Ben Martens v. Minister of National Revenue, [1990] 2 CTC 2385, 90 DTC 1873

Teskey, T.C.J.: —The appellant appeals his assessment dated August 9, 1985 wherein the respondents assessed the income tax payable by the appellant for 1984 by calculating his average income based on the years 1980, 1981, 1982, 1983 and 1984.

Issue

The issue to be decided is whether section 119 of the Income Tax Act (the "Act") requires the appellant's 1981 taxation year be included in the averaging period for purposes of determining the appellant's income tax payable for 1984.

Facts

There is an agreed upon statement of facts filed with the Court. These facts are as follows:

1. The Appellant was a resident of Canada whose chief source of income was farming at all times material hereto.

2. The Respondent provided the Appellant with a copy of the "Farmer's Income Tax Guide” (the "Guide") together with his TT income tax return in the spring of each year from 1980 to 1985 in respect of each of the taxation years from 1979 to 1984 respectively.

3. The Guide for each of the 1981, 1983 and 1984 taxation years of the Appellant provided detailed instructions to taxpayers regarding the completion of the income averaging provisions of a return. Photocopies of those instructions are attached hereto as Schedules "A", "B" and "C". The 1979, 1980 and 1982 versions of the Guide are identical, in all respects material hereto, to the 1981, 1983 and 1984 versions of the Guide.

4, The Appellant filed his T1 income tax return for his 1981 taxation year after April 30, 1982.

5. If the 1981 taxation year is not a year eligible for averaging under section 119 (the "Farm Averaging Provision”) of the Income Tax Act (Canada) (the "Act"), the 1979 taxation year is the next preceding available year to be included under that section.

6. While an issue in this Appeal is whether the investment tax credits claimed by the appellant pursuant to section 127 of the Act in respect of his 1981 taxation year (which resulted in nil net federal tax payable) precluded that year from being excluded as a farm averaging year, if the Appellant had claimed $1 less investment tax credit under section 127 of the Act, the 1981 taxation year would have been excluded as a farm averaging year.

7. By Notice of Assessment dated August 9, 1985, (the "Assessment") the Respondent assessed the income tax payable by the Appellant for 1984 by calculating his average income based on the years 1980, 1981, 1982 and 1983. A photocopy of the Assessment which the Respondent claims to have sent the Appellant is attached as Schedule "D" hereto.

The wording of the 1984 Farmer's Income Tax Guide referred to in paragraph 2 above which is relevant to this appeal is found in Chapter 7 under the heading "Averaging of Income”.

An averaging period consists of the year of averaging and four preceding years. If a return for a previous year was not filed on time, it cannot be included in the averaging period. In this case, if returns have been filed on time for at least four of the six immediately preceding years, you may group the latest four of such years with the year of averaging to establish an averaging period. For example, you wish to average your income in 1984 and have filed Income Tax returns on time for 1984, 1983, 1982, 1981, 1979 and 1978. You would use 1983, 1982, 1981 and 1979 as the prior years in your election to average. You may not include a year that was included ina previous averaging period or a year earlier than the sixth year prior to the year of averaging.

(B) Income Tax returns must be filed for each of the five years regardless of whether Income Tax was payable for each year. For a year in which “Income Tax" was payable, a return must have been filed on or before April 30 following the end of that year. (This requirement does not apply when the only amount payable was contributions in the Canada Pension Plan.) For a year in which no Income Tax was payable, a return must be filed on or before the date that the election to average income from is due;

The oral evidence disclosed that the late filing of the 1981 tax return was a deliberate late filing by the appellant so that when in the future he elected to average his income, the income in 1981 would not be used. The return shows "federal tax otherwise payable” of $6,860.99; the appellant applied an investment tax credit pursuant to subsection 127(5) of the Act to reduce his "federal tax otherwise payable” to nil.

The appellant on filing his income tax return for 1984 elected to average his income from farming for the years 1979, 1980, 1982, 1983 and 1984 (omitting 1981) for purposes of determining his income tax payable for 1984.

Analysis

Section 119 of the Act bears the heading "Averaging for farmers and fishermen". Subsection 119(1), for the purpose of this appeal reads:

(1) Where an individual’s chief source of income has been farming for a taxation year. . . and the 4 immediate preceding years for which he has filed returns of income as required by this Part. . .

Subsection 119(4) of the Act which deals with the election for the averaging reads:

(4) An election under subsection (1) is a nullity unless the earliest of the "preceding years" is one of the 6 years immediately prior to the year of averaging.

Mr. Justice Cattanach of the Federal Court in Israel v. The Queen, [1979] C.T.C. 468; 79 D.T.C. 5418 at 469 (D.T.C. 5418) described the purpose of section 119 of the Act:

The purpose of the section is abundantly clear. Farmers are recognized as being peculiarly vulnerable to the vagaries of nature with consequent fluctuations in income from year to year. Farming is a hazardous occupation subject to the elements which cannot be foreseen, guarded against or mitigated.

Thus the purpose of section 119 is to provide a measure of stability in the income tax exacted of farmers by extending to them the privilege, if they elect to exercise it, of averaging their income over five-year periods.

This case concerns itself with the proper interpretation of the words “filed returns of income as required by this Part" as found in subsection 119(1).

The appellant argues that the filing of the 1981 income tax return after April 30, 1982 was either a late filing or a voluntary filing, neither of which were a filing as required under the Act. He further argues that from the express language of section 119, it can be noted that the filing deadline for electing to farm average in subsection 119(1) is the date a return for the farm averaging year is required to be filed or, in the case where no return is required, the date a return would have been required to be filed if tax had been payable for that year. In the absence of determining which preceding years are included within the farm averaging period, no similar provision is made to include years for which no return is required. To include such a preceding year in the farm averaging period reference would have to be made not only to a year for which a return has been filed as required, but also in the case where no return was required, to a year that would have been filed as required if tax had been payable in that year. The absence of such language in that part of the subsection dealing with "dropped years" underlines that a proper construction of the provision must be to drop years from the farm averaging period where there is no requirement in the Act to file a return.

The words "as required by this Part” contained in subsection 119(1) of the Act were dealt with by the Exchequer Court in M.N.R. v. Arthur Topham, [1954] C.T.C. 54; 54 D.T.C. 1027. In the Topham case the Court was dealing with a taxpayer who filed a tax return late with tax owing. He paid the penalties for the late filing and wished that year to be included in the averaging. The Court held that it could not be included inthe averaging. A tax return must not only be properly completed it must also (in the case of an individual who has taxable income) be filed on or before April 30 of the next year.

The respondent submits on the authority of the Israel decision that the averaging provisions of section 119 are a privilege available only to farmers and fishermen which is extended by way of an exemption and that exempting provisions of a taxing statute must be constructed strictly.

The respondent further argues that to exclude all nil assessment years from the averaging period under section 119 would work great hardship on the very taxpayers these provisions were meant to benefit and that such an interpretation is contrary to the purpose of the section as stated by the Federal Court in the Israel case.

The effect of section 150 of the Act is that an individual for whom tax is payable must complete a tax return and file the same on or before April 30 of the following year. If the taxpayer does not owe any tax there is no necessity to complete and file a tax return unless a demand has been made upon the taxpayer by the Minister pursuant to subsection 150(2) then the return filed pursuant to such a demand would be a return that would fall within the meaning "as required”. The Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305 is the paramount authority for interpreting the Income Tax Act. The Court said that the words of the Act are to be read in their entire context and in their grammatical ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

If the appellant's argument was accepted then the proper construction of section 119 must be to drop all years from the averaging period where there is no requirement under the Act to file a return. That is, even if a return is filed it would not fit into the words "as required" since there is no requirement to file a return where no tax is payable. On this interpretation a farmer could never use for averaging purposes a year that there was no tax payable and that year would have to be excluded from the averaging period. This would be contrary to the purpose of the Act as enunciated by Cattanach, J. in Israel, supra, as it would prejudice the very taxpayers it is meant to benefit.

The words "and the 4 immediately preceding years for which he has filed returns of income as required by this Part” must be interpreted as meaning or referring to returns that have tax payable and do not refer to returns where no tax is payable. Thus, when a taxpayer makes an election under this section and has not filed returns for some of the years in the period, as there was no tax payable, he then would file those returns at the same time or at any time prior so that the Minister would have the proper and correct figures in order to complete the averaging calculation. By using this interpretation a taxpayer is penalized by having a year excluded only if there was tax owing in that year and the return was not filed on or before April 30 of the following year.

The appellant submits as an alternate argument, that he was required to file a return for 1981 on or before April 30, 1982 in that he had federal tax payable of approximately $6,000 and instead of paying this amount he used investment tax credits pursuant to subsection 127(5).

Subsection 127(5) reads in part:

(5) Investment tax credit. There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount equal to the aggregate of

[Emphasis added.]

The respondent in the agreed statement of facts agrees in paragraph 6 above that if the appellant had claimed $1 less investment tax credits under section 127 of the Act, the 1981 taxation year would have been excluded as a farm averaging year because then there would have been tax payable and the filing would not be "as required”.

The use of the tax credit whether it be before April 30, 1982 or any time thereafter eliminates the “tax payable".

For the purpose of section 150 "tax payable" is defined at subsection 248(2) which reads:

(2) Tax payable. In this Act, the tax payable by a taxpayer under any part of this Act by or under which provision is made for the assessment of tax means the tax payable by him as fixed by assessment or reassessment subject to variation on objection or on appeal, if any, in accordance with the provisions of that Part.

Since the income tax system in Canada is a self-assessing system, it is the taxpayer who makes the first assessment of tax payable. The Court rejects the argument that there is an amount of tax payable prior to applying the investment tax credits pursuant to subsection 127(5). What was showing pursuant to this subsection is "tax otherwise payable". There was no requirement on the appellant to file a tax return for 1981 as on the completion of the return as assessed by himself there was no tax payable. Under the interpretation of subsection 119(1) as set out above, year 1981 is included in the averaging period and therefore the 1981 tax return could be filed at any time up to April 30, 1984, for the sole purpose of giving the Minister the right income figures so that the averaging calculation could be made.

Judgment

For the reasons set out above the appeal is dismissed.

Appeal dismissed.