Savard v. R, [1997] 2 CTC 2705

P.R. Dussault T.CJ.:

These appeals were heard on common evidence under the Court’s informal procedure. They are appeals from assessments for the 1991, 1992 and 1993 taxation years in which the Minister of National Revenue (the Minister) disallowed the deduction for gifts applicable to members of religious orders provided for in subsection 110(2) of the Income Tax Act (the Act). This provision reads as follows:

Where an individual is, during a taxation year, a member of a religious order and has, as such, taken a vow of perpetual poverty, he may deduct in computing his taxable income for the year an amount equal to the aggregate of his superannuation or pension benefits and his earned income for the year (within the meaning assigned by section 63) if, of his income, that amount is paid in the year to the order.

During the years in issue, the appellants were members of the Roman Catholic Congregation of “The Fathers of the Sacred Hearts” (the congregation) established as a civil corporation in Quebec by special statute in 1949. [1] Section 6 of that statute provides in particular that “The corporation shall be governed according to the rules of its congregation ” and “it may exercise all the powers necessary for such purpose.”

It is not disputed that the appellants are members of a religious order and that, as such, they have taken a vow of perpetual poverty. However, since during the years in issue the appellants had bank accounts in their own names in which their salaries were deposited and since they also owned investments and other assets in their own names and paid their own ex- penses, the respondent argued that the third condition stated in subsection 110(2) of the Act was not met in that the appellants did not pay all of their earned income over to their religious order in those years.

Roger Le Roy is currently Regional Superior and Bursar of the congregation in Canada. He reports to a Provincial Superior in France, who in turn reports to the Superior General in Rome.

During the years in issue, the appellants were members of the congregation in Canada and resided in different locations in Quebec. Mr. Le Roy lives in Alma in the Lac St-Jean area. The other members are scattered elsewhere in the province, in particular in Montréal and Boucherville, where they generally perform the duties of parish priests or vicars. According to Mr. Le Roy, the congregation’s members were initially all together in the regional house in Longueuil, and later in Montréal. At that time, the bursar handled the details of all financial matters affecting the congregation and its members. During the 1970’s, the members dispersed, each continuing his ministry in a different place. Starting at that time, each member, wherever he was, opened a bank account in his own name in which his salary or other income was deposited. Because of the distance factor, each also administered his own current expenditures. Surpluses were sent to the bursar or invested by the members in their own names. According to Mr. Le Roy, there can be no doubt that all the money deposited in the bank and all the other property acquired by the members in their own names, such as automobiles and investments, including those in RRSP [2] or SSP [3] accounts belonged to the congregation. M. Le Roy also stated that it was he who was responsible for the members’ having been allowed to pay their current expenditures. Given his relationship of trust with the members, however, not all current expenditures had to be authorized in advance by him, only those in excess of a few hundred dollars. In addition, at least once a year, the members sent him a statement of total revenues and expenditures, bank account balances and investments. [4] From these individual reports, Mr. Le Roy prepared a comprehensive annual report on the status of the congregation’s assets for “the Canada region” and forwarded it to his Provincial Superior in France. This comprehensive report indicated in particular total cash and investments held in each member’s name, bank account numbers and de- tails of the make-up of the various investments. [5] Although these documents were not prepared as an accounting professional would prepare them, they leave no doubt that all the assets belonged to the congregation.

The question as to why these specific investments were in the names of the individual members rather than in that of the congregation was raised in cross-examination. In reply, Mr. Le Roy indicated that, as the Quebec Taxation Act made no provision for a deduction equivalent to that under subsection 110(2) of the Act, provincial authorities had suggested that members invest individually in RRSP and SSP accounts so as to reduce their provincial tax.

Counsel for the respondent also asked why it was necessary for members to make a will if the assets, and more particularly members’ salaries, truly belonged to the congregation. Mr. Le Roy stated that members could privately own patrimonial property received by way of gift or inheritance, for example, and could dispose of such property by will. With respect to one particular clause (which appears, among other places, in the will of Louis Michelot, now deceased) providing for the bequest to the congregation of unpaid salary or benefits of any kind whatever for labour or from pension plans, Mr. Le Roy explained that a provision in a civil will merely constituted an extra precaution, but that it was not necessary for the purpose of establishing the congregation’s ownership of such assets.

The appellant Eric Bouleau ’s testimony was generally consistent with that of Mr. Le Roy. In his view, he was essentially the depositary of the amounts paid into his personal bank account. He kept most of it to pay his current expenses and forwarded the surplus to Mr. Le Roy in Alma once or twice a year. He also sent him the aforementioned annual report.

Lucienne Boisvert, a member of the Sisters of Charity and Chancellor of the Archdiocese of Quebec, testified concerning the rules of canon law governing congregations and their members, and more particularly concerning the ownership of income from the labour of members. Ms. Boisvert holds a Licentiate in Canon Law from St. Paul University in Ottawa. Counsel for the respondent raised no objection to her testimony on this subject.

Ms. Boisvert first referred to canon 668, § 3, chapter IV, of the Code of Canon Law respecting the obligations and rights of institutes and of their members. This provision reads as follows:

Whatever a religious acquires by personal labour, or on behalf of the institute, belongs to the institute. Whatever comes to a religious in any way through pen- sion, grant or insurance also passes to the institute, unless the institute’s own law decree otherwise.

According to Ms. Boisvert, canon 702, § 1, chapter VI, of the Code of Canon Law confirms in a way canon 668, § 3. It reads as follows:

Whoever lawfully leaves a religious institute or is lawfully dismissed from one, cannot claim anything from the institute for any work done in it.

Thus, in Ms. Boisvert’s view, the basic rule is simple and clear: the proceeds of the work of a member of a congregation belong to that congregation. Ms. Boisvert also referred to articles 26 and 27 of the constitution and statutes of the congregation to which the appellants belong. These provisions read as follows:

[TRANSLATION]

26. We undertake by the vow of poverty:

1. Not to have or use material property, either patrimonial or belonging to the community, except with the authorization of the lawful superiors who direct the religious community in accordance with universal law and the Institute’s own law. [6]

2. To share all we earn or receive in any way whatever except by way of family inheritance.

3. Accordingly, all we receive in exchange for our labour or on behalf of the Institute we acquire for the Institute, as is likewise the case with all pensions, grants or insurance. [7]

27. By virtue of their vow of poverty, the brothers lose neither the ownership of their property nor the ability to acquire other property through family inheritance. However, prior to their temporary profession, they shall designate by civilly valid deed, an administrator of that property and the persons who may have the use or usufruct thereof during the time they are bound by vows. They may not pay their income or annuities into their own patrimony beyond what is required to maintain its value. Similarly, prior to their perpetual profession, they shall make a civilly valid will respecting their property. The permission of the Provincial is required in order to amend the provisions of either of those documents and to alienate property that is part of their patrimony. [8]

As Ms. Boisvert noted, paragraph 3 of article 26 essentially restates canon 668, § 3, of the Code of Canon Law referred to in the footnote.

Thus, in Ms. Boisvert’s view, a very clear distinction is drawn between patrimonial property, which remains the property of a member but the administration of which must be entrusted to a third party as long as the mem- ber is bound by vows, and the salary or other proceeds of his labour, which are simply acquired for the institute and thus become its property. What is involved here, she said, is a contract in which the consideration is the obligation on the part of the institute to provide the member with those things necessary for a decent life. In her view, the fact that the members of a congregation have, for example, bank accounts in their own names is merely one way of administering property that belongs to the institution or to the congregation and not an indication that those assets belong to the members. This mode of administration cannot, in her view, change the applicable legal principles.

In this context, Ms. Boisvert pointed out that a member is subject to the vow of obedience and that he must obtain the necessary authorizations from his superior.

As to the question of the necessity of making a will, Ms. Boisvert stated that, while this is mandatory for the disposition of patrimonial property, it is nothing more than a superfluous precaution in the case of unpaid wages or pension benefits which, in any case, belong to the institute.

The testimony of André Boudreau, a Revenue Canada auditor, and that of Yves Côté, an appeals officer, did not really shed any new light on the merits of the case. Their evidence mainly concerned the position taken during and after the audit. It is important to note here that not necessarily all the documents filed in evidence at the hearing were brought to the attention of the authorities when the returns of income were filed or subsequently during the audit. In my view, there was somehow a misunderstanding and lack of communication respecting the documents required by the authorities. There was definitely no bad faith on the appellants’ part nor any refusal to cooperate. Be that as it may, I think it important to point out that the basis of Revenue Canada’s decision to disallow the deduction under subsection 110(2) of the Act for the years in issue was the fact that the bank accounts, investments and other assets were in the members’ names and not the congregation’s. In light of this fact, it was assumed that each of the appellants had the discretion to dispose of his income as he wished.

In a letter from Mr. Boudreau to Mr. Le Roy dated December 14, 1994, the following suggestions were moreover offered as to changes that should be made in the administration of the congregation’s property so that mem- bers might eventually be able to take advantage of the deduction under subsection 110(2) of the Act:

[TRANSLATION]

-Transfer all the assets in your name to that of the community of the Fathers of the Sacred Hearts (RRSPs, automobiles, bank accounts, investments, etc.).

-Open a bank account in the name of the community in which all the incomes of all the members of the community are deposited directly and in their entirety.

-Pay all expenses of the members out of that account and keep accounts in order to monitor the situation. [9]

Starting in 1995, the congregation and its members compiled with these instructions.

My understanding of Mr. Côté’s testimony is that to the extent that only a portion of the income earned by the appellants during the years in issue was handed over to the congregation, the deduction under subsection 110(2) of the Act had to be disallowed, although a tax credit could have been granted under section 118.1 of the Act in respect of the amounts thus paid to the congregation. However, as he was not made aware of any evidence as to the amount paid by each of the appellants, no credit was allowed. According to Mr. Côté, the decision to disallow the deduction under subsection 110(2) of the Act in these circumstances was consistent with the judgment of the Federal Court, Trial Division, in Aubry [10] This was also the official position of the Department of National Revenue as stated in paragraph 5 of Interpretation Bulletin IT-86R. [11] In Aubry, supra, a Jesuit no longer living in a community but alone in an apartment had admitted having paid to his community only the excess of his salary over the amount of his personal expenses. He was denied the deduction under subsection 110(2) solely on the basis of this admission.

Counsel for the appellants contended that the position adopted by Revenue Canada was incorrect because it was too technical and strict, being based essentially on a matter of form. In counsel’s view, effect must be given to canon law regarding the consequences of the vow of poverty. [12] Thus, even though the members of the congregation had accounts in their own names in which they deposited their salaries, it is very clear that they were merely agents of the congregation just as they would have been if they had had a power of attorney to conduct transactions involving accounts which were in the congregation’s name. He also stressed the fact that the annual financial reports indicated that these personal accounts and the members’ investments were the congregation’s property. Counsel for the appellants emphasized that one must also consider the actual situation and, in particular, the provincial tax legislation, which makes no provision for a deduction equivalent to that under subsection 110(2), as a consequence of which, in order to reduce their personal income tax, the members had to invest, for example, in RRSPs or SSPs, which could be done only in their own names. In this respect, he insisted, the members were never anything other than nominees or agents of the congregation, just as they were with respect to any interest income that the amounts on deposit or invested might generate. Furthermore, everything took place under the supervision of the congregation’s Regional Superior and Bursar, he said.

Counsel for the appellant felt that the decision in Aubry, supra, did not indicate what arrangement the appellant there might have had with his community. He further thought that that decision put forward too technical an interpretation of the conditions stated in subsection 110(2) of the Act. He submitted that such an interpretation was not consistent with the spirit of the provision, which must take precedence and be given effect. With respect to the applicable rules of interpretation, counsel for the appellants referred to the decisions by the Supreme Court of Canada in Stubarl^ [13] and Corporation Notre-Dame de Bon-Secours.^ [14] The latter judgment was also cited in support of the principle of residual presumption in favour of the taxpayer.

It is important first to emphasize that, in Aubry, supra, cited in support of the respondent’s position, judgment was rendered on the basis of the appellant’s admission that only the excess of his salary over the amount of his expenses had been paid to his community. It indeed appears that no other evidence was adduced that might have enlightened us as to the nature of the

sion is reported in (1987), 8 Q.A.C. 1 (Que. C.A.). See also Regent Taxi & Transport Co. v. Congrégation des petits frères de Marie, [1932] A.C. 295 (Quebec P.C.).

arrangement made in this regard or as to the rules governing the Society of Jesus and its members. The situation is different here.

First, it was established that the basic rule of canon law is that a member of a congregation who takes a vow of poverty renounces in favour of his congregation all that he acquires by his personal labour (C.C.L., c. 668, § 3).

The constitution and statutes of the congregation restate in essence the same rule for its members in referring to an undertaking “to share all we earn or receive in any way whatever except by way of family inheritance” [15] (paragraph 2 of article 26). The nature of the undertaking is more specifically set out, and in the clearest of terms, in paragraph 3 of article 26, which I cite again for the sake of convenience:

[TRANSLATION]

Accordingly, all we receive in exchange for our labour or on behalf of the Institute we acquire for the Institute, as is likewise the case with all pensions, grants or insurance. [16]

These two above-mentioned provisions are preceded by the first undertaking of the vow of poverty expressed in the following terms:

[TRANSLATION]

1. Not to have or use material property, either patrimonial or belonging to the community, except with the authorization of the lawful superiors who direct the religious community in accordance with universal law and the Institute’s own law. [17]

In my view, the effects of these undertakings in civil law cannot be disregarded. They are part of a sui generis agreement or contract whereby a member transfers to his congregation the right to everything he receives in exchange for his labour. The consideration is of course the congregation’s obligation to provide him with the necessities life. [18] Such an agreement is entirely valid. It sets out an obligation whose object is possible and not forbidden by law or good morals. [19] Similarly, the obligation has for its object something determinate at least as to its kind. Although the quantity may at first have been uncertain, it could subsequently and by degrees be ascer- tained. [20] The salary of a member thus becomes the property of the congregation and it should be borne in mind that the member cannot have or use it except with the permission of his superiors. It should be added that the rules of the congregation are recognized through the granting of a civil charter by special statute. [21] So much then for the applicable law. In my view, this satisfies the requirement of subsection 110(2) of the Act that all of the income earned must be paid to the religious order during the year. The undertaking made at the time the vows are taken continues to have effect for the duration of the vows and as long as a salary or other income is earned by the person who made such vows, including the vow of poverty.

As to the facts, contrary to appearances, they did not reveal a reality different to that stated above. The characteristics of property law must not be confused with the exercise of administrative powers. The evidence clearly shows that all the assets in the members’ names were the property of the congregation. Because of the distance factor, the Superior and Bursar of what is called the “Canada region” allowed the few members of the congregation living in Canada to handle themselves the administration of their own incomes and expenses. This was done with his approval and under his authority. His permission was required to incur any major expense. The members also had to provide him with an annual report on the funds administered and he himself submitted to his Provincial Superior in France an annual report on all funds and investments held in the names of the members individually or of the congregation. In the circumstances, it certainly cannot be claimed that each member of the congregation administered his earned income at his own discretion as though it belonged to him personally. He merely administered an asset belonging to the community and did so under the authority of his Superior. The modes of a decentralized form of administration which were selected in order to deal with a particular situation did not change the respective rights and obligations of the members and their congregation.

The appeals are allowed with costs.

Appeal allowed.