William F. Kubicek Iii, Executor for the Estate of the Late William F. Kubicek Jr. v. Her Majesty the Queen, [1996] 3 CTC 2419, 97 DTC 1551 (Informal Procedure)

McArthur J.T.C.C.: — Mr. W.F. Kubicek Jr. and his wife, both American residents, purchased a cottage in Ontario in 1967 for $17,500.00. He was deemed to have acquired the cottage for $28,700.00 upon Mrs. Kubicek’s death in 1981. The fair market value of the cottage immediately prior to his death in 1992 was $350,000.00.

The issue is; how shall the capital gain be calculated? The parties filed an agreed statement of facts which reads in part as follows:

8. In computing the Taxpayer’s income for the 1992 taxation year, the Appellant calculated the exempt portion of the gain on the deemed disposition of the one-half interest in the Property acquired in 1967 to be $115,045.00 by applying the following formula:

Gain of $166,250.00 x 207 (months Sept. 19, 1967 to Dec. 31, 1984); 299 (months owned Sept. 19, 1967 to Sept. 16, 1992)

9. In the Return, the Appellant reported a capital gain on the deemed disposition of the Property at death of $197,505.00 [$146,300.00 + ($166,250.00 - $115,045.00 reduction)]. A total taxable capital gain of $148,128.75 [3/4 x $197,505.00] was reported.

11. In reassessing the Taxpayer, the reduction under paragraph 9 of the Convention of the taxable capital gain on the one-half interest acquired by the Taxpayer on September 16, 1967 was calculated by the Minister using a different formula from that used by the Appellant. The Minister calculated the exempt portion of the capital gain of $166,250.00 on the deemed disposition of the one-half interest in the Property acquired in 1967 to be $104,156.00 by applying the following formula:

Gain of $166,250.00 x 156 (months Dec. 31, 1971 to Dec. 31, 1984); 249 (months owned Dec. 31, 1971 to Sept. 16, 1992)

12. The total amount of the taxable capital gain of $234,414.00 [75% x $166,250.00 + $146,300.00)] was reduced in the Reassessment by $78,117.00 (3/4 of the exempt portion of $104,156.00 as calculated by the Minister). The total taxable capital gain reassessed by the Minister in respect of the deemed disposition on September 16, 1992 of the Property was $156,297.00. Tax of $65,408.90 was assessed by the Minister in respect of the taxable capital gain of $156,297.00.

Position of the Appellant

The Appellant relies primarily on the reasoning and decision in Kaplan Estate v. R. 94 D.T.C. 1816.

Position of the Respondent

The word “gain” as it is used in the Canada - United States Tax Convention must be defined and then the mathematical calculation or fraction is to be structured.

Counsel submitted Article III of the Tax Convention states that any term not defined in the Convention has the meaning it has under the law of the taxing state. The term “gain” is defined in paragraph 40(1 )(a) of the Income Tax Act (the “Act”) as the difference between the proceeds of disposition and the adjusted cost base. According to subsection 20(3) of the Income Tax Application Rules the adjusted cost base is the value of the property on Valuation Day. Thus the term “gain” means only the capital gain from the Valuation Day. The Kaplan decision is not applicable for three reasons:

1. The above argument was not considered.

2. Chief Judge Couture relied in part on an Interpretation Bulletin which has since been changed to reflect the Minister’s current position.

3. The decision was under the Informal Procedure and I am not bound by it.

Paragraph 9 of Article XIII of the Convention, for the purposes of this appeal, reads:

9. Where a person who is a resident of a Contracting State alternates a capital asset which may in accordance with this Article be taxed in the other Contracting State and

(a) that person owned the asset on September 26, 1980 and was resident in the first-mentioned State on that date; or

(b) n/a

the amount of the gain which is liable to tax in that other State in accordance with this Article shall be reduced by the proportion of the gain attributable on a monthly basis to the period ending on December 31 of the year in which the Convention enters into force, or such greater portion of the gain as is shown to the satisfaction of the competent authority of the other State to be reasonably attributable to that period. For the purposes of this paragraph the term “nonrecognition transaction” includes a transaction to which paragraph 8 applies and, in the case of taxation in the United States, a transaction that would have been a non- recognition transaction but for Sections 897(d) and 897(c) of the Internal Revenue Code. The provisions of this paragraph shall not apply to

Income Tax Conventions Interpretation Act section 3 reads:

3. Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is

(a) not defined in the Convention

(b) not fully defined in the convention, or

(c) to be defined by reference to the laws of Canada,

that term has, except to the extent that the context requires, the meaning it has for the purpose of the Income Tax Act, as amended from time to time, and not the meaning it had for the purposes of the Income Tax Act on the date the convention was entered into or given the force of law in Canada if, after that date, its meaning for the purpose of the Income Tax Act has changed.

Analysis

The issue is the same as that in the Kaplan case. I do not accept the submission of counsel for the Respondent that his argument was not considered in Kaplan.

While it is true that the Minister’s argument in Kaplan was based on section 3 of the Income Tax Conventions Interpretation Act and here it is based on Article III of the Convention, the following passage from page 1819 makes clear that this distinction would not have mattered in Judge Couture’s mind because in his opinion the term “gain” is not defined in the Act:

If I understand the reasoning of counsel as to the meaning of this section 3, she asserts that whenever a term is not defined in a tax convention you refer to the provisions of the Income Tax Act (the Act) to obtain its meaning.

It is difficult to comprehend how the wording of section 3 of the Income Tax Conventions Interpretation Act can be ascribed the meaning sought by counsel for the Respondent, but even if such a capricious meaning was possible there would be a major flaw in her reasoning.

Admittedly there is no definition of the work “gain” in the Convention, but it is equally true that this word is not defined in the Act. What the Act provides is the process that must be followed once a gain has been realized by a taxpayer from the disposition of property he owned on December 31st, 1971 to determine what is the capital gain for its purpose. This requires a computation to arrive at the adjusted cost base of the disposed property at the time of disposition. The proceeds of disposition less this adjusted cost base and the selling expenses is the capital gain for the purpose of the Act. It is a fallacy to claim that the word “gain” by itself may be construed as a capital gain for the purpose of the Act.

Judge Couture then reviews the law on the interpretation of international conventions. He concludes that the U.S. technical explanations should be accorded some weight because they have been approved by the Department of Finance and because such conventions must be interpreted liberally with a view to implementing the intentions of the parties. Finally, he discusses the Minister’s Interpretation Bulletin on this subject merely to express that the Minister was taking a different position in Court from his published views in the Bulletin. Chief Judge Couture did not rely on the Interpretation Bulletin. I do not agree with the opinions expressed in the amended Bulletin.

In Kaplan, Chief Judge Couture considered and rejected the same arguments submitted in the present case. I agree with his reasoning in Kaplan and adopt it as my own. I find that the time period to be used in calculating the deduction is from the date of purchase of the property.

The appeal is allowed with costs to the Appellant.

Appeal allowed.