Eugene M. Yaremy v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2402, 95 DTC 177

Mogan J.T.C.C.:— In this appeal, the appellant has elected the informal procedure. The appellant was a long time resident of Canada but, throughout 1990 and 1991, he was residing in Austria. In 1991, the appellant received pension income from a Canadian source in the amount of approximately $31,000. The pension income would ordinarily have been subject to Part XIII (withholding) tax under paragraph 212(1 )(h) of the Income TaxAct, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appellant, however, made an election under section 217 of the Act to be taxed under Part I with respect to his 1991 Canadian source income. Having made that election, the appellant paid $6,000 into his wife's Registered Retirement Savings Plan (RRSP) on the basis that the $6,000 would be deductible under Part I when computing his income for 1991.

According to the appellant's evidence, his election under section 217 for 1991 would work to his financial advantage only if he were permitted to deduct all of the non-refundable tax credits in the amount of $3,297 which he claimed based upon (i) his personal exemption; (ii) his married status; (iii) charitable donations;

(iv) tuition fees for a daughter; and (v) medical expenses. Upon reassessment following the appellant's objection, the Minister of National Revenue allowed the $6,000 deduction with respect to the payment to the wife’s RRSP but allowed non-refundable tax credits in the amount of only $569. At the hearing of this appeal, the Minister took the position that there was an error in the assessment; the appellant was entitled to non-refundable tax credits of only $259 with respect to charitable donations; and the additional non-refundable tax credits of $310 actually allowed were based on medical expenses which should not have been accepted as a basis for such additional credits. The Minister was simply acknowledging the error, however, and was not claiming that the assessment under appeal should be changed to the appellant's disadvantage.

Prior to 1991, the appellant would have been permitted to deduct all of his non-refundable tax credits as claimed but, for 1991 and subsequent taxation years, paragraph 217(c) of the Act was amended. In the amendment, most of the non- refundable tax credits were permitted as deductions under Part I only if more than one-half of the income of the non-resident person for the year was included in that person's taxable income or taxable income earned in Canada for the year. In this case, the appellant acknowledges that while residing outside Canada in 1991, more than one-half of his world income was from sources outside Canada. Therefore, he was restricted in the amount of non-refundable tax credits which he could deduct for 1991.

The appellant's claim in substance relates to hindsight and what he regards as fairness. When he made his election, he thought that he would be entitled to deduct all of the non-refundable tax credits which he claimed. In hindsight, if he had known that he would not be permitted to deduct all of the claimed tax credits, he would not have elected under section 217 to be taxed under Part I. In the appellant's version of an ideal world, he should be permitted to reverse his election under section 217 for 1991; withdraw the $6,000 from his wife's RRSP as if it had not been contributed; and accept withholding tax under Part XIII with respect to his Canadian source pension. Paragraph 217(c) was amended only in December 1991 but made applicable to the whole 1991 calendar year. In fairness, the appellant feels that theMinister of National Revenue must have known long before December 1991 that section 217 would be amended and the Minister should have warned non-residents like the appellant that an election under section 217 could be to their disadvantage.

The appellant's first objective in making the election under section 217 was to save about $1,000 in tax. If his Canadian pension income were taxed under Part XIII at a flat rate of 25%, the tax would be about $7,890. But if he elected to be taxed under Part I and were permitted to deduct the $6,000 paid into his wife's RRSP, the tax would be about $6,820 according to the appellant's evidence. He goes one step farther, however, and states that the $6,000 will be taxed at a higher rate when it is withdrawn from his wife’s RRSP after they return to Canada. Therefore, the $1,000 apparent tax saving in 1991 is not worthwhile unless he is permitted to deduct all of the non-refundable tax credits ($3,297) as claimed in his return.

In Words and Phrases, published by Carswell in 1993 (Rae Blackburn/Cheryl Finch), the word "election" is defined as follows:

. . .if one who has a choice of two courses of action, either of which, if taken, affects the rights of another person, proceeds along one course so far that the other person has acted upon it, then he has elected to take that course. Election is "the exercise of his choice by a man left to his own free will to take or do one thing or another. It is the obligation conferred upon a person to choose between two inconsistent or alternative rights or claims”.

Section 217 of the Income Tax Act refers to a non-resident person who has "filed a return of income under Part I for the year and so elected therein". The appellant acknowledge that, for the 1991 taxation year, he filed a return under Part I and made an election therein. Also, the Minister of National Revenue did not collect tax under Part XIII but has issued an assessment under Part I.

The appellant must realize that it is not the function of any court to rewrite history. By filing his income tax return for 1991 and electing to be taxed under Part I, he avoided the withholding tax under Part XIII on the gross amount of his Canadian source pension, and he was permitted to deduct in computing income the $6,000 which he in fact paid into his wife’s RRSP. Also, that $6,000 has earned and will earn tax-free income as long as it remains in the RRSP. By making that election under section 217, the appellant traded a flat rate of tax under Part XIII on all of his Canadian source pension for a different rate of tax on his Canadian income determined with certain deductions. He was also entitled to certain tax credits for his donations to Canadian charities. Even when he filed his 1991 income tax return in March 1992, it was not too late to change his mind and pay tax under Part XIII. He did not change his mind because, at thattime, he still thought that he would be entitled to non-refundable tax credits of $3,297. It was only after 80 per cent of his claimed tax credits were disallowed that he wanted to reversed his election. It was too late. The appeal is dismissed.

Appeal dismissed.