Citation: 2007TCC658
Date: 20071116
Docket: 2006-2147(IT)G
BETWEEN:
BERNICE MACKINNON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal
from an assessment by the Minister of National Revenue (the Minister) issued
against the appellant on October 11, 2005 and confirmed on April 20, 2006.
The Minister increased the appellant’s taxable income by $67,171.70 on the
basis that this amount was received by the appellant in her 2003 taxation
year as, on account of, in lieu of payment of or in satisfaction of, interest
pursuant to paragraph 12(1)(c) of the Income Tax Act (the Act).
The appellant also attempted to deduct her legal expenses incurred to recover
RRSP money to which she was entitled as the named beneficiary and that had been
remitted to her son’s estate by mistake. The deduction was refused by the
Minister.
[2] The parties
provided the Court with an Agreed Statement of Facts which is reproduced below:
1. The Appellant is
the mother of Dennis Mackinnon who died on September 26, 1994;
2. Patrick Mackinnon,
the son of Dennis Mackinnon, was named as the beneficiary of his Father’s
estate;
3. At the time of his death, Dennis Mackinnon
owned a Registered Retirement Savings Plan (“RRSP”) with Nesbitt Burns in the
amount of $162,554.94;
4. The RRSP was converted into an annuity with
Patrick Mackinnon as the sole beneficiary;
5. In 2001, after the RRSP had been converted
into an annuity for the benefit of Patrick Mackinnon, Nesbitt Burns
determined that the Appellant was named as the beneficiary to the RRSP;
6. The Appellant filed an Application in the
Ontario Superior Court of Justice in order to recover the RRSP. More
specifically, the Order sought from the Court was “payment to the Applicant in
the sum of $235,517.00 inclusive of interest from the 26th day of
September, 1994;
7. In 2003, the Ontario Superior Court of
Justice awarded the Appellant the sum of $162,554.94 together with interest
fixed at the sum of $67,171.70. The interest accrued in relation to the RRSP
from September 26, 1994, until the date of the Ontario Superior Court of
Justice’s Judgment. A copy of the Judgment is attached as Schedule A;
8. The amount of interest of $67,171.70 referred
to in paragraph 7 was arrived at by the Ontario Superior Court of Justice
based on calculations submitted by the Estate’s accountant, Hewitt & Young,
which calculations is [sic] detailed on a sheet attached as Schedule B;
9. TD Canada Trust issued a T5 Investment
Information Slip to the Appellant on January 17, 2005, in respect of her
2003 taxation year, showing interest income in the amount of $67,171.70. A
copy of the T5 Investment Information Slip is attached as Schedule C;
10. During the 2003 taxation year, the Appellant
incurred legal expenses in the amount of $21,548.81 in order to recover the
amount of money described in paragraph 7 above;
11. The Minister of National Revenue (the “Minister”)
initially assessed the Appellant’s tax liability for the 2003 taxation year by
Notice dated May 13, 2004;
12. By Notice of Reassessment dated October 11,
2005, the Minister increased the Appellant’s 2003 taxable income by including
$67,171.70 of previously unreported interest income.
[3] When it was
determined that the RRSP money had been paid by mistake to the estate and later
rolled into an annuity for her grandson, the appellant was told that, if she brought
an action against Nesbitt Burns, the process would lead to a succession of
lawsuits in which the estate would be embroiled. To avoid all these lawsuits, it
was suggested that the estate should pay her what was rightfully hers and this
was agreed to by the executors of the estate. The application filed with the
Ontario Superior Court of Justice was necessary given the involvement of the
grandson, who at the time was a minor and was represented by his litigation
guardian, the children's lawyer.
[4] The appellant
agreed to settle her claim for the amount awarded by the Superior Court
judgment. She testified that she was entitled to more money than she agreed to
settle for, but accepted the settlement to avoid further litigation and costs.
[5] The compromise
amount was arrived at through calculations made by an accountant in order to establish
a fair value for the RRSP at the time of the judgment. To that end,
calculations were made that were based on past guaranteed income certificate
interest rates taken from the Bank of Canada’s Website and on a simulated
investment of the original amount of the RRSP, that is to say that the
$162,554.94 in the RRSP as of September 26, 1994, was divided into three
equal parts and invested for one-, two- and five-year terms. When the three
original GICs matured, the funds were re‑invested for 5 years after
deducting tax at the same rate as that applicable to the estate’s tax returns
for each year. The end result of these calculations was an after‑tax additional
value of $67,171.70, which is the amount that appears in the judgment of the
Superior Court of Justice. The total amount so calculated would have been
$89,647.82 had it not been for the deduction of taxes in the amount of
$22,476.13 paid by the estate and which the accountant took into consideration.
[6] Further
hypothetical calculations were made by the accountant to show that, had the
appellant settled for the full $89,647.82, her net amount after taxes would
have been higher, thus the benefit to her would have been greater. These
calculations being hypothetical, they are not relevant to resolving the issues
before this Court.
[7] The application for
approval of the settlement made before the Ontario Superior Court was opposed
by the litigation guardian representing the grandson, but only regarding the award
of pre‑judgment interest to the appellant. In an affidavit dated
March 10, 2003, Ruth Kilgour, the legal assistant to the Ottawa agent for the office of
the children's lawyer, set out a series of circumstances explaining why such an
award was being opposed.
[8] Notwithstanding the
children’s lawyer’s opposition, the application was eventually approved. The relevant
portions of the judgment read as follows:
JUDGMENT
THIS APPLICATION was heard this day
without a jury at Ottawa, in the presence of counsel for the Applicant and the
Respondent Patrick MacKinnon by his Litigation Guardian, the Office of the
Children’s Lawyer; no-one appearing for the Executor and Trustee of the Estate,
the T-D Canada Trust, although properly served as appears from the Affidavit of
Travis Henderson, sworn December 12, 2002, filed.
ON READING the Application Record, the
Affidavits of Bernice MacKinnon and Ruth Kilgor [sic], and the
exhibits contained therein; and upon hearing the submissions of counsel for the
parties:
1. THIS COURT ORDERS
that the Estate of Dennis MacKinnon, by its Executor and Trustee, the T-D
Canada Trust, pay to the Applicant the sum of One Hundred and Sixty-Two
Thousand, Five Hundred and Fifty-Four Dollars and Ninety-Four Cents
($162,554.94), together with interest fixed in the sum of Sixty-Seven Thousand,
One Hundred and Seventy-One Dollars and Seventy Cents ($67,171.70); for a total
of Two Hundred and Twenty-Nine Thousand, Seven Hundred and Twenty-Six Dollars
and Sixty-Four Cents ($229,726.64).
[9] The issues are
whether the appellant must include the amount of $67,171.70 in her income as
taxable interest for her 2003 taxation year, and if so, whether she can deduct
her legal expenses in the amount of $21,548.81 incurred to recover the RRSP
funds.
[10] I will deal first
with the issue of whether the $67,171.70 is interest. Counsel for the appellant
submits that the $67,171.70 paid to the appellant by the estate is not interest
as contemplated by the Income Tax Act. The Court must look at the
circumstances of each case and determine from the facts whether the amount paid
was intended by the parties to be interest irrespective of the fact that the
judgment identifies it as such. Counsel also submits that the Court must look
at the intention of the parties in resolving the issues between them. In this
case, he submits that the intent was to simply bridge the gap between the value
of the RRSP at the time it should have been paid to the appellant (1994) and
the time it was actually paid (2003) so that the appellant would receive the fair
value of the RRSP.
[11] Counsel for the
appellant further submits that since interest is not defined in the Act,
the meaning thereof becomes a question to be decided by the Court. He referred
the Court to the Supreme Court of Canada decision in Shell Canada v. Canada, [1999]
3 S.C.R. 622, where it was held that if there is no legal obligation
to pay interest, the payment cannot be interest, and also to a quotation from
the Federal Court of Appeal decision in the same case stating that something is
not interest merely because the parties agree to call it interest.
[12] Counsel for the
respondent submits that even though the Act does not define the term
interest, it has been defined by the Supreme Court of Canada in Re: Farm Security
Act 1944 (Saskatchewan), [1947] S.C.R. 394 (QL), in the
following passage by Mr. Justice Rand:
Interest is, in general
terms, the return or consideration or compensation for the use or retention by
one person of a sum of money, belonging to, in a colloquial sense, or owed to,
another. There may be other essential characteristics but they are not material
here. The relation of the obligation to pay interest to that of the principal
sum has been dealt with in a number of cases including: Economic Life Assur.
Society v. Usborne [[1902] A.C. 147] and of Duff J. in Union Investment
Co. v. Wells [(1929) 39 Can. S.C.R. at 645]; from which it is clear
that the former, depending on its terms, may be independent of the latter, or
that both may be integral parts of a single obligation or that interest may be
merely accessory to principal.
But the definition, as well
as the obligation, assumes that interest is referrable to a principal in money
or an obligation to pay money. Without that relational structure in fact and
whatever the basis of calculating or determining the amount, no obligation to
pay money or property can be deemed an obligation to pay interest.
[13] Counsel for the
respondent therefore submits that the wording used in the judgment makes it clear
that interest is what was paid in this case,
and that the wording of paragraph 12(1)(c) of the Act is
sufficiently broad to include this situation. The amount of $67,171.70 thus cannot
be anything other than taxable interest in the hands of the appellant.
[14] Paragraph 12(1)(c)
of the Act reads as follows:
12(1) There shall be included in computing the
income of a taxpayer for a taxation year as income from a business or property
such of the following amounts as are applicable:
(c) Interest — subject to
subsections (3) and (4.1), any amount received or receivable by the taxpayer in
the year (depending on the method regularly followed by the taxpayer in
computing the taxpayer's income) as, on account of, in lieu of payment of or in
satisfaction of, interest to the extent that the interest was not included in
computing the taxpayer's income for a preceding taxation year;
. . .
[15] The Shell Canada
case referred to by counsel for the appellant in fact established four factors
to be used in determining whether there is interest under paragraph 20(1)(c),
but this is in relation to the deductibility of interest. According to paragraph 20(1)(c),
the lack of an obligation to pay interest will prevent the interest from being
deductible and this may lend support to the argument that it is not interest per
se. I do not believe, however, that the fact that an amount may not be considered
interest under paragraph 20(1)(c) can make it something other than
interest for the purposes of other provisions of the Act, more
particularly paragraph 12(1)(c).
[16] Paragraph 12(1)(c)
of the Act does not specifically make mention of a legal obligation to
pay interest, but given the definition of interest found in Re Farm Security
Act, supra, interest arises when there is an amount due to, or
belonging to, another person for the period for which the interest is
calculated.
[17] The appellant's
position is that, until the Superior Court judgment was signed in March of
2003, the estate was under no obligation to pay anything whatsoever to the
appellant, there being no enforceable agreement between them and thus no
requirement to pay interest. Accordingly, the $67,171.70 is simply added on to
adjust the RRSP to its 2003 value and is therefore not paid on account of, in
lieu of payment of, or in satisfaction of, interest within the meaning of
paragraph 12(1)(c) of the Act.
[18] The fact of the
matter, though, is that the appellant was the designated beneficiary of the
RRSP and was entitled to receive the funds in question as early as 1994. By
reason of what has been termed a mistake by Nesbitt Burns, the appellant
was deprived of that sum of money for a period of over seven years. It is
Nesbitt Burns’ failure to pay the RRSP funds over to the appellant in 1994 that
has deprived her of the use of that money. It was Nesbitt Burns that owed the
appellant, the rightful owner of the money, consideration or compensation in
exchange for having deprived her of it. Had Nesbitt Burns paid the $67,171.70
directly to the appellant, the amount would have fallen within the definition
of interest found in Re Farm Security Act and thus would have been
taxable.
[19] In order to avoid
legal costs and a succession of actions, the appellant reached an agreement
with her son’s estate to settle her action against Nesbitt Burns by
accepting that the estate pay directly to her the principal amount of the RRSPs,
that is, its 1994 value, together with a sum of money which, in my opinion, can
only be compensation for having been deprived of the use of that money for over
seven years. The fact that the judgment refers to the $67,171.70 as interest is
consistent with the position taken by the children's lawyer, who was opposing the
award of pre-judgment interest.
[20] The appellant's
entitlement to the principal amount of the RRSP and the obligation to pay that
amount arose in 1994. The appellant, having been deprived of the use of that
money, therefore became entitled to be fully compensated, which is what the
judgment intended to do and what the litigation guardian was trying to prevent
in opposing the application. When an amount is awarded over and above the
amount wrongfully withheld, it has the characteristics of interest income and
therefore is to be taxed under paragraph 12(1)(c) (See Coughlan
v. R., [2001] 4 C.T.C. 2004).
[21] The second issue
concerns the deductibility of the legal expenses incurred by the appellant to
recover what was rightfully hers. In fact, the Agreed Statement of Facts states
that the legal expenses were incurred in order to recover the sum of
$162,554.94 together with interest fixed at $67,171.70.
[22] Counsel for the respondent
agrees that the legal expenses are deductible insofar as they pertain to the
recovery of the pre-judgment interest but are not deductible with respect to the
principal amount of the RRSP, as this should be considered as being of a capital
nature (paragraph 18(1)(b) of the Act), and therefore the legal
expenses relating thereto were not incurred for the purpose of gaining or
producing income from property under paragraph 18(1)(a) of the Act.
Counsel for the respondent therefore suggests that the legal expenses be prorated
accordingly. Counsel for the appellant maintains that the legal expenses
relating to the principal amount were incurred for the purpose of gaining or
producing income from property and that there is no capital aspect to the
payment of that amount.
[23] In Evans v. MNR,
60 DTC 1047, the Supreme Court of Canada addressed the issue of the deductibility
of legal fees. The appellant in that case was seeking to recover legal fees paid
in the pursuit of her testamentary right, as a beneficiary, to the income
flowing from her share of the residue of the estate. The court determined that
a distinction must be made between establishing a right to, or receiving, a
capital asset and collecting income to which one is entitled but which one
cannot obtain without incurring legal fees. The Supreme Court further said that
the nature of the property cannot be altered by the circumstance that it was
mistakenly claimed by another. Justice Cartwright also pointed out that the
grounds on which the payment or the right was withheld from the appellant were
in no way relevant and that the sole factor to be considered is the nature of
the right. He further stated that a right flowing from a will does not depend
on a court judgment for its existence. The judgment permits the release of a
sum of money owing to the legal owner and does not create the right to that
sum.
[24] The definition of
property found at subsection 248(1) of the Act, and more particularly
the phrase “a right of any kind whatever”, has been the subject of many court
decisions. In Manrell v. The Queen, 2003 DTC 5225, madam Justice Sharlow
had this to say on the meaning of property:
[48] I turn now to the jurisprudence
that has considered the statutory definition of “property” and the meaning of
the phrase “a right of any kind whatever”. There is ample authority for the
proposition that the word “property” is capable of many meanings, and that in
the fiscal context its meaning must be understood to be broad and inclusive.
For example Justice Linden, writing for this Court in Kieboom v. Minister of
National Revenue, [1992] 3 F.C. 488, [1992] 2 C.T.C. 59, 92 DTC 6382
(F.C.A.), said this:
As for the word property, it too has been widely
interpreted. The Income Tax Act, subsection 248(1) defines property as “property
of any kind whatever whether real or personal or corporeal or incorporeal [page
500] and, without restricting the generality of the foregoing includes (a) a
right of any kind whatever, a share or a chose in action,”. Lord Langdale once
stated that the word property is the 'most comprehensive of all the terms which
can be used, inasmuch as it is indicative and descriptive of every possible interest
which the party can have.” (See Jones v. Skinner (1836), 5 L.J. (N.S.)
Ch. 87 (Rolls Ct.), at page 90; see also Re Lunness (1919), 46
O.L.R. 320 (App. Div.), at page 322; Fasken, supra [Fasken,
David v. Minister of National Revenue, [1948] Ex.C.R. 580], at page 591;
and Vaillancourt v. Deputy M.N.R., [1991] 3 F.C. 663 (C.A.).)
[49] Based in part on this understanding of
the word “property”, Justice Linden concluded that a person who owns common
shares of a corporation is considered to have transferred property to his wife
when he enters into an arrangement whereby she subscribes for newly issued
common shares of the corporation at a nominal price, reducing his interest from
90% to 20%, while increasing her interest correspondingly. This case is
authority for the proposition that a share interest in a corporation is
property, and the transaction in issue was a transfer of property because it
resulted in a movement of part or all of that bundle of rights from one
shareholder to another. While this case recognizes and restates the proposition
that in the income tax context the word “property” has a very broad meaning, it
does not say that everything of value is “property”.
[50] The phrase upon which the Crown relies in this case, “a right
of any kind whatever”, like the word “property”, has a very broad meaning. But
it is not a word of infinite meaning. It cannot include every conceivable
right. It cannot be given a meaning that would extend the reach of the Income
Tax Act beyond what Parliament has conceived. Even counsel for the Crown
conceded that it does not include a human right, or a constitutional right.
[51] It is not difficult to imagine examples in which the
meaning of “a right of any kind whatever” would be taken too far. Consider the
case of a person who is injured in a car accident caused by the negligence of
another person. The injured person has the right, possibly a valuable right, to
claim damages against the negligent person. Suppose that claim is released in
consideration of the payment of a sum of money. One could say that the right to
claim damages was disposed of. But no one would accept the argument that the
payment is the proceeds of disposition of capital property. Why? Because
fundamentally the payment is compensation for a personal injury, something that
is well understood to be beyond the reach of the Income Tax Act.
Although a legal claim for damages for personal injury is a “right”, the
settlement transaction is not within the scope of the capital gains provisions
in the Income Tax Act.
[52]
Counsel for Mr. Manrell has provided
what appears to be an exhaustive list of all the cases in which something has [sic]
found to be “a right of any kind whatever”. I will not reproduce the whole
list. But I will cite a few illustrative examples. The right represented by a
term life insurance policy that has no cash surrender value but is convertible
without evidence of insurability is a “right” for purposes of the definition of
“property” in the Estate Tax Act, S.C. 1958, c. 29 (a definition very
similar to the definition in the Income Tax Act): Estate of Harry A.
Miller v. Minister of National Revenue, [1973] C.T.C. 793, 73 DTC 5583 (F.C.T.D.).
An entitlement to receive payments from the pension plan of a deceased spouse
is a “right” for purposes of the definition: Driol v. Canada, [1989] 1
C.T.C. 2175, 89 DTC 122 (T.C.C.). An irrevocable promise in a marriage
contract to pay a sum of money to the spouse during the marriage gives rise to
a right in the hands of the recipient spouse as of the date of the promise, and
that right is at that time a “right” for purposes of the definition: Furfaro-Siconolfi
v. Canada, [1990] 2 F.C. 3, [1990] 1 C.T.C. 188, 90 DTC 6237
(F.C.T.D.). An entitlement to maintenance or alimony is a “right” for purpose
of the defintion [sic]: Canada v. Burgess, [1982] 1 F.C. 849, [1981]
C.T.C. 258, 81 DTC 5192 (F.C.T.D.), see also Nissim v. Canada, [1999] 1
C.T.C. 2119, Donald v. Canada, [1999] 1 C.T.C. 2025 (T.C.C.).
[53] The fact is that in the history of tax jurisprudence in
Canada, involving dozens of cases that consider the statutory definition
of “property”, there is not a single case in which the word “property” has been
held to include a right that is not or does not entail an exclusive and legally
enforceable claim. This does not prove that the Crown's argument is wrong, but
in my view it casts serious doubt on it.
[25] A distinction is to
be made between fees incurred to affirm a right and those incurred to acquire a
right. This distinction was made in Kellogg Co. of Canada v. M.N.R., 2
DTC 548 (Exchequer Court of Canada) at page 553 (a decision affirmed by the
Supreme Court of Canada):
No “material”
or “positive” advantage or benefit resulted to the trade of Kellogg from the
litigation except perhaps a judicial affirmation of an advantage already in
existence and enjoyed by Kellogg. I do not think that the Crown can be
heard to say that because the litigation affirmed a right which Kellogg, in
common with others, was already
entitled to and enjoyed that therefore it acquired something which should be
treated as an asset or an enduring advantage to its trade. . . . It was to maintain this trading and profit-making
position that Kellogg was obliged to make the expenditure in question.
[Emphasis added.]
[26] The application before
the Ontario Superior Court was necessary to obtain approval of the out-of-court
settlement because it involved a minor. It was also necessary in order to
dispose of the objection by the litigation guardian with regard to pre-judgment
interest. The legal fees incurred were necessary in order for the appellant to
have returned to her that which was rightfully hers after the passing of her
son, and they were not incurred for the purpose of acquiring a right. In my
opinion, the legal fees were incurred by the appellant in order to materialize
that right and they thus fall under the exception contained in paragraph 18(1)(a)
of the Act and are therefore deductible.
[27] The appeal is
allowed in part and the assessment is
referred back to the Minister of National Revenue for reconsideration and
reassessment. Both parties shall bear their own costs.
Signed at Ottawa, Canada, this 16th
day of November 2007.
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