Date:
20021209
Docket:
2002-1618-IT-I
BETWEEN:
LLOYD
QUANTZ,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
McArthur
J.
[1]
The two issues in these appeals are (i) whether the Appellant can
deduct life insurance premiums pursuant to paragraph
20(1)(e.2) of the Income Tax Act in the 1996, 1997
and 1999 taxation years; and (ii) whether late filing penalties
and interest for the 1996 and 1997 taxation years were properly
assessed together with interest on the amount payable for 1999.
An appeal for the 1998 taxation year was discontinued by the
Appellant.
[2]
I will commence with the insurance premium question. The Minister
of National Revenue submits that the Appellant is not entitled to
deduct the premiums pursuant to paragraph 20(1)(e.2) of
the Act which reads as follows:
20(1) Notwithstanding
paragraphs 18(1)(a), (b) and (h), in
computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the following
amounts as are wholly applicable to that source or such part of
the following amounts as may reasonably be regarded as applicable
thereto:
(a) such
part of the capital cost to the taxpayer of property, or such
amount in respect of the capital cost to the taxpayer of
property, if any, as is allowed by regulation;
...
(e.2) such portion of
the lesser of
(i)
the premiums payable by the taxpayer under a life insurance
policy (other than an annuity contract) in respect of the year,
where
(A) an interest in the policy is assigned to a restricted
financial institution in the course of a borrowing from the
institution,
(B) the interest payable in respect of the borrowing is or would,
but for subsections 18(2) and (3.1) and sections 21 and 28, be
deductible in computing the taxpayer's income for the year,
and
(C) the assignment referred to in clause (A) is required by the
institution as collateral for the borrowing
and
(ii)
the next cost of pure insurance in respect of the year, as
determined in accordance with the regulations, in respect of the
interest in the policy referred to in clause (i)(A),
as can
reasonably be considered to relate to the amount owing from time
to time during the year by the taxpayer to the institution under
the borrowing;
[3]
The Minister submits that as an interest in the life insurance
policy was not assigned to a restricted financial institution in
the course of borrowing and the assignment was not required by
the institution as a collateral for the borrowing; the Appellant
is not entitled to deduct life insurance premiums pursuant to
paragraph 20(1)(e.2) of the Act.
[4]
The Appellant represented himself and was the only witness. He
was a farmer (rancher turned land developer). He paid premiums
for $250,000 in coverage as follows:
Taxation
Year
Life Insurance Premiums
1996
$4,236
1997
$4,191
1999
$3,787
His wife
Sharon was the beneficiary. In written submissions he stated in
part:
Life
insurance premiums were substantial and had to remain in place
due to difficulty in obtaining lender offered insurance based on
deteriorating medical condition. The policy had initially been a
"Key man policy" when I was CEO of a firm in the early
1990s and the beneficiary became my wife upon the demise of the
corporate entity and continuation of borrowing under a
proprietorship of the same basic name. She henceforth became the
required co-signor on loans at the financial institutions with
which I dealt.
...
Important to consider that a serious illness - torn left
hemi-diaphragm - resulted in life insurance being not only
prudent but crucial as a risk management expense to enable
borrowing for business purposes and that the higher levels of
health risk were experienced during the term of borrowing from
several financial institutions.
...
To meet the terms of 20(1)(e.2) of the Income Tax
Act, several reasons provide support for a deduction of life
insurance premiums from income.
First, the acceptable format of assignment of the policy to the
financial institution is not specified. ...
Second, the assignment was directly implied in the co-signature
on all of the loans by my wife, the beneficiary stated in the
policy with the full understanding and acceptance of the
financial institution.
Third, the insurance policy was crucial to my ability to borrow
and, due to severe health problems I was certain I would not have
been able to qualify for the insurance policy owned/offered by
the institution.
Fourth, the financial institution had a long business history of
lending to me and generally was not interested in amending its
borrowing conditions being already in a stronger position through
the personal guarantee of my spouse.
Fifth, the policy in effect began as a "Key Man" policy
in favour of a company wholly owned by my wife and I. Upon the
termination of the company charter and conversion to a
proprietorship, the nature of the business(es) did not change and
a title transfer of the policy was undertaken to my wife and
without cautionary comment about its tax deductibility status by
the expert employed in this matter - a long experienced life
insurance broker.
Finally, it appears that the intent (spirit) of the regulations
in the matter was what we followed.
[5]
To support his position that the policies were assigned to the
lender, he entered into evidence two letters, both dated March 1,
2001 (Exhibit A-4), one from Farm Credit Corporation and one from
the Alberta Treasury Branches. The letter from Farm Credit
Corporation states:
Re: Life
Insurance - Lloyd Quantz
We have
periodically reviewed our security since 1995 with respect to the
loans held by Lloyd and Sharon Quantz and have determined that it
is an important condition of our lending that Mr. Quantz be
insured adequately to the levels of the loans outstanding during
the years 1995 to present.
He has
assured us of his policy coverage indicating a $250,000 policy is
in effect and this will be adequate to meet our needs for
continued lending with Lloyd and Sharon Quantz.
The letter from
Alberta Treasury Branches states:
RE: Life
Insurance on Outstanding Loans
Further to
our discussions regarding life insurance, we advise that Loan
#1039865-80 is currently life insured in the amount of $85,000.00
for both you and Sharon and has been since August
1996.
It is my
understanding that when loans were applied for in and around this
time period, you held discussions with the Lender at that time
regarding a life insurance requirement.
As your
current Lender, the fact that you have obtained life insurance
for yourself to the amount that covers you indebtedness to the
Alberta Treasury Branches, it provides me with a greater comfort
level knowing this policy is in existence. Especially of late
with the medical conditions that you are currently suffering
through.
Analysis
[6]
The Appellant originally arranged the policy as a "Key Man
policy" to provide for his wife upon his demise. To deduct
the premiums, the Appellant must meet the criteria in paragraph
20(1)(e.2) which clearly states that an interest in the
policy be assigned to a restricted financial institution in the
course of borrowing from the institution before premiums can be
deducted. The question is, did the Appellant assign the policy to
the financial institution that lent him the money. To answer this
question the Appellant entered Exhibit A-4 in evidence. I find
that the two letters cannot be taken as an assignment of the
policy or an interest in the policy.
[7]
There is no evidence that upon the Appellant's death, the
financial institution would be obligated under a contract of
assignment to pay the proceeds of the policy to the financial
institution rather than to his wife, the named beneficiary. The
Farm Credit Corporation appears to have taken a casual approach
by simply assuring themselves that the Appellant was adequately
insured. This is not a legal contractual assignment of the
policy. The legislation is clear. I cannot change the wording of
the Act. I am bound by what happened. It would be
stretching reality too far to find that he met the requirements
of the Act because an assignment could have or should have
been made. The fact remains, there was no assignment of an
interest in the insurance policy to a restricted financial
institution in the course of borrowing. This issue in the appeals
is dismissed.
Late
filing penalty and interest
[8]
The uncontested facts from paragraph 11 of the Reply to the
Notice of Appeal include:
(f)
the returns of income of the Appellant for the 1996, 1997, and
1999 taxation years were required to be filed with the Minister
on or before June 15, 1997, June 15, 1998 and June 15, 2000,
respectively;
(g)
the Minister requested that the Appellant file the 1996 and 1997
income tax returns by issuing forms TX11 and TX14 "Request
to File a Return: on:
|
Taxation Year
|
TX11
|
TX14
|
|
1996
|
January 23, 1998
|
March
10, 1999
|
|
1997
|
September 15, 1998
|
|
(h)
the Minister issued a demand for the Appellant to file a 1997
income tax return by issuing form TX14D "Demand for Income
Tax Return" on:
Taxation
Year
TX14D
1997
October 27, 1998
(i)
the Appellant filed his 1996 and 1997 income tax returns on
November 6, 2000;
(j)
the Appellant filed his 1999 income tax return on April 30,
2000;
(k)
the amounts payable that remained unpaid when the returns of
income of the Appellant for the 1996, 1997 and 1999 taxation
years were required to be filed were:
|
Description
|
Amount Payable for Years Under Appeal
|
|
|
1996
|
1997
|
1999
|
|
Federal Tax
|
$3,709.49
|
$410.43
|
$5,402.10
|
|
Provincial Tax
|
1,687.48
|
0.00
|
2,561.90
|
|
CPP
Payable
|
1,786.40
|
338.28
|
2,344.72
|
|
Amount Payable
|
$7,183.37
|
$748.71
|
$10,308.72
|
|
|
|
|
|
The amounts
are not in issue. The Appellant explained in some detail why he
felt he was mistreated by officers of Canada Customs and Revenue
Agency (CCRA), particularly with respect to collection procedures
taken against him. During the hearing, I explained to the
Appellant that this background, while regrettable, was not
relevant to the issue which is whether penalties and interest
were properly levied.
[9]
The Appellant's position is that he was unable to file in a
timely manner because of serious health problems and family
tragedies. In his written argument he stated the
following:
My medical
condition became increasingly fragile during the 1996-2000
period. Detailed descriptions by many medical specialists can be
provided including a report of tests performed at Mayo Clinic,
Scottsdate, AR. However, the general condition is described by
the document entitled "Diaphragmatic paralysis".
However, this condition had progressed to the point where the
stomach had twisted upside down - a condition leading to volvulus
which is life-threatening. However, the analysis of this
condition and its effects on sleep patterns and therefore brain
function is a very complex process. It is clear to my General
practitioner and I, after extensively reviewing this with many
specialists including lung, nerve, heart, thoracic, etc., that it
would be very difficult for a layperson to determine the
symptoms, causes and effects. Surgery at the University Hospital
in Edmonton was successful in replacing the failed diaphragm and
restoring some stability to my organs although it does not move
to assist in the breathing process.
In
addition, several family members including my father (died in
1995) and my mother (died in 2000) required extensive care in our
home and at hospitals during terminal illnesses. A granddaughter
(infant) died during this period as well creating a need to
provide additional support to family members. The fairness policy
of the Agency states that these matters will be taken into
account upon requests for fairness. CCRA Rulings have been made
which discount these as mitigating factors and no relief for
penalties or interest have been allowed.
[10] The
applicable legislation is subsection 162(2), which
reads:
162(2) Every person
(a)
who fails to file a return of income for a taxation year as and
when required by subsection 150(1),
(b)
on whom a demand for a return for the year has been served under
subsection 150(2), and
(c)
by whom, before the time of failure, a penalty was payable under
this subsection or subsection (1) in respect of a return of
income for any of the 3 preceding taxation years
is liable
to a penalty equal to the total of
(d)
an amount equal to 10% of the person's tax payable under this
Part for the year that was unpaid when the return was required to
be filed, and
(e)
...
A formula
follows.
[11] I agree
with Lamarre Proulx J. in Bennett v. Canada
where she found that:
The wording
of subsection 162(2) did not have the clarity necessary to make
it an absolute liability provision. Accordingly, a defence of due
diligence exists; however, in order to establish such a defence,
a taxpayer should be expected to comply with the requirements of
the Act with a high degree of diligence.
She was
following the reasoning of Bowman J. in Pillar Oilfield v.
Canada wherein he laid
the foundation for a due diligence defence dealing with a similar
penalty under section 280 of the Excise Tax Act. He
stated:
...
"if the person assessed can show "due diligence"
in attempting to comply with the legislation, the penalty will
not apply. It would be abhorrent for a person to be susceptible
of being penalized administratively by a public servant without
any possibility of exculpating himself by demonstrating due
diligence. Penalties are no different from criminal or provincial
offences in this respect.
I agree that
due diligence applies in the present case; yet a high degree of
diligence is necessary to escape subsection 162(1) penalties as
suggested by Judge Lamarre Proulx. The question narrows down
to whether the Appellant acted with a high degree of
diligence.
[12] The
Appellant stated that he filed "rudimentary" returns on
a timely basis in each of the relevant three years but each time
his returns were lost or at least never acknowledged. There is no
record of these returns having been filed. It is unlikely that
Revenue Canada or CCRA lost his return three years in a row. He
made no effort to follow up. I do not believe
"rudimentary" or any returns were filed for 1996, 1997,
1999 until November 6, 2000 for 1996 and 1997 and April 30, 2000
for 1999. The late filing penalties apply only to the 1996 and
1997 returns.
[13] During the
trial, I advised the Appellant that I had no jurisdiction over
interest charged on late payment amounts unless calculation of
the interest was not mathematically correct. The Appellant
questioned the Minister's arithmetic but had no calculations
of his own. He was given time to make written submissions setting
out the errors, if any, made by the Minister in calculation of
interest.
[14] There is no
doubt that the Appellant went through difficult times from 1995
to 2000 and beyond. He had failing health and lost his parents
and a grandchild. On the other hand, there is evidence that he
was not always incapacitated. He was still able to function. We
know that during that period, he subdivided some of his land into
six lots and sold at least some of the lots.
[15] When the
Minister felt he had no other choice but to prepare income tax
returns for the Appellant, a business income for the Appellant of
$104,000 for 1996 and 1997 was used. The Minister took this
figure from a statement made by the Appellant when completing
forms for the rental of a four-by-four truck in about 1997. When
the Appellant established that this amount was false and was used
only by him for obtaining approval for the truck rental, the
Minister reassessed him using greatly reduced amounts provided by
the Appellant.
[16] Other than
letters from medical doctors describing his medical condition,
there is no corroborating evidence that the Appellant was
incapacitated for long periods of time during the relevant years.
The medical information in no way suggests that he was unable to
file income tax returns. I find no reason why he could not have
filed or give instructions to someone on his behalf to file
returns. As stated by Judge Lamarre Proulx in Bennett and
Judge Bowman in Pillar Oil Fields, a high degree of due
diligence is required for the Appellant to demonstrate that he
has complied with subsection 162(2) of the Act. He has not
met this burden of proof.
[17] The appeals
are dismissed.
Signed at
Ottawa, Canada, this 9th day of December, 2002.
J.T.C.C.
COURT FILE
NO.:
2002-1618(IT)I
STYLE OF
CAUSE:
Lloyd Quantz and Her Majesty the Queen
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
October 23, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
December 9, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Galina Bining
COUNSEL OF
RECORD:
For the
Appellant:
Name:
n/a
Firm:
n/a
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1618(IT)I
BETWEEN:
LLOYD
QUANTZ,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on October 23, 2002, at Calgary, Alberta, by
the
Honourable Judge C.H. McArthur
Appearances
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Galina Bining
JUDGMENT
Whereas the Appellant informed the Court that he was
discontinuing the appeal for the 1998 taxation year;
The appeals from assessment of tax made under the Income Tax
Act for the 1996, 1997, 1998 and 1999 taxation years are
dismissed.
Signed at
Ottawa, Canada, this 9th day of December, 2002.
J.T.C.C.
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