Florence A. Hawkins v. Her Majesty the Queen, [1991] 2 CTC 148

Joyal, J.: —This is an appeal by the plaintiff from a tax reassessment issued by the Crown with respect to the plaintiff's 1980 tax return. The effect of this reassessment was to add to the plaintiff's income for that year an amount of $19,250 being the plaintiff's taxable capital gain upon the transfer of a parcel of farm land in the District of Shamrock, in the province of Saskatchewan.

The Facts

The facts surrounding this dispute are substantially admitted and indeed the trial of the action proceeded on the basis of an agreed statement of facts. This statement discloses that on or about May 29, 1980, the plaintiff exchanged some farm property with one Linda Armson. Both before and after the transfer, the plaintiff was engaged in farming operations. The transaction was at arm's length and no moneys were paid out or paid in. It was a simple exchange of properties of equal value.

In the plaintiff's return for the taxation year 1980, the plaintiff did not report the disposition of her former property nor the acquisition of the replacement property. As a consequence, the Crown concluded that there had been a disposition of capital property, i.e., that property transferred by the plaintiff to Linda Armson. The Crown fixed the deemed proceeds of disposition of that property at $50,000, deducted the adjusted cost base of $11,500, calculated the total capital gain at $38,500 and then fixed the taxable capital gain tax at $19,250.

The Law

It is well known that since the major revisions to Canadian income tax law came into effect by the adoption of the Income Tax Law Amendment Act in 1971, gains on the disposition of capital property are taxable. The Act, however, provides for temporary relief to a taxpayer when, upon the disposition of such property, he acquires capital property as replacement property. Pursuant to section 44, the taxpayer may elect to offset the gain in one with the price of the other and postpone the eventual reckoning of any capital gain to a subsequent or ultimate disposition.

The detailed provisions of section 44 are herein set out:

44. (1) Where at any time in a taxation year (in this subsection referred to as the “initial year") an amount has become receivable by a taxpayer as proceeds of disposition of a capital property (in this section referred to as his "former property") that is either

(a) property the proceeds of disposition of which are described in subparagraph 13(21)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv), or

(b) a property that was, immediately before the disposition, a former business property of the taxpayer,

and the taxpayer has

(c) where the former property is described in paragraph (a), before the end of the second taxation year following the initial year, and

(d) in any other case, before the end of the first taxation year following the initial year,

acquired a capital property (in this section referred to as his "replacement property") as a replacement for his former property and his replacement property has not been disposed of by him prior to the time he disposed of his former property, notwithstanding subsection 40(1), if he so elects under this subsection in his return of income under this Part for the year in which he acquired the replacement property,

(e) the gain for a particular taxation year from the disposition of his former property shall be deemed to be the amount, if any, by which

(i) where the particular year is the initial year, the lesser of

(A) the amount, if any, by which the proceeds of disposition of the former property exceed the aggregate of its adjusted cost base to him immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, and

(B) the amount, if any, by which the proceeds of disposition of the former property exceed the aggregate of the cost to him, or in the case of depreciable property, the capital cost to him, determined without reference to paragraph (f), of his replacement property and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) where the particular year is subsequent to the initial year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the former property,

exceeds

(iii) such amount as he may claim, not exceeding a reasonable amount, as a reserve in respect of such of the proceeds of disposition of the former property that are not due to him until after the end of the particular year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

(f) the cost to him or, in the case of depreciable property, the capital cost to him of his replacement property at any time after the time he disposed of his former property, shall be deemed to be

(i) the cost to him or, in the case of depreciable property, the capital cost to him of his replacement property otherwise determined,

minus

(ii) the amount, if any, by which the amount determined under clause

(e)(i)(A) exceeds the amount determined under clause (e)(i)(B).

(2) For the purposes of this Act, the time at which a taxpayer has disposed of a property for which there are proceeds of disposition as described in subparagraph 13(21)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv), and the time at which an amount, in respect of those proceeds of disposition has become receivable by the taxpayer shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation to him for the property lost, destroyed, taken or sold,

(b) where a claim, suit, appeal or other proceeding has been taken before one or more tribunals or courts of competent jurisdiction, the day on which the taxpayer's compensation for the property is finally determined by such tribunals or courts,

(c) where a claim, suit, appeal or other proceeding referred to in paragraph (b) has not been taken before a tribunal or court of competent jurisdiction within two years of the loss, destruction or taking of the property, the day that is two years following the day of the loss, destruction or taking,

(d) the time at which the taxpayer is deemed by section 48 or 70 to have disposed of the property, and

(e) where the taxpayer is a corporation other than a subsidiary corporation referred to in subsection 88(1), the time immediately before the winding-up of the corporation,

and he shall be deemed to have owned the property continuously until the time so determined.

(3) Subsection 70(3) does not apply to compensation referred to in subparagraph 13(21)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv) that has been transferred or distributed to beneficiaries or other persons beneficially interested in an estate or trust.

(4) Where a former property of a taxpayer was a depreciable property of the taxpayer

(a) if he has elected in respect thereof under subsection (1), he shall be

deemed to have elected in respect thereof under subsection 13(4); and

(b) if he has elected in respect thereof under subsection 13(4), he shall be deemed to have elected in respect thereof under subsection (1).

(5) For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same or a similar use as the use to which he put the former property;

(b) where the former property was used by the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business; and

(c) where the taxpayer was not resident in Canada at the time he acquired the particular capital property, in addition to the requirements in paragraphs (a) and (b), the particular capital property was taxable Canadian property.

(6) Where a taxpayer has disposed of property that was a former business property and was in part a building and in part the land, or an interest therein, subjacent to or necessary for the use of the building, for the purposes of subsections (1) and 13(4), the amount, if any, by which

(a) the proceeds of disposition of one such part determined without regard to this subsection

exceed

(b) the cost to him or, in the case of depreciable property, the capital cost to him of a replacement property for that part

shall, to the extent that the taxpayer so elects in his return of income under this Part for the year in which he acquired the replacement property, be deemed not to be proceeds of disposition of that part and to be proceeds of disposition of the other part.

(7) Subparagraph (1)(e)(iii) does not apply to permit a taxpayer to claim any amount thereunder in computing a gain for a taxation year where

(a) the taxpayer, at the end of the year or at any time in the immediately following year, was not resident in Canada or was exempt from tax under any provision of this Part; or

(b) the person to whom the former property of the taxpayer was disposed of was a corporation that, immediately after the disposition,

(i) was controlled directly or indirectly by the taxpayer,

(ii) was controlled directly or indirectly by a person or group of persons by whom the taxpayer was controlled directly or indirectly, or

(iii) controlled the taxpayer directly or indirectly where the taxpayer is a corporation.

The Issues

The first question before the Court is whether or not the plaintiff, in the relevant period, exercised her right of election pursuant to section 44.

The second question is whether the valuation of $50,000 set by the Crown on the property sold by the plaintiff, and on which the taxable capital gain was calculated, is a proper valuation.

The Findings

On a reading of section 44 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the form of an election thereunder is not quite clear. Some assistance, though not necessarily determinative, may be had from paragraph 2(e) of Interpretation Bulletin IT-259R2, which states that in order to benefit from the tax deferral, the taxpayer must make a valid election. In paragraph 7 of that same bulletin it is stated:

7. A taxpayer must elect to have the provisions of subsections 44(1), 13(4) and 14(6) apply. The election should be made as follows:

(a) If the disposition and replacement takes [sic] place in the same year, the calculation of the recaptured capital cost allowance, the amount payable (net of outlays or expenses) under subparagraph 14(5)(a)(iv) by reason of subsection 14(6) or the capital gain under the provisions of subsection 13(4) or 44(1) in the taxpayer's return of income will be considered to constitute an election.

(b) If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the return of income for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost allowance, the taxable capital gain reported or the amount included in income by virtue of subsection 14(1) in a prior year, and a calculation of the revised recapture, taxable capital gain or cumulative eligible capital.

(c) If the replacement property is acquired prior to the year of disposition of the property, the election to apply subsections . . . , 44(1) . . . should take the form of a letter attached to a return of income for the year in which the replacement property is acquired . . . .

[Emphasis added.]

Thus it would appear that if the disposition of the former property and the acquisition of the replacement property occur in the same year, the taxpayer need simply calculate the taxable capital gain on the basis that section 44 applies and this, in my view, would constitute an election. It is only if the replacement property is acquired in a subsequent or prior year that, according to the bulletin, the taxpayer must expressly make a section 44 election by attaching a letter to this effect in his or her tax return.

In the case before me, the disposition and acquisition of the replacement property occurred simultaneously and, in such event, I should find that no particular formality would be required in order to meet the election requirements under section 44. Assuming therefore that the plaintiff calculated the amount of her taxable capital gain for 1980 on the basis that section 44 applied, this would be sufficient to satisfy section 44 requirements.

Unfortunately, such is not the case before me. As the documentary evidence discloses, the taxpayer reported neither the disposition nor the acquisition of the properties at all. It is difficult therefore, even in adopting an interpretation of “election” in a manner most favourable to the plaintiff, that the absence of any disclosure in her 1980 return could possibly lead to an inference that an election had been made.

Counsel for the plaintiff, in an adroit submission, argued that the simultaneous registration of the requisite deeds in the local registry office was tantamount to an election. That registration constituted public notice that an exchange of similar capital assets had taken place and such notice, in the light of the somewhat undefined meaning of the word "election" in section 44 should satisfy the requirements of the statute. After all, pleaded counsel, the application of section 44 is not to avoid taxes but to defer them to a later date. In the circumstances, only a minimum standard of "election" must be met.

I would certainly agree with plaintiff's counsel that the form of the election may vary from case to case. I would also agree that the fiscal considerations involved as far as taxes are involved are not at opposite poles. It is not a section of the statute which provides complete relief to a taxpayer if an election is made or otherwise no relief at all if an election is not made. Absent an election, tax is payable on the basis of the spread between the adjusted cost base of the taxpayer's property which in this case is admitted to be $11,500 and the deemed value of disposition which the Crown fixed at $50,000. The result is a gross capital gain of $38,500 and a taxable gain of $19,250. The effect of it, however, because the two properties were of equal value, is that the taxpayer thereafter enjoys an adjusted cost base not of $11,500 but of $50,000. Some taxpayers, depending on their individual circumstances or their future plans or on the nature of any particular capital asset might very well be happy with an earlier tax bite and an easier one later. Others would choose the election route thereby postponing any tax liability to a remote future date.

Whatever the practical application of section 44 in the eyes of the individual taxpayer, there is no doubt in my mind that the requirement for an election is clearly set forth and must be respected. One of the essential requirements of an election, if the dictum in Cooksley v. Toomaten Oota (1901), 5 C.C.C. 26, is to be respected is that in all events an election must be communicated. The particular method of communication might vary from case to case and indeed there is implied in the language of section 44 various methods of communicating an election. Nevertheless, absent an election, I do not see where the normal tax rules relating to the disposition of any capital asset can be avoided.

This observation also prompts me to note that section 44 is not in the statute for purposes of setting a trap for the unwary taxpayer. If Parliament decrees that in some instances when a capital asset is replaced by another similar one a taxpayer may elect to follow the tax deferral route, it seems to me that for the proper application of the tax rules in future years, the Crown has before it a record of the election. Otherwise, entanglements and conflicts would result.

In the case before me, I should find that whatever might have been in the mind of the taxpayer when she filed her 1980 tax return, no election was made or, if made, was not communicated to the Crown. Her counsel's ingenious argument that the election is inferred from the registration of the transfer documents might well stand up as an election per se but in the absence of a communication of that intention to the Crown, it cannot comply with the requirements of section 44, no matter how liberal the "election" provisions might be interpreted.

If the foregoing disposes of the first issue before the Court, there is left the matter of the deemed value of the property which the Crown, in its assessment, fixed at $50,000. The only evidence of value is that found in an affidavit attached to the transfer document and dated May 29, 1980. The value there is fixed at $25,000 which, after the trial and after some discussions between the parties, was accepted as a proper valuation.

The Conclusions

I should therefore conclude that the Crown's reassessment on the basis that the plaintiff had not made her election under the Act must be affirmed. I should further conclude, however, that the reassessment should be varied on the basis that the realized value of the capital asset is in the sum of $25,000 and that the taxable capital gain should be adjusted accordingly. I make no order as to costs.

The Court is appreciative of the thorough briefing provided by counsel for both sides in the course of the trial.

Appeal allowed in part.