Lise E Hafenstein, Administratrix of the Estate of Horst Emil Hafenstein, Deceased v. Minister of National Revenue, [1977] CTC 2091, 77 DTC 64

A J Frost:—This is an appeal from an assessment to income tax dated September 13, 1974 in respect of the 1973 taxation year, wherein the Minister ignored the election filed by the administratrix of the estate under section 40 of the Income Tax Application Rules, 1971 with regard to a lump sum payment of $6,915.47 made to the estate out of a Ford Motor Company’s retirement pension plan, on the ground that such an election was not to her advantage.

A Notice of Objection to this assessment was filed on October 9, 1974 and, after much discussion and correspondence between the taxation officials and counsel for the appellant, the Minister eventually confirmed the said assessment by a notification T2008A dated one year after the Notice of Objection, namely, October 9, 1975.

At the hearing, under Rule 6 of the Board Rules of Practice and Procedure, counsel for the appellant objected to the filing of a reply by counsel for the respondent because the date of filing was two weeks after the expiration of the 60 days permitted by this Rule. Since this matter hinges on the legal interpretation of various provisions of the Income Tax Act and of the Income Tax Application Rules governing the calculation of the tax to be levied on a lump sum payment if an election is made under section 40 of the Income Tax Application Rules, 1971 the facts contained in the Notice of Appeal do not carry much weight in comparison to the legal arguments to be put forward by the parties, and therefore merely to assume that counsel for the respondent admits those facts does not automatically result in a judgment allowing the appeal. As the acceptance of the Minister’s reply after the expiration of 60 days does not appear to be in any way prejudicial to the appellant’s case, the Board agreed that it could be filed.

The Income Tax Application Rules, 1971, enacted as Part III of chapter 63, SC 1970-71-72, deal with the coming into force of the revised Income Tax Act, and set forth inter alia special transitional rules that were to apply until such time as the present Act became fully operative. The relevant portions of subsection 40(1) of the Income Tax Application Rules, 1971 read as follows:

40. (1) In the case of

(a) a single payment

(i) out of or pursuant to a superannuation or pension fund or plan

(A) upon the death, withdrawal or retirement from employment of an employee or former employee,

the payment or payments made in a taxation year ending after 1971 and before 1974 may, at the option of the taxpayer by whom it is or they are received, be deemed not to be income of the taxpayer for the purpose of Part I of the amended Act, in which case the taxpayer shall pay, in addition to any other tax payable for the year, a tax on the payment or aggregate of the payments equal to the proportion thereof that

(d) the aggregate of the taxes otherwise payable by the employee under that Part for the 3 years immediately preceding the taxation year (before making any deduction under section 120, 121 or 126 of the amended Act),

is of

(e) the aggregate of the employee’s income for those 3 years.

The appellant argues that the words “under that Part” in the phrase “the aggregate of the taxes otherwise payable under that Part” in paragraph (d) above, refer to “Part I of the amended Act” as used in the body of the text immediately preceding paragraph (d) and therefore, of “the 3 years immediately preceding the taxation year”, the only year in which tax was payable under Part I of the amended Act was 1972. According to information filed by the appellant, the late Mr Hafenstein’s federal tax for 1972 before deductions under sections 120, 121 and 126 of the amended Act was $8,948.59, and his total income for 1970, 1971 and 1972 was $91,225.59. Appellant’s counsel therefore argues that the tax payable on the pension payment of $6,915.47 is

8,948.59

<x 6,915.47 or $678.36.

However there are other Income Tax Application Rules that must be applied, and which have been invoked by the respondent, namely, ITAR 13, and certain definitions which precede it, in particular those in ITAR 12:

12. In this section and sections 13 to 18,

(a) “enactment” has the meaning assigned by the Interpretation Act;

(b) “new law” means the Income Tax Act as amended by this and any subsequent Act;

(c) “old law’’ means the Income War Tax Act, The 1948 Income Tax Act, and the Income Tax Act as amended from time to time otherwise than by this or any subsequent Act; and

(d) “The 1948 Income Tax Act" has the meaning assigned by subsection 140(9) of the former Act.

13. (1) Subject to this Part and unless the context otherwise requires, a reference in any enactment to a particular Part or provision of the new law shall be construed, as regards any transaction, matter or thing to which the old law applied, to include a reference to the Part or provision, if any, of the old law relating to, or that may reasonably be regarded as relating to, the same subject matter.

(2) For greater certainty and without limiting the generality of subsection (1), the expression “enactment” in subsection (1) includes a provision of this Part.

Counsel for the respondent argues that tax for the other two years immediately preceding the taxation year was payable under Part I of the Income Tax Act, RSC 1952, c 148 as amended and made applicable to those years, and therefore that part of “the old law’, namely, the former Income Tax Act, relates to the same subject matter as Part I of “the amended Act” under which tax was payable for 1972. Furthermore, subsection 36(1) of the former Income Tax Act refers to the same subject matter as ITAR 40(1).

Counsel for the appellant has adopted the argument that, by definition, “the old law’’ means the Income War Tax Act, The 1948 Income Tax Act, and the Income Tax Act, RSC 1952, c 148 as amended. He argues that there must be a provision in each of those Acts that is analogous to any enactment of the new law that is being applied. He is right in saying that the old law consists of all three of these Acts but merely as a continuous body of law covering each of the years from 1917 to 1971 for which income tax has been payable. First, one must determine the taxation year relevant to the ‘transaction, matter or thing to which the old law applied’’ and then simply examine the particular portion of the legal chain of statutes that constitutes the “old law” to see if there is a provision therein for that year or years that relates to the same subject matter. In this case, the subject matter is the tax payable for the three years immediately preceding 1973, and the legislation applicable to 1970 and 1971 is the Income Tax Act as amended prior to the enactment of SC 1970-71-72, c 63, which, as amended, applies to 1972.

Therefore the numerator of the fraction to be used in computing the tax payable under ITAR 40(1)(d) and (e) must be the aggregate of the tax paid by the late Mr Haferstein for the taxation years 1970, 1971 and 1972, and not merely for 1972 as argued by the appellant’s counsel.

The second item at issue is the interpretation to be given to the word “income” in ITAR paragraph 40(1)(e) in order to arrive at the denominator of the fraction to be multiplied by the amount of the lump sum payment.

Appellant’s counsel argues that it should be “gross” income and objects to the references by respondent’s counsel to “net income”, which Mr Easton claims is a misnomer in any case as income should be either “gross” or “taxable”.

Perhaps this would be an appropriate place to say that an income tax statute has to be systematically constructed and that an income tax return is carefully structured to follow the mechanics of the statute as closely as possible. Division B of Part I of all three recent Income Tax Acts is headed “Computation of Income’’, and although a taxpayer may start with his gross income from all sources, he will find in Division B that many amounts are not included in computing his income for a taxation year. Also, many expenses related to the earning of income may be deducted in “computing” that income. It is therefore deemed by the Act that the amount arrived at after making all the computations referred to in Division B is a taxpayer’s “income” for the year to which reference is made in other Parts of the Act. The reason the expression “net income” occurs at hearings before this Board is that this designation is used in most income tax returns to denote the amount reached when the return has been completed to this point. Unless a specific descriptive phrase is used such as income from property, income from a business, earned income, etc, the word “income”, when it appears elsewhere in the Act, usually refers to the income computed under Division B.

A taxpayer then turns to Division C entitled “Computation of Taxable Income’’ and proceeds to utilize the marital exemptions provided therein and the allowable charitable and medical deductions, etc, which is why, in computing the denominator of the fraction for computing the tax on a lump sum pension payment, the taxpayer should use the amount of his “income” for each year rather than his ‘‘taxable income”.

This I accept as the proper way to compute tax if an election is made under ITAR 40(1), and therefore, if the appellant’s counsel feels it is still to the appellant’s advantage to make such an election, the Minister shall use this method of computation.

Unfortunately, due to the fact that the original returns as processed by Revenue Canada, Taxation have already been destroyed for 1970 and 1971, I am unable to judge from the handwritten copies of the returns submitted by Mr Hafenstein, and filed as exhibits by appellant’s counsel, whether they were accepted as filed or whether any corrections or changes had been made by the assessors. For this reason, the exact figures applicable to the computation are not available to me, but appellant’s counsel has indicated his willingness to abide by the respondent’s computer printouts.

Also filed, as Exhibit A-1(11), is a notice of reassessment dated February 16, 1976, or four months after the Minister’s notification upholding the previous assessment. This notice appears to indicate that the lump sum payment has been deleted from 1973 income in accordance with the election filed by the administratrix under ITAR 40, but no assessment of the tax on the lump sum payment itself has been brought before the Board.

The appeal is therefore dismissed on the points raised by the appellant, except that, if the Minister is right in believing that accepting the ITAR 40 election is not to the appellant’s advantage, the original assessment is to be reinstated.

Appeal dismissed.