Citation: 2009TCC21
Date: 200090109
Docket: 2006-1674(IT)G
BETWEEN:
LEOLA PURDY, SONS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1]
Leola Purdy, Sons Ltd.,
appeals from a reassessment of income tax for its taxation year ended October
31, 2002. In its notice of appeal the appellant identified two issues to be
decided, i) whether its gain on dispositions of index futures trading contracts
in the S&P 500 International Money Market Fund ("contracts") was
taxable on capital or income account, and ii) if the gain was taxable on income
account, whether, pursuant to subsection 111(1) of the Income Tax Act ("Act"),
it was entitled to apply its loss on dispositions of contracts in its 1998
taxation year to reduce its income in 2002.
[2]
The appellant conceded
the first issue, acknowledging its gains on the dispositions of the contracts
in 2002 were on income account. However, the appellant argued that if the gain
on the sale of the contracts was on income account in 2002, then the loss on
dispositions of like contracts in 1998 must also be on income account,
notwithstanding that the appellant filed its 1998 tax return on the basis that the
loss was a capital loss and the tax authority assessed the loss as declared.
[3]
The facts are not in
issue. A Statement of Agreed Facts was filed by the parties. Mr. John Purdy,
the appellant's sole shareholder, testified as to the appellant's investments
and futures trading. From 1997 to 2002 the appellant purchased and sold futures
trading contracts and reported gains and losses on their dispositions on
capital account. The gains or losses from purchases and sales of the
appellant's other securities were also reported on account of capital. The
nature of the appellant's activities, in particular its purchases and sales of
futures contracts, during the period appear to have been the same in 1998 as in
2002.
[4]
The parties agreed on
the following facts:
1. During its
taxation years ending October 31, 1997 to October 31, 2002, the Appellant
traded in various index futures contracts in the S&P 500 International
Money Market Fund.
2. The Appellant
always reported its gains and losses from its investments in those contracts on
capital account.
3. In the
relevant period, the Appellant also invested in shares and other securities.
4. From its
taxation year ending October 31, 1997 to its taxation year ending October 31,
2002, the Appellant had the following gains and losses with respect to the
index futures trading contracts as follows:
|
Taxation Year ending
October 31
|
Net Gain/Loss
|
|
1997
|
$(1,729,243)
|
|
1998
|
(6,026,121)
|
|
1999
|
2,803,186
|
|
2000
|
856,831
|
|
2001
|
1,895,516
|
|
2002
|
1,262,264
|
5. The taxable
capital gain or allowable capital loss reported by the Appellant was as
follows:
|
Taxation year
ending October 31
|
Inclusion Rate
|
Taxable Capital Gain/Loss
|
|
1997
|
75%
|
$(1,276,114)
|
|
1998
|
75%
|
(4,519,591)
|
|
1999
|
75%
|
2,102,390
|
|
2000
|
75%
|
3,548,109
|
|
|
67%
|
(2,584,439)
|
|
|
50%
|
1,533
|
|
2001
|
50%
|
947,758
|
|
2002
|
50%
|
631,132
|
6. In its returns
of income, the Appellant made the consequential adjustment to its capital
dividend account.
7. The Appellant
elected under subsection 83(2) to pay capital dividends of $361,418 in its
taxation year ending October 31,1998 and $1,900,000 in its taxation year ending
October 31, 2002.
1998 LOSS
8. During its
taxation year ended October 31, 1998, the Appellant disposed of various index
futures trading contracts (the "1998 Contracts").
9. The Appellant
reported the disposition of the 1998 Contracts in its tax return for its
taxation year ended October 31, 1998 as a capital loss of $6,026,121.
10. The calculation
giving rise to the allowable capital loss claimed by the Appellant was:
|
$5,491,508
|
Gain from other investments
|
|
$6,026,121
|
Loss from trading of index futures
contracts
|
|
$534,613
|
Net capital loss
|
|
X 75%
|
Inclusion rate
|
|
$400,959
|
Allowable capital loss (available for
carryback)
|
|
$178,140
|
Applied in 1996 taxation year
|
|
$222,819
|
Applied in 1997 taxation year
|
11. The Appellant
applied $4,118,631 of the claimed allowable capital loss (i.e. 3/4 of
$6,026,121) against its taxable capital gains in its taxation year ending
October 31, 1998.
12. After applying
the above allowable capital loss against its taxable capital gains in 1998, the
Appellant's remaining taxable income in the taxation year ending October 31,
1998 was $369,152.
13. The Appellant's
income tax return for the taxation year ending October 31, 1998 was assessed as
filed on April 6, 1999 and became statute-barred under subsection 152(4) on
April 6, 2002.
14. The Appellant
applied $400,959 of the allowable capital loss as net capital losses against
taxable capital gains it had reported in the years prior to its taxation year
ending October 31, 1998, being $178,140 in its taxation year ending October 31,
1996 and $222,819 in its taxation year ending October 31, 1997.
15. The Appellant
did not make a request for a non-capital loss determination under subsection
152(1.1) with respect to the taxation year ending October 31, 1998.
2002 GAIN
16. During the
taxation year ended October 31, 2002, the Appellant disposed of various index
futures trading contracts (the "2002 Contracts").
17. The Appellant
reported the disposition of the 2002 Contracts in its tax return for its
taxation year ended October 31, 2002 as a capital gain of $1,262,264 and a
taxable capital gain of $631,132.
NOTICE OF
REASSESSMENT
18. By Notice of
Reassessment dated September 6, 2005, the Minister of National Revenue (the
"Minister") reassessed the Appellant's taxation year ending October
31, 2002 to:
(a) increase its business income by
$1,277,906; and
(b) correspondingly decrease its taxable
capital gain by $631,132.
19. The Minister
increased the Appellant's business income on the basis that the gain on the
disposition of the 2002 Contracts was taxable on income account.
20. The Appellant
no longer disputes that the 2002 Contracts were taxable on income account and
agrees that the gain from the 2002 Contracts was on income account.
[5]
The appellant's
position is quite simple: if the gains on the dispositions of futures contracts
in 2002 are on income account then the losses on dispositions of futures
contracts in 1998 also were on income account, notwithstanding that the
appellant originally treated the losses as capital losses. In 1998, as described
above, the appellant deducted three quarters of the purported capital losses as
allowable capital losses ($4,519,591) from its taxable capital gains for the
year ($4,118,632).
The net loss of $400,959 was carried back to the appellant's 1996 and 1997 taxation
years pursuant to subsection 152(6) of the Act.
[6]
The
appellant states that its losses on the disposition of the futures contracts in
1998, that is, $6,026,121, were incurred in a business and it had a non-capital
loss in the year of $1,137,378.
The base amount in issue, $1,506,530, is the balance of the one quarter of the originally
claimed capital gain of $6,026,121.
[7]
The
position of the respondent is that if the Minister of National Revenue ("Minister")
were to recognize that the appellant had a non-capital loss of $1,137,378 in
its 1998 taxation year, he could only do so by reassessing 1998. The respondent
submits the Minister has no authority to reassess since the 1998 assessment is
statute‑barred. Respondent's counsel argued that the appellant is
attempting to extend jurisprudence inappropriately and to retroactively recharacterize
the losses used in calculating income for 1998 and then apply those losses to non-statute-barred
taxation years. A major problem, says the respondent, is that the appellant wishes
to recharacterize a transaction that took place in a statute‑barred year.
In any event, the respondent does not agree that the disposition of the
contracts in 1998 were non‑capital losses.
[8]
As far as the appellant
is concerned, 1998 is a lost cause. It has been assessed and the assessment is
statute-barred. However, an error made in assessing 1998 impacts on its 2002
taxation year. The error is that there were non-capital losses — not capital
losses as claimed by the appellant in its 1998 tax return — from dispositions
of futures contracts in 1998. And in assessing 2002 the Minister must recognize
the non-capital losses from 1998.
[9]
As previously
mentioned, Mr. Purdy confirmed that how the appellant conducted itself in
buying and selling futures contracts did not change over time. The motivation
for buying and selling futures contracts was the same in 1998 as it was in 2002.
Cross-examination did not suggest that the dispositions in 1998 could be
characterized as capital transactions. And the parties agreed that in 2002 the
appellant bought and sold futures contracts in the course of a business. In the
circumstances, I have concluded that the appellant was doing in its 1998 taxation
year what it was doing in 2002, carrying on a business of buying and selling
futures contracts. The losses from disposing contracts in 1998 were also non-capital
losses.
[10]
The appellant relies on
the Exchequer Court's decision in New St. James Limited v. M.N.R. for the principle that a loss incurred in
a statute-barred year may be recalculated for the purpose of reassessing a
non-statute-barred year. In New St. James Limited, the Court
recognized the Minister's right to recompute tax accounts in any year,
including years that were statute-barred from assessment.
[11]
The respondent does not
dispute that the Minister may recalculate a loss incurred in a statute-barred
year. However, respondent's counsel submits that in order for the Minister to
recalculate a non-capital loss for a taxation year, the taxpayer must have
reported a non-capital loss in its tax return for that year, that is, in the tax
return for the year the loss was realized. Respondent's counsel refers to a
passage in First Farm Inc. (Formerly Romo Seafood Limited) v. The Queen, to explain how
the principle in New St. James Limited is to be applied:
. . . In that case the original assessment
for 1955 was a "nil assessment", New St. James having reported
a loss after deducting the cost of the alterations as an expense of some
$38,000, which loss was carried forward to 1956. In computing its income for
the 1956 reassessment, the Minister recalculated the 1955 loss to be carried
forward at $330 by treating the cost of the alterations as an amount subject to
capital cost allowance rather than a deductible expense. New St. James
maintained that its 1955 loss had been determined by the Minister when making
the original "nil assessment" and that the loss could not be altered
by him when making the reassessments for 1956 to 1959 because the four-year
time limit of subsection 46(4) had elapsed with respect to 1955.
New St. James,
supra, relied on subsection 46(4) (the predecessor to subsection 152(4))
and argued that the Minister was precluded thereby from inquiring into the
actual loss in respect of which the allowance should be made. Sheppard, D.J. held
at page 5243:
The limitation of section 46(4) only applies
when four years have elapsed after the designated notice or notification and
that has occurred only in respect of the 1955 taxation year.
Hence section 46(4) imposes no
restriction as to any year other than 1955 and therefore not to be subsequent
years 1956 to 1959 inclusive to which the four years have not elapsed and the
limitation of section 46(4) cannot apply. For these subsequent years
section 46(4), having no application, does not preclude an assessment
being made in accordance with the provisions of this Statute, including
sections 139(1)(x) and 32(5). That requires the loss for the years
1956 to 1959 inclusive being taken as provided by the Statute, not as implied
in the assessment for the year 1955.
. . . the relevant parts of subsection 46(4)
referred to by Sheppard, D.J. are now found in subsection 152(4) and are, for
all practical purposes, unchanged.
[Emphasis added by respondent.]
[12]
It appears that the
respondent relies on the emphasized words above in New St. James Limited,
supra, as authority that a loss must be reported in a prior statute‑barred
year in order to be reconsidered in a subsequent taxation year that is not
statute-barred. In First Farm Inc., supra, the taxpayer took an
excessive deduction in a prior year in calculating a loss and in the latter
year the Minister tried to correct the excess deduction by disallowing a
carry-forward of the loss to the extent it was excessive. Whether the loss was
reported was not an issue in First Farm Inc.
[13]
The
respondent also argues that if a taxpayer had income as well as a capital loss
in a year and is assessed tax for the year, the taxpayer may object to and
appeal the assessment recharacterizing the capital loss as a non-capital loss.
But if the taxpayer fails to object to, and appeal, the assessment, the
taxpayer loses his or her right forever to recharacterize the loss for the
year. New St. James Limited would not apply in such
circumstances.
[14]
Thorson P. explained
what is an assessment in Pure Spring Co. Ltd. v. M.N.R.:
The assessment is different from the notice of assessment; the one
is an operation, the other a piece of paper. The nature of the assessment
operation was clearly stated by the Chief Justice of Australia, Isaacs, A.C.J.,
in Federal Commissioner of Taxation v. Clarke ((1927) 40 C.L.R. 246 at
277):
An
assessment is only the ascertainment and fixation of liability.
a definition which he had previously
elaborated in The King v. Deputy Federal Commissioner of Taxation (S.A.); ex parte Hooper ((1926) 37 C.L.R. 368 at 373):
An "assessment" is not
a piece of paper; it is an official act or operation; it is the Commissioner's
ascertainment, on consideration of all relevant circumstances, including
sometimes his own opinion, of the amount of tax chargeable to a given taxpayer.
When he has completed his ascertainment of the amount he sends by post a
notification thereof called "a notice of assessment" . . . But
neither the paper sent nor the notification it gives is the "assessment".
That is and remains the act of operation of the Commissioner.
It is the opinion as formed, and not the
material on which it was based, that is one of the circumstances relevant to
the assessment. The assessment, as I see it, is the summation of all the
factors representing tax liability, ascertained in a variety of ways, and the
fixation of the total after all the necessary computations have been made.
[15]
In the respondent's
view, therefore, the Minister would have to reconsider the appellant's income
and expenses for 1998 and find that the losses on the dispositions of the
futures contracts were incurred in a business, in other words, reassess the
appellant's income for 1998. This, respondent's counsel says, the Minister
cannot do. To recharacterize the loss realized in 1998, reported and assessed
as a capital loss, to a non-capital loss realized in the appellant's 1998
taxation year would amount to a reassessment of 1998.
[16]
That is not how Bowman
J. (as he then was) saw New St. James Limited. In Coastal
Construction, supra,
he explained:
. . . The Minister is obliged to assess in
accordance with the law. If he assesses a prior year incorrectly and that year
becomes statute-barred this will prevent his reassessing tax for that year, but
it does not prevent his correcting the error in a year that is not
statute-barred, even though it involves adjusting carry-forward balances from
previous years, whether they be loss carry-forwards or balances of investment
tax credits. New St. James Limited v. M.N.R., 66 DTC 5241; Allcann Wood
Suppliers Inc. v. The Queen, 94 DTC 1475. No question of estoppel arises: Goldstein
v. The Queen, 74 DTC 1029.
[17]
The Minister need not
reassess the appellant's 1998 taxation year in order to recharacterize the loss
in issue. The Minister formed an opinion as to the appellant's liability for
tax for 1998 and fixed the appellant's tax liability for 1998. The appellant's
tax liability for 1998 will not change. Any error in making the assessment may
be corrected to the extent it affects the calculation of income or fixation of
tax liability for future taxation years of the appellant. But, again, the
appellant's tax liability for 1998 will not be altered.
[18]
One of the respondent's
arguments was that in appealing 2002, the appellant is attempting to request a
notice of loss determination (in accordance with subsection 152(1.1) of the Act)
for 1998, notwithstanding the fact that the 1998 taxation year is
statute-barred and the appellant did not report a non-capital loss in its
original income tax return for 1998. It is a fact that the appellant never made
a request for a determination of a loss and I cannot conclude that in making
this appeal it is now making such a request.
A taxpayer who does not request a notice of determination is not restricted to
the conditions of subsection 152(1.1) of the Act. In Aallcann
Wood Suppliers Inc. v. The Queen, ("Aallcann") Bowman J. (as he
then was) was presented with a similar argument and concluded that:
[I]n the
absence of a binding loss determination under subsection 152(1.1), it is open
to a taxpayer to challenge the Minister's calculation of a loss for a
particular year in an appeal for another year where the amount of the
taxpayer's taxable income is affected by the size of the loss that is available
for carry-forward under section 111. In challenging the assessment for a year
in which tax is payable on the basis that the Minister has incorrectly
ascertained the amount of a loss for a prior or subsequent year that is
available for deduction under section 111 in the computation of the taxpayer's
taxable income for the year under appeal, the taxpayer is requesting the court
to do precisely what the appeal procedures of the Income Tax Act contemplate:
to determine the correctness of an assessment of tax by reviewing the correctness
of one or more of the constituent elements thereof, in this case the size of a
loss available from another year. This does not involve the court's making a
determination of loss under subsection 152(1.1) or entertaining an appeal from
a nil assessment. It involves merely the determination of the correctness of
the assessment for the year before it.
[19]
The issue of a
statute-barred year was absent in Aallcann. In any event, there is no
statutory obligation for a taxpayer to invoke subsection 152(1.1) of the Act
and request a determination of a loss. A request for a loss determination is
optional and when a taxpayer does not request a determination, the fisc and the
taxpayer are in the same position that they were before subsection 152(1.1) was
enacted.
[20]
The appellant also
submits that there is no requirement under the Act that a loss, whether
a non-capital loss or an allowable capital loss, must be reported in a tax
return for the year in which the loss was realized, nor is there any
requirement, as submitted by the respondent, that a loss resulting in a nil
taxable income for that year must be reported in order to deduct the loss as a
carry-forward in a subsequent year. It is the balance of the loss in a prior
year that may be carried forward to a subsequent year. Appellant's counsel
relies on the comments of Bowman A.C.J. (as he then was) in Burleigh et al.
v. The Queen:
The next misconception is the idea
that not only must the loss upon which the loss carryforward is based have been
reported in a return of income for the year in which it is incurred, but also
that the return must have been "processed" and the loss accepted by
the Minister. This idea is wrong on two counts. First, it is wrong to say that
the loss must have been reported in a return of income for the year in which it
was incurred. Section 111 imposes no such restriction. It permits a taxpayer to
carry various types of losses forward or back. It says nothing about requiring
the losses to have been reported in an income tax return. The definitions in
subsection 111(8) of the various types of losses to which section 111 applies
do not include a requirement that they be reported in a return of income for
the year in which they were incurred. There are obviously practical reasons why
it is desirable to report the loss in the return of income for the year in
which it is incurred but this is not a requirement of the law.
[21]
The respondent submits
the facts of the appeal at bar are distinguishable from the facts in Burleigh
et al. In Burleigh et al. the two taxpayers filed their 2001 tax
returns claiming net capital losses in November 2003, after they had
filed their 2002 tax returns (in April 2003) applying net capital losses that arose
in 2001 against their 2002 taxable capital gains. In other words, the Burleighs
had not filed tax returns for 2001 claiming a non-capital loss at the time
they filed their 2002 tax returns applying their losses.
[22]
Because the appellant reported
taxable income for 1998 and 2002, the respondent argues, and the Minister
assessed tax for each year, neither the Burleigh et al. nor the Aallcann
decisions assist the appellant. The corporate appellant at bar was not issued nil
assessments for those years. I do not agree that the Burleigh et al. and
Aallcann cases stand for the propositions that a taxpayer must have a
nil assessment or claim non-capital loses in an earlier year to claim an
adjustment in the amount of loss carry-forward to a future year. The
requirement that a non‑capital loss must be reported before one can adjust
a non-capital loss is found as a condition in subsection 152(1.1), a request
for a determination of a loss. There is no such condition in an appeal from an
assessment of a subsequent year.
[23]
In The Queen
v. Papiers Cascades Cabano Inc.
("Cabano") the Minister assessed the taxpayer for 1993 to 1995,
inclusive, allowing input tax credits ("ITC"). However, later on the
Minister audited the taxpayer and determined that the taxpayer had deducted
$206,365 in excess of the ITCs to which it was entitled for the years 1993 to
1995 and reassessed, although the reassessments were statute‑barred. In
assessing the taxpayer for 1996, the Minister reduced ITCs of $493,672 claimed by
the taxpayer by $206,865. The Tax Court judge allowed the appeal concluding
that the Minister could only correct the initial assessments for 1993 to 1995
by way of reassessment and that it was too late to do so. To allow the Minister
to reduce the ITCs in 1996, the trial judge held, would be tantamount to
allowing the Minister to circumvent the limitation provisions of
subsection 152(4) of the Act. The Crown appealed.
[24]
The Court of Appeal did
not agree with the trial judge. At paragraph 24 of their reasons, the
appellate judges held that only ITCs that change the tax payable in 1996 are
affected by the Minister's assessment for 1996, and that the reduction in ITCs
did not affect the earlier years.
[25]
The Federal Court of
Appeal agreed in Clibetre Exploration Ltd. v. The Queen that there was
no bar to recharacterizing expenses claimed as deductions resulting in non-capital
losses as Canadian exploration expenses. There was no need to reassess the earlier
taxation years in which the deductions were treated as non‑capital losses;
in either characterization the taxable income and thus the tax payable for the
earlier taxation years would be nil.
[26]
In The Queen v.
Bradley
the Federal Court of Appeal held that unless a year is statute-barred, the
Minister is obliged to assess each year in accordance with the Act. Bradley
involved calculating the aggregate of deductible charitable gifts with a
possible carry-forward for the five years prior to the year in which the
deduction was claimed. Strayer J. stated:
It appears to us that in, for example, an
assessment made in respect of 1985 taxes the Minister is obliged, in
considering the amount to be carried forward, to determine the aggregate of
"gifts" made in previous years and this must in the context be
confined to qualifying charitable gifts. In this
case, the Tax Court Judge determined that the sum allegedly given to the
Museum in 1984 (purportedly $98,867) was not a gift because there was no
loan which could have been forgiven by the respondent. Therefore in
calculating, for purposes of carry-forward in subsequent years, the aggregate
of gifts made in 1984, as required by paragraph 110(1)(a), that
aggregate cannot include the invalid amount of $98,867.
[Emphasis added.]
[27]
The respondent is
concerned that if I accept the appellant's interpretation of the statutory
provisions and the jurisprudence the statute-barred provisions would seem to
operate against a further reassessment of a taxpayer by the Minister, but would
almost never prohibit taxpayers from making adjustment requests beyond the
statutory time period.
[28]
The respondent's
concern is unnecessary. We are not dealing with an adjustment request. Nobody
is saying that a statute-barred year can be reassessed. The tax the taxpayer
has been assessed for the statute-barred year cannot be changed. The assessment
of tax for the statute-barred year is "deemed valid and binding
notwithstanding any error, defect or omission in the
assessment. . ."
But it is valid and binding only for the year assessed. If an error was made in
the assessment of the statute-barred year which affects another year, the
Minister, in assessing the other year, must follow the Act and if there
was an error in law in a previous year, including a statute-barred year, that
error ought to be corrected so that the assessment for the current year is
correct: New St-James Limited, supra, Coastal Construction,
supra, Aallcann, supra, Burleigh et al., supra,
Cabano, supra, Clibetre Exploration Ltd., supra.
[29]
It is only "a
foolish consistency [that] is the hobgoblin of little minds . . ." wrote
Ralph Waldo Emerson. Where there is a sound and practical reason to assess in a
consistent manner that is not prohibited by statute, the Minister should not
fear doing so.
[30]
The appeal is allowed
with costs.
Signed at Ottawa, Canada, this 9th day of January 2009.
"Gerald J. Rip"
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