Barnabe Estate v. Minister of National Revenue, 98 DTC 1824, [1998] 3 CTC 2201 (TCC)

McArthur T.C.J. (orally):

THE REGISTRAR: Tax Court of Canada in Winnipeg is now open. The Honourable Judge Cameron McArthur presiding.

HIS HONOUR: Good morning.

MR. CHARTIER: Good morning.

THE REGISTRAR: Recalling case number 96-1166(IT)G, Roger and Richard Barnabe, in their capacities as executors of the Estate of the late Louis Barnabe versus Her Majesty The Queen.

HIS HONOUR: Yes, I am prepared to read judgment in the Estate of Louis Barnabe. The Estate of Louis Barnabe appeals the assessment of the Minister of National Revenue, wherein the Minister assessed the appellant as having disposed of farming assets immediately prior to his accidental death on May 10, 1992. The Minister disallowed a taxable gains exemption of $330,004.00. The issue is whether Louis Barnabe disposed of his farming assets to a corporation prior to his accidental death taking advantage of the provisions of section 85 of the Income Tax Act.

Louis Barnabe carried on a large and profitable farming operation consisting of approximately 5,000 acres of land and extensive equipment. While, being an able farmer he neglected his paperwork. His accountant, Mr. Fillion, testified that the deceased was unsophisticated in the accounting part of his operation.

In 1990, on the advice of Mr. Fillion, the deceased’s solicitor created a corporation 2674859 Manitoba Ltd. to take over his farming operations.

Entered in evidence is a letter from the appellant’s solicitor, Mr. Schmidt, who wrote, and I will read in the entire letter,

On or about June 4, 1990, I received a telephone call from Louis Barnabe requesting me to act as his solicitor for the incorporation of a numbered company, under the Corporations Act of Manitoba.

The purpose of incorporating was to create a one-man corporation to take over the farming operations previously run by Louis Barnabe as an individual. The corporation was to acquire the inventory and machinery owned by Mr. Barnabe and carry out his obligations regarding farm lands leased from others, as well as leasing, but not buying, any of the lands owned by Mr. Barnabe himself.

The Articles of Incorporation were signed by the writer and issued December 28, 1990. The writer then resigned as Director, and was replaced by Mr. Barnabe, effective January 2, 1991.

I received no written instructions from Mr. Barnabe. All instructions from him were verbal. My only communication with his accountant, Denis Fillion, was a letter from my office to him dated February 6, 1992.

There were several times in 1990 and 1991 when Mr. Barnabe attended at my office, without appointments. On each of these occasions, because of his lack of sobriety, I did not take instructions from him, and my requests to him to make an appointment when he was not drinking were not responded to. Unfortunately, he had a severe drinking problem and this made it very difficult to look after the required paperwork for his business affairs in an efficient and timely manner. Our relationship, however, was always amiable, but he did not appreciate the problems he created for me. I refused to discuss business with him when it was obvious he had been drinking. I seldom saw him when he was sober. I assume other professionals with whom he had dealings experienced similar problems.

At the same time, Mr. Barnabe was generally regarded as a good farmer, and ran a large operation with hired help profitably and efficiently. His organization of farming activities was, I believe, above average, but his attention to paperwork left much to be desired. His untimely death revealed the extent to which this aspect of his operations had been neglected.

Each party referred to that part of the letter that served his individual purpose. The appellant read in the first three paragraphs, and the respondent read in the final two paragraphs. The author, Mr. Schmidt, did not give evidence and the weight to be given to the letter’s contents is questionable. The facts set out are supported by direct evidence presented. An important exception to this is there was absolutely no evidence to support the statement that the deceased had a severe drinking problem and that, of course, has no bearing on this decision.

The appellant relied on the advice of his accountant. Prior to May 1, 1991, Mr. Fillion advised the appellant not to transfer his farm assets to the corporation until all his 1991 income had been accounted for. On May 1, 1992, the appellant attended the offices of Mr. Fillion with respect to his 1991 income tax return. At that time Mr. Fillion advised him to transfer his farm assets to the corporation.

Mr. Fillion stated that the appellant then signed an election in blank, in prescribed form pursuant to subsection 85(1) of the Income Tax Act. Mr. Fillion subsequently lost this form. There are no notes whatsoever of this meeting. Nine days later the appellant died accidentally.

The question before me is whether Louis Barnabe disposed of his farming assets to the corporation, and did Louis Barnabe and the corporation jointly elect in accordance with subsection 85(1) prior to his death.

The position of the appellant includes the following: Section 85 requires that there be a disposition in the year. The operative word is “disposition”.

Section 54 of the Act defines “disposition”,

any transaction or event entitling a taxpayer to proceeds of disposition of property.

It is not necessary under section 85 for there to be a disposition that a transaction had to close, or whether the consideration had been paid or not. The importance is entering into the agreement, not concluding it.

In Dale v. R. (1997), 211 N.R. 191 (Fed. C.A.), the Federal Court of Appeal at paragraph 9 stated,

it is sufficient for purposes of compliance with section 85 that there be a binding obligation to issue shares at the time the property is transferred and that the shares be issued within a period that, in all the circumstances, is reasonable.

Specifics can be completed after the fact to ensure that the formula is complied with.

Counsel for the appellant went on to refer to the following four principles: Number one, the law to be applied to establish whether there was a disposition is the common law of the province.

Number two, there is no requirement that the agreement to transfer be in writing. An oral agreement can be valid and binding in the jurisdiction of Manitoba if it is proved.

Number three is that the Court should not be preoccupied with the form of transfers in the context of the rollover provisions of the Income Tax Act.

And fourthly, the Court should look at the incidence of ownership and not become preoccupied with housekeeping matters that have to be completed.

Mr. Fillion stated that the actual transfer of ownership, as opposed to possession and control, was delayed as a result of certain advice that he had given to the appellant to wait until the 1991 tax returns had been completed. Counsel for the appellant continued that there was a logical and sensible and consistent reason for doing that, which adds to the credibility of the accountant’s recollections on this point.

The uncontradicted evidence of Mr. Fillion is that Mr. Barnabe, having received that advice, made the decision on May 1st to dispose of the equipment to the corporation.

The appellant stated that Louis Barnabe was personally the vendor of the equipment and he was in complete control of the corporation that was acquiring it. He continued to state that what has to happen to make the decision is the person who is wearing both hats has to make the decision and, on May 1st, Mr. Barnabe made that decision.

The incidences of ownership in this case were already with the corporation, having been completed prior to May 1, 1992. It is uncontradicted that the appellant had transferred possession and control well before his death.

Counsel concluded that the issue is whether Mr. Barnabe’s accidental death should benefit the Government of Canada at the expense of the beneficiaries of the Estate of Mr. Barnabe, because had he not died it would have been documented in the usual course as at May 1st and there would have never been a question about it; it was fate that caused the question. And counsel added, in the alternative, if the Court does not find for the taxpayer on the main issue, the Court should find that the transfer took place as at October 26, 1992.

The position of the respondent. The issue is whether prior to his death Louis Barnabe disposed of the assets to the corporation for consideration that included shares of the corporation, and was there an actual contract made and a transfer that was effected. Secondly, whether Louis Barnabe and the numbered corporation jointly elected in prescribed form in accordance with the provisions of the Act.

Counsel continued that at best what the evidence shows is a subjective intention on behalf of Louis Barnabe to transfer the assets to the corporation at some point in time, which intention was frustrated by his death.

There are no notes or other documents eminating from the meeting with the appellant and his accountant on May 1st. The corporation did not issue minutes or resolutions indicating that a transfer had been made. The only document that apparently comes out of this meeting is a blank signed election, which was lost. There is no hard evidence of what happened on May 1st.

There may have been an intention of Mr. Barnabe to dispose of his property, but simply put, he did not. He neglected his paperwork. He neglected to do the things that ought to have been done. He wanted the paperwork to get done, but that is not a contract. He was also the shareholder and director of the corporation, and the corporation therefore has no one to testify on its behalf.

The first position is that there was no oral contract. If there was, it was incomplete. Evidence fails to show fair market value was established. Apparently, Louis Barnabe brought a list of equipment on May 1st, but that had to be verified by the accountant, and this was not done.

If there was an oral contract, what assets were included and at what price? We do not have this information. No election form was completed by Mr. Barnabe and the corporation. They had to execute this document pursuant to subsection 85(6) of the Act. The onus rests on the taxpayer.

In the Dale case cited earlier, the Federal Court of Appeal stated,

It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is in correct form, but in fact, are in all respects legally correct real transactions.

The Respondent’s Counsel further referred the Court to the often quoted Friedberg case [Friedberg v. R.] (1991), 92 D.T.C. 6031 (Fed. C.A.) at 6032 where Justice Linden stated,

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained...

In Deconinck v. /?., [1990] 2 C.T.C. 464, 90 D.T.C. 6617 (Fed. C.A.), Hugessen, the Federal Court of Appeal stated,

An election by a taxpayer under section 85 must be made in such a way that it is possible to determine in respect of which property it is made.

It is not enough for a taxpayer simply to intend to elect in respect of a given property. He must actually do it.

In Bronfman Trust v. R. (1987), 87 D.T.C. 5059 (S.C.C.). The Supreme Court of Canada stated,

It would be a sufficient answer to this submission to point to the principle that courts must deal with what the taxpayer actually did, and not what he might have done...

In reply the appellant urged the Court to refer to the factual context of the cases in which the principles quoted by the respondent’s counsel were taken.

Analysis

I have read the facts of the cases referred to me by both counsel. For the reasons that follow, I find in favour of the respondent’s position.

Subsection 85(1) of the Income Tax Act reads in part, “Where a taxpayer has, in a taxation year, disposed of any of his property, which was eligible property to a taxable Canadian corporation for consideration..., the corporation have jointly elected in prescribed form and in accordance with subsection (6)...”.

There can be no doubt that the onus rests with the appellant to prove to this Court that the tax arrangement meets the requirements of subsection 85(1) and paragraph 85(1 )(6) of the Act, and that it meets the legalities required to establish that there was a binding agreement between Louis Barnabe and his company to dispose of certain property or assets on May 1, 1992.

This is a sympathetic case, the appellant having died prior to his compliance with the fundamental requirements. I agree with the position of the respondent as stated herein. It does not serve a purpose to repeat with approval those cases quoted. In order for the rollover provisions of the Act, subsections 85(1) and 85(2), to apply, the appellant must have disposed of property to a corporation for consideration that includes shares of capital stock of the corporation. Had he done so, the estate would have benefitted significantly.

The provisions of the Act cannot be complied with by an intention to do so alone. There is a duty by the taxpayer to meet the legal requirements to obtain the benefits of section 85.

Dealing with the period prior to May 10, 1992, I find there was no disposition of the taxpayer’s property in accordance with subsection 85(1), and that the taxpayer and the corporation did not jointly elect in prescribed form in accordance with subsection 85(6).

It is of course unfortunate that the taxpayer met an untimely death, but this Court cannot create a disposition and election that did not take place prior to the appellant’s death. There was no specific list of the assets, no values attributed to the assets. There may well have been an intention to prepare such a list; I believe Mr. Fillion stated that he intended taking an inventory of the assets upon attending the appellant’s farm. There was no enforcable contract between the deceased and his corporation. There was no fair market value attributed to the assets. There were no corporate resolutions.

Now dealing with the appellant’s alternative approach, I have no difficulty in finding that a transfer took place as of October 26, 1992. For these reasons, the appeal is dismissed with costs.

Appeal dismissed.