Bernard T. Chen v. Her Majesty the Queen, [1996] 3 CTC 2823 (Informal Procedure)

Bowman J.T.C.C.: - This appeal is from an assessment for the 1992 taxation year. It is concerned with the inclusion in Mr. Chen’s income of $993.92 in respect of contributions that he made to a registered retirement savings plan. If this case established nothing else, it is that the RRSP regime in Canada has reached a point of complexity where it is beyond the grasp of the average taxpayer.

Mr. Chen is a chemist who came to Canada in 1969 from Taiwan. On March 12, 1992, he withdrew from his and his wife’s RRSPs $4,958.68 and $4,959.61 respectively. These amounts, totalling $9,918.26 were used to purchase a home under the home buyers’ plan introduced in that year. Accordingly, they were not taxed in his hands under subsection 146(8) because they were eligible amounts and therefore excluded withdrawals within subsection 146.01(1). All the conditions required for their exclusion from income were met and their taxability is not in issue. Their withdrawal and exclusion from income is, however, relevant to the treatment of subsequent contributions.

On March 1, 1993, the appellant made contributions to his and his wife’s RRSPs in the amounts of $2,993.92 and $2,000.00 totalling $4,993.92. On the basis of advice that he received from the tax department he deducted this amount in computing his income for 1992 and also in- eluded it in his income, thereby neutralizing any possible benefit that he might have had from his contribution to his and his wife’s RRSPs and rendering the amount of $4,993.92 subject to tax when he withdrew it.

On May 13, 1993, the appellant visited the offices of the Department of National Revenue and signed three forms T3012A(E). On those forms he designated a total of $4,993.92 ($993.92 + $2,000.00 + $2,000.00). One designation read as follows:

Of the total contributions entered on line 1, $4,993.92 was contributed to the following plan. I designate $993.92 for refund from this plan. The total amounts you designate for refund from this plan, and from any other plans, cannot be more than the amount shown on line 7.

The other forms each designated $2,000.00.

On the same date he signed a form T-196 requesting an amendment of his 1992 return on lines 208 and 129, the amounts of $4,993.92 and $4,993.92 which were the amounts which he originally included and deducted as set out above. These were described on the form T-196 as “amounts are being withdrawn on a T3012A ($4,993.92 total)” and were to be reduced to zero.

In fact, in 1993, he withdrew only $4,000.00 from the two RRSPs. This amount, according to paragraph 7(f) of the Reply:

was included in the income of the Appellant in 1993 pursuant to subsections 146(8) and 146(8.3) of the Income Tax Act (the “Act”).

From this the respondent stated in paragraph 7(g):

the net premium balance of the Appellant for 1992 is $993.92 calculated as follows:

Total premiums per paragraph (d) supra: $4,993.92

Less:

Total per paragraph (f) supra: 4,000.00

Net Premium Balance for 1992: $ 993.92

The representative of the respondent, after the case was closed, filed a copy of the appellant’s 1993 return. I accepted it for what it was worth but it was not properly identified, nor were the notes and adjustments, apparently made by an assessor, properly explained or identified. The inference that the respondent’s representative asks me to draw is that the assessor added $4,000.00 at line 129 and deducted it at line 232. In the absence of testimony by the assessor, I do not, however, regard this as acceptable evidence and all I am left with is the unrebutted “assumption”, so-called, that the sum of $4,000.00 was included in the appellant’s income for 1993. The appellant’s 1993 assessment was not put in evidence.

The basis of the inclusion in the appellant’s income for 1992 of $993.92 is subsection 146.01(9) which requires the inclusion in income for 1992, the lesser of:

(a) the net premium balance for the year of the individual, and

(b) the total of

(i) all eligible amounts received by the individual before March 2, 1993 (in this case, the $4,958.68 that he withdrew on March 12, 1992 and possibly also the $4,959.61 that he withdrew from his wife’s RRSP under the home buyers’ plan), and

(ii) the lesser of

(A) + (B)

(Essentially amounts calculated in respect of the individual’s spousal RRSP).

The calculation of net premium balance is provided in subsection 146.01(10). The Department of National Revenue calculated it as $993.92, being the excess of the $4,993.92 which he contributed on March 1, 1993 over the $4,000.00 which he withdrew in 1993. In fact by including the $4,993.92 in his 1992 income and also deducting it, the appellant effectively neutralized the effect of his paying the amount and so the net premium balance should arguably have been nil under subsection 146.01(10).

I do not however have to put my decision on this basis. What, on the evidence, is the net result of all of this?

(a) A payment of $4,993.92 into the RRSPs for 1992 which, effectively, gives him no tax benefit because its deduction is offset by an equal inclusion, but which, when withdrawn, must be included in income as indeed, according to the Reply, $4,000 was.

(b) The sum of $993.92 which in 1992 is subjected to tax under subsection 146.01(9) and remains subject to tax again when it is withdrawn.

In short, on the evidence before me, Mr. Chen gets no deduction when the $993.92 goes into the plan, he is taxed on it in 1992 under subsection 146.01(9) when it is in the plan and he is taxed on it again when it comes out. Moreover, if he does not repay the $9,918.26 which he withdrew under the home buyer’s plan, he is taxed on that.

The result is, to say the least, bizarre. Indeed, it is penal and confiscatory and, as such, intolerable. Where an interpretation of a statute leads to a patent absurdity it is to be avoided. (Victoria (City) v. Bishop of Vancouver Island, [1921] 2 A.C. 384, 59 D.L.R. 399 (P.C.); R. v. Consumers' Co-op. Refineries Ltd. (sub nom. The Queen v. Consumers' Co-operative Refineries Ltd.), [1987] 2 C.T.C. 204, 87 D.T.C. 5409 (F.C.A.)). The result of the Department’s interpretation is not in conformity with the scheme of the Act (Highway Sawmills Ltd. v. Minister of National Revenue, [1966] S.C.R. 384, [1966] C.T.C. 150, 66 D.T.C. 5116, at page 393 (C.T.C. 157-58)) or its object and spirit (Stubart Investments Ltd. v. R. (sub nom. Stubart Investments Ltd. v. The Queen), [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305). The benefit of the doubt must be given to the taxpayer in these circumstances R. v. Fries ((sub nom. Canada v. Fries; The Queen v. Fries), [1990] 2 S.C.R. 1322 (sub nom. Fries v. Canada), [1990] 2 C.T.C. 439 (sub nom. Fries v. R.), 90 D.T.C. 6662; Stubart, supra). To accept the respondent’s interpretation would be to follow a “purely mechanical approach” rather than a “functional one” in which the scheme is “considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes”. (Swantje v. R. (sub nom. Swantje v. Canada), [1994] 2 C.T.C. 382 (sub nom. R. v. Swantje), 94 D.T.C. 6633 (F.C.A.); aff’d, [1996] 1 S.C.R. 73, [1996] 1 C.T.C. 355, 96 D.T.C. 6310).

Moreover, the Department’s interpretation and application of the provisions of sections 146 and 146.1 are contrary to the provision of subsection 4(4) of the Act which prohibits, in the clearest terms, double taxation.

The appeal is allowed and the assessment for 1992 is referred back to the Minister of National Revenue for reconsideration and reassessment to delete from the appellant’s income the sum of $993.92.

The appellant is entitled to his costs, if any.

Appeal allowed.