Citation: 2012 TCC 10
SHAYE B. GREEN,
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
This is an appeal by
Mr. Shaye Green in respect of assessments made under the Income Tax Act
(the "Act") for his 2008 taxation year. In reassessing the
appellant, the Minister of National Revenue (the "Minister") deleted
a capital loss of $2,750 claimed by the appellant and included a capital gain
of $68,250 in respect of the disposition of a property located at 66 Main Street in the City of Ottawa
The Property had
belonged to the appellant's grandmother and was purchased as a lot in 1926. In or
about 1954, a building was constructed, and the first level was used for
commercial purposes while the grandmother's family resided in the upper-level apartment
until 1966. The appellant's grandmother passed away in 1967. In her will, the Property
was devised to her trustees, namely, the appellant's mother and her two
brothers or their survivor or survivors, to hold and administer for the benefit
of the appellant's mother for the term of her life, and upon her death, the Property
was to be used and administered by her trustees for the benefit of the children
of the appellant's mother until the youngest of those children should attain
the age of twenty-one years, upon which event the Property was to be
transferred in equal shares to those of her children who were alive at that
time for their own use absolutely.
The appellant's mother had
the enjoyment of her life interest until she passed away on June 18, 2007. At
the time of her death, all her children had reached the age of twenty-one years
and four were alive, including the appellant. They acquired a fee simple interest
in the Property after the appellant's mother passed away. The appellant's
mother was the only surviving trustee under the grandmother's will; until 2003
she filed T3s on behalf of the trust, but no capital disposition was reported by
the trust during all those years.
Transfer Tax Statements
for the Property (Exhibit R-1, Tab 15) indicate that on March 7, 2008,
documents were registered at the land registry office showing that the
appellant, his brother and two sisters were tenants in common of the Property.
The four of them sold the Property on March 10, 2008 for $395,000.
An audit of the
appellant's 2008 taxation year was conducted as a result of a request for a clearance
certificate made by the appellant for his mother's estate. The audit revealed
that the Property was not a principal residence, that T3s were filed by the
trustees until 2003 and, as mentioned earlier, that no capital disposition was
reported by the trust. On March 15, 1994, the trust did file an election to
defer the deemed realization day under subsection 104(5.3) of the Act (Exhibit
R-1, Tab 9).
As a result, the
auditor calculated the capital gain on the disposition of the Property by using
the fair market value of the Property on December 31, 1971 (valuation day),
which was agreed by the appellant to be at $100,000. The auditor added selling
costs of $22,000 to that amount. An adjusted cost base of $122,000 was thus used
to determine a total gain of $273,000, of which a one-quarter share was
attributed to the appellant.
The respondent submits
that the beneficiaries, including the appellant, are deemed to have received
the Property at its fair market value at the date of the grandmother's death in
1967. Since that date was prior to valuation day, the cost of the Property
would be its fair market value on valuation day, which was agreed to be
$100,000. The respondent further submits that the capital gain on the Property
was properly calculated and included in the appellant's income for the 2008
The appellant submits
that the trust was responsible for paying the capital gains tax and that, since
he only became an owner of the Property upon his mother's death, an adjusted
cost base of the Property at that time should be used to calculate the capital
gain. He submits that the adjusted cost base at the time of his mother's death
cannot be lower than the price at which the Property was sold a few months
The issue is whether
the Minister correctly included the capital gain from the disposition of the Property
in the appellant's income for his 2008 taxation year.
It is important to
review the facts of this appeal in order to answer the above question. When the
appellant's grandmother was alive, she had both the legal and equitable title,
which, in legal terms, is called a fee simple. When she passed away in 1967,
her will created a trust with the appellant's mother and her two brothers being
appointed as trustees. The fee simple was to remain with the trust but subject
to a life estate in favour of the appellant's mother. Upon the appellant's
mother's death, the fee simple held by the trust passed to the beneficiaries of
the trust, namely, the appellant, his brother and two sisters, as tenants in
common. There were no conditions attached to the life estate that made the
appellant's mother liable for income taxes with respect to the Property.
Trustees are responsible for filing income tax returns and it is they who deal
with liability for capital gains tax, including where there are deemed
The appellant also
argued that his grandmother's estate should be liable for the capital gains tax.
The capital gains tax was introduced on December 31, 1971 and such tax only
started accruing in 1972. (See paragraph 104(4)(b) of the Income Tax
Act). Since the appellant's grandmother passed away in 1967, her estate
cannot be held responsible for capital gains tax that had not started accruing
during her lifetime.
This leaves us with the
question of whether the trust may be held liable for paying the capital gains tax
on the Property. Subsection 104(4) of the Act sets the date on which a
deemed disposition occurs in a trust. It is called the 21-year deemed
disposition rule. Subparagraph 104(4)(b)(i) applies to the appellant's
grandmother's testamentary trust and under that provision the deemed
disposition date is January 1, 1993, namely, 21 years after January 1, 1972.
Subsection 104(5.3) of
the Act allows a trust to defer the deemed disposition day if it files
an election within six months after the subsection 104(4) deemed disposition
day and if there is an "exempt beneficiary" among its beneficiaries.
The appellant's mother is considered an exempt beneficiary under clause 104(5.4)(b)(ii)(A)
of the Act. The appellant's mother, as trustee, filed the election on
March 15, 1994, with the result that the deemed disposition day was deferred
until January 1, 1999 in accordance with the provisions of subparagraph
104(5.3)(a)(i) of the Act.
The trust did not
follow up on this election and, although a disposition was deemed to have
occurred in 1999, the trust did not pay tax on the capital gains accrued up to
that time. The Canada Revenue Agency could therefore have assessed the trust for
Since 1999, in my
opinion, capital gains have been accruing in the trust. Subsection 107(2) of
the Act obliges a trust to roll over to the beneficiaries the capital
gains accrued on a capital property by deeming the beneficiaries to have acquired
the asset at a cost approximately equal to the trust's adjusted cost base. Subsection
107(2.001) of the Act allows the trust to elect not to have subsection 107(2)
apply if it is resident in Canada, but a prescribed form must be filed with the
trust's income tax return in the year of the distribution if that subsection (107(2.001)
is invoked. The trust did not file the prescribed form with its 2007 income tax
return when the Property passed from it to the appellant and his brother and
sisters. Subsection 107(2) therefore applies so as to effect the rollover of the
accrued capital gain to the beneficiaries.
The evidence revealed
that the auditor offered the appellant the opportunity to have the deemed
disposition rule disregarded. It is very likely that the auditor, in such
circumstances, would have used subsection 152(4) to assess taxes, interest and
penalties on capital gains tax that has been owing since 1999. That would no
doubt have led to a far worse result for the appellant.
I have already informed
the appellant, during the trial, that his claims for property tax, utilities
and general maintenance for the Property were properly disallowed by the respondent
as it was not established, on a balance of probabilities, that those expenses
were incurred by him for the purpose of gaining or producing income from a
business or property.
The appeal is
Signed at Ottawa, Canada, this 10th
day of January 2012.