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Citation: 2004TCC639
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Date: 20040917
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Docket: 2003-2652(IT)I
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BETWEEN:
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JOCELYNE LAFRAMBOISE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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DRAFTED REASONS FOR JUDGMENT
Lamarre, J.
[1] This is an appeal under the
informal procedure against an assessment made by the Minister of
National Revenue ("Minister") for the appellant's
2000 taxation year. The appeal concerns the application of
sections 110.2 and 120.31 of the Income Tax Act
("Act"), which sections provide a special tax
calculation that may benefit a taxpayer who is in receipt of a
qualifying retroactive lump-sum payment ("QRLSP"). In
the present case, the Minister considered the application of
those sections of the Act and determined that the special
tax calculation was not beneficial to the appellant. The Minister
therefore included the totality of the lump-sum amount of
$60,426, of which $56,378 was applicable to the 1995 to 1999
taxation years, received by the appellant from Public Works and
Government Services Canada, Superannuation Directorate
("Superannuation") in the 2000 taxation year in her
income for that year pursuant to paragraph 56(1)(a) of the
Act.
[2] The appellant argues that the
calculation of the notional tax on the QRLSP pursuant to sections
110.2 and 120.31 of the Act was not done correctly by the
Minister. She is of the view that none of the QRLSP should be
taxable in 2000 since the total lump-sum amount received by her
had to be reimbursed to Sunlife Financial ("Sunlife")
as she was in receipt of an overpayment of $64,571 from them. As
a matter of fact, she reimbursed an amount of $34,817 in 2000, of
which $26,743 was applied by Sunlife to the wage loss replacement
overpayment of previous years. She also reimbursed an amount of
$20,000 in 2001. After 2001, she still owed $9,754.
Facts
[3] The respondent summarized the
facts at paragraphs 3 to 14 of the Respondent's Written
Submissions, and the appellant, in paragraph 3 of the
Appellant's Written Submissions, agreed with that
summary.
[4] The facts as summarized by the
respondent are reproduced below:
FACTS
Background
3. The
Appellant was in receipt of Wage Loss Replacement Benefits from
Sunlife Financial ( « Sunlife » ) as a result of an
illness.
4. The
Appellant was required by Sunlife to establish her right to
benefits from Public Works and Government Services Canada,
Superannuation directorate. ( « Superannuation » ).
Lump-sum Payment from Superannuation
5. The
Appellant was successful in establishing a right to benefits from
Superannuation and received in the 2000 taxation year, gross
benefits in the amount of $65,459.20; $60,426.10 represented a
retroactive lump-sum payment of which the amount of
$56,378.63 was applicable to the 1995 to 1999 taxation years.
6. The
lump-sum payment referred to in paragraph 6 [sic]
represented payments applicable to the 1995 to 2000 taxation
years as follows:
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Year
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Amount
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1995
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$ 9,866
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1996
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$11,242
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1997
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$11,574
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1998
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$11,794
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1999
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$11,901
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2000
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$ 4,049
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Total:
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$60,426
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7. The
Appellant received a cheque dated July 25, 2000 from
Superannuation in the amount of $34,817.21, which was the net
amount of the lump-sum payment of $60,426.10 as a sum of
$25,608.89 was withheld for income tax.
Disability Insurance Plan Benefits from
Sunlife
8. Following
the receipt of the benefits from Superannuation, Sunlife advised
the Appellant in a letter dated September 21, 2000 that she was
entitled to wage loss replacement benefits in the amount of
$101,717.83 for the period of January 20, 1995 to August 31,
2000. However, wage loss replacement benefits in the amount of
$166,289.59 had previously been paid to the Appellant, which
resulted in an overpayment. As such, the Appellant was required
to reimburse to Sunlife an amount of $64,571.76.
9. The
Appellant repaid Sunlife in part, with a cheque dated August 14,
2000 in the amount of $34,817.21 to be applied to her outstanding
debt, thereby reducing the amount owed to $29,754.55.
10. The refund in the
amount of $34,817.21 was applied by Sunlife as follows:
• $26,743.00
was applied to the wage loss replacement overpayment of previous
years.
• $8,074.00 was
applied to the wage loss replacement overpayment occurring in the
2000 taxation year.
11. Sunlife issued a T4 in the amount
of $18,617.00 to the Appellant for the 2000 taxation year. This
amount represented the difference between the amount of
$26,691.00 received by the Appellant in the 2000 taxation year
and the amount of $8,074.00 reimbursed to Sunlife for the 2000
taxation year.
Tax Calculation
12. The Appellant's basic federal
tax for the 2000 taxation year using the special tax calculation
(pursuant to sections 110.2 and 120.31) was $16,016.57, whereas
the basic federal tax using the regular calculation was
$13,324.83. Accordingly the Minister of National Revenue did not
assess the Appellant using the special tax calculation.
13. For the Appellant's 2000
taxation year, the Minister allowed a deduction in the amount of
$26,743.00, which represented the amount the Appellant reimbursed
to Sunlife in the 2000 taxation year.
14. For the 2001 taxation year, the
Minister allowed a deduction in the amount of $20,000, which
represented the amount the Appellant, reimbursed to Sunlife in
the 2001 taxation year.
[5] For a better understanding of the
situation, I reproduce hereunder the tax calculations done by the
Canada Customs and Revenue Agency ("CCRA") with respect
to the QRLSP as they appear in Exhibit A-2:
Tax calculations for qualifying retroactive
lump-sum payment (QRLSP)
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Year
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Taxable income
($ dollars only)
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Payment allocation reported
($ dollars only)
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Allocation allowed
($ dollars only)
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Tax difference
($)
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Deemed tax [interest]
($)
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2000
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--
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4,047
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4,049
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--
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--
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1999
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30,455
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11,901*
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11,901
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3,094.26
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--
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1998
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28,367
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11,794*
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11,794
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2,956.07
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142.20
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1997
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24,119
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11,574*
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11,574
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2,516.55
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312.28
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1996
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34,725
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11,242*
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11,242
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2,922.92
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562.91
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1995
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28,059
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9,866*
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9,866
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2,427.07
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669.28
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[$60,424]**
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Total
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$13,916.87
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$1,686.67
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Your QRLSP tax adjustment is the total of the tax
difference and deemed tax amounts for the above
years:
$15,603.54
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Your 2000 basic federal tax using the special
tax calculation:
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Taxable income including the total lump-sum
payment . . . . .
[which is the net income after deduction of
salary reimbursement pursuant to paragraph 8(1)(n)
of the Act]***
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$67,736.***
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Less: Part of the lump-sum payment allocated
to previous years
[deduction under subsection 110.2(2) of the
Act]
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56,377.*
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Reduced taxable income . . . . . . . . . . .
. . . . . . . . . . . . . . .
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$11,359.
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Tax calculated on the reduced taxable income
. . . . . . . . . . . .
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$413.03
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Add: QRLSP tax adjustment . . . . . . . . . .
. . . . . . . . . . . . .
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$15,603.54
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2000 basic federal tax . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
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$16,016.57(A)
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Your 2000 basic federal tax using the regular
calculation:
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Taxable income including the total lump-sum
payment . . .
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$67,736.***
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2000 basic federal tax . . . . . . . . . . . . .
. . . . . . . . . . . .
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$13,324.83(B)***
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* The total for
1995 to 1999 is $56,377
** $60,424 is the gross
amount of the retroactive lump-sum payment
*** See statement of income and deductions
below
STATEMENT OF INCOME AND DEDUCTIONS
FOR THE TAXATION YEAR 2000
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104
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[Net income received from Sunlife in
2000]
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18,617
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233
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TOTAL DEDS
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27,076
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115
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OTHER PEN [including lump-sum payment of
$60,424]
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65,459
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236
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NET
INCOME
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67,736
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121
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INTEREST
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151
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---
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NADJNETINC
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38,100
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130
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OTHER INC
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10
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---
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TX INC CALC
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67,736
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162
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GRS BUS IN
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18,394
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266
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FGN-PROP-CD
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2
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135
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NET BUS IN
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10,575
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420
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NET FED
TAX
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13,324.40
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150
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TOT INCOME
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38,433
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94,812
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421
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CPP PAY
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551.87
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208
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RRSP
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333
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---
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NET PRO TAX
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5,621.80
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229
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[Deduction of amount reimbursed in 2000 to
Sunlife, pursuant to paragraph 8(1)(n) of the
Act]
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26,743
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435
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TOT PAYABLE
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19,498.07
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Issue
[6] The issue before this Court is
whether the Minister correctly calculated the appellant's
basic federal tax for the 2000 taxation year using the special
tax calculation in sections 110.2 and 120.31 of the Act to
arrive at an amount of tax of $16,016.57, as stated in paragraph
12 of the Respondent's Written Submissions and as explicitly
shown in the tax calculations reproduced above (see Exhibit
A-2, Figure A). In doing the calculation, the Minister determined
that the QRLSP was the gross amount received by the appellant in
2000 that was applicable to the prior years, namely, $56,377. The
appellant is of the view that the QRLSP should be the net amount,
that is, the gross amount less the amount that had to be
reimbursed by her to Sunlife. If the QRLSP is the net amount, the
federal tax should be lower than the result obtained by the
Minister. In the appellant's view, she should not be taxed on
the QRLSP because in the end she will have to reimburse it in
full.
Analysis
[7] As the respondent stated in
paragraphs 16 to 19 of her written submissions:
16. A lump sum payment of
superannuation or pension benefit must, as a general rule, be
included in a taxpayer's income in the year in which it is
received as provided in paragraph 56(1)(a)(i) of the
ITA.
17. There is however a
mechanism in the ITA, set out in sections 110.2 and
120.31, that provides for the calculation of a "notional tax
payable" to compute the tax on the lump sum payments
relating to previous tax years.
18. The purpose of the
notional tax payable calculation is to allow a taxpayer to be
taxed on income in the year it relates to if this is beneficial
to the taxpayer. Although the calculation considers the tax that
would be payable in the previous years if the portion of the lump
sum payment that relates to previous years had been added to the
taxable income of the individual in those previous years, the
actual tax is assessed in the year of receipt of the lump sum
payment.
19. The notional tax
payable is calculated for each taxation year to which a specified
portion of a qualifying amount received by the individual
relates. This notional tax payable is comprised of a component
representing the tax that would have been payable for that year
if the relevant income had been received and taxed in the
eligible taxation year and a component representing notional
interest calculated on that additional tax.
[8] Furthermore, salary reimbursements
are deductible by the taxpayer in the year in which the
reimbursement occurs, as provided in paragraph 8(1)(n) of
the Act.
[9] It is important at this stage to
reproduce the relevant sections of the Act referred to
above.
Deductions
SECTION 8: Deductions allowed.
(1) In computing a taxpayer's income for a taxation year from
an office or employment, there may be deducted such of the
following amounts as are wholly applicable to that source or such
part of the following amounts as may reasonably be regarded as
applicable thereto:
. . .
4 8(1)(n) 3
(n) Salary reimbursement - an amount paid by or
on behalf of the taxpayer in the year pursuant to an arrangement
(other than an arrangement described in subparagraph
(b)(ii) of the definition "top-up disability
payment" in subsection 6(17)) under which the taxpayer is
required to reimburse any amount paid to the taxpayer for a
period throughout which the taxpayer did not perform the duties
of the office or employment, to the extent that
(i) the amount so paid to the taxpayer for the period was
included in computing the taxpayer's income from an office or
employment, and
(ii) the total of amounts so reimbursed does not exceed the
total of amounts received by the taxpayer for the period
throughout which the taxpayer did not perform the duties of the
office or employment;
SECTION 56: Amounts to be included in income for
year.
(1) Without restricting the generality of section 3, there shall
be included in computing the income of a taxpayer for a taxation
year,
4 56(1)(a) 3
(a) Pension benefits, unemployment insurance
benefits, etc. - any amount received by the taxpayer in the
year as, on account or in lieu of payment of, or in satisfaction
of,
(i) a superannuation or pension benefit . . .
Lump-sum Payments
SECTION 110.2: Definitions.
(1) The definitions in this subsection apply in this section and
section 120.31.
"eligible taxation year" -
"eligible taxation year" in respect of a qualifying
amount received by an individual, means a taxation year
(a) that ended after 1977 and before the year in which
the individual received the qualifying amount;
(b) throughout which the individual was resident in
Canada;
(c) that did not end in a calendar year in which the
individual became a bankrupt; and
(d) that was not included in an averaging period,
within the meaning assigned by section 119 (as it read in its
application to the 1987 taxation year), pursuant to an election
that was made and not revoked by the individual under that
section.
"qualifying amount" - "qualifying
amount" received by an individual in a taxation year means
an amount (other than the portion of the amount that can
reasonably be considered to be received as, on account of, in
lieu of payment of or in satisfaction of, interest) that is
included in computing the individual's income for the year
and is
. . .
(b) a superannuation or pension benefit (other than a
benefit referred to in clause 56(1)(a)(i)(B)) received on
account of, in lieu of payment of or in satisfaction of, a series
of periodic payments (other than payments that would have
otherwise been made in the year or in a subsequent taxation
year),
. . .
except to the extent that the individual may
deduct for the year an amount under paragraph 8(1)(b),
(n) or (n.1), 60(n) or (o.1) or
110(1)(f) in respect of the amount so included.
"specified portion" - "specified
portion", in relation to an eligible taxation year, of a
qualifying amount received by an individual means the portion of
the qualifying amount that relates to the year, to the extent
that the individual's eligibility to receive the portion
existed in the year.
4 110.2(2) 3
(2) Deduction for lump-sum payments. There may be deducted
in computing the taxable income of an individual (other than a
trust) for a particular taxation year the total of all amounts
each of which is a specified portion of a qualifying amount
received by the individual in the particular year, if that total
is $3,000 or more.
Lump-sum Payments
SECTION 120.31: Definitions.
(1) The definitions in subsection 110.2(1) apply in this
section.
4 120.31(2) 3
(2) Addition to tax payable. There shall be added in
computing an individual's tax payable under this Part for a
particular taxation year the total of all amounts each of which
is the amount, if any, by which
(a) the individual's notional tax payable for an
eligible taxation year to which a specified portion of a
qualifying amount received by the individual relates and in
respect of which an amount is deducted under section 110.2 in
computing the individual's taxable income for the particular
year
exceeds
(b) the individual's tax payable under this Part
for the eligible taxation year.
4 120.31(3) 3
(3) Notional tax payable. For the purpose of subsection
(2), an individual's notional tax payable for an eligible
taxation year, calculated for the purpose of computing the
individual's tax payable under this Part for a taxation year
(in this subsection referred to as "the year of
receipt") in which the individual received a qualifying
amount, is the total of
(a) the amount, if any, by which
(i) the amount that would be the individual's tax payable
under this Part for the eligible taxation year if the total of
all amounts, each of which is the specified portion, in relation
to the eligible taxation year, of a qualifying amount received by
the individual before the end of the year of receipt, were added
in computing the individual's taxable income for the eligible
taxation year
exceeds
(ii) the total of all amounts each of which is an amount, in
respect of a qualifying amount received by the individual before
the year of receipt, that was included because of this paragraph
in computing the individual's notional tax payable under this
Part for the eligible taxation year, and
(b) where the eligible taxation year ended before the
taxation year preceding the year of receipt, an amount equal to
the amount that would be calculated as interest payable on the
amount determined under paragraph (a) if it were so
calculated
(i) for the period that began on May 1 of the year following
the eligible taxation year and that ended immediately before the
year of receipt, and
(ii) at the prescribed rate that is applicable for the purpose
of subsection 164(3) with respect to the period.
[10] The mechanism found in sections 110.2
and 120.31, specifically the determination of "notional tax
payable", is intended to create, in the context of providing
relief to taxpayers, a situation reflecting as accurately as
possible the situation that would have existed if the lump-sum
payment had actually been received over a number of years. The
issue is whether using for allocation purposes a net figure
calculated as the "qualifying amount" would further the
attainment of this goal, and if so, whether the Act
authorizes the use of a net figure.
[11] There is no indication that a lump-sum
payment must be allocated on a gross basis. The Budget Plan
1999, which introduced sections 110.2 and 120.31, states at
page 202:
In recomputing the notional tax liability for prior years, no
adjustments will be made to the income tax returns for those
years. That is, individuals will not be able to modify items such
as RRSP contributions and tax credits. Similarly, the government
will not recapture income-tested benefits paid in prior years.
Any reduction in federal tax through this measure will also have
the effect of reducing provincial tax liability in those
provinces that are part of the tax collection agreements. . . .
These changes do not affect the current provisions applying to
retroactive lump-sum CPP/QPP benefits.
The above statement does not preclude the use of a net
lump-sum payment figure.
[12] To discover the intent behind sections
110.2 and 120.31, one may resort to "February 16, 1999 -
Federal Budget, Canada Tax Service - Stikeman Analysis":
The Budget proposes to introduce an interesting, if complex,
concessionary regime for the computation of income tax on certain
retroactive lump-sum payments to individuals (other than trusts).
Under this regime, taxpayers will have the choice of paying tax
on "qualifying retroactive lump-sum payments" not at
the rate otherwise applicable in the year of actual receipt, but
rather at a lower rate that would have been applicable if the
amount in question had instead been received in the earlier year
or years to which the amount relates and throughout which the
taxpayer was resident in Canada. . . .
The intent is to compensate individuals for the penalizing
effects of the graduated rates of taxation stipulated in the
Income Tax Act. . . .
In some respects, it is not entirely clear how the new system
will operate. The exclusion of "non-periodic" pension
plan payments, in particular, deserves clarification. Does this
exclusion mean, for example, that a distribution of pension
surplus would not qualify for the more favourable treatment? More
generally, on what basis will it be determined to which year(s) a
given amount relates?
In keeping with the concessionary nature of this change, any
increase in income resulting from the new regime will have no
negative impact on an individual's position for the prior
year or years in question. For example, the government will not
claw back means-tested benefits, such as the Child Tax Benefit or
Guaranteed Income Supplement, previously paid to that individual.
On the other hand, prior year RRSP contributions will not be
adjusted in computing the tax payable for that prior year. The
Budget materials are silent on the impact, if any, this change
will have on the calculation of alternative minimum tax.
In a tacit admission of the complexity the requisite
computations will undoubtedly engender, the Budget papers specify
that taxpayers will be entitled to request Revenue Canada to
determine whether the alternative methodology is advantageous to
them in any particular circumstance. The calculation will require
a determination of the tax that would have been payable in the
prior year(s) and the interest that would have accrued at the
prescribed rate (for tax refunds) on such tax. Consequently, the
reduction in tax allowed to the taxpayer will itself be reduced
to reflect the notionally delayed payment.
[13] From this, it can be taken that the
scheme contemplated by Parliament was not comprehensive. Thus,
the use of a net QRLSP figure is not necessarily forbidden.
Furthermore, it can be argued that using a net figure would
advance Parliament's intention of lessening the impact of
graduated rates of taxation on lump-sum payments.
[14] The above having been provided in the
way of background, the relevant provisions of the Act must
now be examined. The definition of "qualifying amount"
may be distilled to read as follows: a superannuation benefit
received by an individual in a taxation year that is included in
computing the individual's income for the year, except to the
extent that the individual may deduct for the year an amount
under paragraph 8(1)(n) in respect of the amount so
included.
[15] In this context, the words "in
respect of" must be considered. This phrase has been
judicially considered many times, in particular by the Supreme
Court of Canada in its recent decision Markevich v.
Canada, [2003] 1 S.C.R. 94, 2003 DTC 5185. Major J. stated at
paragraph 26:
The appellant's submission turns on whether these
proceedings are undertaken "in respect of a cause of
action". The words "in respect of" have been held
by this Court to be words of the broadest scope that convey some
link between two subject matters. See Nowegijick v. The
Queen, [1983] 1 S.C.R. 29, at p. 39, per Dickson J.
(as he then was):
The words "in respect of" are, in my opinion, words
of the widest possible scope. They import such meanings as
"in relation to", "with reference to" or
"in connection with". The phrase "in respect
of" is probably the widest of any expression intended to
convey some connection between two related subject matters.
In the context of s. 32, the words "in respect of"
require only that the relevant proceedings have some connection
to a cause of action.
[16] One must also consider the definition
of "specified portion", which can be distilled to read:
the portion of the qualifying amount received by an individual
that the individual was entitled to receive in the eligible
taxation year. Essentially, the definition of "specified
portion" permits the allocation of a qualifying amount over
a number of years: the qualifying amount is broken up into parts
and allocated accordingly.
[17] Reading the definitions of
"qualifying amount" and "specified portion"
conjunctively, I find that it could very well be argued that a
qualifying amount is a net figure. Although there is no explicit
authority for the proposition that a reimbursement can be
allocated to previous years, the fact that
paragraph 8(1)(n) of the Act is incorporated
in the definition of "qualifying amount" presupposes,
in my view, that, for the purpose of determining the lump-sum
payment amount to be allocated, the reimbursement may be deducted
in the year it was made. Indeed, the definition of
"qualifying amount" specifically states that a
superannuation benefit, among other things, received in a year is
a qualifying amount except to the extent that a deduction is
taken under paragraph 8(1)(n) in respect of that
amount. When that definition is applied to the instant case, the
qualifying amount is the portion of the superannuation benefit
received by the appellant in 2000 that is included in her income
for that year and that relates to previous years ($56,377),
except to the extent that she may deduct for 2000 an amount under
paragraph 8(1)(n), among other provisions, in respect of
the superannuation benefit so included ($26,743). The qualifying
amount is therefore the difference, which is $29,634.
[18] The deduction is thus not being carried
back to make adjustments to the income tax returns for the
previous years but is being used in the year the reimbursement
was made for the purpose of determining the lump-sum payment
amount to be allocated. It is my opinion that, for this limited
purpose, it does not seem inconsistent with the Act to
permit the deduction to have an impact on taxation years other
than the taxation year in which the reimbursement was made.
[19] With respect to the request of the
appellant to be allowed to deduct the entire amount owed by her
to Sunlife, even though only a part had been repaid in 2000, the
respondent is correct in asserting that amounts owing but not
paid ought not to be factored into the notional tax payable
calculation. Indeed, as explained above, the definition of
"qualifying amount" in subsection 110.2(1) of the
Act includes, in particular, all amounts received from
Superannuation, except to the extent that a related amount
may be deducted under, among other provisions, paragraph
8(1)(n). Thus, it is a net figure that will be allocated
to the "eligible taxation years", but paragraph
8(1)(n) of the Act clearly applies only to "an
amount paid" where that amount is a reimbursement.
Since paragraph 8(1)(n) is incorporated in the definition
of "qualifying amount", it is reasonable to conclude
that only amounts that are actually paid will be factored into
the notional tax payable calculation.
[20] Having reached that conclusion, I am
not sure, however, that the use of a net amount will yield a
better tax result for the appellant. Indeed, if we use the net
amount as the qualifying amount that will be allocated to the
eligible taxation years, the same figure must also be used as a
deduction from taxable income in the year of receipt of the
QRLSP. As a result, although the tax on the QRLSP may be lower,
the tax on the reduced taxable income for the year of receipt
will be higher. Coming back to the calculations made by the
Minister in Exhibit A-2 and referred to above, we see that if we
determine the QRLSP to be the net amount ($29,634) instead of the
gross amount ($56,377), the tax adjustments with respect to the
QRLSP will clearly be less than $15,603. However, the taxable
income for 2000 would be reduced by the net amount of $29,634
(not the gross amount of $56,377), with the result that the
reduced taxable income would be $38,102 (and not the $11,359
arrived at in Exhibit A-2). As a consequence, the tax on
that reduced taxable income would not be $413 but a much higher
amount.
[21] In any case, I am not in a position to
determine whether the alternative method of computation will be
more advantageous to the appellant if a net amount instead of a
gross amount is used to establish the QRLSP. That calculation was
not provided with the Respondent's Written Submissions and
will have to be done by the Minister.
[22] I therefore suspend my judgment until
the Minister does new calculations bearing in mind that the QRLSP
is the excess of the portion of the lump-sum payment received by
the appellant in 2000 which is applicable to the previous years
($56,377) over the amount reimbursed in 2000 and allocated to the
previous years ($26,743). The new calculations will therefore
require a determination of the tax that would have been payable
in the prior years (and of the interest that would have accrued)
on a net total amount of $29,634 (and not $56,377), namely, the
QRLSP, which will be reallocated to each of the affected taxation
years in accordance with the figures given by Sunlife (Exhibits
A-3 and R-2 enclosed herewith).
[23] If the new calculations reveal that the
alternative methodology is advantageous to the appellant, the
appeal will be allowed accordingly. If it is not advantageous to
the appellant, the appeal will simply be dismissed.
Signed at Ottawa, Canada, this 17th day of September 2004.
Lamarre, J.
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