (Fed. C.A.). At page 67 he wrote:
What is put in issue on an appeal to the
courts under the Income Tax Act is the Minister's assessment. While the word
“assessment” can bear two constructions, as being either the process by which
tax is assessed or the product of that assessment, it seems to me clear, from a
reading of sections 152 to 177 of the Income Tax Act, that the word is there
employed in the second sense only. This conclusion flows in particular from
subsection 165(1) and from the well established principle that a taxpayer can
neither object to nor appeal from a nil assessment.
33 I agree with the motions judge
that the appeal is not from the confirmation of the assessment. The appeal is,
to use the words of Hugessen J.A., from the product of that assessment: see
also Minister of National Revenue v. Parsons, supra, at page 814, where
Cattanach J. held that the “assessment by the Minister, which fixes the quantum
and tax liability, is that which is the subject of the appeal”. That product
refers to the amount of the tax owing as initially assessed or determined, and
subsequently confirmed. From the perspective of the process itself, the
assessment pursuant to sections 152 to 165 is not completed by the Minister
until, within the time allotted by the Act, the amount of the tax owing is
finally determined, whether by way of reconsideration, variation, vacation or
confirmation of the initial assessment: see Minister of National Revenue v.
Parsons, supra, at page 814.
[33] As a result, since
the amount of taxes payable by the Appellant for 2000 is not changed by the
reclassification of the amount included in income as a taxable capital gain
instead of business income and since the appeal is from an assessment of taxes,
the appeal is dismissed, with costs.
Signed at Vancouver, British Columbia, this 21st day of November 2007.
“Wyman W. Webb”
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