Widla v. The Queen, docket 98-1704-IT-I (Informal Procedure)

Date: 20010113

Docket: 98-1704-IT-I

BETWEEN:

KRZYSZTOF WIDLA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1]            This is an appeal from an assessment for the appellant's 1996 taxation year.

[2]            The sole issue is the right of the appellant to claim the sum of $4,559.81 in 1996 in computing the tax credit to which he is entitled under section 118.8 of the Income Tax Act which, in 1996, read as follows.

                For the purpose of computing the tax payable under this Part for a taxation year by an individual who, at any time in the year, is a married person (other than an individual who, by reason of a breakdown of their marriage, is living separate and apart form the individual's spouse at the end of the year and for a period of 90 days commencing in the year), there may be deducted an amount determined by the formula

A + B - C

where

A              is the lesser of $680 and the total of all amounts that the individual's spouse may deduct under section 118.5 or 118.6 for the year;

B              is the total of all amounts each of which is an amount that the individual's spouse may deduct for the year under subsection 118(2) or (3) or 118.3(1); and

C              is the amount of the individual's spouse's tax payable under this Part for the year computed before any deductions under this Division (other than a deduction under subsection 118(1) by reason of paragraph 118(1)(c) or under section 118.7).

[3]            The appellant married his wife Monika in 1994. In 1996 both Monica and the appellant paid tuition fees on Monika's behalf to the University. She was enrolled for 12 months at the University. The appellant testified that over $5,000 was paid in respect of Monika's tuition. Her income was low and accordingly she claimed sufficient to bring her tax to zero. The balance was transferred to the appellant under section 118.8.

[4]            It does not appear to be disputed that $4,559.81 was the unused portion of the tuition amount and education amount of Monika.

[5]            The appellant and Monika separated about the middle of October, 1996. They never reconciled and were divorced in 1998.

[6]            The assumptions pleaded by the respondent are as follows, insofar as they are relevant to this issue:

(a)            the facts admitted above;

(b)            the claim by the Appellant for a transfer of unused credits to spouse was made in respect of the unused portion of the tuition amount and education amount of the former spouse;

(c)            the Appellant, by reason of a breakdown of their marriage, was living separate and apart from the former spouse at the end of the 1996 taxation year and for a period of not less than 90 days commencing in the 1996 taxation year.

[7]            The facts admitted are:

(a)            that the Appellant married to Monika Widla (hereinafter the "former spouse");

(b)            that the Appellant claimed the unused portion of tuition fees in respect of the former spouse on his 1996 income tax return; and

(c)            that the Appellant indicated on his 1996 income tax return that he was separated on December 31.

[8]            As stated above, nothing in the reply to the notice of appeal puts in issue the mathematical computation of the claim under section 118.8

[9]            The appellant's understanding of the basis of the assessment is that the exclusion in parenthesis in the opening words of section 118.8 means that if the spouses did not reconcile within 90 days from the date of separation, whether that 90 days extends over the year end or not, the spouse claiming the other spouse's unused tax credits loses the right to do so.

[10]          The narrow point is whether the 90 days must occur entirely within the year. One would infer from the words "commencing within the year" that the 90 days would not have to end in the year, because had Parliament intended that the period commence and terminate in the year it would have said so.

[11]          The French version reads:

                Le particulier qui, à un moment d'une année d'imposition, est marié peut déduire dans le calcul de son impôt payable en vertu de la présente partie pour cette année — sauf si, pour cause d'échec du mariage, il vit séparé de son conjoint à la fin de l'année et pendant une période de 90 jours commençant au cours de l'année —, le montant calculé selon la formule suivante :

A + B - C

[12]          The plain wording of the statute appears to support the Crown's position even though it requires taking into account events that occurred after the end of the year. Nonetheless, it does seem to run counter to the rule stated by Pratte J. in a dissenting judgment in Dale et al. v. The Queen, 97 DTC 5252 at 5261 where he said:

                We are dealing here with the validity of an income tax assessment for the 1985 taxation year. Under our law, income tax is an annual affair. Taxpayers must file an income tax return for each taxation year and the Minister of Revenue must thereafter assess the tax for that year. It follows, in my view, that, save when the law prescribes otherwise,⁵ the Minister, when he assesses the tax for a given year, must take into consideration the facts as they existed during that year. It also follows that, if there is an appeal from the Minister's assessment, the correctness and validity of the assessment must be decided on the basis of the facts that existed at the end of the taxation year. An assessment which was correct when it was made cannot, with the passage of time, degenerate into an incorrect assessment. On an appeal from an income tax assessment, the question to be decided is whether the assessment was valid when it was made.

                This is not to say that the Minister, in assessing or reassessing, must ignore all judgments concerning the taxpayer that are rendered after the end of the taxation year. In performing his assessment function, the Minister must first determine what were the relevant facts during the taxation year and, in making that determination, he must consider all pertinent evidence, whether it came to light before or after the end of the taxation year. If a judgment pronounced against or in favour of the taxpayer determines what was his situation during the taxation year, the Minister may not ignore it for the sole reason that it was rendered after the end of the taxation year. The situation is different, however, when a judgment, on the basis of facts which occurred after the end of the taxation year, declares the situation that existed ruing that year to be different from what it really was. Then, the judgment must be ignored by the Minister because it is irrelevant to the question that he has to address, namely the assessment of the taxpayer's liability on the basis of the facts existing at the end of the taxation year. In other words, if the Minister may not, in the performance of his assessment function, take into consideration facts that occur after the end of the taxation year, he may not, either, take into consideration judgments based on such facts.

______________________

⁵                For instance, under section 85, the Minister must take into consideration, for the purposes of that section, the election made after the end of the taxation year and, in my view, the facts existing when that election was made.

[13]          I am aware that Pratte J. was dissenting and Robertson J., writing for the majority, seemed to have had no difficulty in giving retroactive effect to an order made years later by a court in a different province. Nonetheless the point of view expressed by Pratte J. seems to have a certain following and it merits some discussion.

[14]          In the first place it is not a principle of statutory interpretation that facts that occur after a year end cannot be taken into account in determining tax liability for an earlier year. The principle stated by Pratte J. continues to represent the accepted view but it is subject to numerous exceptions. Indeed the majority decision in Dale itself appears to be a departure from the rule.

[15]          Also there are many statutory provisions that require taking into account events that occur after the year end: loss carry-backs under section 111, section 85 rollovers (mentioned by Pratte J.), contributions to RRSPs, repayment of employment insurance benefits made after the end of the year (paragraph 60(v.1)) are examples.

[16]          The view that, absent specific statutory provisions one must ignore everything that occurs after the year end has its genesis, I believe, in the manner in which our courts have distinguished a number of English cases where it was held that accounts could be reopened to give effect to facts that occurred in a subsequent year. Such cases are I.R.C. v. Newcastle Breweries, Ltd. (1927) 12 T.C. 927; as I.R.C. v. Isaac Holden & Sons, Ltd. (1924) 12 T.C. 768 (the "Woolcomber's case); Gardner Mountain & D'Ambrumenil, Ltd. v. I.R.C., (1947) 29 T.C. 69; Johnson (H.M. Inspector of Taxes) v. W.S. Try, Ltd., (1947) 27 T.C. 167. (See generally Hannan & Fansworth, The Principles of Income Taxation, at 211-214). In M.N.R. v. Benaby Realties Limited, 67 DTC 5275, Judson J., speaking for the Supreme Court, discussed the principle stated in the above cases and said at pages 5276-5277:

                The application of this decision to the Canadian Income Tax Act is questionable. This decision implies that accounts can be left open until the profits resulting from a certain transaction have been ascertained and that accounts for a period during which a transaction took place can be re-opened once the profits have been ascertained.

                There can be no objection to this on the properly framed legislation, but the Canadian Income Tax Act makes no provision for doing this. For income tax purposes, accounts cannot be left open until the profits have been finally determined. Taxpayers are required to file a return of income for each taxation (s. 44(1)) and the Minister must "with all due despatch" examine each return of income and assess the tax for the taxation year. However, in many cases, compensation payable under the Expropriation Act is not determined until more than four years after the expropriation has taken place and, in many of these cases, the Minister would be precluded form amending the original assessment because of the four-year limitation for the assessment (s. 46(4)).

                My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained.

[17]          The view expressed in the dissenting judgment of Pratte J. in Dale represents the traditional and orthodox view, supported by the Supreme Court in Benaby Realties whereas the majority judgment seems to be more in accordance with the English authorities.

[18]          Here of course we have a clear direction in section 118.8 that an event that occurs after the year end be taken into account. The result is, as Mr. Widla points out, unfair. It is impossible to discern any rational policy reason behind the exception. However absurd the result, if the legislation is clear the court must give effect to it. Here the appellant falls squarely within the exception in parentheses.

[19]          The appellant also appeals against the assessment of interest. I can give him no relief in this respect. As it turns out the tax credit claimed by him was not available and interest is automatically charged on the underpayments.

[20]          The appeal is therefore dismissed.

Signed at Ottawa, Canada, this 13th day of February 2001.

"D.G.H. Bowman"

A.C.J.

COURT FILE NO.:                                                 98-1704(IT)I

STYLE OF CAUSE:                                               Between Krzysztof Widla and

                                                                                                Her Majesty The Queen

PLACE OF HEARING:                                         Rankin Inlet, Nunavut

DATE OF HEARING:                                           November 23, 2000

WRITTEN SUBMISSIONS BY THE RESPONDENT:     January 17, 2001

REASONS FOR JUDGMENT BY:      The Honourable D.G.H. Bowman

                                                                                                Associate Chief Judge

DATE OF JUDGMENT:                                       February 13, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

For the Respondent:                             No one appeared

COUNSEL OF RECORD:

For the Appellant:                

Name:                      --

Firm:                        --

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

98-1704(IT)I

BETWEEN:

KRZYSZTOF WIDLA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on November 23, 2000 at Rankin Inlet, Nunavut, by

The Honourable D.G.H. Bowman

Associate Chief Judge

Appearances

For the Appellant:             The Appellant himself

For the Respondent:         No one appeared

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is dismissed.

Signed at Ottawa, Canada, this 13th day of February 2001.

"D.G.H. Bowman"

A.C.J.