Estate of Hannah Reisman v. Minister of National Revenue, [1978] CTC 2541, [1978] DTC 1398

Delmer E Taylor:—This is an appeal against an income tax assessment for the year 1972 wherein the Minister of National Revenue assessed to tax the recaptured capital cost allowance in connection with a deemed disposition of depreciable property. The appellant relied upon paragraph 20(6)(c) of the Income Tax Act, RSC 1952, c 148 (the old Income Tax Act) and subsections 104(4) and (5) of the Income Tax Act, SC 1970-71-72, c 63 (the new Income Tax Act). The respondent relied, inter alia, on section 13 and subsections 104(4) and (5) of the Income Tax Act, SC 1970-71-72, c 63.

Facts

The taxpayer in 1972 and prior years was a Spousal Trust created on March 23, 1957 by the will of the late Hannah Reisman. The life tenant died on October 29, 1972. An asset of the Estate was a dwelling house at 354 Walmer Road rented to several tenants. In 1967 and prior years the Estate had claimed capital cost allowances on the dwelling house. Subsequent to that year no capital cost allowance was Claimed.

On the death of the life tenant a return for 1972 was filed assuming a deemed disposition of the property under the provisions of subsections 104(4) and (5) of the Income Tax Act. In computing the tax payable the provisions of ITAR 42 were applied with respect to the deemed recapture of $4,551.78. The Minister, on August 22, 1974, by assessment No 4214378 assessed ‘the taxpayer in the amount of $850.44 for the tax year 1972. This resulted in the payment by the taxpayer of $277.36 additional tax plus interest. On November 12, 1974 a notice of objection was filed. On June 23, 1975 the Minister confirmed the assessment.

Contentions

It was the appellant’s position that:

—its return for the taxation year was computed in error.

—under paragraph 20(6)(c) of the former Act, the capital cost of a property acquired by bequest was the fair market value at the date of acquisition. As the proceeds of disposition to the Estate were nil, no recapture would have taken place.

—the taxpayer accepts that on termination of the Spousal Trust subsections 104(4) and (5) properly result in the recapture of capital cost allowances claimed under the amended Act. However, the application of subsections 104(4) and (5) to the taxpayer recapturing capital cost allowances claimed under the former Act seriously gives retroactive effect to the amendments, thereby offending a major dogma of taxation law.

—the taxpayer contends that the immediate recapture on the death of the life tenant of the capital cost allowances previously claimed on the property is an undue hardship in equity and should be ameliorated.

The respondent contended that at the date of death of the life tenant in the trust:

—the fair market value of the building was $75,000;

—the capital cost to the appellant of the said building was $13,524;

and

—the undepreciated capital cost to the appellant of the said building was $5,476;

—the appellant is deemed by subsections 104(4) and (5) to have disposed of the said property at that time for proceeds equal to $44,724.11 (being computed as $14,448.22 plus /2 ($75,000— $14,448.22)) and accordingly, pursuant to section 13 of the Income Tax Act the amount of $4,551.78 (being computed as $13,524 minus $8,972.22) is to be included in the computation of the appellant’s income for 1972.

Evidence

No evidence was submitted by either party, the facts as indicated above having been agreed.

Argument

Since the point at issue is fundamental and the argument from each side relatively brief, the essence of it is quoted here to portray as accurately as possible the positions of the parties:

For the appellant:

I want to bring to the Board’s attention the fact that the pre-1972 Tax Act, that is the old Act, where the beneficiary or the remaining spouse by way of an estate becomes deceased, the remainder would obtain the assets of the estate at fair market value and the estate itself would be considered not to have disposed of any of the assets at any gain to the trust.

If I may shorten that, what I am trying to say is that in similar circumstances (pre-1972), there is no question that there would be no recapture of depreciation to the estate; there would be no taxation.

With that, I would like to go to subsection 104(4). I bring to the Board’s attention that this particular section deals with estate specifically, ‘‘and for the purposes of this Act’’; and then it goes on. My point of argument here is, “which Act”? This Act is called the Income Tax Act.

When reviewed the CCH, the Canadian Edition of the Income Tax Act, and in referring to Mr Hermosa’s statements, they both stated emphatically— albeit that’s only the editorial—but this is the grasp; tnis is the manner of reference: “The following tables provide a handy cross-reference from the current Income Tax Act to the pre-1972 Income Tax Act, and vice-versa .. .” Then they go into a cross-reference of tables. I submit that there was no provision in the Act that says “we will recapture any depreciation under these circumstances’’. My submission is that this Act (indeed the post-1972 Act) can only refer to capital cost allowance under this Act, as subject to recapture (italics mine).

The relevant sections that the Department, I must say, is relying on for the calculation or assessment of this cost allowance is subsections 104(4) and (5), as well as stated in their Reply, section 13, I believe. And if I refer to section 13, Mr Chairman, I would point out something, a very strong anomaly. Subsection (1) of section 13 says:

“Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of . . .”

and then it goes on.

I submit that the Notice of Reply by the department errs in relying on section 13 in order to encompass the provisions of subsections 104(4) and

(5) if, in fact, those provisions are applicable to these circumstances.

I stand to be corrected, but I submit that there has never been any such legislation passed to give that effect to subsections 104(4) and (5) as referred to in the Government’s Notice of Reply.

I don’t think there is a provision under the Income Tax Act to deal with the particular problem. I submit it is not required. The Act speaks for itself. Section 13 speaks of “having been disposed of’’. Subsection 104(4) speaks of “In this Act”. I think the Act speaks for itself, and I think there was no need for any rules or regulations under the Income Tax Act.

The Chairman:

So, the essence of your argument is that in a trust, any capital cost allowance taken prior to December 31, 1971 is not recapturable by the Government under the New Act?

Mr Reisman: I think that is much better than the way I made the point. Under the testamentary trust, any depreciation taken prior to 1972 was not recapturable under the Old Act, and is not recapturable under the New Act.

For the respondent:

Just briefly, two points. The appellant refers to subsection 104(4): “For the purposes of this Act”-: It seems to me it is logical to come back to what “this Act” is. Of course it comes back to the Income Tax Act which we have in effect now.

It seems to me whether or not capital cost allowance is recapturable in this section under this Act, trusts are taxed as individuals under the Act. Unless there are any special provisions, trusts should be taxed as any individual, and individuals are taxed according to section 3 of the Act.

In this case we are dealing with depreciable property, and in this regard if we look at subsection 13(1), it provides that recaptured capital cost allowance may be wholly or partly brought back into income in later years.

The basic rule underlying this is: capital cost on depreciable property [sic] could not exceed the actual declining value of the property. Since the provisions of subsection 3(1) apply to taxpayers, the section applies to trusts. Since a trust is one of the taxpayers involved here, therefore the recapture provisions of subsection 13(1) apply to the CCH.

In this particular situation, it seems to me the design of this is to bring into income depreciable property. In this case we have class 3 depreciable, class 3 schedule—so it seems to me we have to look at this trust and the taxation as an individual under the Act.

We find that the recapture as set out in the Reply of the Minister, under the New Act, is applicable.

Finally, for the appellant:

At the risk of being redundant or repetitious, I draw the Board’s attention to the fact that even my friend Mr Hermosa referred to this new Act. On one hand he says there are no rules and regulations to omit or to prevent the taxation on this recapture capital cost. On the other hand he is attempting to interpret or add to section 13.

Findings

There is no disagreement between the parties about subsections 104(4) and (5) of the Act as they have been applied to deal with the value attributed to the property (the building) at the relevant date in 1972. The disposal amount appears to be $44,724.11 as detailed in the Reply to Notice of Appeal. Had the matter rested there, it is evident from the argument of the agent for the appellant, there would have been no issue. However, the Minister has invoked the provisions of subsection 13(1) to tax as income to the trust, in the form of recaptured capital cost allowance, that depreciation taken by the trust in the years up to 1967, amounting to $4,551.78.

The argument presented by counsel for the respondent, that the trust in question is to be treated for tax purposes just as any other individual taxpayer, is valid. That argument includes the application of provisions dealing with recaptured capital cost allowance. The proposition of the agent for the appellant is founded on his belief that since depreciation was not taken on the building subsequent to the passage of the 1972 Income Tax Act, no depreciation is available for recapture. It may be that with some chagrin the agent sees depreciation now being recaptured which was taken by the trust during a period when the legislation did not provide for recapture. However, the inclusion of subsection 104(2) in the Act prescribing that a trust is to be treated as an individual would indicate that this was precisely the result desired by Parliament. The “purposes” of this Act (and its predecessor) were the determination and collection of income taxes, and it is evident to me that the specific purpose of section 104 is to regularly establish (three times with a spousal trust and twice with others, all at intervals of 21 years), an equitable asset value for depreciable property under subsection (5) and for all other capital assets under subsection (4). Thereby any reduction in taxable income of the trust by virtue of asset depreciation taken but not in fact experienced, would be brought into that income reconciliation. To be supportable, the assertion of the agent for the appellant would require evidence in the section that the legislation was intended to exclude from tax any depreciation taken under the predecessor Act. I do not read that, and in fact read quite clearly the opposite intent— to bring into the tax picture precisely such unwarranted charges against the income of the estate.

Decision

The appeal is dismissed.

Appeal dismissed.