Hannibal Holdings Ltd. v. Minister of National Revenue, [1989] 2 CTC 2053, 89 DTC 345

Taylor, T.CJ.: —

Facts

On January 17, 1983, the Minister of National Revenue reassessed the corporation for its 1980 taxation year, for an amount of $3,077.46 (excluding penalties, interest and credits) on taxable income arising as follows according to the T7W-C attached to the reassessment:

On January 18, 1983, a further reassessment (excluding interest) for $4,542.60 was struck:

On April 18, 1983 a notice of objection was filed by the corporation specifying on its face the January 17, 1983 reassessment noted above, but stating in the reasons for objecting "the company objects to both reassessments . .

Dated August 24, 1983, the Minister of National Revenue confirmed as follows:

The profits realized from the sales of properties known as Lot B Block 1 D.L. 1491; and Lot 2 Block 4/6 D.L. 688 have been taken into account in computing your income in accordance with the provisions of section 3 and subsection 9(1) of the Act.

On March 20, 1984, the corporation filed with the Tax Court the following letter together with a copy of the notice of objection dated April 18, 1983 and both the "Facts and Reasons” attached to that notice as well as a restated set of "Facts and Reasons" relating to the application letter:

We enclose an application to the Tax Court against an assessment dated January 18 1983 for the above company. We hereby request an extension of time for the filing of the application and have attached a statement of facts and reasons in support of an extension.

On June 7, 1984, the Minister wrote to the applicant corporation as follows:

This is to inform you that the Minister will oppose your application to request a time extension to file an appeal.

The Minister is of the position that Hannibal Holdings Ltd. does not wish to appeal the confirmation of the assessment but rather wishes to have its Notice of Objection previously filed accepted as a valid election under subsection 184(3). There is no provision in the Income Tax Act which allows for the late filing of subsection 184(3) elections.

However, if such authority does exist, it is submitted that in the circumstances it is not just and equitable to do so and further that Hannibal Holdings Ltd. has not satisfied the requirements of paragraph 167(5)(c).

The above application was heard on September 26, 1984 and on October 15, 1984 the following Court Order was issued:

Upon reading the Application of the taxpayer in respect of the 1980 taxation year;

And upon hearing what was alleged by the parties;

This Court doth order that:

(a) The Application dated March 20, 1984 and all materials attached forming part thereof be accepted as an Application to extend the time to institute an Appeal; and

(b) the time within which the said Appeal may be instituted is hereby extended to the date of this order and the said Application and attached materials is hereby deemed to be a valid Notice of Appeal.

A reply to notice of appeal dated January 17, 1986 was filed which stated in part:

STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

The Respondent relies, inter alia, upon section 3 subsections 9(1), 83(2) and (3), and 185(1).

The Respondent submits that the appellant's gain from the sale of properties has properly been treated on account of income being an adventure in the nature of trade and that the excess election on the capital dividends paid has thus been properly assessed.

In reply to the Respondent's alternative argument, the respondent says that if the transactions are found to be of an income character by this Court, then the appellant is not disputing the amount of tax assessed as a result of the excess capital dividend election and the appeal should be dismissed.

The Respondent further submits that an election under subsection 184(3) must be filed within 90 days of assessment and as this was not done, this Court has no jurisdiction to extend the time to file such an election.

Reference to some “Amended Notice of Appeal” dated August 14, 1985 was made in the above reply to notice of appeal, but no record of it was available to the Court, and accordingly, at the hearing on the appeal, the Court proceeded on the basis of the Court Order, supra, and the documents referenced therein.

Analysis

It is clear from the above that the hearing was faced with a convoluted set of circumstances, and it might well be asked not only what was being appealed, but how the matter had ever reached this level. It is equally clear from the reasons provided by the learned Judge in connection with issuing the court order dated October 15, 1984, that every effort was made to provide some stable basis for an eventual resolution of the dispute, as follows:

I find that the delay in bringing the application is not adverse to the applicant and I am going to rule that it is within my power to treat the application in its entirety. This is, the letter dated March 20th, 1984, together with its total enclosures, which include the Statement of Facts and Reasons, and more particularly, the Statement of Facts as it has been attached to the Notice of Objection as a Notice of Appeal.

The grounds and particulars in respect of the appeal concerning the capital income matter, the supportive facts are in the Statement of Facts and I am going to treat that and those particulars there as the Statement of Facts and Reasons for the appeal.

It is going to be a difficult question. I don't know whether or not this taxpayer, through Ms. Coffey, has the resources or the training to do so, but you will have the opportunity.

But unless you are seen to be appealing the basic assessment, you can't have one without the other, and I think it's a starting ground for you to cope with this document as a Notice of Appeal. And it will have to be pleaded accordingly, . . .

At the hearing arising out of the court order above, the agent for the appellant effectively raised both reassessments—that reversing the capital gain to an income account (January 17, 1983) and that assessing the "excess distribution" of the alleged capital gain (January 18, 1983). Even taking into account all the chronology and information noted above, the agent did little to clarify the situation and the following exchange indicates the difficulty:

MS. McLEAN:—when the capital dividend was declared, it had been assumed that it was a Capital transaction.

MS. McLEAN: At that time there was an objection began on the first assessment relating to the trading issue. And it was assumed by the company that the Notice of Objection would be approved by the Minister. I understand at that time, from correspondence on the file, that there was several conversations and letters between the Department and the taxpayer to determine whether or not there was a trading or a Capital item.

And it’s on that basis that the company feels that their election under Section 184(3) should be allowed as being within the time frame, as it was filed 14 days after the letter of confirmation. The letter of confirmation on both assessments came at the same time.

HIS HONOUR: Yes, well on the assessment notice, which is dated January 17, 1983, that's the first assessment notice that deals with reversing the capital gain allocation.

MS. McLEAN: Yes.

I would also note as a matter of record, that on January 18, 1983, the document issued by the Minister was a reassessment. There is no evidence of an original assessment as called for under section 184 of the Act, but the appellant did not raise that issue. The January 18, 1983 reassessment must be taken by this Court (and that appears to be consistent with the court order dated October 15, 1984) as a reassessment of the January 17, 1983 document, as inconsistent as this may sound since one is struck under Part I of the Act and the other under Part III of the Act. This requires an examination of the circumstances surrounding the reassessment dated January 17, 1983, and it can be dealt with readily.

Mr. Roberts, the President of the appellant corporation, was a realtor. With three other parties, in 1973, he acquired a large parcel of raw land. In about one year, he bought out his partners and subdivided the property into two lots. Later, he turned one lot over to his wife. He formed the appellant corporation in 1979 and turned the other lot over to it, also acquiring a second lot in the company name. Both lots were sold in 1980; on the first the corporation made a modest profit of about $500, (which the agent agrees should be on income account), but on the sale of the other, there was the profit in dispute in this appeal, some $12,000. Mr. Roberts, in his testimony, gave no reasonable explanation for the formation of the appellant corporation, nor for the turning over to the corporation the lot at issue. He simply called it an “investment”. There was no evidence which could support a conclusion that Mr. Roberts, or the subsequent corporation, had any real intention or objective related to income-earning on the subject lot. The Minister's assessment with regard to the January 17, 1983 reassessment changing the amount therein from capital to income will be upheld.

Turning then to the January 18, 1983 reassessment we have a different problem, and it is one appropriately recognized by the Minister of National Revenue in the reply to notice of appeal, (supra):

— The Appellant did not file an election under subsection 184(3) of the Income Tax Act within 90 days of the excess dividend election assessment of January 18, 1983.

— The Respondent further submits that an election under subsection 184(3) must be filed within 90 days of assessment and as this was not done, this Court has no jurisdiction to extend the time to file such an election.

Conclusion

lt may appear to be an unreasonable result that the appellant corporation should be taxed on income account based on the full amount of the gain realized, and in addition assessed for the payment of a dividend—originally asserted (incorrectly) to be from capital account—on some of the proceeds of that gain. In my view, however, that is the proper determination which flows from the series of events detailed above. Obviously when a taxpayer claims a “capital gain” under circumstances which may fall into dispute, great care must be taken to meticulously follow each and every requirement provided in the Act, not only to sustain that claim if necessary, but to serve other rights available under the Act to challenge later taxation which might arise. The requirements under the Act are clear and the Minister has followed these. The assessments must be upheld.

The appeal is dismissed.

Appeal dismissed.