Fred E Coombs and the Estate of Fred E Coombs v. Minister of National Revenue, [1978] CTC 2508, [1978] DTC 1370

Delmer E Taylor:—There are two matters in these appeals resulting from income tax assessments for the years 1972 and 1973. One deals with valuation to be used as of Valuation Day (V-Day) December 31, 1971, for real estate sold in 1973 by the appellant; the second, concerns the disallowance by the Minister of a capital loss of $40,500, alleged by the taxpayer to have been incurred in the year 1972 from the disposition of company shares. The appellant, in the Notices of Appeal, relied particularly on sections 3, 38, 39 and 54 of the Income Tax Act, while the respondent relied, inter alia, upon paragraphs 13(21)(c), 13(21)(d), 54(c) and subsection 139(1) of the Income Tax Act, R.S.C. 1952, c 148 as amended by SC 1970-71-72, c 63.

Facts

The Board will deal with the matters raised as separate issues in these appeals—indexed Issue (1) and Issue (2) where necessary. The appellant was an engineer by profession, living in Shelburn, Ontario. On V-Day he owned a parcel of real estate in the area, consisting of approximately 76 acres, and having on it a two-storey house—the amount of the gain on the sale is Issue (1). On V-Day the appellant was also the owner of 150,000 shares without par value of the common stock of R B Filters Limited (hereinafter referred to as “the Company’’). That Company was incorporated on April 24, 1970, by Letters Patent from the Province of Ontario. On December 13, 1972, pursuant to a debenture dated May 11, 1971 given by the Company to Charterhouse Canada Limited, MacPherson Hubbell was appointed Receiver and Manager on behalf of the debenture holder to receive and manage the assets. and undertakings of the Company. The Company discontinued business on December 15, 1972, and on February 9, 1973, Master G C Saunders of the Supreme Court of Ontario approved the sale of the assets and undertakings of the Company which proceeds were paid to the debenture holder after deduction of expenses and costs—the alleged loss is Issue (2).

Contentions

Dealing with Issue (1) the Notice of Appeal stated:

4. . . . both the Appellant and the Minister agree that the net sale proceeds for the land portion were $77,363.20.

5. The Minister has valued the land on Valuation Day at $53,000 and the Appellant has valued the land on Valuation Day at $67,000.

8. The Appellant’s taxable capital gain from the sale of the above- mentioned land should be calculated as follows:

Land proceeds	$77,363.20
V-Day Value at December 31 st, 1971	$67,000.00
Taxable capital gain ( /2 of $10,363.20) or	$5,181.60

and reduced from $12,181.60 assessed by the Minister to $5,181.60 and setoff against the capital loss claimed by the Appellant.

An Amended Notice of. Appeal was filed with the Board and accepted by the respondent at the commencement of the hearing. It Stated:

4. . . . and the Appellant and the Minister agree that the net sale proceeds for the land and buildings were $87,468.

5. The Minister has valued the land and buildings on Valuation Day at $64,000 and the Appellant has valued the land and buildings on Valuation Day at $77, 000.

8. The Appellant’s taxable capital gain from the sale of the above- mentioned land and buildings should be calculated as follows:

Net Proceeds	.-	$87,468
V-Day Value at December 31st, 1971		$77,000
Taxable Capital Gain (1/2 of $10,468)		$ 5,234

and reduced from $12,181.60 assessed by the Minister to $5,234 and setoff against the capital loss claimed by the Appellant.

In the Reply to Notice of Appeal (before the Amended Notice of Appeal had been filed) the respondent asserted:

8. The Respondent submits that the Appellant has been properly assessed for the 1973 taxation year because:

(i) the value of the property on valuation day was $53,000 with the consequence that the Appellant realized a capital gain of $24,363.20 giving rise to a taxable. capital gain of $12,181.60;

A further amendment was requested and agreed to by the respondent, which changed the style of cause to read: “Estate of Fred E Coombs and Fred E Coombs” (italics mine). It was explained to the Board that Mr Coombs, the original appellant, was now deceased and the appeal was being carried on by his son as executor of the estate.

On Issue (2) the appellant contended that:

—the appellant’s shares in the Company were valued at 27¢ each on V-Day;

—the Company charter contained the following clause:

the right to transfer shares of the company shall be restricted in that no share shall-be transferred without the express consent of a majority of the Board of Directors to be signified either by a resolution passed by the Board of Directors or in writing;

—the Company has not carried on business since December 15th, 1972 and has not had any assets since February 9th, 1973. In addition, the common stock of the Company has had no value since December 13th, 1972 and since that date it has not been possible to transfer the common stock of the Company in accordance with the requirements of the Company’s Letters Patent.

—the appellant submits that a disposition within the meaning of the Income Tax Act took place in the year 1972 giving rise to a capital loss of $40,500 in the year 1972;

—he is entitled to carry this loss forward into the year 1973;

— in the alternative, the appellant submits that a disposition within the meaning of the Income Tax Act took place in the year 1973 giving rise to a capital loss of $40,500 in the year 1973.

Evidence

For the appellant, a real estate valuator, Mr John D Hutchison, was called and his report dated May 27, 1975 was filed as Exhibit A-1. Its conclusion was that the property had a market value as of December 31, 1971 of $77,000.

Later the respondent called Mr J Douglas Henderson, AACI, and his evaluation report dated December 18, 1975, stated ‘‘the estimated value of the property (italics mine) as at December 31, 1971 was $64,000.

Each party provided substantial comparative information in support of the documents noted above, but it became quickly obvious that the difference of opinion centered on the value that should be attributable to the buildings—the house and one out-building. In the appellant’s valuation report the breakdown between land and buildings was not provided, but in that of the respondent’s the following detail was provided:

Mr Hutchison was of the opinion that while he had made, and provided to the Board, several comparisons dealing with similar buildings in certain cases and certain lands in other cases, the totality of the Subject property must be regarded in: any such evaluation report. Pressed for some breakdown of this total, he indicated his general support for the land valuation used in the respondent’s assessment $53,000, (he himself would have used $52,000) but he disagreed with the valuation placed on the buildings by the respondent of $11,000, particularly the main building valuation of $10,000. It appeared to the Board that the respondent had not been prepared to contest the total valuation, but had expected the building valuation not to be in dispute. Counsel for the appellants offered this explanation for the apparent difficulty the change in valuation had occasioned to the respondent— the original Notice of Appeal may have been filed on the assumption that the house had been the principal residence of the appellant. However that may have been, the Amended Notice of Appeal gave a rather clear indication that both land and buildings were considered by the appellant, and the parties having agreed to that at the commencement of the hearing, the Board found no reason in the documentation to restrict the appellant’s claim for relief.

It would serve little purpose to review in detail the documentary and oral evidence of the two evaluators. Both men appeared professional, experienced and competent. There were certainly differences of perspective and opinion, one of the major ones, in my view, being the general conclusion of Mr Henderson (for the. respondent) that the house could not be accorded a value related to some of the houses on comparables used by Mr Hutchison, because these comparable houses were situated on smaller pieces of land (ie 15, 25 or 50 acres) as opposed to the 75 acres in the subject property—and this tended to accord a greater proportionate value of the total to the houses in the comparables than would be the case for the subject property— the smaller the land portion, the higher the percentage of the total should be directed to the value of the building on it.

On Issue (2) there was no evidence presented.

Argument

On Issue (1) counsel generally reiterated the position taken by the respective evaluators.

On Issue (2) the entire argument of the respective counsel is reproduced:

i

Argument by Mr Keeling:

Mr Chairman, very briefly, certain facts can be admitted. I think they are clear in the Notice of Appeal and the Reply of the Minister, but I will go through them very quickly.

First of all, we have admitted that the appellant was the owner of R B Filters Ltd. Secondly, it is admitted that on December 13, 1972, a receiver was appointed on the basis of the debenture that another company held. Thirdly, it is admitted that the company discontinued business as of December 15, 1972, and, lastly, it is admitted that on February 9, 1973, Master Saunders of the Supreme Court of Ontario authorized sale of the assets of the company, and directed that the proceeds of the sale of the assets be paid to the debenture holder. The sole issue to be determined this afternoon is whether or not those circumstances triggered a disposition of the appellant’s shareholdings in R B Filters Ltd either in the year 1972 or 1973.

I am going to be of necessity very brief. I am going to be brief because I could not find any case after the recent Income Tax Act came into force, dealing with this:issue, which surprised me.

I am going to confine my argument to an interpretation of subsection 54(c) of the Act, which defines disposition as it pertains to capital gains and capital loss. The first thing ! would point out with regards to subsection 54(c), is that disposition is stated to include certain situations. But subsection 54(c) does not say that disposition means the following—I will argue that because subsection 54(c C) does not say disposition means one, two, three and four; it says “includes”. Because of that, certain situations not specifically referred to in subsection 54(c) can therefore be included in the term “disposition”.

Referring to the situations that subsection 54(c) does define as being a “disposition”, first of all, ‘‘(a) any property of a taxpayer that is a share, bond, debenture, note, certificate, mortgage ., . . is redeemed in whole or in part or is cancelled,” and I would argue that the shares in this particular case were cancelled the moment the company was placed into receivership, discontinued carrying on business and the assets of the company were sold, and the proceeds paid to the debenture holder.

(b) states: “any debt owing to a taxpayer or any other right of a taxpayer to receive an amount is settled or cancelled”. I realize I am stretching the point somewhat when I! argue that the word “debt” can in this case refer to a share; the company is indebted to each and every shareholder. I argue that when the company is placed in receivership and no longer carrying on business, and indeed has no assets, the assets at that point are cancelled.

Next I argue that subsection 54(c), after outlining three or four cases in which “disposition” is deemed to have occurred—and I refer—the section states further; “but, for greater certainty, does not include . . .” and it sets out the exclusions. In the Coombs situation, we can argue that they did intend to include it.

Lastly, I argue that the golden rule of the interpretation of the Statute applies—“to adhere to the words used”.

Now in this case, Mr Chairman, I can see an absurdity or repugnance recurring if subsection 54(c) does not include the Coombs situation; because we can have the situation if Mr Coombs ceases to be a resident of Canada, a deemed disposition would occur. With respect to subsection 48(1) of the Act, a deemed disposition would occur, and he would be entitled to claim the capital loss. Of course, Mr Coombs did not cease to be a resident. I can’t believe that the legislation intended that disposition would occur' if he ceased to be a Canadian resident, but not occur if he remained in Canada, which he did.

Argument by Mr Kerr:

Mr Chairman, just to briefly outline the structure of the Act as it applies to the circumstances in question, or at least as it relates to the circumstances in question. Of course it’s my position that it doesn’t apply.

Basically the starting point is the basic presumption or axiom that to be deductible the alleged loss must be classified as a deduction under the Act; that is undisputable. From there we go into the Statute, and go to Subsection 3(b), paragraph (ii), which allows the deduction of allowable capital loss through disposition of property. So the next step is to determine what is allowable capital loss as defined in subsection 38(1). We are therefore left to determine what is a capital loss.

Going further to paragraph 39(1)(b), it indicates that a capital loss is “capital loss’’ from the disposition of any property as calculated in the subdivision. Now the subdivision that is referring to is the subdivision which includes section 38.

Now the word that s used in the section is “disposition of property includes’’. Now I will grant or agree with the criterion stated by counsel for the appellant, that that is not exhaustive; that there can be other elements. However, every time capital loss has been referred to in the Act, it indicates a ‘‘disposition of property’’.

Now if we go outside the purview of the Act, we are left with the simple word, “disposition’’. What is disposition? My submission is that “disposition” is something which occurs as a result of an event whereby the party who is beneficially entitled to a certain amount of property is now no longer beneficially entitled as a result of the event; he has disposed of the event. If you dispose of your house you sell beneficial ownership in the house; if you dispose of shares, you either sell or in some other manner lose your beneficial ownership of those shares.

Now a common definition of “disposition”, or the common business use of the phrase as applies to this fact situation, it’s clear there was no disposition prior to the dates in question, 1972 and 1973; the taxpayer—the appellant— owned common shares in the company. Subsequent to those years he owned common shares in that company. Now the intervening occurrences are, from his point of view the shares became useless; the debenture owners seized the assets of the company, appear to be in poor financial position. However, that doesn’t change the fact that after these events he still owned the shares. There has been no evidence of any nature introduced to indicate beneficial interest of share ownership change on the books and records and share register from the name of the appellant to somebody else’s name in those years.

Secondly, how can it be said that there has been disposition? That to me is the end of the matter. Certainly there has been no evidence to establish that anything has happened with respect to the shares in question. Granted there has been evidence to indicate that the underlying assets of the corporation were taken over by the debenture holder, or a trustee appointed pursuant to the exercise of rights contained in the debenture, but the shares remained the same ownership in the shares, narrowing it down in looking at the property, when referring to capital loss, to disposition of property, as it says in sections 3, 39 and 54. And there are other sections of the Act that I won’t bother referring to—they all refer to “disposition”.

Looking further at the specific sections to see whether or not there is something within the Act that gives the appellant (the party) to take advantage of the capital loss provision. we are led to the remainder of subsection 54(c). As I said, just to back-track, we have determined that subsection 54(c) says in defining disposition of property, it includes the things that are enumerated. I took the most liberal view of that section and say it is exhaustive. I find no argument to indicate that there was anything that would fit within the definition of “disposition” outside of the purview of the Act, of normal business usage, of the dictionary or otherwise looking at the Act itself.

Then it is my submission if the appellant is to receive any redress in the circumstances, it has got to be in the four corners of the Statute.

A couple of arguments were raised by counsel for the appellant that he can find applicability in sub-paragraph 54(c)(ii)(A), wherein it states that “a disposition of property includes any transaction or event by which any property . . . that is a share”; then it goes on and says “bond, debenture . . .” Now certainly it does say “shares”, so far as it is applicable, “is redeemed in whole or in part”, so that to be applicable, we have to have the share redeemed—certainly it wasn’t redeemed. There has been no evidence that it was. There has been no argument that it was. Counsel indicated that it has been cancelled. In the circumstances there is no evidence that there has been any change in the share register of the company in question to change the ownership; the shares in question being registered in the name of the appellant. So can I take from the dearth or the absolute lack of evidence that those shares having been cancelled, no matter how wide an interpretation can be put on the word ‘‘cancelled’’?

It is most important to look at what happened. A company finds itself in poor condition; one of the shareholders that had a debenture, which allowed it to seize assets so this condition develop, decided he would cover his position in seizing the assets; he didn’t seize the shares, he didn’t have anything to do with the shares.

He also indicated—counsel that is—that he was stretching the interpretation of sub-paragraph 54(c)(ii)(B), that indicates that a disposition includes any transaction or event by which any debt of the taxpayer is settled or cancelled.

Again there is no existing debt from the company that would evidence itself in a debtor-creditor relationship. The shareholder has a right to take part in the distribution—this is the common shareholder, not a preference shareholder:—has the right to take part in the net assets of the corporation upon its being wound up, and its creditors paid off in full.

The company, during the currency of their relationship as a company and as a shareholder of the company, has no obligation to him whatsoever with respect to the amount that he paid, his consideration for those shares. They don’t have to do anything other than make payment pursuant to whatever interest or dividend stipulation attributed to the shares; there has been no evidence of that. There is no evidence to indicate that there was a debt, I submit, owing to the taxpayer.

I had anticipated further argument, Mr Chairman, but since they haven’t been raised, I don’t feel it necessary to go through my rebuttal of them. I simply conclude by saying: Looking at the definition of paragraph 54(c), looking at the fact situation of the case in question, it becomes patent that the Act does not give the appellant the right to claim capital loss in the circumstances in question, because there has been no disposition to trigger such a loss.

I have no further submissions.

Findings

On Issue (1) the Board takes the position that the value of the buildings on the property has been more appropriately determined by the analysis prepared for the appellant. On the main difference in the perspective used by each evaluator (noted earlier) the Board is unable to conclude that in a generally rural setting the difference between 15, 25, 50 or 75 acres of land surrounding a comparable house would have the debilitating effect on that house itself described by Mr Henderson. The basic principle which he has employed would probably hold true if the comparison were between a house on 75 acres and a comparable house on 1 or 2 acres. Under those circumstances the purpose would be quite different—that does not appear to me to obtain here. The valuations assigned to the property will be, land, $53,000, and, buildings, $24,000, supporting the total $77,000 valuation Submitted by Mr Hutchison.

Respecting Issue (2), the Board, notes for the record that while no evidence respecting the value of the shares in question (27¢ each) was adduced by the appellant, there was no indication from the respondent that this or any other value would have been acceptable to the Minister. On the question of “disposition”, which then remains the only point at issue, the Board notes that the relevance of the restriction on the right to transfer shares pointed out in the Notice of Appeal, was not raised or discussed at the hearing. Assuming that the clause in the company charter was operative, it would, however, have inhibited the transfer of “beneficial ownership” by the appellant. I point this out since paragraph 54(c)(v), in excluding from “disposition” a transfer of legal but not beneficial ownership, would imply but not necessarily determine that a simple transfer of legal and beneficial ownership could qualify as a disposition. There would not appear to be constraints placed on a transfer of that kind, including value of the property, or consideration for the transfer. In my view, this inverse reading of paragraph 54(c) does provide sufficient support for the contention of counsel for the appellant that paragraphs (i), (ii) and (iii) of paragraph 54(c) need not be regarded as all inclusive of the forms of disposition and warrants the Board examining separately the propositions of counsel, in subsection 48(1), clause 54(c)(ii)(B) and clause 54(c)(ii)(A).

With respect to subsection 48(1) noted by counsel, while there may appear to be the anomaly he has suggested, it is the very fact that section 48 deals with deemed disposition that bars its value to counsel in these appeals. The deeming provisions there detailed have no application here today—they are a reference to ministerial discretion— the taxpayer does not have that discretion of deeming that there has been a disposition.

The Board finds no merit in the alternative proposed by counsel under clause 54(c)(ii)(B). The shares held by the appellants were not debt of the Company, they represented equity.

These appeals do not seek to exclude some proceeds of disposition from the taxing provisions contained in paragraph 39(1)(a), rather they seek to include an alleged loss under the “deductible” provisions of paragraph 39(1 )(b). To that extent it must therefore fit squarely within such provisions, and to accomplish this counsel asserts that the events described in the Notices of Appeal be regarded as having “cancelled” the shares under clause 54(c)(ii)(A), and thereby having disposed of them. The argument of counsel for the respondent on this point is totally persuasive—there is no evidence that anything at all has happened to the shares and the Board must be of the opinion that they are still held by the appellants, and that even the Company charter itself has not been cancelled or surrendered.

Decision

That portion of the appeal dealing with the property is allowed, the valuation to be $77,000; that portion of the appeal dealing with the alleged loss on shares of $40,500 is dismissed. The appeals, therefore, are allowed in part and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed in part.