The Queen v. Adelman, 93 DTC 5376, [1993] 2 CTC 207 (FCTD)

Strayer, J.:—

Relief requested

This is an appeal from a judgment of the Tax Court of Canada dated August 29,1991 in which that Court allowed the defendant's appeal from a reassessment by the Minister of National Revenue of the defendant's income for the 1985 taxation year.

Facts

The essential facts are not in dispute. Some time before 1972 the defendant purchased 60,000 shares in Foamcoil Corporation Ltd. The fair market value of those shares on December 31, 1971 ("Valuation Day") was $210,000, being $3.50 per share. During his 1985 taxation year the defendant disposed of those shares by an arm's length transaction, the total proceeds being $60. In his income tax return for 1985 the defendant reported a business investment loss in respect of this transaction in the amount of $209,940 and an allowable business loss, being 50 per cent of that amount, of $104,970. The latter amount was deducted from his income. This was his first disposition of capital property which had been owned by him on December 31, 1971.

In filing his 1985 return, the defendant did not file prescribed form T-2076 which is the form prescribed under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the exercise of the election under subsection 26(7) of the Income Tax Application Rules, 1971.

On September 14,1989 the Minister mailed a notice of reassessment to the defendant with respect to his 1985 taxation year disallowing the deduction of an active business investment loss in the amount of $104,970. This reassessment was made on the basis that the defendant had failed to elect under subsection 26(7) of the Income Tax Application Rules, 1971 to establish the cost of all capital property owned by him on December 31,1971 as being the fair market value on Valuation Day.

Subsection 26(7) of the Income Tax Application Rules, 1971 provides as follows:

26.(7) Where, but for this subsection, the cost to an individual of any property actually owned by him on December 31, 1971 would be determined under subsection (3) or (4) otherwise than by virtue of subsection (5) and the individual has so elected, in prescribed manner and not later than the day on or before which he is required by Part I of the amended Act to file a return of his income for his first taxation year in which he disposes of all or any part of such property, other than

(a) personal-use property of the individual that was not listed personal property or real property,

(b) listed personal property, if his gain or loss, as the case may be, from the disposition thereof was, by virtue of subsection 46(1) or (2) of the amended Act, nil,

(c) his principal residence, if his gain from the disposition thereof was, by virtue of paragraph 40(2)(b) of the amended Act, nil,

(d) personal-use property of the individual that was real property (other than his principal residence), if his gain from the disposition thereof was, by virtue of subsection 46(1) or (2) of the amended Act, nil, or

(e) any other property, the proceeds of disposition of which are equal to its fair market value on valuation day,

the cost to him of each capital property (other than depreciable property, and interest in a partnership or any property described in any of paragraphs (a) to (e) that was disposed of by him before that taxation year) actually owned by him on December 31, 1971 shall be deemed to be its fair market value on valuation day.

[Emphasis added.]

Section 4700 of the Income Tax Regulations provides as follows:

4700. Any election by an individual under subsection 26(7) of the Income Tax Application Rules, 1971 shall be made by filing with the Minister the form prescribed.

It is not in dispute that the form prescribed by the Minister is form T-2076. This is a one-page form. It is entitled Valuation Day Value Election for Capital Properties Owned on December 31, 1971". More than half of the page is occupied with an explanation as to the use of this form and the consequences of its use: namely, that once such an election is made it cannot be revoked, and that it applies to all subsequent dispositions of capital properties owned on December 31, 1971. In the bottom half of the page there is a box headed “Election”. It commences with the sentence

I hereby elect to establish the cost of all capital property owned by me on December 31, 1971, except for excluded capital property referred to in (c) above, as being the fair market value on Valuation Day.

The taxpayer is then required, in order to complete the form, to provide his name and address, social insurance number, the taxation year in respect of which this form is being filed, the date, and the taxpayer's signature. The reference to "(c) above” is to a passage in the preceding explanation indicating that certain forms of capital property cannot be included in such an election.

Instead of using this form as prescribed under the Act, the defendant included with his 1985 return a schedule which provided in part as follows:

HOWARD ADELMAN

ALLOWABLE BUSINESS LOSSES 1985

1. (a) Name of Corporation: Foamcoil Corporation Ltd.

(b) Number and class of shares: 60,000 common shares

(c) Date of shares acquired: prior to 1972

(d) Adjusted cost base (Valuation Day): $3.50 per share

(e) Outlays and expenses on disposition: nil

Sale Price	$	60
Valuation Day value ($3.50 x 60,000)	(210,000)
Business investment loss	$(209,940)
Allowable business loss	$ 104,970

The defendant says in effect that line 1(d) of this schedule was his election under subsection 26(7) of the Income Tax Application Rules, 1971. That is, he considers that he sufficiently exercised his election with this statement: "Adjusted cost base (Valuation Day): $3.50 per share."

The defendant appealed the Minister's reassessment to the Tax Court of Canada and on August 21, 1991 that Court delivered judgment allowing the appeal. In reasons of less than one page delivered orally at the close of the hearing the learned Tax Court judge followed the decision of that Court in Trynor v. M.N.R., [1988] 1 C.T.C. 2425, 88 D.T.C. 1294, which was to the effect that, the requirement under the Act of filing such an election in a prescribed form was directory rather than mandatory. The learned judge therefore allowed the appeal and referred the assessment back to the Minister of National Revenue for reconsideration and reassessment on the basis that a valid election had been made by the defendant pursuant to subsection 26(7) of the Income Tax Application Rules, 1971 and therefore in effect that the costs of the Foamcoil shares to the defendant should be considered to be $3.50 each, their value on Valuation Day.

Issue

The essential issue is whether the statement provided by the defendant in the schedule of “allowable business losses" filed with his tax return stating "Adjusted cost base (Valuation day): $3.50 per share" is a sufficient exercise of the election permitted by subsection 26(7) of the Income Tax Application Rules, 1971. In other words, where section 4700 of the Income Tax Regulations states that such election "shall" be made by filing the form prescribed, must “shall” be taken to be mandatory or only directory?

Conclusions

The trial judge in this case essentially relied on the decision of another Tax Court judge in the Trynor case. He understandably felt himself bound to follow that decision, or at least to follow it "in the absence of strong reasons to the contrary". It is therefore necessary to consider the relevant parts of the Trynor decision, supra. In that case the Minister had rejected the elections because they had been made late and not on the prescribed forms. Kempo, T.C.C.J. found that in the circumstances the elections had been made in time and although not made on the proper forms were nonetheless effective. In her view Regulation 4700 is only directory. Following are the most relevant portions of her analysis at pages 2428-29 (D.T.C. 1297):

The use of the word "shall" in a Regulation is not necessarily conclusive as to whether the provision was mandatory or directory. In my opinion, consideration must be given to the nature of the provision and whether it is substantive or procedural. If procedural, regard must be had as to whether a failure to adhere thereto would cause surprise, uncertainty or prejudice to the Minister. The information and decision to use V-Day values as per form 12076 required a mere statement of intent. Here this decision was made and had been clearly communicated. No surprise, confusion or prejudice to the respondent had been alleged or argued. I agree with appellants’ counsel that to hold otherwise would have the result of mandating form above substance.

There are many authorities in support of the principle that substance should take precedence over form when characterizing a transaction for fiscal purposes. In this particular case, I see no compelling reason why this principle should not be applied to the subject procedural rule and regulation of the Act where such has not been foreclosed, either expressly or by compelling implication, founded on some rational and reasoned necessity. No reasons had been advanced as to why the substance over form principle could or should not be employed as an indicator in the determination as to whether this particular procedural requirement was mandatory or directive.

In the final analysis, and having already determined that the lateness of filing was not to be fatal to the validity of the purported election, it would lead to taxation by mere form over that of substance if the clear declaration made by these appellants in their returns to use V-Day value was held to be other than as substantively valid and fully effective for fiscal purposes. Any decision to the contrary would have brought about a manifestly anomalous and unjust situation not necessarily mandated by or flowing from the legislation itself.

No specific jurisprudence was cited in respect of this aspect of her reasons.

Section 11 of the Interpretation Act, R.S.C. 1985, c. 1-21 provides as follows:

11. The expression “shall” is to be construed as imperative and the expression "may" as permissive.

Subsection 3(1) of that Act provides as follows:

3.(1) Every provision of this Act applies, unless a contrary intention appears, to every enactment, whether enacted before or after the commencement of this Act.

This means that the requirement in section 11 that "shall" is to be construed as imperative should apply in the interpretation of every "enactment" unless a contrary intention appears in that enactment". By virtue of subsection 2(1) of the Interpretation Act "'enactment'" means an Act or regulation or any portion of an Act or regulation”, and

“regulation” includes [a] . . . form . . . made or established

(a) in the execution of a power conferred by or under the authority of an Act. . . .

By section 16 expressions used in regulations have the same respective meanings as in the enactment conferring the power to make those regulations.

We may therefore apply the requirements of sections Tl and 3 of the Interpretation Act—to the effect that "shall" is to be interpreted as imperative unless found in an enactment where the context indicates otherwise — to the interpretation of section 4700 of the Income Tax Regulations. As noted above, that section says that an election under subsection 26(7) of the Income Tax Application Rules, 1971 "shall" be made by filing the prescribed form. Is there any basis for interpreting this as directory only? An authoritative statement of the criteria for treating "shall" as other than imperative may be found in the decision of the Supreme Court of Canada in Re Manitoba Language Rights, [1985] 1 S.C.R. 721, 1985] 4 W.W.R. 385, where the following statement was made at page 737 (W.W.R. 398):

As used in its normal grammatical sense, the word “shall” is presumptively imperative. See Odgers’ Construction of Deeds and Statutes (5th ed. 1967) at page 377; the Interpretation Act, 1867 (Can.), 31 Vict., c. 1, subsection 6(3); Interpretation Act, R.S.C. 1970, c. I-23, section 28 ("shall" is to be construed as "imperative"). It is therefore incumbent upon this Court to conclude that Parliament, when it used the word "shall" in section 23 of the Manitoba Act, 1870, R.S.C. 1970, App. Il, intended that those sections be construed as mandatory or imperative, in the sense that they must be obeyed, unless such an interpretation of the word "shall" would be utterly inconsistent with the context in which it has been used and would render the section irrational or meaningless. See, e.g. Public Finance Corp. v. Edwards Garage Ltd. (1957), 22 W.W.R. 312, at page 317 (Alta. S.C.).

In that case even though the consequences were to treat as prima facie invalid all statutes passed by the legislature of Manitoba since 1870, the Court could find no indication that the word “shall” had other than its normal imperative sense. The Court, as quoted, approved an earlier statement by the Alberta Supreme Court in Public Finance Corp. v. Edwards Garage Ltd., cited by the Court, to the effect that one must find, in order to avoid giving "shall" a mandatory interpretation, that to do so would render a section in which it is found "irrational or meaningless”.

I am unable to say that giving the word “shall” in section 4700 of the Regulations an imperative meaning would be irrational or meaningless. It does not seem at all irrational for the Regulations to require that a taxpayer clearly express his election not only to establish the cost of his first property disposed of after Valuation Day to be its value on Valuation Day but also to accept that all other property owned by him before 1972, when disposed of in future, should have attributed to it an acquisition cost equal to its value on Valuation Day. It is not irrational for the Minister to be satisfied, through the use of the prescribed form, that the taxpayer understands the implications of his election. Nor is it irrational to require a separate and distinct document completed by the taxpayer which can, presumably, be filed separate from the particular tax return in respect of which the election is first made, for future reference. (See Hawkins v. The Queen, [1991] 2 C.T.C. 148, 91 D.T.C. 5502 at page 153 (D.T.C. 5506) (F.C.T.D.).) Further, as was held in Public Finance Corp. v. Edwards Garage Ltd. (1957), 22 W.W.R. 312 at page 317 (Alta. S.C.), a case cited with approval on another point by the Supreme Court of Canada in the above quotation,

[W]hen powers, rights or privileges are granted with a direction that certain regulations or formalities shall be complied with, it seems neither unjust nor inconvenient to exact a rigorous observance of them as essential to the acquisition of the right or privilege or authority conferred, and it is therefore probable that such was the intention of the legislature. .. . .

In the present case the general rule for the valuation of the shares in question would have been provided by subsection 26(3) of the Income Tax Application Rules, 1971, commonly referred to as the “median rule". As I understand it, this general rule would not be advantageous to a taxpayer in a situation such as the present, where the value of the property on disposition was far below what it had been at Valuation Day. The Income Tax Application Rules, 1971 (which are enacted as part of the Income Tax Act), in subsection 26(7) confer on the taxpayer the right to take advantage of an optional determination of cost of the property based on its value on Valuation Day, provided that the taxpayer is prepared to have the same rule apply to all of his other property acquired before 1972 and disposed of in the future. It seems neither unjust nor unreasonable, nor in any way inconsistent with the Act or the Regulations, for a taxpayer to be required to adhere strictly to the procedure prescribed by the law for the exercise of this right having regard to the fact that its exercise will affect his position and that of the Minister both in respect of this particular disposition but also in respect of all those dispositions in the future where pre-1972 property is involved.

I have considered the defendant's argument that the legal effect of making one election (in whatever form) in respect of the first property disposed of after 1971 would, in any event, oblige the taxpayer to have subsequent dispositions treated in the same way. That may be the effect of subsection 26(7) of the Income Tax Application Rules, 1971. However that does not obviate the advantages of having the election clearly subscribed to by a taxpayer in full knowledge of the consequences, as would normally be the result if the prescribed form were used. Neither does it take into account the advantage which, I believe, I can reasonably deduce, of the Minister having a separate form clearly endorsed by the taxpayer which can be kept available for reference in respect to future dispositions of property. These advantages of the use of the form, as opposed to the very obscure kind of statement included in a schedule to the defendant's 1985 return, preclude in my view the interpretation of "shall" in section 4700 of the Regulations as “irrational or meaningless” within the language employed by the Supreme Court of Canada.

In the quoted passage from the Trynor decision, supra, which the trial judge followed in the present case, Kempo, T.C.C.J. referred to

many authorities in support of the principle that substance should take precedence over form when characterizing a transaction for fiscal purposes.

With respect, I believe the principle she invokes is not pertinent to the present problem. The problem here is, not to characterize a business transaction — about which there is no dispute — but rather to interpret a statutory instrument imposing conditions on a taxpayer for invoking an advantageous option made available to him by statute. The more pertinent jurisprudence, it seems to me, is that which has rejected the earlier strict interpretation of taxation statutes. [1] The cardinal rule is now to give the statute its plain meaning and I am unable to avoid the conclusion that the plain meaning of the statutory instrument here is that the advantage available under subsection 26(7) of the Income Tax Application Rules, 1971 cannot be claimed unless an election is filed in form T-2076.

I have reviewed other cases cited by the defendant and do not find them helpful. Those most relevant, Ca/ Investments Ltd. v. Canada, [1990] 2 C.T.C. 418, 90 D.T.C. 6556 (F.C.T.D.) and O'Brien Estate v. M.N.R., [1991] 2 C.T.C. 2747, 91 D.T.C. 1349 (T.C.C.), seem to me to be distinguishable. In the Cal Investments case the failure to meet a formal requirement was invoked by the taxpayer who had failed to use the company seal in executing a waiver permitting the Minister to carry on a reassessment beyond the four-year limitation period. It was the company ultimately which invoked its own failure, a failure which the Minister had obviously waived. Further the trial judge emphasized the consensual nature of the arrangement and implied that the company would in any event have been estopped from denying that a properly authorized waiver had been granted. In the O'Brien Estate case there was clearly an internal inconsistency in the Act as applied to the particular facts of that case rendering compliance with the requirements of a receipt to prove a charitable donation impossible of performance in the circumstances. That is not the situation here as there is no suggestion that the defendant could not have used the proper form and also complied with all other requirements of the Act and Regulations.

Disposition

I must therefore allow the appeal and confirm the Minister's reassessment of the defendant's 1985 income in respect of the cost of the Foamcoil shares. Costs having been requested by the successful party, they will be awarded to the plaintiff.

Crown's appeal allowed.