A-342-90
Her Majesty the Queen (Appellant) (Defendant)
v.
Miriam Rumack (Respondent) (Plaintiff
INDEXED AS: RUMACK v. M.N.R. (C.A.)
Court of Appeal, Heald, Hugessen and Stone
JJ.A.—Toronto, January 14; Ottawa, January 27,
1992.
Income tax — Income calculation — Taxpayer winning lot
tery prize of $1,000 monthly for life, guaranteed for minimum
20 years — Prize funded by purchase of annuity for
$135,337.75 — Reassessment including $8,155.20 in 1979
income — $3,844.80 not taxed as representing capital portion
of payments under Income Tax Act, s. 60(a) (permitting deduc
tion of capital element of each annuity payment) — Trial Judge
holding each monthly payment tax exempt under s. 52(4)
(deemed acquisition of prize at fair market value) — Appeal
allowed — S. 52(4) not applicable as relating to capital gains
— Lottery winnings traditionally tax exempt as not traceable
to income-producing source — S. 52(4) reflecting policy deci
sion not to tax as capital gains lottery winnings which were not
income — Not 240 or more separate "prizes" of $1,000 each
within s. 52(4), but single prize of guaranteed income stream
for 20 years or more — Payment stream having quality of
income as periodic, regular, certain, foreseeable, expected,
enforceable and inexhaustible, subject to lifetime of winner —
Each payment composed largely of income resulting from tax
exempt capital value of prize.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 40(2)W,
52(4), 56(1)(d), 60(a) (as am. by S.C. 1977-78, c. 32, s.
12), 248.
CASES JUDICIALLY CONSIDERED
REVERSED:
Rumack (M.) v. M.N.R., [1990] 1 C.T.C. 413; (1990), 90
DTC 6271 (F.C.T.D.).
COUNSEL:
Alexandra K. Brown for appellant (defendant).
Joanne E. Swystun for respondent (plaintiff).
SOLICITORS:
Deputy Attorney General of Canada for appel
lant (defendant).
Goodman and Carr, Toronto, for respondent
(plaintiff).
The following are the reasons for judgment ren
dered in English by
HUGESSEN J.A.: This appeal raises the issue of the
proper income tax treatment to be given certain types
of lottery winnings. Traditionally such winnings have
always been exempted from income tax, being
treated as "windfalls", i.e. of a capital nature.' The
question here is to know whether the same exemption
should be accorded where the winnings themselves
take the form of a stream of income.
The matter arises in this way. In 1978, the respon
dent was the holder of the winning ticket in a lottery
organized by the Ontario Association for the Men
tally Retarded. The ticket on its face described the
game as a "cash for life lottery". The front of the
ticket also stated: "first prize $1,000.00 each month
for life". There were other prizes, some of which con
sisted of smaller monthly life payments. On the back
of the ticket the following text appears:
Lifetime prizes are funded by Life Annuities purchased by the
Association, and are guaranteed for a minimum of 20 years.
Lifetime prize payments to start at age 18 or older and com
mence approximately 30 days after Winners' declarations. All
proceeds go to aid the Ontario Association for the Mentally
Retarded. Check your newspaper or "Cash for Life" ticketsel-
1er for winning numbers after the draw date.
1 The term "windfall" itself, implying a capital receipt,
comes from the old rule whereby, as between the remainder-
man and the tenant for life, timber trees blown down by the
wind were required to be sold and the proceeds invested as
capital.
In the course of the 1979 taxation year, the only
one directly in issue on the present appeal, the
respondent received twelve monthly payments of
$1,000 each. These were paid to her by the Sun Life
Assurance Company from which the Ontario Associ
ation for the Mentally Retarded had purchased an
annuity on the respondent's life with a guaranteed
period of twenty years. The single premium of
$135,337.75 was paid by the Association which
remained the owner of the annuity. The respondent's
name appears as payee but the Association as owner
retained the right to revoke or change the payee at
any time prior to the death of the annuitant.
Following the end of the 1979 taxation year, Sun
Life issued to the respondent a T-4A form showing
that the sum of $8,155.20 was to be included in her
income for the year. The balance of the $12,000,
being $3,844.80, represented the capital portion of
the payments and was deducted pursuant to para
graph 60(a) of the Act. The respondent did not
include any part of the payments received from Sun
Life in her return for 1979 and the Minister, in due
course, assessed her for income tax in respect of the
sum of $8,155.20. An objection and an appeal to the
Tax Court of Canada were both unsuccessful, but a
further appeal by way of an action in the Trial Divi
sion of this Court succeeded [[1990] 1 C.T.C. 413].
Hence, the present appeal.
The relevant provisions of the Income Tax Act 2 are
as follows:
40....
(2) Notwithstanding subsection (1),
(f) a taxpayer's gain or loss from the disposition of
(i) a chance to win a prize, or
(ii) a right to receive an amount as a prize,
in connection with a lottery scheme is nil;
52....
2 S.C. 1970-71-72, c. 63 [as am. by S.C. 1977-78, c. 32, s.
12].
(4) Where any property has been acquired by a taxpayer at
any time after 1971 as a prize in connection with a lottery
scheme, he shall be deemed to have acquired the property at a
cost to him equal to its fair market value at that time.
56. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a
taxation year,
(d) any amount received by the taxpayer in the year as an
annuity payment except to the extent that the payment is
otherwise required to be included in computing his income
for the year;
60. There may be deducted in computing a taxpayer's
income for a taxation year such of the following amounts as
are applicable:
(a) the capital element of each annuity payment (other than a
superannuation or pension benefit, a payment under a regis
tered retirement savings plan, a payment under a registered
retirement income fund, a payment under an income-averag
ing annuity contract or a payment of an annuity paid or pur
chased pursuant to a deferred profit sharing plan or pursuant
to a plan referred to in subsection 147(15) as a "revoked
plan") included in computing the taxpayer's income for the
year, that is to say,
(i) if the annuity was paid under a contract, an amount
equal to that part of the payment determined in prescribed
manner to have been a return of capital, and
(ii) if the annuity was paid under a will or trust, such part
of the payment as can be established by the recipient not
to have been paid out of the income of the estate or trust;
248. (1)...
"annuity" includes an amount payable on a periodic basis
whether payable at intervals longer or shorter than a
year and whether payable under a contract, will or
trust or otherwise;
In my view, the respondent is taxable upon the lot
tery proceeds.
As I indicated at the outset, lottery prizes have tra
ditionally been exempted from income tax in Canada.
Originally, this was not as a result of any declared
policy or legislative provision in the Income Tax Act.
Instead, it was simply a consequence of the fact that
income tax was only imposed upon income from a
source. Lottery winnings did not have the character
or quality of income and could not be traced to any
source which might be identified as income produc-
ing. They were described as "windfalls" which, as I
have indicated above, was simply another way of
saying that they were receipts of a capital nature.
With the introduction of capital gains tax in
Canada in 1972, it became necessary to deal with the
possibility that lottery winnings which were not
incomc might nonetheless attract tax as capital gains.
Clearly, a policy decision was reached that they
should not be so taxed and the result was the enact
ment of paragraph 40(2)(f) and subsection 52(4)
above, both of which appear in Subdivision c of Divi
sion B of Part I: "Taxable Capital Gains and Allowa
ble Capital Losses".
The learned Judge of the Trial Division was of the
view that each monthly payment of $1,000 received
by the respondent fell within what he called the
"exempting provision" in subsection 52(4) and was
therefore free from income tax. With respect, I think
he was wrong.
In my view, subsection 52(4) simply cannot be of
any assistance to the respondent. As previously indi
cated it is found in the subdivision of the Act particu
larly devoted to the matter of capital gains; it does
not purport to deal with whether or not the payments
received were to be treated as income. The very
words of subsection 52(4) are cast in the language of
capital gains talking as they do of a deemed cost of
the acquisition of property.
Even if, as the learned Judge of the Trial Division
seems to have thought, each monthly payment of
$1,000 was a prize acquired by the respondent in
connection with the lottery scheme, a proposition as
to which I have some difficulty as appears below, that
still does not avail to make the payments exempt
from income tax if in fact they have the quality of
income. Many income payments are "acquired" by a
taxpayer, in the sense of coming into his possession,
at a cost to him equal to their fair market value; obvi
ous examples are salaries, fees, royalties and the like.
The fact that the taxpayer has given value for what he
gets has never, however, as far as I know, served to
deprive income payments of their character as such
or to make them non-taxable.
Furthermore, and as suggested in the preceding
paragraph, I do not think that one can properly char
acterize each $1,000 monthly payment as "a prize"
within the meaning of subsection 52(4). I have
already quoted the lottery ticket which describes the
"first prize" as being "$1,000 each month for life".
Surely on any ordinary use of language this is not to
be regarded as two hundred and forty or more sepa
rate prizes of $1,000 each, but rather as a single prize
consisting of a guaranteed income stream for 20
years or more. This is confirmed by the text on the
back of the ticket which indicates that each lifetime
prize is to be funded by the purchase of a life annuity.
By its very nature a stream of payments of $1,000
monthly for life has the character and quality of
income. Some of the features strongly indicative of
that character in my view are the following. The pay
ments are periodic, regular, certain, forseeable,
expected and enforceable; they are also to endure for
the payee's lifetime and, subject only to that limita
tion, are inexhaustible. The fact that their present
value is significantly less than their minimum face
value over time shows that they contain a large com
ponent based upon interest or the productivity of
money.
The source of the income constituted by the stream
of payments is the contractual obligation undertaken
by the Association at the time the respondent pur
chased the winning ticket. More immediately it is the
annuity contract purchased by the Association from
Sun Life for the respondent's benefit and in order to
discharge its obligation to her. If it cost the Associa
tion $135,337.75 to meet its contractual obligation to
her at the time she turned in her winning ticket in
1978, that is also surely the value of the prize which
she won.
The respondent acquired through a lottery scheme
a prize consisting of a stream of payments of $1,000
a month for life. That prize had a value of
$135,337.75, and as such is clearly one which is
intended to be covered, and is covered by the provi
sions of subsection 52(4). It is a "windfall" of a capi
tal nature and is therefore not taxable as income.
Since it is deemed to have been acquired by her at a
cost equal to its fair market value, i.e. $135,337.75, it
also does not attract capital gains tax.
The monthly payments received by the respondent
are, however, an entirely different matter. It is true
that each payment comes to her as a consequence of
her having won a prize of a value of $135,337.75, but
no payment or group of payments is itself the prize.
The prize is the lifetime guaranteed stream of pay
ments, each of which is composed, in large measure,
of the income resulting from the tax exempt capital
value of the prize. If she had won a lump sum and
invested it there can be no doubt that the income
from such investment would be taxable in her hands;
only the capital would be free of tax by the operation
of subsection 52(4). Here, the investment of the capi
tal value of the prize was in effect compulsory,
forced on her by the rules of the game itself, but that
surely cannot change the result.
What the respondent has received in 1979 are
twelve payments of $1,000 each. Those payments
have been made under an annuity as that term is
defined in subsection 248(1) above. As such they
have the character of income and are required by par
agraph 56(1)(d) to be included in computing the tax
payer's income. By the terms of paragraph 60(a)
there may be deducted therefrom the amounts deter
mined in prescribed manner to be a return of capital.
Those amounts totalled $3,844.80 in 1979. The bal
ance of $8,155.20 was taxable income and was prop
erly assessed as such.
I would allow the appeal with costs, set aside the
judgment of the Trial Division, and dismiss the action
with costs.
HEALD J.A.: I agree.
STONE J.A.: I agree.
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.