Johannes Braaksma v. Minister of National Revenue, [1981] CTC 2883

The Chairman:—The appeal of Johannes Braaksma is from an assessment in respect of the 1977 taxation year.

The appellant, a citizen of Holland but resident in Canada for many years, became eligible to receive monthly payments from Holland by paying to that country in 1977 a retroactive lump-sum payment of pension contributions in the amount of $8,537 for the period of January 1, 1957 to October 1, 1974, when he attained the age of 65.

As a result, he received pension benefits totalling $18,335 in 1977, $12,163 Of which represented retroactive benefits, the balance being regular monthly pension payments. Although it is alleged pension benefits are not taxable under Dutch Pension Law, the appellant included the full amount of pension benefits received in his 1977 income but in his appeal, seeks to deduct his lump-sum contributions of $8,537 as being an expense incurred to earn income from a business or property, in accordance with the provisions of paragraph 18(1 )(a) of the Income Tax Act.

Paragraph 18(1 )(a) of the Act reads as follows:

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation. — an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Property is defined in subsection 248(1) of the Act as:

“Property” — “property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money, and

(c) a timber resource property.

The facts of the appeal are not disputed and in his reply to the notice of appeal the respondent submits that the amount of $8,537 was paid by the appellant on account of capital within the meaning of paragraph 18(1 )(b) of the Income Tax Act and therefore specifically prohibited as a deduction by virtue of paragraph 18(1 )(a) of the Act.

Paragraph 18(1 )(b) of the Act reads as follows:

Capital outlay or loss. — an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

The appellant, in contending that the amount of $8,537 was an expense incured to earn income and deductible under the general provisions of paragraph 18(1 )(a) of the Act, submitted that under the Dutch pension law, he had an entitlement to the pension funds prior to making the contribution. His position is that the payment of the contributions did not bring into existence a right which he did not already have. The appellant suggests that, having been employed in the Netherlands, he had a right to receive his pension and that the payment of the contributions merely activated this right and commenced the flow of funds to which he was entitled.

The amounts received by the appellant are unquestionably pension benefits and were in fact included in the appellant’s 1977 income in accordance with subparagraph 56(1 )(a)(i) of the Act. Whether or not pension benefits are taxable in the Netherlands is of course immaterial to the issue before the Board.

The appellant recognized that his contributions to the Dutch pension fund were not paid into a registered retirement savings plan within the meaning of section 146 of the Act and admitted that they were not deductible on that ground.

The sole issue therefore is whether the appellant’s contributions into the Dutch pension fund is an expense incurred to earn income from property within the meaning of paragraph 18(1 )(a) of the Act.

In submitting that the Minister was wrong in assessing the appellant on the basis that the contributions in the amount of $8,537 were a payment on capital account and not deductible, the appellant cited the Supreme Court decision in Gladys Evans v MNR, [1960] CTC 69; 60 DTC 1047.

I find on reading the Evans decision (supra) that the facts are, as suggested by counsel for the respondent, fundamentally different from those in the instant appeal. In Evans, there was no question that the taxpayer’s lifetime right to be paid income for a one-third share held by a trustee had come into existence under a will, free of any contingency and enforceable under the law. The legal fees paid by the taxpayer to have that right confirmed by the courts and recognized by the trustee did not create the right

— it merely enforced it upon the trustee.

Mr Justice Cameron, in his reasons, makes that point clear at 75 [1050]:

The payment of the legal fees in question did not bring this right or any asset or advantage into existence. Her right to receive the income is derived not from the judgment of the Court but from the combined effect of the wills of Thomas Alexander Russell, and John Alexander Russell. Wrongly, as it turned out, the trustee entertained doubts, presumably engendered by the claims of Mrs. Andersen as to whether it should pay to the appellant the income to which she was entitled and it would not pay anything until the matter had been passed upon by the Court.

In the instant appeal the appellant’s right to pension benefits prior to paying his contributions was not so clearly established and his entitlement to the benefits was contingent upon the payment of the contributions.

Further on 76 [1050], the learned justice continues:

The precise form in which the matter was submitted to the Court appears to me to be of no importance; the legal expenses paid by the appellant were expended by her for the purpose of obtaining payment of income; they were expenses of collecting income to which she was entitled but the payment of which she could not otherwise obtain. So viewed, it could scarcely be doubted that the expenses were properly deductible in computing the appellant’s taxable income. This, in my opinion, is the right view of the matter and is not altered by the circumstance that it was mistakenly claimed by Mrs. Andersen that the appellant was not entitled to any income at all.

Evans’ legal right to the / share income existed prior to the payment of legal fees; the expense was incurred so as to receive the income to which she was already entitled.

Although I can agree with the appellant that the payment of the contributions started the flow of pension benefits, I cannot accept that the appellant had any prior enforceable right or entitlement to the pension benefits unless and until he had paid his pension contributions.

Unlike the circumstances in the Evans case, it is the appellant’s contributions to the Dutch pension fund which brought into existence an enforceable right to receive pension benefits. As interesting as may be the question raised by counsel for the respondent, whether or not a contribution is an expense, I do not feel it necessary for purposes of this appeal to comment on that point.

It is sufficient in deciding this issue to determine that the amount of $8,537 was paid by the appellant to acquire the right to receive pension benefits and, as such, is a payment on account of capital within the meaning of paragraph 18(1 )(b) of the Act. I cannot find any basis on which I could conclude that the amount was an outlay or expense incurred for the purpose of gaining or producing income from property. As I see it paragraph 18 (1 ) (a) of the Act cannot apply since the appellant, prior to the payment of contributions, had no “property” (right to pension benefits) from which income could be gained.

Furthermore, the appellant’s payment into the Dutch pension fund, as pointed out by counsel for the respondent in the case law he cited, falls well within the criteria which the Courts have applied in determining that the nature of a payment is on account of capital: the appellant’s payment was not a recurring payment but a lump-sum payment made once and for all which brought into existence an enduring benefit to the appellant in the form of a right to receive pension benefits for the rest of his life.

I conclude therefore that the amount of $8,537 was a payment on account of capital within the meaning of paragraph 18(1 )(b) of the Act and that the Minister properly disallowed the deduction of the said amount by virtue of paragraph 18(1 )(a) of the Income Tax Act.

The appeal is therefore dismissed.

Appeal dismissed.