Taylor v. The Queen, 88 DTC 6422, [1988] 2 CTC 226 (F.CTC)

Martin, J.:—The plaintiff appeals the defendant's refusal to allow as a deduction from her 1985 taxable income the sum of $84,774 claimed as a non-capital loss pursuant to the provisions of section 111 of the Income Tax Act which claimed loss originated in the plaintiff's 1983 tax return in which she claimed as a deduction against income, pursuant to subsection 20(12) of the Act, non-business income taxes totalling some $325,000 paid by her to the taxing authorities of the United States of America and the State of California.

The plaintiff is a Canadian citizen who left Vancouver to reside in California in July of 1979, staying there until October 31, 1983. She returned to reside in Canada on November 1, 1983 where she has since remained.

In 1983 she filed an income tax return in Canada as well as federal and state income tax returns in the United States and California. In that year, before returning to Canada, she paid non-business income taxes, within the meaning of paragraph 126(7)(c) of the Act, in the amount of $325,226 to the government of a country other than Canada. The majority of these taxes were paid with respect to the plaintiff's disposition of certain shares in January and May of 1983.

During the period from November 1, 1983 to December 31, 1983, while the plaintiff was a resident in Canada, she received interest and rental income totalling some $8,600 which she reported on her 1983 Canadian income tax return. She did not report the gains made on the sales of her shares in the United States but pursuant to subsection 20(12), which allows as a deduction from income the amount of foreign taxes paid, she deducted the amount of the non-business income taxes paid to the American authorities in respect of those gains.

In her 1985 income tax return the plaintiff reported income of $98,855 against which she claimed as a deduction in computing her taxable income a "non-capital loss of other years utilized in 1985" of $84,774. This was done on the basis that the deduction of the foreign taxes from her income on her 1983 tax return resulted in a non-capital loss for that year which loss she purported to carry forward to her 1985 taxation year.

The defendant disallowed the subsection 20(12) deduction and resultant loss and ruled that there was no loss which could be carried forward from her 1983 taxation year to be used as a deduction in computing her taxable income for her 1985 taxation year.

There are thus two issues. The first is whether the deduction of foreign taxes under subsection 20(12) was available to the plaintiff. The second is, assuming that the deduction was available to the plaintiff, could the loss which arose as a result of its deduction from the plaintiff's 1983 income be carried forward from 1983 and used as a deduction from her 1985 taxable income.

In dealing with the first issue I note that by paragraph 8 of the "Agreed Statement of Facts" it has been agreed that in 1983 the plaintiff paid non- business taxes within the meaning of paragraph 126(7)(c) of the Income Tax Act in the amount of $325,226 to a government of a country other than Canada (the “foreign taxes"). That being so the foreign taxes paid by the plaintiff clearly fall within the provisions of subsection 20(12) of Division B of the Act:

(12) Foreign non-business income tax. In computing the income of a taxpayer for a taxation year, there may be deducted such amount as he may claim not exceeding the non-business income tax paid by him for the year to the government of a country other than Canada (within the meaning assigned by paragraph 126(7)(c) read with reference to subparagraphs (iii) and (v) thereof) other than any such tax, or part thereof that may reasonably be regarded as having been paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation.

Division B of the Act is the division of the Act which contains the rules governing the computation of the taxpayer's income as opposed to the taxpayer's taxable income. The rules governing the computation of the taxpayer's taxable income are contained in Division C of the Act. Section 20 of Division B is the section listing the deductions which are permitted in computing income from business or property and, as already noted, subsection 20(12) is the subsection which provides for the deduction of foreign non-business income taxes.

That subsection refers to the computation of the taxpayer's income for a "taxation year" which is defined, by section 249 of the Act, to be, in the case of an individual, the calendar year. Because the plaintiff paid foreign taxes on the sale of her shares in the calendar year 1983 she claims to come within the clear meaning of subsection 20(12) so as to enable her, when computing her income tax for the 1983 calendar year, to deduct from the income she was required to report to the defendant the amount of the foreign taxes paid by her for that calendar year.

This unusual result is brought about by the application of the sections of the Act to which reference has already been made and section 114 which governs the method whereby a person who is resident in Canada for only a part of a year calculates his taxable income.

Sec. 114. Individual resident in Canada during part only of year.

Notwithstanding subsection 2(2), where an individual was resident in Canada during part of a taxation year, and during some other part of the year was not resident in Canada, was not employed in Canada and was not carrying on business in Canada, for the purpose of this Part, his taxable income for the taxation year is the aggregate of

(a) his income for the period or periods in the year during which he was resident in Canada, was employed in Canada or was carrying on business in Canada, computed as though such period or periods were the whole taxation year and as though any disposition of property deemed by subsection 48(1) to have been made by virtue of the taxpayer having ceased to be resident in Canada were made in such period or periods, and

(b) the amount that would be his taxable income earned in Canada for the year if at no time in the year he had been resident in Canada, computed as though the portion of the year that is not in the period or periods referred to in paragraph (a) were the whole taxation year,

minus the aggregate of such of the deductions permitted for the purpose of computing taxable income as many [sic] reasonably be considered wholly applicable to the period or periods referred to in paragraph (a) and of such of any other of those deductions as may reasonably be considered applicable to such period or periods.

Under the provisions of section 114 the plaintiff is obliged to compute both her Division B income and her Division C taxable income. By paragraph 114(a) her income, which is subject to any deductions available to her under the rules of Division B, consists only of her income for the months of November and December, 1983. However because, by definition, her taxa- tion year is the calendar year, she is entitled to the subsection 20(12) deduction from her short year income. In completing the computation of her income as required by paragraph 114(a) she elected to exercise her right given under subsection 20(12) to claim as a deduction the foreign taxes paid by her. This, of course, resulted in a substantial non-business loss.

Having calculated her income as required by paragraph 114(a) she then became subject to the final portion of section 114 which authorizes her to deduct from her income calculated under paragraph 114(a) the deductions permitted for the purpose of computing her Division C taxable income. Those deductions are permitted only in so far as they are reasonably applicable to the last two months of 1983.

The plaintiff submits, and I agree, that the deductions from taxable income referred to in the closing words of section 114 are those permitted in computing taxable income under Division C of the Act such as the deductions permitted for charitable donations, marital status, alimony payments, medical expenses, etc. It is that portion of these deductions which, in order to be permitted under section 114, must be reasonably applicable to the plaintiff's two months' residency in Canada. That restriction relates to the computation of the plaintiff’s Division C taxable income. It does not relate to the computation of the plaintiff's Division B income.

I can find nothing in section 114 or elsewhere in the Act, and counsel for the defendant has cited nothing in the Act, which would limit the right claimed by the plaintiff, in computing her Division B income for 1983, to deduct, pursuant to subsection 20(12), the foreign taxes paid by her during 1983 even though these taxes were paid prior to her arrival in Canada and in respect of transactions which occurred before she re-established herself as a Canadian resident. In other words, on the first issue for my determination, I conclude that, in computing her Division B income for 1983, the plaintiff was entitled to elect and did elect to take the deduction permitted under subsection 20(12) for foreign taxes paid.

Counsel for the defendant submits that the deductions from income contemplated by section 114 can only be taken by the plaintiff if they arose after she became a resident of Canada because her taxation year must be considered to be the short year referred to in paragraph 114(a), and that the taxation year referred to in subsection 20(12) must be taken to mean the same short year referred to in paragraph 114(a).

Furthermore he says that subsection 20(12) is contained in the Act in order to prevent double taxation and if there is no double taxation, which there admittedly was not in this matter, there can be no relief given under subsection 20(12).

Finally he argues that to give the interpretation sought by the plaintiff would give rise to an absurd result which is contrary to the general scheme of the Act and that is to be avoided if at all possible.

I do not agree with any of these submissions. It was open to Parliament to provide in section 114 that in the computation of the taxpayer's income he would only be allowed such of the Division B deductions which could reasonably be considered wholly applicable to the taxpayer's short year referred to in paragraph 114(a). It specifically made that restriction on the deductions which it permitted a taxpayer to make from his Division C taxable income but omitted to enact a like restriction on the computation of the taxpayer's Division B income.

The notion of a short year and the adjustments to be made in respect of a short year are contained elsewhere in the Act. For example subsection 141(1) deems the taxation year of an employees' profit sharing plan accepted for registration by the Minister as a deferred profit sharing plan, to have ended immediately before the plan is deemed to have become registered as such. Under paragraph 87(2)(a) the taxation year of a corporate entity created by an amalgamation is deemed to have commenced at the time of the amalgamation.

Perhaps more to the point is subsection 126(1) dealing with foreign tax deductions from taxes otherwise payable which specifically refers to section 114 and provides that where section 114 is applicable the tax credit is based on the short period referred to in paragraph 114(a). As well in subsection 20(11), immediately preceding the subsection under consideration, the deduction permitted is restricted to an amount which:

. . . may reasonably be regarded as having been paid in respect of an amount that has been included in computing his income for the year from the property,

It seems apparent to me that when Parliament intended to restrict deductions permitted in short taxation years to those which occurred in such years or to those which could reasonably be considered applicable to those shortened years it enacted appropriate legislation to give effect to that intention. The fact that Parliament not only did not enact like restrictions on the subsection 20(12) deduction, but specifically provided that the taxation year of the individual taxpayer should be the calendar year, leaves me with no incentive to find that the taxation year referred to in subsection 20(12) should be taken to be the same shortened taxation year referred to in paragraph 114(a).

If, as counsel for the defendant claims, the only purpose of subsection 20(12) is to prevent double taxation, and that the deduction provided for in that subsection was to be available only if the tax was paid in two jurisdictions, it could easily have given effect to that intention. It could, for example, have provided that for the purposes of subsection 20(12) “taxation year" would mean the period for which the taxpayer was resident in Canada. It could have provided, as it did in subsection 126(1), that the taxation year referred to in subsection 20(12) would mean the period referred to in paragraph 114(a). Because those, or like words, limiting the deduction allowed by subsection 20(12) were not used the deduction, in my view, must be allowed.

While the result of interpreting the legislation this way might be unusual in that the plaintiff appears to be obtaining tax relief that perhaps was not contemplated at the time the legislation was enacted, I do not find the result absurd. In my view the result follows the plain meaning of the words used in the legislation. I do not find that there are two possible meanings to be assigned to subsection 20(12) which would permit me, according to the authorities cited by counsel for the defendant, to give preference to the meaning which would be more consistent with the general scheme of the Act. The only meaning to be assigned to subsection 20(12) is, in my view, the one submitted by counsel for the plaintiff and accepted by me. The meaning sought to be assigned to it by counsel for the defendant would require me either to read into the subsection words which are not there or to add elsewhere in the Act a limitation on the deduction permitted by subsection 20(12) which does not now exist. As Collier, J. said in Tahsis Company Ltd. v. The Queen, [1979] C.T.C. 410 at 413; 79 D.T.C. 5328 at 5330:

That is not the way the draftsman wrote it. Nor is that the way it is to be interpreted.

The second issue is whether the loss which arose as a result of the deduction of the foreign taxes from her 1983 income could be carried forward from 1983 and used as a deduction from her 1985 taxable income.

The plaintiff points to paragraph 111(8)(b) and says, by reason of the subsection 20(12) deduction of foreign taxes taken by her, there was a noncapital loss created which, pursuant to paragraph 111(1)(a), could be carried forward and used as a deduction in her 1985 return.

Counsel for the defendant submits that there was no loss from an office, employment, business of property within the meaning of paragraph 111(8)(b) and, even if there was such a loss, it could not be carried forward in the absence of a specific provision in the Act permitting it.

This last assertion is not in accord with the view expressed by the Federal Court of Appeal in Pandju Merali v. The Queen, [1988] 1 C.T.C. 320; 88 D.T.C. 6173. In that case the issue was whether a non-resident taxpayer was able to deduct losses incurred in 1978 and 1979 when he was a non-resident but had elected to be treated as a resident for tax purposes because he had Canadian property. At page 324 (D.T.C. 6176) the Court observed:

The correct approach to this issue is not, as submitted by counsel for the appellant, whether the Income Tax Act expressly permits a resident taxpayer to carry forward losses incurred while he was a non-resident but, as submitted by counsel for the respondent, whether there is any prohibition to that effect since paragraph 111(1)(a) plainly permits that deduction in the absence of an express prohibition.

As counsel could not point to any prohibition against the plaintiff taking the deduction permitted by paragraph 111(1)(a) there is no reason why she should not be able to take advantage of that paragraph.

That leaves for consideration the defendant's contention that there was no loss to carry forward. Counsel's submission in this respect is that a tax itself can never be an expense so as to create a loss within the meaning of paragraph 111(8)(b). In support of that contention he cites Clinton W. Roenisch v. M.N.R., [1928-34] C.T.C. 69; 1 D.T.C. 199 in which a taxpayer's deduction of provincial taxes for the purpose of determining his federal income tax was disallowed.

That case is distinguishable from the present case, in my view, because the Act makes no provision for the deduction from income of provincial taxes as it does for foreign taxes under subsection 20(12).

Although paragraph 18(1)(a) provides that in computing his income a taxpayer shall make no deduction in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property, the deduction of foreign taxes under subsection 20(12) is a specific exception to this general rule.

Accordingly, with respect to the second issue, I find that by electing to claim the foreign taxes as a deduction against her 1983 income pursuant to subsection 20(12) of the Act a non-capital loss was created within the meaning of paragraph 111(8)(b) which could be carried forward pursuant to paragraph 111 (1)(a) and used as a deduction in the plaintiff’s 1985 taxation year.

Because the plaintiff has properly reported her income for her 1985 taxation year it follows that the defendant's reassessment is vacated and the plaintiff’s appeal will be allowed with costs.

Appeal allowed.