Meltzer v. R., [1996] 1 CTC 2493

Teskey J.T.C.C.: — All these appeals were heard on common evidence. The appellants elected to have their appeals heard pursuant to the informal procedure.

Issue

The issue is whether certain annuity payments paid by London Life Insurance Company (“London Life”), after an order of the Honourable Mr. Justice Morse of the Court of Queen’s Bench in Manitoba, dated July 2nd, 1991 are to be included as income of Meltzer and Essers.

FACTS

The appeals proceeded by way of an agreed statement of facts, (Exhibit A-l) and amended slightly by adding to paragraph 5 thereof a subparagraph (b) which reads:

The judgment by Mr. Justice Morse was the result of a contested trial and the appellants did not consent thereto.

The germane facts to the issue before me are:

1. Both appellants, in 1985 but prior to November 25, 1985, collapsed their Registered Retirement Savings Plans and transferred the proceeds thereof into single premium guaranteed income annuities;

2. Both appellants became bankrupt on November 25, 1985;

3. Both appellants received discharges from bankruptcy on the 22nd day of December 1986 (Exhibits A-2 and A-3). Both Court orders contained the following provision:

THIS COURT DOTH FURTHER ORDER that the said discharge granted herein shall be without prejudice to the rights of the creditors of the estate of Mendie Martin Meltzer in proceeding with an application under Section 69 and/or 73 of The Bankruptcy Act for an order that the purchase and/or assignment ‘of a single premium guarantee income annuity from London Life Assurance Company by Mendie Martin Meltzer is fraudulent and void.

4. It had been agreed between the appellants and their creditors in the bankruptcy that they would not contest their discharges from bankruptcy provided the above paragraph was in the Court order of discharge;

5. The creditors’ action in the Court of Queen’s Bench was concluded by the judgment of Justice Morse which has not been appealed. The four provisions thereof read:

1. THIS COURT DECLARES that the transfer by the Defendants of the proceeds of their respective Registered Retirement Savings Plan with Inland Trust and Savings Corporation, Central Trust Company, Canada Trust Company and Co-operative Trust Company of Canada to purchase the London Life Insurance Company Guaranteed Income Annuities numbered A 320 625-5 and A 320 637-1 is a settlement within the meaning of Section 91(1) of the Bankruptcy Act, R.S.C., 1985, c.B-3 and, therefore, void.

2. THIS COURT DECLARES that the said London Life Insurance Company Guaranteed Income Annuities numbered A 320 625-5 and A 320 637-1 purchased with the proceeds of the aforesaid Registered Retirement Savings Plan are not exempt property under Section 67 of the Bankruptcy Act.

3. THIS COURT DECLARES that the foregoing declarations are without prejudice to the rights, if any, of the Defendants under an alleged agreement binding on the parties hereto respecting payments heretofore made under the said annuities which alleged agreement may be the subject matter of further proceedings herein.

4. THIS COURT ORDERS AND ADJUDGES that the payments net of taxes, payable by the Defendants, and other charges required to be made by London Life Insurance Company under the said annuities, be paid to the Plaintiffs counsel, Pitblado & Hoskin, on their behalf.

Justice Morse gave written reasons for this judgment. The pertinent portion thereof reads:

For the foregoing reasons, I must find that the trust company R.R.S.P.s were exigible assets of the defendants, and I declare that the transfer of the proceeds of these R.R.S.P.s to purchase the London Life guaranteed income annuities was a settlement within the meaning of s. 91(1) of the Bankruptcy Act and, therefore, void. I further declare that the London Life annuities purchased with the proceeds of the trust company R.R.S.P.s are not exempt property under s. 67 of the Bankruptcy Act, and I order that the payments — net of taxes and other charges — required to be made by London Life under the annuities be paid to the plaintiffs, or, if they agree, to their counsel. I do not order the collapse of the annuities because to do so would result in the defendants becoming liable for tax even though they would not receive the proceeds of the collapsed annuities.

The defendants take the position that, on December 22, 1986, they were discharged from bankruptcy and that, although the trustee knew of their source of income from the annuities, no specific condition with respect to these annuities was imposed at the time of discharge. However, at the time of application for discharge, counsel for the plaintiffs agreed to withdraw the notice of objection which had been filed by the plaintiff banks “so long as it is understood and acknowledged that same is without prejudice to the claim which is being made by the Banks and Revenue Canada to set aside the transfers of the R.R.S.P. funds ...”. “It was agreed that the Banks would not oppose a request by your clients for an absolute discharge so long as the terms of the order contained satisfactory wording to the effect that the absolute order is without prejudice to the rights of the creditors to continue their application under Section 69 of the Bankruptcy Act to set aside the R.R.S.P. transfer . ” “It is acknowledged by the Banks that the monthly annuity payments shall continue to be made to your clients until a settlement or court determination of this matter is made.”

The actual orders of discharge provided that the discharge was “without prejudice to the right of” (the defendants’) “creditors in proceeding with an application under Section 69 and/or 73 of the Bankruptcy Act for an order that the purchase and/or assignment of a single premium guaranteed income annuity is fraudulent and void.”

I have no doubt the defendants understood that, in their application, the plaintiffs would seek to set aside the transfer of the proceeds of the R.R.S.P.s to the annuities. The logical consequence of this is that the defendants would have no legal right to retain the payments which they received under the annuities. I find, therefore, that the defendants are liable to repay to the plaintiffs the amounts which they have received from the annuities purchased with the proceeds of the trust company R.R.S.P.s and the plaintiffs will have judgment against the defendants for this amount.

Appellants’ position

The appellants submit that from the date of Justice Morse’s judgement, they did not receive any payments from London Life nor did they receive the benefit of the payments thereafter as their indebtedness to the plaintiffs in the Queen’s Bench lawsuit and any obligation towards these plaintiffs was extinguished by their discharge from bankruptcy. Since the appellants herein did not receive the payments after that date and there was no benefit accruing to them in any way, the payments are not taxable in their hands.

I was referred to the Supreme Court of Canada decision of Sura v. Minister of National Revenue, [1962] S.C.R. 65, [1962] C.T.C. 1, 62 D.T.C. 1005, wherein Taschereau J. said at page 68 (C.T.C. 4, D.T.C. 1006):

it is not the ownership of a thing which is taxable but the tax is imposed on a taxpayer and is determined by the income that he receives from his employment, his business, his property, or the property of which he is the legal beneficiary. As Mignault J. said in McLeod v. Minister of Customs & Excise, [1926] S.C.R. 457, [1917-27] C.T.C. 290, [1926] 1 D.T.C. 85 at page 464 (C.T.C. 296, D.T.C. 87):

All this is in accord with the general policy of the Act which imposes the income tax on the person and not on the property.

That proposition cannot be doubted and without any hesitation or reservation it must be accepted that only the person who has the absolute enjoyment of the income is liable to pay the tax without any regard whatsoever to any restraint that there might be on his right to free disposition of the income:

The appellants referred to a passage at page 337 of Materials on Canadian Income Tax, 9th edition, which reads:

Section 4 of the pre-1972 Income Tax Act thus stated that the income of a taxpayer from a business or a property was the “profit” therefrom, and this has been continued in subsection 9(1) of the present Act. The purpose of limiting income for tax purposes simply to net profit or gain is obvious. It is only to the extent that there is a “profit” for the year that one can say there is a “net accretion to one’s economic power between two points of time”. This accords with the economist’s definition of “income”, which underlies the basis for taxation by Canadian income tax legislation. Tax should be imposed only to the extent that the taxpayer can be said to have truly gained or improved his position.

The appellants submit that the payments made pursuant to the said judgment cannot be taxed pursuant to paragraph 56(1 )(d) of the Income Tax Act which reads:

56(1 )(d) Annuity payments — any amount received by the taxpayer in the year as an annuity payment other than an amount

(i) otherwise required to be included in computing his income for the year, or

as they were not received by the appellants.

Nor pursuant to subsection 56(2), which reads:

56(2) Indirect payments — A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

Because the appellants did not direct or concur in the payments being made to the plaintiffs, nor was there any benefit to the appellants to have the payments made to the plaintiffs as their obligations to the plaintiffs was extinguished, and for obvious reasons, the money is not taxable

pursuant to subsection 56(4), which reads:

56(4) Transfer of rights to income — Where a taxpayer has, at any time before the end of a taxation year (whether before or after the end of 1971), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount (other than any portion of a retirement pension assigned by the taxpayer pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the year unless the income is from property and the taxpayer has also transferred or assigned the property.

Respondent’s position

The respondent puts forth the proposition that the appellants did receive a benefit. The benefit being that they received their discharges from bankruptcy. That is, after that date they could become directors of corporations and could make contracts.

The respondent also pointed to that portion of Justice Morse’s reasons reproduced herein and the wording of paragraph 4 of his judgment.

Also, the respondent submits that the order of Justice Morse should be considered the same as a garnishee.

Analysis

In 1991, liability for income tax is determined by the Minister of National Revenue by making an assessment of tax. The only court or original jurisdiction to change, alter or amend that assessment is this Court.

Neither Justice Morse’s reasons for judgment, nor paragraph 4 of his judgment, can impose income tax on these monies. The essence of his order is to the effect that if the sums of money to be paid by London Life after the date of the order are taxable, then London Life is to only remit net amounts.

I do not accept the argument that the benefit the appellants received by being discharged from bankruptcy is such as to make the monies taxable.

The appellants received no benefits from the judgment. At the time of the judgment, they owed nothing to the plaintiffs therein and the money paid pursuant to the judgment cannot be said to decrease an obligation as there was none. It is this that takes this case out of the normal garnishee type cases.

Assuming the appellants had not been discharged from bankruptcy and the trustee in bankruptcy had been the plaintiff in the action before Justice Morse, then subsection 128(2) of the Act would be applicable. The pertinent portion thereof reads:

128(2) Where individual bankrupt - Where an individual has become a bankrupt, the following rules are applicable:

(a) the trustee in bankruptcy shall be deemed to be the agent of the bankrupt for all purposes of this Act;

(b) the estate of the bankrupt shall be deemed not to be a trust or an estate for the purposes of this Act;

(c) the income and the taxable income of the individual for any taxation year during which he was a bankrupt and for any subsequent year shall be calculated as if

(i) the property of the bankrupt did not pass to and vest in the trustee in bankruptcy on the receiving order being made or the assignment filed but remained vested in the bankrupt, and

(ii) any dealing in the estate of the bankrupt or any act performed in the carrying on of the business of the bankrupt estate by the trustee was done as agent on behalf of the bankrupt estate by the trustee from such dealing or carrying on is income of the bankrupt and not of the trustee;

(e) where the individual was a bankrupt at any time in a calendar year the trustee shall, within 90 days from the end of the year, file a return with the Minister, in prescribed from, on behalf of the individual of the individual’s income for any taxation year occurring in the calendar year computed as if

(i) the only income of the individual for such taxation year was the income for the year, if any, arising from dealings in the estate of the bankrupt or acts performed in the carrying on of the business of the bankrupt by the trustee,

(ii) in computing taxable income, the individual was not entitled to any deduction permitted by Division C for such taxation year except any deduction permitted by section 111, and

(iii) in computing the tax payable under this Part by the individual, he was not entitled to deduct any amount under any of sections 118 to 118.3, 118.5, 118.6, 118.8 and 118.9,

and the trustee is liable to pay any tax payable under this Part by the individual in respect of such taxable income for such taxation year;

(f) notwithstanding paragraph (e), the individual shall file a separate return of his income for any taxation year during which he was a bankrupt, computed as if

(i) the income required to be reported in respect of the year by the

trustee under paragraph (e) was not the income of the individual,

(ii) in computing income, the individual was not entitled to deduct any loss sustained by the trustee in the year in dealing with the estate of the bankrupt or in carrying on the business of the bankrupt, and

(iii) in computing taxable income, the individual was not entitled to any deduction under section 111 with respect to any losses for a previous taxation year,

and the individual is liable to pay any tax payable under this Part by him in respect of such taxable income for the taxation year;

(h) where, in a taxation year commencing after an order of discharge has been granted in respect of the individual, the trustee deals in the estate of the individual who was a bankrupt or performs any act in the carrying on of the business of such individual, paragraphs (e), (f) and (g) shall apply as if the individual were a bankrupt in the year; and

The cumulative effect of these provisions under the assumed facts would be that the annuity payment would be income to be reported by the trustee and the trustee would have had to file a tax return and pay the tax thereon.

The effect of the “without prejudice” portion of the discharge from bankruptcy (see fact No. 3) was that the assets in question were to be considered as assets available to the creditors if the actions were successful.

Since the actions were successful, the income would have had to be reported by the trustee pursuant to paragraph 128(2)(e) of the Act as set out above and paid by the trustee.

The appellants here cannot be in any worse position because the plaintiffs in the successful action were the individual creditors in the bankruptcy estate and not the trustee, and that they had been discharged from bankruptcy.

The result of Justice Morse’s judgment is that the transfer of the funds realized on the collapse of the RRSPs was void. By directing that the annuity payments be made directly to the creditors, he effectively removed the ownership from the appellants to the creditors. Of particular importance here is that at least following the judgment (if not earlier) the appellants had no beneficial ownership of, or interest in, the annuities and income arising therefrom, was not their income.

In any event, the sums are not taxable as neither appellant received any money from London Life after the date of the judgment and received no benefit, as their debt and obligations to the plaintiffs therein had been extinguished by their discharge in bankruptcy.

Therefore, the Meltzer appeal is allowed and the assessment for 1992 is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that all payments made by London Life pursuant to the order of Justice Morse are not to be included as income in the appellants’ income.

In the Essers appeals, for the years 1992 and 1993, the appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessments on the basis that all payments made by London Life pursuant to the order of Justice Morse are not to be included as income in the appellants’ hands.

The parties agreed that in the 1992 reassessment, that the income in the hands of the appellant Essers, from annuity A050431 should be calculated in the amount of $409.44 and not $4,900 as in the existing assessment.

The appellants are entitled to one set of costs.

Appeals allowed.