Marguerite Désy Labbé v. Her Majesty the Queen, [1995] 1 CTC 2209

Archambault J.T.C.C.:—The respondent filed with the Court an application pursuant to section 58 of the Tax Court of Canada Rules (General Procedure) (the ’’Rules”) for the determination of a question of law. Solicitor for the appellant opposed this application and the parties therefore filed no joint agreement on the facts. Under paragraph 58(2)(a) of the Rules, no evidence is admissible on an application for a determination of a question of law except with leave of the Court or on consent of the parties. No leave was requested from the Court. The respondent relied strictly on the facts stated in the appellant’s notice of appeal in support of her application. The facts stated in the appellant’s notice of appeal are as follows:

1. A notice of assessment was issued against the appellant on August 28, 1990 as the respondent considered that the capital gain made on the disposition of shares of the corporation 2329-2808 Québec Inc. by the appeilant was not qualified farm property as defined in subsection 110.6(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”);

2. The assessment mentioned in paragraph 1 above was disputed and no decision was rendered as pursuant to section 165 the Minister agreed to the taxpayer appealing forthwith to the Tax Court of Canada and waived reconsideration of the notice of assessment, considering that it was advisable for this matter to be heard concurrently with that involving Nancy Désy, social insurance number 234 356 798, and Diane Beaulieu Désy, social insurance number 214 697 054; a copy of the Minister’s consent is filed in support hereof as Exhibit P-1;

3. The respondent’s argument in support of the notice of assessment mentioned in paragraph 1 above is that the deduction claimed under subsection 110.6(2) of the Income Tax Act in respect of the capital gain made on the disposition of shares of the corporation 2329-2808 Québec Inc. was disallowed pursuant to the provisions of the Income Tax Act as in the respondent’s view the said shares are not qualified farm property as defined in subsection 110.6(1) of the Act;

4. The decision mentioned in paragraph 1 above is wrong in fact and in law as at the time of the transaction the shares of the capital stock of 2329-2808 Québec Inc. were qualified farm property as defined in subsection 110.6(1) of the Income Tax Act;

5. The shares sold, referred to above, were fully owned by Mrs. Marguerite Désy Labbé who was always the sole owner of the shares thus sold up till the time of the transaction which is the subject of the assessment;

6. The corporation 2329-2808 Québec Inc. is and has always been, up till the time of the transaction mentioned above, the sole and only owner of all the capital stock of 2329-2790 Québec Inc., which is itself the sole and only owner of all the common capital stock of Dion Aviculture Inc.;

7. The activities of Dion Aviculture Inc. have always been exclusively farming activities;

8. Through her spouse the appellant has taken an active part in managing the farm property.

[Translation.]

It should be noted that this notice of appeal was not prepared by a solicitor who appeared before the Court but by a solicitor from another firm. At the same time, no application to amend the facts stated in the notice of appeal was submitted to the Court.

It appeared from this notice of appeal that the respondent disallowed the deduction for a capital gain on the disposition of qualified farm property on the ground that the shares of the company 2329-2808 Quebec Inc. ("2808”) were not "share[s] of the capital stock of a family farm corporation” ("qualified shares") in accordance with paragraph 70(10)(b) of the /ncome Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act"). This was allegedly because neither the appellant, her husband nor her child took an active part in the farming business operated by Dion Aviculture Inc. ("Aviculture"). However, the respondent now argues that the 2808 shares are not qualified shares because that company did not hold the shares in Aviculture. As the appellant stated in her notice of appeal, 2808 held the shares of 2329-2790 Québec Inc. ("2790"), which in turn held the shares of Aviculture. It can thus be seen that it was decided to place a holding company between 2808, itself a holding company, and Aviculture, the company operating the farming business. The respondent’s argument is that the interposition of this second holding company has the effect of disqualifying the 2808 shares for the purposes of the definition of a "qualified farm property".

It is worth citing the relevant legislation:

110.6(1) Definitions—For the purposes of this section, "qualified farm property" of an individual means a property owned by him or his spouse that was

(b) a share of the capital stock of a family farm corporation (within the meaning assigned by paragraph 70(10)(b)) of the individual or his spouse....

70(10)

(b) "share of the capital stock of a family farm corporation" of a person at a particular time means

(i) a share of the capital stock of a corporation that, at that time, carried on the business of farming in Canada in which it used all or substantially all of its property and in which that person, his spouse or his child was actively engaged, or

(ii) a share of the capital stock of a corporation all or substantially all of the property of which was, at that time,

(A) shares of the capital stock of one or more corporations described in subparagraph (i), or a bond, debenture, bill, note, mortgage, hypothec or similar obligation issued by such a corporation,

(B) property used by the corporation in carrying on the business of farming in Canada in which that person, his spouse or his child was actively engaged, or

(C) any combination of properties described in clauses (A) and (B).

A strict reading of paragraph 70(10)(b) indicates that only the shares of a company carrying on a farming business or the shares of a holding company having the shares in this company carrying on a farming business are covered by this definition. As 2808 was not operating a farming business, all or substantially all of its property had to be the shares of a company carrying on a farming business. In the facts of the instant case, as stated by the appellant herself in paragraph 6 of her notice of appeal, the shares held by 2808 are the shares of a holding company, namely the shares of 2790, and not the shares of a corporation carrying on a farming business such as Aviculture.

Appellant’s arguments

Solicitor for the appellant raised several arguments against the respondent’s application. First, he argued that there was no agreement on the facts. Second, he contended that the Court did not have all the relevant facts before it on which it could render judgment. In particular, he indicated that the agents for the appellant had obtained confirmations from representatives of the Department of Finance and Revenue Canada, Taxation that the company group structure existing at the time of the sale of the shares apparently met the definition of 70(10)(b) of the Act. In his view, it was important that these facts be entered in evidence to enable the Court to arrive at its decision. He further alleged that the facts described in the notice of appeal were strictly true but may not represent the real substance of these operations. In particular, he mentioned that 2790 could act as agent for 2808. He also argued that the appellant wanted to plead the doctrine of estoppel in support of her opposition to the assessment made by the respondent.

Respondent's arguments

In support of her application, solicitor for the respondent cited the decision of the Federal Court of Appeal in Berneche v. Canada, [1991] 3 F.C. 383, 133 N.R. 232 (C.A.). In that case the Federal Court-Trial Division judge had interpreted Rule 474(1 )(a) (Federal Court Rules, C.R.C.

c. 663), authorizing the Federal Court to rule on a point of law. He had followed case law indicating that this rule should only be applied where a consensus existed between the parties. Mahoney J.A., speaking for the Federal Court of Appeal, rejected this interpretation (at page 388 (F.C.)):

With respect, the Trial Division has unduly restricted application of the Rule.

What Rule 474(1 )(a) requires is that there be application for the preliminary determination by at least one of the parties: the Court cannot proceed ex proprio motu. It then requires that the Court be satisfied (1) that there is no dispute as to any fact material to the question of law to be determined; (2) that what is to be determined is a pure question of law, and (3) that its determination will be conclusive of a matter in dispute so as to eliminate the necessity of a trial or, at least, shorten or expedite the trial.

In his view, his application met these three conditions.

Analysis

Solicitor for the appellant placed greatest emphasis on the fact that he wanted the opportunity of entering in evidence the facts surrounding contacts with the Department of Finance and the Department of National Revenue so he could then apply to this case the doctrine of estoppel and the approach adopted by the Supreme Court of Canada in Hard v. D./M.R. (Que), [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438. In his view, these facts are relevant in enabling the Court to reach an enlightened conclusion.

In that case De Grandpré J., then a judge of the Supreme Court of Canada, relied on the administrative practices of the Quebec Department of Revenue in determining the meaning of the expression a sum paid "in recognition of long service". In his view, this expression was not clear. However, it is worth citing the following passage on the probative force of these administrative practices when a statutory provision is clear:

Once again, I am not saying that the administrative interpretation could contradict a clear legislative text, but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor.

In my opinion the wording of paragraph 70(10)(b) is quite clear and not subject to any ambiguity. That provision does not authorize the interposition of a second holding company between 2808 and Aviculture. The approach taken in Harel therefore cannot be followed in the instant case.

As to the application of the doctrine of estoppel, in Gibbon v. The Queen, [1977] C.T.C. 334, 77 D.T.C. 5193 (F.C.T.D.), Walsh J. clearly indicated that the Court could not by application of that doctrine adopt the incorrect interpretation of an agent for the Crown. In support of his conclusion Walsh J. cited the decision by Cameron J. in Woon v. M.N.R., [1950] C.T.C. 263, 4 D.T.C. 871 (Ex. Ct). One of the grounds of appeal was that the commissioner had rendered a decision contrary to the provisions of the Income War Tax Act. Walsh J. said the following at page 338 (D.T.C. 5196):

Mr. Justice Cameron after a detailed and analytical review of the leading authorities held that the Commissioner had no power to bind the Minister by a ruling limiting tax action other than in accordance with the tax statutes; that the assessment must be made pursuant to the terms of the statute and that it was not open to the appellant to set up an estoppel to prevent the operation of the Statute.

In Stickel v. M.N.R., [1972] C.T.C. 210, 72 D.T.C. 6178 at page 219 (D.T.C. 6185), Cattanach J. gave a clear summary of the state of the law on this point: "In short, estoppel is subject to the one general rule that it cannot override the law of the land".

In accordance with these principles, even if the appellant introduced evidence that the Department of National Revenue or the Department of Finance had confirmed that the company group structure met the definition stated in paragraph 70(10(b), this could not relieve the Court of its duty to apply the Act as written. These facts are therefore not relevant in the circumstances of the instant case.

It must now be determined whether the application meets the three requirements stated by the Court of Appeal in Berneche, supra. Is there a dispute as to any material fact in the instant case? In Berneche Mahoney J.A. interpreted the meaning of this requirement as follows at pages 388-89 (F.C.):

While the first requirement is often stated in terms of an agreement or admission of facts because that is the context in which the application is being considered, what is required is that the facts material to the question of law not be in dispute. That does not require the acquiescence of all parties. It is a conclusion for the judge to draw and I see no reason whatever why that conclusion cannot be drawn from the entire pleadings of the party respondent to the application on the assumption that what has been pleaded is true.

In my opinion, there is no dispute as to any fact material to determination of the question of law. Solicitor for the appellant did try to argue, though not too strenuously, that the intermediary holding company could act as an agent. However, paragraph 6 of the appellant’s notice of appeal is quite clear: 2790 was the ’’sole and only owner of all the common capital stock of Dion Aviculture Inc.". Solicitor for the appellant at no time sought to amend this paragraph 6 of the notice of appeal, which was read to him by the Court. All the other material facts also come from the appellant’s notice of appeal.

Furthermore, the application and interpretation of paragraph 70(10)(b) is purely a question of law, and unfortunately for the appellant this interpretation of the paragraph ends the discussion. It confirms the respondent’s position in his assessment of August 28, 1990 which disallowed the deduction for a capital gain on the ground that the shares sold by the appellant were not qualified farm property within the meaning of subsection 110.6(1) of the Act.

The Court accordingly answers the following question in the negative:

On reading the corporate structure described above, do the shares of the company 2329-2808 Québec Inc. fall within the definition of “share[s] of the capital stock of a family farm corporation", in particular within the meaning of subparagraph 70(10)(b)(ii) of the Income Tax Act as applicable to the taxation year at issue?

[Translation.]

For this reason the respondent’s application is allowed and the appellant’s appeal from the tax assessment for the 1987 taxation year, dated August 28, 1990, is dismissed.

Respondent’s application allowed and appellant's appeal dismissed.