A double taxation victory: But it was a long fight
Taxpayers everywhere can take solace from a Federal Court of Appeal decision
this month that concluded that the government can't tax you twice on the same
The case stems from the government's 1994 elimination of the lifetime
$100,000 capital gains exemption. Prior to Feb. 22, 1994, each Canadian was able
to earn up to $100,000 of capital gains without paying any tax.
When the exemption was cancelled in 1994, the government gave taxpayers one
last chance to take advantage of any remaining exemption by allowing them to
file an election.
This election permitted investors to crystallize any accrued capital gains on
their investments as of that date and shelter that gain by any remaining gains
exemption. The result of the election is that investors would only be taxed
prospectively on gains accrued and realized after Feb. 22, 1994.
In 1994, Jack Holder filed the election for shares he owned in his private
company, whose only asset was a small strip mall in London, Ont.
Unfortunately, he did not seek professional advice at the time and made two
critical errors. Firstly, the shares didn't qualify for the election because
they derived their value from real estate, which did not qualify.
Mr. Holder's second mistake was that he erroneously claimed that the fair
market value of the shares was $50,000 when, in fact, they had only a nominal
To discourage taxpayers from making elections on property that does not
qualify for the election (such as real estate), there is a penalty provision,
which caused Mr. Holder to pay tax on the $50,000 elected gain.
Furthermore, to discourage taxpayers from electing a fair market value that
is too high, a separate penalty provision required the excess over fair value,
or $50,000, to be taxed again in Mr. Holder's hands.
In the lower court, Mr. Holder lost his case, although the judge was somewhat
sympathetic, stating: "[Holder] appears to have been made the victim of
statutory overkill ... [He ] prepared his return and made the election without
professional help. It seems unfortunate that severe consequences which flow from
obscure and almost incomprehensible statutory provisions should be imposed on
Mr. Holder appealed this decision to the Federal Court of Appeal. In so
doing, he relied on a rule in the Income Tax Act that attempts to prevent double
taxation by stating that "unless a contrary intention is evident," the same
amount cannot be included in income more than once.
While the lower court found that this rule was inapplicable because it felt a
"contrary intention" did indeed exist, the Appeal court disagreed, saying: "the
fact that two statutory provisions have different objectives cannot, by itself,
justify an inference that double taxation was intended ... Double taxation is a
possible but not a necessary result of their combined operation. Therefore, it
seems to us unreasonable to conclude that Parliament intended both provisions to
apply in Mr. Holder's situation."
Although Mr. Holder was eventually victorious, one can only speculate that
the cost of some upfront, professional advice may be cheaper in the long run
than the expense (and hassle) associated with litigation, even if it is