E L Smith v. Minister of National Revenue, [1983] CTC 2714, 83 DTC 669

Tremblay, TCJ:—This case was heard in Sydney, Nova Scotia on August 2, 1983.

1. The Point at Issue

The point at issue is whether the appellant is correct in considering as cash bonus and therefore as capital gain, the amount of $687.50 received in 1981 from the Government of Canada over the regular interest on Canada Savings Bonds. The appellant contends that this overpayment meets the wording of section 12.1 of the Income Tax Act, and is a cash bonus.

The respondent contends that the said amount of $687.50 was received on account as interest and not as a cash bonus.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially 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 assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in subparagraphs 3(a) to (f) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

3. In so assessing the Appellant’s income tax liability for her 1981 taxation year, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) In 1981 the Appellant received interest income from Canada Savings Bonds series 33 and 34 in the amount of $2,162.50;

(b) In her 1981 income tax return the Appellant reported this income as follows:

		Series	Regular	Bonus
Slip No	No	No	Interest	Interest	To tai
129512		33	$ 450.00	$270.84 $ 720.84
492-0413560		34	1,025.00	416.66	1,441.66
		TOTALS	$1,475.00	$687.50	$2,162.50

(c) In 1981 the Government of Canada increased the interest rates printed on the face of the Series 33 and 34 bonds in order to reflect the then current economic climate;

(d) As a result of this increase in the rate, the Appellant received interest in the amount of $2,162.50, $687.50 of which she reported as “bonus interest” (see paragraph 3(b));

(e) The amount of $687.50 claimed by the Appellant as “bonus interest” was not an amount that the Government of Canada undertook to pay as a cash bonus;

(f) The sum of $687.50 was an amount received by the Appellant on account or in lieu of, payment of, or in satisfaction of, interest.

3. The Facts

3.01 In substance the facts are not in dispute. The appellant admitted subparagraphs (a) and (b) of paragraph 3 of the reply to notice of appeal quoted above, but denied the interpretation given by the respondent in subparagraphs (c), (d), (e) and (f).

3.02 Photocopies of the two certificate bonds issued to the appellant were filed as Exhibit A-1. On the face of RS33 certificate one can read:

CANADA SAVINGS BOND 1978/79 SERIES REGULAR INTEREST

THE GOVERNMENT OF CANADA will pay to the registered owner hereof named below on November 1, 1985 or on demand at the owner’s option the sum of

FIVE THOUSAND DOLLARS

plus accrued interest if applicable. Interest will be paid on November 1st in each year at the rates stated on the reverse hereof.

DATED AT OTTAWA, NOVEMBER 1, 1978.

On the reverse of the said certificate one can read: “the annual rates of interest: 1979 — 8 1980-85 — 9%”.

3.03 Concerning the certificate CS34, one can read the same wording as the other certificate except it is the 1979/80 series and the annual rate of interest is 10% per cent for 1980 to 1986.

4. Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are 12(1 )(c) and 12.1. They read as follows:

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(c) any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfaction of, interest;

12.1 Notwithstanding any other provision of this Act, where in a taxation year a taxpayer receives any amount from the Government of Canada in respect of a Canada Savings Bond as a cash bonus that the Government of Canada has undertaken to pay (other than any amount of interest, bonus or principal agreed to be paid at the time of the issue of the bond under the terms of the bond) he shall, in computing his income for the year, include

(a) the amount, or such portion thereof, if any, as the taxpayer may report, as interest; and

(b) an amount equal to /2 of the amount, if any, by which

(i) the amount received as a cash bonus exceeds

(ii) the portion of the amount reported as interest under paragraph (a) as a

taxable capital gain for the year from the disposition of a property.

4.02 Analysis

4.02.1 In her notice of appeal, the appellant contended that:

The amount of $687.50 representing interest enrichment on Series RS33 and 0834 was properly claimed as a capital gain in accordance with Sec 12.1 and IT284R. There is no formal definition of cash bonus. Act refers to “cash bonus that Government has undertaken to pay (other than any amount of interest, bonus or principal agreed to be paid at the time of the issue of the bond under the terms of the bond)”. The amount of interest agreed to be paid in this case was printed on the bond (9% and 1O /4°/o) It is the amount of interest paid over and above these rates (687.50) that qualifies as a bonus eligible as a capital gain.

Para 10 of IT284R reinforces view — “any cash bonus over and above interest Originally agreed must be reported in year received. However, recipient has option of treating as capital gain”. The 687.50 was over and above definite amount of interest originally agreed on bonds and, as such, bonus eligible as capital gains as Originally reported on 1981 return.

4.02.2 The counsel for the respondent submitted that the payment of $687.50 over the regular rate is in substance the increase of interest to reflect the then current economic climate, and it is not a “cash bonus” as provided in provision 12.1.

4.02.3 Even if there is not in provision 12.1 an official definition of “cash bonus” pursuant to the ordinary method of defining the word, the Court’s opinion however, is that the most important element, the substance of the definition of “cash bonus”, is provided in the said provision in the words between parentheses “(other than any amount of interest, bonus or principal agreed to be paid at the time of the issue of the bond under the terms of the bond)”. Whereas it is obvious, and even admitted by the respondent that the $687.50 is over the regular interest, (ie other than an amount paid “under the terms of the bond”) the Court concludes that it must be considered as a “cash bonus” and the appeal must be allowed.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.