Citation: 2003TCC720
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Date: 20031003
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Docket: 2002-2882(IT)G
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BETWEEN:
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MOON MAH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.
[1] The issue in this appeal is
whether a tax reassessment under Part I of the Income Tax
Act for 1996 issued to Moon Mah, the appellant, notice of
which is dated April 19, 2002, is statute-barred. The date
of mailing of the notice of the original assessment to Ms. Mah
for 1996 is May 20, 1997. Ms. Mah filed a waiver dated February
17, 2000 in respect of the normal assessment period for 1996 with
the Canada Customs and Revenue Agency.
[2] The trial in this appeal proceeded
by way of the following Agreed Statement of Facts:
1. The
Appellant is an individual resident in Canada for the purposes of
the Income Tax Act, R.S.C. 1985, c. 1
(5th Supplement), as amended (the "Act").
2. Prior to
December 15, 1996, the Appellant owned 250 out of 1,000 issued
and outstanding shares in the capital of Wei's Holdings Ltd.
which was previously known as Wei's Western Wear Ltd. (the
"Company").
3. On December
15, 1996, the Appellant exchanged her 250 common shares of
the Company for 8,000 Class "G" preferred shares of the
Company in accordance with the Articles of Incorporation of the
Company (the "Share Exchange").
4. At December
15, 1996, the directors of the Company determined that the fair
market value of the Appellant's 250 common shares was
$800,000 and provided upon issuance of the Class "G"
preferred shares for a declared redemption amount of $100 per
share or $800,000 in the aggregate in accordance with the
Company's Articles of Incorporation. The actual redemption
amount of the Class "G" preferred shares was
subsequently determined to be $140 per share.
5. On December
20, 1996 the Company redeemed 500 of the Appellant's Class
"G" preferred shares (the "Share Redemption")
by payment of their declared redemption amount of $100 per share
or $50,000 in the aggregate. The actual redemption amount was
subsequently determined to be $140 per share or $70,000 in the
aggregate in respect of the 500 Class "G" preferred
shares.
6. In her 1996
income tax return, the Appellant reported a taxable dividend in
the amount of $62,498 resulting from the Share Redemption at the
declared redemption amount of $100 per share.
7. The
Appellant's 1996 income tax return was assessed by Notice of
Assessment dated May 20, 1997
(the "1996 Assessment").
8. On February
23, 2000, the Canada Customs and Revenue Agency (the
"CCRA") received a Form T2029 - Waiver in Respect of
the Normal Reassessment Period for her 1996 taxation year
(the "Waiver") from the Appellant in respect of an
audit of the income tax return for 1996 with respect to the Share
Exchange. A copy of the waiver is attached as Exhibit 1.[1]
9. By Notice
of Reassessment dated July 11, 2000 in respect of the
Appellant's 1996 taxation year (the "First 1996
Reassessment"), the Minister of National Revenue
(the "Minister") reassessed the Appellant in
reliance on subsections 86(1) and 86(2) and other provisions of
the Act by adding $447,753 to her income as a taxable capital
gain resulting from the Share Exchange on the basis that the fair
market value of the 250 common shares of the Company was
$1,397,030 and not $800,000 as determined by the directors of the
Company.[2]
10. The Appellant filed a
Notice of Objection to the First Reassessment in prescribed form
and within the time prescribed under the Act (the "Notice of
Objection").
11. In the course of
dealing with the Notice of Objection, the Appellant and the
representative of the CCRA agreed
(a) that the fair
market value of the 250 shares of the Company on December 15,
1996 was $1,120,000;
(b) to give effect
to the price adjustment clause in the Share Exchange agreement;
and
(c) to adjust the
redemption amount of the 8,000 Class "G"
preferred shares from $100 to $140 per share or $1,120,000 in the
aggregate with effect from December 15, 1996.
12. As a result of the
increase in the redemption value of the Class "G"
preferred shares from $100 to $140 per share,
(a) the amount of
the capital gain resulting from the Share Exchange became nil;
and
(b) the amount of
the Appellant's taxable dividend resulting from the Share
Redemption increased by $25,000.
13. By Notice of
Reassessment dated April 19, 2002 (the "Second 1996
Reassessment"), the Minister reassessed the Appellant's
1996 taxation year to:
(a) eliminate the
amount of $447,754 included in income in the First Reassessment
as a taxable capital gain resulting from the Share Exchange;
and
(b) in reliance of
subsection 84(3) and other provisions of the Act, include the
amount of $25,000 in income as the taxable amount of the increase
in the deemed dividend resulting from the Share Redemption after
the increase in the redemption amount of the Class "G"
preferred shares from $100 to $140 per share.
[3] The appellant states that the
April 19, 2002 reassessment
("Second 1996 Reassessment") is invalid by
reason of being statute-barred insofar as it purports to include
in income the amount of the deemed dividend as a result of a
share redemption. The waiver she executed does not refer to any
share redemption.
[4] The Minister may assess a taxpayer
after the normal reassessment period of the taxpayer for the year
when, among other conditions, the taxpayer has filed a waiver in
respect of the year in prescribed form within the normal
reassessment period for the taxpayer.[3]
[5] For purposes of this appeal a
taxpayer's normal reassessment period in respect of a
taxation year is defined by paragraph 152(3.1)(b)
... the period that ends 3 years after the earlier of the day
of mailing of a notice of an original assessment under this Part
in respect of the taxpayer for the year and the day of mailing of
an original notification that no tax is payable by the taxpayer
for the year.
[6] Subparagraph
152(4.01)(a)(ii) provides that
Notwithstanding subsections (4) and (5), an assessment,
reassessment or additional assessment to which
paragraph (4)(a) or (b) 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, ...
(ii) a matter
specified in a waiver filed with the Minister in respect of the
year;
[7] In order for me to determine
whether the waiver signed by Ms. Mah permits the Minister to
reassess under subsection 84(3) of the Act, I must first
identify the matter specified in the waiver and, second, decide
whether a reassessment under subsection 84(3) can
"reasonably be regarded as relating to a matter specified in
the waiver".[4]
[8] To identify the matter specified
in the waiver I must consider not only the language of the waiver
itself but also the contents of the letter of
January 21, 2000 from the CCRA to Ms. Mah which is
specifically referred to in the waiver.
[9] The letter to Ms. Mah refers only
to the share exchange transaction and to subsections 86(1) and
86(2) of the Act. The writer of the letter does not refer
to the share redemption transaction of December 20, 1996 nor does
she refer to subsection 84(3). It is clear, therefore, that the
matter specified in the waiver is the application of subsection
86(2) to the share exchange transaction.
[10] The Minister is of the view that the
capital gain and the dividend are related to the core issue. That
is, the exchange of a share and the value of a share. The
valuation of a share is intrinsic to the capital gain and the
redemption of the shares. The Minister has "backed out"
of a capital gain and is assessing the taxpayer in the same
manner the taxpayer originally filed, that is on the basis of a
deemed dividend, only that there is a difference in the value of
the shares.
[11] Respondent's counsel submitted that
subsection 152(4.01) provides to the Minister and the taxpayer
the boundaries for the waiver. Where a matter can
"reasonably be regarded as relating to another 'matter
specified in the waiver', the former matter is included in
the waiver." Counsel referred to Stone Container
(Canada) v. Her Majesty the Queen, [5] In Stone Container, the
Minister issued a reassessment on the basis of a waiver "in
respect of" a shareholder benefit. The reassessment deleted
an alleged shareholder benefit from the taxpayer's income.
The taxpayer argued that it only waived a shareholder benefit and
therefore the Minister did not have the authority to make a
corresponding downward adjustment to the taxpayer's federal
abatement. The federal abatement is 10% of the corporation's
taxable income earned in the year in a province.[6]
[12] In Stone Container I disagreed
with the taxpayer and held that the phrase "in respect
of" limited the application related to the matter specified
and the calculation for any items that necessarily flow from, or
are normally connected to, the matter specified. Taxable income
is connected to the federal abatement by virtue of the mechanical
application of section 124 and a recalculation of the abatement
is connected with, and necessary flows from, a recalculation of
taxable income. This is not the situation in the appeal at
bar.
[13] In Stone Container I was
concerned with the phrase "in respect of" in the waiver
form. In the case at bar, I am also concerned of the language of
subparagraph 152(4.01)(a)(ii) and whether that provision
authorizes the reassessment in issue on the basis that "it
can reasonably be regarded as relating to a matter specified in
the waiver". The phrase "in respect of" in the
standard form of waiver limits the application of the waiver to
the matter specified and, by virtue of subparagraph
152(4.01)(a)(ii), any other matters that can reasonably be
regarded as relating to the matter specified. In other words, the
phrase "in respect of" in the waiver is simply an
expression of the reasonable relationship required by
subparagraph 152(4.01)(a)(ii). It is quite clear that the
Minister cannot base a reassessment on a substantive issue that
is not specified in a waiver or cannot be regarded as relating to
the substantive issue that is specified in the waiver.
[14] In Pedwell v. Her Majesty the
Queen[7], Rothstein, J. explained that
... taxation is transaction-based (or perhaps deemed
transaction-based) and if more than one transaction is to
form the base of assessment, the assessment must reflect that
fact. Where the basis of the Minister's assessment is one
transaction, the Court cannot, expost facto, broaden the
scope of the assessment to include other transactions.
[15] The letter of January 21, 2000
described one transaction as the cause of a proposed
reassessment; the waiver referred to that one transaction and to
the January 21, 2000 letter. In reassessing after the
taxpayer's normal reassessment period for a taxation year the
Minister cannot reassess on the basis of another transaction,
event or circumstance that is not described in the waiver nor is
reasonably related to it. A distinction is to be drawn, for
example, between a recalculation that necessarily flows from the
mechanical application of the Act and a totally separate
and unrelated transaction.
[16] In the case at bar, unlike the facts in
Stone Container, subsection 84(3) is not in any way
related to subsection 86(2) by virtue of a mechanical application
of the provisions of the Act. There is no relationship
between these two provisions whatsoever, except that in the
present case, Ms. Mah happened to trigger them both in the same
year. A capital gain triggers an inclusion of income pursuant to
subsection 86(2) of the Act and a deemed dividend triggers
an inclusion of income under subsection 84(3) of the Act;
these are two totally separate and discrete substantive
issues.
[18] Finally, the Courts have held that in
interpreting a waiver, the judge should have regard to the
intentions of the parties at the time the waiver was granted.[8] One should also
consider whether the party opposing the waiver can demonstrate
any prejudice. In the appeal at bar, the waiver specifically
referred to the CCRA's own proposal letter which set out the
basis for the proposed reassessment. The letter was written three
years after the share exchange and share redemption transactions.
Again, the letter does not refer to subsection 84(3) or to the
share redemption transaction. I am sure that Ms. Mah had no
intention of opening up the share redemption transaction to
reassessment under subsection 84(3) when she filed the
waiver and it is probable that when the January 21, 2000 letter
was written, the Minister did not consider anything other than a
possible assessment based on a capital gain.
[18] The appeal should succeed, with
costs.
Signed at Ottawa, Canada, this 3rd day of October,
2003.
Rip, J.