E. William Abrahamson v. Minister of National Revenue, 91 DTC 213, [1991] 1 CTC 2061 (TCC)

Rip, T.C.J.:—In assessing E. William Abrahamson ('Abrahamson"), the ap- pellant, for 1986 the Minister of National Revenue, the respondent, included in his income the sum of $85,126 (US$62,136) received by Abrahamson in the year from an Individual Retirement Account “IRA").1 [1] The IRA was established by Abrahamson on August 22, 1975 under the laws of the United States of America in accordance with the provisions of section 408(a) of the United States Internal Revenue Code. The sole trustee of the IRA was Cleveland Federal Savings and Loan Association of Cuyahoga County ( Cleveland Federal”) and the trust was, at all material times, resident in the United States. The principal beneficiaries of the IRA were the appellant and his spouse. The assessment was made on the basis the $85,126 was a payment received by Abrahamson on account or in lieu of payment of, or in satisfaction of, a superannuation or pension benefit in accordance with subparagraph 56(1)(a)(i) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The respondent pleads in the alternative the amount of $85,126 was a payment out of or under a superannuation or pension fund by virtue of paragraph 254(a) of the Act.

The appellant says the $85,126 represented a capital amount paid to him in 1986 from a non-resident inter vivos trust established by him and that such amount was not a payment of a superannuation or pension benefit within the meaning of subparagraph 56(1)(a)(i) of the Act.

Abrahamson was a professor at Case Western Reserve University CCase") in 1975 when he accepted a similar position at the University of Guelph. On June 17,1975 he moved to Kitchener, Ontario where he had purchased a home. Although he became a resident in Canada in June 1975 and ceased teaching at Case in the middle of the summer semester, he remained as an unpaid employee of Case until the end of the summer semester.

Abrahamson was a member of the Case pension plan "Case plan”) to which both employees of Case and Case made contributions. Abrahamson was entitled to the full amount of the contributions upon ceasing to be employed by Case. There is no evidence with respect to the withdrawal by Abrahamson of his contributions to the Case plan fund and it is not relevant for purposes of this appeal.

Under United States tax laws in 1975 an individual had the right to transfer on a tax-free basis the full amount of the employer's contributions, and income earned thereon, made to a pension plan from that pension plan to an IRA. Since 1959, when Abrahamson first joined Case, the university had contributed to the Case plan fund for the benefit of Abrahamson; these contributions and income earned over the years totalled US$38,642.89 in 1975. Accordingly, Abrahamson established the IRA on August 27,1975 and on the same day the trustee of the Case plan transferred the sum of US$30,005.86 directly to his IRA representing part of the employer's contributions? [2] to the Case plan. The balance of the employer's contributions, US$8,637.03, had been paid directly to Abrahamson and he deposited the money to the IRA on October 9, 1975. The lateness in paying the US$8,637.03 was due to the time required by Case to calculate and verity its contributions and send cheques to Abrahamson.

Abrahamson testified he was advised that United States tax law levied a substantial penalty if a distribution was made out of an IRA prior to the beneficiary attaining the age of 59 1/2. Consequently Abrahamson made the first withdrawal from the IRA after July 6, 1981, when he attained the age of 59 1/2. In 1981 he withdrew US$21,500 to pay off a mortgage on his home in Kitchener. [3] Later on in 1981 and in 1984 and 1985 he withdrew additional amounts. Finally, in 1986, he withdrew the balance of his IRA account.

Although not particularly relevant to the narrow issue subject to the appeal at bar the following facts underscore the events preceding the assessment for 1986. By 1984 Abrahamson was contemplating becoming a Canadian citizen. When he earlier withdrew funds from his IRA he did so on the assumption the amounts were not taxable in Canada. In order to satisfy himself with his tax status in Canada he retained the services of Clarkson, Gordon, [4] a firm of chartered accountants. Mr. John R.A. Cleaver ("Cleaver"), a partner of Clarkson, Gordon, in Waterloo, Ontario, recommended Abrahamson voluntarily disclose to the respondent that he reported no income to the Canadian tax authorities in the years he made the withdrawals.

Prior to making the disclosure Clarkson, Gordon reviewed Abrahamson's tax situation in both Canada and the United States. Apparently the income accumulating in the IRA also had not been reported for Canadian tax purposes. Cleaver testified Clarkson, Gordon concluded that income earned in the IRA during 1984 was taxable in Canada under section 94 [5] and “ probably subsection 75(2)" [6] of the Act. Clarkson, Gordon then wrote to the respondent setting out the facts on a hypothetical basis and requested the respondent's views. Abrahamson's 1984 tax return, prepared by Clarkson, Gordon included in his income for the year the income earned by the IRA in 1984; the withdrawal of funds in that year was treated as a capital receipt.

Later on, in May of 1985, the Minister of Finance released draft legislation adding subsection (3) to section 75.7 [7]

deemed to be a non-resident corporation that is controlled by the beneficiary,

(ii) the trust shall be deemed to be a non-resident corporation having a

capital stock of a single class divided into 100 issued shares, and

(iii) each beneficiary under the trust shall be deemed to own at any time the

number of the issued shares that is equal to the proportion of 100 that

(A) the fair market value at that time of his beneficial interest in the trust is of

(B) the fair market value at that time of all beneficial interests in the trust.

As a result of subsection 75(3), which was applicable to the 1982 and subsequent taxation years, Clarkson, Gordon took the position with the respondent that no amount of income earned by the IRA ought to have been included in Abrahamson's 1984 tax return since the IRA was not resident in Canada, the United States imposes an income tax but the IRA is exempt from income tax and that the IRA was established as a retirement fund. Thus when the return was assessed as filed, a notice of objection was made. Cleaver testified the respondent agreed the income earned by the IRA in 1984 ought not to have been included in income but insisted the amount withdrawn in 1984 was income. After further discussion the respondent relented and the objection was allowed in full, said Cleaver. [8]

Then the voluntary disclosure was proceeded with. The appellant took the position subsection 75(3) was authority that income of the IRA was not income for Canadian tax purposes for any year since 1982; with respect to the years prior to 1982, Abrahamson had not been resident in Canada for a period in excess of sixty months since the IRA was established and therefore the rules in subsection 94(1) of the Act did not apply. In the disclosure Abrahamson submitted that because of the non-business tax paid to the United States with respect to withdrawals from the IRA, he ought to be entitled to the combination of the deductions available under subsections 20(12) and 126(1) of the Act. Had the deductions been taken he would have been liable for less tax than he actually paid. Cleaver said the respondent's officials acknowledged the disclosure without further communication.

Abrahamson became a Canadian citizen in 1985 and began to file United States tax returns on income earned in the United States as a non-resident alien. In 1986, Abrahamson, on advice of Clarkson, Gordon's tax advisers in the United States, made a number of withdrawals from his IRA. (These withdrawals are the subject matter of this appeal.) If he made a single withdrawal from the IRA, Abrahamson was informed by Clarkson, Gordon, the amount of the withdrawal may not be considered by United States tax authorities to be a "periodic pension payment" under section XVIII of the Canada-United States Tax Convention, 1980° [9] and the United States would therefore levy a tax of 30 per cent, instead of 15 per cent, on the withdrawal.

is a resident, and

(iv) was established principally in connection with, or the principal purpose of which is to administer or provide benefits under, one or more superannuation, pension or retirement funds or plans or any funds or plans established to provide employee benefits; or

(d) by a prescribed trust.

Under the terms of the Case plan Abrahamson had the option of withdrawing the value of his accounts in the Case plan in a lump sum or retaining the accounts in the Case plan for an immediate or subsequent pension. In fact Abrahamson withdrew the portion of the employer's contributions for transfer to the IRA. In the notice of appeal it is alleged "the appellant became entitled to the full amount” of the employer’s contribution upon ceasing to be employed by Case. Cleaver also testified that Mr. Bowman, counsel for Abrahamson, had informed him that Mr. Gill, respondents counsel, disagreed with the veracity of the allegation. A copy of a summary description of the Case pension plan obtained by the respondents counsel is dated April 1987 and was included in the appellants book of documents produced as Exhibit A-1. Both counsel agreed, however, that the summary may be applied to the Case plan for the years when Abrahamson was a participant. The summary advises the participants that on termination ” . . . If the total value of your account is $3,500 or more, then, unless you elect an immediate lump sum distribution, you may elect. . .” to place the funds in various accounts. Cleaver was not qualified as an expert witness; however there was no objection to the following evidence. Cleaver said he researched the problem and referred to a book on United States tax published by Ernst and Young. Under United States tax law, he discovered, the words "lump sum distribution" have a special meaning: money may be paid out of a pension plan in a lump sum distribution only in certain circumstances, one of which is when an employee separates from service. Such a lump sum distribution may be made on a tax-free basis from a pension plan to an IRA, provided the IRA receives the money within 60 days of its distribution from the pension plan. Therefore, once Abrahamson resigned from Case, he had the right to withdraw amounts standing to his credit in the Case plan.

In the appellant's view, the amount of $85,126, except for that portion of income earned by the IRA in 1986, received by him from the IRA in 1986 represented a capital amount paid to him from a non-resident inter vivos trust established by him and is not income that, by virtue of subparagraph 56(1)(a)(i), is to be included in his income for 1986. Subparagraph 56(1)(a)(i) reads:

Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(i) a superannuation or pension benefit (other than the portion thereof received out of or under an employee benefit plan that is required by paragraph 6(1)(g) to be included in computing his income for the year, or would be required to be so included if that paragraph were read without reference to subparagraph (ii) thereof), including, without limiting the generality of the foregoing,

(A) the amount of any pension, supplement or spouse's allowance under the Old Age Security Act and the amount of any similar payment under a law of a province, and

shall not exceed 15 per cent of the gross amount of such payment; and

(b) Annuities may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of an annuity payment, the tax so charged shall not exceed 15 per cent of the portion of such payment that would not be excluded from taxable income in the first-mentioned State if the beneficial owner were a resident thereof.

3. For the purposes of this Convention, the term“ pensions" includes any payment under a superannuation, pension or retirement plan, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan, but does not include payments under an income-averaging annuity contract or any benefit referred to in paragraph 5.

(B) the amount of any benefit under the Canada Pension Plan or a

provincial pension plan as defined in section 3 of that Act.

The appellant says he established a trust, the IRA, in 1975 for the primary benefit of himself and his wife. That the trust was established with money which came from a pension plan, he says, is irrelevant. On his retirement from Case in 1975 he was entitled to his employer's, as well as his own, contributions to the pension plan. He withdrew the funds relating to his employer's contributions directing the trustee of the pension plan to deposit it with Cleveland Trust, the trustee of the IRA. The trustee of the pension plan forwarded the bulk of the appellant's account in the pension fund to Cleveland Trust directly and Abrahamson, himself, deposited to the IRA the balance of Case's contributions which had been sent to him later.

The respondent has assessed on the basis not that the amount received by Abrahamson from the IRA was income in the classic sense but that the amount was a "superannuation or pension benefit”. The respondent's view is set out in a position paper of the respondent, which bears no date, which was included in Exhibit A-1:

Under the U.S. Code an individual may roll a lump sum payment received out of a U.S pension fund including a 401(k) plan to an IRA. Where a Canadian resident receives an amount out of the U.S. pension plan, such amount is included in his income as pension payments. However, provided he is permitted to roll the amounts to an IRA, Article XVIII of the Canada-U.S. Income Tax Convention (Convention) requires Canada to provide a resident of Canada with an exemption for any amounts rolled into an IRA. When amounts are subsequently received out of such an IRA, it is our view that the payment which relates to the lump sum pension payments rolled into the IRA, together with any income earned in the IRA, will continue to be subject to tax as pension payments pursuant to subparagraph 56(1)(a)(i) of the Act. That is, amounts rolled to an IRA from a U.S. pension fund including a 401(k) plan retain their identity as pension funds and will be taxed as such.

I must decide if the respondent is correct. If the amount from the IRA is a “superannuation or pension benefit" it makes no difference whether the amounts withdrawn in 1986 were income or capital; they are included in the appellant's income: The Queen v. Herman, [1978] C.T.C. 442; 78 D.T.C. 6311 at 446 (D.T.C. 6315). There is no definition of the term “superannuation or pension benefit” in the Act, but section 248 provides that:

“superannuation or pension benefit” includes any amount received out of or under a superannuation or pension fund or plan and without restricting the generality of the foregoing includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder,

(a) in accordance with the terms of the fund or plan,

(b) resulting from an amendment to or modification of the fund or plan, or

(c) resulting from the termination of the fund or plan . . .

Counsel for the appellant brought to the Court's attention the following reported cases which refer to the words "superannuation or pension plan": Molleur v. M.N.R., [1965] C.T.C. 267; 65 D.T.C. 5166 at 271 (D.T.C. 5169), West Hill Redevelopment Co. v. M.N.R., [1969] 2 Ex. C.R. 441; [1969] C.T.C. 581; 69 D.T.C. 5385 at 597 (D.T.C. 5393), The Queen v. Herman, supra, Specht v. The Queen, [1975] C.T.C. 126; 75 D.T.C. 5069, Burke v. The Queen, [1976] C.T.C. 209; 76 D.T.C. 6075, Jackson v. M.N.R., [1951] Ex. C.R. 52; [1951] C.T.C. 9; 51 D.T.C. 447 at 14 (D.T.C. 450) and M.N.R. v. Eastern Abbatoirs, [1963] C.T.C. 19; 63 D.T.C. 1023 at 22 (D.T.C. 1025).

The reasons for judgment in most of these decisions refer to dictionary definitions of the words "superannuation" and "pension". These words are defined in the following dictionaries:

The Shorter Oxford English Dictionary

superannuation . . . the act of superannuating an official; also, the allowance or pension granted to one who is discharged on account of age. . .

pension . . . an annuity or other periodical payment made, esp. by a government, a company, or an employer of labour, in consideration of past services. . .

Random House Dictionary of the English Language

superannuation . . . a pension or allowance to a superannuated person.

pension. . . a fixed amount, other than wages, paid at regular intervals to a person or the person's surviving dependents in consideration of past services, age, merit, poverty, injury, loss sustained, etc. . . . a retirement pension.

In the French language the words “superannuation or pension benefit” in subparagraph 56(1)(a)(i) are d’une prestation de retraite ou d'autres pensions".

Le Grand Robert de la Langue Française defines these words as follows:

prestation 1. Action de fournir; résultat de cette action. . .

retraite . . . situation d’une personne qui cesse d'exercer une fonction, un emploi, d'accomplir un travail régulier rémunéré et qui a droit à une somme d'argent régulièrement versée (Pension). Vieilli.

pension . . . Allocation périodique qui est payée a une personne pour assurer son existence, pour la récompenser de services rendus, pour l'indemniser. . .

The same dictionary defines "pension de retraite” as" Le passage de l'activité . . . à la retraite. . .”.

Hence, the words "superannuation or pension benefit" in subparagraph 56(1)(a)(i) contemplate a payment of a fixed or determinable allowance paid at regular intervals to a person usually, but not always, as a result of the termination of employment for the purpose of providing that person with a minimum means of existence; the formal program for the payment of the specified benefits, or the way the benefits are to be carried out, must be organized or promoted by a person other than the beneficiary since the beneficiary's right to receive the superannuation or pension benefits is determined by the superannuation or pension plan contemplated by subparagraph 56(1)(a)(i). In other words, the regularity and amount of the payments are made according to the terms of a plan and not at the discretion or direction of the beneficiary.

The respondent says the amounts withdrawn from the IRA in 1986 were benefits received "out of the IRA which represented the amounts rolled from the US pension plan to the IRA in 1975 as well as income earned in these amounts”. The respondent is of the view the US$38,642.89 was required to be rolled into an IRA once Abrahamson left Case and retained its identity as a pension benefit.

Paragraph 3 of Article XVIII of the Canada-U.S Tax Convention, 1980 includes a retirement plan within the definition of pension. Therefore, counsel for the respondent submitted, for purposes of Article XVIII, the payments out of the IRA are taxable in Canada. Mr. Gill reiterated his client's view as set forth in the position paper. He argued that because the transfer of funds from the Case plan to the IRA was exempt from tax under U.S. law it could not be taxed in Canada under the Convention of 1980. This, he said, is the relevance of Article XVIII. He added that if the appellant had not moved to Canada any amount withdrawn from the IRA would have been taxable in the United States. In other words, he said, under the laws of Canada, specifically the Convention of 1980, an exemption is given for a U.S. rollover. Therefore, in the respondent's view, “it seems implicit that when moneys are taken out of, in this instance, an IRA, [the receipt] should be taxable”. Thus the respondent included the $85,126 in the appellant's income for 1986.

Mr. Gill claimed that in making this submission he is “not suggesting that the Tax Treaty can expand the scope of taxation”. The relevant provisions of the Act, he argued, should be construed in such a manner that they are responsive to the tax treatment of eventually taxing a receipt of property that previously was free from tax in a year due to the tax law granting a tax deferral. The provisions of the Act, namely paragraph 56(1)(a), subsection 254(a) and, if necessary, subsection 3(a), he submitted, should be construed without distorting their meaning in a manner responsive to the exemption in Article XVIII. In short, Mr. Gill's position, or rather that of his client, is that since the appellant's transfer of assets from the Case plan to the IRA was excluded from tax under United States law and by virtue of paragraph 1 of Article XVIII of the Convention of 1980, the Act should be interpreted to include in income in the year any amounts withdrawn from the IRA.

I cannot agree with the respondent's reason for including the money received out of the IRA in Mr. Abrahamson's income for 1986. Firstly, tax conventions are entered into between countries for, amongst other reasons, the avoidance of double taxation and not to enhance taxation. A tax convention cannot grant Canada a greater right to tax than does the Act itself.

Secondly, assuming his theory that a tax-free transfer of property must eventually result in a taxable event is correct, the respondent has relied on a provision that was not law when the tax-free transfer of property originally took place. The Canada-United States Tax Convention, 1980, on which the respondent relies, was not in force in 1975. Consequently, while the transfer of the taxpayer's contributions of the Case plan to the IRA in 1975 may have qualified for tax exclusion in the United States, I am not satisfied there was a similar qualification under the laws of Canada by virtue either of the Act or any tax convention. Article VIA of the Canada-United States Tax Convention in force in 197510 [10] exempted from Canadian tax pensions and life annuities derived from within the United States by a resident of Canada. The term "pensions" referred to in Article VIA of the earlier Convention contemplates periodic payments. Under no stretch of one’s imagination were the amounts received from the Case plan “life annuities". It may well be, as his counsel suggested, that since Abrahamson was resident in Canada since mid-June 1975 any benefit he received from the Case pension plan in August and October of that year ought to have been included in his income for Canadian tax purposes in 197511 [11] notwithstanding its transfer to the IRA; but this question is not before me.

Thirdly, an IRA is a non-resident inter vivos trust. The IRA in issue had as its primary beneficiaries persons who, at all relevant times, were resident in Canada. The trust was settled by Abrahamson for the benefit of himself and his spouse. It was a discretionary trust. The IRA was not established by Abrahamson to provide any employee benefits. When Abrahamson retired from Case he had the option of receiving a benefit from the Case plan on a monthly basis immediately or on retirement, or immediately in a lump sum. He was not legally compelled to transfer his benefits from the Case plan to the IRA; I assume he did so voluntarily to avoid paying the tax at the tide. Once the money was withdrawn from the Case plan Abrahamson ceased to have any rights in that plan and the trustee of the Case plan had fulfilled his obligations to Abrahamson. Abrahamson was free to do as he wished with the money. He settled a trust, the IRA.

The IRA was not a superannuation or pension plan as those words are used in the Act and the amounts received by Abrahamson from an IRA in 1986 were not on account of or in lieu of payment of or in satisfaction of a superannuation or pension benefit. The beneficiary of an IRA may have demanded the balance in his IRA at any time; payments out of the IRA were neither fixed, determinable nor paid at any regular intervals as are pension or superannuation benefits. For a payment to have been made out of an IRA at any particular time was the beneficiary's decision. The Act does not consider benefits from a RRSP [12] to be superannuation or pension benefits even when property from a pension plan was transferred to the RRSP and neither are benefits from an IRA. The Act deals with pension and superannuation benefits separately from other retirement funds such as a RRSP.

The taxability of a Canadian resident beneficiary of a non-resident inter vivos trust is determined by provisions in the Act such as subsections 75(2) and (3), sections 94 and 104. However, the taxation of trusts relating to deferred and special income arrangements such as RRSPs and registered pension plans are regulated by special rules set forth in the Act for such trusts; neither these trusts nor their beneficiaries are taxed under the ordinary rules of trusts and their beneficiaries. For the 1986 taxation year there were no rules in the Act dealing specifically with IRAs or similar retirement savings plans, other than RRSPs. The trust that is an IRA and its beneficiaries are taxed according to the general rules in the Act governing trusts. Income earned in the year by the IRA is included in the Canadian beneficiary's income and the annual income is added to, and becomes part of, the capital of the trust. When amounts are withdrawn from a trust they are capital except for the amount of any income that has been earned by the trust in the year of payment: Ansell Estate v. M.N.R., [1966] C.T.C. 785; 66 D.T.C. 5508 at pages 801-803 (D.T.C. 5516-17), per Thurlow, J. The Canadian resident beneficiary of an IRA is generally taxed on this basis. [13]

The respondent's second argument was that money received from the IRA by the appellant in 1986 was a payment out of or under a superannuation or pension fund or plan by virtue of subsection 254(a) of the Act. Subsection 254(a) reads:

For greater certainty it is hereby declared that, where a document has been issued or a contract entered into (either before, on or after September 15, 1953) purporting to create, to establish, to extinguish or to be in substitution for, a taxpayer's right to an amount or amounts, immediately or in the future, out of or under a superannuation or pension fund or plan,

(a) if the rights provided for in the document or contract are rights provided for by the superannuation or pension plan or are rights to a payment or payments out of the superannuation or pension fund, any payment under the document or contract is a payment out of or under the superannuation or pension fund or plan and the taxpayer shall be deemed not to have received, by the issuance of the document or entering into the contract, an amount out of or under the superannuation or pension fund or plan, and . . .

Mr. Gill argued the IRA was entered into“ " in substitution for" Abrahamson's right to an amount out of the Case pension plan. Rather than taking the funds from the pension plan and paying tax, it was suggested, Abrahamson elected to have an IRA and avoid adverse tax consequences, I have no doubt this is in fact so, but does a legitimate attempt to avoid adverse tax consequences necessarily result in taxation?

The purpose of subsection 254(a) is described by the Minister of National Revenue in his Interpretation Bulletin IT-499, which was issued on November 24, 1983. Paragraph 6 reads:

In certain cases, pursuant to a superannuation or pension plan, employers maintain annuity contracts in the names of their employees. These contracts may be individual contracts or a group contract in respect of. all employees covered by the plan. Some plans provide that, if an employee leaves the employment prior to attaining the retirement age specified in the plan, there will be received from an insurance company either an individual annuity contract or a certificate showing the employee's equity in a group annuity contract. By virtue of paragraph 254(a), an annuity contract issued to an employee in these circumstances does not give rise to income in the employee's hands at the time of issue. Any amount subsequently received by the ex-employee or other person under the contract, however, whether periodically upon maturity of the contract or as a lump sum then or prior to that time, is income when received. The amounts so received are not treated as annuity payments but are included in income either under subparagraph 56(1)(a)(i) as superannuation or pension benefits or under paragraph 6(1)(g) if the plan is an employee benefit plan.

I agree with this interpretation. Where a pension plan provides for the pension benefit to be paid in the form of an annuity all payments received under the annuity are treated as if they came out of the pension plan [14] . This is not the situation at bar. It may well be Abrahamson elected to transfer the Case plan funds to an IRA to avoid paying tax. But to tax Abrahamson in Canada in 1986, the respondent must base this assessment on a provision in the Act. Subsection 254(a) is not a provision which assists the respondent. I cannot find the IRA was entered into purporting to create, to establish, to extinguish or to be in substitution for a taxpayer's right to an amount out of the Case plan. The Case plan and the IRA were different documents with different causes, considerations and objects. That money from one was used to fund the other does not make the benefits of the IRA amounts out of or under the Case plan. The amounts from the Case plan lost their identity once they were received, either actually or constructively, by Abrahamson and were applied to settle the IRA. [15]

Counsel also referred the Court to the reasons for judgment of the Federal Court of Appeal in Canada v. Fries, [1989] 1 C.T.C. 471; 89 D.T.C. 5240; revd [1990] 2 C.T.C. 439 in support of his third submission that the money withdrawn from the IRA in 1986 was income from a source: subsection 3(a). The issue in Fries was whether "strike pay" paid to an individual by his union for agreeing to participate in a strike was income. The Court of Appeal agreed with the Federal Court-Trial Division, that the "strike pay" was income from a source within the meaning of subsection 3(a) of the Act. The taxpayer appealed the judgment to the Supreme Court of Canada. On November 1, 1990, Sopinka, J., delivering judgment of the Supreme Court, stated at page 439:

We are not satisfed that the payments by way of strike pay in this case come within the definition of “income . . . from a source” within the meaning of section 3 of the Income Tax Act. In these circumstances the benefit of the doubt must go to the taxpayer. The appeal is therefore allowed and the decision of the Tax Review Board is restored. The appellants are to have their costs throughout.

In my view, except for that portion which was income earned by the IRA in 1986, what was withdrawn from the IRA by Abrahamson was capital. I cannot satisfy myself that the portion of the amount withdrawn, which was not income earned in 1986, was income from a source within the meaning of section 3 of the Act. The capital included the capital settled on the IRA in 1975 and income earned and accumulated by the trust between 1975 and 1985, inclusive.

The appeal is allowed with costs.

Appeal allowed.