Date: 20011206
Docket: A-519-00
Neutral citation: 2001 FCA 380
CORAM: STRAYER J.A
SHARLOW J.A.
MALONE J.A.
BETWEEN:
STANLEY TRZOP,
Appellant.
and
HER MAJESTY THE QUEEN,
Respondent.
Heard at Fredericton, New Brunswick on December 4, 2001
Judgment delivered at Fredericton, New Brunswick on December 6, 2001
REASONS FOR JUDGMENT BY: THE COURT
Date: 20011206
Docket: A-519-00
Fredericton, New Brunswick, December 6, 2001.
CORAM: STRAYER J.A
BETWEEN:
STANLEY TRZOP,
Appellant.
and
HER MAJESTY THE QUEEN,
Respondent.
JUDGMENT
This appeal is dismissed with costs.
"B. L. Strayer"
J.A.
Date: 2001206
Docket: A-519-00
Neutral citation: 2001 FCA 380
CORAM: STRAYER J.A
BETWEEN:
STANLEY TRZOP,
Appellant.
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
BY THE COURT
[1] In this case, Mr. Trzop had successfully appealed reassessments for his 1977 and 1980 income tax years to the Supreme Court of Canada. The Supreme Court allowed the appeal on May 26, 1994 and referred the matter back to the Minister of National Revenue (the "Minister") for reassessment in accordance with its unanimous reasons (reported as Antosko et al v. Her Majesty the Queen, [1994] 2 S.C.R. 312). The issue in this appeal is the scope of the Minister's authority to reassess following that judgment.
[2] To dispose of this appeal it is critical to understand the basis for Mr. Trzop's success in the Supreme Court.
[3] On March 1, 1975, the New Brunswick Industrial Finance Board, an agency of the Crown in right of the Province of New Brunswick, entered into an agreement with Mr. Trzop and Mr. Antosko relating to the shares and debt of Atlantic Forest Products Ltd. The principal amount of the debt was approximately $5 million, but it was in default. Included in the agreement was a promise on the part of the Board to transfer the debt to Mr. Trzop and Mr. Antosko for $10 if they operated the company for two years in a good and business-like manner.
[4] Mr. Trzop and Mr. Antosko fulfilled their obligations under the agreement and, on July 6, 1977, the debt was transferred to them as contemplated in the agreement. In 1977, Mr. Trzop was paid $38,335 in partial payment of interest accrued on the debt prior to its transfer. In 1980, a further $283,363 was paid to Mr. Trzop as interest accrued on the debt prior to its transfer.
[5] In filing his income tax returns for 1977 and 1980, Mr. Trzop included the interest in income but claimed an offsetting deduction under paragraph 20(14)(b) of the Income Tax Act R.S.C. 1985, c.1. Subsection 20(14) reads as follows:
|
(14) Accrued bond interest -- Where, by virtue of an assignment or other transfer of a debt obligation, other than an income bond, an income debenture, a small business development bond or a small business bond, the transferee has become entitled to an amount of interest that accrued on the debt obligation for a period commencing before the time of transfer and ending at that time that is not payable until after that time, that amount (a) shall be included as interest in computing the transferor's income for the transferor's taxation year in which the transfer occurred, except to the extent that it was otherwise included in computing the transferor's income for the year or a preceding taxation year; and
(b) may be deducted in computing the transferee's income for a taxation year to the extent that the amount was included as interest in computing the transferee's income for the year. |
(14) Intérêts courus sur obligations -- Lorsque, en raison d'une cession ou autre transfert d'une créance, à l'exception d'une obligation à intérêt conditionnel, d'une obligation pour le développement de la petite entreprise et d'une obligation pour la petite entreprise, le bénéficiaire du transfert a obtenu, pour une période commençant avant le moment du transfert et se terminant à ce moment, le droit à un montant d'intérêt qui s'est accumulé pendant cette période et qui n'est payable qu'après le moment du transfert, ce montant_: a) est inclus, à titre d'intérêt, dans le calcul du revenu de l'auteur du transfert pour son année d'imposition dans laquelle le transfert survient, sauf dans la mesure où il a été inclus dans le calcul de son revenu, pour l'année d'imposition ou une année d'imposition antérieure;
b) est déductible dans le calcul du revenu du bénéficiaire pour une année d'imposition, dans la mesure où il a été inclus à titre d'intérêt dans le calcul de son revenu pour l'année. |
[6] When Mr. Trzop claimed the deductions pursuant to paragraph 20(14)(b) in 1977 and 1980, paragraph 53(2)(l) would have automatically applied to require the adjusted cost base of the acquired debt to be reduced by the amount of the deduction. If, as a result of the application of paragraph 53(2)(l) the adjusted cost base became negative, the negative amount should have been taxed as a deemed capital gain pursuant to subsection 40(3). However, Mr. Trzop's 1977 and 1980 returns do not reflect any capital gain resulting from the combined operation of paragraph 53(2)(l) and subsection 40(3).
[7] Both returns were reassessed to disallow the deduction under paragraph 20(14)(b). Mr. Trzop objected to the reassessments but they were confirmed by the Minister. On July 10, 1985, Mr. Trzop filed notices of appeal in the Tax Court of Canada challenging the reassessments for both years. A judge of the Tax Court allowed the appeal on July 23, 1985. That decision makes no reference to paragraph 53(2)(l) or subsection 40(3); presumably because neither provision was argued.
[8] On December 5, 1986, the Minister commenced an action in the Federal Court Trial Division to appeal the decision of the Tax Court Judge. The Statement of Claim repeats the assumptions upon which the reassessments were said to be based and also alleges, among other things, that Mr. Antosko and Mr. Trzop acquired the debt for $10. However, there is no factual allegation or assumption that the debt was capital property with an adjusted cost base of $10 before the application of subsection 20(14). A Justice of the Federal Court Trial Division allowed the appeal on the basis that subsection 20(14) had no application to the interest because the party from whom the debt was transferred was not a taxable entity.
[9] The decision of the Federal Court Trial Division was appealed to the Federal Court of Appeal. The factum submitted in support of Mr. Trzop's appeal mentioned the capital gain issue in paragraph 3.13:
To permit the deduction ... does not mean that there will be no tax consequences for the Appellant. If the securities in question are capital property ... any deduction under section 20(14) ... would reduce their adjusted cost base of the property by an equivalent amount under section 53(2)(l). This could result in a capital gain.
This comment is correct but stops short of explaining the possibility of the application of subsection 40(3), which would give rise to a deemed capital gain. The Minister's factum in the Federal Court of Appeal says nothing about the capital gain issue. This Court dismissed the appeal from the judgment of the Federal Court Trial Division.
[10] Mr. Trzop then sought and obtained leave to appeal to the Supreme Court. Again, Mr. Trzop's factum in the Supreme Court refers to the capital gain issue at paragraph 37:
To permit the deduction ... does not mean that there will be no tax consequences for the Appellant. If the securities in question are capital property ... any deduction under section 20(14) ... would reduce their adjusted cost base of the property by an equivalent amount under section 53(2)(l). This could result in a capital gain pursuant to subsection 40(3).
The reference to subsection 40(3) necessarily imports the notion that, if subsection 20(14) applied, there could have been a deemed capital gain if the adjusted cost base of the debt became negative.
[11] The Supreme Court allowed Mr. Trzop's appeal on May 26, 1994. The Minister defended the assessments on the basis that subsection 20(14) is essentially an income allocation provision, and that the transferee of a debt cannot claim a deduction under paragraph 20(14)(b) unless the transferor is a taxable entity to which paragraph 20(14)(a) can apply. In this case, the transferor, as an agent of the Crown in right of the Province of New Brunswick, was exempt from tax. The Minister argued that since paragraph 20(14)(a) had no effect on the transferor, paragraph 20(14)(b) should not apply to Mr. Trzop as transferee. The Supreme Court rejected that argument and held that Mr. Trzop was entitled to a paragraph 20(14)(b) deduction based on its plain words. This appears under the heading "Conclusion and Disposition":
The appellants are entitled to a deduction of interest accruing prior to the transfer and payable thereafter. The transaction ... meets the requirements of subsection 20(14). The interest which accrued during the period that repayment of the debt was suspended did not become payable until after the transfer. However, the parties agree that this result may have other tax consequences for the appellants, such a taxable capital gain pursuant to s. 40(3). In this connection, these and any other possible consequences can be taken into account by the respondent in reassessment.
Therefore, the appeals are allowed, the judgment of the Federal Court of Appeal is set aside, and the matters referred back to the Minister for reassessment in accordance with these reasons.
The judgment of the Supreme Court simply repeats the last paragraph of the reasons.
[12] Following the judgment the Minister reassessed Mr. Trzop for 1977 and 1980 to allow the deductions under paragraph 20(14)(b) and to include in his income a taxable capital gain arising from the combined operation of paragraph 53(2)(l) and subsection 40(3). The effect was that the tax reduction was approximately one-half of what he was anticipating after his success in the Supreme Court. Mr. Trzop appealed the reassessment to the Tax Court of Canada. His appeal was dismissed by Bowie J.T.C.C. That decision is reported at [2000] 4 C.T.C. 2093, 2000 D.T.C. 2364.
[13] It is argued for Mr. Trzop that the reassessment contravenes long-standing authority that a successful tax appeal curtails the Minister's power to raise a new assessment. As stated by Lord Greene in Minister of National Revenue v. Wrights' Canadian Ropes Ltd. [1947] 1 D.L.R. 721 (J.C.P.C.) at p. 733:
Where...the issues are fought out and the taxpayer is successful on his appeal [subsection 65(2), now subparagraph 171(1)(b)(iii)] does not, in their Lordships' opinion, apply. A fortiori it cannot apply in the manner and with the consequences contended for by counsel for the appellant in the present case. They endeavoured to interpret the order as meaning that it would be open to the Minister to start as it were de novo and reconsider the whole matter of disallowance with power to come to the same conclusion as before or a different conclusion on the same or different material. This, in their Lordships' opinion, would plainly be inadmissible. The issues have been fought out by action in the Courts and the appeal of the respondents was in terms allowed by the Supreme Court. The view submitted was in terms allowed by the Supreme Court. The view submitted by the appellant, if correct, would give the minister a second opportunity of making a determination unfavourable to the respondents and thus depriving them of the fruits of their victory.
[14] The statutory basis for Mr. Trzop's argument is paragraph 152(4)(b), which precludes the Minister from reassessing tax for any taxation year more than three years after the date of the initial assessment for the year or the first notification that no tax is payable for the year, unless certain conditions are met. The Minister does not argue that any of these conditions apply.
[15] Mr. Trzop also relies on Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358. In that case, the Bank had been assessed on the basis that a certain disposition of a partnership interest resulted in a gain on income account rather than a capital gain, as had been reported. When the case reached the Supreme Court the Crown asserted for the first time an argument that the Bank had actually sold the assets of the partnership rather than a partnership interest, and so should be taxed on the basis that a recapture of capital cost allowance arose upon the sale. The Court refused to entertain that argument on a number of grounds. First, the limitation period had expired when the Crown first tried to raise the issue of recaptured capital cost allowance. Second, the Crown could have reassessed the Bank on that basis before the limitation period expired, but chose not to do so. Third, the recapture argument could not be supported as simply a new argument in support of the assessment. Finally, it was not clear that there was a proper factual basis for the recapture argument and because the issue had not been argued in the Tax Court, the appellant did not have an opportunity to adduce evidence on the point.
[16] The Minister's position is that the authority to reassess Mr. Trzop's tax for 1977 and 1980 in this case was not derived from subsection 152(4), and so the limitations in that provision and the restraints on the Minister's authority to reassess as stated in Continental Bank, supra, are not germane. The Minister argues that the Supreme Court judgment authorized or compelled the Crown to tax Mr. Trzop on the capital gain said to arise from subsection 40(3), because on the facts of this case that is the logical and inevitable consequence of the Supreme Court's determination that subsection 20(14) applied. If that is so, then any prejudice to Mr. Trzop will have been cured because a reassessment under subsection 164(4.1) can be the subject of a separate objection and appeal under subsection 165(1.1), subject to the limitations stated in that provision.
[17] Subsections 164(4.1) and 165(1.1) read as follows:
|
164 (4.1) Where the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada has, on the disposition of an appeal in respect of taxes, interest or a penalty payable under this Act by a taxpayer resident in Canada, (a) referred an assessment back to the Minister for reconsideration and reassessment, or (b) varied or vacated an assessment, the Minister shall with all due dispatch, whether or not an appeal from the decision of the Court has been or may be instituted, (c) where the assessment has been referred back to the Minister, reconsider the assessment and make a reassessment in accordance with the decision of the Court, unless otherwise directed in writing by the taxpayer, and
(d) refund any overpayment resulting from the variation, vacation or reassessment, and the Minister may repay any tax, interest or penalties or surrender any security accepted therefor by the Minister to that taxpayer or any other taxpayer who has filed another objection or instituted another appeal if, having regard to the reasons given on the disposition of the appeal, the Minister is satisfied that it would be just and equitable to do so, but for greater certainty, the Minister may, in accordance with the provisions of this Act, the Tax Court of Canada Act, the Federal Court Act or the Supreme Court Act as they relate to appeals from decisions of the Tax Court of Canada or the Federal Court, appeal from the decision of the Court notwithstanding any variation or vacation of any assessment by the Court or any reassessment made by the Minister under paragraph (c).
|
164 (4.1) Lorsque la Cour canadienne de l'impôt, la Cour d'appel fédérale ou la Cour suprême du Canada, en se prononçant sur un appel concernant des impôts, intérêts ou pénalités payables par un contribuable résidant au Canada en vertu de la présente loi, ordonne_: a) soit le renvoi d'une cotisation au ministre pour réexamen et pour établissement d'une nouvelle cotisation; b) soit la modification ou l'annulation d'une cotisation, le ministre, avec diligence, qu'un appel de la décision de la cour ait été ou puisse être interjeté ou non_: c) d'une part, réexamine la cotisation et en établit une nouvelle conformément à la décision de la cour, sauf instruction écrite contraire du contribuable, dans le cas du renvoi d'une cotisation au ministre; d) d'autre part, rembourse tout paiement en trop qui découle de la modification ou de l'annulation d'une cotisation, ou de l'établissement d'une nouvelle cotisation; de plus, le ministre peut rembourser tout impôt, tout intérêt ou toute pénalité ou remettre toute garantie qu'il a acceptée, pour ceux-ci, à ce contribuable ou à un autre contribuable qui a fait opposition ou interjeté appel, s'il est convaincu, compte tenu des motifs exposés dans le prononcé sur l'appel, qu'il serait juste et équitable de faire ce remboursement ou cette remise; il est entendu toutefois que le ministre peut en appeler de la décision de la cour conformément aux dispositions de la présente loi, de la Loi sur la Cour canadienne de l'impôt, de la Loi sur la Cour fédérale ou de la Loi sur la Cour suprême relatives à l'appel d'une décision de la Cour canadienne de l'impôt ou de la Cour fédérale du Canada, malgré la modification ou l'annulation de la cotisation par la cour ou l'établissement d'une nouvelle cotisation par le ministre en vertu de l'alinéa c). |
|
165(1.1) Notwithstanding subsection (1), where at any time the Minister assesses tax, interest, penalties or other amounts payable under this Part by, or makes a determination in respect of, a taxpayer (a) under subsection 67.5(2) or 152(1.8), subparagraph 152(4)(b)(i) or subsection 152(4.3) or (6), 161.1(7), 164(4.1), 220(3.4) or 245(8) or in accordance with an order of a court vacating, varying or restoring an assessment or referring the assessment back to the Minister for reconsideration and reassessment, ... the taxpayer may object to the assessment or determination within 90 days after the day of mailing of the notice of assessment or determination, but only to the extent that the reasons for the objection can reasonably be regarded .. (e) in any other case, as relating to any matter that gave rise to the assessment or determination and that was not conclusively determined by the court, and this subsection shall not be read or construed as limiting the right of the taxpayer to object to an assessment or a determination issued or made before that time. |
165(1.1) Malgré le paragraphe (1), dans le cas où, à un moment donné, le ministre établit une cotisation concernant l'impôt, les intérêts, les pénalités ou d'autres montants payables par un contribuable en vertu de la présente partie ou détermine un montant à l'égard d'un contribuable_: a) soit en application des paragraphes 67.5(2) ou 152(1.8), du sous-alinéa 152(4)b)(i) ou des paragraphes 152(4.3) ou (6), 161.1(7), 164(4.1), 220(3.4) ou 245(8) ou en conformité avec l'ordonnance d'un tribunal qui annule, modifie ou rétablit la cotisation ou la renvoie au ministre pour nouvel examen et nouvelle cotisation; ... le contribuable peut faire opposition à la cotisation ou au montant déterminé dans les 90 jours suivant la date de mise à la poste de l'avis de cotisation ou de l'avis portant qu'un montant a été déterminé seulement dans la mesure où il est raisonnable de considérer que les motifs d'opposition sont liés à l'une des questions suivantes que le tribunal n'a pas tranchée définitivement_: e) dans les autres cas, une question qui a donné lieu à la cotisation ou au montant déterminé. Toutefois, le présent paragraphe n'a pas pour effet de limiter le droit du contribuable de s'opposer à quelque cotisation établie ou montant déterminé avant le moment donné. |
[18] The Supreme Court ruled on a very narrow issue, which was whether interest on the debt came within the scope of subsection 20(14) of the Act. On a fair reading of the reasons, the Supreme Court first ruled that the transaction came within subsection 20(14) but then acknowledged that this result may have other tax consequences involving particularly the application of paragraphs 53(2)(l) and subsection 40(3). We agree with the Crown and Bowie J.T.C.C. that the creation of a taxable capital gain pursuant to subsection 40(3) was the logical and inevitable consequence of the decision of the Supreme Court that subsection 20(14) applied. That consequence was required to be taken in account by the Minister in assessing Mr. Trzop following the decision of the Supreme Court. The Minister acted in accordance with the reasons of the Supreme Court in applying subsection 40(3) to include a taxable capital gain in Mr. Trzop's income for 1977 and 1980.
[19] However, this appeal does not end there. The correctness of the assessment itself, as opposed to its validity, is also in issue. In applying subsection 40(3), the Minister made a factual assumption as to the adjusted cost base of the debt. Specifically, the Minister assumed a cost base of $10, presumably based on the agreement between the Board and Mr. Trzop and his partner, Mr. Antosko.
[20] It was open to Mr. Trzop to object to that assessment, and he did so. In objecting to the assessment, the onus was upon to demolish the assumption made by the Minister that the adjusted cost base of the debt was $10. At the Tax Court hearing, Mr. Trzop did not lead evidence contradicting the Minister's assumption as to the adjusted cost base. He did, however, raise in oral argument the proposition that the adjusted cost base should be increased in light of unpaid labour that he contributed to the company. He argued that the consideration for the transfer of debentures included not only $10, but also the undertaking that he would operate the company in a good and business-like manner; an undertaking that required him to perform unpaid labour for the company.
[21] Bowie J.T.C.C. considered and rejected this argument in the following paragraph:
The undertaking to operate the company in a good and business-like manner was part of the consideration, but that cannot be equated to an obligation on the part of the Appellant to work for two years without pay. He did that of his own volition, and the success of the enterprise was his reward for doing so. The computation of the ACB of a security is governed principally by section 53 of the Act, the operative words of which, so far as this case is concerned, are "...there shall be added to the cost to the taxpayer of the property ...". Nothing that follows assists the Appellant's case, so for this argument to succeed he would have to bring the value of his labours within "...the cost to [him] of the property...". As there was no term in the agreement with the board that required him to work without pay, he cannot satisfy that requirement.
[22] We can find no error in this conclusion. Mr. Trzop's unpaid labour cannot, by operation of statute or otherwise, be included to increase the adjusted cost base. It cannot be said that Mr. Trzop's unpaid labour formed part of the "cost to the taxpayer" of the debt for the purposes of section 53 of the Income Tax Act. Thus, Mr. Trzop has not established that the Minister was incorrect in assuming that the adjusted cost base of the debt was $10.
[23] Another argument advanced by Mr. Trzop is that to allow the Minister to assess taxable capital gains after the long delay in this case would violate his right to enjoy property without due process as set out in subsection 1(a) of the Bill of Rights. In our opinion, this ground of appeal is without merit. It is far from clear that the Bill of Rights has any application to income tax disputes but in any event, the issues in this case have been heard before every level in the Canadian judicial system that deals with such disputes. Due process of law has been afforded to Mr. Trzop; due process being all legal processes recognized by Parliament and the Courts of Canada (Curr v. The Queen, [1972] S.C.R. 889 at 916). The portion of the delay that was not part of the judicial process was largely due to negotiations to which Mr. Trzop was a party. There was no undue delay in these circumstances.
[24] A final argument on this appeal concerns the Tax Court Judge's refusal to consider two documents tendered by Mr. Trzop; a copy of the transcript of the Supreme Court hearing and an opinion letter from a former Supreme Court Justice. Bowie J.T.C.C. refused to enter either the transcript or the letter as an exhibit on the basis that both were inadmissible:
Mr. Mockler invited me to draw inferences favourable to his client from the questions that were asked and comments made by the judges of the Supreme Court during argument. In my view, it would be quite wrong to attribute any opinion to either the Court itself or to individual judges on any such basis. The purpose of the questions asked by judges in the course of argument is not to express their views on the points at issue, but to test the submissions of counsel. Nothing said by a judge of any court during the course of argument should be taken as an expression of that judge's opinion on the matter before the court. I have disregarded the transcript. I have also ignored the letter of opinion. However distinguished its author, it is simply the opinion of a lawyer as to the point of law before me, and it cannot be elevated beyond that. It is inadmissible.
[25] At the hearing of this appeal, counsel for Mr. Trzop did not press his argument with respect to the letter, but continued to argue that the transcript was admissible. In our analysis Bowie J.T.C.C. properly excluded the transcript of oral argument and the opinion letter for the reasons that he gave.
[26] The appeal should be dismissed with costs.
"B. L. Strayer"
J.A.
"K. Sharlow"
J.A.
"B. Malone"
J.A.
Fredericton, New Brunswick
December 6, 2001
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-519-00
STYLE OF CAUSE: STANLEY TRZOP v.
HER MAJESTY THE QUEEN
PLACE OF HEARING: Fredericton, New Brunswick
DATE OF HEARING: December 4, 2001
REASONS FOR JUDGMENT BY: By the Court
DATED: December 6, 2001
APPEARANCES:
E. J. Mockler, Q.C. FOR THE APPELLANT
Donald G. Gibson FOR THE RESPONDENT
SOLICITORS OF RECORD:
Mockler Peters Oley Rouse & Williams FOR THE APPELLANT
Barristers and Solicitors
839 Aberdeen Street
P. O. Box 547
Fredericton, New Brunswick
E3B 5A6
Department of Justice FOR THE RESPONDENT
222 Queen Street
12th Floor
Ottawa, Ontario
K1A 0H8