Citation:
2017 TCC 75
Date: 20170505
Docket: 2014-3997(IT)G
BETWEEN:
R
& S INDUSTRIES INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Graham J.
[1]
The Respondent has brought a motion to quash the
appeal of R & S Industries Inc. on the basis that the Court does
not have the jurisdiction to hear the appeal.
[2]
In 2005, R & S transferred its business to a
limited partnership called Big Eagle Limited Partnership. The parties elected
to have the rollover provisions in subsection 97(2) of the Income Tax Act
apply to the transfer. R & S filed a T2059 election with its return. The
Minister assessed R & S as filed.
[3]
The Minister subsequently became aware that the
tax consequences of the elected amounts on the T2059 election were different
than those reported by R & S in its tax return. Accordingly, the Minister
reassessed R & S to include substantial amounts in its income.
[4]
The primary issue in this motion is whether the
Court has jurisdiction to hear the appeal.
[5]
There are several components to a T2059 election
form. One component is the basic factual information about the parties, the
transaction and the property transferred. There is no dispute about this
component of the T2059 election.
[6]
A second component of the T2059 election is the
parties’ election of an “agreed
amount” in respect of each property transferred.
There is no dispute about this component of the form. Both R & S and the
Respondent agree that R & S and Big Eagle are bound by the agreed
amounts set out in the T2059 election, subject to the filing of an amended
election. Since the request by R & S and Big Eagle to file an amended
election under subsection 96(5.1) was denied by the Minister and since the
Federal Court denied their application for judicial review of the Minister’s
decision, R & S is not in a position to file an amended election. This
Court does not have jurisdiction to order the Minister to accept an amended
election. Accordingly, R & S cannot, through its appeal, change the agreed
amounts that it and Big Eagle put on the election form.
[7]
A third component of a T2059 election is the
parties’ description of various key facts relating to the transfers. These key
facts include the fair market value of the property transferred, the number and
value of the partnership interests received for the transfer, and the type and
value of the non-partnership interest consideration received for the transfer. Subsections
97(2) and 85(1) provide that the agreed amount selected by the parties to a
rollover will be altered in certain factual situations. The key facts set out
in the third component of a T2059 election allow the Minister to determine
whether these provisions will apply to alter the agreed amount or not. It is in
respect of this third component of the T2059 election that R & S and the
Respondent disagree.
[8]
R & S takes the position that the allocation
of consideration between partnership interests and non-partnership interests
that was set out on the T2059 election form does not reflect the actual
allocation agreed to by R & S and Big Eagle. R & S anticipates that, if
this matter proceeds to trial, it will be able to introduce sufficient evidence
to convince the Court that the actual allocation was different and that R &
S should accordingly be reassessed based on that actual allocation.
[9]
The Respondent takes the position that a
taxpayer cannot use an appeal to the Tax Court to dispute the allocation of
consideration between partnership interests and non-partnership interests in a
T2059 election. The Respondent submits that, because such amounts can have the
effect of indirectly altering the agreed amount through the operation of
subsection 85(1), allowing a taxpayer to amend such amounts effectively allows
the taxpayer to amend the taxpayer’s election. The Respondent also submits that
the allocation of the consideration set out on the T2059 form is part of the
election and thus cannot be amended other than in accordance with subsection
96(5.1).
[10]
I disagree with the Respondent’s position. I
find that the only thing that subsection 85(1) requires the parties to a
transaction to elect is the agreed amount. There is no doubt that the key facts
set out in the T2059 election are essential in order for the Minister to
properly determine whether the various provisions in subsection 85(1) apply to
alter the agreed amount. However, there is an important difference between the
agreed amount and the key facts. The agreed amount is an amount selected by the
parties to the transaction. Other than in accordance with the provisions of
subsection 85(1), the agreed amount cannot be altered by the Minister. By
contrast, the key facts are factual determinations. For example, the parties to
a transaction may record the fair market value of the non-partnership interest
consideration as being $X. However, simply recording $X on the T2059 election form
does not mean that the fair market value is $X. It simply means that the
parties believe it to be $X. If the Minister disagrees with that valuation, the
Minister is free to reassess based on a different valuation. Doing so may,
through the operation of subsection 85(1), have the effect of altering the
agreed amount, but that is not the same as the Minister simply changing the
agreed amount. The Respondent does not dispute the fact that, if, in this
example, the taxpayer disagreed with the fair market value upon which the
Minister had reassessed, the taxpayer could object to, and ultimately appeal
from, the resulting reassessment. In bringing such an appeal, the taxpayer
could not simply point to the fair market value set out in its T2059 election. The
taxpayer would have to introduce evidence of the fair market value. As in any
valuation case, the Court would not be bound by either the figure argued for by
the Minister or the figure argued for by the taxpayer. Ultimately, the fair
market value would be found to be what the Court, based on all of the evidence,
concluded it was.
[11]
Other key facts, such as the allocation of
consideration among transferred properties, are no different than fair market
value. The Minister is not bound by the key facts stated on the T2059 and may,
if she disagrees, reassess accordingly. Similarly, taxpayers are free to object
to, and appeal from, such reassessments.
[12]
The Minister is bound by the agreed amount
because it is something that the parties have elected. The Minister is not
bound by the key facts because the facts are the facts. They exist
independently from the election. So, if the Minister is not bound by the key
facts stated in the election, why would the parties to the transaction be bound
by them?
[13]
There is no question that a taxpayer would face
an uphill battle in court trying to prove that a key fact that both parties to
the transaction certified in the T2059 election to be true is, in fact, not
true. However, that does not mean that the taxpayer is not free to try to do so.
More importantly, it does not mean that the Court lacks jurisdiction to hear
such an appeal.
[14]
Based on all of the foregoing, the Respondent’s
motion to quash the appeal for want of jurisdiction is denied.
[15]
The Respondent asserts in the alternative that
the Amended Notice of Appeal lacks key particulars. Specifically, the
Respondent asserts that the Amended Notice of Appeal fails to identify the
total consideration that R & S says was paid and the allocation of that
consideration among the different items of property. The Respondent submits
that, if I deny her motion to quash the appeal on the basis of jurisdiction, I
should nonetheless strike the appeal on the basis that the Appellant has, after
what amounts to three attempts, failed to disclose a reasonable ground for
appeal. While I agree that the Amended Notice of Appeal lacks certain key
information and that additional particulars are required, I am not prepared to
strike the appeal on that basis. During the hearing of the motion, R & S
conceded that the total consideration was $39,931,772. Rather than force the
Respondent to bring a demand for particulars, I advised the parties that if I
found for R & S on the motion I would order that R & S provide particulars
to the Respondent in the form set out on page 3 of the T2059 election, showing R & S’
position as to what R & S and Big Eagle intended the allocation of
consideration to be. R & S has since provided those particulars to the
Respondent so there is no need for me to order it to do so.
[16]
The Respondent shall have until June 30, 2017 to
file a Reply to the Amended Notice of Appeal.
[17]
Costs of this motion shall be in the cause.
Signed at Ottawa,
Canada, this 5th day of May 2017.
“David E. Graham”
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