Robert Hunke v. Minister of National Revenue, [1990] 2 CTC 2033

Christie, A.C.J.T.C.:—The facts are brief and not in dispute. The appellant filed an election with his 1982 income tax return to forward average elective income of $9,689 under subsection 110.4(1) of the Income Tax Act ("the Act"). He complied with the requirements of subsection 110.4(6) of the Act. The respondent reassessed and increased the appellant's total income from $46,892 to $54,866 whereupon the appellant sought to vary his election by increasing the forward average by the difference in total income of $7,974 for a new forward average total of elective income of $17,663. It is the position of the respondent that this is not authorized by the Act.

In Miller v. M.N.R., [1985] 1 C.T.C. 2390; 85 D.T.C. 318, Judge Taylor of this Court held that the appellant was entitled to increase the amount he elected to forward average by the amount of a disallowed deduction on reassessment. In Stephenson v. M.N.R., [1986] 2 C.T.C. 2073; 86 D.T.C. 1520, Judge Rip came to the conclusion that there was nothing in the Act that permitted the taxpayer to revise his election to forward average even though the amount elected was in error because of his failure to claim certain deductions in his return of income. These two decisions cannot be reconciled.

At the time this appeal was tried, argument had been heard on the appeal in Miller to the Federal Court-Trial Division. It was decided to defer judgment in this case until the appeal was disposed of by the Federal Court-Trial Division. Mr. Justice Collier delivered judgment in Miller v. M.N.R. on April 27, 1990. The reasons are unreported to date. He said in part:

Revenue Canada refused to allow the defendant (Miller) to amend his forward averaging election form. The defendant appealed to the Tax Court of Canada. Taylor, T.C.J., allowed the appeal, stating at page 2392:

I see nothing which remains sacred and untouchable in the election form, merely because it is an option, available to and activated at the prerogative of the taxpayer, after the Minister has rejected the bases or basis upon which the election was made.

The plaintiff appeals from that decision on the grounds there is no provision in the Income Tax Act to allow for a revision of the forward averaging election form once such an election has been made. The defendant, it is said, has filed a valid election for forward averaging of $36,213.92, no other valid election has been filed; there is no statutory authority to permit an amendment of the election already filed.

The defendant's position is straightforward. An error was made in the calculation of his 1982 income tax return; as a result of the error, the defendant's income was reported as $5,262 less than it should have been; when the return was prepared, the election to apply forward averaging was made on the full amount that was then perceived to be eligible; the Minister has refused to allow amendment of the elective amount on the basis of the revised data. The defendant maintains he should be permitted to elect averaging on the full eligible amount.

Sections 110.4 and 120.1 of the Income Tax Act provide for a system of forward averaging. The forward averaging provision is elective and the election, in prescribed form, must be filed for a year to which a taxpayer wishes averaging to apply, with the taxpayer's return. If an individual elects to forward average income, a deduction is allowed in computing taxable income. Subsection 120.1(2) of the Act provides, however, tax at the highest marginal rate will be paid on the forward averaged amount. In a subsequent year, the taxpayer may elect to bring a portion of the forward averaged amount back into income and will receive a credit for the taxes previously paid.

The prescribed form, T-540, sets out the steps in the calculation of the taxation years eligible averaging income. The amounts to be used in this calculation are taken from the taxpayer's general income tax return. For example, the taxpayer must enter his net income from his general return.

In my view, common sense dictates that, when the amounts appearing in the taxpayer's income tax return are changed by Revenue Canada, because of an assessment, the corresponding amounts on the forward averaging election form must also be changed.

The plaintiff places great importance on the fact the Income Tax Act does not make provision for an amendment of this nature. It does not, in my opinion, require a legislative provision to allow for a correction of this nature. Section 110.4 of the Act operates on the general assumption taxpayers will complete their income tax return correctly, make an election to forward average and then transfer the figure on their general return to the forward averaging election form. Should Revenue Canada reassess a taxpayer, causing a change in the amounts used to calculate income eligible for forward averaging, it follows those changes must be made, not only to the taxpayer's general income tax return for the year, but also to the forward averaging election form.

The result of the plaintiff’s position is untenable: once a taxpayer completes a forward averaging election form, he is precluded from making corrections to that form even if the Minister determines, by way of an assessment, the figures used in the form are incorrect. In the case at bar, the forward averaging election form submitted by the defendant, now reflects amounts which have no relation to the corresponding amounts in the defendant's income tax return. As previously stated, it does not require a legislative provision to make a correction of this nature.

Counsel for the plaintiff referred me to the decisions of the Tax Court of Canada in Stephenson v. M.N.R.,supra, and Hall v. M.N.R. (unreported), file number 85-1031, August 5,1986. [1] In those cases, the taxpayers sought to make corrections to their forward averaging election form after discovering an error in the computation of their income for the relevant taxation years. The Tax Court refused to allow the changes on the ground that, what the taxpayers were in fact seeking, was a partial revocation of their forward averaging election, something which the legislation did not provide for.

I am unable to agree with those decisions. Making a correction on a form is not tantamount to a partial revocation. In my view, these decisions are not in keeping with the spirit and intent of the legislative provisions dealing with forward averaging.

The purpose of the legislation is to allow a taxpayer with large increases in income in any year, to average them over future years, when the taxpayer may be in a lower tax bracket. A taxpayer should not be punished when, in good faith, he completes the general averaging election form, using inaccurate figures.

In choosing to differ from the Tax Court's decisions in Stephenson and Hall, I am further persuaded by the fact neither case referred to the Tax Court's decision in the Miller case which is the subject of this appeal, although both Stephenson and Hall were decided more than a year after the Miller decision was issued.

I believe that under the doctrine of stare decisis I should follow the course charted by Collier, J. It follows that this appeal is allowed with costs.

Appeal allowed.