Citation: 2006TCC669
Date: 20061206
Docket: 2005-1380(IT)G
BETWEEN:
LUCIE VACHON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from an assessment made by the Minister of National Revenue
("the Minister") under the Income Tax Act ("the
Act") for the 2000 taxation year.
[2] The principal issues are as follows:
(a) Did the appellant
truly effect a subsection 85(1) rollover of her 45 Class "A" shares
in 2743‑0156 Québec Inc. to 9084‑3772 Québec Inc., a
holding company,
(b) If so, was the delay
in submitting Form T2057 fatal to its acceptance by the Canada Customs and
Revenue Agency ("the Agency")? In addition, does the Tax Court
of Canada have the power to review the Minister's discretionary decision to
accept or reject the form?
(c) If not, can the
amount received by the appellant upon the sale of her shares be considered a
deemed dividend within the meaning of subsection 84(3) of the Act?
FACTS
[3] The appellant held 45 Class "A" shares
of 2743-0156 Québec Inc., and the paid-up capital, within the meaning
of subsection 89(1) of the Act, for all these shares was $45.
[4] The appellant was married to
Claude Martineau until November 30, 1999, when the divorce
judgment was pronounced.
[5] In accordance with the divorce judgment, the
parties agreed that the appellant would redeem her
45 Class "A" shares in 2743‑0156 Québec Inc. for $150,000 within 30 days from the
judgment.
[6] However, pursuant to an agreement that they
entered into that same day, the parties agreed that the appellant's shares
would first be transferred through a subsection 85(1) rollover to a holding company
newly incorporated by the appellant's ex-husband, and that these shares would
then be redeemed by 2743‑0156 Québec Inc., and ultimately
cancelled.
[7] A holding company, 9084‑3772 Québec Inc.,
was thus incorporated on November 19, 1999.
[8] The T2057 rollover form never reached the Agency
and thus does not appear with the appellant's 2000 tax return.
[9] There is no evidence in the record that the appellant
actually transferred the Class "A" shares to her holding company,
9084‑3772 Québec Inc.
[10] The holding company, 9084‑3772 Québec Inc.,
did not issue any shares to the appellant.
[11] In January 2000, 2743‑0156 Québec Inc.
purchased 45 Class "A" shares of its capital stock over the counter
for $150,000.
[12] As a result, the appellant received from the
Minister a notice of assessment dated December 31, 2003, taxing her
on a deemed dividend of $149,955 under subsection 84(3) of the Act,
and, consequently, on a taxable dividend of $187,444 under paragraphs 82(1)(a)
and 12(1)(j) of the Act.
THE APPELLANT'S SUBMISSIONS
[13] Essentially, the appellant submits that, as form
should not prevail over substance, the delay in submitting the T2057 rollover
form should not be fatal to the acceptance of the form by the Minister. Such a
penalty for the delay would be a grave injustice.
[14] The appellant submits that the Tax Court of Canada
has jurisdiction to correct the injustice caused by the Minister in failing to
accept the form as he could have done pursuant to subsection 85(7.1) of
the Act.
[15] She told the Court that she truly did transfer her
Class "A" shares in 2743‑0156 Québec Inc. to the holding
company, 9084‑3772 Québec Inc.
[16] Lastly, she told the Court that since she no
longer owned the Class "A" shares of 2743‑0156 Québec Inc. when
they were purchased over the counter, she should not suffer the consequences
imposed by subsection 84(3) of the Act and should not be assessed for a deemed
dividend under that provision.
THE RESPONDENT'S SUBMISSIONS
[17] The respondent submits that she cannot accept the
rollover under subsection 85(1) of the Act for the following reasons:
(a) The
appellant did not transfer the Class "A" shares to the holding company,
9084-3772 Québec Inc.
(b) The holding company,
9084-3772 Québec Inc., never issued shares of its capital stock to the appellant.
(c) The appellant failed
to submit the form required by subsection 85(6) of the Act in order to
effect the rollover.
(d) The appellant did
not send Form T2057 within the time prescribed by subsections 85(6) and
85(7) of the Act.
[18] The respondent submits that the Tax Court of
Canada does not have jurisdiction to hear the appellant's challenge of the
Minister's exercise of his discretion to refuse the appellant's election under
subsection 85(1) of the Act. In her submission, only the Federal Court has
jurisdiction to review such a decision, and that jurisdiction is conferred by section 18
of the Federal Courts Act, R.S.C. 1985, c. F‑7.
[19] The respondent asserts that the Minister did not accept
the T2057 Form, as he could have done under subsection 85(7.1), because
the conditions for a rollover were not met.
[20] She further submits that the appellant still held
the Class "A" shares of 2743-0156 Québec Inc. at the time that
that corporation purchased them.
[21] Lastly, she says that the appellant is subject to
subsection 84(3) of the Act and should therefore be taxed on a deemed
dividend of $149,955 for her 2000 taxation year.
[22] Despite the complexity of her case, the appellant
was not represented; clearly well prepared and articulate, she sought to tender
a number of documents in evidence.
[23] To avoid having things drag on any longer than
necessary, I suggested that the parties meet to look at the various documents
that were eventually to be tendered in evidence. The parties did indeed meet to
discuss the contents of various documents. Upon returning after the recess,
counsel for the respondent made the following statement:
[TRANSLATION]
. . .
Benoit Mandeville: Yes. All
right, Your Honour, the respondent will consent to the appellant's documents
being tendered in evidence. This having been said, the appellant admitted
during our discussions that she has no evidence concerning the transfer of her
shares in 2743‑0156 Québec Inc. to her holding company, 9084‑3772 Québec Inc.,
which was newly created in 1999. She says that in all these documents, or
anything else she may have brought with her today, there is nothing to show
that she transferred her shares to her holding company. The reason that
the appellant has come to Court today — and the appellant can confirm this
— is to challenge the respondent's decision to refuse a late election under
subsection 85(1), which the Minister had the discretion to do under
subsection 85(7.1). So, it seems to be more a matter of challenging the
Minister's decision not to accept the election. Would that be an accurate
summary?
[24] The appellant replied:
[TRANSLATION]
R. Very good
summary. You see, actually . . .
THE COURT:
Q. OK, you fully
understand what counsel for the respondent just said.
R. That is correct.
Q. You agree with
everything that he has said?
R. Yes, Your
Honour.
Q. All right.
R. It's really a
matter of shedding light on the fact the if the rollover form had been filed, I
wouldn’t have got a notice of assessment, which results, of course, from a sort
of division of assets, but a division of assets following a divorce. Yes, it's
a type of share transfer as well, in which I did not have to . . . and there
are documents, in what has been submitted to you, that also corroborate that in
fact it was left to the ex-husband’s full discretion to take the necessary
steps to create the corporation with Gilles Ducharme at the time, and,
yes, there may have been some anomalies, but I don't think I would have got a
notice of assessment if the rollover form had been done. Because it's not really
a deemed dividend. I didn’t use that money. I didn’t have the enjoyment of it.
So I think it’s unfair that it be treated as a dividend and that it result in
that kind of a notice of assessment. So I still believe that the Department
lost no money, nor would it have lost any if the form had been done properly
from the start. And what I'm actually asking for is the chance to file that
rollover form, with the penalty. I'm prepared to pay up when it comes to the
penalty but not the notice of assessment, because, as far as I'm concerned, it
is not a deemed dividend. So that's really the reason I'm here this
morning.
. . .
[25] The appellant seems to believe that the basis of
the assessment that she is challenging is essentially tied to the issue of the
form and its acceptance following the expiry of the time limit.
[26] In other words, she submits that the only
basis of the notice of assessment is the failure to file the appropriate form for
the rollover contemplated in subsection 85(6) of the Act. The rollover
form is not as decisive as she thinks, and, contrary to her belief, the issue
here is not essentially one of form. Rather, substance is the dominant issue.
[27] So the first question we must ask is whether the
conditions set out in subsection 85(1) of the Act have been met. The
second question, which we must ask only if the conditions for the rollover have
been met, is whether this Court has the power to review the Minister's
discretionary decision to accept or not a rollover form that is filed late.
A) Have the conditions set out in
subsection 85(1) of the Act been met?
[28] The following is the relevant excerpt from
subsection 85(1) of the Act, which sets out the fundamental conditions for a
rollover:
85. (1) Where a
taxpayer has, in a taxation year, disposed of any of the
taxpayer's property that was eligible property to a taxable Canadian
corporation for consideration that includes shares of the capital stock of the
corporation, if the taxpayer and the corporation have jointly elected
in prescribed form and in accordance with subsection (6) . . .
[Emphasis
added.]
[29] It is also important to understand that the shares
of a corporation constitute "eligible property" for the purposes of
that section:
85. (1.1) For the purposes of subsection (1),
"eligible property" means
(a) a capital property (other than real property, or an
interest in or an option in respect of real property, owned by a non-resident
person);
. . .
[30] Simply put, the conditions for a rollover under
subsection 85(1) of the Act are as follows:
(i) Shares must have been transferred to
a taxable Canadian corporation.
In the case at bar, no evidence of such a transfer
was provided. In her testimony, the appellant admitted that she fully agreed
with the statement by counsel for the respondent that there was nothing in the
documents that she submitted to the Court that showed she had transferred her
shares to her corporation. Thus, the evidence does not support a finding that
shares were transferred to the appellant's holding company.
ii) Shares of the taxable Canadian
corporation's capital stock must have been issued in exchange.
Once again, the evidence does not support a
finding that the holding company, 9084‑3772 Québec Inc., issued shares to
the appellant.
[31] The essential criteria for a rollover were
therefore not fulfilled, and I must find that the appellant’s
Class "A" shares were not rolled over under
subsection 85(1) of the Act.
[32] While the foregoing determinations are sufficient for
a finding in favour of the respondent in this appeal, I will briefly address
the secondary issue of whether the Tax Court of Canada has jurisdiction to
review the Minister's exercise of discretion with respect to acceptance of the
form after the time prescribed in subsection 85(7.1) has elapsed, since
this is the appellant's main argument in terms of the merits of her appeal.
[33] In the case at bar, the Minister had discretion
under the Act. When discretion is conferred on the Minister, as in subsection
85(7.1) of the Act, the courts cannot interfere with the exercise of that
discretion. In Commission
des relations de travail du Québec v. L'Association unie des compagnons
et apprentis de l’industrie de la plomberie et tuyauterie des États-Unis et du
Canada, [1969] S.C.R. 466, at page 470, Abbott J. stated:
[TRANSLATION]
Section 33 confers discretion on the Commission, and, as a general
rule, courts must not interfere with the exercise of such discretion. . . .
[34] However, this rule is not absolute and this
discretion is not unlimited. Indeed, the courts have been given the authority
to review certain decisions through the exercise of their superintending and reviewing
power.
[35] The scope of this power is, however,
limited to very specific situations, in particular those in which one has acted
in pursuit of purposes that are unlawful or contrary to the spirit of the Act,
those in which an administrative decision is based on irrelevant factors, those
in which one has acted without valid reason, or those in which one has acted in
bad faith or in a discriminatory or unreasonable manner.
[36] However, the Tax Court of Canada does not possess such
superintending and reviewing power in tax cases. This power has been expressly
conferred on the Federal Court by section 18.1 of the Federal Courts Act,
supra:
18.1 (1) An application for judicial review may be
made by the Attorney General of Canada or by anyone directly affected by the
matter in respect of which relief is sought.
(2) An application for
judicial review in respect of a decision or an order of a federal board,
commission or other tribunal shall be made within 30 days after the time the
decision or order was first communicated by the federal board, commission or
other tribunal to the office of the Deputy Attorney General of Canada or to the
party directly affected by it, or within any further time that a judge of the
Federal Court may fix or allow before or after the end of those 30 days.
(3)
On an application for judicial review, the Federal Court may:
(a) order a
federal board, commission or other tribunal to do any act or thing it has
unlawfully failed or refused to do or has unreasonably delayed in doing; or
(b) declare invalid or
unlawful, or quash, set aside or set aside and refer back for determination in
accordance with such directions as it considers to be appropriate, prohibit or
restrain, a decision, order, act or proceeding of a federal board, commission
or other tribunal.
(4) The Federal Court may
grant relief under subsection (3) if it is satisfied that the federal board,
commission or other tribunal
(a) acted without
jurisdiction, acted beyond its jurisdiction or refused to exercise its
jurisdiction;
(b) failed to observe a
principle of natural justice, procedural fairness or other procedure that it
was required by law to observe;
(c) erred in law in making a
decision or an order, whether or not the error appears on the face of the record;
(d) based its decision or
order on an erroneous finding of fact that it made in a perverse or capricious
manner or without regard for the material before it;
(e) acted, or failed to act,
by reason of fraud or perjured evidence; or
(f) acted in any other way
that was contrary to law.
(5) If the sole ground for
relief established on an application for judicial review is a defect in form or
a technical irregularity, the Federal Court may
(a) refuse the
relief if it finds that no substantial wrong or miscarriage of justice has
occurred; and
(b) in the case of
a defect in form or a technical irregularity in a decision or an order, make an
order validating the decision or order, to have effect from any time and on any
terms that it considers appropriate.
[Emphasis
added.]
[37] The Tax Court of Canada does not have jurisdiction to entertain
an application for the judicial review of a discretionary decision by the
Minister to accept or refuse the rollover form under subsection 85(7.1) of the
Act. This jurisdiction belongs solely to the Federal Court.
[38] While the appellant placed special emphasis on the issue of the
form and whether or not it could be accepted, her case raises another very
important question.
B) Must the amount that she received upon the sale
of her shares be considered a deemed dividend within the meaning of
subsection 84(3) of the Act?
[39] Subsection 84(3) of the Act reads as follows:
84. (3) Where at any time after December 31, 1977 a
corporation resident in Canada has redeemed, acquired or
cancelled in any manner whatever (otherwise than by way of a
transaction described in subsection (2)) any of the shares of any class
of its capital stock,
(a) the corporation shall be deemed
to have paid at that time a dividend on a separate class of shares comprising
the shares so redeemed, acquired or cancelled equal to
the amount, if any, by which the amount paid by the corporation on the
redemption, acquisition or cancellation, as the case may be, of those shares
exceeds the paid-up capital in respect of those shares immediately before that
time; and
(b) dividend
shall be deemed to have been received at that time by each person who held any
of the shares of that separate class at that time equal to that portion
of the amount of the excess determined under paragraph (a) that the
number of those shares held by the person immediately before that time is of
the total number of shares of that separate class that the corporation has
redeemed, acquired or cancelled, at that time.
[Emphasis added.]
[40] A reading of the foregoing very clear provisions
shows that their effect is to create a deemed dividend as soon as that a
corporation acquires shares of its own capital stock.
[41] Since 2743‑0156 Québec Inc.
purchased over the counter 45 Class "A" shares of its own
capital stock, subsection 84(3) must apply, and it is thus deemed that the appellant
received a dividend following the redemption of the shares in question.
[42] This being the case, did the appellant own the
Class "A" shares of 2743‑0156 Québec Inc. at the time
that that corporation purchased them over the counter?
[43] Since the appellant's Class "A" shares
were not transferred to her holding company, 9084‑3772 Québec Inc.,
the appellant still held the Class "A" shares at the time that they
were purchased. The application of the deemed dividend provision is thus
warranted.
[44] For all these reasons, the appeal is dismissed,
with costs to the respondent.
Signed at Ottawa, Canada, this 6th day of December 2006.
"Alain Tardif"
Translation
certified true
on this 29th day
of February 2008.
Erich Klein, Revisor
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