The Assistant Chairman:
1 This is the appeal of Cecil M Langille from an income tax assessment in respect of the 1972 taxation year which was heard in London, Ontario on September 29, 1975.
2 The issue, as I understand it, is that the appellant, having made no deduction from his income for premiums paid into a registered retirement savings plan, objects to being taxed on the return of his capital in the form of annuity payments.
3 The facts are that, in March of 1961, the appellant purchased a registered retirement savings plan #216,864 (a copy of which was filed with the Board). The annuity of $1,200 was to be payable in instalments of $100 per month as of March 1, 1971 for a period of 15 years. The premium of $1,279.10 was to be paid yearly by the appellant from March 1, 1961 to March 1, 1970 inclusive. The appellant testified that the registered retirement savings plan was purchased from a Mrs McLaren of the Department of Labour with the understanding that, if the appellant did not deduct the premiums paid into the said plan from his taxable income, he would not have to pay tax on the refund of the capital so invested, but would only have to pay tax on the interest element of each year's annuity.
4 On November 30, 1965 the appellant decided, on the advice of Mrs McLaren, to purchase what appears to be a straight government annuity #236110 because the interest rates were higher.
5 In the transaction, he agreed to be paid an annuity of $522.24 instead of $1,200 a year on the registered retirement savings plan purchased in 1961, and the related and recalculated premium of $5,097.84 in respect thereof was agreed to have been fully paid by the appellant.
6 The straight annuity purchased by the appellant in 1965 was in the amount of $677.76 for a period of 15 years, payable in instalments of $56.48 on the first day of each month, the first instalment of the annuity to be paid on November 1, 1970. The annual premium of $1,477.29 was payable from November 1, 1965 to November 1, 1969.
7 It is on record that the appellant at no time deducted any premiums from his income and counsel for the respondent confirmed that the Department of National Revenue, in assessing the appellant, was aware that no deductions for such premiums were ever made by him from his yearly income.
8 Although the appellant alleges that he began receiving benefits from his annuities in 1970, he was advised that he would have to include in his income an amount of $11 which represented the interest on his capital from November 1, 1970 to January 1, 1971 and that in subsequent years he would have to include an amount of $69 as earned interest. The appellant did not object to the inclusion of $69 in his income since, in his opinion, it represented the interest element at the current interest rate of approximately 4%.
9 However, by Notice of Assessment dated August 23, 1974 the Minister, pursuant to paragraph 56(1)(h) of the new Income Tax Act, included in the appellant's income for the year 1972 an amount of $522.24, the exact amount of the appellant's annuity from registered retirement savings plan #216,864, which the respondent claims to be a blended payment of taxable capital and interest under paragraph 56(1)(h) and which is the amount in issue in this appeal.
10 Counsel for the respondent, who did not appear too happy with the circumstances and the consequences of the appellant's assessment, properly pointed out, however, that we were dealing with statutory law and that the Department of National Revenue, the Tax Review Board and any other tribunal are bound by and must apply the statutory provisions as enacted by Parliament. No one can quarrel with that principle; however, it seems to me of the utmost importance that the particular provision in this section of the Income Tax Act was meant to apply to the facts as they are proven to be in a particular set of circumstances.
11 The key sections of the Act on which counsel relies are paragraph 56(1)(h), subsection 146(5) and subsection 146(8) which read:
56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,146. (5) There may be deducted in computing the income for a taxation year of a taxpayer who is an annuitant under a registered retirement savings plan or becomes, within 60 days after the end of the taxation year, an annuitant thereunder, the amount of any premium paid by the taxpayer under the plan during the taxation year or within 60 days after the end of the taxation year (to the extent that it was not deductible in computing his income for a previous taxation year), not exceeding however the amount, if any, by which(a) in the case of a taxpayer in respect of whom any amount is deductible under paragraph 20(1)(q) or (r) in computing the income of any other person for that taxation year (or would be so deductible if that other person were a person taxable under subsection 2(1)), an amount that, when added to the amount deductible under subparagraph 8(1)(m)(i) for that taxation year, does not exceed the lesser of $2,500 and 20% of his earned income for that taxation year; and
(b) in the case of any other taxpayer, the lesser of $4,000 and 20% of his earned income for that taxation year
146. (8) There shall be included in computing the income of a taxpayer for a taxation year all amounts received by him in the year as a benefit under a registered retirement savings plan.
12 Subsection 146(5) stipulates, among other things, that an annuitant under a registered retirement savings plan may deduct the amount of premiums paid by him during the taxation year. The question that arises in my mind, in reading the whole section, is whether the legislature in this case was merely attempting to limit the amount of deductions that a taxpayer could claim in a particular taxation year or whether it actually intended to impose double taxation on an annuitant who had made no deductions from his income in respect of premiums paid into an alleged retirement savings plan.
13 The legislature has always been meticulously clear and explicit when imposing penalties on taxpayers for tax avoidance, tax evasion or failure to file returns or to furnish required information, and it further specifies that, in respect of such penalties, the burden of proof rests on the Minister. Is it likely that subsection 146(5) was intended to impose automatic double taxation on an annuitant who, as in this instance, never deducted from his income the premiums paid into a savings plan? And was it intended that he should be unable to obtain any compensation or relief within the provisions of the Income Tax Act but must, as suggested by the respondent, seek compensation under the Financial Administration Act?
14 I think the Board can take judicial notice that the legislature generally encourages persons, and rightly so, to invest in registered retirement savings plans by permitting them to deduct from their income the premiums paid into such plans and to defer the tax payable on the portion of their income so invested to a later period when the annuitant's tax rates may be lower. Although the advantages to be gained by such plans are evident, the deduction of such premiums is not mandatory. In my view, it is utterly inconceivable that because the appellant, whose only other dependable source of income is his old age pension and the Canada pension plan, failed to deduct the premiums from his income, he is by statute to be penalized by paying tax twice on the same earned money.
15 In my opinion, neither paragraph 56(1)(h) nor subsection 146(5) of the Income Tax Act are applicable to the facts of this case, because what the appellant in fact did was to deposit moneys on which he already had paid the required tax into a savings account of a sort. Whether the tax-free money was deposited in a bank or trust or whether it was placed in government annuities or a registered retirement savings plan is, in my view, immaterial, and does not in any way change the nature of the appellant's tax-free deposit. Such a deposit, in my opinion, constitutes ordinary savings, and does not come within the meaning and intent of a registered retirement savings plan as described and regulated in the Income Tax Act, unless the premiums are deducted as and when paid. The refund of such capital is not income, and should not be treated as such, and therefore should not be made subject to the regulations governing registered retirement savings plans.
16 Whenever tax-free capital is refunded to a taxpayer, from whatever source, it cannot, in my view, by any legal principle or by any provision of the Income Tax Act be taxed a second time. The only taxable portion of the amount received by the appellant in 1972 was the income derived from the interest on his capital.
17 Since it was not clear in the appellant's assessment as to what portion of the $522.24 was a refund of capital and what portion was interest, the Board allows the appeal in part, and refers the matter back to the Minister for reconsideration and reassessment so as to consider as tax-free those amounts received yearly by the appellant as a refund of his tax-paid capital and to further consider as taxable only that portion of the appellant's yearly receipts that represents the interest element of the payments under both government annuity contracts, pursuant to the provisions of paragraph 60(a) of the new Income Tax Act as applicable in the taxation year 1972.
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