Date: 20001024
Docket: 98-3864-IT-I; 1999-2782-IT-I
BETWEEN:
FRIEDER KEMPE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] The Appellant has filed two Notices of Appeal, one for the 1993 taxation year and the other for the 1994, 1995 taxation years.
[2] The Appellant is claiming deductions from his Canadian tax payable for the 1993, 1994 and 1995 taxation years in respect of German Kirchensteuer ("church tax") under subsection 126(1) of the Income Tax Act ("the Act"). The Minister of National Revenue ("Minister") assessed the Appellant for the taxation years and disallowed the claimed deductions.
[3] The issue in the appeals is whether the German "church tax" is allowable to be included by the Appellant as part of his foreign tax paid for the purpose of calculating the foreign tax deduction under subsection 126(1) of the Act.
[4] At the outset of the hearing the parties filed the following Agreed Statement of Facts:
General
1. The Appellant, Frieder Kempe, is an individual residing in Coquitlam, British Columbia.
2. Throughout the 1993, 1994 and 1995 taxation years Mr. Kempe was resident in Canada, a citizen of Germany, and a member of the Lutheran Church in Germany.
3. Mr. Kempe's wife, Irene Kempe, was a member of the Catholic Church.
4. Mr. and Mrs. Kempe filed joint tax returns in Germany for 1993, 1994 and 1995.
Income and Kirchensteuer
5. In 1993, Mr. Kempe's total German-source income was DM 184,747 ($144,177 using the average exchange rate of 0.7804 for 1993). Mrs. Kempe had total German-source income of DM 26,093 ($20,363). Their combined German-source income was therefore DM 210,840 ($164,540), of which Mr. Kempe earned 87.6%.
6. For 1993 Mr. and Mrs. Kempe were assessed and paid the German Kirchensteuer ("church tax") of DM 5,402 ($4,216).
7. In 1994, Mr. Kempe's total German-source income was DM 183,050 ($154,567 using the average exchange rate of 0.8444 for 1994). Mrs. Kempe had total German-source income of DM 26,945 ($22,752). Their combined German-source income was therefore DM 209,995 ($177,319), of which Mr. Kempe earned 87.2%.
8. For 1994, Mr. and Mrs. Kempe were assessed and paid church tax of DM 5,156 ($4,354).
9. In 1995, Mr. Kempe's total German-source income was DM 133,374 ($127,919 using the average exchange rate of 0.9591 for 1995). Mrs. Kempe had total German-source income of DM 27,026 ($25,921). Their combined German-source income was therefore DM 160,400 ($153,840), of which Mr. Kempe earned 83.2%.
10. For 1995 Mr. and Mrs. Kempe were assessed and paid church tax of DM 2,633 ($2,525).
11. Mr. and Mrs. Kempe paid church tax at a rate of 8% of income tax or wage tax.
12. Mr. Kempe's employer in Germany computed the church tax and remitted it together with wage tax to the tax office on behalf of Mr. Kempe.
13. Mr. Kempe is claiming deductions from his Canadian tax payable for the 1993, 1994 and 1995 taxation years of church tax in the amounts of $3,694 (i.e., 87.6% of total church tax of $4,216), $3,796 (i.e., 87.2% of total church tax of $4,354) and $2,100 (i.e., 83.2% of total church tax of $2,525) respectively, under subsection 126(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1.
14. The Minister of National Revenue assessed Mr. Kempe for the 1993, 1994 and 1995 taxation years and did not allow any deductions in respect of the church tax.
German Law
15. Some, but not all, churches in Germany are entitled to collect church taxes. The Lutheran Church is one of the churches that have been granted the right to impose a church tax on its members.
16. The churches, including the Lutheran Church, use the proceeds of church taxes to fulfil their ecclesiastical duties.
17. Although church taxes existed in the various German States in the last century, they were accorded a new legal basis in the constitution of the first German Republic in 1919 (the so-called Weimar Constitution). Church taxes are levied on the basis of laws enacted by the legislative bodies of the German Federal States (Länder).
18. Church tax is payable by all those who are members of a church that has been granted the right to impose a church tax in the church district (of their faith) in which they live. If a person leaves the church, his or her obligation to pay church tax ends.
19. Church taxes, as a rule, are based on the income tax or wage tax (a withholding tax on wages).
20. Church taxes are not levied on the basis of withholding taxes, except for the above mentioned wage tax. Further, capital yields tax is not used as a basis for assessment.
21. Most church tax laws also allow for assessment on the basis of the net worth tax or the basic amount of real property tax, although these tax bases are now seldom used.
22. If married couples practise different faiths and if they file a joint tax return, the church tax for each faith is either computed on half of the joint income tax or first computed as if both persons were members of the same faith, and then divided between the two churches. The second method of computation can only be applied, however, when both church tax rates are the same. If only the husband or the wife is a member of a church, the church tax is always computed on an individual basis. The amount payable by the person who is a church member will in such a case be based on his or her share of the joint income tax or wage tax.
23. Church tax rates vary between 8% and 9% of income tax or wage tax, depending on where the taxpayer resides in Germany. Some church tax laws stipulate a minimum tax.
24. Net church tax paid in a year, after taking refunds of overpayments in prior years into account, is deducted in determining taxable income for the year.
25. To the extent church taxes are levied on the basis of the income or wage tax, they are administered by the tax authorities of the German Federal States. The same authorities also administer the income and wage tax. Administration includes collection and, if necessary, enforcement.
26. If a taxpayer is subject to wage tax, his employer computes the church tax at the rate valid for the employee's place of residence and is required to remit it together with the wage tax to the tax office.
27. Proceeds collected in respect of church taxes are paid over to the respective churches, after a collection fee is deducted. Church tax revenue does not belong to either the German Federation or the Federal States under the German Constitution.
THE POSITION OF THE PARTIES
[5] The Appellant states that the "church tax" is a "non-business-income tax" within the meaning of subsection 126(7) of the Act. It was paid for the taxation years to the government of a country other than Canada and it was paid as an income or profits tax. Therefore the "church tax" is deductible as a foreign tax deduction under subsection 126(1) of the Act.
[6] The Minister has denied the inclusion of the "church tax" in the calculation of the Appellant's foreign tax deduction under subsection 126(1) on the basis that the "church tax" is paid to a church rather than the German government and the "church tax" is not an "income or profits tax" within the meaning of the Act.
RELEVANT LEGISLATIVE PROVISIONS
[7] The relevant provisions of the Income Tax Act are as follows:
126. (1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part by the taxpayer an amount equal to
(a) such part of any non-business-income tax paid by the taxpayer for the year to the government of a country other than Canada (except, where the taxpayer is a corporation, any such tax or part thereof that may reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer) as the taxpayer may claim.
...
(7) "non-business-income tax" paid by a taxpayer for a taxation year to the government of a country other than Canada means such portion of any income or profits tax paid by the taxpayer for the year to the government of that country, or to the government of a state, province or other political subdivision of that country, ...
SIGNIFICANT FACTS
[8] Church taxes have a legal basis in the Constitution of Germany.[1] Church taxes are levied on the basis of German Federal State law.[2] In this case, under the law, the Lutheran Church had the right to impose a church tax on its members.[3] The Appellant being a member of the Lutheran Church, was assessed and paid church tax at a rate of 8% of income tax or wage tax.[4] The church taxes are administered by the tax authorities of the German Federal States.[5] Administration includes collection and enforcement.[6] The church tax, after a collection fee is deducted, is paid over to the church.[7] Under the German Constitution church tax revenue does not belong to the German Federation or the Federal States.[8] The proceeds are used for the purposes of the Lutheran Church.[9]
ANALYSIS
IS THE CHURCH TAX A TAX?
[9] A tax is a levy, enforceable by law imposed under the authority of a legislature, imposed by a public body and levied for a public purpose.[10]
[10] The enforceable church tax levied against the Appellant was imposed under the authority of the German legislature. German constitutional law sanctions the tax and the German legislature (a public body) grants the Lutheran Church the right to impose a church tax on its members. The constitutional approval and the legislative action together are conclusively presumed to be for public purposes.[11] As to the compulsory nature of this tax, the ability to avoid the tax by giving up citizenship or church membership does not make it any the less a tax. The imposition of the church tax is,[12] I conclude, a compulsory obligation.
[11] I therefore conclude that the church tax is a tax.
IS THE CHURCH TAX AN INCOME TAX?
[12] Church taxes are generally based on the income or wage tax. A church tax that is superimposed on the income or wage tax does not change its character. It is still a tax, a derivative tax on income or wages.
[13] The church tax, calculated as a percentage of the income or wage tax, varies directly with the variations of income or wages. It is a tax, that is a surtax (tax on tax). Its designated destination does not change its characteristic of a tax on income or wage tax.
TO WHOM WAS THE CHURCH TAX PAID?
[14] In the Appellant's case the Appellant paid church tax at the rate of 8% of income or wage tax. The church tax was collected and paid to the government of Germany.[13] Thereafter, the government of Germany paid the net proceeds collected (after a charge for a collection fee) to the church. Church tax revenue does not belong to either the German Federation or the Federal States under the German Constitution.
[15] In order to qualify for a foreign tax deduction subsection 126(1) provides that such part of any non-business-income tax paid by the taxpayer for the year must be paid to the government of a country other than Canada.
[16] From the agreed facts I find that the Appellant paid the assessed church tax to the tax authorities of the German Federal States, the same authorities that administer the income or wage tax and administer collection and enforcement.
[17] I therefore conclude that the Appellant paid church tax to the tax authorities of the appropriate German Federal State, that is, he paid the church tax to a government of a country other than Canada. In terms of the law of Canada, when the legislative language is clear and unambiguous as it is here, that is the end of the inquiry.[14]
CONCLUSION
[18] The church tax is a non-business-income tax paid by the taxpayer to the German government on a compulsory basis pursuant to the laws of Germany. The tax is calculated as a percentage of the income or wage tax and it is collected by the German government in the same manner and with the same authority as ordinary income or wage tax.
DECISION
[19] The appeals from the assessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to foreign tax deductions for the 1993, 1994 and 1995 taxation years for the church taxes he paid as set forth in the Agreed Statement of Facts (paragraph 13).
Signed at Ottawa, Canada, this 24th day of October 2000.
"D. Hamlyn"
J.T.C.C.
[1] Agreed Statement of Facts, paragraph 17.
[2] Ibid.
[3] Agreed Statement of Facts, paragraph 15.
[4] Agreed Statement of Facts, paragraphs 2 6, 8, 10 and 11.
[5] Agreed Statement of Facts, paragraph 25.
[6] Ibid.
[7] Agreed Statement of Facts, paragraph 27.
[8] Ibid.
[9] Agreed Statement of Facts, paragraph 16.
[10] Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, [1931] S.C.R. 357.
[11] Lawson, supra at 363.
[12] See Re Eurig Estate, [1998] 2 S.C.R. 565 (Tab 3, page 703 of Appellant's Book) where a probate levy in Ontario was found to be a tax.
[13] Agreed Statement of Facts, paragraphs 12 and 25.
[14] Shell Canada Limited v. The Queen, 99 DTC 5669 (S.C.C.).