Deitcher v. The Queen, 79 DTC 5415, [1979] CTC 500 (FCTD)

Marceau, J:—This action—which was appealed from a decision of the Tax Review Board upholding a reassessment dated November 7, 1974, made on plaintiff by the Minister for the 1971 taxation year—concerns the interpretation and application of two provisions of the Income Tax Act (RSC 1952, c 148) as they stood in 1971, namely the provisions of subsections 1 and 5 of the old section 110 (now section 216 in the new Act), which then read as follows:

110.(1) Where an amount has been paid during a taxation year to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent on real property in Canada or a timber royalty, he may, within two years from the end of the taxation year, file a return of income under Part I in the form prescribed for a person resident in Canada for that taxation year and he shall, without affecting his liability for tax otherwise payable under Part I, thereupon be liable, in lieu of paying tax under this Part on that amount, to pay tax under Part I for that taxation year as though

(a) he were a person resident in Canada and were not exempt from tax under section 62,

(b) his interest in real property in Canada or timber limits in Canada were his only source of income, and

(c) he were not entitled to any deduction from income to determine taxable income.

(5) Where a non-resident person has filed a return of income under Part I for a taxation year as permitted by this section and has, in computing his income under Part I for that year, deducted an amount under paragraph (a) of subsection (1) of section 11 in respect of real property in Canada or a timber limit in Canada, he Shall, within the time prescribed by section 44 for filing a return of income under Part I, file a return of income under Part I, in the form prescribed for a person resident in Canada, for any subsequent taxation year in which that real property or timber limit or any interest therein is disposed of, within the meaning of section 20, by him, and he shall, without affecting his liability for tax otherwise payable under Part I, thereupon be liable, in lieu of paying tax under this Part on any amount paid to him or deemed by this Part to have been paid to him in that subsequent taxation year in respect of any interest of that person in real property in Canada or timber limits in Canada, to pay tax under Part I for that subsequent taxation year as though

(a) he were a person resident in Canada,

(b) his interest in real property in Canada or timber limits in Canada were his only source of income, and

(c) he were not entitled to any deduction from income in computing his taxable income.* [1]

The facts are straightforward and not in dispute; they may be summarized as follows. In 1961 and 1962 plaintiff, who was then a Canadian citizen and resident, acquired a joint half of an apartment building located in Laval, in the province of Quebec. Until 1970, in reporting income from this building annually for tax purposes, plaintiff claimed, as he was entitled to do under paragraph 11(1)(a) of the Act, a capital cost allowance, and benefited accordingly from depreciation deductions amounting to a total of $30,580.35. In 1970, the undepreciated balance of the capital cost amounted to $60,382.71.

On May 18, 1970 plaintiff became a resident of the Bahamas. In submitting his tax return for 1970, he again claimed a deduction for capital cost depreciation on his building relying on the option authorized by subsection 110(1), reproduced above. The following year, however, plaintiff disposed of his share in the building for a price considerably greater than its purchase price. By the terms of subsection 110(5), which I also reproduced above, he was required to make a return accordingly, and include in his income the recovery of depreciation which he had just realized. This is what he did, but relying on his status as a non-resident he claimed to be able to limit the amount of this recovery to the deduction claimed by him in this capacity, that is, only that for the preceding year, amounting to $2,262.43. In his reassessment, the Minister challenged this procedure and included in plaintiff’s taxable income the total amount of the deductions claimed by him since 1962. Plaintiff naturally objected, but in vain, and as his arguments were dismissed by the Tax Review Board, he submitted his procedure to the Court.

Through his counsel, plaintiff maintained that the actual wording of subsections 1 and 5 of section 110, as they stood in 1971, supports his arguments that the amount of recovery which he is required to account for should be limited to the deduction claimed by him in the preceding year, and he further argued that the changes which Parliament saw fit to make subsequently to these provisions in Part III of the Act confirmed the interpretation supported by him. More precisely, his argument was as follows.

Plaintiff contended, first, that Parts I and III of the Act should be treated as separate, each being independant of the other and constituting autonomous legislation in itself. Section 110 (like its succesor in the present Act) refers to Part I, but merely by “reference” and solely in order to avoid a repetition of certain provisions already stated elsewhere. The reference sections should accordingly be read as if they were reproduced in the section referring to them, and the scope of the latter should not be extended beyond the context in which it must apply. In 1970, section 110 concerned only a non-resident, with the result that the deduction which it permitted initially (subsection 1) and the recovery which it then authorized (subsection 5) could only relate to a non-resident. This was his situation. In 1970, so to speak, he moved out of Part I into Part III, and his obligation to include the depreciation recovery in his income in 1971 resulted solely from the provisions in Part III, that is only those of subsection 5 of section 110, which could only apply to depreciation deductions previously claimed by him under subsection 1.

The result, plaintiff went on, is questionable in terms of equity, but equity is not the basis for interpreting a fiscal statute, and indeed it was to alter this result that Parliament intervened in 1974, amending subsection 5 of section 216 (formerly section 110) and requiring that in future a taxpayer should account at the time he disposes of his property for the recovery covering both the depreciation deductions he might have obtained under Part I and those obtained by him under Part III.

That, as I understand it, is plaintiff’s argument. Unfortunately, it was not an argument which succeeded in persuading me.

To begin with, in my opinion the interpretative analysis suggested by plaintiff does not take into account the wording actually used by the legislator in subsection 1 of section 110. Thus, the subsection does not refer strictly to certain specific provisions of Part I, it speaks of a tax return “under Part I”, and it authorizes the non-resident to be treated “as though he were a resident in Canada”. Accordingly, with regard to the subject in question and for these purposes, the entire scheme of Part I is incorporated and the taxpayer is treated like a Canadian resident. I cannot read MNR v Bessemer Trust Co et al, [1972] CTC 473; [1973] CTC 12; 72 DTC 6404; 73 DTC 5054, in any other way. In my opinion, the result is that as a consequence of his opinion in 1970, plaintiff with respect to his real property remained subject to the same scheme as before, and he continued to be treated in this regard as if he had remained a Canadian resident. In 1971, by the application of subsection 5, he was required to be subject to the same scheme and to be treated as if he had still been a Canadian resident.

Then, to the extent that legislative changes subsequent to 1971 are relevant. I do not interpret them the same way as plaintiff. The wording of subsection 5 of section 216 (formerly section 110), amended in 1974 by 1974-75-76, c 26, subsection 121(5), reads as follows:

(5) Where a person or a trust of which that person is a beneficiary had filed a return of income under Part I for a taxation year as permitted by this section or as required by section 150 and, in computing the amount of his income under Part I an amount has been deducted under paragraph 20(1)(a), or is deemed by subsection 107(2) to have been allowed under that paragraph, in respect of real property in Canada, a timber resource property or a timber limit in Canada, he shall, within the time prescribed by section 150 for filing a return of income under Part I, file a return of income under Part I in the form prescribed for a person resident in Canada, for any subsequent taxation year in which he was a non-resident person and in which that real property, timber resource property or timber limit or any interest therein is disposed of, within the meaning of section 13, by him or by a partnership of which he is a member, and he shall, without affecting his liability for tax otherwise payable under Part I, thereupon be liable, in lieu of paying tax under this Part on any amount paid, or deemed by this Part to have been paid to him or to a partnership of which he is a member in that subsequent taxation year in respect of any interest in real property, timber resource property or timber limit in Canada, to pay under Part I for that subsequent taxation year as though

(a) he were a person resident in Canada and not exempt from tax under section 149;

(b) his income from his interest in real property, timber resource property or timber limits in Canada and his share of the income of a partnership of which he was a member from its interest in real property, timber resource property or timber limits in Canada were his only income; and

(c) he were entitled to any deduction from income for the purpose of computing his taxable income.

In my opinion, the amendments made to the old legislation did not have the effect of covering in future a case like that of plaintiff; rather, they applied to a taxpayer who, having benefited from depreciation deductions while he was a Canadian resident, became a foreign resident and did not exercise the option authorized by subsection 1.

I am of the opinion that the Minister’s interpretation was correct and the Tax Review Board correctly upheld it; by exercising in 1970 the option allowed by him by subsection 1 of section 110, plaintiff remained subject with respect to his real property to the scheme of Part I, and thereupon had to be treated as though he were still resident in Canada.

The action will accordingly be dismissed with costs.

At the request of the parties, nevertheless, I will return the case to the Minister for him to make an assessment taking into account the undertaking given by him to fix the amount of the recovery at $30,588.35 instead of $31,159.05, as set forth in paragraph 11 of the joint statement of facts.