Citation: 2011TCC285
Date: 20110602
Docket: 2010-3546(IT)I
BETWEEN:
ANNE BURCHAT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-3547(IT)I
AND BETWEEN:
NELSON BURCHAT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The Appellants,
who are married to each other, acquired 300 units in Fording Canadian Coal Trust
in 2006. The Appellants had two separate accounts at TD Waterhouse. One account
was in the name of both Appellants and the other account was in Anne Burchat’s
name alone. The units were acquired as follows:
Account in the names of
Nelson Burchat and Anne Burchat
|
Date
|
Number of Units
|
Purchase Price (including commission paid)
|
|
May 8, 2006
|
100
|
$4,096
|
|
August 9, 2006
|
100
|
$3,214
|
|
Total:
|
200
|
$7,310
|
Account in the name of Anne Burchat
|
Date
|
Number of Units
|
Purchase Price (including commission paid)
|
|
May 8, 2006
|
100
|
$4,106
|
|
Total:
|
100
|
$4,106
|
[2]
In
2008 Teck Cominco Limited acquired all the assets and assumed all of the
liabilities of Fording Canadian Coal Trust. As a result certain amounts were
distributed to the unitholders of Fording Canadian Coal Trust. The Appellants
received T3 slips indicating that the following amounts were to be included in their
income:
|
|
Nelson Burchat or Anne
Burchat
|
Anne Burchat
|
Total
|
|
Amount:
|
$20,659
|
$10,330
|
$30,989
|
[3]
In
filing their income tax returns for 2008, the Appellants reported the following
amounts as “other income” on line 130:
|
|
Nelson Burchat
|
Anne Burchat
|
Total
|
|
Amount:
|
$11,165
|
$21,430
|
$32,595
|
[4]
There
were also some other smaller amounts that were to be included as “other income”
for 2008. It is obvious, and it was not disputed by the Respondent, that all of
the amounts that were indicated as income on the T3 slips were reported by the
Appellants. Anne Burchat reported all of the amount from the T3 slip for the
investment in Fording Canadian Coal Trust held in the account in her name alone
and one-half of the amount for the investments held in the other account.
Nelson Burchat reported one-half of the amount from the T3 slip for the
investment in Fording Canadian Coal Trust held in the account that was in both
their names.
[5]
The
Appellants (who are 81 and 82 years old) do not understand why they are not
entitled to treat the amount received in relation to the transactions between
Fording Canadian Coal Trust and Teck Cominco Limited as proceeds of disposition
of a capital asset and therefore report a capital gain in the amount equal to
the difference between the amount received and the amount they paid for the
units. One-half of the capital gain would then be included in income as a
taxable capital gain. They filed notices of objection that raised this issue.
[6]
In
the Notification of Confirmation by the Minister that the Appellants received
in response to their Notices of Objection, the only explanation that was
provided in relation to why the amounts were to be included in income was the
following:
[y]ou have not shown
that $10,329.56 is a capital gain according to paragraphs 38(a), 39 (1)(a), and
40(1)(a). It has been included in your income according to section 3.
[7]
Stating
that an amount has been included in income under section 3 of the Income Tax
Act (the “Act”) is of no assistance in explaining why an amount has
been included in income as this is the general section that determines that
income is to be determined in accordance with the Act.
[8]
It
seems to me that the Appellants are simply seeking an explanation of why an
amount received in relation to the termination of an investment that the
Appellants had purchased on the stock exchange should be reported as income and
not as a capital gain.
[9]
In
order to answer this question it seems to me that it is very important to
understand the nature of the investment that the Appellants had made in the
units of Fording Canadian Coal Trust. These were units of a trust, not shares
of a corporation. The tax treatment of a trust is different from that of a corporation.
The assets of the trust are held for the benefit of the beneficiaries, which,
in this case, would be the holders of the units of the trust. A trust is taxed
as an individual (subsection 104(2) of the Act), which means that a
trust will file its own tax return and pay taxes on its income. If any part of
the income earned by a trust is payable in the year to a beneficiary, the trust
is entitled to deduct the amount of such income in determining its income for
the purposes of the Act (subsection 104(6) of the Act) and that
beneficiary will include the amount of such income in his, her or its income
for the purposes of the Act (subsection 104(13) of the Act).
[10] There was very little
information that was presented at the hearing in relation to the transactions
between Fording Canadian Coal Trust and Teck Cominco Limited or how the amount
included on the T3 slips that were sent to the Appellants was determined.
However, it does appear, based on the limited information that was submitted during
the hearing, that the principal assets of Fording Canadian Coal Trust may have
been Canadian resource properties as defined in subsection 66(15) of the Act.
In particular, the definition of Canadian resource property provides that:
“Canadian resource property” of a
taxpayer means any property of the taxpayer that is
…
(b) any right, licence or privilege to
…
(ii) prospect, explore,
drill or mine for minerals in a mineral resource in Canada,
…
(f) any real property in Canada the principal value of which depends on its mineral
resource content (but not including any depreciable property), or
[11] Subsection 248(1) of the
Act provides that “mineral” includes coal and “mineral resource” means,
among other things, a coal deposit. Paragraph 39(1)(a) of the Act
provides that a person will not have a capital gain as a result of a sale of a
Canadian resource property as such a property is not included, pursuant to
subparagraph 39(1)(a)(ii) of the Act, as a property that, if sold for a
gain, would result in such gain being a capital gain. A disposition of a
Canadian resource property, if sold for sufficient proceeds, will result in an
income gain, not a capital gain. Any amount received on the sale of a Canadian
resource property that is described in paragraphs (b) or (f) of the definition
of Canadian resource property referred to above, will be deducted in
determining the cumulative Canadian development expense of the holder of that
property as it will be included in F in the formula as set out in the
definition of cumulative Canadian development expense in subsection 66.2(5) of
the Act. If the amounts deducted on a cumulative basis in determining
the cumulative Canadian development expense (including any amount for F) exceed
the amounts added on a cumulative basis in determining the cumulative Canadian
development expense then the resulting surplus is income as provided in
paragraph 59(3.2)(c) and subsection 66.2(1) of the Act.
[12] It would appear that
since Teck Cominco Limited acquired the assets of Fording Canadian Coal Trust
that Fording Canadian Coal Trust realized significant gains on the disposition
of its Canadian resource properties and hence significant income gains. Any
part of the income of Fording Canadian Coal Trust, as a trust, that was payable
to its beneficiaries would have been deductible by Fording Canadian Coal Trust
in determining its income for the purposes of the Act and included by
the beneficiaries in determining their income for the purposes of the Act.
As holders of trust units in Fording Canadian Coal Trust the Appellants were beneficiaries
of this trust and therefore they would have been required to report their share
of the income realized by Fording Canadian Coal Trust on the disposition of its
Canadian resource properties. The T3 slips that the Appellants had received
simply reflected the amount of the income realized by Fording Canadian Coal
Trust that was payable to them.
[13] The Replies that were
filed in these Appeals are identical, except with respect to such changes as
were required to reflect the amounts reported by each Appellant. In paragraph 9
of the Reply in relation to the Appeal of Nelson Burchat, it is stated
that:
9. In determining
the appellant's tax liability for the 2008 taxation year, the Minister made the
following assumptions of fact:
(a) the appellant
and his wife owned 300 shares of Fording Canadian Coal Trust (“Fording Trust”):
200 of those units were jointly held by the appellant and his wife at 50-50 and
the other 100 units were solely held by the wife;
(b) the appellant
and his wife received other income in the amount of $30,988.69 and return of
capital in the amount of $273.71 from Fording Trust in the 2008 taxation year;
(c) the other
income in the amount of $30,988.69 and return of capital in the amount of
$273.71 distributed by Fording Trust were a result of an arrangement that took
effect on October 30, 2008 involving the acquisition of the assets and
liabilities of Fording Trust by Teck Cominco Limited;
(d) of total other
income distributed, an amount of $20,659.13 pertained to the 200 Fording Trust
units and an another of $10,329.56 pertained to the 100 Fording Trust units;
(e) a T3 slip and Summary
of Trust Income relating to other income of $30,988.69 and return of capital
$273.71 were issued by TD Waterhouse, the appellant's agent for investment;
(f) the T3 slip
and Summary of Trust Income stated the amount of $30,988.69 as “other income” in
box 26;
(g) Fording Trust
directed all financial institutions, including TD Waterhouse, that the
consideration paid to its unit holders be taxed as mostly “other income” in box
26 with a small portion as “return of capital” in box 42;
(h) the appellant
reported 50% of the $20,659.13 with respect to the 200 units of Fording Trust as
“other income” on line 130 of his tax return for the 2008 taxation year; and
(i) the amount of $30,988.69
distributed to the appellant and his wife is “other income” as prescribed by
Fording Trust.
[14] Under the heading
“STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT” in the Reply it is
stated that:
11. He relies on
sections 3, 9, 108, 118 and 126 of the Act, R.S.C. 1985, c.1, (5th
Suppl.) as amended (the “Act”).
12. He submits that the
Minister properly assessed the appellant’s income in respect of his 2008
taxation year in accordance with sections 3, 118, and 126 of the Act.
13. He further submits
that the amount of $30,988.69 distributed to the appellant and [sic] her
husband represents “other income”, and the Minister has correctly assessed the
appellant's income from [sic] the Fording Trust units in such a way that
the income was reported by Fording Trust in the 2008 taxation year.
[15] The statutory references
in the Replies are not relevant and are misleading in this particular case. As
noted above it appears that the amount that the Appellants should have reported
and did report as income were related to the income amounts payable to them as beneficiaries
of the Fording Canadian Coal Trust. However, none of these sections listed in
the Replies would require the Appellants to include in their income, any
amounts of income of a trust that were payable to them as beneficiaries of that
trust. Paragraph 12(1)(m) and subsection 104(13) of the Act would
require such amounts to be included in income but there is no reference to either
one of these provisions in the Replies. There is no reference in the Replies to
the requirement that beneficiaries of a trust must include in their income, any
amount of income payable by that trust to such beneficiaries. The basis for the
assessment is stated to be sections 3, 118 and 126 of the Act. To add
further confusion, the first reference to the investment in the paragraph that
lists the assumptions of fact, describes the investment as “shares of Fording
Canadian Coal Trust” and in paragraph 9(g) there is a reference to the
“consideration paid” which would suggest that the amount paid was proceeds of
disposition.
[16] Section 3 is a general
section of the Act that does not provide any assistance to any person in
determining why an amount is required to be included in income. Section 118 of
the Act provides personal tax credits that are available to individuals.
There would be nothing in section 118 that would require the amounts received
by the Appellants from Fording Canadian Coal Trust to be included in income. Section
126 of the Act provides a foreign tax credit. Both sections 118 and 126
provide credits that may be deducted in determining taxes payable – they do not
provide for amounts to be included in income by beneficiaries of a trust. Sections
118 and 126 of the Act have no relevance to the issue in this appeal and
would mislead any self-represented taxpayer. It appears as if random unrelated
section numbers were included as part of the basis for the assessment.
[17] The references to
sections 9 and 108 in paragraph 11 are equally of little assistance to anyone
reading the Replies. Section 9 is the general section related to income from a
business or property and provides that a taxpayer’s income from a business or
property is the taxpayer’s profit from such business or property. While section
108 at least does relate to a trust, it only sets out various definitions and
includes other subsections that are not relevant in this matter.
[18] The appeal was heard on
a Wednesday. On Monday of the same week counsel for the Respondent realized
that the sections that were referred to in the Replies were not relevant in
relation to this matter and that the relevant sections were not included among
those sections that were listed. She informed the Appellants that she would be asking
to amend the Replies. The Appellants did not see the proposed amended Replies until
the commencement of the hearing as they had to travel approximately 100 miles
to attend the hearing and therefore had left their home prior to the time that
the Respondent could send them a copy of the proposed amended Replies. Prior to
the commencement of the hearing, counsel for the Respondent made the request to
amend the Replies.
[19] The request to amend the
Replies was denied. In Burton v. The Queen, 2006 FCA 67, [2006] 2 C.T.C. 286,
2006 DTC 6133, the Federal Court of Appeal addressed the situation where a
request had been made at the commencement of the hearing to amend the Reply.
There was no advance notice of the proposed amendment nor was there any formal
motion. Justice Rothstein (as he then was) writing on behalf of the Federal
Court of Appeal, stated as follows:
11 The
appellant says that the Tax Court judge should have refused the Minister's
application to file an amended Reply on the morning of the trial. In not doing
so and in offering him only the choice of a short recess or adjournment, there
was breach of the rules of procedural fairness. He relies on the decision of
Bowman A.C.J.T.C. (as he then was) in Poulton v. R., [2002] 2 C.T.C.
2405. In Poulton, after citing authority to the effect that the Court
will normally be permissive in granting leave to amend pleadings, Bowman
A.C.J.T.C. explained why he refused to allow the amendment in that case.
12 As I
understand his reasoning, Bowman A.C.J.T.C. was of the view that in cases
governed by the informal procedure, the Tax Court should not always be willing
to grant a motion by the Crown "at the eleventh hour to spring a brand new
argument on a taxpayer". Where an adjournment results "in undue
delay" of "relatively small informal appeals", the Tax Court judge
must carefully exercise his or her discretion in deciding whether to allow the
amendment and the consequent adjournment. He notes that in informal appeals,
denying the Crown the opportunity to amend at the last minute would not result
in a "jurisprudential or fiscal catastrophe".
13 At
paragraphs 16, 17 and 18 Bowman A.C.J.T.C. wrote:
16. Why then did I not allow the amendment
here as was done in the above cases? Well, there is a world of difference
between large public corporations, and multinationals with batteries of senior
counsel to protect them and millions of dollars at stake and small taxpayers,
unrepresented by lawyers, with relatively small amounts of money in issue.
17. Procedural fairness requires that in
cases governed by the informal procedure the Crown not be permitted at the 11th
hour to spring a brand new argument on a taxpayer. Had the appellants known
from the outset or at least a reasonable time before trial that the Crown was
going to rely on paragraph 6(1)(b) their approach might have been entirely
different and they could have called evidence to rebut the assertion that the
amounts were "allowances" within the meaning of paragraph 6(1)(b) or
that they were exempted from the operation of that paragraph by subsection
6(6). Had I granted the Crown's motions and allowed the amendment the
appellants would have been entirely justified in requesting an adjournment and
this would have resulted in an undue delay of these relatively small informal
appeals. I cannot emphasize too strongly that it is of consummate importance
that the court in the informal procedure be vigilant to ensure that the
unrepresented taxpayer not be deprived of procedural fairness.
18. I quite agree that by denying the
Crown's motion to amend to refer to paragraph 6(1)(b) I may have deprived it of
what might be a very potent argument. However the Crown's loss of these appeals
because it slipped up and failed to refer to a provision that might have helped
it is not, in the scheme of things, a jurisprudential or fiscal catastrophe.
What is far more important is that unrepresented taxpayers in the informal
procedure be given every benefit of procedural fairness. To force them to
confront the complexities of paragraph 6(1)(b) and subsection 6(6) on the eve
of trial would do the administration of justice irreparable damage.
14 The
question of whether to allow an amendment to pleadings and if so whether a
recess or adjournment is appropriate is, of course, a matter of discretion. I
do not read Bowman A.C.J.T.C. to purport to lay down fixed rules for dealing
with such occurrences. However I do think he was providing some guidance as to
the practical considerations to be taken into account by a Tax Court judge in
exercising discretion in these cases.
…
17 The
relevant considerations are, first, that the taxable benefits at issue are
$6,348.00 for the year 2000 and $4,801.00 for the year 2001. The amounts of tax
involved are of course, only a percentage of these figures -- according to the
appellant about forty percent. The amounts involved therefore are relatively
small.
18 Second,
the matter involved taxation years that were some four and five years old at
the time of trial.
19 Third,
the appellant is self-represented. He was justified in expecting that the
Minister's original Reply was the basis for the assessment and restricting his
preparation to the statutory provisions relied upon by the Minister in that
Reply. Section 6 of the Income Tax Act is drafted in a manner that contains
exceptions and exceptions to exceptions and is therefore not straightforward.
This is not a case in which the Minister's error in not referring to paragraph
6(1)(l) in the original Reply was self-evident and in respect of which, the
appellant should have anticipated an amendment.
[20] In this case Counsel for
the Respondent had written to the Court the day before the hearing to advise
that a request would be made to amend the Replies. The Appellants, however, did
not receive copies of the amended Replies until just before the commencement of
the hearing.
[21] Justice Rothstein
indicated that the relevant considerations in Burton, referred to above, were the
amount of income in dispute, the length of time from the taxation years in
dispute to the date of hearing and the fact that the Appellant was self-represented.
[22] In this case, the
Appellants submitted that they should be entitled to claim a capital gain in
relation to the amount that they had received. Since there were two separate
accounts, the adjusted cost base of the 100 units held in the account in Anne
Burchat’s name will be calculated separately from the adjusted cost base of the
200 units held in the other account. The adjusted cost base of the 100 units
held in the account in Anne Burchat’s name was $4,106. The adjusted cost base
of the 200 units held in the other account was $7,310 and therefore the
adjusted cost base of each unit held in that account was $7,310 / 200 = $36.55.
[23] Anne Burchat reported
all of the amount received in relation to the 100 units held in the account in
her name and one-half of the amount received for the units in the other account
and this was not challenged or questioned by the Respondent, although this may have
related to the lack of knowledge on the part of the Respondent in relation to
the facts related to the accounts, which were apparently not disclosed until
the hearing. If the amounts received would have been proceeds of disposition of
a capital property, the amounts that the Appellants would be claiming as the
amounts that should have been included in their incomes as taxable capital
gains (also based on two-thirds of the amount being reported by Anne Burchat)
would be the following:
|
|
Nelson Burchat
|
Anne Burchat
|
|
Proceeds:
|
$10,312
|
$20,624
|
|
Adjusted cost base:
|
$3,655
|
$7,761
|
|
Capital Gain:
|
$6,657
|
$12,863
|
|
Taxable capital gain:
|
$3,328
|
$6,432
|
[24] This would result in
total proceeds of $30,936 ($10,312 + $20,624). The amounts as shown on the T3
slips (and therefore the amounts reported as income) were slightly greater.
Based on the amounts as shown on the T3 slips and using the same allocation,
the following were the amounts reported by each of the Appellants and assessed
by the Canada Revenue Agency:
|
|
Nelson Burchat
|
Anne Burchat
|
Total
|
|
Amount:
|
$10,330
|
$20,659
|
$30,989
|
[25] As a result the income
amounts in dispute in this case are the following:
|
|
Nelson Burchat
|
Anne Burchat
|
|
Amount assessed:
|
$10,330
|
$20,659
|
|
Taxable capital gain amount:
|
$3,328
|
$6,432
|
|
Difference (amount in dispute)
|
$7,002
|
$14,227
|
[26] In the Burton case the income amounts
in dispute were $6,348 for one year and $4,801
for another year or $11,149 over two years for one taxpayer. In this appeal
there are two taxpayers and the amount for one Appellant is less than the total
amount in dispute in Burton and the amount for the other Appellant is
$3,078 more than the total amount in dispute in Burton. In
my opinion, this greater amount is not significant enough to distinguish the Burton
case.
[27] In Burton the taxation years
under appeal predated the hearing date by 4 and 5 years. In this appeal the
taxation year in issue was 2008 which was three years prior to the hearing
date. This is not sufficient to distinguish Burton.
[28] In both the Burton case and this appeal, the taxpayers were
self-represented. It seems to me that this is an important consideration. The
random unrelated collection of section references in the Replies in this case
would be bound to add confusion and frustration to any self-represented
litigant. How reading sections 118 and 126 of the Act would assist the
Appellants in this appeal is inexplicable.
[29] As noted above, the
request to amend the Replies was denied. Counsel for the Respondent then asked
for an adjournment. The Appellants, as noted above, are 81 and 82 years old. Nelson
Burchat stated that they had to drive approximately 100 miles to attend the hearing
and had to arrive the day before. The Replies in these appeals were filed on
January 31, 2011, approximately 3 months after the Notices of Appeal were filed
on October 29, 2010 and more than 3 and one-half months before the scheduled
hearing date. The Respondent had plenty of time to prepare and review the Replies.
The amounts in issue in these appeals are small. The request to adjourn was
denied.
[30] As a result, the
assessment of the Appellants cannot be sustained based on the random unrelated
sections referred to in the Replies as the basis for the assessment. The
Appellants are therefore to be reassessed to reduce their incomes to the
amounts that would be included in their incomes if the amounts received were to
be treated as proceeds of disposition of a capital property with a resulting
capital gain, after the amount paid for the units is taken into account.
[31] During the course of the
hearing, Nelson Burchat was clear that the account in both of their names was
his account and that his wife’s name was only added so that she could have
signing authority. It appears therefore that she did not have any property
interest in the investments held in this account and there does not appear to
be any basis for Anne Burchat to report income earned in relation to the
investments in this account. Even if she did have a property interest, the
attribution rules in sections 74.1 and 74.2 of the Act may apply. In
this case, the Respondent did not make any submissions in relation to the
allocation of one-half of the income earned in relation to the investments held
in the account in both their names and in the Replies the Respondent assumed
that the investments in this account were held equally by the two of them.
[32] In Pedwell v. The Queen, 2000 DTC 6405,
[2000] 3 C.T.C. 246, Justice Rothstein, writing on behalf of the Federal
Court of Appeal, stated as follows:
15 While
the parties referred to a number of older authorities on the issue, Continental
Bank of Canada now makes it clear (subject to subsection 152(9) which applies
to appeals disposed of after June 17, 1999 and is not relevant here in any
event) that the Minister is bound by his basis of assessment. While this case
does not involve the Minister advancing a different basis of assessment,
I think the principle in Continental Bank of Canada is applicable to a judicial
determination on a basis different from that in the notice of reassessment.
16 First,
if the Crown is not able to change the basis of reassessment after a limitation
period expires, the Tax Court is not in any different position. The same
prejudice to the taxpayer results - the deprivation of the benefit of the
limitation period. It is not open to that Court or indeed this Court, to
construct its own basis of assessment when that has not been the basis of the
Minister's reassessment of the taxpayer.
17 Second,
while it is open to the Minister to change the basis of assessment before the
limitation period expires, where he does not do so, in my respectful opinion,
the Tax Court Judge is bound by the assessment at issue before the Court.
Fairness requires that the taxpayer be given a reasonable opportunity to
contest a new basis of assessment. If the Tax Court Judge decides on a basis of
assessment not at issue during the court proceedings, the taxpayer is deprived
of that opportunity.
18 Here,
on his own motion, the Tax Court Judge, in his decision and after the
completion of the evidence and argument directed to the Minister's basis of
assessment, changed the basis of that assessment without the appellant having
the opportunity to address the change. This is clear because the Tax Court
judgment allowed the appellant's appeal, i.e. found that there was no
appropriation of property which was the basis of the Minister's assessment, but
then referred the matter back to the Minister to reassess on the basis that the
Euler proceeds and the Landpark deposit were appropriated. What has taken place
is tantamount to allowing the Minister to appeal his own reassessment.
19 I do
not say that the Minister cannot assess in the alternative. However, that was
not done here.
[33] While subsection 152(9) of the Act (to which
Justice Rothstein refers) may have been available to the Minister to advance an
alternative argument in support of the reassessment of the Appellant, this
subsection is only available if the Minister advances such alternative
argument. Since the Minister did not advance any alternative argument to
include all of the income earned on the investments held in the account that
was in both of their names in Nelson Burchat’s income, it is not open for me to
do so. As a result, no adjustment will be made to the allocation of the amounts
as between the two Appellants.
[34] As a result, the
adjustments that will be made to the income of the Appellants is as follows:
|
|
Nelson Burchat
|
Anne Burchat
|
|
Amount assessed:
|
($10,330)
|
($20,659)
|
|
Taxable capital gain:
|
$3,328
|
$6,432
|
|
Amount of the reduction in
income:
|
$7,002
|
$14,227
|
[35] The appeals are therefore
allowed and the matters are referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that Anne Burchat’s income
for 2008 is reduced by the amount of $14,227 and Nelson Burchat’s income for
2008 is reduced by the amount of $7,002.
[36] The Respondent shall pay
each Appellant the amount of $300 in costs.
Signed at Halifax, Nova
Scotia, this 2nd day
of June 2011.
“Wyman W. Webb”
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