Digests

Trzop v. Canada

A-519-00

2001 FCA 380, Strayer, Sharlow and Malone JJ.A

6/12/01

13 pp.

Appeal from T.C.C. decision dismissing appeal from reassessment ([2000] 4 C.T.C. 2093)--In 1975 New Brunswick Industrial Finance Board entering agreement with Trzop, Antosko relating to shares, debt of Atlantic Forest Products Ltd.--Principal amount of debt $5 million, but in default--Agreement included promise by Board to transfer debt to Trzop, Antosko for $10 if operated company for two years in good, business-like manner--Trzop, Antosko fulfilled obligations and in 1977 debt transferred to them--In 1977 Trzop received $38,335 in partial payment of interest accrued on debt prior to transfer--In 1980 further $283,363 paid to Trzop as interest accrued on debt prior to transfer-- Trzop included interest in income, but claimed offsetting deduction under Income Tax Act, s. 20(14)(b)--When claimed s. 20(14)(b) deductions, s. 53(2)(l) would have automatically applied to require adjusted cost base of acquired debt to be reduced by amount of deduction--If, as result of application of s. 53(2)(l), adjusted cost base became negative, negative amount should have been taxed as deemed capital gain pursuant to s. 40(3)--But Trzop's 1977, 1980 returns not reflecting any capital gain--Returns reassessed to disallow deduction under s. 20(14)(b)--T.C.C. allowed appeal from reassessments--Decision not referring to ss. 53(2)(l), 40(3)-- F.C.T.D. allowed appeal therefrom on basis s. 20(14) had no application to interest because party from whom debt transferred not taxable entity: [1990] 1 C.T.C. 208--F.C.A. dismissed appeal, saying nothing about capital gain issue: [1992] 2 C.T.C. 350--S.C.C. allowed appeal (Canada v. Antosko, [1994] 2 S.C.R. 312), holding Trzop entitled to s. 20(14)(b) deduction based on plain words--Noting Minister could take into account resulting tax consequences, such as taxable capital gain pursuant to s. 40(3) in reassessment-- Reassessment allowing deductions under s. 20(14)(b); including in income taxable capital gain arising from combined operation of ss. 53(2)(l), 40(3)--T.C.C.'s dismissal of appeal therefrom subject of this appeal--Trzop arguing reassessment contravening long-standing authority successful tax appeal curtailing Minister's power to raise new assessment --S. 152(4)(b) precluding Minister from reassessing tax for any taxation year more than three years after date of initial assessment unless certain conditions met--Minister arguing S.C.C. judgment authorized Crown to tax Trzop on capital gain said to arise from s. 40(3) because logical, inevitable consequence of determination s. 20(14) applied--If so, any prejudice cured because reassessment under s. 164(4.1) can be subject of separate objection--Appeal dismissed--S.C.C. ruled on very narrow issue of whether interest on debt within s. 20(14)--Ruled transaction within s. 20(14), but acknow-ledged result may have other tax consequences involving particularly application of ss. 53(2)(l), 40(3)--Creation of taxable capital gain pursuant to s. 40(3) logical, inevitable consequence of S.C.C. decision that s. 20(14) applied--That consequence required to be taken into account by Minister in assessment--Minister acted in accordance with reasons of S.C.C. in applying s. 40(3) to include taxable capital gain--But correctness of assessment also in issue--In applying s. 40(3) Minister made factual assumption as to adjusted cost base of debt i.e. assumed cost base of $10--In objecting, onus on Trzop to demolish assumption made by Minister--At Tax Court hearing, Trzop not leading evidence contradicting Minister's assumption--Raised proposition adjusted cost base should be increased in light of unpaid labour that contributed to company, arguing consideration for transfer of debentures included undertaking would operate company in good, business-like manner--No error in T.C.C.'s rejection of argument--Trzop's unpaid labour cannot be included to increase adjusted cost base--Not part of "cost to taxpayer" of debt for purposes of s. 53--Trzop not establishing Minister incorrect in assuming adjusted cost base of debt $10--Trzop afforded due process--T.C.C. properly excluded transcript of S.C.C. hearing as nothing said by judge in court during course of argument should be taken as expression of judge's opinion on matter, and opinion letter from former S.C.C. justice as no more than opinion--Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(14)(b), 40(3) (as am. by S.C. 1974-75-76, c. 26, s. 16), 53(2)(l)--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 152(4)(b), 164(4.1).