Henry Dekker v. Her Majesty the Queen, [1993] 2 CTC 3115, 93 DTC 1481

Christie, A.C.J.T.C.C.:—Three matters came on for hearing under the Tax Court of Canada Rules (General Procedure) at London on October 7, 1993. First was a motion on behalf of the respondent for judgment dismissing this appeal on the ground that: "The amount of the tax payable for the appellant’s 1987 taxation year is not in issue before the Court". Second was a motion on behalf of the appellant for: "(a) An order that the provisions of subsection 17.3(1) of the Tax Court of Canada Act do not apply; (b) An order that the appellant is entitled to an oral discovery of the respondent". Third was a status hearing under section 125 of the said rules.

In support of the respondent's motion is the affidavit of Sudesh K. Sehgal, an employee of Revenue Canada, sworn June 30, 1992. The appellant filed his own affidavit sworn November 18, 1992 and the affidavit of Stan J. Fisher, C.A., sworn May 3, 1993.

In his return of income for 1987 the appellant reported a taxable capital gain of $53,246.50 on the transfer to his sons of shares of Henry Dekker Ltd. In arriving at this amount the appellant determined the adjusted cost base (V-Day value) to be $199,987 and he claimed as a deduction a reserve of $958,436 under subsection 40(1.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") on the basis that the shares were capital stock of a family farm corporation. The consideration for the shares was $1,264,916. Thus:

He applied $53,246.50 of his life-time capital gains exemption as a capital gain deduction with the result that the return of income reported no tax payable in 1987 on the disposition of the shares.

In reassessing the Minister of National Revenue ("the Minister") reduced the adjusted cost base from $199,987 to $54,750 and concomitantly increased the subsection 40(1.1) deduction from $958,436 to $1,089,149 with the result that the taxable capital gain was increased to $60,508.50. Thus:

The increase in taxable capital gain by virtue of the reassessment is $60,508.50 — $53,246.50 = $7,262.

At the request of the appellant, his life-time capital gains deduction was again resorted to for the purpose of claiming a capital gain deduction of $7,262. The result of the reassessment was, therefore, the same as stated by the appellant in his return of income, i.e., there was no tax payable in 1987 on the disposition of the shares.

With reference to the $7,262, attached as Exhibit" B” to Mr. Sehgal's affidavit is a letter dated October 23, 1989, to John Pihlak of Revenue Canada signed by the appellant. It reads:

Please use up $7,262 of my capital gains exemption for my 1987 tax year in order to offset the increase in the taxable capital gain. This gain resulted from a revised valuation of the V-day value of shares of Henry Dekker Ltd. I understand that using my capital gains exemption does not mean that I agree with the valuation performed by Revenue Canada and that if I am successful in an appeal of that V-day value my claim for an exemption will be revised. [1]

Paragraphs 6 and 7 of that affidavit read:

6. An examination of the records for the 1987 taxation year of the appellant reveals that John Pihlak, auditor in the London District Office of the Department, who completed the audit of the appellant's 1987 taxation year, telephoned the appellant and the appellant's representative at the time, Stan Fisher, on October 23, 1989, and explained that the difference between the Minister’s assessment and the appellant’s reported taxable capital gain with respect to the 14,997 common shares of Henry Dekker Ltd. was $7,262.

7. An examination of the records for the 1987 taxation year of the appellant reveals that John Pihlak met with the appellant on October 23, 1989 and that the appellant requested in writing that the Minister increase the appellant's capital gain deduction for 1987 by the amount of $7,262 to offset the assessed increase in the appellant's taxable capital gains resulting from the disposition of the 14,997 common shares of Henry Dekker Ltd. Attached hereto and marked as Exhibit"B" is a copy of the appellant's request.

In his affidavit the appellant identifies Stan J. Fisher, C.A. as his accountant.

On November 2, 1989, Mr. Pihlak wrote the appellant as follows:

As previously discussed the Department's valuation of the V-day value of shares of Henry Dekker Ltd. has resulted in an increase in your capital gain on the disposition of the said shares.

The total addition to the capital gain is $145,237, resulting in an increase of the taxable capital gain of $72,619 (Schedule 1). Due to a reserve on the proceeds received the increase in the capital gain for 1987 is $14,524 with the taxable capital gain being $7,262 (Schedule 3).

As requested, your 1987 capital gains deduction has been revised to offset this increase in your capital gain.

A revised schedule of capital gains deduction is attached (Schedule 2).

A notice of reassessment based on the above will follow in due course.

A copy of this letter was sent to Mr. Fisher. A notice of reassessment dated November 23, 1989 followed.

The notice of appeal is concerned with the transfer of the shares of Henry Dekker Ltd. and the related reassessment by the Minister. In particular the reduction of the adjusted cost base of the shares from $199,987 to $54,750 is challenged. Paragraph 7 of the notice of appeal reads: "The appellant states that his calculation of V-Day value was correct.” Paragraph 8 thereof reads: "The appellant further states that the Minister was incorrect in his determination of the V-Day value for the sold shares for the following reasons". It is unnecessary to set out those reasons here.

The appellant is not asking this Court to change the product or result of the reassessment. What is sought is a re-examination of the process and the referring of the reassessment back to the Minister for reassessment using a different process, namely, treating the adjusted cost base of the shares as $199,987. The result of such an exercise would be to produce the same product as arrived at on the reassessment, namely, no liability to tax in 1987 on the disposition of the shares.

My understanding is that this is not within the contemplation of an appeal to this Court under the Act. In Consumers’ Gas Co. v. The Queen, [1987] 1 C.T.C. 79, 87 D.T.C. 5008 (F.C.A.) Mr. Justice Hugessen, speaking for the Court, said at pages 83-84 (D.T.C. 5012):

What is put in issue on appeal to the courts under the Income Tax Act is the Minister’s assessment. While the word “assessment” can bear two constructions, as being either the process by which tax is assessed or the product of that assessment, it seems to me clear, from a reading of section 152 to 177 of the Income Tax Act, that the word is there employed in the second sense only. This conclusion flows in particular from subsection 165(1) and from the well established principle that a taxpayer can neither object to nor appeal from a nil assessment.

Notwithstanding that it might be said that this is obiter dicta, I regard it as something to which I should pay heed. The statements are a considered opinion made in respect of a procedural point that was the subject of argument before the Court of Appeal. In Se//ars v. The Queen, [1980] 1 S.C.R. 527, 110 D.L.R. (3d) 629, Mr. Justice Chouinard, who delivered the judgment of the Court, cited with approval a statement about obiter dicta made by a former Chief Justice of Ontario. He said at page 530 (D.L.R. 632):

In (City of) Ottawa v. Nepean (Township), [1943] 3 D.L.R. 802, [1943] O.W.N. 352, Robertson, C.J. wrote for the Court of Appeal of Ontario, at page 804 (O.W.N. 353):

What was there said may be obiter, but it was the considered opinion of the Supreme Court of Canada and we should respect it and follow it even if we are not strictly bound by it.

I see no reason why this should not apply to this Court with respect to obiter dicta in reasons for judgment of the Federal Court of Appeal, especially having regard to the application of the doctrine of stare decisis to this Court with respect to decisions of the Federal Court of Appeal. In Consoltex Inc. v. Canada, [1992] 2 C.T.C. 2040, 92 D.T.C. 1567 (T.C.C.), Dussault, T.C.C.]. cited at page 2044 (D.T.C. 1569) in support of his determination of that appeal, along with other authorities, the passage quoted from the reasons for judgment delivered by Hugessen, J.A. in Consumers' Gas, supra.

A judgment shall issue dismissing this appeal.

While allowing the motion on behalf of the respondent disposes of the appeal, I shall express my opinion about the appellant's motion regarding subsection 17.3(1) of the Tax Court of Canada Act. This issue was fully argued at the hearing and this expression of opinion may save time and expense in the event that the judgment dismissing the appeal is set aside on appeal to the Court of Appeal.

The subsection provides: [2]

17.3(1) Where the aggregate of all amounts in issue in an appeal under the Income Tax Act is $15,000 or less, or where the amount of the loss that is determined under subsection 152(1.1) of that Act and that is in issue is $30,000 or less, an oral examination for discovery shall not be held unless the parties consent thereto or unless one of the parties applies therefor and the Court is of the opinion that the case could not properly be conducted without that examination for discovery.

The keywords for present purposes are: "amounts in issue in an appeal under the Income Tax Act". Appeals under that Act of the kind presently under consideration are appeals from the Minister's assessment or reassessment of the appellant's liability to income tax in respect of a particular taxation year. [3] This, to my mind is clearly the combined effect of subsections 150(1), 152(1), 165(1) and (3), and 169(1) of the Act and it is the amount of tax in dispute in a particular taxation year that is to be compared to the $15,000 in subsection 17.3(1) to determine whether an oral examination for discovery is barred unless the parties consent thereto or the Court is of the opinion that the case could not properly be conducted without an examination for discovery.

In calculating the figure to be compared to the $15,000 the ramifications of an assessment or reassessment made in a particular year as it relates to liability for tax in future years are not to be included. This is the approach adopted by the appellant, which I regard as erroneous. It must be borne in mind that subsection 17.3(1) does not speak of total of amounts of tax liability arising out of a reassessment, but rather it refers to amounts in issue in an appeal. Paragraphs 1 to 8 of the affidavit of Mr. Fisher filed in support of the motion read:

1. I am the accountant for Henry Dekker ("Dekker"), the appellant in the within appeal, and as such, have knowledge of the matters to which I hereinafter depose.

2. On or about May 1, 1987, Dekker sold 14,997 common shares of Henry Dekker Ltd. for $1,264,916. The value of the shares on V-Day, December 31, 1971, was determined to be $199,987.

3. By Notice of Reassessment dated November 23, 1989, the Ministry reassessed the V-Day value of the shares and determined the value to be $54,750.

4. As a result of the reassessment of the V-Day value, the capital gains for Dekker attributable to the shares increased by $145,237.

5. I have calculated the effect of the reassessment to Dekker’s tax liability, and determined that prior to the reassessment, the tax liability of Dekker from the sale of the shares, after calculating the Taxable Capital Gains (2/3), the tax liability of approximately (49 per cent), was $184,544. The tax liability of Dekker after the reassessment is $231,988. Therefore, as a result of the reassessment, the tax liability of Dekker increased by $47,444. Attached hereto and marked as Exhibit "A" to this my Affidavit is a true copy of the Schedule entitled Tax Liability Calculation, which shows the difference in tax liability as a result of the reassessment.

Exhibit "A" reads:

	Originally Filed	DNR
Gain On Sale of Shares — 1987	$1,064,929	$1,210,166
Less Capital Gains Exemption	(500,000)	(500,000)
Capital Gains Subject to Tax	564,929	710,166
Taxable Portion (2/3)	376,619	473,444
Tax Liability at 49 per cent	184,544	231,988
	Difference	$47,444

6. I further prepared a Schedule of Gain for Dekker which takes into consideration the reserve available to Dekker, using the original V-Day value as calculated by Dekker, which is attached hereto to this my Affidavit and marked as Exhibit” B". As outlined at Exhibit "B", the gain reported on the sale of the shares was $1,064,929 and the gross taxable gain was $564,929. Assuming Dekker takes the maximum capital gains exemption, the tax liability of Dekker is $184,544.

Exhibit"B" reads:

Gain On Sale Of Shares, Spring 1987			$1,064,929
	Gain Reported	Reserve Balance	Exemption	Gross Taxable
1987	$106,493	$958,436	$106,493	$	NIL
1988	167,918	790,518	167,918		NIL
1989	167,918	622,600	167,918		NIL
1990	88,943	533,657	57,671		31,272

1991	88,943	444,174	NIL	88,943
1992	88,943	355,771	NIL	88,943
1993	88,943	226,828	NIL	88,943
1994	88,943	177,885	NIL	88,943
1995	88,943	88,942	NIL	88,943
1996	88,942	NIL	NIL	88,942
	$1,064,929		$500,000	$564,929

7. I also prepared a Revised Schedule of Gain — DNR Reassessment using the V-Day value of the shares as reassessed by the Department of National Revenue. Attached hereto to this my Affidavit and marked as Exhibit "C" is a copy of the Revised Schedule of Gain — DNR Reassessment. The gain reported is $1,210,166, and the gross taxable gain is $710,166. Assuming Dekker takes the maximum capital gains exemption, Dekker’s tax liability is $231,988. As a result of the reassessment, Dekker’s tax liabilities have increased by $47,444.

Exhibit "C" reads:

Gain on sale of shares, Spring 1987			Original		$1,064,929
			DNR Add		*145,237
					$1,210,166
	Gain Reported	R eserve Balance	Exemption	G ross Taxable
1987	$121,016	$1,089,149	$121,016		$	NIL
1988	167,918	921,231	167,918			NIL
1989	167,918	753,313	167,918			NIL
1990	107,616	645,697	43,148		$64,468
1991	107,616	538,081	NIL		107,616
1992	107,616	430,465	NIL		107,616
1993	107,616	322,849	NIL		107,616
1994	107,616	215,233	NIL		107,616
1995	107,616	107,618	NIL		107,616
1996	107,618	NIL	NIL		107,618
	$1,210,166		$500,000		$710,166
*ORIGI NAL V-DAY VALUE USED					$199,987
DNR's V-DAY VALUE					(54,750)
INCREASE TO GAIN					$145,237

8. I verily believe that based on the calculations which I have conducted, as outlined above, the reassessment by the Ministry will result in an increased tax liability to Dekker in the amount of $47,444.

In dealing with the motion for judgment dismissing the appeal I concluded that there was no amount in issue. If this is incorrect then the only amount I can conceive of as being in issue is the liability to tax in 1987 deriving from the $7,262 increase in taxable capital gain on the reassessment.

With reference to the status hearing, there were discussions thereat about trial dates and dates for the completion of the remaining steps to be taken before trial. But in light of the respondent's success on the application to dismiss the appeal, the status hearing is adjourned sine die.

Appeal dismissed.