Tax Court of Canada Judgments

[OFFICIAL ENGLISH TRANSLATION]

2000-3978(IT)I

BETWEEN:

GHISLAINE A. CÔTÉ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on July 26, 2001, at Montréal, Quebec, by

the Honourable Judge Gerald J. Rip

Appearances

Counsel for the Appellant:                    Robert Vaillancourt

Agent for the Respondent:                   Philippe Dupuis (student-at-law)

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is dismissed.

Signed at Ottawa, Canada, this 21st day of September 2001.

"Gerald J. Rip"

J.T.C.C.

Translation certified true

on this 26th day of June 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

Date: 20010921

Docket: 2000-3978(IT)I

BETWEEN:

GHISLAINE A. CÔTÉ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rip, J.T.C.C.

[1]      The appellant is appealing from the assessment of the Minister of National Revenue (the "Minister") for the 1999 taxation year. The issue is whether the Minister correctly computed tax payable under section 180.2 of the Income Tax Act (the "Act") for the 1999 taxation year.

[2]      The facts are not in dispute. The appellant, Ms. Côté, had been employed by her former employer since 1976. She stopped working on April 28, 1995, as a result of medical problems. She underwent several medical procedures. On June 25, 1997, one of her doctors gave her a certificate authorizing her to return to work on June 26, 1997.

[3]      Before the appellant's return to work, her employer required that she be examined by two doctors retained by the employer, and those doctors found that she was not fit to return to work. The appellant filed with her union a grievance and a request that she be reinstated. After a medical adjudication, the employer reinstated the appellant in her position with all her rights and privileges, retroactive to July 4, 1997.

[4]      After working for about a month, the appellant reached an agreement with her employer that she would resign and the employer would pay her a lump sum of $63,201.21. This amount was received as remuneration from her employment in 1999. Of the $63,201.21, $17,785.32 related to 1997 and $39,043.37 to 1998.

[5]      In her tax return for the 1999 taxation year, the appellant indicated an amount of $99,741.86 as net income before adjustments. (Her "total income" was $106,937.01.) This last amount includes all amounts paid by her former employer. In computing her total income, she included the old age security pension amount that she had received, namely, $4,959.51, but in determining her net income for the 1999 taxation year, she deducted $4,959.51 from her net income before adjustments ($99,741.86) as a social benefits repayment.

[6]      In assessing the appellant for the 1999 taxation year, the Minister computed, under section 180.2 of the Act, a "clawback" tax on the old age security benefits since the appellant's net income before adjustments exceeded $53,215. Counsel for the appellant explained in the Notice of Appeal that [TRANSLATION] "the 1999 income is not, in reality, $106,937.00 but $50,108.82 after deduction of the amount of $56,228 (representing the backward averaging to 1997 of $17,785.52 in salary and to 1998 of $39,043.37 in salary).[1] The amount of $50,108.82 is below the $53, 215 cap for the 1999 taxation year."

[7]      In her Notice of Appeal, the appellant states that the action by officials of the Canada Customs and Revenue Agency ("CCRA") is [TRANSLATION] "unjust, unfair and not according to law". Her counsel does not rely on any case law. He bases his argument primarily on the general rules of interpretation of the Act as set out in the work of Professor P.-A. Côté.[2] Taking recent decisions of the Supreme Court of Canada as his basis, that author summarizes the contemporary doctrine of interpretation of tax legislation as follows:

           In the Notre-Dame de Bon-Secours case [[1994] 3 S.C.R. 3], Gonthier J., for the Court, set out the principles which are to govern interpretation of tax legislation. There are three propositions: 1) "the interpretation of tax legislation should follow the ordinary rules of interpretation"; 2) the choice between a strict or liberal reading of the texts must not be guided by presumptions favourable to the State or the taxpayer, but by reference to the goal which underlines the provision under interpretation; 3) "only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer."

[8]      Regarding each of the above three propositions, counsel for the appellant referred the Court to the following excerpts at pages 495-497:

. . . However, two principles can be drawn from the present case law of the Supreme Court. First, the fact that the literal meaning is clear, that it is free of any ambiguities or imprecisions, does not constitute a justifiable reason to ignore the objectives of the provision: these must always be borne in mind, as a contextual element. Second, when establishing the meaning of a rule of tax law, arguments drawn from the objectives of a provision could tip the balance where the literal meaning is obscure; on the other hand, their weight would be noticeably reduced in the presence of a text whose literal meaning, when analysed contextually, appears plain.

. . .

. . . If a choice is to be made between giving a tax provision a strict or wide meaning, one must not ask which interpretation would be beneficial to whom, but rather which interpretation would best meet the objectives of the provision . . . .

. . . Interpretation of a provision which grants an exemption or deduction must be done so as to provide it with its full meaning, in light of the objectives sought by the legislature. If the usual rules of interpretation used to arrive at the meaning of the provision leave a serious doubt, the provision of exemption or deduction, as is the case for a provision which imposes a tax, will be interpreted in favour of the taxpayer.

[9]      Relying primarily on the excerpts reproduced above, counsel for the appellant concluded, without actually interpreting sections 110.2 and 180.2 of the Act, that it would be unfair to make the appellant pay the tax in question.

[10]     The interpretation of section 180.2 was considered by Marceau J.A. of the Federal Court of Appeal in The Queen v. Swantje.[3] Mr. Swantje was the recipient of a pension from Germany that was exempt from taxation under the Canada-Germany Income Tax Agreement (1981). The pension was included in the respondent's income under paragraphs 56(1)(a) and 81(1)(a) of the Act, but was deducted under paragraph 110(1)(f) of the Act in computing his taxable income. The treaty exemption was thus respected. The Canadian pension was, however, subject to tax under section 180.2 of the Act.[4]

[11]     It would be appropriate to analyse the relevant sections in the manner suggested by Professor Côté. In fact, the proper interpretation of section 180.2 was considered by Marceau J.A. in the decision of the Federal Court of Appeal in Swantje, at page 6635:

. . . The proper approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes (cf. Stubart Investments Limited v. The Queen, 84 DTC 6305 (S.C.C.)).[5]

[12]     What is the literal meaning in context of the phrase "the amount that would be the individual's income under Part I"?

[13]     The definition of the term "adjusted income" refers to the "amount that would be . . . income under Part I" and not to the individual's "taxable income". There is an important distinction between "taxable income" and "adjusted income". Judge Lamarre Proulx commented in Poulin v. R.[6] that "income" and "taxable income" are different concepts and are governed by specific statutory provisions. However, Division B under which income is computed and Division C under which "taxable income" is computed are both to be found in Part I of the Act. The question is whether the reference to the "amount that would be the individual's income under Part I" in the definition of "adjusted income" is a minor imprecision on the part of Parliament or whether it is a specific reference to "income" as determined under Division B of Part I of the Act. It is clear that it is the second proposition that is correct in law.

[14]     What is the purpose of sections 110.2 and 180.2 of the Act? Concerning the purpose of section 180.2, Marceau J.A. wrote the following in Swantje, supra, at page 6635:

. . . What Part I.2 of the Act, completed by paragraph 60(w), realizes is the repayment of social benefits by taxpayers who, because of their higher incomes, have a lesser need of them. [Emphasis added.]

[15]     Normally, Ms. Côté's income was modest. The payment of the lump sum by her employer in 1999, which made up for her very low income in 1997 and 1998, created an anomaly in the income received by the appellant. It could therefore be claimed that it would be contrary to the purpose of the legislation to apply section 180.2 to Ms. Côté. Moreover, the purpose of section 110.2 is, inter alia, to eliminate the ups and downs in a taxpayer's income received and to spread a lump sum out over the years to which it relates. However, the purpose of section 180.2 is to put a cap on the amounts of social benefits that can be received, in this case by the appellant, for a taxation year. Since the old age pension is primarily based on need, the formula in Part I.2 is based on the amount actually received, that is to say, in the case at bar, that actually received by the appellant in 1999, and not on a notional amount that includes the deduction provided for in section 110.2.

[16]     Does the residual presumption in favour of the taxpayer apply in the instant case? In considering the residual presumption in favour of the taxpayer, Professor Côté wrote as follows at page 498:

If the taxpayer receives the benefit of the doubt, such a "doubt" must nevertheless be "reasonable". A taxation statute should be "reasonably clear". This criterion is not satisfied if the usual rules of interpretation have not already been applied in an attempt to clarify the problem. The meaning of the enactment must first be ascertained, and only where this proves impossible can that which is more favourable to the taxpayer be chosen. The presumption in favour of the taxpayer is now merely a subsidiary one.

[17]     Counsel for the appellant did not try through use of the ordinary rules of interpretation to resolve the doubt, if any, regarding the interpretation of the definition of "adjusted income". Thus, it is unlikely that the residual presumption in favour of the taxpayer applies in the instant case.

[18]     I must conclude that the phrase "the amount that would be the individual's income under Part I" in section 180.2 refers to "income" as determined by Division B of Part I of the Act. The deduction provided for in section 110.2 should not be taken into consideration in computing the appellant's "adjusted income", as section 110.2 refers to "taxable income". The appeal is therefore dismissed, and Ms. Côté will have to pay tax totalling $4,959.51 under section 180.2 of the Act.

Signed at Ottawa, Canada, this 21st day of September 2001.

"Gerald J. Rip"

J.T.C.C.

Translation certified true

on this 26th day of June 2002.

Erich Klein, Revisor

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