Ford v. The Queen, 95 D.T.C 848, [1994] 2 CTC 2395 (TCC)

Bell, J.T.C.C.:—The issues in this matter are

(a.) whether the appellant is liable to pay interest for the 1991 taxation year pursuant to the provisions of subsections 161(1) and 161(11) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), and

(b.) whether the appellant is liable to pay a late filing penalty for the 1991 taxation year pursuant to subsection 162(1) of theAct. The appellant and her husband ("husband") separated and lived apart since February 1, 1991.

The appellant and husband entered into a separation agreement on December 23, 1992, under and by virtue of which, inter alia, husband agreed to pay combined spousal and child support in the sum of $2,800 per month retroactive to February 1, 1991. That agreement provided that the appellant acknowledged receipt of same for the period from and including the first day of February 1991 to and including the first day of December 1992.

That agreement also contained the following clause,

The support and maintenance shall be deductible by the husband and included into income for tax purposes by the Wife all as according to the provisions of the Income Tax Act, Canada. This shall apply retroactively for the calendar years 1991 and 1992.

As at April 30, 1992, the day on which the appellant's 1991 return of income might otherwise have been due, the appellant had, in respect of the 1991 taxation year, no tax payable, no taxable capital gain and had disposed of no capital property, and did not, therefore, file a 1991 income tax return.

Appellant filed a return of income for the 1991 taxation year including the amounts received from husband in respect of her 1991 taxation year, approximately 90 days after the aforesaid agreement. The Minister of National Revenue assessed that return on May 20, 1993, and in so doing assessed the appellant interest in the amount of $505.85 and a late filing penalty in the amount of $652.16, such interest having been computed from May 1, 1992.

Appellant's counsel argued that the appellant had no obligation to file an income tax return in respect of her 1991 taxation year on April 30, 1992, that a return of income for 1991 was filed by her approximately 90 days after the separation agreement and that no interest should be payable in respect of same except from the date of the separation agreement, namely December 23, 1992, and that no penalty should be payable.

Respondent's counsel argued that, in accordance with the agreement, the appellant had income allocated to her for her 1991 taxation year and that under the separation agreement the appellant had agreed to include the amount respecting 1991 in ncome for tax purposes. He argued that the appellant was, by virtue of subsection 56.1(3) of the Act considered to have received the amount allocated to her in respect of 1991 under the agreement and that the amount was deemed to have been received for purposes of paragraph 56(1)(b). He referred to a number of cases which do not resolve this matter and referred to subsection 162(1) respecting the levy of the penalty and subsections 161(1) and 161(11) with respect to interest.

Subsection 150(1) reads as follows,

A return of the income for each taxation year in the case of a corporation (other than a corporation that was a registered charity throughout the year) and in the case of an individual, for each taxation year for which tax is payable, in which the individual has a taxable capital gain or has disposed of a capital property, shall, without notice or demand therefor, be filed with the Minister in prescribed form containing prescribed information,

The above quoted portion continues with respect to individuals in paragraph 150(1)(d) as follows,

. . . in the case of any other person, on or before April 30, in the next year by that person. . . .

It is noted that the individual "shall" file a return in the circumstances outlined in subsection 150(1). The word ”shall” creates an absolute obligation for the filing of a tax return. Since the appellant had no tax payable, had no taxable capital gain ana had not disposed of any capital property in 1991, there was no requirement for her to meet that absolute obligation. Had she, however, had taxable income in that year the obligation upon her to file a tax return for that year was mandatory. Accordingly, so far as the Act is concerned there is no further obligation for filing a return of income for the 1991 taxation year.

Subsection 56.1(3), for the pertinent period, read as follows:

For the purposes of this section and section 56, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount received before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been received pursuant thereto; and

(b) the person who made the payments shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

The pertinent part of section 56 is paragraph 56(1)(b) which, for the period in question, read as follows

(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for ataxation year,

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder the year;

It is clear, from the wording of subsection 56.1(3) that the amount received by the appellant in the 1991 taxation year is to be considered to have been paid and received under the aforesaid written agreement. There then follows an obligation pursuant to paragraph 56(1)(b) to include that amount in income for the 1991 taxation year.

It was, of course, impossible for the appellant to include such amount in the return of income for her 1991 taxation year required to be filed on or before April 30, 1992. Anyone with even a casual understanding of logic could comprehend that truism.

Apart from logic, was there any legal obligation for the appellant to file such a return? Assuming she had filed a return in respect of 1991 income on April 30, 1992, would there be any requirement for her to file a second return in respect of 1991?

Lord Wensleydale, in Grey v. Pearson (1857), 6 H.L.C. 61, 10 E.R.1216 (U.K.), at H.L.C. page 106, stated the principle which would later become known as the “Golden Rule" of interpretation, namely:

I have been long and deeply impressed with the wisdom of the rule, now, I believe, universally adopted, at least in the Courts of Law in Westminster Hall, that in construing wills and indeed statutes, and all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no farther.

In Grand Trunk Pacific Railway Co. v. Dearborn (1919), 58 S.C.R. 315, 47 D.L.R. 27, Justice Davies stated at S.C.R. pages 320-21:

I cannot admit the right of the courts where the language ofa statute is plain and unambiguous to practically amend such statute either by eliminating words or inserting limiting words unless the grammatical and ordinary sense of the words as enacted leads to some absurdity or repugnance or inconsistency with the rest of the enactment, and in those cases only to the extent of avoiding that absurdity, repugnance and inconsistency. Not only is it absurd for the appellant to be expected to file a return in these circumstances for the 1991 taxation year but there is no provision in the Income Tax Act requiring same. Looking momentarily at the other side of the coin, if husband filed a second return for the 1991 taxation year there would be no obligation upon the Minister of National Revenue to assess same. The legislators have failed to include in the Income Tax Act a section having the same effect as does subsection 152(6). That subsection provides that where a taxpayer has filed a return for a particular taxation year and an amount is subsequently claimed in respect of a number of situations, including a loss for a subsequent taxation year, the filing of a prescribed form amending return will oblige the Minister to reassess tax for any relevant taxation year. In the absence of such provision, there would be no obligation for the Minister to reassess. Similarly, there is no obligation in respect of amounts deemed under subsection 56.1(3) and paragragh 60(b) for the Minister to assess an amended return. Also, there is no corresponding requirement for the filing of a second return by a recipient.

161(1)(ii) and 162(1)

Bowman J.T.C.C., in Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49 (T.C.C.), considered, under the informal procedure, the penalty provisions of section 280 of the Excise Tax Act, R.S.C. 1985, c. E-15. He decided that there was no reason for not extending an analysis respecting penalties in a criminal matter to administratively imposed penalties. He found that (at page 49-4),

. . .the Crown would need to demonstrate a compelling reason for treating the imposition of the numerous penalties provided for in our fiscal statutes as incapable of being challenged by a taxpayer who could establish that he or she was without fault and acted with due diligence. To infer a legislative intent that such penalties were unassailable on any ground would be contrary to the principle enunciated by Dickson J., in R. v. Sault Ste. Marie (City), [1978] 2 S.C.R. 1299, 85 D.L.R. (3d) 161 that:

. . .punishment should in general not be inflicted on those without fault. . .

Dickson J., in the passage quoted above, stated that:

Offenses of absolute liability would be those in respect of which the Legislature had made it clear that guilt would follow proof merely of the proscribed act.

Bowman J. stated also at page 49-7:

Absolute liability for such penalties cannot be justified as a deterrent where the omissions or errors which the penalties are sought to deter could not have been avoided even by the exercise of the very due diligence that the imposition of the penalties is designed to encourage. The fact that permitting a defence of due diligence purportedly may be administratively burdensome to the Department of National Revenue is no justification for interpreting fiscal statutes in a manner that is contrary both to high judicial authority and to principles of fundamental justice and fairness.

Having regard to the foregoing I find that it would be absurd to interpret the pertinent legislation as requiring the appellant to file an income tax return as of April 30, 1992, including an amount of income which was not determined until December 23, 1992, further, there is no statutory requirement for such filing.

It is noted that the appellant filed an income tax return respecting the alimony in question about 90 days after the date of the agreement. As above set forth, an individual is required to file a return for each year for which tax is payable by April 30 in the following year (being 120 days after the end of the year in which income arose). In these circumstances it is evident that the appellant used due diligence in so filing. In my judgment, no interest or penalty is appropriate.

Accordingly, the appeal is allowed.

Appeal allowed.