[1] This is an appeal from a Tax Court judgment in which the appellant was held to be subject to tax on a deemed taxable capital gain of $75,000 in respect of the shares of his corporation. The reasons for the judgment are reported as Holder v. Canada, [2003] 3 C.T.C. 2114, 2002 D.T.C. 1991 (T.C.C.).

[2] Mr. Holder made the mistake of attempting to file an election under subsection 110.6(19) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th supp.). That provision was enacted to provide some relief to individuals against the elimination of the capital gains exemption for gains arising from dispositions made after February 22, 1994. Subsection 110.6(19) permitted individuals to elect to recognize, for income tax purposes, certain capital gains accrued but not realized as of February 22, 1994. By making the election, they could take advantage of the capital gains election and only be taxed on gains accrued and realized after that date.

[3] Generally, the effect of the election in the simplest case is to deem the elected property to have been disposed of in 1994 for an elected amount. The property is then deemed to have been reacquired at the elected amount, so that the same gain is not taxed again when the property is finally disposed of. There are numerous complications to this simple scheme which require adjustments to the deemed proceeds and deemed cost. One complication is the special provision for elections in respect of "non-qualifying real property", a term defined in subsection 110.6(1). Another complication arises if the elected amount exceeds 11/10 of the fair market value of the property as of February 22, 1994.

[4] In this case, Mr. Holder made the election in respect of the shares of a corporation. Unfortunately for Mr. Holder, the shares of his corporation fell within the definition of "non-qualifying real property" because the fair market value of the shares was derived principally from real property, a small strip mall in London, Ontario which was not used in an active business carried on by the corporation. Mr. Holder should not have attempted to make the election for his shares because they did not qualify for the election. That was his first mistake.

[5] Mr. Holder chose an elected amount for his shares of $50,010. On the election form, Mr. Holder stated that the fair market value of the shares was $50,000 and that their adjusted cost base was $10. In fact, the shares had only a nominal fair market value. Therefore, he chose an elected amount that was too high. That was his second mistake.

[6] The Minister concluded, and the Tax Court Judge agreed, that the election is valid and must be given its statutory effect even though Mr. Holder made mistakes in filing it. We agree with that conclusion. It is common ground that if the election was valid, it could not be revoked because of paragraph 110.6(28)(a).

[7] However, we respectfully disagree with the Tax Court Judge on the other point raised in this appeal, which is the effect of subsection 4(4) of the Income Tax Act (repealed and replaced by subsection 248(28) effective July 19, 1995). At the relevant time, subsection 4(4) read as follows:

4(4). Unless a contrary intention is evident, no provision of this Part shall be read or construed to require the inclusion or to permit the deduction, either directly or indirectly, in computing a taxpayer's income for a taxation year or the taxpayer's income or loss for a taxation year from a particular source or from sources in a particular place, of any amount to the extent that that amount has been directly or indirectly included or deducted, as the case may be, in computing such income or loss for the year or any preceding taxation year under, in accordance with or because of any other provision of this Part.

4(4). Sauf intention contraire évidente, les dispositions de la présente partie n'ont pas pour effet d'exiger l'inclusion ou de permettre la déduction, directement ou indirectement, d'une somme dans le calcul du revenu d'un contribuable pour une année d'imposition ou du revenu ou de la perte du contribuable pour une année d'imposition, provenant d'une source déterminée ou de sources situées dans un endroit déterminé, dans la mesure où cette somme a été incluse ou déduite, directement ou indirectement, dans le calcul de ce revenu ou de cette perte pour l'année ou pour une année d'imposition antérieure, en application d'une autre disposition de la présente partie.

[8] The effect of Mr. Holder's mistakes in making the election was to trigger the application of paragraph 110.6(21)(b) and subsection 110.6(22), and thus paragraphs 53(2)(u) and (v). Each of paragraph 53(2)(u) and (v), read literally as the Minister has done, required the adjusted cost base of Mr. Holder's shares as of 1994 to be reduced by $50,000, for a total of $100,000. That resulted in a negative adjusted cost base which, because of subsection 40(3), resulted in a taxable capital gain to Mr. Holder in 1994 of $75,000.

[9] Each of the two adjustments represent, in substance, the same capital gain that Mr. Holder believed he was entitled to trigger by making the election. It is argued for Mr. Holder that this double reduction of the adjusted cost base of Mr. Holder's shares, combined with the application of subsection 40(3), contravenes subsection 4(4).

[10] The Tax Court Judge concluded that subsection 4(4) has no application in this case because "a contrary intention is evident". He reached this conclusion because subsection 53(2) treats the two adjustments (i.e., the adjustments under paragraph 110.6(21)(b) and subsection 110.6(22)) differently and thus, in his view, they are not the "same amounts". We are unable to reach the same conclusion.

[11] On the facts of this case, the adjustments under paragraph 110.6(21)(b) and subsection 110.6(22) are exactly the same. They are the same in quantum and they are the result of the same event. The Crown argues that one of the adjustments is intended to trigger tax on a deemed capital gain on property that is not eligible for the subsection 110.6(19) election, and the other is intended as a penalty, to deter a taxpayer from choosing an elected amount that is too high.

[12] That may be, but the fact that two statutory provisions have different objectives cannot, by itself, justify an inference that double taxation was intended. The two provisions are of general application. Double taxation is a possible but not a necessary result of their combined operation. Therefore, it seems to us unreasonable to conclude that Parliament intended both provisions to apply in Mr. Holder's situation. Certainly there is nothing in the language or context of the provisions that provides any evidence that Parliament intended to displace the statutory presumption against double taxation in subsection 4(4).

[13] For these reasons, this appeal will be allowed with costs here and in the Tax Court. The reassessment will be referred back to the Minister for reassessment in a manner consistent with these reasons.

"Karen R. Sharlow"

J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-654-02

STYLE OF CAUSE: JACK D. HOLDER

Appellant

and

HER MAJESTY THE QUEEN

Respondent

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: MAY 11, 2004

REASONS FOR JUDGMENT

OF THE COURT: (STONE, NADON, SHARLOW JJ.A.)

DELIVERED FROM THE

BENCH BY: SHARLOW J.A.

APPEARANCES:

Douglas D. Langley FOR THE APPELLANT

Shatru Ghan FOR THE RESPONDENT

SOLICITORS OF RECORD:

Wilson Vukelich

Markham, Ontario FOR THE APPELLANT

Morris Rosenberg

Deputy Attorney General of Canada FOR THE RESPONDENT

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)

double deduction denied

The taxpayer designated an elected amount of $50,010 in an election under s. 110.6(19) in respect of shares that were non-qualifying real property...

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Holder v. Canada, 2004 DTC 6413, 2004 FCA 188

Citations2004 DTC 6413, 2004 FCA 188

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Citations
2004 DTC 6413, 2004 FCA 188