Lamarre
Proulx,
J.T.C.C.:—
This
appeal
concerns
the
appellant’s
1986
taxation
year.
The
issues
in
this
case
are
whether
the
assessment
of
the
Minister
of
National
Revenue
("the
Minister")
may
reasonably
be
regarded
as
relating
to
the
matter
specified
in
the
waiver
as
required
by
paragraph
152(5)(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
and,
if
so,
whether
the
conditions
for
the
application
of
subsection
56(4)
of
the
Act
(transfer
of
rights
to
income)
have
been
met,
or
alternatively,
whether
those
described
in
subsection
56(2)
of
the
Act
(indirect
payments)
were
met.
The
issues
as
stated
in
the
reply
to
the
notice
of
appeal
were
the
following:
(a)
Did
the
Minister
have
the
authority
to
assess
the
appellant
beyond
the
three-year
deadline?
(b)
Were
the
conditions
stated
in
subsection
56(2)
of
the
Income
Tax
Act
met?
(c)
What
was
the
fair
market
value
of
the
land
and
the
building
on
September
5,
1986?
[Translation.]
The
reply
to
the
notice
of
appeal
was
amended
at
the
start
of
the
hearing
to
add
the
following
paragraph
(d)
to
the
issues:
(d)
Were
the
conditions
stated
in
subsection
56(4)
of
the
Income
Tax
Act
met?
[Translation.]
At
the
hearing,
counsel
for
the
respondent
stated
to
the
Court
that
the
application
of
subsection
56(4)
of
the
Act
had
become
the
respondent's
main
point.
Before
the
date
set
for
the
hearing
the
parties
asked
the
Court
to
divide
the
hearing
of
this
appeal
by
initially
dealing
with
the
scope
of
the
waiver
and
the
application
of
subsection
56(2)
of
the
Act.
The
Court
made
an
order
to
this
effect.
At
the
time
of
the
hearing
the
Court,
at
the
request
of
the
parties,
varied
its
order
to
add
the
application
of
subsection
56(4)
of
the
Act.
Facts
The
facts
upon
which
the
Minister
relied
in
assessing
the
appellant
were
set
out
in
paragraph
5
of
the
amended
reply
to
the
notice
of
appeal.
(a)
on
May
13,
1982
the
appellant
signed
a
sixty-month
lease
for
a
building
located
at
180
de
Grandmont
in
Cap-de-la-Madeleine;
(b)
this
building
was
the
property
of
the
Norton
Company
("Norton"),
a
U.S.
corporation;
(c)
the
lease
included
inter
alia
the
following
clause:
In
the
event
that
the
lessor
wishes
to
sell
the
building
housing
the
leased
premises,
he
shall
first
offer
it
to
the
lessee
and
the
latter
shall
have
thirty
days
from
the
receipt
of
written
notice
to
this
effect
to
purchase
the
same
at
the
price
and
subject
to
the
charges
and
conditions
stipulated
by
any
eventual
purchaser
in
good
faith;
(d)
on
August
9,
1986,
Aligro
Inc.
signed
an
irrevocable
offer
with
the
appellant
to
purchase
the
goodwill,
land
and
building
leased
by
the
appellant
for
$5,000,000;
(e)
$1,200,000
of
the
$5,000,000
was
for
the
land
and
the
building;
(f)
on
September
4,
1986,
Norton
transferred
the
land
and
building
for
$500,000
to
Les
Placements
Fab
Inc.,
Les
Entreprises
Jules
Tessiers
Inc.,
Hôtel
Union
Inc.
and
Fabien
St-Arnaud;
(g)
Les
Placements
Fab
Inc.,
Les
Entreprises
Jules
Tessier
Inc.,
Hôtel
Union
Inc.
and
Fabien
St-Arnaud
are
persons
not
dealing
with
the
appellant
at
arm's
length;
(h)
on
September
5,
1986,
these
related
persons
transferred
the
land
and
building
to
the
appellant
for
$1,200,000;
(i)
on
the
same
day,
that
is
September
5,
1986,
the
appellant
transferred
inter
alia
the
land
and
building
to
Aligro
Inc.
for
$1,200,000;
(j)
on
March
14,
1990
the
appellant
signed
a
notice
of
waiver
of
prescription
with
respect
to
Capital
gain
on
disposal
of
right
to
purchase
180
de
Grandmont,
Cap-de-la-
Madeleine.
6.
The
fair
market
value
of
the
land
and
building
on
September
5,
1986
was
$500,000.
[Translation.]
Counsel
for
the
appellant
submitted
the
latter's
evidence
by
reading
the
entire
transcript
of
the
examination
for
discovery
of
Michel
Carbonneau
on
January
21,
1993.
This
document
was
filed
as
Exhibit
A-1.
On
reading
this
document
counsel
for
the
appellant
referred
to
documents
in
Exhibit
1-1,
an
Exhibit
which
contains
documents
relating
to
the
transaction
at
issue
here.
Mr.
Carbonneau
is
an
employee
of
the
Department
of
National
Revenue
("the
Department"),
who
has
been
assigned
to
the
head
office
of
the
Appeals
and
Referrals
Division
since
1992.
He
is
now
section
chief
of
the
Appeals
Division,
Ottawa
district
office.
He
had
no
part
in
preparing
the
notice
of
waiver
or
reassessment
of
the
appellant.
His
involvement
began
after
November
15,
1991
with
the
preparation
of
an
opinion
dated
March
6,
1992
for
the
head
of
section,
Appeals
and
Referrals
Division,
Appeals
Branch,
pursuant
to
a
request
for
an
opinion
from
the
Sherbrooke
district
office.
This
nine-page
opinion
(tab
1
of
Exhibit
I-1)
resulted
from
the
notice
of
objection
filed
by
the
taxpayer
and
analyzed
the
scope
of
the
waiver
and
the
legal
basis
for
the
reassessment.
The
opinion
concluded
that
the
waiver
allowed
the
reassessment
and
that
the
basis
for
the
reassessment
was
indeed
subsection
56(2)
of
the
Act.
The
notice
of
assessment
under
appeal
is
dated
May
13,
1991
(tab
2
of
Exhibit
1-1).
There
was
agreement
on
the
fact
that
July
20,
1990
would
have
been
the
last
day
on
which
the
Minister
had
the
power
to
reassess
the
appellant
for
its
1986
taxation
year
if
there
had
been
no
waiver
on
the
part
of
the
appellant.
I
return
to
the
facts
which
led
to
the
waiver
and
the
reassessment.
By
a
lease
(tab
5(s)
of
Exhibit
1-1)
made
on
May
13,
1982
at
Worcester,
Massachusetts
between
the
Norton
Corporation
("Norton"),
the
lessor,
having
its
head
office
in
Worcester,
Massachusetts,
U.S.A.,
and
a
place
of
business
at
190
rue
de
Grandmont
in
the
town
of
Cap-de-la-Madeleine,
and
Marché
Sanpri
Inc.
("Sanpri"),
the
lessee,
a
corporation
having
its
head
office
at
180
rue
de
Grandmont
in
the
town
of
Cap-de-la-Madeleine,
the
premises
at
issue
in
the
instant
case
were
leased
for
a
60-month
period
from
May
1,
1983
to
April
30,
1988.
This
lease
contained
a
clause
entitled
"purchase
option"
which
read
as
follows:
In
the
event
that
the
lessor
wishes
to
sell
the
building
housing
the
leased
premises,
he
shall
first
offer
it
to
the
lessee
and
the
latter
shall
have
thirty
days
from
receipt
of
written
notice
to
this
effect
to
purchase
the
same
at
the
price
and
subject
to
the
charges
and
conditions
stipulated
by
any
eventual
purchaser
in
good
faith;
However,
this
purchase
option
will
be
inoperative
in
the
event
of
sale
of
all
the
assets
of
the
lessor
located
in
Cap-de-la-Madeleine
to
another
company
as
part
of
a
commercial
transaction.
[Translation.]
On
August
9,
1986
Aligro
Inc.
made
a
purchase
offer
to
Sanpri
and/or
other
third
parties
designated
by
the
latter
to
purchase
the
food
supply
business
in
its
entirety,
comprising
furniture,
equipment,
goods,
goodwill
and
trade
name
as
well
as
the
building
and
land
for
a
price
of
$5,000,000.
The
breakdown
of
the
purchase
price
is
as
follows:
$800,000
for
the
furniture
and
equipment,
$1,800,000
for
the
goodwill
and
trade
name
and
$1,200,000
for
the
building
and
land,
the
remainder
of
the
price
being
for
the
goods
(tab
5(a)
of
Exhibit
I-1).
Sanpri's
acceptance
was
given
on
the
same
day.
It
was
signed
by
Jules
Tessier
and
Fabien
St-Arnaud
for
Sanpri.
On
the
same
day,
August
9,
a
non-competition
clause
was
also
agreed
to
by
Jules
Tessier
and
Fabien
St-Arnaud.
(These
documents
are
also
to
be
found
at
tab
5(a)
of
Exhibit
I-1.)
At
the
time
the
acceptance
of
the
purchase
offer
was
signed
Sanpri
was
not
the
owner
of
the
land
or
the
building.
It
would
be
purchasing
them
from
Norton.
Under
the
clause
of
the
lease
dealing
with
the
purchase
option,
Sanpri
had
the
priority
right
to
purchase
the
land
and
the
building
but
did
not
avail
itself
of
this
option.
Sanpri
was
owned
50
per
cent
by
Placements
Fab
Inc.
and
50
per
cent
by
Entreprises
Jules
Tessier
Inc.
The
chart
of
the
corporate
structure
of
the
various
parties
involved
in
the
instant
case
was
set
out
in
Exhibit
A-2
as
follows:
[Graph
not
reproduced.]
On
September
4,
1986,
the
contract
of
sale
of
the
building
and
land
between
Norton
and
Les
Placements
Fab
Inc.,
Fabien
St-Arnaud,
Les
Entreprises
Jules
Tessier
Inc.
and
Hôtel
Union
Inc.
was
concluded.
Norton
and
the
purchasers
were
dealing
at
arm’s
length.
There
was
no
evidence
as
to
the
negotiations
which
led
Norton
to
sell
to
these
buyers
rather
than
to
Sanpri.
In
any
event,
the
validity
of
the
sale
contract
is
not
in
question.
The
selling
price
stipulated
in
the
contract
is
$500,000.
At
page
9
of
the
sale
contract
(tab
5(b)
of
Exhibit
1-1)
the
following
clause
headed
"agreement
between
the
purchasers"
provides:
The
purchasers
have
agreed
between
themselves
and
each
party
has
acknowledged
that
each
of
the
four
purchasers
will
be
owner
and
possessor
of
the
immoveable
sold
above
in
the
following
proportion,
since
the
funds
to
purchase
the
said
immoveable
were
provided
and/or
spent
by
each
of
the
purchasers
in
the
following
proportion,
namely:
Les
Placements
Fab
Inc.:
40
per
cent
of
such
immoveable;
Fabien
St-Arnaud,
personally:
10
per
cent
of
such
immoveable;
Les
Entreprises
Jules
Tessier
Inc.:
16
per
cent
of
such
immoveable;
Hôtel
Union
(Cap-de-la-Madeleine)
Inc.:
34
per
cent
of
such
immoveable.
[Translation.]
Exhibit
A-3
is
a
chart
describing
the
shares
of
the
purchasers:
[Chart
not
reproduced.]
As
mentioned
in
paragraphs
(h)
and
(i)
of
the
reply,
the
purchasers
who
were
not
dealing
at
arm's
length,
sold
the
land
and
building
for
$1,200,000
to
Sanpri
which
in
turn
sold
them
to
Aligro
for
the
same
amount.
On
November
28,
1989,
an
auditor
of
the
Department
wrote
to
Jean
Lanouette,
an
accountant
belonging
to
a
firm
of
accountants
in
Trois-Rivières
and
acting
as
accountant
for
the
appellant,
giving
him
the
results
of
the
adjustment
which
Revenue
Canada
proposed
to
make
to
the
income
previously
reported.
The
statement
of
the
proposed
adjustment
referred
to
the
"proceeds
of
disposition
of
the
right
to
purchase
the
land
and
building
located
at
180
de
Grandmont,
Cap-de-
la-Madeleine:
$700,000”
(tab
3
of
Exhibit
1-1).
The
waiver
signed
on
March
14,
1990
read
as
follows:
“Capital
gain
on
disposal
of
right
to
purchase
180
de
Grandmont,
Cap-de-la-Madeleine’’.
The
waiver
was
signed
by
Jean
Lanouette
(tab
4
of
Exhibit
1-1).
Appendix
2
of
the
notice
of
assessment
gives
as
an
explanation
of
the
reassessment:
"Capital
gain
on
disposal
of
180
de
Grandmont,
Cap-de-la-Madeleine,
Quebec”.
At
the
examination
for
discovery
Mr.
Carbonneau
stated
that
reference
was
made
to
the
same
real
property
and
to
the
same
amount,
but
in
the
waiver
reference
was
made
to
a
capital
gain
on
the
disposal
of
a
right
to
purchase
and
in
the
assessment
to
a
capital
gain
on
the
disposal
of
the
180
de
Grandmont.
The
respondent's
evidence
consisted
in
reading
several
pages
from
the
cross-
examination
of
Jean
Lanouette
at
the
examination
for
discovery
on
January
21,
1993.
The
cross-examination
was
filed
as
Exhibit
1-2.
To
the
question
"Were
you
surprised
to
find
the
amounts
relating
to
the
capital
gain
of
$350,000?",
the
answer
was
"No.
We
knew
that
we
were
speaking
of
the
transaction
which
took
place
there"
(pages
28
and
30
of
Exhibit
I-2).
Analysis
The
respondent
did
not
submit
arguments
regarding
misrepresentation
attributable
to
neglect,
carelessness
or
wilful
default
as
provided
in
subparagraph
152(4)(a)(i)
of
the
Act.
The
Court
must
therefore
ensure
that
the
assessment
can
reasonably
be
regarded
as
relating
to
a
matter
specified
in
the
waiver
in
accordance
with
paragraph
152(5)(c)
of
the
Act.
Subsection
152(5)
of
the
Act
reads
as
follows:
152(5)
There
shall
not
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year,
for
the
purposes
of
any
reassessment,
additional
assessment
or
assessment
of
tax,
interest
or
penalties
under
this
Part
that
is
made
after
the
normal
reassessment
period
for
the
taxpayer
in
respect
of
the
year,
any
amount
(a)
that
was
not
included
in
computing
the
taxpayer’s
income
for
the
purposes
of
an
assessment
of
tax
under
this
Part
made
before
the
normal
reassessment
period
for
the
taxpayer;
(b)
in
respect
of
which
the
taxpayer
establishes
that
the
failure
so
to
include
it
did
not
result
from
any
misrepresentation
that
is
attributable
to
negligence,
carelessness
or
wilful
default
or
from
any
fraud
in
filing
a
return
of
his
income
or
supplying
any
information
under
this
Act,
and
(c)
where
any
waiver
has
been
filed
by
the
taxpayer
with
the
Minister,
in
the
form
and
within
the
time
referred
to
insubsection
(4),
with
respect
to
a
taxation
year
to
which
the
reassessment,
additional
assessment
or
assessment
of
tax,
interest
or
penalties,
as
the
case
may
be,
relates,
that
the
taxpayer
establishes
cannot
reasonably
be
regarded
as
relating
to
a
matter
specified
in
the
waiver.
[Emphasis
added.]
The
French
version
of
subsection
152(5)
of
the
Act
uses
the
word
"question"
to
translate
the
word
"matter".
Counsel
for
the
appellant
submitted
that
Sanpri
had
no
obligation
to
purchase
the
immoveables
but
had
a
right
of
first
refusal.
This
right
was
property
within
the
meaning
of
the
Act,
property
which
could
be
disposed
of.
The
building
and
the
land
are
also
property
that
can
be
disposed
of.
They
are
distinct
property:
the
land
and
building
are
separate
from
the
right
to
acquire
these
immoveables.
The
waiver
related
to
the
latter
property,
the
assessment
to
the
former.
Counsel
for
the
appellant
further
stated
that
as
the
assessment
did
not
relate
to
the
right
of
disposal
mentioned
in
the
waiver
but
to
the
disposal
of
the
immoveables,
it
could
not
reasonably
be
regarded
as
relating
to
the
matter
specified
in
the
waiver.
Counsel
for
the
appellant
referred
to
the
following
cases:
Bailey
v.
M.N.R.,
[1989]
2
C.T.C.
2177,
89
D.T.C.
416
(T.C.C.);
Cal
Investments
Ltd.
v.
Canada,
[1990]
2
C.T.C.
418,
90
D.T.C.
6556
(F.C.T.D.);
Canadian
Marconi
Co.
v.
Canada,
[1991]
2
C.T.C.
352,
91
D.T.C.
5626
(F.C.A.).
He
referred
to
the
following
passages
in
Bailey,
supra,
at
pages
2183-84
(D.T.C.
421):
In
assessing
the
appellant
on
April
13,
1988,
the
respondent
disallowed
a
deduction
claimed
by
the
appellant
in
his
income
tax
return
for
1983.
In
calculating
the
amount
of
the
deduction
the
appellant,
in
his
income
tax
return,
referred
to
the
calculation
as
“Inventory
Write
Down".
These
words
may
describe
an
accounting
term,
but
they
also
describe
the
calculation
performed
by
the
appellant
in
his
income
tax
return
to
determine
an
amount
deducted
in
computing
income.
The
dispute
between
the
appellant
and
the
respondent
is
whether
the
amount
so
determined
may
or
may
not
be
deducted
by
the
appellant
in
computing
his
income.
During
negotiations
between
the
appellant
and
officials
of
the
respondent,
the
latter
said
the
appellant
could
not
deduct
the
amount
claimed
because
of
Jellaczycv.
M.N.R.,
[1985]
1
C.T.C.
2158,
85
D.T.C.
184
(T.C.C.).
The
respondent
now
sees
fit
to
deny
the
deduction
for
other
reasons
and
his
counsel
has
prepared
pleadings
accordingly.
The
amount
originally
in
question,
before
and
after
the
waiver
was
signed,
and
the
amount
disallowed
by
the
reassessment
was
[sic]
the
same
amount.
The
amount
was
calculated
and
referred
to
in
the
income
tax
return
as
"Inventory
Write
Down".
The
subject
matter
to
which
the
amount
referred
both
before
and
after
and
[sic]
signing
of
the
waiver
and
on
reassessment
was
the
same:
inventory
write
down.
A
sensible
and
not
absurd
view
of
the
dispute
is
that
the
amount
disallowed
as
a
deduction
in
computing
income
can
be
reasonably
regarded
as
relating
to
the
"Inventory
Write
Down"
described
in
the
appellant's
1983
income
tax
return.
[Emphasis
added.]
In
Cal
Investments,
supra,
counsel
drew
the
Court's
attention
to
the
following
passage
at
page
426
(D.T.C.
6562)
and
argued
that
the
Crown
must
ensure
that
the
taxpayer
is
bound
by
the
waiver:
If
by
its
nature,
a
waiver
under
the
Income
Tax
Act
may
be
said
to
be
a
mutual
affair,
it
might
nevertheless
be
incumbent
upon
the
Crown
in
accepting
a
waiver
to
be
satisfied
that
the
taxpayer
will
be
bound
by
it.
This
would
normally
present
no
problem
when
the
taxpayer
is
an
individual.
It
is
otherwise,
however,
when
the
taxpayer
is
a
corporation
which
can
only
become
bound
by
the
hand
of
a
person
or
persons
acting
on
its
behalf.
The
authority
of
such
person
or
persons
would
of
course
be
best
assured
by
the
affixing
of
the
corporate
seal.
The
corporate
seal
would
thus
provide
a
sufficient
degree
of
validity
or
authenticity
on
which
the
Crown
could
rely.
Viewed
in
that
light,
the
requirements
of
a
corporate
seal
could
be
said
to
be
for
the
benefit
of
the
Crown.
Counsel
for
the
appellant
also
referred
to
the
Federal
Court
of
Appeal’s
judgment
in
Canadian
Marconi,
supra,
at
page
356
(D.T.C.
5629),
and
noted
that
the
Minister
does
not
have
the
power
to
reassess
after
the
deadline
specified
by
the
Act.
I
would
allow
the
appeal
with
costs
and,
pursuant
to
subparagraph
52(b)(iii)
of
the
Federal
Court
Act,
declare
that
on
the
facts
as
agreed
the
Minister
of
National
Revenue
had
no
power
to
reassess
the
respondent's
income
tax
returns
for
its
taxation
years
1977
to
1981,
inclusive,
on
or
after
November
6,
1989.
Relying
on
the
fact
that
the
Minister
had
no
power
beyond
the
specified
deadline,
counsel
for
the
appellant
argued
that
the
Court
should
interpret
the
purpose
of
the
waiver
strictly.
Counsel
for
the
respondent
also
referred
to
Cal
Investments,
supra,
and
cited
the
following
observations
of
Joyal,
J.
at
page
426
(D.T.C.
6562):
A
waiver
of
the
sort
at
issue
in
this
case
might
be
interpreted
as
an
accommodation
between
the
Crown
and
a
taxpayer
for
the
better
administration
of
the
Income
Tax
Act
and
to
provide
a
more
efficient
determination
of
any
liability
thereunder.
In
the
light
of
the
limitations
on
assessments
under
section
152
of
tne
Act,
the
Crown
requests
a
waiver
so
that
it
may
continue
its
assessment
or
audit
work
in
a
normal
administrative
mode
without
having
to
worry
about
limitations.
The
taxpayer,
on
the
other
hand,
knows
full
well
that
on
an
assessment
being
made
he
alone
has
the
burden
of
proving
it
wrong.
That
burden
becomes
much
heavier
if
the
Crown,
facing
the
end
of
the
limitation
period,
issues
what
might
be
termed
a
premature
assessment
which,
for
purposes
of
abundant
caution,
would
include
many
sundry
items
which
the
taxpayer
would
have
to
traverse
one
by
one.
The
taxpayer
in
those
circumstances
would
look
upon
a
waiver
as
being
to
his
own
benefit
as
well
as
the
Crown's
and
would
ordinarily
comply
with
the
Crown's
request.
In
many
cases,
also,
the
waiver
might
be
limited
to
specified
issues,
i.e.,
those
where
assessing
or
auditing
processes
have
not
been
completed
and
which
in
fact
remain
the
only
outstanding
items
on
which
the
Crown
can
ultimately
decide
to
assess
or
reassess.
This
narrows
the
field
of
the
assessment
and
again
provides
mutual
advantages
to
both
the
Crown
and
the
taxpayer.
He
also
referred
to
Solberg
v.
Canada,
[1992]
2
C.T.C.
208,
92
D.T.C.
6448
(F.C.T.D.),
at
page
213
(D.T.C.
6452),
in
which
Reed,
J.
said:
The
appropriate
approach
to
the
interpretation
of
the
waiver
is
to
seek
to
ascertain
the
intention
of
the
parties
as
expressed
in
that
document
together
with
any
relevant
circumstances
for
which
evidence
is
available.
This
is
consistent
with
the
approach
taken
in
interpreting
taxing
statutes
themselves,
see,
for
example,
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305
at
C.T.C.
pages
315-16
(D.T.C.
6323).
In
Bailey,
supra,
counsel
for
the
respondent
referred
to
pages
2181-82
(D.T.C.
419-20):
A
waiver
is
usually
given
by
a
taxpayer
to
the
respondent
when
there
is
an
unresolved
dispute
over
one
or
more
specific
matters
and
the
three-year
time
period
within
which
the
respondent
may
reassess
is
fast
approaching.
The
execution
of
a
waiver
avoids
a
hasty
reassessment
by
the
respondent;
it
provides
the
taxpayer
with
further
opportunity
to
consider
adjustments
proposed
by
the
respondent
and
to
allow
him
to
make
further
representations
to
support
his
claim.
What
is
“reasonable”
is
not
the
subjective
view
of
either
the
respondent
or
appellant
but
the
view
of
an
objective
observerwith
a
knowledge
of
all
the
pertinent
facts:
Canadian
Propane
Gas
&
Oil
Ltd.
v.
M.N.R.,
[1972]
C.T.C.
566,
73
D.T.C.
5019
per
Cattanach,
J.
at
page
577
(D.T.C.
5028).
The
appellant’s
position
is
that
an
objective
observer
knowing
that
the
respondent
had
proposed
to
reassess
strictly
on
the
basis
of
Jellaczyc,
supra,
knowing
that
a
waiver
is
normally
provided
only
with
respect
to
a
specific
matter
that
is
in
dispute
and
knowing
that
the
normal
meaning
of
"inventory
writedown"
is
a
specific
accounting
treatment
of
inventory,
would
not
conclude
that
the
issue
of
whether
a
particular
piece
of
property
is
capital
or
inventory
is
"to
a
fairly
sufficient
extent”
related
to
the
matter
of
"inventory
writedown".
Conclusion
on
the
scope
of
the
waiver
It
is
true
that
the
text
of
the
waiver
was
prepared
by
an
employee
of
the
Department
and
it
is
also
true
that
the
employee
could
have
been
speaking
only
of
a
capital
gain
rather
than
of
the
disposition
of
a
right
giving
rise
to
a
capital
gain,
but
I
do
not
feel
I
can
come
to
the
conclusion
that
the
assessment
cannot
reasonably
be
regarded
as
relating
to
the
matter
specified
in
the
waiver.
It
is
the
very
purpose
of
a
waiver
to
allow
that
be
continued
the
analysis
of
a
transaction
or
of
a
matter
where
there
is
uncertainty
regarding
the
basis
of
the
assessment.
Since
further
analysis
is
required,
the
description
of
the
matter
at
this
stage
cannot
be
expected
to
be
perfect.
The
assessment
must
relate
to
the
transaction
or
matter
which
is
the
source
of
the
disagreement
between
the
Minister's
officers
and
the
taxpayer
and
concerning
which
the
latter
has
agreed
to
sign
a
waiver.
The
taxpayer
was
not
taken
by
surprise
by
the
assessment.
He
did
not
agree
with
the
assessment
but
it
was
a
matter
for
which
he
signed
a
waiver.
In
these
circumstances,
I
consider
that
the
reassessment
reasonably
relates
to
the
matter
for
which
the
waiver
was
issued.
Application
of
subsection
56(4)
The
Minister’s
position
is
that
if
the
appellant
had
exercised
its
right
to
purchase
directly
from
Norton
it
would
have
been
the
entity
which
would
have
been
entitled
to
the
capital
gain,
and
that
by
assigning
this
right
to
purchase,
it
assigned
the
right
to
the
capital
gain
and
so
found
itself
in
the
circumstances
mentioned
in
subsection
56(4)
of
the
Act.
Counsel
for
the
appellant
argued
that
the
fact
that
a
right
is
not
exercised
does
not
constitute
a
transfer,
and
especially
that
the
appellant
was
at
no
time
entitled
to
a
capital
gain.
He
further
argued
that
there
is
nothing
reprehensible
in
arranging
one's
affairs
in
the
most
suitable
way
financially
and
that
the
businesses
which
made
the
capital
gain
had
actual
business
losses.
He
added
that
all
the
appellant
undertook
when
it
signed
the
purchase
offer
was
to
purchase
the
property
and
sell
it
atthe
same
time
as
its
business.
It
did
not
undertake
to
purchase
the
property
directly
from
Norton.
Subsection
56(4)
of
the
Act
reads
as
follows:
56(4)
Where
a
taxpayer
has,
at
any
time
before
the
end
of
a
taxation
year
(whether
before
or
after
the
end
of
1971),
transferred
or
assigned
to
a
person
with
whom
he
was
not
dealing
at
arm's
length
the
right
to
an
amount
(other
than
any
portion
of
a
retirement
pension
assigned
by
the
taxpayer
pursuant
to
section
64.1
of
the
Canada
Pension
Plan
or
a
comparable
provision
of
a
provincial
pension
plan
as
defined
in
section
3
of
that
Act
or
of
a
prescribed
provincial
pension
plan)
that
would,
if
the
right
thereto
had
not
been
so
transferred
or
assigned,
be
included
in
computing
his
income
for
the
taxation
year
because
the
amount
would
have
been
received
or
receivable
by
him
in
or
in
respect
of
the
year,
the
amount
shall
be
included
in
computing
the
taxpayer’s
income
for
the
year
unless
the
income
is
from
property
and
the
taxpayer
has
also
transferred
or
assigned
the
property.
[Emphasis
added.]
Was
the
appellant
entitled
to
an
amount
and
was
that
entitlement
transferred?
This
leads
us
to
consider
the
legal
effect
of
what
was
in
fact
done.
It
is
the
actual
legal
situation
which
must
be
considered
unless
the
legislation
regarding
tax
avoidance
in
Part
XVI
of
the
Act
is
alleged,
which
is
not
the
case
here.
What
occurred
here
was
the
non-exercise
of
a
right
of
first
refusal.
Did
this
constitute
the
transfer
of
a
right?
That
may
be
open
to
debate,
However,
there
is
no
doubt
that
this
was
not
the
transfer
of
a
right
to
an
amount
which
should
have
been
included
in
income
to
give
rise
to
the
capital
gain
in
question.
The
appellant
was
not
legally
entitled
to
the
capital
gain
in
question
unless
the
validity
of
the
transactions
is
questioned
by
the
respondent,
and
this
was
not
done.
I
therefore
consider
that
subsection
56(4)
cannot
be
applied
in
the
circumstances
of
this
appeal.
Application
of
subsection
56(2)
What
about
the
application
of
subsection
56(2)
of
the
Act?
This
subsection
reads
as
follows:
56(2)
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
person
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
(other
than
by
an
assignment
of
any
portion
of
a
retirement
pension
pursuant
to
section
64.1
of
the
Canada
Pension
Plan
or
a
comparable
provision
of
a
provincial
plan
as
defined
in
section
3
of
that
Act
or
of
a
prescribed
provincial
pension
plan)
shall
be
included
in
computing
the
taxpayer's
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
him.
[Emphasis
added.]
This
subsection
applies
to
the
situation
of
a
payment
which
should
have
been
made
to
an
individual
and
included
in
that
individual’s
income,
and
which
on
his
instructions
was
made
to
someone
else.
Under
subsection
56(2)
of
the
Act,
such
a
payment
must
be
included
in
the
first
individual's
income.
It
is
somewhat
difficult
to
see
how
this
provision
would
apply
in
the
circumstances.
What
in
fact
was
the
Minister’s
primary
position,
in
the
first
reply
to
the
notice
of
appeal,
became
his
alternative
position
in
the
amended
reply
to
the
notice
of
appeal,
the
primary
position
becoming
the
application
of
subsection
56(4).
He
submitted
that
the
payment
was
the
amount
of
$1,200,000
paid
to
the
four
entities
rather
than
to
the
appellant,
but
in
fact
the
payment
of
$1,200,000
was
made
to
the
appellant
which
purchased
the
property
for
$1,200,000
from
the
four
entities.
I
do
not
see
any
indirect
payment
here.
All
payments
were
made
directly
to
the
parties
concerned.
This
is
not
a
situation
to
which
subsection
56(2)
of
the
Act
applies.
Fraser
Co.
v.
The
Queen,
[1981]
C.T.C.
61,
81
D.T.C.
5051
(F.C.T.D.),
and
the
recent
judgments
of
the
Federal
Court
of
Appeal
in
Shaw
v.
M.N.R.,
[1993]
2
C.T.C.
24,
93
D.T.C.
5213
and
Smith
v.
M.N.R.,
[1993]
2
C.T.C.
257,
93
D.T.C.
5351,
have
held
that
the
legal
effects
of
transactions
must
be
respected
unless
fraud
is
proven
or
the
provisions
of
Part
XVI
of
the
Act
regarding
tax
avoidance
are
alleged.
There
is
no
such
proof
or
allegation
here.
Accordingly,
since
the
appellant
was
never
legally
entitled
to
a
capital
gain
it
cannot
be
assessed
for
such
a
gain
under
subsections
56(2)
and
(4)
of
the
Act.
These
reasons
for
judgment
were
sent
to
the
parties
on
August
6,
1993.
As
mentioned
at
the
beginning
of
these
reasons,
the
parties
asked
the
Court
to
divide
the
hearing
of
this
appeal
by
limiting
it,
first,
to
the
waiver
and
the
application
of
subsections
56(2)
and
(4)
of
the
Act,
and
second
to
determining
the
fair
market
value
of
the
land
and
building
on
September
5,
1986,
for
the
purposes
of
applying
subsection
69(1)
of
the
Act.
A
consent
to
judgment
has
now
been
filed
in
this
Court,
on
December
17,
1993.
It
reads
as
follows:
The
parties
consent
to
this
Honourable
Court
rendering
judgment
allowing
the
appeal
with
costs
in
the
amount
of
$500
for
the
1986
taxation
year
and
referring
the
assessment
back
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
of
the
reasons
for
decision
by
Judge
Lamarre
Proulx
in
this
matter
on
August
6,
1993.
[Translation.]
The
appeal
is
accordingly
allowed
with
costs
in
the
amount
of
$500.
Appeal
allowed.
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