Date: 19991110
Docket: 98-2103-IT-I
BETWEEN:
DAVID M. SHERMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal for the 1995 taxation year.
[2] In his return of income for the 1995 taxation year, the Appellant reported taxable income in the amount of $59,180.00. In computing regular tax payable, the Appellant deducted total non-refundable tax credits in the amount of $3,766.50. In computing minimum tax payable, the Appellant claimed total non-refundable tax credits in the amount of $13,615.16 as basic minimum tax credit.
[3] In assessing the Appellant by Notice of Assessment dated March 26, 1999 the Minister of National Revenue (the "Minister") assessed taxable income, allowed total non-refundable tax credits in the amount of $3,766.00 and assessed minimum tax in the amount of $11,010.91.
PARTIAL STATEMENT OF AGREED FACTS
[4] The following facts were agreed to by the Appellant and the Respondent. The parties reserved their right to lead evidence not inconsistent with the facts agreed herein:
Statutory references herein are to the Income Tax Act (Canada) (the "Act"). References to "AMT" are to the Alternative Minimum Tax. References to the "Minister" are to the Minister of National Revenue.
1. The Appellant filed his return for the 1995 taxation year on June 4, 1996.
...
2. The Appellant reported net income of $254,304.06 and taxable income of $59,180.00 on his return.
3. The Appellant reported total non-refundable credits on page 3 of his return (line 350) of $3,766.50. These non-refundable credits were composed of the basic personal amount, CPP contribution, and $8,289 of charitable donations.
...
4. The Appellant made total charitable donations of $41,515 and paid total medical expenses of $2,868, all evidenced by the necessary receipts, for the 1995 taxation year.
5. The Appellant did not claim the charitable donations in excess of $8,289, or the medical expenses, on page 3 of his return (line 350).
6. The Appellant filed a separate Page 3 of his return, marked "FOR MINIMUM TAX T691 ONLY", showing total credits of $13,615.16, which credits were composed of the basic personal amount, CPP contribution, $41,515 of charitable donations and $2,868 of medical expenses.
...
7. On the Appellant's T691 as filed with his return, he used the figure of $13,615.16, rather than $3,766.50, for "total non-refundable tax credits", and flagged this line with "SEE ATTACHED LETTER (NOTE)".
...
8. The Appellant attached a note to his return requesting that the higher figure on the separate Page 3 should be used for purposes of calculating his AMT.
...
9. In assessing the Appellant for the 1995 taxation year, the Minister computed AMT for the Appellant and allowed a basic minimum tax credit of $3,766.
...
10. The Appellant filed a Notice of Objection on August 9, 1996. The assessment was confirmed by the Minister on July 16, 1998. The Appellant appealed to the Court on August 13, 1998.
11. The Minister reassessed the Appellant's 1995 taxation year, issuing a Notice of Reassessment dated March 26, 1999. The reassessment was on unrelated grounds and does not affect the substance of this appeal.
...
ISSUE TO BE DECIDED
[5] The sole issue is whether the Appellant is entitled to include amounts for charitable donations and medical expenses which were not deducted for regular tax purposes under sections 118.1 and 118.2 as basic minimum tax credit for alternative minimum tax ("AMT") purposes under section 127.531.
THE APPELLANT'S ARGUMENT
[6] Section 127.531 of the Act states:
An individual's basic minimum tax credit for a taxation year is the total of amounts that may be deducted in computing the individual's tax payable for the year under this Part under any of subsections 118(1) and (2), sections 118.1 and 118.2, subsection 118.3(1) and sections 118.5 to 118.7.
(emphasis added)
[7] The word "may" is permissive: Interpretation Act, R.S.C. 1985, c. I-21, section 11.
[8] Therefore, the words "may be deducted" in section 127.531 of the Act mean "may be deducted". They do not mean "has been deducted".
[9] Nothing in section 127.531 requires that the basic minimum tax credit as calculated under that section be the same as the total credits calculated for regular tax purposes.
THE MINISTER'S POSITION
[10] He submits that the Appellant was not entitled to include amounts for charitable donations and medical expenses that were not deducted for regular tax purposes under sections 118.1 and 118.2 of the Act as basic minimum tax credit for minimum tax purposes under section 127.531 of the Act for the 1995 taxation year and, accordingly, the Minister properly assessed minimum tax payable by the Appellant for that year in accordance with section 127.5 of the Act.
[11] The Minister says that the Appellant's interpretation of section 127.531 is contrary to the plain meaning of the words used in sections 118.1, 118.2 and 127.531 of the Act and that the Appellant renders meaningless the Act’s intended comparison between the AMT tax liability and the regular tax liability.
[12] The Minister also says that:
1) The Appellant is seeking to utilize his charitable donations and medical expenses for AMT purposes only and at the same time retain the use of the donations to reduce his tax payable in future years.
2) The words "tax payable for the year under this Part" in section 127.531 mean that a taxpayer can only claim one amount for charitable donations and medical expenses in computing tax payable for the year. If Parliament had intended to authorize the deduction of different tax credits for Divisions E and E.1, it would have said "Division E" rather than "Part" in subsection 127.531.
3) The words in subsection 118.1(3) "there may be deducted such amount as the individual claims" define the term "may be deducted" as the amount actually claimed for regular tax purposes.
4) The addition of section 127.531 added to the Act in 1988 did not change the plain meaning of the original scheme of the AMT enacted in 1985 which clearly stated that only the amounts deducted for charitable donations in determining regular tax could be deducted for charitable donations in determining AMT.
ANALYSIS
[13] In determining his 1995 Division E tax payable (regular tax payable), Mr. Sherman claimed tax credits for $8,289 in charitable donations. He had available for tax credits charitable donations of $41,515 and medical expenses of $2,868. In his 1995 taxation year, the AMT was triggered and Mr. Sherman, in determining his Division E.1 minimum tax payable, claimed tax credits for all of the charitable donations and medical expenses he had available. Mr. Sherman disagrees with the Minister that in determining his minimum tax payable, he must claim only the same tax credits that he claimed in determining his regular tax payable.
[14] Parliament's choice of the words "may be deducted" is clear and precise; "may" is permissible and not mandatory. The words do not lend themselves to an interpretation "may be deducted and were deducted".
[15] The words refer to categories of eligible deductions for tax credits but do not refer to categories of only deductions actually used for tax credits in the computation of regular tax.
[16] As the Appellant ably pointed out, the words "may be deducted in computing the individual's tax payable for the year under this Part" in section 127.531 does not assist the Respondent's argument that only a single amount may be deducted for both regular tax and AMT. The argument ignores, in referring to "tax payable for the year under this Part", that the Act in many instances distinguishes between amounts that "may be deducted" and amounts that "have been deducted". In his written submissions, the Appellant cited 17 examples in the Act were an amount "may be deducted" or is "deductible" in computing tax payable "under this Part" and 27 examples of an amount that "was deductible" or "has been deducted" in computing tax payable "under this Part".
CONCLUSION
[17] In my view, the words in section 127.531 are clear and unambiguous and they should simply be applied. This is consistent with the propositions recently applied by Madam Justice McLachlin in Shell Canada Ltd. v. Canada, S.C.C., file number 26596, October 15, 1999 at paragraphs 40 and 45:
40 Second, it is well established in this Court's tax jurisprudence that a searching inquiry for either the "economic realities" of a particular transaction or the general object and spirit of the provision at issue can never supplant a court's duty to apply an unambiguous provision of the Act to a taxpayer's transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied: Continental Bank, supra, at para. 51, per Bastarache J.; Tennant, supra, at para. 16, per Iacobucci J.; Canada v. Antosko, [1994] 2 S.C.R. 312, at pp. 326-27 and 330, per Iacobucci J.; Friesen v. Canada, [1995] 3 S.C.R. 103, at para. 11, per Major J.; Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at para. 15, per Cory J.
...
45 However, this Court has made it clear in more recent decisions that, absent a specific provision to the contrary, it is not the court's role to prevent taxpayers from relying on the sophisticated structure of their transactions, arranged in such a way that the particular provisions of the Act are met, on the basis that it would be inequitable to those taxpayers who have not chosen to structure their transactions that way. This issue was specifically addressed by this Court in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at para. 88, per Iacobucci J. See also Newman v. M.N.R., [1998] 1 S.C.R. 770, at para. 63, per Iacobucci J. The court's role is to interpret and apply the Act as it was adopted by Parliament. Obiter statements in earlier cases that might be said to support a broader and less certain interpretive principle have therefore been overtaken by our developing tax jurisprudence. Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done, and certainly not based on what a less sophisticated taxpayer might have done.
(emphasis added)
[18] The words "may be deducted" in section 127.531 contemplate that a taxpayer may have expenses available for determining minimum tax credits that he did not use, for whatever reason, in determining regular tax credits. If Parliament intended that the tax credits should be the same in determining regular tax payable and minimum tax payable, the words at issue in section 127.531 should be more specific.
DECISION
[19] The appeal is allowed and the assessment for the 1995 taxation year is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to include charitable donations and medical expenses, which were not deducted for regular tax purposes under sections 118.1 and 118.2, as basic minimum tax credit for determining minimum tax purposes under section 127.531.
Signed at Ottawa, Canada, this 10th day of November 1999.
"D. Hamlyn"
J.T.C.C.