2 August 1990 Ministerial Letter 9016488 F - The Queen v. Jack Miller and Robert Hunke v. M.N.R. - Adverse Decisions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Re: Adverse Decision The Queen v. Jack Miller (F.C.T.D.) Robert Hunke v. M.N.R. (T.C.C.)

This is in reply to your memorandum of July 20, 1990.

The law is quite clear.  No amendment for an election to forward average is included in section 110.4.  Provided the election is valid (110.4(6)) and not revoked (110.4(6.1)), it stands.  There is no late election.  This contrasts with section 85.  There is provision for an amended election (85(7.1)), accompanied by a penalty (85(8)).  There is also a provision for late elections (85(7)), but not for a revoked election.

The election is made on a dollar amount chosen by the taxpayer.  The law requires that the elected amount be within certain limits. In this case, it must be greater than $1,000 and cannot exceed the lesser of taxable income and the excess of income over 110% of the average of the prior three years' income. An assessment or reassessment by the Minister of any or all of the 4 years involved can change the limits restricting the elected amount.  For example, if the elected amount was $100,000 and the Minister's reassessment shifted $60,000 of the taxable income of $200,000 from the year to the prior year the elected amount would actually be much less, say $30,000, to meet the statutory limits. If the taxpayer elected on $100,000 he certainly elected on $30,000 and this presents no further problem.  The same is not true where the reassessment results in higher taxable income.  The elected amount was $100,000 and taxable income increased by reassessment from $200,000 to $300,000.  The elected amount being a dollar amount is still $100,000, not anywhere from $100,000 up to $200,000, even though the limits now allow $200,000.

The Federal Court Trial Division holds that "common sense dictates that, when the amounts appearing in the taxpayer's income return are changed by Revenue Canada, because of an assessment, the corresponding amounts on the forward averaging election form must also be changed".  This is indeed so for the limits and where the elected amount exceeds the limits by $70,000 as shown above.  But the elected amount is a dollar amount, $100,000, and not a concept and therefore is not increased by a reassessment.  It is still within the limits.  The court says that "the election to apply forward averaging was made on the full amount that was then perceived to be eligible, In 1982 there were 10 marginal rates applicable to individual taxpayers.  The taxpayer would have to make a judgement as to how much of his eligible (within the limits) income he wanted to forward average based on his perception of current and future tax rates (marginal) and his level of income.  The amount on which to elect would not necessarily be the full amount eligible but still the maximum beneficial amount based on his expectations and judgement.  If he elected an amount of at least $1,000 and equal to all income taxed at the highest (10th) marginal rate (federal) of 34% he would have chosen the maximum beneficial amount as far as he is concerned but not the full eligible amount.  The same is true if he had included the 30% amounts or also the 25%, (23%, 20%, 19%, 18%, 17%, 16%, and 6%) amount.  Could the Minister as the Court has it "simply correct the form" to include all the increased income from the reassessment forcing the taxpayer to pay tax now at the highest marginal rate on an amount he did not state in his election? No, he could not and he  would not do it.

21(1)(b)

Your adverse decision files are returns herewith.

Bernhard BuetowChiefTechnical Review SectionTechnical Publications DivisionLegislative Affairs Directorate

BB/rr Tech A (memo-2)

c.c.  Roy Shultis