William Whittaker v. Her Majesty the Queen (Informal Procedure), [1995] 1 CTC 2342

Taylor J.T.C.C.:-This is an appeal heard in Charlottetown, Prince Edward Island on October 4, 1994, under the informal procedure of the Tax Court of Canada, against an assessment under the Income Tax Act, in which the respondent included an amount of $9,269 received by the appellant as a pension in his taxable income for the year 1991.1 do point out that I use the term "pension" only because it is used by both the appellant and the respondent in the relevant pleadings before this Court - I attach no particular significance to the use of that term, while at the same time recognizing that it may be the correct identification for the amount at issue. The appellant launched his appeal as follows:

I am writting to request an informal appeal of the decision of the Tax Board, dated 17-2-94. I have had my pension since 1963; with not tax problems. I did not receive any tax credits during my service, for pension. I was informed that it was tax free as my rank was below warrant officer, and it carries no family benefits.

For the respondent, the elements were:

— the appellant retired from the Canadian Navy in 1963, having completed 20 years of service;

— the appellant became entitled to a pension under the Defence Services Pension Continuation Act, 1959 and the Canadian Forces Superannuation Act;

and

— during the 1991 taxation year the appellant received pension benefits under the said Acts in the amount of $9,269.

The respondent relied on section 3 and on paragraph 56(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as amended for the 1991 taxation year.

The appellant reviewed the history of this matter — his service in the Royal Canadian Navy (R.C.N.), an option provided to him - as well as to all other serving ranks Petty Officer and below — in 1960 to retain the pension rights they had at that time or to make a change to a different system. The rights he had at that time (to be exercised after 20 years service) arose from an arrangement with the Department of National Defence, based on no contribution from the serving naval men, no survivors benefits, and as he understood it, no income tax obligation on the payments when they would be received. He, and a very small minority of others decided to remain under the existing system, which he generally referred to as "Part IV" of their previous superannuation. Those who decided to make the change, would do so by signifying such intent (on the same kind of form he was required to complete) by filling in the space and accepting both the obligations and rights under "Part V" of the provisions. These obligations and rights did include a contribution by the individual, higher pension, survivors benefits and the income tax liabilities. According to Mr. Whittaker’s recollection, there were probably only six of the personnel at his base in 1960 who decided to remain under "Part IV", merely because they had only a few years of service yet to go (in this case three years) and the additional income tax liability assumed under "Part V" would have been greater than any additional pension they could receive. As he understands it now, there are probably only a few hundred ex- armed forces personnel in all of Canada remaining under the old "Part IV" of the Act - he himself is into his seventies now. Mr. Whittaker supplied the Court with a copy of the form he completed in 1960, and it supported his contentions — although there was no mention thereon regarding income tax exemption for the "Part IV" personnel. Mr. Whittaker described his role in the R.C.IN. to the degree that it placed him in a position with some considerable knowledge and information on this subject — clearly the understanding of "no income tax" was not simply scuttlebutt, although at the end of this case I am no more aware of its legislative source that I was at the beginning, despite the best efforts of both parties to be of assistance to the Court. I am however impressed by the fact that 25 years of receipt of the amount had gone by uneventfully (1963 to 1988) before the question of possible taxability was even raised by Revenue Canada for the years 1988 and 1989 through reassessments - which reassessments were later discon- tinned. Apparently nothing untoward happened for 1990, but the issue resurfaced for the 1991 taxation year.

Counsel for Mr. Whittaker pointed out that in his opinion the amount at issue did not come under the provisions of the current Canadian Forces Superannuation Act at all as asserted by the respondent — but remained as arising out of the antiquated, but still serviceable "Defense Services Pension Continuation Act of 1959". He further noted that nothing new or significant had occurred to the "pension" system liabilities or legislation in 1988, 1989 or in 1991 which would have made the amount now taxable, while it had not been so previously. He dealt with what are referred to as the "pension exclusions" under certain section of the Act, by pointing out that since the amount was not specifically so excluded, it might not be a pension at all but rather some form of other compensation of the type that is obliquely referenced there, but long since lost in history. Counsel specifically referred the Court to the Supreme Court case Fries v. The Queen, [1990] 2 S.C.R. 1322, [1990] 2 C.T.C. 439, 90 D.T.C. 6662, and the exclusion therein of "strikepay" from income.

Counsel for the respondent restated that the wording of section 56 of the Act should include this amount, since it appeared to be all inclusive, and none of the exempting provisions specifically mentioned it. Further it must be included in income since it is from a "source" — that source being the service provided by Mr. Whittaker to the armed forces. Counsel did note that she also had been unsuccessful in her research to provide the Court with more positive information on the specific taxability of the amount, and pointed out that perhaps the relevant amounts should have been taxable in the hands of Mr. Whittaker during all the years from 1963.

Analysis

My simple opinion is that the respondent is on very thin ice in assessing this amount to tax in 1991 — the record of non-taxation over the many years, the fact that the immediately preceding years were not reassessed even now, and that no penalties were imposed for non-inclusion of the amount for many years, strikes me as extraordinarily magnanimous on the part of Revenue Canada, although certainly praiseworthy. It does tend however to lend credibility to the assertion of Mr. Whittaker that the amounts were never to be regarded as taxable. The exclusion of this amount from the "exclusions" under the Act I regard as possibly an oversight — and I have no basis at all for that view - it only seems logical. Certainly, it was always clear in the records provided to Mr. Whittaker and any interested parties annually that he was in receipt of such an amount. I do not think that now the respondent can rely on section 56 of the Act.

With regard to section 3 of the Act, while I do recognized that its terms and subject and subsequent jurisprudence lead one to almost the "all inclusive" view, I will rely on the expressed opinion of the Supreme Court of Canada in Fries, supra and adopted at page 1323 (C.T.C. 439; D.T.C. 6662):

We are not satisfied that the payments by way of strike pay in this case come within the definition of "income...from a source" within the meaning of section 3 of the Income Tax Act, S.C. 1970-71-72, c. 63. In these circumstances the benefit of the doubt must go to the taxpayers.

In this instance, the benefit of the doubt must go to Mr. Whittaker. It would appear from that judgment that there do remain a few areas of alleged income beyond the reach of the tax man, and perhaps even that fragile hope is an important part of our economic and fiscal structure.

The appeal is allowed, no costs are to be awarded.

Appeal allowed.