REASONS
FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from a Notice of Reassessment dated May 8, 2015, made
under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended
(the “Act”) against the Appellant, now represented by her estate, for
the 2010 taxation year. What is at issue is a claimed Capital Gains Deduction
of $43,727 that was disallowed on the disposition of two properties that were
owned by the Appellant since 1979 and disposed of in 2010.
Factual
Context
[2]
Christina
McCullock-Finney was born October 10, 1942. She passed away on June 20, 2016 at
the age of 73. Consequently, her estate now has carriage of this appeal.
Throughout these reasons for decision, where I use the term Appellant, I do so
interchangeably to mean either Christina McCullock-Finney personally or her
estate.
[3]
This appeal is in
relation to the disposition in 2010 of two rental properties owned by the
Appellant situated in Lachine Quebec. These properties are situated at 82-86,
11th Avenue, Lachine, Quebec and 1091-1099 Saint-Louis, also in Lachine, Quebec
(the “Properties”). She has owned the Properties for quite some time −
since 1979. She also owned other rental real estate that is not the subject of
this appeal.
[4]
The Properties
were disposed of in 2010.
[5]
In filing her
income tax return for the 2010 taxation year, the Appellant declared a taxable
capital gain in the amount of $36,942 from the disposition of the Properties.
She subsequently filed a T1 Adjustment Request Form for the 2010 taxation year
wherein she claimed a Capital Gain Deduction of $43,727.
[6]
In a reassessment
dated May 8, 2015, the Minister disallowed the amount of $43,727 claimed by the
Appellant as a Capital Gain Deduction on the grounds that the Appellant never
filed a Form T664 “Election to Report a Capital Gain on a Property Owned at
the End of February 22, 1994” pursuant to s. 110.6(19) of the Act, nor
a Form T657A “Calculation of Capital Gains Deduction for 1994 on Other
Capital Property”, when
she filed her personal tax return for 1994. In addition, the Respondent takes
the position that the Appellant did not declare a Capital Gain and did not
claim a Capital Gain Deduction resulting from the s. 110.6 election in her 1994
tax return. On August 4, 2015, the Appellant filed a Notice of Objection in
respect of the reassessment dated May 8, 2015. The Minister, by way of Notice
of Confirmation dated October 13, 2015, confirmed the reassessment. Hence the
appeal to this Court.
[7]
The issue to be
decided is whether the Minister was justified in disallowing the Capital Gain
Deduction in the amount of $43,727 claimed by the Appellant.
[8]
Christiansen
Lebrun is a Chartered Professional Accountant. He was the accountant for
Christina McCullock-Finney while she was alive. He first met her in 2012. At
that time, she was undergoing a Canada Revenue Agency (the “CRA”) audit for the
2009 and 2010 years. He prepared an objection on her behalf and built up a file
for the CRA’s consideration. This file was submitted to the CRA but apparently
it was lost. Consequently, he had to rebuild the file and resubmit it to the
CRA. This was done in October 2014 and took some considerable effort on his
part. Mr. Lebrun is certainly a dedicated professional who prides himself in
providing quality services to his clients. He did not disappoint. As a result
of his efforts, all of the outstanding issues between Ms. McCullock-Finney and
the CRA were successfully resolved except for the capital gains issue.
[9]
Mr. Lebrun
explains that the capital gains tax changed as of
February 22, 1994. Before that date, the
inclusion rate of capital gains into taxable income was 25% of the capital
gain. It was changed to 50% as of February 22, 1994. The Minister decided to
permit eligible taxpayers to elect to declare a disposition of capital property
at the fair market value of the property at that time and then to claim an
off-setting Capital Gains Deduction so as to take advantage of the existing
Capital Gains Exemption. In order to do so, a taxpayer had to complete Form T664
“Election to Report a Capital Gain on Property Owned at the End of February
22, 1994”. In this form, the taxpayer designated properties for which
he/she was filing an election. Mr. Lebrun is in possession of the Appellant’s
working papers for 1994 and he produced to the Court, a copy of a completed
Form T664 dated April 21, 1994 (part of Exhibit A-2) signed by the
Appellant. In this Form T664, the Appellant designated the two Properties. The
Appellant also established the fair market value of the Properties, subtracted
the adjusted cost base for the Properties, determined the elected capital gains
of $65,888 and arrived at an elected taxable capital gain of $49,416. This is
the capital gain that had to be reported in her T1 personal tax return. Mr.
Lebrun also produced from the Appellant’s working papers a copy of a signed
Form T657A “Calculation of Capital Gains Deduction for 1994 on Other Capital
Property” (also dated April 21, 1994 and also part of Exhibit A-2). On this
form, the Appellant calculated the amount of $49,416 as a capital gain
exemption. This amount also had to be claimed on the Appellant’s T1 personal
tax return in order to avoid paying tax on the elected taxable capital gain. By
completing those two forms and by properly reporting both the elected taxable
capital gain and the claimed Capital Gain Deduction in his/her T1 personal tax
return, a taxpayer would not be taxed on the exempt portion, when the property
is sold years later. If the taxpayer did not make a proper election and report
the deemed disposition in his/her return, any gains in the future would be
taxed at the prevailing rates which would be higher than they were prior to
February 22, 1994.
[10]
Mr. Lebrun is of the view that the Appellant clearly intended
to take advantage of the capital gains
exemption. He is convinced that the Appellant completed the necessary elections
in Forms T664 and T657A and he concludes that she must have sent them to the
CRA at the time of filing her 1994 personal tax return. Otherwise, why else
would she go through the trouble of completing these forms and preserving
copies of these forms in her personal files? Mr. Lebrun stated that he is in
possession of a copy of the Appellant’s personal tax return for 1994. He
candidly admits that she did not complete Schedule 3, “Capital Gains (or
Losses) in 1994” and attach it to her personal tax return for 1994 as she
was required to do. He admits that she did not report her electable taxable
capital gain at line 127 of her 1994 personal tax return, as she was required
to do. He also candidly admits that she did not claim the Capital Gain
Deduction at line 254 of her 1994 tax return, as she was required to do.
[11]
In
cross-examination, Mr. Lebrun agreed that the Appellant likely also completed
and signed a second T664 form (see Exhibit R-1). However, this T664 does not
contain the same information as in the first T664 – it is in relation to only
one of the Properties, the one on St. Louis. It makes no mention at all of the
property on 11th Avenue. In addition, the numbers on the two T664 forms are
different. Apparently, the Appellant also completed another Form T657A (see
Exhibit R-2). The information contained on this second T657A is different from
the information contained on the first T657A. Mr. Lebrun cannot tell us why the
Appellant would have prepared two different T664 and T657A forms. He cannot
tell us which of these two sets of forms she would have intended to file nor
which ones were in fact filed, if any. He can only conclude that she meant the
election forms to be filed and he believes that they were. He agrees that the
amount calculated on the forms have to be carried over to Schedule 3 of the tax
return which has to be attached to the tax return. The elected capital gain had
to be declared on line 127 of the tax return. The T657A Capital Gain Deduction
had to be included on line 254 of the tax return. Mr. Lebrun cannot tell us why
the Appellant did not include this information on her personal tax return for
1994. He agrees that this information must appear on the tax return but it does
not. He opines that she did not know she had to complete Schedule 3 or fill in
line 127 and line 254 of her return. He is of the view that she believed
that the two election forms T664 and T657A alone were sufficient. In his view,
the Appellant should be allowed to claim the Capital Gain Deduction that was
disallowed by the Minister. She went out of her way to obtain the requisite
Forms T664 and T657A and she completed them and signed them. She fully intended
to file them and he concludes that she likely did so since she preserved copies
of these documents in her personal files. She did everything to the best of her
knowledge and her abilities to comply with the requirements of the Act.
[12]
Catalina Sylvia Tempea is a litigation officer employed by the CRA in the
Montreal Tax Services Office. She examined all of the electronic documents that
the CRA had on file with respect to the Appellant’s 1994 personal tax returns.
She produced to the Court an electronic document known as an “Option-C”
computerized printout (see Exhibit R-5). This document contains the information
pertaining to the income and deductions reported in the Appellant’s
personal tax return for 1994. The information contained thereon is cross-referenced
to the corresponding line numbers on the personal tax return. She states that
if all the necessary forms had been properly completed and filed to make an
election pursuant to s. 110.6(19) of the Act, this would have been so
indicated on the Option-C printout. The Option-C printout would show that
Schedule 3 as well as Forms T664 and T657A had been filed. It does not. The Option-C
printout shows a taxable capital gain of $43,747 cross-referenced to line 127
of the return but it does not. It would also show that the capital gain
exemption of the same amount would have been cross-referenced to line 254 of
the tax return; but it does not. There was no reference to line 127, line 254 and
Schedule 3. According to her, there is no information regarding capital gain or
capital gain exemption on Option-C for the 1994 taxation year. This is
consistent with the evidence of Mr. Lebrun to the effect that Schedule 3, line
127 and line 254 of the Appellant’s return were not completed.
[13]
According
to Ms. Tempea, this means that the capital gain was not declared and the
offsetting capital gain exemption was not claimed. Ms. Tempea stated that the
fact that the file in relation to the 2009 and 2010 years may have been lost,
has no impact on the 1994 taxation year.
[14]
She
testified that the election we are dealing with in the instant case involves more
than completing and filing the election Forms T664 and T657A. The taxpayer has to
make the election and also has to declare the capital gain and claim the
exemption in the tax return. A properly-made election and capital gain
deduction had to be claimed in the 1994 taxation return. It could not be made
later when the property is subsequently sold. Even if forms T664 and T657A were
included with the Appellant’s 1994 personal tax return, the information was not
reported in the return. This is not a matter of intention or good faith; it is a
matter of properly declaring a deemed disposition as a gain and then claiming the
exemption. Ms. Tempea is of the view that the election was not properly
made.
Position of
the Parties
[15]
The Appellant’s
representative and accountant candidly and forthrightly admit that the elected
taxable capital gain was not calculated in Schedule 3 and was not reported at
line 127 of her 1994 tax return. It is also admitted that she did not claim the
Capital Gain Deduction, which should have been shown at line 254 of her return.
However, she knew that it was important to make an election in the 1994 tax
year. She did what she believed was necessary and the fact that she had the
forms in her personal file indicates that she likely filed the election forms. The Appellant’s
representative argues that the Respondent had lost the appellant’s tax
information or otherwise rendered the information inaccessible for proper
verification. Unfortunately, there is no record of the
forms anymore. It is argued that this does not prove that the Appellant did not
file the forms. The Respondent simply failed to correctly record her election. It is
argued that the Appellant was entitled to the capital gain exemption on the Properties
that she owned as of February 22, 1994 and she did everything that she believed
was necessary to make the election and claim the capital gain exemption. She
may not have known the complexity of the law but she knew that an election had
to be made and she always intended to comply. She
believed that filing the forms was sufficient. It is argued that she was
entitled to the capital gain deduction. The Appellant’s representative prays
therefore that the appellant’s appeal be allowed so as to permit the capital
gain deduction of $43,727.16.
[16]
The Respondent argues that there is no evidence of either
Form T664 or T657A having been filed; if they had been, this would be so
indicated on the Option-C printout. It is also argued that even if the forms
had been filed, that in and of itself is not enough. The Appellant had to
complete Schedule 3 and attach it to her personal tax return. She also had to
declare the capital gain at line 127 of her personal tax return and then claim
the Capital Gain Deduction at line 254 of her personal return for the 1994
taxation year. This she failed to do. Therefore, there was no elected capital
gain declared and no Capital Gain Deduction claimed. The failure to declare the
capital gain and to claim the Capital gain Deduction is fatal to her appeal.
The Respondent therefore prays that this Appeal be dismissed.
Legislative dispositions
[17]
Subsection
110.6 of the Act reads in part as follows:
Election for
property owned on February 22, 1994
110.6(19) Subject to subsection 110.6(20), where an individual (other than a
trust) or a personal trust (each of which is referred to in this subsection and
subsections 110.6(20) to 110.6(29) as the “elector”), elects in prescribed form
to have the provisions of this subsection apply in respect of
(a)
a capital property . . . owned at the end of February 22, 1994 by the elector .
. . the property shall be deemed . . . ,
(i) to
have been disposed of by the elector at that time for proceeds of disposition
equal to the greater of
(A) the amount determined by the
formula
A – B
where
A is the amount
designated in respect of the property in the election, and
B is the amount, if
any, that would, if the disposition were a disposition for the purpose of
section 7 or 35, be included under that section as a result of the disposition
in computing the income of the elector, and
(B) the adjusted cost base to the
elector of the property immediately before the disposition, and
(ii) to
have been reacquired by the elector immediately after that time at a cost equal
to
. . .
(C) in any other case, the lesser of
(I)
the designated amount, and
. . .
110.6(24) Time for an election. An election made under subsection 110.6(19)
shall be filed with the Minister
(a) where the
elector is an individual (other than a trust),
(i) if the election is in
respect of a business of the elector, on or before the individual’s filing-due
date for the taxation year in which the fiscal period of the business that
includes February 22, 1994 ends, and
(ii) in any other case,
on or before the individual’s balance-due day for the 1994 taxation year; and
. . .
110.6(25) Revocation of election. Subject to subsection 110.6(28), an
elector may revoke an election made under subsection 110.6(19) by filing a
written notice of the revocation with the Minister before 1998.
110.6(26)
Late election. Where an election made under subsection
110.6(19) is filed with the Minister after the day (referred to in this
subsection and subsections 110.6(27) and 110.6(29) as the “election filing
date”) on or before which the election is required by subsection 110.6(24) to
have been filed and on or before the day that is 2 years after the election
filing date, the election shall be deemed for the purposes of this section
(other than subsection 110.6(29)) to have been filed on the election filing
date if an estimate of the penalty in respect of the election is paid by the
elector when the election is filed with the Minister.
110.6(27) Amended election. Subject to subsection 110.6(28), an
election under subsection 110.6(19) in respect of a property or a business is
deemed to be amended and the election, as amended, is deemed for the purpose of
this section (other than subsection 110.6(29)) to have been filed on the
election filing date if
(a) an amended election in prescribed form in respect of the
property or the business is filed with the Minister before 1998; and
(b)
an estimate of the penalty, if any, in respect of the amended election is paid
by the elector when the amended election is filed with the Minister.
110.6(28) Election that cannot be revoked or amended. . . .
110.6(29) Amount of penalty. The penalty in respect of an election to
which subsection 110.6(26) or 110.6(27) applies . . .
Analysis
[18]
As I pointed out in Sicurella v.
Canada, [2013] T.C.J. No. 67, the statutory provisions that apply to the
Capital Gains Exemption are complex. With respect to the Capital Gains
Exemption, as provided for in s. 110.6 of the Act, it is appropriate to
learn a bit about the history of capital gains taxation in Canada. Justice
Lamarre-Proulx provided us with a very brief overview on this history in her reasons for decision
in Foisy v. The Queen, 2000 CanLII 431
(TCC) at para. 16 et seq.:
[16] I consider
it useful in this case to briefly summarize the history of capital gains
taxation. I have taken the information from the following works in particular:
Lord, Sasseville and Bruneau, Les principes de l'imposition au Canada,
10th ed. (1993), chapters II and VII; and Hogg and Magee, Principles of
Canadian Income Tax Law (1995), chapters 3 and 15.
[17] Before 1972, capital gains were not subject
to income tax. In 1967, the report of the Royal Commission on Taxation, known
as the Carter Commission, recommended that such gains be taxable in the same
way as business earnings. In 1969, the White Paper on Taxation recommended the
full taxation of capital gains with the exception of those on shares of
Canadian public corporations, which would be taxed at 50 percent. The Income Tax Act that came into force on January 1, 1972, provided for a 50 percent
tax rate for capital gains.
[18] In 1985, the Act was amended to give
individuals a cumulative capital gains exemption that could progressively reach
$500,000. That exemption increased gradually: thus, the limit was $20,000 in
1985, $50,000 in 1986 and $100,000 in 1987. It was then supposed to increase by
$100,000 each year until it reached a final limit of $500,000 in 1990.
[19] The exemption was said to be cumulative
because it was necessary to accumulate the exemptions taken throughout an
individual's life. Any exemption amount used in a previous year reduced the
available exemption limit.
[20] The increase in the exemption limit stopped
at $100,000 in 1987 with the tax reform of that year. The same reform provided
that the taxable portion of capital gains would rise to 66 2/3 percent in 1988
and 75 percent starting in 1990. The $100,000 exemption ended in 1994. (The
federal budget of February 28, 2000, contains a proposal to bring the inclusion
rate for capital gains realized after February 27, 2000, down to two thirds.)
[21] The end to the increase in the tax exemption
limit that occurred in 1988 did not apply to qualified farm property or
qualified small business corporation shares. For them, the exemption reached
its final limit in 1990 and did not end in 1994.
[22] When the $100,000 exemption was repealed in
1994, subsection 110.6(19) of the Act enabled individuals to make an election
by which capital property would be deemed to be disposed of on February 22,
1994, and repurchased at its fair market value or some lower value. The elected
value became the property's adjusted cost base. The election had to be made
within the time set out in subsection 110.6(24) of the Act.
[19]
I observe in paragraph 16 of Sicurella
that subsection 110.6(19) of the Act makes it possible for a
taxpayer to elect to use the amount remaining from the cumulative capital gains
exemption to prevent the exemption from being lost forever. The taxpayer,
through the T664 election, designates a capital property or properties and
elects a value for those properties. According to the statutory provisions, the
taxpayer is deemed to have disposed of the designated property and to have
reacquired it for the elected value. Any gain on the deemed disposition will
result in a taxable capital gain that could be offset by the amount remaining
to the taxpayer as a cumulative exemption. In future, when there is a
disposition or sale of the property, the gain at that time will be offset
against the elected amount, rather than the original cost and the future gain.
This will result in a reduction of tax payable from the eventual sale of the
property. In paragraph 18 of Sicurella, I point out that the amount
designated by the taxpayer as proceeds of disposition (and therefore the new
cost of acquisition of the property) in the T664 election is very important in
calculating the capital gain when the property is ultimately sold possible many
years later. However, the election, the declaration of capital gain and the
claim of capital gain exemption all had to be done in the 1994 personal tax
return or within the time frame set out in s. 110.6(26) of the Act. If
not, then the capital gain exemption is forever lost.
[20]
What must a taxpayer have done in order to perfect his/her
election and thus take maximum advantage of the capital gain exemption? At the
risk of being repetitive, the taxpayer had to follow the following procedure.
[21]
The taxpayer
had to complete Form T664 “Election to Report a Capital Gain on Property
Owned at the End of February 11, 1994. In this form the taxpayer designated
selected capital properties for which the election was being filed. The
taxpayer then had to determine the elected proceeds of disposition for the
designated properties in an amount not exceeding the fair market value (or
available capital gain exemption) of those properties as of February 22nd
1994. The elected capital gain for the designated properties was then calculated.
This then leads to a determination of the elected taxable capital gains based
on the then current inclusion rate. This amount is then carried over to line
546 of Schedule 3 “Capital Gains (or Losses) in 1994”. The total amount
of taxable capital gains is then reported at line 127 of the T1 General Tax
Return for 1994. A completed Schedule 3 had to be attached to the return. The
effect of this was to include the elected taxable capital gains into total
income. If nothing further were done, the taxpayer would be taxed on the
elected taxable capital gains. The taxpayer could avoid paying taxes on the
elected taxable capital gains by completing Form T657A “Calculation of
Capital Gains Deduction for 1994 on Other Capital Property”. The Capital
Gains Deduction calculated on this form was then transcribed to line 254 of the
T1 Tax Return, which is then subtracted from total income thus avoiding the
payment of taxes on the elected capital gains. This all had to be done in the
taxpayer’s 1994 tax return. According to s. 110.6(24), the election had to be
made no later than April 30, 1995, the due date for filing one’s 1994 personal
tax return. Subsection 110.6(26) permitted a late election to be made but
extended the time for two years and this was subject to penalties.
[22]
In the case at bar, I am satisfied that the
Appellant was an honest person who had every intention of complying with the
requirements of the Act. However, there are difficulties with this
appeal:
a.
The Appellant’s representative and her accountant while she was alive
are of the view that the forms T664 and T657A were filed because she went
through the trouble of completing the forms and preserving copies of them in
her personal records. The Respondent is of the view that the forms were not
filed for if they were, it would be so indicated on the Option-C printout. On
the basis of the evidence that has been presented to me, I am satisfied that
the Appellant had every intention of filing the forms and making the proper
election. However, on the evidence that has been led before me, there are two
different sets of forms containing different information. They cannot both have
been filed. I am unable to determine if the forms were in fact filed with her
1994 tax return and if so, which set of forms were filed. It is trite law that
in tax cases, the burden of proof rests on the Appellant: see Hickman Motors
Ltd. v. Canada, [1997] 2 SCR 336 at paras. 91 to 98. The weight of
the evidence does not sway me one way or the other.
b.
Even if the forms were filed, it is not disputed that the Appellant did
not complete Schedule 3 nor did she attach it to her tax return for 1994.
c.
Even if the forms were filed, it is admitted that the Appellant did not
declare on line 127 of her 1994 return that she had elected a taxable capital
gain.
d.
Even if the forms were filed, it is admitted that the Appellant did not
claim on line 254 of her 1994 return a Capital Gains Deduction.
[23]
Even though the Appellant did intend to make a
s. 110.6(19) election and actually produced working papers demonstrating that
intention, she did not follow through on the election. In view of the
incontrovertible fact that the Appellant did not complete and attach a Schedule
3, she did not declare a taxable capital gain and she did not claim a Capital Gain
Deduction in her 1994 return, I come to the conclusion that the Minister was
justified in disallowing the claimed Capital Gain Deduction.
Conclusion
[24]
For all of the foregoing reasons, this appeal is
dismissed.
Signed at Kingston,
Canada, this 9th day of June 2017.
“Rommel G. Masse”
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