[OFFICIAL ENGLISH
TRANSLATION]
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Reference: 2004TCC154
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Date: 20040217
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Court File No.: 2003-2113(IT)I
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BETWEEN:
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JACQUES BIRON,
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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
Lamarre
Proulx, J.
[1] These
are appeals under the informal procedure concerning the 1999 and 2001 taxation
years. The appeals raise six issues. The outcome of the sixth turns on the
outcome of the second.
[2] The
first issue is whether the Appellant is entitled to claim a tax credit for
severe and prolonged physical impairment for the 1999 and 2001 taxation years.
[3] The
Appellant’s impairment is sleep apnea. He must use a CPAP (Continuous Positive
Airway Pressure) device at night in order to correct it.
[4] Dr.
Michel Camirand, the physician who signed the “Disability Tax Credit
Certificate”, testified at the Appellant’s request. The certificate, dated
October 4, 2001, was tendered as Exhibit A‑1.
[5] The
physician did not check any of the basic activities of daily living that would
be markedly restricted, but wrote in: [translation]
“The activity of breathing.”
[6] The
physician checked “No” in response to question 9, which reads: [translation] “Is the impairment severe enough to restrict the
basic activity of daily living identified above, all or almost all the time,
even with the use of appropriate aids, devices, medication, or therapy?” He explained that he checked “Yes” in the subsequent documents and this
answer should now be interpreted as “Yes.”
[7] Based
on Exhibit A‑3, a report submitted by an ENT/respiratory allergy
specialist to attending physician Dr. Michel Camirand, the Appellant
has been suffering from this condition since 1995. The attending physician’s
certificate, produced as Exhibit A‑1, indicates the same year.
[8] The
physician explained that the Appellant suffers from severe sleep apnea and
therefore needs to wear a breathing mask while sleeping. The device consists of
a mask that is placed on the sleeper’s nose and produces pressure when the
person breathes in, thereby keeping the breathing passages open. The device
regularizes the supply of oxygen. A patient who uses it functions much better.
However, the use of the device disrupts daily life. Life is not normal. The device
is difficult to tolerate and most patients reject it.
[9] The
physician explained that people who suffer from sleep apnea cease breathing
during sleep, thereby decreasing their blood’s oxygen level. Over the long
term, this condition can cause serious health problems.
[10] The second issue is whether the Minister of National Revenue
(“the Minister”) correctly added to the Appellant’s income for the 1999
taxation year the amount of $36,792 from a registered retirement savings plan
(RRSP). The Appellant was bankrupt at the time. He became bankrupt in 1994 and
was discharged from the bankruptcy in March 2001.
[11] The Appellant’s tax return for the year 1999 was produced as
Exhibit I‑1. It includes Form T4RSP, entitled “Statement
of RRSP Income.” According to the statement, the payor is Industrial
Alliance, the beneficiary is Jacques Biron, $36,792.68 was withdrawn
and the income tax was $5,518.90.
[12] The Appellant states that the trustee, not he, obtained the amount
since the trustee was declared the owner thereof. The Appellant defended his
right of ownership to the money all the way to the Supreme Court of Canada.
[13] The Appellant produced Exhibit A‑6, a final statement of
receipts and disbursements in the bankruptcy of Jacques Biron dated June 17, 2002. Included under the heading Réalisation de l’actif (proceeds of the estate) is the
RRSP refund in the amount of $36,792.68, less amounts for federal tax
($5,518.90) and provincial tax ($8,462.32) for a balance of $22,811.46.
[14] Apparently, the trustee did not produce an income tax return in this
regard. At any rate, the Appellant did not obtain one.
[15] The third issue is whether the Appellant is entitled to claim, in
determining his federal income for the 2001 taxation year, an
equivalent-to-spouse tax credit for a wholly dependent person in respect of his
son Marc‑Antoine. It is admitted that Marc‑Antoine is more than 18
years old and suffers from no mental or physical impairment within the meaning
of paragraph 118(1)(b) of the Income Tax Act (ITA.)
[16] The fourth issue is whether the Minister correctly refused an amount
of $20,130 for legal fees when computing the Appellant’s income for the 2001
taxation year. The description can be found in Exhibit I‑2, the tax
return. It is a compilation of expenses incurred during the years 1996 to 2001,
including some expenses paid in 2001. There are no invoices or payment
documents.
[17] Exhibit I‑6, produced by counsel for the respondent,
consists of various judgments in legal proceedings initiated by the Appellant.
Counsel had the Appellant explain that these proceedings were to challenge
seizures of the Appellant’s assets by the tax authorities and the trustee in
bankruptcy. The Appellant responded that he was being accused of fraud and
wanted to prove that he had acted lawfully. This would ensure that he could
practice as a chartered accountant.
[18] Exhibit I‑7, produced by counsel for the respondent, is the
trustee’s report concerning the bankrupt’s application for a discharge. It
states that the bankrupt initiated one proceeding, challenge, disciplinary
complaint, and motion after another, resulting in considerable disbursements by
the trustee. The bankrupt offered the trustee no cooperation whatsoever in the
administration of his estate.
[19] The fifth issue is whether the Minister correctly refused to allow the
amount of $10,046 on account of carrying charges.
[20] The 2001 tax return includes form T4RSP, “Statement of RRSP Income.”
The amount withdrawn is $188,976.38. The Appellant does not contest the inclusion
of that amount because the financial institution paid it to the trustee at the
Appellant’s request to settle his bankruptcy.
[21] The documents showing the redemptions of February 14, 2000, and January 19, 2001, were produced as Exhibit I‑8.
The exhibit shows that the gross amount redeemed for the year 2001 is
$197,071.44. There were $8,095.06 in carrying charges. The gross amount less
charges is equal to the amount indicated on the T4RSP as the pre-tax amount of
$188,976.38.
[22] There were also charges, in the amount of $1,951.62, for the
transaction effected in taxation year 2000. When the two charges are added,
they are equal to the amount claimed by the Appellant for the year 2001.
[23] These charges were apparently incurred because the RRSP investments
were withdrawn early.
[24] The sixth issue is whether the Minister correctly disallowed an unused
tuition credit claim of $174.83 with respect to the 2001 taxation year. Both
parties agree that if the RRSP amount is to be included in the 1999 income,
this question will not arise.
Arguments
[25] With regard to the first issue, the Appellant relies on the concept of
life‑sustaining treatment, which was included in the Act for the year
2000.
[26] Counsel for the respondent does not deny that the Appellant has a
medical problem, but submits that no basic activity of daily living is markedly
restricted and that the wearing of the breathing mask cannot be considered a
therapy that is both essential to sustain a vital function of the Appellant and
administered at least three times each week for a total duration averaging 14
hours a week.
[27] With regard to the second issue, the Appellant submits that he did not
have to include the $36,792.68 in determining his income for the year 1999
because the Court declared that he was not the owner of that amount. The
Appellant further submits that he uses the cash method of accounting and that
he never received the amount.
[28] However, the Appellant was entitled to take account of, and claim – as
he did on line 437 of his 1999 return – the tax
withheld by the financial institution on his behalf. In any event, this last
point is not in issue.
[29] Counsel for the respondent submitted that the Appellant, by virtue of
paragraph 56(1)(h) of the Act, must include this amount in computing his
income. The bankrupt’s property is vested in the trustee and the trustee has
the management of that property. The trustee may file a tax return under
subsection 128(2) of the Act. It is up to the taxpayer to show this
return. If he cannot do so, he must report the income himself.
[30] For the third issue, the Appellant invokes the fact that his former
spouse was able to claim the equivalent-to-spouse credit for a wholly dependent
person when their son was in her care.
[31] Counsel for the respondent explains that, under paragraph 118(1)(b)
of the Act, the dependent must be less than 18 years old unless he or she is
dependent by reason of a mental or physical infirmity. In the case at bar, the
Appellant admits that his son is over 18 years old and does not suffer from a
mental or physical infirmity.
[32] With regard to the fourth question, namely the deduction for legal
fees, the Appellant submits that they were incurred to defend his honour and,
consequently, his ability to practice chartered accountancy. He was entitled to
practice from the moment he became a discharged bankrupt. The Appellant relies
on Interpretation Bulletin IT99‑R‑5, paragraphs 3‑4:
3. In limited circumstances, legal fees have been held to be
deductible where they are incurred in connection with the defence by a taxpayer
against a charge of performing illegal actions in the operation of a business
or in defence of the day-to-day methods of carrying on business. See, for
example, the decision of the Exchequer Court in Rolland Paper Co. Ltd. v.
MNR, [1960] CTC 158, 60 DTC 1095, in which legal fees to
defend against a successful prosecution for anti-competitive trade practices
were allowed as a deduction. In each case, the issue of whether or not a
payment of fees to defend against criminal prosecution can meet the conditions
of deductibility set out in ¶ 1 above is a question of fact which
depends upon the relationship of the conduct in question to the taxpayer's
income-earning activities. (See also the comments in ¶ 33 below
regarding prosecutions for tax evasion.)
4. Legal costs to prosecute or to defend most tort, contract or other
civil claims arising in the ordinary course of business will generally be
deductible. Subject to the comments in ¶ 8 below, if the taxpayer is
successful in a legal proceeding, the gross amount of the legal fees which are
otherwise deductible must be reduced by any legal costs awarded by the court
which are received by the taxpayer. The treatment of damages or settlements
paid by a taxpayer is discussed in the current version of IT-467, Damages,
Settlements and Similar Payments; fines and penalties are dealt with in
the current version of IT-104, Deductibility of Fines or Penalties.
[33] Counsel for the respondent noted that the amounts are not documented
because statements of account were never submitted. Furthermore, she noted that
fees were incurred to contest seizures before judgment, executed by the tax
authorities, and to challenge the seizure of some property by the trustee upon
the Appellant’s bankruptcy. There were seven years of proceedings.
Exhibit I‑7 attests to the trustee’s difficulties with Mr. Biron. The
fees are related to the bankruptcy matter and were incurred to defend the
Appellant’s personal property. They were not incurred for the purpose of
earning income from a business or property within the meaning of
sections 9 and 18 of the Act.
[34] With regard to the fifth question, which pertains to the deduction for
carrying charges, the Appellant admits that the amount of income to include in
computing his income was reduced by the amount of those charges. However, he
argued that he paid those charges.
[35] The respondent submits that the Appellant cannot deduct the charges
twice. The charges were not included in his income. In order to be able to
deduct the $10,000 in computing income, he would have had to add the charges to
the withdrawal amount stated by the bank.
[36] However, if the RRSP is included for the year 1999, the Appellant has
taxable income and can claim the tuition deduction for that year. There is no
longer anything available for the year 2001.
Conclusion
[37] Section 118.4 of the Act reads as follows:
118.4. (1) Nature of
impairment —
For the purposes of subsection 6(16), sections 118.2 and 118.3 and this
subsection,
(a) an
impairment is prolonged where it has lasted, or can reasonably be expected to
last, for a continuous period of at least 12 months;
(b) an
individual’s ability to perform a basic activity of daily living is markedly
restricted only where all or substantially all of the time, even with therapy
and the use of appropriate devices and medication, the individual is blind or
is unable (or requires an inordinate amount of time) to perform a basic
activity of daily living;
(c) a
basic activity of daily living in relation to an individual means
(i) perceiving, thinking and
remembering,
(ii) feeding oneself or dressing
oneself,
(iii) speaking so as to be
understood, in a quiet setting, by another person familiar with the individual,
(iv) hearing so as to understand,
in a quiet setting, another person familiar with the individual,
(v) eliminating (bowel or bladder
functions), or
(vi) walking;
(d) for
greater certainty, no other activity, including working, housekeeping or a
social or recreational activity, shall be considered as a basic activity of
daily living; and
(e) feeding
oneself does not include
(i) any of the activities of
identifying, finding, shopping for or otherwise procuring food, or
(ii) the activity of preparing food
to the extent that the time associated with the activity would not have been
necessary in the absence of a dietary restriction or regime; and
(f) dressing oneself does
not include any of the activities of identifying, finding, shopping for or otherwise
procuring clothing.
[38] Paragraph 118.3 (1)(a.1) read as
follows for the year 1999:
118.3 (1) Credit for mental or physical impairment — Where
. . .
(a.1) the
effects of the impairment are such that the individual’s ability to perform a
basic activity of daily living is markedly restricted,
. . .
for the purposes of computing the
tax payable under this Part by the individual for the year, there may be
deducted an amount determined by the formula
A
X $4,118
[39] The same paragraph has read as follows since the year 2000:
118.3(1) Credit for
mental or physical impairment — Where
...
(a.1) the
effects of the impairment are such that the individual’s ability to perform a
basic activity of daily living is markedly restricted or would be markedly
restricted but for therapy that
(i) is essential
to sustain a vital function of the individual,
(ii) is required
to be administered at least three times each week for a total duration
averaging not less than 14 hours a week, and
(iii) cannot
reasonably be expected to be of significant benefit to persons who are not so
impaired,
. . .
there may be deducted in
computing the individual’s tax payable under this Part for the year the amount
determined by the formula . . .
[40] The evidence concerning activities of daily living described in subsection 118.4(1) of the Act did not disclose that the
Appellant was unable, or required an inordinate amount of time, to perform
these activities all or substantially all of the time. The breathing mask can
help him, but that does not mean that the Appellant’s ability to perform one of
these activities is markedly restricted within the meaning of that provision of
the Act. Indeed, if, thanks
to the therapy and the appropriate devices and medication, the person does not
require an inordinate amount of time to a basic activity, then, within the
meaning of the provision, the individual’s ability to perform an activity of
daily living is not markedly restricted.
[41] The attending physician certified that the sleep apnea imperils the
breathing function. Breathing is a vital function. Parliament has legislated
with regard to vital functions by amending paragraph 118.3(1)(a.1)
of the Act; this amendment came into force in the year 2000. An individual is
entitled to the credit for mental or physical impairment if the individual’s
ability to perform a basic activity of daily living is markedly restricted but
for therapy that is both essential to sustain a vital function of the
individual and must be administered at least three times a week for a total
duration averaging 14 hours a week.
[42] The explanatory notes regarding the amendment in issue are worthy of
note:
Credit
for Mental or Physical Impairment
Paragraphs 118.3(1)(a.1) and
(a.2) are amended to extend eligibility for the DTC to individuals who
would be so markedly restricted but for therapy administered to them at least
three times a week for a total duration averaging not less than 14 hours a week
in order to sustain one of their vital functions. Examples of taxpayers who
will benefit from this exemption include individuals with severe kidney disease
requiring dialysis and persons with severe cystic fibrosis requiring clapping
therapy in order to properly breathe.
[43] I might note that paragraph 118.3(1)(a.1) of the Act refers
only to therapy, whereas subsection 118.4(1) of the Act refers to therapy
and the use of devices or medication. Does therapy encompass the breathing
mask? I ask this question without answering it because it was not in issue here.
[44] Based on my reading of the sleep apnea articles submitted to me and
the testimony of Dr. Camirand himself, I find that the breathing mask does
not fall under the category of essential therapy within the meaning of
paragraph 118.3(1)(a.1) of the Act.
[45] Parliament has used the term “essential.” In its legal meaning,
“essential” refers to something on which the existence of a juridical act
depends. Based on this reasoning, I find that an essential therapy is one
which, if the patient ceased to tolerate it, would result fairly promptly in
his death. Whether and for how many nights a breathing mask is worn are matters
over which the patient has some degree of discretion. The patient’s life is not
in immediate or proximate danger if he does not wear it. Over the long term,
sleep apnea can cause damage if the person does not take the applicable
precautions: breathing mask, medication, physical exercise and diet. Those are
not therapies essential to sustain a vital function within the meaning of
paragraph 118.3(1)(a.1) of the Act.
[46] The second question was whether the Appellant had to include the
amount withdrawn from an RRSP which had been paid to the trustee who was
declared its owner by court judgments.
[47] Subsection 128(2) of the Act reads as follows:
128(2) Where individual bankrupt — Where an
individual has become a bankrupt, the following rules are applicable:
(a) the
trustee in bankruptcy shall be deemed to be the agent of the bankrupt for all
purposes of this Act;
(b) the
estate of the bankrupt shall be deemed not to be a trust or an estate for the
purposes of this Act;
(c) the
income and the taxable income of the individual for any taxation year during
which the individual was a bankrupt and for any subsequent year shall be
calculated as if
(i) the
property of the bankrupt did not pass to and vest in the trustee in bankruptcy
on the receiving order being made or the assignment filed but remained vested
in the bankrupt, and
(ii) any
dealing in the estate of the bankrupt or any act performed in the carrying on
of the business of the bankrupt estate by the trustee was done as agent on
behalf of the bankrupt and any income of the trustee from such dealing or
carrying on is income of the bankrupt and not of the trustee;
(d)
except for the purposes of subsections 146(1), 146.01(4) and 146.02(4) and Part
X.1,
(i) a
taxation year of the individual is deemed to have begun at the beginning of the
day on which the individual became a bankrupt, and
(ii) the
individual's last taxation year that began before that day is deemed to have
ended immediately before that day;
(d.1) . . .
(d.2) . .
.
(e) where
the individual was a bankrupt at any time in a calendar year the trustee shall,
within 90 days from the end of the year, file a return with the Minister, in
prescribed form, on behalf of the individual of the individual's income for any
taxation year occurring in the calendar year computed as if
(i) the
only income of the individual for that taxation year was the income for the
year, if any, arising from dealings in the estate of the bankrupt or acts
performed in the carrying on of the business of the bankrupt by the trustee,
. . .
and the trustee is liable to pay
any tax so determined for that taxation year;
(f) notwithstanding
paragraph 128(2)(e), the individual shall file a separate return of the
individual's income for any taxation year during which the individual was a
bankrupt, computed as if
(i) the income required to
be reported in respect of the year by the trustee under paragraph 128(2)(e)
was not the income of the individual,
. . .
[48] I would refer to a paper by Marc Robert, C.A., M. Fisc., entitled
“L'insolvabilité et la fiscalité” and submitted at the May 1993
conference (Conference #6)
of the Association de planification fiscale et financière:
[translation]
6.3. INDIVIDUAL TAX RETURNS
BEFORE AND DURING BANKRUPTCY
As mentioned, the regular taxation year of an
individual who has become bankrupt is deemed to end on the day preceding the
date of the bankruptcy, and a new taxation year is deemed to begin on the date
of the bankruptcy. The Income Tax Act takes account of these two
taxation years (within the same calendar year) during which the property of the
individual is seized by the trustee. It also takes account of the fact that
certain income, such as employment income, can be earned by the individual
during the settlement of his bankruptcy without being under the trustee’s
management. Consequently, three tax returns must be filed during the year of
the bankruptcy:
(a) A return for the taxation year
that ended by reason of the bankruptcy. We will call this “the first return.”
It must be filed no later than April 30 of the following year.
(b) A return that the trustee is to
file in respect of the period that begins on the date of the bankruptcy and
ends either on December 31 or on the date of unconditional discharge,
whichever comes first. We will call this the “second return.” This return only
includes income from property or business assets under the trustee’s
management. It must be filed no later than March 31 of the subsequent year
and can include no claims for personal income tax credits. However, tax losses
accrued by the individual before or during the bankruptcy can be used in
connection with this return.
Note: If the trustee’s mandate continues into the
following calendar year or beyond, the trustee must file a return for those
years based on the same principles.
(c) The individual must also file a
return (“the third return”) for any income not included in the return filed by the
trustee for the same period. Essentially, that means income not under the
trustee’s management. In this third return, the individual can claim personal
tax credits as though there were 12 months in that taxation year, but cannot
use losses accrued previously.
The cases
Erna A. Davis, Trustee of the Estate of
Donald Martin McLeod, a Bankrupt v. MNR, 92 D.T.C. 1033, is an example of a case comparing
income that must be included in the trustee’s tax return (“the second return”)
to income that must be included in the individual’s return (“the third
return”). The income in question consisted of payments to the bankrupt under
Income Averaging Annuity Contracts (IAAC) — payments that were remitted to creditors
because they had been assigned to those creditors well before the bankruptcy.
Bowman, T.C.C.J. [In fact it was Sobier, T.C.C.J.]
held that the trustee was not required to include the income in the second
return because the trustee had no control over the IAACs as they had already
been assigned. In order for income to be part of the “second return” under
paragraph (e), the income must arise from the trustee’s dealings.
[49] I would cite the following passages from paragraphs 13 and 21 of
the reasons of Bowman, T.C.C.J. in Sinnott v. The Queen, [2000] T.C.J.
No. 590:
13 Under paragraph 128(2)(f) the
bankrupt individual is the person who must file a separate return for income
not included in the return prepared by the trustee. …
21 There are some differences between the
scheme of the Income Tax Act and the Bankruptcy and Insolvency Act,
and they are not necessarily reconcilable. The first is that the trustee is
deemed to be an agent of the bankrupt for the purposes of the Income Tax Act.
No such agency specifically arises under the Bankruptcy and Insolvency Act.
Second, the estate of the bankrupt is deemed not to be an estate or trust for
the purposes of the Income Tax Act, although it is an estate or trust
for the purposes of the Bankruptcy and Insolvency Act as it read in
1997. Third, the salary, wages or other remuneration of the bankrupt individual
that arises after the bankruptcy does not vest in the trustee. Moreover, income
tax refunds with respect thereto belong to the bankrupt and not the trustee.
[50] There is little case law regarding subsection 128(2) of the Act.
The first thing to note is that Parliament has specifically stated, at
paragraph 128(2)(a), that the trustee in
bankruptcy is deemed to be the agent of the bankrupt for the purposes of the
Act. Consequently, the
taxpayer bears primary responsibility for correctly reporting the income.
[51] The statement in paragraph 128(2)(e) of the Act is to the same
effect. Under that paragraph, the trustee must file a return setting out the
individual’s income arising from dealings in the estate
of the bankrupt or acts performed in carrying on the business of the bankrupt
by the trustee. The return
is filed on behalf of the individual.
[52] The Appellant merely submitted that the trustee had been declared the
owner of a portion of the RRSP and that it was up to him to file the income tax
return.
[53] As one can see from McLeod, cited in the text above, it is not
certain that a portion of an RRSP, seized and declared to be owned by the
trustee, constitutes income arising from dealings in the estate of the bankrupt
by the trustee. Moreover, I note that the Appellant did not have the name
of the beneficiary changed on the T4RSP, not did he ask the financial
institution for explanations.
[54] In any event, since the trustee is merely an agent of the individual,
it is up to the individual either to report the income that must be reported,
or show that the trustee did so.
[55] As far as the other issues are concerned, there is no need to go
beyond the statements by counsel for the respondent contained in paragraphs 33‑36
of these reasons.
[56] The appeals are accordingly dismissed.
Signed at Ottawa, Canada, February 17,
2004.
Lamarre
Proulx, J.
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