Citation: 2015 TCC 207
Date: 20150819
Docket: 2013-2904(IT)I
BETWEEN:
JANET
HATT,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
D'Arcy J.
[1]
The issue in this appeal is whether the Appellant
is entitled to deduct for her 2010 taxation year a non-capital loss from
employment.
Summary of Facts
[2]
The Government of Canada employed the Appellant
from July 1978 to October 2007. She worked in various government departments,
namely the Office of the Auditor General, Public Works and Government Services
and Citizenship and Immigration.
[3]
From July 26, 2003 until her retirement on
October 18, 2007, the Appellant was on leave without pay. During this period,
she worked outside of Canada for an international agency.
[4]
The Appellant left Canada in 2003 and did not
return until March 2010. Both parties accept that during this period the
Appellant was a non-resident of Canada for the purposes of the Income Tax
Act (“the Act”).
[5]
In 2007 the Appellant received the following two
payments from the federal government upon her retirement:
-
A payment of $2,497.44 in respect of unused
annual leave credits (the “$2,497.44 Annual Leave
Income”).
-
A severance payment of $43,255 that was also
referred to as a retiring allowance (the “$43,255
Retiring Allowance”).
[6]
The Appellant contributed $22,384 of the $43,255
Retiring Allowance to her registered pension plan (the“$22,384
RPP Payment”). The Appellant explained that she made this payment in
order for the years that she was on unpaid leave to count towards the
determination of her annual pension.
[7]
The federal government subsequently issued two
information slips in respect of the two payments. The first slip was a T4,
which included the $2,497.44 Annual Leave Income and the $22,384 RPP Payment.
The second slip was a T4A, which showed the $43,255 Retiring Allowance and an income
tax deduction of $6,261.47.
[8]
The Appellant believed, after reviewing the T4
and T4A, that the federal government had withheld an incorrect amount of tax
from the $43,255 Retiring Allowance. As a result, while a non-resident of
Canada, she submitted an income tax return for her 2007 tax year on which she
reported the $2,497.44 Annual Leave Income, the $43,255 Retiring Allowance and
pension income she received in 2007 after her retirement. She also reported the
$22,384 RPP Payment and $6,261.47 of income tax deducted from the $43,255
Retiring Allowance.
[9]
The Minister subsequently issued three separate
notices of assessment in respect of the items reported on the Appellant’s 2007
income tax return.
[10]
The first “notice of
assessment” is dated April 30, 2009 and is a nil assessment (the “Nil Assessment”). The Nil Assessment shows the
following in respect of the Appellant’s 2007 tax year:
-
Total income: $2,497
-
Deductions from total income: $22,799
-
Net income: 0
-
Taxable income: 0
-
CPP overpayment: $123.62
[11]
The evidence before me, which the parties
accept, is that the $2,497 represents employment income, namely, the $2,497.44
Annual Leave Income, and the $22,799 represents amounts allowed as deductions
from that employment income under subsection 8(1) of the Act. The $22,799
is comprised of the $22,384 RPP Payment and $415 of annual union, professional
or like dues.
[12]
The Nil Assessment contains two pages of written
comments entitled “Explanation of changes and other
important information”. One of the comments states the following: “Our records show that you have unused non-capital losses of
other years. The amount that is available to apply to the other years is
$20,302.” This amount is equal to the difference between the
total income assessed ($2,497) and the assessed deductions from total income
($22,799).
[13]
The second notice of assessment is dated July
22, 2009 and assesses Part XIII tax (the “Part
XIII Assessment”). Specifically, the assessment assesses Part XIII tax
of $10,814 on the $43,255 Retiring Allowance (25% x $43,255.57). The Appellant
is given credit for the $6,261.47 of tax withheld by the “Canadian payor”, namely the Government of Canada.
[14]
The third notice of assessment, also dated July
22, 2009, assesses Part XIII tax on the pension income the Appellant received
in 2007.
[15]
The Appellant does not accept the Minister’s
calculation of Part XIII tax on the $43,255 Retiring Allowance. She believes
the Minister should have levied the Part XIII tax on an amount equal to the
$43,255 Retiring Allowance minus the $22,384 RPP Payment. However, the
Appellant did not file a notice of objection in respect of the Part XIII Assessment.
[16]
I explained to the Appellant during the hearing
of the appeal that in such a situation the Part XIII assessment is not properly
before the Court. Since the Appellant did not file a notice of objection and
the Minister has not reassessed, both the Appellant and the Minister are bound
by the assessment.
[17]
The Appellant returned to Canada on March 4,
2010 and became a resident of Canada on that day. When filing her tax return
for the 2010 taxation year the Appellant claimed a $22,384 deduction. She
explained to the Court that she was not sure which line of the return she
should use to claim the deduction. She decided to claim the deduction on line
207 as a registered pension plan deduction. The Appellant included with her
return a letter requesting the Canada Revenue Agency (the “CRA”) to review the return and determine if she had
claimed the deduction on the proper line.
[18]
When assessing the Appellant on June 23, 2011, the
Minister allowed the $22,384 deduction. On October 6, 2011, the Minister
reassessed the Appellant and denied the $22,384 deduction.
[19]
The Appellant filed a notice of objection.
[20]
On July 10, 2012, Mr. Dylan Dinardo, a CRA
appeals officer, wrote a letter to the Appellant stating that she would not be
given a deduction for the full $22,384, however she would be allowed a
deduction of $20,302 as a carry-forward of a non-capital loss she incurred in
2007. Mr. Dinardo explained the $20,302 non-capital loss carry-forward as
follows:
The RPP
contributions that you incurred in the 2007 taxation year in the amount of
$22,384 were deducted on your 2007 T1 Income Tax Return. Your total income in
2007 was $2,497. Your total deductions were $22,799 which was an incorporation
of $22,384 of RPP contributions and $415 of Annual union, professional, or like
dues. Once your taxable income was reduced to $0, you had $20,302 of unused
non-capital losses available to be carried forward to be applied to other
years. As a result, pursuant to paragraph 111(1)(a) of the Income Tax Act,
the Appeals Division will allow you a non-capital loss on line 252 on your
2010 T1 Income Tax Return in the amount of $20,302 to reduce your taxable
income to $11,164.
[21]
On August 24, 2012, the Appellant wrote to Mr.
Dinardo accepting the CRA’s position. The Appellant believed that the Minister
would reassess her 2010 taxation year to allow a deduction of $20,302.
[22]
However, on September 7, 2012 she received from
Mr. Dinardo a second letter, the purport of which was that the CRA had changed
its mind and concluded that the Appellant was not entitled to claim a deduction
for a non-capital loss carry-forward or to claim any additional deductions in
respect of her 2010 taxation year.
[23]
The letter states the CRA’s new position as
follows:
After
further consideration, it has been determined that your unused RPP
contributions from the 2007 taxation year in the amount of $20,302 cannot be
converted into a non-capital loss to [be] deducted on your 2010 T1 Income Tax
and Benefit Return. Paragraph 147.2(4)(a) of the Income Tax Act states
that … .
The
Appeals Division is taking the position that an employee’s contributions must
be made in the year in respect of which the deduction is deemed. Past service
contributions cannot be carried forward to claim in a future year nor are they
convertible into a non-capital loss to be used to reduce taxable income of a
future year.
[24]
The Minister subsequently confirmed the October
6, 2011 reassessment.
[25]
The only issue before the Court is whether the
Appellant is entitled to the deduction of a non-capital loss carry-forward of
$20,302 when calculating her 2010 taxable income.
The Appellant’s Position
[26]
The Appellant argued that, pursuant to the definition
of non-capital loss in subsection 111(8) of the Act, non-capital losses
are determined according to a formula. The relevant value in her situation is
her loss for the year from employment.
[27]
Subsection 5(2) sets out the basic rules with
regard to a loss from employment. Section 6 sets outs the amounts to be
included as income from employment and section 8 sets out the deductions
allowed in computing a taxpayer’s income for a taxation year from employment.
[28]
These sections result in the Appellant incurring
in 2007 a non-capital loss from employment of $20,302, calculated as the $2,497
Annual Leave Payment minus the $22,384 RPP Payment and the $415 deduction in
respect of union dues.
[29]
Subsection 111(1)(a) allows the $20,302
non-capital loss to be carried forward for 20 years.
The Respondent’s Position
[30]
The Respondent argued that there was no
non-capital loss available to the Appellant to carry forward from 2007 to apply
against income in the 2010 taxation year.
[31]
Counsel for the Respondent accepted during her
argument at the hearing that the Minister concluded that in 2007 the Appellant
had $2,497 of employment income under Part I of the Act and deductions
from that employment income of $22,799 under subsection 8(1). However, counsel
argued that the $22,384 RPP Payment that was allowed as a deduction under
paragraph 8(1)(m) should not be used in 2007 to calculate a
non-capital loss from employment under section 111.
[32]
The Respondent argued that the $22,799 deduction
allowed in 2010 resulted from a registered pension plan (“RPP”) contribution and must be treated pursuant to
the statutory limits on that form of deduction.
[33]
She argued that the deduction of contributions
to RPPs is only allowed under paragraph 8(1)(m). Because of the wording
of 8(1)(m), the qualifying factors in subsection 147.2(4) apply to such
a deduction.
[34]
One of the qualifying factors is that only amounts
which represent contributions made by the individual to a registered pension
plan in a particular year may be deducted in that year. Subsection 147.2(4)
does not permit the carry-forward of RPP contributions.
[35]
She argued that the limitation in subsection
147.2(4) must be adhered to or its purpose would be frustrated by the
availability of non-capital losses under section 111. The specific wording “in
the year” precludes deduction in later years outright. If the deduction could
be applied without reference to this limit regarding timing, that portion of
the section would be rendered meaningless.
[36]
With respect to the statement in the Nil
Assessment that the Appellant had unused non-capital losses, she argued that
this was an error of legal representation of the nature of the deduction for
2007. Such an error cannot bind the Crown. Counsel relied on the comments of
Associate Chief Judge Bowman (as he then was) comments in Moulton v. R.,
[2002] C.T.C. 2395 at paragraph 11, where he stated, “the
court cannot be bound by erroneous departmental interpretations. Any other
conclusion would lead to inconsistency and confusion.”
The Court’s Decision
[37]
I accept the Respondent’s argument that the
Court is not bound by departmental interpretations. As a result, the statements
in the Nil Assessment and Mr. Dinardo’s July 10, 2012 letter that the Appellant
had a non‑capital loss of $20,302 are not binding on the Court.
[38]
I do not accept the Respondent’s argument that
the $22,384 RPP Payment that the Minister allowed as a deduction in 2007 under
paragraph 8(1)(m) should not be used to calculate a non-capital loss
from the Appellant’s employment.
[39]
In order for the taxpayer to determine her
income for a taxation year under section 3, she must determine under paragraph
3(d) her losses from an office or employment.
[40]
Subsection 5(2) of the Act reads as
follows:
A taxpayer's loss
for a taxation year from an office or employment is the amount of the taxpayer's
loss, if any, for the taxation year from that source computed by applying, with
such modifications as the circumstances require, the provisions of this Act
respecting the computation of income from that source.
[41]
The Minister concluded, as reflected in the Nil
Assessment, that the Appellant had employment income of $2,497 and allowable
subsection 8(1) deductions from such employment income of $22,799.
[42]
Included in the $22,799 in deductions is the
$22,384 RPP Payment that the Minister found was deductible under paragraph
8(1)(m). I agree with counsel for the Respondent that if the Minister
concluded that the latter amount was deductible under paragraph 8(1)(m)
then she also concluded that the qualifying factors in subsection 147.2(4) were
satisfied. Appendix A to these reasons contains the wording of those
provisions.
[43]
Once the Minister allowed the Appellant a
deduction under paragraph 8(1)(m) for the $22,384 RPP Payment, this
amount must be used, for the purposes of subsection 5(2), to calculate her loss
from employment for the particular taxation year. Neither paragraph 8(1)(m)
nor paragraph 147.2(4)(a) contains wording that would exclude the
$22,384 RPP Payment from the calculation of the Appellant’s loss from employment.
[44]
If one takes the employment income and the
deductions therefrom determined by the Minister and applies subsection 5(2),
the result is that the Appellant incurred a loss from employment in her 2007
taxation year of $20,302.
[45]
The non-capital loss available to the Appellant
in 2010 is determined under paragraph 111(1)(a) and subsections 111(8)
and (9). The relevant portions of these provisions are included in Appendix A.
[46]
Subsection 111(9) sets out the rules for
determining a non-resident’s non‑capital loss. The subsection allows a
non-resident to include his/her non‑capital loss a loss from carrying out
the duties of an office or employment only if the duties are performed in
Canada. The Respondent did not, in either her oral argument or her written
submissions filed after the conclusion of the hearing, argue that this
provision applied to preclude the creation of a non-capital loss for the
Appellant’s 2007 taxation year. Further, I assume that, when the Minister
included the $2,497 of employment income in the Appellant’s Part I income for
2007, she concluded, for the purposes of subsection 115(1), that the employment
income arose from employment performed by the Appellant in Canada.
[47]
Subsection 111(8) defines non-capital loss of a
taxpayer for a taxation year to mean the amount determined by the formula
(A+B)-(D+D.1+D.2). A taxpayer’s loss for the year from employment is included
in A. Since the only source of income covered by the Minister’s assessment was
the Appellant’s employment with the Government of Canada, the remaining parts of
the formula do not apply to the determination of the Appellant’s non-capital
loss for her 2007 taxation year.
[48]
As a result, pursuant to the definition in
subsection 111(8), the Appellant incurred a non-capital loss from employment of
$20,302 in her 2007 taxation year. Pursuant to subsection 111(1)(a),
such loss may be carried forward and deducted when determining the Appellant’s
2010 taxable income.
[49]
For the foregoing reasons, the appeal is allowed
and the reassessment is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant was entitled
to deduct a non-capital loss of $20,302 when determining her 2010 taxable
income. The Appellant is awarded costs of $500 plus disbursements.
Signed at Antigonish,
Nova Scotia, this 19th day of August 2015.
“S. D’Arcy”
Appendix A
8(1) In computing a taxpayer’s income for a taxation year from
an office or employment, there may be deducted such of the following amounts as
are wholly applicable to that source or such part of the following amounts as
may reasonably be regarded as applicable thereto:
. .
.
(m) the amount in respect of contributions to registered
pension plans that, by reason of subsection 147.2(4), is deductible in
computing the taxpayer’s income for the year;
. . .
111(1) For the purpose of computing
the taxable income of a taxpayer for a taxation year, there may be deducted
such portion as the taxpayer may claim of the taxpayer’s
(a) non-capital
losses for the 20 taxation years immediately preceding and the 3 taxation years
immediately following the year;
111(8) In this section,
. .
.
“non-capital loss” of a taxpayer for a taxation year means,
at any time, the amount determined by the formula
(A + B) - (D + D.1 + D.2)
where
A is the amount determined by the formula
E - F
where
E is the total of all
amounts each of which is
(a)
the taxpayer’s loss for the year from an office, employment, business or
property,
(a.1) an amount
deductible under paragraph 104(6)(a.4) in computing the taxpayer’s
income for the year,
(b)
an amount deducted under paragraph (1)(b) or section 110.6, or
deductible under any of paragraphs 110(1)(d) to (d.3), (f),
(g), (j) and (k), section 112 and subsections 113(1) and
138(6), in computing the taxpayer’s taxable income for the year, or
(c)
if that time is before the taxpayer’s eleventh following taxation year, the
taxpayer’s allowable business investment loss for the year, and
F
is the amount determined under paragraph 3(c) in respect of the taxpayer
for the year,
B
is the amount, if any, determined in respect of the taxpayer for the year under
section 110.5 or subparagraph 115(1)(a)(vii),
D
is the amount that would be the taxpayer’s farm loss for the year if the amount
determined for B in the definition “farm loss” in this subsection were zero,
D.1
is the total of all amounts deducted under subsection (10) in respect of the
taxpayer for the year, and
D.2
is the total of all amounts by which the non-capital loss of the taxpayer for
the year is required to be reduced because of section 80;
. . .
111(9) In this section, a
taxpayer’s non-capital loss, net capital loss, restricted farm loss, farm loss
and limited partnership loss for a taxation year during which the taxpayer was
not resident in Canada shall be determined as if
(a) in the part
of the year throughout which the taxpayer was non-resident, if section 114
applies to the taxpayer in respect of the year, and
(b) throughout
the year, in any other case,
the taxpayer had no income other than income described in any of
subparagraphs 115(1)(a)(i) to (vi), the taxpayer’s only taxable capital
gains, allowable capital losses and allowable business investment losses were
from dispositions of taxable Canadian property (other than treaty-protected
property) and the taxpayer’s only other losses were losses from the duties of
an office or employment performed by the taxpayer in Canada and businesses
(other than treaty-protected businesses) carried on by the taxpayer in Canada.
147.2(4) There may be deducted in
computing the income of an individual for a taxation year ending after 1990 an
amount equal to the total of
(a) the total
of all amounts each of which is a contribution (other than a prescribed
contribution) made by the individual in the year to a registered pension plan
that is in respect of a period after 1989 or that is a prescribed eligible
contribution, to the extent that the contribution was made in accordance with
the plan as registered,
(b) the least
of
(i) the amount, if any,
by which
(A) the total of all
amounts each of which is a contribution (other than an additional voluntary
contribution or a prescribed contribution) made by the individual in the year
or a preceding taxation year and after 1945 to a registered pension plan in
respect of a particular year before 1990, if all or any part of the particular
year is included in the individual’s eligible service under the plan and if
(I) in the case of a
contribution that the individual made before March 28, 1988 or was obliged to
make under the terms of an agreement in writing entered into before March 28,
1988, the individual was not a contributor to the plan in the particular year,
or
(II) in any other
case, the individual was not a contributor to any registered pension plan in
the particular year
exceeds
(B) the total of all
amounts each of which is an amount deducted, in computing the individual’s
income for a preceding taxation year, in respect of contributions included in
the total determined in respect of the individual for the year under clause
(A),
(ii) $3,500, and
(iii) the amount determined
by the formula
($3,500 × Y) - Z
where
Y
is the number of calendar years before 1990 each of which is a year
(A) all or any part of
which is included in the individual’s eligible service under a registered
pension plan to which the individual has made a contribution that is included
in the total determined under clause (i)(A) and in which the individual was not
a contributor to any registered pension plan, or
(B) all or any part of
which is included in the individual’s eligible service under a registered
pension plan to which the individual has made a contribution
(I) that is included
in the total determined under clause (i)(A), and
(II) that the
individual made before March 28, 1988 or was obliged to make under the terms of
an agreement in writing entered into before March 28, 1988, and in which the
individual was not a contributor to the plan, and
Z
is the total of all amounts each of which is an amount deducted, in computing
the individual’s income for a preceding taxation year,
(A) in respect of
contributions included in the total determined in respect of the individual for
the year under clause (i)(A), or
(B) where the
preceding year was before 1987, under subparagraph 8(1)(m)(ii) (as it
read in its application to that preceding year) in respect of additional
voluntary contributions made in respect of a year that satisfies the conditions
in the description of Y, and
(c)
the lesser of
(i) the amount, if any,
by which
(A) the total of all
amounts each of which is a contribution (other than an additional voluntary
contribution, a prescribed contribution or a contribution included in the total
determined in respect of the individual for the year under clause (b)(i)(A))
made by the individual in the year or a preceding taxation year and after 1962
to a registered pension plan in respect of a particular year before 1990 that
is included, in whole or in part, in the individual’s eligible service under
the plan
exceeds
(B) the total of all
amounts each of which is an amount deducted, in computing the individual’s
income for a preceding taxation year, in respect of contributions included in
the total determined in respect of the individual for the year under clause (A),
and
(ii) the amount, if
any, by which $3,500 exceeds the total of the amounts deducted by reason of
paragraphs (a) and (b) in computing the individual’s income for
the year.
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