Bottom Line: Use Em If You Got Em!
In the recent tax court case of Zhang v. Her Majesty The Queen, 2017 CarswellNat 7397, the Tax Court of Canada had to interpret the law when it came to a dentist using OR deferring the use of their education and tuition tax credits. So Dr. Hui Zhang had accumulated $52,040 in tuition and education tax credits. Dr. Zhang COULD use them for her 2014 tax year; in that year, she earned dividend income from her professional corporation. She decided NOT to use any tuition and education tax credits that year. So she figured she could use them (carry forward) in 2015. And that’s what she did: when she filed her 2015 tax return, she claimed $52,040 in tuition and education tax credits. But the CRA (Minister of National Revenue) DENIED HER CLAIM!!! According to them, she didn’t have any credits because they had been applied in her 2014 tax year. Dr. Zhang took the CRA to court.
The Tax Court of Canada looked at section 118.61(1) of the Income Tax Act, which contained a formula for determining the amount by which an individual’s unused tuition, textbook and education tax credits are to be determined. In 2013, that section said you need to use this formula:
A + (B – C) – (D + E)
A the amount determined under this subsection in respect of the individual at the end of the preceding taxation year;
B is the total of all amounts each of which may be deducted under section 118.5 or 118.6 in computing the individual’s tax payable under this Part for the year;
C is the lesser of the value of B and the amount that would be the individual’s tax payable under this Part for the year if no amount were deductible under this Division (other than an amount deductible under this section and any of sections 118 to 118.06, 118.3 and 118.7);
D is the amount that the individual may deduct under subsection (2) for the year; and
E is the tuition, textbook and education tax credits transferred for the year by the individual to the individual’s spouse, common-law partner, parent or grandparent.
OK, so everyone agreed on everything except for how D was to be interpreted. A was obviously $52,040 and B, C and E were nil. That left D. What did the words “may deduct” in D mean? Did it mean, as the CRA had argued, the amount by which the taxpayer COULD and therefore HAD to deduct and irrespective of whether they wanted or actually did so or not? That would be $52,040, resulting in $0 deductions for the next tax year. OR did it mean, as Dr. Zhang had argued, the amount by which a taxpayer COULD deduct if they chose? That would be $0, resulting in $52,040 as a carry forward for the next tax year.
The Court used a textual and purposive approach to interpreting D and concluded that the CRA was correct in its interpretation. The government had, in drafting D, used the word “deduct” instead of “deducted”, which supported the CRA’s interpretation. And the government also used the word “deductible” instead of “deducted” in a Department of Finance Technical Note (which accompanied the enactment of the legislation), which further supports the CRA’s interpretation. Finally, a Budget Plan stated that the purpose of the law was to “allow the student to carry forward those credits indefinitely until they have sufficient tax liability to make use of them”. This indicates that students will be FORCED to use the credit once they have income against which the credit could be applied.
On this basis, the Court sided with the government and concluded that D in subsection 118.61(1) should be read as if as if it said: “D is the amount which may be deducted under subsection (2) for the year” instead of what it says above.
On that basis, Dr. Zhang’s appeal was dismissed.
