Citation: 2012TCC151
Date: 20120509
Docket: 2011-3079(IT)I
BETWEEN:
BRIAN A. LUSCHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this
appeal is how “income for the year” is to be determined for the purposes of
section 118.94 of the Income Tax Act (the “Act”) and in
particular how capital gains realized in Canada and capital losses realized in
another country (in the United States in this case) are to be taken into
account in determining a person’s income for the purposes of this section. This
section provides as follows:
118.94 Sections 118 to 118.06 and 118.2, subsections
118.3(2) and (3) and sections 118.6, 118.8 and 118.9 do not apply for the
purpose of computing the tax payable under this Part for a taxation year by an
individual who at no time in the year is resident in Canada unless all or
substantially all the individual's income for the year is included in computing
the individual's taxable income earned in Canada for the year.
[2]
The Appellant was not a
resident of Canada at any time in 2008. During that year he
disposed of a taxable Canadian property and reported the taxable capital gain
realized as a result of this disposition in a tax return that he filed in Canada for that year. He also included a claim for a tax
credit based on medical expenses of $8,865, although he did cross out the
non-refundable tax credit of $2,514 in determining the amount of taxes payable
(which as a result of the amount withheld and remitted following the sale of
his property, resulted in a refund). In assessing his return the Canada Revenue
Agency did take the tax credit based on the medical expenses into account and
increased his refund. He was subsequently reassessed to deny any claim for
medical expenses and the Appellant has appealed this reassessment.
[3]
The issue of whether
the Appellant is entitled to the tax credit based on medical expenses will
depend on the amount of the Appellant’s income for 2008 that was included in
computing his taxable income earned in Canada
in 2008.
[4]
It is the Appellant’s
position that in determining the total amount of his income for 2008 the amount
of the capital gain realized in Canada ($113,692) should be treated as his income
in Canada. It is also his position that he did not
have any income in the United States since he had realized a capital loss in
the United States and the full amount of this capital loss ($169,767 US)
exceeded his other income earned in the United States ($61,000 US), even though only $3,000 US of the
capital loss was deducted in determining his total income for U.S. tax purposes
(to reduce his total income to $58,000 US). Therefore it is his position that
all or substantially all of his total income was included in computing his
taxable income earned in Canada.
[5]
It is the position of
the Respondent that the Appellant’s taxable income earned in Canada in 2008 is his
taxable capital gain ($56,846) (which is one-half of his capital gain of
$113,692) and that his other income was the amount that the Appellant reported
as his “adjusted gross income” of $57,231 US ($61,008 Cdn) in his US tax return
for 2008. The “adjusted gross income” included the
deduction of $3,000 US that the Appellant claimed in relation to a capital loss
of $169,767 US that the Appellant had incurred in 2008 and a deduction of $769
US as a “domestic production activities deduction”. Based on this determination of income, it
is the Respondent’s position that the Appellant’s taxable income earned in
Canada ($56,846) was less than one-half of all of his income for 2008 ($56,846
+ $61,008 = $117,854) and therefore not all or substantially all of the
Appellant’s income for 2008 was included in computing his taxable income earned
in Canada.
[6]
In my opinion neither
position is correct in relation to the determination of the Appellant’s income
for 2008. The Act is divided into several Parts. In this case Part I is
the relevant Part. This Part is divided into various Divisions including:
Division A – Liability for Tax (section 2)
Division B – Computation of Income
(sections 3 to 108)
Division C – Computation of Taxable Income
(sections 109 to 114.2)
Division D – Taxable Income Earned in Canada by Non-Residents (sections 115 to116)
Division E – Computation of Tax (sections
117 to 127.41)
[7]
Section 118.94 of the Act
requires two calculations – one is the person’s income for the year and the second
is the person’s taxable income earned in Canada
for the year. Once these two amounts are known, it is then necessary to
determine whether all or substantially all of the Appellant’s income for 2008
was included in computing his taxable income earned in Canada
for 2008. To determine this it will be necessary to determine what amounts are
included in the Appellant’s income for 2008 and also included in computing the
Appellant’s taxable income earned in Canada for 2008.
[8]
The first question is,
therefore, what is the Appellant’s income for 2008? Since Division B of the Act
addresses the computation of income it would seem to me that this is the
Division that should be reviewed to determine the Appellant’s income for
2008.
Appellant’s Income for 2008
[9]
Section 3 of the Act
(which is within Division B) provides, in part, as follows:
3. The income of a taxpayer for a taxation year for the purposes of
this Part is the taxpayer's income for the year determined by the following
rules:
(a) determine the total of all amounts each of which is the
taxpayer's income for the year (other than a taxable capital gain from the
disposition of a property) from a source inside or outside Canada, including,
without restricting the generality of the foregoing, the taxpayer's income for
the year from each office, employment, business and property,
(b) determine the amount, if any, by which
(i) the total of
(A) all of the taxpayer's taxable capital gains for the year from
dispositions of property other than listed personal property, and
(B) the taxpayer's taxable net gain for the year from dispositions
of listed personal property,
exceeds
(ii) the amount, if any, by which the taxpayer's allowable capital
losses for the year from dispositions of property other than listed personal
property exceed the taxpayer's allowable business investment losses for the
year,
(c) determine the amount, if any, by which the total
determined under paragraph (a) plus the amount determined under
paragraph (b) exceeds the total of the deductions permitted by
subdivision e in computing the taxpayer's income for the year (except to the
extent that those deductions, if any, have been taken into account in
determining the total referred to in paragraph (a)), and
(d) determine the amount, if any, by which the amount
determined under paragraph (c) exceeds the total of all amounts each of
which is the taxpayer's loss for the year from an office, employment, business
or property or the taxpayer's allowable business investment loss for the year,
(e) where an amount is determined under paragraph (d)
for the year in respect of the taxpayer, the taxpayer's income for the year is
the amount so determined, and
(f) in any other case, the taxpayer shall be deemed to have
income for the year in an amount equal to zero.
[10]
Section 3 provides the
general rules for the determination of income from various sources, and in
particular the general rules related to the amount that is to be included in
income for taxable capital gains and allowable capital losses. The opening part
of section 3 of the Act provides that a person’s income for the purposes
of Part I of the Act is to be determined in accordance with the rules as
set out in this section. Since section 118.94 of the Act is within Part
I of the Act, the rules for determining income, as set out in section 3
of the Act, apply in determining income for the purposes of section
118.94 of the Act.
[11]
The determination of income
for the purposes of Part I of the Act is not based on whether the income
is earned inside Canada or outside Canada. Income is to
be determined for the purposes of Part I of the Act in accordance with
the rules as set out in section 3 and Division B of Part I of the Act
regardless of where it is earned. It should be noted that a person who is a resident
of Canada will pay tax based on that person’s taxable income which is determined under Division C of
Part I of the Act and a person who is not a resident of Canada but who
was employed in Canada, carried on a business in Canada or disposed of a taxable
Canadian property will, subject to any applicable tax treaty, pay tax in Canada
based on that person’s taxable income earned in Canada as determined in
accordance with the provisions of Division D of Part I.
[12]
Therefore, for the
first calculation that is required for the purposes of section 118.94 of
the Act, it is necessary to determine the Appellant’s income for 2008,
as it would be determined for the purposes of Part I of the Act,
regardless of where the income was earned. It is clear in paragraph 3(b)
of the Act that, with respect to the dispositions of capital properties,
the amount to be included in income (in relation to the taxable capital gains
or allowable capital losses realized on the dispositions of such capital
properties) is the amount, if any, by which the Appellant’s taxable capital
gains realized during the year exceed his allowable capital losses for the year.
[13]
Section 38 of the Act
provides, in part, as follows:
38. For the purposes of this Act,
(a) subject to paragraphs (a.1) to (a.3), a taxpayer's
taxable capital gain for a taxation year from the disposition of any property
is ½ of the taxpayer's capital gain for the year from the disposition of the
property;
…
(b) a taxpayer's allowable capital loss for a taxation year
from the disposition of any property is ½ of the taxpayer's capital loss for
the year from the disposition of that property; and
[14]
Taxable capital gains
are therefore one-half of capital gains and allowable capital losses are
one-half of capital losses. In 2008 the Appellant incurred a capital gain in
relation to the disposition of property in Canada
and a capital loss in relation to the disposition of property
in the United States. As provided in section 3 of the Act,
the Appellant’s income for 2008 is to be determined, in part, by determining
the amount by which his taxable capital gains exceed his allowable capital
losses. This would include taxable capital gains and allowable capital losses
related to the dispositions of any capital property, not just taxable Canadian
properties (which are relevant in determining taxable income earned in Canada under a separate Division of the Act).
[15]
Therefore, based on the
rules for determining income as set out in paragraph 3(b) of the Act,
the amount of the Appellant’s income for 2008 related to his dispositions of
capital properties is:
|
Capital Gain (property in Canada)
|
$113,692
|
|
|
Taxable capital gain (1/2 of the capital
gain)
|
|
$56,846
|
|
Capital Losses (property in the U.S.)
|
$180,972
|
|
|
Allowable capital losses (1/2 of the capital
losses)
|
|
($90,486)
|
|
Amount included in income:
|
|
0
|
[16]
Since paragraph 3(b)
of the Act provides that a taxpayer’s income is determined based on the
amount, if any, by which that person’s taxable capital gains exceed that
person’s allowable capital losses, no amount would be included in income under
paragraph 3(b) of the Act as the Appellant’s taxable capital
gains in 2008 did not exceed his allowable capital losses. It must be
remembered that this calculation is being done to determine the Appellant’s total
income for 2008 not his taxable income earned in Canada (which is used to
determine his liability for taxes in Canada).
[17]
The Appellant’s other
income for 2008 was earned in the United States and was
derived from interest, dividends, pensions and IRA distributions. The amount
identified on his US tax return as his total income was $58,000
US. It seems to me that this is the starting point to determine his income
earned in the United States as this amount is before any deduction is taken for
the “domestic production activities deduction” which appears to be a deduction
that is allowed in computing his adjusted gross income for the purposes of the Internal
Revenue Code but would not be a deduction that would be permitted in
determining his income for the purposes of the Act.
[18]
The total income amount
of $58,000 US included a deduction of $3,000 US for the capital loss which, for
the purposes of section 3 of the Act, would only be relevant in relation
to taxable capital gains. His income earned in the United States, excluding this deduction for $3,000 US, was $61,000
US ($65,026 Cdn). It is not clear whether any other
adjustments would have to be made to the total income to determine what the
income amount would be for the purposes of Part I of the Act.
[19]
As a result it appears
that his total income for 2008, as determined for the purposes of Part I
of the Act, would be $65,026. No amount would be included in relation to
the taxable capital gain as it would be offset by the allowable capital losses.
Appellant’s Taxable Income Earned in Canada for 2008
[20]
The second amount that
is required for the purposes of section 118.94 of the Act is the amount
of the Appellant’s taxable income earned in Canada.
Subsection 115(1) of the Act provides in part as follows:
115.(1) For the purposes of this Act, the taxable income earned in
Canada for a taxation year of a person who at no time in the year is resident
in Canada is the amount, if any, by which the amount that would be the
non-resident person's income for the year under section 3 if
(a) the non-resident person had no income other than
…
(iii) taxable capital gains from dispositions described in paragraph (b),
…
(b) the only taxable capital gains and allowable capital
losses referred to in paragraph 3(b) were taxable capital gains and allowable
capital losses from dispositions, other than dispositions deemed under
subsection 218.3(2), of taxable Canadian properties (other than
treaty-protected properties), and …
[21]
“Taxable Canadian
properties” is defined in subsection 248(1) of the Act. There is no
dispute in this case that the real property that was located in Canada (which
the Appellant sold in 2008 and, as a result of such disposition, realized a
capital gain) was a taxable Canadian property and that the properties, the
disposition of which gave rise to capital losses in the United States, were not
taxable Canadian properties. Therefore in determining the Appellant’s taxable
income earned in Canada, only the taxable capital gain realized as
a result of the disposition of the real property located in Canada is to be included. The allowable capital losses
arising as a result of the dispositions of the properties in the United States
(which were not taxable Canadian properties) are not taken into account in
determining the Appellant’s taxable income earned in Canada.
[22]
There was no dispute
that the other income amounts earned by the Appellant in the United States are not to be included in determining the Appellant’s
taxable income earned in Canada. Therefore the Appellant’s taxable income
earned in Canada (which is used to determine his tax
liability under the Act) is $56,846, which is the amount of his taxable capital
gain realized as a result of the disposition of his taxable Canadian property.
Comparison of Income to Taxable Income
Earned in Canada
[23]
The next step is to
determine whether all or substantially all of the Appellant’s income for 2008 is
included in computing the Appellant’s taxable income earned in Canada for 2008. In order to determine what part of the Appellant’s
income is included in computing his taxable income in Canada,
it is necessary, in this case, to examine how his income is determined and what
amounts are included in his income. It is then necessary to determine what
components of his income are also used in computing his taxable income earned
in Canada.
[24]
As noted above the
Appellant’s income for 2008 (as determined in accordance with the rules as set
out in section 3 of the Act) was $65,026, which consisted of his
dividend income, interest income, pension income and IRA withdrawals. No part
of this income of $65,026 was included in the Appellant’s taxable income earned
in Canada (which is $56,846). His taxable income
earned in Canada only included his taxable capital gain
which would not be included in determining his income for 2008 as the allowable
capital losses exceeded his taxable capital gains. Therefore all or substantially
all of the Appellant’s income for 2008 was not included in computing his
taxable income earned in Canada and the Appellant is not entitled to any
claim for a tax credit in relation to the medical expenses that he incurred.
[25]
While this is an
unusual case as the Appellant’s income (from all sources) is less than his
taxable income earned in Canada, it seems to me that this is the result of the
application of the rules for determining income and the provisions related to
the determination of his taxable income earned in Canada. The allowable capital
losses realized by the Appellant in the United States are deductible (to the extent they do not exceed his
taxable capital gains) in determining his income for the purposes of Part I of
the Act. These allowable capital losses, however, are not deductible in
determining his taxable income earned in Canada
as the properties, the disposition of which gave rise to the allowable capital
losses, were not taxable Canadian properties.
Canada – US Tax Convention
[26]
The Appellant referred
to Article XXV of the Canada - United States Tax Convention. Paragraph
1 of this Article, as it read in relation to the 2008 taxation year, provided that:
1. Citizens of a Contracting State, who are residents of the other Contracting
State, shall not be subjected in that other State to
any taxation or any requirement connected therewith which is other or more
burdensome than the taxation and connected requirements to which citizens of
that other State in the same circumstances are or may be subjected.
[27]
While the Appellant was
a citizen of the United States he was not a resident of Canada in 2008 and therefore this paragraph is not
applicable.
[28]
Paragraph 2 of this
Article, as it read in relation to the 2008 taxation year, provided that:
2. Citizens of a Contracting State, who are not residents of the
other Contracting State, shall not be subjected in that other State to any
taxation or any requirement connected therewith which is other or more
burdensome than the taxation and connected requirements to which citizens of
any third State in the same circumstances (including State of residence) are or
may be subjected.
[29]
Since the income of a
person who is a citizen of the United States and not a resident of Canada would
be determined for the purposes of section 118.94 of the Act in the same
manner as the income of a person who is a citizen of any other country and not
a resident of Canada, the Appellant is not being subjected to any different
taxation or requirement than any citizen of any other country in the same
circumstances. A citizen of any other country (who is not a resident of Canada)
with the same sources and amounts of income as the Appellant had in this case
would also not be entitled to claim a tax credit under the Act based on
medical expenses. Each non-resident person, regardless of their citizenship,
would calculate their income for the purposes of section 118.94 of the Act
in accordance with the same rules as set out in section 3 and Division B of the
Act. Therefore this provision of the Canada
- United States Tax Convention, as it read for 2008, is not applicable.
[30]
As a result the
Appellant’s appeal is dismissed, without costs.
Signed at Halifax, Nova Scotia,
this 9th day of May 2012.
“Wyman W. Webb”
Email this Content