T-440-76
Bernard Shinder and Meriam Weiner, Executors
of the Estate of Bertram L. Katz, deceased
(Plaintiffs)
v.
The Queen (Defendant)
Trial Division, Addy J.—Ottawa, April 21 and
September 24, 1976.
Income tax — Claim for deduction from income of capital
cost allowance on depreciable property of deceased — Whether
taxation year of deceased person ends on date of death or on
December 31 of year of death — Conflict between ss. 3, 13, 20,
70 and 249 of Act and Regulation 1100 Income Tax Act,
S.C. 1970-71-72, c. 63 Income Tax Regulations, SOR/54-
682 — The Devolution of Estates Act, R.S.O. 1970, c. 129
The Wills Act, R.S.O. 1970, c. 499 Interpretation Act,
R.S.C. 1970, c. I-23.
At the time of his death in September 1973, the deceased
owned depreciable property in classes 3 and 8 of Schedule B of
the Income Tax Regulations and the plaintiffs filed his income
tax return for the year 1973 claiming as a deduction capital
cost allowances in respect of these assets. Plaintiffs argued that
section 3 of the Act envisaged that in determining the aggre
gate in section 3(a) normal business expenses would be deduct
ible and that the combined effect of sections 1100(1)(a) and
(3b) of the Regulations and section 20(1)(a) of the Act entitle
a deduction for capital cost allowance to be made for the year
of the deceased's death. Plaintiffs further maintained that
section 70(6) is intended to cover the determination of capital
gains and not capital cost allowances and in any event is of
general application and does not override the provisions of
section 1100(3b) of the Regulations. Defendant argues that
section 70(6) is not limited and states that taxpayer is deemed
to have received the proceeds from the disposal of his property
at the time of his decease and so has no basis for calculating
any capital cost allowance under Regulation 1100(3b); further
more, section 20(1) does not authorize the enacting of any
regulation contrary to the Act.
Held, the action is dismissed, with parties left to pay their
own costs since the defendant neglected to repeal or amend its
own Regulations which are in direct conflict with the new
legislation. Whether the taxpayer's taxation year is deemed to
end at the date of his death or at the end of the year of his
death, he would be deemed under section 70(6) to have dis
posed of his asset and received the proceeds immediately before
the end of the taxation year which ended on his decease and
therefore there would be no asset remaining on which capital
cost allowance could be claimed. The wording of section 70(5)
and (6) is too specific to allow for the continued application of
Regulations 1100(1)(a) or (3b) to circumstances such as those
of this case.
Compagnie Immobilière BCN Liée v. The Queen [1972] 2
F.C. 433, distinguished.
ACTION.
COUNSEL:
B. Shinder for plaintiffs.
O. A. Pyrcz for defendant.
SOLICITORS:
Goldberg, Shinder, Shmelzer, Gardner &
Kronick, Ottawa, for plaintiffs.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: The deceased, Bertram L. Katz, died
testate on or about the 18th of September 1973,
leaving all of his property to named executors and
trustees in trust to pay the revenue to his wife with
the remainder to other beneficiaries after his wife's
death.
At the date of his death, the deceased owned
depreciable property in classes 3 and 8 of Schedule
B of the Income Tax Regulations', the unde-
preciated capital cost of which was $418,272 in
respect of class 3 and $3,287 in respect of class 8.
A 1973 individual income tax return was filed on
behalf of the deceased by the plaintiffs and there
was claimed as a deduction from income, capital
cost allowance in the amount of $14,951 in respect
of class 3 assets and $470 in respect of class 8
assets.
On reassessment, the Minister of National
Revenue disallowed the deduction of the above-
mentioned capital cost allowances claimed by the
plaintiffs who, as a result, instituted the present
action.
The case turns on the interpretation of and
possible conflicts between certain provisions of
' SOR/54-682.
sections 3, 13, 20, 70 and 249 of the Income Tax
Act' and of Regulation 1100, supra, the Regula
tion having come into force in 1954. The relevant
portions of those provisions are reproduced
hereunder for the sake of convenience:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year determined by
the following rules:
(a) determine the aggregate of amounts each of which is the
taxpayer's income for the year (other than a taxable capital
gain from the disposition of a property) from a source inside
or outside Canada, including, without restricting the general
ity of the foregoing, his income for the year from each office,
employment, business and property;
(b) determine the amount, if any, by which
(i) the aggregate of his taxable capital gains for the year
from dispositions of property other than listed personal
property, and his taxable net gain for the year from
dispositions of listed personal property,
exceeds
(ii) his allowable capital losses for the year from disposi
tions of property other than listed personal property,
(c) determine the amount, if any, by which the aggregate
determined under paragraph (a) plus the amount determined
under paragraph (b) exceeds the aggregate of the deductions
permitted by subdivision e in computing the taxpayer's
income for the year (except such of or such part of those
deductions, if any, as have been taken into account in
determining the aggregate referred to in paragraph (a));
13.. ..
(21) In this section and any regulations made under para
graph 20(1)(a),
(f) "undepreciated capital cost" to a taxpayer of depreciable
property of a prescribed class as of any time means the
capital cost to the taxpayer of depreciable property of that
class acquired before that time minus the aggregate of
(ii) for each disposition before that time of property of the
taxpayer of that class, the least of
(A) the proceeds of disposition of the property,
(B) the capital cost to him of the property, and
(C) the undepreciated capital cost to him of property of
that class immediately before the disposition,
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
2 S.C. 1970-71-72, c. 63.
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;
70....
(5) Where in a taxation year a taxpayer has died, the
following rules apply:
(b) the taxpayer shall be deemed to have disposed, immedi
ately before his death, of all depreciable property of a
prescribed class owned by him at that time and to have
received proceeds of disposition therefor equal to,
(i) where the fair market value of that property at that
time exceeds the undepreciated capital cost thereof to the
taxpayer at that time, the amount of that undepreciated
capital cost plus of the amount of the excess, and
(ii) in any other case, the fair market value of that
property at that time plus ' of the amount, if any, by
which the undepreciated capital cost thereof to the taxpay
er at that time exceeds that fair market value;
(6) Where any property of a taxpayer who was resident in
Canada immediately before his death that is a property to
which paragraphs (5)(a) and (c) or paragraphs (5)(b) and (d),
as the case may be, would otherwise apply has, on or after his
death and as a consequence thereof, been transferred or dis
tributed to
(a) his spouse, who was resident in Canada immediately
before the taxpayer's death, or
(b) a trust, created by the taxpayer's will, that was resident
in Canada immediately after the time the property vested
indefeasibly in the trust and under which
(i) his spouse is entitled to receive all of the income of the
trust that arises before the spouse's death, and
... the following rules apply:
(c) paragraphs (5)(a) to (d) are not applicable to the
property;
(d) the taxpayer shall be deemed to have disposed of the
property immediately before his death and to have received
proceeds of disposition therefor equal to,
(i) where the property was depreciable property of the
taxpayer of a prescribed class, that proportion of the
undepreciated capital cost to him immediately before his
death of all of the depreciable property of the taxpayer of
that class that the fair market value at that time of the
property is of the fair market value at that time of all of
the depreciable property of the taxpayer of that class, and
(ii) in any other case, the adjusted cost base to the taxpay
er of the property immediately before his death,
and the spouse or trust, as the case may be, shall be deemed
to have acquired the property for an amount equal to those
proceeds; and
249. (1) For the purpose of this Act, a "taxation year" is
(b) in the case of an individual, a calendar year,
1100. (1) Under paragraph (a) of subsection (1) of section
11 of the Act, there is hereby allowed to a taxpayer, in
computing his income from a business or property, as the case
may be, deductions for each taxation year equal to
(a) such amounts as he may claim, in respect of property of
each of the following classes in Schedule B not exceeding in
respect of property
(iii) of class 3, 5%
of the amount remaining, if any, after deducting the amounts
determined under sections 1107 and 1110 in respect of the
class, from the undepreciated capital cost to him as of the end
of the taxation year (before making any deduction under this
subsection for the taxation year) of property of the class;
(3b) Where a taxpayer dies in the course of a taxation year,
in determining his income from sources other than those
referred to in subsection (3a), the amount allowed as a deduc
tion under paragraphs (a), (d) and (h) of subsection (1) shall
not exceed the proportion of the maximum amount allowable
that the number of days that had elapsed in that taxation year
prior to the day after the day of death is of 365.
Counsel for the plaintiffs argues that because
section 3(c) above contains the words: "except ...
such part of those deductions... as have been
taken into account in determining the aggregate
referred to in paragraph (a)" section 3 clearly
envisages that in determining the aggregate in
section 3(a) normal expenses incurred in operating
the business would be allowed as deductions other
than the specific deductions allowed in subdivision
e, that is, sections 60 to 66 inclusively. He also
maintains that the combined effect of sections
1100(1)(a) and 1100(3b) of the Regulations which
are authorized under section 20(1) (a) of the Act
clearly entitle a deduction for capital cost allow
ance to be made in the case of the deceased
taxpayer for the year of his decease.
Counsel for the plaintiffs also maintains that
section 70(6), which deals with the question of a
trust in favour of the spouse, is like section 70(5)
intended in essence to cover the determination of
capital gains and not capital cost allowances and
in any event is but of general application and does
not override or render null and - void the provisions
of section 1100(3b) of the Regulations.
The Crown on the other hand maintains that
section 70(6) is not by any means limited in its
application and it clearly states that the deceased
taxpayer is not only deemed to have disposed of
the property immediately before his decease but is
deemed to have received the proceeds at that time
and that therefore at the end of the taxation year,
there remains no base for any capital cost allow
ance calculation including that calculated by
virtue of Regulation 1100(3b) and that section
20(1) obviously does not authorize the enacting of
any regulation which would be contrary to the Act.
At the hearing, counsel for the plaintiffs,
because of the general wording of section 249
which, in his view, was not qualified or modified
by any other section of the Act, stated that he was
conceding that the end of a deceased taxpayer's
year remains the 31st of December of the year of
his death and does not end with his death.
Notwithstanding that both counsel seem to
share this view, I am not prepared to hold that, in
the absence of a more express provision to that
effect, a deceased taxpayer is, for taxation pur
poses, deemed to have a taxation year which ends
at the end of the calendar year of his decease and,
therefore, at a time when he no longer exists. It
would seem more logical to conclude that, where
section 249 refers to an individual, it must be
taken to refer to an individual who is alive and
that the deceased taxpayer's taxation year would
end at the date of his death although it would
obviously not be a twelve-month period. Be that as
it may, it is not in my view necessary to decide this
issue in the present case because, if the deceased
taxpayer's taxation year terminates at his death,
then, under section 70(6), he would still be deemed
to have disposed of the asset and received the
proceeds of the disposition immediately before the
end of the taxation year which ended on his
decease and, therefore, in that case also there
would be no asset then remaining on which a
capital cost allowance could be claimed. The situa
tion is to be distinguished from that which the
Federal Court of Appeal dealt with in the case of
Compagnie Immobilière BCN Ltée v. The Queen 3
(presently under appeal before the Supreme Court
of Canada) because in that case it was held by the
Court of Appeal that there had been no disposition
of the asset. If the appeal in the above case
succeeds before the Supreme Court of Canada, it
would presumably be on the basis that that Court
has been persuaded that there has been a disposi
tion in the circumstances and that, notwithstand
ing the absence of proceeds, no capital cost allow
ance could be taken by the taxpayer, or,
alternatively, on the basis that, notwithstanding
the fact that there was no actual disposition in the
strict sense of the word, the asset must be in
existence or another asset in the same class must
be in existence at the end of the taxation year in
order to allow capital cost allowance to be claimed.
In either eventuality, the case would be of no
assistance to the plaintiffs.
Regulation 1100(3b) rather than 1100(3a)
would be the one applicable to the - facts of this
case since the income, according to the tax return
of the deceased, was from property and not from
business, but whether 1100(3b) rather than
1100(3a) would apply appears to be completely
immaterial.
Prior to the coming into force of section 70 in
1972, there was no deemed disposition of the asset
nor any deemed receipt of the proceeds immediate
ly before the death of a taxpayer under the Income
Tax Act. Such is clearly not the case now. The
Regulations in question were never repealed and
therefore must be enforced, providing they are not
contrary to the new legislation.
Counsel for the plaintiffs argued that, even
before the enactment of section 70, taxpayers, in
Ontario at least, were in the same position as they
are at present by reason of the provisions of section
3 [1976] 2 F.C. 433.
2 of The Devolution of Estates Act 4 and of section
33 of The Wills Act' which vest the assets in the
personal representative of the deceased and that
consequently there was a deemed disposition by
operation of the law. He argued that there was
never any question but that they were nevertheless
entitled to the deduction for capital cost allowance.
This argument cannot succeed. If the taxation
year of a deceased taxpayer ends on his death
then, contrary to section 70, where the disposition
is deemed to have taken place before death and
therefore before the end of the taxation year,
under both section 2 of The Devolution of Estates
Act and section 33 of The Wills Act the vesting is
deemed to take place on death. Under both sec
tions also, there is no question of the estate, the
deceased or any person being deemed to have
received the proceeds of a disposition resulting
from the vesting of the assets in the personal
representative. Finally and more importantly, even
if the taxation year of a deceased taxpayer is to be
considered to remain at all times the 31st of
December of the year of his decease, where a
regulation is validly issued pursuant to a taxing
statute, and does not contravene any of the provi
sions of that statute, and where such a regulation
purports to afford a deduction or some relief to the
taxpayer from the tax burden imposed by the
taxing statute, its effect must never be considered
as nullified by reason of the existence of another
enactment in a statute totally unrelated to taxa
tion, especially where the enactment emanates
from another jurisdiction.
In view of the very specific wording of section
70(5) and section 70(6), I fail to see how that
wording can be interpreted to allow for the con
tinued application of Regulations 1100(1)(a) or
1100(3b) for the reasons which I have stated
above, namely, that the asset is deemed to have
been disposed of and paid for before death and
therefore before the end of the taxation year, when
the capital cost allowance is to be calculated.
4 R.S.O. 1970, c. 129.
5 R.S.O. 1970, c. 499.
In coming to this conclusion, I wish to empha
size that I am making no finding as to whether in a
properly worded regulation issued pursuant to sec
tion 20(1)(a) and notwithstanding section 70, it
would not be possible to afford the relief to a
deceased taxpayer's estate which sections 1100(3a)
and (3b) seem to contemplate. Even though taxa
tion legislation must be interpreted in favour of the
taxpayer rather than the taxing authority, the
clear meaning of an enactment must not be twisted
nor must its logical result be diverted merely
because a regulation previously enacted still exists
which now is in direct conflict with the statutory
enactment.
It would therefore appear to me that the above-
mentioned sections of the regulations have ceased
to have any effect whatsoever and, therefore,
might well be deemed to have been repealed pursu
ant to section 2(2) of the Interpretation Act 6 . In
any event, whether or not they are absolutely
repealed by operation of law, they are certainly of
no help to the plaintiffs in the circumstances of the
case at bar. The re-assessment by the Minister will
therefore be confirmed and the action dismissed.
As to costs, however, since the case has arisen
because the defendant has neglected to repeal or
amend its own Regulations which are in direct
conflict with the new legislation, the parties should
be left to pay their own costs.
6 R.S.C. 1970, c. 1-23.
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.