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Federal Tax - Capital Income/Loss. Gupta v. Canada (the King)
In Gupta v. Canada (the King) (Fed CA, 2025) the Federal Court of Appeal considered the interaction of net capital loss, related notices of determination and bankruptcy:[1] Mr. Gupta appeals from a judgment of the Tax Court of Canada (2023 TCC 82) dismissing his appeal from an assessment of his 2020 taxation year. The Tax Court found that, in the absence of a notice of determination, the Minister of National Revenue was entitled to reduce Mr. Gupta’s net capital loss balance because part of what he had claimed was an amount of net capital loss incurred prior to his discharge from bankruptcy in 1994. Subparagraph 128(2)(g)(i) of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.) (ITA) provides that losses incurred prior to an individual’s discharge from bankruptcy may not be deducted in computing the individual’s taxable income for taxation years after the discharge from bankruptcy.
[2] The underlying facts of this appeal are not in dispute. When Mr. Gupta declared bankruptcy in 1993, he had unused net capital losses. Following his discharge, he continued to accumulate net capital losses that he carried forward and added to those he had incurred prior to his bankruptcy. On July 30, 2020, the Minister issued a notice of assessment in respect of the 2019 taxation year, reducing the balance of Mr. Gupta’s net capital losses and advising him that he could not claim pre-bankruptcy net capital losses. Mr. Gupta nonetheless claimed a portion of his pre-bankruptcy net capital losses against his capital gains for the 2020 taxation year. The Minister issued a notice of assessment for the 2020 taxation year, wherein the amount of net capital losses available to Mr. Gupta was lower than the amount claimed, leaving Mr. Gupta with a higher taxable income for the 2020 taxation year.
[3] Mr. Gupta’s position before the Tax Court was that the net capital loss balances shown in the notices of assessment prior to July 30, 2020, reflected a determination made many years ago that the net capital loss balance included the pre-bankruptcy losses. He also argued that the Minister could not modify that determination some 25 years after the fact to adjust his net capital loss balance. In support of his position, Mr. Gupta relied on subsections 152(1.3) and 152(4) of the ITA.
[4] The Tax Court held that a statement contained within a notice of assessment regarding the available balance of net capital losses does not constitute a binding determination to which subsection 152(1.3) of the ITA applies. In order to be binding, a notice of determination of net capital losses must be made pursuant to subsection 152(1.1) of the ITA. Furthermore, relying on earlier decisions to a similar effect, the Tax Court held that such a statement does not constitute an assessment that is subject to the time limitations set out in subsection 152(4) of the ITA. The statement is not binding, and if it affects a year that is not statute-barred, the Minister may correct the amount when assessing the later year, even though it involves adjusting carry-forward balances from previous years.
[5] Mr. Gupta submits that the Tax Court erred in finding there was no notice of determination and that the Minister was not statute-barred from considering the consequences of his bankruptcy discharge for the purposes of the 2020 taxation year. He also submits that the Tax Court incorrectly applied the capital loss carry-forward rules.
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[8] First, subparagraph 128(2)(g)(i) of the ITA is clear. The Tax Court was correct to conclude that Mr. Gupta could not deduct net capital losses incurred prior to his absolute discharge from bankruptcy.
[9] Second, the Tax Court found and Mr. Gupta confirmed, that he never sought nor received a notice of determination of a net capital loss.
[10] Third, the Tax Court made no error in concluding that the Minister was not barred from considering the consequences of Mr. Gupta’s bankruptcy in assessing his 2020 taxation year. This finding is consistent with prior decisions of the Tax Court (see Coastal Construction & Excavating Ltd. v. R., 1996 CanLII 21537 (TCC), [1996] 3 C.T.C. 2845 at p. 2856; Peach v. The Queen, 2020 TCC 12 at para. 66, upheld on appeal at 2022 FCA 163), the Exchequer Court of Canada (see New St. James Ltd. v. Minister of National Revenue, 1966 CanLII 947, [1966] Ex. C.R. 977) and this Court (Canada v. Papiers Cascades Cabano Inc., 2006 FCA 419 at para. 23). . Magren Holdings Ltd v. Canada
In Magren Holdings Ltd v. Canada (Fed CA, 2024) the Federal Court of Appeal dismissed a appeal, this from a dismissed Tax Court appeal, this from a Ministerial assessment "imposing tax on the basis that all of the capital dividends those corporations paid in 2006 were excess dividends", and "where a corporation pays a capital dividend in excess of the balance of its capital dividend account, the corporation is liable for tax":
Here the court gets fundamental regarding capital losses and gains:(a) Abuse of the object, spirit and purpose of the capital gain and capital loss provisions
[227] Triad Gestco FCA involved a series of transactions undertaken to create a loss to avoid tax on a substantial capital gain. There, this Court observed that "“the capital gain system is generally "understood" to apply to real gains and real losses”": Triad Gestco FCA at para. 41. This Court cited as "“entirely apposite”" the following passage from the House of Lords decision in W.T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] UKHL 1 (BAILII), [1981] 1 All E.R. 865 at 873:The capital gains tax was created to operate in the real world, not that of make-believe. As I said in Aberdeen Construction Ltd. v. Inland Revenue Comrs, [1978] 1 All ER 962 at 996, [1978] AC 885 at 893, [1978] STC 127 at 131, it is a tax on gains (or, I might have added, gains less losses), it is not a tax on arithmetical differences. [228] As the Court further observed in Triad Gestco FCA, "“the capital gain system has been understood, since a time that pre-dates its creation, to be aimed at taxing increases in ‘economic power’”": para. 42 [citation omitted].
[229] The same must be said of a capital loss—it must be understood as being aimed at providing relief where there is a decrease in economic power. It is not a relief from tax based on an arithmetic difference.
[230] This Court has said that "“[i]n Triad Gestco, this Court distinguished a ‘paper loss’ from an ‘economic’ or ‘true’ loss and held that, given the object, spirit and purpose of paragraphs 38(b), 39(1)(b) "and" 40(1)(b), a paper loss does not give rise to an allowable capital loss”": 2763478 Canada Inc. v. Canada, 2018 FCA 209, 2018 D.T.C. 5130 at para. 53 [2763478]. It there explained:Sections 39 and 40 provide the method for calculating the gain or loss. A loss is incurred when property is disposed of for “proceeds of disposition” that are lower than its “adjusted cost base”. The “adjusted cost base” is the purchase price of a capital property adjusted in accordance with section 53, and the “proceeds of disposition” is the price for which the property is sold or is otherwise compensated for, as provided in section 54. The difference between the adjusted cost base and the proceeds of disposition of a given property provides a measure of its change in value, and the corresponding increase or decrease in the owner’s economic power ...
2763478 at para. 55, citing Triad Gestco at paras. 42 and 50 (emphasis added). While 2763478 concerned capital losses, the same is true of capital gains – the difference between the proceeds of disposition and the adjusted cost base of a given property provides a measure of its change in value and the corresponding increase in the owner’s economic power. . 3295940 Canada Inc. v. Canada
In 3295940 Canada Inc. v. Canada (Fed CA, 2024) the Federal Court of Appeal sets out a brief summation of aspects of the ITA capital gains regime:A. Capital Gains Regime
[31] Capital gains represent the accrued economic gain a taxpayer realizes when she disposes of a capital asset: paragraph 39(1)(a). One calculates capital gains as the proceeds of disposition (POD) minus the adjusted cost base (ACB): subsection 40(1). For example, if a taxpayer buys a capital asset for $100 and sells it for $150, she realizes a $50 capital gain; that is, $150 POD minus $100 ACB. Only half of capital gains are taxable: paragraph 38(a). Thus, in our example, the taxpayer’s taxable capital gain is only $25; that is, half of the $50 capital gain.
B. Capital Dividends
[32] Parliament’s objective is to tax half of capital gains, whether they are earned directly by an individual or indirectly through a corporation. Where a private corporation realizes a capital gain, the non-taxable portion is added to the corporation’s Capital Dividend Account (CDA). As mentioned, the CDA represents amounts, including capital gains’ non-taxable portion, which a corporation can distribute to its shareholders tax-free via capital dividends. Without this feature, the system would tax the non-taxable portion of the capital gain. When the distributing corporation pays a capital dividend to a corporate shareholder, the distributing corporation’s CDA decreases by the amount of the dividend, and the corporate shareholder’s CDA increases by that amount. These provisions are found in subsections 83(2) and 89(1).
C. Subsection 55(2)
[33] Subsection 55(2) operates in the context of the intercorporate dividend regime. Key to that regime is subsection 112(1), which says that a taxable dividend that a corporate shareholder receives from a Canadian corporation is deductible from that shareholder’s income. As a result, the corporate shareholder receives this dividend tax-free. The rationale is that this dividend has been paid from after-tax earnings; taxing it again in the hands of the recipient corporation would result in double taxation.
[34] Subsection 55(2) serves a dual purpose.
[35] First, it prevents “capital gains stripping”. Capital gains stripping happens when a corporation, before its shares are sold, reduces its value by paying an intercorporate dividend to its corporate shareholder, thereby converting a capital gain into a tax-free intercorporate dividend. An example can illustrate the effect of subsection 55(2). Suppose ACo wholly owns BCo. BCo has an asset worth $100. BCo pays a $99 intercorporate dividend to ACo, which receives that dividend tax-free. ACo could then sell its shares in BCo to a third party for $1. Using this manoeuvre, ACo would turn a $100 sale into a $1 sale and, in so doing, transform what would have been a taxable capital gain into a tax-free intercorporate dividend. Subsection 55(2) prevents this sort of tax plan by deeming the $99 dividend to be part of ACo’s capital gain from its sale of BCo’s shares.
[36] Second, subsection 55(2) protects the tax-free flow of dividends attributable to income that has already been taxed in the corporation paying the dividend: Canada v. Kruco Inc., 2003 FCA 284 at para. 32 [Kruco]. To continue with the previous example, if BCo had $10 of after‑tax income, it could pay a $10 dividend to ACo prior to its sale. Subsection 55(2) would allow such a dividend. The underlying assumption is that dividends in excess of after-tax profits—in our example dividends in excess of $10—represent the untaxed appreciation of capital assets: Kruco at para. 32; Ottawa Air Cargo Centre Ltd. v. The Queen, 2007 TCC 193 at para. 27, aff’d 2008 FCA 54. . Glencore Canada Corporation v. Canada
In Glencore Canada Corporation v. Canada (Fed CA, 2023) the Federal Court of Appeal considered a second appeal (first was from the Tax Court) of the tax categorization status of 'non-completion fees' that the taxpayer received on the failure of it's auction bids to purchase shares of another corporation.
In these quotes the court considers the distinction between income categorized under s.9(1) ITA ['basic rules'] and capital gains:E. Issue 1 – Did the Tax Court err in concluding that the Fees were business income pursuant to s. 9(1)?
[23] The Tax Court applied the Supreme Court’s decision in Ikea Ltd. v. Canada, 1998 CanLII 848 (SCC), [1998] 1 S.C.R. 196, 155 D.L.R. (4th) 295 [Ikea]. As I explain below, the principles from Ikea were misinterpreted by the Tax Court and this resulted in an extricable error of law.
[24] Ikea, the well-known furniture retailer, received a tenant inducement payment (TIP) from the West Edmonton Mall in connection with entering into a long-term lease. The issue was whether the TIP was received on income or capital account. The Supreme Court noted that s. 12(1)(x) of the Act could not apply because the provision was not in force at the relevant time (Ikea at para. 20).
[25] In the Supreme Court, Iacobucci J. concluded that the TIP was received on income account based on the factual finding that the TIP was made to reimburse rent or other obligations on revenue account. The Court stated that since “the TIP was made to reimburse an expense on income account [it] was clearly itself income” (Ikea at para. 29).
[26] The conclusion was summarized at paragraph 33 of Ikea. This is reproduced below, with emphasis on the passage that was relied on by the Tax Court.[33] In my view, Bowman J. was entirely correct in finding that the TIP received by Ikea was on revenue account and should have been included in income for tax purposes. The payment was clearly received as part of ordinary business operations and was, in fact, inextricably linked to such operations. On the evidence, no question of linkage to a capital purpose can seriously be entertained. Had Ikea wished, it could have requested that the TIP be advanced expressly for the specific purpose of fixturing, or to defray some other capital cost. It did not do so, however, and the payment was in fact made free of any conditions for or stipulations as to its use. Therefore, whether the TIP represented a reduction in rent or a payment in consideration of Ikea’s assumption of its various obligations under the lease, it clearly cannot be treated as a capital receipt and should have been included in Ikea’s income ....
[Emphasis added] ....
[28] The Court’s interpretation of Ikea, and its application to the facts, essentially ignores the distinction between capital and revenue receipts. This was the very issue in Ikea.
[29] When Ikea is read as a whole, it is evident that Iacobucci J.’s reference to ordinary business operations in paragraph 33 is referring to something on revenue account. The very next sentence in Ikea states that there is no link to a capital purpose.
[30] The necessary linkage to something on revenue account is also made clear at paragraph 30 of Ikea:
[30] As for the second contention, Ikea argued that if the payment were to be characterized as consideration for its continued obligation to carry on business in the premises during the term of the lease, it should be considered a capital receipt because such a payment goes to the “structure of the business”. With respect, however, I believe this submission misses the mark. An accurate characterization of the receipt requires an assessment of the nature of the specific obligations in question. In this case, as Bowman J. correctly found, Ikea’s obligations under the lease essentially consisted of the payment of rent and the operation of its business in the leased premises. These were clearly expenses incurred in the day‑to‑day operation of the business and were therefore on revenue account.
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[34] In this Court, the Crown submitted that the application of Ikea in this case is supported by the decision of this Court in Morguard Corporation v. Canada, 2012 FCA 306 [Morguard]. In Morguard, this Court upheld a decision of the Tax Court which applied Ikea to a break fee received as part of a failed takeover bid.
[35] However, the facts in Morguard are materially different from the facts in this case. For example, in Morguard the Tax Court determined that Morguard Corporation was in the business of acquiring companies. In this case, the Tax Court found that Falconbridge was not in the business of acquiring or selling companies (TC Reasons at para. 73). It is not surprising that the Tax Court did not rely on Morguard.
[36] The Crown urged us to apply Morguard despite this difference. Essentially, it seeks to extend Morguard beyond its particular facts. In my view, an extension to the facts of this case is not warranted because it would erode the well-entrenched principles as to the distinction between items on capital and revenue account. I am not aware of any facts in this case which would provide a sufficient link between the Fees and something on revenue account. I conclude that the Fees were received on capital account because the linkage was to a proposed acquisition of a capital asset.
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[39] A capital gain is generally a gain from the disposition of property, unless the gain is otherwise included in computing income. The capital gain is calculated as the compensation received for the disposition, less the cost of the property disposed of and expenses incurred in the disposition.
[40] Whether the Non-Completion Fee gave rise to a capital gain depends in large part on the bid terms set out in the Arrangement Agreement. It required that Falconbridge and Diamond Fields each facilitate the completion of the merger. This required approvals from the shareholders of both companies. The Arrangement Agreement also provided that nothing in that agreement restricted Diamond Fields’ board of directors from supporting or facilitating a competing bid in fulfilment of its fiduciary duties.
[41] The Arrangement Agreement also set out the different circumstances in which the Non-Completion Fee would be payable. In all cases, the Non-Completion Fee was not payable unless a competing offer was made and completed. The circumstances which triggered Diamond Fields’ obligation to pay the Non-Completion Fee were: (1) a competing offer was made before August 31, 1996; (2) the Arrangement Agreement was terminated in accordance with its terms when Falconbridge dropped out of the bidding; and (3) the transaction contemplated by the competing offer was completed.
[42] To qualify as a capital gain, the Non-Completion Fee must be received as compensation for the disposition of property. ... . Procon Mining and Tunnelling Ltd. v. Canada
In Procon Mining and Tunnelling Ltd. v. Canada (Fed CA, 2023) the Federal Court of Appeal considered a capital loss income tax issue, noting that attributing transactions to a capital account is largely a matter of fact-finding:[7] Deciding whether a particular outlay or receipt is on income or capital account, or a particular property is capital property, is often difficult. In each case, that determination must be made with regard to the particular facts, having regard to various factors and all the surrounding circumstances: Canada Safeway at para. 61; Hillsdale Shopping Centre Ltd. v. The Queen, 1981 CanLII 4991 (FCA), [1981] C.T.C. 322, 81 D.T.C. 5261 (FCA) at 327 (C.T.C.). It is necessarily a highly factually infused determination. Fact-finding is the purview of the Tax Court, not this Court on appeal.
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[11] Although the appellant says the Tax Court erred in law, in effect it is asking us to review the evidence and make our own findings of fact, apply legal principles, and then come to our own conclusion. For example, the appellant says dividends were not expected to be paid on the shares, pointing to testimony from Mr. Yurkowski. Similarly, the appellant states that it contemplated the shares might increase in value in which case it might sell the shares, again pointing to Mr. Yurkowski’s testimony.
[12] Referencing a particular statement made by a witness does not permit this Court to make the factual findings the appellant desires, particularly where the Tax Court expresses concerns about the credibility of the testimony, as it did here. It expressly questioned the completeness of the “description of the circumstances of the acquisition of the shares by the Appellant’s [witness] in his testimony”, requiring it “to look beyond [the appellant’s] own description of [its] intention, motivation, reason or purpose for having done something, and to effectively test that against the other objective evidence”: Reasons at para. 11.
[13] Here, neither the Tax Court nor the agreed statement of facts addressed the appellant’s or the issuer’s intentions concerning dividends on the shares following development of the mining project. Moreover, Mr. Yurkowski was equivocal regarding the appellant’s plans for holding or disposing of the shares. During examination in chief, he described the appellant’s goal as “forming long-term joint ventures” and the share acquisitions as “the first step to a long 20-, 30-year deal”. The witness also testified that “[w]hether or not we ever sold the shares was immaterial” and when the appellant “bought equity in a company [it] was to keep it as long as [it] possibly could”.
[14] Likewise, counsel and the courts must exercise care in considering the application of statements drawn from other cases. Read in light of the context in which they were made, statements that appear to mandate a particular characterization of an outlay or receipt, or acquisition or disposition, as being on income or capital account are not, in fact, unequivocal, but rather have a meaning that differs from that which the words on their face might suggest. Each case must be decided on the basis of its own facts and circumstances.
[15] The appellant says that once the Tax Court found that a sale of the shares was inevitable, it must have viewed a future sale at a profit as a motivating factor in the acquisition, consistent with the testimony of its witness. Again, I disagree.
[16] Although the Tax Court used the phrase “inevitable sale” at paragraph 10 of its reasons, the relevant sentence cannot be read in isolation. Read in the context of the statements that immediately precede it, and the Tax Court’s reasons in their entirety, it cannot be seen as a finding that the appellant established an intention to sell the shares at a profit.
[17] That the appellant may have “contemplated the possibility of resale of [the shares] is not, in itself, sufficient to conclude … the existence of an adventure in the nature of trade”: Canada Safeway at paras. 61, 70. Rather, the prospect of resale must be an important consideration, or an operating motivation, for the acquisition: Canada Safeway at para. 61, see also paras. 46-59 where this Court discusses other relevant cases; Crystal Glass Canada Ltd. v. The Queen, 1989 CanLII 10217 (FCA), [1989] 1 C.T.C. 330, 43 D.T.C. 5143 (FCA) at 330 (C.T.C.). As I have already explained, the evidence here supported more than one interpretation of the appellant’s intention and I see no reason to interfere with the Tax Court’s conclusions.
[18] Contrary to the appellant’s submission, the Tax Court did turn its mind to whether the shares could have been acquired as an adventure in the nature of trade. It quoted a passage from Canada Safeway addressing the distinction between inventory and capital property in that context: Reasons at para. 17. However, in neither its notice of appeal, nor its submissions to the Tax Court, did the appellant posit that the share acquisitions were adventures in the nature of trade. The Tax Court said not taking that position was consistent with the agreed statement of facts: Reasons at para. 21. In other words, the facts did not support finding an adventure in the nature of trade.
[19] Finally, the appellant submits that Morguard Corporation, Glencore Canada, and Johns-Manville “demonstrate that losses incurred by disposing of property that is ‘inextricably linked’ to the ongoing operation of the business are on income account”: appellant’s memorandum of fact and law at para. 86. Had the Tax Court applied those cases, says the appellant, it “would have held that the Appellant acquired and disposed of the Shares in the course of an undertaking” and that “the Losses were business losses”: appellant’s memorandum of fact and law at para. 106.
[20] I cannot agree with the appellant’s characterization of the three cases it cites, nor their relevance to this appeal. First, Morguard Corporation and Glencore Canada concern negotiated break fees received after a failed acquisition, not dispositions of property. Moreover, they were decided based on their particular facts and circumstances, as all of these cases must be.
[21] As to Johns-Manville, the Tax Court considered it, but viewed it as inapplicable. I agree. It concerns property acquired for consumption in the business, the cost of which the Court there described as “not part of a plan for the assembly of assets”: at 73. Here, the Tax Court found the shares were an investment made with a view to providing the appellant with long-term revenue and earnings, a finding amply supported by the evidence.
[22] As I have noted, although the appellant asserts errors of law, it asks us to reweigh the evidence and substitute our views for those of the Tax Court. We cannot interfere with the Tax Court’s factual findings, and findings of mixed fact and law, absent a palpable and overriding error.
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