Clifford B Clark v. Minister of National Revenue, [1973] CTC 2069, 73 DTC 63

The Chairman (orally):—This is an appeal by Clifford B Clark against notices of reassessment issued by the Minister of National Revenue for the taxation years 1966 and 1967. Two separate appeals were filed, namely, 72-721 and 72-722, for the 1966 and 1967 years respectively.

No evidence has been called in support of the appellant or the respondent. The reason for this is that the facts are not in dispute and the parties have agreed that the Minister’s assumptions as set forth in paragraph 9 of his reply were substantially correct, but the appellant does not concede that the transaction was a sham. The appellant’s position is that what took place—which I will describe in a moment—was a bona fide transaction which was permitted by paragraph 85F(1)(a) of the Income Tax Act as it then applied.

What happened was that in the taxation year 1966 the appellant, apparently after considering his tax position, purchased in the latter part of that year cattle from Lang Cattle Company Limited for $9,595. This, of course, he deducted as an expense of his farming operation, that is to say, his ranching operation, for that taxation year. Early in 1967, and I think the argument and the agreement indicates that it was only an interval of a few weeks that we are considering, he sold the same cattle back to Lang Cattle Company for $9,500. These cattle never left the physical possession of the Lang Cattle Company, that is, they were never transported or delivered to the property or ranch of the appellant. The same thing took place, with a difference only in the numbers involved, in the 1967 taxation year.

I must deal with each appeal of this appellant—or any appeal before this Board—on the basis that a taxation year is inclusive within itself.

The taxpayer in this instance makes no pretence about the transaction. He admits that he purchased the cattle to reduce his income in the respective taxation years, and that he sold them back to the vendor, minus a service charge, after the turn of the new fiscal year. It is urged upon me by counsel for the appellant, and I think it is evident when reading the provisions of the Income Tax Act, that certain concessions have been made to those who qualify as farmers by virtue of the various definitions contained throughout the Act. it is also admitted that the appellant in this instance falls within the class of taxpayers known as “farmers”.

These special provisions extending special treatment to farmers are well known, and I cite, as a couple of examples, the averaaina of income over a period of five years that is permitted to farmers and the inclusion of farmers in the section dealing with reporting income on a cash basis, which is permitted to farmers and professional people under paragraph 85F(1)(a). There are others, such as accelerated capital cost allowances, but it is clear that certain advantages have been extended to farmers to compensate them, ! would suspect—because I cannot know what was in the minds of the Members of Parliament when they arrived at the wording of each and every section of the Act—for the hazards and uncertainties of weather and world markets that particularly affect persons engaged in farming.

lt is true that the cattle were never delivered, but payment was made, and I make this finding on the basis of the facts contained in the notices of appeal and in the admissions made in the Minister’s reply to the effect that the cheque was cashed by Lang Cattle Company Limited and honoured by the appellant’s banker. Subsequently, also, Lang repaid the purchase price, less the service charge and commission, to the appellant. I don’t think that there is any doubt, certainly there is no doubt in my mind, that the appellant never intended to take possession of these animals but was strictly attempting to avoid payment of any more tax than was absolutely necessary and to reduce his taxable income by taking advantage of the provisions of paragraph 85F(1)(a) of the Act.

The Minister relies on two sections of the Act which have been used, and which evidently were included in the Act, to prevent taxpayers from artificially reducing their income and thus gaining an advantage that would be unfair to the rest of the taxpayers of the country. These were included in the Act for this purpose in Part VI, which is headed “Tax Evasion”. Subsection 137(1) is a catch-all section which allows the Minister, where there is an artificial reduction of income, to overcome this and to tax the income involved, by providing, and I quote:

137. (1) In computing income for the purpose of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

Paragraph 12(1)(a) is also relied on by the Minister and, although appearing on the face of it to be more specific, is really only a statement in general terms that an expense incurred by a taxpayer in a given taxation year must be incurred for the purpose of gaining or producing income from a business. I stop there because this taxpayer was in the business of farming or ranching in both the taxation years in question.

So it is urged upon me by counsel for the appellant that I should be guided by the specific provisions of subsection 85F(1) and by counsel for the respondent that I should be guided by the overall application of paragraph 12(1)(a) and subsections 85F(1) and 137(1). It is admitted, and in any event I so find, that there was no attempt to evade the payment of tax but simply to avoid it.

Cases have been cited by counsel for the respondent, particularly two cases dealing with pension plans under section 76, with which I do not quarrel. He could have cited many more cases along the lines indicated in those two, but the principle involved in the section 76 cases was, I think, succinctly put by the trial judge in what was then. I believe, the Exchequer Court of Canada (although it may have been at that time the Federal Court), and I paraphrase, that something which complies specifically with certain provisions of the Act may nevertheless be disallowed as an expense if it artificially reduces the income of the taxpayer. In other words, under section 76 the pensions that were anticipated and which were approved, or to be approved, by the Minister could be found to have met the requirements of that portion of the Act but still be caught by subsection 137(1) because, in effect, they artificially reduced the income of the taxpayer.

There is a distinction, however, in dealing with these cases and dealing with others, and that is, that farmers—and I am using the word in the wide general interpretation given to it within the Act—are given a special consideration, as I have said, under paragraph 85F(1)(a), that is given to only two classes of taxpayers: professions in the wide sense, and farmers.

It is common knowledge that one of the few points that are clear at this stage of the new tax reform legislation is that the professions have been removed from the “cash basis” and placed on an accrual basis. Farmers have still been allowed to continue on the cash basis, subject to certain limitations brought about by the introduction of capital gains legislation, and so are now the only ones, in my recollection, who are still allowed the ‘‘cash basis” approach to their income.

So to come right down to it, in this instance the transaction was, in my view, a sham in that the taxpayer never intended to take possession of those cattle notwithstanding the fact that he paid his money, and one is tempted to say, not facetiously, that, having paid his money, he took his chance that no disaster would befall either the business or the individual animals themselves before he could get his money back in the next year.

It seems to me that the farmer has been given an advantage which would allow him, if I were to carry it to its furthest extent and provided he has either the credit or the cash available for the purpose, to reduce his taxable income in any given year to zero and then sell his product back to the same individual from whom he purchased it without, as is apparent in this case, incurring any loss other than a service charge.

I feel that it is a means that this taxpayer has used to take maximum advantage of the provisions of subsection 85F(1) of the Act. It is not for me to say whether or not this is an unfair advantage to one group of taxpayers over another group, because Parliament has seen fit, in its wisdom, to grant this, or at least, according to my interpretation of the relevant sections with which I have been dealing, to make this possible. It is trite law to say that everyone is entitled to arrange his affairs so that he pays the minimum amount of tax, provided he does so within the confines of the relevant provisions of the Income Tax Act.

In my view, in the circumstances of this case, the predominant provision is subsection 85(F)(1), the taxpayer has taken the maximum advantage permitted to him under that provision, and the artificiality of it is not subject to attack under the general wording of subsection 137(1) or paragraph 12(1)(a) because the two transactions were completed and the two cheques were cleared and to that extent there was no sham.

For these reasons I would allow the appeals and refer the matter back to the Minister for reassessment on the basis that each of the appeals is allowed in full.

Appeal allowed.