Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358
Her Majesty The Queen Appellant
v.
Continental Bank of Canada Respondent
Indexed as: Continental Bank of Canada v. Canada
File No.: 25521.
1998: January 26; 1998: September 3.
Present: L’Heureux‑Dubé, Gonthier, Cory, McLachlin, Iacobucci, Major and Bastarache JJ.
on appeal from the federal court of appeal
Income tax -- Taxable capital gains -- Bank purporting to dispose of partnership interest -- Whether gain from disposition of partnership interest capital gain or income gain -- Whether Crown’s alternative argument that Bank liable for recapture of capital cost allowance should be entertained.
In 1986, Continental Bank of Canada (the “Bank”), which had decided to wind up its affairs, invited offers for the purchase of the shares or assets of its wholly owned subsidiary, Continental Bank Leasing Corp. (“Leasing”). Central Capital Leasing (“Central”), which had concerns about the creditworthiness of several of the leases and certain contingent tax liabilities of Leasing, proposed a transaction whereby Leasing would form a partnership with several Central subsidiaries to carry on the same business as Leasing, transfer its assets other than the excluded leases to the partnership using an election under s. 97(2) of the Income Tax Act, a rollover provision, distribute its partnership interest to the Bank at its cost base as part of its winding-up, and then have the Bank sell its interest to Central or its subsidiaries. A master agreement was signed setting out the various steps to be executed by the parties. The partnership was formed on December 24, 1986; all partners, except Leasing, gave representations and warranties that they were and would remain duly registered and qualified to carry on the business of the partnership. On December 27, Leasing and the Bank signed an indenture providing for the transfer of Leasing’s partnership interest to the Bank. On December 29, 1986, the Bank sold the interest in the partnership to subsidiaries of Central. Leasing filed its income tax return for 1987 based on these transfers. The Minister of National Revenue reassessed Leasing on the basis that the partnership transaction was invalid and that the true nature of the transaction was a disposition by Leasing of its leasing assets to Central, making the s. 97(2) election invalid and giving rise to recaptured capital cost allowance in the hands of Leasing. As an alternative to the reassessment of Leasing, the Minister assessed the Bank on the basis that it realized an income gain as opposed to a capital gain from the disposition of the partnership interest it had acquired from Leasing. The Tax Court of Canada concluded that the Bank properly reported the proceeds from the sale of the partnership interest as a capital gain and was not required to include those proceeds on its income account. That decision was affirmed by the Federal Court of Appeal.
Held: The appeal should be dismissed.
Per Gonthier, Cory, McLachlin, Iacobucci and Major JJ.: Assuming that the Bank transferred its partnership interest, the transfer should be construed as a capital transaction and not an adventure in the nature of trade. None of the circumstances indicate that the Bank’s acquisition and subsequent disposition of Leasing’s partnership interest was a speculative trading venture. The Minister’s argument that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Income Tax Act, raised for the first time in this Court, cannot be entertained. The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.
Per L’Heureux-Dubé and Bastarache JJ.: Because it was found in Continental Bank Leasing Corp. v. Canada that the reassessment of Leasing should be maintained because Leasing did not roll its assets into a valid partnership pursuant to s. 97(2) of the Income Tax Act, the assessment on the Bank’s disposition of the “partnership interest” does not arise. Given the finding that it was Leasing and not the Bank that sold the assets to Central, it is not necessary to determine whether the Bank would be liable for the recapture of capital cost allowance on the basis that it acquired the leasing assets as properties distributed to it under s. 88(1) of the Income Tax Act. Furthermore, the Minister may not now advance this new basis for reassessment since the limitation period has expired.
Cases Cited
By McLachlin J.
Referred to: Hudgell Yeates & Co. v. Watson, [1978] 2 All E.R. 363.
By Bastarache J.
Referred to: Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298; The Queen v. McLeod, 90 D.T.C. 6281; British Columbia Telephone Co. v. Minister of National Revenue (1994), 167 N.R. 112; Minister of National Revenue v. Riendeau (1991), 132 N.R. 157.
Statutes and Regulations Cited
Bank Act, R.S.C., 1985, c. B-1, s. 174.
Income Tax Act, R.S.C. 1952, c. 148 [am. 1970-71-72, c. 63], ss. 9 [am. 1986, c. 6, s. 4], 13(1) [rep. & sub. 1980-81-82-83, c. 48, s. 5], 88(1) [am. 1974-75-76, c. 26, s. 52; am. 1980-81-82-83, c. 48, s. 48], 97(2), 152(3.1) [ad. 1990, c. 39, s. 38], (4) [rep. & sub. idem].
Partnerships Act, R.S.O. 1980, c. 370, s. 34.
APPEAL from a judgment of the Federal Court of Appeal (1996), 199 N.R. 100, 96 D.T.C. 6355, [1996] F.C.J. No. 765 (QL), dismissing the Crown’s appeal from a decision of the Tax Court of Canada, [1995] 1 C.T.C. 2135, 94 D.T.C. 1858, [1994] T.C.J. No. 585 (QL), finding that the gain realized by the Bank on the disposition of a partnership interest was a capital gain. Appeal dismissed.
S. Patricia Lee and Larry R. Olsson, Q.C., for the appellant.
Kent E. Thomson and H. Lorne Morphy, for the respondent.
The reasons of L’Heureux-Dubé and Bastarache JJ. were delivered by
1 Bastarache J. -- In light of my disposition of the appeal in Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, released concurrently (“Leasing Appeal”), the issues in this appeal no longer arise. I will, however, comment on the validity of the Minister’s approach to the reassessment of Continental Bank of Canada (the “Bank”).
Factual Background
2 This case arises out of the facts as summarized in the Leasing Appeal. In addition to the facts set out in that appeal, the following additional facts are relevant. On October 12, 1989, as an alternative to the reassessment of Continental Bank Leasing Corporation (“Leasing”), the Minister assessed the Bank on the basis that the gain realized on the disposition of its alleged partnership interest was not a capital gain as the Bank had reported, but an income gain which is fully taxable. On this basis, the sum of $83,052,657 was included in the computation of the Bank’s income from business under s. 9(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended (the “Act”).
Relevant Statutory Provisions
3 The relevant statutory provisions are as follows:
Income Tax Act, R.S.C. 1952, c. 148, as amended
9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.
(2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.
(3) In this Act, “income from a property” does not include any capital gain from the disposition of that property and “loss from a property” does not include any capital loss from the disposition of that property.
13. (1) Where, at the end of a taxation year, the aggregate of all amounts determined under subparagraphs (21)(f)(iii) to (viii) in respect of depreciable property of a particular prescribed class of a taxpayer exceeds the aggregate of all amounts determined under subparagraphs (21)(f)(i) to (ii.1) in respect of depreciable property of that class of the taxpayer, the excess shall be included in computing the income of the taxpayer for that taxation year.
88. (1) Where a taxable Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound up after May 6, 1974 and not less than 90% of the issued shares of each class of the capital stock of the subsidiary were, immediately before the winding-up, owned by another taxable Canadian corporation (in this subsection referred to as the “parent”) and all of the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by persons with whom the parent was dealing at arm’s length, notwithstanding any other provision of this Act, the following rules apply:
(a) . . . each property of the subsidiary that was distributed to the parent on the winding-up shall be deemed to have been disposed of by the subsidiary for proceeds equal to,
. . .
(iii) in the case of any other property, the cost amount to the subsidiary of the property immediately before the winding-up;
. . .
(f) where property that was depreciable property of a prescribed class of the subsidiary has been distributed to the parent on the winding-up and the capital cost to the subsidiary of the property exceeds the amount deemed by paragraph (a) to be the subsidiary’s proceeds of disposition thereof, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a),
(i) notwithstanding paragraph (c) the capital cost to the parent of the property shall be deemed to be the amount that was the capital cost thereof to the subsidiary, and
(ii) the excess shall be deemed to have been allowed to the parent in respect of the property under regulations made under paragraph 20(1)(a) in computing income for taxation years before the acquisition by the parent of the property.
Judicial History
Tax Court of Canada, [1995] 1 C.T.C. 2135
4 In determining the Bank’s appeal from Revenue Canada’s reassessment, Bowman J.T.C.C. held that there was no basis upon which the Bank’s gain realized on the disposition of its partnership interest to subsidiaries of Central should be taxed as income. After considering the evidence, he concluded that the partnership interest was a capital asset in the hands of Leasing and preserved that quality when it was transferred to the Bank on the winding-up of Leasing.
5 Bowman J.T.C.C. rejected the argument that during the period in which title to the partnership interest was held by the Bank, it ceased to be a capital asset and became trading stock. He noted that the circumstances in which the Bank acquired and then disposed of its partnership interest did not have the indicia of a speculative trading venture. Bowman J.T.C.C. concluded that the Bank properly reported the proceeds from the sale of the partnership interest as a capital gain and was not required to include those proceeds on its income account.
Federal Court of Appeal (1996), 199 N.R. 100
6 Linden J.A. for the court dismissed the Crown's appeal and upheld Bowman J.T.C.C.'s decision with respect to the Bank. He noted that a court must consider the context in which transactions are performed when determining if an asset trade was an adventure in the nature of trade or a capital asset transaction. He held that a court should consider the intention of the parties, the nature and quantity of the asset purportedly traded, the isolation and uniqueness of the transaction and the similarity with ordinary trades. For the purposes of this judgment, Linden J.A. assumed that the Bank had sold a partnership interest. He noted that the sale had been part of a composite transaction designed to wind up Leasing and that at all times the Bank intended to realize a capital asset. He held that the context of the sale disclosed that the transaction had been capital in nature and not a speculative endeavour designed to make a profit. Therefore, he concluded, the sale had not been an adventure in the nature of trade and was taxable as a disposition of a capital asset subject to capital gains.
Issues
7 Because I have found in the Leasing Appeal that the reassessment of Leasing should be maintained because Leasing did not roll its assets into a valid partnership pursuant to s. 97(2) of the Act, the assessment on the Bank’s disposition of the “partnership interest” does not arise. The appellant, however, set out an alternative argument for the first time in this appeal that should be addressed. The appellant argued that if the Court held in the Leasing Appeal that it was the Bank and not Leasing that acted as the vendor when the assets were sold to Central Capital Corporation (“Central”), the reassessment of the Bank in this appeal should be restored on the basis that having acquired the leasing assets as properties distributed to it under s. 88(1) of the Act, the Bank is taxable on the recapture of capital cost allowance under s. 13(1) of the Act in the amount of $83,052,657. The issue that arises out of this argument is whether the Crown is permitted to substitute its original reassessment of the Bank for an assessment on a different basis that amounts to the same amount of income.
Analysis
8 Given the finding in the Leasing Appeal that it was Leasing and not the Bank that sold the assets to Central, it is not necessary to determine whether the Bank would be liable for the recapture of capital cost allowance on the basis that it acquired the leasing assets as properties distributed to it under s. 88(1) of the Act. However, even if it was found that the Bank was the vendor of those assets and liable for the recapture, the appellant could not succeed in upholding its reassessment of the Bank in this appeal.
9 The only basis given in the Notice of Reassessment that Revenue Canada issued to the Bank for the 1987 taxation year was that the amount in question was alleged to constitute a “trading gain on sale of Central Capital Leasing’s partnership interest”. Revenue Canada did not reassess the Bank on any other basis including that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Act, as the appellant now alleges for the first time in this Court.
10 The applicable limitation period under the Act for assessing a taxpayer is four years from the date of issuance of Revenue Canada’s Notice of Reassessment (ss. 152(3.1) and 152(4) of the Act). As a result, the latest that the Minister could have reassessed the Bank for the recapture of cost allowance was October 12, 1993. The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired. The proper approach was expressed in The Queen v. McLeod, 90 D.T.C. 6281 (F.C.T.D.), at p. 6286. In that case, the court rejected the Crown’s motion for leave to amend its pleadings to include a new statutory basis for Revenue Canada’s assessment. The court refused leave on the basis that the Crown’s attempt to plead a new section of the Act was, in effect, an attempt to change the basis of the assessment appealed from, and “tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts”. Similarly, the Federal Court of Appeal has described such attempts by the Crown as “a belated attempt to put the appellant’s case on a new footing” (British Columbia Telephone Co. v. Minister of National Revenue (1994), 167 N.R. 112, at p. 116).
11 It was open to the appellant to assess the respondent on the basis that it was liable for the recapture of cost allowance when it issued its Notice of Reassessment on October 12, 1989 or anytime prior to the expiration of the limitation period for reassessment. The appellant did not choose to do so and cannot now be permitted to change its assessment eleven years later. The appellant argued that the liability of the respondent for the assessment pursuant to s. 13(1) is an alternative reason for its previous assessment, not a new assessment or reassessment. According to the appellant, because the liability for recapture under s. 13(1) would arise solely as a consequence of a finding that Leasing, in the Leasing Appeal, was not the vendor of the assets in the sale to Central, a reassessment on this basis is merely a legal conclusion flowing from the proper application of the statute.
12 To accept this characterization by the appellant would, in effect, create a situation where the Crown is permitted to raise new arguments simply because other arguments failed in the courts below. Unlike the Minister in Minister of National Revenue v. Riendeau (1991), 132 N.R. 157 (F.C.A.), the Minister in the present case has never sought to amend, correct or reissue the reassessment of the Bank to include a claim for recapture under s. 88(1)(f) of the Act. Moreover, the appellant’s characterization of the argument as an alternative one ignores the fact that Leasing and the Bank are two separate taxpayers. What the Minister is seeking to do is to substitute an assessment of one taxpayer for the assessment of another taxpayer because the first assessment did not succeed.
13 Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge that assessment. Here, it is not clear that there is the proper factual basis to support a reassessment on the basis proposed by the appellant. For example, the value of the goodwill associated with the Bank’s leasing business, which was transferred to Central in December 1986, could bear on the appellant’s new claim for recapture by the Bank. It is not possible to measure the extent to which the Bank might otherwise be liable for recapture, or the Bank’s income for tax purposes, without being able to properly allocate the purchase price paid by Central between goodwill and leasing assets. Because the Bank was not assessed on the recapture, the evidence relating to the allocation of the purchase price was not adduced at trial. To allow the appellant to proceed with its new assessment without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.
14 As I stated above, it was not necessary, because of the disposition of the Leasing Appeal, to deal with the issues raised in this case. I would dismiss the appeal with costs.
//McLachlin J.//
The judgment of Gonthier, Cory, McLachlin, Iacobucci and Major JJ. was delivered by
15 McLachlin J. -- This second appeal arises out of the Minister of National Revenue’s alternative assessment of the Continental Bank of Canada (the “Bank”). As an alternative to the reassessment of the Continental Bank Leasing Corporation (“Leasing”), the Minister assessed the Bank on the basis that it realized an income gain as opposed to a capital gain from the disposition of the partnership interest it had acquired from Leasing. The trial judge found, and the Federal Court of Appeal agreed, that the disposition of the partnership interest could not be characterized as an adventure in the nature of trade and that the Bank therefore properly reported the proceeds of the disposition of the partnership interest as a capital gain.
16 Assuming that the Bank transferred its partnership interest to 693396 Ontario Limited (“693396”) and 693397 Ontario Limited (“693397”), I agree with Bastarache J. that the transfer should be construed as a capital transaction and not an adventure in the nature of trade, making the alternative assessment untenable. None of the circumstances indicate that the Bank’s acquisition and subsequent disposition of Leasing’s partnership interest was a speculative trading venture. I would simply add that this disposition of the appeal is not dependent on the conclusion that the Bank disposed of a partnership interest per se. This is important to note because it may be argued that by December 29, 1986 the Bank was no longer a member of the partnership and thus could not transfer a valid partnership interest.
17 The argument focuses on two events. The first event occurred on December 27, 1986 when Leasing was wound up and transferred its partnership interest to the Bank. At this point, the Bank ceased to be merely an investor in the partnership; it became a partner. It was arguably not lawful for it to be a partner: s. 174 of the Bank Act, R.S.C., 1985, c. B-1. Thus, the transfer of Leasing’s partnership interest to the Bank may be viewed as “an event” that rendered it unlawful for the members of the partnership to continue to conduct their business as partners. If so, the partnership was dissolved: s. 34 of the Partnerships Act, R.S.O. 1980, c. 370. The dissolved partnership may then have been reconstituted as a new partnership between the remaining eligible partners: Hudgell Yeates & Co. v. Watson, [1978] 2 All E.R. 363 (C.A.), at p. 368 (per Bridge L.J.).
18 The next event occurred on December 29, 1986 when the Bank transferred its interest in the partnership to 693396 and 693397. The Minister cannot argue that the Bank could not transfer its partnership interest at this stage. The Minister must accept that this transfer took place because his assessment of the Bank was based on the assumption that the Bank disposed of its partnership interest. I agree with Bastarache J. that the Minister’s argument that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, raised for the first time in this Court, cannot be entertained. The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.
19 On the basis that the Bank disposed of its interest in the partnership, the Bank properly reported the proceeds of the disposition of its partnership interest as a capital gain. I would therefore dismiss this second appeal with costs. All of the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
Appeal dismissed with costs.
Solicitor for the appellant: George Thomson, Toronto.
Solicitors for the respondent: Tory Tory DesLauriers & Binnington, Toronto.