Citation: 2004TCC433
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Date: 20040622
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Docket: 2003-3146(IT)I
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BETWEEN:
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DEBBIE NADEAU,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] This
is an appeal from an assessment for the 2001 taxation year. The Minister
of National Revenue ("Minister") reduced the Appellant's
foreign tax credit by an amount of $2,455. This is the amount of the premiums
paid by the Appellant to the Maine State Retirement System ("MSRS")
in the course of her employment.
[2] The
Appellant is an American citizen and Canadian resident for the purposes of her
income tax return for the taxation year at issue. During this taxation year,
she was a teacher in a public school in the State of Maine in the United
States. During the taxation year at issue, she earned $32,104 of income in
Canadian funds from her work and interest income from Canada. She also paid
premiums to the MSRS. The MSRS was created to provide certain benefits to State
of Maine employees and public school teachers, including a pension fund and
disability and death benefits. Federal tax owing on income from her work in the
State of Maine, before the foreign tax credit, is $3,726.32.
[3] The
issue is determining whether the Appellant is entitled to a foreign tax credit
for the amount of the MSRS premiums. In her income tax return for the taxation
year at issue, the foreign tax credit claimed by the Appellant included the tax
she had paid on her income in the State of Maine and her MSRS premiums. The
most recent assessment made by the Minister, on October 28, 2002,
reduced the amount of the foreign tax credit by the amount of the premiums paid
by the Appellant to the MSRS. However, the amount of federal tax to be paid in
the case at bar remained the same because the foreign tax credit cannot be
higher than the federal tax to be paid on foreign income. A foreign tax credit
cannot be used to reduce tax to be paid on income from Canadian sources, such
as interest income in the case at bar. The Appellant argues that her MSRS
premiums are a foreign tax and must therefore be taken into consideration.
[4] This
situation arises out of section 126 of the Income Tax Act ("Act")
the provisions of which are to prevent a Canadian taxpayer from double taxation
on income earned abroad. Thus, section 126 grants the taxpayer a credit
equal to the foreign tax paid which can be deducted from tax to be paid in
Canada on this income. However, this credit cannot be greater than the tax
computed according to the proportion set out at paragraph 126(1)(b),
in order to prevent the application of the foreign tax credit to tax to be paid
on his or her Canadian income.
[5] The
Appellant argues that her premiums are a foreign tax and therefore, must be
taken into consideration. It must therefore be determined whether the
Appellant's premiums to the MSRS in the course of her employment in the State
of Maine, are a tax as understood in the Convention between Canada and the
United States or as understood in section 126 of the Act,
consequently entitling her to a deduction for foreign tax.
81.(1) There shall not be included
in computing the income of a taxpayer for a taxation year,
(a) an amount that is declared to
be exempt from income tax by any other enactment of Parliament, other than an
amount received or receivable by an individual that is exempt by virtue of a
provision contained in a tax convention or agreement with another country that
has the force of law in Canada;
110 (1) For the purpose of
computing the taxable income of a taxpayer for a taxation year, there may be
deducted such of the following amounts as are applicable:
. . .
(f) any social assistance
payment made on the basis of a means, needs or income test and included because
of clause 56(1)(a)(i)(A) or paragraph 56(1)(u) in computing
the taxpayer's income for the year or any amount that is
(i) an amount exempt from
income tax in Canada because of a provision contained in a tax convention or
agreement with another country that has the force of law in Canada,
126(1) Foreign tax deduction [credit
for foreign tax – non-business income] - A taxpayer who was resident in
Canada at any time in a taxation year may deduct from the tax for the year
otherwise payable under this Part by the taxpayer an amount equal to
(a) such part of
any non-business-income tax paid by the taxpayer for the year to the government
of a country other than Canada (except, where the taxpayer is a corporation,
any such tax or part thereof that may reasonably be regarded as having been
paid by the taxpayer in respect of income from a share of the capital stock of
a foreign affiliate of the taxpayer) as the taxpayer may claim,
not
exceeding, however,
(b) that
proportion of the tax for the year otherwise payable under this Part by the
taxpayer that
(i) the amount, if any,
by which the total of the taxpayer's qualifying incomes exceeds the total of
the taxpayer's qualifying losses
(A) for the year, if the taxpayer is
resident in Canada throughout the year, and
(B) for the part of the year
throughout which the taxpayer is resident in Canada, if the taxpayer is
non-resident at any time in the year,
from
sources in that country, on the assumption that
(C) no businesses were carried on by
the taxpayer in that country,
(D) where the taxpayer is a
corporation, it had no income from shares of the capital stock of a foreign
affiliate of the taxpayer, and
(E) where the taxpayer is
an individual,
(I) no amount was deducted under
subsection 91(5) in computing the taxpayer's income for the year, and
(II) if the taxpayer
deducted an amount under subsection 122.3(1) from the taxpayer's tax otherwise
payable under this Part for the year, the taxpayer's income from employment in
that country was not from a source in that country to the extent of the lesser
of the amounts determined in respect thereof under paragraphs 122.3(1)(c)
and 122.3(1)(d) for the year,
is of
(ii) the
total of
(A) the amount, if any,
by which,
(I) if the taxpayer was
resident in Canada throughout the year, the taxpayer's income for the year
computed without reference to paragraph 20(1)(ww), and
(II) if the taxpayer was
non-resident at any time in the year, the amount determined under
paragraph 114(a) in respect of the taxpayer for the year
exceeds
(III) the total of all
amounts each of which is an amount deducted under section 110.6 or
paragraph 111(1)(b), or deductible under any of
paragraphs 110(1)(d) to 110(1)(d.3), 110(1)(f),
110(1)(j) and sections 112 and 113, in computing the taxpayer's
taxable income for the year, and
(B) the amount, if any,
added under section 110.5 in computing the taxpayer's taxable income for
the year.
126(7) Definitions
— In this section:
"non-business-income tax" paid by a taxpayer for a
taxation year to the government of a country other than Canada means, subject
to subsections 126(4.1) and 126(4.2), the portion of any income or profits
tax paid by the taxpayer for the year to the government of that country that
(a) was not included in computing the
taxpayer's business-income tax for the year in respect of any business carried
on by the taxpayer in any country other than Canada,
(b) was
not deductible by virtue of subsection 20(11) in computing the taxpayer's
income for the year, and
(c) was
not deducted by virtue of subsection 20(12) in computing the taxpayer's
income for the year,
but does
not include a tax, or the portion of a tax,
(c.1)
that is in respect of an amount deducted because of subsection 104(22.3)
in computing the taxpayer's business-income tax,
(d)
that would not have been payable had the taxpayer not been a citizen of that
country and that cannot reasonably be regarded as attributable to income from a
source outside Canada,
(e)
that may reasonably be regarded as relating to an amount that any other person
or partnership has received or is entitled to receive from that government,
(f)
that, where the taxpayer deducted an amount under subsection 122.3(1) from
the taxpayer's tax otherwise payable under this Part for the year, may
reasonably be regarded as attributable to the taxpayer's income from employment
to the extent of the lesser of the amounts determined in respect thereof under
paragraphs 122.3(1)(c) and 122.3(1)(d) for the year,
(g)
that can reasonably be attributed to a taxable capital gain or a portion
thereof in respect of which the taxpayer or a spouse or common-law partner of
the taxpayer has claimed a deduction under section 110.6,
(h)
that may reasonably be regarded as attributable to any amount received or
receivable by the taxpayer in respect of a loan for the period in the year
during which it was an eligible loan (within the meaning assigned by
subsection 33.1(1)), or
(i) that
can reasonably be regarded as relating to an amount that was deductible under
subparagraph 110(1)(f)(i) in computing the taxpayer's taxable
income for the year;
Convention Between Canada and the
United States of America with Respect to Taxes on Income and on Capital (1980):
Article II
2. Notwithstanding paragraph 1, the
taxes existing on March 17, 1995 to which the Convention shall apply
are:
. . .
(b) in the case of
the United States, the Federal income taxes imposed by the Internal Revenue
Code of 1986. However, the Convention shall apply to:
. . .
(iii) the United
States social security taxes, to the extent, and only to the extent, necessary
to implement the provisions of paragraph 2 of Article XXIV (Elimination of
Double Taxation) and paragraph 4 of Article XXIX (Miscellaneous Rules);
and . . .
Article III
1.
For
the purposes of this Convention, unless the context otherwise requires:
. . .
(d) the term
"United States tax" means the taxes referred to in Article II (Taxes
Covered), other than in subparagraph (b)(i) to (iv) of paragraph
2 thereof, that are imposed on income by the United States;
Article XV
1. Subject to the provisions of
Articles XVIII (Pensions and Annuities) and XIX
(Government Service), salaries, wages and other similar remuneration derived by
a resident of a Contracting State in respect of an employment shall be taxable
only in that State unless the employment is exercised in
the other Contracting State. If the employment is so exercised, such
remuneration as is derived therefrom may be taxed in that other State.
Article XXIV
2. In the case of Canada, subject to the
provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as
follows:
(a)
subject to the provisions of the law of Canada regarding the deduction from tax
payable in Canada of tax paid in a territory outside Canada and to any
subsequent modification of those provisions (which shall not affect the general
principle hereof)
(i) income tax paid or accrued to the United States on
profits, income or gains arising in the United States, and
(ii) in the case of an individual, any social security
taxes paid to the United States (other than taxes relating to unemployment
insurance benefits) by the individual on such profits, income or gains
shall be deducted from any Canadian tax
payable in respect of such profits, income or gains;
7. For the purposes of this Article, any
reference to "income tax paid or accrued" to a Contracting State
shall include Canadian tax and United States tax, as the case may be, and taxes
of general application which are paid or accrued to a political subdivision or
local authority of that State, which are not imposed by that political
subdivision or local authority in a manner inconsistent with the provisions of
the Convention and which are substantially similar to the Canadian tax or
United States tax, as the case may be.
Canada-United States Tax
Convention Act, S.C. 1984, c. 20:
3(2) In the event of any
inconsistency between the provisions of this Act, or the Convention, and the
provisions of any other law, the provisions of this Act and the Convention
prevail to the extent of the inconsistency.
Title 5, Part 20: Maine
State Retirement System Act, P.L. 1985, c. 801:
§ 17050 It is the intent of the
Legislature to encourage qualified persons to seek public employment and to
continue in public employment during their productive years. It is further the
intent of the Legislature to assist these persons in making provision for their
retirement years by establishing benefits reasonably related to their highest
earnings and years of service and by providing suitable disability and death
benefits.
§ 17651 All employees shall become
members of the retirement system as a condition of their employment.
§ 17701‑B Notwithstanding
sections 17701 and 17701‑A, on and after July 1, 1993 all
members shall contribute to the retirement system or have pick‑up
contributions made at a rate of 7.65% of earnable compensation except as
otherwise provided in this Part.
§ 18056 . . . Life
insurance and accidental death and dismemberment insurance, to be known as
"basic insurance", shall be available to all eligible participants.
. . .
[6] The
Appellant's agent conceded during his argument that the premiums are not
subject to the provisions of the Convention, particularly paragraph 2 of
Article XXIV of the Convention. This section prevents double taxation in
Canada by granting a deduction for "income tax paid or accrued to
the United States on profits, income or gains arising in the United
States" as well as "any social security taxes paid to the United
States" by the taxpayer on all Canadian taxes owing on the same sources of
income. Although the agent
did not specify the reason for this concession, I assume that he concluded that
the premiums were not a [translation]
"social security" tax and that they were instead in the case at bar,
premiums for funding a retirement fund and insurance benefits for teachers in
the State of Maine and state employees.
[7] The
Appellant's agent stated, without supporting evidence, that the State of
Maine's MSRS replaces the American federal social security program, and
as such, it could be a social security tax. I wish to specify that the
objective of the MSRS, according to section 17050 of the laws of Maine, supra,
is to encourage the residents of the State of Maine to work for the State by
making provisions for a pension fund and benefits in the event of death or
accident. It is not a social program whose funding is ensured by a [translation] "social security
tax".
[8] The
Appellant's agent primarily based his argument on the fact that even if these
premiums are not subject to the Convention between Canada and the United
States, their deductibility is possible under the definition of a
"business‑income tax" found at subsection 126(7) of the Act,
supra. A deduction for a foreign tax is allowed on amounts that were not
claimed under certain provisions of the Act and that were paid by the
taxpayer to the government of a foreign country.
[9] The
Supreme Court of Canada set out the essential characteristics for an amount of
money levied by Government to qualify as a tax for the purpose of the Act.
As in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction,
[1931] S.C.R. 357, the Supreme Court wrote in Eurig Estate,
[1998] 2 S.C.R. 565, [2000] 1 C.T.C. 284:
15 Whether a levy
is a tax or a fee was considered in Lawson, supra. Duff J. for the
majority concluded that the levy in question was a tax because it was: (1)
enforceable by law; (2) imposed under the authority of the legislature; (3)
levied by a public body; and (4) intended for a public purpose.
. . .
19 The
probate levy also meets the fourth Lawson criterion for a tax as the
proceeds were intended for a public purpose. The Ontario Law Reform Commission
concluded in 1991 that it is difficult to discern a principled justification
for ad valorem probate fees, and that "[t]he only rationale for the
graduated fee schedule appears to be that it has been regarded as a suitable
vehicle for raising revenue" (Report on Administration of Estates of
Deceased Persons, at p. 286).
20 Those conclusions are supported
by the evidence before this Court which showed that probate fees do not
"incidentally" provide a surplus for general revenue, but rather are
intended for that very purpose. The revenue obtained from probate fees is used
for the public purpose of defraying the costs of court administration in
general, and not simply to offset the costs of granting probate.
21 Another factor that
generally distinguishes a fee from a tax is that a nexus must exist between the
quantum charged and the cost of the service provided in order for a levy to be
considered constitutionally valid: see G. V. La Forest, The
Allocation of Taxing Power Under the Canadian Constitution (2nd ed. 1981),
at p. 72. This nexus was also considered relevant to determining the
nature of a municipal charge in Allard Contractors, supra. In that case
the Court engaged the question of whether an indirect tax levied by a province
was validly enacted as incidental to a matter of provincial jurisdiction.
Addressing the relationship between a charge and the cost of the underlying
service, Iacobucci J. wrote (at p. 411):
. . .
22 In determining
whether that nexus exists, courts will not insist that fees correspond
precisely to the cost of the relevant service. As long as a reasonable
connection is shown between the cost of the service provided and the amount
charged, that will suffice. The evidence in this appeal fails to disclose any
correlation between the amount charged for grants of letters probate and the
cost of providing that service. The Agreed Statement of Facts clearly shows
that the procedures involved in granting letters probate do not vary with the
value of the estate. Although the cost of granting letters probate bears no
relation to the value of an estate, the probate levy varies directly with the
value of the estate. The result is the absence of a nexus between the levy and
the cost of the service, which indicates that the levy is a tax and not a fee.
[10] In his book entitled The Fundamentals of Canadian Income Tax
Vern Krishna reminds us on page 8 that:
A tax system, however, can be used
for more than financing public sector goods and services. It can be used and is
also used to implement socio‑economic and political policies.
[11] In the case at bar, the Appellant's MSRS premiums meet the first three
criteria in Eurig Estate (Re) in that there is an enabling statute, the
amount is imposed under the authority of the legislature and it is levied by a
public agency, i.e. the State of Maine. The difficulty posed by the
premiums is the last criterion, for a public interest. As I previously
indicated, the MSRS is a retirement and benefit fund for teachers and employees
of the State of Maine only and its objective is to encourage the residents of
this State to work for the state by establishing these benefits. The premiums
therefore are not imposed for the purpose of a public interest, that is, in
order to generate income for the state. The premiums, in my opinion, are
not a tax for the purposes of section 126 of the Act and should not
be included in the foreign tax deduction. The Minister therefore correctly
assessed the Appellant.
[12] The appeal is therefore dismissed.
Signed at Edmundston, New Brunswick, this 22nd day
of June 2004.
Angers J.
Translation certified true
on this 23rd day
of September 2004.
Sharon Winkler Moren, Translator
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