Section 207.05

The taxpayer contributed shares of a private company each year from 2009 to 2012, and sold the shares in 2013 for around $114,000. After the Minister’s proposed in 2015 to impose “tax” under s. 207.05 in an amount exceeding $114,000, and following negotiation, the Minister offered to reduce such tax by approximately 45%, so that it was imposed at the top marginal rate on the computed advantage amount. After this offer was rejected, the tax was assessed as originally proposed.

In response to a Rule 58 question imposed as to whether such “tax” (after also taking s. 207.06 into account) was “in law a penalty or a tax,” and after noting (at para. 42) that the apparent context of the question was that “[i]f section 207.05 were a penalty, a due diligence defence applies, and a successful defence renders non-qualified income free of tax,” Bocock J found that such provisions imposed a tax, stating (at paras. 44, 58):

Barring ambiguity, any interpretation holding that the words “a tax is payable” creates a penalty, where penalties are otherwise exceptionally stated to be so in the legislation, impugns the coherency of the Act … .

… A charge labelled as a tax may have characteristics so clearly coercive and disproportionate that one concludes it is a penalty; however, this case does not meet that standard.

Over the years 2009 to 2012, the taxpayer transferred to his Tax Free Savings Account (“TFSA”) common shares in the capital stock of a privately held corporation which had been issued to him at a low value following an estate freeze. In 2013, his TFSA sold those shares for their fair market value of $114,067.26 ($8,063 per share), with the taxpayer being assessed by the Minister as being subject to the 100% advantage tax under s. 207.05 based on the annual increases in the shares’ FMV totalling to approximately those proceeds (with the Minister later being willing to reduce the advantage tax to the taxpayer’s top marginal rate of federal and provincial tax through a s. 207.06 waiver).

The taxpayer brought a motion pursuant to s. 58(1) of the Tax Court of Canada Rules (General Procedure) for a declaration that s. 207.05 was in contravention of s. 53 of the Constitution Act, 1867 as a consequence of Parliament having improperly delegated the rate-setting element of the charge imposed thereunder to the Minister of National Revenue, arguing (para. 16) that “the existence of the discretionary relieving provision of section 207.06 following 207.05 gives the Minister the discretion to set the tax rate from anywhere between 0 and 100 percent thus amounting to an implied delegation of the right to set the tax rate.”

Pizzitelli J first stated (at para. 14) that “There is … no real dispute between the parties that clear and express language must be used to delegate taxing power to comply with such principle of no taxation without representation”. Before rejecting the taxpayer’s position, Pizzitelli J stated (at para. 28):

… [T]he words of both 207.05 and 207.06 are clear and … each represents a separate stand-alone provision, the first a detailed provision that sets a tax rate of 100 percent on the advantages it clearly defines in 207.01, in regard to detailed transactions it clearly sees as misusing or abusing the TFSA tax exemption regime, with detailed and specific exceptions and, the second, a discretionary ability of the Minister to waive or cancel all or any portion of such 100 percent tax. Section 207.05 makes no reference to being subject to 207.06 to suggest they must be read together and section 207.06 clearly contemplates the 100 percent tax has already been assessed… .

From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. After finding that the taxpayer had received an “advantage” for 2009 that was described n s. (b)(i) of the s. 207.01(1) definition, Lamarre ACJ rejected the taxpayer’s argument that TDW was responsible for the advantage tax, stating (at para. 87) that “making the trustee liable simply by virtue of status would render subsection 207.05(3) meaningless” and that no evidence had been provided of any significant role of TDW in the swaps.