http://decisions.fct-cf.gc.ca/fc-cf/decisions/en/item/142802/index.do
R & S Industries Inc. v. Canada (March 2, 2016 – 2016 FC 275, Diner J.).
Précis: The taxpayer attempted to file an amended election in Form T2059 in connection with a transfer of property to a partnership. CRA rejected the amendment and the taxpayer applied to the Federal Court for review of that decision. The application was dismissed with costs both because it was itself late-filed and because there was no basis established to reverse CRA’s decision to refuse the late-filed election.
Decision: The taxpayer attempted to late-file an election in Form T2059 in connection with property transferred to a partnership:
[3] The Applicant is an Alberta corporation with its principal place of business in Edmonton. It is controlled by Roger Stokowski. On September 1, 2005, the Applicant transferred its assets, including goodwill, to Big Eagle Limited Partnership [BELP] through an Acquisition and Investment Agreement [the Transfer Agreement]. BELP, like R&S, was controlled by Roger Stokowski at the time. The Applicant states that it transferred the business to a partnership structure to grow that business and to attract new investors. Article 4.1(a) of the Transfer Agreement states that the Applicant and BELP shall:
Jointly elect and file in the prescribed form and within the prescribed time period under subsection 97(2) of the [Act] that the elected amounts that shall be deemed to be R&S’ proceeds of disposition and [BELP’s] cost of each property (in respect of which such election is made) at the minimum agreed amounts under the [Act], which shall be the basis on which the Purchase Price is allocated to the Assets, provided however that in respect of the Goodwill, the elected amount shall, unless otherwise agreed, be equal to $2,502,600. (Applicant’s Record [AR], p 42)
[4] Subsection 97(2) of the Act permits parties to a transfer to a partnership to rollover the tax consequences of that transfer to a future date by jointly electing that, for income tax purposes, a transferred asset was sold for an amount other than the actual consideration exchanged. The amount the parties elect, which is established per asset, rather than in the aggregate, is the “agreed amount”, and the Act contains rules on what this amount may be. Taxpayers make this election by filing a T2059 (Election on Disposition of Property) form with the Respondent.
[5] As reproduced above, article 4.1(a) of the Transfer Agreement states that the agreed amount for each asset would be the minimum amount permitted by the Act, except for goodwill, which would be $2,502,600, unless otherwise agreed. R&S claims that this figure was chosen because the parties to the Transfer Agreement did not know the precise extent of the assets and debts it was transferring to BELP. In other words, according to R&S, the goodwill amount of $2,502,600 reflected an estimate of the amount by which non-share consideration exceeded the costs of the assets transferred.
[6] R&S also asserts that the intention of the parties was always to adjust the agreed amount for the goodwill if it had been found to be inaccurately valued when the Transfer Agreement was signed because full information was not available at that time.
[7] R&S and BELP made a joint election per the terms of the Transfer Agreement by filing a T2059 [the Original T2059]. R&S now asserts, however, that the Original T2059 contained errors. Specifically, the non-share consideration allocated to the assets being transferred – other than goodwill – was in excess of the agreed amounts (i.e. the minimum amount permitted under the Act for each asset), contrary to the intention of the parties as expressed in article 4.1(a).
[8] On January 19, 2010, the Respondent reassessed R&S’s 2006 taxation year, the year that transfer took place. R&S’s tax payable was increased to $490,270 from $5,120. R&S suggests that the majority of this increase was based on the erroneous figures in the Original T2059, though the Respondent claims that only “$1,982,126 pertained to correcting the tax consequences of the agreed amounts submitted with the [Original] T2059 Election” (Respondent’s Record, [RR], p 5). A subsequent reassessment by the Respondent dated August 17, 2010 allowed the Applicant to carry back $2,027,605 in losses from its 2009 taxation year and reduce its tax payable accordingly.
[9] On November 12, 2010, R&S filed a Notice of Objection to the Respondent’s reassessment on the basis that the amounts given in the Original T2059 were mistakenly identified (RR, p 57).
[10] On March 12, 2012, Lori Tymchuk, Appeals Officer with the CRA Appeal Division, was appointed to review the Applicant’s objection (RR, p 6).
[11] On January 17, 2013, Ms. Tymchuk explained that she would not have any basis to consider changing the assessment on appeal without a properly filed subsection 97(2) amendment, namely through the filing of an amended T2059 [the New T2059] (AR, p 87).
[12] R&S thereafter submitted a New T2059, pursuant to subsection 96(5.1) of the Act, which allows a subsection 97(2) rollover election to be amended where “in the opinion of the Minister, the circumstances of a case are such that it would be just and equitable”. According to R&S, the New T2059 clarified that (a) the non-share consideration for every asset being transferred (except for goodwill) was equal to the amount stated for that asset in the Transfer Agreement and (b) that the agreed amount for the transfer of the goodwill was equal to the remainder of the total non-share consideration.
CRA denied the application:
[18] On January 31, 2014, Ms. Mah sent her Decision to R&S denying the submission of the New T0259. In her Decision, which is the subject of this judicial review, Ms. Mah found that “there does not appear to be any provision in the Agreement [between R&S and BELP] that would require the reallocations provided” but that instead “the reallocations result in the agreed amount for goodwill being overstated and in contravention of the specific terms of the Agreement”. She concluded that, “pursuant to the power delegated to me under subsection 220(2.01) of the Income Tax Act and in accordance with the facts presented, your request to amend the original T2059 filed under subsection 97(2) has been denied” (AR, p 14).
Justice Diner held that the application for judicial review was late and there were no grounds to exercise his discretion to permit it to be filed:
[52] R&S argues that the Respondent made an unreasonable error in requiring that, to accept the New T2059, there be written evidence of an agreement to change the elected amount for goodwill from $2,502,600, as described in the Transfer Agreement, to $3,054,868. R&S contends that article 4.1(a) the Agreement does not impose this requirement, and that since both BELP and R&S were under the control of Mr. Stokowski, it would have made no sense for him to draft a contract to demonstrate that he shared an intention with himself. In light of this, the New T2059 should have been more than adequate evidence of Roger Stokowski’s intentions.
…
[54] I am unable to accept these arguments. CRA’s interpretation of the Transfer Agreement and the underlying facts were reasonable. Simply put, there was insufficient evidence available to substantiate the Applicant’s claim that a new agreement had been made, and the Respondent drew a reasonable conclusion from this absence. As for R&S’s submissions on the logic of the decision itself, the Respondent argues that R&S is ignoring the words “provided however”, a critical phrase in its interpretation of article 4.1(a) of the Transfer Agreement (reproduced above), such that it was entirely open to Ms. Katzenback to conclude that if the goodwill was not going to remain at $2,502,600, there needed to be agreement from the other parties. I agree that the words “provided however” in article 4(1)(a) provide a plain and clear meaning.
[55] Despite the arguments about an illogical structure and outcome to the CRA Decision, there appears nothing unreasonable in the Respondent’s conclusions, which found that (1) the Transfer Agreement requires that goodwill be fixed at a certain amount unless the parties agree otherwise; (2) the New T2059 does not fix the goodwill at that amount; and (3) therefore, it is in contravention of the Transfer Agreement and should not be accepted. The Respondent asked for evidence to show that there was an agreement between the parties to substantiate the amended election, but none was ever produced.
[56] As noted by Justice Evans in Canada Revenue Agency v Telfer, 2009 FCA 23 at para 25, another judicial review of an exercise of ministerial discretion under the Act, “[w]hen reviewing for unreasonableness, a court must examine the decision-making process (including the reasons given for the decision), in order to ensure that it contains a rational ‘justification’ for the decision, and is transparent and intelligible.” This Court cannot engage in a search for the “correct” answer. Instead, I find that this is a transparent, intelligible conclusion provided by a decision-maker with expertise in the subject-matter and, from the deferential perspective of a reasonableness review, there would be no reason to disturb it.
[57] In summary, in considering the principles laid out in Exeter and Grewal, I do not find that the Applicant should be granted an extension of time.
As a result the application was dismissed with costs.