Date: 20000316
Docket: 98-2628-IT-I
BETWEEN:
JOSEPH VOSICKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal for the 1997 taxation year concerning the calculation of the Appellant's forward-averaging tax credit, pursuant to sections 110.4 and 120.1 of the Income Tax Act (the "Act"). In assessing the Appellant for the 1997 taxation year, the Minister of National Revenue (the "Minister") determined that the said tax credit was in the amount of $1,789.30, rather than $2,099.84, as claimed by the Appellant. The provisions of the Act concerning the forward-averaging tax credit are no longer in existence. Paragraph 110.4(1) of the Act was repealed by 1988, C. 55, s. 80(1), applicable to the 1988 and subsequent taxation years. However, subparagraph 110.4(2) of the Act entitled individuals to continue to make use of this regime and include portions of the accumulated averaging amount in computing the taxable income for a year up to the taxation year ending before 1998.
[2] The assumptions of fact made by the Minister for the assessment are described at paragraph 4 of the Reply to the Notice of Appeal (the "Reply") as follows:
a) the Appellant was a resident in Canada throughout 1997 taxation year;
b) the Appellant filed with his income tax return for the taxation year 1997, the prescribed form T581 before April 30, 1998;
c) during the year in litigation, the Appellant was not a farmer or fisherman;
d) the Appellant's tax payable for the 1997 taxation year was $2,910.70;
e) the Minister assessed the Appellant in relying upon the amounts indicated by the Appellant in the prescribed form T581, except for the percentage of calculation of the federal forward-averaging tax credit that was changed from 34% to 29%;
f) on the said form T581, the Appellant indicated, inter alia, the following amounts:
i) Accumulated-averaging amount
at the end of 1996 taxation year $ 6,176
ii) Accumulated-averaging amount
withdrawal $ 6,176
iii) Federal forward-averaging tax credit
$6176 X 34% = $ 2,099
g) the Minister brought, inter alia, the following changes on the said Appellant's form T581:
i) Accumulated-averaging amount
at the end of 1996 taxation year $ 6,170
ii) Accumulated-averaging amount
withdrawal $ 6,170
iii) Federal forward-averaging tax credit
$6170 X 29% $ 1,789
h) in hence, during the month of January 1994, the Appellant appealed to the Tax Court of Canada for the taxation year 1992, which appeal was registered under the number 94-96 (IT) I;
i) the matter was essentially the same as in this appeal;
j) according to the judgement dated July 22, 1994, rendered by the Honourable Judge Archambault, the appeal was dismissed;
k) during the month of November 1995, the Appellant appealed to the Tax Court of Canada for the taxation year 1994, which appeal was registered under the number 95-3701(IT)I;
l) again, the matter was essentially the same as in this appeal;
m) on March 27, 1996, the judgement was rendered from the Bench by the Honourable Judge D. G. H. Bowman, the appeal being dismissed.
n) On or about April 21, 1996, the Appellant applied to the Federal Court of Canada, for the purpose of obtaining a review of the decision of the Tax Court of Canada, made on March 27, 1996, which application was registered under the number A-331-96;
o) the hearing of the cause A-331-96 occurred on the 30th of October 1996 by the Federal Court of Canada, and the appeal was dismissed;
p) consequently, the Minister applied the amount calculated in paragraph g) as forward-averaging tax credit, for the taxation year in litigation.
[3] The Appellant admitted all of the above mentioned facts.
[4] In the year 1985, Mr. Vosicky made an election in prescribed form to apply the forward-averaging option regarding a portion of his income for that year. I will now refer to the description of facts made by Bowman J. in his judgement referred at paragraph 4m) of the Reply. I quote paragraph 3 and part of paragraph 4 of that judgement:
[3] Basically, in nineteen eighty-five (1985), Mr. Vosicky made an election under the forward averaging provisions of the Income Tax Act in respect to about sixteen thousand dollars ($16,000). He paid tax thirty-four percent (34%) under the Federal Act. This was a rate which was considerably higher than the rate which he would have paid had he not made an election. He did so on the basis of two (2) assumptions, 1) that his income would decrease in later years and 2) that the credit under section 120.1 would stay at thirty-four percent (34%). His assumption was basically premised upon a pamphlet that the Department of National Revenue issued called Forward Averaging which explained the way in which forward averaging provisions of the Act work.
[4] As it turns out, his expectation was not well-founded. In nineteen eighty-eight (1988), the top marginal rate dropped to twenty-nine percent (29%) from thirty-four percent (34%), and so too did the rate of credit under section 120.1. In a nutshell, Mr. Vosicky elected in nineteen eighty-five (1985) to pay taxes at thirty-four percent (34%), a rate at which he would not have had to pay had he not elected. When the top marginal rate went down to twenty-nine percent (29%) in subsequent years, so too did the credit. ...
[5] The Appellant filed as Exhibit A-3 the booklet issued by Revenue Canada on Forward Averaging in September 1985. The Appellant referred to a few excerpts:
What it is
Forward averaging provisions allow qualifying taxpayers an election to spread certain eligible income received in the current year over future years when they may be in a lower tax bracket.
This eligible income is excluded in calculating taxable income but tax is nevertheless paid on it, at the highest marginal rate as later explained. The eligible income and the tax paid on it are carried forward to following years.
A taxpayer may then elect to report all or any part of this income in any subsequent year and claim an appropriate share of the taxes previously paid as a credit against tax otherwise payable in that year. If the taxpayer's income (including the amount brought back into income) has declined to the point where the taxpayer is in a lower tax bracket than in the year of forward averaging, a tax savings will result.
An election may be made in any year that a taxpayer qualifies.
How it works
Suppose that you have received a large amount of income or a lump sum payment in a year:
First, you must determine whether you qualify for forward averaging and your income is eligible, as explained later in this leaflet.
Then you file an election to forward average some or all of your eligible income, which cannot be less than $1,000 (using form T540).
The amount you designate, your elective income, is excluded in calculating your taxable income for the year or forward averaging. Instead, this excluded amount is taxed federally at 34 per cent plus the federal surtax, if applicable, and provincially at the current rate for your province.
The amount of your elective income will be carried forward until such time as you elect to draw on it. Amounts involved in future years' elections will be added to your balance. Each year an indexing factor based on changes in the Consumer Price Index will be applied to keep your elective income on a current dollar basis.
The resulting amount constitutes your accumulated averaging amount.
...
How to draw on your accumulated averaging amount
...
To draw amounts from your accumulated averaging amount back into income, just decide how much you want to include in your income. Complete form T581, available from your district office and file it with your tax return by April 30 at the latest. Enter on line 225 of your return, the amount you want to withdraw and add this amount to your Net Income. On line 458 of your return, enter the total federal and provincial forward averaging tax credit to which you are entitled. The federal credit will be 34 per cent of the amount you are reporting on line 225. ...
[6] The Appellant stated forcefully that he believed that this amount of tax paid was like money in a bank and that he would be entitled to use the entire amount as tax credit when he would include, in his income returns of the following years, part of the accumulated averaging amount.
[7] Although the two judges of this Court who have heard his previous appeals and who are referred to in subparagraphs 4 j) and 4 m) of the Reply expressed sympathy at his case they nonetheless dismissed his appeals. Archambault J. found that the applicable provisions of the Act were without any ambiguity and Bowman J. found that there was no Charter issue in that case. I entirely agree with the findings of these judges more so that both were confirmed by the Federal Court of Appeal. There is an issue, however, that was not discussed at the trial level and was succinctly addressed at the appeal level and that comes to mind after hearing the complaint of the Appellant, which is the issue of the acquired right expressed at paragraph 43(c) of the Interpretation Act.
[8] This paragraph reads as follows:
43. Where an enactment is repealed in whole or in part, the repeal does not
....
(c) affect any right, privilege, obligation or liability, acquired, accrued, accruing or incurred under the enactment so repealed,
[9] Paragraph 110.4(1) of the Act determined what could be comprised in the averaging amount. Paragraph 110.4(2) of the Act provided for the inclusion of a portion of the accumulated averaging amount in computing the taxable income. The deduction and addition of tax was provided for at paragraphs 120.1(1) and 120.1(2). Paragraph 120.1(1) of the Act read as follows:
(1) There may be deducted from the amount that would, but for this section, be the tax otherwise payable under this Part (other than the tax payable with respect to a return of income referred to in subsection 110.4(5)) by an individual for a taxation year an amount equal to the product obtained when
(a) the amount specified in his election for the year under subsection 110.4(2) and, where his legal representative has filed on his behalf an election under subsection (2) for the year, his accumulated averaging amount at the end of the year
is multiplied by
(b) the percentage referred to in paragraph 117(2)(c).
and subparagraph 120.1(2)(a) read as follows:
There shall be added to the amount that would, but for this section, be the tax otherwise payable under this Part (other than the tax payable with respect to a return of income referred to in subsection 110.4(5)) by an individual for a taxation year an amount equal to
(a) the product obtained when the amount deducted under subsection 110.4(1) in computing his taxable income for the year is multiplied by the percentage referred to in paragraph 117(5.2)(j); and
...
[10] It can be seen from reading paragraphs 120.1(1) and 120.1(2), that for the calculation of the tax payable on the averaging amount, the reference is to the percentage mentioned in paragraph 117(5.2)(j) of the Act. At that time, 117(5.2)(j) read as follows:
The tax payable by an individual under this Part upon his taxable income or taxable income earned in Canada, as the case may be, (in this subdivision referred to as the ‘amount taxable’) for the 1982 and subsequent taxation years is
...
(j) $5,950 plus 34% of the amount by which the amount taxable exceeds $24,000.
[11] It is by this amendment to paragraph 117(5.2)(j) that the amounts of deduction of tax or tax credits, to which the Appellant would have been entitled to in 1985, were modified.
[12] Was there an accrued right to the Appellant? Or in other terms has the Appellant been deprived of one of his property rights? Has he been dispossessed of moneys to which he was entitled? The point of law regarding accrued right not having been specifically raised in the Notice of Appeal, I do not have the Respondent's view as to whether indeed the Appellant is not going to recover some moneys that he has expanded as taxes in 1985. The Respondent's views on the matter is that the applicable provisions of the Act are clear and have been applied accordingly. However, because the Appellant is not represented by a lawyer, I find opportune to make a summary analysis of the notion of vested rights.
[13] Regarding vested rights the Supreme Court of Canada in Gustavson Drilling (1964) Limited v. M.N.R., 1977 1 S.C.R. 271, at page 282 stated the following:
Second, interference with vested rights. The rule is that a statute should not be given a construction that would impair existing rights as regards person or property unless the language in which it is couched requires such a construction: Spooner Oils Ltd. v. Turner Valley Gas Conservation Board [ [1933] S.C.R. 629.], at p. 638. The presumption that vested rights are not affected unless the intention of the legislature is clear applies whether the legislation is retrospective or prospective in operation. A prospective enactment may be bad if it affects vested rights and does not do so in unambiguous terms. This presumption, however, only applies where the legislation is in some way ambiguous and reasonably susceptible of two constructions. It is perfectly obvious that most statutes in some way or other interfere with or encroach upon antecedent rights, and taxing statutes are no exception. The only rights which a taxpayer in any taxation year can be said to enjoy with respect to claims for exemption are those which the Income Tax Act of that year give him. The burden of the argument on behalf of appellant is that appellant has a continuing and vested right to deduct exploration and drilling expenses incurred by it, yet it must be patent that the Income Tax Acts of 1960 and earlier years conferred no rights in respect of the 1965 and later taxation years. One may fall into error by looking upon drilling and exploration expenses as if they were a bank account from which one can make withdrawals indefinitely or at least until the balance is exhausted. No one has a vested right to continuance of the law as it stood in the past; in tax law it is imperative that legislation conform to changing social needs and governmental policy. A taxpayer may plan his financial affairs in reliance on the tax laws remaining the same; he takes the risk that the legislation may be changed.
[14] The Federal Court of Appeal in its decision rendered on this matter for the year 1992 (Vosicky v. The Queen, 95 DTC 5224), made use of some words of the above decision:
... However, the courts must apply the law as it is written and the applicant, contrary to what he thinks, had "no vested right in the continuance of the law as it stood" in 1985.
That decision does not explain how it has arrived at the conclusion regarding the Appellant's case that there were no vested rights but I shall think that that Court has made the relevant analysis.
[15] It is nonetheless interesting to read the authors on the subject. In Dreidger on the Construction of Statutes, 3rd edition, by Ruth Sullivan, there is an analysis of the subject from pages 528 to 543. It is stated that for a right to be a vested right it must be particularized and personalized. The right claimed must have been acted upon and effectively claimed as one's own. The key to weighing the presumption against interference with vested rights is a degree of unfairness the interference will create in particular cases.
[16] An analysis of vested rights is also made in the Interpretation of Legislation in Canada, 2nd Edition, Pierre-André Côté, from pages 139 to 155. At page 141:
To attempt a definition of "vested rights" would be somewhat audacious. In conventional legal language, vested rights are contrasted with simple expectations.
at page 143:
Yet, to deny the existence of vested rights, and rule in favour of a statute's immediate and prospective operation, may have dire consequences for the individual. Law should reflect a certain stability: legal reform, which is not undertaken gradually can entail serious prejudice to individuals. The Courts require the individual to establish that his legal situation is tangible and concrete, rather than general and abstract, and that this situation was sufficiently constituted at the time of the new statute's commencement. The mere possibility he may have had to prevail himself of a specific statute does not create a vested right.
at page 146:
... a sufficiently constituted legal situation, in determining the existence of vested rights, the courts require not only that they be concrete and tangible, but that they attain a sufficiently individualized and materialized degree to justify judicial protection. At what moment does this take place? This is a delicate question, and often little more than a guess can suggest where the judge will draw the line between vested rights and simple expectations. The distinction between what is and what is not a right must often be one of great fineness.
[17] In this particular case, it is not the case of a person who could have prevailed himself of a specific provision. It is the case of a person who had taken advantage of a provision that was later on amended. This, in my view, appears to put the Appellant in a position different to that of the taxpayer in Gustavson Drilling (supra).
[18] In the circumstances of a taxpayer who, when he elected to avail himself of the forward averaging provisions, would have had to pay the highest tax rate, he would not appear as having been treated unfairly by the subsequent changes to the tax rate used in the calculation of the tax deduction, and later on the tax credit. However, in the circumstances of this particular appeal, in a case where the taxpayer was not to be assessed on his income at the highest tax rate of 34 p. 100, but at 29 p. 100, and who has accepted to pay the highest tax rate on an averaging amount, under the belief that he was entitled in future years to credit in the same amount, for this taxpayer, the subsequent changes of the Act appear more unfair.
[19] As I mentioned earlier, I did not have the benefit of the Respondent's view on the matter and I did not seek it in view of the decision of the Federal Court of Appeal, referred to in paragraph 14 of these Reasons, which specifically put aside any entitlement to some vested right. The appeal should be dismissed.
Signed at Ottawa, Canada, this 16th day of March, 2000.
"Louise Lamarre Proulx"
J.T.C.C.