Paul H. Cohen v. Minister of National Revenue, [1988] 2 CTC 2021, 88 DTC 1404

Rip, T.CJ.:—The appellant, Paul H. Cohen, appeals notices of reassessment issued by the respondent, the Minister of National Revenue, for the 1979, 1980, 1981, 1982 and 1985 taxation years. No notice of objection as required by section 169 of the Income Tax Act ("Act") had been filed by Mr. Cohen for 1979, 1980, 1981 and 1982 and on application by counsel by the Minister, the appeals for the four years were quashed. Thus only the appeal with respect to 1985 is a valid appeal.

In 1978 Mr. Cohen purchased Series 33 compound interest Canada Savings Bonds ("bonds"). In accordance with the terms of the bond, owners of the bonds receive interest only when the bonds are cashed; interest is earned on a monthly basis. Interest earned for a year is added to the principal amount of the bond. In filing his income tax returns for 1979, 1980, 1981 and 1982 Mr. Cohen elected pursuant to subsection 12(8) [1] of the Act to include in his income interest earned for the year from the bonds as if the interest was received in the year. Mr. Cohen reported the following amounts of interest in his income:

The respondent assessed Mr. Cohen pursuant to the elections.

Sometime in 1984 Mr. Cohen, who is employed as an appeals officer by the Minister, requested the Minister to reassess him for 1979 to 1982 inclusive to reduce interest from the bonds by the following amounts:

so that interest included in income for 1979, 1980, 1981 and 1982 be $850, $975.70, $1,062.70 and $1,157.30 respectively. The aggregate amount of excess interest which Mr. Cohen claims to have reported for the four years is $2,618.10.

Mr. Cohen sought the adjustments because he was of the view he reported excess interest in his returns of income since $2,618.10 of the reported interest ought to be reported in his return of income for 1985 as a "cash bonus", as defined by section 12.1 of the Act. A bondholder who received a cash bonus on maturity of the bonds in 1985 may include only one-half of the cash bonus in his income as interest. Section 12.1 reads as follows:

12.1 Notwithstanding any other provision of this Act, where in a taxation year a taxpayer receives an amount from the Government of Canada in respect of a Canada Savings Bond as a cash bonus that the Government of Canada has undertaken to pay (other than any amount of interest, bonus or principal agreed to be paid at the time of the issue of the bond under the terms of the bond), he shall, in computing his income for the year, include as interest in respect of the Canada Savings Bond '/2 of the cash bonus so received. [2]

The Minister refused Mr. Cohen's request. Mr. Cohen filed a waiver in prescribed form for each of 1979 to 1981 taxation years inclusive in accordance with subsection 152(4) of the Act. However he testified that a Minister’s official has advised him no reassessment will be issued, notwithstanding the filing of waivers.

The bonds matured in 1985 and were redeemed by Mr. Cohen on November 5, 1985. The financial institution where Mr. Cohen redeemed the bonds issued to him form T600 indicating receipt by him of interest in the amount of $8,173.90 and form T600C indicating the redeemed amount included a cash bonus of $4,884.70. The principal amount of the bonds was $10,000. These amounts are not an issue.

During the years 1979 to 1985 inclusive Mr. Cohen reported interest from the bonds aggregating $10,792; this amount includes the amount of $8,173.90 and $2,618.10 of claimed excess interest.

In filing his income tax return for 1985 Mr. Cohen included in income that amount of interest on the bonds, $1,495 that was referable to 1985. He also reported a cash bonus of $2,266.60, of which $1,133.30 was included as interest income. The respondent assessed accordingly.

Mr. Cohen objected to the assessment on the basis that in accordance with section 12.1 of the Act the cash bonus be adjusted to $4,884.70, an increase of $2,618.10 over that declared, 50 per cent of which would be added to interest income. Again he requested reductions of interest aggregating $2,618.10 declared in his 1979 to 1982 tax returns.

The Minister confirmed his assessment for 1985 stating that:

Interest received from Canada Savings Bonds has been properly included in income in accordance with the provisions of section 12.1 and paragraph 12(11)(c) of the Act; consequently an increase in the amount of $1,309.05 may not be made to the taxable amount of bonus interest included in income.

Because the appellant was seeking to increase his income for 1985 by way of appeal, counsel for the respondent made an application that the appeal be dismissed. The respondent's position is that the appellant in appealing the assessment for 1985 is not seeking any relief from the assessment but Is asking the Court to increase the assessment. An increase in tax for 1985 would result in Mr. Cohen being taxed twice on the same amount of interest income, firstly for the years 1979 to 1982 and secondly for 1985. In his view Mr. Cohen would then be in a stronger position to argue that this inequity be remedied by the Minister reducing the assessments for the earlier years. The Court can consider an appeal for an assessment of tax only when relief sought is in the form of a reduced amount of tax for the year under appeal: Vide: No 526 v. M.N.R., 20 Tax A.B.C. 114; 58 D.T.C. 497, Neil L. Boyko et al. v. M.N.R., [1984] C.T.C. 2233 at 2237; 84 D.T.C. 1233 at 1237; and Steven Cooper v. M.N.R., [1987] 1 C.T.C. 2287 at 2301; 87 D.T.C. 194 at 205. The Court has no authority to increase tax in a taxation year properly before it even if such a decision may result in reduced taxes for other taxation years.

The appellant relies on section 12.1 and subsection 20(21) of the Act. He acknowledges that the effect of section 12.1 would be to increase income for 1985. However, after increasing income pursuant to section 12.1 subsection 20(21) would come into play, he says, so that income for 1985 would be reduced and he would receive some relief for 1985.

Mr. Cohen says that in 1985 he received from the Government of Canada in respect of series 33 Canada Savings Bonds a cash bonus of $4,884.70 and pursuant to section 12.1 he is to include one-half of $4,884.70, or $2,442.35, in computing his income for the year. The cash bonus, he submits, must be included in income in the year it is received by the taxpayer and cannot be reported on an accrual basis. [3]

What Mr. Cohen desires, he says, is for the Court to order the Minister to tax in accordance with the Act. Of the amounts of interest accrued and reported in income for each of 1979, 1980, 1981 and 1982 the amounts of $100.00, $327.10, $629.10 and $1,561.90 were portions of the cash bonus, as defined by section 12.1, one-half of which is to be reported as income in the year of receipt, 1985.

I agree with Mr. Cohen's interpretation of section 12.1: the cash bonus is to be included in income in year of receipt. Subsection 12(8) of the Act provides that in computing income for a year the taxpayer may include in income interest accrued to him on a debt obligation to the end of year. However the opening words of section 12.1, “notwithstanding any other provision of this Act", clearly indicates subsection 12(8) does not apply to money receivable as a cash bonus. The respondent ought to have assessed Mr. Cohen for 1985 to include one-half of the amount of the cash bonus in computing his income for the year.

The Court, as indicated, cannot consider a taxpayer's request to increase his income for a taxation year, in the case at bar, by $2,618.10, the amounts included as interest in the years 1979 to 1982 inclusive. However subsection 20(21) permits a taxpayer to deduct, in computing income, amounts he may have overpaid in prior years in the year he disposes of a debt obligation at fair market value. According to subsection 20(21):

Where a taxpayer has in a particular taxation year disposed of a property that is an interest in a debt obligation for consideration equal to its fair market value at the time of disposition, there may be deducted in computing his income for the particular year the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount that was included in computing his income for the particular year or a preceding taxation year as interest in respect of that property

exceeds the aggregate of all amounts each of which is

(b) the portion of an amount that was received or became receivable by him at or before that time as can reasonably be considered to be in respect of an amount described in paragraph (a); or

(c) an amount in respect of that property that was deductible by him by virtue of paragraph 14(b) in computing his income for the particular year or a preceding taxation year.

Mr. Cohen thus submits that in 1985 he disposed of Canada Savings Bonds, a debt obligation, for consideration equal to its fair market value at the time and has calculated an amount he may deduct pursuant to subsection 20(21) as follows:

Paragraph 20(21)(a)

Amounts included in income for 1985

and preceding years as interest:

1979 to 1984	$ 9,297.00
1985 — original interest	1,495.00
— bonus interest from cash bonus
(one half of $2,266.60)	1,133.30
Sub-Total	$11,925.30
Paragraph 20(21 )(b)
Interest received at the time of
disposition in 1985:
— original interest	$ 8,173.90
— bonus —'(other than any amount of interest,
bonus or principal agreed to be paid
at the time of issue of the bond under
the terms of issue of the bond)' equals
$4,884.70, one-half of which is
interest per section 12.1 of the
Income Tax Act	2,442.35
Sub-Total	$10,616.25
Excess of paragraph 20(21)(a) of the Income Tax Act
over paragraph 20(21)(b) of the Income Tax Act
to be deducted from the appellant’s 1985
interest income reported	$1,309.05

The $9,297.00 includes $2,618.10 of cash bonus. The sum of $2,618.10 and $2,266.60 equals $4,884.70, the amount of cash bonus received in 1985.

The respondent says that for the years prior to 1985, in particular the years 1979 to 1982 inclusive, he assessed interest on Canada Savings Bonds in the manner reported by the appellant. For 1985 the appellant reported additional interest on the bonds. In the respondent's view, however, the appellant is not entitled to deduct any amount pursuant to subsection 20(21) of the Act as the amounts included in income as interest in the preceding years and for 1985 do not exceed the aggregate amounts of interest received in the 1985 taxation year computed in accordance with paragraphs 20(21)(a) and 20(21)(b). The respondent's calculation is as follows:

Paragraph 20(21)(a)

Amounts included in income for 1985

and preceding years as interest:

1979 to 1984	$ 9,297.00
1985 — original interest	1,495.00
— bonus interest	1,133.30
TOTAL	$11,925.30

Paragraph 20(21) (b)

Interest received at the time of

disposition in 1985:

original interest	$8,173.90
bonus interest	4,884.70
TOTAL	$13,058.60
Excess paragraph 20(21)(a) over 20(21)(b) “nil”

Thus the issue between the parties in respect of subsection 20(21) is whether all or only one-half of the cash bonus received in 1985 is to be included in the "amount" in paragraph 20(21)(b) that was "received" by Mr. Cohen in 1985. Section 12.1 provides that only one-half of the cash bonus is to be included in income. The appellant therefore argues that only one-half of the cash bonus is a portion of an amount that was received or became receivable by him at or before the disposition of the bond as can reasonably be considered to be in respect of an amount that was included in computing income for 1985 or a preceding year as interest in respect of the debt obligation.

The respondent's view is that since the word "received" is found in both section 12.1 and paragraph 20(21)(b), the amount so received must be the same in both provisions, namely all and not one-half of the cash bonus so received.

If the appellant's interpretation is correct a reduction in tax will result and the Court has jurisdiction to hear his appeal. If the respondent's interpretation is correct there would be no decrease in tax assessed and therefore the appeal would be dismissed.

I agree with the appellant's interpretation of subsection 20(21). The aggregate of amounts determined in paragraph 20(21)(b) are portions of an amount in respect of an amount described in paragraph 20(21)(a). The amounts in paragraph 20(21)(a) are "amounts each of which is an amount that was included in computing his income for the particular year or a prior year in respect of the bond”. The amounts included in income comprise of interest and one-half of the cash bonus. The amounts in paragraph 20(21)(b), in my view, must include only the portion of an amount received by Mr. Cohen in 1985 that can reasonably be considered to be an amount that was included in computing his income for 1985 or a prior year as interest from the bonds. The amounts received by Mr. Cohen in 1985 or receivable by him in prior years that were included in income in 1985 and prior years included only those amounts of accrued interest received in 1985 and one-half the bonus.

To include, as the respondent did, all the cash bonus in paragraph 20(21)(b) would cause the "portion" of the amount that was received or became receivable at the time Mr. Cohen disposed of the bond in 1985 to be greater than the amount of the cash bonus that was included in computing income for 1985. This would not be the result contemplated by subsection 20(21). It appears the Minister, in making his calculations for the purposes of subsection 20(21), may have relied on paragraph 20(21)(b) as it applied to taxation years prior to 1983. [4]

If the sum of $1,309.05, the difference between $2,442.35 (50 per cent of the cash bonus) and $1,133.30 (the amount of cash bonus he included in his income for 1985) was added to Mr. Cohen's income for 1985 pursuant to section 12.1, he would be entitled to deduct in computing his income for 1985 the amount of $2,618.10 pursuant to subsection 20(21):

Paragraph 20(21)(a)

Amounts included in income for

1985 and preceding years as interest

1979 to 1984	$ 9,297.00
1985 — interest during 1985	1,495.00
— one-half of cash bonus	2,442.35
(includes the $1,309.05
added to income)	$13,234.35
Paragraph 20(21 )(b)
Interest received at time of
disposition of bond in 1985
accrued interest received	$ 8,173.90
one-half of cash bonus	2,442.35
	$10,616.25
	$ 2,618.10

As a result the respondent's application is dismissed and the appeal will be allowed with costs and the assessment for 1985 referred back to the respondent for reconsideration and reassessment on the basis that in computing the appellant's income for 1985:

a) he add to the appellant's income the sum of $1,309.05 in accordance with section 12.1, and

b) he deduct from the appellant's income the amount of $2,618.10 in accordance with subsection 20(21).

In effect the appellant will receive a deduction in the amount of $1,309.05, which is less than the amount he claims he overpaid in interest prior to 1985 but is the amount he eventually sought at trial.

I should also add that if the respondent is advised by a taxpayer of an error in his return he ought to review the assessment and if it is an error he should endeavour to reassess the taxpayer, even if a reduction in taxes may result. I cannot otherwise deal with the assessments issued to Mr. Cohen for 1979 to 1982 inclusive.

Appeal allowed.