Taylor (V.) v. Canada, [1991] 1 CTC 304

Hugessen, J.A. (Heald and Stone, JJ.A. concurring):—This is an appeal from a judgment of the Trial Division which allowed the taxpayer's appeal from the Minister’s reassessment in respect of the 1985 taxation year.

Although the reassessment relates to the 1985 taxation year the transactions and resulting computations all relate to 1983. Since the taxpayer is an individual her taxation years are in each case and invariably the same as the calendar year (Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), section 249).

For the first ten months of 1983, and for a number of years before that, the taxpayer was a resident of the United States. As such her income from property or a business located outside of Canada was not subject to Canadian income tax. She became a resident of Canada on November 1, 1983 from which point her entire income worldwide from whatever source became subject to Canadian tax.

During the first ten months of 1983 the taxpayer had income from sources outside Canada on which she paid foreign "non-business income tax” (as defined in paragraph 126(7)(c)) of $325,226.

During the last two months of 1983 the taxpayer had an income of some $8,600 which she reported on her 1983 Canadian income tax return. From this income, she deducted the entire amount of the foreign non-business income tax previously mentioned. Such deduction was, in the taxpayer's view, permitted by subsection 20(12):

20.(12) Foreign non-business income tax.—In computing the income of a taxpayer for a taxation year, there may be deducted such amount as he may claim not exceeding the non-business income tax paid by him for the year to the government of a country other than Canada (within the meaning assigned by paragraph 126(7)(c) read without reference to subparagraphs (iii) and (v) thereof) other than any such tax, or part thereof, that may reasonably be regarded as having been paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation.

In her income tax return for the 1985 taxation year the taxpayer claimed as a deduction in computing her taxable income a " non-capital loss of other years utilized in 1985" in an amount of $84,774, the effect of which was to reduce her federal tax payable to zero. This deduction was claimed on the basis that the deduction of the foreign non-business income taxes from her income for the two months of 1983 during which she had been a resident of Canada resulted in a non-capital loss which was available for carry-forward to her 1985 taxation year.

The Minister disallowed the subsection 20(12) deduction and resultant loss and ruled that there was no loss for the 1983 taxation year which could be carried forward to be used as a deduction in computing taxable income for the 1985 taxation year. The taxpayer appealed successfully to the Trial Division, hence, the present appeal.

In allowing the taxpayer's appeal, the learned trial judge first noted that subsection 20(12), upon which the taxpayer relied, formed part of Division B of the Act. He said at page 229 (D.T.C. 6424):

Division B of the Act is the division of the Act which contains the rules governing the computation of the taxpayer's income as opposed to the taxpayer's taxable income. The rules governing the computation of the taxpayer's taxable income are contained in division C of the Act. Section 20 of the Division B is the section listing the deductions which are permitted in computing income from business or property and, as already noted, subsection 20(12) is the subsection which provides for the deduction of foreign non-business income taxes.

That subsection refers to the computation of the taxpayer's income for a "taxation year" which is defined, by section 249, of the Act, to be, in the case of an individual, the calendar year. Because the plaintiff paid foreign taxes on the sale of her shares in the calendar year 1983 she claims to come within theclear meaning of subsection 20(12) so as to enable her, when computing her income tax for the 1983 calendar year, to deduct from the income she was required to report to the defendant the amount of the foreign taxes paid by her for that calendar year.

Recognizing that the result contended for by the taxpayer is ” unusual” the learned trial judge nonetheless felt that it was proper because of the application of section 114. That section reads:

114. Individual resident in Canada during part only of year—Notwithstanding subsection 2(2), where an individual was resident in Canada during part of a taxation year, and during some other part of the year was not resident in Canada, was not employed in Canada and was not carrying on business in Canada, for the purpose of this Part, his taxable income for the taxation year is the aggregate of

(a) his income for the period or periods in the year during which he was resident in Canada, was employed in Canada or was carrying on business in Canada, computed as though

(i) such period or periods were the whole taxation year,

(ii) any disposition of property deemed by subsection 48(1) to have been made by virtue of the taxpayer's having ceased to be resident in Canada were made in such period or periods, and

(iii) any amount deemed by subsection 48(1.1) to be a capital gain or capital loss for the year from an indexed security investment plan were a capital gain or capital loss, as the case may be, for such period or periods, and

(b) the amount that would be his taxable income earned in Canada for the year if at no time in the year he had been resident in Canada, computed as though the portion of the year that is not in the period or periods referred to in paragraph (a) were the whole taxation year,

minus the aggregate of such of the deductions permitted for the purpose of computing taxable income as may reasonably be considered wholly applicable to the period or periods referred to in paragraph (a) and of such part of any other of those deductions as may reasonably be considered applicable to such period or periods.

Commenting on this text the learned trial judge said at pages 229-30 (D.T.C. 6424-25):

Under the provisions of section 114 the plaintiff is obliged to compute both her Division B income and her Division C taxable income. By paragraph 114(a) her income, which is subject to any deductions available to her under the rules of Division B, consists only of her income for the months of November and December, 1983. However because, by definition, her taxation year is the calendar year, she is entitled to the subsection 20(12) deduction from her short year income. In completing the computation of her income as required by paragraph 114(a) she elected to exercise her right given under subsection 20(12) to claim as a deduction the foreign taxes paid by her. This, of course, resulted in a substantial nonbusiness loss.

[Emphasis added.]

In my respectful view the learned trial judge went wrong here and the source of his error is in the underlined words. While it is true that by the operation of subsection 249(1) of the Act'"taxation year' is . . . in the case of an individual, a calendar year" section 114 specifically makes an exception to that rule in the case of a taxpayer who is resident in Canada for a part only of the year. [1] For such a taxpayer's period of Canadian residence, his“ income" is to be "computed as though such period . . . [was] the whole taxation year"; during his period of non-Canadian residence his "taxable income earned in Canada" is to be computed as though that period "were the whole taxation year".

The result of this legislative disposition is that although the taxation year for every individual taxpayer continues to be the calendar year, a special form of computation is required for taxpayers who are resident during a part of the year only. For them their resident and non-resident periods must be computed separately as though in each case such period constituted the entire taxation year. In effect the calendar year for them is divided into two notional taxation years, one corresponding to the period of residence, the other to the period of non-residence.

The application of these rules to the case of the present taxpayer demonstrates that the Minister was correct to disallow the deduction here in question. As the trial judge rightly pointed out a deduction under subsection 20(12) is relevant to the computation of ” income". That computation, however, in the case of the present taxpayer in respect of her 1983 Canadian income tax return, is to be made "as though” the period of her Canadian residence, the months of November and December, "were the whole taxation year." The deduction allowed under subsection 20(12) in computing the taxpayer's income "for a taxation year" is in respect of non-business income tax paid by the taxpayer “for the year" i.e., for those same months of November and December 1983. Since in the present taxpayer's case the foreign non-business income tax was paid in respect of income earned in the first ten months of the year it cannot be deducted in computing income: a "whole taxation year" consisting of the months of November and December necessarily excludes the months of January to October.

I would allow the appeal, set aside the judgment of the Trial Division and restore the Minister's reassessment, with costs against the taxpayer in both Divisions.

Crown's appeal allowed.