Bryan R Jones v. Minister of National Revenue, [1980] CTC 2243, 80 DTC 1217

D E Taylor:—This is an appeal heard in the City of Victoria, British Columbia, on January 21, 1980 against an income tax assessment for the year 1974 in which the Minister of National Revenue assessed to capital gains tax part of the proceeds from the sale of certain property of the appellant. In so assessing the appellant, the respondent relied, inter alia, upon sections 3, 14, 38, 39, 40, 54 and 68 and paragraph 13(21 )(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended, Income Tax Application Rules, sections 20(1) and 21 as amended, and Income Tax Regulation, section 1700 as amended.

Background

The appellant is a fisherman living in and working out of Port Alberni, BC. The property sold was a fishing vessel (“the vessel”) which had a “Class “A” fishing licence” (“the licence”). The appellant acquired the vessel in 1960 for $20,213.43, and sold it on December 1, 1974 for $80,000. Neither at acquisition nor on disposition was any indication given regarding the value of the vessel or of the licence. The vessel had been depreciated on a “straight line” basis using the total cost of $20,213.43. In reporting his income for 1974 the appellant did not include in his income any portion of the proceeds of the above-mentioned sale. The respondent reassessed the appellant, adding to his income 50% of the deemed proceeds from the sale of eligible capital property in the amount of $5,062.50 and a taxable capital gain on the sale of the fishboat in the amount of $3,753.92.

Contentions

For the appellant:

Capital gains and losses on fishboats depreciated under Part XVII of the Regulations are not taxable and losses not allowable.

The sale price of a fishing licence is not for the determination of the assessor.

For the respondent:

The sale of December 1, 1974 constituted a disposition of both the fishboat and the Class “A” fishing licence;

$55,250 of the sale proceeds were attributable to the sale of the fishboat;

$24,750 of the sale proceeds were attributable to the sale of the Class “A” licence;

on December 31, 1971, the fishboat had a fair market value of $47,742.16;

the appellant acquired the Class “A” licence prior to December 31, 1971 at no cost;

on December 31, 1971, the Class “A” licence had a fair market value of $4,500;

the sale of the fishboat constituted a disposition of property within the meaning of sections 40 to 54 and accordingly is subject to capital gains tax and is included in the appellant’s income;

the proceeds from the disposition of the Class “A” fishing licence were correctly computed and included in the appellant’s income.

Evidence

The appellant confirmed the general facts upon which the assessment was based. The dispute did not focus on these facts, but rather on the interpretation of the Act in dealing with these facts. The appellant, however, did question the amount of the sale price allocated to the licence, but provided no evidence of any other amount.

Mr Henry Wright, an evaluator with Revenue Canada, outlined for the Board the dramatic increase which had occurred in the value of Class “A” fishing licences during the relevant period between 1971 and 1974. The Minister’s evaluation was based on the figure of approximately $2,000 per vessel ton for the licence—this vessel being rated at about 12 tons. The evidence supplied to the Board through Mr Wright was to the effect that this was a modest valuation compared to advertised prices and sales of which he was personally aware.

Argument

The agent for the appellant proposed that the wording of the sections of the Act, the Regulations and the Application Rules did not provide for taxing the capital gain on the sale of assets depreciated on the straight-line basis. He contended that the amount which could be claimed annually by this taxpayer was in fact an allowance and not depreciation, and that since the appellant could not claim a “capital cost”, then he should not be taxable on any capital gain. He focused primarily on the change in wording of Income Tax Application Rule 20(1) which occurred on April 18, 1973, and proposed that it should be clear at least before that date that no such capital gains tax was intended and that the change did not affect this Original intention of Parliament. No legislative authority or jurisprudence was presented by the agent in support of these propositions. The agent for the appellant also questioned the authority of the Minister to “break down” the $80,000 into any separate amounts for the “vessel” and the “licence”; whether the “breakdown” of $55,250 and $24,750 respectively was proper; and whether the Minister was allowed to tax the “gain” from the licence.

Counsel for the respondent argued that the term “any property” in section 39 of the Income Tax Act meant precisely what it said, and covered all property unless it was specificially excepted. It was however clear to counsel that the term presently in the Regulation “any depreciable property” applied during the taxation year in question, and therefore the appellant had no basis for an appeal. Further, if there was any contradiction between the Regulations and the Act, the Act should govern.

Findings

It might well be argued that the phrase “any depreciable property of a prescribed class” (ITAR 20(1) before the amendment) should be read altogether as one phrase, and does not lend itself to separation into “any depreciable property”, and “of a prescribed class”, which is the underlying principle of the argument proposed by counsel for the respondent. The very deletion (by the amendment) of the portion “of a prescribed class” lends considerable weight to the proposition of the agent for the appellant that the original intention was not to so include property outside these prescribed classes. However, I have been unable to determine to my own satisfaction what purpose was served by either the inclusion of that phrase Originally or its deletion by the amendment.

In my view, vessels are specifically included in Class 7 of Regulation 1100, and are depreciable at the rate and under the circumstances therein described. The fact that the particular vessel in this appeal is used for fishing permits the depreciation at a rate different, and under different circumstances than that detailed for other Class 7 assets. However, Regulation 1700 does not withdraw or exclude from assets “of a prescribed class” that asset itself. It remains an integral part of Regulation 1100, subject to all the appropriate taxing provisions, unless specific provision is made to the contrary for a particular purpose (eg Regulation 1700).

On the other aspects of the appeal raised by the agent for the appellant, having determined the main question, I find nothing in the facts available in this appeal which could possibly affect the assessment in a manner beneficial to this appellant, and therefore no reason exists in my view for the Board to decide upon them in precise terms. Touching on them briefly, however, merely for the record—if the Minister does not have the authority to “break down” the $80,000 into what he (the Minister) considers its respective parts (vessel: $55,250; licence: $24,750), then the entire amount of $80,000 might be subject to the capital gain treatment provided for in the Act. As to whether or not the amounts themselves ($55,250 and $24,750) are accurate, it would be for the appellant to show they were not, and the only evidence the Board has, indicates that they are reasonable. Finally, if tax should not be assessed on the “licence” portion of the amount involved, it would be for the appellant to show it was a kind of property exempted from such tax under the Act, and clearly this has not been done.

Summary

The capital gain realized on the disposition of property coming for depreciation purposes under Regulation 1700 is taxable under the appropriate taxing sections of the Income Tax Act. The amendment in ITAR 20(1) dated April 18, 1973, had no bearing on the matter at issue in this appeal.

Decision

The appeal is dismissed in all respects.

Appeal dismissed.