Brown v. The Queen, 79 DTC 5421, [1979] CTC 476 (FCTD)

Cattanach, J:—It is apparent from the pleadings herein that this is an appeal from a decision (or perhaps four decisions) of the Tax Review Board dated February 16, 1979 whereby the plaintiff’s appeals from assessments to income tax for his 1973, 1974, 1975 and 1976 taxation years were dismissed although the allegations in the statement of claim which were admitted in the statement of defence are not consistent with the information contained in the material transmitted to the Registry of this Court as required by section 176 of the Income Tax Act.

There is no dispute between the parties as to the facts. The dispute is as to propriety of the inclusion of amounts in the plaintiff’s taxable income in the years in question.

The facts can best be set out by reproducing paragraphs 1 to 8 of the statement of claim each of which paragraphs has been admitted in the statement of defence:

1. The plaintiff is the son of the late Ethel Jane Brown and one of the beneficiaries of her estate which estate is hereinafter referred to as the “trust”.

2. The last will and testament of Ethel Jane Brown provided that

“All the rest and residue of my estate I direct my trustee to invest and keep invested .. . and to receive the income therefrom and the income of so much of my estate as shall for the time being remain unsold and unconverted, and to pay the said income to my son, Grant Cullen Brown, during his lifetime, and upon his death to my daughter-in-law, Ruth Elizabeth Brown, if living at his death.”

[Paragraph 3(e)]

3. In each of the 1973 to 1976 taxation years inclusive, income received by the trust was paid to the plaintiff.

4. In computing its income pursuant to the provisions of the Income Tax Act, hereinafter referred to as the “Act”, the trust did not deduct any amount on account of the said payments to the plaintiff.

5. The plaintiff, in computing his income for tax purposes for the 1973, 1974, 1975 and 1976 taxation years, has not included any amount on account of the receipts from the trust as aforesaid.

6. By Notices of Reassessment made in respect of the 1973 to 1976 taxation years inclusive the Minister of National Revenue included the following amounts in the computation of the plaintiff’s income:

Taxation	Date of Notice
Year	of Reassessment	Amount
1973	August 11, 1977	$12,519.57
1974	August 11, 1977	14,718.68
1975	August 11, 1977	18,453.04
1976	October 7, 1977	17,015.41

7. By Notices of Objection each dated November 5, 1977 the plaintiff appealed directly to the Tax Review Board and waived reconsideration of the assessments made in respect of the 1973 to 1976 taxation years inclusive as set out above.

8. By decisions each dated the 16th day of February, 1979, the Tax Review Board dismissed the appeals by the plaintiff.

The dates of the notices of reassessment set forth in paragraph 6 do not coincide with the dates on notices of reassessment included in the material transmitted to the Registry nor do the amounts coincide. These documents must be photostatic copies of the notices of reassessment because that is what each document is called on its face and it bears the printed name of the Deputy Minister of National Revenue for Taxation over that title which legend is the only matter which confers authenticity on the document by virtue of the deeming provision in subsection 244(13) of the Income Tax Act.

It is possible that there were other notices of reassessment made on different dates and in different amounts than those in paragraph 6 but that seems unlikely since three of the four dates on the notices of reassessment filed are subsequent to the dates in paragraph 6.

The learned member of the Tax Review Board in his reasons for decision dated February 16, 1979 identified the appeals as being “appeals from assessments of income tax for the appellant’s 1973, 1974, 1975 and 1976 taxation years’’.

His conclusion was:

I can see no basis on which I can allow these appeals and they must therefore be dismissed.

However the only formal decision in the material sent to the Registry reads:

DECISION

It is ordered and adjudged that the appeals in respect of the 1976 taxation year be and the same is hereby dismissed.

Signed at Ottawa, Canada

this 16th day of February, 1979

The member then affixed his signature.

There were no similar decisions included in the material sent to the Registry with respect to the plaintiff’s 1973, 1974 and 1975 taxation years. Therefore it would seem to follow that the appeals for the 1973, 1974 and 1975 taxation years were not dismissed but it was the clear intent from the concluding sentence in the reasons for decision that these appeals were also to be dismissed.

Perhaps the additional three decisions were not included in the material sent up.

I am confirmed in this assumption by the clear language in paragraph 8 of the statement of claim reading:

By decisions each dated the 16th day of February, 1979, the Tax Review Board dismissed the appeal by the plaintiff.

This paragraph was also admitted in the statement of defence.

Because counsel for the parties agreed and this appeal was presented on that basis I accept that paragraph 6 of the statement of claim accurately reflects the additional amounts which were included in the plaintiff’s income in each of the taxation years enumerated and income tax thereon was exacted from the plaintiff in those years.

I also accept that the plaintiff’s four appeals against the assessments in the taxation years in question were dismissed by the Tax Review Board as alleged in paragraph 8 of the statement of claim.

The issue between the parties (it is the same issue in each taxation year in question) is succinctly set out in the statement of claim and statement of defence.

Paragraph 9 of the statement of claim reads:

The plaintiff states that pursuant to the provisions of subsections 104(6) and (13) of the Act since the trust did not deduct, in computing its income for tax purposes, any amount on account of amounts paid to the plaintiff, the plaintiff is not subject to tax on the said amounts.

Paragraph 3 of the defence reads:

It is submitted that as the income of the trust at all material times was payable to the plaintiff in the 1973 and 1976 taxation years inclusive, such income was properly included in computing the plantiff’s income for the said years by virtue of subsection 104(13) of the Income Tax Act, SC 1970-71-72, Chapter 63 and amendments thereto, notwithstanding that the trust in computing its income for the same taxation years chose not to deduct the said sums as it was allowed to do so by virtue of subsection 104(6) of the Income Tax Act.

Thus the matter falls to be determined upon the interpretation of subsections (6) and (13) of section 104 of the Income Tax Act.

A trust or an estate is not a person either natural or fictitious, but because income enures to a trust or estate that source of revenue has not escapted the tax collector.

The Income Tax Act provides by subsection 104(2) that a trust, for the purposes of the Act, shall be taxed as an individual (except that deductions personal to an individudal are not permitted) and this had been so since the temporary Income War Tax Act.

Basically what is contended on behalf of the plaintiff is that when no deduction has been claimed by an estate or trust under subsection 104(6) of an amount payable in the year to a beneficiary then the provisions of subsection 104(13) do not require that such amount shall be included in the income of the beneficiary for that year and tax computed thereon but rather it should be taxed in the hands of the trust only.

As I appreciate that contention it amounts to this:

(a) what is deducted by the trust from its income under subsection 104(6) is taxable income in the hands of the beneficiary, and

(b) what is not deducted by the trust from its income is not taxable income in the hands of the beneficiary under subsection 104(13).

Subsection 104(13) reads:

104.(13) Such part of the amount that would be the income of a trust for a taxation year if no deduction were made under subsection (6) or (12) or under regulations made under paragraph 20(1)(a) as was payable in the year to a beneficiary shall be included in computing the income of the person to whom it so became payable whether or not it was paid to him in that year and shall not be included in computing his income for a subsequent year in which it was paid.

Contradictorily to the contention on behalf of the plaintiff the basic contention on behalf of the defendant is that subsection 104(13) is a charging section with respect to the beneficiary and subsection (6) is an exempting section with respect to the trust and that the words:

Such part of the amount that would be the income of a trust for a taxation year if no deductions were made under subsection (6). . . as was payable in the year to a beneficiary

do not avail the plaintiff and that the circumstance that the trust chose not to deduct the amount payable to a beneficiary from its income does not detract from the language of subsection 104(13) that the amount paid to the beneficiary:

shall be included in computing the income of the person to whom it became so payable whether or not it was paid to him in that year and shall not be included in computing his income for a subsequent year in which it was paid.

In the facts of these appeals the plaintiff was entitled under the will of his late mother to all of the income from the investments of the estate during his lifetime. The amounts in paragraph (6) of the statement of claim included by the Minister in the plaintiffs’ income for the years therein mentioned represent all of the income from the estate’s investments and the entire amount was paid by the estate to the plaintiff in each year.

Therefore the first three words of subsection 104(13) being “Such part of” do not apply in the facts of these appeals because it was not a part of an amount that was paid to the beneficiary but the whole of the investment income in each year unless the whole is to be construed as a part in which event the result is the same.

As I appreciate the meaning of subsection 104(13) from the language employed therein it is that the amount that would be the income of the trust if no deduction was made under subsection (6) (and no such deduction was made by the estate) as was payable to the beneficiary shall be included in the income of the beneficiary.

Therefore it follows that the beneficiary is liable for the tax in either event:

(1) if the trust deducts the amount payable to the beneficiary from the income in its hands the beneficiary is taxable thereon, and

(2) if the trust does not deduct the amount payable to the beneficiary that amount is nevertheless taxable in the hands of the beneficiary by virtue of subsection 104(13) and it is also taxable in the hands of the estate by virtue of subsection 104(2).

In this second eventuality there is definitely double taxation.

The avoidance of double taxation is the purpose served by subsection 104(6) in that the trust or estate is permitted thereby to deduct from its income the amount that is payable to the beneficiary.

Subsection 104(6) being an exempting provision the discretionary word “may” is used. That is to say the estate may deduct the amount or it may not. If the estate does deduct the amount, as it is permitted so to do, then the beneficiary is solely liable for tax on the amount and the estate is not liable to tax thereon.

On the other hand, for the reasons I have expressed, if the estate does not see fit to avail itself of the alleviation provided by subsection 104(6) by claiming the deduction then the estate is liable for the tax and the beneficiary also remains liable therefor.

It may be that the remedy of a beneficiary, should the trustees of an estate not claim the deduction under subsection 104(6), would be by action against the trustees sounded in negligence.

The plaintiff, who is a barrister and solicitor carrying on his profession at Tillsonburg, Ontario in addition to being the beneficiary during his lifetime is also the trustee. He gave evidence to the effect that he had prolonged discussions with officials of the Department of National Revenue, which Department by virtue of the schedule to the Department of National Revenue Act, RSC 1970, c N-15, is charged with the responsibility for the collection of income taxes, and that he was assured by those officials that if the estate did not deduct from its income the amount paid to the beneficiary then the beneficiary would not be liable therefor and that he acted upon that advice and assurance to his detriment and also to the detriment of the ultimate beneficiaries of the estate.

The plaintiff’s mother by her will provided that the income from her estate should be paid to the plaintiff during his lifetime and upon his death to his wife, if living. Upon the death of both the whole of the residue of the estate is to be divided equally among her four grandchildren.

It was the plaintiff’s fondest wish to carry out the wishes of his mother that her estate be divided equally among her four grandchildren. To accomplish this he considered it expedient that the tax on the income of the estate be exacted at that source and not in the hands of the four beneficiaries. He foresaw that the incomes of the four grandchildren might vary greatly with the result that the rate of tax would be higher on some than on others and therefore his mother’s wish for an equal distribution would be frustrated. The distribution would be equal but the consequence of equal distribution might have unequal tax results.

In his testimony the plaintiff as above summarized might raise the possibility of an estoppel. Estoppel was not pleaded but in any event it is not open to the plaintiff to set up an estoppel to prevent the operation of a Statute see Stickel v MNR, [1972] FC 672; [1972] CTC 210; 72 DTC 81.

With respect to the frustration of the wishes of the testatrix that frustration would be caused by the operation of the Income Tax Act from which there is no relief (only legitimate avoidance).

It was submitted by counsel for the plaintiff that the interpretation of subsection 104(13) advanced by him was consistent with the interpretation propounded in a tax information pamphlet entitled “Trusts and Their Beneficiaries’’ particularly paragraph 25 thereof. Assuming that this pamphlet was published and circulated by the Department of National Revenue, there being no indication that the Department was the author, it is nothing more than what it is stated to be, that is a tax information pamphlet. This paragraph of this pamphlet was the subject of comment and explanation in Interpretation Bulletin IT-342. At one time these information bulletins were issued by the Deputy Minister of National Revenue but there was no indication on the face of the document produced before me that this document was so issued.

Assuming that this pamphlet and this interpretation bulletin were issued by the Department of National Revenue under the authority of the deputy head of that Department these documents are not authoratative interpretations of the Statute. They are nothing more than the Department’s interpretation of the Statute for departmental purposes and cannot be considered by a Court in determining the proper interpretation of a statute which is the function of the judicial branch of government, that is the Courts.

It would appear, however, that during the taxation years 1973 to 1976 the Minister assessed the trust for tax on the income earned by the investments of the estate in the hands of the trustee.

Sometime in 1977 the Minister did an about face and concluded that the income should have been taxed in those years in the hands of the beneficiary (and in all likelihood with a higher incidence of taxation).

This the Minister is authorized to do by section 152 of the Income Tax Act. Liability for tax is not affected by an incorrect assessment (for the reasons expressed this taxation was not incorrect) and the Minister may reassess a taxpayer within four years or beyond four years when there has been inaccurate information in a return, that is to say “misrepresentation” fraudulent or innocent.

This being so the Minister not only proceeded to reassess the planitiff and include the income from the trust in the plaintiff’s taxable income for the years in question as beneficiary but the Minister also reassessed the trust by deducting from the income of the trust the amount that was payableto and paidto the beneficiary, and this despite the fact that the trust was well aware of the provisions of subsection 104(6) and deliberately refrained from claiming the deduction.

This in my view, was an unwarranted interference by the Minister in the conduct of the affairs of the trust by the trustee. The Minister’s function is to collect income tax from a taxpayer but not to conduct the affairs of the taxpayer. In this instance the Minister was actuated by altruistic motives. Belatedly his officers realized that the trust income paid to the beneficiary by the estate should have been included in the income of the beneficiary and that this income had been taxed as income of the estate did not alter taxability in the hands of the beneficiary. Because the plaintiff was so reassessed the Minister, through his officers, exercised the option available to the estate by subsection 104(6) on behalf of the trustee, even though the trustee had seen fit not to do so, to deduct the amounts paid to the beneficiary in the year in question and reassessed the estate accordingly resulting in nil assessment.

For the reasons I have expressed I have concluded that the income payable to the plaintiff as beneficiary of the trust in the years 1973, 1974, 1975 and 1976 taxation years was properly so included from which it follows that the appeals are dismissed.

The defendant has asked for Her costs. Despite the defendant’s success the circumstances recited do not warrant an award of costs to the defendant and the appeals are therefore dismissed without costs.