Robertson
J.A.:
I.
Introduction
This
is
an
appeal
from
a
reported
decision
of
the
Tax
Court
of
Canada.
[1995]
2
C.T.C.
2057,
involving
the
interpretation
and
application
of
section
55
of
the
Income
Tax
Act
(the
“Act”).
The
essential
facts
are
that
the
respondent
taxpayer,
Nassau
Walnut
Investments
Inc.
(“Nassau”),
disposed
of
certain
shares
and
claimed
the
proceeds
as
a
tax-free
dividend
pursuant
to
subsections
84(3)
and
112(1)
of
the
Act
when
filing
its
1989
income
return.
The
Minister
of
National
Revenue
(the
“Minister”)
reassessed
Nassau
on
the
basis
that
the
dividend
was
caught
by
subsection
55(2).
That
subsection
has
the
effect
of
converting
certain
tax-free
dividends
into
(taxable)
capital
gains.
While
Nassau
agreed
with
the
Minister
that
subsection
55(2)
applied,
it
sought
to
invoke
paragraph
55(5)(f).
In
defined
circumstances,
that
provision
has
the
effect
of
reducing
the
amount
of
the
capital
gain,
thereby
allowing
a
portion
of
the
dividend
to
remain
tax-free.
The
Minister
refused
to
accede
to
Nassau’s
request
on
the
basis
that
it
had
failed
to
make
a
“designation”
at
the
time
it
filed
its
return
as
required
by
paragraph
55(5)(f).
Two
issues
arise
for
our
consideration.
First,
was
Nassau
obligated
at
the
time
of
filing
its
1989
return
to
“make”
a
designation
pursuant
to
paragraph
55(5)(f)
of
the
Act
in
order
to
reduce
its
tax
liability
arising
from
the
sale
of
the
shares?
The
answer
to
that
question
hinges
on
the
interpretation
of
subsection
55(2).
Second,
as
Nassau
did
not
make
such
a
designation,
and
assuming
that
it
was
required
to
do
so,
then
it
is
necessary
to
decide
whether
Nassau
was
entitled
to
submit
what
the
parties
have
labelled
a
“late-filed
designation”.
The
Tax
Court
Judge
concluded
that
it
was
unnecessary
for
Nassau
to
file
a
designation
and,
therefore,
he
declined
to
deal
with
the
second
issue.
In
the
reasons
that
follow,
I
come
to
the
respectful
conclusion
that
Nassau
was
obligated
to
make
a
designation
at
the
time
it
filed
its
return
for
the
taxation
year
in
question.
With
respect
to
the
second
issue,
I
conclude
that
Nassau
was
entitled
to
claim
the
benefit
of
paragraph
55(5)(f)
of
the
Act
once
the
notice
of
reassessment
issued
and
the
Minister
invoked
subsection
55(2).
II
Legislative
Framework
Paragraph
84(3)(c)
of
the
Act
provides
that
if
a
corporation
redeems,
acquires
or
cancels
shares
of
its
capital
stock
then
that
corporation
is
deemed
to
have
paid
a
dividend
equal
to
the
difference
between
the
amount
paid
and
the
paid-up
capital
in
respect
of
the
shares
so
acquired.
Correspondingly,
paragraph
84(3)(b)
provides
that
the
person
who
disposed
of
the
shares
is
deemed
to
have
received
a
taxable
dividend.
In
turn,
subsection
112(1)
has
the
effect
of
rendering
such
intercorporate
dividends
tax-
free
by
permitting
the
corporate
taxpayer
to
take
an
equivalent
deduction.
The
operation
of
these
provisions,
however,
is
subject
to
subsection
55(2).
Subsection
55(2)
of
the
Act
is
an
anti-avoidance
provision
which
has
the
effect
of
converting
certain
tax-free
dividends
into
(taxable)
capital
gains.
The
object
is
to
prevent
“capital
gains
stripping”.
However,
to
the
extent
that
a
dividend,
including
a
deemed
dividend
arising
under
subsection
84(3),
is
attributable
to
what
is
colloquially
referred
to
as
“safe
income”
of
the
dividend
paying
corporation,
then
that
portion
of
the
dividend
remains
tax-free.
Broadly
stated,
safe
income,
as
calculated
under
paragraph
55(5)(b),
is
equivalent
to
the
tax
retained
earnings
of
the
dividend
paying
corporation
realized
after
1971
and
prior
to
the
receipt
of
the
dividend.
Subsection
55(2)
reads
as
follows:
55(2)
Deemed
proceeds
or
capital
gain.
Where
a
corporation
resident
in
Canada
has
after
April
21,
1980
received
a
taxable
dividend
in
respect
of
which
it
is
entitled
to
a
deduction
under
subsection
112(1)
or
138(6)
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
(other
than
as
part
of
a
series
of
transactions
or
events
that
commenced
before
April
22,
1980),
one
of
the
purposes
of
which
(or,
in
the
case
of
a
dividend
under
subsection
84(3),
one
of
the
results
of
which)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
disposition
at
fair
market
value
of
any
share
of
capital
stock
immediately
before
the
dividend
and
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
income
earned
or
realized
by
any
corporation
after
1971
and
before
the
transaction
or
event
or
the
commencement
of
the
series
of
transactions
or
events
referred
to
in
paragraph
(3)(a),
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
(a)
shall
be
deemed
not
to
be
a
dividend
received
by
the
corporation;
(b)
where
a
corporation
has
disposed
of
the
share,
shall
be
deemed
to
be
proceeds
of
disposition
of
the
share
except
to
the
extent
that
it
is
otherwise
included
in
computing
such
proceeds;
and
(c)
where
a
corporation
has
not
disposed
of
the
share,
shall
be
deemed
to
be
a
gain
of
the
corporation
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
Before
subsection
55(2)
of
the
Act
may
be
deemed
applicable
with
respect
to
dividends
arising
under
subsection
84(3),
it
must
be
established,
inter
alia,
that:
(i)
the
payment
of
such
dividend
effected
a
significant
reduction
in
the
capital
gain
that
would
have
been
realized
but
for
the
payment
of
the
dividend;
and
(ii)
that
said
reduction
in
capital
gain
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
safe
income.
Thus,
if
it
can
be
shown
that
the
entire
amount
of
the
dividend
is
attributable
to
or
covered
by
safe
income
then
subsection
55(2)
is
not
applicable.
If,
however,
a
portion
of
the
dividend
or
capital
gain
is
attributable
to
something
other
than
safe
income,
then
the
entire
amount
received
by
the
corporation
is
deemed
not
to
be
a
dividend.
In
cases
where
the
shares
have
been
sold
at
the
time
the
dividend
has
been
paid,
paragraph
55(2)(b)
deems
the
proceeds
of
sale
to
be
proceeds
of
disposition.
Where
the
dividend
has
been
paid
but
the
shares
retained,
paragraph
55(2)(c)
deems
the
dividend
to
be
a
gain
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
As
is
apparent,
subsection
55(2)
of
the
Act
is
an
“all
or
nothing”
provision.
If
any
portion
of
the
dividend
is
tainted
by
something
other
than
safe
income,
then
the
entire
amount
of
the
tax-free
dividend
is
converted
into
a
capital
gain.
Relief,
however,
is
found
in
paragraph
55(5)(f)
which
reads
as
follows:
55(5)
For
the
purposes
of
this
section,
(f)
where
a
corporation
has
received
a
dividend
any
portion
of
which
is
a
taxable
dividend,
(i)
the
corporation
may
designate
in
its
return
of
income
under
this
Part
for
the
taxation
year
during
which
the
dividend
was
received
any
portion
of
the
taxable
dividend
to
be
a
separate
taxable
dividend,
and
(ii)
the
amount,
if
any,
by
which
the
portion
of
the
dividend
that
is
a
taxable
dividend
exceeds
the
portion
designated
under
subparagraph
(i)
shall
be
deemed
to
be
a
separate
taxable
dividend.
The
above
provision
[which
is
by
no
stretch
of
the
imagination
a
model
of
legislative
clarity],
allows
a
corporation
to
avoid
the
“all
or
nothing”
result
by
designating
a
dividend
to
be
a
number
of
separate
dividends.
By
means
of
designation,
the
portion
of
the
dividend
attributable
to
safe
income
is
severed
and
thus
remains
tax-free.
That
part
of
the
dividend
which
is
not
attributable
to
safe
income
is
to
be
treated
as
though
a
capital
gain
had
been
realized.
It
is
also
of
significance
to
this
appeal
that
the
separate
dividend
designation
is
to
be
made
at
the
time
of
filing
of
the
tax
return
for
the
year
in
which
the
dividend
was
received.
III.
Facts
Together,
Diane
Avery
and
her
brother,
Arthur
Knowles,
owned
all
of
the
issued
shares
of
Westminster
Transport
Ltd.
(“Westminster”).
Each
held
70,000
shares.
At
the
time
Ms.
Avery
decided
to
sell
her
half
interest
to
her
brother,
her
shares
had
a
paid-up
capital
of
$1000
and
a
fair
market
value
of
$700,000.
Had
Mr.
Knowles
been
in
a
financial
position
to
purchase
his
sister’s
shares
directly,
Ms.
Avery
would
have
been
able
to
take
advantage
of
the
then
existing
$500,000
capital
gains
exemption.
Mr.
Knowles,
however,
was
not
in
such
a
financial
position.
On
the
advice
of
Ms.
Avery’s
accountants,
it
was
therefore
agreed
that
she
would
transfer
her
Westminster
shares
to
Nassau
for
$700,000,
at
an
adjusted
cost
base
of
$39,469,
and
that
Westminster
would
subsequently
repurchase
those
shares
in
a
series
of
ten
consecutive
transactions.
Upon
redemption,
Mr.
Knowles
would
be
left
as
the
sole
shareholder
of
Westminster.
The
repurchase
transaction
was
structured
as
follows:
The
accountants
who
structured
the
transaction
anticipated
that
on
the
redemption
of
Nassau’s
shares
in
Westminster,
Nassau
would
receive
$270,978
as
a
tax-free
intercorporate
dividend.
It
is
common
ground
that
that
amount
represents
the
safe
income
attributable
to
the
70,000
shares
in
issue.
The
safe
income
of
Westminster
was
calculated
prior
to
the
completion
of
the
transactions
so
that
a
designation
under
paragraph
55(5)(f)
of
the
Act
could
be
made.
Had
the
designation
been
filed
in
accordance
with
the
accountants’
instructions,
it
would
have
resulted
in
the
realization
of
a
capital
gain
of
$389,553
[$700,000
(fair
market
value)
-
$270,978
(safe
income)
-
$39,469(adjusted
cost
base)
=
$389,553].
Soon
after
the
closing
of
the
transaction,
Nassau
appointed
a
new
accounting
firm.
In
filing
Nassau’s
1989
tax
return,
the
new
accountants
mistakenly
reported
the
difference
between
the
purchase
price
of
the
shares
and
their
paid-up
capital,
$699,000,
as
a
deemed
dividend
under
subsection
84(3)
of
the
Act.
Unfortunately,
this
was
contrary
to
the
advice
of
the
accountants
who
had
structured
the
transaction
so
that
only
an
amount
equal
to
the
safe
income
attaching
to
the
shares
would
be
reported
as
a
deemed
dividend
and
that
the
balance
of
the
redemption
price
would
be
reported
as
proceeds
of
disposition
with
respect
to
a
taxable
capital
gain.
The
new
accountants
also
failed
to
make
the
designation
under
paragraph
55(5)(f)
with
respect
to
the
deemed
dividend.
The
Minister
reassessed
Nassau
on
the
basis
that
the
whole
dividend
should
be
deemed
a
capital
gain.
[However,
the
parties
later
agreed
that
$660,531,
rather
than
$699,000,
represented
the
capital
gain
that
would
have
been
realized
on
a
disposition
of
the
shares
at
fair
market
value
to
an
arm’s-length
party
at
a
time
just
prior
to
Westminster’s
redemption
of
its
shares].
In
response
to
the
Minister’s
reassessment,
Nassau
filed
an
objection
and
requested
permission
to
make
a
designation
under
paragraph
55(5)(f)
of
the
Act.
The
Minister
refused
to
accept
a
late-filed
designation.
Nassau
appealed
to
the
Tax
Court
of
Canada.
IV.
Argument
and
Decision
Below
Before
the
Tax
Court,
Nassau
submitted
that
there
is
nothing
in
subsection
55(2)
of
the
Act
that
indicates
how
safe
income
is
to
be
allocated.
Nassau
went
on
to
argue
that
allocation
on
a
per
shareholder
basis
is
a
reasonable
method.
Applying
this
method,
Nassau
contended
that
all
of
the
safe
income
attributable
to
all
of
its
shares
in
Westminster
could
be
allocated
to
the
first
27,000
of
the
70,000
shares
redeemed.
Therefore,
subsection
55(2)
was
not
applicable
to
the
$270,000
deemed
dividend
received
by
Nassau
on
the
purchase
for
cancellation
of
those
shares.
Correlatively,
there
was
no
need
to
make
a
designation
under
paragraph
55(5)(f)
of
the
Act.
Nassau
also
took
the
position
that
it
should
not
be
prejudiced
by
reason
of
an
inadvertent
misunderstanding
on
the
part
of
its
accountants
as
to
the
tax
treatment
to
be
accorded
to
the
redemption
proceeds.
On
this
basis,
Nassau
sought
permission
to
amend
its
1989
tax
return
to
show
that
a
capital
gain
was
realized
on
the
repurchase
transaction
to
the
extent
that
that
gain
exceeded
the
amount
of
safe
income
attributable
to
the
Westminster
shares.
Finally,
Nassau
sought
permission
to
file
a
designation
pursuant
to
paragraph
55(5)(f)
of
the
Act
so
that
an
amount
equal
to
Westminster’s
safe
income
could
be
treated
as
a
separate
taxable
dividend.
The
Minister
adopted
the
position
that
the
more
reasonable
method
of
allocating
safe
income
is
on
a
pro
rata
basis
per
share.
Consequently,
the
$270,978
of
safe
income
attributable
to
Nassau’s
shares
in
Westminster
should
be
allocated
on
the
basis
of
$3.87
per
share
($270,798
70,000).
Accordingly,
only
$104,490
of
the
$270,000
fair
market
value
of
the
first
27,000
shares
redeemed
can
be
said
to
be
attributable
to
something
other
than
safe
income.
Within
this
context,
it
follows
that
Nassau
was
required
to
make
a
designation
under
paragraph
55(5)(f)
of
the
Act
at
the
time
it
filed
its
1989
return.
With
respect
to
the
late
designation
issue,
the
Minister
contended
that
if
the
Act
contemplated
such,
it
would
have
stated
so
as
is
the
case
with
respect
to
other
provisions
of
the
Act.
As
well,
the
Minister
maintained
that
there
is
a
compelling
policy
reason
why
some
elective
provisions
of
the
Act
have
late-filing
provisions
and
others
do
not.
Specifically,
the
Minister
submitted
that
to
allow
a
late-filed
designation
would
open
up
the
system
to
abuse
by
unscrupulous
taxpayers.
The
Tax
Court
Judge’s
analysis
begins
with
the
understanding
that
sub
section
55(2)
of
the
Act
is
an
anti-avoidance
provision
intended
to
ensure
that
only
capital
gains
which
reflect
safe
income
will
be
treated
as
tax-free
intercorporate
dividends.
In
interpreting
that
provision
it
was
held
that
substance
must
prevail
over
form
to
the
extent
that
this
approach
is
consistent
with
the
wording
and
object
of
Parliament.
The
Tax
Court
Judge
noted
that
had
Nassau’s
new
accountants
not
mistakenly
reported
the
full
redemption
price
of
the
shares
as
a
deemed
dividend,
the
Minister
would
have
allowed
Nassau
the
benefit
of
the
$270,000
of
safe
income
available
to
the
Westminster
shares.
He
also
noted
that
Nassau
was
involved
in
this
litigation
because
of
that
mistake
and
because
“the
form
of
the
transactions
did
not
mirror
the
method
recognized
by
Revenue”
(at
2068).
Thus,
by
allowing
Nassau’s
appeal
and
accepting
its
method
of
allocating
safe
income,
the
Tax
Court
Judge
concluded
that
“substance
is
given
precedence
over
form”.
Finally,
it
was
held
that
if
there
remains
a
reasonable
doubt
[not
resolved
by
the
ordinary
rules
of
interpretation]
as
to
whether
subsection
55(2)
permits
a
method
of
allocating
safe
income
other
than
that
recognized
by
Revenue,
this
doubt
is
to
be
settled
by
recourse
to
the
residual
presumption
in
favour
of
the
taxpayer:
see
Corporation
Notre-Dame
de
Bon-Secours
v.
Communauté
Urbaine
de
Quebec
and
City
of
Quebec
et
al.,
95
DTC
5017
at
5023
(S.C.C.).
V.
Analysis
In
written
argument,
the
Minister
submitted
that
the
Tax
Court
Judge
erred
in
determining
that
the
Minister’s
pro
rata
method
of
allocating
safe
income
among
Nassau’s
Westminster
shares
was
not
reasonable.
As
the
Tax
Court
Judge
made
no
such
finding,
the
Minister’s
argument
was
recast
as
follows.
Subsection
55(2)
applies
if
a
dividend
effects
a
significant
reduction
in
a
capital
gain
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
safe
income.
Accordingly,
assuming
that
the
other
requirements
of
that
provision
are
satisfied,
so
long
as
the
approach
taken
by
the
Minister
in
allocating
safe
income
is
reasonable,
subsection
55(2)
should
apply
regardless
of
whether
the
method
chosen
by
Nassau
could
also
be
considered
reasonable.
I
agree
with
this
submission.
It
is
not
difficult
to
argue
convincingly
that
the
pro
rata
method
for
allocating
safe
income
is
in
law
a
reasonable
one.
Indeed,
based
on
the
authorities
and
written
commentaries
it
is
arguable
that
the
only
acceptable
method
of
allocating
safe
income
is
on
a
pro
rata
basis.
In
The
Queen
v.
McClurg,
[1990]
3
S.C.R.
1020,
the
Supreme
Court
of
Canada
confirmed
that
there
is
a
presumption
of
equality
amongst
shares
unless
the
articles
of
incorporation
provide
otherwise
by
means
of
the
division
of
shares
into
different
classes.
This
well-accepted
principle
of
equality
among
shares
is
reflected
in
Ministry
policy,
as
noted
in
John
R.
Robertson’s
article,
“Capital
Gains
Strips:
A
Revenue
Canada
Perspective”
in
Report
of
Proceedings
of
the
Thirty-Third
Tax
Conference
(Toronto:
Canadian
Tax
Foundation,
1980)
81
at
85:
Each
share
of
a
corporation
represents
only
its
proportionate
share
of
the
value
of
the
company
and
therefore
is
entitled
only
to
its
proportionate
share
of
the
safe
income
of
the
corporation
during
the
relevant
holding
period
of
that
share.
Although
the
Department
of
National
Revenue’s
administrative
policy
is
not
binding
on
the
courts,
other
commentators
have
also
interpreted
the
words
of
subsection
55(2)
as
requiring
a
pro
rata
allocation
of
safe
income.
In
H.J.
Kellough
and
P.E.
McQuillan,
Taxation
of
Private
Corporations
and
Their
Shareholders,
2d
ed.
(Toronto:
Canadian
Tax
Foundation,
1992),
it
is
stated
at
9:33-34:
As
income
is
earned
it
contributes
to
the
value
of
a
share
of
a
particular
class
to
the
same
extent
it
contributes
to
the
value
of
each
other
share
of
that
class...
Because
safe
income
is
the
portion
of
a
gain
that
is
attributable
to
income,
it
is
necessary,
in
determining
the
safe
income
inherent
in
shares,
to
identify
how
income
that
is
earned
and
retained
by
a
corporation
contributes
to
the
gain
on
the
various
classes
of
shares
of
the
corporation.
Income
that
is
retained
is
reflected
in
the
assets
of
the
corporation.
It
is
therefore
necessary
to
identify
how
the
shares
benefit
from
an
increase
in
the
assets
of
the
corporation.
This
usually
can
be
determined
by
identifying
the
liquidation
entitlement
of
the
shares
of
the
corporation
and
the
relative
priorities
of
the
shares
to
this
liquidation
entitlement.
Each
share
of
a
particular
class
held
by
a
particular
shareholder
will
have
the
same
safe
income,
assuming
that
the
shares
of
the
class
all
have
the
same
adjusted
cost
base.
Finally,
I
am
drawn
to
the
persuasive
reasoning
of
Judge
Lamarre
Proulx
in
Gestion
Jean-Paul
Champagne
Inc.
v.
M.N.R.
(6
October
1995),
88-795
IT
(T.C.C.).
In
that
case,
the
corporate
taxpayer
invoked
the
legal
analysis
offered
in
the
decision
now
under
appeal,
and
argued
that
all
of
the
safe
income
of
a
corporation
could
be
distributed
to
one
of
two
shareholders.
In
rejecting
this
approach,
the
Tax
Court
Judge
confirmed
that
there
was
a
presumption
of
equality
among
shares
and
that
safe
income
had
to
be
attributed
to
the
shares
of
a
corporation
in
accordance
with
this
principle.
At
page
12
of
her
reasons
she
stated:
It
is
my
opinion
that
this
approach
runs
counter
both
to
the
aforementioned
corporate
law
principles
relating
to
the
presumption
of
equality
of
shares
and
to
the
purpose
of
subsection
55(2)
of
the
Act.
On
the
one
hand,
that
presumption
has
not
been
rebutted
and,
on
the
other
hand,
it
seems
obvious
to
me
that
it
is
with
respect
to
the
shares
in
issue
that
the
capital
gain
and
the
dividend
must
be
computed
for
the
purposes
of
subsection
55(2)
of
the
Act.
For
the
principle
of
equality
of
rights
attaching
to
shares
and
for
the
object
of
subsection
55(2)
of
the
Act
to
be
taken
into
account,
the
income
earned
and
realized
after
1971
must
be
reasonably
attributed
according
to
the
ratio
of
the
common
shares
redeemed
to
the
total
common
shares
issued
and
still
held.
If
it
were
necessary
to
decide
the
point,
I
would
not
hesitate
to
conclude
that
the
only
acceptable
method
for
allocating
safe
income
is
on
a
pro
rata
basis
as
was
done
in
The
Queen
v.
Placer
Dome
Inc.
(5
November
1996),
A-259-96
(F.C.A.).
Be
that
as
it
may,
I
am
content
for
purposes
of
this
appeal
to
conclude
that
pro
rata
allocation
is
a
reasonable
method
for
attributing
safe
income
and
that
subsection
55(2)
of
the
Act
is
applicable.
It
necessarily
follows
that
Nassau
was
required
to
file
a
designation
under
paragraph
55(5)(f).
The
remaining
and
more
difficult
issue,
in
my
opinion,
is
whether
Nassau
was
entitled
to
make
a
late-filed
designation.
The
question
before
us
was
cast
in
terms
of
whether
Nassau
was
entitled
to
make
a
late-filed
designation
pursuant
to
paragraph
55(5)(f)
of
the
Act.
I
note
however,
that
the
issue
could
equally
have
been
framed
in
terms
of
whether
Nassau
may
amend
its
tax
return
once
the
Minister
initiates
a
reassessment
on
the
basis
of
subsection
55(2).
Regardless
of
how
the
issue
is
characterized,
the
Minister’s
argument
has
two
prongs.
First,
the
Minister
notes
that
there
is
no
provision
in
the
Act
which
provides
for
the
late-filing
of
a
designation.
This
is
to
be
contrasted
with
the
legislatively
permissible
late
filing
of
“elections”
made
under
other
provisions
of
the
Act.
In
support
of
its
position
the
Minister
relies
on
several
decisions
involving
reassessments
and
attempts
by
taxpayers
to
re-elect
or
remedy
the
failure
to
make
an
election
in
the
first
instance.
Second,
the
Minister
argues
that
there
is
an
“important
policy
reason”
why
a
late-filed
paragraph
55(5)(f)
designation
is
not
contemplated
by
the
Act.
I
shall
deal
with
these
arguments
but
I
turn
first
to
Nassau’s
response.
Nassau
argues
that
there
is
no
principle
of
law
or
statutory
provision
which
would
prevent
a
taxpayer
from
making
a
late-filed
designation
under
paragraph
55(5)(f)
of
the
Act.
Moreover,
it
relies
on
several
decisions
of
the
Tax
Court
of
Canada
in
support
of
its
position.
This
is
a
convenient
point
at
which
to
outline
the
relevant
jurisprudence
which,
with
one
exception,
deals
with
the
issue
of
late-filed
designations
and
fully
supports
Nassau’s
position.
In
Trico
Industries
Limited
v.
M.N.R.,
94
DTC
1740
(T.C.C.),
the
corporate
taxpayer
claimed
a
tax-free
dividend
arising
under
subsection
84(3)
of
the
Act,
but
failed
even
to
calculate
the
amount
of
safe
income
on
hand,
let
alone
file
a
designation
under
paragraph
55(5)(f).
In
obiter,
it
was
stated
that
if
the
corporate
taxpayer
had
made
an
honest
mistake
it
would
have
had
the
right
to
make
a
late-filed
designation
or
request
the
same
in
its
Notice
of
Appeal.
The
Tax
Court
Judge
traced
what
may
be
described
as
the
“doctrine
of
honest
mistake”
to
Lee
v.
M.N.R.,
90
DTC
1738
(T.C.C.).
On
the
facts
of
Trico,
however,
there
was
no
evidence
as
to
whether
the
taxpayer’s
failure
to
file
the
designation
on
time
was
due
to
an
honest
mistake
and,
accordingly,
the
late
“election”
was
not
accepted.
In
Lee,
supra,
the
taxpayer
filed
his
1982
and
1983
returns
in
1985.
In
his
1983
return,
he
deducted
an
allowable
business
investment
loss
but
later
sought
to
move
the
deduction
to
his
1982
return.
At
page
1743,
the
Tax
Court
Judge
reasoned
as
follows:
I
am
not
aware
of
any
authority
for
the
proposition
that
once
a
taxpayer
has
signed
his
tax
return
that
he
may
not
change
his
mind
subsequently
following
the
discovery
of
a
mistake
notwithstanding
the
certificate
that
he
signed
as
part
of
his
return.
Certainly,
when
an
honest
mistake
has
been
discovered
by
a
taxpayer
he
must
be
permitted
to
correct
it
and
the
procedure
to
do
so
is
provided
is
the
Income
Tax
Act
within
certain
prescribed
requirements.
The
appeal
process
serves
this
purpose.
In
Gestion,
supra,
the
Tax
Court
upheld
the
right
to
make
a
late-filed
designation.
In
that
case,
the
corporate
taxpayer
did
not
indicate
in
its
return
that
it
had
received
a
$316,000
deemed
dividend
pursuant
to
subsection
84(3)
of
the
Act.
No
explanation
was
provided,
except
to
say
that
there
had
been
an
error
in
the
return.
The
Tax
Court
Judge
was
unable
to
conclude
that
the
omission
was
due
to
intentional
conduct
or
bad
faith
on
the
part
of
the
taxpayer.
Moreover,
the
Minister
did
not
allege
any
wrongdoing
by
the
taxpayer.
The
Tax
Court
Judge
went
on
to
conclude
that
there
is
no
principle
of
law
that
would
prevent
the
taxpayer
from
availing
itself
of
paragraph
55(5)(f)
unless
such
be
expressly
prohibited
by
its
terms,
which
is
not
the
case.
At
page
15,
she
reasoned:
I
do
not
understand
why
the
Minister
wishes
to
make
this
paragraph
[55(5)(f)]
out
to
be
so
complicated.
The
election
must
be
made
simultaneously
with
the
application
of
subsection
55(2)
of
the
Act,
but
if
an
error
is
made
at
the
time
of
the
first
application
and
if
the
Minister
reassesses
on
the
basis
of
a
new
amount,
there
is
no
reason
for
the
same
correction
not
to
be
made
for
the
purposes
of
paragraph
55(5)(f)
of
the
Act.
In
contrast
to
Gestion,
the
Tax
Court
in
Nivram
Holdings
Inc.
v.
M.N.R.
(19
April
1991),
88-1944(IT),
held
that
the
Tax
Court
lacked
the
jurisdiction
to
allow
a
late
filing.
In
that
case,
the
corporate
taxpayer
claimed
a
tax-
free
deemed
dividend
arising
under
subsection
84(3)
of
the
Act.
The
Minister
reassessed
on
the
basis
of
subsection
55(2)
and
the
taxpayer
sought
to
make
a
late-filed
designation
under
paragraph
55(5)(f).
The
Tax
Court
Judge
concluded
that
“there
is
nothing
in
the
Act
that
gives
the
Tax
Court
the
jurisdiction
to
allow
a
late
filing
except
in
the
case
of
a
Notice
of
Objection
or
a
Notice
of
Appeal”
(at
6).
If
this
case
were
to
be
decided
solely
on
the
basis
of
the
jurisprudence
of
the
Tax
Court
of
Canada
I
would
have
no
difficulty
in
concluding
that
Nassau
is
entitled
to
make
a
late-filed
designation.
The
failure
to
comply
with
paragraph
55(5)(f)
arose
because
of
an
honest
mistake
and
the
matter
was
raised
following
the
issuance
of
the
notice
of
reassessment.
[Paragraph
12
of
the
Agreed
Statement
of
Facts
discloses
that
on
filing
its
Notice
of
Objection
to
the
Minister’s
reassessment
Nassau
requested
permission
to
file
a
designation].
In
my
respectful
view,
however,
the
doctrine
of
honest
mistake
is
not
a
sufficient
basis
on
which
to
accord
taxpayers
the
right
of
making
late
designations.
It
cannot
be
doubted
that
the
refusal
of
the
Minister
to
accede
to
Nassau’s
request
seems
antithetical
to
elemental
concepts
of
fairness.
Conversely,
the
doctrine
of
honest
mistake
is
appealing
because
its
application
is
intended
to
bring
about
a
result
that
is
in
harmony
with
basic
ideas
of
fairness.
But
the
difficulty
with
the
doctrine
lies
in
delimiting
its
boundaries.
To
paraphrase
Judge
Learned
Hand,
I
do
not
think
it
desirable
for
this
Court
to
embrace
the
opportunity
of
anticipating
a
doctrine
which
may
be
in
the
womb
of
time
but
whose
birth
is
somewhat
distant:
see
Spector
Motor
Service,
Inc:,
v.
Walsh,
139
F.
2d
809
at
823.
The
doctrine
of
honest
mistake
may
serve
as
a
starting
point
for
analysis
but
cannot
supplant
a
contextual
and
purposive
approach
to
the
interpretation
of
tax
legislation.
In
other
words,
legal
conclusions
cannot
rest
upon
the
premise
of
unfairness
without
a
corresponding
examination
of
the
legislative
framework
relevant
to
the
issue
at
hand.
It
is
to
that
type
of
analysis
that
I
now
turn.
The
parties
have
framed
the
paragraph
55(5)(f)
issue
in
terms
of
whether
Nassau
is
entitled
to
make
a
late-filed
designation.
They
have
also
pursued
the
argument
in
terms
of
that
subsection
being
an
election
provision
or
anal
ogous
thereto
and,
accordingly,
have
cited
cases
involving
true
election
provisions:
see,
for
example,
Miller
v.
The
Queen,
93
DTC
5035
(F.C.A.).
While
there
are
numerous
provisions
throughout
the
Act
which
require
a
taxpayer
to
make
an
election
at
the
time
of
filing
a
return,
or
within
a
prescribed
period,
paragraph
55(5)(f)
is
not
an
election
provision.
This
is
so
despite
the
fact
that
it
has
been
referred
to
as
such,
and
inadvertently
so,
by
some
judges
of
the
Tax
Court:
see
Gestion
and
Trico,
supra.
In
contradistinction
to
a
designation,
and
as
a
general
proposition,
when
an
election
is
to
be
made
the
taxpayer
must
make
a
decision
to
forego
one
option
in
favour
of
another
on
the
basis
of
an
assessment
of
tax
risks
which
may
or
may
not
materialize
depending
on
uncertain
events.
In
addition
to
this
qualitative
difference,
the
Act
itself
implicitly
recognizes
that
a
designation
and
an
election
are
not
one
and
the
same.
For
example,
subsection
220(3.21),
added
by
S.C.
1995,
c.
21,
s.
42,
deems
certain
designations
under
section
80
and
subsection
80.03(7)
to
be
elections
for
the
purposes
of
subsection
220(3.2).
The
latter
provision
was
inserted
in
the
Act
in
1991
as
part
of
a
set
of
relieving
amendments
intended
to
introduce
flexibility
where
previously
none
existed
in
the
process
of
administering
and
enforcing
certain
election
provisions
in
the
Act.
This
was
to
be
accomplished
by
means
of
Ministerial
discretion
to
be
exercised
upon
application
of
the
taxpayer
to
submit
late,
amended
or
revoked
specified
elections:
see
Regulation
600.
What
designations
and
elections
have
in
common
is
the
fact
that
the
Act
expressly
provides
for
relief
in
some
instances
but
not
others.
In
the
case
at
bar,
the
Minister
seized
on
that
point,
arguing
that
it
can
therefore
be
presumed
that
Parliament
intended
that
no
relief
be
granted
outside
the
stated
circumstances.
I
disagree
with
that
proposition:
see
also
The
Queen
v.
Sentinel
Self-Storage
Corporation
(28
November
1996),
A-201-96
(F.C.A.)
at
6;
The
Queen
v.
On-Guard
Self-Storage
Limited
(28
November
1996),
A-202-
96
(F.C.A.)
at
6.
Although
relief
is
provided
selectively
by
the
Act,
it
does
not
necessarily
follow
that
Parliament
intended
to
preclude
relief
in
those
situations
not
specifically
addressed
by
the
Act.
Rather,
the
fact
that
the
Act
authorizes
the
late
filing
of
a
designation
or
an
election
in
particular
circumstances
gives
rise
only
to
a
rebuttable
inference
that
Parliament
did
not
intend
that
taxpayers
have
such
a
right
in
other
instances.
That
the
inference
is
a
rebuttable
one
rests
on
three
understandings.
First,
to
hold
otherwise
would
be
to
embrace
literalism
as
a
method
of
statutory
interpretation
and
treat
the
Act
as
a
complete
code.
Second,
I
know
of
no
case
which
holds
that
because
an
exception
is
provided
by
statute
for
one
case
and
not
another,
that
fact
alone
is
determinative
such
that
no
other
exceptions
may
exist.
My
position
in
this
regard
was
affirmed
most
recently
in
Sentinel
Self-Storage
and
On-Guard
Self-Storage,
supra.
Third,
the
courts
have
long
adopted
a
contextual
or
purposive
approach
as
the
proper
means
to
construe
legislation.
In
support
of
the
proposition
that
Parliament
intended
to
provide
relief
only
where
it
is
expressly
granted,
the
Minister
invokes
the
jurisprudence
on
elections
which
demonstrates
that
taxpayers
have
had
no
success
in
that
context
in
obtaining
relief
where
the
Act
provides
none:
see
Loewen
v.
M.N.R.,
93
DTC
5109
(F.C.T.D.),
followed
in
W.
Struan
Robertson
v.
The
Queen
(1
March
1996),
93-2242
(T.C.C.);
see
also
The
Queen
v.
Adelman,
93
DTC
5376
(F.C.T.D.).
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.
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
“reelect”.
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
dif-
ference
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.
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.
Having
decided
that
the
present
situation
is
not
analogous
to
the
election
cases,
it
seems
only
logical
to
recast
the
issue
in
terms
of
whether
Nassau
is
entitled,
following
a
reassessment
initiated
by
the
Minister
and
based
on
the
application
of
subsection
55(2),
to
amend
a
tax
return
for
the
purpose
of
taking
advantage
of
the
safe
income
attributable
to
the
shares
sold
to
Westminster.
But
irrespective
of
whether
the
issue
is
framed
in
terms
of
a
right
to
amend
in
these
restricted
circumstances
or
to
make
a
late-filed
designation,
there
will
be
no
difference
in
the
result
or
the
analysis.
Just
as
the
Act
provides
for
a
late-filed
designation
only
in
particular
circumstances,
the
Act
also
accords
a
right
to
amend
a
tax
return
in
some
instances
but
not
others.
In
both
scenarios
there
exists
a
rebuttable
inference
that
relief
may
be
granted
only
in
the
stated
circumstances.
At
the
outset,
though,
I
wish
to
make
clear
that
this
case
can
be
decided
without
reference
to
a
taxpayer’s
general
right
to
amend
his
or
her
tax
return.
While
the
argument
before
the
Tax
Court
was
framed
in
terms
of
a
right
to
amend
and
to
make
a
late-filed
designation,
it
was
argued
before
us
in
terms
of
the
latter.
Perhaps
Nassau
chose
not
to
cast
the
argument
in
terms
of
the
former
because
there
appears
to
be
no
jurisprudence
directly
on
point.
This
dearth
of
case
law
would
seem
to
explain
why
Nassau
relies
on
Tax
Court
cases
establishing
the
doctrine
of
honest
mistake
and
why
the
Minister
invokes
the
cases
respecting
elections.
At
least
one
commentator
has
suggested
that
when
the
Minister
initiates
a
reassessment
to
which
the
taxpayer
subsequently
objects,
there
may
be
a
right
to
amend
the
return
following
issuance
of
the
Notice
of
Reassessment:
see
D.W.
Smith,
“Reassessments,
Waivers,
Amended
Returns,
and
Refunds”
in
Corporate
Management
Tax
Conference
(Canadian
Tax
Foundation,
1988)
8:1
at
8:35.
But
the
existence
of
a
restricted
right
to
amend
in
turn
raises
the
question
of
whether
the
taxpayer
has
all
the
options
that
were
available
to
him
or
her
at
the
time
of
filing
the
return
or
whether
he
or
she
is
confined
to
adjustments
that
relate
directly
to
the
issues
raised
on
the
reassessment.
Based
on
two
authorities,
Smith
implicitly
suggests
that
a
taxpayer
may
have
only
the
latter
type
of
limited
freedom
to
vary
his
or
her
original
return
(at
8:36):
see
Montreal
Trust
Co.
(Lodestar
Drilling
Co.
Ltd.)
v.
M.N.R.,
62
DTC
1242
(S.C.C.)
and
Hadler
Turkey
Farms
Inc.
v.
The
Queen,
86
DTC
6013
(F.C.T.D.).
For
the
purpose
of
deciding
this
appeal,
it
is
unnecessary
to
decide
whether
a
reassessment
has
the
effect
of
giving
the
taxpayer
all
the
options
available
at
the
time
of
filing
his
or
her
return.
In
the
instant
case,
paragraph
55(5)(f)
can
reasonably
be
said
to
be
related
directly
to
the
issues
surrounding
the
applicability
of
subsection
55(2).
Let
us
assume,
then,
that
Nassau
has
a
right
to
amend
its
return
[or
make
a
late-filed
designation]
in
the
wake
of
a
reassessment
initiated
by
the
Minister
and
his
reliance
on
subsection
55(2).
Is
there
any
basis
upon
which
it
might
be
said
that
Parliament
did
not
intend
such
a
result?
Here,
I
turn
to
the
Minister’s
policy
argument.
The
Minister
contends
that
the
requirement
of
filing
a
designation
at
the
time
of
filing
a
return
serves
as
a
disincentive
to
the
unscrupulous
taxpayer.
The
argument
is
that
unless
a
designation
is
made
on
time,
there
is
nothing
to
alert
the
Minister
that
a
given
dividend
should
be
subject
to
subsection
55(2)
of
the
Act.
If
late-filed
designations
were
permitted,
it
is
said
that
unscrupulous
taxpayers
could
postpone
filing
a
designation
in
the
hope
of
receiving
a
tax-free
dividend,
at
least
part
of
which
is
properly
subject
to
subsection
55(2).
In
my
opinion,
the
Minister’s
policy
argument
cannot
be
accepted
for
at
least
four
reasons.
First,
the
intended
purpose
of
paragraph
55(5)(f)
is
not
to
discourage
the
unscrupulous.
It
is
my
understanding
that
paragraph
55(5)(f)
was
inserted
into
the
Act
at
the
last
moment
and
as
something
of
an
afterthought
in
order
to
prevent
the
conversion
by
subsection
55(2)
of
an
entire
dividend
into
taxable
capital
gain
where
a
portion
of
that
dividend
might
be
attributable
to
safe
income:
see
generally
R.D.
Brown
and
T.E.
McDonnell,
“Capital
Gains
Strips:
A
Critical
Review
of
the
New
Provisions”
in
Report
of
Proceedings
of
the
Thirty-Second
Tax
Conference
(Canadian
Tax
Foundation,
1981)
51
at
73.
Second,
paragraph
55(5)(f)
of
the
Act
cannot
be
made
to
serve
an
unintended
purpose
when
other
provisions
of
the
Act
are
directed
at
the
very
mischief
to
which
the
Minister
adverts.
Sections
162
and
163
of
the
Act
specifically
address
a
taxpayer’s
failure
to
disclose
income
and,
as
penalty
provisions,
fulfil
a
deterrence
function
in
respect
of
potentially
unscrupulous
taxpayers
identified
by
the
Minister
as
a
cause
for
concern.
Third,
in
some
instances
the
corporate
taxpayer
will
not
have
to
make
a
designation
because
the
entire
dividend
is
covered
by
safe
income.
In
oral
argument,
the
Minister
agreed
that
in
such
a
circumstance,
paragraph
55(5)(f)
of
the
Act
would
not
have
the
effect
of
alerting
Revenue
Canada
to
possible
tax
problems
associated
with
safe
income.
The
Minister’s
policy
argument
is
therefore
unfounded
in
this
scenario.
Finally,
the
Minister’s
interpretation
of
paragraph
55(5)(f)
works
an
unjustified
or
unreasonable
result.
Consider
the
situation
in
which
the
entire
dividend
is
attributable
to
safe
income.
Assume,
for
example,
that
a
taxpayer
calculates
safe
income
at
$4
per
share
on
a
dividend
of
$3
per
share;
hence,
no
designation
is
required.
If
by
chance
that
calculation
is
wrong,
safe
income
might
actually
amount
to
$2
per
share
in
which
case
a
designation
would
be
necessary
in
order
to
preserve
the
tax-free
character
of
that
part
of
the
dividend
which
is
covered
by
safe
income.
On
the
Minister’s
view,
in
the
event
that
the
calculation
of
safe
income
in
our
hypothetical
scenario
is
erroneous,
section
55
should
operate
so
as
to
re-characterize
the
whole
dividend
as
taxable
capital
gains.
The
corporate
taxpayer
therefore
would
be
penalized
even
though
initially
there
appeared
to
be
no
need
to
make
a
designation
under
paragraph
55(5)(f).
In
my
opinion,
such
a
result
is
absurd.
The
Minister’s
approach
to
our
hypothetical
example
produces
an
unwarranted
penal
consequence
which
is
not
supportable
in
law.
The
unreasonable
nature
of
the
Minister’s
position
is
highlighted
by
the
fact
that
it
is
well
recognized
that
the
safe
income
calculation
is
complex
and
controversial:
see
Placer
Dome
Inc.,
supra,
and
B.J.
Arnold,
T.
Edgar
&
J.
Li,
Mater-
ials
on
Canadian
Income
Tax,
10th
ed.
(Toronto:
Carswell,
1993)
at
726-27.
In
conclusion,
it
is
my
opinion
that
Nassau
is
entitled
to
claim
the
benefit
of
paragraph
55(5)(f)
of
the
Act.
That
right
arose
once
the
Minister
issued
the
notice
of
reassessment
and
invoked
subsection
55(2).
In
other
words,
the
inference
that
Parliament
did
not
intend
to
accord
relief
in
these
circumstances
has
been
rebutted.
Accordingly,
the
appeal
should
be
dismissed
with
costs.
Appeal
dismissed.