Max Margles v. Minister of National Revenue, [1985] 2 CTC 2414, 85 DTC 703

Tremblay, TCJ:—This case was heard on October 23, 1984 in the City of Montreal, Quebec, and was taken under advisement on November 28, 1984 on reception of the transcript.

1. The Point at Issue

Pursuant to the pleadings, the point is whether the appellant, a beneficiary of a capital interest in a trust, being identified as Royal Trust Managed Fund “C”, in the computation of his income with respect to the taxation year 1981, is correct in not including the amount of $680.68 as taxable capital gain earned from the trust. The appellant’s contention is that he received the capital gain in the amount of $1,361.37 only in January 1982 and therefore that the taxable part of it can be included only in the income of 1982. Moreover, the appellant contends the said amount was not payable by the trust in 1981.

The respondent's contention in including the said amount in 1981 is that the trust declared the capital gain was payable in 1981, and therefore it must be taxed in the said year despite the fact it was paid only in 1982.

The respondent refers to the provision 104(13) of the Income Tax Act.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent's assessment is incorrect. The burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In assessing the appellant in respect of his 1981 taxation year, the respondent, the Minister of National Revenue, inter alia, upon the following facts:

(a) During the taxation year at issue, the respondent was the beneficiary of a capital interest in a trust as well as of the income interest in same trust, that trust being identified as “Royal Trust Managed Fund-C”;

(b) During the same year, the Royal Trust declared, inter alia, as income

earned from the said Trust certain amounts representing capital gain;

(c) During the same year, the part of said capital gain as declared by the Trust

and allocated to the appellant, represented the amount of $1,361.37;

(d) In computing his income for the taxation year at issue, the appellant omitted to include the amount of $680 as representing the taxable amount of capital gain earned from the said Trust;

(e) The said amount of capital gain had been declared as payable by the Royal Trust for the 1981 taxation year;

3. The Facts

3.01 The appellant before 1981 purchased units of “C” Fund of the Royal Trust. In December 1980, the unit value was 29.0072. In December 1981, the value was 22.9947. (Exhibit A-1).

It is only in March, April and May that the unit value was over 29.0072. Indeed at the end of the said months, the unit value was 29.7528, 29.0860 and 29.2610.

3.02 A T-3 supplementary form issued by the trust to the appellant’s name shows that total capital gain from Canadian securities was $1,361.37. The actual amount of eligible dividends was $772.35 and taxable mount of eligible dividends was $1,158.53. The taxation of dividends is nut at issue.

3.03 On January 11, 1982, the appellant received a cheque in the amount of $1,361.37 with the following notice from the trust: (Exhibit A-3)

NOTICE TO MANAGED FUND PARTICIPANTS CAPITAL GAINS DISTRIBUTION

A capital gains distribution has been declared as follows: “A” Fund; $0.8779 per unit, “C” Fund; $1.9837 per unit, “E” Fund; $0.3598 per unit. This distribution is payable to participants of record on 31st December 1981. Failure to make this distribution would result in the Fund being subject to income tax on taxable capital gains realized in 1981.

By distributing this amount to participants the resulting tax liability will be much lower for many taxable participants, and nil for tax-deferred holders such as Registered Retirement Savings Plan (RRSP).

The distribution will cause the unit price to decline by an amount equal to the amount per unit distributed, thus reducing the taxable gain ultimately realized upon withdrawal from the Fund of participants other than tax-deferred holders such as RRSP’s.

This payment will be included under capital gains in your 1981 T3/TP3 tax slips (not applicable to RRSP holders) and will be paid to you in accordance with your current instructions for the distribution of income for your account.

December 31, 1981

ROYAL TRUST

3.04 The appellant in filing his 1981 income tax return, informed the respondent that the capital gain of $1,361.37 shall be included only in the 1981 income tax return because it was received only in January 1982. (Exhibit A-5).

3.05 The appellant filed as Exhibit A-6 the “A”, “B", “C”, “E” and “M” Funds Annual Report, December 31, 1981 published by Royal Trust. One can see on page 21 that the “Realized gains on Investments sold" by the Trust in 1981 are as follows:

The net income in 1980 was $4,739,008 and the net income per unit then was 1.6298.

4. Law — Cases at law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this appeal are:

Sec. 104(13)

(13) Income payable to beneficiary. Such part of the amount that would be the income of a trust (other than a trust governed by an employee benefit plan) for a taxation year if no deduction were made under subsection (6), (12) or 20(16) or under regulations made under paragraph 20(1)(a) as was payable in the year to a beneficiary shall be included in computing the income of the person to whom it so became payable whether or not it was paid to him in that year and shall not be included in computing his income for a subsequent year in which it was paid.

Section 104(21)

(21) Portion of taxable capital gains deemed gain of beneficiary. Such portion of

(a) the amount, if any, by which the aggregate of the taxable capital gains of a trust for a taxation year exceeds the aggregate of

(i) its allowable capital losses for the year, and

(ii) the amount, if any, deductible under paragraph 111(1)(b) from its income of the year

as

(b) may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the amount that, by virtue of subsection (13) or (14) or section 105, as the case may be, was included in computing the income for the taxation year of a particular beneficiary under the trust who is resident in Canada, and

(c) was not designated by the trust in respect of any other beneficiary thereunder,

shall, if so designated by the trust in respect of the particular beneficiary in the return of its income for the year under this Part, be deemed, for the purposes of sections 3 and 111, to be a taxable capital gain for the year of the particular beneficiary from the disposition of capital property.

4.02 Cases at Law

The following cases at law were referred to the Court:

1. Marguerite Johnson v MNR, 58 DTC 592.

2. Grant C Brown v The Queen, [1979] CTC 476; 79 DTC 5421.

4.03 Analysis

A. Appellant's Argumentation

4.03.1 Based on figures shown in paragraph 3.01, the appellant contends that there is no capital gain in 1981 but a loss (29.0072 — 22.9947). "The fact that it is called capital gain by the Royal Trust does not make it a capital gain”, he said.

4.03.2 Moreover, having received the cheque of $1,361.37 in January 1982 and computing his own income on cash basis, the capital gain, if there is a capital gain, must be included in the income of the 1982 income tax return.

4.03.3 Finally referring to the Interpretation Bulletin IT-342 (Trusts — Income payable to Beneficiaries), the appellant quoted paragraph 3:

3. An amount is not considered to be payable in a taxation year, unless

(a) it is paid in the year, or

(b) the person to whom it is payable is entitled in the year to enforce payment thereof.

He argues he was not in a position to enforce payment of the amount paid at any point in 1981 and therefore the amount in question must be excluded from his income in the year 1981.

B. Court's decision

4.03.4 The capital gain provided in the Income Tax Act as a deemed gain of beneficiary (section 104(21)) is the capital gain realized by the trust when it disposed shares of different companies during the years. In this appeal, the net realized gain by “C” fund in 1981 was $8,414,517, $5,789,780 of which was distributed to participants. (par 3.05) The appellant received $1,361.37, 50 per cent of which, ie $608.68 is taxable.

The computation of the unit value, as I understand it, that a participant owns in the trust, seems to be more affected by income of the trust (dividends and interest) (par 3.06) than by the capital gain. This seems to appear in the actual and taxable amounts of eligible dividends in T3 — Supplementary Form. (par 3.02)

One of the main interests of the Act, subsection 104(21) quoted above, in the computation of the capital gain, however, is the deeming provision which is to the effect that it is a gain of beneficiaries and is

as was payable in the year to a beneficiary shall be included in computing the income of the person to whom it so became payable whether or not it was paid to him in that year and shall not be included in computing his income for a subsequent year in which it was paid.

4.03.5 Concerning the second argument of the appellant in respect of the year involved and the reference to the Interpretation Bulletin 342, the answer in substance is in paragraph 4 of the same bulletin. It reads as follows:

4. The amounts required to be included in computing the income of a beneficiary for a taxation year under subsections 104(13) and 105(2) are considered to have been earned by the beneficiary on the last day of the taxation year of the trust and are thus in respect of the taxation year or years of the trust which ended in the taxation year of the beneficiary.

Provision 104(13) quoted above is clear and the appellant who had the burden of proof, did not give evidence that provision 104(13) must not apply.

Taxpayers in filing returns, the respondent in managing the Department of Revenue and the Court in construing the Act are all bound by this deeming provision. The assessment must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.