Bouchard v. Minister of National Revenue, [1996] 1 CTC 2239

Garon J.T.C.C.:- This is an appeal from an income tax assessment dated August 2, 1988 for the 1987 taxation year. This assessment by the Minister of National Revenue reduced the deduction eligible for contributions to a registered retirement savings plan (RRSP) to $2,197 on the basis of paragraph 146(5)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71- 72, c. 63) (the “Act”). The appellant, on the other hand, had claimed a deduction of $6,500 on the basis of paragraph 146(5)(b) of the Act.

The facts were not disputed. The appellant admitted the facts alleged at subparagraphs (a), (b) and (c) of paragraph 5 of the reply to the notice of

appeal. The subparagraphs read as follows:

(a) the taxpayer was employed by an accounting firm from 1979 to August 31, 1987, at which time he became a partner in the firm;

(b) from January 1, 1987 to August 31, 1987, the appellant paid $1,304.24 into his employer’s registered pension plan (RPP), in which he was an annuitant;

(c) the appellant claimed this amount as a deduction in computing his employment income for the 1987 taxation year under paragraph 8(1 )(m) of the Income Tax Act.

[Translation.]

It was also admitted that the appellant paid as a contribution an additional $6,500 in the first 60 days of the year 1988 into a registered retirement savings plan. It is in connection with this $6,500 contribution that the appellant claimed a deduction of this same amount in calculating his income for the year 1987.

It is mentioned in the notice of appeal that as of August 31, 1987, the date upon which the appellant ceased to be an employee of the chartered accountants company, he also ceased to be an annuitant under the pension plan to which he had contributed since 1979. Some time afterwards, the appellant transferred “the amounts accrued on his behalf to his personal RRSP”, according to what is alleged in the notice of appeal.

Appellant’s contentions

In his notice of appeal, the appellant made the following observations to support his right to deduct the amount of $6,500 as a contribution to an RRSP:

The appellant contended that in February 1988, as he was no longer an annuitant under the plan and as he could not become entitled to benefits under the plan on the premiums paid into it, contributions to the RRSP were made within the limits provided in paragraph 146(5)(b) of the Act.

The Minister’s contention was that since there were contributions to the plan during the year, 1.e., from January to August 1987, the limits provided in 146(l)(a) of the Act should apply.

The appellant claimed that the Minister’s position was without foundation for the following reasons:

1.0 Whether or not contributions were made to an RPP is irrelevant for the purposes of applying paragraph 146(l)(a).

Paragraph 146(l)(a) applies if by reason of employment, he was a person who was or might have become entitled to benefits under an RPP.

As of September 1, the appellant was not and could not become entitled to any benefits under an RPP, and in this sense, the contributions paid into an RRSP in February of the following year could not be subject to the provisions of paragraph 146( 1 )(a) of the Act, but rather to paragraph 146(1 )(b) of the Act.

[Translation.]

Respondent's contentions

In his notice of confirmation, the Minister of National Revenue gave the following reasons in support of his assessment:

The Minister of National Revenue has studied the facts set out in your notice(s) of objection and hereby confirms the contribution or contributions as established in compliance with the provisions of the Income Tax Act, for the following reasons:

because the deductible amount allocated under paragraph 8(1 )(m) for 1987 was set at $1,303.24: that as a consequence, your deduction for a premium paid to a registered retirement savings plan was limited to $2,197 in accordance with the provisions of paragraph 146(5(a) of the Act.

[Translation.]

In the reply to the notice of appeal, the Minister of National Revenue stated his main contention as follows:

(d) as a consequence of the above, the maximum amount that the appellant could deduct as premiums paid into an RRSP for the 1987 taxation year was $3,500 less the contributions paid to his employer’s RPP.

Analysis

As is clear from the claims made by the parties, I must determine from the technical standpoint whether paragraph (a) or paragraph (b) of subsection 146(5) applies in the instant case. It is useful at this point to reproduce the text of the English version of subsection 146(5) which was applicable in the 1987 taxation year. Subsection 146(5) reads as follows:

There may be deducted in computing the income for a taxation year of a taxpayer who is an annuitant under a registered retirement savings plan or becomes an annuitant thereunder within 60 days after the end of the year, the aggregate of all amounts each of which is the amount of any premium paid by the taxpayer under the plan during the year or within 60 days after the end of the year (to the extent that it was neither deducted in computing his income for a previous year nor designated for the purposes of paragraph 60(j), (j.l) or (1), not exceeding the amount, if any, by which

(a) where the taxpayer was employed in the year and

(i) as a consequence thereof was a person who is or may become entitled to benefits under a pension fund or plan that provides for payment of a pension to him payable in whole or in part out of contributions made or to be made to the fund or plan or out of or in respect of amounts credited or to be credited in lieu of such contributions by a person other than the taxpayer in respect of the taxpayer’s employment in the year,

(ii) contributed an amount in the year to a deferred profit sharing plan of which he was a beneficiary, or

(iii) as a consequence thereof was a person in respect of whom a contribution was made by an employer to a deferred profit sharing plan in the year,

an amount that, when added to the amount, if any, deductible under paragraph 8(1 )(m) in computing the income of the taxpayer for the year, does not exceed the lesser of $3,500 and 20 per cent of his earned income for the year, or

(b) in any other case, the lesser of $7,500 and 20 per cent of his earned income for that taxation year

exceeds the amount, if any, deductible under subsection (6) in computing income for that taxation year.

In the final analysis, we must determine whether subparagraph 146(5)(a)(i) applies in the case of the appellant for the 1987 taxation year, since it is clear that subparagraphs 146(5)(a)(ii) and 146(5)(a)(iii) are inapplicable. That paragraph 146(5)(b) applies if all the requirements of subparagraph (a)(i) are not met is not in dispute.

An analysis of subparagraph 146(5)(a)(i) brings out the following elements:

1. the taxpayer was employed in the year

2. as a consequence thereof he was a person who is or may become entitled to benefits under a pension fund or plan

3. this fund or plan provides for payment of a pension to this taxpayer payable in whole or in part out of contributions made or to be made to the fund or plan or out of or in respect of amounts credited or to be credited in lieu of such contributions

4. such contributions or the amounts credited or to be credited to replace these contributions must come from a person other than the taxpayer in respect of the taxpayer’s employment in the year.

Each of the requirements of subparagraph 146(5)(a)(i) must therefore be examined. With respect to the first requirement, the taxpayer must have been an employee at some time during a given year. This element of this subparagraph does not require that the taxpayer had been an employee for the whole year. There were no differences of opinion with respect to this aspect of subparagraph 146(5)(a)(i) by the parties.

I now move on from the first requirement to the third requirement of this subparagraph. Among other things, the pension plan must provide for the payment of a pension payable out of contributions made or to be made to the plan or out of or in respect of amounts credited or to be credited to this plan. There was no discussion concerning the application of this requirement.

The fourth component may be simply stated. The taxpayer must have been the employee of an employer who contributed or who will contribute to the pension plan or that the amounts credited or to be credited in lieu of such contributions must come from a person other than the employee in question. The appellant rightly underlined that it is not necessary that the employee himself had actually paid a contribution in the year for this requirement to apply. Counsel for the respondent in his argument referred on several occasions to the fact, which appeared to him to be significant, that the appellant had “contributed” to the pension plan in question. The appellant’s argument on this subject appears valid to me, given that in addition to the wording of this fourth part of subparagraph 146(5)(a)(i), the wording of the last part of paragraph 146(5)(a), which states that “there may be deducted in computing the income for a taxation year of a taxpay er... the amount, if any... an amount that, when added to the amount, if any, deductible under paragraph 8(1 )(m) in computing the income of the taxpayer for the year, does not exceed the lesser of $3,500 and 20 per cent of his earned income for the year”. The legislator thus ruled that the monetary limit at issue in paragraph 146(5)(a) could apply even if the employee had no amount to deduct under paragraph 8(1 )(m) which generally sets the maximum amounts that may be deducted as contributions to a registered pension plan, both for current and past employment.

I now return to the second requirement stated in subparagraph 146(5)(a)(i) relative to an employee, according to which “as a consequence thereof was a person who is or may become entitled to benefits under a pension fund or plan”.

Counsel for the respondent contended that to determine whether the person was or could become entitled to benefits under a pension plan it was necessary to do so from the time the appellant was an employee. The appellant contends that the issue should be considered from the end of the year in question or from the end of the 60 days following the end of the year.

Judge Bonner of this Court considered the text of this subparagraph in Gadsby v. Minister of National Revenue, [1985] 2 C.T.C. 2274, 85 D.T.C. 566 (T.C.C.) [appealed to the Federal Court-Trial Division, [1989] 1 C.T.C. 441].

To make it easier to understand Judge Bonner’s observations, we reproduce the subparagraph here:

(a) where the taxpayer was employed in the year and

(i) as a consequence thereof was a person who is or may become entitled to benefits under a pension fund or plan that provides for payment of a pension to him payable in whole or in part out of contributions made or to be made to the fund or plan or out of or in respect of amounts credited or to be credited in lieu of such contributions by a person other than the taxpayer in respect of the taxpayer’s employment in the year,

Judge Bonner stated:

As I indicated during the hearing I have some difficulty in seeing how the appellant could be described as a person who “was employed in the year and as a consequence thereof was a person who is or may become entitled to benefits” within subparagraph (i) in circumstances where before the end of the year and indeed before the end of the first month of the year he left his job, received all that he was entitled to under the pension plan and ceased to be a member of the plan. The verb tenses in that portion of subsection 146(5) indicate a change in time where they shift from the period indicated by “was employed” and “was a person” to the period in time indicated by the words “who is”. As I see it, the appellant may aptly be described by the words “was employed in the year and as a consequence thereof was a person who was or might have become entitled”. He cannot, in my view, aptly be described by the words “was employed in the year and as a consequence thereof was a person who is or may become entitled” after the employment and membership in the pension plan has ceased.

The period of time indicated by the words “who is” is, in my view, that period late in the year during the first 60 days of the next year when a taxpayer is endeavouring to determine the size of the deductible contribution which he may make to a RRSP.

An appeal to the Federal Court of Canada was then allowed by Deputy Prothonotary Giles of this Court on the basis of a consent to judgment executed by counsel for the taxpayer and the government. Noteworthy in this judgment is the fact that the deduction of a portion of the taxpayer’s contribution was granted pursuant to paragraph 146(5)(a) and that another portion of the contribution was deducted under paragraph 60(j) of the Act. This decision by the Deputy Prothonotary is not a precedent. In connection with this subject see the decision of the Federal Court of Appeal in Uppal v. Canada, [1987] 3 F.C. 565, at page 575.

Judge Bertrand Gagnon of the Court of Quebec, in Higgins v. Sous-Ministre du Revenu du Québec, [1987] R.D.F.Q. 184, follows the line of reasoning taken by Judge Bonner in Gadsby, supra.

It also appears to me to be more logical to examine the application of this second requirement at the time the taxpayer’s entitlement to the deduction provided in subparagraph 146(5)(a)(i) or paragraph 146(5)(b) needs to be determined for the purpose of computing his income. It is indeed at the end of the year or within the 60 days following the year end that the taxpayer may exercise his right to one of the deductions in these provisions.

Before concluding, I would like to emphasize that the appellant, who appeared to me to be a competent and trustworthy professional, contended that the assessment by the Minister of National Revenue under appeal runs counter to the Department of National Revenue’s policy, I presume at the relevant time. The authorities concerned will no doubt want to verify the accuracy of this affirmation, moved by their concern for consistency in the treatment of taxpayers relative to a given matter. Counsel for the respondent at the hearing was not able to give a firm opinion on this issue. Needless to say, whether or not this assessment is consistent with the policy of the Department of National Revenue at a given time has no impact on an appellant’s right to the deduction prescribed in paragraph 146(5)(b) of the Act.

For these reasons, the appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled to the deduction prescribed by paragraph 146(5)(b) with respect to the premium paid into an RRSP.

Appeal allowed.