Date: 20010326
Docket: 2000-4044-IT-I; 2000-4045-IT-I
BETWEEN:
DONNA CHO, JONG WOOK CHO
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
FACTS
[1] Jong Wook Cho and Donna Cho (hereinafter the "Appellants") are appealing the reassessment of the 1998 taxation year. The appeals were heard by way of common evidence.
[2] The Appellants submitted the following:
1. Since 1992, they carried on the 5th Avenue Grocery business (hereinafter the "Business");
The fiscal period of their Business ends on March 31;
They were not involved in any other business; and
They included their December 31, 1995 income, $11,862.50, under subsection 34.1(4) and elected to use the alternative method under subsection 249.1(4).
[3] The Minister pleaded the following:
Each of the Appellants had a 50% interest in the Business;
At all material times, the fiscal period of the Business ended on March 31;
The Appellants did not operate any other business other than the Business;
For the taxation years 1995, 1996, 1997 and 1998, the Appellants completed Part 2 of Form T1139. This meant that they elected to keep the Business’ fiscal period not ending on December 31;
The Appellants are required to include additional business income in their calculation of their Business’ income each year; and
The Appellants are required to deduct the prior year’s additional business inclusion in the calculation of their income in each year.
THE APPELLANTS' POSITION
[4] The Appellants appealed on the basis that the Minister of National Revenue (the "Minister") has misinterpreted and has misapplied sections 34.1, 34.2, 249 and 249.1 of the Income Tax Act (the "Act"). These sections relate to the legislated end of the practice of individuals, partnerships and professional practices having a fiscal period after the end of the calendar year.
ANALYSIS
[6] Applicable for fiscal periods beginning after 1994, section 249.1 replaces and modifies the definition of "fiscal period" formerly set out in subsection 248(1). It provides rules for the fiscal period of a business or a property of a person or partnership. Subsection 249.1(1) imposes restrictions on the timing of fiscal periods for certain individuals, inter vivos trusts, partnerships and professional corporations so that generally, December 31 must be the year-end. However, an off-calendar fiscal year is available for tax purposes with certain restrictions for businesses carried on by an individual, otherwise than as a member of a partnership, or in certain circumstances as a member of a partnership, where an election is filed, pursuant to subsection 249.1(4). The "off-calendar fiscal year" method essentially allows individuals and certain partnerships where each member is an individual to retain an off-calendar fiscal year-end for tax purposes. However, if an election is made to use this method, an estimate of the earnings from the business for the portion of the fiscal period that begins in the year and ends on December 31 must be included in income for the taxation year.
[7] The Minister’s witness, Sonja Mitchell, carefully took the Court through the assessment calculations for deemed income and alternative method revisions.[1] The witness relied on two pleaded documents (Exhibits C and D annexed to the Respondent's Reply) to augment her evidence.
[8] Exhibit "C" as annexed to the Respondent’s Reply to the Notice of Appeal is as follows:
DONNA CHO AND JONG WOOK CHO
Calculation of maximum December 31, 1995 deemed income.
The maximum December 31, 1995 income for 1996 and subsequent years is the lesser of (a) and (b).
34.2(7) . . . where paragraph (a)
Partnership Individual
34.1(7)(a) Income for the period
ending 31st March 1995 $31,489.00 $15,744.50
34.1(4) Deduct the maximum amount
in respect of reserve of any,
allowance or other amount:
Maximum CCA allowable $ 4,947.00
CCA deducted in computing
income as filed 4,500.00
Difference 447.00 447.00 223.50
31,042.00 15,521.00
Prorated 275/365 23,387.81 11,693.90
Exceeds paragraph (b)
34.1(7)(b) Income for the particular period
ending 31st March 1996 28,199.00 14,099.50
34.2(2) Deduct the maximum amount in
respect of any reserve, allowance
or other amount:
Maximum CCA allowable 16,254.00
CCA deducted in computing
Income as filed 0.00
Difference 16,254.00 16,254.00 8,127.00
11,945.00 5,972.5 (sic)
Prorated 275/365 8,999.66 4,499.83
For the purposes of subsection 34.2(4) the December 31, 1995
income for the individual is the amount determined under paragraph (b).
The amount determined under paragraph (b) is $4,499.83.
[9] Exhibit "D" as annexed to the Respondent’s Reply to the Notice of Appeal is as follows:
DONNA CHO AND JONG WOOK CHO
Alternative Method Revised
Net income for the fiscal period ending in 1998 $31,019.00 M
Additional business income 23,370.00 N
Reserve deducted last year 7,945.00 O
Sub total (M + N + O) 62,334.00 P
Last year’s additional business income 18,789.00 Q
Sub total (P – Q) 43,545.00 R
Calculation of allowable reserve
December 31st, 1995 income for the business 4,499.83 S
* Amount at S x 65% 2,924.89 T
* Reserve deducted last year 7,945.00 U
* Income for the year 34,923.78 V
Reserve – amount not exceeding the least of T, U and V 2,924.89
Net income for the year – revised $40,620.11
[10] The Appellants’ agent, Mr. Sunwoo, cross-examined the Respondent’s assessment witness at length. The witness explained repeatedly and successfully the additional business income, the deemed income and the maximum deemed income calculations with references to the aforesaid Exhibits C and D and demonstrated her specific calculations in filed Exhibits R-5, R-6 and R-7. Throughout, the witness supported her calculations and interpretations with specific references to sections 34.1, 34.2 and 249.1 of the Act.
[11] One case that deals specifically with the question of the purpose, interpretation and application of this legislation is Cho v. R.[2] Each of the taxpayers, in that case,[3] operated a separate business in a partnership, and each business had a fiscal period ending on March 31. Each taxpayer elected, under the alternative method, not to have section 249.1 apply for their 1997 taxation years by filing the prescribed form. Therefore, section 34.1 applied to the taxpayers’ situations, although they had argued that this was not so, since their businesses had been started before the end of 1994. Hence, each taxpayer added no additional business income under subsection 34.1(1) for the 1996 and 1997 taxation years and neither one deducted the previous year’s additional business income under subsection 34.1(3) of the Act. In assessing each taxpayer for 1997, the Minister applied the provisions of subsections 34.1(1) and (3), adding the additional business income for 1996 and 1997, and deducting the previous year’s additional business income. The taxpayers appealed to the Tax Court of Canada.
[12] Judge Bowman dismissed the appeals. He stated that the taxpayers’ approach simply ignored the plain meaning of the words in section 34.1. In addition, there was no limitation in section 34.1, which would make it inapplicable to the taxpayers’ situation, despite their argument to the contrary.
[13] He found that the Act requires the inclusion of additional business income in each year and the deduction of the prior year’s inclusion.
[14] In Pak v. R.[4] Judge Beaubier of this Court addressed the issue of reserves under section 34.2 of the Act and in particular the deduction of amounts with respect to capital. Mr. Sunwoo, the agent for the Appellants in this case, was also the agent for the Appellant, Pak. In that case Judge Beaubier stated:
3. Mr. Sunwoo filed claims for the Appellants which were based on the optional provision respecting capital cost allowance ("CCA") set out in section 20 of the Income Tax Act (the "Act").
However, in the amendments to the Act contained in section 34.2 which require that CCA be used as stated therein, that option is taken away and the usage of CCA set out is mandatory. In particular, subsection 34.2(2)(c) reads:
(2) Computation of December 31, 1995 income
For the purpose of the definition “December 31, 1995 income” in subsection (1), a taxpayer’s income or loss from a business for a qualifying fiscal period shall be computed as if
...
(c) the maximum amount deductible in respect of any reserve, allowance or other amount were deducted; and
In essence, this interpretation is merely the application of the rule of statutory interpretation that the expression of the particular overrides the expression of the general.
The same principle was applied by Bowman, A.C.J. in Cho v. R., 2000 DTC 2942 (T.C.C. [Informal Procedure]).
7. For these reasons these appeals are dismissed.
[15] In essence, the sections herein, prescribe a complete specific legislative transition code to bring to an end the practice in a case like the Appellants of having a fiscal period end after the end of the calendar year. The Appellants' approach in attacking every term of the legislation including the determination of additional business income inclusions, reserve calculations and, in particular the calculation of maximum December 31, 1995 earned income and the calculation of alternative method assessments has reached exhaustion.
[16] As concluded by Judge Bowman and Judge Beaubier, I conclude that Mr. Sunwoo’s interpretations on behalf of the Appellants are not sustainable given the legislation and the evidence.
DECISION
[17] The appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of March 2001
"D. Hamlyn"
J.T.C.C.
[1] It is to be noted that the Minister’s original calculations for the alternative method is reassessed. The correct calculations would result in a marginally higher assessment. As such, the alternative assessment cannot be revised.
[2] Cho v. R., 2000 DTC 2942 [hereinafter “Cho”].
[3] Note that the Appellant in the case Cho is the same person as the Appellant Jong Wook Cho in the present case and, as in this case, Mr. Sunwoo acted as agent.
[4] [2000] T.C.J. No. 814.