Tax Court of Canada Judgments

Date: 19990706

Docket: 97-1928-IT-G

BETWEEN:

JEANNETTE LUSSIER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Archambault, J.T.C.C.

[1] These are appeals by Jeannette Lussier against notices of assessment issued by the Minister of National Revenue (Minister) for the 1992 and 1993 taxation years. The Minister added $86,786 to Ms. Lussier’s 1992 income and $60,015 to her 1993 income; those amounts represented income she received as a usufructuary of property from the estate of Simon Lussier (estate).

[2] Although Ms. Lussier herself included the amounts in her tax return for each of those taxation years, she now submits that they should be excluded because of designations made by the estate under subsection 104(13.1) of the Income Tax Act (Act) in a letter dated November 15, 1994. The purpose of the letter was to amend the tax returns previously filed by the estate. Under subsection 104(13.1) of the Act, an amount designated by a trust in respect of a beneficiary under the trust is deemed not to have been paid or payable to the beneficiary; it therefore does not have to be included in the beneficiary’s income but is instead income of the trust.

[3] Because the designations were not made by the estate in the tax returns initially filed, the respondent argues that they were not made in accordance with subsection 104(13.1) of the Act.

Facts

[4] Most of the relevant facts are not in dispute. Ms. Lussier, who is now 85 years old, became a usufructuary of some property owned by her husband when he died on January 25, 1988. The bare owners of the property are her children. In her 1992 tax return, Ms. Lussier reported income from various sources, which totalled $143,244. That amount included the $86,786.47 from the estate. The Minister assessed the tax to be paid by Ms. Lussier at the amount calculated in her 1992 tax return.

[5] In her 1993 tax return, Ms. Lussier reported income of $105,891, including $60,014.59 from the estate. The Minister assessed the tax to be paid by Ms. Lussier at the amount calculated in her 1993 tax return.

[6] In the tax returns it filed for 1992 and 1993, the estate did not make the designation provided for in subsection 104(13.1) of the Act. Since all of the estate’s income was paid or payable to Ms. Lussier, the Minister notified the estate that it had no tax to pay for those two taxation years.

[7] To prepare and file their tax returns for 1994 and subsequent years, the estate and Ms. Lussier retained the services of a new chartered accountant, Dominic Vendetti of Samson Belair Deloitte & Touche. Mr. Vendetti recommended that the estate make the designation provided for in subsection 104(13.1) to take advantage of the facts that the Act deems a usufruct to be a trust, that a trust is treated as a separate taxpayer and that a testamentary trust is taxed on the basis of the same graduated income tax rates as those applicable to individuals.[1]

[8] In his testimony, Mr. Vendetti confirmed that designations under subsection 104(13.1) of the Act were made in the estate’s tax returns for the 1994 to 1997 taxation years and were not contested by the Minister.

[9] Mr. Vendetti also confirmed that he had contacted the former accountants of Ms. Lussier and the estate to obtain information relevant to the filing of the 1994 tax returns. In his discussions with them, he got the impression that they had not completely understood the scope of subsection 104(13.1) of the Act. In his view, there was no tax benefit to be derived from not making the designation provided for in subsection 104(13.1) of the Act for 1992 and 1993.

[10] Mr. Vendetti recommended that the estate amend its 1992 and 1993 tax returns to make a designation under subsection 104(13.1) of the Act. At his clients’ request, he sent the Minister the letter of November 15, 1994, to inform him that the estate and Ms. Lussier wanted to amend their tax returns for the 1992 and 1993 taxation years. The letter told the Minister that the estate was designating $86,786 for 1992 and $52,891 for 1993 in respect of Ms. Lussier under subsection 104(13.1) of the Act.

[11] In a letter dated January 12, 1995, a representative of the Minister informed Ms. Lussier that the Minister was refusing to make reassessments to give effect to the amendments made to her tax returns. The explanation given to Ms. Lussier at the time was as follows:

[TRANSLATION]

The election you wish to make under subsection 104(13.1) is not covered by the Fairness Package legislation, which, in conjunction with section 600 of the Income Tax Regulations, makes it possible to apply to make a late election or to amend or revoke an election.

[12] On February 14, 1995, Mr. Vendetti filed notices of objection by the estate and Ms. Lussier for the 1992 and 1993 taxation years with the Minister. The Minister extended the time for filing the notices of objection, which were therefore filed in accordance with the Act.

[13] On March 21, 1997, the Minister confirmed the assessments in respect of which Ms. Lussier had filed notices of objection. The same day, he informed the estate that the nil assessments could not be appealed and that varying them was not justified.

[14] On June 19, 1997, Ms. Lussier alone filed notices of appeal against the assessments for the 1992 and 1993 taxation years in the Registry of this Court.

Analysis

[15] The outcome of Ms. Lussier’s appeals depends on the interpretation to be given to subsection 104(13.1) of the Act. The wording of that subsection in both official languages is as follows:

(13.1) Amounts deemed not paid. Where a trust, in its return of income under this Part for a taxation year throughout which it was resident in Canada and not exempt from tax under Part I by reason of subsection 149(1), designates an amount in respect of a beneficiary under the trust, not exceeding the amount determined by the formula A B ´ (C + D + E) . . . the amount so designated shall be deemed, for the purposes of subsections (13) and 105(2), not to have been paid or to have become payable in the year to or for the benefit of the beneficiary or out of income of the trust.

(13.1) Exception. Le montant qu’une fiducie attribue à un bénéficiaire dans sa déclaration de revenu en vertu de la présente partie pour une année d’imposition tout au long de laquelle elle a résidé au Canada et n’était pas, par application du paragraphe 149(1), exonérée de l’impôt prévu à la partie I, et qui ne dépasse pas le montant calculé selon la formule suivante est réputé, pour l’application des paragraphes (13) et 105(2), ne pas être payé ni être devenu payable au cours de l’année au bénéficiaire ou à son profit ou ne pas provenir du revenu de la fiducie : A B ´ (C + D + E) . . . . [Emphasis added.]

[16] It is helpful to recall the basic rule of statutory interpretation set out in Driedger, Construction of Statutes (2nd edition, 1983), at page 87:

. . . the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

[17] This rule of interpretation has been applied in many decisions, including Friesen v. Canada, [1995] 3 S.C.R. 103, Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, and Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3.

[18] As noted above, the respondent argued that the designations made in the letter of November 15, 1994, were not made in accordance with subsection 104(13.1) of the Act. It is clear from the letter of January 12, 1995, that the Minister refused to give effect to the designations made in the letter of November 15, 1994, because they were made late.

[19] It can be seen from the statement of the facts assumed by the Minister in issuing the notices of assessment, as set out in the Reply to the Notice of Appeal, that the Minister confined himself to the returns filed initially and totally disregarded the amendments made to the initial returns on November 15, 1994. In her Reply to the Notice of Appeal, the respondent provides no explanation of why the Minister did so.

[20] It must therefore be determined whether the Minister was justified in not considering the amendments made by the estate to its 1992 and 1993 tax returns. To make this determination, the first question that must be answered is whether the estate was entitled to amend its 1992 and 1993 returns. It must then be determined whether the letter of November 15, 1994, constitutes an amendment to its tax returns.

[21] To my knowledge, there is no general provision in the Act authorizing taxpayers to amend their tax returns or prohibiting them from doing so. Counsel for the respondent referred to subsection 152(6) of the Act, which provides as follows:

(6) Reassessment. Where a taxpayer has filed for a particular taxation year the return of income required by section 150 and an amount is subsequently claimed by him or on his behalf for the year as (a) a deduction under paragraph 3(e), by virtue of his death in a subsequent taxation year and the consequent application of section 71 in respect of an allowable capital loss for the year, (b) a deduction under section 41 in respect of his listed-personal-property loss for a subsequent taxation year, (b.1) a deduction under paragraph 60(i) in respect of a premium (within the meaning assigned by subsection 146(1)) paid in a subsequent taxation year under a registered retirement savings plan where the premium is deductible by reason of subsection 146(6.1), (c) a deduction under section 118.1 in respect of a gift made in a subsequent taxation year or under section 111 in respect of a loss for a subsequent taxation year, (c.1) a deduction under subsection 126(2) in respect of an unused foreign tax credit (within the meaning assigned by paragraph 126(7)(e)) for a subsequent taxation year, (d) a deduction under subsection 127(5) in respect of property acquired or an expenditure made in a subsequent taxation year, (e) a deduction under section 125.2 in respect of an unused Part VI tax credit (within the meaning assigned by subsection 125.2(3)) for a subsequent taxation year, (f) a deduction under section 125.3 in respect of an unused Part I.3 tax credit (within the meaning assigned by subsection 125.3(3)) for a subsequent taxation year, or . . . (h) a deduction by virtue of an election for a subsequent taxation year under paragraph 164(6)(c) or (d) by his legal representative, by filing with the Minister, on or before the day on or before which the taxpayer is, or would be if a tax under this Part were payable by him for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer’s tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed.

(6) Nouvelle cotisation. Lorsqu’un contribuable a produit la déclaration de revenu prescrite par l’article 150 pour une année d’imposition et que, par la suite, une somme est réclamée pour l’année par lui ou pour son compte à titre de a) déduction, en application de l’alinéa (3)e), résultant de son décès au cours d’une année d’imposition subsé-quente ayant entraîné l’appli-cation de l’article 71 relative-ment à une perte en capital déductible pour l’année, b) déduction d’un montant en vertu de l’article 41 relativement à sa perte relative à des biens personnels désignés pour une année d’imposition subséquente, b.1) déduction, en application de l’alinéa 60i), relativement à une prime, au sens du paragraphe 146(1), versée au cours d’une année d’imposition subséquente dans le cadre d’un régime enregistré d’épargne-retraite et déductible en application du paragraphe 146(6.1), c) déduction, en application de l’article 118.1, relative-ment à un don fait au cours d’une année d’imposition subséquente ou, en applica-tion de l’article 111, relative-ment à une perte subie pour une année d’imposition subséquente, c.1) déduction, en application du paragraphe 126(2), relativement à la fraction inutilisée du crédit pour impôt étranger (au sens donné par l’alinéa 126(7)e)) pour une année d’imposition subséquente, d) déduction, en application du paragraphe 127(5), relativement à des biens acquis ou des dépenses faites dans une année d’imposition subséquente, e) déduction, en application de l’article 125.2, au titre d’un crédit d’impôt de la partie VI inutilisé – au sens du paragraphe 125.2(3) – pour une année d’imposition ultérieure, f) déduction, en application de l’article 125.3, au titre d’un crédit d’impôt de la partie I.3 inutilisé, au sens du paragraphe 125.3(3), pour une année d’imposition ultérieure, ou . . . h) déduction à cause d’un choix pour une année d’imposition subséquente effectué par son représentant légal en vertu de l’alinéa 164(6)c) ou d), en produisant auprès du Ministre, au plus tard le jour où le contribuable est tenu, ou le serait s’il était tenu de payer de l’impôt en vertu de la présente Partie pour cette année d’imposition subséquente, de produire en vertu de l’article 150 une déclaration de revenu pour cette année d’imposition subséquente, une formule prescrite modifiant la déclaration, le Ministre doit fixer de nouveau l’impôt du contribuable pour toute année d’imposition pertinente (autre qu’une année d’imposition antérieure à l’année donnée) afin de tenir compte de la déduction réclamée.

[Emphasis added.]

[22] In my opinion, the purpose of this subsection is more to oblige the Minister to make a reassessment than to authorize the amendment of a previous return. It cannot be concluded from this provision that a taxpayer is not entitled to amend a tax return already filed except in the cases explicitly mentioned. Chief Judge Couture of this Court stated the following on this point in Lee v. M.N.R., [1990] 2 C.T.C. 2262, at page 2268:

. . . Furthermore, I am not aware of any authority for the proposition that once a taxpayer has signed his tax return that [sic] he may not change his mind subsequently following the discovery of a mistake notwithstanding the certificate that he signed as part of his return. Certainly, when an honest mistake has been discovered by a taxpayer he must be permitted to correct it and the procedure to do so is provided in the Income Tax Act within certain prescribed requirements. The appeal process serves this purpose. . . .

[23] It is important to add that the position taken by Chief Judge Couture is consistent with the administrative practice adopted by the Minister himself. For example, in the guide he gives all Canadians to help them complete their yearly tax returns, the Minister tells them that they may make changes to their returns and explains how to go about doing so. The 1993 guide provides the following information:

Q. I have already sent in my return and now I would like to change something on it. What should I do?

A. If you need to make a change to your return, send a letter to your taxation centre. Remember to list all the details, including your social insurance number, the telephone number where we can reach you during the day, and the taxation years you want us to adjust. Do not file another return for the taxation year you want adjusted. See the telephone listings included with this package for your taxation centre’s address.

You can ask for a refund for taxation years as far back as 1985. It usually takes eight weeks before we mail you a Notice of Reassessment.

[24] It should be noted that the Minister even encourages taxpayers who have failed to report all of their income to file amended tax returns. In circular IC 85-1R2 of October 1992, which concerns voluntary disclosures, the Minister tells taxpayers that they can avoid the imposition of penalties if they come forward and disclose unreported amounts.

[25] It must therefore be concluded that, although there is no general provision in the Act authorizing Canadian taxpayers to amend tax returns already filed, there is nothing to prevent them from doing so. On the other hand, it is in the interest of tax administration to allow such amendments. It should be noted that tax administration in Canada is based on the principle of self-assessment and that it is perfectly reasonable and fair for taxpayers to be allowed to correct mistakes that have crept into their tax returns.

[26] In my opinion, the letter of November 15, 1994, was an amendment to the estate’s tax return and its effect was to amend the initial return. The letter was fully consistent with the instructions given by the Minister in the guide referred to above. Accordingly, it must be concluded that, in its (amended) tax returns, the estate designated certain amounts in respect of Ms. Lussier under subsection 104(13.1) of the Act.

[27] Having concluded that the estate amended its 1992 and 1993 tax returns and designated an amount in respect of Ms. Lussier in those returns, have all the other conditions set out in subsection 104(13.1) been met? The respondent did not argue that any of them were not met, aside from one relating to an alleged time limit for filing the designation. She argued based on the time limit in question that the designation was made late.

[28] The first question to be decided is whether subsection 104(13.1) makes it a condition that a designation be made within a certain time. In his argument, counsel for the respondent admitted that subsection 104(13.1) does not explicitly set out a time limit for making a designation. However, he submitted that there is an implicit time limit, namely the time limit for filing the trust’s tax return, as held in Financial Collection Agencies (Quebec Ltd.) v. M.N.R. (88-671(IT)).

[29] To determine whether this argument is correct, I consider it helpful to compare the wording of subsection 104(13.1) of the Act with that of the following subsection, 104(14), which deals with elections made by a trust and a preferred beneficiary. The latter provision allows a trust whose income is neither paid nor payable to a beneficiary to elect jointly with the beneficiary to have part of the trust’s accumulating income included in the beneficiary’s income and excluded from the trust’s income. Subsection 104(14) reads as follows:

(14) Election by trust and preferred beneficiary. Where a trust and a preferred beneficiary thereunder jointly so elect in respect of a taxation year in prescribed manner and within prescribed time, such part of the accumulating income of the trust for the year as is designated in the election, not exceeding the preferred beneficiary’s share therein, shall be included in computing the income of the preferred beneficiary for the year, and shall not be included in computing the income of any beneficiary of the trust for a subsequent year in which it was paid.

(14) Choix fait par une fiducie et un bénéficiaire privilégié. Lorsqu’une fiducie et une personne qui en est un bénéficiaire privilégié en font ensemble le choix, pour une année d’imposition, dans la forme et les délais prescrits, la partie du revenu accumulé de la fiducie pour l’année, qui est indiquée dans le choix et qui ne dépasse pas la part du bénéficiaire privilégié dans cette fiducie, doit être incluse dans le calcul du revenu du bénéficiaire privilégié pour l’année et ne doit pas être incluse dans le calcul du revenu de quelque bénéficiaire de la fiducie pour une année postérieure dans laquelle elle a été versée. [Emphasis added.]

[30] If the effects of subsections 104(13.1) and (14) of the Act are compared, it can be seen that, under subsection 104(14), the trust’s accumulating income is deemed to be paid to the beneficiary and taxable in the beneficiary’s hands, while under subsection 104(13.1) income paid or payable to a beneficiary is deemed not to be paid or payable to the beneficiary and is therefore taxed in the trust. It can also be seen that the provisions are intended to determine whether the designated amount (subsection 104(13.1) of the Act) or elected amount (subsection 104(14) of the Act) must be included in the trust’s income or the beneficiary’s income.

[31] In the case of the election provided for in subsection 104(14), it is expressly stated that an election form must be filed with the Minister within a prescribed time. Under subsection 2800(2) of the Income Tax Regulations, the document must be filed within 90 days from the end of the trust’s taxation year, which is the same time that the trust must file its tax return (paragraph 150(1)(c) of the Act).

[32] In my view, if Parliament's intention had been to require that designations be filed within a prescribed time, it would have said so explicitly as it did for the situation covered by subsection 104(14) of the Act. Parliament has not even provided for a prescribed form in subsection 104(13.1) of the Act. I also consider it quite unreasonable to impose conditions on a taxpayer that are not clearly stated by Parliament.

[33] The statement by Parliament in subsection 104(13.1) of the Act that the trust must make the designation in its tax return has been made for information only. It is as if Parliament had said that the designation must be made “in writing”. It is easy to understand that the Minister must be told of all the relevant facts so that he can determine the amount of tax when making an assessment. If a trust has designated an amount under subsection 104(13.1) of the Act, it is important for the Minister to know this. It is therefore not surprising that Parliament has provided that the trust must express its intention of availing itself of subsection 104(13.1) in this manner: the requirement is quite logical and practical.

[34] Since subsection 104(13.1) says nothing about the existence of a time limit, it is not essential that the designation be made within a specific time. All that matters is that it be made in the tax return, which is the case here given the fact that the return was amended.

[35] If there is no time limit for making a designation under subsection 104(13.1) of the Act, it follows that there is no need to ask whether a taxpayer is entitled to make a late-filed designation.

[36] In case I have erred in law in interpreting subsection 104(13.1) as not providing for a time limit for making a designation, it is important to determine whether the designation could be made late. For this purpose, it is helpful to consider the reasons of Robertson J.A. in Canada v. Nassau Walnut Investments Inc., [1997] 2 F.C. 279. In that case, the issue was whether a taxpayer was entitled to make a “late-filed designation” under paragraph 55(5)(f) of the Act, the English version of which is worded similarly to subsection 104(13.1) of the Act. The verb “designate” is used in both provisions, whereas in the French version “attribuer” is used in subsection 104(13.1) and “désigner” in paragraph 55(5)(f). The latter provision reads as follows:

(f) where a corporation has received a dividend any portion of which is a taxable dividend, (i) the corporation may designate in its return of income under this Part for the taxation year during which the dividend was received any portion of the taxable dividend to be a separate taxable dividend, and (ii) the amount, if any, by which the portion of the dividend that is a taxable dividend exceeds the portion designated under subparagraph (i) shall be deemed to be a separate taxable dividend.

f) lorsqu’une corporation a reçu un dividende dont une partie est un dividende imposable, (i) la corporation peut désigner dans sa déclaration de revenu, en vertu de la présente Partie, pour l’année d’imposition au cours de laquelle la dividende a été reçu, toute fraction du dividende imposable comme étant un dividende imposable distinct, et (ii) le montant éventuel de la fraction du dividende qui est imposable qui est en sus de la partie désignée en vertu du sous-alinéa (i) est réputé être un dividende imposable distinct. [Emphasis added.]

[37] Contrary to the approach I have taken here, it was assumed in Nassau, supra, that there was a time limit for filing the designation. It does not seem to have been argued in that case that paragraph 55(5)(f) of the Act did not set out a specific time limit for making the designation. Robertson J.A. dealt with the issue in the case as follows at page 295, paragraph 22:

The question before us was cast in terms of whether Nassau was entitled to make a late-filed designation pursuant to paragraph 55(5)(f) of the Act. . . . [T]he Minister’s argument has two prongs. First, the Minister notes that there is no provision in the Act which provides for the late filing of a designation. This is to be contrasted with the legislatively permissible late filing of “elections” made under other provisions of the Act.

[38] Rejecting the argument made by counsel for the Minister that the designation could not be filed late because there was no express provision authorizing this, Robertson J.A. stated the following at paragraph 33:

Although relief is provided selectively by the Act, it does not necessarily follow that Parliament intended to preclude relief in those situations not specifically addressed by the Act. Rather, the fact that the Act authorizes the late filing of a designation or an election in particular circumstances gives rise only to a rebuttable inference that Parliament did not intend that taxpayers have such a right in other instances. That the inference is a rebuttable one rests on three understandings. First, to hold otherwise would be to embrace literalism as a method of statutory interpretation and treat the Act as a complete code. Second, I know of no case which holds that because an exception is provided by statute for one case and not another, that fact alone is determinative such that no other exceptions may exist. My position in this regard was affirmed most recently in On-Guard Self-Storage, supra. Third, the courts have long adopted a contextual or purposive approach as the proper means to construe legislation. [Emphasis added.]

[39] In my opinion, the situation in the case at bar is similar to that in Nassau, supra. This case does not involve retroactive tax planning. No attempt is being made to retroactively improve Ms. Lussier’s tax treatment for 1992 and 1993 after learning of facts that arose after the end of each of those taxation years and prompted a change in tax planning. As in Nassau, supra, the estate failed to make a designation because of an honest mistake by the accountants who prepared and filed the returns. If those accountants had properly interpreted the scope of subsection 104(13.1) of the Act, they would have made the designation made by Mr. Vendetti in his letter of November 15, 1994. That designation minimized Ms. Lussier’s taxes and provided her with an after-tax income higher than that established by the initial assessments. All the relevant facts for determining the advisability of such a designation were known when the trust’s tax returns were initially filed. There were no tax disadvantages involved in not making the designation in the returns. This case therefore involves the correction of a mistake that occurred in preparing the tax returns. It does not involve retroactive planning.[2]

[40] To quote Robertson J.A. in Nassau, supra, at pages 301-02, the taxpayer in the case at bar is not one who “did not previously weigh the risks relating to making the designation or abstaining therefrom, nor does he now seek to avoid bearing the downside of a decision he made consciously after due consideration”.

[41] Are there any reasons in the instant case for not allowing the late filing of the designation provided for in subsection 104(13.1) of the Act? First of all, what reason could Parliament have had for wanting to prevent this? Contrary to what occurred in Nassau, supra, no reason was given to me during the parties’ arguments, nor can I myself think of any.

[42] However, there is at least one serious reason to think that Parliament did not want to prevent a “late-filed designation”. One of Parliament’s objectives when it enacted subsection 104(13.1) of the Act in 1988 was to authorize loss carry-overs.[3] Prior to the amendment, a trust all of whose income was paid or payable to a beneficiary could not, in computing its taxable income, take advantage of the deduction for “non-capital losses” or “net capital losses” provided for in section 111 of the Act. Section 111 provides that such losses may be carried back to the three taxation years immediately preceding the year in which they were incurred.

[43] A concrete example will illustrate the scope of this rule. If the estate had incurred non-capital losses in 1995 and had wanted to carry them back to 1992 and 1993, it would have been beneficial for it to deduct the 1995 loss in computing its 1992 taxable income. Prior to the enactment of subsection 104(13.1) of the Act, the deduction of the loss would have been pointless, since the estate did not generally have any income. Since all of the estate’s income was paid to Ms. Lussier, it had no income to report. Under subsection 104(6) of the Act, any income paid or payable to the beneficiary is deductible from the estate’s income and must be included in the beneficiary’s income.

[44] With the enactment of subsection 104(13.1) of the Act, it became possible to designate an amount equal to the amount of the loss carried back, with the result that, in our hypothetical example, the estate would have income from which the loss could be deducted. The estate could thus reduce its taxable income to zero and the beneficiary would be deemed not to have received the designated amount, thus benefiting indirectly from the carryback of the 1995 loss.

[45] It is easy to see that, in 1992, the estate could not have foreseen that it would incur a loss in 1995. If the question of income splitting is disregarded, the estate would have had no reason to make a designation. Thus, if we adopt the respondent’s interpretation that the estate could not, in filing its 1995 return and the amended return for 1992, make a late-filed designation for 1992 so as to carry its loss back to 1992, the estate would not be able to take advantage of subsection 104(13.1) of the Act, which would be contrary to Parliament’s objective as explicitly set out in the explanatory notes.[4] This result would be absurd and contrary to the purpose for which subsection 104(13.1) was enacted in 1988. It is therefore not only more logical to conclude that a designation may be filed late but, in my view, it is essential to do so to achieve the purpose of the Act.

[46] It is important to note that the Minister’s administrative practice is to respond favourably to taxpayers’ requests to make late designations in order to deduct losses carried back under section 111 of the Act. However, he denies such requests when the taxpayer’s purpose is to achieve income splitting.

[47] In my opinion, there is no reason to draw a distinction between a late-filed designation made to take advantage of a loss carryback under section 111 and a late-filed designation that makes it possible to minimize the beneficiary’s tax by means of income splitting. It should be noted that, in Neuman v. M.N.R., [1998] 1 S.C.R. 770, at paragraph 35, the Supreme Court of Canada recognized the legitimacy of income splitting:

. . . In fact, “there is no general scheme to prevent income splitting” in the ITA (V. Krishna and J.A. VanDuzer, “Corporate Share Capital Structures and Income Splitting: McClurg v. Canada” (1992-93), 21 Can. Bus. L.J. 335, at p. 367).

[48] As well, in Hall v. Quebec (Deputy Minister of Revenue), [1998] 1 S.C.R. 220, 1997 CanRepQue 1306, at paragraph 49, Gonthier J. acknowledged that income splitting has always been possible by means of a trust:

As for the fear expressed by the Court of Appeal that the appellant’s position would open the door to all kinds of abuse, such as income splitting, I agree with the appellant that income splitting is integral to the scheme of taxation of estates and is not in any way reprehensible per se. Furthermore, income splitting has always been possible by means of a trust.

[49] It is even possible to conclude that income splitting was anticipated when the 1988 amendment was passed. I will again quote a passage from the explanatory notes I reproduced in footnote 3:

This change will enable trusts to utilize in a particular year losses from prior years without affecting the ability of the trust to distribute its income currently. Also, testamentary trusts will also be able to choose to be taxed at the trust level rather than at the beneficiary level by using subsection 104(13.1).

Why would a trust “also” decide that the income payable to its beneficiary will be taxed at the trust level if not to engage in income splitting?

[50] In conclusion, if subsection 104(13.1) must be read as providing for an implicit time limit, I would conclude, as Robertson J.A. did in Nassau, supra, that “the inference that Parliament did not intend to accord relief in these circumstances has been rebutted” (p. 305).

[51] Before closing, I would like to come back to the question of a taxpayer’s right to amend a tax return and the Minister’s obligation to reassess the taxpayer’s tax. In my view, it is important to properly distinguish between the taxpayer’s right and the Minister’s obligation. The fact that a taxpayer is entitled to amend a return does not necessarily mean that the Minister must automatically give effect to the amendment. The Minister is free to choose whether or not to do so unless he is obliged to do so by the Act, as he is, for example, in the circumstances set out in subsection 152(6) of the Act. Another example is where a decision is rendered by this Court on a validly filed appeal against an assessment. Under subparagraph 171(1)(b)(iii) of the Act, this Court may dispose of an appeal by referring the assessment back to the Minister for reconsideration and reassessment.

[52] In the circumstances of this appeal, not only were the taxpayer and the estate entitled to amend their returns, but the Minister should also have given effect to the amendments. I consider what Robertson J.A. said in Nassau, supra, to be quite apt here: “It cannot be doubted that the refusal of the Minister to accede to Nassau’s request seems antithetical to elemental concepts of fairness” (paragraph 29, p. 297).

[53] Accordingly, the Minister should have reassessed the estate in order to determine the tax to be paid on the amount designated under subsection 104(13.1) of the Act. For inappropriate reasons, he refused to do so. He will have to live with the consequences of his decision if it is too late to make a reassessment. Since the amount of tax assessed by the Minister was nil, the estate could not object to the assessment and appeal to this Court.

[54] As for Ms. Lussier, she also asked the Minister to vary his assessment to reduce the amount of her taxes because of the designation made by the estate. The Minister refused to do so. Fortunately for Ms. Lussier, she filed notices of objection in accordance with the Act’s requirements and then filed notices of appeal with this Court.

[55] To be perfectly clear about this, it is obvious that Ms. Lussier could not have obliged the Minister to make a reassessment if she had not filed her notices of objection within the prescribed time. Since she filed notices of objection and then filed notices of appeal with this Court, she preserved her right to contest the assessments for 1992 and 1993. Before this Court, she was entitled to require that the amount of tax for which she was liable for those years be determined in accordance with the Act’s provisions, inter alia subsection 104(13.1). Since all the conditions set out in that subsection have been met, she is entitled to benefit therefrom.

[56] I conclude that the amounts designated by the estate in respect of Ms. Lussier, namely $86,786 for 1992 and $52,891 for 1993, are deemed not to be income for her.

[57] For these reasons, the appeals are allowed with costs and the notices of assessment are referred back to the Minister for reconsideration and reassessment on the basis that $86,786 in 1992 and $52,891 in 1993 must be excluded from Ms. Lussier’s income.

Signed at Sherbrooke, Canada, this 9th day of July 1999.

“Pierre Archambault”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 23rd day of December 1999.

Stephen Balogh, Revisor

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