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Docket: 2002-1940(IT)I |
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BETWEEN: |
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TERRENCE COSTER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on February 4, 2003, at Toronto, Ontario,
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Before: The Honourable Judge M.A. Mogan |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
James Rhodes |
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JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 2000 taxation year is dismissed. The trial judge, however, in his Reasons for Judgment makes a recommendation with respect to the exercise of the Minister's discretion under subsection 220(3.2) of the Act.
Signed at Ottawa, Canada, this 7th day of March, 2003.
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"Murray A. Mogan" |
J.T.C.C.
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Citation: 2003TCC112 |
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Date: 20030307 |
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Docket: 2002-1940(IT)I |
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BETWEEN: |
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TERRENCE COSTER, |
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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
Mogan J.
[1] This appeal is from an assessment with respect to the 2000 taxation year. At all relevant times, the Appellant owned 700 shares of 3Com Corp. ("3Com"). On July 28, 2000, 3Com distributed to its shareholders certain shares of Palm Inc. ("Palm") in a transaction known as a "spin-off". Specifically, 3Com distributed 1.483 shares of Palm for each one share of 3Com held by its shareholders. On the spin-off, the Appellant received 1,038 shares of Palm (700 x 1.483). Both 3Com and Palm are U.S.A. corporations, and the spin-off transaction occurred in the U.S.A. For Canadian income tax purposes, the Appellant was regarded as having received in 2000 a stock dividend of $40,532 (USD) or $60,199 (Can).
[2] The Appellant was not sure how to report the spin-off transaction for income tax purposes in Canada. After consulting a number of persons, the Appellant reported the total spin-off transaction as follows:
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Capital gain on disposition of 1,038 Palm shares |
$36,512 |
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Capital (loss) on disposition of 700 3Com shares |
($28,054)
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Foreign taxable dividend |
$60,199 |
The Appellant was persuaded to report the foreign taxable dividend of $60,199 by his receipt of a pink form T5 (Statement of Investment Income) prescribed by Canada Customs and Revenue Agency ("CCRA") and issued by TD Waterhouse (the Appellant's broker) showing, in box 15, foreign income of $40,532 (USD) which the Appellant converted to $60,199 (Can). The pink form T5 was entered as Exhibit R-2.
[3] After filing his 2000 income tax return in the spring of 2001, the Appellant learned that he could have made an election under paragraph 86.1(2)(f) of the Income Tax Act to defer the tax on the dividend of $60,199. Section 86.1 was added to the Act only in 2001 applicable to dispositions received after 1997. The amending legislation which added section 86.1 to the Act received Royal Assent only on June 14, 2001 which was after the date when the Appellant was required to file his income tax return for the year 2000. The relevant provisions of subsection 86.1(2) are:
86.1(2) For the purposes of this section and Part XI, a distribution by a particular corporation that is received by a taxpayer is an eligible distribution if
(a) ...
(b) the distribution consists solely of common shares of the capital stock of another corporation that were owned by the particular corporation immediately before their distribution to the taxpayer (in this section referred to as the "spin-off shares");
(c) ...
(f) except where Part XI applies in respect of the taxpayer, the taxpayer elects in writing filed with the taxpayer's return of income for the taxation year in which the distribution occurs (or, in the case of a distribution received before October 18, 2000, filed with the Minister before July 2001) that this section apply to the distribution and provides information satisfactory to the Minister
(i) of the number, cost amount (determined without reference to this section) and fair market value of the taxpayer's original shares immediately before the distribution,
(ii) of the number, and fair market value, of the taxpayer's original shares and the spin-off shares immediately after the distribution of the spin-off shares to the taxpayer,
(iii) ...
[4] The Appellant's accountant, Paul Webb, wrote to CCRA on September 20, 2001 attempting to make an election under paragraph 86.1(2)(f) by asking that the Appellant's income tax return for 2000 be adjusted as follows:
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Reported |
Adjusted |
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Capital gain on disposition of 1,038 Palm shares |
$36,512 |
$36,779 |
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Capital (loss) gain on disposition of 700 3Com shares |
($28,054)
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$12,274 |
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Foreign taxable dividend |
$60,199 |
Nil |
Paul Webb's letter dated September 20, 2001 was entered as Exhibit R-1 but the above table is taken from paragraph 8 of the Respondent's Reply.
[5] In response to Paul Webb's letter, CCRA wrote directly to the Appellant on February 15, 2002 explaining why the Appellant's election under paragraph 86.1(2)(f) would not be accepted. The letter from CCRA was not entered as an exhibit but a copy is attached to the Appellant's Notice of Appeal. The principal part of the letter stated:
We have reviewed your request for an adjustment to your 2000 return with regards to your claim for the foreign spin-off shares election.
As your election was not received by the due date of September 12, 2001, it is not considered as valid and no adjustment will be made to your return for this reason. The envelope in which your election was received was postmarked September 21, 2001.
[6] The date of September 12, 2001 referred to in the above letter from CCRA needs an explanation. As stated in paragraph 3 above, the amending legislation which added section 86.1 to the Act received Royal Assent on June 14, 2001. That amending legislation contains the following provision:
64(2) Subsection (1) (i.e. the whole of section 86.1) applies to distributions received after 1997, except that
(a) ...
(b) the election referred to in paragraph 86.1(2)(f) of the Act, as enacted by subsection (1), is deemed to be filed on a timely basis if it is filed with the Minister of National Revenue before the day that is 90 days after the day on which this Act receives royal assent.
September 12, 2001 was the 90th day after June 14, 2001 when the amending legislation received Royal Assent. The letter from CCRA was correct in stating that the Appellant's election, postmarked September 21, 2001 was not received by the due date of September 12, 2001.
[7] In this appeal, the Respondent has taken the position that the Appellant's election under paragraph 86.1(2)(f) was late; and the Minister does not have jurisdiction to extend time under subsection 220(3.2) of the Act. Paragraphs 13 and 14 of the Respondent's Reply make the following arguments:
The Deputy Attorney General of Canada submits:
13. ... that the foreign taxable dividend in the amount of $60,199.43 received by the Appellant in the 2000 taxation year is not an eligible distribution for the purposes of section 86.1 of the Act, because an election was not filed with the Minister on a timely basis under paragraph 86.1(2)(f) of the Act and paragraph 64(2)(b) of the Amendment Act.
14. ... that the time limit for an election under paragraph 86.1(2)(f) of the Act must be strictly applied as an extension of time limit is specifically excluded from the Minister's jurisdiction under subsection 220(3.2) of the Act and section 600 of the Regulations.
[8] At the hearing of this appeal on February 4, 2003, the Appellant stated that it was his understanding that the Income Tax Regulations had recently been amended to grant the Minister discretion to extend the time to file an election under paragraph 86.1(2)(f) of the Act. At the conclusion of the hearing, counsel for the Respondent undertook to review the Act and Regulations on this point. By letter dated February 13, 2003 to the Registrar of this Court, Mr. Rhodes stated that paragraph 600(c) of the Income Tax Regulations was recently amended to include paragraph 86.1(2)(f) as a prescribed provision for the purposes of paragraph 220(3.2) of the Act. The relevant provisions are set out below.
220(3.2) Where
(a) an election by a taxpayer or a partnership under a provision of this Act or a regulation that is a prescribed provision was not made on or before the day on or before which the election was otherwise required to be made, or
(b) a taxpayer or partnership has made an election under a provision of this Act or a regulation that is a prescribed provision,
the Minister may, on application by the taxpayer or the partnership, extend the time for making the election referred to in paragraph (a) or grant permission to amend or revoke the election referred to in paragraph (b).
600 For the purposes of paragraphs 220(3.2)(a) and (b) of the Act, the following are prescribed provisions:
(a) section 21 of the Act;
(b) subsections 13(4) and (7.4), 14(6) ...
(c) paragraphs 48(1)(a) and (c), 66.7(7)(c), (d) and (e) and (8)(c), (d) and (e), 80.01(4)(c), 86.1(2)(f) and 128.1(4)(d) of the Act;
(c.1) ...
[9] According to the material enclosed with Mr. Rhodes' letter, the amending Regulation adding paragraph 86.1(2)(f) as a prescribed provision in paragraph 600(c) came into force the day when it was registered; and it was registered on April 11, 2002. Therefore, when CCRA wrote to the Appellant on February 15, 2002 (see paragraph 5 above), the Minister did not at that time have jurisdiction to extend the time for making an election under paragraph 86.1(2)(f) of the Act.
[10] As a matter of law, the Appellant's election made on September 21, 2001 was late but it was late by only nine days. Having regard to the following facts, all of the equities are running in the Appellant's favour:
(i) when a public corporation spins off the shares of a subsidiary (as 3Com spun off Palm), the measurement of the financial benefit (if any) derived by a shareholder of the public corporation is complex; as is the determination of the cost base of the spin-off shares and the adjustment (if any) to the shareholder's cost base of the shares in the public corporation;
(ii) the taxation of that financial benefit is also complex and will be complicated if the spin-off transaction was in a foreign country;
(iii) the taxation of spin-off transactions was changed in Canada by the enactment of section 86.1 in the spring of 2001 (Royal Assent on June 14, 2001) applicable to dispositions received after 1997;
(iv) the Appellant as a shareholder of 3Com received his 1,038 spin-off shares of Palm in July 2000;
(v) the Appellant did in fact report the spin-off transaction to the best of his knowledge and ability when he filed his 2000 income tax return in the spring of 2001;
(vi) the Appellant, as an ordinary citizen, could not be expected to know about the enactment of section 86.1 in the spring of 2001; and its coming into force by Royal Assent on June 14, 2001, starting a 90-day period to make an election; and
(vii) the Appellant made his election under paragraph 86.1(2)(f) on September 21, 2001, only nine days after the expiration of the 90-day period and within a reasonable time by any standard.
[11] This Court does not have jurisdiction to extend the time to make an election under paragraph 86.1(2)(f). Only the Minister has discretion under subsection 220(3.2) to extend the time for such an election. It is my understanding that the Minister will not ordinarily exercise his/her discretion under subsection 220(3.2) unless asked to do so in writing by the taxpayer. I regard the letter from Paul Webb to CCRA dated September 20, 2001 (Exhibit R-1) as an attempt on behalf of the Appellant to make an election under paragraph 86.1(2)(f). The Minister seems to have regarded that letter in the same way because the second paragraph of the CCRA reply commences with the words: "As your election ... ". See paragraph 5 above.
[12] As a matter of law, the appeal for the taxation year 2000 is dismissed. Recognizing, however, that only the Minister has discretion to extend time under subsection 220(3.2), I recommend that the Appellant (Mr. Coster) write a fresh letter to CCRA asking that the Minister exercise his/her discretion under subsection 220(3.2) of the Act to extend the time for the Appellant to make an election under paragraph 86.1(2)(f); and that Mr. Webb's letter of September 20, 2001 be regarded as a late election. Also, I strongly recommend that such discretion be exercised in the Appellant's favour having regard to the facts summarized in paragraph 10 above.
[13] The Appellant was informed by Respondent's counsel in August 2002 (i) that CCRA had concluded that the amount in issue in this appeal was approximately $17,500; and (ii) that by electing the informal procedure, the Appellant could not obtain relief in an amount greater than $12,000. The Appellant has stated in a letter to the Court that, in the interests of expediency, he wished to continue under the informal procedure. Because the appeal is dismissed in law, the Appellant's decision to elect the informal procedure has not affected his relief.
Signed at Ottawa, Canada, this 7th day of March, 2003.
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"M.A. Mogan" |
J.T.C.C.
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CITATION: |
2003TCC112 |
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COURT FILE NO.: |
2002-1940(IT)I |
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STYLE OF CAUSE: |
Terrence Coster and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
February 4, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge M.A. Mogan |
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DATE OF JUDGMENT: |
March 7, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
James Rhodes |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |