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Citation: 2003TCC726
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Date: 20031212
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Docket: 2001-2022(IT)G
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BETWEEN:
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GEORGE DENNIS DALLAS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
(Delivered orally from the bench on July 14,
2003,
in Vancouver, British Columbia)
Teskey, J.
[1] The Appellant appeals his
reassessment of income tax for the year 1996, wherein the
Minister of National Revenue (the "Minister")
included a taxable capital gain of $493,583.00 in the
Appellant's income for the 1996 year.
Facts
[2] Most of the facts are not in
dispute and none of the mathematics is in dispute.
[3] The undisputed facts are:
(a) The Appellant and a partner
named Vaglio, in 1996, sold properties on Richard Street,
Vancouver, to the City of Vancouver under threat of
expropriation.
(b) His share of the proceeds was
$2,667,225.00.
(c) As replacement properties, he
purchased properties on Point Grey Road in Vancouver and on
Taylor Road on Bowen Island, for collectively
$2,009,114.50.
(d) The Appellant also purchased
150 shares of a private corporation which owned property on
Seymour Street in Vancouver, and a 16-acre property
described as the "Fountain Property" and Lots 1
and 2 at Brook Cove, plus a one half interest in Lot 20
at Brook Cove for $475,000.00.
(e) At the time of this
purchase, the Appellant owned all the other outstanding issued
common shares of the private corporation and the other one half
interest in the said Lot 20.
[4] Facts in dispute:
a. the value of the half
interest in Lot 20;
b. the intention of the
Appellant when he purchased the balance of the outstanding shares
in the private corporation and the outstanding one half interest
in Lot 20.
Issues
[5] The two issues before the Court
are:
(1) Does the purchase of shares of a
private corporation that holds title to property qualify as
replacement property for the purpose of the Income Tax Act
(the "Act")? and
(2) Does the purchasing of the other
one half interest in Lot 20 qualify for the same
purpose?
[6] The Appellant is a lawyer
practicing in Vancouver and was the only witness.
[7] His testimony was not consistent
in regards with his intention concerning the share purchase.
[8] The Appellant, when filing his T1
tax return for 1996, on or just before April 30, 1997,
claimed the exemption from capital gain tax for the purchase of
the Point Grey and Taylor properties. As set forth in
paragraph 3(c) above, no claim was made in the T1 tax return
for the purchase of the shares of the private corporation or the
one half interest in Lot 20.
[9] The Appellant claims that he and
his accountant discussed the additional purchases described in
paragraph 8 above and the accountant said it would be done
at the objection stage. I reject this outright. I do not believe
any accountant or a solicitor would take this position. If the
inclusion of the share purchase and the one half interest in
Lot 20 was intended to be replacement property, the only
sensible position would be to file an amended T1 tax return in
early May of 1997. I specifically find that no such conversation
took place and no such intention existed. Furthermore, there
would be no objection stage, as the Appellant's T1 tax return
would be accepted as filed.
[10] I find that the first time the
Appellant made a claim in any fashion for the share purchase was
after Canada Custom Revenue Agency (CCRA) wrote to the Appellant
on June 6, 2000.
[11] Attached to the 1996 T1 tax return is a
letter by the Appellant addressed to Revenue Canada that, in
part, says:
I was forced to sell against my will and I used the proceeds
of the sale to replace the lands for the same purpose as
3018 Point Grey Road, Vancouver and the other on Bowen
Island.
(No mention is made of the land in the private
corporation.)
Conclusion
[12] Subsection 44(5) of the Act
defines "Replacement Property". It reads:
(5) Replacement
property - For the purposes of this section, a particular
capital property of a taxpayer is a replacement property for a
former property of the taxpayer, if
(a) it is
reasonable to conclude that the property was acquired by the
taxpayer to replace the former property;
(a.1) it was acquired by the
taxpayer and used by the taxpayer or a person related to the
taxpayer for a use that is the same as or similar to the use to
which the taxpayer or a person related to the taxpayer put the
former property;
(b) where the
former property was used by the taxpayer or a person related to
the taxpayer for the purpose of gaining or producing income from
a business, the particular capital property was acquired for the
purpose of gaining or producing income from that or a similar
business or for use by a person related to the taxpayer for such
a purpose;
(c) where the
former property was a taxable Canadian property of the taxpayer,
the particular capital property is a taxable Canadian property of
the taxpayer; and
(d) where the
former property was a taxable Canadian property (other than
treaty-protected property) of the taxpayer, the particular
capital property is a taxable Canadian property (other than
treaty-protected property) of the taxpayer.
[13] My colleague ,O'Connor J.,
said, in Grove Acceptance Ltd. v. The Queen,
2002 DTC 2172, at paragraph 14:
Sections 13 and 44 are exceptional provisions. Normally, when
a property is disposed of, there is capital gain (almost $2
million in this case) and a deferred recapture of almost
$300,000. Normally, a taxpayer has to pay the tax on the capital
gain and has to pay the tax on the recapture. This is an
exceptional provision allowing for deferrals. Indeed, this Court
has said that, in the case of Edwynn Holdings Ltd. v. Minister
of National Revenue, [1990] 1 C.T.C 2108, it allows a person
to essentially defer tax that should otherwise be paid at that
time. As a result, the taxpayer has to fit within the four
corners of the provisions.
[14] Desjardins, J.A. of the Federal
Court of Appeal, in Glaxo Wellcome Inc. v. The Queen,
98 DTC 6638, said:
Despite the valiant effort of counsel for the appellant, we
agree with the interpretation given by Bowen, J.T.C.C. to the
word "used" in the definition of "former business
property"
The Tax Court Judge encapsulated his reasoning, with which we
agree, as follows:
[The property] was intended to be used, it was waiting to be
used but in any meaningful sense of the term, it was not being
used.
There is nothing we could say better than what was stated by
him in his analysis.
This appeal will be dismissed with costs.
[15] The Appellant argues that I should
pierce the corporate veil and look to the corporation's
assets, which qualify as replacement property, and in support of
this, refers to Interpretation Bulletin IT-259R4, Exchange
of Property, mainly paragraphs 16 and 17 thereof, which read
as follows:
Same or a Similar Use
16. Where a former property described in par. 1(a) was not
used for the purpose of gaining or producing income from a
business, the following comments apply in determining whether a
replacement property is acquired for "the same or a similar use"
as required by paragraphs 13(4.1)(a.1) and 44(5)(a.1) (as
described in par. 14(b)(ii)).
(a) This requirement is met where the use of the property is
the same or similar to the use to which the taxpayer or a person
related to the taxpayer put the former property. Since the former
property must have been used, land that has never been used by
the taxpayer or a related person cannot qualify as a former
property. Land (or any other capital property) that has been used
for non-income earning purposes can qualify as a former property
(for example, a personal-use cottage that is expropriated). Land
that is acquired for resale cannot qualify because it is not a
capital property.
(b) Although the property generally will bear the same
physical description as the former property, for example, land
replaced by land or a building by a building (but see par. 4),
there may be cases where a different type of property provides
the same use or function as the former property. For example,
where shares of a cooperative corporation which carry rights to
accommodation in an office building are acquired to replace an
expropriated office building of the taxpayer, the shares could
constitute a replacement property.
17. Where the former property was used for the purpose of
gaining or producing income from a business, another property
will usually be considered to be a property acquired for the
"same or a similar use" if it is acquired to gain or produce
income from the same or a similar business and if it generally
bears the same physical description as the former property. For
example, a taxpayer may replace a warehouse with a manufacturing
building used in the same or a similar business because both
properties are buildings and the two uses are "similar" in that
they are both part of the overall process of providing products
from the same or a similar business to the consumer. It must be
kept in mind, however, that the "same or a similar use" test
referred to in pars. 14(a)(ii) and (b)(ii) is still a separate
test from, and is not overridden by, the "same or a similar
business" test referred to in pars. 14(a)(iii) and (b)(iii) and
discussed in pars. 18 to 21. Thus, for example, if a company
owned a residential property used to house its employees, a
building used to carry on the company's day-to-day operations
would generally not be considered as having the "same or a
similar use" even though both properties are real property and
are used in the same business. Also, a property normally will not
be a replacement property acquired for the same or a similar use
when it is acquired to replace a former property and at the same
time provide substantial other uses. An insignificant secondary
use of a new replacement property is not a concern. A former
business property cannot be replaced with a rental property.
[16] My former colleague,
Kempo, T.C.J., in Edwynn Holdings Ltd. v. M.N.R.,
89 DTC 720, was dealing with a taxpayer who sold shares in a
hotel and then purchased another hotel with a partner.
[17] The taxpayer's appeal was dismissed
as Kempo T.C.J. declined a lifting of the corporate veil
under the circumstances therein.
Analysis
[18] In no way commenting on the correctness
of paragraph 16(b) of the Interpretation Bulletin, the
purchase of shares of a cooperative corporation which carries the
right to exclusive accommodation in an office building is
entirely different from purchasing all, or the balance of the
outstanding shares, of a private corporation that owns real
estate. The purchase of shares of a corporation is not the
purchase of its assets. You only obtain the normal rights of a
shareholder, even if you own all of the shares.
[19] Section 44 of the Act has
the heading "Exchange of Property".
[20] Subsection 44(1) was amended in
2001 and can be paraphrased to read: "Where at any time
an amount has been received by a taxpayer as proceeds of
disposition of a capital property that is not a share of the
capital stock of the corporation."
[21] Prior to the 2001 Amendment,
section 44, subsection (1)(b) thereof, made it
clear that the sale of shares would not qualify, as it read:
(b) a
property that was, immediately before the disposition, a former
business property of the taxpayer.
[22] Shares cannot be business property,
unless you are in the business of selling and buying shares,
which the Appellant herein was not.
[23] I also reject the Appellant's claim
that the share purchase qualify as replacement property on the
basis that it is "not" reasonable to conclude
that the Appellant acquired the shares to replace the former
property. If, in fact, it had been the Appellant's intention
of the share purchase, it would have been included in his 1996 T1
tax return or in an amended return filed very shortly after
April 30, 1997.
[24] Even if I had been prepared to accept
that outright ownership of all the outstanding shares of a
corporation, which owns property, that the property could qualify
as replacement property, I would have excluded the 16-acre
Fountain property and Lots 1, 2 and 20 of Brook Cove, as
these were vacant parcels of land, not being used in any way but
were just being held.
[25] I also believe that
paragraph 44(5)(c) would exclude the share purchase
from the benefit of this section. It reads:
(c) where the
former property was a taxable Canadian property of the taxpayer,
the particular capital property is a taxable Canadian property of
the taxpayer; and
[26] Herein, the capital property of the
Appellant are the shares of the corporation and the land owned by
the corporation is not taxable capital property of the
Appellant.
[27] For all the above reasons, the appeal
is dismissed with costs.
Signed at Calgary, Alberta, this 12th day of December,
2003.
Teskey, J.
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