Citation: 2009 TCC 289
Date: 20090528
Docket: 2006-3535(IT)G
BETWEEN:
GEORGE BONAVIA, JR.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau, J.
[1]
This is an appeal from
a Notice of Reassessment dated April 28, 2005 whereby the Minister of
National Revenue (the “Minister”) added $118,097 to the appellant’s income for
the 2001 taxation year on the basis that it was a benefit to him out of or
under a registered retirement savings plan under paragraph 56(1)(h) and
subsection 146(8) of the Income Tax Act, R.S.C. 1985, c.1 (5th
Suppl). as amended (the “Act”).
[2]
The facts relevant to this
appeal are described in the Statement of Agreed Facts dated November 26,
2008 and filed by the parties at the hearing. The parties also agreed to the authenticity
of the documents included in the Joint Book of Documents filed as
Exhibit A-1 in this appeal. The Statement of Agreed Facts reads as
follows:
1. On June 7, 1999, an amount of
$126,661.80 (the “retirement savings”) was paid out of the Appellant’s public
service pension plan and transferred into a locked-in RRSP, account number [. .
. ], held with the Royal Bank of Canada (the “Royal Bank”).
2. On June 28, 1999, the Appellant
entered into an agreement with the Royal Bank establishing a Life Income Fund
(the “Fund”) pursuant to the Pension Benefits Standards Act, 1985 and he
also made an application to the Royal Bank to be paid the maximum allowable
monthly income payments from the Fund in order to meet his living expenses.
3. On July 8, 1999, $126,999.31 was
transferred from the Appellant’s locked-in RRSP to the Fund. Throughout the
period from July 1999 to March 2001, the Appellant received monthly payments
from the Fund, in amounts ranging from $601.89 to $641.08 (the “monthly
payments”), which were deposited directly in his personal chequing account.
4. The Fund was registered as a retirement
income fund under the Income Tax Act.
Appellant’s Dealings with NBI in Trust inc.
5. On February 6, 2001 the Appellant made a
loan application to NBI in Trust inc. (“NBI”).
6. On February 6, 2001 the Appellant also
signed a Power of Attorney.
7. On March 1, 2001, the Appellant executed
Revenue Canada Form T2151. At some time subsequent to March 1, 2001, the
Form T2151 that had been executed by the Appellant was stamped “Canadian
Corporation Creation Centre 1062363 RREMCCCC”.
8. On March 19, 2001, $74,975 was transferred
from the Fund to a bank account held by Canadian Corporation Creation Centre
(“CCCC”) with Canada Trust, account number [. . .]. On April 23, 2001,
$42,959.43 was transferred from the Fund to same account of CCCC.
9. On March 27, 2001, NBI issued a
cheque to the Appellant for $52,167.00, which was cashed on March 30,
2001.
10. On April 30, 2001, NBI issued a cheque to
the Appellant for $30,501.00, which was cashed on or about May 1, 2001.
Reassessment Under Appeal
11. On April 4, 2005, an auditor from the
Canada Revenue Agency informed the Appellant that $118,097.14 would be added to
his income for the 2001 taxation year as a withdrawal from his registered
pension plan.
12. Prior to being contacted by the Revenue
Canada auditor in 2005, the Appellant had never heard of, and had no knowledge
about, CCCC.
13. By Notice of Reassessment dated April 28,
2005, the Canada Revenue Agency added $118,097 to the Appellant’s income for
the 2001 taxation year on the basis that it was a benefit to him out of or
under a registered retirement savings plan under para. 65(1)(h) and subsec. 146(8)
of the Income Tax Act.
14. The Appellant objected to the reassessment
by Notice of Objection received by the Canada Revenue Agency on June 15,
2005.
15. On August 31, 2006, the Canada Revenue
Agency issued a Notification of Confirmation to the Appellant on the basis
that:
“the amount of $118,097 that you transferred to “Régime de retraite
des employés et members [sic] de Canadian
Corporation Creation Centre” is a benefit out of or under a registered
retirement savings plan. The amount has been included in your income according
to paragraph 56(1)(h) and subsection 146(8).”
Unlawful Activity by CCCC and NBI
16. Subsequently, the Appellant was informed by
the Ministry of the Attorney General, Province of Ontario, that he had been the victim of unlawful activity by
CCCC and NBI, and was eligible for compensation of $117,934.43, to be paid on a
pro-rata basis amongst the victims of their unlawful activity.
17. On March 22, 2007, the Appellant
received compensation from the Government of Ontario as a victim of crime by
CCCC and NBI, in the pro‑rated amount of $92,731.05, which he is using to
buy years of pensionable service with the Government of Canada.
CCCC and NBI
18. NBI was a corporation incorporated under
the Ontario Business Corporations Act on November 15, 1999.
19. CCCC was incorporated under the Canada
Corporations Act for which letters patent were issued on February 23,
2000.
20. According to its articles of incorporation,
the initial directors of CCCC were Michel Rolland, Pierre Lesage and David
McKenzie. Its stated objects were, inter alia, to attract small business
entrepreneurs, to promote their interests and to provide various services to
its members.
21. On June 21, 2000, CCCC created a trust
purportedly to administer a pension plan for its employees and members.
22. On July 18, 2000, Michel Roland, as president of CCCC,
applied for registration of a pension plan called “Régime de retraite des
employés et membres de Canadian
Corporation Creation Center”
(the “Plan”).
The registration was granted by Canada Customs Revenue Agency (“CCRA”) as it
then was on December 19, 2000, effective July 24, 2000, under section
147.1 of the Income Tax Act.
23. On or about March 30, 2001,
$254,044.33 was transferred from CCCC’s Canada Trust account to a bank account
held by NBI with Canada Trust (number [. . .]). On or about May 2, 2001, an
amount of $250,000.00 was transferred from CCCC’s Canada Trust account to
another Canada Trust account held by NBI (number [. . . ]).
24. On September 28, 2001, the Financial
Services Commission of Ontario revoked the Plan’s provincial registration.
25. On December 11, 2001, CCRA issued a Notice
of intent to revoke in accordance with subsection 147.1(11) of the Act
on the grounds that the Plan did not comply with the conditions for
registration set out in subsection 8501(1) of the Income Tax
Regulations (“the Regulations”). Particularly:
a) the Plan’s primary purpose was not to
provide periodic payments to individuals after retirement in respect of their service
as employees; and
b) there was no employer-employee
relationship between CCCC and the members of the Plan.
26. CCCC did not appeal the Notice of Intent to
Revoke.
27. On January 11, 2002, a Notice of
Revocation was issued in accordance with subsection 147.1(12) of the Act
with an effective date of revocation of July 24, 2000, the Plan’s original
effective date.
28. The Appellant had no knowledge of any of
the facts admitted in paragraphs 18 through 27 of this Statement of Agreed
Facts, until after he was contacted by the auditor in 2005.
[3]
The issue to be decided
is whether the amount of $118,097.14 is to be included in computing the
appellant’s income for the 2001 taxation year:
(a) on the basis that
the amounts were received by the appellant in 2001 “out of or under” his
registered retirement income fund (the “RRIF”) within the meaning of
subsection 146.3(5) of the Act;
(b) in the alternative,
on the basis that the transfer of the funds from the Royal Bank to CCCC was
made pursuant to the direction of the appellant and for his benefit, within the
meaning of subsection 56(2) of the Act.
[4]
The Minister has
changed the basis of the reassessment because the Fund established by the
appellant at the Royal Bank was registered as a retirement income fund within
the meaning subsection 146.3(1) of the Act and not as a registered retirement
savings plan.
[5]
The appellant’s
position is that he did not receive any amount in his 2001 taxation year as a
benefit out of or under a registered retirement savings plan or a registered
retirement income fund. He submits that the agreement with NBI was a loan
agreement and that the total amount of $82,668 received in 2001 was the
advancement of the loan.
[6]
The appellant further
contends that he did not enter into an arrangement whereby his rights and
obligations under his Fund were released or extinguished, and that he did not direct
the Royal Bank to transfer any amount from his Fund to CCCC.
[7]
The appellant further
submits that he applied to NBI for a loan and that:
(a) the Power of Attorney
given to NBI was only to permit it to recover the amount of its loan plus the
interest charged, through its receipt of monthly payments due to the appellant;
(b) Form T-2151 was
signed on the understanding that it was necessary to protect his retirement
savings by ensuring that they continued to be held by a registered plan;
(c) withdrawals from his
registered retirement savings plan were not authorized by him and documents
purporting to authorize any such withdrawals were fraudulently created;
(d) NBI and CCCC created
arrangements and documents with the intention of deceiving the appellant and
others who might rely on them by creating an appearance different from what
really occurred, i.e. theft of registered retirement savings;
(e) transfers from the Fund
were solely the result of a fraud and a scheme in which the appellant was the
victim, such that no effect should be given to them for the purposes of the Act.
Analysis
[8]
The rules governing
RRIF are found in section 146.3 of the Act. A “retirement income
fund” is defined in paragraph 146.3(1) of the Act as follows:
“retirement income fund” means an
arrangement between a carrier and an annuitant under which, in consideration
for the transfer to the carrier of property, the carrier undertakes to pay to
the annuitant and, where the annuitant so elects, to the annuitant's spouse or
common-law partner after the annuitant's death, in each year that begins not
later than the first calendar year after the year in which the arrangement was
entered into one or more amounts the total of which is not less than the
minimum amount under the arrangement for that year, but the amount of any such
payment shall not exceed the value of the property held in connection with the
arrangement immediately before the time of the payment.
[9]
When a “retirement
income fund” is accepted for registration by the Minister, it becomes a RRIF.
To be registered as a RRIF, the contract between the annuitant and the carrier
must contain very strict conditions relating to the use of the property held in
connection with the fund which are described in subsection 146.3(2) of the
Act. In particular, the conditions found in the following provisions
shall be complied with:
Paragraph 146.3(2)(b)
(b) the fund provides that payments thereunder may
not be assigned in whole or in part;
Subparagraph 146.3(2)(c)(ii)
(ii) the property held in connection with the
fund cannot be pledged, assigned or in any way alienated as security for a loan
or for any purpose other than that of the making by the carrier to the
annuitant those payments described in paragraph (a);
Paragraph 146.3(2)(d)
(d) the fund provides that, except where the
annuitant’s spouse or common-law partner becomes the annuitant under the fund,
the carrier shall, as a consequence of the death of the annuitant, distribute
the property held in connection with the fund at the time of the annuitant’s
death or an amount equal to the value of such property at that time;
Paragraph 146.3(2)(g)
(g) the fund requires that no benefit or loan, other
than
(i)
a benefit the amount of which is required to be
included in computing the annuitant’s income,
(ii)
an amount referred to in paragraph (5)(a) or
(b), or
(iii)
the benefit derived from the provision of
administrative or investment services in respect of the fund,
that is conditional in any way on the existence of the fund may be
extended to the annuitant or to a person with whom the annuitant was not
dealing at arm’s length; and
[. . . ]
[10]
Subsection 146.3(5) of
the Act requires that all amounts received by a taxpayer in a taxation
year out of or under a RRIF shall be included in computing his income for the
year. The opening words of subsection 146.3(5) of the Act reads as
follows:
(5) Benefits taxable – There shall be
included in computing the income of a taxpayer for a taxation year all amounts
received by the taxpayer in the year out of or under a registered retirement
income fund other than the portion thereof that can reasonably be regarded as
(a) part of the amount included in computing the
income of another taxpayer by virtue of subsections (6) and (6.2);
(b) an amount received in respect of the income of
the trust under the fund for a taxation year for which the trust was not exempt
from tax by virtue of subsection (3.1); or
(c) an amount that relates to interest, or to
another amount included in computing income otherwise than because of this
section, and that would, if the fund were a registered retirement savings plan,
be a tax‑paid amount (within the meaning assigned by paragraph (b) of the
definition “tax-paid amount” in subsection 146(1)).
[11]
Section 146.3 of the Act
contains a series of rules aimed at preventing the revision, amendment or
substitution of fund that does not comply with the requirements of section
146.3 of the Act for its acceptance by the Minister for registration for
the purpose of the Act. Those rules are found in subsections 146.3(11),
(12) and (13) of the Act which read as follows:
(11) Change in fund after registration —
Where, on any day after a retirement income fund has been accepted by the
Minister for registration for the purposes of this Act, the fund is revised or
amended or a new fund is substituted therefor, and the fund as revised or
amended or the new fund substituted therefor, as the case may be, (in this
subsection referred to as the “amended fund”) does not comply with the
requirements of this section for its acceptance by the Minister for
registration for the purposes of this Act, the following rules apply:
(a) the amended fund shall be deemed, for the
purposes of this Act, not to be a registered retirement income fund; and
(b) the taxpayer who was the annuitant under the
fund before it became an amended fund shall, in computing the taxpayer's income
for the taxation year that includes that day, include as income received out of
the fund at that time an amount equal to the fair market value of all the
property held in connection with the fund immediately before that time.
(12) Idem — For the purposes of
subsection (11), an arrangement under which a right or obligation under a
retirement income fund is released or extinguished either wholly or in part and
either in exchange or substitution for any right or obligation, or otherwise
(other than an arrangement the sole object and legal effect of which is to
revise or amend the fund) or under which payment of any amount by way of loan
or otherwise is made on the security of a right under a retirement income fund,
shall be deemed to be a new fund substituted for the retirement income fund.
(13) Idem — Where at any time a benefit
or loan is extended or continues to be extended as a consequence of the
existence of a registered retirement income fund and that benefit or loan would
be prohibited if the fund met the requirement for registration contained in paragraph
(2)(g), for the purposes of subsection (11), the fund shall be deemed to have
been revised or amended at that time so that it fails to meet the requirement
for registration contained in paragraph (2)(g).
[12]
When the appellant made
a loan application to NBI, he had received monthly payments from the Fund from
July 1999 to March 2001 in amounts ranging from $601.89 to $641.08 which were
deposited in his personal chequing account. To obtain the loan, the appellant
signed a Power of Attorney and executed Form T‑2151 which is required by CCRA
to transfer money from the Fund.
[13]
The appellant testified
that he simply wanted to obtain a loan to buy a house and to assign his monthly
payments to the reimbursement of the loan. According to him, he never authorized
the encroachment of the capital of the Fund which was to stay intact. However,
he did accept that the capital of the Fund be transferred to another registered
plan by signing Form T-2151. The appellant also stated that he never had any
knowledge of CCCC and never discussed with NBI the transfer of the capital of the
Fund to CCCC.
[14]
What the appellant
intended to do was to obtain a loan on the security of the monthly payments
from his RRIF which is contrary to the object and spirit of the Act and
to the terms and conditions of his RRIF. The conditions enunciated in
paragraph 146.3(2)b) of the Act specifically provide that
payments under a RRIF may not be assigned in whole or in part.
[15]
This means that the
appellant had to transfer the capital of his RRIF into another registered plan
which cannot be another RRIF and that is the reason why the appellant signed a
Form T‑2151. The appellant also testified that he might very well have
signed a Form T‑2033. The vehicle offered by the promoters of the scheme
was a pension plan that was registered at the time the capital of the
appellant’s RRIF was transferred.
[16]
Unfortunately for the
appellant, the registered pension plan was not a pension plan that met the
prescribed conditions for registration so that is has been retroactively
deregistered by the Minister. Consequently, the two transfers of the capital of
the Fund to a bank account held by CCCC constituted a withdrawal of the capital
of the appellant’s RRIF which had to be included in the appellant’s income for
the 2001 taxation year pursuant to subsection 146.3(5) of the Act.
[17]
The Act assumes
that any transfer of property held in connection with the Fund made at the
direction of the annuitant is an amount received by the annuitant under the
RRIF. An exception to this rule is found in subsection 146.3(14) of the Act
which deems a transfer to another RRIF not to be an amount received by the
annuitant out of or under a RRIF.
[18]
The word “received” for
the purpose of the Act includes not only cash or property in the hands of
the taxpayer but also benefits or advantages obtained or enjoyed from something
without necessarily having it in one’s hands. This interpretation was retained
by the Federal Court, Trial Division, in Morin v. R., 75 D.T.C. 5061 at paragraph 24:
“We regret to say that this proposition seems to us absolutely
inadmissible, because the word 'receive' obviously means to get or to derive
benefit from something, to enjoy its advantages without necessarily having it
in one's hands.”…
[19]
The extended meaning of
the word “received” for the purposes of the Act has been applied by the Courts,
namely in Simser v. R., 2005 D.T.C. 5001 (Federal Court of Appeal) and
in Bertrand v. R., 2007 D.T.C. 190 (Tax Court of Canada).
[20]
In addition to the
extended meaning of the word “received”, the Courts have also applied the
concept of “constructive receipt”. In Belusic v. R., 3 C.T.C. 2908,
Justice Bowman set out in paragraph 13, the conditions for the application
of “constructive receipt” concept to a payment to a third party:
[…] I should think that for there to be constructive receipt of the
$3,281.30 by the appellant as the result of the payment by Canada Post to the
City of London, one or both of
two conditions would need to be met:
(a) the appellant would need to have authorized
or in any event acquiesced in the payment; or
(b) even if he had not authorized or acquiesced
in the payment, at least he would have had to be under a legal obligation to
make the repayment so that the payment by Canada Post to the City of London had the effect of relieving him of
that obligation.
[21]
This approach was
applied by this Court in Toth v. R., 2006 D.T.C. 2479. The Court found
that Mr. Toth had received the amounts under his RRSP despite the fact that Mr.
Toth derived no benefit whatsoever from the proceeds of his RRSP and the
payment was not authorized or the result of a legal obligation.
[22]
Considering the facts
of this case and the appellant’s evidence, it seems clear to me that the
amounts transferred out of his RRIF with the Royal Bank were properly included
in the calculation of his income under subsection 146.3(5) of the Act.
The transfer of funds was for the purpose of serving a future debt and was
therefore to his benefit. Furthermore, the transfer of funds was authorized by
the appellant. Finally, by signing the Power of Attorney, the appellant was
under a legal obligation to the transfer of funds to NBI but he was relieved of
that legal obligation when NBI chose to have the payment directed to another
entity, CCCC.
[23]
Even if it was considered
that the amounts transferred were not received by the appellant pursuant to
subsection 146.3(5) of the Act, the amounts would nevertheless have to
be included in the income of the appellant pursuant to subsection 56(2) of
the Act.
[24]
Subsection 56(2) of the
Act reads as follows:
Indirect payments — A payment or
transfer of property made pursuant to the direction of, or with the concurrence
of, a taxpayer to some other person for the benefit of the taxpayer or as a
benefit that the taxpayer desired to have conferred on the other person (other
than by an assignment of any portion of a retirement pension pursuant to
section 65.1 of the Canada Pension Plan or a comparable provision of a
provincial pension plan as defined in section 3 of that Act or of a prescribed
provincial pension plan) shall be included in computing the taxpayer's income
to the extent that it would be if the payment or transfer had been made to the
taxpayer.
[25]
The purpose of
subsection 56(2) of the Act is to prevent tax avoidance through income
splitting. It is a specific tax avoidance provision in the sense that it can
only operate to prevent income splitting when the four preconditions to its
application are specifically met.
[26]
The Supreme Court of Canada recognized in Newman v. M.N.R., 98 D.T.C. 6297
that subsection 56(2) of the Act requires the application of four
conditions. In paragraph 32 of that case, the Court referred to the four
preconditions in the following terms:
In order for s. 56(2) to apply, four preconditions, each of which is
detailed in the language of the s. 56(2) itself, must be present:
(1) the payment must be to a person other than the
reassessed taxpayer;
(2) the allocation must be at the direction or with
the concurrence of the reassessed taxpayer;
(3) the payment must be for the benefit of the
reassessed taxpayer or for the benefit of another person whom the reassessed
taxpayer wished to benefit; and
(4) the payment would have been included in the
reassessed taxpayer's income if it had been received by him or her.
[27]
It seems to me that the
four prerequisites are present in this instance for the following reasons:
(a) payment to another
person: on March 19, and on April 23, 2001, the amounts of $74,975 and
42,959.43 respectively were transferred from the appellant’s Fund to CCCC;
(b) at the direction or
with the appellant’s concurrence: in March 2001, the appellant executed
Form T-2151. He understood that this executed form could only be used for one
purpose —
to authorize the Royal Bank to transfer the capital of his Fund. The appellant
cannot repudiate the authorization on the basis that the name of CCCC was
stamped after the fact because he signed a blank document;
(c) the payment is for
the benefit of the appellant: without the transfer of funds, the appellant would
not have been able to obtain the funds necessary to purchase the house. The
appellant testified that he was made aware that the funds had been transferred
by the fact that he had received the loan. There was a direct correlation
between the funds obtained from NBI and transfer of the capital of his Fund to
CCCC;
(d) the payment would
have been taxable if received by the appellant: if the amounts had been paid
directly to the appellant, it would have been included in his income pursuant
to subsection 146.3(5) of the Act.
[28]
The appellant was, at
the very least, negligent in signing the documents that led to the inclusion in
his income of the amounts in issue. The Federal Court of Appeal clearly stated
in Norm v. R., 2007 D.T.C. 6111 that a taxpayer should not escape the
consequences of his actions on the basis of fraud and mistake. At
paragraph 22 of that case, the Court stated the following:
By purchasing the shares in a non-qualified investment,
subsection 146(1) was automatically triggered. Undoubtedly, this result is
harsh but it would be unfair to exempt a taxpayer from his or her tax
obligation on the basis of mistake or fraud.
[29]
The same reasoning was
applied in Vankerk v. R., 2006 D.T.C. 6199, Dubuc c. R., 2004
D.T.C. 2811 and in Deschamps v. R. [2007] 3 C.T.C. 2298. In Deschamps,
this Court made the following statement at paragraph 15:
The appellant may have failed to exercise care in signing these
documents but that does not relieve him of the consequences.
[30]
For these reasons, the
appeal is dismissed with costs.
Signed at Montreal, Quebec,
this 28th day of May 2009.
“Réal Favreau”
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