William W. Macdougald v. Minister of National Revenue, [1990] 2 CTC 2110, 90 DTC 1597

Taylor, T.C.J.:—This is an appeal heard in London, Ontario, on May 2, 1990, against an income tax assessment for the year 1986 in which the Minister of National Revenue disallowed a deduction of $2,628.45 claimed as an “invest- ment tax credit", but the Minister of National Revenue did allow an amount of $533.12. The relevant parts of the Income Tax Act as it read for the taxation year in issue are—section 119 and subsections 127(5) and 127(9).

The notice of appeal and the Minister's reply thereto put forward the area of dispute:

For the appellant:

. . . the issue here is whether investment tax credits are "rejuvenated" when the provisions of section 119 are applied . . . Effectively, the block average for farmers rejuvenates an investment tax credit.

For the respondent:

—the Appellant had investment tax credits in respect of property acquired or expenditures made as follows:

Year	Cost	%	Credit	Applied	Balance
1976 $ 3,420.00 5% #£§$ 171.00				nil	$ 171.00
1977 8,901.00 5% 445.05 nil					616.05
1978 11,436.00 5% 571.80 625.37					562.48
1979 59,885.00 7% 4,191.95 nil					4,754.43
1980 19,268.00 7% 1,348.76 nil					6,103.19
1981 7,616.00 7% 533.12 nil					6,636.31

— in respect of his 1982 taxation year, the Appellant made an election under section 119 of the Income Tax Act;

—at the end of the 1986 taxation year, the Appellant was entitled to an investment tax credit of no more than $533.12;

—. . . The application of section 119 to the 1982 taxation year did not change the amount of credits at the end of the 5 taxation years immediately preceding the 1986 taxation year as determined under paragraph 127(9)(a) of the Act.

The parties noted that testimony or detailed evidence at the trial would serve little purpose, but certain background information, supporting schedules and calculations were submitted by agreement, portions of which I will refer to later in this judgment.

The effect of the proposition put forward by the agent for the appellant was that an extension of the “five year" limitation on "investment tax credits" to perhaps a total of twelve years, but possibly unlimited renewals, was available for farmers when the averaging process of the Act was used with discretion—as had been done quite deliberately he agreed in this case.

The main points contended by the agent for the appellant were:

(a) the administrative assessing practice of Revenue Canada had permitted just such "rejuvenation" during the early taxation years of the 19805.

(b) by his calculations since Revenue Canada had already agreed that an amount of $533.12 above was available to the taxpayer for the year 1986, that agreement represented a form of “rejuvenation”, since to him it showed that all the available "investment tax credits" had been used by virtue of the section 119 election in 1982.

(c) Interpretation Bulletin 331R, effective during the year 1986, contains the following paragraph:

An upward adjustment of the investment tax credit of farmers or fishermen is provided by paragraph (d) of the investment tax credit definition in subsection 127(9) (paragraph 127(9)(d.3) for taxation years ending prior to 1985) where in a block averaging period the deductions claimed in respect of the investment tax credit exceed the aggregate of average taxes payable during the period.

(d) Explanations contained in the Canadian Tax Reporter publication covering the year 1986, regarding Section 119(9) of the Act noted:

Where the total investment tax credits actually claimed in each year of the averaging period exceed the aggregate of the average taxes for those years, subsection 119(9) provides for an adjustment to the investment tax credit pool. Any such excess is added to the individual’s investment tax credit pool at the end of the year of averaging. By virtue of subsection 127(9) (18,829), these credits are eligible for a seven year carryforward from the year in which they are added back.

(e) The Farmers' Income Tax Guide for 1982 published by Revenue Canada commented:

Where the aggregate amount of the business investment tax credits deducted in the calculation of "Average Tax", for 1978, 1979, 1980, 1981 and 1982 is greater than the aggregate of similar credits used to reduce the federal tax otherwise payable for 1978, 1979, 1980 and 1981, you will be considered to have deduction the lesser amount in respect of those years. Accordingly, no adjustment to the capital cost of qualified property, as previously determined in 1978, 1979, 1980 and 1981, will be required as a consequence of an election to average in 1982. The following represents an example of this case:

	1980	1981	1982	TOTAL
			(year of
			Averaging)
Capital Cost of Qualified Property
(eligible for Business Investment Tax
Credit)	$50,000 $60,000			$110,000
Business Investment Tax Credit available	10,000	12,000	—	22,000
Business Investment Tax Credit claimed	2,600	3,000	—	5,600
Average Tax otherwise payable on
Average Net Income before deducting
Business Investment Tax Credit	3,250	3,500	$750	7,500
Business Investment Tax Credit deducted
for averaging purposes	3,250	3,500	750	7,500

The Business Investment Tax Credit rate is 20% in both years as the qualified property was acquired for a business carried on in Nova Scotia. The properties were acquired on October 1, 1980 and June 1, 1981 respectively.

In this case you will be considered to have deducted total business investment tax credits of $5,600 in 1980-1982 and no adjustment to the capital cost of qualified property will be required. You will have a business investment tax credit carry forward of $16,400— ($7,400 from 1980 and $9,000 from 1981).

Careful explanations and argument were given by counsel for the respondent, which followed the total, and admittedly complicated procedures and calculations, one step at a time, through the assessment process and the review in Revenue Canada at the objection stage of this case. It was clear to the Court and I believe to the agent for the appellant that the references to (d) and

(e) above had no bearing on the point before the Court, and could not be used in support of it. In essence, the interpretation asserted by the agent for the appellant arose from an incorrect view of the provision in the Income Tax Act allowing only for adjustments in connection with the credit at issue, in connection with changes a taxpayer could find advantageous as a result of development in years subsequent to the claiming of the investment tax credit. It could not be extended to the "rejuvenation" (to use the words of the agent) to allowances already provided to the taxpayer, as I see it based on those provisions alone.

With regard to the Interpretation Bulletin (c) above, it is possible to read into it, as the agent for the appellant does, a calculation which could lead one to believe this sought after “rejuvenation” was even suggested by Revenue Canada. However, that is not the only interpretation which can be put on that information—among other points counsel for the respondent noted that the example given did not extend beyond a five year period. Whatever may be the rationale for the use of the example in the Interpretation Bulletin, and perhaps whatever may have been the possible misuse of it in assessing (as contended by the agent for the appellant) there is no basis in the argument of the agent, let alone in legislation, for the interpretation proposed.

Turning then to the assertion by the agent for the appellant (b) above, that the recognition by the respondent of an amount of $533.12 (above) available for the year 1986 supports his view, I concur that such a conclusion is possible. I do not say it is the right conclusion, but at least, I could follow the calculations outlined by the agent for the appellant. At the same time, it must be admitted (see reply to the notice of appeal above) that by the same assessment at issue here the respondent has directly rejected the contention of the appellant that any such "rejuvenation" was in order. Whether the respondent in assessing has accorded this appellant an "investment tax credit" of $533.12 to which he is not entitled is not a matter for the concern of this Court. It is clear that the respondent does not accept, nor do I, that such a concession in some way could validate the basic assertion put forward by the appellant in this appeal.

On the first point to be addressed (a) above, it rather parallels the comments made immediately above with regard to the $533.12. Counsel for the respondent did not concede that there was any such administrative assessing practice, but certainly by his detailed and concise argument he rejected completely that there should be such a practice. I accept counsel's argument.

In the end analysis, while this was a rather small, and perhaps, obscure point, it deserved the attention paid to it by the appellant and his agent; in light of the possible lack of clarity in the surrounding circumstances. To his credit counsel treated it with that regard and attention. The end result, however, is that the contention of the appellant cannot be supported. I can only add that no logical explanation was put forward by the agent for the appellant which would provide any acceptable rationale for the Court to read the relevant legislation for the filing and assessing procedure he suggested, which of course would give to a certain class of taxpayers a benefit (perhaps an unending benefit) not available to all taxpayers. The appeal is dismissed.

Appeal dismissed.