Date: 20021209
Docket: 2002-1618-IT-I
BETWEEN:
LLOYD QUANTZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1] The two issues in these appeals are (i) whether the Appellant can deduct life insurance premiums pursuant to paragraph 20(1)(e.2) of the Income Tax Act in the 1996, 1997 and 1999 taxation years; and (ii) whether late filing penalties and interest for the 1996 and 1997 taxation years were properly assessed together with interest on the amount payable for 1999. An appeal for the 1998 taxation year was discontinued by the Appellant.
[2] I will commence with the insurance premium question. The Minister of National Revenue submits that the Appellant is not entitled to deduct the premiums pursuant to paragraph 20(1)(e.2) of the Act which reads as follows:
20(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
...
(e.2) such portion of the lesser of
(i) the premiums payable by the taxpayer under a life insurance policy (other than an annuity contract) in respect of the year, where
(A) an interest in the policy is assigned to a restricted financial institution in the course of a borrowing from the institution,
(B) the interest payable in respect of the borrowing is or would, but for subsections 18(2) and (3.1) and sections 21 and 28, be deductible in computing the taxpayer's income for the year, and
(C) the assignment referred to in clause (A) is required by the institution as collateral for the borrowing
and
(ii) the next cost of pure insurance in respect of the year, as determined in accordance with the regulations, in respect of the interest in the policy referred to in clause (i)(A),
as can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing;
[3] The Minister submits that as an interest in the life insurance policy was not assigned to a restricted financial institution in the course of borrowing and the assignment was not required by the institution as a collateral for the borrowing; the Appellant is not entitled to deduct life insurance premiums pursuant to paragraph 20(1)(e.2) of the Act.
[4] The Appellant represented himself and was the only witness. He was a farmer (rancher turned land developer). He paid premiums for $250,000 in coverage as follows:
Taxation Year Life Insurance Premiums
1996 $4,236
1997 $4,191
1999 $3,787
His wife Sharon was the beneficiary. In written submissions he stated in part:
Life insurance premiums were substantial and had to remain in place due to difficulty in obtaining lender offered insurance based on deteriorating medical condition. The policy had initially been a "Key man policy" when I was CEO of a firm in the early 1990s and the beneficiary became my wife upon the demise of the corporate entity and continuation of borrowing under a proprietorship of the same basic name. She henceforth became the required co-signor on loans at the financial institutions with which I dealt.
...
Important to consider that a serious illness - torn left hemi-diaphragm - resulted in life insurance being not only prudent but crucial as a risk management expense to enable borrowing for business purposes and that the higher levels of health risk were experienced during the term of borrowing from several financial institutions.
...
To meet the terms of 20(1)(e.2) of the Income Tax Act, several reasons provide support for a deduction of life insurance premiums from income.
First, the acceptable format of assignment of the policy to the financial institution is not specified. ...
Second, the assignment was directly implied in the co-signature on all of the loans by my wife, the beneficiary stated in the policy with the full understanding and acceptance of the financial institution.
Third, the insurance policy was crucial to my ability to borrow and, due to severe health problems I was certain I would not have been able to qualify for the insurance policy owned/offered by the institution.
Fourth, the financial institution had a long business history of lending to me and generally was not interested in amending its borrowing conditions being already in a stronger position through the personal guarantee of my spouse.
Fifth, the policy in effect began as a "Key Man" policy in favour of a company wholly owned by my wife and I. Upon the termination of the company charter and conversion to a proprietorship, the nature of the business(es) did not change and a title transfer of the policy was undertaken to my wife and without cautionary comment about its tax deductibility status by the expert employed in this matter - a long experienced life insurance broker.
Finally, it appears that the intent (spirit) of the regulations in the matter was what we followed.
[5] To support his position that the policies were assigned to the lender, he entered into evidence two letters, both dated March 1, 2001 (Exhibit A-4), one from Farm Credit Corporation and one from the Alberta Treasury Branches. The letter from Farm Credit Corporation states:
Re: Life Insurance - Lloyd Quantz
We have periodically reviewed our security since 1995 with respect to the loans held by Lloyd and Sharon Quantz and have determined that it is an important condition of our lending that Mr. Quantz be insured adequately to the levels of the loans outstanding during the years 1995 to present.
He has assured us of his policy coverage indicating a $250,000 policy is in effect and this will be adequate to meet our needs for continued lending with Lloyd and Sharon Quantz.
The letter from Alberta Treasury Branches states:
RE: Life Insurance on Outstanding Loans
Further to our discussions regarding life insurance, we advise that Loan #1039865-80 is currently life insured in the amount of $85,000.00 for both you and Sharon and has been since August 1996.
It is my understanding that when loans were applied for in and around this time period, you held discussions with the Lender at that time regarding a life insurance requirement.
As your current Lender, the fact that you have obtained life insurance for yourself to the amount that covers you indebtedness to the Alberta Treasury Branches, it provides me with a greater comfort level knowing this policy is in existence. Especially of late with the medical conditions that you are currently suffering through.
Analysis
[6] The Appellant originally arranged the policy as a "Key Man policy" to provide for his wife upon his demise. To deduct the premiums, the Appellant must meet the criteria in paragraph 20(1)(e.2) which clearly states that an interest in the policy be assigned to a restricted financial institution in the course of borrowing from the institution before premiums can be deducted. The question is, did the Appellant assign the policy to the financial institution that lent him the money. To answer this question the Appellant entered Exhibit A-4 in evidence. I find that the two letters cannot be taken as an assignment of the policy or an interest in the policy.
[7] There is no evidence that upon the Appellant's death, the financial institution would be obligated under a contract of assignment to pay the proceeds of the policy to the financial institution rather than to his wife, the named beneficiary. The Farm Credit Corporation appears to have taken a casual approach by simply assuring themselves that the Appellant was adequately insured. This is not a legal contractual assignment of the policy. The legislation is clear. I cannot change the wording of the Act. I am bound by what happened. It would be stretching reality too far to find that he met the requirements of the Act because an assignment could have or should have been made. The fact remains, there was no assignment of an interest in the insurance policy to a restricted financial institution in the course of borrowing. This issue in the appeals is dismissed.
Late filing penalty and interest
[8] The uncontested facts from paragraph 11 of the Reply to the Notice of Appeal include:
(f) the returns of income of the Appellant for the 1996, 1997, and 1999 taxation years were required to be filed with the Minister on or before June 15, 1997, June 15, 1998 and June 15, 2000, respectively;
(g) the Minister requested that the Appellant file the 1996 and 1997 income tax returns by issuing forms TX11 and TX14 "Request to File a Return: on:
|
Taxation Year |
TX11 |
TX14
|
|
1996 |
January 23, 1998 |
March 10, 1999 |
|
1997 |
September 15, 1998 |
|
(h) the Minister issued a demand for the Appellant to file a 1997 income tax return by issuing form TX14D "Demand for Income Tax Return" on:
Taxation Year TX14D
1997 October 27, 1998
(i) the Appellant filed his 1996 and 1997 income tax returns on November 6, 2000;
(j) the Appellant filed his 1999 income tax return on April 30, 2000;
(k) the amounts payable that remained unpaid when the returns of income of the Appellant for the 1996, 1997 and 1999 taxation years were required to be filed were:
|
Description |
Amount Payable for Years Under Appeal
|
||
|
|
1996
|
1997 |
1999 |
|
Federal Tax |
$3,709.49 |
$410.43 |
$5,402.10 |
|
Provincial Tax |
1,687.48 |
0.00 |
2,561.90 |
|
CPP Payable |
1,786.40 |
338.28 |
2,344.72 |
|
Amount Payable |
$7,183.37 |
$748.71 |
$10,308.72 |
|
|
|
|
|
The amounts are not in issue. The Appellant explained in some detail why he felt he was mistreated by officers of Canada Customs and Revenue Agency (CCRA), particularly with respect to collection procedures taken against him. During the hearing, I explained to the Appellant that this background, while regrettable, was not relevant to the issue which is whether penalties and interest were properly levied.
[9] The Appellant's position is that he was unable to file in a timely manner because of serious health problems and family tragedies. In his written argument he stated the following:
My medical condition became increasingly fragile during the 1996-2000 period. Detailed descriptions by many medical specialists can be provided including a report of tests performed at Mayo Clinic, Scottsdate, AR. However, the general condition is described by the document entitled "Diaphragmatic paralysis". However, this condition had progressed to the point where the stomach had twisted upside down - a condition leading to volvulus which is life-threatening. However, the analysis of this condition and its effects on sleep patterns and therefore brain function is a very complex process. It is clear to my General practitioner and I, after extensively reviewing this with many specialists including lung, nerve, heart, thoracic, etc., that it would be very difficult for a layperson to determine the symptoms, causes and effects. Surgery at the University Hospital in Edmonton was successful in replacing the failed diaphragm and restoring some stability to my organs although it does not move to assist in the breathing process.
In addition, several family members including my father (died in 1995) and my mother (died in 2000) required extensive care in our home and at hospitals during terminal illnesses. A granddaughter (infant) died during this period as well creating a need to provide additional support to family members. The fairness policy of the Agency states that these matters will be taken into account upon requests for fairness. CCRA Rulings have been made which discount these as mitigating factors and no relief for penalties or interest have been allowed.
[10] The applicable legislation is subsection 162(2), which reads:
162(2) Every person
(a) who fails to file a return of income for a taxation year as and when required by subsection 150(1),
(b) on whom a demand for a return for the year has been served under subsection 150(2), and
(c) by whom, before the time of failure, a penalty was payable under this subsection or subsection (1) in respect of a return of income for any of the 3 preceding taxation years
is liable to a penalty equal to the total of
(d) an amount equal to 10% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed, and
(e) ...
A formula follows.
[11] I agree with Lamarre Proulx J. in Bennett v. Canada[1] where she found that:
The wording of subsection 162(2) did not have the clarity necessary to make it an absolute liability provision. Accordingly, a defence of due diligence exists; however, in order to establish such a defence, a taxpayer should be expected to comply with the requirements of the Act with a high degree of diligence.
She was following the reasoning of Bowman J. in Pillar Oilfield v. Canada[2] wherein he laid the foundation for a due diligence defence dealing with a similar penalty under section 280 of the Excise Tax Act. He stated:
... "if the person assessed can show "due diligence" in attempting to comply with the legislation, the penalty will not apply. It would be abhorrent for a person to be susceptible of being penalized administratively by a public servant without any possibility of exculpating himself by demonstrating due diligence. Penalties are no different from criminal or provincial offences in this respect.
I agree that due diligence applies in the present case; yet a high degree of diligence is necessary to escape subsection 162(1) penalties as suggested by Judge Lamarre Proulx. The question narrows down to whether the Appellant acted with a high degree of diligence.
[12] The Appellant stated that he filed "rudimentary" returns on a timely basis in each of the relevant three years but each time his returns were lost or at least never acknowledged. There is no record of these returns having been filed. It is unlikely that Revenue Canada or CCRA lost his return three years in a row. He made no effort to follow up. I do not believe "rudimentary" or any returns were filed for 1996, 1997, 1999 until November 6, 2000 for 1996 and 1997 and April 30, 2000 for 1999. The late filing penalties apply only to the 1996 and 1997 returns.
[13] During the trial, I advised the Appellant that I had no jurisdiction over interest charged on late payment amounts unless calculation of the interest was not mathematically correct. The Appellant questioned the Minister's arithmetic but had no calculations of his own. He was given time to make written submissions setting out the errors, if any, made by the Minister in calculation of interest.
[14] There is no doubt that the Appellant went through difficult times from 1995 to 2000 and beyond. He had failing health and lost his parents and a grandchild. On the other hand, there is evidence that he was not always incapacitated. He was still able to function. We know that during that period, he subdivided some of his land into six lots and sold at least some of the lots.
[15] When the Minister felt he had no other choice but to prepare income tax returns for the Appellant, a business income for the Appellant of $104,000 for 1996 and 1997 was used. The Minister took this figure from a statement made by the Appellant when completing forms for the rental of a four-by-four truck in about 1997. When the Appellant established that this amount was false and was used only by him for obtaining approval for the truck rental, the Minister reassessed him using greatly reduced amounts provided by the Appellant.
[16] Other than letters from medical doctors describing his medical condition, there is no corroborating evidence that the Appellant was incapacitated for long periods of time during the relevant years. The medical information in no way suggests that he was unable to file income tax returns. I find no reason why he could not have filed or give instructions to someone on his behalf to file returns. As stated by Judge Lamarre Proulx in Bennett and Judge Bowman in Pillar Oil Fields, a high degree of due diligence is required for the Appellant to demonstrate that he has complied with subsection 162(2) of the Act. He has not met this burden of proof.
[17] The appeals are dismissed.
Signed at Ottawa, Canada, this 9th day of December, 2002.
|
"C.H. McArthur" |
J.T.C.C.
COURT FILE NO.: 2002-1618(IT)I
STYLE OF CAUSE: Lloyd Quantz and Her Majesty the Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: October 23, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: December 9, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Galina Bining
COUNSEL OF RECORD:
For the Appellant:
Name: n/a
Firm: n/a
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1618(IT)I
BETWEEN:
LLOYD QUANTZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 23, 2002, at Calgary, Alberta, by
the Honourable Judge C.H. McArthur
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Galina Bining
JUDGMENT
Whereas the Appellant informed the Court that he was discontinuing the appeal for the 1998 taxation year;
The appeals from assessment of tax made under the Income Tax Act for the 1996, 1997, 1998 and 1999 taxation years are dismissed.
Signed at Ottawa, Canada, this 9th day of December, 2002.
|
"C.H. McArthur" |
J.T.C.C.