Katz Estate v. The Queen, 76 DTC 6377, [1976] CTC 633 (FCTD)

Addy, J:—The deceased, Bertram L Katz, died testate on or about September 18, 1973, leaving all of his property to named executors and trustees in trust to pay the revenue to his wife with the remainder to other beneficiaries after his wife’s death.

At the date of his death, the deceased owned depreciable property in Classes 3 and 8 of Schedule B to the Income Tax Regulations,* the undepreciated capital cost of which was $418,272 in respect of Class 3 and $3,287 in respect of Class 8. A 1973 individual income tax return was filed on behalf of the deceased by the plaintiffs and there was claimed as a deduction from income, capital cost allowance in the amount of $14,951 in respect of Class 3 assets and $470 in respect of Class 8 assets.

On reassessment, the Minister of National Revenue disallowed the deduction of the above-mentioned capital cost allowances claimed by the plaintiffs Who, as a result, instituted the present action.

The case turns on the interpretation of and possible conflicts between certain provisions of sections 3, 13, 20, 70 and 249 of the Income Tax Act, SC 1970-71-72, c 63, and of Regulation 1100 (supra), the regulation having come into force in 1954. The relevant portions of those provisions are reproduced hereunder for the sake of convenience:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which Is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

(b) determine the amount, if any, by which

"PC 1954-1917, SOR 54-682.

(i) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property, and his taxable net gain for the year from dispositions of listed personal

property,

exceeds

(ii) his allowable capital losses for the year from dispositions of property other than listed personal property;

(c) determine the amount, if any, by which the aggregate determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the aggregate of the deductions permitted by subdivision e in computing the taxpayer’s income for the year (except such of or such part of those deductions, if any, as have been taken into account in determining the aggregate referred to in paragraph (a));

13. (21) In this section and any regulations made under paragraph 20(1)(a),

(f) “undepreciated capital cost’’ to a taxpayer of depreciable property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(ti) for each disposition before that time of property of the taxpayer of that class, the least of

(A) the proceeds of disposition of the property,

(B) the capital cost to him of the property, and

(C) the undepreciated capital cost to him of property of that class immediately before the disposition,

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

.

70. (5) Where in a taxation year a taxpayer has died, the following rules apply:

(b) the taxpayer shall be deemed to have disposed of all depreciable property of a prescribed class owned by him immediately before his death and to have received proceeds of disposition therefor equal to,

(I) where the fair market value of that property at that time exceeds the undepreciated capital cost thereof to the taxpayer at that time, the amount of that undepreciated capital cost plus I2 of the amount of the excess, and

(li) in any other case, the fair market value of that property at that time plus /2 of the amount, if any, by which the undepreciated capital cost thereof to the taxpayer at that time exceeds that fair market value;

(6) Where any property of a taxpayer to which paragraphs (5)(a) and (c) or paragraphs (5)(b) and (d), as the case may be, would otherwise apply has, on or after the death of the taxpayer and as a consequence thereof, been transferred or distributed to

(a) his spouse, or

(b) a trust created by the taxpayer’s will under which

(i) his spouse is entitled to receive all of the income of the trust that arises before the spouse’s death, and

. . . the following rules apply:

(c) paragraphs (5)(a) to (d) are not applicable to the property;

(d) the taxpayer shall be deemed to have disposed of the property immediately before his death and to have received proceeds of disposition threfor equal to,

(i) where the property was depreciable property of the taxpayer of a prescribed class, that proportion of the undepreciated capital cost to him of the property immediately before his death that the fair market value at that time of the property is of the fair market value at that time of all of the depreciable property of the taxpayer of that class,

and

(ii) in any other case, the adjusted cost base to the taxpayer of the property immediately before his death,

and the spouse or trust, as the case may be, shall be deemed to have acquired the property at the same amount; and

249. (1) For the purpose of this Act, a “taxation year” is

(b) in the case of an individual, a calendar year,

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

(a) such amounts as he may claim, in respect of property of each of the following classes in Schedule B not exceeding in respect of property

(iii) of class 3, 5%,

of the amount remaining, if any, after deducting the amounts determined under sections 1107 and 1110 in respect of the class, from the undepreciated capital cost to him as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of property of the class;

(3b) Where a taxpayer dies in the course of a taxation year, in determining his income from sources other than those referred to in subsection (3a), the amount allowed as a deduction under paragraphs (a), (d) and (h) of subsection (1) shall not exceed the proportion of the maximum amount allowable that the number of days that had elapsed in that taxation year prior to the day after the day of death is of 365.

Counsel for the plaintiffs argues that because paragraph 3(c) above contains the words “except such part of those deductions as have been taken into account in determining the aggregate referred to in paragraph (a)” section 3 clearly envisages that in determining the aggregate in paragraph 3(a) normal expenses incurred in operating the business would be allowed as deductions other than the specific deductions allowed in Subdivision e, that is, sections 60 to 66 in- Clusively. He also maintains that the combined effect of paragraph 1100(1)(a) and subsection 1100(3b) of the Regulations which are authorized under paragraph 20(1 )(a) of the Act clearly entitle a deduction for capital cost allowance to be made in the case of the deceased taxpayer for the year of his decease.

Counsel for the plaintiffs also maintains that subsection 70(6), which deals with the question of a trust in favour of the spouse, is like subsection 70(5) intended in essence to cover the determination of capital gains and not capital cost allowances and in any event is but of general application and does not override or render null and void the provisions of subsection 1100(3b) of the Regulations.

The Crown on the other hand maintains that subsection 70(6) is not by any means limited in its application and it clearly states that the deceased taxpayer is not only deemed to have disposed of the property immediately before his decease but is deemed to have received the proceeds at that time and that, therefore at the end of the taxation year, there remains no base for any capital cost allowance calculation including that calculated by virtue of Regulation 1100(3b) and that subsection 20(1) obviously does not authorize the enacting of any regulation which would be contrary to the Act.

At the hearing, counsel for the plaintiffs, because of the general wording of section 249 which, in his view, was not qualified or modified by any other section of the Act, stated that he was conceding that the end of a deceased taxpayer’s year remains December 31 of the year of his death and does not end with his death.

Notwithstanding that both counsel seem to share this view, I am not prepared to hold that, in the absence of a more express provision to that effect, a deceased taxpayer is, for taxation. purposes, deemed to have a taxation year which ends at the end of the calendar year of his decease and, therefore, at a time when he no longer exists. It would seem more logical to conclude that, where section 249 refers to an individual, it must be taken to refer to an individual who is alive and that the deceased taxpayer’s taxation year would end at the date of his death although it would obviously not be a twelve-month period. Be that as it may, it is not in my view necessary to decide this issue in the present case because, if the deceased taxpayer’s taxation year terminates at his death, then, under subsection 70(6), he would still: be deemed to have disposed of the asset and received the proceeds of the disposition immediately before the end of the taxation year which ended on his decease and, therefore, in that case also there would be no asset then. remaining on which a capital cost allowance could be claimed. The situation is to be distinguished from that which the Federal Court of Appeal dealt with in the case of Compagnie Immobilière BCN Ltée v The Queen, [1976] CTC 282; 76 DTC 6153 (presently under appeal before the Supreme Court of Canada) because in that case it was held by the Court of Appeal that there had been no disposition. of the asset. If the appeal in the above case succeeds before the Supreme Court of Canada, it would presumably be on the basis that that Court has been persuaded that there has been a disposition in the circumstances and that, notwithstanding the absence of proceeds, no capital cost allowance could be taken by the taxpayer, or, alternatively, on the basis that, notwithstanding the fact that there was no actual disposition in the strict sense of the word, the asset must be in existence or another asset in the same class must be in existence at the end of the taxation year in order to allow capital cost allowance to be claimed. In either eventuality, the case would be of no assistance to the plaintiffs.

Regulation 1100(3b) rather than 1100(3a) would be the one applicable to the facts of this case since the income, according to the tax return of the deceased, was from property and not from business, but whether 1100(3b) rather than 1100(3a) would apply appears to be completely immaterial.

Prior to the coming into force of section 70 in 1972, there was no deemed disposition of the asset nor any deemed receipt of the proceeds immediately before the death of a taxpayer under the Income Tax Act. Such is clearly not the case now. The regulations in question were never repealed and therefore must be enforced, providing they are not contrary to the new legislation.

Counsel for the plaintiffs argued that, even before the enactment of section 70, taxpayers, in Ontario at least, were in the same position as they are at present by reason of the provisions of section 2 of The Devolution of Estates Act, RSO 1970, c 129, and of section 33 of The Wills Act, RSO 1970, c 499, which vest the assets in the personal representative of the deceased and that consequently there was a deemed disposition by operation of the law. He argued that there was never any question but that they were nevertheless entitled to the deduction for capital cost allowance.

This argument cannot succeed. If the taxation year of a deceased taxpayer ends on his death then, contrary to section 70, where the disposition is deemed to have taken place before death and therefore before the end of the taxation year, under both section 2 of The Devolution of Estates Act and section 33 of The Wills Act the vesting is deemed to take place on death. Under both sections also, there is no question of the estate, the deceased or any person being demed to have received the proceeds of a disposition resulting from the vesting of the assets in the personal representative. Finally and more importantly, even if the taxation year of a deceased taxpayer is to be considered to remain at all times the 31st of December of the year of his decease, where a regulation is validly issued pursuant to a taxing statute and does not contravene any of the provisions of that statute, and where such a regulation purports to afford a deduction or some relief to the taxpayer from the tax burden imposed by the taxing statute, its effect must never be considered as nullified by reason of the existence of another enactment in a statute totally unrelated to taxation, especially where the enactment emanates from another jurisdiction.

In view of the very specific wording of subsection 70(5) and subsection 70(6), I fail to see how that wording can be interpreted to allow for the continued application of Regulations 1100(1)(a) or 1100(3b) for the reasons which I have stated above, namely, that the asset is deemed to have been disposed of and paid for before death and therefore before the end of the taxation year, when the capital cost allowance is to be calculated.

In coming to this conclusion, I wish to emphasize that I am making no finding as to whether in a properly worded regulation issued pursuant to paragraph 20(1)(a) and notwithstanding section 70, it would not be possible to afford the relief to a deceased taxpayer’s estate which subsections 1100(3a) and (3b) seem to contemplate. Even though taxation legislation must be interpreted in favour of the taxpayer rather than the taxing authority, the clear meaning of an enactment must not be twisted nor must its logical result be diverted merely because a regulation previously enacted still exists which now is in direct conflict with the statutory enactment.

It would therefore appear to me that the above-mentioned sections of the regulations have ceased to have any effect whatsoever and, therefore, might well be deemed to have been repealed pursuant to subsection 2(2) of the Interpretation Act, RSC 1970, c 1-23. In any event, whether or not they are absolutely repealed by operation of law, they are certainly of no help to the plaintiffs in the circumstances of the case at bar. The reassessment by the Minister will therefore be confirmed and the action dismissed.

As to costs, however, since the case has arisen because the defendant has neglected to repeal or amend its own regulations which are in direct conflict with the new legislation, the parties should be left to pay their own costs.