The Queen v. Miller, 90 DTC 6335, [1990] 2 CTC 4 (FCTD)

Collier, J.:—This is an appeal from a decision of the Tax Court of Canada, [1985] 1 C.T.C. 2390. That Court held the defendant was entitled to amend the forward averaging election form for his 1982 taxation year.

In his 1982 taxation year, the defendant claimed a deduction of $5,500 in respect of contributions to a registered retirement savings plan. The defendant filed a forward averaging election form pursuant to subsection 110.4(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, in respect of his income for the year. In accordance with this election, the amount deductible in computing the defendant's taxable income was $36,213.92.

The Minister of National Revenue reassessed the defendant for his 1982 taxation year, disallowing $5,262 of the $5,500 claimed as a deduction for the registered retirement savings plan.

The defendant filed a notice of objection, stating his position as follows:

Although we acknowledge that the Minister is correct in reducing the allowable amount of the taxpayer's deduction for contributions to a Registered Retirement Savings Plan from $5,500.00 to $238.00 thereby increasing income by $5,262.00, we object to the Minister's failure to provide an opportunity by the taxpayer to increase the amount of income elected under the provisions of section 110.4 of the Income Tax Act. It is our view that where an election has been properly filed within the time limit imposed by paragraph 110.4(6)(b) of the Act based on circumstances as they were then perceived, there is no provision that would hinder its amendment to reflect the correction of an error in those circumstances.

Revenue Canada refused to allow the defendant to amend his forward averaging election form. The defendant appealed to the Tax Court of Canada. Taylor, T.C.J., allowed the appeal, stating at page 2392:

I see nothing which remains sacred and untouchable in the election form, merely because it is an option, available to and activated at the prerogative of the taxpayer, after the Minister has rejected the bases or basis upon which the election was made.

The plaintiff appeals from that decision on the grounds there is no provision in the Income Tax Act to allow for a revision of the forward averaging election form once such an election has been made. The defendant, it is said, has filed a valid election for forward averaging of $36,213.92, no other valid election has been filed; there is no statutory authority to permit an amendment of the election already filed.

The defendant's position is straightforward. An error was made in the calculation of his 1982 income tax return; as a result of the error, the defendant's income was reported as $5,262 less than it should have been; when the return was prepared, the election to apply forward averaging was made on the full amount that was then perceived to be eligible; the Minister has refused to allow amendment of the elective amount on the basis of the revised data. The defendant maintains he should be permitted to elect averaging on the full eligible amount.

Sections 110.4 and 120.1 of the Income Tax Act provide for a system of forward averaging. The forward averaging provision is elective and the election, in prescribed form, must be filed for a year to which a taxpayer wishes averaging to apply, with the taxpayer's return. If an individual elects to forward average income, a deduction is allowed in computing taxable income. Subsection 120.1(2) of the Act provides, however, tax at the highest marginal rate will be paid on the forward averaged amount. In a subsequent year, the taxpayer may elect to bring a portion of the forward averaged amount back into income and will receive a credit for the taxes previously paid.

The prescribed form, T-540, sets out the steps in the calculation of the taxation year's eligible averaging income. The amounts to be used in this calculation are taken from the taxpayer's general income tax return. For example, the taxpayer must enter his net income from his general return.

In my view, common sense dictates that, when the amounts appearing in the taxpayer's income tax return are changed by Revenue Canada, because of an assessment, the corresponding amounts on the forward averaging election form must also be changed.

The plaintiff 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 plaintiff'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. As previously stated, it does not require a legislative provision to make a correction of this nature.

Counsel for the plaintiff referred me to the decisions of the Tax Court of Canada in Stephenson v. M.N.R. [1986] 2 C.T.C. 2073; 86 D.T.C. 1520 and Hall v. M.N.R., (unreported), file number 85-1031, August 5, 1986. In those cases, the taxpayers sought to make corrections to their forward averaging election form after discovering an error in the computation of their income for the relevant taxation years. The Tax Court refused to allow the changes on the ground that, what the taxpayers were in fact seeking, was a partial revocation of their forward averaging election, something which the legislation did not provide for.

I am unable to agree with those decisions. Making a correction on a form is not tantamount to a partial revocation. In my view, these decisions are not in keeping with the spirit and intent of the legislative provisions dealing with forward averaging.

The purpose of the legislation is to allow a taxpayer with large increases in income in any year, to average them over future years, when the taxpayer may be in a lower tax bracket. A taxpayer should not be punished when, in good faith, he completes the general averaging election form, using inaccurate figures.

In choosing to defer from the Tax Court's decisions in Stephenson and Hall, I am further persuaded by the fact neither case referred to the Tax Court's decision in the Miller case which is the subject of this appeal, although both Stephenson and Hall were decided more than a year after the Miller decision [was] issued.

The defendant's position is the defendant had only one opportunity to complete the forward averaging election form. To succeed, the plaintiff would have to satisfy me the defendant is statute-barred from making the corrections sought. It has failed to do so.

I agree with the decision of the Tax Court of Canada. The plaintiff's appeal is dismissed.

I am unable, on the facts before me, to determine if subsection 178(2) is applicable, in respect of costs. If counsel can agree one way or the other, please advise the registry accordingly. I shall withhold the formal pronouncement until that matter is resolved.

Crown's appeal dismissed.