Reference: 2006TCC197
Date: 20060421
Docket: 2005-789(IT)I
BETWEEN:
YVES LANDRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] This is an appeal,
under the informal procedure, from a reassessment by which the Minister of
National Revenue ("the Minister") added $17,769 to the Appellant's
income for the 2001 taxation year on account of interest and other investment
income derived from the Appellant's disposition of a life insurance policy that
he held. The Appellant submits that he did not have to report this income of
$17,769 in the 2001 taxation year because tax on this income had been paid in
1999 under an agreement made on December 2, 1999, with the Canada
Customs and Revenue Agency ("the Agency").
Facts
[2] On April 8, 1990,
the Appellant obtained an insurance policy ("the policy") from
Desjardins‑Laurentian Life Assurance Inc. ("Desjardins") on his
life. The insured principal upon issuance was $50,000.
[3] In each of the
years 1993, 1994, 1995 and 1996, the Appellant invested $6,000 in this policy
by means of equal and consecutive monthly instalments of $500.
[4] At December 31,
2000, Desjardins estimated that $121,024 had accumulated in the policy.
[5] On June 11, 2001,
the Appellant disposed of a part of his interest in the policy and received the
sum of $83,000 from Desjardins as a result.
[6] In computing his
income for the 2001 taxation year, the Appellant did not include the sum of
$17,769 associated with his disposition of a part of his interest in the
policy. This amount of $17,769 represented the amount by which the
proceeds of disposition of
his interest in the policy exceeded the adjusted cost base of his interest in the
policy immediately prior to the disposition. Desjardins issued a T5 slip
(Statement of Investment Income) indicating that, in 2001, the Appellant
received $17,769 in income from the disposition of a part of his interest in
the policy. It should be noted that the Appellant attached this T5 to the
income tax return that he filed for his 2001 taxation year, although he did not
include this amount in computing his income for that year.
[7] The Appellant was
audited for the 1995 and 1996 taxation years. The Agency used the net worth
method to establish the Appellant's unreported income for those years.
[8] On or about
December 2, 1999, the Agency accepted the Appellant's offer of $50,000
(Exhibit A‑1) in settlement of tax, interest and penalties associated
with his unreported income for the 1995 and 1996 taxation years.
The Appellant's position
[9] In his oral
submissions, counsel for the Appellant essentially repeated the arguments made
in the Notice of Appeal, which read as follows:
[TRANSLATION]
12. However, the
Statement of Net Worth prepared by auditor Johanne Ouellet in
September 1998 takes into account the assets held in the insurance policy
issued by Desjardins‑Laurentian Assurance Inc. as shown by a copy of the
said statement, which will be produced at the hearing.
13. In light of the
foregoing, the Canada Customs and Revenue Agency is attempting to disregard a
final and comprehensive settlement that it reached with the objector and is now
seeking to assess him a second time on an amount that was already audited and
assessed for years prior to 1997.
14. In short, the
objector has already paid the tax due on the insurance policy.
15. Moreover, and in
the alternative, even if the audit method did not include the investment
interest or profit, the Canada Customs and Revenue Agency, through Johnny
Gallagher, nonetheless clearly agreed with the objector — notably by characterizing the
settlement as "full and final" with regard to the 1995 and 1996 tax
returns — that
the objector was entitled to consider all liabilities in relation to these
returns definitively settled.
16. Indeed, no
particulars regarding the consequences of using the net worth assessment method
were given or reported to the opponent, thereby reinforcing the certainty that
the 1995 and 1996 returns were definitively settled without any reservation by
the Canada Customs and Revenue Agency.
17. Thus, the Canada
Customs and Revenue Agency erred in determining that the amount of $17,769 had
to be included in the opponent's income, because that amount includes interest
earned during years prior to 1997, years for which a final and comprehensive
settlement was reached, all of which is established by documents that will be
produced at the hearing.
Analysis
[10] Based on my analysis
of the Statement of Net Worth prepared by Ms. Ouellet of the Agency, I
find that the amounts under the item "Desjardins‑Laurentian Life
Insurance" (Exhibit I‑6, page 2) were simply amounts that
the Appellant invested in the policy during 1993, 1994, 1995 and 1996.
By adding the cost of the Appellant's investments in the policy during a
year to his balance for that year, the Agency was simply seeking to determine
the changes in the Appellant's principal from year to year — a sensible process that is indispensable in determining the Appellant's
additional or unreported income in a given year. Indeed, when the Minister uses
the net worth method to determine a taxpayer's unreported income in a given
year, one of the things that he must do is determine the taxpayer's balance at
the end of that year and compare it with the balance at the end of the previous
year. If this process identifies an increase in the taxpayer's principal that
year, and the taxpayer is unable to explain it, the Minister will correctly
conclude that the difference constitutes the taxpayer's unreported income for
that year.
[11] In my opinion, the
inclusion of the amounts that the Appellant invested in the policy was not
intended to include, in his income, the profit from the policy or the interest
accrued therein, nor did it have that effect. Rather, the only intent and
effect of the inclusion was to determine the Appellant's additional or
unreported income.
[12] The Appellant
submitted that the inclusion of the $17,769 in his income for the 2001 taxation
year resulted in a kind of double taxation because the Minister had already
taken account of the assets that the Appellant held in the policy when he
determined the Appellant's additional unreported income for the 1995 and 1996
taxation years. In my opinion, the inclusion of the $17,769 in the Appellant's
income did not result in any double taxation. As I stated, the only intent and
effect of the inclusion, in the Appellant's 1995 and 1996 balances, of the
amounts that he had invested, was to determine the Appellant's additional and
unreported income during these years, not to tax the Appellant on the profit
from or interest accrued in the policy at December 31, 1996, or, in
other words, to tax the Appellant on the income from the Appellant's deemed
disposition of his interest in the policy on December 31, 1996.
Moreover, the amounts that the Appellant invested in the policy were not
subject to double taxation because they were part of the adjusted cost base of
his interest in the policy. I emphasize that when a taxpayer disposes of his
interest in a policy, he must add to his income, in the year of disposition,
the amount by which the proceeds of disposition of his interest exceed the
adjusted cost base (including the amounts that the taxpayer invested in the
policy) of his interest in the policy immediately prior to the disposition.
[13] Lastly, turning to
the alternative argument made by the Appellant in the Notice of Appeal, which
reads as follows:
[TRANSLATION]
Moreover, and in the alternative,
even if the audit method did not include the investment interest or profit, the
Canada Customs and Revenue Agency, through Johnny Gallagher, nonetheless
clearly agreed with the objector — notably by characterizing the settlement as
"full and final" with regard to the 1995 and 1996 tax returns — that
the objector was entitled to consider all liabilities in relation to these
returns definitively settled.
[14] In my opinion, the
terms of the settlement between the Agency and the Appellant are clear and
leave no room for interpretation. I find that the only purpose of this
settlement was fully and finally to settle all the tax, interest and penalties
owed by the Appellant for the 1995 and 1996 taxation years. I find it
implausible that the agreement could have been intended to effect a full or
partial settlement of the Appellant's tax liability in respect of his future or
potential disposition of all or part of his interest in the policy.
[15] For these reasons,
the appeal is dismissed.
Signed at Ottawa, Canada, this 21st day of April 2006.
"Paul Bédard"
Translation
certified true
on
this 29th day of November 2006
Monica F. Chamberlain,
Reviser
Email this Content