Date: 20011011
Docket: A-691-99
Neutral citation: 2001 FCA 302
CORAM: ROTHSTEIN, J.A.
BETWEEN:
MAI TAI (MATTHEW) CHAN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Calgary, Alberta on Thursday, October 11, 2001.
Judgment delivered from the Bench at Calgary, Alberta
on Thursday, October 11, 2001.
REASONS FOR JUDGMENT OF THE COURT BY: SEXTON, J.A.
Date: 20011011
Docket: A-691-99
Neutral citation: 2001 FCA 302
CORAM: ROTHSTEIN, J.A.
BETWEEN:
MAI TAI (MATTHEW) CHAN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Calgary, Alberta
on Thursday, October 11, 2001)
SEXTON, J.A.
Introduction
[1] This appeal concerns the issue of whether a payment in settlement of an interest in a trust is property distributed by the trust in satisfaction of the taxpayer's capital interest in the trust or a simple disposition of his capital interest in the trust. If it is the former it is subject to a rollover and is not taxable at the time of the distribution; if it is the latter, it is not subject to a rollover and is taxable at the time of the disposition.
Facts
[2] The Appellant was a beneficiary of a trust established by his father and mother who were the trustees. He became suspicious about how the assets of the trust were being handled and brought an action in Hong Kong against his mother and father. The action was settled and by a Consent Order of the Supreme Court of Hong Kong the Appellant received the approximate sum of 1.8 million Canadian dollars. The Consent Order was based on an agreement between the parties to settle the litigation on the basis that:
(1) The 1st Defendant [father] to pay to the Plaintiff the sums of HK$3,500,000.00 and HK$8,638,000.00 through the Plaintiff's solicitors by way of cash or bank draft (drawn or issued by a licensed bank in Hong Kong) at or before 4:00 p.m. on 9th September, 1992.
(2) The Plaintiff to deliver to the 1st and 2nd Defendants, upon payment under paragraph (1) above by the 1st Defendant, a Deed of Release and Disclaimer duly executed by the Plaintiff in the form as in Annex A hereof.
[3] The Deed of Release and Disclaimer commenced with a recital that the Appellant "was and still is the beneficial owner of 3,500 shares in the Company".
[4] The document provided that:
1. In consideration of the said Mr. Chan [father] paying to the Undersigned the sums of HK$3,500,000.00 and HK$8,638,000.00 and pursuant to a Consent Order made by The Honourable Deputy Judge Burrell in Chambers on the 3rd day of September 1992, the Undersigned hereby release [sic] the said Mr. and Madam Chan from any and all their duties liabilities whatsoever (whether joint or several) under the said Trust Deed.
2. Further, also in consideration of the said payment of the said sums of HK$3,500,000.00 and HK$8,638,000.00 and also pursuant to the Consent Order refer to in paragraph above, the Undersigned hereby disclaim [sic] all his beneficial rights interest and entitlements arising out of or in respect of the said 3,500 shares in the Company.
[5] The Appellant filed his return of income on the basis that by the settlement he had disposed of the capital property which had been held in trust for him and that he had realized a taxable capital gain on the disposition.
[6] The Minister of National Revenue assessed tax on the same basis but he assumed that the adjusted cost base was less than declared and that the taxable capital gain on the disposition was therefore greater than declared.
[7] When the matter became before the Tax Court the key question had become whether the money paid to the Appellant was property of the trust which was "distributed" by the trust in satisfaction of the Appellant's interest.
[8] The Tax Court held that the payment to the Appellant was not a distribution of trust property to the Appellant because it was not an action taken by the trustee in response to his obligations under the trust. The Court held that the Deed of Release and Disclaimer was quite inconsistent with any sort of distribution of property of the trust. The Appellant's father had demanded and received consideration as provided in the form of the Deed of Release and Disclaimer. The deed eliminated any fiduciary duty owing by the father and the mother to the Appellant with respect to the ownership in the 3,500 shares which they had previously held in the trust. Thus the Tax Court Judge held that the transaction was a sale and therefore the payment was not subject to a rollover.
[9] Before the Tax Court Judge there were two procedural issues. Firstly, the Appellant had argued that the assessment under the appeal was made on the basis that the Appellant had realized a taxable capital gain from the disposition of the 3,500 shares. According to the Appellant when the Respondent filed its Reply to the Notice of Appeal it was too late for the Respondent to assert that the Appellant was liable for a tax on a different basis that is, the disposition of his interest in the trust to his father. The Appellant asserted that the Respondent could not advance an alternative basis for reassessment after the applicable limitation period had expired. The Tax Court Judge held that section 152 of the Act permitted the Minister to advance the alternative argument.
(9) The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.
(3) Subsections (1) and (2) are applicable to appeals disposed of after the day on which this Act is assented to.
[10] The Appellant argued that the appeal was disposed of within the meaning of the section when judgment was reserved at the conclusion of the hearing on January 27, 1999. The amendment was assented to on June 17, 1999 and the judgment was rendered on October 6, 1999. The Tax Court Judge held that litigation was not "disposed of" until it had been brought to a conclusion by the issuance of a judgment.
[11] The second procedural argument was that even if section 152 (9) does apply, it does not permit the Minister to advance a factual basis for reassessment different from the factual basis assumed by the Minister in making the original assessment. The Tax Court Judge did not agree.
Applicable Legislation
[12] Subsections 107 (1), and (2) of the Income Tax Act read in part:
107. (1) Where a taxpayer has disposed of all or any part of his capital interest in a trust,
(a) where the trust is a personal trust or a prescribed trust , for the purposes of computing the taxpayer's taxable capital gain, if any, from the disposition of the interest or part thereof, as the case may be, the adjusted cost base to the taxpayer thereof immediately before the disposition shall be deemed to be an amount equal to the greater of the adjusted cost base to the taxpayer thereof otherwise determined immediately before that time and the cost amount to the taxpayer thereof immediately before that time,
...
except that where the interest was an interest in an inter vivos trust not resident in Canada that was purchased by the taxpayer, paragraph (a) does not apply in respect of the disposition of all or any part thereof except where subsection (2) is applicable in respect of any distribution of property by the trust to him in satisfaction of that interest or that part thereof, as the case may be.
(2) Where at any time any property of a personal trust or a prescribed trust has been distributed by the trust to a taxpayer who was a beneficiary under the trust in satisfaction of all or any part of his capital interest in the trust, the following rules apply:
(a) the trust shall be deemed to have disposed of the property for proceeds of disposition equal to its cost amount to the trust immediately before that time;
(b) the taxpayer shall be deemed to have acquired the property at a cost equal to the aggregate of its cost amount to the trust immediately before that time and the amount, if any, by which
(i) the adjusted cost base to him of the capital interest or part thereof, as the case may be, immediately before that time as determined for the purposes of paragraph (1) (b) exceeds
(ii) the cost amount to him of the capital interest or part thereof, as the case may be, immediately before that time;
(c) the taxpayer shall be deemed to have disposed of all or part, as the case may be, of the capital interest for proceeds equal to the cost at which he is deemed by paragraph (b) to have acquired the property, minus the amount of any debt assumed by the taxpayer or of any other legal obligation assumed by him to pay any amount, if the distribution of the property to him was conditional upon the assumption by him of the debt or obligation;
[13] The Tax Court Judge has made findings of fact on the basis of testimony of the Appellant, the Agreed Statement of Facts, and a number of documents. We are of the view that the inferences drawn from the facts by the Tax Court Judge are not manifestly wrong and that they are indeed reasonable and supportable on the facts as led in evidence.
[14] We are of the view that after the execution of the Consent Order and the Release the Appellant was disentitled to the shares because he had disclaimed "all his beneficial rights, interest and entitlements" to them. The legal effect of this is that the father and the mother became the legal and beneficial owners of the 3,500 shares. Thus, the effect of the Consent Order and Release is the same as a sale.
[15] In order for Section 107 (2) to apply, it is our view that it is necessary for the taxpayer to demonstrate that the property which was transferred to him was indeed property distributed out of the trust assets. While this could include cash, that cash must have been in the trust.
[16] There is no evidence that the cash came out of the trust nor is there evidence that indeed the trust had sufficient cash to pay that mount at the time it was paid. The onus is on the taxpayer to demonstrate that the cash which the Appellant received came from the trust itself, and this he has failed to do. Thus, there is no evidence that trust property was distributed to the Appellant so as to allow him to invoke the provisions of Section 107 (2).
[17] On the two procedural issues we are in complete agreement with the holdings of the Tax Court Judge. The appeal will therefore be dismissed with costs.
"J. Edgar Sexton"
J.A.
Calgary, Alberta
October 11, 2001
FEDERAL COURT OF CANADA
FEDERAL COURT OF APPEAL
Date: 20011011
Docket: A-691-99
CORAM: ROTHSTEIN, J.A.
SEXTON, J.A.
EVANS, J.A.
BETWEEN:
MAI TAI (MATTHEW) CHAN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-691-99
STYLE OF CAUSE: MAI TAI (MATTHEW) CHAN v. THE QUEEN
PLACE OF HEARING: CALGARY, Alberta
DATE OF HEARING: October 11, 2001
REASONS FOR JUDGMENT OF THE COURT BY: SEXTON, J.A.
DATED: October 11, 2001
APPEARANCES:
Mr. Ken S. Skingle FOR THE APPELLANT
Ms. Rhonda Nahorniak FOR THE RESPONDENT
SOLICITORS OF RECORD:
Felesky Flynn
Calgary, Alberta FOR THE APPELLANT
Morris Rosenberg
Deputy Attorney General of Canada FOR THE RESPONDENT