Citation: 2009 TCC 614
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
This is an appeal,
under the informal procedure, from an assessment made by the Minister of
National Revenue (Minister) by which he refused to consider the income
of $50,482 earned by the appellant from the accounting firm KPMG (KPMG)
during the 2007 taxation year as pension income eligible to be split with his
wife, in computing their respective incomes, within the meaning of paragraph
60(c) and section 60.03 of the Income Tax Act (ITA).
The appellant is an
accountant who practised his profession from 1965 until he retired on February
28, 1997. He was a partner of KPMG and, in that capacity, had accumulated, over
the years, units of participation, which entitled him to share in the profits,
losses and capital of KPMG.
At the time of his
departure, he became a retired partner of KPMG, thus accepting to relinquish
all of his units of participation. In doing so, he became eligible for
membership in a benefits plan for retired partners for the rest of his life, as
provided by the company agreement, and related procedures and methods (Procedures
The appellant left at the age of 59 and, according to his testimony, was
entitled to seek reimbursement of 10% of the capital invested to acquire his
units of participation. Had he left at the mandatory retirement age of 62, he
would have been entitled to up to 20% of the capital invested for those same
Also, the appellant
received a monthly retirement allowance from KPMG for life, which was
calculated based on the percentage of the maximum number of units of
participation that the former partner held over the course of the ten-year
period prior to the date on which the partner relinquished his units of
participation, multiplied by the value of each unit of participation estimated
on an accrual basis upon the partner's retirement (see Procedures and Methods,
Exhibit A-1, Tab 2, section XI).
In the present case,
the amount of the retirement allowance to be paid to the appellant was
established using the calculation found at page 5 of the agreement proposed by
KPMG to the appellant (Exhibit A-1, Tab 3). That allowance was set at $43,982
annually, which, according to the appellant, was reduced to $41,607 in order
for the allowance to be transferred to his wife upon his death. Furthermore,
the appellant explained that except with respect to the annual cost-of-living
increase adjustment, of up to 3%, the retirement allowance does not fluctuate
based on the profits of KPMG.
allowance is derived from the annual profits of KPMG. This is reflected in
Article XI, clause 3(b) of the Procedures and Methods (page 13). If the total amount
of interest held by retired partners exceeds 15% of the company's profits for any
fiscal year, that interest will be reduced so that the total of the interest
accounts globally for 15% of the company's profits (Article XI, clause 3(f) of
the Procedures and Methods, at page 14).
Furthermore, it was
agreed that the interest of former partners in the profits of the partnership
be treated as equal to the share of the income or
loss of the partnership allocated, within the meaning of subsection
96(1.1) of the ITA (section XI, subsection 9 of the Procedures and Methods, at
Thus, KPMG filled out
Form T5013 (Statement of Partnership Income) indicating that the appellant's
professional income from the company for the 2007 taxation year was $50,482.
That form was attached to the appellant's income tax return for the 2007
taxation year (Exhibit I-1, page 11). On his income tax return, the appellant
reported half of that amount, $25,241, under "Professional income"
(Exhibit I-1, page 2, line 137). The other half was reported on his wife's
income tax return for that same year.
The appellant submits
that the retirement allowance is pension income within the meaning of paragraph
60(c), of section 60.03 and of subsection 118(7) of the ITA, and that as
such, he had the right to split that income with his wife.
60. Other deductions -- There may be deducted in computing a taxpayer’s
income for a taxation year such of the following amounts as are applicable
. . .
(c) Pension income reallocation -- where the taxpayer
is a pensioner (as defined in subsection 60.03(1)), any amount that is a
split-pension amount (as defined in that subsection) in respect of the
pensioner for the taxation year;
. . .
60.03 [Pension income split] –
. . .
has the same meaning as in
. . .
"pensioner" for a taxation year means an individual who
(a) receives eligible
pension income in the taxation year; and
(b) is resident in
if the individual dies in
the taxation year, at the time that is immediately before the individual’s
in any other case, at the
end of the calendar year in which the taxation year ends.
"pension income" has the meaning assigned by section 118.
. . .
amount" for a taxation year is the amount elected by a pensioner
and a pension transferee in a joint election for the taxation year not
exceeding the amount determined by the formula
0.5A × B/C
A is the eligible pension income of
the pensioner for the taxation year;
B is the number of months in the
pensioner’s taxation year at any time during which the pensioner was married
to, or was in a common-law partnership with, the pension transferee; and
C is the number of months in the pensioner’s taxation year.
. . .
118(7) Definitions -- Subject to subsections (8) and (8.1), for the
purposes of this subsection and subsection (3),
"eligible pension income" of an individual for a taxation year means
(a) if the individual has attained the age of 65 years before the end of the
taxation year, the pension income received by the individual in the taxation
(b) if the individual has not attained the age of 65 years before the end of
the taxation year, the qualified pension income received by the individual in
the taxation year;
"pension income" received by an individual in a taxation year
means the total of
(a) the total of
all amounts each of which is an amount included in computing the individual’s income
for the year that is
a payment in respect of a
life annuity out of or under a superannuation or pension plan
. . .
The appellant submits
that the retirement allowance he receives from KPMG qualifies as pension income
as it is a life annuity out of or under a
superannuation or pension plan within the meaning of subparagraph
118(7)(a)(i) of the ITA. The appellant acknowledges that neither he, nor
the company, contributed to a pension plan during the years he was a partner.
The respondent argues
that the retirement allowance in question is not a
life annuity out of or under a superannuation or pension plan, but
rather compensation for the loss of his right to share in the future profits of
the company following the relinquishment of his units of participation.
According to the respondent, that is very different from a pension plan created
for the benefit of the employees.
The appellant relies on
two decisions of this Court to claim that the allowance received from KPMG can
be likened to pension income. In Kaiser v. Canada  T.C.J. No. 493
(QC), Rowe J.T.C.C. defined the expression "superannuation
or pension plan" that at the time was contained in subparagraph
56(1)(a)(i) of the ITA as contemplating
. . . a payment of a fixed or determinable
allowance paid at regular intervals to a person usually, but not always, as a
result of the termination of employment for the purpose of providing that
person with a minimum means of existence; the formal program for the payment of
the specified benefits, or the way the benefits are to be carried out, must be
organized or promoted by a person other than the beneficiary since the
beneficiary's right to receive the superannuation or pension benefits is
determined by the superannuation or pension plan contemplated by subparagraph
56(1)(a)(i). In other words, the regularity and amount of the payments
are made according to the terms of a plan and not at the discretion or
direction of the beneficiary.
Moreover, the appellant
refers to Ouellet v. Canada  T.C.J. No. 676, to argue that the
assessment by the employer is not necessarily required for there to be a
pension plan. Lamarre Proulx J.T.C.C. stated as follows at paragraph 39:
What is in fact important for determining
whether the arrangement is a retirement plan is to verify that it is "a
set of rules forming an organized whole", in conjunction with an office or
employment, that provides for the payment of pensions in case of termination of
that office or employment.
Counsel for the
respondent distinguished the two decisions arguing that they applied to
taxpayers holding an office or employment who could enjoy pension income.
According to the respondent, this does not apply here. The respondent did not
cite any authority or case law to support that argument.
In fact, in Kaiser,
it was admitted that the funds in question derived from a foreign retirement
arrangement to be included in income within the meaning of provision 56(1)(a)(i)(C.1)
of the ITA. The issue was whether, at the death of the beneficiary of those
funds, the beneficiary designated upon his death was also subject to taxation
under this same provision.
In Ouellet, the
dispute was over whether a judge appointed under
the Quebec Courts of Justice Act was entitled to benefits
under any pension fund or plan within the meaning of Paragraphs 146(5)(a)
and (b) of the ITA, for the purposes of determining the amount he could
contribute to a registered retirement savings plan.
The Quebec Courts of Justice Act deals specifically with the retirement and
pension plan of judges at the Court of Quebec.
In the present case,
the appellant is the former partner of an accounting firm who shared in the
business profits and losses of the company. He was not an employee. He did not,
over the years, make contributions to a pension plan or any fund whatsoever for
future pension income.
In Dunne v. Deputy
Minister of Revenue of Quebec, 2007 S.C.C. 19, the Supreme Court of
Canada ruled on the legal nature of the payments received by a taxpayer in a
similar situation. Mr. Dunne, a resident of Ontario, was a partner with an
accounting firm for many years and became eligible to
receive what he characterizes as a retirement allowance in accordance with his
partnership agreement. The core issue was the legal nature of the
amounts received by Mr. Dunne from the company for the purposes of
determining whether a portion of those amounts could be taxed in the province
of Quebec, as the accounting firm he was a partner with also carried on a
business in Quebec.
According to his partnership agreement, Mr. Dunne was entitled
to a retirement allowance that is based on a formula
under which length of service with the partnership is factored in together with
the average of the retired partner's combined salary and share of profits
during his or her best three-year period. Moreover, according to the
Court, it is clear from the partnership agreement that
this allowance was a share of the profits of the
partnership, even though the allowance was intended in part as consideration
for past services. The Court reached this conclusion, among others, for
the following reasons. First, the agreement provided that if the gross profit was insufficient, payments to former partners
could be reduced proportionately. Moreover,
the agreement treated the retirement allowance as a
share of the gross profit. It capped such payments in any year at 15 percent of
the gross profit and provided for a proportionate reduction to keep them within
the cap if necessary.
the partners agreed that amounts payable in respect of the retirement allowance
should be considered a share of the partnership's income for tax purposes.
The Supreme Court of
Canada upheld the judgment of the Quebec Court of Appeal,  R.J.Q. 2184,
2007 D.T.C. 5237 (French), which stated as follows at paragraphs 38 to 44:
we must examine sections 608 and 609 [of the Quebec Taxation Act,
(T.A.)], from which I again quote the relevant excerpts below:
For the purposes of
sections 600, 607, 634 and 635, where the principal activity of a partnership
is carrying on a business in Canada and its members have entered into an
agreement to allocate a share of the income or loss of the partnership from
any source in Canada or from sources in another place to any person
described in section 609, that person is deemed to be a member of the
partnership and the amount so allocated for a particular fiscal period of
the partnership shall be included in computing the person’s income for the
taxation year in which that fiscal period of the partnership ends.
The person to whom section
608 applies is:
(a) a taxpayer who at any time ceased to be a
member of the partnership described therein …, where the members thereof or the
members of a third partnership in which a member of such other partnership
became a member immediately after the other partnership was dissolved, have
entered into an agreement described in section 608 in favour of the taxpayer or
of any person described in paragraph b; and
. . .
for the purposes of section 600 T.A., in particular, where the principal activity of a partnership
is carrying on a business in Canada and its members have entered into an
agreement to allocate a share of the income or loss of the partnership to any
person described in section 609, that person is deemed, pursuant to section
608, to be a member of the partnership and the amount so allocated shall be
included in computing the person’s income. Section 609 applies, among others,
to a taxpayer who, at one time or
another, ceased to be a member of the partnership described in section 608.
respondent's situation falls within these two provisions.
activity of the partnership of which the respondent
was a member until 1994 carries on a business in Canada, as was always the case
during the 1997 taxation year.
the members of the partnership entered into an agreement under which the
respondent (like the other retired partners) received, in the form of a
pension, a share of the income of the partnership. That, incidentally, is
not contested by the respondent. In any case, articles 4.4 and 5.5 of the partnership
agreement filed as Exhibits R-9 and R-10 confirm that the pension is a
form of allocation of the income of the partnership.
the respondent is a person who ceased to be a member of the partnership in
based on sections 608 and 609 T.A., the respondent is, despite his retirement,
deemed to be a member of the partnership and must therefore include in his
income for the taxation year in issue the amount of retirement pension paid by
the partnership. Subsection 600(f) confirms the respondent's obligation to
include the amount in his income.
96(1.1) of the ITA states as follows:
96(1.1) Allocation of share of income to retiring
partner. For the purposes of subsection 96(1) and
sections 34.1, 34.2, 101, 103 and 249.1,
(a) where the principal activity of a
partnership is carrying on a business in Canada and its members have entered
into an agreement to allocate a share of the income or loss of the partnership
from any source or from sources in a particular place, as the case may be, to
any taxpayer who at any time ceased to be a member of
(ii) a partnership that at any time has ceased to exist or
would, but for subsection 98(1), have ceased to exist, and either
members of that partnership, or
members of another partnership in which, immediately after that time, any of
the members referred to in clause 96(1.1)(a)(ii)(A) became members
have agreed to make such
or to the taxpayer’s spouse,
or common-law partner, estate or heirs or to any person referred to in
subsection 96(1.3), the taxpayer, spouse, or common-law partner, estate,
heirs or person, as the case may be, shall be deemed to be a member of the
amounts each of which is an amount equal to the share of the income or loss
referred to in this subsection allocated to a taxpayer from a partnership in
respect of a particular fiscal period of the partnership shall, notwithstanding
any other provision of this Act, be included in computing the taxpayer’s income
for the taxation year in which that fiscal period of the partnership ends.
In the present case,
the partnership agreement binding the appellant and KPMG is very similar to the
one analyzed in Dunne. Although the appellant did not produce the
agreement in its entirety, in the portion of the document that was filed in
Court, there are similar provisions determining a maximum amount payable to
retired partners based on the profits of the partnership (the maximum being 15%
of the profits for retired partners). Furthermore, the agreement specifically
provides that the interest of former partners in the profits of the partnership
are treated as equal to the share of the income of
the partnership allocated, within the meaning of subsection 96(1.1) of
Thus, despite the fact
that he is a retired partner, the appellant is deemed to be a member of the
partnership and must therefore include the amount of his retirement allowance
as partnership income. In Dunne, the Supreme Court of Canada concluded
that the retired partner was deemed to have carried
on a business in Quebec within the meaning of section 612.1 of the
Quebec Taxation Act.
The Quebec Court of
Appeal wrote as follows at paragraphs 45 to 48:
45 The issue is
whether the respondent should be taxed, on all or a portion of that amount, in
46 To deal
with the issue it is necessary to consider sections 612.1 and 25 T.A.
612.1 T.A. states that
612.1 Where a partnership carries on a business in Québec at any
time during a taxation year, each taxpayer who is deemed to be a member of the
partnership under section 608 is deemed, for the purposes of section 25, to
carry on that business in Québec at any time during the year.
47 This section
applies to the respondent: in 1997, the partnership in issue carried on a
business in Quebec and the respondent was deemed to be a member of the partnership under section
608. The respondent was
therefore also deemed, for purposes of the application of section 25 T.A., to
have carried on "that" business
in Quebec. Which business?
The very business of which he was deemed to be a member, of course. Indeed, we see
in the wording that the legislator did not state that the taxpayer was deemed
to have carried on "a" business in Quebec but rather that the
taxpayer was deemed to have carried on "that" business, the use of
the demonstrative pronoun refers directly to the business of the partnership of
which the taxpayer was deemed to be a member.
considering that the respondent is deemed to have carried on the business of
the partnership, he is necessarily deemed to have carried on that business in
exactly the same way and by the same means as the partnership. And if the
partnership is carrying on its business in an establishment located in Quebec,
the respondent is also deemed to be carrying on that business in the same
establishment. Essentially, his situation is exactly what it would have been
had he continued to be an active member of the partnership. As explained above,
a partnership is merely a conduit and the members, real or deemed, who make up
and carry on their business through the partnership, are accountable for its
activities, seeing as it the business is carried on in one or more
establishments. There is no confusion between the concepts of business and
establishment: it is rather a question of recognizing the links between the
concept of business and that of establishment and of recognizing also that the
former is not completely dissociated from the concept of situs. Section
12 T.A. illustrates well the links between the business and the establishment
by defining the latter as the fixed or principal location where the taxpayer
carries on his business. [Emphasis added.]
Therefore, the purpose
of section 612.1 is to determine the situs of the business income in the
province of Quebec. As far as the ITA is concerned, there is no similar
provision because regardless of the province in which a business is carried on,
the business is carried on in Canada. We can therefore conclude that the
retired member is deemed to have carried on a business in Canada.
I therefore believe
that the income produced cannot inevitably be anything other than business
income for the former partner which he must include in his income pursuant to
section 9, reproduced below, and paragraph 96(1.1)(b) (supra) of the
-- Subject to this Part, a
taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.
Income from the profits
of a partnership cannot be considered pension income within the meaning of
subsection 118(7) of the ITA. In fact, if it is business income, that same
income cannot also be defined as a life annuity out
of or under a pension plan "forming an organized whole," which
would qualify as pension income, and for which a split-pension amount could be
permitted under paragraph 60(c) of the ITA. The reason is simple. If, as
suggested by the appellant according to his interpretation of the Act, that
income were to be included as pension income, it would be necessary to also
include that same income as business income by application of subsection
96(1.1) of the ITA. The result would be double taxation of the same amount,
which the appellant surely does not want, and which, in any case, is prohibited
by paragraph 248(28)(a) of the ITA, which reads as follows:
(28) Limitation respecting inclusions, deductions and tax credits -- Unless a contrary
intention is evident, no provision of this Act shall be read or construed:
(a) to require the inclusion or permit the deduction, either
directly or indirectly, in computing a taxpayer’s income, taxable income or
taxable income earned in Canada, for a taxation year or in computing a
taxpayer’s income or loss for a taxation year from a particular source or from
sources in a particular place, of any amount to the extent that the amount has
already been directly or indirectly included or deducted, as the case may be,
in computing such income, taxable income, taxable income earned in Canada or
loss, for the year or any preceding taxation year;
96(1.1) of the ITA requires the inclusion of that income as income of the
partnership, "notwithstanding any other provision
of this Act," that income can no longer qualify as otherwise, as
that provision of the ITA, as it stands, trumps all other provisions of the
For these reasons, I
would dismiss the appeal.
Signed at Ottawa, Canada, this 7th day of
Translation certified true
on this 25th day
of February 2010.