James Stephenson v. Minister of National Revenue, [1986] 2 CTC 2073, 86 DTC 1520

Rip, T.C.J.:—The appellant appeals his income tax assessment for 1982. The appellant is asking the Court to permit him, in computing taxable income, to reduce the forward averaging election deduction in his income tax return for 1982 from $42,590.29, the amount he elected under section 110.4 of the Income Tax Act (“Act”) for 1982, to $39,786.29.* [1]

The facts in this appeal are not in issue and the trial proceeded by way of agreed statement of facts, as follows:

The parties hereto by their respective counsel admit the following facts, provided that the admission is made for the purpose of this action only and may not be used against either party on any other occasion, and provided further that the parties may adduce further and other evidence relevant to the issues and not inconsistent with this agreement.

1. The Appellant’s 1982 Income Tax Return was filed on or before April 30, 1983;

2. In that return, the Appellant claimed no personal exemption with respect to his wife;

3. The Appellant claimed a Forward Averaging Elective Income Deduction for $42,590.29;

4. The 1982 T1 return reported that no federal tax for the 1982 year, excluding

the Federal Forward Averaging Tax on Elective Income was payable;

5. On May 16, 1983, the Appellant’s accountants wrote to Revenue Canada (Appendix I) requesting that a change in the 1982 T1 return be made to allow for the following:

(a) a personal exemption of $1,216 with respect to the Appellant's spouse;

(b) a transfer of the spouse’s deduction with respect to interest and dividends of $1,000 be made;

(c) a deduction of $200 of Federal Tax Reduction with respect to the Appellant’s spouse.

6. By a Notice of Assessment dated September 9, 1983, the Appellant’s 1982 tax was assessed, taking into account the information on the return as filed and the additional information as described in 5 above.

7. On September 19, 1983, the Appellant’s accountants wrote to Revenue Canada, Taxation on behalf of the Appellant (Appendix II) requesting a change in the amount on which he had elected to forward average from $42,590.29 to $39,786.29.

APPENDIX I

May 16, 1983

Revenue Canada

Taxation Centre

Ottawa, Ontario

K1A 1A3

Dear Sirs:

Re: James Stephenson

S.I.N. 415 071 091

When Mr. Stephenson’s T1-1982 was prepared, we were not aware of the fact that he could get a claim for his spouse. A list of his spouse’s income and Schedule 3 are enclosed.

Please take the following into consideration when assessing the above return:

1. Line 42 — additional deduction of $1,216.00.

Line 55 — spouse’s deduction of $1,000.00.

Line 913 — extra tax deduction of $200.00.

Yours truly

Elward G. Burnside

EGB: pc

Enclosures

c.c. Mr. James Stephenson

APPENDIX II

September 19, 1983

Revenue Canada, Taxation

36 Adelaide Street East

Toronto, Ontario

MSC 1J7

Dear Sirs:

Re: James Stephenson

Account No. 141 5071 091

When we wrote to you on May 16, 1983, we neglected to state that Mr. Stephenson wished to change the amount on which he elected to forward average.

The amount should be $39,786.29 rather than $42,590.29.

To elect on more than $39,786.29 is to pay federal tax on income on which there is no tax.

Your co-operation will be appreciated.

Yours truly

Elward G. Burnside

EGB: ml

c.c. Mr. James Stephenson

No facts other than those contained in the agreed statement of facts were adduced in evidence.

The appellant acknowledges the respondent made no error in assessing. The respondent (sometimes referred to as the “Minister”) had before him a properly filed election in prescribed form wherein the appellant elected an amount under section 110.4 of the Act to be $42,590.29.1 [2] In assessing, the respondent permitted the appellant the deduction of $42,590.29 in computing his taxable income. The assessment in issue was made in accordance with an election which was valid at the time. Counsel for the appellant however, states that as a result of changes made to his return as set out in paragraph 5 of the agreed statement of facts, the elective amount, $42,590.29, was excessive, and accordingly the deduction made by his client in computing taxable income was excessive.

The appellant is in effect appealing an assessment on the basis the tax assessed is too low.

Appellant's counsel states that his client ought to be allowed to decrease the amount elected for forward averaging to $39,786.29. He argues that nowhere in the Act (as it applied for 1982) does it state the amount a taxpayer may deduct pursuant to subsection 110.4(1) is the amount elected in the form of election; the only requirement for such deduction is that the amount be not less than $1,000 and not more than the lesser amount determined by paragraphs (a) and (b) of subsection 110.4(1). He adds that unlike the election provided for in subsection 110.4(2),t [3] which states the taxpayer shall specify in the election an amount to be added to his income, subsection 110.4(1) does not require the taxpayer to specify in the form of election an amount he wishes to deduct, although counsel admits that a reading of the subsection 110.4(1) may imply that the amount eligible for the forward averaging deduction is the amount the taxpayer elects in the form of election. The wording of subsection 110.4(1), counsel submits, is ambiguous. Subsection 110.4(1) does not have words of a nature comparable to subsection 110.4(2) or for example, section 85, where specific amounts are to be elected.

Counsel says he is not asking the Court to permit his client to make a new election under subsection 110.4(1), but is asking the Court to permit him to change the amount of the election, and thus reduce the deduction claimed in his income tax return. He referred the Court to the decision of Miller v. M.N.R., [1985] 1 C.T.C. 2390; 85 D.T.C. 318, where Taylor, T.C.J. found that where the Minister disallows a deduction, thus increasing the taxpayer's taxable income, the Minister must complete the reassessment he has commenced and revise an election under subsection 110.4(1), and thus revise the forward averaging deduction.

Counsel also referred the Court to subsection 110.4(6.1), which, although added to the Act in 1985, applies to 1982. Subsection 110.4(6.1) permits an individual to revoke an election filed under subsection 110.4(1) in the case of death or in any other case, by filing a notice of revocation in writing not later than the 30th day following the day of mailing of a notice of assessment of an amount payable by the individual under Part I of the Act for the year, or in the facts of this case, on or before April 30, 1986.

The appellant’s counsel argued that “revocation” in subsection 110.4(6.1) includes “partial revocation" and the appellant’s letter of September 19, 1983 constituted a notice of revocation. Thus, he concludes, his client ought to be permitted to forward average $39,786.29, as requested. The appellant's authority is Hoe's Case, 5 Co.Rep. 89 b.; 77 E.R. 191. Counsel for the appellant says that in wills, for example, a testator may partially revoke a will by revoking one or more bequests in the will. He argues that subsections 70(4) and 119(5) provide for total revocations because a partial revocation would make no sense. There must be some method, he claims, to correct an error made by a taxpayer in a form of election.

The respondent's counsel argues that the election provided for in subsection 110.4(1) must be filed in prescribed form and the filing of an election is more than simply filing a form: the form must be completed with the information required. She adds that if one examines the form of election there is no ambiguity in subsection 110.4(1) since the form provides a specific amount for the taxpayer to elect. Counsel also submits that the word “revocation" in subsection 110.4(6.1) is a “full and complete" revocation, “‘an out and out cancellation". Counsel referred to the Shorter Oxford English Dictionary on Historical Principles definition of “revoke": “To annul, repeal, rescind, cancel.". She concludes a taxpayer may only amend an election where the Act provides for such amendment (for example, paragraph 85(7.1)(b)) and there is no amending procedure in section 110.4.

The appellant is asking the Court to decrease a deduction he claimed in his return of income and which was allowed by the respondent in assessing. A decrease in the deduction in computing his taxable income would result in an increase in taxable income and in income taxes. He is asking the Court to allow his appeal and increase his taxes for 1982; however in subsequent years, as he elects under subsection 110.4(2), the aggregate of tax he would be required to pay on the elected amount would be less. When the Minister did not agree to alter the appellant’s election, as requested in his letter of September 19, 1983, the appellant filed a notice of objection to the assessment. In confirming the assessment the Minister stated:

The Forward Averaging election was filed in a prescribed form within the provisions of subsection 110.4(2) [sic] of the Act, and accordingly an amount of $42,590.29 has been properly deducted in computing the taxpayers [sic] income for the 1982 taxation year.

The appellant then appealed the assessment to this Court.

It must be borne in mind that what is before the Court is the correctness of the assessment for 1982: G.J. Ryan v. M.N.R., [1967] C.T.C. 484 at 496; 67 D.T.C. 5325 at 5333. The Court must decide whether the deduction which the appellant claimed in his return of income in 1982 as a result of filing an election pursuant to section 110.4 may be altered.

Subsection 156(2) permits a taxpayer to amend a return of income for a taxation year in limited circumstances as a result of an event in a subsequent taxation year; the Act contains no other provision permitting an amendment of a return of income and I understand that returns of income amended otherwise than in accordance with subsection 156(2) from time to time have been accepted by the Minister in his sole discretion.

The Minister in administering the Act frequently allows a taxpayer to revise capital cost allowance claims for previous taxation years and accordingly issues a reassessment, or permits a revision as a result of a proposed reassessment: Information Circular No. 84-1. There is no provision in the Act barring the Minister from granting a taxpayer similar relief by varying the amount of a deduction under section 110.4 when the taxpayer could not reasonably have anticipated on or before the day he was required to file his return and form of election that the taxable income on which the assessed tax is calculated would be different from the taxable income reported by him in his return of income. On the facts before me, therefore, I cannot understand why the Minister could not have granted the taxpayer's request of September 19, 1983, and objection since the request was a direct consequence of the increased deductions sought earlier and allowed by the Minister.

It is obvious that had the appellant known of the additional deductions set out in his letter of May 16, 1983, at the time he filed his return of income and the form of election such deductions would have been claimed and the elected amount would have been $39,786.29. As a result of the additional deductions the amount elected was in error. I cannot, however, even in a broad construction of section 110.4, conclude that a taxpayer has the right to revise his election. The Act contains several provisions for a taxpayer to make an election and subsequently to amend the election (e.g., paragraph 85(7.1)(b) ) or reduce the burden of an erroneous election (e.g., subsection 184(3.1)). The revocation of an election under subsection 110.4(1) [sic] is a cancellation of the election; a partial revocation, as proposed by the appellant's counsel, would be tantamount to an amendment of the election. Ina statute Parliament intends the words it uses to have precise meanings and had it intended to permit an amendment to an election it would use the word “amend” as it does in other provisions of the Act. It is clear that once a taxpayer files an election there is no right for the taxpayer to change his mind and demand the cancellation or revision of his earlier claim unless the Act permits him so to do. I think it impossible for the appellant to avoid at this stage the consequences of his election and the deduction claimed in his return of income: G.J. Ryan v. M.N.R., op. cit. at 497 (D.T.C. 5333). When assessing a taxpayer the Minister considers the information in the taxpayer's return of income, and if he has good reason disallows certain deductions claimed by the taxpayer. The Minister however has no authority to arbitrarily vary an election made by a taxpayer, even if his assessment cries out for revision.

Adverse tax consequences may flow to taxpayers who, like the appellant, file their income tax returns in good faith but because of facts not known to them at the time the returns were filed are assessed tax differently from what they anticipated when they filed their returns and elections under subsection 110.4(1). The inability to amend the election and the return of income in such circumstances is a serious gap in the tax system.

In the case at bar the Minister assessed on the basis of the information provided to him by the appellant and none of this information was shown to be wrong. The appellant filed a form of election and claimed a deduction in calculating his taxable income in his return of income. The deduction was allowed. Subsequently, after the issuance of the assessment, the appellant requested, by letter and by notice of objection a change in the deduction claimed, but nowhere does he show the assessment, as issued, is wrong.

The appeal will therefore have to be dismissed.

Appeal dismissed.