Citation: 2007TCC348
Date: 20070615
Docket: 2004-4347(IT)G
BETWEEN:
KLANTEN FARMS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1] This is an appeal
from a reassessment of the Appellant’s 2000 taxation year whereby the Minister
of National Revenue included in the Appellant’s income a taxable capital
gain of $563,755 on the disposition of certain farmland in Bowden, Alberta.
[2] The Appellant did
not report any gain on the disposition because it claims to have acquired certain
replacement properties and that it was therefore entitled to defer the gain
pursuant to section 44 of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) the (“Act”).
[3] Under section 44 of the Act, a
taxpayer is permitted to defer the capital gain realized on the disposition of certain
capital property if a “replacement property” is acquired within a specified
period. In order to obtain the deferral, the taxpayer must so elect in its
return of income for the year in which it acquired the replacement property.
[4] The first issue in
this appeal is whether property acquired by the Appellant in 2000 near Smokey River, Alberta, qualifies as a
“replacement property” within the meaning of subsection 44(5) of the Act.
If so, it must then be
determined whether the Appellant properly elected under subsection 44(1) of the
Act to treat the Smokey River property as a replacement property.
Applicable legislative provisions
[5] The relevant portions of section 44 read as
follows:
44(1)
Exchanges of property — Where at any time in a taxation year
(in this subsection referred to as the "initial year") an amount has
become receivable by a taxpayer as proceeds of disposition
of a capital property that
is not a share of the
capital stock of a corporation
(which capital property is in
this section referred to as the taxpayer's
"former property")
that is either
a) property
the proceeds of disposition
of which are described in paragraph (b), (c) or (d) of the definition "proceeds of disposition"
in subsection 13(21) or paragraph (b), (c) or (d) of the definition "proceeds of disposition"
in section 54,
or
b) a property that was,
immediately before the disposition, a former business property of the taxpayer,
and the taxpayer has
(c) where the
former property is
described in paragraph (a), before the end of
the second taxation year
following the initial year, and
(d) in any
other case, before the end of the first taxation year
following the initial year,
acquired a capital property that is a replacement property
for the taxpayer's former property and the replacement property
has not been disposed of by the taxpayer before the
time the taxpayer disposed of
the taxpayer's former property,
notwithstanding subsection 40(1),
if the taxpayer so elects
under this subsection in the taxpayer's return of
income for the year in which the taxpayer acquired the replacement property,
(e) the gain for a particular taxation year
from the disposition of
the taxpayer's
former property shall
be deemed to be … .
44(5)
Replacement property -- For the purposes of this section, a particular
capital property of a taxpayer is a replacement property
for a former property of the
taxpayer, if
(a) it is reasonable to conclude that the property was
acquired by the taxpayer to
replace the former property;
(a.1) it was
acquired by the taxpayer and
used by the taxpayer or a
person related to the taxpayer for a
use that is the same as or similar to the use to which the taxpayer or a
person related to the taxpayer put
the former property;
(b) where the
former property was
used by the taxpayer or a
person related to the taxpayer for
the purpose of gaining or producing income from a business, the
particular capital property was
acquired for the purpose of gaining or producing income from that or a similar business or for
use by a person related to the taxpayer for
such a purpose;
(c) where the
former property was a taxable Canadian property
of the taxpayer, the
particular capital property is a taxable Canadian property
of the taxpayer; and
(d) where the
former property was a taxable Canadian property
(other than treaty-protected property) of the taxpayer, the
particular capital property
is a taxable Canadian property
(other than treaty-protected property) of the taxpayer.
Facts
[6] The parties filed a Statement of Agreed
Facts the relevant parts of which read as follows:
STATEMENT OF AGREED FACTS
1. Prior to April 2000, the Appellant owned
and operated a farming business on 11 quarter sections of farmland near Bowden, Alberta (the "Bowden Farmland").
2. The Bowden Farmland was used exclusively
for the purpose of farming.
3. In or about May 2000, the Appellant sold
almost 6 quarter sections of the Bowden Farmland (the "Former
Property").
4. The proceeds of disposition from the sale
of the Former Property was $2,124,632.
5. The capital cost of the Former Property
was $1,279,000.
6. In or about November 2000, Willie and Lisa
Klanten (the "Klantens") entered into an agreement to transfer a 1/4
section of farmland in the Bowden area to the Appellant.
7. The Klantens subsequently transferred the
1/4 section of land it bought from the Klantens.
8. The Appellant paid $330,000 for the 1/4
section of land it bought from the Klantens.
9. The 1/4 section of land the Appellant
bought from the Klantens qualified as a replacement property for the Former
Property.
10. The proceeds of disposition of the Former
Property exceeded the cost of the land bought by the Appellant from the
Klantens by $1,794,632.
11. With the purchase of the 1/4 section from
the Klantens, the Appellant operated a farming business on 6 quarter sections
of land in the Bowden area.
12. In the fall of 2000, the appellant
purchased all of the issued and outstanding shares of 859374 Alberta Ltd.
13. 859374 Alberta Ltd. owned 43 quarter
sections of land near the town of Falher, Alberta and near the Smokey River in Alberta (the
"Smokey River Property").
14. In or about December 2000, 859374 Alberta
Ltd. was wound up.
15. The capital cost of the Smokey River
Property to the Appellant on wind-up was approximately $1,900,844.11.
16. At all material times, all of the Smokey
River Property was under lease to third parties (the "Tenants").
17. The Appellant was made aware of the
Tenants' leasehold interests prior to buying the shares of 859374 Alberta Ltd.
18. The Tenants were not related to either of
the Appellant or its shareholder, or both.
19. With the exception of one lease, the
Tenants' leases expired on December 31, 2002, but the leasehold interests on
the Smokey River Property operated through December 31, 2001.
20. The Appellant received cash rent, not a
crop share.
21. The primary business of the Appellant is
grain farming.
[7] The Statement of Agreed Facts was
supplemented by evidence given at the hearing by Mr. Willie Klanten, the sole
shareholder of the Appellant. Mr. Klanten stated that the Smokey River property was acquired by the Appellant in order
“to maintain the Appellant’s land base” after the sale of the Bowden property.
The Appellant wished to maintain an amount of land sufficient to permit Mr.
Klanten and his spouse as well as their two sons and their prospective families
to earn a living from farming. Mr. Klanten felt that the property that the
Appellant still owned in Bowden after the sale of the parcels in question was
only large enough to provide a livelihood for himself and his spouse. At the
time in 2000, Mr. Klanten’s sons were aged 18 and 12 years.
First issue : Was the Smokey River property a “Replacement property” ?
Position of the parties
[8] The Respondent contends that the Smokey River property does not meet the requirements set out in
paragraph 44(5)(a.1), because the property was not used by the Appellant or a
related person for a use that was the same or similar to the use to which the
taxpayer or a related person put the former property.
[9] The Respondent says that the Appellant only
used the Smokey River property to earn rental income, whereas it had used
the Bowden property to grow crops in its farming business.
[10] Counsel also submitted that, although the
Appellant intended to farm the Smokey River property in the future, an intended
future use is not a use within the meaning of paragraph 44(5)(a.1) of the Act.
She relied on the decision of this Court in Glaxo Wellcome Inc. v. H.M.Q.,
1996 CarswellNat 853, (T.C.C.), affirmed by the Federal Court of Appeal at 1998
CarswellNat 1928, [1999] 4 C.T.C. 371 (F.C.A.). The issue there was whether
certain vacant land disposed of by the taxpayer had been used by the taxpayer
in its business so as to qualify as a “former business property” thereby entitling
the taxpayer to a section 44 deferral.
[11] In that case, the former property had been
acquired and held for future use in the taxpayer’s business. The Court held
that the property was not used by the taxpayer, saying that “it was intended to
be used, it was waiting to be used, but in any meaningful sense of the term it
was not being used”.
[12] The Respondent’s counsel also says that
since the requirements set out in paragraphs 44(5)(a) to (d) are conjunctive
and since the Smokey River property fails to meet the requirements of
paragraph 44(5)(a.1), the property cannot qualify as a replacement property.
[13] The Appellant’s counsel submits that
paragraph 44(5)(a.1) does not apply in this case because the Appellant
voluntarily disposed of the Bowden property. The Appellant argues that
paragraph 44(5)(a.1) only applies to property acquired to replace property
which was the subject of an involuntary disposition, whereas paragraph 44(5)(b)
applies to property acquired to replace former business property which a
taxpayer disposes of voluntarily.
[14] The distinction drawn by the Appellant’s
counsel between voluntary and involuntary dispositions has its source in
subsection 44(1) of the Act. That provision allows a deferral of a gain
that arises from an involuntary disposition of any capital property of a
taxpayer if a replacement property is acquired within two years. Involuntary
dispositions include those caused by expropriation, destruction or loss of the property.
In the case of voluntary dispositions of a “former business property” a
taxpayer must acquire a replacement property within one year. A “former
business property is, generally speaking, real property that was a capital
property owned and used by the taxpayer to earn income from a business.
[15] Counsel for the Appellant argues that a
similar dichotomy between voluntary and involuntary dispositions is also
present in subsection 44(5). Counsel says that it is implicit in subsection
44(5) that paragraph (a.1) does not apply where the property being replaced was
disposed of involuntarily. He says that paragraph 44(5)(a.1) was originally
enacted (as paragraph 44(5)(a)) to correspond to involuntary dispositions of
any capital property, whereas paragraph 44(5)(b) was enacted to correspond to
voluntary dispositions of former business properties. Counsel argues that this
distinction was carried through the subsequent amendments by which paragraph 44(5)(a)
was renumbered as paragraph 44(5)(a.1), and that that paragraph should still be
read as corresponding only to involuntary dispositions of capital property.
[16] In the alternative, counsel for the
Appellant argues that the Appellant meets the conditions set out in paragraph
44(5)(a.1), because the Appellant maintained the Smokey
River property as part of its land base upon which its
business could operate. Since the Bowden property had also been held as part of
the Appellant’s land base, the Appellant says that it put both properties to
the same use. Counsel referred to this use as “the broader use” to which both
properties were put. Counsel said that the Act only required that only
one of the uses to which the former property and the replacement property were
put had to coincide, and that it is not necessary that the principal use of the
two properties be the same or similar. Therefore, the fact that the principal
use made by the Appellant of the Smokey River property was to earn rental income was
not determinative of the application of section 44.
[17] Counsel relied on the decision in Depaoli
v. The Queen, 96 D.T.C. 1820, [2000] 1 C.T.C. 6, there the taxpayer
was seeking a section 44 deferral of a gain on resulting from the expropriation
of land he had acquired as a future site for his home and a farming operation. The
issue is that case was whether the two new properties acquired by the taxpayer
were replacement properties within the meaning of subsection 44(5). The
Respondent argued that since the former property had not been put to any use by
the taxpayer, the new properties were not acquired for the same or a similar
use. The taxpayer argued that he used the former property by maintaining it as
farm land by allowing other farmers to cultivate it, and that the same use was
made of the two new properties. The Court agreed with the taxpayer and held
that the new properties were replacement properties.
[18] The Appellant’s counsel submitted that in Depaoli,
although the precise use of the land was to cultivate and harvest crops, the
broader use, and the use which was accepted by the Court, was to keep the land
clean until some future use could take place. Counsel said that this broader
use was analogous to the broader use of the Appellant for the Smokey River
Property, that of maintaining a land base which would allow the Appellant to
continue to successfully farm into the future.
[19] Counsel also relied on the decision of Newcastle
City Council v. Royal Newcastle Hospital, [1959] A.C. 248 (N.S.W.P.C.),
where it was held that land that was acquired by a hospital to provide clean
air and quiet for the patients by acting as buffer between the hospital and
neighbouring houses and factories, and to give room to expand the hospital was “used”
by the hospital for those purposes.
Analysis
[20] With respect to the Appellant’s first
argument, I am unable to see any basis for the suggestion that Parliament
intended paragraph 44(5)(a.1) to apply only to properties acquired to replace ones
that were involuntarily disposed of.
[21] The wording of subsection 44(5) is clear
and unambiguous and does not impose any limit on the application of paragraph
44(5)(a.1) to involuntary dispositions or on the application of paragraph
44(5)(b) to voluntary dispositions.
[22] Furthermore, the use of the word “and” at
the end of paragraph 44(1)(c) indicates that paragraphs 44(5)(a) to (d) operate
conjunctively. A property must thereby meet all of the relevant conditions in
subsection 44(5) in order to qualify as a replacement property, regardless of
whether the acquisition of the replacement property was preceded by an
involuntary or voluntary disposition.
[23] I also find no merit in the Appellant’s
argument that prior to its amendment subsection 44(5) drew a distinction
between involuntary and voluntary dispositions.
[24] Subsection 44(5) as it was originally
enacted read as follows:
44(5) For the purposes of this section, a
particular capital property of a taxpayer is a replacement property for a
former property of the taxpayer, if
(a) it was acquired by the taxpayer for the
same or a similar use as the use to which the taxpayer put the former property;
(b) where the former property was used by the
taxpayer for the purpose of gaining or producing income from a business, the
particular capital property was acquired for the purpose of gaining or
producing income from that or a similar business; and
(c) where the taxpayer was not resident in Canada at the time the taxpayer acquired the particular
capital property, in addition to the requirements in paragraph (a) and (b), the
particular capital property was taxable Canadian property.
[25] It can be seen that this version of
subsection 44(5), like the current version, contains no wording that would lead
one to conclude that paragraph 44(5)(a.1) was only applicable to involuntary
dispositions or that paragraph 44(5)(b) was only applicable to voluntary
dispositions.
[26] If Parliament had intended to relate former
paragraphs 44(5)(a) and (b) (or current paragraphs 44(5)(a.1) and (b), for that
matter) to particular types of dispositions it would have used wording to that
effect, such as that found in paragraphs 44(1)(c) and (d). In those paragraphs,
the time limit for acquiring a replacement property is made expressly dependent
on the involuntary/voluntary disposition distinction. No comparable wording
appears in subsection 44(5).
[27] The Appellant’s second argument, that it
used the Smokey River property for a
use that was the same as or similar to the use to which it put the Bowden
property, cannot succeed either. Paragraph 2 of the Statement of Agreed Facts
states that the Appellant used the Bowden property exclusively for the purpose
of farming. There is no evidence to show that the Appellant or anyone related
to the Appellant used the Smokey River property for farming. Therefore,
even if “maintaining a land base” could be considered to be a use of property
within the meaning of paragraph 44(5)(a.1), as submitted by the Appellant, this
use of the Smokey River property would not have been the same as or similar to any
use made by the Appellant of the Bowden property.
[28] In any event, I do not think that
“maintaining a land base” is a use of property such as is contemplated by
paragraph 44(5)(a.1) of the Act. Maintaining a land base in this case
amounts to holding the property to farmed in the future by Mr. Klanten and his
sons.
[29] “Use” in paragraph 44(5)(a.1) does not, in
my view, include the notion of holding for a future use. This was the finding
of this Court in Glaxo with respect to the word “use” in the definition
of “former business property” in subsection 248(1) of the Act. I find
the analysis of the issue in that case to be equally applicable here. In
particular, Bowman J. (as he then was) distinguished the case of Newcastle
City Council v. Royal Newcastle Hospital on the basis that the use of the
vacant land, to assist in keeping the air clean and the atmosphere quiet, was a
current use. This was contrasted with the future intended use of the land by
the taxpayer in Glaxo.
[30] In Depaoli, the Court accepted that
the activities of the taxpayer amounted to a current use by him of the property
and therefore, for the purposes of subsection 44(5), applied the same test as
in Glaxo. The maintaining of the property as farmland in Depaoli
required a certain level of activity on the land, which constituted the current
use. In
contrast, “maintaining a land base” in this case did not involve any current activity
or use of the land by the Appellant. It was merely the passive holding of the
land.
[31] For all the
foregoing reasons, I find that the Smokey River property was not a replacement property within the meaning
of subsection 44(5) of the Act.
Second issue: Election under subsection
44(1)
[32] In light of my
conclusion set out above, the Appellant was not entitled to treat the Smokey River property as a
replacement property, and therefore it is not necessary for me to deal with the
question of whether the Appellant properly elected under subsection 44(1) to
defer the gain of the disposition of the Bowden property.
[33] The appeal is therefore
dismissed, with costs.
Signed at Ottawa,
Canada, this 15th day of June 2007.
"B. Paris"
CITATION: 2007TCC348
COURT FILE NO.: 2004-4347(IT)G
STYLE OF CAUSE: KLANTEN FARMS LTD. AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: September 22, 2006
REASONS FOR JUDGMENT BY: The
Honourable Justice B. Paris
DATE OF JUDGMENT: June 15th, 2007
APPEARANCES:
|
Counsel for the
Appellant:
|
James Yaskowich
|
|
|
|
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Counsel for the
Respondent:
|
Margaret McCabe
|
COUNSEL OF RECORD:
For the Appellant:
Name: James Yaskowich
Firm:
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa,
Canada
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