Miller v. The Queen, 93 DTC 5035, [1993] 1 CTC 269 (FCA)

Mahoney, J.A.:— This is an appeal from a reported decision of the Trial Division ([1990] 2 C.T.C. 4, 90 D.T.C. 6335) arising out of a mistake made by the respondent in preparing his 1982 income tax return. The respondent elected to forward average under subsection 110.4(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

Where an individual (other than a trust) who was resident in Canada throughout a taxation year (in this section referred to as the "year of averaging”) and the two immediately preceding taxation years files with his return of income for the year of averaging under this Part an election in the prescribed form with the Minister on or before the day on or before which he was required to file the return, there may be deducted in computing his taxable income for the year of averaging an amount (in this section referred to as the "averaging amount") that is not less than $1,000 nor more than the lesser of. . . .

We need not be concerned with the complex formula that follows. Suffice it to say, the respondent duly filed an election claiming the maximum deduction with his return. He also claimed a deduction for a $5,500 registered retirement savings plan contribution. The income in respect of which he was entitled to make an RRSP contribution supported a contribution of only $238.

This appeal is concerned with the refusal of the Minister to increase the amount elected to be forward averaged by the $5,262 RRSP deduction disallowed. Subsection 110.4(7) provided that if the amount deducted pursuant to an election was greater than the amount deductible, the deduction was deemed to be reduced and taxable income for the year increased accordingly. Aside from that, there was no provision of the Act that authorized amendment of an election once made. There was no provision that expressly prohibited an amendment either.

In the Tax Court, the respondent's appeal was allowed on the basis that, since it was the Minister's assessment that had resulted in a greater amount being eligible, amendment of the election was merely a matter of the Minister completing the assessment ([1985] 1 C.T.C. 2390, 85 D.T.C. 318). The learned trial judge appears to have agreed with that and also to have concluded that if assessment resulted in a greater amount being eligible, the taxpayer was entitled to amend the election accordingly. See [1990] 2 C.T.C. 5, 90 D.T.C. 6335 at pages 5-6 (D.T.C. 6337):

The [Minister] places great importance on the fact that the Income Tax Act does not make provision for an amendment of this nature. It does not, in my opinion, require a legislative provision to allow for a correction of this nature. Section 110.4 of the Act operates on the general assumption taxpayers will complete their income tax return correctly, make an election to forward average and then transfer the figure on their general return to the forward averaging election form. Should Revenue Canada reassess a taxpayer, causing a change in the amounts used to calculate income eligible for forward averaging, it follows those changes must be made, not only to the taxpayer's general income tax return for the year but also to the forward averaging election form.

The result of the [Minister’s] position is untenable: once a taxpayer completes a forward averaging election form, he is precluded from making corrections to that form even if the Minister determines, by way of an assessment, the figures used in the form are incorrect. In the case at bar, the forward averaging election form submitted by the defendant, now reflects amounts which have no relation to the corresponding amounts in the defendant's income tax return.

The [Minister's] position is the defendant had only one opportunity to complete the forward averaging election form. To succeed, the [Minister] would have to satisfy me the defendant is statute barred from making the corrections sought.

The reasoning that amendment of the election was part and parcel of the assessment might well be unexceptionable if a taxpayer electing to forward average had been obliged to make that election in respect of a prescribed amount or portion of his taxable income for the year but that was not the case. Subject to a minimum of $1,000, the taxpayer had the option to forward average all, some or none of the eligible amount. It was the taxpayer’s election and there was no basis upon which the Minister, absent legislative authority, could be allowed to impose the choice on him even if the taxpayer considered it beneficial.

I am of the opinion that the Minister had no power to amend a forward averaging election for much the same reason that this Court held that absent fraud, misrepresentation or a timely waiver, the Minister is powerless to reassess after expiration of the limitation period provided by subsection 152(4) of the Act even if the taxpayer wanted the reassessment (see Canadian Marconi v. The Queen, [1991] 2 C.T.C. 352, 91 D.T.C. 5626) A finding that the Minister had that power would not be limited to the particular taxpayer and could oblige other taxpayers to object to amendment of their elections and perhaps to litigate.

As for the taxpayer having the right to amend an election after assessment or reassessment of his relevant tax return, it is not, in my opinion, a question of a limitation period. There were, in 1982, several provisions for late elections in the Act (e.g., subsections 83(3), 85(7), 93(5) and 96(5)). No such provision was made for a forwarding averaging election; it had to be made not later than the date on which the relevant tax return was required to be filed and it had to be filed with the return. The intention of Parliament is, in my view, clear; the taxpayer was entitled to make the election on the basis of his circumstances as they existed, and as only he could know, at the time he filed his return. The Act did not contemplate the election being made on the basis of changed circumstances which might result from an assessment or reassessment of the return.

To allow amendment of the election, either by the Minister as part of the assessment process or the taxpayer after assessment, would, in my opinion, require an inadmissible reading into the Act of words that were not there. I would allow the appeal and restore the assessment.

The appellant asks that we nevertheless award the respondent costs pursuant to subsection 178(2) of the Act. That provision applies to appeals from the Tax Court, not the Trial Division. There are, in my opinion, circumstances which warrant an exercise of discretion to award the respondent costs pursuant to Rule 344.

Many other requests to amend forward averaging elections are said to be outstanding. Had the respondent achieved what he wanted, his federal tax for 1982 would have been $499 more than it actually was and his provincial tax $220 more because he would have paid tax on the forward averaged amount at the highest prescribed marginal rate, which was greater than his own top marginal rate. The benefit, if any, from the election would be realized in subsequent years and that arising out of forward averaging $5,262 could not be great in dollar terms. Furthermore, the forward averaging option of section 110.4 was repealed as of the end of 1987. In allowing the appeal, I would not disturb the award of costs by the Trial Division pursuant to subsection 178(2) and I would award the respondent his costs as between solicitor and client.

Appeal allowed.