Douglas Wood v. Minister of National Revenue, [1987] 1 CTC 2391, 87 DTC 312

Taylor, T.C.J.:—This is an appeal against an income tax assessment, for the year 1984, heard in London, Ontario, on March 2, 1987, in which the Minister of National Revenue disallowed the “personal exemption” claimed by the taxpayer. The Minister's reply to notice of appeal read in part:

Statement of Facts

— the appellant was a non-resident of Canada who worked in Canada and the United States.

— the Appellant’s net income from Canadian sources was $25,400 and income from United States sources was 16,741.63 (Cdn.);

— all or substantially all of the Appellant’s income for the 1984 year was not included in computing his taxable income as the amount of $16,741.63 was not included in computing his income pursuant to the Income Tax Act.

— The Respondent relied, inter alia, upon subsection 2(3) and paragraph 115(1)(f) of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended (the ‘Act’).

— Of the Appellant’s world income of $42,141.63, only $25,400, or 60.27%, was included in computing his taxable income earned in Canada for the year, so he was precluded by paragraph 115(1)(f) from taking other deductions for the purpose of computing taxable income.

In testimony Mr. Wood noted that his Canadian income had been about $30,000, and his U.S. income about $12,500 rather than the amounts refer- enced above by the respondent. Counsel for the Minister did not disagree with these changes but commented that they did not affect the basis for the disallowance. Mr. Wood's position was that . . his income from nonCanadian sources was an insignificant part, since the Canadian source income was from full-time employment and represented the majority of his world wide income". Both parties noted for the Court that there did not appear to be any recent jurisprudence dealing directly with the term "substantially all” as it is found in paragraph 115(1)(f) of the Act:

Section 115. Non-residents’ taxable income earned in Canada.

(1) For the purpose of this Act, a non-resident person's taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under section 3 if

(f) where all or substantially all of the non-resident person's income for the year is included in computing his taxable income earned in Canada for the year, such of the other deductions permitted for the purpose of computing taxable income as may reasonably be considered wholly applicable.

Paragraph (d) and (e) of subsection 115(1) provide for deductions from income of a non-resident of certain amounts found under section 110 and section 111 of the Act. It was the understanding of counsel for the Minister (and agreed to by the appellant) that except for the dispute over the term “substantially all” (supra) Mr. Wood would be permitted the deduction he claimed by virtue of the words:

(e) such of the deductions from income permitted by section 111 as may reasonably be considered to be applicable to the duties of an office or employment performed by him in Canada, a business carried on by him in Canada or a disposition of property, any profit or gain on which would have been required by this subsection to be included in computing his taxable income earned in Canada, and

(f) where all or substantially all of the non-resident person's income for the year is included in computing his taxable income earned in Canada for the year, such of the other deductions permitted for the purpose of computing taxable income as may reasonably be considered wholly applicable.

That view of the section, presupposes that the "taxable income" referred to is a reflection of the definition of “taxable income" given by subsection 2(2) of the Act, dealing with "resident" persons as opposed to the taxable income" as outlined in subsection 2(3) of the Act dealing with "non-resident" persons:

Section 2. Tax payable by persons resident in Canada.

(1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

Section 2(2)

(2) Taxable income defined. The taxable income of a taxpayer for a taxation year is his income for the year plus the additions and minus the deductions permitted by Division C.

Section 2(3)

(3) Tax payable by non-resident persons. Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

One could assert that if indeed the intention of the drafters of the Act was to make available to “non-residents”, (under the conditions precluded in paragraph 115(1 )(f) of the Act the personal exemption under section 109 of the Act, this might have been so stated in view of the specific reference to sections 110 and 111. This is particularly apt, since as I read Interpretation Bulletin 171 (Special Release) dated September 4, 1985, the only other section of the Act to which reference is made is section 109. Whether the wording of paragraph 115(1)(f) of the Act (supra) serves the Minister for assessment purposes in the manner expressed by I.T.-171 (supra) and used in this appeal, (as providing for “personal exemptions from section 109) may be a moot point, and while it entered into the discussions held at this hearing of the appeal, it will be left for review, if necessary, at another time. This Court will simply address the question of whether the situation as described by Mr. Wood qualifies under the term “substantially all” from paragraph 115(1 )(f) of the Act.

The Minister's rule (from I.T.-171 (supra)) is that the Canadian income should be at least 90 per cent of total income — the “90 per cent rule”. Obviously that is just a departmental assessing policy, and while arbitrary is undoubtedly a useful and functional mechanism in dealing with a difficult section of the Act. I would think the Minister might be hard-pressed to refuse a claim where the percentage was 89 per cent, maybe even 85 per cent or 80 per cent or lower — and that brings up this taxpayer's position which ends up to be about 70 per cent. ($30,000 out of $42,500).* [1] Clearly the term “substantially all” does not lend itself to a simple mathematical formula. Further it would seem to me that any particular definition of “substantially” would be only valid with reference to the specific context in which it is found. In this case, if it be correct that qualifying under paragraph 115(1 )(f) of the Act, entitles the taxpayer to the personal exemption at issue, then the options available to him to attain such qualifications with regard to declaring his income in Canada are “all” or “substantially all”. Obviously, if the taxpayer desperately wanted to obtain the “personal exemption” he claims he has the option of declaring “all” of his income in the preparation of his Canadian tax return. As I read the relevant section, the Minister then could have no quarrel with the return. From that I would deduce that when a taxpayer chooses not to declare “all” his income in filing his Canadian return, the non-declared portion must be so insignificant that neither its inclusion or exclusion would make a “substantial” difference in the income tax return in Canada. One might even postulate that the undisclosed (foreign) income, of itself, might not be sufficient to even require that the individual file a tax return in the foreign country.

While that view does not place any mathematical level on the term “substantially all”, in my opinion it comes much closer to the description accorded it by counsel for the Minister in this appeal — “small, unrelated amounts, such as interest etc.” rather than the Minister’s policy of 90 per cent, and certainly far removed from the $12,500 out of $42,500 at issue in the instant case.

It can readily be determined that the “foreign” income has provided a “substantial” financial benefit to the taxpayer, which would be still further enhanced by the benefit accruing as a result of the personal exemption sought, to the taxpayer in this appeal. Under these circumstances the provi- sions of the Act that “substantially all” of the non-resident person's income be included have not been met in my view.

The appeal is dismissed.

Appeal dismissed.