Alex Tadman v. Minister of National Revenue, [1988] 1 CTC 2281, 88 DTC 1116

St-Onge, T.C.J.: — [Orally]: The appeals of Mr. Alex Tadman were heard on the 26th day of May, 1987, at the City of Winnipeg, Province of Manitoba.

The issue in this matter is whether the appellant is entitled to deduct the scientific research tax credit with respect to his 1983 and 1984 taxation years.

The respondent reassessed the appellant on the following grounds. Paragraphs 3 and 4 of the amended reply to notice of appeal (85-1647(IT)) read as follows:

3. A Notice of Assessment dated July 22, 1985 was issued to the Appellant informing him that the Respondent had reassessed his income tax liability for the 1984 taxation year as follows:

(a) by deducting the scientific research tax credit from tax otherwise payable under section 127.3 of the Income Tax Act without allowing the deduction referred to in section 120(3.1) of the Act;

(b) by not allowing a deduction under s. 120(3.1) of the Income Tax Act as the amount of the "tax otherwise payable” referred to in section 120(4)(c) was nil;

(c) by determining the remaining amount of the unused scientific research tax credit was in the amount of $14,043.78.

4. In so reassessing the Appellant's income tax liability for the 1984 taxation year, the Respondent made, inter alia, the following assumptions of fact:

(a) for the purpose of section 127.3 of the Income Tax Act, the amount of the tax otherwise payable in 1984 was in the amount of $19,956.22;

(b) The Appellant's scientific research tax credit in 1984 was in the amount of $34,000.00;

(c) for the purpose of section 120(3.1) of the Income Tax Act, the tax otherwise payable was nil.

At the hearing counsel for the appellant presented orally to the Court the following overview of the written argument:

Overview of issue:

Appellant and Revenue Canada agree that in 1984 the Appellant had scientific research tax credit of $34,000.

Revenue Canada says that the Appellant must use $19,956 of the $34,000 to reduce his taxes to nil in 1984, which would leave $74,044 of unused scientific research tax credit to carry back and use in 1983.

The Appellant says that he must use only $19,556 of the $34,000 to reduce his taxes to nil in 1984, which would leave $14,444 of unused scientific research tax credit to carry back and use in 1983.

So in the end the issue is how much of the $34,000 scientific research tax credit is left unused in 1984 in order that it is available for 1983, $14,044 or $14,444?

APPELLANT'S ARGUMENT - ALEX TADMAN

1984

INTRODUCTION

The federal tax payable is	$20,132
Political Tax Credit S. 127(3)	-176
	$19,956

before reductions under S. 127.3(1) or S. 120(3.1). This is not disputed by Revenue Canada.

1984

Step 1 - Scientific Research Tax Credit Provided by S. 127.3(1)(a)

S. 127.3(1)(a). A taxpayer may reduce his taxes if he has a scientific research tax credit (S.R.T.C.). The taxpayer's total S.R.T.C. in 1984 was $34,000 which is not disputed.

The key words in S. 127.3(1) are that:

"There may be deducted from tax otherwise payable an amount not exceeding his S.R. T. C. for the year”.

"may" is permissive

— see Théoret v. M.N.R., 84 D.T.C. 1844 (T.C.C.)

— compare s. 40(1)(a)(iii) and Revenue Canada IT-236R2, para. 5

— see 1984 Revenue Canada Tax Guide

The taxpayer chose under S. 127.3(1) to use only $19,556 of his S.R.T.C. to reduce his 1984 taxes.

Revenue Canada has assessed on the basis that the taxpayer must deduct $19,956 under S. 127.3(1); this is explained in the Notice of Confirmation for 1984. However, there is no basis for denying the taxpayer's decision to deduct $19,556 rather than using $19,956.

Step 2 - Basic Federal Tax Reduction Provided by S. 120(3.1)

One then goes to S. 120(3.1) which gives another reduction from tax. To apply it one must first determine the “tax otherwise payable” under S. 120(4)(c). That amount is clearly

$19,956
— 19,556		claimed under S. 127.3
$	400

since S. 120(4)(c) takes into account the S. 127.3 tax reduction in calculating the "tax otherwise payable".

S. 120(3.1) then applies to give a reduction from tax equal to:

(a) $200 + $200 (not in dispute)

less

(b) 10% ($400 tax otherwise payable - 6,000)

or, in other words

(a) $400

less

(b) 10% (0)

$400
Conclusion
Starting Tax	$20,132
Less Political tax credit S. 127(3)	(	176)
Less S.R.T.C. S. 127.3(1)	( 19,556)
Less Basic Federal Tax Reduction S. 120(3.1)	(	400)
		Nil

1983

S. 127.3(1)(b). The taxpayer is able to deduct in 1983 his "unused S.R.T.C." from the immediately following year (i.e. 1984).

S. 127.3(2)(b) defines unused S.R.T.C. for 1984 as:

(i) $34,000 S.R.T.C.

less

(ii) $19,556 = "tax otherwise payable” for 1984 under S. 127.3(8)*

(iii) not relevant

nil

In other words, the unused S.R.T.C. for 1984 is:

(i) $34,000

less

(ii) $19,556

(iii) nil

$14,444

*S. 127.3(8) "tax otherwise payable for 1984" is the tax payable if the taxpayer were not entitled to a reduction in taxes under S. 127.3 or S. 120.1 (not relevant):

I.E.	$19,556
less	400	basic Federal tax reduction under S. 120(3.1)
	$19,556

Counsel for the respondent argued with respect to subsection 120(3.1) of the Income Tax Act which reads as follows:

There may be deducted from the tax otherwise payable under this Part by an individual for a taxation year the amount, if any, by which

(a) $50 or, where the individual’s spouse was resident in Canada during the year, $50 plus the amount, if any, by which $50 exceeds the amount, if any, of that spouse's tax otherwise payable under this Part for the year computed without reference to section 120.1

exceeds

(b) 10% of the amount by which the individual's tax otherwise payable under this Part for the year exceeds $6,000,

except that where the individual's return of income is filed pursuant to subsection 70(2), 128(2) or 150(4) or paragraph 104(23)(d), the individual’s spouse was resident in Canada during the year and an excess is determined under paragraph (a) for the year, the excess shall, notwithstanding that determination, be deemed to be nil.

The Court must take into account what was the intention of the legislator when such section was enacted, and according to counsel for the respondent, the appellant should not have the scientific research tax credit because subsection 120(3.1) of the Act was enacted for low income people.

Counsel for the respondent referred the Court to the Canada Tax Service, Richard De Boo Publishers, Stikeman, Volume 6, at page 120-132, which reads:

Former subsection 120(3.1), a feature of the Act since 1972, provided an overall reduction in the tax otherwise payable which was designed to be a specific benefit to individuals at the lower end of the income scale. This provision was repealed, however, with effect for 1986 and subsequent taxation years.

In the case at bar, the Court sees no reason not to apply the principles enunciated in the decision of Claude Théoret v. M.N.R., [1984] C.T.C. 2960; 84 D.T.C. 1844.

Furthermore, it is well known and recently mentioned in the decision of the Supreme Court of Canada in Stubart Investments Limited v. M.N.R., [1984] C.T.C. 294; 84 D.T.C. 6305 that a taxpayer can arrange his affairs to pay less tax, and more so if it is done legally.

There is no evidence to the effect that the appellant did not follow the Act, and the Minister is not allowed to use his discretionary power to prevent a taxpayer from arranging his affairs to pay less tax, or to correct an ambiguity for which the legislator is the sole responsible.

In other words, as mentioned in Johns-Manville Canada Inc. v. The Queen, cited by the appellant at [1985] 2 C.T.C. 111 at 126; 85 D.T.C. 5373 at 5384, factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

For all these reasons, the appeals are allowed, with costs.

Appeals allowed.