Sunday, February 10, 2013
A taxpayer owned shares in a public corporation. The company reorganized itself as a unit trust. As part of the reorganization shareholders received units of the trust in exchange for their shares. Such an exchange is a taxable event—there are no tax deferral provisions. The taxpayer did not report the capital gain on the shares and should have.
On a second matter, the return was not statute-barred as the judge found the failure to report the gain, “resulted in a misrepresentation in that return attributable to neglect or carelessness.” Given the amounts involved and the information circulars delivered to shareholders explaining the reorganization, it wasn’t reasonable for the taxpayer to take the position the event was not taxable.
 The issues to be decided are whether:
i) Ms. Roud realized a taxable capital gain when shares owned by her were the subject of an income trust conversion in 2006; and,
ii) Whether Ms. Roud’s 2006 year was statute-barred when the Canada Revenue Agency (“CRA”) reassessed her 2006 year to include the unreported gain.
ITA / ETA
| 152(4)—Assessment and reassessment |
 It is the Appellant’s position that no capital gain should have been realized and taxed at that time because (i) the Aliant corporate shares were not sold for cash but merged into Bell Aliant Trust Units, or (ii) perhaps Aliant Inc. was merely renamed Bell Aliant.
 Unfortunately for Ms. Roud and for other individuals and taxable entities, income trust conversions did not qualify for tax deferred corporate rollover treatment under the Income Tax Act (the “Act”) even though such a rollover would have been available had shares been converted into or exchanged for shares of another corporation as was the case when her Newtel shares were exchanged for Aliant Inc. shares. The tax treatment of corporations and their shareholders under the Act differs significantly from the tax treatment of trusts and their unitholders. For this reason, Ms. Murphy’s argument can not succeed. Ms. Roud did dispose of her Aliant Inc. shares and received in exchange the Bell Aliant Trust units. The amount of proceeds she received for her Aliant Inc. shares is the fair market value of Bell Aliant Trust units she received. It does not matter that she did not receive cash.
 There is absolutely no suggestion that either Ms. Roud or Ms. Murphy intended to do anything wrong. Income trust conversions are complex but different from the earlier conversion of Ms. Roud’s Newfoundland Telephone Newtel shares into shares of Aliant Inc. in the 1990s. However, in these circumstances, I am satisfied that the failure to include the capital gain in Ms. Roud’s 2006 tax return resulted in a misrepresentation in that return attributable to neglect or carelessness. The result of this is that the normal three-year reassessment period did not apply and the 2006 year is not statute-barred with respect to this taxable capital gain.
 For these reasons this appeal must be dismissed. I would note as an aside that does not affect my decision that the CRA believes it overstated Ms. Roud’s adjusted cost base in her shares by more than $1,000. If so, this is to her favour as the CRA cannot seek to increase the reassessment in this appeal. Further, it appears that had Ms. Roud not exchanged her shares in 2006 for trust units, or even if there had been a tax-deferred rollover available, this capital gain would have been realized and taxable in 2007 upon her death in any event.
A paragraph beginning with a number in square brackets is a direct quote from the case.