Helmut Swantje v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2559, 94 DTC 1359

Bonner, J.T.C.C.:—The appellant appeals from assessments under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the 1990 and 1991 taxation years. The issue is whether pension income received by the appellant from a source in Germany, which income is exempt under Article 18(3)(c) of the Canada-Germany Agreement ("Treaty") (Canada-Germany Tax Agreement Act, 1982, I.C. 1980-81-82-83 c. 156), can properly be taken into account in the computation of the Part 1.2 tax base. The Minister of National Revenue ("Minister") made the assessments under appeal on the basis that it can.

The Part 1.2 tax is often described as a “claw-back” of benefits under the Family Allowances Act and the Old Age Security Act. It applies to individuals whose net income including such benefits exceeds $50,000. The legislation is so framed that the amount of the tax does not exceed the total payments under the Old Age Security Act and Family Allowances Act included in computing the taxpayer’s income. Subsection 180.2(1) of the Act imposes the tax. It reads:

180.2(1) Every individual (other that a trust) shall pay a tax under this Part for each taxation year that is equal to the lesser of

(a) the aggregate of all amounts each of which is the amount of any pension, supplement or spouse's allowance under the Old Age Security Act or family allowance under the Family Allowances Act included in computing the individual's income under Part I for the year, to the extent that no deduction is allowed under paragraph 60(n) or (p) for the year or any subsequent taxation year in respect of that amount, and

(b) 15 per cent of the amount, if any, by which

(i) the amount that would, but for paragraph 60(w), be the individual’s income under Part I for the year

exceeds

(ii) $50,000.

During the 1990 and 1991 taxation years the appellant received benefits under the two statutes. He also received pension benefits from the Federal Republic of Germany. The Minister included the German pension in the computation of income pursuant to subparagraph 56(1 )(a)(i) of the Act which reads:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(i) a superannuation or pension benefit. . . .

It was common ground that the German pension was exempt from tax in Canada under Article 18(3)(c) of the treaty. Article 18 reads:

ARTICLE 18 Pensions, Annuities and Similar Payments

1. Periodic or non-periodic pensions andother similar allowances derived by a resident of a contracting state shall be taxable only in that state. However, such pensions and allownces may also be taxed in the other contracting state if:

(a) they are derived from sources in that other contracting state;

(b) contributions to the pension fund or plan were deductible for the purposes of taxation in that other state or if the pension was funded by that other state, a "land", a political subdivision, a local authority or a governmental instrumentality thereof; and

(c) they are not paid in respect of services rendered or activities exercised outside that other state by a person when he was not a resident of that other state.

2. Annuities derived by a resident of a contracting state shall be taxable only in that state unless they are derived from sources within the other contracting state. If they are so derived, such annuities may be taxed in that other state. The term "annuities" means stated sums payable periodically at stated times, during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money's worth but does not include any annuity the cost of which was deductible for the purposes of taxation in the contracting state in which it was acquired.

3. Notwithstanding any provision in this agreement:

(a) pensions and allowances received from Canada under the Pensions Act, the Civilian War Pensions and Allowances Act or the War Veterans Allowances Act shal I be taxable only in Canada;

(b) periodic or non-periodic payments received from the Federal Republic of Germany, or a “land” or a governmental instrumentality thereof as compensation for any injury or damage sustained as a result of hostilities or past political persecution shall be taxable only in the Federal Republic of Germany;

(c) benefits under the social security legislation in a contracting state paid to a resident of the other contracting state shall be taxable only in the first-mentioned state;

(d) alimony or similar allowances arising in a contracting state and paid to a resident of the other contracting state shall be taxable only in that other state.

The treaty exemption was not regarded by the Minister as a basis for exclusion of the German pension income from the computation of the appellant's income. In this regard the Minister relied on the words of exception found in paragraph 81 (1 )(a) of the Act which provision reads:

81(1) There shall not be included in computing the income of a taxpayer for a taxation year,

(a) an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada;

The Minister considered that the deduction in the computation of taxable income authorized by paragraph 110(1 )(f) of the Act constituted sufficient compliance with the treaty. That provision reads:

110(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such of the following amounts as are applicable:

(f) any amount that is

(i) an amount exempt from income tax in Canada by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada. . -. .

Counsel for the respondent furnished the following calculation which illustrates the two competing approaches to the computation of Part 1.2 tax [1] in this case.

The appellant, who was not represented by a lawyer, relied on the plain language of the treaty.

Counsel for the respondent argued that because the appellant was accorded the deduction under section 110 of the Act, the German pension was not itself taxed. He submitted further that the "triggering event” in respect of the Part 1.2 tax was not the receipt of the German pension income but rather was the receipt of the Old Age Security and Family Allowance payments.

I disagree with both of the respondent's submissions. The first may have validity in the case of Part I tax but it has none in the case of Part 1.2 tax. The calculations set forth above make it abundantly clear that the tax base to which the 15 per cent Part 1.2 rate was applied includes the German pension. The only difference between the "excess amount” in line 3 of situation A and line 3 of the corresponding column in situation B is the amount of German pension received by the appellant. The only difference between the last line in situation A and the last line of the corresponding column in situation B is 15 per cent of the amount of German pension (reduced for 1990 by /3). The "triggering event" of the appellant’s Part 1.2 tax liability in the amount assessed was not just the receipt of Old Age Security and Family Allowance benefits but also the presence of the other elements necessary by virtue of the language of section 180.2 of the Act.

Finally I will observe that there is a distinction to be drawn between a liability to pay tax in an amount not exceeding other amounts previously received and a requirement for the repayment of amounts previously received. Part 1.2 by its very language imposes a tax, nothing more, nothing less. In this case it imposes a tax on amounts declared to be exempt by the treaty. The treaty must, of course, prevail (Canada-Germany Tax Agreement Act, 1982, supra, subsection 3(2)). The appeals will therefore be allowed with costs and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant's Part 1.2 tax base does not include the German pension.

Appeal allowed.