Linda W. King v. Her Majesty the Queen, [1995] 1 CTC 2353

Bowman J.T.C.C.:-This appeal is from an assessment for the appellant’s 1987 taxation year and has to do with the inclusion by the Minister of National Revenue of $22,475 in the appellant’s income as a shareholder benefit under subsection 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the •’Act”).

In 1987 the appellant and her husband, Peter King, owned between them all of the shares of Marem Properties Ltd. which in turn owned all or substantially all of the shares of Cove Foods Ltd. In 1982 Cove had purchased a restaurant from CTC Holdings Ltd. with which it dealt at arm’s length and as part of the purchase price had given an unsecured interestbearing note for $30,500. In 1987 Cove sold the restaurant. The purchasers were concerned that CTC might be able to pursue them, or the assets, to obtain payment of the note, which by then had been paid down to $23,175. Therefore, as part of the sale, Marem agreed with the purchasers to assume the obligation under the note. The evidence was not as clear as it might have been on this point but it appears to have been a transaction between Marem and the purchasers of the assets from Cove. CTC, the holder of the note, was not a party to the transaction and did not know about it. I am not aware of any basis upon which it could have taken advantage of Marem’s obligation had it sought to enforce payment.

In 1987 as well the owner of CTC, a Mr. Comeau, approached Peter King and invited him to make an offer to purchase the note because he wanted to get rid of it. Evidently he viewed the note as worthless. Cove had defaulted on it and was, according to Mr. King, without assets. Mr. King offered CTC $700 for the note and the offer was accepted.

Had that been all that happened there would, of course, have been no reassessment. However, in March 1988 Mr. King’s accountant, in reviewing the affairs for 1987, presumably with a view to preparing income tax returns, suggested that Mr. King should transfer the note to his wife, the appellant.

Mr. King stated that a piece of paper was prepared assigning the note to the appellant for $700, Peter King’s cost. The piece of paper was not put in evidence and it seems unlikely that the $700 was actually paid.

The accounting records of Marem for 1987 were therefore prepared to reflect a credit to Mrs. King’s shareholder’s account of $23,175, the amount outstanding on the note, so that the books of Marem showed that this credit, along with other credits, reduced her shareholder’s account to nil by the end of 1987.

In filing her return of income for 1987 the appellant declared a capital gain of $22,475 (the difference between the $700 that she allegedly paid to her husband and the amount outstanding under this note) in respect of the disposition to Marem of the note. The appellant’s lifetime capital gains exemption was applied against this gain so that no tax was paid in respect of this amount.

On assessing, the Minister of National Revenue included in her income the sum of $22,475 as a benefit under subsection 15(1) of the Income Tax Act. At trial the respondent moved to amend the reply to add an alternative ground for upholding the assessment, viz., that the note was never capital property in Mr. or Mrs. King’s hands but was acquired with a view to its immediate redemption at a profit, and that accordingly the profit of $22,475 was income in the appellant’s hands.

I shall revert later to the fact that the events giving rise to the tax consequences were simply accounting entries made after the end of 1987, and I shall deal with the matter on the basis on which it was assessed, pleaded and argued, that is to say that all events that were relevant to the taxability of this amount occurred in 1987.

There was no evidence that the appellant paid the $700 for the note. Therefore, the appellant received a gift from her husband. According to subsection 69(1), she would be deemed to have acquired the property at, and Mr. King would be deemed to have received proceeds of disposition equal to, its fair market value.

If the note was capital property in Mr. King’s hands its transfer by him to the appellant would, under subsection 73(1) be deemed to have taken place at his adjusted cost base to him, $700. No election under subsection 73(1) was filed and, even if one had been filed, the result would have been the same, assuming the fair market value of the note was $700. If on the other hand the note was not capital property but was acquired as part of an adventure in the nature of trade, the transfer would be at fair market value under section 69 and subsection 73(1) would not apply. Assuming the fair market value was $700 the proceeds of disposition and the appellant’s deemed acquisition cost under subsection 69(1) would be $700.

Where the difference between the note’s being a capital property and its being a trading asset becomes relevant is when the appellant disposes of it. If it was a capital property any capital gain realized by her would be deemed to be that of Mr. King under the attribution rules in section 74.2. If the note was a trading asset, it would be deemed to have been transferred by Mr. King at its fair market value under subsection 69(1) and, assuming it retained its quality as a trading asset in her hands, any gain on its disposition would be income in her hands, If it were a trading asset and its fair market value exceeded the $700 paid for it by Mr. King it would be deemed to have been disposed of by Mr. King at that fair market value and he would be taxable on the difference when he transferred it to his spouse.

The accountant who advised Mr. King seems to have assumed that the note was capital property and that Mrs. King could realize a capital gain which she could set off against her lifetime exemption. The attribution rules were evidently ignored or forgotten.

The disposition of this case, on the basis of the analysis which follows, does not require a determination of the questions discussed above. Central to this analysis is the fair market value of the note. Prima facie its value was $700, the price paid in an arm’s length transaction between Mr. King and CTC.

Mr. Comeau did not know that Marem had agreed with the purchasers of Cove’s assets to stand behind the note in the event that he tried to follow those assets to satisfy Cove’s liability and I doubt that it would have enhanced his legal position if he had. He was a stranger to that agreement and could not have enforced it against Marem. The agreement between the purchasers and Marem may have given them a measure of security, but it did not enhance in any way the fair market value of an obligation of a company with no assets, Cove. No third party who owned the note could have enforced Marem’s obligation to the purchasers. Therefore I agree with the respondent that the fair market value of the note did not exceed $700.

On this analysis then, when Mrs. King surrendered the note to Marem and was credited with $23,175 she received an immediate benefit of at least $22,475 and she realized that benefit as a shareholder. Marem certainly would not have paid a third party $23,175 for the note, for two reasons: it had no legal obligation to do so and the note was not worth anything.

The benefit that the appellant received was real and immediate. This is not a case of a mere bookkeeping entry of the type discussed in such cases as Sinclair v. M.N.R., [1992] 1 C.T.C. 2218, 92 D.T.C. 1163 (T.C.C.) at page 2226 (D.T.C. 1169), Gresham Life Society Co. Ltd. v. Bishop, [1902] 4 T.C. 464 at page 476 or Phillips v. M.N.R., [1994] 1 C.T.C. 383, 94 D.T.C. 6177 (F.C.A.). Mrs. King’s shareholder loan account was reduced by $23,175. This amounts to a receipt.

Nor do I think the attribution rules apply here. She realized neither a trading gain nor a capital gain. She received a benefit under subsection 15(1) when she was credited with $23,175 for a note that did not have a fair market value in excess of $700. That benefit is not attributable to her spouse under section 74.1 or 74.2.

I come now to what is for me the most troubling part of this case. The accounting entries giving rise to the taxation of this amount in 1987 were not made until 1988, when the accountant did his so-called "year-end adjustments". The transfer of the note from CTC,I must accept, took place on December 31, 1987. I cannot assume that a document witnessed by a justice of the peace was backdated. However the accounting entries evidencing the crediting of $23,175 to Mrs. King’s account were, on Mr. King’s evidence, made in 1988. The assessor, in preparing his assessment, proceeded on the assumption that the accounts of Marem reflected events that actually occurred in 1987 and Mrs. King’s own income tax return was based on the same premise. Moreover in both the notice of appeal and reply it is agreed that the relevant transactions occurred in 1987. Were I to hold that the benefit under subsection 15(1) was conferred in 1988-or indeed if I accepted the Crown’s contention that the appellant realized a trading gain, but held that that gain was realized in 1988—it would mean that the income should have been taxed in 1988, a year that is unquestionably statute-barred by now. Even if I had held that a capital gain had been realized, but that it was attributable to Mr. King under section 74.2, it would mean putting the taxable capital gain into a statute-barred year of Mr. King. To do so would not disturb me particularly in a case where the Minister had a choice between two years and deliberately and knowingly chose one that turned out to be the wrong one. Here however the Minister acted on the basis of a representation of fact by the appellant in her 1987 tax return that the relevant transactions, whatever their ultimate legal effect, occurred in 1987. While it is trite law that there is no estoppel against the terms of a statute, we have here a classic case of estoppel with respect to a matter of fact. The Crown sometimes argues-erroneously in my view-that whenever a taxpayer changes his or her position from that taken in a return of income or in some other document he or she is somehow “estopped”. Estoppel by conduct is a much narrower concept. It is a rule [1] that prohibits a person who has made a statement of fact upon which another party had relied and has acted to his or her detriment from denying the truth of that statement as against that other party. That is precisely what happened here. The time at which an event takes place is purely a matter of fact and the Minister, in assessing 1987 on the basis of the statement that the events took place in 1987 and in not assessing 1988, acted in reliance on that statement to his detriment. Accordingly the appellant is estopped from now taking the posi- tion that the taxable event took place in 1988. [2] I should mention in fairness to Mr. King that he did not press the point with any particular vigour. Had I not found estoppel I would have held that there was a binding formal admission in the pleadings as to the year in which the events took place.

My conclusion therefore is that the Minister was justified in assessing the appellant for her 1987 taxation on the amount of $22,475 under subsection 15(1) of the Income Tax Act.

The appeal is therefore dismissed.

Appeal dismissed.