Citation: 2010TCC576
Date: 20101117
Docket: 2008-2213(IT)G
BETWEEN:
ENVISION CREDIT UNION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
This appeal arises as a
result of a merger of two Credit Unions that the Appellant submits was a merger
to which section 87 of the Income Tax Act (the “Act”) did not
apply. There are a number of issues that have been raised:
(a)
Was the merger of Delta
Credit Union (“Delta”) and First Heritage Savings Credit Union (“First
Heritage”) on January 1, 2001 an amalgamation to which section 87 of the Act
applies?
(b)
If this merger of Delta
and First Heritage was not an amalgamation as defined in subsection 87(1) of
the Act:
(i) Do the tax
attributes, such as the undepreciated capital cost (“UCC”) of the assets of the
various classes of depreciable property of Delta and First Heritage, flow
through to the Appellant? It is the position of the Appellant that the tax
attributes of Delta and First Heritage do not flow through to the Appellant and
therefore that the UCC of the assets of the various classes of depreciable
property of the Appellant as of the beginning of the Appellant’s 2001 taxation
year reverts to the original cost of the assets to the predecessor companies.
It is the position of the Respondent that the tax attributes do flow through
and therefore the UCC of the assets of the various classes of depreciable
property of the Appellant as of the beginning of the Appellant’s 2001 taxation
year is the cumulative total amount of the UCC of the assets of the various
classes of depreciable property to Delta and First Heritage as of the end of
their 2000 taxation years.
(ii) If the Appellant’s
position, as outlined in the immediately preceding paragraph, is correct, does
the general anti-avoidance rule (“GAAR”), in section 245 of the Act, apply
to reduce the UCC of these assets to the Appellant as of the beginning of its
2001 taxation year to the total UCC of these assets to Delta and First Heritage
as of the end of their 2000 taxation years?
(c)
Is the reassessment of
the Appellant’s 2001 taxation year, which was issued after the end of the
normal reassessment period for this year, valid?
[2]
Section 87 of the Act
applies if there has been an amalgamation of two or more companies in the
manner as set out in subsection 87(1) of the Act. This subsection
provides that:
87. (1) In this section, an amalgamation means a merger of two or
more corporations each of which was, immediately before the merger, a taxable
Canadian corporation (each of which corporations is referred to in this section
as a “predecessor corporation”) to form one corporate entity (in this section
referred to as the “new corporation”) in such a manner that
(a) all of the property (except amounts receivable from any
predecessor corporation or shares of the capital stock of any predecessor
corporation) of the predecessor corporations immediately before the merger
becomes property of the new corporation by virtue of the merger,
(b) all of the liabilities (except amounts payable to any
predecessor corporation) of the predecessor corporations immediately before the
merger become liabilities of the new corporation by virtue of the merger, and
(c) all of the shareholders (except any predecessor corporation),
who owned shares of the capital stock of any predecessor corporation
immediately before the merger, receive shares of the capital stock of the new
corporation because of the merger,
otherwise than as a result of the acquisition of property of one
corporation by another corporation, pursuant to the purchase of that property
by the other corporation or as a result of the distribution of that property to
the other corporation on the winding-up of the corporation.
[3]
Delta and First
Heritage were amalgamated pursuant to the provisions of the Credit Union
Incorporation Act (British
Columbia) (the “CUIA”) as
First Heritage Delta Credit Union effective January 1, 2001. On November 30,
2001, First Heritage Delta Credit Union changed its name to Envision Credit
Union.
[4]
Section 20 of the CUIA
provides that:
20 (1) Two or
more credit unions (the "amalgamating credit unions") may amalgamate
and continue as one credit union (the "amalgamated credit union"),
but must not do so except in accordance with this section.
(2) Amalgamating credit unions,
including any ordered under section 277 (g) of the Financial
Institutions Act to amalgamate, together must propose and submit to the
commission an amalgamation agreement that
(a) specifies
(i) the name of the proposed
amalgamated credit union,
(ii) the terms and conditions of
the amalgamation,
(iii) the manner of carrying the
amalgamation into effect,
(iv) the names and addresses of
the individuals proposed as the directors and senior officers of the proposed
amalgamated credit union,
(v) whether the business proposed
to be carried on by the proposed amalgamated credit union is deposit business
or both deposit business and trust business,
(vi) the services that the
proposed amalgamated credit union intends to offer to its members,
(vii) the common bond of
membership of the proposed amalgamated credit union,
(viii) the manner in which the
issued and unissued shares of each amalgamating credit union will be exchanged
for those of the amalgamated credit union, and
(ix) the fair market value of the
equity shares of any class, or a method of determining the fair market value of
the equity shares of any class, for the purpose of section 24, and
(b) contains
(i) the constitution prepared in
accordance with section 6, and
(ii) the rules prepared in
accordance with section 7,
that are proposed as the constitution
and rules of the amalgamated credit union.
(3) On receiving a proposed
amalgamation agreement submitted to the commission, including one where one or
more of the amalgamating credit unions is acting under section 21 through
an administrator,
(a) the commission may consent to
the proposed amalgamation agreement, or
(b) if the commission considers
that the proposed amalgamation agreement is contrary to the interests of one or
more of the amalgamating credit unions or its or their members, the commission may
refuse to consent to it.
(4) If the commission consents under
subsection (3) to a proposed amalgamation agreement under which any of the
proposed amalgamating credit unions is one that is not acting under
section 21 through an administrator, then this subsection applies to that
amalgamating credit union, and it must
(a) submit the proposed amalgamation agreement to its
members for approval by special resolution, if it is a credit union that has
issued no equity shares or has issued no equity shares other than the
membership shares, or
(b) submit the proposed amalgamation agreement
(i) to its members for approval by special
resolution, and
(ii) to the holders of each class of equity shares
other than the membership shares for approval by a separate resolution of the
holders of that class, requiring a majority of 2/3 of the votes cast,
if it is a credit union that has issued 2 or more classes
of equity shares.
(5) If an amalgamating credit union to which
subsection (4) applies has provided in its rules as set out in
section 58 (2) respecting rights or special rights attached to its
issued equity shares, then, on a separate resolution required under
subsection (4) (b) (ii), each holder of equity shares has one
vote in respect of each share held by that holder.
(6) If the members or the members and other equity
shareholders, as the case may be, of an amalgamating credit union to which
subsection (4) applies have approved the proposed amalgamation agreement
in compliance with subsections (4) and (5), that amalgamating credit union
may enter into the proposed amalgamation agreement, which, when executed by
each of the amalgamating credit unions, including any of them acting under
section 21 through an administrator, must be delivered to the registrar
together with a certified copy of each of any resolutions required in respect
of an amalgamating credit union to which subsection (4) applies.
(7) On receiving the
executed amalgamation agreement, or the executed amalgamation agreement and a
certified copy of each of any resolutions, delivered under subsection (6),
the registrar must
(a) register the agreement or the agreement and
a certified copy of each resolution, as the case may be,
(b) issue a certificate of amalgamation showing
that the amalgamating credit unions are amalgamated and the date of the
amalgamation, which must not be earlier than the date the documents are
received by the registrar, and
(c) publish in the Gazette a notice of the
amalgamation showing the names of the amalgamating credit unions, the name of
the amalgamated credit union, the address of its registered office and the date
of the amalgamation.
[5]
Section 23 of the CUIA
provides that:
23 On
and after the date of the amalgamation shown in a certificate of amalgamation
issued under section 20 (7) (b),
(a) the amalgamating credit unions are
amalgamated and are continued as one credit union under the name and with the
constitution and rules provided in the amalgamation agreement,
(b) the amalgamated credit union is seized
of and holds and possesses all the property, rights and interests and is
subject to all the debts, liabilities and obligations of each amalgamating
credit union, including any obligations to members or auxiliary members under
section 24, and
(c) every member and auxiliary member of
each amalgamating credit union is bound by the amalgamation agreement.
[6]
It is the position of
the Appellant that even though Delta and First Heritage were amalgamated as
provided in the CUIA, that this merger was not an amalgamation as defined in
subsection 87(1) of the Act because each of the predecessor credit
unions transferred an interest in certain real property to 619547 B.C.
Ltd. (“619”) at precisely the time of the amalgamation and therefore not all of
the property of the predecessor credit unions immediately before the merger became
property of the Appellant by virtue of the merger. During the course of the
hearing an amalgamation that complies with the applicable corporate legislation
related to the amalgamation of two or more companies but which does not satisfy
the requirements of the definition of “amalgamation” contained in subsection
87(1) of the Act was referred to as a broken amalgamation, a taxable
amalgamation or a non-qualifying amalgamation.
[7]
The Appellant’s
position is that the amount of the UCC of the assets of each class of the
Appellant, as of the commencement of the first taxation year following the
amalgamation, was the capital cost of the assets of the various classes to the
predecessor credit unions. The following table sets out the balance of the UCC of
the assets of the various classes to Delta and First Heritage as of the end of
the last taxation of these companies ending before the amalgamation (the
closing balance) and the opening balance of UCC as stated by the Appellant:
|
Class
|
Closing Balance UCC - Delta
|
Closing Balance UCC – First Heritage
|
Combined UCC Balance
|
Opening Balance of UCC - Appellant
|
|
1
|
3,865,000
|
6,863,291
|
10,728,291
|
17,919,244
|
|
3
|
195,522
|
469,479
|
665,001
|
3,326,000
|
|
6
|
172,805
|
9,379
|
182,184
|
1,193,125
|
|
8
|
1,499,659
|
1,760,140
|
3,259,799
|
12,538,015
|
|
10
|
1,408,341
|
1,371,048
|
2,779,389
|
11,796,495
|
|
10.1
|
203
|
577
|
780
|
24,000
|
|
12
|
0
|
0
|
0
|
116,998
|
|
13
|
60,852
|
0
|
60,852
|
165,202
|
|
13
|
0
|
0
|
0
|
362,813
|
|
13
|
118,729
|
0
|
118,729
|
245,344
|
|
13
|
441,919
|
0
|
441,919
|
882,031
|
|
13
|
277,675
|
0
|
277,675
|
504,203
|
|
13
|
88
|
0
|
88
|
871
|
|
13
|
361,271
|
0
|
361,271
|
656,796
|
|
13
|
0
|
1,121,140
|
1,121,140
|
1,191,114
|
|
17
|
3,143
|
102,967
|
106,110
|
57,508
|
|
Total:
|
8,405,207
|
11,698,021
|
20,103,228
|
50,979,759
|
[8]
In total the Appellant
would have additional capital cost allowance (“CCA”) of $30,876,531 ($50,979,759
- $20,103,228) that it could deduct over time than it would if the closing UCC
balances would have been carried forward as the opening balance of UCC to the
Appellant. It appears from the CCA schedules for Delta and First Heritage that
were submitted as an exhibit that neither one of these companies reported any
recapture of CCA in their tax returns for the period ending immediately before
the amalgamation and therefore the $30,876,531 would represent CCA that would
be claimed twice – once by Delta or First Heritage and again by the Appellant.
[9]
In filing its tax
returns for its 2001 to 2004 taxation years (which are the taxation years that
are the subject of these appeals) the Appellant claimed CCA in each year based
on a total opening balance of UCC
of all classes of property of $50,979,759 as of the commencement of the first
taxation year following the amalgamation. The Appellant was reassessed to
reduce the amount of CCA allowed for each year to the amount that could be
claimed if the opening balance of UCC of all classes of property was $20,103,228
as of the commencement of the first taxation year following the amalgamation.
The CCA claimed in each year was therefore reduced.
[10]
The Appellant also, in
filing its tax return for its 2001 taxation year, did not include the allowance
for doubtful debts in the amount of $851,649
that had been deducted by Delta in computing its income for its 2000 taxation
year. There is also a reference to excess tax reserves of $888,291 in the Reply
and this will be discussed below in relation to the reassessment of the
Appellant’s 2001 taxation year.
[11]
There is another tax
account that is affected by the transactions. The preferred rate amounts of
Delta and First Heritage were not carried forward to the first taxation year of
the Appellant and therefore the Appellant claimed that its opening preferred
rate amount was zero. The preferred rate amount is only relevant for credit
unions and is used in determining the amount of income that will be subject to
the small business tax rate. The net result of subsections 137(3), (4), (4.3)
and (6) of the Act is that, in addition to the tax credit that the
credit union may be entitled to claim pursuant to section 125, the credit union can claim an additional
tax credit (which would reduce its tax rate to the small business tax rate).
The amount of income on which this additional tax credit may be claimed is
limited by subsection 137(3) of the Act.
[12]
Subsection 137(3) of
the Act limits the amount of taxable income to which this additional tax credit will
be applied (which will reduce the tax rate to the small business tax rate) to
the lesser of the following two amounts:
(a)
the credit union’s
taxable income for the year; and
(b)
(4/3 of the credit
union’s maximum cumulative reserve at the end of the year) minus the credit
union’s preferred rate amount at the end of the immediately preceding taxation year.
[13]
The maximum cumulative
reserve is defined in subsection 137(6) of the Act and is 5% of the
total amount owing by the credit union to its members (including deposits) and
its share capital.
[14]
The preferred rate
amount is determined pursuant to subsection 137(4.3) of the Act. The
preferred rate amount for the years under appeal was the cumulative total amount
of income that was taxed at the small business tax rate.
[15]
The preferred rate
amount will increase every year (assuming that the credit union is profitable).
If however the amount of deposits that the credit union has received is large
enough (which is determined at the end of the year and therefore will include the
net amount of new deposits minus withdrawals made during the year), it is
possible that all of the income of the credit union will continue to be taxed
at the small business tax rate even though the preferred rate amount is
increasing each year since the limit is based on the difference between 4/3 of
the maximum cumulative reserve as of the end of the year and the preferred rate
amount as of the end of the immediately preceding taxation year.
[16]
In this case, the
Appellant’s position is that its preferred rate amount that would be relevant
in determining its entitlement to a tax credit pursuant to subsection 137(3) of
the Act for its 2001 taxation year, is nil. The preferred rate amount
for the Appellant for its 2001 taxation year would be its preferred rate amount
as of the end of its immediately preceding taxation year. If there has been an
amalgamation within the meaning of subsection 87(1) of the Act,
paragraph 137(4.3)(b) of the Act provides that:
(4.3) For the
purposes of subsection (3),
…
(b) where at any time a new corporation has been formed as a result
of an amalgamation of two or more predecessor corporations, within the meaning
of subsection 87(1), it shall be deemed to have had a taxation year ending
immediately before that time and to have had, at the end of that year, a
preferred-rate amount equal to the total of the preferred-rate amounts of each
of the predecessor corporations at the end of their last taxation years;
Since it is the position of the Appellant that the
amalgamation is not an amalgamation as defined in subsection 87(1) of the Act
and therefore that the provisions of this paragraph of the Act do not
apply, the Appellant did not carry forward the preferred rate amounts of either
Delta or First Heritage.
[17]
It is the position of
the Respondent that the preferred rate amounts of Delta and First Heritage
should have been carried forward by the Appellant and therefore that the preferred
rate amount for the Appellant for its 2001 taxation year should have been
$72,341,531 because the preferred rate amount for Delta as of the end of its
taxation year ending December 31, 2000 was $20,182,268 and for First Heritage
as of the end of its taxation year ending December 31, 2000 was $52,159,263.
[18]
However both parties
did agree that whether the Appellant’s preferred rate amount was nil or
$72,341,531 for its 2001 taxation year, the amount of taxes payable by the
Appellant under the Act would not be affected for any of the taxation
years under appeal. The maximum cumulative reserve amount for each year was
sufficiently large that the Appellant would be entitled to the same tax credit
pursuant to subsection 137(3) of the Act whether the preferred rate
amounts from the predecessors were carried forward to the Appellant or the
preferred rate amount of the Appellant for 2001 was nil.
Does section 87 of the Act apply?
[19]
The first issue that
must be addressed is whether section 87 of the Act applies to the
amalgamation of Delta and First Heritage. It is clear that subsection 87(1) of
the Act provides a definition of “amalgamation” for the purposes of
section 87 of the Act. Therefore if any part of the definition is not
satisfied, then, even though the merger may be an amalgamation for the purposes
of the applicable corporate legislation, it will not be an amalgamation for the
purposes of section 87 of the Act.
[20]
It is clear that the
merger of Delta and First Heritage was driven by business considerations. It is
also clear that the parties intended to structure the merger in a manner that
would result in the amalgamation failing to meet the definition of amalgamation
in subsection 87(1) of the Act and that the means by which this would be
accomplished were dictated by Fraser Milner Casgrain. Although the Respondent
argued that the officers of the predecessors and the accountant for one of the
predecessors (who was also the accountant for the Appellant) did not seem to
fully understand how the transactions were structured, they were not the
individuals who structured the transaction. There are probably many
transactions that are structured by tax advisors which clients do not fully
understand. The issue is not whether the officers of the predecessors understand
what happened, but what did happen.
[21]
The Respondent had
focused on some inconsistencies between the amalgamation agreement and the
transactions that were completed. In particular, the Respondent referred to the
fact that the amalgamation agreement had provided that a new corporation was to
be incorporated at the time of the amalgamation (the “Effective Time”) but 619
was actually incorporated before that time on December 19, 2000. There is no reason why the incorporation of 619 on
December 19, 2000 would prevent the transfer of property as proposed by the
Appellant. It would actually assist the Appellant since the new company would
have to be incorporated to acquire the property and incorporating 619 before
January 1, 2001 simply reduced the number of transactions or events that were
to occur at the Effective Time and removed any concerns about whether this
company could actually be incorporated at the Effective Time.
[22]
As noted by Justice
Archambault in Fredette v. The Queen, 2001 DTC 263,
2001 DTC 621, [2001] 3 C.T.C. 2468 at
paragraph 45:
45. …According to
well-settled case law, the tax consequences of a transaction must be determined
on the basis of the actual transactions that took place.
[23]
Therefore it is
necessary to examine the actual transactions that were completed by the parties
as it is the actual transactions that were completed that will determine the
tax consequences and not what the parties agreed to do if there is any
inconsistency between what the parties agreed to do and what they actually did
do.
[24]
The Respondent had also
raised arguments related to simultaneous transactions and whether simultaneous
transactions are effective. In particular the Respondent raised the issue of
the number of transactions or events that the Appellant appeared to be claiming
had happened simultaneously. However in relation to the Appellant’s argument
that the amalgamation was not an amalgamation as defined in subsection 87(1) of
the Act, the two transactions or events that the Appellant would have to
establish as occurring simultaneously are the transfer of the beneficial
interest of either Delta or First Heritage in at least one property to 619 and
the amalgamation of Delta and First Heritage. In relation to the definition of
“amalgamation” in subsection 87(1) of the Act, the issue is whether the beneficial
interests in the properties were transferred from Delta and First Heritage (or
at least from one of these companies) to 619 at the exact moment that the
amalgamation occurred so that the beneficial interest in these properties did
not become property of the Appellant by virtue of the amalgamation. The focus
is on the property of the predecessors and whether all of the property of Delta
and First Heritage became property of the Appellant by virtue of the amalgamation.
It seems to me that the amalgamation was the event that determined the timing
of the transfer of the beneficial interest in the properties by Delta and First
Heritage to 619. In order to establish that the amalgamation of Delta and First
Heritage was not an amalgamation as defined in subsection 87(1) of the Act
the Appellant would simply have to establish that the beneficial interests in
the properties that were transferred by Delta and First Heritage to 619 were
transferred to 619 at the exact time of the amalgamation. Whether any other
transaction or event, such as the issuance of shares by 619, occurred at that
moment or at a later time is irrelevant.
[25]
The Respondent had also
raised the issue of the capacity of the predecessors to complete the transactions
as submitted by the Appellant. In the written arguments submitted by counsel
for the Respondent the following statements are made:
1.34 It is
our submission that the simultaneous transaction device is incompatible with
continuation model amalgamations. In a continuation model amalgamation, at the
moment of amalgamation the predecessor corporations become streamed in the
amalgamated entity. Predecessors don’t die or disappear and are not
extinguished but neither are they able to enter into new contractual
arrangements in their previous identities. …
1.35 Regardless
of how the appellant explains the timing of these transactions, as of the
commencement of January 1, 2001, the time of the Amalgamation, neither
First Heritage nor Delta was capable of negotiating or executing independent
transactions….
(emphasis
added)
[26]
Counsel for the
Respondent referred to the decisions of the Supreme Court of Canada in The Queen
v. Black and Decker Manufacturing Company Ltd., [1975] 1 S.C.R.
411, Witco Chemical Company, Canada, Limited v. The Corporation of
the Town of Oakville et al., [1975] 1 S.C.R. 273, 43 DLR (3d) 413 and the decision of the
Federal Court of Appeal in The Queen v. Guaranty Properties Ltd.
[1990] 3 F.C. 337, 90 DTC 6363. Counsel for the Respondent then stated
that:
1.37 These
seminal amalgamation cases are neither authority for, nor capable of being
construed as standing for the proposition that predecessor corporations have a
residual juridical ability to enter into contractual relations upon amalgamation.
[27]
Counsel for the
Respondent did not suggest that the consequences of this argument would be that
no interest in the real properties was conveyed by either Delta or First
Heritage to 619 but this argument was advanced as support for its argument that
the transactions were not completed as proposed by the Appellant.
[28]
Justice MacFarland of
the Ontario Court of Justice (General Division) in Rendall v. Royal
Insurance Canada [1997] O.J. No. 2672, 34 O.R. (3d) 762 stated that:
13 Counsel
for Royal seize upon the words of Mr. Justice Dickson at page 398 of the
decision where he states:
... It is true that upon amalgamation each constituent company
loses its "separate" existence but it by no means follows that it has
thereby ceased to exist.
Counsel argues
that Re/Max Grand ceased to exist as an entity to sue or be sued on its own
after November 28, 1995 (the date of amalgamation). He says the company had no
status to sue or be sued and that, accordingly, any insurance coverage that had
been in place to cover that eventuality will no longer apply. The argument is
that each of the amalgamating companies loses its separate existence but has
not ceased to exist. He says for practical and legal purposes the amalgamating
companies cease to exist as legal entities.
14 The
answer to this argument is found , I think, in the judgment of Mr. Justice
Spence at page 420 of the Witco Chemical Co. Canada Ltd. case where he
considers the judgment of Arnup J.A. in the Ontario Court of Appeal and
specifically disagrees with him in this language:
I find it difficult to contemplate a situation where the
amalgamating corporation does not cease to exist for all purposes but is not a
juristic person with a status to commence an action.
And, further,
at page 421:
I am, however, of the opinion that in the present case there was
not an extinguishment of the corporate identity of the Witco Chemical
Company,Canada, Limited, sufficient to justify the court in holding that the
writ had been issued in the name of a non-existent plaintiff.
In my view,
the combined effect of what is now section 179 of the Business Corporations
Act and the Regina v. Black & Decker and Witco
Chemical Co. Canada Ltd. cases is that the amalgamating corporations
continue to exist and have juristic status following amalgamation. That
being so it follows that the Royal policy, unless there be a specific condition
to the effect that coverage ends on amalgamation of the named insured with
another corporation, would continue to provide coverage.
(emphasis added)
[29]
Delta and First
Heritage would therefore continue to exist and have juristic status following
the amalgamation. The implication of the statement of the Supreme Court of
Canada in the Witco Chemical Company, Canada, Limited case is that an
amalgamating company is a juristic person with status to commence an action. If
this juristic person can commence an action can it also enter into contracts?
This would raise the question of who could negotiate or execute the contract as
the officers and directors of the predecessor companies would cease to be
officers and directors of these companies upon amalgamation. It does not seem
to me that the references to the predecessor companies continuing should be
interpreted as the officers and directors of the predecessor companies
continuing to hold their office in the predecessor companies following
amalgamation. If it did, then, in this case, there would be three boards of
directors and three sets of officers – one for Delta, one for First Heritage
and one for the Appellant. This cannot be the result of the references to the
amalgamating companies continuing.
[30]
It seems to me that in
order to determine whether there was a transfer of an interest in the real
property at the time of the amalgamation it is not necessary to determine
whether Delta and First Heritage had any capacity to enter into contracts on
their own following the amalgamation and therefore it is not necessary to
determine whether the juristic status of Delta and First Heritage would permit
them to enter into contracts following the amalgamation.
[31]
In this case it is clear
that the agreements in question were executed prior to the amalgamation. By
letter from David Jones, Senior Vice-President Corporate Services and C.F.O.
for First Heritage to Baker Newby dated December 29, 2000, the executed
documents (including the asset transfer agreements and trust agreements) were
returned to Baker Newby. Therefore it is clear that the asset transfer
documents and the trust agreements were executed on or before December 29,
2000.
[32]
In Hewlett Packard (Canada) Ltd. v. The Queen, 2004 FCA 240, 324 N.R. 201, 2004 DTC 6498, Justice
Noël, writing on behalf of the Federal Court of Appeal, stated that:
59 Although the civil and the common
law notions of ownership stem from different roots, there is one basic rule
that is common to both systems: ownership passes when the parties intend it to
pass.
[33]
In the Hewlett
Packard case the property in question was personal property - cars. In this
case it is real property.
[34]
In Anger &
Honsberger “Law of Real Property” Third Edition by Anne Warner La Forest,
in describing the classification of property as real or personal property it is
stated at page 1-7 that:
…Nevertheless,
many differences persist. This is particularly true with respect to the
different manner of acquisition, investigation of title and alienation of the
two forms of property. In general it may be said that these differences
inevitably exist because of the physical differences between them.
[35]
In Stonehouse v.
British Columbia (Attorney General), [1962] S.C.R. 103, an individual
and his wife were the registered owners of a property in Vancouver as joint tenants. Prior to her death, the wife
conveyed her interest in the property to her daughter by a former marriage. The
deed conveying this interest was not registered until after the death of the
wife. Justice Ritchie, on behalf of the Supreme Court of Canada, stated that:
Under the provisions of s. 35 an unregistered deed could not be
operative “to pass any estate or interest either at law or in equity” other
than that of the grantor, but the effect of Mrs. Munk’s deed was not “to pass”
any such estate or interest of Mr. Stonehouse but rather to change its
character from that of a joint tenancy to that of a tenancy in common and thus
to extinguish his right to claim title by survivorship which is an incident of
the former but not of the latter type of interest. The right of survivorship
under a joint tenancy is that, on the death of one joint tenant, his interest
in the land passes to the other joint tenant or tenants (Megarry and Wade, The
Law of Real Property, 2nd ed., p.390. But, on the execution
and delivery of the transfer by Mrs. Stonehouse, she divested herself of her
entire interest in the land in question. At the time of her death,
therefore, there was no interest in the land remaining in her which could pass
to her husband by right of survivorship.
(emphasis added)
[36]
Therefore an interest
in real property in British
Columbia will pass upon the
execution and delivery of the transfer document even though such document is
not registered.
[37]
In dealing with
delivery, the Nova Scotia Court of Appeal in Re MacNeil Estate, 219
N.S.R. (2d) 80, stated as follows:
11 The law on delivery of deeds is discussed by C. W.
MacIntosh in Nova Scotia Real Property Manual, looseleaf, Markham, ON: Butterworths, 1988 at s. 5.5A:
Physical delivery of the deed to the grantee is not necessary to
constitute effective delivery. Delivery of a deed is a matter of intention.
What is essential to delivery of the document as a deed is that “the
party whose deed the document is expressed to be, having first sealed it, must
by words or conduct expressly or impliedly acknowledge his intention to be
immediately and unconditionally bound by the expressions contained therein.
The intention is to be determined from the words, conduct and the
surrounding circumstances.
…
12 In Ross v. Lynds Estate (1977), 28 N.S.R.
(2d) 260 (S.C.T.D.) Hallett, J. (as he then was) said:
[18] One would have thought that delivery of a deed would mean
physical delivery but, as indicated earlier in this decision, the Courts over a
long period of time have held that physical delivery of a deed to the grantee
is not necessary to constitute effective delivery. No doubt the development of
the law in this direction was as a result of the Courts attempting to fulfil
what they perceive to be the intention of the grantor…
[19] The cases cited earlier show that there does not have to be a
physical handing over of a deed to the grantee or to some other person to take
it out of the control of the grantor to effect delivery.
[38]
As a result it seems
clear that whether an interest in personal property or real property is being
transferred the intention of the parties plays an important role in determining
when such transfer occurs. In this case it is clear that the documents related
to the transfer of the interest in the real property were executed prior to
January 1, 2001. The Respondent has not made any argument or suggestion that
the documents were not effective to transfer an interest in the property. The
only argument raised by the Respondent was with respect to the timing of the
transfer of the interest in the property to 619.
[39]
It is clear that Delta
and First Heritage intended to transfer their interest in the real property to
619 at the moment that they were amalgamated under the CUIA. The Amalgamation Agreement
provided as follows:
1.1 In
this Agreement:
…
(f) “Effective Time” means the commencement of
the Amalgamation Date;
…
2.2 The amalgamation will be effective as and from the
Effective Time.
…
8.1 Delta and First Heritage agree that certain assets of each
will be surplus to the needs of the Amalgamated Credit Union and will be
transferred to a new subsidiary at the Effective Time.
…
8.3 At the Effective Time, each of First Heritage and Delta
will transfer to the subsidiary those assets determined by the parties prior to
the Amalgamation Date to be surplus to the needs of the Amalgamated Credit Union
in exchange for Preferred Shares of the subsidiary having an aggregate
redemption/retraction amount equal to the fair market value of each asset transferred
as agreed on by the parties.
8.4 Where any property transferred is real property the
transfer of which is potentially taxable under the Property Transfer Act (British Columbia), the transferring party
and the subsidiary will enter into a bare trust/agency agreement providing that
the transferring party remain the registered owner of the real property in
trust for the benefit of the subsidiary.
[40]
There are two
Memorandums of Agreement – one between Delta (as the Vendor) and 619 (as the
Purchaser) and the other between First Heritage (as the Vendor) and 619 (as the
Purchaser). Each agreement is “dated effective the ‘Effective Time’ January 1,
2001 as defined in the Amalgamation Agreement between Delta Credit Union and
First Heritage Savings Credit Union dated for reference the 1st day of January,
2001”.
[41]
Paragraph 1 of each
agreement provided as follows:
1. Subject to the terms and conditions of this Agreement and
based on the warranties and representations herein contained, the Vendor hereby
sells and the Purchaser hereby purchases the Assets
[42]
Paragraph 4 of each
agreement provided as follows:
4. The effective date and time of this Agreement and all
matters provided for herein shall be the “Effective Time” January 1, 2001 as
defined in the Amalgamation Agreement between Delta Credit Union and First Heritage
Savings Credit Union dated for reference the 1st day of January, 2001 notwithstanding
the actual date of execution of this Agreement or any other documents and deeds
made pursuant to this Agreement.
[43]
The agreement between
Delta and 619 included a schedule that listed the three real properties that
were to be included as the “Assets” for that agreement and the agreement
between First Heritage and 619 included a schedule that listed the one real
property that was to be included as the “Assets” for that agreement.
[44]
There were also trust
agreements between Delta and 619 and between First Heritage and 619 that were
“dated effective the ‘Effective Time’ January 1, 2001 as defined in the
Amalgamation Agreement between Delta Credit Union and First Heritage Savings
Credit Union dated for reference the 1st day of January 2001”. In the Trust
Agreements each of Delta and First Heritage confirmed that they had no
beneficial interest in the real properties that were subject to the agreements
described above.
[45]
It is clear from the
documents that were executed that it was the intention of the parties to
transfer the beneficial interest in the real properties that were described in
the schedules to the memorandums of agreement as of the time of the
amalgamation. The Respondent has agreed that the amalgamation occurred at the
first moment of time on January 1, 2001. Therefore it is clear that the
intention of the parties was to transfer the beneficial interest of Delta and
First Heritage in the real properties to 619 as of the first moment of time on
January 1, 2001, which was the same moment in time as Delta and First Heritage
were amalgamated under the CUIA.
[46]
The Respondent referred
to the case of Hauber Contracting Ltd. v. British
Columbia, [1984] B.C.J. No. 3100 as authority for the proposition that the transfer of
assets could not have occurred at the moment of amalgamation. That case dealt
with a provision in the regulations made pursuant to the Social Service Tax Act, R.S.B.C. 1979 Chap. 388. Regulation 3 - 14 provided
that a transfer of tangible personal property to a corporation would be exempt
from social services tax if, inter alia, the “property is sold to a
corporation at the time of its incorporation”.
[47]
Hardinge, Co. Ct. J., stated that:
8 The
wording of regulation 3 - 14 is, on its face, clear enough. Ordinarily the
phrase, "at the time of its incorporation", could be equated to
"when it is incorporated". It seems the draughtsman intended both
events to be concurrent. The difficulty is that when one speaks of
"incorporation" as an event, it is impossible to tell after the event
the precise moment in time when it took place. This is due to the practice in
the office of the Registrar of Companies of stamping the date they are received
in his office en documents submitted in conjunction with applications for
incorporation. The documents are then vetted by various officials over a period
of several days or even, in some cases, weeks. If all is found to be in order
the new company will be incorporated. A certificate of incorporation is then
issued indicating the incorporation date as the date when the memorandum and
articles of association were received in the office of the registrar.
9 Looking
at the matter from the perspective of solicitors engaged in the practice of
commercial law, it is not difficult to understand the argument that it would be
a practical impossibility to transfer assets to a corporation "at the time
of its incorporation" if that phrase is read literally. As stated, a
corporation does not come into existance when the last requirement of the
Company Act, R.S.B.C. 1979 Chap. 59 has been found to be met. It commences to
exist when the registrar issues a certificate of incorporation and published
notice of incorporation in the Gazette pursuant to section 9 of the Company
Act. The certificate of incorporation is then issued bearing a date which is
said (albeit not correctly) to be the date of incorporation.
10 Even if
the date on a certificate of incorporation was the true date of incorporation
(there being no provision in the Company Act presuming it to be so), it would
still be a virtual impossibility to transfer property to a company "at the
time of its incorporation". This is because a solicitor cannot know when
he entrusts to the mail service a proposed memorandum of association, articles
of association and the prescribed fee, when the documents will reach the office
of the registrar or when the incorporation process will be effected. Therefor
short of draughting an agreement covering the sale of property to a company it
is proposed to incorporate and providing in it that the agreement will come
into effect only "if and when the proposed company is incorporated",
there would still be no way of complying with the precise wording of the
regulation.
[48]
The transfer of assets
in this case does not suffer from the same problems identified in the Hauber
Contracting Ltd. case. In that case the recipient of the assets would not
have existed at the time that the agreement to transfer the assets would have been
made as presumably the agreement to transfer assets to the corporation at the
time of the incorporation would be made prior to the incorporation of the
company. In this case the transferee of the assets did exist prior to the
Effective Time as 619 was incorporated prior to January 1, 2001. Since it was
acknowledged by both parties that the effective time of the amalgamation was
the first moment in time on January 1, 2001, it is clear that the time of the
transfer was certain (the first moment of time on January 1, 2001) and this
moment in time is simply the reference point to determine the time of the
transfer of assets to 619. I do not accept the Hauber Contracting Ltd.
case as authority for the proposition that the transfer of assets by Delta and
First Heritage to 619 could not have occurred at the Effective Time.
[49]
The Respondent also
argued that “an amalgamation that proceeds under the CUIA is necessarily one
that meets the description at section 87 of the Act”. Subsection 20(2) of the
CUIA provides, in part, that:
(2) Amalgamating credit unions …
together must propose and submit to the commission an amalgamation agreement
that
(a) specifies
…
(iii) the manner of carrying the
amalgamation into effect,
[50]
The Amalgamation
Agreement in this case, clearly provided that in carrying the amalgamation into
effect, certain surplus assets would be transferred to a new corporation at the
time of the amalgamation. It seems to me that since the CUIA provides that the
amalgamating credit unions may determine, pursuant to the amalgamation
agreement, the manner of carrying out the amalgamation (subject to the approval
of the Financial Institutions Commission as provided in subsection 20(3) of the
CUIA), then the amalgamation under the CUIA will be completed in the manner as
provided in the amalgamation agreement. The reference in paragraph 23 of the
CUIA to the amalgamated credit union being seized of all of the property and
being subject to the obligations, would simply mean that the amalgamated credit
union would acquire the assets of the predecessor credit unions subject to any
obligations of the predecessors. Since the predecessors had the obligation to
transfer the assets at the Effective Time, the amalgamated credit union did not
acquire full legal and beneficial title to these assets. The amalgamated credit
union acquired all of the shares of 619 which had acquired the beneficial
interest in the assets (and therefore the Appellant indirectly acquired the
beneficial interest) but the Appellant did not directly acquire the beneficial
interest in the surplus assets.
[51]
In my opinion the transfer
by Delta and First Heritage of their beneficial interest in the real property to
619 occurred, as Delta and First Heritage intended, at the Effective Time.
Therefore, as a result, the Appellant did not acquire the beneficial interest
in these properties by virtue of the amalgamation and hence the amalgamation of
Delta and First Heritage is not an amalgamation as defined in section 87 of the
Act.
Do the tax accounts of Delta and First Heritage flow
through to the Appellant?
[52]
Since the amalgamation
of Delta and First Heritage is not an amalgamation as defined in subsection
87(1) of the Act, the next issue is whether the tax attributes of Delta
and First Heritage would flow through to the Appellant. Most of the discussion
during the hearing centered on the preferred rate amount. However the tax
liability of the Appellant in each of the years under appeal will be the same
whether the preferred rate amount of the Appellant was nil at the commencement of
2001 or whether the preferred rate amount of the Appellant at that time was
equal to the combined preferred rate amounts of Delta and First Heritage as of
the end of their 2000 taxation years. As a result the determination of the preferred
rate amount will not affect the Appellant’s tax liability for any of the years
under appeal.
[53]
In Interior Savings
Credit Union v. The Queen 2007 FCA 151, [2007] 4 C.T.C. 55,
2007 DTC 5342, the Federal Court of Appeal held that a credit union did not
have a right of appeal to this Court when the only issue was the determination
of the preferred rate amount following an amalgamation where the preferred rate
amount as proposed by the credit union would not reduce the tax liability of
the credit union. This is the situation in this case. The preferred rate amount
as proposed by the Appellant will not result in any reduction in the taxes
payable by the Appellant for any of the years under appeal and therefore is not
a matter that can be appealed to this Court.
[54]
The UCC of the assets,
on the other hand, does affect the amount that may be claimed as CCA and does
affect the amount of taxes payable. Therefore the issue that will be addressed
is whether the UCC of the assets of the Appellant as of the commencement of its
2001 taxation year was the original capital cost of the assets to Delta and
First Heritage or the UCC of these assets to Delta and First Heritage as of the
end of their 2000 taxation years.
[55]
The UCC of assets is
determined as provided in subsection 13(21) of the Act. This subsection
provides, in part, that:
“undepreciated capital cost” to a taxpayer of depreciable property
of a prescribed class as of any time means the amount determined by the formula
(A + B + C + D +
D.1) –
(E + E.1 + F + G + H + I + J + K)
where
A is the total of all amounts each of which is the capital
cost to the taxpayer of a depreciable property of the class acquired before
that time,
…
E is the total depreciation allowed to the taxpayer for
property of the class before that time,
[56]
It is the position of
the Appellant that in applying this formula for the purpose of determining the UCC
to the Appellant of each class of its depreciable property, that the amount for
A (the capital cost to the Appellant of the depreciable property) is the
capital cost of such property to Delta or First Heritage (or to the Appellant
for any property acquired after the amalgamation) but in determining the amount
for E, only the depreciation allowed to the Appellant following the
amalgamation is to be included. It is the Appellant’s position that the
depreciation allowed to Delta and First Heritage is not to be included in
determining the amount for E in the above formula for the Appellant.
[57]
Justice Dickson (as he
then was) writing on behalf of the Supreme Court of Canada in The Queen
v. Black and Decker Manufacturing Company Ltd., supra, stated that:
The Court of
Appeal concluded as a matter of construction of the language of s. 137 of the
Canada Corporations Act that "liabilities" as used in subs. (13)(b)
and (14) could not be interpreted to include criminal liabilities, but in
reaching that conclusion it would seem that the Court accepted, as a first
step, the proposition that the "new" company, i.e. the amalgamated
company, is a different, separate and distinct company from the "old"
companies, i.e. the amalgamating companies. Whether an amalgamation creates or
extinguishes a corporate entity will, of course, depend upon the terms of the
applicable statute, but as I read the Act, in particular s. 137, and consider
the purposes which an amalgamation is intended to serve, it would appear to me
that upon an amalgamation under the Canada Corporations Act no "new"
company is created and no "old" company is extinguished. The Canada
Corporations Act does not in terms so state and the following considerations in
my view serve to negate any such inference: (i) palpably the controlling word
in s. 137 is "continue". That word means "to remain in existence
or in its present condition"-Shorter Oxford English Dictionary. The
companies "are amalgamated and are continued as one company" which is
the very antithesis of the notion that the amalgamating companies are
extinguished or that they continue in a truncated state; (ii) the statement in
s. 137(13)(b) that the "amalgamated company possesses all the property,
rights ..." If corporate birth or death were envisaged, one would have
expected to find, in the statute, some provision for transfer or conveyance or
transmission of assets and not simply the word "possesses", a word
which re-enforces the concept of continuance; (iii) letters patent of
amalgamation are obtained for the purpose of "confirming the
agreement" (s. 137(11)), in marked contrast to letters patent of
incorporation which expressly create a body corporate and politic; (iv) the
French version of s. 137(1), perhaps better than the English version, serves to
express what has occurred, "Deux ou plus de deux compagnies ... peuvent
fusionner et continuer comme une seule et meme compagnie". The effect is
that of blending and continuance as one and the selfsame company; (v) the Act
contains a number of express provisions whereby the life of corporate creations
may be terminated--Videlicet where a company carries on business not within the
scope of its objects (s. 5(4)), or forfeits its charter (s. 31), or surrenders
its charter (s. 32), or is dissolved (s. 133(11)). The Act is silent on the
extinction of companies by amalgamation; (vi) if Parliament had intended that a
company by the simple expedient of amalgamating with another company could free
itself of accountability for acts in contravention of the Criminal Code or the
Combines Investigation Act or the Income Tax Act, I cannot but think that other
and clearer language than that now found in the Canada Corporations Act would
be necessary.
…
On the same
date, July 4, 1966, that Jessup J. delivered his reserved judgment in Beamish,
Kelly J.A. delivered a reserved judgment of the Court of Appeal for Ontario in Stanward
Corporation v. Denison Mines Ltd. [[1966] 2 O.R. 585], the Court
consisting of Kelly, Wells and Laskin JJ.A., in which Kelly J.A. said, at p.
592:
What we have here is an amalgamated company into which, simultaneously,
two amalgamating companies have fused along with their assets and liabilities.
Under this fusion, and by virtue of its statutory implementation, it may be said,
broadly, that the amalgamated company acquired the assets and assumed the
liabilities of the two component companies; ...
and later, on the same page:
Returning to the view that the amalgamated companies do not form
a new company but continue to subsist as one, the conclusion that there is no
acquisition is, if anything, more apparent. The language of s. 96 is in my
opinion unambiguous in providing that the two amalgamating companies shall
continue as one company. While it may be difficult to comprehend the exact
metamorphosis which takes place, it is within the Legislature's competence to
provide that what were hitherto two shall continue as one.
Kelly J.A.
compared the language of s. 96 of Ontario Statutes 1953, c. 19, upon which the Stanward
case was decided, and that of its predecessor, s. 11 of The Companies Act,
R.S.O. 1950, c. 59, upon which Regina v. Howard Smith Paper Mills,
Ltd. [(1954), 4 D.L.R. (2d) 161], a judgment of my brother Spence, was
decided. The earlier legislation referred to the amalgamated corporation as the
"new corporation" and spoke of "the corporation so
incorporated". The language expressed a clear intention to substitute a
new corporation in the place and stead of the amalgamating corporations. By the
time the Stanward case fell to be decided, however, the Legislature had
re-enacted the section in words which, in the opinion of Kelly J.A., with which
I agree, indicated an intention to change the effect of amalgamation. With
respect, I am of the view that the observations of Kelly J.A. in Stanward,
although perhaps obiter, are sound in law and correctly reflect the
consequences of an amalgamation pursuant to the language found in s. 96 of
Ontario 1953, c. 19, or pursuant to the substantially similar language found in
s. 137 of the Canada Corporations Act.
…
It was also submitted that if the amalgamating companies continue in
amalgamation, in all their plenitude, then ss. 137(13)(b) and 137(14) are mere
surplusage. I would not so regard them. These sections spell out in broad language
amplification of a general principle, a not uncommon practice of legislative
draftsmen. If ss. 137(13)(b) and 137(14) are to be read, however, as other than
merely supportive of a general principle and other than all-embracing, then
some corporate incidents, such as criminal responsibility, must be regarded as
severed from the amalgamating companies and outside the amalgamated company.
What happens to these vestigial remnants? Are they extinguished and if so, by
what authority? Do they continue in a state of ethereal suspension? Such
metaphysical abstractions are not, in my view, a necessary concomitant of the
legislation. The effect of the statute, on a proper construction, is to
have the amalgamating companies continue without subtraction in the amalgamated
company, with all their strengths and their weaknesses, their perfections and
imperfections, and their sins, if sinners they be. Letters patent of
amalgamation do not give absolution.
(emphasis
added)
[58]
The CUIA, as did the Canada
Corporations Act, provides in paragraph 23(a) that the amalgamating credit
unions “are amalgamated and are continued as one credit union”. The CUIA also
provides in paragraph 23(b) that “the amalgamated credit union is seized of and
holds and possesses all of the property…of each amalgamating credit union”. It
seems to me that the principles as stated by the Supreme Court of Canada in the
Black and Decker case are applicable to credit unions that have
amalgamated under the CUIA.
[59]
It also seems to me
that if the depreciation that was claimed by Delta and First Heritage is not
carried forward to the Appellant, then something has been subtracted from each
of these companies. Since the predecessor companies continue “without
subtraction” in the amalgamated company, Delta and First Heritage continued
with the depreciation that each such company had claimed.
[60]
The Appellant had
argued that the tax accounts (such as the amount of depreciation claimed) of
Delta and First Heritage were not assets and therefore did not carry forward to
the Appellant on the amalgamation of Delta and First Heritage (since section 87
of the Act was not applicable). However it seems to me that this
argument highlights the different basis for the decision of the Ontario Court
of Appeal and the Supreme Court of Canada in Black and Decker. The
Ontario Court of Appeal had held that “liabilities” would not include criminal
liabilities and therefore the amalgamated company could not be held responsible
for acts of its predecessors. However, the Supreme Court of Canada held that
the issue turned on the consequences of “continuing”. Since the predecessor
corporations were continued as one, the amalgamated company could be held
responsible for the acts of its predecessor companies. The result did not
depend on which liabilities were included in “liabilities” but on the
consequences of continuing as one corporation. Therefore whether tax attributes
are assets (or liabilities) is irrelevant.
[61]
The Appellant also
argued that tax accounts do not flow through following an amalgamation, based
on the principles as set out in Black and Decker, and as a result of the
decision of this Court and of the Federal Court of Appeal in CGU Holdings
Canada Ltd. v. The Queen, 2008 TCC 167 and 2009 FCA 20.
[62]
In CGU Holdings
Canada Ltd. the taxpayer was formed as a result of an amalgamation of three
companies. This amalgamation was an amalgamation as defined in subsection 87(1)
of the Act. One of the predecessor companies was a non-resident-owned
investment corporation (an “NRO”) and the other two were not NROs. As a result
of paragraph (g) of the definition of an NRO in subsection 133(8) of the Act,
the amalgamated company was not an NRO. The issue in that case was whether the
amalgamated company could elect, under section 134.1 of the Act, to be
an NRO. This election was available to a company that was an NRO in one year
but which ceased to be an NRO in the following year. If this election could be
made, the next issue was whether the allowable refundable tax on hand of the
predecessor that was an NRO flowed through to the amalgamated company.
[63]
Justice Hershfield in
his decision in CGU Holdings Canada Ltd. (2008 TCC 167) noted that:
27 The
Appellant went on to recognize that the subsequent decision of the Federal
Court of Appeal in Pan Ocean qualified that limitation of paragraph
87(2)(a) by finding that it applied for purposes beyond establishing
year ends but was nonetheless limited in its application to computations of the
amalgamated corporation's income and where necessary, as a consequence thereof,
to its computation of taxable income.*
(* denotes a
footnote reference that was in the original text but which has not been
included.)
[64]
Based on this, Justice
Hershfield held that “since the election provided for in section 134.1 of the Act
does not deal with the calculation of income or taxable income”, paragraph
87(2)(a) of the Act, which deems the amalgamated company to be a new
corporation, did not prevent the predecessor that was an NRO from making
the election following the amalgamation. He then also found that the allowable refundable
tax on hand did not flow through either pursuant to paragraph 87(2)(cc) of the Act
or under general principles as a result of the amalgamating companies being
continued.
[65]
The Federal Court of
Appeal did not agree with the restricted interpretation of its decision in The
Queen v. Pan Ocean Oil Ltd., [1994]
2 C.T.C. 143, 94 DTC 6412. Justice Noël writing on behalf of the Federal Court
of Appeal in CGU Holdings stated that:
37 Prior
to reaching this conclusion, the Tax Court Judge did hold that GA Scottish had
the standing to elect pursuant to subsection 134.1(1) on the basis that it was
continued into CGU in accordance with corporate law principles (Reasons, para.
33). According to the Tax Court Judge, paragraph 87(2)(a) did not deem
the appellant a new corporation since this provision has no application with
respect to Division F, where the NRO provisions are found. He read the decision
of this Court in Pan Ocean Oil, supra, as authority for this proposition.
With respect, I do not believe that Pan Ocean Oil has the effect which
the Tax Court Judge attributed to it.
…
40 The
only issue which the Court had to decide was whether Pan Ocean Oil was
deemed to be a new corporation for purposes of the successor rules. The
observation that an amalgamated corporation is "only" a new
corporation for the purpose of the computing income under Division B and where
necessary as a consequence thereof, to Divisions C and E is obiter. The
Court did not decide, let alone consider whether paragraph 87(2)(a) deems an
amalgamated corporation to be a new corporation for the purpose of the NRO
provisions in Division F.
41 Considering
this question, it is apparent that the new corporation rule in paragraph 87(2)(a)
which is said to apply "for the purposes of this Act", would be
rendered meaningless in the context of Division F, if its application was
restricted, as the appellant suggests, to the computation of income (Division
B), and where necessary to the calculation of taxation income (Division C) and
tax (Division E). Significantly, this would result in paragraph 133(8)(g),
which provides that an amalgamated corporation is not an NRO unless all of its
predecessors were NROs, being read out of the Act. In my respectful view there
is no reason to exclude Division F and in particular section 134.1 from the
application of paragraph 87(2)(a) of the Act.
42 Since
CGU was a "new corporation" pursuant to that provision, it follows
that it never was an "NRO in a taxation year" as contemplated by
paragraph 134.1(a) and therefore did not have the standing to make the
election under that provision.
[66]
Having found that CGU Holdings
could not make the election under section 134.1 of the Act, the Federal
Court of Appeal did not need to address the issue of whether the allowable
refundable tax on hand account of the predecessor flowed through to the
amalgamated company.
It is clear, in the decision of the Federal Court of Appeal, that it was
significant that, as a result of the application of paragraph 87(2)(a) of the Act,
the amalgamated corporation was a new corporation. This paragraph of the Act
provides that:
(2) Where there has been an amalgamation of two or more corporations
after 1971 the following rules apply:
(a) for the purposes of this Act, the corporate entity formed as a
result of the amalgamation shall be deemed to be a new corporation the first
taxation year of which shall be deemed to have commenced at the time of the
amalgamation, and a taxation year of a predecessor corporation that would
otherwise have ended after the amalgamation shall be deemed to have ended
immediately before the amalgamation;
[67]
It also seems clear
that in Black and Decker, supra, it was significant that no new
corporation was formed. Justice Dickson (as he then was) stated that:
…Whether an
amalgamation creates or extinguishes a corporate entity will, of course, depend
upon the terms of the applicable statute, but as I read the Act, in particular
s. 137, and consider the purposes which an amalgamation is intended to serve,
it would appear to me that upon an amalgamation under the Canada Corporations
Act no "new" company is created and no "old" company is
extinguished.
[68]
In National Bank of
Canada v. British Columbia, 48 B.C.L.R. (2d) 45, [1991] 2 C.T.C.
189, Justice Boyd of the British Columbia Supreme Court held that the
principles as set out in Black and Decker did not apply to an
amalgamation under the Bank Act as a bank is “created” on the
amalgamation. Justice Boyd made the following comments:
I agree with
the petitioner's counsel that the reasoning in Black & Decker
(supra) cannot be applied here since the specific language of the Canada
Corporations Act, which is distinguishable from that in the Bank Act,
dictated the result there. In Black & Decker the Court placed great
weight upon the use of the word "continue" in s. 137….
…
In the case at
bar, in contrast to the language considered by the Court in Black &
Decker and Stanward, the legislation specifically provides that a newly
amalgamated bank is "created" by the letters patent (s. 256(2)) and
that the bank "created" by the letters patent is subject to all the
liabilities set out in the Act (s. 256(3)). I reject the Minister's
counsel's submission that the word "create" is used, not in the sense
that a new bank is created which replaces that original bank, but rather that
the newly created bank allows the original amalgamating banks to carry on. If
that was the case, the word "created" would be superfluous. In my
view, while the language of the statute does not contemplate the extinguishment
of the two amalgamating banks, but rather "the continuing as one corporation
and bank...", the statute clearly does contemplate the emergence or
creation of a new entity. (Deltona Corporation v. Min. of National
Revenue, 71 DTC 5196, (Exch. Ct. of Canada); on appeal 73 DTC 5180
(S.C.C.); Allendale Mutual Insurance Co. v. Her Majesty the Queen,
73 DTC 5382 (Fed. Ct.))
(emphasis
added)
[69]
Therefore the
principles applicable to companies that amalgamate as set out in Black and
Decker will not apply if a new corporation is created on an amalgamation. Since
paragraph 87(2)(a) of the Act (which
applies to an amalgamation as
defined in subsection 87(1) of the Act) deems the amalgamated
corporation to be a new corporation, the principles applicable to companies
that amalgamate as set out in Black and Decker will not apply, for the
purposes of the Act, to a merger that satisfies the definition of
amalgamation as set out in subsection 87(1) of the Act. Since the amalgamation
in the CGU Holdings case was an amalgamation as defined in subsection
87(1) of the Act and therefore paragraph 87(2)(a) of the Act was
applicable, any comments of Justice Hershfield in CGU Holdings that tax
accounts do not flow through under the principles of the decision of the
Supreme Court of Canada in Black and Decker are therefore consistent
with this conclusion that these principles do not apply when a new corporation
is created.
[70]
In this case since the
merger of Delta and First Heritage is not an amalgamation as defined in
subsection 87(1) of the Act and therefore paragraph 87(2)(a) of the
Act is not applicable to deem the amalgamated corporation to be a new
corporation, the principles in Black and Decker, supra, will be
applicable to the Appellant. As a result Delta and First Heritage are continued
without subtraction and therefore are continued with the amounts that had been
allowed to each of them for depreciation.
[71]
Counsel for the Appellant
also argued that “for
Federal tax purposes a Provincial statute that deems an Amalco to be a
continuation of its predecessors cannot have the effect of flowing through
notional federal tax accounts”. There were five reasons provided. The first
reason was stated as follows:
As noted by
this Court in CGU, paragraph 23(a) says Amalco is a “continuation” of
the Predecessors, but does not say it is the “same” as the predecessors and it
is not the same. One may compare section 108 of the BC Income Tax Act,
Tab 79. So when one asks of Envision, what is this taxpayer’s PRA or UCC, one
cannot simply add together the Predecessors’ PRAs or UCCs; it is not the same
taxpayer as the Predecessors. The Court in CGU held expressly that Black
& Decker did not stand for that principle.
[72]
As I had indicated above, the CGU
Holdings case is not applicable in this case because the amalgamation in
that case was an amalgamation as defined in subsection 87(1) of the Act
and therefore the amalgamated company was deemed to be a new corporation for
the purposes of the Act and the principles in Black and Decker
would not apply to determine whether tax accounts would flow through following such
an amalgamation for the purposes of the Act. In this case, the
amalgamation of Delta and First Heritage was not an amalgamation as defined in
subsection 87(1) of the Act and it does, as I had noted above, seem to
me that if the depreciation that had been allowed to Delta and First Heritage
is not recognized by the Appellant, then Delta and First Heritage would not be
continued without subtraction. To not include the depreciation that had been
allowed to Delta and First Heritage would be to subtract this claim and in my
opinion would not be the correct result based on the statement of Justice
Dickson (as he then was) that:
The effect of
the statute, on a proper construction, is to have the amalgamating companies
continue without subtraction in the amalgamated company, with all
their strengths and their weaknesses, their perfections and imperfections, and
their sins, if sinners they be.
(emphasis added)
[73]
Counsel for the
Appellant also submitted the following arguments:
Subsection
87(2.1) of the Act prevents losses from flowing through on an amalgamation. If
losses “continue” under paragraph 23(a) of the CUIA, the result will be that
the CUIA permits a federal tax account to flow through that which Parliament
has proscribed from flowing through. That would be unconstitutional
…
The difference
between Black & Decker and this case is that it dealt with a Federal
corporate statute that provided that the predecessors would continue as one
company and the Court applied that to a Federal statute. In this case, the
Crown seeks to rely on a Provincial law to determine the Federal tax attributes
of a corporation. The cases are not the same, as the Court in CGU
recognized.
[74]
Both of these arguments
are based on the premise that an amalgamation under a provincial statute (the
CUIA in this case) cannot affect matters that are dealt with in a federal
statute (the Act in this case). There are two cases that are cited in
support of the proposition as stated in the first paragraph referred to above.
The first case is the decision of the Provincial Court Judge in R. v. Black
and Decker Manufacturing Co. Ltd., (1972), 9 C.P.R. (2d) 129 (which was
eventually appealed to the Supreme Court of Canada). In this decision, the
Provincial Court Judge referred to the decision of Justice Jessup of the Ontario High Court of Justice (as
he then was) in R. v. J. J. Beamish Construction Co. Ltd. (1966),
59 D.L.R. (2d) 6 (which is the other case that is cited) in which Justice Jessup
stated that:
…”Liabilities” in s. 96(4) cannot be taken to include criminal
liabilities which would involve ultra vires legislation by the Province
on a matter of criminal law.
[75]
Justice Jessup noted
that subsection 96(4) of the Corporations Act of Ontario (at that time) provided that:
96(4) If the agreement is adopted in accordance with
subsection 3, the amalgamating companies may apply jointly to the Lieutenant
Governor for letters patent confirming the agreement and amalgamating the
companies so applying, and on and from the date of the letters patent such
companies are amalgamated and are continued as one company by the name in the
letters patent provided, and the amalgamated company possesses all the property,
rights, privileges and franchises and is subject to all liabilities, contracts,
disabilities and debts of each of the amalgamating companies.
[76]
Subsection 137(13) of the Canada
Corporations Act RSC 1970, c-32, which was the statute considered by the
Supreme Court of Canada in its decision in Black and Decker, provided as
follows:
(13) Upon the issue of letters patent pursuant to subsection (11), the
amalgamation agreement has full force and effect and
(a)
the amalgamating companies are amalgamated and are continued as one
company (in this section called the "amalgamated company") under the
name and having the authorized capital and objects specified in the
amalgamation agreement; and
(b)
the amalgamated company possesses all the property, rights, assets,
privileges and franchises, and is subject to all the contracts, liabilities,
debts and obligations of each of the amalgamating companies.
[77]
There are two general consequences
that are identified when companies amalgamate:
(a)
they continue as one; and
(b)
the amalgamated company possesses
all of the property and is subject to all of the liabilities of the predecessor
corporations.
[78]
The Ontario Court of Appeal in Black
and Decker focused on the second aspect – that the amalgamated company is subject
to all of the liabilities of the predecessor companies. This is also clearly
the focus of Justice Jessup in the J. J. Beamish case. In the decision
of the Supreme Court of Canada in Black and Decker, there is a reference
to the decision of the Ontario Court of Appeal (that was being appealed) which
includes the following from the judgment of the Ontario Court of Appeal:
The case
narrows down in the end to the question whether subsection (13)(b) of s. 137,
in making the new company "subject to all the liabilities" of each of
the old companies, imposes upon the new company criminal liability of one of
the old companies.
[79]
However the Supreme
Court of Canada decided the Black and Decker case based on the
consequences of the amalgamating companies continuing as one. This is based on
paragraph 137(13)(a) and not (b) of the Canada Corporations Act. It
therefore seems to me that the comments of Justice Jessup in J. J. Beamish
and of the Provincial Court Judge in Black and Decker, would no longer
be relevant as the Supreme Court of Canada decided Black and Decker on a
different basis and it is this different basis that would support a finding
that the Appellant would have to recognize and take into account the
depreciation that had been claimed by Delta and First Heritage.
[80]
A similar argument was also
raised in R. v. Mercantile Distributing Ltd., (1975) 61 D.L.R.
(3d) 481. Justice Munroe of the British Columbia Supreme Court stated as
follows:
6 Counsel
for the respondent seeks to distinguish the present case from that authority on
the grounds that (1) the amalgamation in the latter occurred under an act of
Parliament which, unlike the provincial Legislature, has jurisdiction in
criminal matters and (2) in the Black & Decker case the amalgamated company
was held to be responsible and liable to prosecution for the acts prior to
amalgamation of the constituent companies but here the Crown seeks not to
prosecute the amalgamated company but to invoke remedies against it in respect
of a sentence imposed against one of the constituent companies prior to
amalgamation, and (3) the relief sought herein by the Crown is available only
in respect of a fine imposed under Section 647 of the Criminal Code and not for
a fine imposed under the Income Tax Act as this one was. I cannot agree. I reject
each of those submissions and hold that upon amalgamation the amalgamated
company became liable to the Crown for payment of the fine imposed upon the old
company by virtue of Section 272 of the Companies Act, it being a liability and
obligation of the old company, and that Section 648 of the Criminal Code being
in part 20 of the Criminal Code which deals with "punishment
generally" is a section of general application which authorizes the relief
claimed herein by the Crown.
7 It
seems to me that it makes no sense to hold that an old company can be traced
through amalgamation so as to allow the amalgamated company to be convicted of
the crime of the old company and to be liable for the punishment yet, on the
other hand, to hold that if the old company has been found guilty before
amalgamation the amalgamated company is exempt from such liability.
8 The
provincial statute does not purport to make the amalgamated company criminally
liable. The liability is simply a logical result of the finding that the old
company continues to exist, as the Supreme Court of Canada
has held.
(emphasis
added)
[81]
In this case the requirement
of the Appellant to recognize and account for the depreciation that was allowed
to Delta and First Heritage is not as a result of the CUIA mandating that tax
accounts relevant for the purposes of the Act flow through on an
amalgamation under the CUIA, but, as stated by Justice Munroe, it “is simply a logical result of the finding that the old compan[ies]
continue[] to exist, as the Supreme Court of Canada has held”.
[82]
Counsel for the
Appellant also argued that:
The Act was
amended in 1979 to add subsection 87(9)*, dealing with triangular
amalgamations, a transaction permitted under corporate law but not yet
recognized by the Act (as noted by the Explanatory Note to that subsection).
The purpose of doing this was to ensure that tax accounts would flow through on
a triangular amalgamation. Similarly, for many years after Black &
Decker was decided, the Act has been amended to allow various new tax [sic]
accountants to flow through*. Why do any of that if Amalco as a continuation
of the predecessors has all its tax attributes anyway? It would make all of
section 87 and every other section that refers to section 87 redundant,
contrary to the conclusion of this Court in CGU.
(* denotes a
footnote reference that has not been included)
[83]
A triangular
amalgamation would not satisfy the definition of “amalgamation” in subsection
87(1) of the Act in the absence of subsection 87(9) of the Act.
As noted below, there were conflicting opinions expressed in published articles
and texts with respect to the issue of whether the tax accounts would flow
through to an amalgamated company following an amalgamation that did not
satisfy the definition of amalgamation in subsection 87(1) of the Act. Parliament
can hardly be criticized for wanting to bring certainty to a situation where
the result was uncertain.
[84]
Since Parliament
included paragraph 87(2)(a) in the Act (which deems the amalgamated
corporation to be a new corporation), as noted above, the principles as set out
in Black and Decker will not apply to a merger that is an amalgamation
as defined in subsection 87(1) of the Act. Therefore it is necessary to
identify which accounts will flow through to this “new” corporation. The fact
that the net result in relation to particular tax accounts, such as the UCC of
assets of particular classes of property, may be the same by applying the
principles in Black and Decker and the provisions of paragraph 87(2)(d)
of the Act simply means that this was the desired result. In Black
and Decker Justice Dickson (as he then was) faced a similar argument. He
stated as follows:
It was also
submitted that if the amalgamating companies continue in amalgamation, in all
their plenitude, then ss. 137(13)(b) and 137(14) are mere surplusage. I would
not so regard them. These sections spell out in broad language amplification of
a general principle, a not uncommon practice of legislative draftsmen.
[85]
It seems to me that
Parliament was simply setting out the detailed rules in section 87 of the Act
in relation to the consequences under the Act of amalgamating two or
more corporations and, as noted above, since paragraph 87(2)(a) of the Act
deems the amalgamated corporation to be a “new” corporation, it then became
necessary to specify the various tax consequences arising from the amalgamation.
It also appears that not all tax consequences would be the same. For example,
paragraph 87(2)(e.4) of the Act provides, in the circumstances as
set out in this paragraph, that the cost to the new corporation of a
mark-to-market property will be its fair market value, which would not be the
same result if the principles as set out in Black and Decker were
applied.
[86]
Counsel for the
Appellant also argued that:
More
generally, under Black & Decker, if a predecessor actually did
something that is a matter of historical fact (spent money, caused pollution),
then Amalco, as a “continuation” of the predecessor, can be seen to have done
that same thing. The actions or inactions of a predecessor “continue” to be
the actions or inactions of Amalco. It is notable that in Black &
Decker it was the Amalco which was charged for the offenses of its
predecessor, but the Supreme Court did not say that it was the predecessor’s
“liability” that was continued in Amalco, but the corporate act itself. They
continue with “their sins, if sinners they be.”
This is how the Supreme Court got around the Court of Appeal’s finding that
“liability” could not extend to a criminal liability without an express
provision to that effect in the Criminal Code. But merely having some notional
tax account is not an action or inaction by the predecessor, it is not a matter
of historical fact, and therefore is not carried forward into Amalco under
paragraph 23(a). If a river is a continuation of two streams, the fact that
one stream is 5 feet deep and the other stream is 10 feet deep does not mean
the river is 15 feet deep, it may be 1 foot deep or 20 feet deep.
[87]
In this case Delta and
First Heritage did take an action – they each claimed depreciation in their
corporate tax returns. This depreciation was allowed and hence for the purposes
of “E” in the definition of “undepreciated capital cost” in paragraph 13(21)(f)
of the Act, the total depreciation allowed to Delta and First Heritage
would be the total depreciation allowed as a result of the action of each of
these companies in claiming CCA in their tax returns. Since depreciation is a
discretionary deduction (paragraph 1100(1)(a) of the Income Tax Regulations
refers to “such amount as he may claim”), Delta and First Heritage would have
to take the action of claiming depreciation in order for the depreciation to be
allowed. Therefore this is not a basis for distinguishing the decision of the
Supreme Court of Canada in Black and Decker. With respect to the river
analogy to which the Appellant referred, it seems to me that the depth of the
river is not relevant but what is relevant is the amount of water in the
combined river (which would be the total combined amount of water of the
streams that came together) and what was in or floating on the water as the
combined river would have whatever was in or floating on the streams that came
together.
[88]
As a result, in
determining the UCC of the depreciable assets of the Appellant, the amount
allowed to each of Delta and First Heritage as depreciation is to be deducted.
Therefore the opening balance of the UCC of any particular class of depreciable
property to the Appellant as of January 1, 2001 would be equal to the aggregate
closing balances of UCC of such class of depreciable property to Delta and
First Heritage as of December 31, 2000.
[89]
Although the preferred
rate amount is not relevant in determining the amount of tax payable by the
Appellant for any of the years under appeal, it also seems to me that since
Delta and First Heritage were continued “without subtraction” then in
determining the preferred rate amount of the Appellant for its 2001 taxation
year, the balance of the preferred rate amounts of each of Delta and First
Heritage as of December 31, 2000 should have been included.
[90]
The Appellant was also
reassessed for 2001 to include in its income the allowance for doubtful debts
in the amount of $851,649. It seems to me that since Delta is continued
“without subtraction”, then this amount should also have been included in the
income of the Appellant for 2001. This failure to include this amount only
affects the reassessment for 2001 and therefore it will be necessary to
determine if the reassessment of the Appellant’s 2001 taxation year was
properly issued. There was also a reference in the Reply to excess tax reserves
of $888,291 that had been deducted by Delta in computing its income for its
2000 taxation year. These “extra tax reserves” will be discussed more fully
below.
[91]
Since GAAR was raised
as an alternative argument as outlined above, and since I have determined that
in determining the UCC of each class of depreciable property to the Appellant
the amount of depreciation allowed to each of Delta and First Heritage must be
deducted, whether GAAR would apply if my finding would have been different, is
not relevant.
Reassessment of
2001
[92]
In this case, there
were two reassessments issued in relation to the 2001 taxation year. The first
reassessment was dated May 23, 2006 and, in addition to the matters under
appeal, also included other amounts. The Appellant was again reassessed in
relation to its 2001 taxation year on April 22, 2008 to remove the other
amounts from its income. The Appellant’s 2001 taxation year was initially
assessed on September 25, 2002. Therefore the first reassessment of the
Appellant in relation to its tax liability for its 2001 taxation year was made
more than three years after it was originally assessed for this year.
[93]
During the course of
the proceeding the Respondent acknowledged that the Appellant was a
Canadian-controlled private corporation and therefore its normal reassessment
period was three years. It is the position of the Respondent, however, that the
Appellant could be reassessed after the expiration of its normal reassessment
period as a result of the provisions of subparagraph 152(4)(a)(i) of the Act
which provides that:
(4) The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer's normal reassessment period in
respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in filing the return
or in supplying any information under this Act,
[94]
Initially the
Respondent was arguing that the Appellant had made a misrepresentation by
identifying itself as an “Other Corporation” and not as a Canadian-controlled
private corporation on the first page of its tax return. However subsection
137(7) of the Act provides that:
(7)
Notwithstanding any other provision of this Act, a credit union that would, but
for this section, be a private corporation shall be deemed not to be a private
corporation except for the purposes of sections 123.1, 125, 127, 127.1, 152 and
157 and the definition “small business corporation” in subsection 248(1) as it
applies for the purposes of paragraph 39(1)(c).
[95]
Therefore a credit
union is a private corporation for the purposes of some sections of the Act
but not for others. Therefore since the only other categories on the first page
of the income tax return were:
(a)
Canadian-controlled
private corporation;
(b)
Other private corporation;
(c)
Public corporation; and
(d)
Corporation controlled
by a public corporation
it seems to me that the only logical choice available
to the Appellant was to identify itself as an “Other Corporation” and to then
specify that it was a credit union, which it did. Only during closing arguments
did counsel for the Respondent indicate that the Respondent was no longer
relying on the identification of the Appellant as an “Other Corporation – Credit
Union” as a misrepresentation.
[96]
In Nesbitt v. The
Queen, 96 DTC 6588, Justice Strayer, on behalf of the Federal Court of
Appeal, stated that:
8 Even assuming that the letter of
August 6, 1986, could be taken to prove the Minister's knowledge by that date
(two months prior to expiry of the four-year limitation period) of the true
facts and that there had been a misrepresentation, I do not believe this
assists the appellant. It appears to me that one purpose of subsection 152(4)
is to promote careful and accurate completion of income tax returns. Whether or
not there is misrepresentation through neglect or carelessness in the
completion of a return is determinable at the time the return is filed. A
misrepresentation has occurred if there is an incorrect statement on the return
form, at least one that is material to the purposes of the return and to any
future reassessment. …
(emphasis added)
[97]
In this case the amount
stated to be the preferred rate amount did not affect the liability of the
Appellant under the Act for 2001. Therefore it seems to me that the
Appellant’s statement that the preferred rate amounts of Delta and First
Heritage were not to be included in determining its preferred rate amount (which
was made by the Appellant in its 2001 income tax return by stating that its
preferred rate amount for the previous year was nil) was not material for the
purposes of the return and would not be a relevant misrepresentation for the
purposes of subsection 152(4) of the Act. In any event, subsection
152(4.01) of the Act provides that:
(4.01) Notwithstanding subsections (4) and (5), an assessment,
reassessment or additional assessment to which paragraph (4)(a), (b) or (c)
applies in respect of a taxpayer for a taxation year may be made after the
taxpayer's normal reassessment period in respect of the year to the extent
that, but only to the extent that, it can reasonably be regarded as relating
to,
(a) where paragraph (4)(a) applies to the assessment, reassessment
or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who filed
the taxpayer's return of income for the year that is attributable to neglect,
carelessness or wilful default or any fraud committed by the taxpayer or that
person in filing the return or supplying any information under this Act, or
[98]
Therefore the
reassessment issued after the normal reassessment period must relate to the
misrepresentation. Since including the preferred rate amounts for Delta and
First Heritage in calculating the preferred rate amount for the Appellant does
not affect the tax liability of the Appellant for 2001, no reassessment could
be issued in relation to the understated preferred rate amount for 2001 and
this understated amount could not support a reassessment for some other matter.
[99]
Counsel for the
Respondent, in closing argument, also submitted that the Appellant had made other
misrepresentations by:
b)
overstating its opening UCC balances by $30,876,531 by
failing to account for previous total depreciation allowed to the Predecessors;
c)
understating its taxable income by the amount of
$5,527,968 in respect of overstated CCA; and
d)
understating its taxable income by the amount of
$1,739,950 in respect of its failure to add back various reserves claimed by
the Predecessors.
[100]
There was very little
evidence during the hearing related to the reserves. In the Amended Notice of
Appeal, under the heading “other amounts reassessed for 2001 – 2004”, it is
stated that:
1.44 In the First 2001 Reassessment the Minister included in
Amalco’s income an allowance for doubtful debts deducted by Delta in its 2000
taxation year in the amount of $851,659.
…
1.47 In the First 2001 Reassessment the Minister included in
Amalco’s income $888,291 as a reserve deducted by Delta or as prepaid expenses
deducted by Delta in its 2000 taxation year.
[101]
In the Amended Notice
of Appeal under the heading “Issues”, it is stated that:
2.3 Was the Amalgamation a Section 87 Amalgamation such that
the UCC of [sic] $20,103,22, the $851,659 and the $888,291 referred to
above flowed through to Amalco or alternatively did these amounts flow through
to Amalco under the CUIA or subsection 245(2)?
[102]
In the Amended Notice
of Appeal under the heading “Reasons Relied on” – part “(b) other issues”, it
is stated that:
3.10 In respect of the $851,659 referred to above, this
inclusion was based on the assumption that the Amalgamation was a Section 87
Amalgamation or that the CUIA or GAAR applied and therefore was incorrect. In
any event, the amount that should have been included is not more than $851,649.
3.11 In respect of the $888,291 referred to above, this
inclusion was based on the assumption that the Amalgamation was a Section 87
Amalgamation or that the CUIA or GAAR applied and was therefore incorrect.
[103]
There was no admission
in paragraph 3.11 (as there was in paragraph 3.10) that the amount that should
have been included in any event was not more than $888,291.
[104]
In paragraph 21 of the
Reply it is stated that the Appellant was reassessed in relation to its 2001
taxation year to include in income:
b) …
ii) …other
tax reserves deducted in the 2000 taxation year by Delta in the amount of
$888,291 (the “Excess Tax Reserves”),
iii) …an
allowance for doubtful debts deducted in the 2000 taxation year by Delta in the
amount of $851,659 (the “Doubtful Debt Allowance”).
[105]
Then Chief Justice Bowman
in Mensah v. The Queen, [2008]
T.C.J. No. 302, 2008 DTC 4358 stated
that:
8 The
fourth preliminary point is that the assessment for the 1993 taxation year is
statute-barred. The onus is upon the Minister to establish the facts justifying
the reassessment of the 1993 taxation year beyond the normal reassessment
period. The provisions of the Income Tax Act permitting the Minister to
open up statute-barred years have evolved and the evolution was summarized in 943372
Ontario Inc. v. R., 2007 D.T.C. 1051; [2007] 5 C.T.C. 2001 at paragraph 18:
18 The evolution of these provisions can be briefly summarized as
follows: originally, subsection 152(4) permitted the Minister to open up a
statute-barred year for all purposes if he could find any misrepresentation of
the type described in subsection 152(4), however small, and reassess any items
whether the subject of any type of misrepresentation or not. This obviously
appeared somewhat unfair and the result was paragraph 152(5)(b) which
was introduced in 1973-1974 with effect from 1972. This provision permitted the
taxpayer to establish that the omission of an amount of income was not the
result of a misrepresentation that was attributable to neglect, carelessness,
wilful default or fraud. Nonetheless it did cast on the taxpayer an onus.
Subsection 152(4.01) was therefore introduced and its effect, according
to Mr. Kutkevicius, is to remove that onus from the taxpayer and put a two-fold
onus on the Minister to establish:
(a)
that there was misrepresentation, and
(a)
that the misrepresentation was attributable to neglect,
carelessness, wilful default or fraud.
I think this is the correct interpretation. If the onus
that was imposed on the taxpayer under former paragraph 152(5)(b)
survived the amendment to subsection 152(5) and the enactment of subsection
152(4.01), subsection (4.01) would have no purpose.
(emphasis added)
[106]
Therefore the onus was
on the Respondent to not only establish that there was a misrepresentation with
respect to the omission of these amounts from the income of the Appellant, but
also that the “misrepresentation was
attributable to neglect, carelessness, wilful default or fraud”.
[107]
A copy of Delta’s
income tax return for its taxation year ending December 31, 2000 that was
originally filed and a copy of the amended income tax return for this year were
introduced into evidence. The amended income tax return was accepted by the Canada
Revenue Agency or its predecessor (the “CRA”) and resulted in a reassessment in
April 2002. In the original return, Schedule 1 and Schedule 13 show that the
following reserves were claimed by Delta in computing its income for this year:
Reserve for Doubtful debts: $851,649
Other tax reserves: $888,291
Total: $1,739,940
[108]
In the amended income
tax return for Delta for this taxation year, Schedule 13 only shows one
amount for reserves - $851,649 as a reserve for doubtful debts. It is not
obvious where this reserve amount of $851,649 appears on Schedule 1. On Schedule
1 there is an amount identified as “Deferred and prepaid expenses” in the
amount of $888,291. It is not at all clear why these “deferred and prepaid
expenses” were deducted in computing the income of Delta for 2000.
[109]
The tax return for the
Appellant for its 2001 taxation year was also introduced into evidence. It
seems clear from this tax return that no amount was included in Schedule 13 for
reserves claimed in the previous year. However, since the amended income tax
return for Delta only included the reserve for doubtful debts of $851,649
arguably only the amount of $851,649 should have been included in Schedule 13
for the Appellant for 2001 as the balance at the beginning of this year.
[110]
The net income of the
Appellant for 2001 as stated in Schedule 1, after taxes (as per the financial
statements) was $9,777,931. It is not possible to determine from the
information provided whether this income amount includes the amount deducted
previously as either “other tax reserves” or “deferred and prepaid expenses”.
It is also not clear why the amount identified as “other tax reserves” in the
original return and “deferred and prepaid expenses” in the amended return would
be included in the income of the Appellant for 2001.
[111]
The only evidence at
the hearing directly related to these two amounts was submitted by Thomas
Webster who was the Vice-President – Finance for Delta and the Appellant and by
James Thatcher, the auditor for the CRA. Thomas Webster, during direct
examination by counsel for the Appellant, stated that:
Q And
then the third point I wanted to ask you about is something that's not in this
return. And it has to do with Delta's loan loss reserves. In its 2000 tax
year, Delta took a reserve for a bad debt in the amount of $800,000, some rough
number like that. Is that correct?
A That
sounds about right, yes.
Q And
normally either Delta or -- on a Section 87 amalgamation, the amalgamated
company would have to bring that reserve back into income in 2001, and then
possibly deduct it again if it was still bad. You're aware of that?
A I am
aware of that, yes.
Q But
Envision didn't do that. Envision didn't bring this loan loss reserve back
into income in its 2001 year. It's nowhere in this return, that income
addition. Did you think that was correct, not to include that reserve back
into income in 2001?
A I
also thought that was correct.
[112]
It seems clear that
this testimony is restricted to the amount claimed as a reserve for doubtful
debts in the amount of $851,649. There is no reference to the amounts deducted
as either “other tax reserves” or “deferred and prepaid expenses” by Delta in
the amount of $888,291.
[113]
During the direct
examination of James Thatcher by counsel for the Respondent, the following
exchange took place:
Q And
are you able to say by looking at the schedules, or by referring to your own
recollection, of what -- obviously the adjustments to the capital cost
allowance revision made by the Minister in 2001 and in all the other taxation
years currently under appeal, that would have had, I take it, an impact in
terms of the appellant's taxable income, would it?
A Oh,
yes, it did. Your Honour, as a result of this audit, we issued reassessments
of taxes payable for Envision, for its 2001, '02, '03 and '04 years. In each
of those years, the reassessed additional amount of taxes payable resulted from
our disallowance of the CCA in the amounts computed on the schedules that we
just went through, the amount of CCA adjustments. The only other thing that
resulted in taxes payable in the years under assessment was the Minister adding
back to Envision's 2001 tax year the amount of reserves in the amount of about
one and a half million dollars, that Delta, the predecessor Delta, had been
allowed at the end of its previous -- its 2000 year, Delta claimed reserves of
1.5 million and the Minister added Delta's reserve back to Envision's income in
2001. Those are the adjustments that resulted in the taxes payable, with
regard to the notices of reassessment that were issued.
Q And
can you tell His Honour off the top of your head, in dollars and cents, the tax
consequence of the Minister's adjustments to the CCA in let's say in 2001? Do
you know how much that was, approximately?
A I
would prefer to refer to the notice of reassessment, if I may. It's --
[114]
This testimony does not
assist the Respondent in establishing that the Appellant had made a
misrepresentation by failing to include $888,291 in its income that had been
deducted by Delta as either “other tax reserves” or “deferred and prepaid
expenses” in computing its income for its 2000 taxation year. Since the amount
of $888,291, in the amended income tax return, was not claimed as a reserve,
and since this return has been accepted by the CRA, simply stating that the
amounts claimed as a reserve by Delta were added to the income of the
Appellant, does not assist the Respondent in establishing that this amount of
$888,291 should have been included in the Appellant’s income for 2001. The
Respondent has failed to establish that the Appellant did not include this
amount in its income for 2001 and that the Appellant should have included this
amount in its income for 2001. The Respondent has failed to establish that the
Appellant made any misrepresentation in its 2001 income tax return in relation
to this amount of $888,291.
[115]
However it does seem to
me that the Respondent has established that the Appellant overstated the UCC to
the Appellant of each class of depreciable property (as a result of failing to
include the depreciation that had been allowed to Delta and First Heritage) and
failed to include the reserve for doubtful debts that had been deducted by
Delta in its taxation year ending December 31, 2000. These statements were
material for the purposes of the return. The next issue is whether these
statements were “attributable to neglect, carelessness or wilful default”.
There was no suggestion that the Appellant had committed any fraud in filing
its tax return for 2001.
[116]
In The Queen v. Regina
Shoppers Mall Limited, [1991] 1 C.T.C. 297, 126 N.R. 141, 91 DTC 5101 the
Federal Court of Appeal approved the following comments of Justice Addy:
7. …Where a taxpayer thoughtfully, deliberately and carefully
assesses the situation and files on what he believes bona fide to be the proper
method there can be no misrepresentation as contemplated by section 152 (1056
Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1, 89 D.T.C. 5287). In Levy
(J.) v. Minister of National Revenue, [1989] C.T.C. 151, 89 D.T.C.
5385 at 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following
statement by Muldoon, J. in the above case:
Subsection 152(4) protects such conduct, and perhaps only such
conduct, where the taxpayer thoughtfully, deliberately and carefully
assesses the situation as being one in which the law does not exact the
reporting of that which the taxpayer bona fide believes does not exist.
[Emphasis
added by Justice Addy and Justice MacGuigan.]
It has also been established that the care exercised must be that of
a wise and prudent person and that the report must be made in a manner that the
taxpayer truly believes to be correct. ...
[117]
The parties referred to
two technical interpretations (dated September 30, 1988 and December 2, 2000),
two rulings (one undated but it appears to have been issued in 1989 and the
other one is dated January 1, 2005) and one consultation (dated January 12,
2006) issued by the CRA. The auditor for the CRA acknowledged that the ruling
that appears to have been issued in 1989 was not available to the public prior
to the Appellant being reassessed and was only made available to counsel for
the Appellant after the Appellant had been reassessed. He also acknowledged that
there were no documents that had been issued by the CRA and that were available
to the public at the time that the Appellant filed its tax return for 2001 that
contradicted the statements made by the CRA in the 1988 and in the 2000
technical interpretations. The 1988 technical interpretation provided as
follows:
This is in response to your letter of May 12, 1988 wherein you
requested our opinions as to the income tax implications of an amalgamation
that does not meet the requirements of subsection 87 (1) of the Act.
Any merger carried out under a Canadian statute that provides that
the predecessors continue their existence in the merged corporation, the
property of the predecessors is not disposed of or deemed to be disposed of.
However, the tax accounts and other tax attributes of the predecessors are not
“acquired” by the merged corporation. This conclusion follows from the
existence of the rules of subsection 87 (2) of the Act that provide for the tax
accounts to “flow through” to the merged corporation. Such rules would be
redundant if the tax attitudes of the predecessor became attributes of the
merged corporation in any event.
Finally the shareholders and debtholders of the predecessor
corporations dispose of their shares or debt for an amount equal to the fair
market value of the shares and debt of the merged company that are issued on
the merger.
[118]
The 2000 technical
interpretation stated the same result for tax accounts. This technical
interpretation provided that:
This is in reply to your letter of January 19, 2000, wherein you
requested our comments in respect of the tax implications of an amalgamation
that does not meet the requirements of subsection 87 (1) of the Income Tax Act
(the “Act”) (a “non-qualifying amalgamation”). In particular, you enquire as to
whether the tax accounts and other tax attributes of a predecessor corporation
would flow through to the merged corporation in a non-qualifying amalgamation
where the merger is carried out under a Canadian statute that provides that the
predecessor corporations continue their existence in the merged corporation.
It is our position that the tax accounts and other tax attributes of
the predecessor corporations are not “acquired” by the merged corporation in a
non-qualifying automation. This conclusion follows from the existence of the
rules of subsection 87 (2) of the Act that provide for the tax
accounts to flow through to the merged corporation. Such rules would be
redundant if the tax attributes of the predecessor corporations became
attributes of the merged corporation in any event.
We trust the above comments are of assistance to you. However, as
noted in Information Circular 70 -- 6R3 issued on December 30, 1996, the above
comments are not binding on the Canada Customs and Revenue Agency.
[119]
As noted by Justice
Strayer, on behalf of the Federal Court of Appeal, in Nesbitt, supra:
8 … Whether or not there is
misrepresentation through neglect or carelessness in the completion of a return
is determinable at the time the return is filed.
[120]
Therefore since the
ruling that appears to be dated in 1989 was not available to the public at the
time that the Appellant’s 2001 income tax return was filed in 2002 it is not
relevant in determining whether the misrepresentation made in this return was
“attributable to neglect, carelessness or wilful default”. Similarly the ruling
issued in 2005 and the consultation dated in 2006 are not relevant for this
purpose.
[121]
The technical
interpretations that are relevant in relation to this issue both state it is
the position of the CRA that the tax accounts and other tax attributes do not
flow through to the merged corporation if the amalgamation is not an
amalgamation as defined in subsection 87(1) of the Act. During his
testimony, James Thatcher, the auditor with the CRA, stated that:
A "Cost
amount" is a defined term under the Income Tax Act with respect to,
for example, depreciable property, cost amount means "the undepreciated
capital cost of those depreciable properties". It would be a tax account
or tax attribute. It would be considered a tax account or tax attribute by the
Canada Revenue Agency.
With
respect to "cost", not necessarily tax account in itself.
"Capital cost" is a tax term but "cost" is a more general
commercial term and wouldn't necessarily be tax account or tax attribute.
[122]
It therefore seems
clear that the position of the CRA, as stated in these technical
interpretations and as stated by the auditor for the CRA, is that the UCC is a
tax attribute and that tax attributes did not flow through to the amalgamated
company if the amalgamation did not satisfy the definition of amalgamation in
subsection 87(1) of the Act and therefore the UCC of the predecessors
would not flow through to the amalgamated company in this situation. The issue in
this case is not whether this statement is correct but whether a “wise and
prudent person” could rely on this statement and then file a tax return truly
believing that this would be an acceptable basis on which to file a tax return.
It seems to me that, for the purposes of determining whether a person has made
a misrepresentation in a tax return that is “attributable to neglect,
carelessness or wilful default”, a “wise and prudent person” could, in filing
their tax return, rely on statements made by the CRA that are in the public
domain.
[123]
It is clear in this
case that Delta and First Heritage decided to merge for business reasons before
the method of merging that was utilized in this case was approved. It is also
clear that the primary focus of the tax planning related to the merger was to
reduce the preferred rate amount. Various options to combine the two credit
unions were considered and finally the structure that has lead to this appeal
(which was proposed by Fraser Milner Casgrain) was chosen. It also is clear
that the Appellant “thoughtfully, deliberately and carefully assesse[d] the
situation”. Fraser Milner Casgrain were involved throughout as were Grant
Thornton. The filing position that would be taken was discussed by
representatives of the credit unions at a meeting on June 26, 2000. With
respect to the filing positions, Douglas Graham, CA of Grant Thornton in a
letter dated August 9, 2000 stated as follows:
The filing positions to be adopted are debatable. One position with
which all parties at the June 26th meeting are in agreement:
1) [sic] Is the amalgamated credit union
should report an opening preferred rate amount of nil in its initial tax
return? We agree with that filing position.
There was not agreement with respect to the
second and third filing matters. Some parties at the meeting advocated:
2. Including in the amalgamated credit union’s
income for its 2001 taxation year the loan loss provisions claimed in the final
tax returns of Delta and First Heritage. We do not agree with this filing
position.
3. Reporting its opening undepreciated capital
cost (“UCC”) balances the closing balances in Delta and First Heritage in their
final tax returns. We do not agree with this filing position.
We are of the view that the filing position in #1 will cause CCRA to
challenge the nil preferred rate amount. We expect that CCRA will flag a nil
opening balance in the preferred rate account and the amalgamated credit union
will be asked to explain why there is a nil balance. By not including Delta’s
and First Heritage’s closing loan loss provisions in the amalgamated credit
union’s income for 2001, and by reporting the cost of all the depreciable
property in the opening UCC balance, the amalgamated credit union will be
taking a consistent position that none of the tax attributes should flow
through to the amalgamated credit union.
On a practical level, the amalgamated credit union will have a
stronger bargaining position with CCRA if it is able to compromise by bringing
into income the closing loan loss provisions and by “rolling forward” the
closing UCC balances. If the matter proceeds to court, the consistent filing
position is one from which your litigator would like to be able to argue. I think
there is a high probability that CCRA will challenge the filing position #1 (no
preferred rate amount), and CCRA may wish to carry the challenge through the
courts. I would rather have all three issues on the table from a bargaining
position and from the position of being able to argue consistently that tax
attributes don’t survive a non-qualifying amalgamation.
As we discussed at the meeting and on numerous occasions prior to
the meeting, there are risks in taking the filing positions which we are advocating.
Interest will be charged on any unpaid taxes. There should be no penalties
levied because the filing position is consistent with a recent technical
interpretation issued by CCRA. Management and the Board should be
prepared to see this matter come before the courts. I do not believe that
anyone should feel any embarrassment if this matter proceeds [sic] t
court because, from the credit unions’ perspective, you have received
professional [sic] advise which recommended that the merger be
structured in a manner which will minimize the credit unions’ income tax
liability.
(emphasis added)
[124]
Since Douglas Graham
referred to a recent technical interpretation of the CCRA is it obvious that he
was aware of the 2000 technical interpretation referred to above when he wrote
this letter. He confirmed during the hearing that the technical interpretation
to which he was referring was the 2000 technical interpretation. During the
cross examination of Douglas Graham the following exchange occurred:
Q Yeah.
And is it fair to say that those other tax attributes, discussion of those
other tax attributes -- I won't say they occurred as a surprise, but is it fair
to say that at some point when the predecessors were having to consider the
filing position that the Amalco would take upon, after the amalgamation, that
it was only at that time that the predecessors and their advisors, or at least
their tax advisor, turned to a consideration of UCC and the other tax reserves.
A I'm
going to try to answer the question. The technical interpretations made it
clear to me that the tax attributes didn't flow through on a taxable
amalgamation.
[125]
While counsel for the Respondent
pointed out that Douglas Graham did not become aware of this technical
interpretation until after he had issued his final report that was dated April
18, 2000, his final report only addressed the preferred rate amount and did not
address the issue of whether the depreciation allowed to Delta and First
Heritage should be reflected in the UCC balance of the Appellant. This report
also did not reflect whether the reserve for doubtful accounts claimed by Delta
in its 2000 taxation year should be included in the income of the Appellant for
its 2001 taxation year. It is clear that when the filing position on these two
matters was addressed in Douglas Graham’s letter of August 9, 2000 that he was
aware of this technical interpretation. The important date for the purposes of
determining whether a misrepresentation has been made that is “attributable to
neglect, carelessness, or wilful default” is the date the return is filed by
the Appellant since that is the date on which the misrepresentation is made. It
is clear that by that date (which was in June of 2002) Douglas Graham was aware
of this technical interpretation and there were no other technical
interpretations, rulings, consultation documents or any other public statements
of the CRA that contradicted the position as expressed in this technical
interpretation.
[126]
It also appears clear
that Thomas Webster was also aware of and relied upon the technical
interpretation. During redirect the following exchange of questions and answers
occurred:
Q But
you do recall there being a technical interpretation issued by the CRA?
A I do recall that.
Q And
do you recall -- if I showed you a technical interpretation would you be able
to say whether it's that technical interpretation or another one, or you
wouldn't be able to say?
A I would not be able to
say.
Q But
you knew that there was a technical interpretation issued by the CRA that
supported the filing position?
A That is correct.
Q And
was that one of, not necessarily the main but was that one of the elements on
which the credit union based its filing position, the fact that this technical
interpretation had been issued?
A It strengthened the
conclusions of the filing position and the credit union did rely on that.
[127]
Also during the cross
examination of Thomas Webster the following exchange took place in relation to
the suggestion that the filing position related to the UCC and the reserve
claimed by Delta in 2000 was to provide the Appellant with a bargaining
position:
Q Did
the amalgamating credit unions accept that by taking the UCC position that Mr.
Graham was suggesting that that would give them a stronger bargaining position
with the Agency, if the Agency reassessed to disallow the readjustment of the
PRA to nil? Did they accept that this would give them a stronger bargaining
position?
A I
can only speak for myself. I recall the meeting in question. It started with
a discussion of what are tax attributes that might not flow through, and we
were looking for a consistency with the theory that the preferred rate amount
did not flow through. These two other items were identified and the discussion
was we should be logical in the preparation of our tax returns and we should be
consistent. Those all made sense to me. Whether it gave us a bargaining
position, I'm not sure that I was influenced by that in the least. We knew the
PRA, we've seen in documents it was an aggressive position that was -- I wasn't
overly influenced by the bargaining position statement.
[128]
It seems clear that
both Grant Thornton (who prepared the tax return for the Appellant for 2001)
and Thomas Webster (who reviewed and signed the 2001 tax return on behalf of
the Appellant) were aware of and relied upon the 2000 technical interpretation
that had been issued by the CRA.
[129]
It also seems clear
that Thomas Webster held a bona fide belief that the filing positions that he
had taken in this case were correct. He stated during his direct examination
that:
Q …Now,
can you tell us why did you think back in 2002, when you signed this return and
filed it on, I think it's June 28th, 2002, why did you think those
three positions were correct? What led you to believe that at the time?
A During
the period of 2000, starting after that memorandum of understanding was signed,
we engaged Grant Thornton, who provided the tax opinion to us. During the
period from that opinion being received, in April 2000, we had numerous
discussions with Grant Thornton and as well we received a tax opinion from a
tax law firm, all of which supported the filing positions that we just looked
at on those three points.
Q Okay.
Did you personally, being a chartered accountant, did you go out and do your
own tax research on these points?
A No.
My view is, tax at this level is very specific and complicated, which is why we
engaged Grant Thornton, which is also the point that was noted in the minutes
when I recommended we do so. And we then went and got a second opinion, that
being through the law firm that I described, Fraser Milner. So we relied on
expert tax advice as provided to us.
[130]
There were also
conflicting views among commentators with respect to whether the tax attributes
would flow through on an amalgamation that did not satisfy the definition of
amalgamation under subsection 87(1) of the Act. David A. G.
Birnie in his paper “Consolidation of Corporate Structures” that was presented
at the 1979 Canadian Tax Foundation Conference stated at page 180 in relation
to “Amalgamations to Which Section 87 Does Not Apply” that:
…Furthermore, all relevant tax accounts of the predecessors should
simply be inherited by the amalgamated company.
[131]
In the text “Taxation
of Corporations, Partnerships and Trusts” Second Edition, 2001, by Norman C.
Tobias, it is stated at page 398, in addressing issues related to amalgamations
that do not satisfy the conditions of subsection 87(1) of the Act, that:
However, the tax profiles of each of the amalgamating corporations
and the tax attributes of their respective property may not flow through to the
amalgamated corporation but for the provisions of the Income Tax Act.
[132]
As a result it seems
clear to me that the misrepresentations made by the Appellant in its 2001 tax
return in relation to the opening balance of UCC and the failure to include the
reserve for doubtful debts were not “attributable to neglect, carelessness or
wilful default” but were made carefully after considerable thought and
deliberation and were based on not only the recommended filing position as
advocated by Grant Thornton but also the position of the CRA as stated in the
2000 technical interpretation. The Appellant had a bona fide belief that it had
a valid basis to file its tax return as it was filed. The issue, as noted
above, is not whether this basis was correct, but whether the Appellant had a
bona fide belief that it was correct.
[133]
As a result the
reassessment of the Appellant’s tax liability for 2001 is vacated. In this
case, there were two reassessments issued in relation to the 2001 taxation
year. The first reassessment was dated May 23, 2006 and, in addition to the
matters under appeal, also included other amounts. The Appellant was again
reassessed in relation to its 2001 taxation year on April 22, 2008 to remove
the other amounts from its income. Since vacating the second reassessment
(which is the most recent one and the one from which this appeal was filed)
could result in the first reassessment being reinstated, this is to confirm
that both the second reassessment (dated April 22, 2008) and the first
reassessment (dated May 23, 2006) are vacated.
2002, 2003 and 2004 Taxation years
[134] Counsel for the Appellant submitted that if
the reassessment of the Appellant’s 2001 taxation year was vacated then the
reassessments of the other years would also have to be vacated on the basis
that the UCC amount was fixed. I do not agree.
[135]
The UCC, as noted
above, is determined by the formula as set out in the definition of UCC in
subsection 13(21) of the Act, which, in part, is as follows:
“undepreciated capital cost” to a taxpayer of depreciable property
of a prescribed class as of any time means the amount determined by the formula
(A + B + C + D +
D.1) –
(E + E.1 + F + G + H + I + J + K)
where
A is the total of all amounts each of which is the capital
cost to the taxpayer of a depreciable property of the class acquired before
that time,
…
E is the total depreciation allowed to the taxpayer for
property of the class before that time,
[136]
The definition does not
provide that the UCC at the beginning of one year is the closing balance of UCC
at the end of the previous year. CCA tables are set up on this basis as a
matter of convenience. However the definition requires a new calculation every
year of “the total depreciation allowed to the taxpayer for property of the
class before that time”. Therefore in order to determine the UCC of each class
of depreciable property of the Appellant at the beginning of 2002 it is
necessary to determine the total depreciation allowed to the Appellant, Delta
and First Heritage, prior to 2002.
[137]
The auditor for the CRA
had prepared a table that lists the various classes of depreciable property of
the Appellant and which shows the amount by which the UCC of each class was
overstated as a result of not including the depreciation that had been allowed
to each of Delta and First Heritage. This table is as follows:
|
Class
|
Closing Balance UCC -
Delta
|
Closing Balance UCC –
First Heritage
|
Combined UCC Balance
|
Opening Balance of UCC - Appellant
|
Overstated UCC
|
|
1
|
3,865,000
|
6,863,291
|
10,728,291
|
17,919,244
|
7,190,953
|
|
3
|
195,522
|
469,479
|
665,001
|
3,326,000
|
2,660,999
|
|
6
|
172,805
|
9,379
|
182,184
|
1,193,125
|
1,010,941
|
|
8
|
1,499,659
|
1,760,140
|
3,259,799
|
12,538,015
|
9,278,216
|
|
10
|
1,408,341
|
1,371,048
|
2,779,389
|
11,796,495
|
9,017,106
|
|
10.1
|
203
|
577
|
780
|
24,000
|
23,220
|
|
12
|
0
|
0
|
0
|
116,998
|
116,998
|
|
13
|
60,852
|
0
|
60,852
|
165,202
|
104,350
|
|
13
|
0
|
0
|
0
|
362,813
|
362,813
|
|
13
|
118,729
|
0
|
118,729
|
245,344
|
126,615
|
|
13
|
441,919
|
0
|
441,919
|
882,031
|
440,112
|
|
13
|
277,675
|
0
|
277,675
|
504,203
|
226,528
|
|
13
|
88
|
0
|
88
|
871
|
783
|
|
13
|
361,271
|
0
|
361,271
|
656,796
|
295,525
|
|
13
|
0
|
1,121,140
|
1,121,140
|
1,191,114
|
69,974
|
|
17
|
3,143
|
102,967
|
106,110
|
57,508
|
-48,602
|
|
Total:
|
8,405,207
|
11,698,021
|
20,103,228
|
50,979,759
|
30,876,531
|
[138]
Therefore, in order to
determine the correct amount for the UCC of the Appellant as of the beginning
of the Appellant’s 2002 taxation year, the depreciation allowed to Delta and
First Heritage (which would be the amount by which the opening balance of UCC
as claimed by the Appellant was overstated) should be deducted from the closing
balance of UCC as of the end of 2001. As a result the following will be the
opening balance of UCC of the Appellant as of the beginning of its 2002
taxation year:
|
Class
|
UCC – Appellant as of the
end of 2001
|
Depreciation Allowed to Delta and First
Heritage
|
Revised UCC as of the beginning of 2002
|
|
1
|
16,935,989
|
7,190,953
|
9,745,036
|
|
3
|
3,169,856
|
2,660,999
|
508,857
|
|
6
|
1,073,812
|
1,010,941
|
62,871
|
|
8
|
10,618,898
|
9,278,216
|
1,340,682
|
|
10
|
8,248,436
|
9,017,106
|
-768,670
|
|
10.1
|
16,800
|
23,220
|
-6,420
|
|
12
|
0
|
116,998
|
-116,998
|
|
13
|
132,162
|
104,350
|
27,812
|
|
13
|
686,786
|
362,813
|
323,973
|
|
13
|
196,276
|
126,615
|
69,661
|
|
13
|
705,625
|
440,112
|
265,513
|
|
13
|
403,363
|
226,528
|
176,835
|
|
13
|
697
|
783
|
-86
|
|
13
|
525,437
|
295,525
|
229,912
|
|
13
|
952,892
|
69,974
|
882,918
|
|
13
|
208,688
|
0
|
208,688
|
|
13
|
5,112
|
0
|
5,112
|
|
17
|
52,907
|
-48,602
|
101,509
|
|
Total:
|
43,933,736
|
30,876,531
|
13,057,205
|
[139]
There are several
classes where the revised result will be a negative amount. It also seems that
neither party had contemplated this situation although it is clear that the
Appellant argued that the reassessment of the 2001 taxation year should be
vacated as it was issued after the normal reassessment period (and could not be
justified under subparagraph 152(4)(a)(i) of the Act) and the Respondent
had argued that even if this year could not be reassessed the UCC amounts of
Delta and First Heritage should still be carried forward. It seems that the
above table is simply a reflection of the logical result of these two
determinations.
[140]
Subsection 13(1) of the
Act provides that:
13. (1) Where, at the end of a taxation year, the total of the
amounts determined for E to J in the definition “undepreciated capital cost” in
subsection (21) in respect of a taxpayer's depreciable property of a particular
prescribed class exceeds the total of the amounts determined for A to D in that
definition in respect thereof, the excess shall be included in computing the
taxpayer's income for the year.
[141]
The issue of whether
there would be an income inclusion as a result of the provisions of subsection
13(1) will arise at the end of 2002. As noted, when the UCC is to be determined
at any point in time, the result of the formula is the mathematical result
calculated at that time using each component of the formula. The components
require a calculation from the time when a property is acquired, not just an
update since the end of the previous taxation year. The amount for E, for
example, is based on a determination of all of the depreciation that has been
allowed before the particular time.
[142]
To determine whether
there would be any “excess” for the purposes of subsection 13(1) of the Act
it is necessary to determine the amounts for E to J as of the end of 2002 and
the amounts for A to D as of that time. In preparing the following table the
“rate” for the property of each separate class 13 was determined, for each
year, by dividing the CCA allowed by the auditor for CRA for the property of such
class by the UCC as determined by the auditor for the CRA for the property of
such class (before an amount was allowed for CCA).
|
Class
|
UCC – Beginning of 2002
(B)
|
Additions (C)
|
Dispositions
(D)
|
½ of [C – D]
(E)
|
CCA Rate
(F)
|
CCA (F x (B + E) (G)
|
UCC – end of the year (B + C - D – G)
|
|
1
|
9,745,036
|
121,072
|
0
|
60,536
|
4%
|
392,223
|
9,473,885
|
|
3
|
508,857
|
0
|
0
|
0
|
5%
|
25,443
|
483,414
|
|
6
|
62,871
|
0
|
0
|
0
|
10%
|
6,287
|
56,584
|
|
8
|
1,340,682
|
3,112,049
|
0
|
1,556,024
|
20%
|
579,341
|
3,873,390
|
|
10
|
-768,670
|
714,607
|
0
|
357,304
|
30%
|
0
|
-54,063
|
|
10
|
0
|
1,051,887
|
0
|
525,944
|
30%
|
157,783
|
894,104
|
|
10.1
|
-6,420
|
0
|
0
|
0
|
30%
|
0
|
-6,420
|
|
12
|
-116,998
|
0
|
0
|
0
|
100%
|
0
|
-116,998
|
|
13
|
27,812
|
0
|
0
|
0
|
25%
|
6,953
|
20,859
|
|
13
|
323,973
|
0
|
0
|
0
|
22%
|
71,274
|
252,699
|
|
13
|
69,661
|
0
|
0
|
0
|
25%
|
17,415
|
52,246
|
|
13
|
265,513
|
0
|
0
|
0
|
25%
|
66,378
|
199,135
|
|
13
|
176,835
|
0
|
0
|
0
|
25%
|
44,209
|
132,626
|
|
13
|
-86
|
0
|
0
|
0
|
|
0
|
-86
|
|
13
|
229,912
|
0
|
0
|
0
|
25%
|
57,478
|
172,434
|
|
13
|
882,918
|
0
|
0
|
0
|
25%
|
220,730
|
662,188
|
|
13
|
208,688
|
0
|
231,876
|
0
|
0
|
0
|
0
|
|
13
|
5,112
|
0
|
0
|
0
|
|
1,136
|
3,976
|
|
17
|
101,509
|
0
|
0
|
0
|
8%
|
8,121
|
93,388
|
|
Total:
|
13,057,205
|
4,999,615
|
231,876
|
|
|
1,654,771
|
16,193,361
|
[143]
The total amount, based
on the calculations as set in this table, that would be allowed for CCA for
2002 would be $1,654,771. However, in reassessing the Appellant for 2002, the
total amount of CCA that the Appellant was allowed to claim was $2,641,195.
Therefore it seems to me that the Appellant has been permitted to deduct more
CCA than it was otherwise entitled to claim. This arises as a result of my
finding that the reassessment of the Appellant’s 2001 taxation year is vacated
and therefore the additional CCA claimed by the Appellant in 2001 will reduce
the UCC balance as of the beginning of 2002 to an amount that is less than the
amount used by the CRA in reassessing the Appellant for 2002. However, if the
Appellant is allowed to only deduct $1,654,771 in CCA for 2002 (which is less
than the $2,641,195 allowed by the CRA), this would mean that the Minister
would be appealing his own assessment, which he cannot do.
[144]
Justice
Hamlyn in the case of Valdis, [2001] 1 C.T.C. 2827, stated the following
in paragraph 21:
21 In Millette
c. R., Judge Lamarre Proulx reaffirmed that this Court cannot entertain
an appeal that contemplates increasing an Appellant's tax liability. She stated
at paragraph 72:
It is accepted in the case law that this Court cannot
increase the amount of the Minister's assessment because that would be
tantamount to the Minister appealing the assessment, which he cannot do. The
Minister cannot appeal his own assessment: Harris v. M.N.R.,
64 DTC 5332, at p. 5337; Shiewitz v. M.N.R., 79 DTC 340, at
p. 342; and Abed v. The Queen, 82 DTC 6099, at p. 6103. (emphasis
added by Justice Hamlyn)
[145]
Therefore the Appellant
cannot be reassessed to increase its income by decreasing the amount of CCA
that it may claim in 2002 from the amount of $2,641,195 to the amount
determined above of $1,654,771.
[146]
In this case there are
four classes of property for which the amounts determined under E to J in the definition of
“undepreciated capital cost” in subsection 13(21) of the Act as of the
end of 2002 exceed the amounts for A to D as of that time. The reassessment of
the Appellant’s 2002 taxation year was only related to a reduction in the CCA
amount that the Appellant may claim. The deduction for CCA is provided in
paragraph 20(1)(a) of the Act and the income inclusion for recaptured
capital cost allowance is pursuant to subsection 13(1) of the Act. The
determination is made for each separate class of property. Because “the
Minister cannot appeal his own assessment” the Appellant’s income cannot be
increased by the amount of the recaptured capital cost allowance amounts.
[147]
In Petro-Canada
v. The Queen, 2004 FCA 158, the
taxpayer and the Crown had reached an agreement that the taxpayer was entitled
to a deduction of $700,000 for certain scientific research and experimental
development expenses but were unable to agree on the significantly larger claim
for Canadian exploration expenses. At the hearing of this matter at this Court
Justice Bowie determined that the taxpayer should actually have been allowed
less for the Canadian exploration expenses than was allowed by the Crown. He
therefore concluded that the consent judgment for $700,000 for certain scientific
research and experimental development expenses should not be accepted as the
amount of the Canadian exploration expenses that had been allowed by the CRA
exceeded the amount than he would have allowed the taxpayer to claim for
Canadian exploration expenses by more than $700,000.
[148]
Justice Sharlow, on
behalf of the Federal Court of Appeal, stated that:
68 The
Judge was correct when he concluded that Petro-Canada had been allowed a
deduction that exceeded its entitlement. The only implication of that
conclusion was that the Judge could not grant Petro-Canada the remedy it
sought, which was an increased deduction for the cost of the seismic data. The
Judge was precluded by Harris from requiring the Minister to reduce the deduction
because, in effect, that would allow the Crown to appeal the assessment.
69 However,
the Judge refused to require the Minister to give effect to the consent
judgment. Refusing Petro-Canada's rightful claim to the deduction for
scientific research and experimental development had the same effect as an
order allowing that claim but reducing Petro-Canada's seismic expense deduction
by the same amount. It is as though the Judge had allowed, in part, the Crown's
appeal of the seismic data deduction. The Judge was doing indirectly what he
could not have done directly. In my view, the Judge erred in failing to give
effect to the consent judgment.
[149]
It also seems to me
that, in this case, the amount of CCA that the Appellant is allowed to claim
for 2002 cannot be reduced by the amounts of the recaptured capital cost
allowance on the basis that the Appellant has been permitted a greater
deduction for capital cost allowance for 2002 that it should have been allowed.
This would, as noted by the Federal Court of Appeal in Petro-Canada, be
permitting the Respondent to do indirectly what it cannot do directly. As a
result no adjustment will be made to the capital cost allowance amounts that
the Appellant has been allowed to claim for 2002. Even if such adjustment could
be made, since a reduction in the amount of capital cost allowance that is
allowed would result in an increase in the UCC at the end of the year by the
same amount, the deduction would not be lost – just deferred.
[150]
In determining the UCC,
the amount for B in the formula is as follows:
B is the total of all amounts included in the
taxpayer's income under this section for a taxation year ending before that
time, to the extent that those amounts relate to depreciable property of the
class,
[151]
Since the “excess”
amounts are not included in income in 2002, no amount would be included for B
in subsequent years in relation to these amounts and effectively the negative
balance will simply be carried forward.
[152]
Since the only issue in
relation to the reassessment of the Appellant’s 2003 and 2004 taxation years is
in relation to the amount of CCA that the Appellant is allowed to claim for
each of these years and since the opening balance for 2002 (which will affect
all of the subsequent years) of UCC as determined herein is less than the
opening balance of UCC as used by CRA for 2002, any calculation of CCA for 2003
and 2004 using the revised opening balance for 2002 and the depreciation that
was allowed for 2002 will result in a lesser amount of CCA being determined for
each of these years than was allowed by the CRA. Since, as noted above, the
Minister cannot appeal his own assessment, no adjustment will be made to the
CCA that the Appellant was allowed to claim for 2003 and 2004.
[153]
As a result:
(a)
the Appellant’s appeal
from the reassessment of its 2001 taxation year is allowed, without costs, and
both the second reassessment (dated April 22, 2008) and the first reassessment
(dated May 23, 2006) are vacated; and
(b)
the Appellant’s appeals
from the reassessments of its 2002, 2003 and 2004 taxation years are dismissed,
without costs.
Signed at Halifax, Nova Scotia, this 17th day of November, 2010.
“Wyman W. Webb”
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