Citation: 2003TCC898

Date: 20031222

Docket: 2003-1430(IT)I

BETWEEN:

STEPHEN J. MURPHY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

For the Appellant: The Appellant himself

Counsel for the Respondent: Eric Sherbert

____________________________________________________________________

REASONS FOR JUDGMENT

(Delivered orally from the Bench on

October 24, 2003, at Hamilton, Ontario

McArthur J.

[1]      The Minister of National Revenue disallowed the Appellant's claim in the 2001 taxation year for a $6,923 non-refundable tax credit in respect of a spousal amount on the basis that his spouse had net income in that year of $27,598.92. The issue is whether the $27,598.92 she earned and received in 1995 can be considered her income in 2001 pursuant to subparagraph 118(1)(a)(ii) of the Income Tax Act. It involves the interpretation to be given to the word "income". The facts are not in dispute.

[2]      The Appellant is a retired engineer and his spouse, Megan Murphy is a retired physiotherapist. The net income of $27,598.92 shown on Megan's income tax return in 2001 represented an amount deferred from 1995 as a result of a statutory change to the fiscal year-end date for medical professions. The Appellant's position is that what was deferred from 1995 was the tax that was due on the income and not the income itself which was actually received in 1995 and not 2001. If the purpose of the spousal deduction is to provide assistance to individuals who are in fact supporting a spouse who had no income during a given year, the Appellant states that the appeal should be allowed.

[3]      The Respondent's position is that the net income of the Appellant's spouse was $27,598 in 2001 which is the amount represented by the letter C in the formula found in subparagraph 118(1)(a)(ii) of the Act. Accordingly, the Appellant is precluded from deducting a non-refundable tax credit in respect of a spousal amount under paragraph 118(1)(a) in the 2001 taxation year. Paragraph 118(1)(a) provides in part as follows:

118(1) For the purpose of computing the tax payable under this Part by an individual for a taxation year, there may be deducted an amount determined by the formula

                                   A x B

where

A is the appropriate percentage for the year, and

B is the total of,

(a)         in the case of an individual who at any time in the year is a married person or a person who is in a common-law partnership who supports the individual's spouse or common-law partner and is not living separate and apart from the spouse or common-law partner by reason of a breakdown of their marriage or common-law partnership, an amount equal to the total of

(i) $7,131, and

(ii) the amount determined by the formula

            $6,055 - (C - $606)

where

C is the greater of $606 and the income of the individual's spouse or common-law partner for the year or, where the individual and the individual's spouse or common-law partner are living separate and apart at the end of the year because of a breakdown of their marriage or common-law partnership, the spouse's income for the year while married or in a common-law partnership and not so separated,

[4]      The problem arises after the application of sections 34.1 and 34.2 of the Act. The Appellant's spouse was a self-employed physiotherapist until mid-2000. The purpose of section 34.1 effective after 1994 was to end the practice of achieving in effect a deferral of income earned in a fiscal period for almost an additional year. Arising from the solution an individual could be taxed on almost two years of income in one year.

[5]      As a result, an application of subsections 34.1(1) and 249.1(4) permits a taxpayer to spread her 1995 or 1996 income over a period of years pursuant to a formula. Megan Murphy took advantage of sections 34.1 and 34.2 and as a result, declared 1995 earned income in 2001. She, in fact, had no income in 2001, having retired in mid-2000. As stated, subsection 118(1) reads in part "... there may be deducted an amount determined by the formula ..." and for married status, under the letter C referring to the formula, "is the greater of $606 and the income of the individual's spouse or common-law partner for the year ...". The crux of the matter is the word "income" and whether the $27,598 declared in 2001 is the income of the Appellant's spouse.

[6]      Further definitions include subsection 34.2(6) which reads in part:

34.2(6)              No deduction shall be made under subsection (4) in computing a taxpayer's income for a taxation year from a business where

                        (a)         ...

(c)         the taxpayer is an individual, and

(i)          at the beginning of the year, the business is not carried on principally by the individual nor by members of a partnership of which the individual is a member.

The Respondent states that this subsection disentitles the Appellant's claim because Megan Murphy was no longer carrying on business in 2001. I believe this subsection is referring to the taxpayer claiming the deduction and not his spouse and I return to the word "income" as contained in paragraph 118(1)(c) of the Act. It does not say "earned income" in the year the deduction is claimed. It simply refers to "income". What else could the $27,598 be but income? This is admitted. There is no limitation to the word "income" in the subsection.

[7]      The Appellant's wife declared income of $27,598 in 2001 and I cannot ignore the plain and ordinary meaning of the word "income" as referred to in the subsection. The appeal is dismissed.

Signed at Ottawa, Canada, this 22nd day of December, 2003.

"C.H. McArthur"

McArthur J.

CITATION:

2003TCC898

COURT FILE NO.:

2003-1430(IT)I

STYLE OF CAUSE:

Stephen J. Murphy and Her Majesty the Queen

PLACE OF HEARING:

Hamilton, Ontario

DATE OF HEARING:

October 20, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice C.H. McArthur

DATE OF JUDGMENT:

October 30, 2003

APPEARANCES:

For the Appellant:

The Appellant himself

Agent for the Respondent:

Eric Sherbert

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada