Lamarre Proulx, J.T.C.C.:— This appeal concerns the appellant’s 1986 taxation year.
The issues in this case are whether the assessment of the Minister of National Revenue ("the Minister") may reasonably be regarded as relating to the matter specified in the waiver as required by paragraph 152(5)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), and, if so, whether the conditions for the application of subsection 56(4) of the Act (transfer of rights to income) have been met, or alternatively, whether those described in subsection 56(2) of the Act (indirect payments) were met.
The issues as stated in the reply to the notice of appeal were the following:
(a) Did the Minister have the authority to assess the appellant beyond the three-year deadline?
(b) Were the conditions stated in subsection 56(2) of the Income Tax Act met?
(c) What was the fair market value of the land and the building on September 5, 1986?
[Translation.]
The reply to the notice of appeal was amended at the start of the hearing to add the following paragraph (d) to the issues:
(d) Were the conditions stated in subsection 56(4) of the Income Tax Act met?
[Translation.]
At the hearing, counsel for the respondent stated to the Court that the application of subsection 56(4) of the Act had become the respondent's main point.
Before the date set for the hearing the parties asked the Court to divide the hearing of this appeal by initially dealing with the scope of the waiver and the application of subsection 56(2) of the Act. The Court made an order to this effect. At the time of the hearing the Court, at the request of the parties, varied its order to add the application of subsection 56(4) of the Act.
Facts
The facts upon which the Minister relied in assessing the appellant were set out in paragraph 5 of the amended reply to the notice of appeal.
(a) on May 13, 1982 the appellant signed a sixty-month lease for a building located at 180 de Grandmont in Cap-de-la-Madeleine;
(b) this building was the property of the Norton Company ("Norton"), a U.S. corporation;
(c) the lease included inter alia the following clause:
In the event that the lessor wishes to sell the building housing the leased premises, he shall first offer it to the lessee and the latter shall have thirty days from the receipt of written notice to this effect to purchase the same at the price and subject to the charges and conditions stipulated by any eventual purchaser in good faith;
(d) on August 9, 1986, Aligro Inc. signed an irrevocable offer with the appellant to purchase the goodwill, land and building leased by the appellant for $5,000,000;
(e) $1,200,000 of the $5,000,000 was for the land and the building;
(f) on September 4, 1986, Norton transferred the land and building for $500,000 to Les Placements Fab Inc., Les Entreprises Jules Tessiers Inc., Hôtel Union Inc. and Fabien St-Arnaud;
(g) Les Placements Fab Inc., Les Entreprises Jules Tessier Inc., Hôtel Union Inc. and Fabien St-Arnaud are persons not dealing with the appellant at arm's length;
(h) on September 5, 1986, these related persons transferred the land and building to the appellant for $1,200,000;
(i) on the same day, that is September 5, 1986, the appellant transferred inter alia the land and building to Aligro Inc. for $1,200,000;
(j) on March 14, 1990 the appellant signed a notice of waiver of prescription with respect to
Capital gain on disposal of right to purchase 180 de Grandmont, Cap-de-la- Madeleine.
6. The fair market value of the land and building on September 5, 1986 was $500,000.
[Translation.] Counsel for the appellant submitted the latter's evidence by reading the entire transcript of the examination for discovery of Michel Carbonneau on January 21, 1993. This document was filed as Exhibit A-1. On reading this document counsel for the appellant referred to documents in Exhibit 1-1, an Exhibit which contains documents relating to the transaction at issue here.
Mr. Carbonneau is an employee of the Department of National Revenue ("the Department"), who has been assigned to the head office of the Appeals and Referrals Division since 1992. He is now section chief of the Appeals Division, Ottawa district office. He had no part in preparing the notice of waiver or reassessment of the appellant. His involvement began after November 15, 1991 with the preparation of an opinion dated March 6, 1992 for the head of section, Appeals and Referrals Division, Appeals Branch, pursuant to a request for an opinion from the Sherbrooke district office. This nine-page opinion (tab 1 of Exhibit I-1) resulted from the notice of objection filed by the taxpayer and analyzed the scope of the waiver and the legal basis for the reassessment.
The opinion concluded that the waiver allowed the reassessment and that the basis for the reassessment was indeed subsection 56(2) of the Act.
The notice of assessment under appeal is dated May 13, 1991 (tab 2 of Exhibit l-1). There was agreement on the fact that July 20, 1990 would have been the last day on which the Minister had the power to reassess the appellant for its 1986 taxation year if there had been no waiver on the part of the appellant.
I return to the facts which led to the waiver and the reassessment. By a lease (tab 5(s) of Exhibit 1-1) made on May 13, 1982 at Worcester, Massachusetts between the Norton Corporation ("Norton"), the lessor, having its head office in Worcester, Massachusetts, U.S.A., and a place of business at 190 rue de Grandmont in the town of Cap-de-la-Madeleine, and Marché Sanpri Inc. ("Sanpri"), the lessee, a corporation having its head office at 180 rue de Grandmont in the town of Cap-de-la-Madeleine, the premises at issue in the instant case were leased for a 60-month period from May 1, 1983 to April 30, 1988.
This lease contained a clause entitled "purchase option" which read as follows:
In the event that the lessor wishes to sell the building housing the leased premises, he shall first offer it to the lessee and the latter shall have thirty days from receipt of written notice to this effect to purchase the same at the price and subject to the charges and conditions stipulated by any eventual purchaser in good faith;
However, this purchase option will be inoperative in the event of sale of all the assets of the lessor located in Cap-de-la-Madeleine to another company as part of a commercial transaction.
[Translation.]
On August 9, 1986 Aligro Inc. made a purchase offer to Sanpri and/or other third parties designated by the latter to purchase the food supply business in its entirety, comprising furniture, equipment, goods, goodwill and trade name as well as the building and land for a price of $5,000,000. The breakdown of the purchase price is as follows: $800,000 for the furniture and equipment, $1,800,000 for the goodwill and trade name and $1,200,000 for the building and land, the remainder of the price being for the goods (tab 5(a) of Exhibit I-1).
Sanpri's acceptance was given on the same day. It was signed by Jules Tessier and Fabien St-Arnaud for Sanpri. On the same day, August 9, a non-competition clause was also agreed to by Jules Tessier and Fabien St-Arnaud. (These documents are also to be found at tab 5(a) of Exhibit I-1.)
At the time the acceptance of the purchase offer was signed Sanpri was not the owner of the land or the building. It would be purchasing them from Norton. Under the clause of the lease dealing with the purchase option, Sanpri had the priority right to purchase the land and the building but did not avail itself of this option.
Sanpri was owned 50 per cent by Placements Fab Inc. and 50 per cent by Entreprises Jules Tessier Inc. The chart of the corporate structure of the various parties involved in the instant case was set out in Exhibit A-2 as follows:
[Graph not reproduced.]
On September 4, 1986, the contract of sale of the building and land between Norton and Les Placements Fab Inc., Fabien St-Arnaud, Les Entreprises Jules Tessier Inc. and Hôtel Union Inc. was concluded. Norton and the purchasers were dealing at arm’s length. There was no evidence as to the negotiations which led Norton to sell to these buyers rather than to Sanpri. In any event, the validity of the sale contract is not in question.
The selling price stipulated in the contract is $500,000. At page 9 of the sale contract (tab 5(b) of Exhibit 1-1) the following clause headed "agreement between the purchasers" provides:
The purchasers have agreed between themselves and each party has acknowledged that each of the four purchasers will be owner and possessor of the immoveable sold above in the following proportion, since the funds to purchase the said immoveable were provided and/or spent by each of the purchasers in the following proportion, namely:
Les Placements Fab Inc.: 40 per cent of such immoveable;
Fabien St-Arnaud, personally: 10 per cent of such immoveable;
Les Entreprises Jules Tessier Inc.: 16 per cent of such immoveable;
Hôtel Union (Cap-de-la-Madeleine) Inc.: 34 per cent of such immoveable.
[Translation.]
Exhibit A-3 is a chart describing the shares of the purchasers:
[Chart not reproduced.]
As mentioned in paragraphs (h) and (i) of the reply, the purchasers who were not dealing at arm's length, sold the land and building for $1,200,000 to Sanpri which in turn sold them to Aligro for the same amount.
On November 28, 1989, an auditor of the Department wrote to Jean Lanouette, an accountant belonging to a firm of accountants in Trois-Rivières and acting as accountant for the appellant, giving him the results of the adjustment which Revenue Canada proposed to make to the income previously reported. The statement of the proposed adjustment referred to the "proceeds of disposition of the right to purchase the land and building located at 180 de Grandmont, Cap-de- la-Madeleine: $700,000” (tab 3 of Exhibit 1-1). The waiver signed on March 14, 1990 read as follows: “Capital gain on disposal of right to purchase 180 de Grandmont, Cap-de-la-Madeleine’’. The waiver was signed by Jean Lanouette (tab 4 of Exhibit 1-1).
Appendix 2 of the notice of assessment gives as an explanation of the reassessment: "Capital gain on disposal of 180 de Grandmont, Cap-de-la-Madeleine, Quebec”.
At the examination for discovery Mr. Carbonneau stated that reference was made to the same real property and to the same amount, but in the waiver reference was made to a capital gain on the disposal of a right to purchase and in the assessment to a capital gain on the disposal of the 180 de Grandmont.
The respondent's evidence consisted in reading several pages from the cross- examination of Jean Lanouette at the examination for discovery on January 21, 1993. The cross-examination was filed as Exhibit 1-2. To the question "Were you surprised to find the amounts relating to the capital gain of $350,000?", the answer was "No. We knew that we were speaking of the transaction which took place there" (pages 28 and 30 of Exhibit I-2).
Analysis
The respondent did not submit arguments regarding misrepresentation attributable to neglect, carelessness or wilful default as provided in subparagraph 152(4)(a)(i) of the Act. The Court must therefore ensure that the assessment can reasonably be regarded as relating to a matter specified in the waiver in accordance with paragraph 152(5)(c) of the Act.
Subsection 152(5) of the Act reads as follows:
152(5) There shall not be included in computing the income of a taxpayer for a taxation year, for the purposes of any reassessment, additional assessment or assessment of tax, interest or penalties under this Part that is made after the normal reassessment period for the taxpayer in respect of the year, any amount
(a) that was not included in computing the taxpayer’s income for the purposes of an assessment of tax under this Part made before the normal reassessment period for the taxpayer;
(b) in respect of which the taxpayer establishes that the failure so to include it did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default or from any fraud in filing a return of his income or supplying any information under this Act, and
(c) where any waiver has been filed by the taxpayer with the Minister, in the form and within the time referred to insubsection (4), with respect to a taxation year to which the reassessment, additional assessment or assessment of tax, interest or penalties, as the case may be, relates, that the taxpayer establishes cannot reasonably be regarded as relating to a matter specified in the waiver.
[Emphasis added.]
The French version of subsection 152(5) of the Act uses the word "question" to translate the word "matter".
Counsel for the appellant submitted that Sanpri had no obligation to purchase the immoveables but had a right of first refusal. This right was property within the meaning of the Act, property which could be disposed of. The building and the land are also property that can be disposed of. They are distinct property: the land and building are separate from the right to acquire these immoveables. The waiver related to the latter property, the assessment to the former.
Counsel for the appellant further stated that as the assessment did not relate to the right of disposal mentioned in the waiver but to the disposal of the immoveables, it could not reasonably be regarded as relating to the matter specified in the waiver.
Counsel for the appellant referred to the following cases:
Bailey v. M.N.R., [1989] 2 C.T.C. 2177, 89 D.T.C. 416 (T.C.C.);
Cal Investments Ltd. v. Canada, [1990] 2 C.T.C. 418, 90 D.T.C. 6556 (F.C.T.D.);
Canadian Marconi Co. v. Canada, [1991] 2 C.T.C. 352, 91 D.T.C. 5626 (F.C.A.). He referred to the following passages in Bailey, supra, at pages 2183-84 (D.T.C. 421):
In assessing the appellant on April 13, 1988, the respondent disallowed a deduction claimed by the appellant in his income tax return for 1983. In calculating the amount of the deduction the appellant, in his income tax return, referred to the calculation as “Inventory Write Down". These words may describe an accounting term, but they also describe the calculation performed by the appellant in his income tax return to determine an amount deducted in computing income. The dispute between the appellant and the respondent is whether the amount so determined may or may not be deducted by the appellant in computing his income. During negotiations between the appellant and officials of the respondent, the latter said the appellant could not deduct the amount claimed because of Jellaczycv. M.N.R., [1985] 1 C.T.C. 2158, 85 D.T.C. 184 (T.C.C.). The respondent now sees fit to deny the deduction for other reasons and his counsel has prepared pleadings accordingly.
The amount originally in question, before and after the waiver was signed, and the amount disallowed by the reassessment was [sic] the same amount. The amount was calculated and referred to in the income tax return as "Inventory Write Down". The subject matter to which the amount referred both before and after and [sic] signing of the waiver and on reassessment was the same: inventory write down. A sensible and not absurd view of the dispute is that the amount disallowed as a deduction in computing income can be reasonably regarded as relating to the "Inventory Write Down" described in the appellant's 1983 income tax return.
[Emphasis added.] In Cal Investments, supra, counsel drew the Court's attention to the following passage at page 426 (D.T.C. 6562) and argued that the Crown must ensure that the taxpayer is bound by the waiver:
If by its nature, a waiver under the Income Tax Act may be said to be a mutual affair, it might nevertheless be incumbent upon the Crown in accepting a waiver to be satisfied that the taxpayer will be bound by it. This would normally present no problem when the taxpayer is an individual. It is otherwise, however, when the taxpayer is a corporation which can only become bound by the hand of a person or persons acting on its behalf. The authority of such person or persons would of course be best assured by the affixing of the corporate seal. The corporate seal would thus provide a sufficient degree of validity or authenticity on which the Crown could rely.
Viewed in that light, the requirements of a corporate seal could be said to be for the benefit of the Crown.
Counsel for the appellant also referred to the Federal Court of Appeal’s judgment in Canadian Marconi, supra, at page 356 (D.T.C. 5629), and noted that the Minister does not have the power to reassess after the deadline specified by the Act.
I would allow the appeal with costs and, pursuant to subparagraph 52(b)(iii) of the Federal Court Act, declare that on the facts as agreed the Minister of National Revenue had no power to reassess the respondent's income tax returns for its taxation years 1977 to 1981, inclusive, on or after November 6, 1989.
Relying on the fact that the Minister had no power beyond the specified deadline, counsel for the appellant argued that the Court should interpret the purpose of the waiver strictly.
Counsel for the respondent also referred to Cal Investments, supra, and cited the following observations of Joyal, J. at page 426 (D.T.C. 6562):
A waiver of the sort at issue in this case might be interpreted as an accommodation between the Crown and a taxpayer for the better administration of the Income Tax Act and to provide a more efficient determination of any liability thereunder. In the light of the limitations on assessments under section 152 of tne Act, the Crown requests a waiver so that it may continue its assessment or audit work in a normal administrative mode without having to worry about limitations. The taxpayer, on the other hand, knows full well that on an assessment being made he alone has the burden of proving it wrong. That burden becomes much heavier if the Crown, facing the end of the limitation period, issues what might be termed a premature assessment which, for purposes of abundant caution, would include many sundry items which the taxpayer would have to traverse one by one. The taxpayer in those circumstances would look upon a waiver as being to his own benefit as well as the Crown's and would ordinarily comply with the Crown's request.
In many cases, also, the waiver might be limited to specified issues, i.e., those where assessing or auditing processes have not been completed and which in fact remain the only outstanding items on which the Crown can ultimately decide to assess or reassess. This narrows the field of the assessment and again provides mutual advantages to both the Crown and the taxpayer.
He also referred to Solberg v. Canada, [1992] 2 C.T.C. 208, 92 D.T.C. 6448 (F.C.T.D.), at page 213 (D.T.C. 6452), in which Reed, J. said:
The appropriate approach to the interpretation of the waiver is to seek to ascertain the intention of the parties as expressed in that document together with any relevant circumstances for which evidence is available. This is consistent with the approach taken in interpreting taxing statutes themselves, see, for example, Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 at C.T.C. pages 315-16 (D.T.C. 6323).
In Bailey, supra, counsel for the respondent referred to pages 2181-82 (D.T.C. 419-20):
A waiver is usually given by a taxpayer to the respondent when there is an unresolved dispute over one or more specific matters and the three-year time period within which the respondent may reassess is fast approaching. The execution of a waiver avoids a hasty reassessment by the respondent; it provides the taxpayer with further opportunity to consider adjustments proposed by the respondent and to allow him to make further representations to support his claim.
What is “reasonable” is not the subjective view of either the respondent or appellant but the view of an objective observerwith a knowledge of all the pertinent facts: Canadian Propane Gas & Oil Ltd. v. M.N.R., [1972] C.T.C. 566, 73 D.T.C. 5019 per Cattanach, J. at page 577 (D.T.C. 5028). The appellant’s position is that an objective observer knowing that the respondent had proposed to reassess strictly on the basis of Jellaczyc, supra, knowing that a waiver is normally provided only with respect to a specific matter that is in dispute and knowing that the normal meaning of "inventory writedown" is a specific accounting treatment of inventory, would not conclude that the issue of whether a particular piece of property is capital or inventory is "to a fairly sufficient extent” related to the matter of "inventory writedown".
Conclusion on the scope of the waiver
It is true that the text of the waiver was prepared by an employee of the Department and it is also true that the employee could have been speaking only of a capital gain rather than of the disposition of a right giving rise to a capital gain, but I do not feel I can come to the conclusion that the assessment cannot reasonably be regarded as relating to the matter specified in the waiver.
It is the very purpose of a waiver to allow that be continued the analysis of a transaction or of a matter where there is uncertainty regarding the basis of the assessment. Since further analysis is required, the description of the matter at this stage cannot be expected to be perfect. The assessment must relate to the transaction or matter which is the source of the disagreement between the Minister's officers and the taxpayer and concerning which the latter has agreed to sign a waiver. The taxpayer was not taken by surprise by the assessment. He did not agree with the assessment but it was a matter for which he signed a waiver. In these circumstances, I consider that the reassessment reasonably relates to the matter for which the waiver was issued.
Application of subsection 56(4)
The Minister’s position is that if the appellant had exercised its right to purchase directly from Norton it would have been the entity which would have been entitled to the capital gain, and that by assigning this right to purchase, it assigned the right to the capital gain and so found itself in the circumstances mentioned in subsection 56(4) of the Act.
Counsel for the appellant argued that the fact that a right is not exercised does not constitute a transfer, and especially that the appellant was at no time entitled to a capital gain. He further argued that there is nothing reprehensible in arranging one's affairs in the most suitable way financially and that the businesses which made the capital gain had actual business losses. He added that all the appellant undertook when it signed the purchase offer was to purchase the property and sell it atthe same time as its business. It did not undertake to purchase the property directly from Norton.
Subsection 56(4) of the Act reads as follows:
56(4) Where a taxpayer has, at any time before the end of a taxation year (whether before or after the end of 1971), transferred or assigned to a person with whom he was not dealing at arm's length the right to an amount (other than any portion of a retirement pension assigned by the taxpayer pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the year unless the income is from property and the taxpayer has also transferred or assigned the property.
[Emphasis added.]
Was the appellant entitled to an amount and was that entitlement transferred?
This leads us to consider the legal effect of what was in fact done. It is the actual legal situation which must be considered unless the legislation regarding tax avoidance in Part XVI of the Act is alleged, which is not the case here. What occurred here was the non-exercise of a right of first refusal. Did this constitute the transfer of a right? That may be open to debate However, there is no doubt that this was not the transfer of a right to an amount which should have been included in income to give rise to the capital gain in question. The appellant was not legally entitled to the capital gain in question unless the validity of the transactions is questioned by the respondent, and this was not done. I therefore consider that subsection 56(4) cannot be applied in the circumstances of this appeal.
Application of subsection 56(2)
What about the application of subsection 56(2) of the Act? This subsection reads as follows:
56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
[Emphasis added.]
This subsection applies to the situation of a payment which should have been made to an individual and included in that individual’s income, and which on his instructions was made to someone else. Under subsection 56(2) of the Act, such a payment must be included in the first individual's income. It is somewhat difficult to see how this provision would apply in the circumstances. What in fact was the Minister’s primary position, in the first reply to the notice of appeal, became his alternative position in the amended reply to the notice of appeal, the primary position becoming the application of subsection 56(4). He submitted that the payment was the amount of $1,200,000 paid to the four entities rather than to the appellant, but in fact the payment of $1,200,000 was made to the appellant which purchased the property for $1,200,000 from the four entities. I do not see any indirect payment here. All payments were made directly to the parties concerned. This is not a situation to which subsection 56(2) of the Act applies.
Fraser Co. v. The Queen, [1981] C.T.C. 61, 81 D.T.C. 5051 (F.C.T.D.), and the recent judgments of the Federal Court of Appeal in Shaw v. M.N.R., [1993] 2 C.T.C. 24, 93 D.T.C. 5213 and Smith v. M.N.R., [1993] 2 C.T.C. 257, 93 D.T.C. 5351, have held that the legal effects of transactions must be respected unless fraud is proven or the provisions of Part XVI of the Act regarding tax avoidance are alleged. There is no such proof or allegation here. Accordingly, since the appellant was never legally entitled to a capital gain it cannot be assessed for such a gain under subsections 56(2) and (4) of the Act.
These reasons for judgment were sent to the parties on August 6, 1993.
As mentioned at the beginning of these reasons, the parties asked the Court to divide the hearing of this appeal by limiting it, first, to the waiver and the application of subsections 56(2) and (4) of the Act, and second to determining the fair market value of the land and building on September 5, 1986, for the purposes of applying subsection 69(1) of the Act.
A consent to judgment has now been filed in this Court, on December 17, 1993. It reads as follows:
The parties consent to this Honourable Court rendering judgment allowing the appeal with costs in the amount of $500 for the 1986 taxation year and referring the assessment back to the Minister for reconsideration and reassessment on the basis of the reasons for decision by Judge Lamarre Proulx in this matter on August 6, 1993.
[Translation.]
The appeal is accordingly allowed with costs in the amount of $500.
Appeal allowed.