Date: 20110630
Docket: A-344-10
Citation: 2011 FCA 219
CORAM: NADON
J.A.
PELLETIER J.A.
MAINVILLE
J.A.
BETWEEN:
ESTATE OF THE LATE DONALD
MILLS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1]
This is an
appeal by the estate of the late Donald Mills (the appellant) from a judgment
of Sheridan J. (the “Judge”) of the Tax Court of Canada, 2010TCC443, dated
August 26, 2010, wherein she dismissed the appellant’s appeals from the
Minister of Revenue’s (the “Minister”) reassessments of Mr. Mills’ 1999 to 2002
taxation years.
[2]
More
particularly, the Judge found that the unpaid portion of a promissory note in
the amount of $10,588,133, delivered to Mr. Mills by 100935 Canada Inc. was not
a “debt owing” to Mr. Mills pursuant to subparagraph 20(1)(p)(i) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the “Act”).
[3]
The issue
before us in this appeal is whether the appellant can claim a deduction
pursuant to subparagraph 20(1)(p)(i).
The Facts
[4]
Mr. Mills
was the sole shareholder, either directly or indirectly, and director of both
3742878 Canada Inc. and 100935 Canada Inc.
[5]
On May 1,
2000, he sold 21,500,000 common shares in 3742878 Canada Inc. to 100935 Canada
Inc. for the purchase price of $11,653,000. 100935 Canada Inc. paid the
purchase price by delivering to the appellant a non-interest bearing promissory
note (the “Note”) equal to the purchase price.
[6]
At the
time of the disposition, the appellant was not dealing at arm’s length with
100935 Canada Inc. Because the disposition was not at arm’s length, paragraph
84.1(1)(b) of the Act deemed 100935 Canada Inc. to have paid, and deemed Mr.
Mills to have received, a dividend in the amount of $11,222,515 (the purchase
price minus the cost of the shares). Mr. Mills duly reported this dividend in
computing his income in tax year 2000 by including this amount under paragraph
12(1)(j) of the Act.
[7]
The
transactions engaged in by Mr. Mills were part of a series of transactions
carried out by him in the context of the takeover of Newbridge Network Corporation
by Alcatel, a French corporation. The value of Mr. Mills’ shares in Newbridge,
at the relevant time, was approximately $43,000,000.
[8]
Between
2000 and 2002, after the tech stock bubble burst, the value of 100935 Canada
Inc.’s assets fell significantly.
[9]
In October
2002, Mr. Mills demanded payment of the Note. 100935 Canada Inc. transferred
some assets to Mr. Mills in partial repayment, but, by the end of taxation year
2002, Mr. Mills considered the balance owing on the Note to be $10,588,133.
[10]
When
filing his 2002 tax return, Mr. Mills claimed a bad debt deduction of $10,588,133
under subparagraph 20(1)(p)(i) of the Act. The Minister disallowed the
deduction.
Decision of the Tax Court
[11]
The sole
issue before the Judge was whether the third requirement of subparagraph 20(1)(p)(i)
of the Act was met. In order for a debt to be deductible under the
subparagraph, a taxpayer must demonstrate that: (i) there is a debt owing to
him; (ii) the debt has become a bad debt during the year; and (iii) the debt
has been included in computing his income for the year or a preceding tax year.
[12]
Before the
Judge, the parties agreed, as they do before us, that the first two
requirements were met. In other words, at the end of taxation year 2002, Mr.
Mills was owed $10,588,133 and this amount had become uncollectible during the
year. Thus, the remaining question was whether the debt was included by Mr.
Mills in computing his income for the year at issue or a preceding taxation
year.
[13]
The Judge
dismissed the appellant’s appeal. First, she held that this Court’s decision in
Terrador Investments et al v. The Queen, [1999] 3 C.T.C. 520. (F.C.A.),
243 N.R. 176 (F.C.A.) (Terrador) was applicable (Judge’s Reasons at
para. 21). Therein, two taxpayers had sold assets and received promissory notes
in return. This Court held that the taxpayers had voluntarily elected, under
subsection 93(1) of the Act, to treat part of the proceeds of disposition as a
“deemed dividend received” (cited in Judge’s Reasons, para. 13). Thus, when the
deemed dividend was included in the taxpayers’ income under paragraph 12(1)(k),
it was included as a “paid dividend”. Once the Act deems a dividend to have
been paid and received, it cannot also simultaneously be a “doubtful debt” or a
“bad debt”. It has been deemed to be paid, so it cannot also be due to be paid
(Terrador, paras. 18, 19 and 20).
[14]
Second,
the Judge stated that the differences between Terrador and the case
before her were irrelevant. In Terrador, the taxpayers chose to treat
the proceeds as deemed dividend under subsection 93(1) of the Act. In contrast,
paragraph 84.1(1)(b) is not an elective provision, but a mandatory
anti-avoidance provision (Judge’s Reasons, para. 22). The Judge opined that the
lack of election was irrelevant (Judge’s Reasons, para. 24). In her view, Mr.
Mills could have avoided triggering paragraph 84.1(1)(b), but chose not to. If
he had not chosen to convert his capital gain into a deemed dividend, he could
have claimed a capital loss (Judge’s Reasons, para. 25). Instead, Mr. Mills
triggered the provision for tax-planning reasons (Judge’s Reasons, para. 22).
This choice had certain advantages and disadvantages, and the appellant had to accept
the consequences of the choice made.
[15]
The Judge
also noted that, as in Terrador, the deemed dividend was not exactly
equal to the amount of the promissory note (Judge’s Reasons, paras. 26-27).
After all, paragraph 24.1(1)(b) contains a formula for calculating the amount
of the deemed dividend and the only variable in that formula is the
consideration received. In any case, this part of our Court’s analysis in Terrador
was, in the Judge’s opinion, merely supplementary to the central finding that
an amount cannot be simultaneously “paid” and “due” (Judge’s Reasons, para.
27). Once the deeming provision was triggered, the amount included in the
taxpayer’s income under paragraph 12(1)(j) was deemed to be a paid dividend and
so could not also be a “debt” that qualified for a deduction under subparagraph
20.1(p)(i).
The Issue
[16]
The only issue
in this appeal is whether the Judge was correct to conclude that the bad debt deduction
should be disallowed.
Analysis
A. Standard of Review:
[17]
This case
is an appeal of a trial judgment. As such, the review standards articulated by
the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33, [2002]
2 S.C.R. 235 (Housen), are applicable. Questions of fact and of mixed
fact and law can only be overturned if the Judge made a “palpable and
overriding error”. Questions of pure law can be overturned if they are
incorrect.
B. Was the Judge correct to
conclude that the bad debt deduction should not be allowed?
[18]
As I have
already indicated, the parties agreed before the Judge, as they do before us,
that the only question regarding the applicability of subparagraph 20(1)(p)(i)
is whether the debt was included in computing Mr. Mills’ income for the year or
the preceding year (Appellant’s Memorandum, paras. 42 and 43; Respondent’s
Memorandum, paras. 19 and 20).
[19]
I agree
entirely with the Judge and have little to add to her reasoning on this point.
In particular, I agree with her that, based on Terrador, the dividend
having been included in Mr. Mills’ income for 2000 as a paid dividend could
not, at the same time, constitute a bad debt within the meaning subparagraph
20(1)(p)(i). At paragraph 28 of her Reasons, the Judge sets out her rationale
as follows:
[28] … From this it
follows that what was included in income in 2000 under paragraph 12(1)(j) was a
dividend, deemed by paragraph 84.1(1)(b) to have been fully paid, not a “debt”
as required by subparagraph 20(1)(p)(i). In the words of Décary, J.A. above,
“What is deemed to have been paid cannot also be said to be due”.
[20]
The
appellant makes a number of arguments, which I will now briefly deal with.
[21]
First, it argues
that paragraph 84.1(1)(b) “creates a legal fiction” whereby the Act treats a
dividend as being paid, although the dividend might not have, as here, in fact been
paid. This leads the appellant to say that “even though the income is deemed
‘paid’ for the purpose of the Act, legally, a debt remains owing to the
appellant” (Appellant’s Memorandum, para. 50). In R. v. Verrette, [1978]
2 S.C.R. 838 at 845, the Supreme Court made the following remarks concerning
deeming provisions:
… A deeming provision is a
statutory fiction; as a rule it implicitly admits that a thing is not what
it is deemed to be but decrees that for some particular purpose it shall be
taken as if it were that thing although it is not or there is doubt as to
whether it is. A deeming provision artificially imports into a word or an
expression an additional meaning which they would not otherwise convey beside
the normal meaning which they retain where they are used; it plays a function
of enlargement analogous to the word “includes” in certain definitions;
however, “includes” would be logically inappropriate and would sound unreal
because of the fictional aspect of the provision.
[Emphasis
added]
[22]
I cannot
but agree with the appellant that paragraph 84.1(1)(b) of the Act creates a
legal fiction. That is exactly what the provision is meant to do. A
constitutionally valid legal fiction is an applicable legal fiction. Thus, even
though Mr. Mills was not in fact paid the dividend, the provision treats him as
if the dividend had been paid to him. Arguing that the provision creates a
fiction does not advance the appellant’s case.
[23]
Next, the
appellant argues that it would have had a right to make a legal claim against
100935 Canada Inc. in civil or bankruptcy court for the repayment of the
balance due on the Note. Although that statement is true, in that the debt is
still, in fact, due and can be collected through the regular mechanisms, paragraph
84.1(1)(b) deems that for the purpose of calculating the appellant’s income tax,
the proceeds resulting from the disposition of the shares are to be treated as
a dividend deemed to have been paid by 100935 Canada Inc. and deemed to have
been received by Mr. Mills. The fact that for other purposes, the Note will be
treated as if it were due does not detract from the effect of the deeming
provision.
[24]
The
appellant argues that in Cloverdale Paint Inc. v. R., 2006 TCC 628, (2007)
2 D.T.C. 2024, the Tax Court held, in the context of a similar provision of the
Act – namely paragraph 20.1(1) – that a debt deemed to be included in the
taxpayer’s income could be deductible. I do not find this authority persuasive
for two reasons. First, to the extent that it is not consistent with Terrador,
it is not good authority. Second, what paragraph 84.1(1)(b) deems to be
included in the appellant’s income is a dividend, not a debt.
[25]
The
appellant then argues that an amount can be both deemed to be paid and received
and still be a “debt” for the purposes of subparagraph 20(1)(p)(i). This
contention, with respect, is inconsistent with the view held by this Court in Terrador.
[26]
The
appellant also argues that Terrador is not applicable to the case at
hand. It says that, unlike in Terrador, the application of paragraph 84.1(1)(b)
was not voluntary, that the Note was the sole consideration given to the shares
and that Mr. Mills paid tax on his deemed dividend.
[27]
I do not
find any of these arguments convincing. I agree with the Judge’s analysis on
the voluntariness argument that although the application of paragraph 84.1(1)(b)
is not voluntary, Mr. Mills could easily have avoided triggering the provision.
I also agree with the Judge that the type and amount of consideration given is
not relevant.
[28]
Finally,
the fact that Mr. Mills paid tax on his transaction whereas the taxpayers in Terrador
did not is irrelevant. The transactions in the two cases were not the same and,
thus, they received different treatment under the Act. Different tax treatments
in these two circumstances result in different taxes owing.
Disposition
[29]
For these
reasons, I would dismiss the appeal with costs.
“M.
Nadon”
“I
agree.
J.D. Denis Pelletier J.A.”
“I
agree.
Robert M. Mainville J.A.”
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