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Citation: 2004TCC99
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Date: 20040224
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Docket: 2002-2781(IT)I
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BETWEEN:
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ANTHONY J. MCKEATING,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Hershfield, J.
[1] These appeals concern the
Appellant's 1997, 1998, 1999 and 2000 taxation years.
[2] Initially the Court and the
Respondent understood that the Appellant's Notice of Appeal
was only in respect to the 1999 and 2000 taxation years. However
on hearing the matter and reviewing evidence presented at the
hearing I am satisfied that reassessments in respect of the 1997
and 1998 taxation years were sufficiently covered by the Notice
of Appeal and are properly under appeal.[1]
[3] The issues raised in the Notice of
Appeal are as follows: [2]
- Whether amounts
identified by the Respondent as pension income were properly
included in the Appellant's income in the subject years;
- Whether the
Appellant is entitled to loss carryovers in respect of a loss
asserted to have been incurred on the disposition of a residence
in 1985;
- Whether the Appellant
is entitled to the disability tax credit; and
- Whether the
Appellant is entitled to relief of interest and penalties
assessed.
[4] With respect to the pension income
inclusion issue, the Appellant has sought to classify the amounts
received as something other than pension income. Regardless of
the classification however the Appellant has failed to find a
classification for the amounts, admittedly received, that would
take them out of the provisions of the Income Tax
Act (the "Act") that would include them
in his income. It is necessary to review the background of his
situation to better understand the "classification"
issue that understandably has caused the Appellant considerable
anguish.
[5] The Appellant was employed by
Westinghouse Canada Inc. as an industrial lighting specialist. He
was hired in 1974 at the age of 42. He went on disability in 1982
and, it seems, was never taken back by his employer even after
the insurer responsible for his disability coverage took him off
disability in 1988.
[6] Throughout the period of
disability recognized by the insurer, the Appellant was in and
out of hospital. He described himself as being in an encephalitic
coma for some 56 days and, over another period, being subjected
to shock treatments three times per week for six or seven weeks.
The Appellant maintains, and I accept his testimony in this
regard, that he has suffered long-term damage from these
treatments. Certain aspects of his mental functions relating to
coping with his affairs have been impaired. His obsessive
preoccupation with his plight reflects to me his inability to
pursue matters in an organised, methodical manner. He is a victim
who, in my view, seems to suffer to the point of having become to
some extent dysfunctional. He acknowledges this himself. It is
not a self-serving acknowledgement. Indeed the impairment may go
beyond the disability just observed, but I have no medical
evidence as to the extent of his mental health problems.
[7] His disability coverage ended when
the insurer discovered that Mr. McKeating was doing
volunteer work. This, apparently, was sufficient to disqualify
him from coverage under the provisions of the plan for
Westinghouse employees. During the period of his disability he
also received disability payments from CPP. These continued after
his employer's plan cut the Appellant off. The Appellant
emphasizes that this is recognition of his ongoing disability
(which I have accepted).
[8] On being taken off disability
under his employer's plan, the Appellant returned to his
employer and requested work. While it seems likely that
Westinghouse had some duty to accommodate the Appellant in the
circumstances conveyed to me, no accommodation was made.
Westinghouse it seems had sold its lighting division. The
Appellant suggested that there was no one successor as, he
asserted, the lighting division was carved up among a number of
purchasers each taking over different components of
Westinghouse's lighting division. On the other hand, it seems
Westinghouse considered the Appellant as covered under the terms
of a sale agreement with a particular purchaser referred to by
Westinghouse as "Crouse-Hinds".[3]
[9] On refusing to accommodate the
Appellant with work after being cut off disability, Westinghouse
advised the Appellant he could commence payments out of his
pension as he was then eligible for retirement, having reached
age 55. The Appellant refused on the basis that he still was an
employee. He refused to acknowledge that he had retired when he
had not. Since he refused to take his pension at that time,
nothing happened until he reached age 65 when he was told he must
accept payments - so he did. Pension payments from Royal Trust
then commenced which was in (or about) 1996.[4]
[10] The Appellant referred to the monthly
payments as a fringe benefit and did not include them in income.
In his mind these are gratuitous payments he has been forced to
accept in lieu of the appropriate payments he was entitled to
receive. He relies heavily on the fact that the amounts paid are
not from or under a registered pension plan. He has also
suggested that they might be termination payments or a retiring
allowance or even disability payments but he refuses to accept
them as pension payments.
[11] While I regret the unfortunate
treatment the Appellant seems to have suffered, his submissions,
regardless of his earnest and persistent efforts, are ultimately
without merit. There is no classification of the subject amounts
received that would exclude them from the calculation of the
Appellant's income.[5]
[12] As to the Appellant's principle
argument that there is no "pension" here, I have the
following observations:
- Paragraph
56(1)(a) brings into taxable income "any amount
received by the taxpayer in the year as, on account or in lieu of
payment of, or in satisfaction of, (i) a superannuation or
pension benefit including, without limiting the generality of the
foregoing, (A) the amount of any pension ...";
-
"Superannuation or pension benefit" is defined in
subsection 248(1) "to include any amount received out
of ... a ... pension fund and ... includes any payment made to a
beneficiary under the fund ... (a) in accordance with the
terms of the fund ...";
- At the very least
a fund has been set up and administered by Royal Trust according
to terms that require monthly payments to the Appellant as
beneficial recipient;
- The foregoing
provisions of the Act cast a very wide net which
inevitably seems to catch the Appellant's receipts in this
case. The background, the appropriateness and adequacy of the
fund, is not ultimately relevant. Westinghouse may well have
acted unilaterally without appropriate consideration of the
Appellant's rights under employment law. However, I do not
see how that can alter the tax position of the receipts. The fact
that the pension fund is not registered is not relevant
either.
[13] Accordingly I find that the Royal Trust
payments were properly included in the Appellant's taxable
income in the subject years pursuant to
paragraph 56(1)(a) of the Act.
[14] I turn now to the second issue which
concerns the carryover of losses asserted to have been incurred
by the Appellant in 1985. The Appellant's story in respect of
this loss illustrates the persistent nature of the misfortunes
that have plagued the Appellant. In or about 1985, while still
suffering from his disability, his family had the Appellant
declared incompetent to administer his own affairs so that they
were put under the administration of a trustee. The trustee,
according to the Appellant, did not make mortgage payments on his
home (then occupied by his wife and children) notwithstanding
that the disability payments received by the trustee were,
according to the Appellant, adequate to cover the mortgage.[6] The mortgage was
near the end of its amortization period so there was considerable
equity in the property. In any event, according to the Appellant,
the residence was foreclosed on and the trustee absconded with
the proceeds. The Appellant wants his loss recognized for tax
purposes.
[15] The Appellant acknowledges the loss is
a capital loss but claims that in 1985 when the loss was
incurred, up to $2,000.00 per year was allowed to be used to
offset ordinary income (not just capital gains). While correct on
this latter point of law, the Appellant has a number of problems
in respect of his claiming the loss. Even ignoring what might be
the biggest initial problem, which is that he did not show the
loss on his 1985 return, his testimony alone cannot establish
that the loss occurred as he recalls it. Independent
corroboration, even of family members, of events surrounding the
period when his affairs were under the administration of the
trustee would be required. This is a sufficient ground to dismiss
the appeal on this point, but I will go on to point out other
problems I have with allowing this loss.
[16] I have no evidence as to the nature of the trusteeship
alleged by the Appellant. If I assume that the trustee was the
Appellant's agent for tax purposes, the Appellant would be
regarded as having received the proceeds on the disposition of
the property. The subsequent theft would be of personal funds.
The theft of personal funds in such circumstances would not
generally be recognized as a loss for tax purposes. If the
trustee is more than a mere agent (which does not seem likely in
the circumstances), the transfer to the trustee would be a
disposition for tax purposes and proceeds would be deemed to have
been received by the Appellant.
[17] Considering the disposition itself, I
note that I have no evidence that the asserted loss would not be
required to offset the gain on the disposition. The Appellant
acknowledged a significant gain on the subject property (but for
the trustee's alleged defalcation). It seems likely the
Appellant would be responsible for tax on the gain unless there
was a designation of the property as a principal residence. This
is an open question as no disposition was reported.[7] If there is a
designation of the property as a principal residence, subsection
40(2) of the Act would deny the loss.
[18] For all of the above reasons I cannot
allow the appeal in respect of the Appellant's claim for loss
carryovers.
[19] With respect to the third issue, the
disability tax credit claim, the required medical certificate has
not been provided in respect of any of the years in question. I
afforded the Appellant considerable time to provide such
certificate and none has been forthcoming. Accordingly I cannot
allow the Appellant's claim for disability tax credits. I
also note that while I have accepted that the Appellant is
suffering an ongoing disability in mental functions, I observed
no signs that his ability to perform a basic activity of daily
living would be markedly restricted all or substantially all of
the time. Regardless, production of medical certificates for the
subject years is a requirement for the allowance of the
Appellant's claim.
[20] With respect to the last issue
concerning interest and penalties, the Appellant asserts in his
appeal that he had made an application under the fairness
provisions for relief of interest and penalties. The Minister, in
the Reply, stated no application under the fairness provisions
had been made. Regardless, the application is clearly made in the
Notice of Appeal and these Reasons will hopefully be sufficient
in terms of providing the Minister adequate grounds to exercise
the discretion afforded under the Act in favour of
granting the Appellant the relief he seeks. Indeed
Respondent's counsel agreed that penalties should be waived.
Penalties were assessed in 1999 under subsection 163(1) because
the Minister asserted that the Appellant failed to report his
pension income in 1999 and the two preceding years.[8] While I take Respondent
counsel's concession on penalties to be a reflection of the
Minister's acceptance that an application for fairness was
considered and that a decision to waive penalties had been made,
I am in no position to make an order on that basis. On the other
hand, with respect to the penalties, I note that late filed
returns for earlier years do mention, as non-taxable receipts,
certain disability/fringe benefit receipts which were clearly
intended as a reference to the pension income.[9] On this basis, it is open for me
to find that there was sufficient disclosure of the subject
income source to prevent the application of penalties under
subsection 163(1) and I so find. Accordingly I will allow
the appeal on this point.
[21] With respect to interest, same runs
with the liability - I have no jurisdiction to cancel interest.
As stated, the Minister has the discretion to do this under the
fairness provisions. Such accommodation of the Appellant's
request seems justified. The accommodation that the Minister
seemed ready to make in respect of penalties was justified in my
view and applies equally to interest. The justification might
include, for example, the serious emotional and mental distress
and dysfunction that the Appellant clearly suffers. This is not a
case of hiding income. Late filings, misclassifications,
scratched out entries on his return, setting out monthly amounts
instead of annual amounts, even not including information slips
sent out by Royal Trust, do not reveal a taxpayer bent on
misfiling. This is a victimized, dysfunctional man obsessively
struggling to make sense, to rationalize, his misfortunes in the
context of the Act. In these circumstances I would
encourage the Minister to exercise the discretion, afforded under
the Act in regard to interest, in a compassionate
manner, particularly since the CCRA has to date been
anything but compassionate. The Appellant was penniless but for
his CPP, old age security and $519.00 per month Westinghouse
pension and yet the CCRA garnished some 70% of his pension. The
CCRA took every advantage of a pension that was not protected
from garnishment. This was not only not compassionate but borders
on outrageous in my view. The most scandalous tax evaders,
outright cheats and scoundrels have been treated better. The
Appellant has a right, in the circumstances of his case, to be
recognized as a person suffering some mental dysfunction with a
legitimate beef over the categorization of his
"pension". He honestly believed that the pension did
not exist in accordance with the laws governing pensions and that
that would mean that the receipts could not be properly treated
as pension income. That I have found him wrong does not now, with
hindsight, justify the zealous collection activity pursued in
this case. The garnishment left the Appellant in an impoverished
position. He was unable to afford basic necessities of life. The
refund of the garnished funds has hopefully addressed this
problem but going one step further I urge that when collection
activity commences again, following this decision, the
responsible CCRA officials treat the Appellant with due regard to
his near destitute economic state. Since the garnishment, the
Appellant has been short funds for rent, gas and necessities. He
needs an advocate in the department (a department that calls the
Appellant its "client") and I hope he is afforded
one.
[22] In this regard I note that I am not
encouraged by correspondence from Respondent's counsel to the
Court addressing the refund of garnished funds on my finding that
the garnishment occurred in respect of years under objection.
That correspondence includes the following:
The Respondent is therefore prepared to reimburse
Mr. McKeating the amounts of tax and interest with respect
to the 1997 and 1998 taxation years, if he so wishes. We however
wish to emphasize that if Mr. McKeating's appeal is
dismissed, the amounts will again be subject to collection, with
interest. The Respondent's concern is that it might not be in
Mr. McKeating's best interests to proceed in this manner
since the interest then payable may well exceed the amounts that
would be refunded. We fully understand, however that the choice
lies with Mr. McKeating, and we await his direction in this
regard.
[23] While I appreciate that the caution
expressed in the letter may be well-meaning, it also
reflects an opportunistic tax collection posture of waiting to
seize the refund without regard to the relief of interest under
the fairness provisions and without regard to a collection policy
that might recognize the need for tolerance. Again, the Appellant
is in need of an advocate to help ensure that his financial
burdens do not cripple his ability to sustain himself with the
necessaries of life. That said, it is acknowledged that it is
beyond my jurisdiction to deal with the collection of taxes
owing.
[24] Accordingly, the appeals are dismissed
except in respect of the subsection 163(1) penalties which
are hereby vacated.
Signed at Ottawa, Canada, this 24th day of February 2004.
Hershfield, J.
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