[OFFICIAL ENGLISH TRANSLATION]

Docket: 2002-4576(IT)I

BETWEEN:

GUSTAVE MERCURE ESTATE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on July 22, 2003, at Montréal, Quebec

Before: The Honourable Judge Louise Lamarre Proulx
Appearances:
Agent for the Appellant:	Louis Mercure
Counsel for the Respondent:	Mounes Ayadi

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 11th day of September 2003.

"Louise Lamarre Proulx"

Judge Lamarre Proulx

[OFFICIAL ENGLISH TRANSLATION]

Citation: 2003TCC655

Date: 20030911

Docket: 2002-4576(IT)I

BETWEEN:

GUSTAVE MERCURE ESTATE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Judge Lamarre Proulx

[1]      This is an appeal under the informal procedure concerning the 1997 taxation year, the year in which Gustave Mercure died.

[2]      The issue is whether recapture of depreciation arising from the deemed disposition of a rental property under subsection 70(5) of the Income Tax Act (the "Act") can be the subject of a separate tax return under subsection 70(2) of the Act.

[3]      The facts on which the Minister of National Revenue (the "Minister") relied are described in paragraphs 2 to 4 of the Reply to the Notice of Appeal (the "Reply"):

[TRANSLATION]

2.          By a reassessment in respect of the 1997 taxation year, notice of which was sent to the liquidator, André Mercure, on April 17, 2001, concerning the estate of the late Gustave Mercure, the Minister revised the rental income from the property situated at Duvernay Street, in the City of Saint-Hyacinthe, to an amount of $30,316.

3.          By a reassessment in respect of the 1997 taxation year, notice of which was sent to the liquidator, André Mercure, on April 17, 2001, concerning the estate of the late Gustave Mercure, the Minister cancelled the separate tax return filed under subsection 70(2) of the Income Tax Act (hereinafter the "Act") concerning the recapture in relation to the property situated at Duvernay Street, in the City of Saint-Hyacinthe.

4.          In making the reassessments dated April 17, 2001, for the 1997 taxation year, the Minister relied, inter alia, on the following assumptions of fact:

(a)         Gustave Mercure died on April 8, 1997;

(b)         at the time of his death, Gustave Mercure was the owner of a rental property situated at 1700 Duvernay Street, in the City of Saint-Hyacinthe;

(c)         under subsection 70(5) of the Act, Gustave Mercure is deemed to have disposed of his rental property immediately before his death;

(d)         the deemed disposition of the Duvernay Street rental property, in the City of Saint-Hyacinthe, resulted in a recapture of depreciation in the amount of $32,088;

(e)         the liquidator of Gustave Mercure's estate reported the said amount of $32,088 by filing a separate tax return under subsection 70(2) of the Act;

(f)          the Minister is of the opinion that, based on the actual wording of subsection 70(2) of the Act, any amount deriving from the realization or disposition of capital property cannot be the subject of an election under the said subsection of the Act.

[4]      Louis Mercure acted for the legal representative of the deceased taxpayer. He admitted subparagraphs 4(a) to 4(e) of the Reply.

[5]      The agent relies on a decision of the Court of Québec, which decided in favour of the estate, and on an unsigned tax opinion. He filed the two documents during the hearing. The agent said that the capital gain was included in the primary return but that the recapture amount had been the subject of a separate return.

[6]      I shall cite a few passages from the tax decision:

          [translation]

The income resulting from recaptured depreciation is contemplated by the provisions of paragraph 94 et seq. (TA). Under those provisions, this income is deemed to be income from business or property and not proceeds from the disposition of property. Recapture is a consequence incidental to the actual or the deemed disposition of a depreciable property. Depreciation is not and cannot be equated to the proceeds from the realization or disposition of a capital property.

...

Recapture is not an amount of rent receivable periodically within the meaning of paragraph 428 TA because it is not an amount payable periodically. Recapture is taxed in a manner similar to rent but simply results from the application of the Act where a negative amount appears in a tax class.

Furthermore, recapture is not the proceeds from the disposition of a property but a purely fiscal and potential consequence of the disposition of property.

[7]      The agent referred to paragraphs 16 and 17 of the judgment of the Court of Québec referred to above:

[translation]

[16]       In Loi du Praticien, Income Tax Act, Editor-in-Chief David M. Sherman, with respect to subsection 70(2) concerning the rules for computing income, states as follows at page 663, Notes of David Sherman:

          [translation]

A taxpayer's "rights or things" at the time of death must be included in computing his income; however, the inclusion can be effected in a separate tax return in order to take advantage of personal tax credits.

[17]       In Interprétation des lois, Pierre-André Côté states the following at page 432:

            [translation]

Traditionally, tax legislation has been interpreted restrictively in that, where there is doubt, the tendency has been to limit the effects of the law and thus to favour the taxpayer. The courts have stated the rules in two principle ways: (1) a taxing law must express with reasonable clarity the intent to create the tax; (2) ... the taxpayer is entitled, where there is a reasonable doubt, to the interpretation that is favourable to him.

Analysis and Conclusion

[8]      The relevant portions of subsections 70(1), 70(2) and 70(5) of the Act read as follows:

70(1)     In computing the income of a taxpayer for the taxation year in which the taxpayer died,

(a)         an amount of interest, rent, royalty, annuity (other than an amount with respect to an interest in an annuity contract to which paragraph 148(2)(b) applies), remuneration from an office or employment, or other amount payable periodically, that was not paid before the taxpayer's death, shall be deemed to have accrued in equal daily amounts in the period for or in respect of which the amount was payable, and the value of the portion thereof so deemed to have accrued to the day of death shall be included in computing the taxpayer's income for the year in which the taxpayer died; and

(b)         ...

70(2)     Where a taxpayer who has died had at the time of death rights or things (other than any capital property or any amount included in computing the taxpayer's income by virtue of subsection (1)), the amount of which when realized or disposed of would have been included in computing the taxpayer's income, the value thereof at the time of death shall be included in computing the taxpayer's income for the taxation year in which the taxpayer died, unless the taxpayer's legal representative has, not later than the day that is one year after the date of death of the taxpayer or the day that is 90 days after the mailing of any notice of assessment in respect of the tax of the taxpayer for the year of death, whichever is the later day, elected otherwise, in which case the legal representative shall file a separate return of income for the year under this Part and pay the tax for the year under this Part as if

(a)         the taxpayer were another person;

(b)         that other person's only income for the year were the value of the rights or things; and

(c)         ...

70(5)     Where in a taxation year a taxpayer dies,

(a)         the taxpayer shall be deemed to have, immediately before the taxpayer's death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death;

(b)         ...

[9]      Subsection 70(2) of the Act provides that the legal representative of a deceased person may elect to file a separate return of income for certain amounts receivable in respect of rights or things.

[10]     Such amounts are amounts that would have been included in computing the taxpayer's income on the realization or disposition of rights or things belonging to the deceased taxpayer.

[11]     The rights or things do not include capital property. In fact, subsection 70(2) of the Act clearly excludes capital property from the scope of that paragraph.

[12]     The agent claims that only capital gains or losses are excluded by the use of the words capital property. He also claims that the recapture does not have to be included in the computation according to subsection 70(1) of the Act because it is not an amount payable periodically. He maintains that, according to the interpretation bulletins, a doubt must be interpreted in favour of the application of subsection 70(2) of the Act.

[13]     In fact, paragraph 3 of Interpretation Bulletin IT-212R3, entitled "Income of deceased persons - Rights or things", reads as follows:

3. Where there is genuine doubt about whether income earned before a taxpayer's death is a periodic payment or a right or thing, its treatment is generally resolved in favour of the taxpayer. As a consequence, the legal representative may report the income in question under subsection 70(1) or under subsection 70(2)....

[14]     However, subsection 70(2) of the Act clearly excludes capital property.

[15]     To include the amount of the recaptured depreciation in the application of subsection 70(2) of the Act, the amount must be attached to a right or a thing other than a capital property. Even the above-mentioned tax opinion did not do so. There is no doubt, in my opinion, that the recaptured depreciation is a consequence of the deemed disposition of the rental property under subsection 70(5) of the Act.

[16]     Since capital property is excluded from the meaning of rights or things under subsection 70(2) of the Act, that subsection therefore cannot apply.

[17]     Recaptured depreciation cannot be an amount payable periodically within the meaning of subsection 70(1) of the Act, but it is still an amount that must be included in computing income under section 13 of the Act. That section concerns recaptured depreciation and is one of the sections concerning the elements to be included in computing income or loss from a business or property. Section 70 of the Act does not prevent the application of other provisions of the Act that apply to the computation of the income of a deceased taxpayer and to the reporting of that income except to the extent that section 70 specifically modifies them.

[18]     In conclusion, recaptured depreciation arises from the deemed disposition of a capital property. Since capital property is excluded from the application of subsection 70(2) of the Act, the amount of the recapture cannot be the subject of a separate return.

[19]     The appeal is therefore dismissed.

Signed at Ottawa, Canada, this 11th day of September 2003.

"Louise Lamarre Proulx"

Judge Lamarre Proulx