The Estate of the Late William Tatarchuk v. Minister of National Revenue, [1993] 1 CTC 2440

Bowman, T.C.C.J.:— This is an appeal by the executor of the estate of the late William Tatarchuk from an assessment made against the estate in respect of the income for the 1986 taxation year of William Tatarchuk. The appeal relates to the inclusion by the Minister of National Revenue in the year of the deceased's death of the funds in a registered retirement savings plan. The appellant alleges that the RRSP was fraudulently deregistered, that the funds in the plan were stolen and that accordingly the deceased is not taxable thereon.

There are essentially two issues:

The first is a factual one. It is alleged that during the lifetime of William Tatarchuk his son John Tatarchuk forged his father’s signature to a letter to National Trust Company, the trustee of a registered retirement savings plan of which William Tatarchuk was the annuitant. The letter purported to authorize the deregistration of the RRSP. It is alleged that the funds, less an amount withheld in respect of income tax, were paid into the deceased's chequing account and then appropriated by John Tatarchuk without the deceased's knowledge or consent. The Minister, on assessing, denied that the alleged forgery and theft took place and included in the deceased's income for 1986 the amount in the RRSP.

The second issue is one of law and arises only if I decide in the appellant's favour on the first point: even if the deceased's signature on the letter to the trust company was forged and the moneys were stolen is the assessment for the 1986 taxation year of the amounts that were in the RRSP account nonetheless correct?

The facts are as follows:

William Tatarchuk, ("the deceased") lived in Edmonton. He had three children, John David Tatarchuk ("John"), Patricia Lynn Griffin ("Patricia") and William Joseph Tatarchuk (“William J.”). Patricia was married and lived in Ottawa. William J. was called to the bar of Alberta in 1984 and has practised law in Edmonton since that time. He is the executor of his father’s estate and appeared both as witness and as counsel on his own behalf as executor. Following the death of the deceased's wife in 1984 William J.'s older brother John, who had worked as a loans officer at National Trust Company in Edmonton, lived with his father in the family house. The deceased in 1984 and in subsequent years was in ill health. He had diabetes and had suffered a stroke after his wife's death.

The deceased had expressed a desire to give some of the funds in his RRSPs to his three children during his lifetime. In February of 1986, two RRSP accounts numbered 10206 and 10207 were deregistered. Each account had a balance of $12,739. These amounts, net of tax which National Trust withheld and remitted to the Receiver General, were paid into the deceased's chequing account with National Trust. The net amount paid into his account on February 26, 1986 was $20,382.94. At this time William J. received from his father a gift of $20,000 which he used as part of a down payment on a house.

The letter authorizing the deregistration of the RRSP is dated February 21, 1986, and resulted in a payment on February 26, 1986 into William Tatarchuk's account no. 450322 with National Trust of the amount of $20,382.94. On the same day $20,000 was withdrawn from the account. William J. acknowledges that this amount was received by him and states that it seemed likely that the funds for this gift came from the RRSP that was deregistered in accordance with the letter of February 21, 1986. He does not put in issue the taxability of the amounts paid out of the RRSP accounts 10206 and 10207.

A second letter dated April 2, 1986 was sent to Mr. lan Humphrey, RSP Administrator, National Trust. The letter is signed "W. Tatarchuk". The letter purports to "deregister" another RRSP and reads as follows:

Thank you for the early redemption and deregistration, as per my request, of one of my Guaranteed Fund deposits on February 28, 1986.

On September 23, 1986 I have a $20,480.44 one year 9 per cent deposit maturing and on October 20, 1986, $18,795.32 comes due at 11 per cent. With Mr. Walz's permission, I request that you "early redeem" these deposits and de-register the proceeds, plus. interest and any free cash, and credit the funds to my personal chequing account, number 450332, as soon as possible.

The purpose of these redemptions is to gift the funds to my eldest son and daughter.

The copy of this letter which was filed as Exhibit A-2 bears notes that are evidently approvals at different levels of National Trust. It is the signature “W. Tatarchuk” that the appellant William J. Tatarchuk alleges is a forgery and specifically a forgery by his older brother John Tatarchuk. He alleges further that the funds from the RRSP that was deregistered were paid into his father’s chequing account at National Trust and appropriated by John as part of the fraudulent scheme.

In support of this allegation the appellant adduced a number of matters in evidence:

(a) Prior to the deceased's death on December 17, 1986 a cheque bearing the date December 15, 1986 had been issued to Bill Tatarchuk in the amount of $1,750 by one Hunka as a rental payment for a farm rented from the deceased. During lunch on the day William Tatarchuk died, December 17, 1986, John showed William J. the cheque. It was not endorsed. He asked William J. to endorse it as he had the same name as his father and he, John, needed some money. William J. of course refused. Subsequently the cheque turned up with the endorsement “Bill Tatarchuk" and also the endorsement John Tatarchuk. There is no evidence that the proceeds ever found their way into the deceased's account. John was subsequently charged with the theft of the money. He pleaded guilty and was sentenced to three months in prison. It is clear that John forged his father’s signature on the cheque and his plea of guilty is an admission against penal interest that is admissible in evidence. [R. v. O’Brien, [1978] 1 S.C.R. 591, [1977] 5 W.W.R. 400; R. v. Demeter, [1978] 1 S.C.R. 538, 75 D.L.R. (3d) 251; cf. Sussex Peerage (1844), 11 Cl. & Fin. 85, 8 E.R. 1034 (H.L.)].

(b) William J. compared the forged signature on the cheque with the signature on Exhibit A-2 and testified that in his opinion neither was that of his father. His basis for this statement was that he was familiar with his father’s signature. He put in evidence a cheque that he had seen his father sign (Exhibit A-12) as well as a copy of his father’s last will and testament and drew the court's attention to a number of differences in the signatures. I accepted the evidence. A lay witness is entitled to give evidence on the authenticity or otherwise of a another person's handwriting if an appropriate foundation is laid [Alexanders. Vye (1889), 16 S.C.R. 501; Pitre v. R., [1933] S.C.R. 69, [1933] 1 D.L.R. 417; Canada Evidence Act, R.S.C. 1985 c. C-5, section 8: Generally, Sopinka, Lederman and Bryant; The Law of Evidence in Canada, (Toronto: Butterworths, 1985)].

I am satisfied that William J. is well qualified to give reliable evidence on the authenticity or lack thereof of a signature purporting to be that of his late father.

In support of the allegation that the money went into his father’s account and was subsequently appropriated by John, William J. referred to the fact that on April 18, 1986, $28,805 was deposited in his father's account with National Trust. In fact, $28,805 was the exact amount paid out of the RRSP, i.e., $41,150 less the tax of $12,345 withheld by the trust company and remitted to the Receiver General. On April 21, 1986, $28,600 was taken out of the account by way of cheque. Notwithstanding the statement in the letter of April 2, 1986, that "the purpose of these redemptions is to gift the funds to my eldest son and daughter” no portion of the funds was paid to the deceased's daughter. [1] Shortly after the removal of the $28,600 from the deceased's account John, through his company, made substantial purchases of securities through his company Quick Trade Investments. I am prepared in the absence of any evidence to the contrary to infer that the source of the funds used for that purpose was the money paid out of the RRSP.

I shall not review the rest of the evidence. The evidence that I have cited, as well as other evidence adduced by the appellant, established not only that John had a propensity for fraud ana a larcenous streak of some considerable breadth but also that his fraud with respect to his father’s RRSP was part of a pattern or system. The evidence of similar acts of the same pattern justifies a finding that John committed the forgery and theft that are relevant to this appeal [Blake v. Albion Life Assurance Society (1878), 4 C.P.D. 94 at page 107 per Lindley, L.J.; MacDonald v. Canada Kelp Co., 39 D.L.R. (3d) 617, [1973] 5 W.W.R. 689 (B.C.C.A.)]. The preponderance of evidence establishes that the signature on the letter of April 2, 1986 to the National Trust Company was a forgery and that as part of the fraud John stole the proceeds from his father's account and appropriated them without his knowledge or consent. [2] In making this finding I am applying a civil standard of proof that is commensurate wit the gravity of the allegations made. Within a standard of proof that is based upon a balance of probabilities there are degrees of probability depending upon the nature of the matter that is the subject of the evidence. Where fraud is alleged, as it is here, a court must, even in applying a civil standard of proof, scrutinize the evidence with great care ana look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established [Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164, 131 D.L.R. (3d) 559, 25 C.P.C. 72, per Laskin, C.J.C. at pages 168-71 (D.L.R. 562-64, C.P.C. 75-77); Bâter v. Bater, [1950] 2 All E.R. 458 at page 459]. That standard has been met by the appellant in this case.

The more difficult question is the legal result of these findings of fact. Since it is a matter of law no question of onus arises. The court is obliged to decide the matter in accordance with the law irrespective of the legal premises upon which the Minister may have proceeded in assessing.

The assessment of William Tatarchuk for 1986 included the following amounts in his income:

The inclusion of the sum of $66,628.67 was based on the assumption that in the 1986 taxation year William Tatarchuk, deceased, deregistered RRSP funds in the amount of $66,628.67 and that he received in 1986 RRSP funds from the National Trust Company as follows:

It is only the sum of $41,150 that is in issue in this case. The Minister’s basis of including this amount is twofold: that the late William Tatarchuk "deregistered" the RRSP plan ER10508 in 1986 and that he received the amount in 1986. The two bases are necessarily alternative. Deregistration, so-called, is a phenomenon that triggers tax whether or not there is receipt. Receipt, which in some cases would be preceded by deregistration, is a separate basis of tax. The word "deregistration" is not used in subsection 146(12). It is a shorthand term used to denote an event described in that subsection as well as its consequences. The subsection read as follows in 1986:

Where, at any time after a retirement savings plan has been accepted by the Minister for registration for the purposes of this Act, the plan is revised or amended or a new plan is substituted therefor, and the plan as revised or amended or the new plan substituted therefor, as the case may be, (hereinafter in this subsection referred to as the "amended plan”) does not comply with the requirements of this section for its acceptance by the Minister for registration for the purposes of this Act, the following rules apply:

(a) the amended plan shall be deemed, for the purposes of this Act, not to be a registered retirement savings plan; and

(b) the taxpayer who was the annuitant under the plan before it became an amended plan shall, in computing his income for a taxation year, include as income received at that time, an amount equal to the fair market value of all the property of the plan immediately before that time minus the amount required by subsection (8.3) to be included in computing the income of the taxpayer's spouse.

The other basis of assessment is found in subsection 146(8), which reads as follows:

There shall be included in computing the income of a taxpayer for a taxation year all amounts received by him in the year as a benefit out of or under a registered retirement savings plan, other than an amount that is included in computing his income pursuant to paragraph (12)(b).

Where the annuitant dies without a spouse subsection 146(8.8) includes the fair market value of the property in the plan in his or her income in the year of death. That subsection reads as follows:

Where the annuitant under a registered retirement savings plan (other than a plan that had matured before June 30, 1978) dies after June 29, 1978, he shall be deemed to have received, immediately before his death, an amount as a benefit out of or under a registered retirement savings plan equal to the amount, if any, by which

(a) the fair market value of all the property of the plan at the time of his death

exceeds

(b) the portion thereof that, as a consequence of his death, becomes receivable by his spouse, or would become so receivable should that spouse survive throughout all guaranteed terms contained in the plan.

The effect of deregistration is the subject of Interpretation Bulletin IT-415R dated December 31, 1979. Paragraph 4 thereof provides in part as follows:

4. The Department views a plan as having been deregistered when it is so amended that it no longer satisfies the requirements of subsections 146(2) and (3) for registration. In particular a plan is considered to be deregistered upon

(a) the payment out of or under the plan of any benefit before the maturity of the plan except for a refund of all or any part of an over-contribution of premiums as provided under subparagraph 146(2)(a)(i).

It is apparent from subsection 146(12) itself—and the bulletin is consistent with this conclusion—that the mere writing of the letter requesting''deregistration", whether that letter is a forgery or not, does not constitute, in itself, a "deregistration", i.e., a revision, amendment or a substitution of a new plan that results in a revised, amended or substituted plan that does not qualify for registration. The department's view is that one of the events giving rise to tax in the annuitant's hands under subsection 146(12) is the payment out of or under the plan before its maturity. Where the full amount in a plan is paid out to an annuitant prior to maturity of the plan there is no need to regard this payment as resulting in a“ "deregistration" which gives rise to tax. Taxation arises from the receipt under subsection 146(8). The effect under subsection 146(12) of the payment to the annuitant of only a portion of the property in the plan would, on the department's interpretation, bring into the annuitant's income the entire value of the property in the plan unless the plan permitted such a payment in accordance with paragraph 146(2)(b).

The result of this is that, had the plan not in the Minister’s view been "deregistered" by the unauthorized and forged request of April 2, 1986 and the removal of the funds, those funds would still have been in plan no. ER10508 and would have been taxed in any event on the deceased's death under subsection 146(8.8).

It is of assistance in analyzing the matter to set out what I conceive to be the arguments in support of the two conflicting points of view. They are not necessarily expressed in the precise manner in which counsel articulated them.

For the appellant it may be said that the basis of taxation under subsection 146(12) has been destroyed in that no "deregistration" (i.e., an amendment, revision or substitution that would disqualify the plan) took place and the purported request for deregistration was unauthorized, illegal, fraudulent and was made without the deceased's knowledge or consent. Similarly the basis of taxation under subsection 146(8) has been demolished in that the funds from the RRSP were never received by the deceased. The temporary use of the deceased's bank account as part of the fraudulent scheme does not amount to receipt within the meaning of subsection (8). It was merely John’s method of perpetrating the theft. If the Minister seeks to rely upon subsection 146(8.8) on the basis that the unauthorized "deregistration" did not in law occur and accordingly the funds should still have been there on December 17, 1986 this runs counter to obvious reality and is an attempt to ascribe to the property in the RRSP a notional or fanciful value based on what would have been there had it not been stolen. Taxation is based upon what in fact happened, not on what might have happened [The Queen v. Bronfman Trust, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, at page 55 (C.T.C. 129, D.T.C. 5068), citing Matheson v. The Queen, [1974] C.T.C.186, 74 D.T.C. 6176, at page 189 (D.T.C. 6179)].

The Minister’s response to this would, I presume, be that the RRSP regime involves no more than a deferral of tax. Mr. Tatarchuk obtained a deferral when he deducted the premiums that he paid to the plan and a further deferral of tax on the interest earned in it. Ultimately, however, the Act contemplates that these amounts will be taxed, one way or another: either when he takes the money out on or before the plan's maturity or on his death. Mr. Tatarchuk was going to be taxed on the money sooner or later. The theft was perfected not on the alleged "deregistration" but upon the removal of the money from the deceased's chequing account and this in itself cannot alter the incidence of taxation which arose at the latest when the money was paid into the account, albeit without the deceased's knowledge. Furthermore, his son was probably going to get some or all of the money in any event in accordance with the deceased's stated intention. It should not redound to the detriment of the fisc that John is a forger who appropriated the money before the deceased intended, particularly given that he ultimately would have been taxed on it anyway. The objective fact is that, legally or illegally, the money came out of the RRSP and found its way into the deceased's chequing account from which it was stolen. This objective fact is all that is needed to trigger tax. Either John's action in purporting to "deregister" the plan was a nullity in which case the plan never was deregistered, so that the funds should have been in the plan at the time of the deceased's death, or his purported deregistration was effective. In either case the deceased should be taxed on the funds in 1986. The deceased's estate, or the RRSP trust, has a cause of action against John and National Trust. [3] The appellant's real dispute is with them and not with the Minister of National Revenue.

The appellant's response would be that it is inconceivable that the scheme of the Act should require that the estate pay tax on money that the deceased never received and that was not in the RRSP when he died. That result is contrary to reality and common sense. Taxation cannot be based on a worthless claim against John or a problematical cause of action against National Trust.

Both arguments are compelling in their own way, the Crown's on a theoretical basis, the taxpayer's on a practical one. What tips the balance in favour of the taxpayer in my view is that as a matter of common sense the subject should not, in the absence of clear language to the contrary, be taxed on notional amounts that he or she did not receive. [4]

No such clear language exists in section 146 and I am obliged to look to two general principles enunciated by the Supreme Court of Canada.

As stated by Abbot, J. in Oxford Motors Ltd. v. M.N.R., [1959] S.C.R. 548, [1959] C.T.C. 195, 59 D.T.C. 1119, at page 553 (C.T.C. 202, D.T.C. 1122):

In deciding upon the meaning of income, the Courts are faced with practical considerations which do not concern the pure theorist seeking to arrive at some definition of that term

This principle applies whether we are dealing with the question whether a gain is on income or capital account, as Abbott, J. was in that case, or a sophisticated statutory regime with which we are concerned here.

The second principle is that stated in the recent decision of the Supreme Court of Canada in Fries v. Canada, [1990] 2 S.C.R. 1322, [1990] 2 C.T.C. 439, 90 D.T.C. 6662 where Sopinka, J. said at page 1323 (C.T.C. 439, D.T.C. 6662):

We are not satisfied that the payments by way of strike pay in this case come within the definition of "income . . . from a source" within the meaning of section 3 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). In these circumstances the benefit of the doubt must go to the taxpayers.

In the same vein Estey, J. stated in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373, at page 72 (C.T.C. 126, D.T.C. 5384):

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

Similarly the benefit of the doubt must go to the taxpayer here.

Common sense by itself is a rather fragile and subjective reed upon which to base a decision in fiscal matters, but it is nonetheless the touchstone against which all such determinations must be tested. The technical basis of my decision is that:

(a) there was no "deregistration" (whatever that term may encompass) of Plan ER10508 for the purpose of subsection 146(12) since a stranger cannot "deregister" a plan without the knowledge and authority of an annuitant;

(b) there was no receipt of the funds by the deceased within the meaning of subsection 146(8) since his chequing account was merely a conduit used by his in the furtherance of his fraudulent scheme; and

(c) the value of the funds or property in Plan ER10508 immediately before the deceased's death was nil with the result that subsection 146(8.8) is not applicable.

Accordingly no basis of taxation under section 146 of the amounts appropriated by John has been demonstrated. There should of course be included in the income of the deceased for 1986 the amount of $12,345 withheld and remitted by National Trust as well as the amount of $205 which remained in his chequing account out of the $28,805 after the $28,600 was removed.

The appeal is therefore allowed, with costs, if any, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons to delete from the deceased's income for 1986 the sum of $28,600. The appellant is not entitled to counsel fee as William J. Tatarchuk appeared on his own behalf as executor.

Appeal allowed.