Date: 19990706
Docket: 97-1928-IT-G
BETWEEN:
JEANNETTE LUSSIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Archambault, J.T.C.C.
[1] These are appeals by Jeannette Lussier against notices of
assessment issued by the Minister of National Revenue
(Minister) for the 1992 and 1993 taxation years. The
Minister added $86,786 to Ms. Lussier’s 1992 income and
$60,015 to her 1993 income; those amounts represented income she
received as a usufructuary of property from the estate of Simon
Lussier (estate).
[2] Although Ms. Lussier herself included the amounts in her
tax return for each of those taxation years, she now submits that
they should be excluded because of designations made by the
estate under subsection 104(13.1) of the Income Tax
Act (Act) in a letter dated
November 15, 1994. The purpose of the letter was to
amend the tax returns previously filed by the estate. Under
subsection 104(13.1) of the Act, an amount designated by a
trust in respect of a beneficiary under the trust is deemed not
to have been paid or payable to the beneficiary; it therefore
does not have to be included in the beneficiary’s income
but is instead income of the trust.
[3] Because the designations were not made by the estate in
the tax returns initially filed, the respondent argues that they
were not made in accordance with subsection 104(13.1) of the
Act.
Facts
[4] Most of the relevant facts are not in dispute. Ms.
Lussier, who is now 85 years old, became a usufructuary of
some property owned by her husband when he died on January 25,
1988. The bare owners of the property are her children. In her
1992 tax return, Ms. Lussier reported income from various
sources, which totalled $143,244. That amount included the
$86,786.47 from the estate. The Minister assessed the tax to be
paid by Ms. Lussier at the amount calculated in her 1992 tax
return.
[5] In her 1993 tax return, Ms. Lussier reported income of
$105,891, including $60,014.59 from the estate. The Minister
assessed the tax to be paid by Ms. Lussier at the amount
calculated in her 1993 tax return.
[6] In the tax returns it filed for 1992 and 1993, the estate
did not make the designation provided for in subsection 104(13.1)
of the Act. Since all of the estate’s income was
paid or payable to Ms. Lussier, the Minister notified the estate
that it had no tax to pay for those two taxation years.
[7] To prepare and file their tax returns for 1994 and
subsequent years, the estate and Ms. Lussier retained the
services of a new chartered accountant, Dominic Vendetti of
Samson Belair Deloitte & Touche. Mr. Vendetti recommended
that the estate make the designation provided for in subsection
104(13.1) to take advantage of the facts that the Act
deems a usufruct to be a trust, that a trust is treated as a
separate taxpayer and that a testamentary trust is taxed on the
basis of the same graduated income tax rates as those applicable
to individuals.[1]
[8] In his testimony, Mr. Vendetti confirmed that designations
under subsection 104(13.1) of the Act were made in the
estate’s tax returns for the 1994 to 1997 taxation years
and were not contested by the Minister.
[9] Mr. Vendetti also confirmed that he had contacted the
former accountants of Ms. Lussier and the estate to obtain
information relevant to the filing of the 1994 tax returns. In
his discussions with them, he got the impression that they had
not completely understood the scope of subsection 104(13.1) of
the Act. In his view, there was no tax benefit to be
derived from not making the designation provided for in
subsection 104(13.1) of the Act for 1992 and
1993.
[10] Mr. Vendetti recommended that the estate amend its 1992
and 1993 tax returns to make a designation under subsection
104(13.1) of the Act. At his clients’ request, he
sent the Minister the letter of November 15, 1994, to inform him
that the estate and Ms. Lussier wanted to amend their tax returns
for the 1992 and 1993 taxation years. The letter told the
Minister that the estate was designating $86,786 for 1992 and
$52,891 for 1993 in respect of Ms. Lussier under subsection
104(13.1) of the Act.
[11] In a letter dated January 12, 1995, a representative of
the Minister informed Ms. Lussier that the Minister was refusing
to make reassessments to give effect to the amendments made to
her tax returns. The explanation given to Ms. Lussier at the
time was as follows:
[TRANSLATION]
The election you wish to make under subsection 104(13.1)
is not covered by the Fairness Package legislation, which, in
conjunction with section 600 of the Income Tax
Regulations, makes it possible to apply to make a late
election or to amend or revoke an election.
[12] On February 14, 1995, Mr. Vendetti filed notices of
objection by the estate and Ms. Lussier for the 1992 and 1993
taxation years with the Minister. The Minister extended the time
for filing the notices of objection, which were therefore filed
in accordance with the Act.
[13] On March 21, 1997, the Minister confirmed the assessments
in respect of which Ms. Lussier had filed notices of objection.
The same day, he informed the estate that the nil assessments
could not be appealed and that varying them was not
justified.
[14] On June 19, 1997, Ms. Lussier alone filed notices of
appeal against the assessments for the 1992 and 1993 taxation
years in the Registry of this Court.
Analysis
[15] The outcome of Ms. Lussier’s appeals depends on the
interpretation to be given to subsection 104(13.1) of the
Act. The wording of that subsection in both official
languages is as follows:
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(13.1)
Amounts deemed not paid. Where a trust, in
its return of income under this Part for a taxation
year throughout which it was resident in Canada and not
exempt from tax under Part I by reason of subsection
149(1), designates an amount in respect of a beneficiary
under the trust, not exceeding the amount determined by
the formula
A
B ´ (C + D + E)
. . .
the amount so designated shall be deemed, for the
purposes of subsections (13) and 105(2), not to have
been paid or to have become payable in the year to or
for the benefit of the beneficiary or out of income of the
trust.
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(13.1)
Exception. Le montant qu’une fiducie
attribue à un bénéficiaire dans sa
déclaration de revenu en vertu de la
présente partie pour une année
d’imposition tout au long de laquelle elle a
résidé au Canada et n’était pas,
par application du paragraphe 149(1),
exonérée de l’impôt prévu
à la partie I, et qui ne dépasse pas le
montant calculé selon la formule suivante est
réputé, pour l’application des
paragraphes (13) et 105(2), ne pas être
payé ni être devenu payable au cours de
l’année au bénéficiaire ou
à son profit ou ne pas provenir du revenu de la
fiducie :
A
B ´ (C + D + E)
. . . .
[Emphasis added.]
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[16] It is helpful to recall the basic rule of statutory
interpretation set out in Driedger, Construction of
Statutes (2nd edition, 1983), at page 87:
. . . the words of an Act are to be read in their entire
context and in their grammatical and ordinary sense harmoniously
with the scheme of the Act, the object of the Act, and the
intention of Parliament.
[17] This rule of interpretation has been applied in many
decisions, including Friesen v. Canada, [1995] 3 S.C.R.
103, Stubart Investments Ltd. v. The Queen, [1984] 1
S.C.R. 536, and Québec (Communauté urbaine) v.
Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R.
3.
[18] As noted above, the respondent argued that the
designations made in the letter of November 15, 1994, were not
made in accordance with subsection 104(13.1) of the
Act. It is clear from the letter of January 12, 1995, that
the Minister refused to give effect to the designations made in
the letter of November 15, 1994, because they were made late.
[19] It can be seen from the statement of the facts assumed by
the Minister in issuing the notices of assessment, as set out in
the Reply to the Notice of Appeal, that the Minister confined
himself to the returns filed initially and totally disregarded
the amendments made to the initial returns on November 15, 1994.
In her Reply to the Notice of Appeal, the respondent provides no
explanation of why the Minister did so.
[20] It must therefore be determined whether the Minister was
justified in not considering the amendments made by the estate to
its 1992 and 1993 tax returns. To make this determination, the
first question that must be answered is whether the estate was
entitled to amend its 1992 and 1993 returns. It must then be
determined whether the letter of November 15, 1994, constitutes
an amendment to its tax returns.
[21] To my knowledge, there is no general provision in the
Act authorizing taxpayers to amend their tax returns or
prohibiting them from doing so. Counsel for the respondent
referred to subsection 152(6) of the Act, which provides
as follows:
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(6) Reassessment. Where a taxpayer has
filed for a particular taxation year the return of income
required by section 150 and an amount is subsequently
claimed by him or on his behalf for the year as
(a) a deduction under paragraph 3(e),
by virtue of his death in a subsequent taxation year and
the consequent application of section 71 in respect of
an allowable capital loss for the year,
(b) a deduction under section 41 in respect
of his listed-personal-property loss for a subsequent
taxation year,
(b.1) a deduction under
paragraph 60(i) in respect of a premium (within
the meaning assigned by subsection 146(1)) paid in a
subsequent taxation year under a registered retirement
savings plan where the premium is deductible by reason of
subsection 146(6.1),
(c) a deduction under section 118.1 in
respect of a gift made in a subsequent taxation year or
under section 111 in respect of a loss for a
subsequent taxation year,
(c.1) a deduction under subsection 126(2) in
respect of an unused foreign tax credit (within the meaning
assigned by paragraph 126(7)(e)) for a
subsequent taxation year,
(d) a deduction under subsection 127(5) in
respect of property acquired or an expenditure made in a
subsequent taxation year,
(e) a deduction under section 125.2 in
respect of an unused Part VI tax credit (within the
meaning assigned by subsection 125.2(3)) for a
subsequent taxation year,
(f) a deduction under section 125.3 in
respect of an unused Part I.3 tax credit (within the
meaning assigned by subsection 125.3(3)) for a
subsequent taxation year, or
. . .
(h) a deduction by virtue of an election for a
subsequent taxation year under
paragraph 164(6)(c) or (d) by his legal
representative,
by filing with the Minister, on or before the day on or
before which the taxpayer is, or would be if a tax under
this Part were payable by him for that subsequent taxation
year, required by section 150 to file a return of
income for that subsequent taxation year, a prescribed form
amending the return, the Minister shall reassess the
taxpayer’s tax for any relevant taxation year
(other than a taxation year preceding the particular
taxation year) in order to take into account the deduction
claimed.
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(6) Nouvelle cotisation. Lorsqu’un
contribuable a produit la déclaration de revenu
prescrite par l’article 150 pour une année
d’imposition et que, par la suite, une somme est
réclamée pour l’année par lui ou
pour son compte à titre de
a) déduction, en application de
l’alinéa (3)e), résultant de son
décès au cours d’une année
d’imposition subsé-quente ayant
entraîné l’appli-cation de
l’article 71 relative-ment à une perte en
capital déductible pour l’année,
b) déduction d’un montant en vertu
de l’article 41 relativement à sa perte
relative à des biens personnels
désignés pour une année
d’imposition subséquente,
b.1) déduction, en application de
l’alinéa 60i), relativement
à une prime, au sens du paragraphe 146(1),
versée au cours d’une année
d’imposition subséquente dans le cadre
d’un régime enregistré
d’épargne-retraite et déductible
en application du paragraphe 146(6.1),
c) déduction, en application de
l’article 118.1, relative-ment à un don
fait au cours d’une année d’imposition
subséquente ou, en applica-tion de
l’article 111, relative-ment à une perte
subie pour une année d’imposition
subséquente,
c.1) déduction, en application du
paragraphe 126(2), relativement à la fraction
inutilisée du crédit pour impôt
étranger (au sens donné par
l’alinéa 126(7)e)) pour une
année d’imposition subséquente,
d) déduction, en application du
paragraphe 127(5), relativement à des biens
acquis ou des dépenses faites dans une année
d’imposition subséquente,
e) déduction, en application de
l’article 125.2, au titre d’un
crédit d’impôt de la partie VI
inutilisé – au sens du
paragraphe 125.2(3) – pour une année
d’imposition ultérieure,
f) déduction, en application de
l’article 125.3, au titre d’un
crédit d’impôt de la partie I.3
inutilisé, au sens du paragraphe 125.3(3), pour
une année d’imposition ultérieure,
ou
. . .
h) déduction à cause d’un
choix pour une année d’imposition
subséquente effectué par son
représentant légal en vertu de
l’alinéa 164(6)c) ou
d),
en produisant auprès du Ministre, au plus tard le
jour où le contribuable est tenu, ou le serait
s’il était tenu de payer de
l’impôt en vertu de la présente Partie
pour cette année d’imposition
subséquente, de produire en vertu de
l’article 150 une déclaration de revenu
pour cette année d’imposition
subséquente, une formule prescrite modifiant la
déclaration, le Ministre doit fixer de nouveau
l’impôt du contribuable pour toute
année d’imposition pertinente (autre
qu’une année d’imposition
antérieure à l’année
donnée) afin de tenir compte de la déduction
réclamée.
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[Emphasis added.]
[22] In my opinion, the purpose of this subsection is more to
oblige the Minister to make a reassessment than to authorize the
amendment of a previous return. It cannot be concluded from this
provision that a taxpayer is not entitled to amend a tax return
already filed except in the cases explicitly mentioned.
Chief Judge Couture of this Court stated the following
on this point in Lee v. M.N.R., [1990] 2 C.T.C. 2262, at
page 2268:
. . . Furthermore, I am not aware of any authority for the
proposition that once a taxpayer has signed his tax return that
[sic] he may not change his mind subsequently following
the discovery of a mistake notwithstanding the certificate that
he signed as part of his return. Certainly, when an honest
mistake has been discovered by a taxpayer he must be permitted to
correct it and the procedure to do so is provided in the
Income Tax Act within certain prescribed requirements. The
appeal process serves this purpose. . . .
[23] It is important to add that the position taken by Chief
Judge Couture is consistent with the administrative practice
adopted by the Minister himself. For example, in the guide he
gives all Canadians to help them complete their yearly tax
returns, the Minister tells them that they may make changes to
their returns and explains how to go about doing so. The 1993
guide provides the following information:
Q. I have already sent in my return and now I would like to
change something on it. What should I do?
A. If you need to make a change to your return, send a letter
to your taxation centre. Remember to list all the details,
including your social insurance number, the telephone number
where we can reach you during the day, and the taxation years you
want us to adjust. Do not file another return for the taxation
year you want adjusted. See the telephone listings included
with this package for your taxation centre’s address.
You can ask for a refund for taxation years as far back as
1985. It usually takes eight weeks before we mail you a Notice
of Reassessment.
[24] It should be noted that the Minister even encourages
taxpayers who have failed to report all of their income to file
amended tax returns. In circular IC 85-1R2 of October
1992, which concerns voluntary disclosures, the Minister tells
taxpayers that they can avoid the imposition of penalties if they
come forward and disclose unreported amounts.
[25] It must therefore be concluded that, although there is no
general provision in the Act authorizing Canadian
taxpayers to amend tax returns already filed, there is nothing to
prevent them from doing so. On the other hand, it is in the
interest of tax administration to allow such amendments. It
should be noted that tax administration in Canada is based on the
principle of self-assessment and that it is perfectly reasonable
and fair for taxpayers to be allowed to correct mistakes that
have crept into their tax returns.
[26] In my opinion, the letter of November 15, 1994, was an
amendment to the estate’s tax return and its effect was to
amend the initial return. The letter was fully consistent with
the instructions given by the Minister in the guide referred to
above. Accordingly, it must be concluded that, in its (amended)
tax returns, the estate designated certain amounts in respect of
Ms. Lussier under subsection 104(13.1) of the Act.
[27] Having concluded that the estate amended its 1992 and
1993 tax returns and designated an amount in respect of Ms.
Lussier in those returns, have all the other conditions set out
in subsection 104(13.1) been met? The respondent did not argue
that any of them were not met, aside from one relating to an
alleged time limit for filing the designation. She argued based
on the time limit in question that the designation was made
late.
[28] The first question to be decided is whether subsection
104(13.1) makes it a condition that a designation be made within
a certain time. In his argument, counsel for the respondent
admitted that subsection 104(13.1) does not explicitly set out a
time limit for making a designation. However, he submitted that
there is an implicit time limit, namely the time limit for filing
the trust’s tax return, as held in Financial Collection
Agencies (Quebec Ltd.) v. M.N.R. (88-671(IT)).
[29] To determine whether this argument is correct, I consider
it helpful to compare the wording of subsection 104(13.1) of the
Act with that of the following subsection, 104(14), which
deals with elections made by a trust and a preferred beneficiary.
The latter provision allows a trust whose income is neither paid
nor payable to a beneficiary to elect jointly with the
beneficiary to have part of the trust’s accumulating income
included in the beneficiary’s income and excluded from the
trust’s income. Subsection 104(14) reads as follows:
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(14) Election by trust and preferred
beneficiary. Where a trust and a preferred
beneficiary thereunder jointly so elect in
respect of a taxation year in prescribed manner and
within prescribed time, such part of the accumulating
income of the trust for the year as is designated in the
election, not exceeding the preferred beneficiary’s
share therein, shall be included in computing the income of
the preferred beneficiary for the year, and shall not be
included in computing the income of any beneficiary of the
trust for a subsequent year in which it was paid.
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(14) Choix fait par une fiducie et un
bénéficiaire privilégié.
Lorsqu’une fiducie et une personne qui en est
un bénéficiaire privilégié
en font ensemble le choix, pour une année
d’imposition, dans la forme et les délais
prescrits, la partie du revenu accumulé de la
fiducie pour l’année, qui est indiquée
dans le choix et qui ne dépasse pas la part du
bénéficiaire privilégié dans
cette fiducie, doit être incluse dans le calcul du
revenu du bénéficiaire
privilégié pour l’année et ne
doit pas être incluse dans le calcul du revenu de
quelque bénéficiaire de la fiducie pour une
année postérieure dans laquelle elle a
été versée.
[Emphasis added.]
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[30] If the effects of subsections 104(13.1) and (14) of the
Act are compared, it can be seen that, under subsection
104(14), the trust’s accumulating income is deemed to be
paid to the beneficiary and taxable in the beneficiary’s
hands, while under subsection 104(13.1) income paid or payable to
a beneficiary is deemed not to be paid or payable to the
beneficiary and is therefore taxed in the trust. It can also be
seen that the provisions are intended to determine whether the
designated amount (subsection 104(13.1) of the Act) or
elected amount (subsection 104(14) of the Act) must
be included in the trust’s income or the
beneficiary’s income.
[31] In the case of the election provided for in subsection
104(14), it is expressly stated that an election form must be
filed with the Minister within a prescribed time. Under
subsection 2800(2) of the Income Tax Regulations, the
document must be filed within 90 days from the end of the
trust’s taxation year, which is the same time that the
trust must file its tax return (paragraph 150(1)(c)
of the Act).
[32] In my view, if Parliament's intention had been to
require that designations be filed within a prescribed time, it
would have said so explicitly as it did for the situation covered
by subsection 104(14) of the Act. Parliament has not even
provided for a prescribed form in subsection 104(13.1) of the
Act. I also consider it quite unreasonable to impose
conditions on a taxpayer that are not clearly stated by
Parliament.
[33] The statement by Parliament in subsection 104(13.1) of
the Act that the trust must make the designation in its
tax return has been made for information only. It is as if
Parliament had said that the designation must be made “in
writing”. It is easy to understand that the Minister must
be told of all the relevant facts so that he can determine the
amount of tax when making an assessment. If a trust has
designated an amount under subsection 104(13.1) of the
Act, it is important for the Minister to know this. It is
therefore not surprising that Parliament has provided that the
trust must express its intention of availing itself of
subsection 104(13.1) in this manner: the requirement is
quite logical and practical.
[34] Since subsection 104(13.1) says nothing about the
existence of a time limit, it is not essential that the
designation be made within a specific time. All that matters is
that it be made in the tax return, which is the case here given
the fact that the return was amended.
[35] If there is no time limit for making a designation under
subsection 104(13.1) of the Act, it follows that
there is no need to ask whether a taxpayer is entitled to make a
late-filed designation.
[36] In case I have erred in law in interpreting subsection
104(13.1) as not providing for a time limit for making a
designation, it is important to determine whether the designation
could be made late. For this purpose, it is helpful to consider
the reasons of Robertson J.A. in Canada v. Nassau Walnut
Investments Inc., [1997] 2 F.C. 279. In that case, the issue
was whether a taxpayer was entitled to make a “late-filed
designation” under paragraph 55(5)(f) of the
Act, the English version of which is worded similarly to
subsection 104(13.1) of the Act. The verb
“designate” is used in both provisions, whereas in
the French version “attribuer” is used in subsection
104(13.1) and “désigner” in
paragraph 55(5)(f). The latter provision reads as
follows:
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(f) where a corporation has received a dividend
any portion of which is a taxable dividend,
(i) the corporation may designate in its return
of income under this Part for the taxation year during
which the dividend was received any portion of the taxable
dividend to be a separate taxable dividend, and
(ii) the amount, if any, by which the portion of the
dividend that is a taxable dividend exceeds the portion
designated under subparagraph (i) shall be deemed to
be a separate taxable dividend.
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f) lorsqu’une corporation a reçu un
dividende dont une partie est un dividende imposable,
(i) la corporation peut désigner dans sa
déclaration de revenu, en vertu de la
présente Partie, pour l’année
d’imposition au cours de laquelle la dividende a
été reçu, toute fraction du dividende
imposable comme étant un dividende imposable
distinct, et
(ii) le montant éventuel de la fraction du
dividende qui est imposable qui est en sus de la partie
désignée en vertu du
sous-alinéa (i) est réputé
être un dividende imposable distinct.
[Emphasis added.]
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[37] Contrary to the approach I have taken here, it was
assumed in Nassau, supra, that there was a time
limit for filing the designation. It does not seem to have been
argued in that case that paragraph 55(5)(f) of the
Act did not set out a specific time limit for making the
designation. Robertson J.A. dealt with the issue in the case as
follows at page 295, paragraph 22:
The question before us was cast in terms of whether Nassau was
entitled to make a late-filed designation pursuant to paragraph
55(5)(f) of the Act. . . . [T]he Minister’s argument
has two prongs. First, the Minister notes that there is no
provision in the Act which provides for the late filing of a
designation. This is to be contrasted with the legislatively
permissible late filing of “elections” made under
other provisions of the Act.
[38] Rejecting the argument made by counsel for the Minister
that the designation could not be filed late because there was no
express provision authorizing this, Robertson J.A. stated the
following at paragraph 33:
Although relief is provided selectively by the Act, it does
not necessarily follow that Parliament intended to preclude
relief in those situations not specifically addressed by the Act.
Rather, the fact that the Act authorizes the late filing of a
designation or an election in particular circumstances
gives rise only to a rebuttable inference that Parliament did
not intend that taxpayers have such a right in other
instances. That the inference is a rebuttable one rests on
three understandings. First, to hold otherwise would be to
embrace literalism as a method of statutory interpretation and
treat the Act as a complete code. Second, I know of no case which
holds that because an exception is provided by statute for one
case and not another, that fact alone is determinative such that
no other exceptions may exist. My position in this regard was
affirmed most recently in On-Guard Self-Storage,
supra. Third, the courts have long adopted a contextual or
purposive approach as the proper means to construe legislation.
[Emphasis added.]
[39] In my opinion, the situation in the case at bar is
similar to that in Nassau, supra. This case does
not involve retroactive tax planning. No attempt is being made to
retroactively improve Ms. Lussier’s tax treatment for 1992
and 1993 after learning of facts that arose after the end of each
of those taxation years and prompted a change in tax planning. As
in Nassau, supra, the estate failed to make a
designation because of an honest mistake by the accountants who
prepared and filed the returns. If those accountants had properly
interpreted the scope of subsection 104(13.1) of the Act,
they would have made the designation made by Mr. Vendetti in his
letter of November 15, 1994. That designation minimized
Ms. Lussier’s taxes and provided her with an after-tax
income higher than that established by the initial assessments.
All the relevant facts for determining the advisability of such a
designation were known when the trust’s tax returns were
initially filed. There were no tax disadvantages involved in not
making the designation in the returns. This case therefore
involves the correction of a mistake that occurred in preparing
the tax returns. It does not involve retroactive planning.[2]
[40] To quote Robertson J.A. in Nassau, supra,
at pages 301-02, the taxpayer in the case at bar is not one who
“did not previously weigh the risks relating to making
the designation or abstaining therefrom, nor does he now seek to
avoid bearing the downside of a decision he made consciously
after due consideration”.
[41] Are there any reasons in the instant case for not
allowing the late filing of the designation provided for in
subsection 104(13.1) of the Act? First of all, what reason
could Parliament have had for wanting to prevent this? Contrary
to what occurred in Nassau, supra, no reason was
given to me during the parties’ arguments, nor can I myself
think of any.
[42] However, there is at least one serious reason to think
that Parliament did not want to prevent a “late-filed
designation”. One of Parliament’s objectives when it
enacted subsection 104(13.1) of the Act in 1988 was to
authorize loss carry-overs.[3] Prior to the amendment, a trust all of whose
income was paid or payable to a beneficiary could not, in
computing its taxable income, take advantage of the deduction for
“non-capital losses” or “net capital
losses” provided for in section 111 of the Act.
Section 111 provides that such losses may be carried back to
the three taxation years immediately preceding the year in which
they were incurred.
[43] A concrete example will illustrate the scope of this
rule. If the estate had incurred non-capital losses in 1995
and had wanted to carry them back to 1992 and 1993, it would have
been beneficial for it to deduct the 1995 loss in computing its
1992 taxable income. Prior to the enactment of
subsection 104(13.1) of the Act, the deduction of the
loss would have been pointless, since the estate did not
generally have any income. Since all of the estate’s income
was paid to Ms. Lussier, it had no income to report. Under
subsection 104(6) of the Act, any income paid or payable
to the beneficiary is deductible from the estate’s income
and must be included in the beneficiary’s income.
[44] With the enactment of subsection 104(13.1) of the
Act, it became possible to designate an amount equal to
the amount of the loss carried back, with the result that, in our
hypothetical example, the estate would have income from which the
loss could be deducted. The estate could thus reduce its taxable
income to zero and the beneficiary would be deemed not to have
received the designated amount, thus benefiting indirectly from
the carryback of the 1995 loss.
[45] It is easy to see that, in 1992, the estate could not
have foreseen that it would incur a loss in 1995. If the question
of income splitting is disregarded, the estate would have had no
reason to make a designation. Thus, if we adopt the
respondent’s interpretation that the estate could not, in
filing its 1995 return and the amended return for 1992, make a
late-filed designation for 1992 so as to carry its loss
back to 1992, the estate would not be able to take advantage of
subsection 104(13.1) of the Act, which would be contrary
to Parliament’s objective as explicitly set out in the
explanatory notes.[4] This result would be absurd and contrary to the
purpose for which subsection 104(13.1) was enacted in 1988.
It is therefore not only more logical to conclude that a
designation may be filed late but, in my view, it is essential to
do so to achieve the purpose of the Act.
[46] It is important to note that the Minister’s
administrative practice is to respond favourably to
taxpayers’ requests to make late designations in order to
deduct losses carried back under section 111 of the Act.
However, he denies such requests when the taxpayer’s
purpose is to achieve income splitting.
[47] In my opinion, there is no reason to draw a distinction
between a late-filed designation made to take advantage of
a loss carryback under section 111 and a late-filed
designation that makes it possible to minimize the
beneficiary’s tax by means of income splitting. It should
be noted that, in Neuman v. M.N.R., [1998] 1 S.C.R. 770,
at paragraph 35, the Supreme Court of Canada recognized the
legitimacy of income splitting:
. . . In fact, “there is no general scheme to prevent
income splitting” in the ITA (V. Krishna and J.A.
VanDuzer, “Corporate Share Capital Structures and Income
Splitting: McClurg v. Canada” (1992-93),
21 Can. Bus. L.J. 335, at
p. 367).
[48] As well, in Hall v. Quebec (Deputy Minister of
Revenue), [1998] 1 S.C.R. 220, 1997 CanRepQue 1306, at
paragraph 49, Gonthier J. acknowledged that income splitting has
always been possible by means of a trust:
As for the fear expressed by the Court of Appeal that the
appellant’s position would open the door to all kinds of
abuse, such as income splitting, I agree with the appellant that
income splitting is integral to the scheme of taxation of estates
and is not in any way reprehensible per se. Furthermore,
income splitting has always been possible by means of a
trust.
[49] It is even possible to conclude that income splitting was
anticipated when the 1988 amendment was passed. I will again
quote a passage from the explanatory notes I reproduced in
footnote 3:
This change will enable trusts to utilize in a particular year
losses from prior years without affecting the ability of the
trust to distribute its income currently. Also, testamentary
trusts will also be able to choose to be taxed at the trust level
rather than at the beneficiary level by using subsection
104(13.1).
Why would a trust “also” decide that the income
payable to its beneficiary will be taxed at the trust level if
not to engage in income splitting?
[50] In conclusion, if subsection 104(13.1) must be read as
providing for an implicit time limit, I would conclude, as
Robertson J.A. did in Nassau, supra, that
“the inference that Parliament did not intend to accord
relief in these circumstances has been rebutted” (p.
305).
[51] Before closing, I would like to come back to the question
of a taxpayer’s right to amend a tax return and the
Minister’s obligation to reassess the taxpayer’s tax.
In my view, it is important to properly distinguish between the
taxpayer’s right and the Minister’s obligation. The
fact that a taxpayer is entitled to amend a return does not
necessarily mean that the Minister must automatically give effect
to the amendment. The Minister is free to choose whether or not
to do so unless he is obliged to do so by the Act, as he
is, for example, in the circumstances set out in subsection
152(6) of the Act. Another example is where a decision is
rendered by this Court on a validly filed appeal against an
assessment. Under subparagraph 171(1)(b)(iii) of the
Act, this Court may dispose of an appeal by referring the
assessment back to the Minister for reconsideration and
reassessment.
[52] In the circumstances of this appeal, not only were the
taxpayer and the estate entitled to amend their returns, but the
Minister should also have given effect to the amendments. I
consider what Robertson J.A. said in Nassau, supra,
to be quite apt here: “It cannot be doubted that the
refusal of the Minister to accede to Nassau’s request seems
antithetical to elemental concepts of fairness”
(paragraph 29, p. 297).
[53] Accordingly, the Minister should have reassessed the
estate in order to determine the tax to be paid on the amount
designated under subsection 104(13.1) of the Act. For
inappropriate reasons, he refused to do so. He will have to live
with the consequences of his decision if it is too late to make a
reassessment. Since the amount of tax assessed by the Minister
was nil, the estate could not object to the assessment and appeal
to this Court.
[54] As for Ms. Lussier, she also asked the Minister to vary
his assessment to reduce the amount of her taxes because of the
designation made by the estate. The Minister refused to do so.
Fortunately for Ms. Lussier, she filed notices of objection in
accordance with the Act’s requirements and then
filed notices of appeal with this Court.
[55] To be perfectly clear about this, it is obvious that Ms.
Lussier could not have obliged the Minister to make a
reassessment if she had not filed her notices of objection within
the prescribed time. Since she filed notices of objection and
then filed notices of appeal with this Court, she preserved her
right to contest the assessments for 1992 and 1993. Before this
Court, she was entitled to require that the amount of tax for
which she was liable for those years be determined in accordance
with the Act’s provisions, inter alia
subsection 104(13.1). Since all the conditions set out in that
subsection have been met, she is entitled to benefit
therefrom.
[56] I conclude that the amounts designated by the estate in
respect of Ms. Lussier, namely $86,786 for 1992 and $52,891
for 1993, are deemed not to be income for her.
[57] For these reasons, the appeals are allowed with costs and
the notices of assessment are referred back to the Minister for
reconsideration and reassessment on the basis that $86,786 in
1992 and $52,891 in 1993 must be excluded from Ms.
Lussier’s income.
Signed at Sherbrooke, Canada, this 9th day of July 1999.
“Pierre Archambault”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 23rd day of December
1999.
Stephen Balogh, Revisor
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