http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111396/index.do
Hatt v. The Queen (August 19, 2015 – 2015 TCC 207, D’Arcy J.).
Précis: Ms. Hatt worked as a federal civil servant from July 1978 to October 2007. She took unpaid leave in 2003 and worked for an international organization until her retirement from her civil service job in 2007. It was agreed that between 2003 and 2007 she was a non-resident. In 2007 she contributed $22,799 to her registered pension plan (“RPP”). She claimed that this gave rise to a non-capital loss of $20,302. She returned to Canada in 2010 and when filing her 2010 tax return she applied that non-capital loss carry forward from 2007. While CRA originally indicated that they would accept the loss, ultimately it was denied. Hence Ms. Hatt appealed to the Tax Court.
The Tax Court allowed the appeal. Subsection 111(9) of the Income Tax Act detailed the manner in which the non-capital losses of non-residents were to be computed. Applying that provision Ms. Hatt had a non-capital loss in 2007 in the amount of $20,302 and she was entitled to carry it forward to 2010 when she again became a Canadian resident. The appeal was allowed and the Court awarded costs of $500 plus disbursements to Ms. Hatt (which was a bit unusual since this was an informal procedure appeal).
Decision: While the case involved some complex back and forth with CRA the underlying facts were quite simple:
[2] The Government of Canada employed the Appellant from July 1978 to October 2007. She worked in various government departments, namely the Office of the Auditor General, Public Works and Government Services and Citizenship and Immigration.
[3] From July 26, 2003 until her retirement on October 18, 2007, the Appellant was on leave without pay. During this period, she worked outside of Canada for an international agency.
[4] The Appellant left Canada in 2003 and did not return until March 2010. Both parties accept that during this period the Appellant was a non-resident of Canada for the purposes of the Income Tax Act (“the Act”).
[5] In 2007 the Appellant received the following two payments from the federal government upon her retirement:
- A payment of $2,497.44 in respect of unused annual leave credits (the “$2,497.44 Annual Leave Income”).
- A severance payment of $43,255 that was also referred to as a retiring allowance (the “$43,255 Retiring Allowance”).
[6] The Appellant contributed $22,384 of the $43,255 Retiring Allowance to her registered pension plan (the“$22,384 RPP Payment”). The Appellant explained that she made this payment in order for the years that she was on unpaid leave to count towards the determination of her annual pension.
[Footnotes Omitted]
Ms. Hatt returned to Canada in 2010 and in filing here 2010 tax return claimed a non-capital loss from 2007 in the amount of $20,302 (the $22,384 RPP payment less the $2,497 Annual Leave Income). CRA denied the loss and Ms. Hatt appealed to the Tax Court.
The position of CRA was as follows:
[31] Counsel for the Respondent accepted during her argument at the hearing that the Minister concluded that in 2007 the Appellant had $2,497 of employment income under Part I of the Act and deductions from that employment income of $22,799 under subsection 8(1). However, counsel argued that the $22,384 RPP Payment that was allowed as a deduction under paragraph 8(1)(m) should not be used in 2007 to calculate a non-capital loss from employment under section 111.
[32] The Respondent argued that the $22,799 deduction allowed in 2010 resulted from a registered pension plan (“RPP”) contribution and must be treated pursuant to the statutory limits on that form of deduction.
[33] She argued that the deduction of contributions to RPPs is only allowed under paragraph 8(1)(m). Because of the wording of 8(1)(m), the qualifying factors in subsection 147.2(4) apply to such a deduction.
[34] One of the qualifying factors is that only amounts which represent contributions made by the individual to a registered pension plan in a particular year may be deducted in that year. Subsection 147.2(4) does not permit the carry-forward of RPP contributions.
[35] She argued that the limitation in subsection 147.2(4) must be adhered to or its purpose would be frustrated by the availability of non-capital losses under section 111. The specific wording “in the year” precludes deduction in later years outright. If the deduction could be applied without reference to this limit regarding timing, that portion of the section would be rendered meaningless.
The Court rejected the position of CRA:
[46] Subsection 111(9) sets out the rules for determining a non-resident’s non‑capital loss. The subsection allows a non-resident to include his/her non‑capital loss a loss from carrying out the duties of an office or employment only if the duties are performed in Canada. The Respondent did not, in either her oral argument or her written submissions filed after the conclusion of the hearing, argue that this provision applied to preclude the creation of a non-capital loss for the Appellant’s 2007 taxation year. Further, I assume that, when the Minister included the $2,497 of employment income in the Appellant’s Part I income for 2007, she concluded, for the purposes of subsection 115(1), that the employment income arose from employment performed by the Appellant in Canada.
[47] Subsection 111(8) defines non-capital loss of a taxpayer for a taxation year to mean the amount determined by the formula (A+B)-(D+D.1+D.2). A taxpayer’s loss for the year from employment is included in A. Since the only source of income covered by the Minister’s assessment was the Appellant’s employment with the Government of Canada, the remaining parts of the formula do not apply to the determination of the Appellant’s non-capital loss for her 2007 taxation year.
[48] As a result, pursuant to the definition in subsection 111(8), the Appellant incurred a non-capital loss from employment of $20,302 in her 2007 taxation year. Pursuant to subsection 111(1)(a), such loss may be carried forward and deducted when determining the Appellant’s 2010 taxable income.
In what seems to have been somewhat of a veiled censure of CRA, the appeal was allowed and Ms. Hatt (who was self-represented) was awarded costs of $500 plus disbursements (which was somewhat unusual since this was an informal procedure appeal).