Citation: 2009TCC341
Date: 20090626
Docket: 2006-2923(IT)G
BETWEEN:
BRIAN C. BRADLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
[1] This is an appeal
under the General Procedure of a reassessment of the Appellant’s 2005 taxation year.
[2] The appeal raises
two deduction issues that arise out of the Appellant’s battle with the Veterans
Review and Appeal Board (“the Board or VRA Board”) to acknowledge his
entitlement to a disability pension. Some minor unreported amounts were also
assessed but the Appellant did not take issue at the hearing with those
inclusions.
[3] The battle with the
VRA Board has, according to the Appellant’s testimony, been going on for more
than a decade which included four judicial reviews of the Board’s refusal to
recognize a disability pension entitlement. In all review cases, I am told that
the Federal Court Trial Division sent the matter back to the Board for
reconsideration.
[4] One certainly has
the impression listening to the Appellant that he has not been properly dealt
with by the VRA Board and that his fight to establish his disability pension
rights has resulted in his losing his home and become economically ruined.
[5] His submissions
reflect a genuine plea for justice which he feels can only be achieved by
someone rectifying the treatment he has had to endure. He wants the Federal
government departments that he holds responsible for the burdens he has suffered
made accountable. He seeks compensation and includes in his plea for it, just
and fair treatment from the Canada Revenue Agency (“CRA”) taxation.
[6] This leads me to
direct myself to the taxation issues that have drawn the CRA into the
Appellant’s line of vision as one the government agencies responsible for his
financial regression, as he puts it.
[7] In 2005, the
Appellant launched his fourth action for judicial review of the VRA Board’s
refusal to award him a disability pension. He retained the services of a
prominent law firm. He paid a retainer and was quoted substantial fees, namely,
fees in excess of $40,000. His only source of funds was a modest RRSP
(currently valued at some $16,000 which includes a contribution that is at
issue in this appeal).
[8] To fund the
litigation he withdrew $44,000 from his RRSP. That was in 2005. However, his
legal fees that year only came to $21,095. Realizing the withdrawal was
excessive, he returned $24,000 to his plan and claimed $23,000 on his 2005 tax
return as a deduction in calculating his net income for the year on the basis
that it was an innocent mistake to have taken it out. In effect, he sought to
treat the excess withdrawal as a non-event. I will note here, as well, that he
claimed the legal fees of $21,095 as a deductible expense on the advice,
apparently, of his legal advisor.
[9] The reassessment
being appealed denied both deductions.
[10] Given that the most
recent Federal Court review of the VRA Board’s refusal to award the Appellant a
disability pension has resulted in the matter being referred back once again to
the Board and given his hope of finally having his entitlement to a disability
pension confirmed, one might think that the Appellant will finally be allowed to
deduct his legal fees. However, that is not the case, at least not in respect
of the 2005 taxation year. The Appellant has repeatedly acknowledged that he
never received one cent of income from the pension source in respect of which
he incurred the legal expenses at issue. The relevant provision of the Income
Tax Act (the “Act”) allows that deduction only against the source of
income in respect of which the legal expense at issue is incurred. This leaves
the Appellant in the unfortunate circumstance that his legal expense deduction
cannot be taken, at least not yet.
[11] The provision of the
Act that governs the deduction of legal expenses in this situation is
paragraph 60(o.1) which reads as follows:
60(o.1) legal expenses -- the amount, if any, by
which the lesser of
(i) the
total of all legal expenses … paid by the taxpayer in the year or
in any of the 7 preceding taxation years to collect or establish a right to an amount of
(A)
a benefit under a pension fund or plan …
(ii) the amount, if any, by
which the total of all amounts each of which is
(A)an amount described in
clause (i)(A) or (B) …
(II) in
respect of which legal expenses described in subparagraph (i) were paid, …
(III) that
is included in computing the income of the taxpayer for the year or a preceding
taxation year, or …
[12] The lesser amount in this case, which is the deductible
amount, is the subclause (ii)(A)(III) amount which is zero in 2005. The
provision does, however, allow the deduction of legal expenses 7 years back so
the Appellant will have further opportunities to deduct this expense even though
it was incurred in 2005.
[13] This takes me to consider the RRSP deduction. Once
again, the relevant provisions of the Act are drafted in such a way that
leaves little doubt that the Appellant is not allowed the deduction he seeks.
[14] There is no provision in the Act that increases,
in a case like this, one’s RRSP deduction limit beyond the limit defined in
subsection 146(1) of the Act. That defining limitation on the annual
contribution amount that is deductible, does not make any allowance for re-contributions
of previous withdrawals. There is no accommodation for withdrawals made in
error and then returned, save one.
[15] The exception is found in subsection 146(6.1) of the Act
dealing with re-contributions of certain prescribed premiums.
[16] Subsection 8307(7) of the Income Tax Regulations,
C.R.C., c. 945 provides the conditions that need to be met in order for a
withdrawal to be prescribed as one that can be re-contributed without falling
off-side the RRSP deduction limit. That exception permits a re-contribution where
there has been a withdrawal as a result of a reasonable error of the amount
needed to be withdrawn for certification respecting past service events that
presumably impact a taxpayer’s past service pension adjustments which in turn
impact RRSP deduction limits.
[17] In the case at bar, the requirements of Regulation
8307(7) are clearly not met. The withdrawal here may have been a reasonable
error but errors in one’s budget needs, as reasonable and understandable as
they may be, have simply not been given a second chance by Parliament. Parliament
put its mind to second chances and correcting errors in respect of past service
events and in doing so must be presumed to have intentionally declined allowing
such corrections in other circumstances.
[18] While I said that there was only one exception to the
scheme of the RRSP provisions that do not allow returns of excess withdrawals
on a deductible basis, there is another relieving provision respecting excess
contributions which are subjected to Part X.1 tax. Pursuant to section 204.1 of
the Act, over contributions are taxed at one percent per month. The
Minister of National Revenue can waive the tax if he is satisfied the excess
arose as a consequence of reasonable error and reasonable steps have been taken
to eliminate the excess. Again this underlines that Parliament
put its mind to second chances and correcting errors in respect of certain
consequences that flow from such errors and in doing so must be presumed to
have intentionally declined allowing such corrections in respect of other
consequences in other or even similar circumstances.
[19] It is not for me to suggest whether Parliament should
go further to relieve errors of the type made by the Appellant by allowing re-contributions
in certain cases. However, there is one clear situation where this Court, if
not Parliament, might, in applying common law principles, permit what might be
seen as an allowable re-contribution.
[20] Arguably at least, there could be cases where a withdrawal
is made in error and corrected on discovery of the error without what I might
refer to as effective receipt of the withdrawn amount. A trust company might
send money out of an RRSP account in error and on discovery it is returned.
Arguably there has been no “withdrawal” at all and the two transactions, the
second being a return of the funds to the registered account, are a wash. The
payment out is not taxed and the payment back is not deductible.
[21] In the case at bar, there is no evidence of this type
of error. While I do not know when in 2005 the withdrawal was made, I do know
the retainer letter from the lawyer dealing with the VRA Board’s decision to
deny the Appellant his disability pension is dated November 15, 2005. That
letter sets out an hourly rate of $170 and requests only a $5,000 retainer.
[22] I am neither questioning how his legal fees on this
matter came to exceed $20,000 in 2005, nor the use, or the intended use, of the
funds withdrawn from the RRSP. I am suggesting however that no matter how I feel
about the ruinous circumstances that the Appellant finds himself in, I have
absolutely no evidence that suggests that a reasonable case might be made that
there was no receipt of the funds returned by him to his registered account.
Even if he withdrew the money after November 15, the return of the funds was
not until January 24, 2006, at least 24 days after he must have paid the
$21,095 legal bill claimed in 2005. He had access to it, used some of it, and,
there is no evidence that it was not commingled with other funds in such a way
as to suggest that, in law, he should be regarded as never having received
it.
[23] Still, this aspect of the case troubles me somewhat.
The Respondent never brought into question the quantum of the legal expense nor
its use as it would relate to the source rule in paragraph 60(o.1) of the Act.
This raises the question as to whether the Respondent will raise that question
in a future year and argue that the issue is not issue estopped or res
judicata.
[24] This would not be a laudable practice in my view. The
audit here should not put the Appellant through ongoing burdens by dealing with
one issue at a time, years apart. It is inefficient and can do little else than
continue to harass this Appellant in a way that many would find to be objectionable.
Since, there were no assumptions made that the expense was not incurred in the
amount, and for the purpose claimed, the burden to prove otherwise falls on the
Respondent. I do not believe that burden should shift back to the Appellant
simply because the Respondent may have the opportunity to have the issue
retried in a future year.
[25] I make this comment even in light of some further
confusion caused by the Appellant’s testimony that the legal expense in question
may have only been in part in respect to the VRA Board matter. He suggested
there were other legal expenses in respect of other matters such as obtaining
income support for the severely handicapped from an Alberta assistance program pursuant to
which he was now getting benefits, and, such as appealing the commencement date
of benefits from the Canada Pension Plan. On the other hand, he seemed to acknowledge
that these claims may have been made later when he was eligible for legal aid.
Since then, his legal expenses were admitted as being relatively small
disbursement amounts.
[26] Since the evidence was confused on this point, I asked
Respondent’s counsel if there was room for her client to look into this on the
basis that some legal expenses might now be allowed in respect of other pension
income receipts. In relation to 2005, the only year before me, I accept her
position that it is far too late to open that can of worms. She pointed out
that the Appellant’s Notice of Appeal (amended), his Answer to the Respondent’s
Reply to that Notice (amended) and his sworn answers to written discovery
questions, all maintained that the legal expenses claimed were in respect of
the VRA Board matter. She and her client accepted this assertion and the
discovery evidence maintaining it, and I do as well. That suggests perhaps that
that issue is now resolved.
[27] At this point, I also make mention of the fact that the
Appellant was self-represented. According to Canadian Judicial Council
principles I have tried to assist him in understanding the law and have relaxed
rules of evidence. Counsel for the Respondent was helpful in this regard and I
admitted considerable amounts of evidence where challenges of authenticity and
hearsay would not have been inappropriate in a General Procedure appeal. Still,
weighing the evidence, I must admit that my role is made more difficult – much
of the evidence becomes almost anecdotal and has led to unanswered questions.
Some of this might have been avoided if the audit enquiries had gone beyond
singular reliance on the Appellant’s admission that he received no pension
income in 2005.
[28] As to the Appellant’s view that the relevant provisions
of the Act are being unfairly interpreted and applied, I note simply
that my hands are tied. I must say, however, I do find the legislation relating
to the deduction of legal fees paid to collect or establish a right to pension
income, somewhat draconian. That is only a personal view.
[29] That view, however, is drawn from a consideration of paragraph
8(1)(b) of the Act in respect of employment income which allows legal
expenses paid to collect or establish a right to employment income to be
deducted against any employment income and a net loss is permitted to shelter
any other source of income. Why are pensioners or the disabled, who can ill-afford
to be treated so differently, given such a tough source rule?
[30] As I said, this is just my personal view. Parliament’s
view is all that matters. This is not a Court of equity. I have no jurisdiction
to rectify unfair treatment real or imagined. If the Appellant wants some
Government department or agency to take responsibility for the perpetration of
the injustices he has suffered, he must look to another forum. As well, and in
response to a plea made by the Appellant, I can add that it is not an
abdication of this Court’s responsibility when what it does is ensure that the
Appellant calculates his tax liabilities as all others must: in accordance with
how Parliament has said it must be calculated. Nonetheless, I will add that
this matter appears ripe for interest and collection relief.
[31] Accordingly the Appellant’s appeal
is dismissed, without costs.
Signed at Ottawa, Canada this 26th day of June 2009.
"J.E. Hershfield"
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