Sarchuk T.C.J.:
1 This is an appeal by Eric John (the Appellant) from an assessment of tax with respect to his 1994 taxation year. At issue is the proper application of subsection 118(2) of the Income Tax Act (the Act).
2 The following facts are not in dispute. The Appellant attained the age of 65 years before the end of 1994. In that taxation year, he was the recipient of foreign pensions. In computing income for the 1994 taxation year, the Appellant included the amount of $3,734 as foreign pensions and deducted the amount of $2,736 as an age credit pursuant to the provisions of subsection 118(2) of the Act.
3 In assessing the Appellant, the Minister of National Revenue (the Minister) recalculated the Appellant's age credit for the taxation year in issue as $2,457. The Appellant takes the position that the Minister erred in so doing.
4 The Appellant's position is quite straight forward. Pursuant to tax treaties with Germany and France, no tax is payable on his foreign pensions. However, the effect of the Minister's calculation is to improperly levy tax on those amounts. The Appellant claims that to prevent the assessment of tax on his foreign pension, it is necessary to deduct the amount of his foreign pensions prior to the computation of the age credit. In essence, his position is that the age credit amount must be calculated on the taxable income, not the net income, otherwise tax is paid on the foreign pensions. The computation utilized by the Minister in his assessment, according to the Appellant, results in the additional payment of tax of $278.96.[FN1: <p><p><table><thead><tr><th>1994 tax on foreign pension</th><th>no tax on foreign pension</th><th></th><th></th></tr></thead><tbody><tr><td>net income</td><td>$39,600.74</td><td>taxable income</td><td>$35,866.69</td></tr><tr><td>base amount</td><td>$25,921.00</td><td>base amount</td><td>$25,921.00</td></tr><tr><td>line 4</td><td>$13,679.74</td><td>line 4</td><td>$9,945.69</td></tr><tr><td>times 7.5%</td><td>$1,025.98</td><td>times 7.5%</td><td>$745.92</td></tr><tr><td>line 1</td><td>$3,482.00</td><td>line 1</td><td>$3,482.00</td></tr><tr><td>line 6</td><td>$1,052.98</td><td>line 6</td><td>$745.92</td></tr><tr><td>enter on line 301</td><td>$2,457.02</td><td>enter on line 301</td><td>$2,736.08</td></tr></tbody></table></p></p>]
5 The Respondent's position is that the Minister properly calculated the age credit on the basis of a taxpayer's net income as opposed to taxable income. Counsel for the Respondent outlined the steps taken in this computation as follows. Subsection 118(2) of the Act provides:
118(2)
For the purpose of computing the tax payable under this Part for a taxation year by an individual who, before the end of the year, has attained the age of 65 years, there may be deducted an amount determined by the formulaA × ($3,236 - B)
- A is the appropriate percentage for the year; and
the value of B shall, for the 1994 taxation year, be determined as the lesser of $1,741 and 7.5% of the amount, if any, by which the individual's income for the year exceeds $25,921.
The Minister contends that the reference in subsection 118(2) to income is to total income as described in section 3 of the Act. Taxable income on the other hand is defined in subsection 2(2) of the Act as the taxpayer's income for the year plus the additions and minus the deductions permitted by Division C.6 With respect to pension benefits, paragraph 56(1)(a) of the Act mandates that they shall be included in computing the income of a taxpayer for a taxation year. However, subsection 110(1) permits the deduction of certain amounts for the purpose of computing the taxable income of a taxpayer. One of these is subparagraph 110(1)(f)(i) which states as follows:
110(1)
For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such of the following amounts as are applicable:
7 The foregoing are all of the sections which are relevant in arriving at what this Appellant's taxable income is. The next step is to look at subsection 117(2) of the Act which sets the rates at which the tax payable is calculated. It is from this amount, i.e. the tax payable as calculated pursuant to the provisions of subsection 117(2) of the Act that any permissible credits can be deducted.
Conclusion
8 It is not disputed that on the face of it, the calculation carried out by the Minister in accordance with the provisions of the Act appears to have the effect of “taxing” the Appellant on his foreign pension income. Indeed, Counsel for the Respondent very properly brought to the Court's attention a decision of the Tax Court of Canada to that effect, Peter v. R..[FN2: <p>(1996), [1997] 2 C.T.C. 2504 (T.C.C.).</p>] The issue in that appeal was “whether or not the foreign income protected by the treaty from tax could be looked to in the calculations under Part I.2 of the Income Tax Act whereby, in common parlance, the clawback is applied to the old age security benefit and the family allowance benefit”. On facts similar to the present appeal, the Court concluded in Peter that “the effect of making the computation in the way that the Minister has done is to, in effect, tax the foreign income, albeit at a lower rate than if it were taken into the tax base”.
9 With respect, I am unable to follow this decision. In my view, the decision of the Federal Court of Appeal in Swantje v. R.[FN3: <p>(1994), 94 D.T.C. 6633 (Fed. C.A.); aff'd.(1996), 96 D.T.C. 6310 (S.C.C.).</p>] is applicable. As is the case in the present appeal, the taxpayer in Swantje had several sources of income including a German pension and a Canadian pension under the Old Age Security Act. In assessing Swantje for his 1990 and 1991 taxation years, the Minister computed his Part I.2 tax (under section 180.2 of the Act) by including the Part I.2 tax base pension income from Germany which was exempt from Part I tax under article 18(3)(c) of the Canada-Germany Tax Agreement Act, 1982. In the course of his reasons, Marceau J.A. stated as follows:
It is well established that Part I.2 of the Act provides for the repayment of benefits received by a taxpayer under the Family Allowances Act and the Old Age Security Act to the extent that the taxpayer's income is in excess of a $50,000 (indexed) threshold (see Thompson v. Canada, (1992), No. 92-899 (IT)). The respondent's tax liability under section 180.2 affects solely and exclusively his Canadian pension income. The German pension is used strictly to calculate the amount of the tax owed, a tax which represents a repayment of the Canadian benefits received. This repayable is deductible in the computation of taxable income pursuant to section 69(w) to ensure that the recaptured benefits are not taxed as income.
The approach adopted by the learned judge was a purely mechanical one, focused on the method, the means devised to achieve the goal. The proper approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes (cf. Stubart Investments Ltd. v. R. (1984), 84 D.T.C. 6305 (S.C.C.)). What Part I.2 of the Act, completed by paragraph 60(w), realizes is the repayment of social benefits by taxpayers who, because of their higher incomes, have a lesser need of them.
The reassessment by the Minister of the respondent's tax liability under Part I.2 of the Act did not have the effect of imposing a tax on the German pension. It was based on a strict application of the legislation.
10 The legislative history of subsection 118(2) of the Act, as it read[FN4: <p>In 1988 and in subsequent years, up to but not including 1994, the subsection read:</p><h3><strong>118(2)</strong></h3><ul>For the purpose of computing the tax payable under this Part for a taxation year by an individual who, before the end of the year, has attained the age of 65 years, there may be deducted the amount determined by the formula<li><p>A × $3,236</p></li>where<li><p>A is the appropriate percentage for that year.</p></li></ul>] was discussed by Garon J. in Tiberio v. Minister of National Revenue[FN5: <p>(1991), 91 D.T.C. 17 (T.C.C.)at 20-21.</p>] . He observed at page 20:
The exemption for persons 65 or over was announced in the budget Speech on May 18, 1948 by the then Minister of Finance, the pertinent portion of this speech reported in Hansard at page 4060 reads thus:In the field of personal income taxes, I am proposing one change of significance which will, I believe, be accepted with commendation on all sides of the house. Having in mind the large number of elderly people living on small fixed incomes, and out of consideration for the particular trials and increased expenditures that usually come with advancing years, I am proposing that an additional exemption of $500 be granted to a taxpayer of sixty-five years of age or over. Many of these elderly people living on small pensions or other forms of fixed income with no opportunity to participate in the increased wages, salaries or profits enjoyed by other sections of the community, are particularly hard hit by the higher costs of living which present boom conditions have brought about. This group of our citizens is entitled, I think, to special consideration at this time. This special exemption follows a precedent established both in England and in the United States, and its effect in Canada will be that no taxpayer of sixty-five or over will pay tax until his income exceeds $1,250 if he is single, or $2,000 if he is married. This change will apply for 1948 and will cost about $5 million in revenue for a full year.
This personal exemption in respect of age became part of the Income Tax Act is a result of the enactment of paragraph 25(1)(e) of the Income Tax Act by chapter 52 of the Statutes of Canada for 1948. The principle of an additional deduction in computing taxable income to individuals who are 65 or over was maintained through several amendments or repeals until 1988. More specifically the deduction in respect of age as it was enacted in paragraph 109(1)(h) of the Income Tax Act by an Act to amend the statute law relating to income tax, assented to on April 18, 1973 remained unchanged until it was converted into a tax credit through (a) the repeal of section 109 of the Income Tax Act by section 76 of an Act to amend the Income Tax Act, the Canada Pension Plan, the Unemployment Insurance Act, 1971, the Federal-Provincial Fiscal Arrangements and Federal Post-Secondary Education and Health Contributions Act, 1977 and certain related Acts, S.C. 1988, c. 55 and (b) the enactment by subsection 92(1) of the latter statute of the present subsection 118(2) of the Income Tax Act setting up a tax credit for individuals who, before the end of the relevant year, have attained the age of 65 years. Both the repeal of section 109 of the Income Tax Act and the enactment of section 118(2) of the same Act were made applicable to the 1988 and subsequent taxation years. (Emphasis added)
11 Subsection 118(2) was further amended by S.C. 1995, c. 3, s. 33(1) applicable to the 1994 and subsequent taxation years to incorporate what was effectively a clawback of a portion of the age credit. The amendment was specifically enacted to reduce the age credit as a taxpayer's income increases to the point where at a certain level of income, a taxpayer would no longer be entitled to the credit although he might be 65 years of age in that particular taxation year. As Counsel for the Respondent observed, the intent of Parliament in amending this provision was based on the obvious fact that not each person who attained the age of 65 necessarily required relief from tax otherwise payable by way of a tax credit and that therefore, relief would only be granted where the financial circumstances required. With that intent in mind, it is reasonable to calculate the age credit on total income as opposed to taxable income.
12 In my view, although the effect of the calculation might appear as though the foreign pension were being taxed, the Act does not impose tax by virtue of the provisions in subsection 118(2). It does no more than realize the reduction of a social benefit, i.e. the age tax credit, for those taxpayers “who, because of their higher incomes, have a lesser need of them”. The appeal is dismissed.
Email this Content