Financial Collection Agencies (Quebec) Ltd. v. MNR, 90 DTC 1040, [1990] 1 CTC 2178 (TCC)

Rip, T.C.J.:— Financial Collection Agencies (Quebec) Ltd. ("Quebec"), the appellant, appeals from an income tax assessment for its 1985 taxation year, dated May 1, 1987, in which the Minister of National Revenue, the respondent, treated the appellant's gain on the disposition of a promissory note as income rather than a capital gain.

Facts

Quebec is one of 13 Canadian corporations owned by FCA International Limited ("FCA") and one of approximately 60 corporations associated with FCA. Mr. John Gordonsmith, the secretary-treasurer and executive vice- president of FCA, testified that the appellant and the other companies associated with FCA carried on the business of a collection agency earning income from commissions from debts collected. In 1985 FCA and its associated companies generated $50,000,000 to $60,000,000 in commission income; Quebec's gross income in 1985 was $1,379,291. In years prior to 1985 FCA and its Canadian subsidiaries had carried on some businesses associated with debt collection but in 1985 the companies carried on only the one business, Mr. Gordonsmith said. He explained that over the years FCA would invest funds from earned commissions in conservative investments such as term deposits with a chartered bank. He later convinced the directors to invest in preferred retractable shares of highly rated Canadian corporations. The shares, usually purchased at discount, had a good return and would generally be sold at a profit, never at a loss, after being held for periods of several months to several years. The profits on the shares were reported as capital gains. The subsidiaries did not make any investments.

Quebec's fiscal year end is June 30.

Sometime in 1985 Mr. Gordonsmith was contacted by FCA's auditors who suggested he consider the "purchase" of scientific research tax credits! [1] ("tax credits") from R.D.F. Energy Research Inc. ("RDF") which could result in a better short-term return on money invested than did FCA's current investments. RDF was a Canadian corporation engaged in research and development and had established tax losses which it could not use itself but could pass on to investors, said Mr. Gordonsmith. FCA previously had never acquired tax credits. Mr. Gordonsmith spent several days reviewing the recommendation, calculating income yields, taking into account returns on its investments compared to the returns based on tax credits and actual money received, and studying promotional material. The advice of the auditor was confirmed. The "given facts and figures made sense" said Mr. Gordonsmith. The FCA group would be "buying tax credits at a discount". Mr. Gordonsmith calculated the FCA group's net return on the transaction to be $212,300. [2] On the basis of these calculations, Mr. Gordonsmith recommended the investment in RDF to FCA's investment committee consisting of himself, the chairman and the president of FCA and other corporations owned by FCA. It was eventually decided that ten of the Canadian corporations, including FCA and Quebec, ("FCA group”) would invest in RDF.

Mr. Gordonsmith described how the transaction was explained to him: "We would give them (RDF) a certain amount of money, sign various documents and we would get a certain sum of money back along with the tax credits that we would receive at a later time to apply against tax liabilities. We would be able to get. . . carryback our taxes, get money back that we'd paid for income taxes in 1984 as well as the instalments we paid in 1985 and get interest on our funds.” Mr. Gordonsmith stated the appellant was buying a promissory note.

The certain amount of money the FCA group gave RDF was $4,000,000; in return it received back the aggregate of $2,280,000 by cheques and tax credits valued at $2,000,000; Quebec invested $200,000 and received back $114,000 and was in a position to claim tax credits of $100,000. In other words, according to Mr. Gordonsmith, the appellant spent $86,000 in order to use tax credits of $100,000.

The transaction closed on June 19, 1985 in Montreal. Mr. Gordonsmith was present at the closing, representing all of the companies in the FCA group. No lawyer was retained by the FCA group to represent its interests. Prior to the closing date Mr. Gordonsmith had not seen any document requiring his signature since no negotiations were possible. The deal, he said, was "invest and get tax credits". The closing took one or two hours, according to Mr. Gordonsmith.

A contract had been entered into between RDF and the corporations in the FCA group and an agenda had been prepared for the closing indicating each step to be undertaken by the FCA group and RDF. The contract provided for the issue and sale by RDF to each corporation in the FCA group of a registered promissory note of RDF to each member of the FCA group; the principal amount of a note depended on the amount of the tax credit required by each purchaser of the promissory note. Each of the notes was repayable on the earlier of demand made on or after June 19,1985 or on June 20, 1985. No interest was payable on the principal sum of the note until the day following demand or, if no demand was made, interest at the rate of 18 per cent per annum was to be payable on the principal sum from and including the day following demand or June 21, 1985, whichever was earlier, until paid. On closing each corporation in the FCA group delivered a certified cheque payable to RDF in the full amount of the purchase price of the note. Mr. Gordonsmith testified that he knew the note would be paid off on the closing date, June 19, 1985, and the note was in fact paid off on that date.

The contract also provided, amongst other things, for RDF to designate, pursuant to subsection 194(4) of the Act, for the benefit of each purchaser of a note the full amount of the purchase price of the note by completion and filing with the respondent the requisite prescribed forms. With respect to Quebec, RDF designated $200,000 as consideration received for the promissory note.

Later on at closing, demand by the FCA group was made on RDF for payment of the promissory notes and RDF delivered bank drafts to each corporation in the FCA group representing the principal amount of each note.

Mr. Gordonsmith testified that in recommending the investment in RDF he relied on letters of opinion, which were not advance tax rulings, by the respondent as well as a comfort letter from a national firm of management consultants to the effect, generally, that the expenditures previously incurred by RDF qualified for scientific research deductions under paragraph 37(1)(a) or (b) of the Act and could be utilized to offset RDF's tax liability under Part VIII of the Act; also the financing arrangements with respect to the investment in RDF satisfied transitional provisions contained in the Department of Finance Release No. 84-151 dated October 10, 1984. There was no indication in any correspondence from the respondent that the promissory notes were capital properties.

Statutory Provisions

The gain on the redemption of the promissory note was due to a statutory deduction in the cost of the note. Subsection 127.3(6) read that:

For the purposes of this Act, where at any time in a taxation year a taxpayer has acquired a share, debt obligation or right and is the first registered holder of the share or debt obligation or the first person to have acquired the right, as the case may be, other than a broker or dealer in securities, and an amount is, at any time, designated by a corporation under subsection 194(4), in respect of the share, debt obligation or right, the following rules apply:

(a) he shall be deemed to have acquired the share, debt obligation or right at a cost to him equal to the amount by which

(i) its cost to him as otherwise determined

exceeds

(ii) 50% of the amount so designated in respect thereof; and

(b) where the amount determined under subparagraph (a)(ii) exceeds the amount determined under subparagraph (a)(i), the excess shall

(i) where the share, debt obligation or right, as the case may be, is a capital property to him, be deemed to be a capital gain of the taxpayer for the year from the disposition of that property; and

(ii) in any other case, be included in computing the income of the taxpayer for the year,

and the cost to him of the share, debt obligation or right, as the case may be, shall be deemed to be nil.

As a result of subsection 127.3(6) Quebec's cost of the promissory note was reduced from $200,000 to $100,000 and when it was redeemed at $114,000, Quebec's gain was $14,000. In filing its tax return for 1985 on December 23, 1985, Quebec and the other companies of the FCA group treated the gains as capital gains. The respondent says the gain is income from a business since it resulted from an adventure in the nature of trade: subsection 248(1).

The appellant submits in the alternative that if the gain on the note is found not to be on account of capital, the election it made on or about July 15, 1987 was valid pursuant to subsection 39(4) which reads as follows:

Except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year and the taxpayer so elects in prescribed form in his return of income under this Part for that year,

(a) every Canadian security owned by him in that year or any subsequent taxation year shall be deemed to have been a capital property owned by him in those years; and

(b) every disposition by the taxpayer of any such Canadian security shall be deemed to be a disposition by him of a capital property.

Neither Quebec nor the other companies in the FCA group included in their income tax returns for 1985 an election in prescribed form in accordance with subsection 39(4) of the Income Tax Act ("Act") that the promissory note be deemed to be capital property since, Mr. Gordonsmith said, he was not aware of the possibility of making such an election. On or about July 15, 1987, after the assessment for 1985 had been issued, the elections were filed. FCA group's auditor had discussed the matter with an official of the respondent and then advised Mr. Gordonsmith to file an election for each company. Characterization of Gain

(a) Submissions

Counsel for the appellant argued that what was purchased in reality were tax credits having a value of $ 100,000 at a discounted price of $86,000; the promissory note was only a “modality” of acquiring the tax credits. In the appellant’s view, he said, its outlay at the end of the day was $86,000 for the acquisition of $100,000 in tax credits. The $14,000 was a capital gain.

The appellant's counsel denied the transaction was an adventure in the nature of trade. What was acquired, he said, were tax credits, which were consumed, and a note. There was no risk and no speculation on the appellant's part. There was no venture by the appellant; it bought and realized a note the same day, knowing it was going to realize on the note on the day of purchase, he said.

The gain assessed was triggered by the operation of subsection 127.3(6) and in reality the note was disposed of at a loss, counsel suggested.

The respondent's counsel agreed that the appellant is not a trader in securities; the issue as far as he was concerned was whether the acquisition and disposition of the note was an adventure in the nature of trade.

In counsel for the respondent's view the only property acquired by the appellant was the promissory note; there was no acquisition or purchase of any tax credits by the appellant, he claimed. There is no provision in the Act, he said, that provides for, or permits, a taxpayer to sell or purchase tax credits. The Act does permit a corporation to "designate" an amount pursuant to subsection 194(4) which may not be greater than the promissory note issued; 50 per cent of the amount so designated is paid as a refundable tax by the taxpayer corporation and it is an equal amount that is the tax credit available to the investor taxpayer. For a tax credit to be available to an investor he must invest in the corporation and receive from the corporation, as first registered holder, a bond, debenture, bill, note, mortgage, hypothec or similar obligation ("debt obligation”), a share or a right under a scientific research financing contract: subsections 194(4) and (6)

(b) Analysis

A capital asset traditionally is one which can produce income (e.g., shares, interest bearing debt, revenue producing real estate), is used in a business to produce income (e.g., machinery, plant), may appreciate in value (e.g., shares, bonds, revenue producing property, bullion, bare land) or be personal property (e.g., residential property, works of art). Lord Normand L.P. described the possible subject matter of a transaction in the nature of trade in C./.R. v. Fraser (1942), 24 T.C. 498 at pages 502 and 503:

The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that, that is not the only purpose for which he purchased the article or commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realising it at a profit but it may also yield him an income while he continues to hold it. If he continues to hold it, there may also be a certain pride of possession. But the purchaser of a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, I can scarcely consider to be other than an adventure in a transaction in the nature of trade.

There was no intention by Quebec to use the funds to purchase a capital property nor to hold the note as a capital asset; the promissory note was held for less than two hours. Quebec knew before it entered into the transaction that two hours after the transaction it would have returned to it $114,000 and also be in a position to apply $100,000 of tax credits to its immediately prior and current year's liabilities. Quebec was certain prior to entering the transaction that it would make a gain of $ 14,000. The mere fact of entering a transaction knowing a profit will result does not, of course, determine whether the transaction is on account of capital or income.

The promissory note from RDF to Quebec was not a capital asset. First, there was no interest payable on the principal amount of the note while it was held or contemplated to be held by Quebec. Mr. Gordonsmith acknowledged that the note was to be paid back on the day it was issued and so it was. Quebec never intended to hold the promissory note for the purposes of earning income. The promissory note also was not reasonably susceptible of varying in value. Nor could it be said to be a property which would give its holder any pride of possession or aesthetic enjoyment.

The Act, at subsection 248(1), defines "business" to include ”. . . a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment."

Two indications that a transaction is an "adventure or concern in the nature of trade" are that a person deals with the property purchased in the same way that a regular trader in property of the same kind would ordinarily do and that the nature of the subject matter of the transaction may be such as to exclude the possibility that its sale was the realization of an investment or that it could have been disposed of otherwise as a trade transaction: Taylor v. M.N.R., [1956-60] Ex. C.R. 35; [1956] C.T.C. 189; 56 D.T.C. 1125. A regular trader of promissory notes, of course, will usually not purchase a non-interest bearing promissory note at a premium. But, given the advantage attached to the issue and acquisition of the promissory note, that is, the tax credit, the acquisition and disposition of the promissory note cannot be considered in isolation. The promissory note was not a property or investment which could have been disposed of on capital account. The nature of the transaction undertaken by the appellant was an adventure in the nature of trade even if it was different from and unconnected with his ordinary activities: Taylor, supra, pages 1137 and 1138.

I have no doubt that Quebec acquired the promissory note as a means of "obtaining" $100,000 in tax credits. At the-same time, I am sure, it would not have acquired the note solely for the tax credits. In other words it would not have paid $100,000 for $100,000 worth of tax credits: there was no advantage to this. Some "sweetener" would have to be attached to the “acquisition” of the tax credits. The sweetener was the $14,000. In the appellant’s view the gain of $14,000 represents the difference between what its counsel refers to as the discounted purchase price for the tax credits of $86,000 and the value of the tax credits. The respondent sees the gain as the difference between the deemed cost of the promissory note and the proceeds of redemption. A third view of the gain is that the $14,000 represents the difference between the amounts paid by the appellant, $200,000, and the aggregate of the value in money of the benefit resulting from the transaction, $214,000, that is, $114,000 in cash plus $100,000 in tax credits.

In order for a taxpayer to "acquire" a tax credit he must first invest by way of debt obligation, shares or acquire a right from the corporation under a scientific research financing interest. The Act does not provide for the sale in tax credits. Technically speaking RDF did not sell and Quebec did not purchase any tax credits. The transaction is described in the contract between the parties for the sale and purchase of the promissory notes. The transaction was so structured that at the end of the day RDF would receive and retain a sum of money in return for the use by Quebec of a greater amount of tax credits; this is the appellant’s view of the transaction. The appellant ignores statutory provisions of the Act which legislate a tax consequence as a result of the issuance and redemption of the promissory note.

Mr. Justice Thurlow discussed the definition of "business" in the Act: Drumheller v. M.N.R., [1959] Ex. C.R. 281; [1959] C.T.C. 275; 59 D.T.C. 1177. At page 1180 he explained:

Business is defined by the statute in wide terms. It is not limited to trading or manufacturing but includes, as well, the carrying on of a profession or vocation. It also includes an undertaking of any kind and an adventure or concern in the nature of trade but not an office or employment. The expressions used in this definition are not mutually exclusive, nor are they all equally broad. Some overlap with others. In particular, the expression an undertaking of any kind appears to me to be wide enough by itself to embrace any undertaking of the kinds already mentioned in the definition; that is to say, trades, manufactures, professions, or callings, and any other conceivable kinds of enterprise as well.

In the present case, it is clear that what the appellant and Mr. Brook were doing when they embarked on their joint project was not engaging in a mere hobby or game but carrying out a deliberate and planned course of action with economic gain as its object. Whether or not this project can properly be classified either as a trade or as an adventure or concern in the nature of trade is, to my mind, quite immaterial for, in my opinion, it clearly falls within the meaning of the expression an undertaking of any kind and must accordingly be regarded as a business for the purposes of The Income Tax Act.

In the appeal at bar it appears to me that the transaction entered into by the appellant may arguably be categorized as an undertaking. The Oxford English Dictionary defines "undertaking" as "ready to undertake an enterprise, task, etc., esp. one involving some danger or risk . . .”. However, the facts before me do not suggest the appellant was involved in any danger or risk on entering the transaction and I am therefore reluctant to find the deemed gain on the acquisition and redemption of the promissory note be included in income solely on the basis the transaction was an undertaking.

Quebec advanced RDF $200,000 for less than a day. In return RDF paid to the appellant $114,000 and permitted the appellant to use $100,000 of tax credits. RDF retained the $86,000 for its own purposes. As a result of the transaction the appellant gained an economic benefit of $14,000. There is, I wrote earlier, no actual acquisition of tax credits. Only the promissory note is subject to acquisition and disposition. Subsection 127.3(6) is a calculation for tax purposes of the economic gain to the "investor" on the complete transaction. It is a tantalizingly appealing argument that the promissory note be considered in isolation from the whole of the transaction; however, that is not the real story. What must be considered is the complete transaction and the reason the appellant undertook that transaction. The manifest object of the appellant in entering the transaction, taking into consideration the payment of the promissory note and the right to apply tax credits, was to make a profit. The only way for the appellant to get hold of cash and accomplish its goal of coming out ahead on the transaction was to redeem the note and make use of the tax credits. The Act contemplated the gain would be triggered at the time the money advanced to the corporation which had expenditures that qualified for scientific research deduction was withdrawn; in this case, when the promissory note was redeemed.

I have reviewed the recently released reasons of my brother Judge Garon in Henry Loewen v. M.N.R. (unreported), T.C.C., November 24,1989. [3] In his reasons, Garon, T.C.J. found support for his conclusion that the purchase and redemption of a debenture related to tax credits was not "an adventure or concern in the nature of trade" on two decisions of the House of Lords: Bishop v. Finsbury Securities, Ltd., [1966] 3 All E.R. 105 and FA & AB Ltd. v. Lupton, [1971] 3 All E.R. 948. Judge Garon wrote at pages 9 and 10:

In the Finsbury Securities, Ltd. case, the taxpayer was incorporated to carry on the trade of dealing in shares and securities and did carry on trade after its incorporation. A few years later, the taxpayer company entered into some 15 sets of transactions with other companies, described as "forward stripping” operations. The company claimed that it had sustained a loss in the course of the trade of dealing in shares. The following comments in the speech of Lord Morris of Borth-y-Gest, speaking for all members of the Court, at pages 109 and 112 are particularly illuminating:

My lords, the various arrangements are not to be regarded as sham transactions. They were as real as they were elaborate; but I cannot think that there is room for doubt that they were no more than devices which were planned and contrived to effect the avowed purpose of tax avoidance. The company used their organisation and their resources so that shareholders in Warshaw and in other companies involved should not wholly be deprived of money that had to he paid in tax. The scheme was one whereby the Revenue would be denied certain sums of money. Such sums could be made to find their way to the pockets of the shareholders in the various companies less such proportion as was the payment for the skilful services rendered. That was the reality of the matter.

A consideration of the transactions now under review leads me to the opinion that they were in no way characteristic of, nor did they possess, the ordinary features of the trade of share dealing. The various shares which were acquired ought not to be regarded as having become part of the stock-in trade of the company. They were not acquired for the purpose of dealing with them. In no ordinary sense were they current assets. For the purposes of carrying out the scheme which was devised the shares were to be and had to be retained. The arguments before your lordships depended mainly on the submission by the Crown that the shares were acquired for a period of five years as part of the capital structure of the company from which an income would be earned and, on the other hand, on the submission of the company that they were acquired as part of their stock-in- trade.

The same approach was adopted by the House of Lords in the Lupton case, the second case mentioned above. That reasoning is well expressed in the portion of the headnote reading in part as follows:

. . . it was an essential feature of the sale agreement that it should be followed by dividend-stripping and a claim against the Revenue; since the manifest object of the taxpayer company in entering into the transaction was to secure a tax advantage, the transaction did not constitute dealing in stocks and shares and did not therefore form part of the trading activities of a dealer in stocks and shares.

These cases, in my view, do not assist the appellant in the circumstances of this case. Firstly, the assessment under appeal was not issued on the basis that the acquisition and disposition of the promissory note was part of the appellant's trade. The assessment under appeal was issued on the assumption that the transaction was an adventure in the nature of trade. Indeed, the parties agree the transaction did not form part of the appellant's trade. Notwithstanding the definition of "business" in the Act includes "an adventure or concern in the nature of trade", a person who participates in an adventure or concern in the nature of trade is not carrying on a business or more precisely, a trade. An adventure, as stated by Jackett, P., as he then was, in Tara Exploration and Development Co. v. M.N.R., [1970] C.T.C. 557; 70 D.T.C. 6370 at page 567 (D.T.C. 6376),is an isolated happening. The ordinary sense of a “business” connotes a continuity of time or operations. In Taylor v. M.N.R., supra, Thorson, P. wrote, at page 199 (D.T.C. 1131), that:

It is, I think, plain from the wording of the Canadian Act, quite apart from any judicial decisions, that the terms "trade" and “adventure or concern in the nature of trade" are not synonymous expressions and it follows that the profit from a transaction may be income from a business within the meaning of Section 3 of the Act, by reason of the definition of business in Section 127(1)(e), even though the transaction did not constitute a trade, provided that it was an adventure or concern in the nature of trade.

There is no allegation in the pleadings, and there was no suggestion during the course of the trial, that the transaction entered into by the appellant was a device to avoid tax. In any event the proposition of law laid down in Finsbury Securities Ltd. and FA & AB Ltd., supra, is not authority for the proposition that property acquired for tax avoidance purposes cannot be the subject of an adventure or concern in the nature of trade. Also, the promissory note acquired by the appellant did not yield any interest while held and was not and did not have to be retained for any extended time; in fact the promissory note was to be redeemed as soon as possible. This was not the case in Loewen, supra, for example. Quebec did not hold the promissory note from RDF as a capital asset. The gain on the disposition of the promissory note as a result of the statutory reduction in the cost of the note to the appellant is to be included in income.

Election

There is no question that the promissory note is a Canadian security and the appellant had the right to make an election in accordance with subsection 39(4).

The appellant's position is that [what] it filed was a valid election, notwithstanding that it did not elect in prescribed form in its return of income and that the election in prescribed form was filed some 17 months after the return of income for 1985 was filed.

Appellant's counsel submitted that "a taxpayer can file a return of income at any time he desires notwithstanding section 150 and any election required to be included in the return of income can similarly be filed at such late date and would be a valid election”. The late filing of a return is not fatal. The only prejudice to the taxpayer in late filing his return is his liability for a penalty. The late filing of a form of election constitutes the late filing of the return in which the form of election should have been included. This submission would not apply, he added, with respect to a provision of the Act which provides for a specific date for filing of an election.

Counsel referred the Court to the reasons for judgment of Cullen, J. in Lucas v. The Queen, [1987] 2 C.T.C. 23; 87 D.T.C. 5277 at 27 (D.T.C. 5279) where he cited the following passage of Estey, J. in Johns-Mansville Canada Inc. v. The Queen, op cit:

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

The appellant’s counsel had previously cited the reasons of Kempo, T.C.J. in Trynor and Boyd v. M.N.R., [1988] 1 C.T.C. 2425; 88 D.T.C. 1294 in support of his submission that an election is valid notwithstanding it may have been filed late. In Trynor and Boyd the taxpayers filed their tax returns late and while it was clear from their returns that they were electing to use fair market value on Valuation Day of shares disposed of in 1981, the elections were not made in the prescribed form. [4] They claimed business investment losses which reduced their taxable incomes to nil. The appeals were allowed; the Court found the taxpayers had made valid elections as to Valuation Day value. The business investment loss deductions, if effective, resulted in no taxable income for both taxpayers. Since the taxpayers were individuals their returns did not have to be filed by any particular time unless tax was payable for the year: paragraph 150(1)(d). Accordingly there was also no time limit for the making of the elections. (See also Fisher v. M.N.R., [1988] 1 C.T.C. 2054; 88 D.T.C. 1027.) In her reasons for judgment, Kempo, T.C.J. stated at pages 2428 and 2429 (D.T.C. 1296 and 1297):

On the other hand, no authority had been submitted wherein a taxpayer had been denied elective relief specifically because a wrong, or out-dated, form had been filed. Here the respondent had been given all the substantive information required by form 12076, that is a clear written declaration of intention that they had wished to use the V-Day values. It is in this factual aspect that the case of Knight v. M.N.R., [1984] C.T.C. 2463; 84 D.T.C. 1586, is readily distinguishable.

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. The matter in Topham was a case in which it was discerned (at page 58, D.T.C. 1029) that there had been a clear parliamentary intent to make the conditions of the election "of such an imperative nature that, if not complied with, the right to the special benefits [would] be unavailable to the taxpayer". In my opinion, the requirement of Regulation 4700 was not of an imperative nature and was thus only directory. Therefore, the mere failure to use form T2076 was not fatal to the validity of an election having been made by these appellants, substantive compliance thereto having been shown.

It is clear, in my mind, the facts at bar are quite distinguishable from those in Trynor and Boyd. Firstly, there is absolutely no indication in the appellant's income tax return for 1985 it wished to elect under subsection 39(4): the appellant was not aware of the possibility of making such an election when the income tax return was filed. Secondly, unlike an individual, a corporation is to file its income tax return for the year within six months from the end of the year: paragraph 150(1)(a). Where no tax is payable by an individual for a taxation year he is not compelled to file a return of income by April 30 of the years following the taxation year; thus he need not file a form of election that is required to be filed in his return or at the same time as his return. A corporation, however, must file the return of income whether or not tax is payable by it. Bonner, T.C.J. did not find the imposition of a strict requirement to file a return, and therefore an election, on corporate taxpayers but not on individual taxpayers on the basis of the existence or nonexistence of taxability to be foreign to the scheme of the election provided for in subsection 26(7) of the Income Tax Application Rules: Fishery/. M.N.R., op cit, page 1028.

Counsel also argued that an election is additional information to be added to a tax return and by filing the election late the appellant was simply amending its return. Thus the election ought to be accepted by the respondent as a valid election. There is, as far as I am aware, only one provision in the Act which permits a taxpayer to amend an income tax return for the year which has been filed. Subsection 152(6) sets out the circumstances when returns may be amended. The addition of a form of election is not one of these circumstances.

In written submission, counsel for the appellant submitted that since the appellant reported the profit on the note in its income tax return as a Capital gain

it would have served no useful purpose for [sic] Appellant to file a subsection 39(4) election with its return of income for 1985 because it was the Appellant's position that the disposition of the security was capital in nature, and the gain was clearly a capital gain. Had the Minister accepted this view, the filing of an election under subsection 39(4) [sic] have been redundant and would possibly have caused unnecessary prejudice to the Appellant because once the election is made it is irrevocable.

The appellant need not file the election until it becomes aware the respondent will not accept the character of the gain as reported. Counsel for the appellant relied on the Fisher appeal, supra.

There are other provisions in the Act which provide for the filing of forms of elections notwithstanding it is clearly apparent from the return of income itself how the taxpayer wishes to treat an item of income. Vide, for example, sections 21, 82(3) and 85. Just because it may be obvious from the return of income how a taxpayer wishes to report a particular transaction or item of income does not in itself free the taxpayer of the necessity of filing a form of election as required.

The appellant, a corporation, was required to file its 1985 tax return within six months from the end of its fiscal year (paragraph 150(1)(a)). The appellant filed its return for 1985 on time. The appellant’s income tax return for 1985 contained all the information which the appellant intended to provide to the respondent when the return was filed. The return, when filed, contained all the information required by the respondent in order to assess. The form of election pursuant to subsection 39(4) came sometime later, after the appellant had been assessed in a manner not to its liking. Without ruling whether a subsection 39(4) form of election may be validly filed in a corporate taxpayer's return of income for a year when the return is filed late, I find that on the facts the appellant did not file a form of election on time since the form of election was not “in” the return.

Subsection 39(4) states the taxpayer's election be "in prescribed form in his return of income". The word “in” is defined by the Shorter Oxford English Dictionary on Historical Principles, as, amongst other things:

I Of position or location 1. Whether the limits or bounds of, within (any place or thing) . . . 6. Expressing relation to that which covers, clothes, or envelopes, its material, its colour, etc. = clothed in, wearing, bound in, etc . . .

II Of position. 1. Whether a certain space; op. inside a house ME. B. On the inside, within ME. . . .

Le Petit Robert defines "dans", the word used in the French version of subsection 39(4) as follows:

lo Marque le lieu. Objet rangé dans une boîte. Être dans Paris. Entrer dans sa chambre: à l'intérieur de. Monter dans une voiture . . .

The appellant’s submissions ignore what is stated in subsection 39(4). Subsection 39(4) is clear and unambiguous in both of our official languages: the election is to be made in prescribed form in the return of income. The provision is explicit and certain. While the manner of electing under subsection 26(7) of the Act and section 4700 of the Regulations to the Act may be directory rather than mandatory, the requirement in subsection 39(4) is mandatory. When Parliament writes a law, the law must have meaning. It is the function of a Canadian court to interpret the law and give the words to be interpreted in the law their normal, accepted, everyday meaning. A court should not look for ambiguity in a statute where none exists. Similarly, it is not the function of a court to add words to statutes nor is it its function to alter the intent of Parliament.

Quebec did not elect to have the promissory note to be deemed to have been a capital property owned by it in 1985 because it did not elect in prescribed form in its return of income for 1985 in accordance with subsection 39(4).

Conclusion

The appeal is dismissed.

Appeal dismissed.