REASONS
FOR JUDGMENT
Lyons J.
[1]
This is an appeal by Paul Livingston, the
appellant, from a reassessment of his 2006 taxation year relating to an increase
to the taxable capital gain in respect of the sale of his interest in land described
as Part 1, situated in Brampton, Ontario. The Minister of National Revenue reassessed
based on his determination that farm assets (non-real property), acquired following
the sale of the appellant’s interest in land, did not constitute “replacement
property" within the meaning of subsection 44(5) of the Income Tax Act,
R.S.C. 1985, c.1 (5th Supp.) (the “Act”).
[2]
The appellant, a farmer, operated the dairy Farm
Business on the Farmland Property with his mother prior to her death. They each
owned one-half interest in the Farmland Property. He and his six siblings
entered into agreements with trustees of his mother’s estate (the “Estate”) to
settle the Estate.
[3]
The Farmland Property was subsequently severed
into three parts to facilitate the sale of Part 1 (“Total Land Sold”) to a
third party land developer to settle the Estate. The Total Land Sold included
eight acres the appellant had beneficially owned. Of the eight acres, he used
the proceeds from the sale of 3.2 acres interest in land (the “farmland”
and also identified as the Extra Portion), to satisfy the Promissory Note
he had given to the Estate in order to purchase the remaining one-third
interest in the Farm Business.[1]
[4]
The Farm Business comprised livestock, farm
equipment, feed, grain, growing crops, the bank account and the milk quota (the
“Assets"), all of which had been used in the Farm Business when he
operated it with his mother.[2]
[5]
The appellant elected under subsection 44(1) of
the Act to defer the capital gain on the sale of the farmland, which
would otherwise be included in income, and claims that the Assets constitute “replacement
property”.
[6]
The issue in this appeal is whether the Assets
acquired by him qualify as “replacement property”, within the meaning of
subsection 44(5) of the Act, for the farmland sold.
I. Facts
[7]
The facts of this case are undisputed. An Agreed
Upon Statement of Facts was provided by the parties. The agreed upon facts are
as follows:
Agreed Upon
Statement of Facts
A. BACKGROUND
The Farmland
Property
1. Kathleen Livingston ("Kathleen") and
Armous Livingston ("Armous"),the mother and father respectively
of the Taxpayer, acquired real property in or about 1952, comprising
approximately 97.02 acres1 in the City of Brampton, Ontario (the
"Farmland Property"). Armous and Kathleen were the owners of
the Farmland Property on December 31, 1971.
2. On August 25, 1999, Kathleen and Armous transferred an
undivided one third (1/3) interest in the Farmland Property to the Taxpayer2
pursuant to subsection 73(3.1) of the Income Tax Act (the
"Tax Act"). By virtue of this transfer, the Farmland Property
was owned equally by Armous, Kathleen and the Taxpayer as joint tenants, all
with right of survivorship.
3. On or about April 13, 2001, Armous died, and the Taxpayer
and 1Kathleen became the owners of the Farmland Property, each as to an
undivided one half (1/2) interest, as joint tenants. This result occurred by
automatic operation of law as a result of the death of Armous, by virtue of the
joint tenancy.
4. Pursuant to an election under subparagraph 70(9.01)(b) of
the Tax Act, Armous was deemed to have disposed of his undivided one third
(1/3) interest in the Farmland Property immediately prior to his death for
$574,760.3
5. On November 27, 2001, Kathleen executed a transfer of her
interest in the Farmland Property from herself to herself for the purpose of
severing the joint tenancy with the Taxpayer.4 This step was taken
by Kathleen in order to prevent the Taxpayer from becoming the exclusive owner
of the Farmland Property upon her death by virtue of the automatic operation of
law attributable to the joint tenancy. If she had not done this she would
have, effectively, disinherited the balance of her heirs from any entitlement
to participate in the ownership of the Farmland Property.
6. After the transfer the Taxpayer and Kathleen continued
each to own an undivided one half (1/2) interest in the Farmland Property,
provided only that their ownership was now as tenants in common and not as
joint tenants. The undivided one half (1/2) interest thereafter owned by
Kathleen as a tenant in common with the Taxpayer is hereinafter referred to as
the "Mother's Land Interest". The Taxpayer's undivided one
half (1/2) interest is hereinafter referred as the "Taxpayer's Land
Interest".
The Farm
Business
7. Kathleen and Armous owned and continuously operated a
dairy farm on the Farmland Property from the early 1950s until 1992
(the "Farm Business"). The dairy farm consisted, and
continues to consist, of all the necessary and customary assets required to
operate a dairy farming business for the lawful production of milk.
The assets of the Farm Business as of June 3, 2005 were as set out in
Schedule A. The assets of the Farm Business, the preponderance of which is
non-depreciable, were at all material times, materially the same as those set
out Schedule A, all of which were used, and continue to be used, solely in the
Farm Business.
8. In 1992 Kathleen and Armour gifted a one third (1/3)
interest in the Farm Business to the Taxpayer.
9. The Taxpayer operated the Farm Business under the name
"Goreridge Farm" together with Kathleen and Armous until their respective
deaths and the Taxpayer has continued to operate the Farm Business at all times
material to this appeal.
10. Upon the death of Armous on November 27, 2001, the Taxpayer
received Armous' one third (1/3) interest in the Farm Business. Thereafter the
Taxpayer owned two thirds (2/3) and Kathleen owned one third (1/3) of the Farm
Business, Kathleen's interest in the Farm Business is hereinafter referred to
as the "Mother's Farm Business Assets".
B. DEATH
OF KATHLEEN LIVINGSTON
Kathleen's
Will
11. Kathleen died on June 3, 2005. The terms of her Will,
attached as Schedule B, provided that the residue of her estate (the
"Estate") which included, but did not specifically refer to,
the Mother's Land Interest and the Mother's Farm Business Assets, passed to her
children other than the Taxpayer ("Kathleen's Beneficiaries").
None of Kathleen's Beneficiaries had previously had an ownership interest in
the Farmland Property or the Farm Business.
12. In connection with the administration of the Estate, the
total assets of the Farm Business were valued at $1,250,666.00 (the "Farm
Business Value"), of which approximately $416,889.00, being 1/3 of the
Farm Business Value, was attributable to the Mother's Farm Business Assets.
13. The Taxpayer did not wish to own or operate the Farm
Business with any of Kathleen's Beneficiaries.
14. As part of the administration of the Estate, Kathleen's
undivided one half (1/2) interest in the Farmland Property was conveyed to
Kathleen's Estate Trustees.5 By virtue of the Transmission, the
Farmland Property was vested in the Estate and the Taxpayer personally each as
to an undivided one half (1/2) interest as tenants in common.
C. OFFER
TO PURCHASE PART OF THE FARMLAND PROPERTY
Agreement to
sell Part of the Farmland Property
15. The Taxpayer and the Estate received an unsolicited offer
from a third party to purchase part of the Farmland Property.
16. The Estate wished to divest itself of its entire interest
in the Farmland Property; the Taxpayer did not. The Taxpayer agreed to the sale
of part of the Farmland Property subject to the following conditions which were
imposed by the Taxpayer:
(i) any agreement of purchase and sale of part of the
Farmland Property would be conditional on the Estate and the Taxpayer entering
into an asset purchase agreement pursuant to which the Estate agreed to sell,
and the Taxpayer agreed to buy, the Mother's Farm Business Assets;
(ii) the Farmland Property would be divided into (2) unequal
portions and dealt with as follows:
(a) one portion, being Part 3 in the R Plan, comprising
16.958 hectares would be registered exclusively in the name of, and
beneficially owned by, the Taxpayer ("Taxpayer's Retained Land"),
following the severance referred to in Paragraph 17; and
(b) the other portion, being Part 1 on the R Plan comprising
23.561 hectares (the "Total Sold Land") remained registered in
the names of the Estate Trustees and the Taxpayer to be dealt with in
accordance with the provisions of the Asset Purchase Agreement and would
include 3.301 hectares (the "Taxpayer's Sold Land") beneficially
owned by the Taxpayer. All of the Total Sold Land would be sold to the third
party.
(iii) the agreement of purchase and sale for the sale of the
Total Sold Land must contain a provision requiring the purchaser to enter into
a lease (the "Farm Lease") permitting the Taxpayer to continue
farming all of such land until the Total Sold Land was ready for development.
This entitled the Taxpayer to continue farming the Farmland Property in the
same manner as he and his parents had done historically, notwithstanding the
sale of the Total Sold Land.
The Severance
17. In order to make the Farmland Property lawfully saleable
it was necessary to sever the Farmland Property (the "Severance")
into the requisite parts. In order to obtain the severance it was necessary to
agree to transfer a part of the Farmland Property to the Corporation of the
City of Brampton to be used as a road allowance.
18. By Agreement of Purchase and Sale effective April 19, 2006
(the "Estate Sale Agreement") attached as Schedule C,
the Estate, together the Taxpayer, as a covenantor for other purposes, agreed
to sell the Total Sold Lands to Edenfield Developments Inc. ("Edenfield"),
an arm's length party.
19. The Estate Sale Agreement was conditional for a period of
four (4) months upon the vendor obtaining the Severance. The Severance was
obtained, and the Farmland Property was severed into the three (3) parts, being
Part 1, Part 2 and Part 3 on Plan 43R-31133 (the "R Plan"),
a copy of R Plan is attached as Schedule D. The three (3) Parts of the R
Plan were disposed of as follows:
(i) Instrument No. PR1176017 is a Transfer by Personal
Representative registered November 28, 2006 pursuant to which the Estate
Trustees of the Estate and the Taxpayer transferred Part 2 on the R Plan,
consisting of 0.13 hectares, to the Corporation of the City of Brampton as a
road allowance in satisfaction of the Severance condition referred to in
paragraph 17;
(ii) Instrument No. PR1176018 is a Transfer by Personal
Representative registered November 28, 2006 pursuant to which the Estate
Trustees of the Estate and the Taxpayer jointly transferred Part 3 on the R
Plan, comprising 16.95 hectares, to the Taxpayer; and
(iii) Instrument No. PR1179557, registered December 4, 2006,
is a Transfer of Part 1 on the R Plan pursuant to which the Total Sold Land was transferred by the Taxpayer and the Estate Trustees of the Estate to
Richmead, pursuant to the Estate Sale Agreement;
The Asset
Purchase Agreement
20. As a requirement of the Taxpayer, the Estate Sale
Agreement for the Total Sold land was made conditional until May 19, 2006, upon
him and the Estate entering into a mutually satisfactory asset purchase
agreement pursuant to which the Taxpayer would purchase the Mother's Farm
Business Assets from the Estate.
21. (a) The Estate and the Taxpayer entered into an
Asset Purchase Agreement made as of the April 19, 2006 (the "Asset
Purchase Agreement"), a copy of which is attached as Schedule E,
respecting the Taxpayer's purchase of the Mother's Farm Business Assets.
Attached as Schedule F is a copy of the Bill of Sale dated June 1, 2006
delivered by the Estate to effect the transfer of the Mother's Farm Business
Assets to the Taxpayer.
(b)
The Asset Purchase Agreement provides as follows:
(i) the Taxpayer agreed to provide consideration on closing
for his purchase of the Mother's Farm Business Assets in the form of a
promissory note (the "Promissory Note"), a copy of which is
attached as Schedule G;
(ii) the Total Sold Lands would comprise the lands described
in the Asset Purchase Agreement as the "Remainder Lands",
being beneficially owned by the Estate, the "Extra Portion",
and the "Additional Acreage",6 both being beneficially
owned by the Taxpayer; and
(iii) the proceeds from the sale of the Total Sold Land would be distributed as follows:
(a) the proceeds on account of the Remainder Lands would be
kept by the Estate as its exclusive property;
(b) the proceeds on account of the Extra Portion would be
kept by the Estate in full satisfaction of the Promissory Note; and
(c) the Estate would receive the proceeds (net of any real
estate commissions and Goods and Services Tax) on account of the Additional
Acreage and as bare trustee for the Taxpayer.
Allocation of
the Sale Proceeds
22. The sale price for the Total Sold Land was approximately $7,628,850
of which the Taxpayer's share, being the amounts attributable to the Extra
Portion and the Additional Acreage, was $1,003,088 (the "Taxpayer's Sale Proceeds"). The Taxpayer's Sale Proceeds were distributed as follows:
(i) $423,555, which was on account of the sale of the Extra
Portion, was kept by the Estate in full satisfaction of the Promissory Note;
and
(ii) $579,533, which was on account of the sale of the
Additional Acreage, was paid by the Estate to the Taxpayer as his absolute and
exclusive property.
23. On the closing of the Estate Sale Agreement, Edenfield
directed that title to the Total Sold Land be registered in the name of
Richmead Developments Inc. ("Richmead"), who became the
registered owner of that land.
The Farm Lease
24. It was a condition of the Estate Sale Agreement that
Richmead, as landlord, would enter into a lease with the Taxpayer, as tenant,
(the "Farm Lease") permitting the Taxpayer to continue
farming Part 1 on the R Plan, without the payment of rent, until the issuance
of draft plan approval for a residential plan of subdivision upon that property
and Richmead commenced preparing Part 1 on the R Plan for the installation of
roads and services. The Farm Lease was duly executed and registered against
Part 1 on the R Plan the 4th day of December, 2006 as Instrument No.
PR1180033, a copy of Instrument No. PR1180033 is attached as Schedule H,
and a copy of the Farm Lease is attached as Schedule I.
25. Since the execution of the Farm Lease, at all times material
to this appeal, the Taxpayer continued using the Farm Property for the purposes
of the Farm Business in exactly the same manner that he did when he and
Kathleen owned and operated the Farm Business.
26. The Taxpayer recognized the following capital gain on the
disposition of his interest in the Farmland Property:
Sale price $1,003,088
ACB 69,779
Subtotal 933,309
Outlays and expenses 37,093
$
896,216
27. The Taxpayer had $6,658 of unused net capital losses from
prior years which were applied against the Taxpayer's taxable capital gain from
the sale of his interest in the Farmland Property.
All footnote
references in the Agreed Upon Statement of Facts are set out in the attached
Schedule "A".
[8]
The Agreed Upon Statement of Facts was
supplemented by the appellant’s testimony at the hearing. He gave his evidence
in a forthright manner. The appellant chose the farming lifestyle and his
six siblings chose to pursue other occupations. He had entered into a
succession plan with his siblings relating to his late mother’s half-interest
in the Farmland Property and her one-third interest in the Farm Business. He
testified that the sale of any part of the Farmland Property was conditional
upon him acquiring the Assets to gain full ownership of the Farm Business. This
is confirmed by the agreements tendered in evidence at the hearing. He ultimately
used the proceeds from the sale of the farmland to satisfy the Promissory Note
that he had provided to purchase the Assets.[3]
[9]
The appellant asked the developer to lease the Total
Land Sold to allow him to continue to use it for the dairy farm - as in the
past - to grow forage crops and cattle would pasture on grazing grass. The
agreements in evidence show that it was a condition requested by the appellant
that the developer enter into the Farm Lease permitting the appellant to
continue farming the Total Land Sold, including the farmland, in the same
manner that he and his parents had done. The developer agreed to do so at
$1.00 per year until the developer started to remove the topsoil for
development. This leasing arrangement was ongoing at the time of the hearing.
[10]
The appellant stated that good quality feed is
grown on the Farmland Property and it cannot be purchased from other farmers.
He described the interconnectedness of the equipment to work the land. This produced
forages and the harvest went into silos to feed the cows so there is milk production
to fill the daily milk quota that must be provided to the Dairy Farmers of
Ontario in order for the business to sell the milk through that organization.
[11]
When asked in cross‑examination if the
appellant could grow crops on the tractor, he stated that all the equipment
(Assets) purchased was used to enable the farming operation to grow crops and
that everything revolves around the production of forages for the dairy herd.
He admitted that the right to sell milk (the milk quota) is the most valuable
asset to a dairy farm. He agreed he acquired the equipment and that right as
depreciable assets which he depreciated. Except for gaining full ownership of
the Farm Business, he indicated that there has been no change in the use of the
farmland or the use of the Assets in producing the forages.
II. Statutory
Provisions
[12]
The relevant portions of subsection 44(1)
provide that:
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 …
…
(b) a property that was, immediately
before the disposition, a former business property of the taxpayer,
and the taxpayer has
…
(d) in any other case, before the later
of the end of the first taxation year following the initial year and 12 months
after the end of the initial year,
acquired a capital property that is a replacement property for the
taxpayer’s former property …
[13]
Replacement property is defined in subsection
44(5) as:
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… for a use that is the
same as or similar to 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… for such a purpose.
[14]
Former business property is defined in
subsection 248(1) as:
“former business property” of a taxpayer means a capital property of
the taxpayer that was used by the taxpayer or a person related to the taxpayer
primarily for the purpose of gaining or producing income from a business, and
that was real property of the taxpayer, an interest of the taxpayer in real
property, but does not include
(a) a rental property of the taxpayer,
(b) land subjacent to a rental property of the taxpayer,
(c) land contiguous to land referred to
in paragraph (b) that is a parking area, driveway, yard or garden or
that is otherwise necessary for the use of the rental property referred to in
that paragraph, or
(d) a leasehold interest in any
property described in paragraphs (a) to (c),
…
III. Analysis
[15]
Section 44 is an exception to the normal rule on
capital gains that tax is normally payable on the disposition of capital
property. Subsection 44(1) permits a taxpayer to a rollover of the cost base of
the property and deferral of the accrued capital gain arising on the
disposition of capital property (that was stolen, destroyed or expropriated and
paid by insurance or was a “former business property”) if the proceeds are
reinvested in a “replacement property” and it is acquired within a specified
time. A taxpayer must file an election in his or her return of income for the
year in which the replacement property was acquired.
[16]
The taxpayer has the onus to bring himself or
herself within the four corners of the exempting provision satisfying all its
requirements to meet the definition of a “replacement property” in subsection
44(5) of the Act. In this appeal, only paragraphs 44(5)(a), (a.1)
and (b) are in issue, paragraphs (c) and (d) are not. The
provisions are written conjunctively.
[17]
Replacement property in subsection 44(5) focuses
on a particular capital property acquired to replace the former property
disposed of and if the acquisition was:
1. to replace the
former property (paragraph (a));
2. for the same or similar use to which the taxpayer put and
used the former property (paragraph (a.1)); and
3. for the same or similar business as the former property for
income producing purposes (paragraph (b)).
[18]
In this case, the “former property” was
immediately before the disposition a “former business property”, referenced in
paragraph 44(1)(b), and in turn the later is defined in subsection
248(1) to be real property or an interest therein.
[19]
The formulation of the proper approach to
statutory interpretation ‑ requiring a textual, contextual and
purposive analysis – was restated by the Supreme Court in Canada Trustco
Mortgage Co. v Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 in stating:
10. The
interpretation of a statutory provision must be made according to a textual,
contextual and purposive analysis to find a meaning that is harmonious with the
Act as a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words play a dominant role in the interpretive process.
On the other hand, where the words can support more than one reasonable
meaning, the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive process
may vary, but in all cases the court must seek to read the provisions of an Act
as a harmonious whole. …
13. The Income Tax
Act remains an instrument dominated by explicit provisions dictating specific
consequences, inviting a largely textual interpretation.[4]
Textual
Analysis
[20]
In the Canadian Oxford Dictionary, 2d
ed., the word “replace” is defined as follows:
replace 1
put back in place. 2 take the place of; succeed; be substituted for. 3
find or provide a substitute for. 4 … fill up the place of. 5 … be
succeeded or have one’s place filled by another; be superseded.
[21]
In Black’s Law Dictionary, 7th
ed.,“replace” is defined as:
Replace. To place again; to restore to a former condition. … Term, given its
plain, ordinary meaning, means to supplant with substitute or equivalent.
[22]
A textual interpretation of the words in
paragraph 44(5)(a) that a particular capital property is a replacement
property if it was acquired as a substitute for or an equivalent to a former
property suggests that the replacement property should be the same type of property.
In the present case, farmland is to replace farmland.
[23]
The appellant’s position is that the Assets constitute
“replacement property” for the farmland sold because the Assets are
inextricably linked to the dairy Farm Business. This is demonstrated by the
sale of the farmland and that the purchase of the Assets were interconnected
with causality of that sale and the obligation of the Estate to sell the Assets
to the appellant. Further, there is no explicit requirement in section 44 that a
former business property must be replaced with the same type of property except
that it be capital property.
[24]
The respondent’s position is that the Assets -
being fundamentally different in nature than the farmland - do not qualify as
“replacement property” as the words “to replace” within the meaning of
paragraph 44(5)(a) means a direct substitution of land for land in the
present appeal. Therefore, it is not reasonable to conclude that the Assets were
acquired to replace the farmland. Further, since the farmland, as part of the
Total Land Sold, was immediately leased back to the appellant by the developer,
there was no change or substitution for the farmland.
[25]
Neither counsel were able to cite any case
involving the replacement property provisions in which the acquired and
disposed of capital properties differed in type or nature from each the other.
Respondent counsel stated that other than the dictionary definitions, he was
unable to find any useful guidance interpreting section 44 of the Act in
the circumstances of the present appeal.
[26]
Despite the textual interpretation, conceivably there
is some potential ambiguity as to whether capital property must be replaced by
capital property of the same type thus supporting more than one interpretation.
In such instances, the ordinary meaning of the words plays a lesser role in the
interpretive process and recourse to the context and purpose is necessary.[5]
[27]
Therefore, I turn to the contextual analysis to
read the provision of the Act as a harmonious whole.
Contextual
Analysis
[28]
Implicit in the contextual analysis is that the
grammatical and ordinary view of a provision is not determinative of its
meaning. Therefore, the Court aims from the text and the wider context of the
provision to ascertain Parliament’s intent.
[29]
Contextual aids are found in the evolution of
the Act which may throw light on Parliament’s intention when amending or
adding to a statute or in considering other similar provisions.
[30]
Section 44 was added to the Act at the
time that the capital gains tax was implemented in 1972.[6] The Carter Commission’s report
outlined that section 44 provided a rollover for capital property that was
expropriated or destroyed. However, the wording in section 44, modelled on
subsection 20(5a), did not have an equivalent “like property for like property
clause” similar to the predecessor paragraph 20(5a)(i) which was introduced
in 1955 and provided a rollover when insurance proceeds for the loss or
destruction of depreciable property were reinvested in the same class of
depreciable property.[7]
[31]
The term “replacement
property” was used, but not defined in section 44 until April 1978. Section
44 was amended twice in 1978. The first amendment restructured section 44 into
its present form leading to the addition of:
1. a
voluntary rollover for replacing real property in paragraph 44(1)(b);
2. the
definition of “former business property” in
subsection 248(1); and
3. the definition of “replacement
property” in subsection 44(5).
[32]
The Minister of Finance described the purpose of
the voluntary rollover as a means of helping taxpayers to expand their
businesses. He remarked that:[8]
In order to qualify, the properties must be real property and
replacement must be effected before the end of the year following the year of
the sale.
[33]
Under the first amendment, subsection 44(5)
required that the replacement property had to be put to the “same” use as the
former property and be used in the same business.[9] It was noted that the word “same”
was problematic because:
The definition was
too narrow, and if a farmer was operating a grain business there were some
rulings by the Department of National Revenue that the reinvestment had to be
in grain-producing land. We broadened the definition so that if a person sells
a grain-producing farm and buys a new farm to raise cattle, or some other
farming operation, that is allowed, rather than the narrow interpretation
National Revenue was applying.[10]
[34]
The second amendment was made quickly adding the
word “similar” to both tests in paragraphs 44(5)(a.1) and (b).
The wording was revised to reflect the “same as or
similar to the use” and “that or similar business”
for income earning purposes, respectively. Parliament’s objective in
introducing the second amendment was to ensure a broader application allowing
farmers a tax-free rollover on the disposition of property “so long as they
stay in the farming business”.[11]
[35]
The Technical Notes to the amendments in 1991 to
paragraphs 44(5)(a) [now a.1] and 44(5)(b) to broaden the
availability and benefit of the rollover to allow parties related to the
taxpayer (not relevant in this appeal) provide an example indicating in the
Notes a land for land proposition.[12]
[36]
In 1998, subsection 44(5) was amended so that
existing paragraph 44(5)(a) was moved to (a.1) and a new
paragraph 44(5)(a) was added so that a property will be a replacement
property if it is reasonable to conclude that the property was acquired by the
taxpayer to replace the former property.[13]
[37]
Interpretation bulletins can be a factor a court
can consider in a case of doubt in the meaning of legislation. At the time of
the acquisition and disposition of properties in the present appeal, the
relevant Interpretation Bulletin was IT‑259R4 dated September 23, 2003. At
paragraph 15, it reads:
Replace the Former Property
15.
To satisfy the requirement in paragraph 14(7)(a)
and in paragraphs 13(4.1)(a) and 44(5)(a) (as described in s 14(a)(i) and
14(b)(i)), it must be reasonable to conclude that the property was acquired to
replace the former property. In this regard, there must be some correlation or
direct substitution, that is, a causal relationship between the disposition of
a former property and the acquisition of the new property or properties. Where
it cannot readily be determined whether one property is actually being replaced
by another, the newly acquired property will not be considered a replacement property
for the former property.
[38]
That Interpretation Bulletin refers to a “direct
substitution” of the former property with the acquired property. A recurring
theme in the interpretation bulletins, as section 44 evolved, has been the need,
according to the Minister’s opinion, for the acquired property to generally
bear the same physical description as the former property (such as land
replaced by land).[14]
[39]
Parliament has also created parallel rules, with
similar treatment and requirements to section 44, for more specific species of
property. In taking that approach, presumably Parliament’s intent is that
capital properties disposed of and acquired, within the context of section 44,
would also need to be the same species.[15]
[40]
When paragraph 44(5)(a) was added to the
existing requirements in subsection 44(5), it specifies that reasonableness is
to be considered as to whether the acquired property was to replace the former
property. Thus would an objective and knowledgeable observer, with judgment,
conclude that the Assets were purchased as a direct substitute for the
farmland.
[41]
The appellant argues that all that is required
is some correlation or interconnectedness between the Assets and the farmland
which are inextricably linked by virtue of the Assets being used in the exact
same dairy Farm Business for the purpose of earning income. The sale of the
farmland and the purchase of the Assets supports that interconnection. The
appellant’s submission on this paragraph is broader and more expansive and
conflates the requirements in each of paragraphs 44(5)(a) and (a.1)
and likely (b), without focussing more directly on the elements within
that paragraph.
[42]
In my opinion, given the differences as between the
Assets and the farmland and considering the wider context, encompassing its
historical evolution and in line with the statutory regime providing for
specific rules for specific types of property, I interpret the words “to
replace” in paragraph 44(5)(a) to mean that Parliament intended a direct
substitution so that the same species of capital property would be required for
the acquired property to constitute a replacement property for the former
property. I find that it cannot reasonably be concluded that the Assets were to
replace the farmland within the meaning of paragraph 44(5)(a) of the Act.
[43]
The word “use” in paragraph 44(5)(a.1)
has been interpreted to mean actual use for some purpose .[16]
[44]
The appellant’s position is that the use in
question was earning income and the Assets were acquired – and were used – in
the same Farm Business in which he used the farmland, all of which were inextricably
linked with the purpose of making the farm work and generating income. In his
evidence, the appellant described his farming process as commencing with
seeding in the springtime and harvesting of the crops in the summer months. He
grew good quality feed on the farmland as part of the greater Farmland Property
with storage of the forages for the cows so that they can be milked.
[45]
Where the taxpayer can show more than a passing
resemblance between the purpose or utilization of the former property and the
replacement property, they should be considered similar for the purposes of
paragraph 44(5)(a.1).[17]
[46]
Appellant counsel asserts the use and the
purpose the farmland was put to was dairy farming and that wide scope should be
given to the word “similar” in interpreting paragraph 44(5)(a.l). Such
that the land was used to grow crops and pasture cattle. Tractors were used to
pull equipment. The harrow and the rake were used to prepare the land. Preparing
the land to grow grass is very similar to growing the grass. The purpose
remains the same, the production and sale of milk, with the utilization being
very similar.
[47]
Similarly, he argues, where the land was used to
feed and pasture the cows which produced the milk, the milk quota is used to
gain access to the market to sell the milk. Without the milk quota, there would
be no dairy farm. The purpose of the milk quota remains the same as the land,
the production and sale of milk. Plus there was no change in the use to which
any of the Assets were put or in the purpose for which they were used in the
same Farming Business for the purpose of producing income. All of which worked
in concert for the production of milk in the Farm Business. Therefore,
paragraph 44(5)(a.1) is satisfied. In his view, parsing out different
aspects of the Farming Business would be artificial. I disagree.
[48]
First, the Act routinely makes
distinctions between different classes of assets. For example, subsections
13(4), in respect of a depreciable property of a prescribed class, and 14(6),
in respect of eligible capital property with the companion “replacement
property” rules in subsections 13(4.1) and 14(7), respectively. Second, the net
is not cast as broadly as suggested by the appellant in suggesting that it is
suffice for paragraph 44(5)(a.1) that the Assets be used for the same
overall purpose of gaining or producing income from a dairy farm to make it
work. That paragraph, in my view, requires a narrower scope with a comparative
analysis of the actual use of the acquired and disposed of properties in
determining if the Assets were acquired and used for a use that is the “same as
or similar to” the use to which the appellant put the farmland.
[49]
Respondent counsel argues the actual use of the farmland
was growing grass and pasturing cattle and the purpose of the use was the
production and sale of milk. Although the physical Assets were used to help grow
the grass and pasture the cows, the use to which the farmland was put differed.
Preparing the land with a tractor is not the same as growing crops on land nor
can crops be grown on a tractor. The milk quota is even further removed from
growing crops or pasturing cattle. It was the major farm asset, as part of the
production and sale of milk, providing a right to access the supply management
system set up to regulate the price of milk. He said that the Assets were not
acquired for the use ‑ nor used – for the “same” purpose to which
the appellant had put the farmland.
[50]
I disagree with respondent counsel that it has
to be the “same” use. As noted, the legislation was amended to also permit a “similar”
use. Other than that, I agree that growing crops and pasturing cattle on the
farmland is not the same nor, in my view, is it similar to a use to which the
physical Assets and milk quota were put. As noted by respondent counsel, the
Assets merely helped as part of the wider process. I find that the Assets were
not acquired for the “same or similar” use to which the farmland was put.
[51]
With respect to paragraph 44(5)(b), the
question is whether the Assets acquired were for the purpose of earning income from
a business that was the same or similar to the business carried out on the
farmland. Other than the appellant having obtained full ownership in the Assets
and that farmland was leased, the appellant continued to use the same Assets in
the same business on the farmland.
[52]
For the reasons set out above, the requirements
in each of paragraphs 44(5)(a) and (a.1) were not satisfied. I
conclude that the Assets cannot be a “replacement property” for the farmland
within the meaning of subsection 44(5) of the Act.
[53]
The appeal is dismissed, with costs to the
respondent.
Signed at Ottawa, Canada, this 29th day of January 2015.
"K. Lyons"
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