Estate of Robert McCubbin v. Minister of National Revenue, [1980] CTC 2112, 80 DTC 1113

The Chairman:—These are appeals from two income tax assessments. The first is in respect of the income of the late Mr Robert McCubbin for the period of January 1,1975 to the date of his death on February 28, 1975. The second assessment is in respect of income of the Estate of Robert McCubbin pursuant to subsection 70(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, for the period of February 28, 1975 to December 31, 1975.

Issue

The facts in these appeals are not in issue. The problem arises from an alleged anomaly in the application of subsection 70(2) of the Act in conjunction with section 29 of the Act in respect of the taxpayer’s basic herd.

Summary of Facts

The late Mr Robert McCubbin was a farmer who bequeathed to a spousal trust a substantial estate consisting of livestock, real estate and other assets.

The value of the livestock at Mr McCubbin’s death, February 28, 1975, was estimated at $127,892. Included in the livestock was a basic herd consisting of 65 animals whose value in December 1971 was $26,000. At the death of Mr McCubbin in February 1975, although there had been no reduction in the number of cattle in the basic herd, its fair market value had decreased to $17,875.

The executors of Mr McCubbin’s estate filed two returns in June of 1976. The first return of Mr McCubbin covered the period of January 1, 1975 to February 28, 1975, the date of his death. The executors claimed a capital loss on the deemed disposition of the basic herd in the amount of $4,062.50 ( / x (26,000 - 17,875)).

In his reassessment the Minister disallowed the capital loss on the basic herd for the period of January 1, 1975 to February 28, 1975.

In the second return (period of February 28, 1975 to December 31, 1975), pursuant to subsection 70(2) of the Income Tax Act, the executors reported a net income of $101,014 which was computed as follows:

In his reassessment the Minister allowed the basic herd deduction of $26,000 pursuant to subsection 29(2), but disallowed the deduction of $17,875, the capital portion of the basic herd.

Submissions

The appellant contends that the basic herd is capital property which should not be included in the cattle inventory. Interpreting subsection 70(2) of the Act as including under “rights or things’’ “cattle inventory’’ leads to an anomalous situation as exemplified in the instant appeals.

The respondent’s position is that once the basic herd deduction has been made it cannot be deducted a second time. The Minister having allowed a deduction of the basic herd in the amount of $26,000 pursuant to section 29, he contends that the appellant is not allowed any further relief.

Findings

Other than the possible anomaly in the Income Tax Act, to which counsel referred, there seems to have been some confusion as to the assessments and the pertinent notices of appeal. On the basis of the pleadings and argument, I must assume that the respondent has waived the $500 penalty which he had imposed on the appellant in one of his assessments. Although it is very difficult on examining the documents on file to follow a logical sequence in the steps taken in assessing the appellant, the issue seems to be clearly established in the minds of both counsel and it is on the basis of their argument that I propose to deal with this matter.

I shall deal first with Mr McCubbin’s return for the period of January 1, 1975 to February 28, 1975, in which a deductible capital loss of $4,062.50 was claimed as a result of the decrease of value of the basic herd from its fair market value as of December 31, 1971.

I am satisfied that the late Mr McCubbin was in the business of breeding and selling cattle and I am of the opinion that the basic breeding herd of 65 animals was capital property. Although there is no statutory basis other than the limited reference in subsection 29(3) of the Income Tax Act which identifies a basic herd with capital property, the very concept of a basic herd as opposed to stock in trade, in my opinion, justifies that conclusion.

At the time of Mr McCubbin’s death, the cattle farm’s operations had sustained a deductible capital loss of $4,062.50 by the decrease in volume of the basic herd. In computing the taxpayer’s income for the period of January 1, 1975 to February 28,1975, I cannot see any reason why that loss should not have been claimed in the first return and allowed by the Minister.

The second return was filed pursuant to subsection 70(2) of the Income Tax Act, which reads as follows:

Where a taxpayer who has died had at the time of his death rights or things (other than any capital property or any amount included in computing his income by virtue of subsection (1), the amount whereof when realized or disposed of would have been included in computing his income, the value thereof at the time of death shall be included in computing the taxpayer’s income for the taxation year in which he died, except that where his legal representative has, within one year from the date of death of the taxpayer or witnin 90 days after the mailing of any notice of assessment in respect of the tax of the taxpayer for the year of death, whichever is the later day, so elected, a separate return of the value shall be filed and tax thereon shall be paid under this Part for the taxation year in which the taxpayer died as if he had been another person entitled to the deductions to which he was entitled under section 109 for that year.

The executors having already deducted the capital loss on the basic herd in the first tax return, they proceeded to deduct the fair market value of the basic herd from inventory of cattle:

To that point, the taxpayer’s second return filed pursuant to subsection 70(2) is, in my view, correct. However, having deducted the capital portion of the herd, the value of the remaining cattle which is “stock in trade” comes under the very broad term of “Rights or things” of subsection 70(2) and forms part of the deceased taxpayer’s potential income for the year in which he died.

The problem arises when a second deduction for the basic herd at its fair market value as at December 31, 1971 in the amount of $26,000 is also claimed, presumably pursuant to subsection 29(2) of the Act.

It is difficult to see how the value of the basic herd could be $26,000 in the 1975 taxation year, particularly since a capital loss on the decreased value of the basic herd had already been claimed in the taxpayer’s first return. It is even more difficult to justify two deductions for the same basic herd.

The purpose of the return under subsection 70(2) and the subsequent reassessment is to determine the potential income from the operation of the cattle farm in the year in which the taxpayer died. All the subsections of section 70 prescribe various methods by which a deceased taxpayer’s income is to be computed. Subsection 70(5) to which the appellant referred Stipulates that a taxpayer is deemed to have disposed of his capital property immediately before his death. Having concluded that the basic herd is capital property, the fair market value of the basic herd at the time of the taxpayer’s death would, under that section, have normally been included in his income in the year of his death.

However, the executors having elected to proceed under subsection 70(2), subsection 70(5) is not applicable because the sections, in my view, are mutually exclusive and there is, for purposes of the instant appeals, no deeming that there was a disposition of the basic herd. On the contrary, the executors, having elected to file a second return, reported the potential or future income that the deceased taxpayer would have realized from the normal sale of his cattle inventory in the year of his death, as provided for in subsection 70(2). The cattle farm did in fact continue to operate normally after Mr McCubbin’s death.

By deducting the basic herd from the inventory of cattle, the balance of $110,017 is the value of rights or things and is the potential income that the deceased would have realized in the year of his death on the disposition of his trading cattle. All the requirements of subsection 70(2) in reporting income at the death of the taxpayer have been met and that, in my opinion, should be the end of the matter. The whole of section 29 is evidently aimed at defining a basic herd and phasing out the concept of a basic herd by providing for the gradual reduction of animals in a basic herd.

The evidence is that Mr McCubbin’s basic herd of 65 animals was not reduced nor disposed of in the year of his death and, other than subsection 70(5) which, in my opinion, does not apply to the facts of these appeals, there is no basis on which to deem that the basic herd has been disposed of or reduced. Section 29 therefore has no application in computing the future or potential income of a taxpayer in the year of his death, pursuant to subsection 70(2).

There is, as was pointed out by counsel, a lack of clarity in the sections of the Income Tax Act relative to basic herds. The Department of Justice, in order to arrive at a practical interpretation of the pertinent sections, issued certain Interpretation Bulletins referred to by counsel, which by Departmental policy or practice, seeks to avoid possible anomalies in applying those sections of the Act which are unclear. As commendable as this practice may be, such directives on policy should not become a quasi-permanent substitute for a clarifying amendment passed by Parliament.

It appears to me to be within the role of the Board in applying the Income Tax Act to indicate those areas in the Act which are unclear and whose application on the basis of the Income Tax Act can lead to unforeseen and unintended conclusions.

This appears to me to be such an instance. There seems to have been confusion not only in the interpretation of the Act but also in the appellant’s return, and in the Minister’s reassessments of those returns. It would be unrealistic in the circumstances to expect a categorically clean-cut decision of the Board in these appeals.

On the basis of a review principally of the pertinent section of the Act, I find that the respondent was wrong in disallowing the capital loss claimed by the appellant in his first return. I also find that the respondent was wrong in disallowing the deduction of the value of the basic herd as of February 28, 1975, in the amount of $17,875, from the appellant’s cattle inventory in order to arrive at the deceased taxpayer’s potential income for the year in which he died. However, I have also come to the conclusion that the respondent was wrong in allowing an amount of $26,000, the Valuation Day value of the basic herd, in computing the taxpayer’s income from February 28, 1975 to December 31, 1975. Further, I hold that no amount, in the circumstances of these appeals is deductible under section 29 of the Income Tax Act. The respondent’s assessment is therefore wrong and the appellant’s appeal must be allowed.

However, were I to allow in full the taxpayer’s appeals, I would be allowing a double deduction for the value of the same capital property in computing the taxpayer’s income for the 1975 taxation year which, notwithstanding the possible interpretation of the pertinent sections of the Act would be contrary to the basic principles of tax law and cannot be what the legislators had in mind in drafting subsections 70(5) and 29(2).

If I allow the appeals in part, allowing the capital loss claimed in the first return and allowing the deduction of the capital portion of the cattle inventory in the amount of $17,875, the value of the basic herd at the death of Mr McCubbin, I am left with the amount of $26,000, the Valuation Day value of the basic herd, claimed by the appellant as a deduction under subsection 29(2) in his second return, which was allowed by the respondent.

Having concluded in the circumstances that the Valuation Day value of the basic herd is not pertinent in determining the potential income of the deceased taxpayer in 1975, and being of the opinion that subsection 29(2) is not applicable to the facts of these appeals, I must hold that the respondent was in error in allowing the deduction of the said amount of $26,000. On the basis of what I have already stated, my decision could have the effect of increasing the taxpayer’s assessment which is beyond the jurisdiction of this Board to do.

I must, therefore, hold that the appeals be allowed in part and the matter referred back to the Minister for reconsideration and reassessment on the basis that the capital loss of $4,062.50 claimed by the taxpayer in his first return is deductible; that the amount of $17,875 claimed as the capital value of the basic herd as at the death of Mr McCubbin is deductible in determining the deceased taxpayer’s potential income in the year in which he died; that the amount of $26,000 the Valuation Day value of the basic herd also claimed under subsection 29(2) in the taxpayer’s second return, is not deductible. This disallowance, however, is subject to the jurisdictional limitations of the Board, and valid up to the extent that it does not increase the appellant’s overall tax liability as assessed by the Minister in respect of both the returns filed by the taxpayer for the 1975 taxation year. The appeals are dismissed in all other aspects.

Appeal allowed in part.