Tax Court of Canada Judgments

Docket: 2002-2781(IT)I

BETWEEN:

ANTHONY J. MCKEATING,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on June 2, 2003 at Ottawa, Ontario

Before: The Honourable Justice J.E. Hershfield
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Justine Malone

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1997, 1998, 1999 and 2000 taxation years are dismissed without costs except in respect of penalties levied pursuant to subsection 163(1) of the Act which are vacated for the reasons set out in the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 24th day of February 2004.

"J.E. Hershfield"

Hershfield, J.

Citation: 2004TCC99

Date: 20040224

Docket: 2002-2781(IT)I

BETWEEN:

ANTHONY J. MCKEATING,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Hershfield, J.

[1]      These appeals concern the Appellant's 1997, 1998, 1999 and 2000 taxation years.

[2]      Initially the Court and the Respondent understood that the Appellant's Notice of Appeal was only in respect to the 1999 and 2000 taxation years. However on hearing the matter and reviewing evidence presented at the hearing I am satisfied that reassessments in respect of the 1997 and 1998 taxation years were sufficiently covered by the Notice of Appeal and are properly under appeal.[1]

[3]      The issues raised in the Notice of Appeal are as follows: [2]

-         Whether amounts identified by the Respondent as pension income were properly included in the Appellant's income in the subject years;

-         Whether the Appellant is entitled to loss carryovers in respect of a loss asserted to have been incurred on the disposition of a residence in 1985;

          -         Whether the Appellant is entitled to the disability tax credit; and

-         Whether the Appellant is entitled to relief of interest and penalties assessed.

[4]      With respect to the pension income inclusion issue, the Appellant has sought to classify the amounts received as something other than pension income. Regardless of the classification however the Appellant has failed to find a classification for the amounts, admittedly received, that would take them out of the provisions of the Income Tax Act (the "Act") that would include them in his income. It is necessary to review the background of his situation to better understand the "classification" issue that understandably has caused the Appellant considerable anguish.

[5]      The Appellant was employed by Westinghouse Canada Inc. as an industrial lighting specialist. He was hired in 1974 at the age of 42. He went on disability in 1982 and, it seems, was never taken back by his employer even after the insurer responsible for his disability coverage took him off disability in 1988.

[6]      Throughout the period of disability recognized by the insurer, the Appellant was in and out of hospital. He described himself as being in an encephalitic coma for some 56 days and, over another period, being subjected to shock treatments three times per week for six or seven weeks. The Appellant maintains, and I accept his testimony in this regard, that he has suffered long-term damage from these treatments. Certain aspects of his mental functions relating to coping with his affairs have been impaired. His obsessive preoccupation with his plight reflects to me his inability to pursue matters in an organised, methodical manner. He is a victim who, in my view, seems to suffer to the point of having become to some extent dysfunctional. He acknowledges this himself. It is not a self-serving acknowledgement. Indeed the impairment may go beyond the disability just observed, but I have no medical evidence as to the extent of his mental health problems.

[7]      His disability coverage ended when the insurer discovered that Mr. McKeating was doing volunteer work. This, apparently, was sufficient to disqualify him from coverage under the provisions of the plan for Westinghouse employees. During the period of his disability he also received disability payments from CPP. These continued after his employer's plan cut the Appellant off. The Appellant emphasizes that this is recognition of his ongoing disability (which I have accepted).

[8]      On being taken off disability under his employer's plan, the Appellant returned to his employer and requested work. While it seems likely that Westinghouse had some duty to accommodate the Appellant in the circumstances conveyed to me, no accommodation was made. Westinghouse it seems had sold its lighting division. The Appellant suggested that there was no one successor as, he asserted, the lighting division was carved up among a number of purchasers each taking over different components of Westinghouse's lighting division. On the other hand, it seems Westinghouse considered the Appellant as covered under the terms of a sale agreement with a particular purchaser referred to by Westinghouse as "Crouse-Hinds".[3]

[9]      On refusing to accommodate the Appellant with work after being cut off disability, Westinghouse advised the Appellant he could commence payments out of his pension as he was then eligible for retirement, having reached age 55. The Appellant refused on the basis that he still was an employee. He refused to acknowledge that he had retired when he had not. Since he refused to take his pension at that time, nothing happened until he reached age 65 when he was told he must accept payments - so he did. Pension payments from Royal Trust then commenced which was in (or about) 1996.[4]

[10]     The Appellant referred to the monthly payments as a fringe benefit and did not include them in income. In his mind these are gratuitous payments he has been forced to accept in lieu of the appropriate payments he was entitled to receive. He relies heavily on the fact that the amounts paid are not from or under a registered pension plan. He has also suggested that they might be termination payments or a retiring allowance or even disability payments but he refuses to accept them as pension payments.

[11]     While I regret the unfortunate treatment the Appellant seems to have suffered, his submissions, regardless of his earnest and persistent efforts, are ultimately without merit. There is no classification of the subject amounts received that would exclude them from the calculation of the Appellant's income.[5]

[12]     As to the Appellant's principle argument that there is no "pension" here, I have the following observations:

-         Paragraph 56(1)(a) brings into taxable income "any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, (i) a superannuation or pension benefit including, without limiting the generality of the foregoing, (A) the amount of any pension ...";

-         "Superannuation or pension benefit" is defined in subsection 248(1) "to include any amount received out of ... a ... pension fund and ... includes any payment made to a beneficiary under the fund ... (a) in accordance with the terms of the fund ...";

-         At the very least a fund has been set up and administered by Royal Trust according to terms that require monthly payments to the Appellant as beneficial recipient;

-         The foregoing provisions of the Act cast a very wide net which inevitably seems to catch the Appellant's receipts in this case. The background, the appropriateness and adequacy of the fund, is not ultimately relevant. Westinghouse may well have acted unilaterally without appropriate consideration of the Appellant's rights under employment law. However, I do not see how that can alter the tax position of the receipts. The fact that the pension fund is not registered is not relevant either.

[13]     Accordingly I find that the Royal Trust payments were properly included in the Appellant's taxable income in the subject years pursuant to paragraph 56(1)(a) of the Act.

[14]     I turn now to the second issue which concerns the carryover of losses asserted to have been incurred by the Appellant in 1985. The Appellant's story in respect of this loss illustrates the persistent nature of the misfortunes that have plagued the Appellant. In or about 1985, while still suffering from his disability, his family had the Appellant declared incompetent to administer his own affairs so that they were put under the administration of a trustee. The trustee, according to the Appellant, did not make mortgage payments on his home (then occupied by his wife and children) notwithstanding that the disability payments received by the trustee were, according to the Appellant, adequate to cover the mortgage.[6] The mortgage was near the end of its amortization period so there was considerable equity in the property. In any event, according to the Appellant, the residence was foreclosed on and the trustee absconded with the proceeds. The Appellant wants his loss recognized for tax purposes.

[15]     The Appellant acknowledges the loss is a capital loss but claims that in 1985 when the loss was incurred, up to $2,000.00 per year was allowed to be used to offset ordinary income (not just capital gains). While correct on this latter point of law, the Appellant has a number of problems in respect of his claiming the loss. Even ignoring what might be the biggest initial problem, which is that he did not show the loss on his 1985 return, his testimony alone cannot establish that the loss occurred as he recalls it. Independent corroboration, even of family members, of events surrounding the period when his affairs were under the administration of the trustee would be required. This is a sufficient ground to dismiss the appeal on this point, but I will go on to point out other problems I have with allowing this loss.

[16] I have no evidence as to the nature of the trusteeship alleged by the Appellant. If I assume that the trustee was the Appellant's agent for tax purposes, the Appellant would be regarded as having received the proceeds on the disposition of the property. The subsequent theft would be of personal funds. The theft of personal funds in such circumstances would not generally be recognized as a loss for tax purposes. If the trustee is more than a mere agent (which does not seem likely in the circumstances), the transfer to the trustee would be a disposition for tax purposes and proceeds would be deemed to have been received by the Appellant.

[17]     Considering the disposition itself, I note that I have no evidence that the asserted loss would not be required to offset the gain on the disposition. The Appellant acknowledged a significant gain on the subject property (but for the trustee's alleged defalcation). It seems likely the Appellant would be responsible for tax on the gain unless there was a designation of the property as a principal residence. This is an open question as no disposition was reported.[7] If there is a designation of the property as a principal residence, subsection 40(2) of the Act would deny the loss.

[18]     For all of the above reasons I cannot allow the appeal in respect of the Appellant's claim for loss carryovers.

[19]     With respect to the third issue, the disability tax credit claim, the required medical certificate has not been provided in respect of any of the years in question. I afforded the Appellant considerable time to provide such certificate and none has been forthcoming. Accordingly I cannot allow the Appellant's claim for disability tax credits. I also note that while I have accepted that the Appellant is suffering an ongoing disability in mental functions, I observed no signs that his ability to perform a basic activity of daily living would be markedly restricted all or substantially all of the time. Regardless, production of medical certificates for the subject years is a requirement for the allowance of the Appellant's claim.

[20]     With respect to the last issue concerning interest and penalties, the Appellant asserts in his appeal that he had made an application under the fairness provisions for relief of interest and penalties. The Minister, in the Reply, stated no application under the fairness provisions had been made. Regardless, the application is clearly made in the Notice of Appeal and these Reasons will hopefully be sufficient in terms of providing the Minister adequate grounds to exercise the discretion afforded under the Act in favour of granting the Appellant the relief he seeks. Indeed Respondent's counsel agreed that penalties should be waived. Penalties were assessed in 1999 under subsection 163(1) because the Minister asserted that the Appellant failed to report his pension income in 1999 and the two preceding years.[8] While I take Respondent counsel's concession on penalties to be a reflection of the Minister's acceptance that an application for fairness was considered and that a decision to waive penalties had been made, I am in no position to make an order on that basis. On the other hand, with respect to the penalties, I note that late filed returns for earlier years do mention, as non-taxable receipts, certain disability/fringe benefit receipts which were clearly intended as a reference to the pension income.[9] On this basis, it is open for me to find that there was sufficient disclosure of the subject income source to prevent the application of penalties under subsection 163(1) and I so find. Accordingly I will allow the appeal on this point.

[21]     With respect to interest, same runs with the liability - I have no jurisdiction to cancel interest. As stated, the Minister has the discretion to do this under the fairness provisions. Such accommodation of the Appellant's request seems justified. The accommodation that the Minister seemed ready to make in respect of penalties was justified in my view and applies equally to interest. The justification might include, for example, the serious emotional and mental distress and dysfunction that the Appellant clearly suffers. This is not a case of hiding income. Late filings, misclassifications, scratched out entries on his return, setting out monthly amounts instead of annual amounts, even not including information slips sent out by Royal Trust, do not reveal a taxpayer bent on misfiling. This is a victimized, dysfunctional man obsessively struggling to make sense, to rationalize, his misfortunes in the context of the Act. In these circumstances I would encourage the Minister to exercise the discretion, afforded under the Act in regard to interest, in a compassionate manner, particularly since the CCRA has to date been anything but compassionate. The Appellant was penniless but for his CPP, old age security and $519.00 per month Westinghouse pension and yet the CCRA garnished some 70% of his pension. The CCRA took every advantage of a pension that was not protected from garnishment. This was not only not compassionate but borders on outrageous in my view. The most scandalous tax evaders, outright cheats and scoundrels have been treated better. The Appellant has a right, in the circumstances of his case, to be recognized as a person suffering some mental dysfunction with a legitimate beef over the categorization of his "pension". He honestly believed that the pension did not exist in accordance with the laws governing pensions and that that would mean that the receipts could not be properly treated as pension income. That I have found him wrong does not now, with hindsight, justify the zealous collection activity pursued in this case. The garnishment left the Appellant in an impoverished position. He was unable to afford basic necessities of life. The refund of the garnished funds has hopefully addressed this problem but going one step further I urge that when collection activity commences again, following this decision, the responsible CCRA officials treat the Appellant with due regard to his near destitute economic state. Since the garnishment, the Appellant has been short funds for rent, gas and necessities. He needs an advocate in the department (a department that calls the Appellant its "client") and I hope he is afforded one.

[22]     In this regard I note that I am not encouraged by correspondence from Respondent's counsel to the Court addressing the refund of garnished funds on my finding that the garnishment occurred in respect of years under objection. That correspondence includes the following:

The Respondent is therefore prepared to reimburse Mr. McKeating the amounts of tax and interest with respect to the 1997 and 1998 taxation years, if he so wishes. We however wish to emphasize that if Mr. McKeating's appeal is dismissed, the amounts will again be subject to collection, with interest. The Respondent's concern is that it might not be in Mr. McKeating's best interests to proceed in this manner since the interest then payable may well exceed the amounts that would be refunded. We fully understand, however that the choice lies with Mr. McKeating, and we await his direction in this regard.

[23]     While I appreciate that the caution expressed in the letter may be well-meaning, it also reflects an opportunistic tax collection posture of waiting to seize the refund without regard to the relief of interest under the fairness provisions and without regard to a collection policy that might recognize the need for tolerance. Again, the Appellant is in need of an advocate to help ensure that his financial burdens do not cripple his ability to sustain himself with the necessaries of life. That said, it is acknowledged that it is beyond my jurisdiction to deal with the collection of taxes owing.

[24]     Accordingly, the appeals are dismissed except in respect of the subsection 163(1) penalties which are hereby vacated.

Signed at Ottawa, Canada, this 24th day of February 2004.

"J.E. Hershfield"

Hershfield, J.

CITATION:

2004TCC99

COURT FILE NO.:

2002-2781(IT)I

STYLE OF CAUSE:

Anthony J. McKeating and Her Majesty the Queen

PLACE OF HEARING:

Ottawa, Ontario

DATE OF HEARING:

June 2, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J.E. Hershfield

DATE OF JUDGMENT:

February 24, 2004

APPEARANCES:

For the Appellant:

The Appellant herself

Counsel for the Respondent:

Justine Malone

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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