Hugh B Lambe v. Minister of National Revenue, [1985] 1 CTC 2170, 85 DTC 161

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on December 4, 1984, against an income tax assessment for the year 1981 in which the Minister of National Revenue added to income the proceeds of a Registered Home Ownership Savings Plan (RHOSP) collapsed in that year. In view of the unique nature of the point in dispute, the Court quotes the entire contents of a “Summary of Appellant’s Position” prepared and presented for the hearing by Mr Lambe who is a practising lawyer:

TAX REVIEW BOARD

RE: THE INCOME TAX ACT

BETWEEN:

HUGH B LAMBE,

and	Appellant
— and —
THE MINISTER OF NATIONAL REVENUE,
	Respondent
SUMMARY OF APPELLANT’S POSITION

The taxpayer initially purchased his owner-occupied home in 1976. The issue is whether the amount withdrawn in 1981 from the taxpayer’s Registered Home Ownership Savings Plan (RHOSP), which amount was used in the same year towards mortgage payments on the taxpayer’s owner-occupied home is included in income.

Subsection 146.2(6)(a) of the Income Tax Act provides that there is included in the income of a taxpayer for a taxation year, the amount received by the taxpayer out of a RHOSP except to the extent the amount is used by the taxpayer in the specified period, ie the year of withdrawal plus 60 days thereafter to acquire his owner-occupied home.

When the taxpayer withdrew the funds from his RHOSP in 1981 and used them in the same year towards mortgage payments on his owner-occupied home, were the funds so used an “amount used to acquire an owner-occupied home”? To understand the meaning of this phrase, there are two places to look. First, Revenue Canada has interpreted this phrase. Second, Parliament has interpreted this phrase in the legislation in which it is used, namely subsections 146.2(6)(a) and 146.2(6.1) of the Income Tax Act.

1. Revenue Canada’s Interpretation:

Revenue Canada’s own Information Circular No 75-18R4 paragraph 26(e) dated April 18, 1980 (the relevant Information Circular in effect at the time of withdrawal) states that:

“the amount used to acquire an owner-occupied home means the aggregate of

(i) down payments

(ii) legal fees incurred to acquire the owner-occupied home, and

(iii) mortgage payments (principal and interest)

that were paid during the specified period.”

In this case, the specified period is the taxation year 1981 plus 60 days thereafter, ie the year of withdrawal plus 60 days thereafter. The total of the funds withdrawn were used in the specified period to pay mortgage payments. The taxpayer’s circumstances fit precisely into the circumstances contemplated by subsection 146.2(6)(a) and Information Circular 75-18R4, and the receipt from his RHOSP should not be included in income. The taxpayer relied on Revenue Canada’s Information Circular. Identical wording existed in 1976 in the relevant Information Circular in effect at that time.

Paragraph 26(e) of Information Circular 75-18R4 should not be interpreted to mean that only mortgage payments made in the year of initial purchase will qualify for the exclusion provided for in subsection 146.2(6)(a). If, as Revenue Canada indicates, mortgage payments made in the year of initial purchase are considered to be “amounts to acquire an owner-occupied home’’, then mortgage payments made in a subsequent year should also qualify (assuming they are made in the specified period) as the character of a mortgage payment is the same whether made in the year of initial purchase or a subsequent year.

Title to a house subject to a mortgage is in the mortgagee. The mortgagor has an “equity of redemption” which is the right to have title in the house placed in his name once the mortgage is paid off. If one makes mortgage payments, he becomes closer to having the title in his home conveyed to him. If one makes mortgage payments, he is paying for his home and is thereby acquiring his home.

2. Parliament’s Interpretation:

Let us attempt to understand the meaning of the phrase “amount used to acquire an owner-occupied home” from the actual wording used by Parliament in subsections 146.2(6) and (6.1).

A. Subsections 146.2(6)(a) and 146.2(6.1)

Subsection 146.2(6.1) provides that if the withdrawal is made in a taxation year during which the taxpayer did not own an owner-occupied home, nevertheless a deduction for the withdrawal is permitted in the first of the next three taxation years “‘in which his owner-occupied home is acquired”. Although subsection 146.2(6.1) is not applicable to this case (because the expenditure was made in the year of withdrawal), it is nevertheless useful to examine this subsection as it helps interpret subsection 146.2(6)(a).

Because of the use of the words “in which his owner-occupied home is acquired”, subsection 146.2(6.1) specifically contemplates that the deduction must be made in the year of initial purchase. If parliament had intended that the exclusion of subsection 146.2(a) is to be available only if the funds were withdrawn and used to acquire a home only in the year of initial purchase, it would have used wording identical to subsection 146.2(6.1). However, it used only much more [sic] broader language, ie “to acquire an owner-occupied home”, with the result it must have meant something different than subsection 146.2(6.1), namely, the funds could be expended in other than the year of initial purchase.

It may be noted that it cannot be said that because subsection 146.2(6.1) refers only to the year of initial purchase, that subsection 146.2(6)(a) should be read in the same manner. The interpretation that subsection 146.2(6.1) refers to the year of initial purchase, and subsection 146.2(6)(a) refers to a subsequent year, are entirely consistent. All Parliament is saying is that it matters not when funds are withdrawn from a RHOSP provided they are expended at the first opportunity to acquire one’s owner- occupied home. Under subsection 146.2(6)(a), if a taxpayer purchased a home before the year of withdrawal, the funds must be expended in the year of withdrawal to obtain an exclusion from income. If the taxpayer has not purchased a home when he makes a withdrawal, then under subsection 146.2(6.1) the funds must be expended in the first year in which he does acquire a home to obtain the deduction fom income (with the added proviso that he must acquire a home within three years of withdrawal).

B. Subsection 146.2(6) alone

Let us now look at subsection 146.2(6)(a) alone to determine Parliament’s intention. Subsection 146.2(6)(a) provides for an exclusion from income of funds utilized in the year of withdrawal plus 60 days thereafter (the specified period). The words “in the year’’ in subsection 146.2(6)(a) refer to “the year” in the phrase “an amount received by him in the year” in the first paragraph in subsection 146.2(6), ie, the year of withdrawal or receipt.

If Parliament had intended that the exclusion from income provided for in subsection 146.2(6)(a) were to be available only if the funds withdrawn were utilized to acquire an owner-occupied home only in the year of initial purchase, it would have in effect defined the “specified period” to be the year of initial purchase (plus 60 days thereafter) rather than the year of withdrawal (plus 60 days thereafter). Parliament must have contemplated that funds withdrawn could be expended to acquire an owner- occupied home in other than the year of initial purchase (and an exclusion obtained therefor), otherwise it would not have defined the “specified period” to be the year of withdrawal. Otherwise, it would have set up the “specified period” in subsection 146.2(6)(a) to be the year of initial purchase only. The initial starting point in determining whether an exclusion is available under subsection 146.2(6)(a), is to determine the year of withdrawal. If Parliament had intended an exclusion only if funds were expended in the year of intitial purchase, the starting point to determine an exclusion under subsection 146.2(6)(a) would have been to determine the year of intial purchase, and the concept of the specified period being the year of withdrawal would be irrelevant. Parliament would have said “an exclusion is available if funds are expended in the year of initial purchase” rather than “an exclusion is available if funds are expended in the year of withdrawal to acquire an owner-occupied home.”

It may also be noted that if the funds are withdrawn in a subsequent year and used to acquire an owner-occupied home, the fisc is no better or no worse off than if the funds were so used in the year of initial purchase, Parliament therefore didn’t care whether the funds were expended in the year of initial purchase or a subsequent year, provided they were used for the same purpose in either year.

The net position of the Minister as stated in the reply to notice of appeal was:

The Respondent respectfully submits that as the amount received by the Appellant in the 1981 taxation year out of his RHOSP was not used by him in the year or within 60 days after the end of the year to acquire his owner occupied home, such amount was properly included in computing his income pursuant to Subsection 146.2(6).

It was noted and agreed by the parties that the critical portion of the “Information Circular” relied upon by the appellant had been modified by a subsequent Circular (IC 75-18R5 dated October 11, 1982 and further IC 75-18R6 dated July 12, 1984) and while essentially they read the same, there was added in IC 75-18R6, after . specified period”, the explanatory phrase: “‘. . ., ie, in the year or within 60 days of the end of the year of the acquisition of the taxpayer’s owner occupied home”.

Essentially, it was the position of the appellant at the hearing that the term “specified period” (IC 75-18R4) referred to the time frame from section 146.2(6)(a) of the Act, which permitted exclusion from income of proceeds from a RHOSP — “in the year or within 60 days within the end of the year . . 99

when such proceeds could be described as “. . . an amount received by him as a beneficiary in the year out of or under a registered home ownership savings plan . . .” (146.2(6)). Mr Lambe accepted the view that under the current IC 75-18R6, the Court could determine that the “specified period” should relate not only to the collapse of the RHOSP, but also to the acquisition of the home. I say “could” since I am not required to make any such specific determination on this point, and I would point out that the word “acquisition” in the amended IC 75-18R6 may only provide for repetition of the doubt regarding the interpretation of section 146.2(6) brought on by IC 75-18R4, in which one word used is “acquire”. The fact that the Minister has found it necessary to make an attempt at clarification of the earlier Information Circular, may lead one to conclude that there existed some ambiguity, at the minimum.

The argument of counsel for the respondent largely rested on a constructional and/or a contextual perspective of the entire section of the Act dealing with RHOSP matters. Counsel reinforced this argument by reference to certain jurisprudence, primarily the recent Tax Court case of Susan Bracken v MNR. Counsel did note that a critical examination was required of the word “acquire” in subsection 146.2(6) of the Act and counsel presented certain definitions from which I would select as pertinent the following: “In law of contracts and of descents, to become owner of property; to make property one’s own. To gain ownership of.”. The Minister’s counsel recognized the difficulty of the Minister’s position in this matter in the light of IC 75-18R4 — albeit that logic appeared to dictate that this appellant was stretching the limits of the relevant provisions of the Act too far.

I am conscious of the implication of the proposition put to the Court by Mr Lambe, and I would venture that his view regarding the intent of Parliament expressed in the “Summary” (supra) is subjective rather than objective, when the words of the Act themselves are examined. Nevertheless, the Court is faced with a rationale which may be put (in layman’s terms) as — “Since the Minister in IC 75-18R4 has seen fit to extend the definition of ‘amount used to acquire an owner-occupied home’ to include mortgage payments, as long as the proceeds of the collapsed RHOSP are used for that purpose, the time frame within which any mortgage payments are made, (all other conditions being met) should not be determinative”.

First, it seems to me that the Minister’s response (falling back on a strict constructional or contextual view) at this stage of the matter, with at least the appearance of compromise or contradiction arising out of IC 75-18R4 is highly suspect. The Minister takes the position that the Court should concentrate on the word “acquire” and the Minister brings forward a strict definition of the word “acquire”, which definition he appears to breach by IC 75-18R4. I would have considerable hesitation in ruling that any mortgage payments — subsequent to purchase — are “used to acquire”. They may be used to increase the equity, or to fulfil some other objectives, but it was not explained to me how they could be “used to acquire”. But I am faced with the Minister’s position (and he held to it steadfastly), that such mortgage payments under certain conditions (essentially, a period concurrent with that relevant to acquiring the home) were “used to acquire”, (IC 75-18R4) yet the Minister says this taxpayer is excluded from that favoured group by the time frame imposed on such permitted mortgage payments by the Minister himself. I do not accept and understand that in a practical way, ie where the maximum down payment permitted for some reason did not equal the proceeds of the collapsed RHOSP, one can rationalize the excess (or as much of it as possible) being used for mortgage payments during the year of purchase of the home (or 60 days thereafter) and thinking of those payments as “used to acquire”. But what is the difference between mortgage payments made during the period agreed to by the Minister as acceptable — (in the year or within 60 days after the end of the year), and a similar time span, some period later, providing that in both instances the ‘‘in the year” refers to the year of collapse of the RHOSP? In effect the Minister says that purchasing the home (“down payment”, and “legal fees”) during the same time frame provides it with the kind of dignity allowing its exclusion from income. I am aware that the retention of funds in the RHOSP until a year subsequent to that of the purchase of the home (or 60 days thereafter) may hold great attraction and possible benefits for certain taxpayers, (such as the increase and accumulation of the total available), but that is a problem for the Minister not for the Court. I do not see that it is the task of this Court to place arbitrary limits on any such excesses of the Minister, when the Minister holds to the proposition that the basic element highlighted by this appeal is a reasonable and correct interpretation of the legislation. This taxpayer did not use part of the proceeds of the RHOSP in 1976 for the down payment on the home, or for the legal fees, and he is now attempting to exclude the balance from income in 1981 by making mortgage payments. Presumably he used his own money in 1976 for the purchase of the house. And there is no indication that he made further annual contributions to the RHOSP between 1976 and 1981. He is simply attempting to use the proceeds of the RHOSP in 1981 for a purpose clearly available to him in 1976 if he had collapsed the RHOSP in that year. It is difficult to see how it can be said that the Minister is approaching the Court in this matter completely free of the charge that his difficulty in responding to the appellant’s assertion, is of his own making. Clearly, Mr Lambe would not be an appellant were it not for the interpretation placed on the relevant section of the Act, by the Information Circular, even though it might be argued it is at the very edge of, probably in excess of, the parameters readily obvious in subsection 146.2(6) of the Act.

I do not expect that Information Circulars, or Interpretation Bulletins, should displace the law, but it is readily acknowledged where there is ambiguity or uncertainty, and if the only clarity discernible seems to come from such sources, they should not be lightly discarded by the Court. As I see it (although it was not so identified by either party) the critical phrase cited from IC75-18R4 and stressed by Mr Lambe in order that this appeal have any significance, must come from subsection 146.2(6) of the Act as follows:

. . . to the extent that such amount a) is a payment to the taxpayer and is used by him in the year or within 60 days after the end of the year to acquire his (an) owner-occupied home;” [Emphasis mine]

That is selectivity and discretionary substitution at its best, but I do not think it does material damage to the words of the Act, nor do I believe it impinges adversely upon either the constructional and/or contextual format of that section. In effect, the Minister simply says that he will take those words in the Act to mean what is recited in IC 75-18R4, and the appellant has accepted the Minister’s definition at its face value.

In summary, the proposition and the argument of the taxpayer prevails. The Minister has established a framework within which the term “used to acquire” encompasses mortgage payments. The identifying feature of the mortgage payments allowed by the Minister is that they were made “in the year or within 60 days after the end of the year”. If the term “used to acquire an owner-occupied home” covers mortgage payments subsequent to the date of purchase of the home (up to the 60 days after the end of the year) — and the Minister agrees that it does — then I can find nothing in the Act to prevent this taxpayer from selecting a later year to exercise his privilege of making mortgage payments out of a RHOSP, and excluding the funds relevant thereto from income.

The appeal is allowed and the entire matter is referred back to the Minister for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.