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Citation: 2003TCC726 |
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Date: 20031212 |
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Docket: 2001-2022(IT)G |
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BETWEEN: |
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GEORGE DENNIS DALLAS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
(Delivered orally from the bench on July 14, 2003,
in Vancouver, British Columbia)
Teskey, J.
[1] The Appellant appeals his reassessment of income tax for the year 1996, wherein the Minister of National Revenue (the "Minister") included a taxable capital gain of $493,583.00 in the Appellant's income for the 1996 year.
Facts
[2] Most of the facts are not in dispute and none of the mathematics is in dispute.
[3] The undisputed facts are:
(a) The Appellant and a partner named Vaglio, in 1996, sold properties on Richard Street, Vancouver, to the City of Vancouver under threat of expropriation.
(b) His share of the proceeds was $2,667,225.00.
(c) As replacement properties, he purchased properties on Point Grey Road in Vancouver and on Taylor Road on Bowen Island, for collectively $2,009,114.50.
(d) The Appellant also purchased 150 shares of a private corporation which owned property on Seymour Street in Vancouver, and a 16-acre property described as the "Fountain Property" and Lots 1 and 2 at Brook Cove, plus a one half interest in Lot 20 at Brook Cove for $475,000.00.
(e) At the time of this purchase, the Appellant owned all the other outstanding issued common shares of the private corporation and the other one half interest in the said Lot 20.
[4] Facts in dispute:
a. the value of the half interest in Lot 20;
b. the intention of the Appellant when he purchased the balance of the outstanding shares in the private corporation and the outstanding one half interest in Lot 20.
Issues
[5] The two issues before the Court are:
(1) Does the purchase of shares of a private corporation that holds title to property qualify as replacement property for the purpose of the Income Tax Act (the "Act")? and
(2) Does the purchasing of the other one half interest in Lot 20 qualify for the same purpose?
[6] The Appellant is a lawyer practicing in Vancouver and was the only witness.
[7] His testimony was not consistent in regards with his intention concerning the share purchase.
[8] The Appellant, when filing his T1 tax return for 1996, on or just before April 30, 1997, claimed the exemption from capital gain tax for the purchase of the Point Grey and Taylor properties. As set forth in paragraph 3(c) above, no claim was made in the T1 tax return for the purchase of the shares of the private corporation or the one half interest in Lot 20.
[9] The Appellant claims that he and his accountant discussed the additional purchases described in paragraph 8 above and the accountant said it would be done at the objection stage. I reject this outright. I do not believe any accountant or a solicitor would take this position. If the inclusion of the share purchase and the one half interest in Lot 20 was intended to be replacement property, the only sensible position would be to file an amended T1 tax return in early May of 1997. I specifically find that no such conversation took place and no such intention existed. Furthermore, there would be no objection stage, as the Appellant's T1 tax return would be accepted as filed.
[10] I find that the first time the Appellant made a claim in any fashion for the share purchase was after Canada Custom Revenue Agency (CCRA) wrote to the Appellant on June 6, 2000.
[11] Attached to the 1996 T1 tax return is a letter by the Appellant addressed to Revenue Canada that, in part, says:
I was forced to sell against my will and I used the proceeds of the sale to replace the lands for the same purpose as 3018 Point Grey Road, Vancouver and the other on Bowen Island.
(No mention is made of the land in the private corporation.)
Conclusion
[12] Subsection 44(5) of the Act defines "Replacement Property". It reads:
(5) Replacement property - For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if
(a) it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(a.1) it was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property;
(b) where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose;
(c) where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer; and
(d) where the former property was a taxable Canadian property (other than treaty-protected property) of the taxpayer, the particular capital property is a taxable Canadian property (other than treaty-protected property) of the taxpayer.
[13] My colleague ,O'Connor J., said, in Grove Acceptance Ltd. v. The Queen, 2002 DTC 2172, at paragraph 14:
Sections 13 and 44 are exceptional provisions. Normally, when a property is disposed of, there is capital gain (almost $2 million in this case) and a deferred recapture of almost $300,000. Normally, a taxpayer has to pay the tax on the capital gain and has to pay the tax on the recapture. This is an exceptional provision allowing for deferrals. Indeed, this Court has said that, in the case of Edwynn Holdings Ltd. v. Minister of National Revenue, [1990] 1 C.T.C 2108, it allows a person to essentially defer tax that should otherwise be paid at that time. As a result, the taxpayer has to fit within the four corners of the provisions.
[14] Desjardins, J.A. of the Federal Court of Appeal, in Glaxo Wellcome Inc. v. The Queen, 98 DTC 6638, said:
Despite the valiant effort of counsel for the appellant, we agree with the interpretation given by Bowen, J.T.C.C. to the word "used" in the definition of "former business property"
The Tax Court Judge encapsulated his reasoning, with which we agree, as follows:
[The property] was intended to be used, it was waiting to be used but in any meaningful sense of the term, it was not being used.
There is nothing we could say better than what was stated by him in his analysis.
This appeal will be dismissed with costs.
[15] The Appellant argues that I should pierce the corporate veil and look to the corporation's assets, which qualify as replacement property, and in support of this, refers to Interpretation Bulletin IT-259R4, Exchange of Property, mainly paragraphs 16 and 17 thereof, which read as follows:
Same or a Similar Use
16. Where a former property described in par. 1(a) was not used for the purpose of gaining or producing income from a business, the following comments apply in determining whether a replacement property is acquired for "the same or a similar use" as required by paragraphs 13(4.1)(a.1) and 44(5)(a.1) (as described in par. 14(b)(ii)).
(a) This requirement is met where the use of the property is the same or similar to the use to which the taxpayer or a person related to the taxpayer put the former property. Since the former property must have been used, land that has never been used by the taxpayer or a related person cannot qualify as a former property. Land (or any other capital property) that has been used for non-income earning purposes can qualify as a former property (for example, a personal-use cottage that is expropriated). Land that is acquired for resale cannot qualify because it is not a capital property.
(b) Although the property generally will bear the same physical description as the former property, for example, land replaced by land or a building by a building (but see par. 4), there may be cases where a different type of property provides the same use or function as the former property. For example, where shares of a cooperative corporation which carry rights to accommodation in an office building are acquired to replace an expropriated office building of the taxpayer, the shares could constitute a replacement property.
17. Where the former property was used for the purpose of gaining or producing income from a business, another property will usually be considered to be a property acquired for the "same or a similar use" if it is acquired to gain or produce income from the same or a similar business and if it generally bears the same physical description as the former property. For example, a taxpayer may replace a warehouse with a manufacturing building used in the same or a similar business because both properties are buildings and the two uses are "similar" in that they are both part of the overall process of providing products from the same or a similar business to the consumer. It must be kept in mind, however, that the "same or a similar use" test referred to in pars. 14(a)(ii) and (b)(ii) is still a separate test from, and is not overridden by, the "same or a similar business" test referred to in pars. 14(a)(iii) and (b)(iii) and discussed in pars. 18 to 21. Thus, for example, if a company owned a residential property used to house its employees, a building used to carry on the company's day-to-day operations would generally not be considered as having the "same or a similar use" even though both properties are real property and are used in the same business. Also, a property normally will not be a replacement property acquired for the same or a similar use when it is acquired to replace a former property and at the same time provide substantial other uses. An insignificant secondary use of a new replacement property is not a concern. A former business property cannot be replaced with a rental property.
[16] My former colleague, Kempo, T.C.J., in Edwynn Holdings Ltd. v. M.N.R., 89 DTC 720, was dealing with a taxpayer who sold shares in a hotel and then purchased another hotel with a partner.
[17] The taxpayer's appeal was dismissed as Kempo T.C.J. declined a lifting of the corporate veil under the circumstances therein.
Analysis
[18] In no way commenting on the correctness of paragraph 16(b) of the Interpretation Bulletin, the purchase of shares of a cooperative corporation which carries the right to exclusive accommodation in an office building is entirely different from purchasing all, or the balance of the outstanding shares, of a private corporation that owns real estate. The purchase of shares of a corporation is not the purchase of its assets. You only obtain the normal rights of a shareholder, even if you own all of the shares.
[19] Section 44 of the Act has the heading "Exchange of Property".
[20] Subsection 44(1) was amended in 2001 and can be paraphrased to read: "Where at any time an amount has been received by a taxpayer as proceeds of disposition of a capital property that is not a share of the capital stock of the corporation."
[21] Prior to the 2001 Amendment, section 44, subsection (1)(b) thereof, made it clear that the sale of shares would not qualify, as it read:
(b) a property that was, immediately before the disposition, a former business property of the taxpayer.
[22] Shares cannot be business property, unless you are in the business of selling and buying shares, which the Appellant herein was not.
[23] I also reject the Appellant's claim that the share purchase qualify as replacement property on the basis that it is "not" reasonable to conclude that the Appellant acquired the shares to replace the former property. If, in fact, it had been the Appellant's intention of the share purchase, it would have been included in his 1996 T1 tax return or in an amended return filed very shortly after April 30, 1997.
[24] Even if I had been prepared to accept that outright ownership of all the outstanding shares of a corporation, which owns property, that the property could qualify as replacement property, I would have excluded the 16-acre Fountain property and Lots 1, 2 and 20 of Brook Cove, as these were vacant parcels of land, not being used in any way but were just being held.
[25] I also believe that paragraph 44(5)(c) would exclude the share purchase from the benefit of this section. It reads:
(c) where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer; and
[26] Herein, the capital property of the Appellant are the shares of the corporation and the land owned by the corporation is not taxable capital property of the Appellant.
[27] For all the above reasons, the appeal is dismissed with costs.
Signed at Calgary, Alberta, this 12th day of December, 2003.
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"Gordon Teskey" |
Teskey, J.
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CITATION: |
2003TCC726 |
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COURT FILE NO.: |
2001-2022(IT)G |
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STYLE OF CAUSE: |
George Dennis Dallas and The Queen |
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PLACE OF HEARING: |
Vancouver, British Columbia |
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DATE OF HEARING: |
July 14, 2003 |
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JUDGMENT DELIVERED ORALLY THE BENCH: |
July 14, 2003 |
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REASONS FOR JUDGMENT BY: |
The Hon. Justice Gordon Teskey |
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REASONS FOR JUDGEMENT REVISED AND EDITED: |
December 12, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Peter G. Theocharis |
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Counsel for the Respondent: |
Tom Torrie |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Peter G. Theocharis |
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Firm: |
Peter G. Theocharis, Solicitor Bowen Island, British Columbia |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |