Ast Estate v. R., 97 DTC 5197, [1997] 2 CTC 209 (FCA)

Isaac CJ .:

This is an appeal from a judgment of the Tax Court of Canada (now reported at 92 D.T.C. 1898) which allowed the appeal of Dean Ast, in his capacity as executor of the estate of Harold Ast, deceased, from an assessment under the Income Tax Act, S.C. 1970-71-72, c.63, as amended, (“the Act’) for the 1989 taxation year, and remitted the matter to the Minister of National Revenue (“the Minister”) for reconsideration and reassessment on the basis that the claim for a capital gains deduction from “other property” pursuant to subsection 110.6(2.1) of the Act in the amount of $66,582.11 in respect of the disposition of qualified small business corporation shares was properly claimed in the 1989 taxation year.

Background

On 23 September 1987, Harold Ast sold all of the shares in his pharmacy business to his son for $110,000 cash, paid in full as of that date. In his return for the 1987 taxation year, Harold Ast claimed, in respect of that disposition, the maximum allowable capital gains deduction as “other property” under the Act as it stood at the time, which for him was $49,936.33.

On 13 September 1988, the Act was amended by the addition of subsection 110.6(2.1), which provided for an enhanced capital gains deduction. [1] . The new provision increased the maximum exemption available for capital gains on dispositions of qualified small business corporation shares.

Harold Ast died on 15 October 1989; the respondent, Dean Ast, was named executor of his estate. Harold Ast’s terminal return was prepared by his accountant, Gordon Dillon. In the return, the estate claimed the enhanced deduction, $66,582.11, in respect of the September 1987 sale of pharmacy shares. The respondent contends that the estate was entitled to claim the capital gains deduction in respect of that share disposition because it constituted a disposition of qualified small business corporation shares “in the year or a preceding taxation year and after June 17, 1987”.

The Minister of National Revenue rejected the respondent’s claim to the enhanced deduction and reduced the claim to $1.

Legislative framework

In 1988, section 81 of the amending legislation which enacted subsection 110.6(2.1) read, in part:

(6) Section 110.6 is further amended by adding thereto, immediately after subsection (2) thereof, the following subsection:

(2.1) In computing the taxable income for a taxation year of an individual (other than a trust) who was resident in Canada throughout the year and who disposed of a share of a corporation in the year or a preceding taxation year and after June 17, 1987 that, at the time of disposition, was a qualified small business corporation share of the individual, there may be deducted such amount as he may claim not exceeding the least of

(a) the amount, if any, by which $375,000 exceeds the total of

(i) the aggregate of all amounts each of which is an amount deducted by the individual under this section in computing his taxable income for a preceding taxation year,

(ii) where the taxation year ended after 1987, the amount determined under subparagraph (2)(a)(iii) in respect of the individual for the year, and

(iii) where the taxation year ended after 1989, the amount determined under subparagraph (2)(a)(iii) in respect of the individual for the year;

(b) the amount if any, by which his cumulative gains limit at the end of the year exceeds the amount deducted under subsection (2) in computing his taxable income for the year;

(c) the amount, if any, by which his annual gains limit for the year exceeds the amount deducted under subsection (2) in computing his taxable income for the year; and

(d) the amount that would be determined in respect of the individual for the year under subparagraph 3(b) (other than an amount included in respect of the individual under paragraph (2)(d) in respect of capital gains and capital losses if the only properties referred to in that paragraph were qualified small business corporation shares disposed of by him after June 17, 1987.

(17) Subsections (1) to (10), (12), (13), (15) and (16) are applicable to the 1988 and subsequent taxation years except that

(b) the definition “qualified small business corporation share” in subsection 110.6(1) of the said Act, as enacted by subsection (4), and subsection 110.6(14) of the said Act, as enacted by subsection (16), are applicable with respect to dispositions of shares after June 17, 1987; ...

[Emphasis added.]

This appeal, then, turns upon the interpretation of subsection 110.6(2.1) with respect to the “notch” period between 17 June 1987 and the beginning of 1988. The principal subsection of the amending legislation, subsection 81(17), makes the enhanced deduction “applicable to the 1988 and subsequent taxation years”, whereas subsection 110.6(2.1) appears to make the enhanced deduction available for transactions occurring “in the year or a preceding taxation year and after June 17, 1987”.

Paragraph 39(l)(a) of the Act defines capital gain in a taxation year as the amount of capital gain realized in that year. Paragraph 39(l)(a) reads:

39.(1) For the purposes of this Act,

(a) a taxpayer’s capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression “other than a taxable capital gain from the disposition of a property” in paragraph (a) thereof, be included in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer...

Decision of the Tax Court

The Tax Court Judge concluded that subsection 110.6(2.1) should not be narrowly construed. In the absence of language linking the provisions respecting share dispositions taking place “after June 17, 1987” to reserves carried over, she held that the enhanced deduction also applied to non-re- serve transactions occurring in 1987 after June 17. Although there was evidence that Harold Ast had claimed the deduction for the same disposition in the 1987 return, the Tax Court Judge concluded that the provision was ambiguous, and she resorted to the presumption in favour of the taxpayer to find that the September 1987 share disposition could give rise to the claim for the enhanced capital gains deduction in his terminal return in 1989.

Analysis

In oral argument, counsel for the appellant and the respondent agreed that the provisions of subsection 110.6(2.1) and its enacting legislation are ambiguous with respect to transactions occurring during the “notch” period.

Subsection 81(17) of the enabling legislation provides that subsection 110.6(2.1) of the Act is applicable to 1988 and subsequent taxation years. The appellant contends that the reference in paragraph 81(17)(b) of the enabling legislation to share dispositions occurring “after June 17, 1987” has the effect of allowing such transactions to qualify for the enhanced capital gains deduction only insofar as reserves are carried over into 1988 or subsequent taxation years.

The appellant points out that for the 1987 taxation year, Harold Ast had claimed the full capital gains deduction, $49,936.33, as a deduction in respect of “other capital property” in respect of the September 1987 transaction. [2] In the 1989 terminal return of Harold Ast, however, the estate claimed the full amount of the enhanced deduction, $66,666.67, in respect of a disposition of “qualified small business corporation shares”. [3] . Moreover, in Part 5 of the 1989 return, “Calculation of Capital Gains Deduction - Other Property”, the amount reported as “capital gains deduction claimed in 1987” was zero.

The appellant argues that the accountant who prepared the 1989 return “moved” the deduction originally claimed in 1987 in respect of the September 1987 share disposition from the category “other property” to the category “qualified small business corporation shares” in order to claim the 1989 capital gain for the real estate dispositions as “other property”. The Ast estate then claimed the full enhanced capital gains deduction in respect of the same 1987 transaction for which the capital gains deduction had been allowed in 1987.

The appellant argues further that, since no reserves from the September 1987 transaction were carried over into 1989, Harold Ast received no capital gain in respect of that transaction in 1989 and was therefore his estate was not entitled to claim the capital gains deduction in that year. To conclude otherwise, the appellant says, would amount to allowing the taxpayer to claim retroactively in 1989 the deduction in respect of a transaction for which the benefit was received, and the full deduction allowed, in 1987.

The appellant cites the Technical Notes prepared by the Department of Finance [4] in support of its contention that the enhanced deduction is available in respect of a “notch” period transaction only insofar as reserves from that transaction are carried over into 1988 or a subsequent taxation year. The technical notes read as follows:

110.6(2.1). 1988 TN--New subsection 110.6(2.1) of the Act provides for special increased capital gains exemption for individuals (other than trusts) for a taxation year in respect of net taxable capital gains realized on the disposition of qualified small business corporation shares in the year or in a preceding year and after June 17, 1987.

The deduction permitted under subsection 110.6(2.1) in respect of qualified small business corporation shares is equal to the least of four amounts:

(4) The individual’s net taxable capital gains for the year from dispositions of qualified small business corporation [sic] shares after June 17, 1987, less any such amount accounted for in paragraph 110.6(2)(d) of the Act. This provisions permits reserves from prior years' dispositions of qualified small business corporation shares to qualify for this special capital gains exemption if the shares were disposed of after June 17, 1987. It also prevents a double benefit where the qualified small business corporation shares are also qualified farm property-that is, shares of the capital stock of a family corporation. [5]

[Emphasis added.]

On the other hand, the respondent argues that the Tax Court Judge was correct to conclude that the enhanced capital gains deduction is available in respect of all “notch” period transactions. The respondent argues further that the references to share dispositions “after June 17, 1987” make the legislation specifically retroactive so that the enhanced deduction is available in respect of all transactions occurring after that date, whether or not reserves are carried over into subsequent years. Furthermore, the respondent says that the restrictive interpretation advanced by the appellant is not supported by any statutory language referring to reserves carried over into subsequent years. Moreover, so the argument ran, any ambiguity in the legislation should be interpreted in favour of the respondent taxpayer.

The respondent contends further that the different categorization of the 1987 capital gain in the 1987 and 1989 returns is explained by the 1988 enactment of subsection 110.6(2.1). He says that the September 1987 share disposition was properly characterized according to 1987 law as a capital gain in respect of “other property”. However, he also says that because the enhanced capital gains deduction enacted in 1988 had an explicitly retroactive effect, in 1989 the accountant properly took advantage of the new legislation by “moving” the 1987 capital gains deduction to the category “qualified small business corporation shares”, where the maximum available was now $66,666.67, in order to allow for a claim for a 1989 deduction for capital gains realized in 1989 in respect of real property.

I am in respectful agreement with the learned Tax Court Judge and with the respondent that the effect of subsection 110.6(2.1) and the amending legislation with respect to transactions during the “notch” period is not clear. On the one hand, the provision on its face contains no reference to the mode or timing of payment that would support the appellant’s contention that the “notch” period provisions are intended to include only those 1987 transactions for which a reserve is carried over into a subsequent year.

On the other hand, the interpretation advanced by the respondent is contrary to the statutory definition of “capital gain” in subsection 39(1) of the Act. Subsection 39(1) defines capital gain as a capital gain realized in the particular taxation year. Furthermore, according to the respondent’s interpretation, subsection 110.6(2.1) would allow for “double-dipping” in that it would allow taxpayers to claim the enhanced deduction in subsequent years for 1987 transactions for which they have already claimed, and received, the full benefit of the 1987 capital gains deduction. Indeed, this is exactly what the respondent attempts to do in this case.

Taxation statutes should be construed according to the ordinary rules of statutory interpretation. [6] Thus recourse to the residual presumption in favour of the taxpayer is necessary only if a reasonable doubt about the meaning of the taxing provision cannot be resolved by the ordinary rules of statutory interpretation. [7] The approach to be taken to the interpretation of taxing statutes was laid down by Estey J. in Stubart v. Minister of National Revenue, [1984] 1 S.C.R. 536 (S.C.C.), quoting Driedger in The Construction of Statutes:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [8]

Purposive interpretation cannot override the statutory language selected by Parliament if its meaning and application are clear and plain. [9] However, as I have already noted, the language of subsection 110.6(2.1) does not make clear how the provisions affect share dispositions occurring during the “notch” period. It would be unreasonable, in my respectful view, to conclude that Parliament intended to allow taxpayers to claim the enhanced capital gains deduction in any or every subsequent year in respect of share dispositions occurring between 18 June and 31 December 1987 when the capital gains deduction had already been fully claimed and allowed for the year of the transaction. The interpretation advanced by the respondent would result in an absurd and unreasonable consequence and should therefore not be accepted. [10] As Estey J. stated in Berardinelli v. Ontario Housing Corp. (1978), 90 D.L.R. (3d) 481 (S.C.C.):

Where one interpretation can be placed upon a statutory provision which would bring about a more workable and practical result, such an interpretation should be preferred if the words invoked by the Legislature can reasonably bear it. [11]

Since the effect of subsection 110.6(2.1) and its enacting legislation with respect to share dispositions occurring during the “notch” period is not made clear by the statutory language, the intention of Parliament may be illuminated by the use of the administrative interpretation, which in this case formed part of the legislative context.

The appellant’s interpretation of the reference in subsection 110.6(2.1) to transactions taking place after 18 June 1987 is supported by the explanatory notes [12] published 16 December 1987, after the tabling of the White Paper introducing the legislative amendments that included subsection 110.6(2.1), [13] but well before the legislation was passed on 13 September 1988.

Neither the White Paper nor the explanatory notes were in evidence in this appeal. At trial, the respondent’s accountant, Mr. Dillon, testified that the White Paper informed his decision to claim the capital gains deduction in 1987, and to claim the enhanced deduction in respect of the same transaction in 1989. [14] In argument before us, counsel for the appellant pointed out that at trial he had asked that the White Paper be tendered in evidence, but it was not. [15]

The commentary of the Department of Finance in the White Paper with respect to subsection 110.6(2.1) tends to support the interpretation sug-

gested by the appellant: “Small business shares will be eligible for the $500,000 exemption, effective in 1988”. [16]

In the explanatory notes, the Department made more explicit its view that the enhanced deduction was available in respect of 1987 share dispositions occurring after 17 June 1987 only insofar as reserves were carried over into subsequent years. The explanatory notes respecting this question read:

Capital gains from dispositions of shares of small business corporations that are being included in income after 1987 through the capital gains reserve mechanism will be eligible for the $500,000 exemption for small business shares where the shares have been disposed of after June 17, 1987. A capital gain reserve brought into income after 1987 in respect of capital gains on small business shares disposed of before June 18, 1987 will qualify for the $100,000 exemption provided for other property. [17]

Administrative interpretations such as technical notes are not binding on the courts, but they are entitled to weight, and may constitute an important factor in the interpretation of statutes. [18] Technical notes are widely accepted by the courts as aids to statutory interpretation. [19] The interpretive weight of technical notes is particularly great where, at the time an amendment was before it, the legislature was aware of a particular administrative interpretation of the amendment, and nonetheless enacted it. In Hard v. Quebec (Deputy Minister of Revenue), (1977), [1978] 1 S.C.R. 851 (S.C.C.), de Grandpré J. observed, for a unanimous Supreme Court of Canada:

That was the situation in 1954 when the provincial law closely modelled on the federal law was adopted. At that time, the provincial legislator was familiar not only with the wording of s.36(l) of the federal Act but also, undoubtedly, with the administrative interpretation there, which was to the effect that taxpayers in Mr. Harel’s situation could avail themselves of the averaging provided for in the section. Although the wording of s.45 of the provincial Act differs somewhat from that of s.36(1) of the federal Act, the concept is the same. Consequently, when c.17 of the Statutes of Quebec, 1953-54 was adopted, the administrative interpretation of the federal Act gave it a colour that the provincial legislature could not ignore....

..1 am not saying that the administrative interpretation could contradict a clear legislative text; but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor. [20]

The same reasoning applies in this appeal. Even though reserves carried over from 1987 transactions are not expressly mentioned in subsection 110.6(2.1), Parliament was aware at the time the legislation was passed that the Department of Finance considered the enhanced deduction to apply to 1987 transactions occurring after 17 June 1987 only in respect of reserves carried over into subsequent years. Thus Parliament may be presumed to have intended the effect described in the White Paper, and more particularly in the explanatory notes.

The interpretation advanced by the appellant is therefore preferable to that advanced by the respondent. It is thus unnecessary to resort to the residual presumption in favour of the taxpayer. Gonthier J. observed for the Court in Corporation Notre Dame de Bon-Secours v. Communauté Urbaine de Québec:

Two comments should be made to give Estey J.’s observations [in Johns- Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46] their full meaning: first, recourse to the presumption in favour of the taxpayer is indicated when a court is forced to choose between two valid interpretations, and second, this presumption is clearly residual and should play an exceptional part in the interpretation of tax legislation. [21]

In this case, the two interpretations offered by the parties to this appeal are not equally valid. While the interpretation urged by the respondent would lead to an unreasonable result, the interpretation urged by the appellant is consistent with the language of subsections 110.6(2.1) and 39(1) of the Act, and is supported by the administrative interpretation. Thus the Tax Court Judge erred in resorting to the residual presumption in favour of the taxpayer.

All of the capital gains from the September 1987 transaction were realized in 1987. Thus the capital gain deduction available in respect of that transaction was that available under the legislation as it stood in 1987. Harold Ast claimed and received the benefit of that deduction in 1987; his estate was not entitled to claim again in 1989, in respect of the same transaction, the enhanced deduction under legislation that was enacted one year later.

Conclusion

For all of these reasons, I would allow this appeal with costs, set aside the judgment of the Tax Court judge, and restore the assessment of the Minister.

Appeal allowed.