One for Three LTD v. Minister of National Revenue, [1980] CTC 2293, 80 DTC 1244

D E Taylor:—This is an appeal heard in the City of Winnipeg, Manitoba, on February 14, 1980 against an income tax assessment for the year 1975 in which the Minister of National Revenue assessed the taxpayer to capital gain on the sale of certain real property. The respondent relied, inter alia, upon sections 3, 9, 38, 39, 40, 52 and 82 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Background

—One For Three Ltd (the company) was incorporated in the Province of Manitoba;

—On August 18, 1973, a 525-acre farm was transferred to it by a partnership, and company shares were given in payment;

—The partnership and the appellant filed an election pursuant to section 85(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

—The amount that the partnership and the appellant agreed on as the transfer value of the farm was $67,000 ($127.60 per acre);

—The appellant disposed of a 43-acre portion of the farm in May of 1975;

—The fair market value in May of 1975 of the 43-acre parcel of land was $375 per acre.

Contentions

For the appellant:

—The adjusted cost base of $127.60 per acre was the value of the land on November 1, 1970.

—An error was made by the appellant in completing form 12058, the election under subsection 85(2), when the agreed transfer value was declared as $127.60 instead of $275 which was the market value as at December 31, 1971, Valuation Day.

—The consequence of the error is that a capital gains tax is being imposed on a value increase that accrued prior to the imposition date for capital gains tax.

—The letter of the law may require that the appellant suffer the consequence of its mistake but the spirit of the law is to tax only capital gains realized on value gains subsequent to December 31, 1971.

—The appeal is made on the grounds that fair and just treatment should be afforded the taxpayer, recognizing the spirit of the law and downplaying the application of the law through its regulations, interpretations, forms etc.

For the respondent:

—The cost to the appellant of the 43-acre parcel sold in its 1975 taxation years was the value elected by the appellant and the partnership of $67,000 for 525 acres, or $127.60 per acre within the meaning of section 82 of the Income Tax Act.

—The appellant therefore realized a capital gain of $10,638 on the sale of the 43-acre parcel, and a taxable capital gain of $5,319 within the meaning of sections 38, 39 and 40 of the Income Tax Act.

Evidence and Argument

Considerable discussion relative to the appeal took place between the parties, but it was finally agreed that the Board look at only one issue—whether or not the appellant should be permitted to amend Form T2058 Election on Disposition of Property (the Election) which was filed on August 18, 1973. A copy of the Election was provided to the Board as an ex- hibit, and the agent for the appellant explained to the Board that the $127.60 per acre figure was that which the partnership originally agreed to pay for the property in 1970, although final payment was not made until 1972. The agent indicated that although he did not have a valuation report to support the amount of $275 per acre, he arrived at this figure from reviewing other property sales in the area.

The position of the respondent was summarized as follows:

There has not been a great deal of case law on this section and particularly on the question of whether an election made thereunder is revocable. I think that

(one) doesn’t need to look at a dictionary to find out what the meaning of election is. The Act itself does not define election. I think it is fairly obvious that an election is a choice, the right to make a choice between alternatives; but referring to the one case which has dealt with the question of whether an election is revocable is a recent decision of the Tax Review Board—A S Walker Holdings Limited v MNR, [1979] CTC 2112; 79 DTC 132. In that case, the corporation transferred assets to a subsidiary and it had elected under section 85 to take advantage of the roll-over provision. Subsequently, it wanted to change its election and the Minister took the position that an election once made is not revocable. At pp 2115 and 135 respectively of that decision, the very last paragraph (reads):

The appellant chose to do what it did and, having done so, it must accept the consequences of that act. It did act in accordance with the formal agreement (Exhibit A-3) and I am of the view it should be assessed on the same premise.

.. . I submit there are three basic requirements. There must be a choice of inconsistent and alternatives. There must be an unequivocal act, and the choice must be communicated to the other parties. Applying that to the present appeal, we have the coice of taking advantage of the roll-over provisions of section 85 or not to take them. The taxpayer chose to take the advantage. He elected to take advantage of the roll-over provisions. He did the unequivocal act of filing the joint election, and in filing that he also communicated his choice to the Minister. I submit that he has made his election, (and he is) bound by it.

Findings

The impact of section 85 of the Act was dealt with in A S Walker (supra), and I would only add it would appear to me that paragraph (1)(a) of that section is always operative unless an initiative is taken by the Minister by way of assessment or other appropriate notification, to implement any other subsection. With relation to the specifics of the instant matter, the assessment, against which this appeal has been lodged, was based upon the “elected amount” agreed to in the election by the taxpayer and the corporation, which amount “shall be deemed” to be the proceeds of disposition and the cost of acquisition respectively, according to paragraph (1)(a). As I read the succeeding subsections, they do not provide any avenue for further intervention by either the taxpayer or the corporation, but only by the Minister, in the event that certain given circumstances warrant such attention by him to the matter.

Summary

An election under section 85 is not tenative, it is final as it concerns the rights of the primary parties—the taxpayer and the corporation.

Decision

The appeal is dismissed.

Appeal dismissed.