The law determines judges’ decisions

A recent Tax Court of Canada (TCC) decision shows that, despite personal feelings of sympathy, judges must follow the letter of the law.

In the Oct. 25 judgment in Deborah Maass-Howard v The Queen (2012), the TCC judge, Justice Robert Hogan, noted his sympathies for the appellant, Deborah Maass-Howard, but regrettably denied her appeal noting his hands were tied.

The issue to be determined in this case was the Canada Revenue Agency’s (CRA) reassessment of Maass-Howard’s 2009 return. In 2009, Maass-Howard had withdrawn $105,000 from her RRSP to pay for a surgery in Switzerland that the Canadian health system did not cover. She did not include that amount in her 2009 income tax return, as required by the Income Tax Act. Paragraph 56(1)(H) and subsection 146(1) of the Act says taxpayers must include funds withdrawn from RRSPs in their calculations of income for the year, with taxes withheld at the source by the plan administrator.

So, when the CRA reassessed Maass-Howard’s return, it added $105,000 to her income for 2009. She appealed the assessment and the case ended up in the TCC.

The Crown was generally sympathetic to Maass-Howard’s situation. When a herniated disk in her back failed to improve under medication prescribed by Canadian doctors, Maass-Howard visited a Canadian surgeon practicing in Switzerland for a second opinion. Contrary to the Canadian physicians, this doctor recommended disk fusion and replacement surgery. Still without a domestic solution, Maass-Howard decided to pay for it herself.

To raise the requisite funds, she explored many avenues. Because she had equity in her house, she first applied for a mortgage loan. The bank refused her request. She then asked her financial institution whether she could withdraw funds from her RRSP on a tax-deferred basis, but was told this was not possible. Similar inquires to the CRA were also unsuccessful.

Some time after Maass-Howard had withdrawn the money from her RRSP, she discovered that she could have withdrawn the funds as a mortgage loan from her self-directed RRSP. She submitted to the court that she would have selected this option had she known.

In her appeal, Maass-Howard asked the court for relief under paragraph 60(1)(I) of the Act. This highly complex provision allows for tax-free rollovers of amounts received by a person, for example, from the RRSP of a deceased spouse, provided that the funds are transferred to a RRSP established by the taxpayer within the time prescribed. The court held that 60(1)(I) did not extend to Maass-Howard, and she could not deduct the amount withdrawn from her RRSP.

As a final plea, Maass-Howard asked the court to relieve her of her tax obligation on equitable grounds. Her request was certainly reasonable. After all, her initiative had saved Canadian taxpayers the cost of her surgery and treatment — which was greater than the amount of income taxes on her RRSP withdrawal. Furthermore, she would not have resorted to this plan but for the shortcomings of the Canadian health system.

The TCC accepted that the Canadian health system had failed to find a qualified surgeon to perform the surgery in her home province of Quebec — and that the only funds available to her for the operation were funds from her RRSP. Nevertheless, the TCC denied Maass-Howard’s request for relief — not on uncompassionate grounds but on the strict letter of the law.

In the concluding words of Justice Hogan, the court’s hands were tied: “It is well established that the courts do not have the power to make exceptions to the application of the law on the grounds of fairness, equity or undue hardship. I cannot vacate an assessment if it was made in conformity with the law. The law obliges me to dismiss the appeal although I do so with reluctance in light of the circumstances of the appellant’s case.”

Deborah Maass-Howard reveals the harsh reality that reason and compassion are sidelined in many tax disputes. Although sometimes sympathetic with the appellant, judges are unable to provide relief that isn’t found in their books.

Greer Jacks is updating jurisprudence in EverGreen Explanatory, on online research library of assistance to tax and professionals working with their clients.