Citation: 2010 TCC 91
Date: 20100305
Docket: 2008-3021(IT)G
BETWEEN:
9136-6872 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
This
is an appeal from a notice of determination of a loss dated May 18, 2007, for
the Appellant's taxation year ended November 30, 2004.
[2]
In
its income tax return for its fiscal year ended November 30, 2004, the
Appellant claimed $1,477,154 as a terminal loss. On or about February 21, 2007,
the Appellant received a reassessment in which the Respondent disallowed the
terminal loss in question, adjusting it to half the amount claimed, that is, $738,577.
Following the notice of reassessment, the Appellant made a request for determination
of a loss on March 2, 2007, for the taxation year in question.
[3]
In
her notice of determination of a loss, which is the subject of this appeal, the
Respondent established the "non-capital" loss as $1,092,981 for the
taxation year in question, and the Appellant's objection to that notice of
determination is based on the Respondent's tax treatment of the Appellant with
regard to the demolition of a building (classes 1 and 3) belonging to the
Appellant. What is objected to in particular is the application of paragraph 13(21.1)(b)
of the Income Tax Act ("the Act"), the consequence of which
was to reduce the terminal loss by half.
[4]
The
Appellant operated the Hôtel Rond‑Point in Lévis, Quebec, for several years. In May 2004, it decided
to demolish the building in order to build a commercial building on the site. Construction of the new
building was completed in November of that same year. The building in question
was leased for a period of 20 years with an option to renew the lease for
five-year periods. The lessee (an IGA supermarket) also has a right of first
refusal in the event that the Appellant should decide to sell the building. However,
there was never any question of selling the land either when the hotel was
demolished or thereafter.
[5]
Through
its accounting advisors, the Appellant asked the Canada Revenue Agency what
amount of terminal loss it was entitled to deduct, and, according to the
information it received, it was entitled to claim $1,477,154 as a terminal loss
for its fiscal year ended November 30, 2004. On December 8, 2004, the Canada
Customs and Revenue Agency, as it then was, authorized the Appellant, effective
November 30, 2004, to use November 30 instead of January 31 as its fiscal
year-end. That explains why the Appellant filed two income tax returns in 2004.
[6]
The
terminal loss claimed was disallowed following the audit and also following the
determination request. The Respondent is of the opinion that paragraph 13(21.1)(b)
of the Act applies here. The cost amount of the demolished building was $1,477,154
and the Appellant reported zero proceeds of disposition for the building in its
amortization table. The Appellant, for its part, submits that the aforesaid
paragraph does not apply because at the time the building was demolished, the Appellant
had no intention of selling the land on which the building was situated. It was
already planning to build a new commercial building on the site after the
demolition and to lease the new building for 20 years, and it was therefore entitled
to claim the full amount of the loss.
[7]
The
terminal loss that the Appellant claimed arose from the disposition of all its property
in Class 1 and Class 3 of Schedule II of the Income Tax Regulations and
was established in accordance with subsection 20(16) of the Act, which reads as
follows:
Terminal loss. Notwithstanding
paragraphs 18(1)(a), (b) and (h), where at the end of a
taxation year,
(a)
the total of all amounts
used to determine A to D in the definition “undepreciated capital cost” in
subsection 13(21) in respect of a taxpayer’s depreciable property of a
particular class exceeds the total of all amounts used to determine E to J in
that definition in respect of that property, and
(b)
the taxpayer no longer owns
any property of that class,
in computing the taxpayer’s income for
the year
(c)
there shall be deducted the
amount of the excess determined under paragraph (a), and
(d)
no amount shall be deducted
for the year under paragraph (1)(a) in respect of property of that class.
[8]
That
subsection provides that, where a taxpayer has disposed of all property of a particular
class and there remains a balance in respect of the "undepreciated capital
cost" (UCC) of the property of that class, the balance must be deducted in
full, in computing income, as a final deduction or terminal loss.
[9]
However,
there are restrictions as to the terminal loss in respect of buildings. These
restrictions are set out in subsection 13(21.1) of the Act and the application of
that subsection is ultimately the issue here. According to subsection 13(21.1),
the rules laid down therein apply where the proceeds of disposition are less
than the cost amount of the building, which is the case here, in my opinion,
since the proceeds of disposition are nil and the cost amount of the building
is greater than the proceeds of disposition.
[10]
Subsection 13(21.1) of the Act reads as follows:
Disposition of building
13(21.1)
Notwithstanding subsection (7) and the
definition “proceeds of disposition” in section 54, where at any particular
time in a taxation year a taxpayer disposes of a building of a prescribed class
and the proceeds of disposition of the building determined without reference to
this subsection and subsection (21.2) are less than the lesser of the cost
amount and the capital cost to the taxpayer of the building immediately before
the disposition, for the purposes of paragraph (a) of the description of
F in the definition “undepreciated capital cost” in subsection (21) and
subdivision c,
(a) where in the year the taxpayer or a person with
whom the taxpayer does not deal at arm’s length disposes of land subjacent to,
or immediately contiguous to and necessary for the use of, the building, the
proceeds of disposition of the building are deemed to be the lesser of
. . .
(b)
where paragraph (a) does not
apply with respect to the disposition and, at any time before the disposition,
the taxpayer or a person with whom the taxpayer did not deal at arm’s length
owned the land subjacent to, or immediately contiguous to and necessary for the
use of, the building, the proceeds of disposition of the building are deemed to
be an amount equal to the total of
(i)
the proceeds of disposition of the
building determined without reference to this subsection and subsection (21.2),
and
(ii) 1/2 of the amount by which the greater of
(A)
the cost amount to the
taxpayer of the building, and
(B)
the fair market value of the
building
immediately before its disposition exceeds the
proceeds of disposition referred to in subparagraph (i).
[11]
There is no question that, from a taxation standpoint, the Appellant's
demolition of the building constitutes a disposition. For paragraph 13(21.1)(a)
to apply, the Appellant, or a person with whom the Appellant does not deal at
arm's length, must dispose of the subjacent land during the year, which is not the case here.
The facts of the instant case do not allow this paragraph to be applied because
neither the Appellant, nor a person with whom it was not dealing at arm's
length, disposed of the subjacent land during the year. That being the case,
the proceeds of disposition must be adjusted pursuant to paragraph 13(21.1)(b)
so as to reduce the loss that can be claimed. That loss, which would normally
be fully deductible, will be treated as a capital loss of which only half will
be deductible.
[12]
The
technical notes to subsection 13(21.1) of the Act, which date from 1982, refer
to the particular time of the disposition of the land and indicate that
paragraph (b) applies where paragraph (a) does not apply to
the disposition. Several excerpts from articles and other writings were quoted
at the hearing. In an article entitled "Sale of a Business – Purchaser and
Vendor Issues", 1999 British Columbia Tax Conference, Leonard Glass expresses
the opinion that it is not necessary for the land to be sold in a subsequent
year for paragraph (b) to apply:
Where a land is not sold or is not sold until a
subsequent year, paragraph 13(21.1)(b) effectively treats any
terminal loss on the building as a capital loss.
[13]
Lorne
Shillinger, in an article entitled "Developments in the Taxation of Real
Estate Investments" (Report of Proceedings of the Fifty-ninth Tax Conference,
Canadian Tax Foundation, 2008), pp. 13-50, is of the same opinion. If the
taxpayer does not dispose of the subjacent land, the proceeds of disposition
will be adjusted by operation of paragraph 13(21.1)(b) of the Act.
[14]
In another article, entitled "Règles spéciales concernant la
déduction pour amortissement" (1995), 17 Revue de planification fiscale
et successorale 163, Michelle Desrosiers expresses the same opinion as the Appellant.
She writes
as follows at page 224:
[translation]
Of course, if
the building is demolished and the seller does not intend to sell the subjacent
land, the rules of subsection 13(21.1) I.T.A. will not apply so as to
deem proceeds of disposition to have been received.
Rather, the
usual rules of sections 54 I.T.A. and 251 T.A. and
subsections 13(21) I.T.A. and 93(f) T.A. will apply to
consider a disposition to have taken place, a viewpoint which is supported by
the Supreme Court of Canada’s decision in Compagnie Immobilière BCN Ltée.
Therefore, to
avoid the seller’s demolishing the building before the sale and being able to
claim a terminal loss, certain rules apply whereby new proceeds of disposition
are deemed to have been received for the building and the land.
[15]
Further
on, at page 229, Ms. Desrosiers explains the operation of paragraph 13(21.1)(b)
of the Act as follows:
[translation]
Disposition
of the land during a subsequent year
Paragraph
13(21.1)(b) I.T.A. sets out a second rule where the disposition
of the associated land does not occur during the same taxation year as the
disposition of the building but where the associated land belonged, at any time
before the disposition of the building, to the taxpayer or to a person with
whom the taxpayer was not dealing at arm's length.
[16] In my opinion, it would be incorrect to argue that
paragraph (b) does not apply if the land is never sold or if an
appellant has no intention of selling it, because no taxpayer knows at what
particular time he or she will dispose of land. Yet a terminal loss may be claimed
only in the year during which it was incurred. In The Queen v. Compagnie
Immobilière BCN Ltée, [1979] 1 S.C.R. 865, at page 880, the
Supreme Court of Canada held that the right to claim a terminal loss "exists
in respect to the year in which it was incurred; the right is forfeited if it is not exercised for that year and
it is not available to be used in respect of a subsequent tax year." In my
opinion, therefore, it would be unreasonable and inefficient to allow a
taxpayer to claim a terminal loss in the year a building is disposed of if the
taxpayer does not sell the subjacent land, and then to assess the taxpayer
again subsequently if he or she does sell it. This would make paragraph 13(21.1)(b)
utterly superfluous.
[17] As certain authors have
pointed out, the purpose of subsection 13(21.1) is to prevent taxpayers
from benefiting unduly from the possibility of claiming a terminal loss in
certain circumstances. In the 3rd edition of their
work L’impôt sur le revenu au Canada, Pierre
Dussault and Normand Ratti had this to say about paragraphs 13(21.1)(a)
and (b):
[translation]
9. Subsection
13(21.1) I.T.A. sets out a restriction concerning the terminal loss with
regard to buildings. According to the preceding rules, the disposition of a
building may give rise to a terminal loss where the lesser of the cost and the
proceeds of disposition is less than the "undepreciated capital cost"
of property of the particular class. This terminal loss is normally fully
deductible under subsection 20(16) I.T.A. The land adjacent or subjacent
to the building is moreover a non-depreciable capital asset; its disposition
can only give rise to a capital gain or loss of which only part is taxable or
deductible. If, following the acquisition of land and a building, the building
is disposed of for an amount less than the undepreciated capital cost of the
class to which the building belongs (in the case, for example, of demolition) but
a capital gain is realized on the land, that gain, which is taxable only in
part, may be completely offset or even exceeded by the fully deductible
terminal loss with respect to the building.
In order to prevent taxpayers
from deriving undue benefit from these rules, restrictions have been made to
the possibility of claiming a terminal loss in certain circumstances. The practical
result of these rules is to treat a loss on the sale of a building that
would normally be fully deductible as a capital loss that is only partly
deductible. This result is obtained by reducing the capital gain on the land by
an amount equal to the disallowed terminal loss.
[18] Paragraph 13(21.1)(b) merely provides that the land must not
be disposed of in the same taxation year as the building. In such a case,
the proceeds of disposition must be adjusted to reduce the loss that may be
claimed. No other
interpretation would be functional or efficient.
[19] Sophie Rousseau, of the
Canada Revenue Agency, gave testimony explaining certain corrections to the
calculations made with reference to classes 1, 3 and 8. These corrections
ultimately had no impact on the amount of the terminal loss nor did they have
any other tax consequence. The Appellant did not object to the corrections and it
is not necessary to reproduce them here, in my opinion, since they do not
affect the application of subsection 13(21.1) of the Act in this case.
[20] The appeal is
dismissed, with costs.
Signed at Ottawa, Canada, this 5th day of March 2010.
"François Angers"
Translation
certified true
on this 31st day
of May 2010.
Erich Klein, Revisor
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