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Citation: 2003TCC112
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Date: 20030307
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Docket: 2002-1940(IT)I
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BETWEEN:
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TERRENCE COSTER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] This appeal is from an assessment
with respect to the 2000 taxation year. At all relevant times,
the Appellant owned 700 shares of 3Com Corp. ("3Com").
On July 28, 2000, 3Com distributed to its shareholders certain
shares of Palm Inc. ("Palm") in a transaction known as
a "spin-off". Specifically, 3Com distributed 1.483
shares of Palm for each one share of 3Com held by its
shareholders. On the spin-off, the Appellant received 1,038
shares of Palm (700 x 1.483). Both 3Com and Palm are U.S.A.
corporations, and the spin-off transaction occurred in the U.S.A.
For Canadian income tax purposes, the Appellant was regarded as
having received in 2000 a stock dividend of $40,532 (USD) or
$60,199 (Can).
[2] The Appellant was not sure how to
report the spin-off transaction for income tax purposes in
Canada. After consulting a number of persons, the Appellant
reported the total spin-off transaction as follows:
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Capital gain on disposition of
1,038 Palm shares
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$36,512
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Capital (loss) on disposition of
700 3Com shares
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($28,054)
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Foreign taxable dividend
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$60,199
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The Appellant was persuaded to report the foreign taxable
dividend of $60,199 by his receipt of a pink form T5 (Statement
of Investment Income) prescribed by Canada Customs and Revenue
Agency ("CCRA") and issued by TD Waterhouse (the
Appellant's broker) showing, in box 15, foreign income of
$40,532 (USD) which the Appellant converted to $60,199 (Can). The
pink form T5 was entered as Exhibit R-2.
[3] After filing his 2000 income tax
return in the spring of 2001, the Appellant learned that he could
have made an election under paragraph 86.1(2)(f) of the
Income Tax Act to defer the tax on the dividend of
$60,199. Section 86.1 was added to the Act only in 2001
applicable to dispositions received after 1997. The amending
legislation which added section 86.1 to the Act received
Royal Assent only on June 14, 2001 which was after the date when
the Appellant was required to file his income tax return for the
year 2000. The relevant provisions of subsection 86.1(2) are:
86.1(2)
For the purposes of this section and Part XI, a distribution by a
particular corporation that is received by a taxpayer is an
eligible distribution if
(a)
...
(b) the
distribution consists solely of common shares of the capital
stock of another corporation that were owned by the particular
corporation immediately before their distribution to the taxpayer
(in this section referred to as the "spin-off shares");
(c)
...
(f) except
where Part XI applies in respect of the taxpayer, the taxpayer
elects in writing filed with the taxpayer's return of income
for the taxation year in which the distribution occurs (or, in
the case of a distribution received before October 18, 2000,
filed with the Minister before July 2001) that this section apply
to the distribution and provides information satisfactory to the
Minister
(i) of the
number, cost amount (determined without reference to this
section) and fair market value of the taxpayer's original
shares immediately before the distribution,
(ii) of the number,
and fair market value, of the taxpayer's original shares and
the spin-off shares immediately after the distribution of the
spin-off shares to the taxpayer,
(iii) ...
[4] The Appellant's accountant,
Paul Webb, wrote to CCRA on September 20, 2001 attempting to make
an election under paragraph 86.1(2)(f) by asking that the
Appellant's income tax return for 2000 be adjusted as
follows:
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Reported
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Adjusted
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Capital gain on disposition of
1,038 Palm shares
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$36,512
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$36,779
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Capital (loss) gain on disposition
of 700 3Com shares
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($28,054)
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$12,274
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Foreign taxable dividend
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$60,199
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Nil
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Paul Webb's letter dated September 20, 2001 was entered as
Exhibit R-1 but the above table is taken from paragraph 8 of the
Respondent's Reply.
[5] In response to Paul Webb's
letter, CCRA wrote directly to the Appellant on February 15, 2002
explaining why the Appellant's election under
paragraph 86.1(2)(f) would not be accepted. The
letter from CCRA was not entered as an exhibit but a copy is
attached to the Appellant's Notice of Appeal. The principal
part of the letter stated:
We have reviewed your request for an adjustment to your 2000
return with regards to your claim for the foreign spin-off shares
election.
As your election was not received by the due date of September
12, 2001, it is not considered as valid and no adjustment will be
made to your return for this reason. The envelope in which your
election was received was postmarked September 21, 2001.
[6] The date of September 12, 2001
referred to in the above letter from CCRA needs an explanation.
As stated in paragraph 3 above, the amending legislation which
added section 86.1 to the Act received Royal Assent on
June 14, 2001. That amending legislation contains the following
provision:
64(2) Subsection (1) (i.e. the whole of
section 86.1) applies to distributions received after 1997,
except that
(a) ...
(b) the
election referred to in paragraph 86.1(2)(f) of the
Act, as enacted by subsection (1), is deemed to be filed
on a timely basis if it is filed with the Minister of National
Revenue before the day that is 90 days after the day on which
this Act receives royal assent.
September 12, 2001 was the 90th day after June 14, 2001 when
the amending legislation received Royal Assent. The letter from
CCRA was correct in stating that the Appellant's election,
postmarked September 21, 2001 was not received by the due date of
September 12, 2001.
[7] In this appeal, the Respondent has
taken the position that the Appellant's election under
paragraph 86.1(2)(f) was late; and the Minister does not
have jurisdiction to extend time under subsection 220(3.2) of the
Act. Paragraphs 13 and 14 of the Respondent's Reply
make the following arguments:
The Deputy Attorney General of Canada submits:
13. ... that the
foreign taxable dividend in the amount of $60,199.43 received by
the Appellant in the 2000 taxation year is not an eligible
distribution for the purposes of section 86.1 of the Act,
because an election was not filed with the Minister on a timely
basis under paragraph 86.1(2)(f) of the Act and
paragraph 64(2)(b) of the Amendment Act.
14. ... that the time
limit for an election under paragraph 86.1(2)(f) of the
Act must be strictly applied as an extension of time limit
is specifically excluded from the Minister's jurisdiction
under subsection 220(3.2) of the Act and section 600 of
the Regulations.
[8] At the hearing of this appeal on
February 4, 2003, the Appellant stated that it was his
understanding that the Income Tax Regulations had recently
been amended to grant the Minister discretion to extend the time
to file an election under paragraph 86.1(2)(f) of the
Act. At the conclusion of the hearing, counsel for the
Respondent undertook to review the Act and
Regulations on this point. By letter dated February 13,
2003 to the Registrar of this Court, Mr. Rhodes stated that
paragraph 600(c) of the Income Tax Regulations was
recently amended to include paragraph 86.1(2)(f) as a
prescribed provision for the purposes of paragraph 220(3.2) of
the Act. The relevant provisions are set out below.
220(3.2)
Where
(a) an
election by a taxpayer or a partnership under a provision of this
Act or a regulation that is a prescribed provision was not
made on or before the day on or before which the election was
otherwise required to be made, or
(b) a
taxpayer or partnership has made an election under a provision of
this Act or a regulation that is a prescribed
provision,
the Minister may, on application by the taxpayer or the
partnership, extend the time for making the election referred to
in paragraph (a) or grant permission to amend or revoke
the election referred to in paragraph (b).
600 For the purposes of
paragraphs 220(3.2)(a) and (b) of the Act,
the following are prescribed provisions:
(a) section
21 of the Act;
(b)
subsections 13(4) and (7.4), 14(6) ...
(c)
paragraphs 48(1)(a) and (c), 66.7(7)(c),
(d) and (e) and (8)(c), (d) and
(e), 80.01(4)(c), 86.1(2)(f) and
128.1(4)(d) of the Act;
(c.1) ...
[9] According to the material enclosed
with Mr. Rhodes' letter, the amending Regulation
adding paragraph 86.1(2)(f) as a prescribed provision in
paragraph 600(c) came into force the day when it was
registered; and it was registered on April 11, 2002. Therefore,
when CCRA wrote to the Appellant on February 15, 2002 (see
paragraph 5 above), the Minister did not at that time have
jurisdiction to extend the time for making an election under
paragraph 86.1(2)(f) of the Act.
[10] As a matter of law, the Appellant's
election made on September 21, 2001 was late but it was late by
only nine days. Having regard to the following facts, all of the
equities are running in the Appellant's favour:
(i) when a public corporation
spins off the shares of a subsidiary (as 3Com spun off Palm), the
measurement of the financial benefit (if any) derived by a
shareholder of the public corporation is complex; as is the
determination of the cost base of the spin-off shares and the
adjustment (if any) to the shareholder's cost base of the
shares in the public corporation;
(ii) the taxation of that
financial benefit is also complex and will be complicated if the
spin-off transaction was in a foreign country;
(iii) the taxation of spin-off
transactions was changed in Canada by the enactment of section
86.1 in the spring of 2001 (Royal Assent on June 14, 2001)
applicable to dispositions received after 1997;
(iv) the Appellant as a shareholder of
3Com received his 1,038 spin-off shares of Palm in July 2000;
(v) the Appellant did in fact report
the spin-off transaction to the best of his knowledge and ability
when he filed his 2000 income tax return in the spring of
2001;
(vi) the Appellant, as an ordinary
citizen, could not be expected to know about the enactment of
section 86.1 in the spring of 2001; and its coming into force by
Royal Assent on June 14, 2001, starting a 90-day period to
make an election; and
(vii) the Appellant made his election under
paragraph 86.1(2)(f) on September 21, 2001, only nine days
after the expiration of the 90-day period and within a
reasonable time by any standard.
[11] This Court does not have jurisdiction
to extend the time to make an election under paragraph
86.1(2)(f). Only the Minister has discretion under
subsection 220(3.2) to extend the time for such an election. It
is my understanding that the Minister will not ordinarily
exercise his/her discretion under subsection 220(3.2) unless
asked to do so in writing by the taxpayer. I regard the letter
from Paul Webb to CCRA dated September 20, 2001
(Exhibit R-1) as an attempt on behalf of the Appellant to
make an election under paragraph 86.1(2)(f). The Minister
seems to have regarded that letter in the same way because the
second paragraph of the CCRA reply commences with the words:
"As your election ... ". See paragraph 5
above.
[12] As a matter of law, the appeal for the
taxation year 2000 is dismissed. Recognizing, however, that only
the Minister has discretion to extend time under subsection
220(3.2), I recommend that the Appellant (Mr. Coster) write a
fresh letter to CCRA asking that the Minister exercise his/her
discretion under subsection 220(3.2) of the Act to extend
the time for the Appellant to make an election under paragraph
86.1(2)(f); and that Mr. Webb's letter of September
20, 2001 be regarded as a late election. Also, I strongly
recommend that such discretion be exercised in the
Appellant's favour having regard to the facts summarized in
paragraph 10 above.
[13] The Appellant was informed by
Respondent's counsel in August 2002 (i) that CCRA had
concluded that the amount in issue in this appeal was
approximately $17,500; and (ii) that by electing the informal
procedure, the Appellant could not obtain relief in an amount
greater than $12,000. The Appellant has stated in a letter to the
Court that, in the interests of expediency, he wished to continue
under the informal procedure. Because the appeal is dismissed in
law, the Appellant's decision to elect the informal procedure
has not affected his relief.
Signed at Ottawa, Canada, this 7th day of March, 2003.
J.T.C.C.
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