Arichandra M Coomaraswamy v. Minister of National Revenue, [1979] CTC 2407, 79 DTC 355

Delmer E Taylor:—This is an appeal heard in Toronto, Ontario, on March 1, 1979, against assessments of income tax for the years 1972, 1973, 1974 and 1975. The assessments for the first three years are based on the inclusion by the Minister in the taxable income of the appellant of certain amounts of alleged rental income. The assessment for the year 1975 is based on the disallowance by the Minister of use of certain general averaging provisions in the Income Tax Act which, in the Minister’s view, no longer apply when the alleged rental income noted above is included in the appellant’s taxable income. The rental income problem is therefore the genesis of the appeal for all four years involved. The respondent relies, inter alia, upon sections 2, 3, 4, 9, 118 and subsection 161(6) of the Income Tax Act, RSC 1952, c 148, as amended, as it applied in 1972,1973,1974 and 1975 respectively.

Facts

The appellant immigrated to Canada from Ceylon (Sri Lanka) in the year 1972 and has, since his arrival in Canada, been at all material times thereafter a Canadian resident. Since his departure from Ceylon, the appellant has not at any time been a resident of Ceylon.

Contentions

The position of the appellant was that:

—at the time of his departure from Ceylon in the year 1972, and at all times material hereto, the appellant has had a legal joint interest in certain realty property which has yielded rental income in each of the 1972 through 1975 taxation years.

— Payments outside Ceylon made to or for the benefit of non-residents are described in subsection 8(1) of the Exchange Control Act of Ceylon as follows:

Except with the permission of the Bank, no person resident in Ceylon shall, subject to the provisions of this section, make any payment outside Ceylon to or for the credit of a person resident outside Ceylon.

— Payments in Ceylon made to or for the benefit of non-residents are described in section 7 of the said Act as follows:

Except with the permission of the Bank, no person shall in Ceylon—(a) make any payment to or for the credit of a person resident outside Ceylon, or (b) make any payment to or for the credit of a person resident in Ceylon by order or on behalf of a person outside Ceylon, or (c) place any sum to the credit of any person resident outside Ceylon.

—The appellant has not any time since his departure from Ceylon received any rental payment from his property in Ceylon. The appellant has sought the permission of the Central Bank of Ceylon to receive the rental payments in question, but the Bank has refused such permission.

— In accordance with subsection 31(1) of the said Exchange Control Act of Ceylon, the Bank directed that all sums otherwise payable to the appellant after his departure from Ceylon be paid into a block account at the Bank of Ceylon. In January, 1975, this direction was rescinded and no payments whatsoever have been made into the said block account subsequent to December, 1974.

— He did not receive either directly or constructively any rental income from any property in Ceylon and says further that by virtue of sections 7 and 8 of The Exchange Control Act of Ceylon, the appellant was legally prevented from receiving, using or enjoying any portion of the said rental income.

— In the alternative, only one-half of such rental income ought to be included in the appellant’s income in each of the relevant taxation years since the rental property which produced rental income was held by the appellant jointly with another person.

— In the further alternative, the appellant is entitled to obtain the relief provided under subsection 161(6) of the Income Tax Act.

— In the further alternative, the appellant is entitled to obtain the relief provided by section 126 of the Income Tax Act.

— In the further alternative, the appellant is entitled to the deductions permitted by division C in connection with the said rental property in the computation of the appellant’s taxable income.

The contentions of the respondent were that:

—the rents paid in respect of the property owned by the appellant in Sri Lanka are income of the appellant within the meaning of section 9 of the Income Tax Act.

—the taxable income of the appellant for 1975 was correctly calculated in accordance with the provisions of section 118 of the Income Tax Act.

—a decision made by the Minister of National Revenue, pursuant to subsection 161(6) of the Income Tax Act, which confers upon the Minister of National Revenue the discretion to postpone the payment of tax where he is satisfied that the payment would impose extreme hardship on the taxpayer, is a decision of an administrative nature which is not subject to review by the Tax Review Board.

Evidence

The appellant provided oral evidence himself of the situation as he understood it to be in Sri Lanka. He is practising as a lawyer in Canada and provided the Board with some reference points between the real estate and common property laws in the two countries Canada and Sri Lanka. In general, there seemed little area of disagreement with the facts which have been presented.

Counsel for the respondent provided to the Board a copy of The Exchange Control Act of Ceylon and certain Regulations applying thereto.

Argument

Each counsel dealt professionally and completely with the various aspects of the issues raised in the notice of appeal by the appellant. It was evident to the Board that the underlying question common to both parties was whether or not the income which both parties agreed had been in fact paid by the tenants as rent in Sri Lanka, should be considered as income of the appellant in filing his tax return in Canada.

Findings

During the course of hearing it was determined that the bank account in Sri Lanka had not been a blocked account in the year 1972 by virtue of the fact that the appellant’s wife remained in that country until December of that year. It was evident that she had access to the account but, on her emigration from that country, the account was blocked from further access. Counsel for the appellant agreed that the appeal for that year should be dismissed, and the matter to be determined should apply to the years 1973, 1974 and 1975.

With respect to the above point, the Board also notes that it does throw some light on the entire matter, however. It should clear up—in the appellant’s favour, in the event a determination became necessary—the dispute with regard to whether or not the property, and thereby any income from it, was jointly that of the appellant and his wife. It would appear that the Government of Sri Lanka so regarded it. Further, the appellant’s access to the funds in question might not have been prohibited during the years in question—he could have dealt with the income as he saw fit, although it would have been necessary to deal through his wife if she remained in Sri Lanka. Whether or not he could have transferred the income to Canada under that set of circumstances does not become a matter for determination by this Board, but it would appear he could have used the funds in Sri Lanka for the benefit of his family, improvements to the property, etc. This point, in my view, is of considerable importance in the determination of the matter before the Board. That basic issue is whether or not the funds in the blocked bank account in Sri Lanka represented income to the appellant for purposes of the Income Tax Act. My early reaction to that issue was that the funds should not be classified as income from rentals on the grounds, admittedly narrow, that while they were payable by the tenants, they had not been paid to the appellant. It would be more in order to consider that they had been paid to the Government of Sri Lanka and held for payment to the appellant when he met certain conditions—the major one of which was that he became again a resident of Sri Lanka. I would have been content to allow the appeal on that fact alone, but I hesitated so to do in view of the particular wording of subsection 161(6) of the Act:

Where the income of a taxpayer for a taxation year, or part thereof, is from sources in another country and the taxpayer by reason of monetary or exchange restrictions imposed by the law of that country is unable to transfer it to Canada, the Minister may, if he is satisfied that payment as required by this Part of the whole of the additional tax under this Part for the year reasonably attributable to income from sources in that country would impose extreme hardship on the taxpayer, postpone the time for payment of the whole or a part of that additional tax for a period to be determined by the Minister but no such postponement may be granted if any of the income for the year from sources in that country has been

(a) transferred to Canada,

(b) used by the taxpayer for any purpose whatever, other than payment of income tax to the government of that country on income from sources therein, or

(c) disposed of by him;

and no interest is payable under this section in respect of that additional tax, or part thereof, during the period of postponement.

It struck me that the very fact that the Minister was given powers under the Act to postpone payment of income tax—where the income in question was in a blocked account— indicated rather strongly that the question as to whether or not the rental proceeds should be classed as “income” had been pre-determined. It is my view that indeed that might be the situation where the issue before the Board provided the Minister with such discretionary powers. I would interpret that section to mean that where the money representing income subject to tax in Canada was not available to a taxpayer because it could not be transferred to Canada, the Minister was given certain discretionary powers to postpone the tax. In other words, to be eligible for such discretion a taxpayer’s right to certain funds as “income” would not be in question, and presumabley he could do with that income as he saw fit, with the exception of transferring it to Canada. Were the appellant in this matter able to spend the funds for improvements, even maintenance, on the rental property, invest it, use it to support his relatives, or even I suppose just give it away, all in Sri Lanka, but could not transfer it to Canada, it would be difficult to hold that the funds in question did not represent income, and the Minister’s discretion might be in order. The fact is, however, that this appellant is requesting relief from tax imposed on amounts of money to which he does not have and can not have any access unless and until he should re-establish himself as a resident of Sri Lanka.

Conclusion

It is my conclusion that the funds in question should not be regarded as income for purposes of the Income Tax Act, since the constraints to which they were subjected in Sri Lanka effectively placed them totally beyond receipt or even control by the appellant.

Decision

The appeal is dismissed for the year 1972 and allowed for the years 1973, 1974 and 1975. The matter is referred back to the Minister of National Revenue for reconsideration and reassessment according to these reasons for judgment.

Appeal allowed in part.