Lamarre Proulx T.C.J.:
1 This is an appeal from a reassessment by the Minister of National Revenue (the “Minister”) in which the Minister added a capital gain to the appellant's income for its 1990 taxation year under subsection 55(2) of the Income Tax Act (the “Act”) by treating a taxable dividend of $711,788in respect of which the appellant was entitled to a deduction under paragraph 112(b) of the Act as the deemed proceeds of disposition of the shares that the appellant held in Les Automobiles G. Leclair Inc. and that were redeemed by that company.
2 Subsection 55(2) of the Act reads as follows:
- 55(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events)
(a) shall be deemed not to be a dividend received by the corporation;
(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and
(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property.
3 There was not really any argument as to the facts or the interpretation of the facts. The only point at issue is whether the appellant was prevented from making a designation under paragraph 55(5)(f) of the Act of a portion of a taxable dividend as a separate dividend attributable to income earned after 1971 because it did not do so in its return of income for the taxation year in which the taxable dividend was received.
4 Paragraph 55(5)(f) of the Act reads as follows:
For the purposes of this section,- (f) where a corporation has received a dividend any portion of which is a taxable dividend,
(i) the corporation may designate in its return of income under this Part for the taxation year during which the dividend was received any portion of the taxable dividend to be a separate taxable dividend, and
(ii) the amount, if any, by which the portion of the dividend that is a taxable dividend exceeds the portion designated under subparagraph (i) shall be deemed to be a separate taxable dividend.
5 The facts on which the appellant relies in its appeal are described in paragraph 4 to 8 of the Notice of Appeal, as follows:
[TRANSLATION]4. during the taxation year at issue, all of the appellant's shares were held by Gilles Leclair;
5. during the taxation year at issue, the appellant became a shareholder of the business “Les Automobiles G. Leclair Inc.”; as a result of this transaction, the appellant held 59 per cent of the business's voting shares, while Michel Leclair, Gilles Leclair's brother, held the remaining 41 per cent of the voting shares;
6. during the taxation year at issue, Les Automobiles G. Leclair Inc. proceeded with the redemption of its class E shares held by the appellant, for an amount of $950,000;
7. at the time Les Automobiles G. Leclair Inc. redeemed its shares held by the appellant, “the earned income” attributable to the appellant's shares totalled an amount of $429,832;
8. at the time of the transaction, the appellant had become convinced that the redemption of its shares in Les Automobiles G. Leclair Inc. would be effected without tax consequences since it would give rise to a tax-free intercorporate dividend;
6 The statutory provisions and the reasons in support of the application are described in paragraphs 10 to 14 of the Notice of Appeal as follows:
[TRANSLATION]10. the appellant relies inter alia on subsections 55(2), 55(5) and 84(3) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended;
11. Parliament's purpose at the time subsection 55(2) of the Income Tax Act was passed was to prevent what would otherwise constitute a capital gain from being converted into tax-free intercorporate dividends through a transaction involving parties not dealing with each other at arm's length;
12. it is therefore contrary to Parliament's intention and the spirit of subsection 55(2) of the Income Tax Act to treat the entire deemed dividend resulting from the redemption of the shares as proceeds of disposition giving rise to a capital gain since at least $429,832 of those proceeds of disposition is attributable to “income earned”;
13. the appellant contends that, at the time the shares were redeemed, it was entitled to have a portion of the deemed proceeds of disposition treated as a tax-free intercorporate dividend;
14. the appellant contends that the alleged proceeds of disposition of $950,999 must be reduced by an amount equal to the earned income of $429,832;
15. the appellant contends that the instant appeal is well-founded in fact and in law.
7 At the start of the hearing, counsel for the appellant moved to amend the Notice of Appeal so as to change the amount of the proceeds of disposition of $950,000 stated in paragraphs 6, 9 and 14 by reducing it by an amount of $25,800, which amount was paid by Gilles Leclair to Les Automobiles G. Leclair Inc. on March 2, 1990, allegedly for the appellant for adjustments to the selling price. (Exhibit A-3 is the cheque relating to that transaction.) There was not really any argument on that question during the hearing. I therefore agree that the proceeds of disposition of $950,000 shall be reduced by the amount of $25,800, resulting in proceeds of disposition of $924,200.
8 Paragraph 7 of the Reply to the Notice of Appeal (the “Reply”) was admitted, with the exception of subparagraph 7(v) of the Reply and of the amount of the proceeds of disposition of the redeemed shares which, as stated above, shall be reduced by $25,800. Paragraph 7 of the Reply reads as follows:
[TRANSLATION](a) the company “Les Automobiles G. Leclair Inc.” was incorporated on March 6, 1975;
- (b) since its incorporation, the shares of the company “Les Automobiles G. Leclair Inc.” were distributed as follows:
(c) Gilles Leclair is Michel Leclair's brother;
(d) on April 30, 1990, the directors resolved to pass by-law 90-1 amending the capital stock of the company “Les Automobiles G. Leclair Inc.”;
(e) on May 7, 1990, a certificate of amendment was issued by the Inspector General of Financial Institutions in respect of the changes to the by-laws of “Les Automobiles G. Leclair Inc.”;
(f) as a result of this amendment of the by-laws, the 59 class A shares were converted to 59 class A shares exchangable for class E shares, and the 41 class C shares were converted to 41 class B shares;
(g) on May 8, 1990, the 59 class A shares of “Les Automobiles G. Leclair Inc.” held by Gilles Leclair were exchanged for 59 class E shares of the same company;
(h) furthermore, on May 4, 1990, a certificate of amendment was issued by the Inspector General of Financial Institutions of Quebec in accordance with which the corporate name of the company “Les Constructions Gilles Leclair Inc.” was changed to “Administration G. Leclair Inc.” (hereinafter called the “appellant”);
(i) the certificate of amendment also changed the description of the appellant's capital stock;
(j) on May 9, 1990, the directors of the appellant passed a resolution authorizing the appellant to purchase from Gilles Leclair the shares he held in “Les Automobiles G. Leclair Inc.”;
(k) on May 9, 1990, under subsection 85(1) of the Income Tax Act, Gilles Leclair transferred the 59 class E shares that he held in the company “Les Automobiles G. Leclair Inc.” to the appellant for $950,000;
(l) in accordance with subsection 85(1), the 59 class E shares of the company “Les Automobiles G. Leclair Inc.” were acquired by the appellant for the agreed upon amount of $590 and in return Gilles Leclair received 59 class E shares of the appellant redeemable for $950,000;
(m) on May 10, 1990, “Les Automobiles G. Leclair Inc.” redeemed the 59 class E shares of its capital stock held by the appellant for $950,000;
(n) application of the provisions of the Income Tax Act without reference to section 55 results in the following tax consequences:
| A — Deemed Dividend | |
| Amount paid by the company “Les Automobiles G. Leclair Inc.“ (84(3)a)) | $950,000 |
| Paid-up capital in respect of the 59 class E shares held by the appellant | 950 |
| Deemed dividend | 949,050 |
| Deduction provided for by paragraph 112(1)(a) | $949,050 |
| 0 | |
| B — Capital Gain | |
| Proceeds of disposition of 59 class E shares held by the appellant (54(h)(i)) | $950,000 |
| Deemed dividend | 949,050 |
| Deemed proceeds of disposition | 950 |
| Adjusted cost base | 950 |
| Total | 0 |
- (o) the appellant was dealing with “Les Automobiles G. Leclair Inc.” at arm's length for the following reasons:
(i) the appellant was wholly owned by Gilles Leclair,
(ii) “Les Automobiles G. Leclair Inc.” was wholly owned by Michel Leclair,
(iii) Gilles Leclair and his brother Michel Leclair are deemed to deal with each other at arm's length under paragraph 55(5)(e);
- (p) the dividend received was part of a transaction or event or a series of transactions or events the result of which was:
(i) a disposition of property - the 59 class E shares to a person (Les Automobiles G. Leclair Inc.) with whom that corporation (Administration G. Leclair Inc.) was dealing at arm's length, or
(ii) a significant increase in the interest in a corporation (Les Automobiles G. Leclair Inc.) of a person (Michel Leclair) with whom the corporation that received the dividend (Administration G. Leclair Inc.) was dealing at arm's length;
(q) the appellant received a taxable dividend ($949,050) deductible under subsection 112(1) as part of a transaction or event or a series of transactions or events one of the results of which was to effect a significant reduction in the capital gain realized on a disposition of any share of the capital stock of “Les Automobiles G. Leclair Inc.” that, but for the dividend contemplated by subsection 84(3), would have been realized on a disposition, at the fair market value, of any share of capital stock immediately before the dividend:
| Fair market value of the 59 shares of “Les Automobiles G. Leclair Inc.” before the dividend(54(h)(i)) | $950,000 |
| A.C.B. | 950 |
| Capital gain | $949,050 |
(r) furthermore, the portion of the capital gain that could reasonably be considered to be attributable to anything other than income earned or realized by a corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events was at least:
| Capital gain that would have been realized | $949,050.00 |
| Income earned or realized after 1971 attributable to the 59 class E shares of “Les Automobiles G. Leclair Inc.” | 429,832.52 |
| Amount attributable to anything other than income earned or realized after 1971 | $519,217.48 |
(s) no portion of the dividend deemed received by the appellant was subject to tax under Part IV;
(t) the appellant did not report in its return for the 1990 taxation year that it had received a taxable dividend of $949,050 the amount of which was deductible under subsection 112(1);
(u) the appellant did not designate in its return of income filed on June 20, 1991, under Part I, for the 1990 taxation year, any portion of a taxable dividend that it is deemed to have received as a separate taxable dividend within the meaning of paragraph 55(5)(g) of the Act;
(v) the amount of the dividend of $949,050 is deemed not to be a dividend received by the corporation and is deemed to be the proceeds of disposition of the shares;
9 Juido D'Argensio, accountant, André Primeau, tax adviser, and Gilles Leclair, president of the appellant, testified at the request of counsel for the appellant.
10 Gilles Leclair explained that he had started to do business in the field of automobile sales and repairs with his brother Michel in 1971. In 1975, “Les Automobiles G. Leclair Inc.” was incorporated and continued to operate the business as a corporation. Gilles Leclair held 59 per cent of the common shares and his brother Michel Leclair, 41 per cent.
11 At the end of 1988, “Les Automobiles G. Leclair Inc.” purchased the shares of Avantage Autos, an automobile dealership in St-Sauveur, in the Laurentians, as well as the shares of the corporationthat held the garage's real estate property. Gilles Leclair went to live in St-Sauveur to attend to the new business.
12 After the St-Sauveur business had been operating for a few months, Michel Leclair asked his brother, in the spring of 1989, to separate the joint business. The brothers decided that the business of “Les Automobiles G. Leclair Inc.” would go to Michel and the Autos Avantage operation to Gilles. Gilles Leclair then asked the accountant of “Les Automobiles G. Leclair Inc.” to prepare the necessary separation agreement, which the company's accountant and tax adviser did. They submitted to Gilles Leclair a plan that, in their view, had no tax consequences. As proof of this, Gilles Leclair submitted what is stated at page 2 of the reorganization proposal, a schedule to the Agreement, filed as Exhibit A-1, entered into by Michel Leclair and Gilles Leclair on November 8, 1989. The following remark under stage 4 concerns the rollover: no tax consequences because of the rollover. Stage 5, which concerns the redemption by “Les Automobiles G. Leclair Inc.”, contains the following remark: deemed intercorporate dividend and possible balance.
13 Mr. D'Argensio, who is a chartered accountant, explained that, after the Leclair brothers asked him to find the best way to divide the assets, he asked André Primeau, a lawyer and tax adviser, to analyze this case. The accountant confirmed that there had never been any intention on the part of anyone in this case not to comply with the Act.
14 André Primeau explained that he had acted as a tax adviser for the accounting firm “Argensio et Associés” in 1989 and 1990. The agreement signed by the two brothers on November 8, 1989, which was filed as Exhibit A-1, was prepared by him. Mr. Primeau knew that subsection 55(2) of the Act applied to arm's length transactions, but, for some unknown reason, paragraph 55(5)(e) of the Act, which provides that for the purposes of that section two brothers are deemed to deal at arm's length, escaped him when he was reviewing this case. He had already taken part in the same type of tax planning for a family, but that was a case in which the father was a party to the transaction. I quote Mr. Primeau at pages 46 and 47 of the transcript:
[TRANSLATION]
Q. Can you examine it and can you tell us, explain to the Court, why there was no designation?
A. There was no designation because we believed firmly and in good faith, if you will, that there was not ... there was no question of a taxable dividend because the persons involved in the transaction were persons who were not dealing with each other at arm's length or were, had a relationship in which they were not dealing with each other at arm's length.
Q. Then, without wanting to lead you, in your understanding, did subsection 55(2) apply or not apply to the circumstances?
A. It did not apply to the circumstances.
Q. At the time of the planning, how would you characterize your intention, your intentions and your objective with respect to subsection 55(2)?
A. The objectives were to accomplish what I just told you and there was never ... obviously the idea was to conduct these transactions with as little tax as possible. And all this had to be done, if you will, in a legal and legitimate manner without any intention to evade or avoid tax in any way whatsoever.
15 Gilles Leclair explained as follows why he never thought that there was tax payable on that kind of transaction, at page 65 of the transcript:
[TRANSLATION]
A. Well, I thought it made sense as the shares were going to Gestion G. Leclair and I was not receiving the shares; the money had already been taken out to buy the shares of Avantage. I did not receive the money. The money went from one company to the other. It was a share rollover.
16 According to the schedule to Exhibit A-1 entitled “Reorganization Plan”, the corporation “Les Automobiles G. Leclair Inc.” proceeded with the redemption of its shares using the shares of the capital stock of Autos Avantage and the shares of the corporation owning the St-Sauveur garage and possibly a certain amount paid in cash. The shares of Autos Avantage no longer had any monetary value at the time of the hearing.
17 I cite clause 4 of the Resolution of the directors of “Les Automobiles G. Leclair Inc.” (Exhibit A-2), which describes the consideration given for the redemption of the shares:
[TRANSLATION]
4. THAT the consideration for the redemption of the 59 class E shares consist of a sum of money in the amount of SEVENTY-FIVE THOUSAND DOLLARS ($75,000) and of 100 preferred shares of the capital stock of the company “2635-5164 QUÉBEC INC.”, having a market value of ONE HUNDRED THOUSAND DOLLARS ($100,000), as well as 775,000 class B preferred shares of the capital stock of the company “AVANTAGE PONTIAC BUICK INC.”, having a market value of SEVEN HUNDRED AND SEVENTY-FIVE THOUSAND DOLLARS ($775,000).
18 It should be noted that the witnesses were not cross-examined as, in the view of counsel for the respondent, the taxpayers' intentions were of no importance. All that was important was the fact that the election under paragraph 55(5)(f) of the Act had not been made in the return of income for the year in which the dividend had been received.
Appellant's Argument
19 Counsel for the appellant argued that this case involved an unfortunate error by the tax planning advisers and that the appellant had acted in good faith and wanted to act in a legal manner, and he restated the reasons described in the Notice of Appealcited above at the start of these reasons, but which I cite again so that the argument may be more readily understood:
[TRANSLATION]11. Parliament's purpose at the time subsection 55(2) of the Income Tax Act was passed was to prevent what would otherwise constitute a capital gain from being converted into tax-free intercorporate dividends through a transaction involving parties not dealing with each other at arm's length;
12. it is therefore contrary to Parliament's intention and the spirit of subsection 55(2) of the Income Tax Act to treat the entire deemed dividend resulting from the redemption of the shares as proceeds of disposition giving rise to a capital gain since at least $429,832 of those proceeds of disposition is attributable to “income earned”;
13. the appellant contends that, at the time the shares were redeemed, it was entitled to have a portion of the deemed proceeds of disposition treated as a tax-free intercorporate dividend;
14. the appellant contends that the alleged proceeds of disposition of $950,999 must be reduced by an amount equal to the earned income of $429,832;
20 He also relied on the decision I rendered on October 6, 1995 in Gestion Jean-Paul Champagne Inc. c. Ministre du Revenu national[reported at(1995), [1996] 2 C.T.C. 2537 (T.C.C.)]. In that decision, in virtually identical circumstances, I ruled in the appellant's favour on the basis that it permitted the achievement of the object of paragraph 55(5)(f) of the Act. This aspect of the case is discussed from page 12 of the reasons for judgment until the end. I had held as follows:
Furthermore, it seems to me that not to allow the taxpayer to exercise the right provided for in paragraph 55(5)(f) of the Act in the case of a reassessment would run counter to the object of subsection 55(2) of the Act. The intent of this provision is, on the one hand, that the portion of the capital gain that is not attributable to the payment of a dividend (according to the amount of income earned and realized after 1971 as regards those shares) be considered as proceeds of disposition and subject to capital gains tax and, on the other hand, that the portion of the capital gain that is attributable to the income earned and realized after 1971 may be designated as a dividend.
Counsel for the Respondent's Argument
21 Counsel for the respondent did not contend in the instant appeal that paragraph 55(5)(f) of the Act is a provision that contains a penal element, as his colleague did in Champagne, supra. He therefore contended that it was irrelevant whether there was good faith or bad faith. He further willingly admitted that the Minister had suffered no prejudice as a result of the lateness of the election. He simply adhered to the literal interpretation of the text and contended that the object of the provision was to enable the taxpayer to make an election in his return of income for the taxation year in which the dividend was received and that if the election was not made it could not be made through an appeal from a reassessment.
22 Counsel for the respondent referred to three decisions by our Court respecting the application of paragraph 55(5)(f) of the Act: Nivram Holdings Inc. v. Minister of National Revenue (April 19, 1991), St-Onge T.C.J. (T.C.C.), 81846 Canada Ltd. v. R. (February 10, 1992), Tremblay T.C.J. (T.C.C.), and a decision by Judge Teskey in Trico Industries Ltd. v. Minister of National Revenue (1994), 94 D.T.C. 1740 (T.C.C.).
23 In Nivram Holdings Inc. v. Minister of National Revenue, a decision rendered orally from the bench, Judge St-Onge held as follows, at page 6 of that judgment:
In the present case, the Appellant company filed its return without taking into consideration paragraph 55(5)(f) and there is nothing in the Act that gives the Tax Court the jurisdiction to allow a late filing except in the case of a Notice of Objection or a Notice of Appeal. (The emphasis is mine. It is important to note that distinction made by Judge St-Onge.)
24 Judge Teskey dismissed the appeal in Trico Industries Ltd., supra, because he would have liked the appellant to plead good faith in his Notice of Appeal. He wrote:
In regard to jurisdiction, the Court has the obligation to determine if the assessment of tax made by the Minister is correct. If the Appellant had made an honest mistake, I believe he would have had the right to make a late designation or request the same in its Notice of Appeal.
25 Counsel for the respondent also relied on a few other decisions by our Court and the Federal Court, Trial Division, respecting various other elections that may be made in various applications of the legislation. Those decisions are interesting, but the elections described therein are based on different legal situations from those in the instant appeal. Reviewing them and drawing the necessary distinctions would require an effort which, I ultimately believe, would not be helpful since we would be considering different legal situations: Parliament's purposes in adopting the statutory provisions are not the same and each statutory provision must be interpreted with respect to its purpose.
26 Like his colleague in Champagne, supra, counsel for the respondent referred to the decision by the Federal Court of Appeal in Miller v. Minister of National Revenue (1992), 93 D.T.C. 5035 (Fed. C.A.), in which Mahoney J.A. states the following with respect to the forward averaging election provided for in subsection 110.4(1) of the Act in effect for 1982, the year at issue in that case, at page 5036:
The reasoning that amendment of the election was part and parcel of the assessment might well be unexceptionable if a taxpayer electing to forward average had been obliged to make that election in respect of a prescribed amount or portion of his taxable income for the year but that was not the case. Subject to a minimum of $1,000, the taxpayer had the option to forward average all, some or none of the eligible amount. It was the taxpayer's election and there was no basis upon which the Minister, absent legislative authority, could be allowed to impose the choice on him even if the taxpayer considered it beneficial.
I am of the opinion that the Minister had no power to amend a forward averaging election for much the same reason that this Court held that absent fraud, misrepresentation or a timely waiver, the Minister is powerless to reassess after expiration of the limitation period provided by subsection 152(4) of the Act even if the taxpayer wanted the reassessment. A finding that the Minister had that power would not be limited to the particular taxpayer and could oblige other taxpayers to object to amendment of their elections and perhaps to litigate.
27 I cite my remarks in Champagne on that point:
In attempting to apply the reasoning set forth in the first paragraph cited above to the situation in the instant case, I am of the opinion that this is more a case in which the taxpayer was forced to make an election on the basis of an amount determined by a provision of the Act, in this case subsection 55(2), than a case of an election which is made by the taxpayer of his own volition and which is dictated rather by his own expectations than by the provisions of the Act.
It also seems clear to me from the Federal Court of Appeal's reasons that the considerable increase in the Minister's administrative workload was taken into account. This was obviously a factor to be considered in interpreting Parliament's intention. This factor was not raised in the instant case and I do not see how an amendment of the amount designated under paragraph 55(5)(f) of the Act, correlative with that of the amount determined under subsection 55(2) of the Act for the purpose of reassessment, would cause an administrative overload.
There are also other factors that may be considered with regard to making an election or a designation at the time of a reassessment, including the prejudice caused to the rights of the Minister or other taxpayers. I do not see that any prejudice was caused to anyone in the instant case.
28 Counsel for the respondent also referred to the decision by the Supreme Court of Canada in Montreal Trust Co. (Lodestar Drilling Co.) v. Minister of National Revenue (1962), 62 D.T.C. 1242 (S.C.C.)and cited the following passage:
The mere fact of a re-assessment in 1955 does not open the matter of taxability at large and compel the Minister to re-assess in accordance with an amended return made out of time, according to the above quoted section.
29 Although this passage is from the minority judgment, that portion was approved by the majority. In the instant appeal, we are not dealing with a situation similar to that referred to by the Supreme Court of Canada. What was involved in Lodestar was an application in respect of an amended return filed beyond the time limit, return that was thus not included in the reassessment, even though it concerned the same taxation year. What the appellant is requesting here is not that its assessment for the taxation year at issue be entirely reopened. The issue concerns an element that is reasonably related to the subject of the reassessment and that was the subject of an application in the Notice of Appeal.
30 In construing tax legislation, one must avoid mechanical interpretations of the legislation and refer to the object and purpose of the statutory provision. The Supreme Court of Canada ruled as follows in MacLeod Savings & Credit Union Ltd. v. Perret, [1981] 1 S.C.R. 78 (S.C.C.), at page 90:
...the courts must repudiate any mechanical construction of the Act which thus runs contrary to its very purpose and policy.
31 In Swantje v. R. (1994), 94 D.T.C. 6633 (Fed. C.A.), Marceau J.A. took the following approach.
The approach adopted by the learned judge was a purely mechanical one, focused on the method, the means devised to achieve the goal. The proper approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes (cf. Stubart Investments Limited v. The Queen, 84 D.T.C. 6305 (S.C.C.)). What Part 1.2 of the Act, completed by paragraph 60(w), realizes is the repayment of social benefits by taxpayers who, because of their higher incomes, have a lesser need of them.
32 The purposive method described by the Supreme Court of Canada in Québec (Communauté urbaine) c. Notre-Dame de Bonsecours (Corp.), [1994] 3 S.C.R. 3 (S.C.C.), for the purposes of construing taxing provisions, requires that the emphasis be placed on the purposes of the statutory provision.
33 What then is the purpose of paragraph 55(5)(f) of the Act? It appears to be assumed by all authors who have written on the subject that the purpose of paragraph 55(5)(f) of the Act is to avoid the double taxation of corporate income. That provision is integrated into the capital gains taxation scheme provided for by subsection 55(2) of the Act in the case of share redemptions, which makes it possible not to tax as a capital gain the portion attributable to income earned or realized after 1971. I therefore cannot understand the Minister's purpose in interpreting the provision in a restrictive, and in fact coercive, manner if it is not a penal provision or one that incorporates a punitive element, as counsel for the respondent is contending, a position with which I agree. It is part of the economy of the Act that there are provisions relating to penalties. However, where a rule is punitive, Parliament must clearly express itself on the subject so that the courts may interpret it in that context. One would therefore be wrong to attach a punitive meaning to the provision in question. If the provision is stripped of any punitive nature, it becomes clear that this election, if not made in the return of income filed for the year in which the dividend was received because a taxpayer did not know that subsection 55(2) of the Act applied, may be made at the time of an appeal from an assessment in which subsection 55(2) of the Act is applied. As the object of paragraph 55(5)(f) of the Act is to prevent the double taxation of corporate income, by complementing subsection 55(2) of the Act and not being punitive in nature, it is therefore necessary for this object to be achieved to enable the taxpayer to make the election where subsection 55(2) of the Act applies. If the taxpayer acted knowingly for the purpose of breaching the Act, there are penal provisions available to the Minister to correct that behaviour.
34 The words “in the return of income” have a meaning, but they may not take on a coercive meaning in a provision that is not punitive in nature. What they mean here is that, at the same time a taxpayer reports deemed proceeds of disposition from a share redemption, the taxpayer may make an election and, if he does so, he must do so at the same time he reports the proceeds of disposition. If the election is incorrect or the taxpayer does not make the election, not knowing that he must report proceeds of disposition from the share redemption, the election may be made at the time of reassessment by the Minister or in an amended return filed for the taxation year in which the dividend was received. This is what is intended by the object of the provision and the economy of the Act.
35 The appeal is allowed with costs, and the Minister shall assess the appellant on the following basis: the taxpayer may designate the amount of $429,832 as a separate taxable dividend for the 1990 taxation year, that sum being the income earned or realized after 1971, attributable to the redeemed shares. The difference between the amount of $924,200 and $429,832 constitutes the proceeds of disposition of the shares.
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