Christie,
CJTC
[ORALLY]:—Windfalls
are
exempt
from
inclusion
in
computing
income.
In
the
world
of
Canadian
taxation,
the
most
famous
windfalls
of
all
are
the
proceeds
of
winning
a
prize
under
a
lottery
scheme.
These
prizes
are
not
regarded
as
taxable
income,
the
principal
sources
of
which
are
business,
property,
office
or
employment.
Subparagraph
40(2)(f)(ii)
of
the
Income
Tax
Act
(“the
Act”)
provides
that
a
taxpayer’s
gain
from
the
disposition
of
a
right
to
receive
an
amount
as
a
prize
in
connection
with
a
lottery
scheme
is
nil.
Subsection
52(4)
states
that
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.
Both
the
subparagraph
and
the
subsection
appear
in
subdivision
(c)
of
Division
B
of
the
Act
which
pertains
to
taxable
capital
gains
and
allowable
capital
losses.
The
issue
in
this
appeal
is
whether
the
method
chosen
to
recompense
the
winner
of
a
lottery
can
create
a
condition
which
will
result
in
the
prize-money,
or
some
portion
thereof,
being
taxable
income
in
the
hands
of
the
winner.
If
a
person
who
conducts
a
lottery
scheme
simply
pays
the
prize-money
directly
to
the
winner,
the
transaction
is
not
taxable.
This
appeal
relates
to
the
appellant’s
1979
taxation
year.
Paragraphs
1
to
9
of
the
notice
of
appeal
read:
1.
The
appellant
resides
in
the
Borough
of
North
York,
in
the
Municipality
of
Metropolitan
Toronto.
2.
In
September,
1978,
the
Appellant
won
the
“Cash
for
Life”
Lottery
sponsored
by
the
Ontario
Association
for
the
Mentally
Retarded
(the
“Association”).
As
a
result
of
winning,
the
Appellant
was
entitled
to
receive
$1,000
a
month
for
the
rest
of
her
life,
with
a
guaranteed
term
for
a
minimum
period
of
20
years.
It
was
always
understood
that
the
prizes
were
to
be
funded
by
life
annuities
purchased
by
the
Association.
3.
When
the
Appellant
was
notified
that
she
had
won
her
prize,
she
was
notified
that
she
was
not
entitled
to
receive
a
lump
sum
payment,
but
rather
she
was
entitled
only
to
receive
$1,000
a
month
for
her
life
with
a
guaranteed
term
of
20
years.
4.
In
1979,
the
Taxpayer
received
$12,000
and
the
Minister
of
National
Revenue
has
determined
that
the
amount
of
$8,155.20
in
respect
of
the
$12,000
is
to
be
included
in
the
income
of
the
Appellant
in
accordance
with
the
provisions
of
paragraph
56(1
)(d)
and
subsection
60(a)
of
the
Income
Tax
Act.
5.
On
September
14,
1978,
the
Association
made
an
application
for
an
annuity
with
the
Sun
Life
Assurance
Company
of
Canada.
In
the
application,
the
Association
named
the
Appellant
as
the
annuitant.
In
order
to
purchase
the
annuity,
a
premium
in
the
amount
of
$135,337.75
was
paid
by
the
Association
to
the
Sun
Life
Assurance
Company
of
Canada.
6.
The
terms
under
which
the
annuity
was
issued
include,
among
other
things,
the
provision
that
“Unless
other
(sic)
specified
by
the
owner,
all
payees
may
be
changed
from
time
to
time
before
the
death
of
the
annuitant”.
7.
On
June
24,
1980,
the
Minister
of
National
Revenue
assessed
the
Appellant
by
including
the
said
amount
of
$8,155.20
as
income
for
her
1979
taxation
year.
8.
On
July
15,
1980,
the
Appellant
filed
a
Notice
of
Objection
in
respect
of
the
Notice
of
Assessment.
9.
On
February
10,
1981,
the
Minister
of
National
Revenue
notified
the
Appellant
pursuant
to
paragraph
165(3)(a)
of
the
Income
Tax
Act
that
the
said
Assessment
was
confirmed.
Paragraph
60(a)
mentioned
in
paragraph
4
of
the
notice
of
appeal
allows
a
taxpayer
to
deduct
from
his
income
for
a
taxation
year
the
capital
element
of
each
annuity
payment
paid
in
that
year
under
a
contract.
That
element
is
determined
in
accordance
with
regulations
made
under
the
Act.
The
evidence
adduced
during
the
course
of
the
hearing
of
this
appeal
did
not
vary
in
any
relevant
manner
from
what
was
said
in
the
paragraphs
just
quoted
from
the
notice
of
appeal.
The
appellant
and
her
husband
endeavoured
unsuccessfully
to
persuade
the
Association
for
the
Mentally
Retarded
to
convey
the
prize
to
her
by
way
of
a
lump
sum
settlement.
In
his
reply
to
the
notice
of
appeal,
the
respondent
admitted
all
the
facts
alleged
in
paragraphs
1
to
9
with
the
exception
of
paragraph
6.
Regarding
paragraph
6,
he
said
he
had
no
knowledge
of
the
facts
alleged
therein
but,
if
true,
they
are
irrelevant.
It
is
settled
law
that
in
the
field
of
liability
for
income
tax
there
may
be
optional
roads
open
to
achieve
a
desired
result
and
if
one
road
is
travelled
the
transaction
will
attract
tax,
while
if
another
had
been
chosen
there
would
be
no
liability
for
tax.
In
Auld
v
Minister
of
National
Revenue,
28
Tax
ABC
236;
62
DTC
27,
the
appellant
had
loaned
personal
funds
to
a
corporation
of
which,
aside
from
certain
qualifying
shares,
he
was
the
sole
shareholder.
The
corporation
dealt
in
automotive
supplies
and
the
purpose
of
the
loan
was
to
enable
it
to
rebuild
the
fire-damaged
premises
and
to
purchase
a
parking
lot.
It
was
accepted
that
this
was
clearly
done
for
business
purposes.
The
result
was
that
the
appellant
became
short
of
funds
and
secured
a
bank
loan,
a
substantial
portion
of
which
was
used
to
enable
him
to
discharge
a
personal
debt.
In
1956
and
1957,
he
sought
to
deduct
the
interest
paid
on
that
portion
of
the
loan
used
to
discharge
the
debt
pursuant
to
paragraph
1
l(l)(c)
(now
paragraph
20(l)(c))
of
the
Act
as
interest
expended
in
respect
of
the
automotive
business.
The
Minister
of
National
Revenue
disallowed
the
deductions.
It
was
said
on
behalf
of
Auld
that
the
loan
from
the
bank
to
discharge
his
personal
debt
was
made
necessary
by
the
use
of
his
personal
funds
for
the
rebuilding
and
the
purchase
of
the
parking
lot
and,
therefore,
should
be
regarded
as
money
used
in
the
automotive
business.
In
other
words,
the
appellant
could
have
discharged
his
personal
debt
out
of
his
own
resources
and
arranged
for
money
to
be
borrowed
by
the
corporation
to
repair
the
building
and
purchase
the
parking
lot.
If
this
had
been
done
the
interest
would
have
been
deductible
under
paragraph
11(l)(c).
Counsel
for
the
appellant
contended
that
his
client
should
not
be
penalized
for
the
method
adopted
when
the
end
result
was
the
same
and
there
was
no
difference
in
substance
in
both
cases.
J
D
C
Boland
delivered
the
decision
of
the
Tax
Appeal
Board
and,
in
rejecting
this
submission,
said
at
240-41
[29-30]:
In
my
opinion,
this
is
a
confusion
of
substance
with
financial
result.
The
answer
to
this
approach
is
contained
in
two
cases,
the
reasoning
of
which
I
adopt.
The
first
1s:
Henriksen
v
Grafton
Hotel
Ltd
(1942)
2
KB
194;
24
TC
453,
460
per
Lord
Green
MR
It
frequently
happens
in
Income
Tax
cases
that
the
same
result,
in
a
business
sense,
can
be
secured
by
two
different
legal
transactions,
one
of
which
may
attract
tax
and
the
other
not.
There
is
no
justificaton
for
saying
that
a
taxpayer
who
had
adopted
the
method
which
attracts
tax
is
to
be
treated
as
though
he
had
chosen
the
method
which
does
not,
or
vice
versa.
The
second
is:
I
R
v
Wesleyan
&
General
Assurance
Society
30
TC
11,
16,
25
per
Lord
Simon:
It
may
well
be
to
repeat
two
propositions
which
are
well-established
in
the
application
of
the
law
relating
to
income
tax
.
.
.
Secondly,
a
transaction
which,
on
its
true
construction,
is
of
a
kind
that
would
escape
tax,
is
not
taxable
on
the
ground
that
the
same
result
could
be
brought
about
by
a
transaction
in
another
form
which
would
attract
tax.
As
the
Master
of
the
Rolls
said
in
the
present
case:
In
dealing
with
income
tax
questions
it
frequently
happens
that
there
are
two
methods
at
least
of
achieving
a
particular
financial
result.
If
one
of
those
methods
is
adopted
tax
will
be
payable.
If
the
other
method
is
adopted,
tax
will
not
be
payable
.
.
.
The
net
result
from
the
financial
point
of
view
is
precisely
the
same
in
each
case,
but
one
method
of
achieving
it
attracts
tax
and
the
other
method
does
not.
The
learned
justices
in
both
cases
quoted
above
were
directing
their
minds
to
taxable
and
non-taxable
transactions.
The
logic,
in
my
opinion,
is
just
as
applicable,
when
what
we
are
considering
is
the
deductibility
or
non-deductibility
of
an
expenditure
in
arriving
at
taxable
income.
(italics
supplied)
As
I
see
it,
the
insuperable
difficulty
facing
the
appellant
is
that
the
wrong
road
was
chosen,
namely,
the
one
which
brings
her
within
the
application
of
paragraph
56(1
)(d)
of
the
Act
which
expressly
deals
with
annuity
payments.
It
requires
that
they
shall
be
included
in
computing
the
income
of
a
taxpayer
for
the
taxation
year
in
which
they
are
received
by
her,
subject
to
an
exception
which
is
irrelevant
to
this
appeal.
It
is
of
no
assistance
to
the
appellant
that
the
$1,000
per
month
might
have
been
transferred
to
her
free
of
tax.
She
must
endure
with
what
actually
transpired.
Counsel
for
the
appellant
attacked
the
assessment
on
three
grounds,
none
of
which
persuade
me
that
the
respondent
erred.
First
it
is
said
that
paragraph
40(2)(f)
of
the
Act,
which
I
have
already
mentioned
and
which
is
designed
to
ensure
that
an
amount
received
as
a
prize
in
connection
with
a
lottery
scheme
is
not
taxable
as
a
capital
gain,
disposes
of
this
appeal
in
the
appellant’s
favour.
The
fact
that
an
amount
is
not
taxable
as
a
capital
gain
does
not,
of
itself,
preclude
the
possibility
of
the
amount
being
dealt
with
in
such
a
way
that
some
or
all
of
it
becomes
taxable
as
income
in
the
recipient’s
hands
and
that,
as
I
say,
is
what
happened
in
this
case.
The
second
argument
is
that
subsection
56(2)
of
the
Act
applies
with
the
result
that
the
amount
in
dispute
should
have
been
included
in
the
income
of
the
Ontario
Association
for
the
Mentally
Retarded
and
“the
common
law
dealing
in
income
tax
matters
requires
this
amount
not
to
be
included
or
any
portion
of
it
included
a
second
time
in
Mrs
Rumack’s
income”.
Subsection
56(2)
provides:
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
persons
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
shall
be
included
in
computing
the
taxpayer’s
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
him.
I
must
confess
that
I
have
never
heard
of
the
existence
of
a
doctrine
at
common
law
that
prohibits
funds
that
are
being
indirectly
transferred
from
one
taxpayer
to
another
taxpayer
from
being
included
in
computing
the
income
of
both.
No
authority
was
cited
in
support
of
this
alleged
substantive
rule
of
common
law.
Assuming,
however,
for
the
purpose
of
this
argument
that
it
does
exist,
the
rationale
for
it
presumably
is
that
both
taxpayers
shall
not
be
exposed
to
taxation
in
relation
to
the
transferred
funds.
If
that
is
so,
the
reason
for
the
rule
can
have
no
application
to
the
transaction
with
which
this
appeal
is
concerned
because,
as
counsel
for
the
appellant
said
more
than
once
in
the
course
of
his
argument,
the
Ontario
Association
for
the
Mentally
Retarded
is
a
charitable
organization
and
is
not
liable
to
pay
income
tax.
Furthermore,
and
apart
from
anything
else
that
might
be
said
in
the
rejection
of
this
aspect
of
the
argument,
the
object
of
subsection
56(2),
as
I
understand
it,
is
to
frustrate
any
attempt
made
by
a
taxpayer
to
avoid
including,
in
computing
his
income,
payments
to
him
that
should
otherwise
be
included
by
transferring
them
to
another
person.
A
simple
example
would
be
the
transfer
of
interest
payments
to
a
mortgagee
taxpayer
to
a
friend
or
relative.
What
is
embodied
in
subsection
56(2)
cannot
be
properly
associated
with
the
reality
of
what
is
relevant
to
this
case.
Finally,
the
appellant
sought
assistance
from
an
Interpretation
Bulletin,
No
IT-365R
dated
March
9,
1981,
and
published
by
Revenue
Canada.
In
Wollenberg
v
MNR,
[1984]
CTC
2043;
84
DTC
1055,
I
said
at
2045
[1057]:
What
Parliament
has
decreed
shall
be
the
rules
applicable
in
determining
what
is
payable
by
way
of
tax
under
the
provisions
of
the
Act
is
paramount
and
cannot
be
repealed
or
amended
in
any
manner
by
whatever
Revenue
Canada
may
choose
to
publish
by
way
of
Tax
Guides,
Interpretation
Bulletins
or
otherwise.
This
is
not
to
say
that
publications
of
the
kind
just
mentioned
are
totally
void
of
potential
legal
impact.
They
can
have
limited
legal
consequences
in
the
sense
that
if
a
particular
provision
of
the
Act
is
ambiguous,
or
is
ambiguous
in
a
specific
context,
thereby
giving
rise
to
doubt
about
its
meaning,
administrative
policy
and
interpretation
as
reflected
in
Revenue
Canada
publications
such
as
Tax
Guides
and
Interpretation
Bulletins
are
“entitled
to
weight”
and
can
be
an
“important
factor”
in
the
process
of
proper
interpréta-
tion.
See
Harel
v
The
Deputy
Minister
of
Revenue
of
the
Province
of
Québec,
[1978]
1
SCR
851,
per
de
Grandpré,
J
delivering
the
judgment
of
the
Supreme
Court
of
Canada
at
pages
858-9,
and
Nowegijick
v
The
Queen,
83
DTC
5041,
per
Dickson,
J
delivering
the
judgment
of
the
same
Court
at
page
5044.
I
find
no
ambiguity
which
would
authorize
invoking
the
Interpretation
Bulletin.
It
is
said
that
the
ambiguity
which
would
make
the
decisions
of
the
Supreme
Court
of
Canada
just
cited,
applicable
to
this
case
arises
out
of
giving
consideration
to
paragraph
56(1
)(d)
in
relation
to
subsection
56(2).
I
respectfully
disagree.
Moreover,
even
if
IT-365R
could
properly
be
taken
into
consideration,
I
do
not
regard
it
as
furnishing
reasons
entitling
the
appellant
to
succeed.
The
Bulletin
discusses,
inter
alia,
the
tax
status
in
respect
of
damages
for
personal
injuries.
It
recites
that
amounts
in
respect
of
personal
injury
or
death
may
be
rceived
on
account
of
special
damages,
general
damages,
and
by
the
dependants
of
a
deceased
as
compensation
for
loss
of
support.
Examples
of
what
constitutes
special
and
general
damages
are
given.
Paragraph
13
of
the
bulletin
reads
in
part:
Where
payments
for
damages
that
have
been
awarded
by
a
Court
or
resolved
in
an
out-of-
court
settlement,
in
respect
of
personal
injuries
or
death,
are
paid
on
a
periodic
basis,
the
payments
will
not
be
considered
to
be
annuity
payments
for
the
purposes
of
paragraph
56(l)(d)
and
60(a).
Accordingly,
no
part
of
such
payments
will
be
treated
as
interest
income.
However,
where
an
award
for
damages
has
been
used
by
the
taxpayer
or
his
representative
to
purchase
an
annuity,
the
amounts
received
will
be
considered
as
annuity
payments
under
paragraphs
56(1
)(d)
and
60(a)
and
Regulation
300.
(italics
supplied)
In
my
opinion,
it
does
not
follow
as
a
matter
of
law
that,
because
Revenue
Canada
deals
with
payments
for
damages
in
the
manner
described,
the
assessment
in
this
case
was
wrong.
The
appeal
is
dismissed.
Appeal
dismissed.
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