T-2063-79
Grant C. Brown (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Cattanach J.—Toronto, October
26; Ottawa, November 7, 1979.
Income tax — Income calculation — Income from a "trust"
— In computing income, the trust did not deduct payments to
plaintiff — Whether plaintiff must include payments in
income for tax purposes — Income Tax Act, S.C. 1970-71-72,
c. 63, s. 104(6),(13).
This is an appeal from a decision of the Tax Review Board
whereby the plaintiff's appeals from assessments to income tax
for his 1973, 1974, 1975 and 1976 taxation years were dis
missed. The plaintiff was entitled under the will of his late
mother to all of the income from the investments of the estate
during his lifetime. The entire amount was paid by the estate to
the plaintiff each year. The plaintiff contended that when no
deduction has been claimed by an estate or trust under subsec
tion 104(6) of the Income Tax Act of an amount payable in the
year to a beneficiary then the provisions of subsection 104(13)
do not require that such amount shall be included in the income
of the beneficiary for that year and tax computed thereon but
rather it should be taxed in the hands of the trust only.
Held, the appeals are dismissed. Subsection 104(6) being an
exempting provision the discretionary word "may" is used.
That is to say the estate may deduct the amount or it may not.
If the estate does deduct the amount, as it is permitted so to do,
then the beneficiary is solely liable for tax on the amount and
the estate is not liable to tax thereon. If the trust does not
deduct the amount payable to the beneficiary that amount is
nevertheless taxable in the hands of the beneficiary by virtue of
subsection 104(13) and it is also taxable in the hands of the
estate by virtue of subsection 104(2). The avoidance of double
taxation is the purpose served by subsection 104(6) in that the
trust or estate is permitted thereby to deduct from its income
the amount that is payable to the beneficiary. It may be that
the remedy of a beneficiary, should the trustees of an estate not
claim the deduction under subsection 104(6) would be by
action against the trustees sounded in negligence.
INCOME tax appeal.
COUNSEL:
S. M. Borraccia for plaintiff.
R. B. Thomas for defendant.
SOLICITORS:
Stitt, Baker & McKenzie, Toronto, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
CATTANACH J.: It is apparent from the plead-
ings herein that this is an appeal from a decision
(or perhaps four decisions) of the Tax Review
Board dated February 16, 1979 whereby the plain
tiffs appeals from assessments to income tax for
his 1973, 1974, 1975 and 1976 taxation years were
dismissed although the allegations in the statement
of claim which were admitted in the statement of
defence are not consistent with the information
contained in the material transmitted to the Regis
try of this Court as required by section 176 of the
Income Tax Act, S.C. 1970-71-72, c. 63.
There is no dispute between the parties as to the
facts. The dispute is as to propriety of the inclusion
of amounts in the plaintiffs taxable income in the
years in question.
The facts can best be set out by reproducing
paragraphs 1 to 8 of the statement of claim each of
which paragraphs has been admitted in the state
ment of defence:
1. The plaintiff is the son of the late Ethel Jane Brown and one
of the beneficiaries of her estate which estate is hereinafter
referred to as the "trust".
2. The last will and testament of Ethel Jane Brown provided
that
All the rest and residue of my estate I direct my trustee to
invest and keep invested ... and to receive the income
therefrom and the income of so much of my estate as shall
for the time being remain unsold and unconverted, and to
pay the said income to my son, Grant Cullen Brown, during
his lifetime, and upon his death to my daughter-in-law, Ruth
Elizabeth Brown, if living at his death. [Paragraph 3(e).]
3. In each of the 1973 to 1976 taxation years inclusive, income
received by the trust was paid to the Plaintiff.
4. In computing its income pursuant to the provisions of the
Income Tax Act, hereinafter referred to as the "Act", the trust
did not deduct any amount on account of the said payments to
the Plaintiff.
5. The Plaintiff, in computing his income for tax purposes for
the 1973, 1974, 1975 and 1976 taxation years, has not included
any amount on account of the receipts from the trust as
aforesaid.
6. By Notices of Reassessment made in respect of the 1973 to
1976 taxation years inclusive the Minister of National Revenue
included the following amounts in the computation of the
Plaintiff's income:
Date of Notice
Taxation Year of Reassessment Amount
1973 August 11, 1977 $12,519.57
1974 August 11, 1977 14,718.68
1975 August 11, 1977 18,453.04
1976 October 7, 1977 17,015.41
7. By Notices of Objection each dated November 5, 1977 the
Plaintiff appealed directly to the Tax Review Board and waived
reconsideration of the assessments made in respect of the 1973
to 1976 taxation years inclusive as set out above.
8. By decisions each dated the 16th day of February, 1979, the
Tax Review Board dismissed the appeals by the Plaintiff.
The dates of the notices of reassessment set
forth in paragraph 6 do not coincide with the dates
on notices of reassessment included in the material
transmitted to the Registry nor do the amounts
coincide. These documents must be photostatic
copies of the notices of reassessment because that
is what each document is called on its face and it
bears the printed name of the Deputy Minister of
National Revenue for Taxation over that title
which legend is the only matter which confers
authenticity on the document by virtue of the
deeming provision in section 244(13) of the
Income Tax Act.
It is possible that there were other notices of
reassessment made on different dates and in differ
ent amounts than those in paragraph 6 but that
seems unlikely since three of the four dates on the
notices of reassessment filed are subsequent to the
dates in paragraph 6.
The learned member of the Tax Review Board
in his reasons for decision dated February 16, 1979
identified the appeals as being "appeals from
assessments of income tax for the Appellant's
1973, 1974, 1975 and 1976 taxation years".
His conclusion was:
I can see no basis on which I can allow these appeals and they
must therefore be dismissed.
However the only formal decision in the ma
terial sent to the Registry reads:
DECISION
It is ordered and adjudged that the appeal in respect of the
1976 taxation year be and the same is hereby dismissed.
Signed at Ottawa, Canada,
this 16th day of February, 1979.
The member then affixed his signature.
There were no similar decisions included in the
material sent to the Registry with respect to the
plaintiffs 1973, 1974 and 1975 taxation years.
Therefore it would seem to follow that the appeals
for the 1973, 1974 and 1975 taxation years were
not dismissed but it was the clear intent from the
concluding sentence in the reasons for decision
that these appeals were also to be dismissed.
Perhaps the additional three decisions were not
included in the material sent up.
I am confirmed in this assumption by the clear
language in paragraph 8 of the statement of claim
reading:
By decisions each dated the 16th day of February, 1979, the
Tax Review Board dismissed the appeals by the Plaintiff.
This paragraph was also admitted in the state
ment of defence.
Because counsel for the parties agreed and this
appeal was presented on that basis I accept that
paragraph 6 of the statement of claim accurately
reflects the additional amounts which were includ
ed in the plaintiffs income in each of the taxation
years enumerated and income tax thereon was
exacted from the plaintiff in those years.
I also accept that the plaintiffs four appeals
against the assessments in the taxation years in
question were dismissed by the Tax Review Board
as alleged in paragraph 8 of the statement of
claim.
The issue between the parties (it is the same
issue in each taxation year in question) is succinct
ly set out in the statement of claim and statement
of defence.
Paragraph 9 of the statement of claim reads:
9. The Plaintiff states that pursuant to the provisions of sub
sections 104(6) and (13) of the Act since the trust did not
deduct, in computing its income for tax purposes, any amount
on account of amounts paid to the Plaintiff, the Plaintiff is not
subject to tax on the said amounts.
Paragraph 3 of the defence reads:
3. It is submitted that as the income of the trust at all material
times was payable to the Plaintiff in the 1973 to 1976 taxation
years inclusive, such income was properly included in comput
ing the Plaintiff's income for the said years by virtue of
subsection 104(13) of the Income Tax Act, S.C. 1970-71-72,
Chapter 63 and amendments thereto, notwithstanding that the
trust in computing its income for the same taxation years chose
not to deduct the said sums as it was allowed to do so by virtue
of subsection 104(6) of the Income Tax Act.
Thus the matter falls to be determined upon the
interpretation of subsections (6) and (13) of sec
tion 104 of the Income Tax Act.
A trust or an estate is not a person either
natural or fictitious, but because income enures to
a trust or estate that source of revenue has not
escaped the tax collector.
The Income Tax Act provides by subsection
104(2) that a trust, for the purposes of the Act,
shall be taxed as an individual (except that deduc
tions personal to an individual are not permitted)
and this has been so since the temporary Income
War Tax Act.
Basically what is contended on behalf of the
plaintiff is that when no deduction has been
claimed by an estate or trust under subsection
104(6) of an amount payable in the year to a
beneficiary then the provisions of subsection
104(13) do not require that such amount shall be
included in the income of the beneficiary for that
year and tax computed thereon but rather it
should be taxed in the hands of the trust only.
As I appreciate that contention it amounts to
this:
(a) what is deducted by the trust from its
income under subsection 104(6) is taxable
income in the hands of the beneficiary, and
(b) what is not deducted by the trust from its
income is not taxable income in the hands of the
beneficiary under subsection 104(13).
Subsection 104(13) reads:
104....
(13) Such part of the amount that would be the income of a
trust for a taxation year if no deduction were made under
subsection (6) or (12) or under regulations made under para
graph 20(1)(a) as was payable in the year to a beneficiary shall
be included in computing the income of the person to whom it
so became payable whether or not it was paid to him in that
year and shall not be included in computing his income for a
subsequent year in which it was paid.
Contradictorily to the contention on behalf of
the plaintiff the basic contention on behalf of the
defendant is that subsection 104(13) is a charging
section with respect to the beneficiary and subsec
tion 104(6) is an exempting section with respect to
the trust and that the words:
Such part of the amount that would be the income of a trust for
a taxation year if no deductions were made under subsection
(6) ... as was payable in the year to a beneficiary
do not avail the plaintiff and that the circumstance
that the trust chose not to deduct the amount
payable to a beneficiary from its income does not
detract from the language of subsection 104(13)
that the amount paid to the beneficiary:
shall be included in computing the income of the person to
whom it so became payable whether or not it was paid to him in
that year and shall not be included in computing his income for
a subsequent year in which it was paid.
In the facts of these appeals the plaintiff was
entitled under the will of his late mother to all of
the income from the investments of the estate
during his lifetime. The amounts in paragraph (6)
of the statement of claim included by the Minister
in the plaintiffs income for the years therein
mentioned represent all of the income from the
estate's investments and the entire amount was
paid by the estate to the plaintiff in each year.
Therefore the first three words of subsection
104(13) being "Such part of' do not apply in the
facts of these appeals because it was not a part of
an amount that was paid to the beneficiary but the
whole of the investment income in each year unless
the whole is to be construed as a part in which
event the result is the same.
As I appreciate the meaning of subsection
104(13) from the language employed therein it is
that the amount that would be the income of the
trust if no deduction was made under subsection
(6) (and no such deduction was made by the
estate) as was payable to the beneficiary shall be
included in the income of the beneficiary.
Therefore it follows that the beneficiary is liable
for the tax in either event:
(1) if the trust deducts the amount payable to
the beneficiary from the income in its hands the
beneficiary is taxable thereon, and
(2) if the trust does not deduct the amount
payable to the beneficiary that amount is never
theless taxable in the hands of the beneficiary
by virtue of subsection 104(13) and it is also
taxable in the hands of the estate by virtue of
subsection 104(2).
In this second eventuality there is definitely
double taxation.
The avoidance of double taxation is the purpose
served by subsection 104(6) in that the trust or
estate is permitted thereby to deduct from its
income the amount that is payable to the
beneficiary.
Subsection 104(6) being an exempting provision
the discretionary word "may" is used. That is to
say the estate may deduct the amount or it may
not. If the estate does deduct the amount, as it is
permitted so to do, then the beneficiary is solely
liable for tax on the amount and the estate is not
liable to tax thereon.
On the other hand, for the reasons I have
expressed, if the estate does not see fit to avail
itself of the alleviation provided by subsection
104(6) by claiming the deduction then the estate is
liable for the tax and the beneficiary also remains
liable therefor.
It may be that the remedy of a beneficiary,
should the trustees of an estate not claim the
deduction under subsection 104(6), would be by
action against the trustees sounded in negligence.
The plaintiff, who is a barrister and solicitor
carrying on his profession at Tillsonburg, Ontario
in addition to being the beneficiary during his
lifetime is also the trustee. He gave evidence to the
effect that he had prolonged discussions with offi-
cials of the Department of National Revenue,
which Department by virtue of the schedule to the
Department of National Revenue Act, R.S.C.
1970, c. N-15, is charged with the responsibility
for the collection of income taxes, and that he was
assured by those officials that if the estate did not
deduct from its income the amount paid to the
beneficiary then the beneficiary would not be
liable therefor and that he acted upon that advice
and assurance to his detriment and also to the
detriment of the ultimate beneficiaries of the
estate.
The plaintiffs mother by her will provided that
the income from her estate should be paid to the
plaintiff during his lifetime and upon his death to
his wife, if living. Upon the death of both the
whole of the residue of the estate is to be divided
equally among her four grandchildren.
It was the plaintiffs fondest wish to carry out
the wishes of his mother that her estate be divided
equally among her four grandchildren. To accom
plish this he considered it expedient that the tax on
the income of the estate be exacted at that source
and not in the hands of the four beneficiaries. He
foresaw that the incomes of the four grandchildren
might vary greatly with the result that the rate of
tax would be higher on some than on others and
therefore his mother's wish for an equal distribu
tion would be frustrated. The distribution would
be equal but the consequence of equal distribution
might have unequal tax results.
In his testimony the plaintiff as above summa
rized might raise the possibility of an estoppel.
Estoppel was not pleaded but in any event it is not
open to the plaintiff to set up an estoppel to
prevent the operation of a statute (see Stickel v.
M.N.R. [1972] F.C. 672 at pp. 684-685).
With respect to the frustration of the wishes of
the testatrix that frustration would be caused by
the operation of the Income Tax Act from which
there is no relief (only legitimate avoidance).
It was submitted by counsel for the plaintiff that
the interpretation of subsection 104(13) advanced
by him was consistent with the interpretation pro
pounded in a tax information pamphlet entitled
"Trusts and Their Beneficiaries" particularly
paragraph 25 thereof. Assuming that this pam
phlet was published and circulated by the Depart
ment of National Revenue, there being no indica
tion that the Department was the author, it is
nothing more than what it is stated to be, that is a
tax information pamphlet. This paragraph of this
pamphlet was the subject of comment and expla
nation in Interpretation Bulletin I.T.-342. At one
time these information bulletins were issued by the
Deputy Minister of National Revenue but there
was no indication on the face of the document
produced before me that this document was so
issued.
Assuming that this pamphlet and this interpre
tation bulletin were issued by the Department of
National Revenue under the authority of the
deputy head of that Department these documents
are not authoritative interpretations of the statute.
They are nothing more than the Department's
interpretation of the statute for departmental pur
poses and cannot be considered by a Court in
determining the proper interpretation of a statute
which is the function of the judicial branch of
government, that is the Courts.
It would appear, however, that during the taxa
tion years 1973 to 1976 the Minister assessed the
trust for tax on the income earned by the invest
ments of the estate in the hands of the trustee.
Sometime in 1977 the Minister did an about
face and concluded that the income should have
been taxed in those years in the hands of the
beneficiary (and in all likelihood with a higher
incidence of taxation).
This the Minister is authorized to do by section
152 of the Income Tax Act. Liability for tax is not
affected by an incorrect assessment (for the rea
sons expressed this taxation was not incorrect) and
the Minister may reassess a taxpayer within four
years or beyond four years when there has been
inaccurate information in a return, that is to say
"misrepresentation" fraudulent or innocent.
This being so the Minister not only proceeded to
reassess the plaintiff and include the income from
the trust in the plaintiff's taxable income for the
years in question as beneficiary but the Minister
also reassessed the trust by deducting from the
income of the trust the amount that was payable to
and paid to the beneficiary, and this despite the
fact that the trust was well aware of the provisions
of subsection 104(6) and deliberately refrained
from claiming the deduction.
This in my view, was an unwarranted interfer
ence by the Minister in the conduct of the affairs
of the trust by the trustee. The Minister's function
is to collect income tax from a taxpayer but not to
conduct the affairs of the taxpayer. In this
instance the Minister was actuated by altruistic
motives. Belatedly his officers realized that the
trust income paid to the beneficiary by the estate
should have been included in the income of the
beneficiary and that this income had been taxed as
income of the estate did not alter taxability in the
hands of the beneficiary. Because the plaintiff was
so reassessed the Minister, through his officers,
exercised the option available to the estate by
subsection 104(6) on behalf of the trustee, even
though the trustee had seen fit not to do so, to
deduct the amounts paid to the beneficiary in the
year in question and reassessed the estate accord
ingly resulting in nil assessments.
For the reasons I have expressed I have conclud
ed that the income payable to the plaintiff as
beneficiary of the trust in the 1973, 1974, 1975
and 1976 taxation years was properly so included
from which it follows that the appeals are
dismissed.
The defendant has asked for her costs. Despite
the defendant's success the circumstances recited
do not warrant an award of costs to the defendant
and the appeals are therefore dismissed without
costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.