Citation: 2008 TCC 358
Date: 20080703
Docket: 2005-2731(IT)G
BETWEEN:
CHRISTIANE ST-JEAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal from
a reassessment made on July 26, 2004, and confirmed on May 20, 2005, in respect of the 2001 taxation year.
[2]
The Minister submits
that the issues are as follows:
(a)
Did the immovable constitute former business
property immediately before its disposition?
(b)
If the Court finds that the immovable constituted
former business property, can the Appellant designate a portion of that
property for the purposes of subsection 44(1) of the Act?
[3]
In making and confirming
the assessment under appeal, the Minister relied on the following assumptions
of fact, most of which were admitted by the Appellant:
[TRANSLATION]
(a)
The Appellant holds 100% of the shares of 9010-9109
Québec Inc., a management corporation (hereinafter "the Management Corporation").
(admitted)
(b)
The Management Corporation holds 100% of the
shares of Re/Max Carrefour Duplessis Inc. (hereinafter "Re/Max"). (admitted)
(c)
Re/Max operates a real estate brokerage
business. (admitted)
(d)
On March 8, 2001, the Appellant purchased an
immovable from the Management Corporation. (admitted)
(e)
The immovable purchased from the Management Corporation
("the Immovable") is lot 1696992 in the cadastre of Quebec, registration division of Québec. (admitted)
(f)
The Appellant purchased the Immovable for $400,000.
(admitted)
(g)
The adjusted cost base of the Immovable is $400,887.
(admitted)
. . .
(j)
The Immovable has an area of roughly 8444 square
metres. (admitted)
. . .
(p)
The area of the lot is approximately 6023 square metres. (admitted)
(q)
The Minister determined that the taxable capital
gain from the disposition of the Immovable was $81,944, calculated as follows:
|
Proceeds of
disposition:
|
$564,775
|
|
Adjusted cost
base:
|
$400,887
|
|
Capital gain
|
$163,888
|
|
Taxable capital gain (50%)
|
$81,944
|
(r)
For her part, the Appellant reported a taxable
capital gain of $26,539, calculated as follows:
|
Proceeds of
disposition:
|
$564,775
|
|
Adjusted cost
base:
|
$551,696
|
|
Capital gain:
|
$53,079
|
|
Taxable
capital gain (50%)
|
$26,539
|
. .
.
[4]
As for the other facts,
they were either denied, or the Appellant claimed to have no knowledge of them:
Facts that were denied:
[TRANSLATION]
. . .
(h)
The Immovable has not been the subject of a
cadastral subdivision. (denied)
(i)
The Immovable is a vacant lot. (denied)
. . .
(k)
The Immovable has never been used to earn
business income. (denied)
(l)
On April 3, 2001, the Appellant sold the
Immovable to 3589711 Canada Inc. (denied)
(m)
The Appellant sold the Immovable for $564,775. (denied)
(n)
On April 5, the Appellant purchased
another immovable, "the Lot", for $389,024.88. (denied)
(o)
The adjusted cost base of the Lot is $396,758. (denied)
No knowledge:
[TRANSLATION]
(s)
In order to arrive at her adjusted cost base of
$511,696, the Appellant divided the cost of the Immovable and added the cost of
the Lot, as calculated below:
|
ACB of
Immovable
$400,887 X 6 024 m2 = $285,994
8 444 m2
|
$400,887
($285,994)
$114,938
|
$114,938
|
|
ACB of Lot
|
|
$396,758
|
|
ACB
|
|
$511,696
|
14. In
addition to the factual assumptions relied on by the Minister, the Deputy
Attorney General is relying on the following facts:
(a)
In 2004, the Appellant disposed of a portion of
the Lot acquired on April 5, 2001.
(b)
In arriving at the adjusted cost base in
calculating the capital gain on the Lot, the Appellant did not use the calculations that she herself had done
in connection with the disposition of the Immovable in 2001.
[5]
The issues are as
follows:
·
Did the immovable constitute
former business property immediately before it was disposed of?
·
If the immovable did not
constitute former business property, did the Minister correctly determine the
Appellant's taxable capital gain to be $81,944?
·
In the alternative, if
the Court finds that the immovable constituted former business property, is the
capital gain calculation proposed by the Appellant consistent with the Act?
Respondent's claims and arguments
[6]
The Respondent is
relying on section 38 and subsections 39(1), 44(1), 152(4.3) and 248(1) of the
Act.
[7]
She submits that, immediately
prior to its disposition, Lot #1 did not constitute "former business
property" within the meaning of subsections 44(1) and 248(1) of the Act.
[8]
That being the case, she
submits that she calculated the taxable capital gain on the sale of Lot #1 correctly in accordance with subsection 38 of the
Act.
[9]
In the alternative,
even if the Court determines that Lot #1 was, immediately prior to its
disposition, former business property, which she denies, she submits that
the Appellant's proposed calculation of the capital gain is erroneous.
[10]
The Respondent denies
that subsection 44(1) applies; however, if it does apply, she submits
that the Appellant was not entitled to divide, as she did, the cost of Lot #1 in calculating the adjusted cost base.
[11]
Subsection 44(1) deals
solely with the question of former business property and replacement property.
It contains no reference to the disposition of a portion of a property, or to
the possibility of taking account of only a portion of the proceeds of
disposition.
[12]
Nothing in the Act
permits the Appellant to artificially increase the adjusted cost base of the lot
sold in order to take account of the area of the old lot in relation to the
area of the new lot.
[13]
The Respondent submits
that Lot #1 is not former business property because it was not "used"
for the purpose of gaining or producing income from a business.
[14]
She submits that the
mere fact of setting up a billboard announcing that the site would be the
future home of the business is not sufficient to conclude that the lot was
"used" for the purpose of gaining or producing business income.
[15]
Further, she submits
that, although preparatory work was commenced, and the expenditures on that
work were deductible or capitalizable, this does not mean that the lot was used
for the purpose of gaining or producing business income.
[16]
In her submission, a vacant
lot cannot be used by a real estate brokerage business for the purpose of
gaining or producing business income.
[17]
The Respondent admits
that the Appellant intended to set up her business on the lot, but maintains that
this is not sufficient. In support of her interpretation, she cites Glaxo
Wellcome, stating that the word "used" does not mean the same
thing as "intended to be used".
[18]
Moreover, the
Respondent submits that since section 44 is an exception to the general rule
that capital gains are taxed, all of its conditions must be met in order for
the taxpayer to be able to benefit from it. Her argument also relies on Edwynn Holdings
Ltd. v. Minister of National Revenue, 89‑906(IT), 1989 CarswellNat
434, [1990] 1 C.T.C. 2108, 89 D.T.C. 720.
The relevant parts of that decision are as
follows:
11. However the appellant, counsel
submits, is not entitled to the replacement property rollover because the Act
requires that the former business property must be an interest in real
property, that subsection 44(1) is an exempting provision in which the
appellant must fit within all of its four corners, Aubry v. The Queen,
[1976] C.T.C. 598 at 600, 76 D.T.C. 6343 at 6344 (F.C.T.D.) , that as
there are no ambiguities in the provision the words must be construed according
to their ordinary and natural meaning; and that there is nothing cloudy or
obscure in the notion of an interest in real property.
14. It is my view that the
submissions of counsel for the respondent are to be preferred and are adopted
as being the correct approach to be taken here.
The decision was considered in Grove
Acceptance Ltd. v. The Queen, Docket No. 2000‑4726(IT)G,
October 30, 2002, [2003] 1 C.T.C. 2377, 2002 D.T.C. 2172:
14.
Sections 13 and 44 are exceptional provisions.
Normally, when a property is disposed of, there is capital gain (almost $2
million in this case) and a deferred recapture of almost $300,000. Normally, a
taxpayer has to pay the tax on the capital gain and has to pay the tax on the
recapture. This is an exceptional provision allowing for deferrals. Indeed,
this Court has said that, in the case of Edwynn Holdings Ltd. v.
Minister of National Revenue, [1990] 1 C.T.C 2108, it allows a person to
essentially defer tax that should otherwise be paid at that time. As a result,
the taxpayer has to fit within the four corners of the provisions.
[19]
For her part, the
Appellant cited several elements in support of her challenge. First of all,
she specified the grounds of her challenge in her Notice of Appeal, notably at
paragraphs 7 et seq. thereof, which read as follows:
[TRANSLATION]
. . .
TAX TREATMENT APPLIED BY THE APPELLANT
7. A portion of
the lot sold (the “SERT lot”), corresponding to the area of the lot purchased ("the
Roussin lot") was designated as "former business property" for
the purposes of section 44(1).
8. The disposition of
the second part of the lot sold ("the SERT lot"), which was not
considered former business property, and which corresponds to the remaining area,
namely, 2421.2 square metres, was considered a capital gain.
9.
The full amount of the proceeds of disposition from
the "SERT lot" portion, which was designated as "former business
property", and in respect of which the election was made, was applied to
the purchase of the new "Roussin lot".
10.
The deferral of the capital gain, which is permitted
by section 44(1), is consistent with the Act.
POINTS IN ISSUE
11.
The Appellant submits that the Canada Revenue
Agency's decision to disallow her election, under section 44 of the ITA, to defer
the taxation of the capital gain on the disposition of the "SERT lot"
portion, which constitutes former business property, when replacement property,
in this instance the "Roussin lot", is acquired, was not
justified.
12.
The CRA claims that the "SERT lot" is
not former business property within the meaning of subsection 248(1); the decision in Glaxo Welcome, on which the CRA is
relying, pertains to an "unused" vacant lot that was held for 14
years for the eventual expansion of the business, and is therefore not
appropriate.
13.
The CRA claims that the "SERT lot" is
not the same business property as defined in subsection 44(1).
14.
The CRA is improperly interpreting the law
regarding the disposition of replacement property, and did not substantiate its
decision.
15.
The Appellant intends to show, through a
question of actions, that the "SERT lot" was former business property
as defined in subsection 248(1).
16.
The "SERT lot" was acquired and used
solely for the purpose of erecting, in the very short term, a building to house
the operations of RE/MAX ACCÈS Inc. in the course of its business
activities. The acquisition process and the other transactions related to the
eventual implementation and use of capital property in connection with the
business are an integral part of the operations of the business, as are the
plans and specifications associated therewith. Consequently, the lot constitutes
former business property, and the intention and the facts demonstrate this.
17.
The definition of "property" is not
restrictive. The election, justified and made in respect of a portion of a
property in such a manner that the "former business property"
has the same characteristics as the "replacement property",
meets the objectives of subsection 44(1). A similar tax treatment has
already been considered and accepted in other situations.
18.
The Appellant intends to show, through an expert
witness, that the "SERT lot" is the same business property as defined
in subsection 44(1).
. . .
[20]
At the Court's request,
the parties submitted their arguments in writing. At that stage, the Appellant
argued as follows:
[TRANSLATION]
The Minister has not shown that the designation of a portion of Lot #1,
having the same qualitative and quantitative characteristics as Lot #2 (the replacement property), as
"former business property", did not comply with the requirements of
subsection 44(1).
Moreover, the Minister has not shown that the absence of a cadastral
subdivision rules out any partial disposition of property. He fails to explain
how the treatment of the excess area of a lot subjacent to a principal residence
can warrant a distinct tax treatment, in the absence of an appropriate
subdivision.
The testimony and the explanations provided by Mr. Kirk in
reference to paragraph 27 of Interpretation Bulletin IT‑259 pertain to
two former business properties replaced by a single property and are therefore
not relevant here.
[21]
Based on these
arguments, the Appellant concludes the following:
[TRANSLATION]
The acquisition of Lot #1 was a business transaction
and an essential prelude to the construction of a building. The work done on Lot #1 is an activity that was a regular
part of the transformation process that was to result, in the short term, in
the relocation of the operations of RE/MAX ACCÈS. Lot #1 is unquestionably
"business property". The rules set out in subsection 44(1)
permit taxpayers who have disposed of property to defer the tax
consequences and relocate their businesses elsewhere without having to incur the
consequences immediately. The Appellant submits that only such portion of
Lot #1 as has the same dimensions as Lot #2 was the subject of an election in keeping with
subsection 44(1).
[22]
The evidence did not
disclose any important new facts; the relevant facts are relatively well
summarized in the Notice of Appeal, and were, for the most part, admitted.
[23]
Above all, the
Appellant's testimony provided context and the reasons for the various
transactions that gave rise to this tax litigation.
[24]
To summarize, the Appellant
began by acquiring the first immovable, with the specific intent of building
thereon the headquarters of the business that she controlled. This was the
transaction of March 8, 2001, which pertained to lot 1696992 of the cadastre
of Quebec, registration division of Québec.
[25]
The lot contiguous to
the Appellant's was to be used for a shopping mega-centre. Following
discussions and negotiations with the mega-centre promoters, it was agreed that
it was in the parties' interests, and to their benefit, to consider relocating the
Appellant's project, as this would ensure that the site to be used for the
shopping centre project and the nearby administrative centre for the business
that the Appellant controlled would be more cohesive.
[26]
In other words, as part
of the planning for a new administrative centre, the Appellant initially
purchased a lot of a certain size, which she then sold because the intentions
of the owner of a contiguous lot caused her interest to lessen.
[27]
She therefore sold the
first lot, and acquired a second lot that was smaller but was located in the
same area, and fit in better with all the projects that were going to be built on
the site.
[28]
This sale and purchase
enabled the owners of the contiguous lots to carry out their respective projects
in a manner that was more consistent with their respective expectations, while
ensuring better relations at the same time.
[29]
No major
income-generating work was done on the first lot; there were simply one or more
indications that the site would eventually be used to construct a building
from which the Appellant's business would be run.
[30]
Further to the two
transactions, which involved the two lots, the Appellant seeks to avail
herself of the tax benefit contemplated in subsection 44(1) and thereby defer
part of the gain realized on the sale of the first lot.
44. Exchanges of property
(1) 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 either
(a) property the proceeds of disposition of
which are described in paragraph (b), (c) or (d) of the
definition "proceeds of disposition" in subsection 13(21) or
paragraph (b), (c) or (d) of the definition "proceeds
of disposition" in section 54, or
(b) a property that was, immediately before the
disposition, a former business property of the taxpayer,
and the taxpayer has
(c) where the former property is described in
paragraph 44(1)(a), before the end of the second taxation year following
the initial year, and
(d) in any other case, before the end of the
first taxation year following the initial year,
acquired a capital property that is a replacement property for the
taxpayer's former property and the replacement property has not been disposed
of by the taxpayer before the time the taxpayer disposed of the taxpayer's
former property, notwithstanding subsection 40(1), if the taxpayer so elects
under this subsection in the taxpayer's return of income for the year in which
the taxpayer acquired the replacement property,
(e) the gain for a particular taxation year
from the disposition of the taxpayer's former property shall be deemed to be
the amount, if any, by which
(i) where the particular year is the initial year, the lesser of
(A) the amount, if any, by which the proceeds of disposition of the
former property exceed
(I) in the case of depreciable property, the lesser of the proceeds
of disposition of the former property computed without reference to subsection
44(6) and the total of its adjusted cost base to the taxpayer immediately
before the disposition and any outlays and expenses to the extent that they
were made or incurred by the taxpayer for the purpose of making the
disposition, and
(II) in any other case, the total of its adjusted cost base to the
taxpayer immediately before the disposition and any outlays and expenses to the
extent that they were made or incurred by the taxpayer for the purpose of
making the disposition, and
(B) the amount, if any, by which the proceeds of disposition of the
former property exceed the total of the cost to the taxpayer, or in the case of
depreciable property, the capital cost to the taxpayer, determined without
reference to paragraph (f), of the taxpayer's replacement property and
any outlays and expenses to the extent that they were made or incurred by the
taxpayer for the purpose of making the disposition, or
(ii) where the particular year is subsequent to the initial year,
the amount, if any, claimed by the taxpayer under subparagraph 44(1)(e)(iii)
in computing the taxpayer's gain for the immediately preceding year from the
disposition of the former property,
exceeds
(iii) subject to subsection 44(1.1), such amount as the taxpayer
claims,
(A) in the case of an individual (other than a trust), in prescribed
form filed with the taxpayer's return of income under this Part for the
particular year, and
(B) in any other case, in the taxpayer's return of income under this
Part for the particular year,
as a deduction, not exceeding the lesser of
(C) a reasonable amount as a reserve in respect of
such of the proceeds of disposition of the former property that are payable to
the taxpayer after the end of the particular year as can reasonably be regarded
as a portion of the amount determined under subparagraph 44(1)(e)(i) in
respect of the property, and
(D) an amount equal to the product obtained when 1/5
of the amount determined under subparagraph 44(1)(e)(i) in respect of
the property is multiplied by the amount, if any, by which 4 exceeds the number
of preceding taxation years of the taxpayer ending after the disposition of the
property, and
(f) the cost to the taxpayer or, in the case of depreciable
property, the capital cost to the taxpayer, of the taxpayer's replacement
property at any time after the time the taxpayer disposed of the taxpayer's
former property, shall be deemed to be
(i) the cost to the taxpayer or, in the case of depreciable
property, the capital cost to the taxpayer of the taxpayer's replacement
property otherwise determined,
minus
(ii) the amount, if any, by which the amount determined under clause
44(1)(e)(i)(A) exceeds the amount determined under clause 44(1)(e)(i)(B).
[31]
These provisions are
specific where there is an exchange of property, in which case the interested
party may make an election.
[32]
When a taxpayer
disposes of "former business property" and acquires, within a certain
amount of time, capital property that replaces the former property
("the replacement property"), the taxpayer may use, in computing
the capital gain, the adjusted cost base (ACB) of the replacement property (i.e.,
its acquisition cost) instead of that of the former property, thereby
deferring the inclusion of at least part of the gain realized.
[33]
First of all, this
provision is not universal, in that it does not necessarily apply to every case
where one immovable is replaced by another. Certain conditions must exist in
order for the election in subsection 44(1) to be available. Secondly, the
property must be "former business property".
[34]
In the case at bar, the
cost of acquiring Lot #2 is less than the ACB of Lot #1 ($396,758, as opposed
to $400,887), and thus, subsection 44(1) is of no help because the gain
computed when using the cost of Lot #2 is greater than the gain computed when
using the ACB of Lot #1.
[35]
In order to justify the
steps in her calculations, the Appellant draws an analogy between subsection 44(1)
and paragraph 40(2)(b) so that she can use the ACB of Lot #2 and add a portion
of the ACB of Lot #1 to it.
[36]
In fact, the Appellant
is adding to the ACB of Lot #2 the fraction of the ACB of Lot #1 that
represents the difference between the area of Lot #1 and the area of Lot #2.
[37]
Paragraph 40(2)(b)
provides for the exemption from the capital gain realized on the sale of a
principal residence. However, where the subjacent land is involved, the
exemption is limited to one-half hectare, except under certain circumstances.
[38]
Thus, where the
subjacent land exceeds one-half hectare, it is sometimes necessary to allocate
the proceeds of disposition between the part that is eligible for the exemption
and the part that is not.
[39]
Subsection 44(1)
does not permit such an approach where replacement property is concerned.
[40]
Subparagraph 44(1)(e)(i)
clearly states that a choice must be made between the lesser of the amount in
clause (A) and the amount in clause (B), that is to say, the lesser of the
capital gain computed using the ACB of the former property or the capital gain
computed using the ACB of the replacement property, not a mixture of the two.
[41]
For an example of this
calculation, see Van Lathing and Holding Co. v. Canada,
No. 92‑2508(IT)G, January 26, 1996, [1996] T.C.J. No. 65, at
paragraph 4:
• Deemed
gain on disposition is lesser of:
|
|
A
|
Gain otherwise determined
|
|
|
|
|
|
|
|
($711,177 - 40,000)
|
$671,177
|
|
A
|
|
|
|
B
|
Amount by which:
|
|
|
|
|
|
|
|
Proceeds of disposition
|
$711,177
|
|
|
|
|
|
|
Exceed: Cost of replacement
|
|
|
|
|
|
|
|
property
|
465,699
|
|
|
|
|
|
|
|
--------
|
|
|
|
|
|
|
Formula Amount
|
$245,478
|
|
B
|
|
|
|
Deemed gain under S. 44(1)(e)(i)
|
|
|
|
|
(the lesser of A and B)
|
$245,478
|
|
[42]
The situation in the
case at bar is not similar to the one in Macklin v. Canada, Docket No. T‑653‑87,
November 5, 1992, 1992 CarswellNat 448, [1993] 1 C.T.C. 21, 58 F.T.R. 42,
92 D.T.C. 6595 (F.C.T.D.) where there was a dispute as to whether only
part of the former property constituted former business property.
[43]
Nor is this a case in
which one property was replaced with two properties. Consequently, the example
in paragraph 27 of Interpretation Bulletin IT-259R4 is not relevant.
[44]
Thus, I find that
subsection 44(1) does not apply to the case at bar. Although this finding
disposes of the instant appeal, it is appropriate to consider the other component
of the Appellant's argument and assess whether Lot #1
constituted "former business property" as required by
subsection 44(1).
[45]
Subsection 248(1) of
the Act reads, in part, as follows:
248. (1) "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 or 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),
and for the purpose of this definition, "rental
property" of a taxpayer means real property owned by the taxpayer, whether
jointly with another person or otherwise, and used by the taxpayer in the
taxation year in respect of which the expression is being applied principally
for the purpose of gaining or producing gross revenue that is rent (other than
property leased by the taxpayer to a person related to the taxpayer and used by
that related person principally for any other purpose), but, for greater
certainty, does not include a property leased by the taxpayer or the related
person to a lessee, in the ordinary course of a business of the taxpayer or the
related person of selling goods or rendering services, under an agreement by which
the lessee undertakes to use the property to carry on the business of selling
or promoting the sale of the goods or services of the taxpayer or the related
person;
[46]
Thus, in order to
constitute former business property, Lot #1 must have been used primarily
for the purpose of earning or producing income from a business.
[47]
In the case at bar, the
evidence has shown that the work done on the lot that was replaced was neither
sufficient nor relevant enough in order to be able to find that it consisted of
revenue‑generating initiatives.
[48]
Indeed, the minor work in
connection with soil quality, levelling, and the announcement of the vocation
of the temporarily laid-out and landscaped site are not of such nature as to necessarily
consider a property to be primarily used for the purposes of gaining or
producing business income.
[49]
With respect both to
this second component and the first, the Appellant is giving the legal underpinnings
of her arguments a meaning and scope inconsistent with the law but essentially
consistent with her self-interested expectations. The provisions relevant
to the instant matter must be assessed having regard to the relevant enactments
and case law, not based on what might be desired.
[50]
For all these reasons,
the appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 3rd day of July 2008.
"Alain Tardif"
Translation
certified true
on this 3rd day of
September 2008.
Susan Deichert,
Reviser
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