Miriam Rumack v. Her Majesty the Queen, [1990] 1 CTC 413, 90 DTC 6271

Rouleau, J.: —This is an appeal by the taxpayer from the decision of the Tax Court of Canada, who upheld the Minister’s assessment. It was determined that certain moneys received by the taxpayer in the 1979 taxation year pursuant to a "Cash for Life” lottery win was a taxable annuity pursuant to paragraph 56(1)(d) of the Income Tax Act.

The parties filed an agreed statement of facts, which sets out the following: in September, 1978, the plaintiff won $1,000 per month for life, with a guaranteed term of 20 years, in a "Cash for Life” lottery sponsored by the Ontario Association for the Mentally Retarded (the "Association"). Although Mrs. Rumack requested a lump sum payment in lieu of the $ 1,000 per month, this was not permitted. In order to fund the prize, the Association purchased a life annuity from the Sun Life Assurance Company of Canada on September 14, 1978, for the capital sum of $135,337.75. Although the Association was the owner, the plaintiff was named as annuitant.

For the 1979 taxation year, the plaintiff received 12 monthly payments of $1,000 each. The Sun Life Assurance Company issued to her a "T-4A" form for tax purposes, which designated that the sum of $8,155.20 was to be included in her income (the capital portion having been deducted under paragraph 60(a) of the Income Tax Act). However, the plaintiff did not include this amount in her income for the year, maintaining that the entire $12,000 was a windfall which was not subject to tax.

She was reassessed by the Minister on June 24, 1980 for the $8,155.20. After objecting and having the Minister confirm the reassessment, the plaintiff appealed to what was then the Tax Review Board on April 27, 1981. Chief Justice D.H. Christie of the Tax Court of Canada dismissed the plaintiff's appeal in an oral judgment rendered March 30, 1984, on the basis that the sums received were taxable annuity payments under paragraph 56(1)(d), even though had another method been chosen to pay the lottery winner it may not have been taxable.

The relevant sections of the Income Tax Act are as follows:

1. With respect to lottery winnings:

s.40(2)(f)

LIMITATIONS

(2) Notwithstanding subsection (1).

(f) a taxpayer's gain or loss from the disposition of

(i) a chance to win a prize, or

(ii) aI right to receive an amount as a prize, in connection with a lottery scheme is nil;

s. 52(4)

COST OF PROPERTY ACQUIRED AS PRIZE

(4) Where any property has been acquired by a taxpayer at any time after 1971 as a prize in connection with a lottery scheme, he shall be deemed to have acquired the property at a cost to him equal to its fair market value at that time.

2. With respect to annuity payments:

s.56(1)(d)

AMOUNT TO BE INCLUDED IN INCOME FOR YEAR

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

ANNUITY PAYMENTS

(d) any amount received by the taxpayer in the year as an annuity payment except to the extent that the payment is otherwise required to be included in computing his income for the year;

s.60(a)

OTHER DEDUCTIONS

60. There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

CAPITAL ELEMENT OF ANNUITY PAYMENTS

(a) the capital element of each annuity payment (other than a superannuation or pension benefit, a payment under a registered retirement savings plan, a payment under a registered retirement income fund, a payment under an income-averaging annuity contract or a payment of an annuity paid or purchased pursuant to a deferred profit sharing plan or pursuant to a plan referred to in subsection 147(15) as a "revoked plan") included in computing the taxpayer's income for the year, that IS to Say,

(i) if the annuity was paid under a contract, an amount equal to that part of the payment determined in prescribed manner to have been a return of capital,

and

(ii) if the annuity was paid under a will or trust, such part of the payment as can be established by the recipient not to have been paid out of the income of the estate or trust;

S.248

"Annuity" includes an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise.

The plaintiff submits that each $1,000 payment received by her is property acquired as a prize in connection with a lottery scheme, and is therefore deemed by subsection 52(4) of the Income Tax Act to have been annually acquired at a cost equal to its fair market value at the time. Hence, no tax is payable. She argues that it does not fall within paragraph 56(1)(d), since the prize which she contracted for and received was not an annuity, but a windfall $1,000 per month for life with a minimum guarantee of 20 years. Further, she submits that she was not the owner of the annuity; the Association purchased it in order to fulfill its obligation to the winner of the lottery. All control over the annuity rested with the Association as owner.

The defendant, on the other hand, submits that, regardless of the reason, she is receiving the $1,000 per month, and on a strict reading of paragraph 56(1)(d) and section 248 this is an annuity payment which is therefore taxable.

On a careful reading of the relevant sections of the Act, and upon consideration of the evidence, I am satisfied that the plaintiff must succeed: the sums received by her pursuant to the lottery scheme constitute a tax- free windfall under subsection 52(4).

Dealing first with paragraph 56(1)(d), I am prepared to accept that the sums received by the plaintiff do appear to fall within this section. Counsel for the plaintiffs attempted to persuade me that the sums received each month were exempt from this section, since the wording used is "received . . . as an annuity payment”. It was argued that Parliament could easily have used "under" an annuity contract or "pursuant to" an annuity contract, or "as recipient" of annuity contract instead. The plaintiff received the sum not as an annuity, but as a prize in connection with a lottery scheme. Although this argument is attractive, I am not persuaded that the choice of language was intended to bear such consequence. More persuasive to my mind is the fact the annuity was owned, not by the taxpayer, but by the Association. It was clear from a reading of the annuity contract that all control and ownership vested in the Association. Under section 3 of the Income Tax Act, a taxpayer is taxed on income from a source, including office, employment, business and property. Income received from an annuity is income from property. However, this was not the taxpayer's property. The person who ought to pay the tax is the person who owns the property, in this case the Association. Being a charitable organization, they are exempt from tax and were therefore not pursued. There is, however, no productive source in the plaintiff's hands; she did not invest the capital in order to generate this return.

The strongest argument against taxing the plaintiff is simply that, even if the sums she received fall within the wording of taxing provision 56(1)(d), they also fall within the exempting provision of subsection 52(4). The defendant urged that the prize which the plaintiff received was an annuity. I cannot agree. The ticket which she bought and contracted for stated that the prize was $ 1,000 per month for life. On the reverse side of the ticket, it specified that the Association would fund the prize by way of an annuity. This provided an assurance to purchasers of the lottery tickets that the prize would be guaranteed. How else could a purchaser of a ticket be assured that any charity could survive the 20 years and meet its obligations. No doubt, the Association could have chosen to fund the prize in another manner; nevertheless, this would not change the character of the moneys received by the winner: it was property acquired in connection with a lottery scheme. Each $1,000 payment which she received falls within this exempting provision in s.52(4). She won, according to the terms of the lottery, $1,000 per month with a guaranteed minimum of 20 years, not an annuity.

As a result of the foregoing, the plaintiff’s action must succeed, with costs.

Appeal allowed.