The Queen v. Swantje, 94 DTC 6633, [1994] 2 CTC 382 (FCA)

Marceau J.A.:—This is an application by the Crown from a decision of the Tax Court in a case involving Part 1.2 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Part 1.2 was inserted into the Act in 1990 under the heading Tax on Family Allowances and Old Age Security Benefits with only one section, section 180.2, whose provisions are ordinarily referred to as the “clawback provisions". The issue to be resolved here is narrow but it goes to the essence of the new legislation, its real purpose and intent, and the resolution may have some broad implications.

The respondent taxpayer had several sources of income in the relevant taxation years, 1990 and 1991. Among these were a German pension and a Canadian pension under the Old Age Security Act.

The German pension was exempt from tax under article 18(3)(c) of the Canada- Germany Income Tax Agreement (1981) (implemented by the Canada-Germany Tax Agreement Act, 1982, S.C. 1980-81-82-83, c. 156). It was included in the respondent's income pursuant to paragraphs 56(1 )(a) and 81(1)(a) of the Act, but it was deducted under paragraph 110(1)(f) of the Act in calculating his taxable income. The treaty exemption was thereby respected. [1]

The Canadian pension, however, was subject to taxation pursuant to section 180.2 of the Act, the first paragraph of which reads as follows:

180.2(1) Every individual (other than a trust, shall pay a tax under this Part for each taxation year that is equal to the lesser of

(a) the aggregate of all amounts each of which is the amount of any pension, supplement or spouse's allowance under the Old Age Security Act or family allowance under the Family Allowances Act included in computing the individual’s income under Part I for the year, to the extent that no deduction is allowed under paragraph 60(n) or (p) for the year or any subsequent taxation year in respect of that amount, and

(b) 15 per cent of the amount, if any, by which

(i) the amount that would, but for paragraph 60(w), be the individual’s income under Part I for the year

exceeds

(ii) $50,000.

In both taxation years, the respondent's income exceeded the threshold of $50,000, therefore he was liable to pay tax under section 180.2. The total amount of his income and, as a result, the amount of tax owed would obviously vary according to whether the German pension was included or not. The respondent excluded the German pension from his income on the basis that it was exempt from tax pursuant to the treaty. The Minister did not agree and reassessed accordingly. The respondent objected and brought the case to the Tax Court.

The Tax Court judge accepted the respondent's position. His reasoning, briefly put, but in his own words, was that since “Part 1.2 by its very language imposes a tax, nothing more, nothing less”, and since ‘the triggering event’ of the appellant's Part 1.2 tax liability in the amount assessed was not just the receipt of Old Age Security and Family Allowance benefits but also the presence of the other elements necessary by virtue of the language of section 180.2 of the Act", the section “imposes a tax on amounts declared to be exempt by the treaty" and “the treaty must, of course, prevail".

With respect, I disagree with the view taken by the Tax Court judge.

It is well established that Part 1.2 of the Act provides for the repayment of benefits received by a taxpayer under the Family Allowances Act and the Old Age Security Act to the extent that the taxpayer's income is in excess of a $50,000 (indexed) threshold (see Thomson v. Canada, (1992), No. 92-899 (unreported)). The respondent's tax liability under section 180.2 affects solely and exclusively his Canadian pension income. The German pension is used strictly to calculate the amount of the tax owed, a tax which represents a repayment of the Canadian benefits received. This repayment is deductible in the computation of taxable income pursuant to paragraph 60(w) [2] to ensure that the recaptured benefits are not taxed as income.

The approach adopted by the learned judge was a purely mechanical one, focussed on the method, the means devised to achieve the goal. The proper

force of law in Canada,

to the extent that it has been included in computing the taxpayer’s income for the year. . . .

approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes (cf. Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305). What Part 1.2 of the Act, completed by paragraph 60(w), realizes is the repayment of social benefits by taxpayers who, because of their higher incomes, nave a lesser need of them.

The reassessment by the Minister of the respondent's tax liability under Part 1.2 of the Act did not have the effect of imposing a tax on the German pension. It was based on a strict application of the legislation.

The decision of the Tax Court will be set aside.

Appeal allowed.