Hugh J Couch v. Minister of National Revenue, [1979] CTC 2531, 79 DTC 525

Assistant Chairman:— The appellant, when he filed his income tax return for the 1976 taxation year, showed as his income the amount of $966.89 as “taxable amount of dividends from taxable Canadian corporations” and also showed as “interest and other investment income” the sum of $1,678.68. The sum of $966.89 was the taxable amount of dividends received by the wife of the appellant. The sum of $1,678.68 was the amount of interest which the appellant received from his bank. The appellant, in computing his taxable income, included in his income his wife’s dividends in the amount of $966.89 and, when he came to compute his tax payable, he claimed and was allowed the dividend tax credit to which his wife was entitled. The transfer to him as his income of his spouse’s dividend and the transfer to him of his spouse’s tax credit was in accordance with subsection 82(3) of the Income Tax Act after tax reform.

With respect to interest and dividend income deductions, pursuant to the provisions of subsection 110.1(1) of the said Act, the appellant claimed $1,000 and, in addition, pursuant to section 110.3 of the said Act, he claimed $1,000 as an eligible deduction transferred from his spouse for a total deduction of $2,000. Having added to his income his wife’s dividend of $966.89, he then claimed full married deduction. His wife did have other income, namely, bond interest in the amount of $55 which was within the ambit of subsection 110.1(1). The Minister did not, by his assessment, agree with the position taken by the appellant. He assessed on the basis that the only sum available to be transferred on account of the interest and dividend deduction to the appellant from his spouse pursuant to section 110.3 was $55. The appellant appealed to this Board from that assessment contending that his income tax return was correct as filed. Alternatively, if the Minister’s interpretation were correct, he then asks that the appeal be allowed and the assessment referred back to the Minister to nullify his election pursuant to subsection 82(3) regarding his spouse’s dividend; that is, his wife’s dividend be deleted from his income and the tax credit relating thereto also be deleted and his exemption on account of his spouse be adjusted accordingly.

The evidence in the case consisted of paragraph 3 of the reply to the notice of appeal which reads as follows:

The Respondent, in computing the Appellant’s income for the 1976 taxation year, acted upon the following findings or assumptions of fact:

(a) the Appellant’s spouse in 1976 received dividends from taxable Canadian corporations in the amount of $966.89;

(b) the Appellant’s spouse in 1976 received bond interest in the amount of $55;

(c) the Appellant filed his return for the 1976 taxation year and included in the computation of his income said amount of $966.89;

(d) said filing of the Appellant’s return in the manner referred to in subparagraph 3(c) herein constituted an election by the Appellant pursuant to subsection 82(3) of the Income Tax Act;

(e) the Appellant filed his return for the 1976 taxation year and deducted the full married exemption in the amount of $1,830.

Insofar as his claim with respect to the transfer to him of his spouse’s deduction pursuant to said section 110.3, the appellant submitted that she could have claimed $1,000 and, since she only had interest income of $55, there was $945 not claimed relating to her and so his claim as computed is correct. It should be noted that, since her only income was $55 as the appellant filed, there was no need for his spouse to claim any amount. His submission continued on the basis that the quantum of his spouse’s income is irrelevant to the determination of what may be transferred. He submitted she may claim $1,000 (and he accentuated the word “may”) and if she had no income within the meaning of said subsection 110.1(1), he could claim the $1,000. Of course the appellant continued that for him to claim his $1,000 he would have to have at least $1,000 income within the meaning of subsection 110.1(1), and to claim his spouse’s full $1,000 he would have to have at least $2,000 income within the meaning of subsection 110.1(1). If he had no income within that section and his wife had none, he could claim nothing. The appellant’s submission in effect was that a husband and spouse were to be treated as one and the holdings which produced the income within subsection 110.1(1) would not have to be shared between the two so that the couple could receive the full deduction. The appellant stressed the “main claim’’ in section 110.3 and for this reason he contended the quantum of the spouse’s income is irrelevant.

The relevant portions of subsection 110.1(1) and section 110.3 read as follows:

110.1(1) For the purpose of computing the taxable income for a taxation year of an individual (other than a trust that is not a testamentary trust within the meaning assigned by paragraph 108(1)(i)), there may be deducted from his income for the year an amount equal to the lesser of

(a) $1,000, and

(b) the aggregate of

(i) the amount of interest included in computing the taxpayer’s income for the year, and

(ii) the taxpayer’s grossed-up dividends for the year.

110.3 For the purpose of computing the taxable income for a taxation year of an individual who, during the year was a married person, there may be deducted from his income for the year the amount, if any, by which

(a) the aggregate of amounts his spouse may claim as a deduction for the year under any of paragraphs 109(1)(h), 110(1)(e) and 110(1)(g) and sections 110.1 and 110.2,

exceeds

(b) the amount, if any, by which his spouse’s income for the year exceeds the amount allowable as a deduction under paragraph 109(1)(c).

Counsel for the Minister did not agree with the position taken by the appellant. His first submission was based on subsection 110.1(1). What may a taxpayer claim pursuant to this subsection? All he can claim is the lesser of $1,000 and the aggregate arrived at under the other clauses of that subsection. He stressed the word “lesser”. In other words, if the taxpayer did not have any income of the character set forth in subsection 110.1(1) there would be no deduction. Yet he points out that, while the appellant agrees with this interpretation with respect to himself, that same interpretation does not apply to his spouse as the appellant contends that, pursuant to section 110.3, he may claim the amount of $1,000 less the amount which his spouse did claim—in this case $945 since she in effect claimed $55, even though she had only $55 of income of the character within subsection 110.1(1).

When referring to section 110.3 the appellant stated that, of all the sections referred to in subsection (a) thereof, only section 110.1 was applicable. In light of that, the section should be considered as saying on the facts of this case:

For the purpose of computing the taxable income for the 1976 taxation year of the appellant, there may be deducted from his income for that year, the amount by which

(a) the amount his spouse may claim as a deduction under section 110.1

exceeds

(b) the amount, if any, by which his spouse’s income for 1976 exceeds

the amount allowable as a deduction under paragraph 109(1)(c).

Insofar as paragraph (a) of section 110.3 is concerned, the amount must be either $55 or that amount plus his wife’s dividends of $966.89, a total of $1,021.89. However, pursuant to the provisions of subsection 82(3), the appellant treated those dividends as his income and claimed the dividend tax credit as his, and consequently those dividends are not her income in 1976. The result is, the figure for paragraph 110.3(a) is $55. What then is the amount to be shown for paragraph 110.3(b)? As stated, his spouse’s income for 1976 was $55. The deduction for 1976 pursuant to paragraph 109(1)(c) is the sum of $2,090. It is obvious that the spouse’s income for 1976 ($55) does not exceed the deduction pursuant to paragraph 109(1)(c) ($2,090) with the result that the amount for paragraph 110.3(b) is zero. The conclusion is that the amount in section 110.3(a) ($55) exceeds the amount in paragraph 110.3(b) (zero) by $55.

Thus my decision is that the appellant is not entitled to the amount he claimed on account of his spouse pursuant to section 110.3, but is only entitled to that amount allowed by the respondent.

However, as noted previously, the appellant in his notice of appeal stated that if his interpretation of the law were incorrect and that of the Minister was correct, then he wished to be assessed on the basis that his wife had the dividend and interest income mentioned above; that he did not have the dividend tax credit; and that his marital exemption was not to be determined on the basis that she had income only of $55, but income of the dividends mentioned in this appeal and her $55 income. The respondent took the position that the appellant, having “elected” pursuant to section 82(3), could not now “re-elect”.

Normally an appellant, having objected and appealed according to the prescribed procedure in the Income Tax Act subject to the rules of this Board or the rules of the Federal Court, Trial Division, if he chooses to appeal to the Court from an assessment rather than to this Board, may in his appeal raise any matter relevant to the assessment (revenue, expenses, deduction, exemption, tax credit, etc). As the Income Tax Act indicates, the Act is designed so that there is to be self-assessment by the taxpayer; that is, the taxpayer is to compute his income, his net income, his taxable income and his tax payable. He is to interpret the Income Tax Act. This the appellant did. He concluded (properly or improperly is unimportant) that he was entitled to the deduction claimed and he claimed it. The Minister did not agree and the appellant appealed. The appellant, on appeal, in effect said that he was correct in his interpretation of section 110.3 but if he were not and if the Minister was correct (and I agree by this judgment that the Minister was) he then wants to be assessed as though he had not used subsection 82(3). As stated, my judgment is that the Minister is correct on the prime issue. Should the appellant be deprived, once the interpretation of section 110.3 is determined, of his right to file his return (or to be assessed or reassessed) on the alternative approach? There was no contract between him and some other party. The return had not been filed for four years. No other person had acted on his return as he filed it. In fact no one accepted his return.

The appellant stated at the hearing that, if the Minister’s position were correct, if he had filed without “transferring” his wife’s income to himself his tax for 1976 would have been less than it will now be if his appeal is just dismissed. Because of this, I allow the appeal and remit the assessment to the respondent for reassessment on the basis that the appellant’s income does not include $966.89 of his wife’s dividends; he does not have a dividend tax credit of $193.38; his marital exemption is reduced by the fact that his wife has income of $1,021.89; and pursuant to the provisions of section 110.3 of the said Act, over the $1,000 allowed to him personally pursuant to subsection 110.1(1), he is allowed the sum of $1,000.

My judgment is, the appeal is allowed and the assessment referred back to the respondent for variation in accordance with these reasons.

Appeal allowed.