James P Campbell v. Minister of National Revenue, [1979] CTC 2237, 79 DTC 231

Delmer E Taylor:—This is an appeal heard in the City of London, in the Province of Ontario, on December 5, 1978, against an income tax assessment in which the Minister of National Revenue taxed an amount of $657.73 as a benefit to the taxpayer and did not consider it as interest, which designation the appellant attached to the amount in filing his income tax return for the year 1976. The appellant relied upon section 110.1 of the Income Tax Act, SC 1970-71-72, c 63, as amended, and the respondent, in the Reply to Notice of Appeal, relied upon the same section and also upon paragraphs 56(1)(h), 146(1)(b) and subsection 146(8) of the said Act.

Facts

The appellant is retired from the Public Service of Canada and during the year in question reported certain pension income. He sought to deduct, on account of the interest income deduction, an amount of $657.73 which was part of an amount of $1,607.73 which he had withdrawn in 1976 from his registered retirement savings plan (hereinafter referred to as an “RRSP”) with the Canada Trust Company (hereinafter referred to as “Canada”) and included in the “Income from Other Sources” section of his tax return.

Contentions

The appellant contended that the $657.73 was interest on money on deposit, and detailed his claim in the following terms in a written statement filed at the hearing:

“Subsection 146(8) (of the “new” Act) was derived from subsection 79B(6) of the Income Tax Act, RSC 1952. This section was intended to assure that any withdrawals from an RRS Plan would be brought back into income and, as there was no comparable section to the present 110.1(1), in the 1952 Act, there was no need to distinguish between return of capital and earned income. The present subsection 146(8) is identical to the original section and if there had been any intention to exclude the interest portion of the benefit from subsection 110.1(1) the appellant argues that such exclusion should have been set out in section 110.2 which was not done.

To take a positive approach, rather than a negative one, to this problem your attention is directed to paragraph 146(1)(b) which defines ‘‘benefit’’ as any amount paid under an RRS Plan, among other things, resulting from termination of the plan, which is the case in question.

Subsection 16(1) states that ‘where a payment under a contract or other arrangement can reasonably be regarded as being in part a payment of interest, or other payment of an income nature, and in part a payment of a capital nature, the part of the payment of an income nature shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in computing the recipient’s income from property’.

Subsection 248(1) defines property, among other things, as money.

The appellant claims that he has complied with subsection 146(8) in that he has reported the full amount of the benefit received in computing his income for the year 1976 and that to comply with subsection 16(1) it is necessary to segregate the income portion of this benefit, which incidently is easily ascertainable from the annual RRSP statements received from Canada Trust, and report same on Schedule 4 of the income tax return, which schedule determines the amount of interest income deduction.”

The position of the respondent was that:

—the said amount of $1,607.73, including the said amount of $657.73, was an amount received by the appellant in the taxation year 1976 as a benefit out of or under an RRSP within the meaning of paragraph 146(1 )(b) of the Income Tax Act;

—the said amount of $1,607.73, including the said amount of $657.73, was properly included in computing the appellant’s income for the taxation year 1976 as a benefit received out of or under an RRSP by virtue of subsections 146(8) and 56(1)(h) of the Income Tax Act;

—the appellant is not entitled to deduct the said amount of $657.73 in computing his income for the taxation year 1976 on account of the interest income deduction because no portion of the said amount of $1,607.73, including the said amount of $657.73, constituted interest included in computing the appellant’s income for the said year within the meaning of section 110.1 of the Income Tax Act.

Evidence and Argument

The appellant provided the Board with information regarding the investment he had made in the RRSP and argued that in addition to section 110.1 which he had earlier noted in support of his case, the Board should also rely upon paragraph 12(1 )(c) of the Act. Exhibit A-1 contained the following information:

CANADA TRUST

RETIREMENT SAVINGS PLAN/PLAN D’ÉPARGNE-RÉTRAITE STATEMENT OF ACCOUNT AS AT APR 30 1976 ÉTAT DE COMPTE AU

PLAN NUMBER 001-3001121 NUMÉRO DU PLAN

MR JAMES P CAMPBELL APR VALUES

760 WONDERLAND RD APT 802 EQUITY SECTION 25.89 LONDON ONT INCOME SECTION 12.38 N6K 1M2 MORTGAGE SECTION 10.69

TRANSACTIONS

					No of	Total
				Unit Price	Units	Units	Market Value
	Type	Amount		Prix	No	Total des Valeur au
Date	Genre	Montant Unitaire D’Unites Unites Marche
	EQUITY SECTION
Apr 30	Cash Withdrawal	$	.00	$25.89
Apr 30	1976 Balance			$25.89			$	.00

	INCOME SECTION
Apr 30	Cash Withdrawal	.00	12.38
Apr 30	1976 Balance		12.38	.00
	MORTGAGE SECTION
Apr 30	Cash Withdrawal	.00	10.69
Apr 30	1976 Balance		10.69	.00
SAVINGS SECTION
Mar 31	1976 Balance			1585.93
Apr 30	Interest @ 8.250	21.80
Apr 30	Cash Withdrawal	1607.73
Apr 30	1976 Balance			.00
Apr 30	PLAN TOTAL			.00

SEE OVER FOR EXPLANATIONS/VOIR EXPLICATIONS AU VERSO

Counsel for the Minister pointed out that there was no disagreement about the facts of the case, only about the basis for taxation of the amount in question. Reference was made to a recent decision of this Board (Frank Tyrala v MNR, [1978] CTC 2905; 78 DTC 1659, in which the Board had not accepted the appellant’s argument that the amount in question was interest.

Findings

The decision of the Board in Tyrala (supra) was to the effect that the amounts in question were neither paid nor received as interest, irrespective of what they were termed by those who participated in the transactions. To that extent there is some relevance between Tyrala (supra) and the instant case, in that the prima facie evidence (Exhibit A-1) would imply that indeed interest had been paid to this appellant. Indeed, it might well be argued that Canada had paid interest on the RRSP account. However, that does not dispose of the real question—did the appellant receive interest when the RRSP was terminated?

In this matter, the appellant was not the direct recipient of the interest paid by Canada—he was the direct recipient only of the proceeds from the withdrawal of the funds accumulated in that RRSP. However, he is in effect holding out to the Board that the $950 deposited in the fund was his investment, remained his property at all times, and that the interest of $657.73 credited thereto was axiomatically his interest, as if the RRSP were simply another form of investment such as stocks, bonds, mortgages, etc. The Minister conversely is stating that the amount in question ($657.73) did not constitute interest when it was received by the appellant. The extension of the Minister’s position is that sections 56 to 59 of the Act, Subdivision d—“Other Sources of Income”, comprise amounts to which the rules relating to sections 9 to 37 of the Act, Subdivision b, do not apply, at least for purposes of deductions from income.

Turning first to subsection 16(1), referenced as support by the appellant, it is my view that there is no basis upon which to conclude that the total amount in question ($1,607.73) “can reasonably be regarded as being in part a payment of interest or other payment of an income nature and in part a payment of a capital nature”. This wording in subsection 16(1) makes a clear distinction between the part of any such payment to be regarded as “of an income nature” and the part not to be so regarded—the balance. The basis for this section is just that—part of the total payment is income (for tax purposes) and part is capital, not income (for tax purposes). The payment in question in this appeal is all “of an income nature”—it does not permit the classification required under subsection 16(1). This section of the Act does not provide to the appellant the necessary platform upon which he can make the division, fundamental to his case.

Dealing with the main question, in my view an RRSP is not an investment Strictly similar to a bond or mortgage—it is a special form of saving for a designated purpose. It is perhaps useful to look at a portion of each RRSP as a “contingent” liability of the taxpayer—it might be argued it is owing to the Minister for income tax, and tax on it is deferred only as long as certain conditions are met and maintained. The Minister effectively agrees to defer the collection of some of his (the Minister’s) tax, and invest the funds in an RRSP in which the taxpayer is the annuitant, provided that the taxpayer Similarly invests some of his own funds. Looked at from this perspective (and I suggest it only as informative, not binding), the claim of a taxpayer that he (the taxpayer) earns interest on all the funds is tenuous indeed. Just as the rules providing for the establishment for the RRSP are specific, so too are the arrangements for eventual settlement of the “contingent” income tax liability related to the original investment, including the fact that the entire proceeds of the RRSP (including any gain) are to be included in the income of the taxpayer as per the provisions of subsection 146(8) of the Act. That section, however, does not specify any particular treatment for the amount in the taxing provisions of the Act. The Act then does proceed, however, to make reference to the amount a second time, and by paragraph 56(1)(h) identifies the “benefit” as coming within the provisions of Subdivision d—“Other Sources of Income”, not within the provisions of Subdivision b—“Income or loss from a business or property”. It is this very designation which is under attack in this appeal by the taxpayer, but this designation must be regarded as the result of a serious consideration of the alternative designation or designations which otherwise could be attributed to any such amount with some apparent validity by a taxpayer.

According to Exhibit A-1, the appellant chose as the vehicle for the RRSP the “Savings Section” of the plans available from Canada. His alternatives (or any combination of them presumably) apparently were “Equity Section”, “Income Section” and “Mortgage Section”. It is a reasonable conclusion from this array of options presented to the potential investor, that on termination of the plan, any variation from the original amount invested (whether increase or decrease) could have arisen not just from interest (which was guaranteed under the “Savings Section”), but alternatively from dividends (“Equity” and “Income” Sections), or gain or loss in the value of asset investments (“Equity” or “Mortgage” Sections). Under such alternative circumstances a taxpayer might attempt to claim a “dividend credit”, or the taxing provisions applying to capital gains and losses rather than those applying to income, if one pursues the rationale proposed by this taxpayer.

Items in Subdivision d—“Other Sources of Income” in my view are special and distinct, and should not be confused because of some generic base (in this appeal—interest) with amounts under other sections of the Act to which different tax treatment may be accorded. Certain exact provisions have been made in the Act allowing consideration to some items included in “Other Sources of Income”. For example, paragraph 63(3)(b) of the Act allows the specific inclusion as “earned income” of “amounts included in computing his income by virtue of paragraphs 56(1)(m), (n) or (o)”, and their subsequent treatment (similar to salaries, wages and income from business) for purposes of a deduction of child care expenses. Paragraph 146(1)(c), for a different deduction (RRSP’s), allows as “earned income” “amounts included in computing the income of the taxpayer by virtue of paragraph 56(1)(b) or (c) . . In the instant case there is no provision allowing the treatment as interest, for purposes of subparagraph 110.1(1)(b)(i) of the Act, of any portion or amount arising out of the termination of an RRSP. That such a deduction is not possible might have been more clear had specific reference been made in the exclusions listed in subsection 110.1(2) of the Act, but the fact that such exclusion was not prescribed therein does not provide the basis for inclusion, using the deduction privileges under section 110.1. Rather, the general rule regarding all deductions from income must be applied—to be permitted it must fall without question within the parameters of the provisions of the Act permitting the deduction sought.

The amounts specified under Subdivision d—“Other Sources of Income” in general terms arise from contracts, agreements or legal entitlements, whether inherent or acquired. The appellant in this matter holds to the view that he received “interest” on his “money” deposited as an investment in an RRSP. I subscribe to the view that he received a “benefit”, the proceeds of a “right” which he had as the annuitant, not as an investor, in the RRSP. Having deposited the funds (partly arising from the tax deferral by the Minister), he no longer had any claim to the funds as an investment—he acquired the rights of an annuitant only. The appellant did not propose that he received “interest” on his “rights” as an annuitant. By placing the proceeds of the RRSP under “Other Sources of Income”, the Minister removed any argument that thereby the appellant had received income from property (the right) which could be viewed as interest. When the term “Other Sources of Income” in Subdivision d is viewed, it would be my opinion that it could be regarded as meaning “Sources of Income other than those covered in Subdivisions a, b and c of the Act”. In the instant case, that which the appellant received ($1,607.73) was not principal and interest (or capital and income), it was a benefit arising out of the termination of his RRSP, and is to be taxed as income by virtue of the provisions of paragraph 56(1)(h) of the Act.

Decision

The appeal is dismissed.

Appeal dismissed.