Date: 20050225
Docket: T-1086-04
Citation: 2005 FC 303
Ottawa, Ontario, this 25th day of February, 2005
PRESENT: THE HONOURABLE MR. JUSTICE JOHN A. O'KEEFE
BETWEEN:
SUSAN CHARITY CHISHOLM
Applicant
- and -
CANADA CUSTOMS AND REVENUE AGENCY
Respondent
REASONS FOR ORDER AND ORDER
O'KEEFE J.
[1] This is an application for judicial review pursuant to section 18 of the Federal Courts Act R.S.C. 1985, c. F-7 of the decision of R. L. Hillier ("Hillier") Assistant Commissioner, Canada Revenue Agency, (the "Agency") Southern Ontario Region, made pursuant to subsection 152(4.2) of the Income Tax Act, R.S.C. 1985, c.1 (the "Act"), that the lump sum disability amount of $80,000 was correctly included in the deceased's taxpayer's income in 1991. Hillier declined to exercise his discretion to re-assess outside the normal re-assessment period.
[2] The applicant seeks an order that the decision of the Agency rejecting the adjustment to the 1991 T1 of the taxpayer be set aside, and the matter be referred back to the respondent for re-determination and a decision in accordance with the law. The applicant also requests costs.
Background
[3] The applicant is the trustee and executrix of the late Ward Cornwell's estate.
[4] In 1991, the now deceased taxpayer, Ward Cornwell, received a lump sum payment of $80,000 from Confederation Life pursuant to a negotiated settlement of benefits due under a private disability insurance plan. A T4A was issued and the amount included in the T1 filed by Mr. Cornwell with respect to the 1991 taxation year. He had received $20,996 in periodic disability payments under the policy up to the point of the settlement agreement. He first applied for fairness relief on February 18, 2002.
[5] The fairness relief requested was to permit the processing of an adjustment to Mr. Cornwell's income as reported on his 1991 T1 income tax return, to re-characterize the $80,000 payment as not being treated as "income" taxable under paragraph 6(1)(a) (taxes the value of any benefits of and kind received by virtue of employment), or paragraph 6(1)(f) (taxes employment insurance benefits received on a periodic basis in respect of the loss of income from employment) of the Act.
[6] The letter denying the applicant's request indicated it was denied because no notice of objection was filed for the 1991 T1 return (within the period for objection), as such, no adjustment could be made to the 1991 T1 return as it was statute barred as of July 28, 1995. Further, the applicant was informed that in accordance with Information Circular 75-7R3, a statute barred year is not to be opened to permit re-assessment solely as a result of a subsequent successful appeal to the Courts by another taxpayer.
[7] By a letter dated August 7, 2002, the applicant again requested that the Minister consider granting fairness relief. In response to that letter, the Agency further explained their position denying the applicant's request to re-assess the 1991 T1 claim.
[8] By letter dated October 16, 2002, the applicant requested that the Minister consider cited cases and reconsider granting fairness relief. The Agency assigned Ms. Sandra McIntyre, CA to review the matter. Ms. McIntyre reviewed the materials on file, and Information Circular 75-7R3. She concluded that the Minister's position remained that the $80,000 amount received as payment from a disability plan is taxable under either paragraph 6(1)(a) or 6(1)(f) of the Act.
[9] The delegation of authority by the Minister in a fairness request under subsection 152(4.2) of the Act to open a statute barred year, must be considered by an Assistant Commissioner. The initial decision of the Minister, dated September 18, 2003, was signed without the proper delegation of authority. As such, the Minister consented on a procedural basis, to setting aside the decision dated September 18, 2003 and to refer the matter back to the Agency for re-determination in accordance with the fairness legislation and guidelines.
[10] The September 18, 2003 decision was set aside by order of Gibson J. The matter was sent back for re-determination and the applicant subsequently submitted additional materials to the fairness committee on March 26, 2004, including recent case law.
[11] Mr. Hillier was assigned to review the applicant's submissions. He stated in his affidavit that he reviewed and considered all relevant information in this matter, including the applicant's letter of March 26, 2004, applicable legislation and case law, and determined that the $80,000 lump sum payment was correctly included in the 1991 T1 return as income.
[12] The applicant's position is based on the assertion that the amount was a lump sum payment received on account of his disability and not the aggregate of periodic payments that would have been received from the Confederation Life Insurance Company up to the age of 65, and therefore was not taxable. The respondent claimed, however, that no evidence was provided to the Minister to support this contention.
[13] Hillier recommended that the Minister not exercise his discretion to grant the applicant fairness relief for these reasons. His recommendation gave rise to the decision that is now before the Court.
Decision of R. L. Hillier (May 7, 2004)
[14] The decision of Hillier reads in part as follows:
I am responding to the order of Mr. Justice Gibson dated February 4, 2004 which refers the above noted matter back to CRA for a redetermination under the fairness legislation.
I have carefully considered the facts of the case and your previous submissions as they relate to the applicable legislation. In addition, I have considered your letter to the Department of Justice dated February 2, 2004 wherein you ask for comments on this matter in light of the Tsiaprailis court case. My review indicates that the lump-sum disability amount of $80,000 was correctly included in income in 1991.
Paragraph 6(1)(f) of the Income Tax Act taxes employment insurance benefits received on a periodic basis in respect of the loss of income from employment. Paragraph 6(1)(a) taxes the value of any benefits of any kind received by virtue of employment. The CRA is of the opinion that a lump-sum settlement of a disability claim should be included in income under paragraph 6(1)(a) where 6(1)(f) does not apply. It is also the CRA's view that a portion of the lump-sum payment would be in lieu of periodic payments and should be included in income under paragraph 6(1)(f). There are numerous technical interpretations to support this view and our opinion has not changed because of court cases.
The Federal Court of Appeal in the Tsiaprailis case found that the portion of the lump-sum payment attributable to the right to the unpaid amounts up to the date of settlement is a taxable receipt under paragraph 6(1)(f). The portion of the lump-sum payment attributable to the right to receive benefits in the future is not taxable under 6(1)(f) or 6(1)(a) but is a capital receipt. As you are aware, Ms. Tsiaprailis has been granted leave to appeal both these issues to the Supreme Court of Canada, therefore this case is not settled.
When Mr, Cornwell filed his 1991 T1 return he included the lump-sum payment in income. He did not file a Notice of Objection for this taxation year and the year became statute barred July 28, 1995.
Based on court cases that occurred subsequent to 1991, a request for a refund in that year has been made. As indicated in IC 7R3, a re-assessment will not be made if the request is based solely upon a successful appeal to the Courts by another taxpayer. To re-assess all taxpayers on a retroactive basis as a result of a court decision would be an onerous, if not impossible task. The Income Tax Act has to be applied equally and fairly to all taxpayers. In order to give the benefit of a retroactive change to all taxpayers, the taxpayers would have to be identified. In addition, we would have to do this for each and every court case in order to be fair to all taxpayers. It should be noted that when a court case is unfavourable to a taxpayer, we do not apply the results retroactively either.
When a taxpayer has filed a Notice of Objection on a certain issue, the request may be held in abeyance pending the outcome of a similar court case. The case will be considered if the case was settled in favour of the taxpayer. Mr. Cornwell did not file a Notice of Objection to the 1991 tax year, so this option cannot be considered.
. . .
Issue (as framed by the respondent)
[15] Did the Minister fail to observe the principles of procedural fairness or err in law pursuant to subsection 18.1(4) of the Federal Courts Act, supra, in making the decision?
Applicant's Submissions
[16] The applicant submitted that the inclusion of the $80,000 amount in the 1991 T1 of Mr. Cornwell was a mistake. The Minister may re-assess the 1991 T1 of Mr. Cornwell pursuant to subsection 152(4.2) of the Act.
[17] The applicant submitted that paragraph 6(1)(f) of the Act includes in income payments from private insurance plans received that were payable to the taxpayer on a periodic basis. The
payment received by Mr. Cornwell was not on a periodic basis, nor was it the sum or present value of amounts payable on a periodic basis.
[18] The applicant submitted that paragraph 6(1)(a) of the Act is a broad provision and not intended to include in income disability payments that are taxable only if the strict provisions of paragraph 6(1)(f) are met (see Vasiliki Tsiaprailis v. Her Majesty the Queen 2002 DTC 1563).
[19] The applicant further submitted that paragraphs 6(1)(a) and 6(1)(f) of the Act have not been amended from 1991 to present, despite rulings in the Tax Court of Canada that lump sum payments of disability benefits are not taxable under 6(1)(f) when not payable on a periodic basis, and that the lump sum settlement does not constitute a benefit received in respect of employment. The position of the Tax Court of Canada was stated in Peel v. The Minister of National Revenue (1987), 87 DTC 268 (T.C.C.).
[20] The applicant submitted that the Agency did not render a decision in accordance with law under subsections 6(1)(a) and 6(1)(f) of the Act and jurisprudence.
Respondent's Submissions
[21] Standard of review
The respondent submitted that considerable deference should be given to its exercise of the discretionary powers exercised by the Minister under the Act. Relying on Sharma v. Canada (Customs and Revenue Agency) 2001 FCT 584, and Cheng v. Canada 2001 FCT 1114, the respondent submitted that the standard of review to be applied by this Court is patent unreasonableness.
[22] Submissions
The respondent submitted that the decision in the present case is based on Hillier's conclusion that a statute barred year is not to be re-assessed solely as a result of a successful appeal to the Courts by another taxpayer many years later and that the $80,000 lump sum was properly included in the applicant's 1991 income such that, there is no need to reassess the applicant's 1991 taxation year.
[23] That conclusion, in turn, is based on the fact that to remove the $80,000 lump sum payment from income would be incorrect in law as pursuant to paragraph 6(1)(f) of the Act, all employment insurance benefits received on a periodic basis in respect of loss of income from employment is taxed. Further, paragraph 6(1)(a) of the Act taxes the value of any benefits of any kind received by virtue of employment. Accordingly, the Minister's conclusions that there is no need to reassess the applicant's 1991 taxation year cannot be said to be "clearly irrational".
[24] The respondent submitted that the Minister observed the principles of procedural fairness and did not err in law in making the decision. Over the course of several reviews by the Agency, the applicant had the opportunity to make representations and submit relevant documentation.
[25] The Minister's representatives carefully considered all of the facts before them and declined to exercise the Minister's discretion to grant relief in accordance with the guidelines formulated to assist the Agency with the exercise of the Minister's discretion pursuant to subsection 152(4.2) of the Act. The decision is clearly not patently unreasonable.
[26] The premise of the applicant's position is that the payment should not be treated as income as the Tax Court of Canada's decision in Tsiaprailis, supra, which held that no part of the proceeds of a settlement of a claim under a disability insurance policy should be included in taxable income, should be applied to this case. However, the Federal Court of Appeal overturned that decision (Canada v. Tsiaprailis, 2003 FCA 136). Leave to appeal to the Supreme Court of Canada from the Federal Court of Appeal, was granted, and the matter heard on November 4, 2004 and reserved.
[27] The decision to decline to exercise the discretion to open to the statute barred year in the present case is based on the law relating to lump sum disability payments as it was at the time the matter was considered, and as it currently stands.
[28] The respondent requested an order dismissing this application with costs.
Relevant Statutory Provisions
[29] Paragraphs 6(1)(a), 6(1)(f) and 152(4.2) of the Act state:
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6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable
(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
(i) derived from the contributions of the taxpayer's employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,
(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,
(iii) that was a benefit in respect of the use of an automobile,
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6. (1) Sont à inclure dans le calcul du revenu d'un contribuable tiré, pour une année d'imposition, d'une charge ou d'un emploi, ceux des éléments suivants qui sont applicables:
a) la valeur de la pension, du logement et autres avantages quelconques qu'il a reçus ou dont il a joui au cours de l'année au titre, dans l'occupation ou en vertu d'une charge ou d'un emploi, à l'exception des avantages suivants:
(i) ceux qui résultent des cotisations de son employeur à un régime de pension agréé, un régime d'assurance collective contre la maladie ou les accidents, un régime privé d'assurance-maladie, un régime de prestations supplémentaires de chômage, un régime de participation différée aux bénéfices ou une police collective d'assurance temporaire sur la vie,
(ii) ceux qui découlent d'une convention de retraite, d'un régime de prestations aux employés ou d'une fiducie d'employés,
(iii) ceux qui étaient des avantages relatifs à l'usage d'une automobile,
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(iv) derived from counselling services in respect of
(A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or
(B) the re-employment or retirement of the taxpayer, or
(v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection 6(11);
(f) the total of all amounts received by the taxpayer in the year that were payable to the taxpayer on a periodic basis in respect of the loss of all or any part of the taxpayer's income from an office or employment, pursuant to
(i) a sickness or accident insurance plan,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan
to or under which the taxpayer's employer has made a contribution, not exceeding the amount, if any, by which
(iv) the total of all such amounts received by the taxpayer pursuant to the plan before the end of the year and
(A) where there was a preceding taxation year ending after 1971 in which any such amount was, by virtue of this paragraph, included in computing the taxpayer's income, after the last such year, and
(B) in any other case, after 1971,
exceeds
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(iv) ceux qui découlent de la prestation de services d'aide concernant:
(A) soit la santé physique ou mentale du contribuable ou d'un particulier qui lui est lié, à l'exclusion d'un avantage imputable à une dépense à laquelle l'alinéa 18(1)l) s'applique,
(B) soit le réemploi ou la retraite du contribuable,
(v) ceux qui sont prévus par une entente d'échelonnement du traitement, sauf dans la mesure où l'avantage est visé au présent alinéa par l'effet du paragraphe (11);
f) le total des sommes qu'il a reçues au cours de l'année, à titre d'indemnité payable périodiquement pour la perte totale ou partielle du revenu afférent à une charge ou à un emploi, en vertu de l'un des régimes suivants dans le cadre duquel son employeur a contribué:
(i) un régime d'assurance contre la maladie ou les accidents,
(ii) un régime d'assurance invalidité,
(iii) un régime d'assurance de sécurité du revenu;
le total ne peut toutefois dépasser l'excédent éventuel du total visé au sous-alinéa (iv) sur le total visé au sous-alinéa (v):
(iv) le total des sommes qu'il a ainsi reçues avant la fin de l'année et:
(A) lorsqu'une de ces sommes a été, en vertu du présent alinéa, incluse dans le calcul de son revenu pour une année d'imposition antérieure se terminant après 1971, après cette année,
(B) sinon, après 1971,
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(v) the total of the contributions made by the taxpayer under the plan before the end of the year and
(A) where there was a preceding taxation year described in clause (iv)(A), after the last such year, and
(B) in any other case, after 1967;
152.(4.2) Notwithstanding subsections 152(4), 152(4.1) and 152(5), for the purpose of determining, at any time after the expiration of the normal reassessment period for a taxpayer who is an individual (other than a trust) or a testamentary trust in respect of a taxation year,
(a) the amount of any refund to which the taxpayer is entitled at that time for that year, or
(b) a reduction of an amount payable under this Part by the taxpayer for that year,
the Minister may, if application therefor has been made by the taxpayer,
(c) reassess tax, interest or penalties payable under this Part by the taxpayer in respect of that year, and
(d) redetermine the amount, if any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer's tax payable under this Part for the year or deemed by subsection 122.61(1) to be an overpayment on account of the taxpayer's liability under this Part for the year.
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(v) le total des cotisations versées par le contribuable dans le cadre du régime avant la fin de l'année et:
(A) lorsqu'il y a eu une année d'imposition antérieure, visée à la division (iv)(A), après cette année,
(B) sinon, après 1967;
152 (4.2) Malgré les paragraphes (4), (4.1) et (5), pour déterminer à un moment donné après la fin de la période normale de nouvelle cotisation applicable à un contribuable -- particulier, autre qu'une fiducie, ou fiducie testamentaire -- pour une année d'imposition le remboursement auquel le contribuable a droit à ce moment pour l'année ou la réduction d'un montant payable par le contribuable pour l'année en vertu de la présente partie, le ministre peut, sur demande du contribuable:
a) établir de nouvelles cotisations concernant l'impôt, les intérêts ou les pénalités payables par le contribuable pour l'année en vertu de la présente partie;
b) déterminer de nouveau l'impôt qui est réputé, par les paragraphes 120(2) ou (2.2), 122.5(3), 122.51(2), 127.1(1), 127.41(3) ou 210.2(3) ou (4), avoir été payé au titre de l'impôt payable par le contribuable en vertu de la présente partie pour l'année ou qui est réputé, par le paragraphe 122.61(1), être un paiement en trop au titre des sommes dont le contribuable est redevable en vertu de la présente partie pour l'année.
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Analysis and Decision
[30] Standard of Review
In Sharma, supra, Pelletier J. (as he then was) addressed the issue of the standard of
review to be applied to tax fairness decisions of the Minister, albeit pursuant to subsection 220(3.2) of the Act. He came to the conclusion that the standard of review to be applied to decisions under the fairness provision is patent unreasonableness. I would adopt this conclusion with the exception that the interpretation of paragraph 6(1)(a) is a question of law and must be decided on the basis of correctness.
[31] Issue
Did the Minister fail to observe the principles of procedural fairness or erred in law pursuant to subsection 18.1(4) of the Federal Courts Act, supra, in making the decision?
In the decision under review, Hillier stated in part:
Based on court cases that occurred subsequent to 1991, a request for a refund in that year has been made. As indicated in IC7R3, a re-assessment will not be made if the request is based solely upon a successful appeal to the Courts by another taxpayer.
This is not correct as the applicant relied on Peel, supra, a 1987 decision which deemed lump sum disability payments not to be taxable. The subsequent cases cited by the applicant merely reinforced the initial decision. Hillier erred in applying the portion of IC75-7R3 (reassessment of a return of income) which states that a re-assessment will not be made if the request is based solely upon a successful appeal to the Courts by another taxpayer, without any indication that the existing case law had been taken into account in the decision-making process. This was a patently unreasonable error.
[32] Mr. Hillier also stated in his decision:
The Federal Court of Appeal in the Tsiaprailis case found that the portion of the lump-sum payment attributable to the right to unpaid amounts up to the date of settlement is a taxable receipt under paragraph 6(1)(f). The portion of the lump-sum payment attributable to the right to receive benefits in the future is not taxable under 6(1)(f) or 6(1)(a) but is a capital receipt. As you are aware, Ms. Tsiaprailis has been granted leave to appeal both these issues to the Supreme Court of Canada, therefore this case is not settled.
[33] My reading of the decision in Tsiaprailis, supra, causes me to conclude that the Court in that case did not decide that the portion of the lump sum payment relating to the right to receive benefits in the future is not taxable under 6(1)(f) or 6(1)(a), but is a capital receipt. What the Court stated at paragraph 417 of Tsiaprailis, supra, was:
This right to receive disability benefits so long as the state of total disability persists is a valuable right, just as the obligation to make payments so long as the insured is eligible to receive them is a significant liability. The right and the corresponding obligation have a monetary value. An insured can agree to surrender his or her rights, thereby extinguishing the insurer's liability, in return for a payment. The fact that the parties choose to negotiate the value of that right/obligation by reference to the amounts which could have become payable under the policy if the insured remained totally disabled and survived until age 65 does not mean that the settlement is a pre-payment of the insurer's obligations under the policy. We are not called upon to decide the nature of that right in this appeal but, in other circumstances, the disposition of a right to receive future amounts has been held to be a capital transaction. See Short v. Canada [1999] 4 C.T.C. 2085 (T.C.C.).
[34] The Court in Tsiaprailis, supra, deemed taxable the portion of the lump sum payment representing the taxpayer's entitlement to past benefits (i.e. arrears) as it was in respect of amounts payable in the past on a periodic basis. That is, the Court only dealt with arrears. In the present case, arrears are not in dispute, and the applicant has included the periodic payments received ($20,996) in the taxable income. I have reviewed the materials and I can find no basis for concluding that any portion of the settlement or lump sum payment would be in lieu of periodic payments and thus, should be included in income under paragraph 6(1)(f) of the Act. There simply is no evidence to support this conclusion.
[35] The respondent also contended that the lump sum amount of $80,000 should be included as income under paragraph 6(1)(a) of the Act. In Landry v. Canada [1998] 2 C.T.C. 2712 (T.C.C.) Bowman J.T.C.C. (as he then was) stated at paragraphs 9 and 10:
With respect, I think that Judge Taylor was right in Peel. Neither the Savage case nor paragraph 6(1)(a) has anything to do with this case. Paragraph 6(1)(f), upon which counsel for the respondent expressly declined to rely, deals specifically and in detail with disability benefits payable on a periodic basis. The lump sum payment received by Mrs. Landry was not payable on a periodic basis and there is no allegation or assumption that the $25,000 represented simply the aggregate of periodic payments that she might have received over her lifetime. (cf. Marchand v. M.N.R., 87 DTC 630 (T.C.C.)).
Paragraph 6(1)(a) is a general provision and it is not intended to fill in all the gaps left by paragraph 6(1)(f) - expressio unius est exclusio alterius.
[36] I am in agreement with Bowman J.T.C.C. (as he then was) and I am of the view that paragraph 6(1)(a) of the Act has no application to this case. Accordingly, Hillier, the assistant commissioner, was in error when he stated that paragraph 6(1)(a) applied in this case so as to make the lump sum payment taxable.
[37] The application for judicial review is therefore allowed with costs to the applicant, and the matter is referred back to the respondent for redetermination.
ORDER
[38] IT IS ORDERED that the application for judicial review is allowed with costs to the applicant, and the matter is referred back to the respondent for redetermination.
"John A. O'Keefe"
J.F.C.
Ottawa, Ontario
February 25, 2005
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1086-04
STYLE OF CAUSE: SUSAN CHARITY CHISHOLM
- and -
CANADA CUSTOMS AND REVENUE AGENCY
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: February 15, 2005
REASONS FOR ORDER AND ORDER OF O'KEEFE J.
DATED: February 25, 2005
APPEARANCES:
Bruce Wormald
FOR APPLICANT
Surksha Nayar
FOR RESPONDENT
SOLICITORS OF RECORD:
Lancaster, Brooks & Welch LLP
St. Catharines, Ontario
FOR APPLICANT
John H. Sims, Q.C.
Deputy Attorney General of Canada
FOR RESPONDENT
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