Dale v. Minister of National Revenue, (1997) 211 N.R. 191 (FCA)

• Judge: Pratte, Décary and Robertson, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: April 21, 1997
• Jurisdiction: Canada (Federal)
• Citations: (1997), 211 N.R. 191 (FCA)

Dale v. MNR (1997), 211 N.R. 191 (FCA)

MLB headnote and full text

Peter Dale and Bernard Dale (appellants/respondents by cross-appeal) v. Her Majesty The Queen (respondent/appellant by cross-appeal)

(A-15-94)

Indexed As: Dale v. Minister of National Revenue

Federal Court of Appeal

Pratte, Décary and Robertson, JJ.A.

April 21, 1997.

Summary:

In 1985, taxpayers agreed to sell an apart­ment building to a third party. To avoid paying tax on capital gains and capital cost allowance recapture on a direct sale, the taxpayers invoked the roll-over provisions of ss. 83(2) and 85 of the Income Tax Act by conveying the property first to their corporation, then to the third party. The corporation assumed the mortgage debt and issued two preference shares to the taxpayers. The taxpayers claimed that divi­dends on the preference shares were tax-free (s. 83(2)). However, the corporation lacked sufficient authorized capital to permit issuance of preference shares. Supplementary letters patent were to be applied for, but the process was never completed and the over­sight was not discovered until 1988. In 1991, the taxpayers obtained an ex parte order from the Nova Scotia Supreme Court under s. 44 of the Companies Act, retroactively deeming the preference shares to have been validly issued in the 1985 taxation year. The Minister, in reassessing the taxpayers' 1985 income, held that he was not bound by the court order and the s. 85 election was invalid because the preference shares were not validly issued in 1985. Accordingly, the dividends were taxable benefits under s. 15(1) of the Income Tax Act. The taxpayers appealed.

The Tax Court of Canada ruled that the dividends were taxable benefits, but the s. 85 roll-over was valid. The taxpayers appealed the first finding. The Minister cross-appealed the second.

The Federal Court of Appeal, Pratte, J.A., dissenting, allowed the appeal and dismissed the cross-appeal. The Nova Scotia Supreme Court order bound the Minister and consti­tuted proof of the fact that the preference shares were validly issued and outstanding in 1985. Accordingly, the s. 85 roll-over was valid.

Courts - Topic 125

Stare decisis - Authority of judicial deci­sions - Courts of superior jurisdiction - Decisions binding on Ministers - In 1985, taxpayers agreed to sell property to a third party - To avoid tax on capital gains and capital cost allowance recapture on a direct sale, the taxpayers invoked the roll-over provisions of ss. 83(2) and 85 of the Income Tax Act by conveying the property first to their corporation, then to the third party - Part of the corporation's consider­ation was two preference shares issued to the taxpayers - The taxpayers claimed that dividends on the shares were tax-free (s. 83(2)) - However, the corporation had lacked sufficient authorized capital to issue the shares - Supplementary letters patent were to be applied for, but the process was not completed and the oversight was not discovered until 1988 - In 1991, the taxpayers obtained an ex parte order from the Nova Scotia Supreme Court under s. 44 of the Companies Act, retroactively deeming the preference shares to have been validly issued in the 1985 taxation year - The Minister, in reassessing the taxpayers' 1985 income (dividends taxable under s. 15(1)), held that he was not bound by the court order and the s. 85 election was invalid because the preference shares were not validly issued in 1985 - The Federal Court of Appeal held that the superior court order bound the Minister - The order, which was not appealed or otherwise directly challenged, could not be collaterally attacked by the Minister - The shares were validly issued and outstanding in 1985 - The s. 85 roll-over was valid.

Income Tax - Topic 1748

Capital gains and losses - Capital gains - Property transferred from shareholder to corporation - [See Courts - Topic 125 ].

Practice - Topic 5408.1

Judgments and orders - Collateral attack - [See Courts - Topic 125 ].

Cases Noticed:

Hillis and Hillis v. Minister of National Revenue (1983), 49 N.R. 1; 83 D.T.C. 5365 (F.C.A.), refd to. [para. 8].

Boger Estate v. Minister of National Rev­enue (1993), 155 N.R. 303; 93 D.T.C. 5276 (F.C.A.), refd to. [para. 8].

Atinco Paper Products Ltd. v. Minister of National Revenue (1978), 22 N.R. 485 (F.C.A.), leave to appeal refused (1979), 25 N.R. 603 (S.C.C.), refd to. [para. 11].

Minister of National Revenue v. Paxton (1997), 206 N.R. 241; 97 D.T.C. 5012 (F.C.A.), refd to. [para. 11].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241; 84 D.T.C. 6305; [1984] C.T.C. 294, refd to. [para. 12].

R. v. Wilson, [1983] 2 S.C.R. 594; 51 N.R. 321; 26 Man.R.(2d) 194; 9 C.C.C.(3d) 97, refd to. [para. 14].

Canadian Transport (U.K.) Ltd. v. Alsbury, [1953] 1 D.L.R. 385 (B.C.C.A.), refd to. [para. 15].

Bently v. Minister of National Revenue (1954), 54 D.T.C. 510 (Tax App. Bd.), refd to. [para. 17].

Hobbs v. Minister of National Revenue (1970), 70 D.T.C. 1744 (Tax App. Bd.), refd to. [para. 17].

Walsh v. Lonsdale (1882), 21 Ch. D. 9, refd to. [para. 19].

Statutes Noticed:

Companies Act, R.S.N.S. 1989, c. 81, sect. 44 [paras. 7, 30, footnote 2].

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 83(2), sect. 85 [para. 27, footnote 1].

Authors and Works Noticed:

Snell's Principles of Equity, p. 41 [para. 19].

Counsel:

D. Laurence Armstrong, for the appel­lant/­respondent on cross-appeal;

Naomi Goldstein and James C. Yaskowich, for the respondent/appellant on cross-appeal.

Solicitors of Record:

Armstrong Nikolich, Victoria, B.C., for the appellant/respondent on cross-appeal;

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the respondent/appellant on cross-appeal.

This appeal and cross-appeal were heard on February 3, 1997, at Vancouver, B.C., before Pratte, Décary and Robertson, JJ.A., of the Federal Court of Appeal.

On April 21, 1997, the judgment of the Court of Appeal was delivered and the following opinions were filed:

Robertson, J.A. (Décary, J.A., concur­ring) - see paragraphs 1 to 25;

Pratte, J.A., dissenting - see paragraphs 26 to 58.