Executive Summary: Key Legal and Evidentiary Issues

• The Tax Court of Canada lacked jurisdiction over Sechelt Holdings Inc.'s appeal because the subject matter involved the Minister's discretionary refusal to extend time for a late-filed election under s. 220(3.2) of the Income Tax Act.

• No reassessment was ever issued following the Minister's rejection of the T2 adjustment request and late-filed replacement property election, leaving the original October 27, 2022, assessment unchanged.

• Misleading CRA audit letters suggested adjustments and a forthcoming Notice of Reassessment, yet no such reassessment was ever made, and administrative errors cannot confer jurisdiction on the Court.

• A condition precedent to instituting an appeal was not met, as the Appellant never objected to the October 27, 2022, assessment nor sought an extension of time to object under s. 166.1 of the ITA.

• Subsection 220(3.4) of the ITA only triggers appeal rights when the Minister accepts a late-filed election and issues a consequential reassessment, not when the election is denied.

• Recourse for the Appellant lies in a judicial review application before the Federal Court, not an appeal to the Tax Court, as the decision was an exercise of ministerial discretion.

The sale of the Lighthouse liquor license and subsequent corporate restructuring

Sechelt Lighthouse Liquor Store Ltd. owned a liquor license used to operate Lighthouse Liquor in British Columbia. On June 11, 2021, the corporation sold the liquor store, its fixtures, inventory, and the liquor license. Shortly after, on June 15, 2021, the corporation changed its name to 0345689 B.C. Ltd. The following year, on June 22, 2022, Sechelt Holdings Inc. acquired the shares of Gaudry Holdings Ltd. and Town Center Holdings Ltd., which operated a liquor store and held a liquor license in Comox, British Columbia. The next day, Sechelt Holdings Inc., 0345690 B.C. Ltd., Gaudry Holdings Ltd., and Town Centre Holdings Ltd. amalgamated and became Sechelt Holdings Ltd., the Appellant in this appeal, with each of the four corporations having a deemed year end of June 22, 2022.

The tax return, assessment, and the replacement property election

On October 24, 2022, the Appellant filed 0345689 B.C. Ltd.'s T2 corporate income tax return for the taxation year ending April 30, 2022. Schedule 6 of that return reported the sale of the liquor license with proceeds of disposition of $3,200,000 and a gain of $3,200,000, resulting in total taxes owing of $1,028,116. The Minister of National Revenue issued a Notice of Assessment dated October 27, 2022, accepting the reported net balance. No objection was ever made to that assessment, and no request was made of the Minister to extend the time to object.

On January 20, 2023, the Appellant submitted a T2 Adjustment Request to the Minister, accompanied by an Acknowledgement of Election under s. 13(4.2) of the Income Tax Act. The election stated that 0345689 B.C. Ltd. and Lighthouse Bay Liquor Store Ltd. jointly elected to have s. 13(4.3) apply to the June 11, 2021, disposition and acquisition of the liquor license for $3,200,000. The Appellant relied on s. 44(1) of the ITA, asserting that the Comox liquor license was replacement property for the Lighthouse liquor license, which would effectively defer the capital gain on the disposition. The Appellant admitted the election was filed late and could only be accepted by exercise of the Minister's discretion to extend the time to accept the election, pursuant to s. 220(3.2). The amended T2 return accompanying the request reported the sale of the liquor license in the amount of $3,200,000 but also reported the license's adjusted cost base as $3,200,000, resulting in no gain.

The CRA audit and misleading correspondence

On March 29, 2023, a CRA auditor wrote to the Appellant advising that the taxation year had been selected for audit and that the T2 adjustment request would be reviewed as part of that audit. Through subsequent correspondence, including letters dated October 4, 2023, May 16, 2024, and August 28, 2024, the CRA auditor communicated that adjustments would be made to disallow the removal of a taxable capital gain of $1,600,000 under s. 38(a) of the ITA. The May 16, 2024, letter specifically stated that the liquor license voluntarily disposed of by the taxpayer did not meet the conditions under subsection 44(1)(b) as a former business property, and therefore section 44 — exchange of property — could not be applied. The August 28, 2024, letter even stated that a Notice of Reassessment would be sent to advise of the amount of taxes owing with interest. However, no notice was ever sent. The CRA team leader, Brian Wang, later acknowledged through affidavit evidence that due to an oversight, the wrong template had been used, and that the letters should have stated that the Minister could not accept the T2 adjustment request and the late-filed election.

The failed objection and appeal

On November 26, 2024, the Appellant filed a Notice of Objection for the taxation year. On February 20, 2025, the Minister sent a letter advising that the objection could not be accepted because the Appellant did not file it within 90 days from the date of the Notice of Assessment dated October 27, 2022, and that no extension of time would be granted. Despite this, on April 11, 2025, the Appellant filed a Notice of Appeal to the Tax Court of Canada.

The parties' competing arguments

The Respondent (the Crown) brought a motion to quash the appeal on two grounds: first, that the Tax Court had no jurisdiction over the subject matter because the Appellant was attempting to appeal from the Minister's refusal to accept the late-filed election, a discretionary decision made pursuant to s. 220(3.2) of the ITA; and second, that a condition precedent to instituting an appeal had not been met because the only assessment of the taxation year was made on October 27, 2022, and the Appellant neither objected nor sought an extension of time to object to that assessment.

The Appellant countered by arguing that the Minister had allowed the late-filed election and T2 adjustment request, and that the Minister's letters referencing the adjustment requests were tantamount to an assessment. The Appellant submitted that the audit required the Minister to determine the application of s. 44(1) of the ITA, and that such an exercise constituted an assessing action entitling it to appeal to the Tax Court. The Appellant further argued that the August 28, 2024, letter was a "determination of a taxpayer" giving rise to appeal rights under subsections 220(3.4) and 165(1.1) of the ITA, and cited the Supreme Court of Canada decision in Iris Technologies Inc v Canada in support of its position that the Minister's audit crossed from discretionary consideration to assessment.

The statutory framework under section 220 of the ITA

The Court examined the legislative framework governing ministerial discretion. Section 220 of the ITA is part of the taxpayer relief provisions, and applications made under s. 220(3.2) are subject to judicial review. The decision as to whether to extend time to make an election is discretionary, as evidenced by the use of the word "may" and the placement of the provision in section 220, which generally deals with discretionary matters. Under s. 220(3.3), where the Minister has extended the time for making an election, the election is deemed to have been made on the day on or before which it was otherwise required to be made. Subsection 220(3.4) then permits the Minister to assess tax notwithstanding limitation periods to give effect to the accepted election. Critically, the Court found that s. 220(3.4) does not apply if the Minister has not extended the time for making an election, and therefore the Appellant's argument that s. 220(3.4) provides an avenue for appeal when the Minister declines to accept a late-filed election is not supported by the legislation. The Court further noted that no penalty was assessed under s. 220(3.5), which the Respondent cited as further evidence that the Minister did not extend the time for the late-filed election.

The ruling and outcome

Justice Jenna Clark of the Tax Court of Canada granted the Respondent's motion and quashed the Appellant's appeal without leave to amend. The Court held that the Minister's decision not to extend the time for the late-filed election was a discretionary decision made pursuant to s. 220(3.2) of the ITA, and the Tax Court does not have jurisdiction to interfere with an exercise of ministerial discretion. The Court acknowledged that the CRA's May 16, 2024, and August 28, 2024, letters were "at best, misleading," and that a taxpayer reading those letters could reasonably be of the view that the Minister had engaged in an audit and a Notice of Reassessment would be issued with appeal rights triggered. However, the Court emphasized that the Minister's actions, including issuing misleading letters, do not grant jurisdiction to the Tax Court, as the Court's jurisdiction is conferred by statute. The Court also found that the Appellant had failed to meet a condition precedent to instituting an appeal, as the only assessment made in respect of the taxation year was on October 27, 2022, and the Appellant did not object to that assessment nor seek an extension of the time to object. The Court observed that the Appellant's proper recourse lies in a judicial review of the Minister's discretionary process and decision. The appeal was quashed in favour of the Respondent (His Majesty the King), with no costs awarded to either party. No specific monetary amount was ordered or granted, as the motion dealt solely with the jurisdictional question and the procedural condition precedent to instituting the appeal.