Date: 20010326
Docket: 2000-4044-IT-I; 2000-4045-IT-I
BETWEEN:
DONNA CHO, JONG WOOK CHO
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
FACTS
[1]
Jong Wook Cho and Donna Cho (hereinafter the
"Appellants") are appealing the reassessment of the
1998 taxation year. The appeals were heard by way of common
evidence.
[2]
The Appellants submitted the following:
1.
Since 1992, they carried on the 5th Avenue Grocery business
(hereinafter the "Business");
The fiscal period of their Business ends on March 31;
They were not involved in any other business; and
They included their December 31, 1995 income, $11,862.50,
under subsection 34.1(4) and elected to use the alternative
method under subsection 249.1(4).
[3]
The Minister pleaded the following:
Each of the Appellants had a 50% interest in the Business;
At all material times, the fiscal period of the Business ended
on March 31;
The Appellants did not operate any other business other than
the Business;
For the taxation years 1995, 1996, 1997 and 1998, the
Appellants completed Part 2 of Form T1139. This meant that
they elected to keep the Business’ fiscal period not ending
on December 31;
The Appellants are required to include additional business
income in their calculation of their Business’ income each
year; and
The Appellants are required to deduct the prior year’s
additional business inclusion in the calculation of their income
in each year.
THE APPELLANTS' POSITION
[4]
The Appellants appealed on the basis that the Minister of
National Revenue (the "Minister") has misinterpreted
and has misapplied sections 34.1, 34.2, 249 and 249.1 of the
Income Tax Act (the "Act"). These
sections relate to the legislated end of the practice of
individuals, partnerships and professional practices having a
fiscal period after the end of the calendar year.
ANALYSIS
[6]
Applicable for fiscal periods beginning after 1994, section 249.1
replaces and modifies the definition of "fiscal period"
formerly set out in subsection 248(1). It provides rules for the
fiscal period of a business or a property of a person or
partnership. Subsection 249.1(1) imposes restrictions on the
timing of fiscal periods for certain individuals, inter
vivos trusts, partnerships and professional corporations so
that generally, December 31 must be the year-end. However, an
off-calendar fiscal year is available for tax purposes with
certain restrictions for businesses carried on by an individual,
otherwise than as a member of a partnership, or in certain
circumstances as a member of a partnership, where an election is
filed, pursuant to subsection 249.1(4). The "off-calendar
fiscal year" method essentially allows individuals and
certain partnerships where each member is an individual to retain
an off-calendar fiscal year-end for tax purposes. However, if an
election is made to use this method, an estimate of the earnings
from the business for the portion of the fiscal period that
begins in the year and ends on December 31 must be included in
income for the taxation year.
[7]
The Minister’s witness, Sonja Mitchell, carefully took
the Court through the assessment calculations for deemed income
and alternative method revisions.[1] The witness relied on two pleaded documents
(Exhibits C and D annexed to the Respondent's Reply) to
augment her evidence.
[8]
Exhibit "C" as annexed to the Respondent’s Reply
to the Notice of Appeal is as follows:
DONNA CHO AND JONG WOOK CHO
Calculation of maximum December 31, 1995 deemed income.
The maximum December 31, 1995 income for 1996 and subsequent
years is the lesser of (a) and (b).
34.2(7) . . . where paragraph (a)
Partnership
Individual
34.1(7)(a)
Income for the period
ending 31st March
1995
$31,489.00
$15,744.50
34.1(4)
Deduct the maximum amount
in respect of reserve of any,
allowance or other amount:
Maximum CCA
allowable
$ 4,947.00
CCA deducted in computing
income as
filed
4,500.00
Difference
447.00 447.00
223.50
31,042.00
15,521.00
Prorated
275/365
23,387.81
11,693.90
Exceeds paragraph (b)
34.1(7)(b)
Income for the particular period
ending 31st March
1996
28,199.00
14,099.50
34.2(2)
Deduct the maximum amount in
respect of any reserve, allowance
or other amount:
Maximum CCA
allowable
16,254.00
CCA deducted in computing
Income as
filed
0.00
Difference
16,254.00
16,254.00
8,127.00
11,945.00
5,972.5 (sic)
Prorated
275/365
8,999.66 4,499.83
For the purposes of subsection 34.2(4) the December 31,
1995
income for the individual is the amount determined under
paragraph (b).
The amount determined under paragraph (b) is
$4,499.83.
[9]
Exhibit "D" as annexed to the Respondent’s Reply
to the Notice of Appeal is as follows:
DONNA CHO AND JONG WOOK CHO
Alternative Method Revised
Net income for the fiscal period ending in
1998
$31,019.00 M
Additional business
income
23,370.00 N
Reserve deducted last
year
7,945.00 O
Sub total (M + N +
O)
62,334.00 P
Last year’s additional business
income
18,789.00 Q
Sub total (P –
Q)
43,545.00 R
Calculation of allowable reserve
December 31st, 1995 income for the business 4,499.83
S
* Amount at S x
65%
2,924.89 T
* Reserve deducted last
year
7,945.00 U
* Income for the
year
34,923.78 V
Reserve – amount not exceeding the least of T, U and
V
2,924.89
Net income for the year –
revised
$40,620.11
[10] The
Appellants’ agent, Mr. Sunwoo, cross-examined the
Respondent’s assessment witness at length. The witness
explained repeatedly and successfully the additional business
income, the deemed income and the maximum deemed income
calculations with references to the aforesaid Exhibits C and D
and demonstrated her specific calculations in filed Exhibits R-5,
R-6 and R-7. Throughout, the witness supported her calculations
and interpretations with specific references to
sections 34.1, 34.2 and 249.1 of the Act.
[11] One case
that deals specifically with the question of the purpose,
interpretation and application of this legislation is Cho v.
R.[2] Each of
the taxpayers, in that case,[3] operated a separate business in a partnership,
and each business had a fiscal period ending on March 31.
Each taxpayer elected, under the alternative method, not to have
section 249.1 apply for their 1997 taxation years by filing the
prescribed form. Therefore, section 34.1 applied to the
taxpayers’ situations, although they had argued that this
was not so, since their businesses had been started before the
end of 1994. Hence, each taxpayer added no additional business
income under subsection 34.1(1) for the 1996 and 1997 taxation
years and neither one deducted the previous year’s
additional business income under subsection 34.1(3) of the
Act. In assessing each taxpayer for 1997, the Minister
applied the provisions of subsections 34.1(1) and (3), adding the
additional business income for 1996 and 1997, and deducting the
previous year’s additional business income. The taxpayers
appealed to the Tax Court of Canada.
[12] Judge
Bowman dismissed the appeals. He stated that the taxpayers’
approach simply ignored the plain meaning of the words in
section 34.1. In addition, there was no limitation in
section 34.1, which would make it inapplicable to the
taxpayers’ situation, despite their argument to the
contrary.
[13] He found
that the Act requires the inclusion of additional business
income in each year and the deduction of the prior year’s
inclusion.
[14] In Pak
v. R.[4] Judge
Beaubier of this Court addressed the issue of reserves under
section 34.2 of the Act and in particular the deduction of
amounts with respect to capital. Mr. Sunwoo, the agent for
the Appellants in this case, was also the agent for the
Appellant, Pak. In that case Judge Beaubier stated:
3.
Mr. Sunwoo filed claims for the Appellants which were based on
the optional provision respecting capital cost allowance
("CCA") set out in section 20 of the Income Tax
Act (the "Act").
However, in the amendments to the Act contained in
section 34.2 which require that CCA be used as stated therein,
that option is taken away and the usage of CCA set out is
mandatory. In particular, subsection 34.2(2)(c) reads:
(2) Computation of December 31, 1995 income
For the purpose of the definition “December 31, 1995
income” in subsection (1), a taxpayer’s income or
loss from a business for a qualifying fiscal period shall be
computed as if
...
(c) the maximum amount deductible in respect of any
reserve, allowance or other amount were deducted; and
In essence, this interpretation is merely the application of
the rule of statutory interpretation that the expression of the
particular overrides the expression of the general.
The same principle was applied by Bowman, A.C.J. in Cho v.
R., 2000 DTC 2942 (T.C.C. [Informal Procedure]).
7.
For these reasons these appeals are dismissed.
[15] In
essence, the sections herein, prescribe a complete specific
legislative transition code to bring to an end the practice in a
case like the Appellants of having a fiscal period end after the
end of the calendar year. The Appellants' approach in
attacking every term of the legislation including the
determination of additional business income inclusions, reserve
calculations and, in particular the calculation of maximum
December 31, 1995 earned income and the calculation of
alternative method assessments has reached exhaustion.
[16] As
concluded by Judge Bowman and Judge Beaubier, I
conclude that Mr. Sunwoo’s interpretations on behalf of the
Appellants are not sustainable given the legislation and the
evidence.
DECISION
[17] The
appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of March 2001
"D. Hamlyn"
J.T.C.C.
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