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Citation: 2003TCC394
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Date: 20030606
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Docket: 2002-4473(OAS)
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BETWEEN:
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RAM NAIDOO,
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Appellant,
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and
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THE MINISTER OF HUMAN RESOURCES DEVELOPMENT
CANADA,
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Respondent.
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AND BETWEEN:
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2002-4474(OAS)
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NEELA NAIDOO,
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Appellant,
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and
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THE MINISTER OF HUMAN RESOURCES DEVELOPMENT
CANADA,
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Respondent.
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REASONS FOR JUDGMENT
Miller, J.T.C.C.
[1] To describe the Income Tax
Act (the "Act") as bewildering to the
average taxpayer is an understatement of some considerable
magnitude. Add the complexity of the interplay between that
Act and Old Age Security legislation, and mix it with a
strong dose of insurance parlance and you have what confronts me
in this case - an elderly couple, Mr. and Mrs. Naidoo, confused
and incredulous and seeking a restoration of their dignity. I
will explain.
[2] Mr. and Mrs. Naidoo are appealing,
pursuant to subsection 28(2) of the Old Age Security Act
("OAS"), a decision of the Minister of Human
Resources Development (the "Minister") dated September
3, 2002 in which Mr. and Mrs. Naidoo's Guaranteed Income
Supplement ("GIS") for the period July 2002 to July
2003 was reduced. The reduction was as a result of the
Minister's inclusion in income, for purposes of calculating
the GIS, of an amount of $16,556. It is the inclusion of this
amount in income, which the Naidoos find objectionable, and which
is the issue over which this Court has jurisdiction.
[3] Mr. and Mrs. Naidoo have a life
insurance policy with the Standard Life Assurance Company (the
"Standard Life"). They understood that upon reaching
the age of 65 they could borrow funds from Standard Life against
that insurance policy. In 2001 this is exactly what they did. Mr.
Naidoo borrowed $25,000 in February 21, 2001 and another $10,000
in May 3, 2001. They were not advised by Standard Life prior to,
or at the time of taking out the loan, that there would be any
tax effect, let alone any impact on their Old Age Security
payments. There was a significant effect.
[4] The amounts contributed by the
Naidoos' to the policy up to the time of the loans were
$18,443.77. Subsequent to taking out the loans Mr. Naidoo was
advised by Standard Life that he was required to bring into
income for tax purposes the amount of the loans less the amount
paid (or $35,000 minus $18,443.77, leaving $16,556.23). Mr.
Naidoo does not dispute the numbers. He does not actually dispute
that the Act requires he report the $16,556 as income. But
he then received notice from Human Resources Development Canada
that this increased income has the effect of reducing his and his
wife's OAS income by $699. The provincial supplement
was reduced by $319. Together this reduced their monthly income
of $1,969 by $1,018, more than half their total income. This
makes it extremely difficult, according to their son, for them to
make the interest payments on the loan. The effect of that is
that Standard Life, again according to the Naidoos' son, will
borrow the interest payments against the policy, which will again
be considered income, upon which Mr. Naidoo will be required to
pay income tax, and which will continue to impact his GIS.
[5] The Naidoos' son argues that
had they been advised by the insurance company that this would be
the result, they could have considered borrowing by assigning the
policy to him for example, and he could have borrowed from a
bank, without these devastating consequences to his parents.
[6] Counsel for the Respondent
appreciated the predicaments, but in reviewing the applicable
legislation confirmed
(a) in accordance with
section 148 of the Act, the amount of the loans less their
adjusted cost base ($35,000 minus $18,443) were properly included
in income; and
(b) in accordance with Part 11
of the OAS and the definition of income being a
person's income computed in accordance with the Act,
the amount of $16,556 included in income for tax purposes was
likewise properly included in income for purposes of the
calculation of the GIS payments.
[7] The Appellants' position is
that they were never advised and had no reason to believe a loan
would constitute income, such that it would drastically reduce
their GIS under the Old Age Security legislation. In effect, they
wish to turn the clocks back and start over again in a way that
would not lead to this unfortunate result. It is perhaps too much
to expect that representatives of Standard Life and Canada
Customs and Revenue Agency might have sat down with the Naidoos
to attempt to do just that. Section 32 of the OAS invites
the Minister to do that in the case of erroneous advice or
administrative error. Unfortunately that is not what we are
dealing with here. No, the strict wording of the legislation is
quoted to confirm for the Naidoos their regrettable circumstance.
So, off they come to Court looking for relief. And what do I have
to tell them - sorry, the Court's only jurisdiction is to
determine whether the government correctly calculated your
income. It did. It is no comfort I am sure to the Naidoos that I
am sympathetic to their position and their evident
frustration.
[8] I will go through the exercise of
a review of the legislation.
[9] The starting point is section 13
of the OAS, part of which reads as follows:
... the income for a calendar year of a person or an applicant
is the income of that person or applicant for that year computed
in accordance with the Income Tax Act . . .
[10] This leads to section 148 of the
Act, part of which reads as follows:
148(1) There shall be included
in computing the income for a taxation year of a policyholder in
respect of the disposition of an interest in a life insurance
policy . . .
the amount, if any, by which the proceeds of the disposition
of the policyholder's interest in the policy that the
policyholder, beneficiary or assignee, as the case may be, became
entitled to receive in the year exceeds the adjusted cost basis
to the policyholder of that interest immediately before the
disposition.
. . .
148(9) Definitions. In this section and paragraph
56(1)(d.1) of the Income Tax Act, chapter 148 of
the Revised Statutes of Canada, 1952,
. . .
"proceeds of the disposition" -
"proceeds of the disposition" of an interest in a life
insurance policy means the amount of the proceeds that the
policyholder, beneficiary or assignee, as the case may be, is
entitled to receive on a disposition of an interest in the policy
and for greater certainty,
. . .
(b) in respect of a policy loan made after March
31, 1978 means the lesser of
(i) the amount of the loan, other than the part
thereof applied, immediately after the loan, to pay a premium
under the policy, as provided for under the terms and conditions
of the policy, and
(ii) the amount, if any, by which the cash
surrender value of the policy immediately before the loan was
made exceeds the total of the balances outstanding at that time
of any policy loans in respect of the policy.
"Adjusted cost basis" is determined by the formula
(A+B+C+D+E+F+G+G.1) - (H+I+J+K+L) where
A is the total of all
amounts each of which is the cost of an interest in the policy
acquired by the policyholder before that time but not including
an amount referred to in the description of B or E,
B is the total of all
amounts each of which is an amount paid before that time by or on
behalf of the policyholder in respect of a premium under the
policy, other than amounts referred to in clause
(2)(a)(ii)(B), in subparagraph (iii) of the description of
C in paragraph (a) of the definition "proceeds of the
disposition" or in subparagraph (b)(i) of that
definition,
...
E is the total of
all amounts each of which is an amount in respect of the
repayment before that time and after March 31, 19r78 of a policy
loan not exceeding the total of the proceeds of the disposition,
if any, in respect of that loan and the amount, if any, described
in the description of J but not including any payment of interest
thereon, any loan repayment that was deductible under paragraph
60(s) of this Act or paragraph 20(1)(hh) of the
Income Tax Act, chapter 148 of the Revised Statutes of
Canada, 1952 (as it applied in taxation years before 1985) or any
loan repayment referred to in clause (2)(a)(ii)(B).
[12] The definition runs to well over a
page. I simply cite two or three of the subparagraphs to provide
some flavour as to what the Appellants might be expected to know.
In summary, income includes the lesser of the actual amount of
the loans and the cash surrender value of the policy less the
amount paid to that point by the Naidoos for the policy. I had
not been provided at trial with the cash surrender value of the
policy so requested that information from the parties, with only
a slim idea that it might reduce the amount of calculated income.
The cash surrender value was agreed to be over $40,000, so it in
fact had no impact on the income calculation.
[13] While the provision is complicated, in
this case the determination of what is included in income is
simple. The government did get it right. The amount of $16,556
was properly included in income.
[14] What is unsettling for the Naidoos is
that had they appreciated the ramifications of their decision to
borrow against the insurance policy, they could have arranged
their affairs differently to avoid this unfortunate result.
Insurance companies would be doing their clients a huge service
if they brought the tax treatment of these loans to their
clients' attention prior to finalizing the loan. Even a
notice to the client to seek tax advice due to the potential
impact of loans would be an appropriate "heads up" that
might save people in the Naidoos' situation.
[15] I must dismiss the appeal as the
Minister did correctly determine the Naidoos' income.
Signed at Ottawa, Canada, this 6th day of June 2003.
J.T.C.C.
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