Citation: 2011 TCC 41
Date: 20110123
Docket: 2004-4185(IT)G
BETWEEN:
MARK A. SOCHATSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
The appellant appeals
from the reassessment of his 2001 taxation year. During that year he was
employed by Northern Industrial Carriers Ltd. (Northern), a trucking business.
[2]
Northern was a family
company founded by his father. Both the appellant and his older brother, Simon,
were shareholders and directors. Over the years the appellant carried out many
functions in the company office and he was for many years the operations
manager.
[3]
Due to certain issues
which began to arise in the late 1990s between the brothers, the appellant
disposed of his interest in the company and left the company some time after the
2001 calendar year.
[4]
In his 2001 income tax
return the appellant reported, among other things, an amount of $3,000,000
million in employment income from Northern.
[5]
The Minister of
National Revenue (Minister) reassessed the appellant to add a further $700,000
in the employment income from Northern on the basis that the appellant received
$3,700,000 in employment income. It is the $700,000 which is in dispute.
[6]
In the notice of appeal
the appellant took the position that “. . . the Minister erred in
determining the Appellant realized employment income from [Northern] in an
amount other than the amount set out in the amended T-4 slip the Appellant received
from [Northern]”, which amended T4 slip showed his employment income as $3,000,000.
[7]
At trial it became
apparent that the appellant’s position was that Northern paid $350,000 to
966772 Alberta Ltd. (772) and $350,000 to 966779 Alberta Ltd. (779) for
management services and that the appellant never earned or received the
$700,000 in issue.
[8]
In its amended reply
the respondent takes the further position that the $700,000 in issue was
properly taxable pursuant to subsection 56(2) of the Income Tax Act (ITA).
The facts
[9]
The appellant testified
about the origins of Northern, the reasons which led to his leaving Northern,
his subsequent successful business activities and certain other unrelated
businesses that he had.
[10]
He testified that the
handwritten T4 slip contained in his 2001 income tax return, Exhibit A-3, was
the only T4 slip that he received from Northern. This T4 slip has “amended”
written at the bottom right of the form and shows an employment income of
$3,000,000 for the 2001 taxation year.
[11]
The appellant testified
that his actual amount of employment income at Northern in 2001 was $3,000,000.
While he was not sure exactly when he received this, he said that he received
the amount less the tax withheld.
[12]
The appellant
identified a number of documents. I will refer to some of these documents
below.
[13]
He testified that he
set up 772 and 779.
[14]
The appellant also
identified three cheques dated 18 June 2002. All of these
cheques were issued by Northern. The first and third cheques, each in the
amount of $374,500 (i.e. $350,000 plus GST), were issued to 772 and 779. The
second cheque was made out to the appellant and was for an amount of
$1,555,812.16, an amount which is equal
to $3,000,000 less the amounts withheld from the appellant’s pay by Northern.
[15]
The appellant also gave
testimony and produced documents to show that 772 and 779 had each included
$350,000 in computing their income and in computing their taxes for the fiscal
years ending 30 April 2003 and 31 January 2003 respectively.
[16]
The appellant stated
that he became an employee of 772 and 779 after their incorporation. He did not
work for 772 or 779 in 2001.
[17]
It is also worth noting
that there is a great deal with respect to which the appellant did not testify.
[18]
While he identified
invoices dated 14 May 2002 from 772 and 779 to Northern, invoices stating “management
services rendered”, he did not testify as to any agreement for such services
between 772 and 779, on the one hand, and Northern, on the other hand, nor did
he testify that any management services were performed by him or by anyone else
acting on behalf of 772 or 779 for the benefit of Northern.
[19]
The appellant did not
testify regarding how his 2001 remuneration from Northern was set.
[20]
From the corporate
documents filed as Exhibits R-1 and R-2 it is clear that 772 and 779 were
incorporated on 27 December 2001 and that Brent S. Vander Ploeg
was the first director of the corporations and remained the only director until
1 May 2002.
On 1 May 2002 the appellant became the sole director of 772 and Andrea
Sochatsky, the appellant’s spouse,
became the sole director of 779.
[21]
On 1 May 2002 the shares
of 772 and 779 were first issued.
772 and 779 were controlled by the appellant and his spouse respectively.
[22]
Exhibit A-8 is entitled
“Northern Industrial Carriers Ltd. – Due to Shareholders – 31-May-02”. The document is in the form
of a schedule, portions of which are reproduced below:
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. . .
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Mark
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. . .
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(Mark)
966779 Alberta
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Opening balance – May 31, 2001
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–
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–
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Payment of 2001 bonus
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Bonus (original T4)
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3,700,000.00
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Revise bonus on Mark to
966779 Alberta Ltd.
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(700,000.00)
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700,000.00
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Income Tax
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(1,442,691.44)
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. . .
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. . .
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. . .
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[23]
Raymond Liu, an
accountant, testified. Mr. Liu started to work for the appellant in early
2002 and stopped working for the appellant two or three years later. He prepared
the appellant’s 2001 income tax return filed with the amended T4 showing
employment income of $3,000,000.
[24]
At the time that the
appellant came to see him, he advised the appellant about the best structure
for running a business and suggested that the appellant form corporations, one
for the appellant and one for his spouse. He explained to the appellant the
small business deduction limit.
[25]
Gerald Telidetzki
testified. He was the controller of Northern from November 2000 until June
2002. He explained that Northern had a May 31 year‑end. His recollection
was that the bonus paid to the appellant was paid out in the way that is common
in smaller companies that is to say: the bonus was declared, source deductions
were remitted and the balance was then lent back to the company.
[26]
He also testified that
the appellant’s brother Simon would have decided the amount of the appellant’s
bonus and that this determination would have been made between May and November
2001.
The total amount of the bonuses was a function of the profitability of the
company and was determined so as to have corporate profits taxed at the small
business rate; Simon then determined the split of the bonus between the
brothers.
[27]
Mr. Telidetzki prepared
a T4 for the appellant which is identified as Exhibit R-4; it shows the
appellant’s bonus as $3,700,000 for the 2001 taxation year. He also
prepared a T4 summary for the company which shows the company paying employment
income totalling $5,832,505.82.
Both the T4 and the T4 summary were sent in February 2002 to the Canada
Revenue Agency (CRA). The amounts in question were determined in 2001.
[28]
Mr. Telidetzki
also testified that the relevant source deductions for all the bonuses were paid
at the end of November 2001.
This testimony was uncontradicted.
[29]
On or around 23 April
2002 Mr. Telidetzki spoke with the appellant and was instructed by the appellant
that $700,000 of the $3,700,000 was to be channelled to a company that the
appellant had set up and was to be characterized as consulting fees. Later in April
an amended T4 was prepared; the amounts withheld on the T4 were not changed. He
also stated that from the perspective of the company the change did not affect
the deductibility of the amounts.
[30]
Prior to that
conversation he was not aware of the consulting fees or consulting companies.
[31]
Mr. Telidetzki
considered that while Simon could determine the bonuses, the appellant did not
have the authority to determine his bonus. However, he did consider that the
appellant had the authority to tell him to channel the $700,000 to a numbered
company.
[32]
While it was suggested
to Mr. Telidetzki that the $3,700,000 or the $3,000,000 plus $700,000
related to a later year, I am satisfied that Mr. Telidetzki’s evidence was
quite clear that the $3,700,000 bonus related to the company’s year ending 31 May
2001.
[33]
Diane Major, an appeals officer
with the CRA, testified.
[34]
Ms. Major
testified that the CRA received what have been entered as Exhibits R-4 and R-5
from Northern. R-4 is a T4 showing the appellant as having received $3,700,000.
R-5 is a T4 summary signed 28 February 2002 and received on 5 March
2002. R-5 also shows the total employment income paid by the company to its
employees as $5,832,505.82.
[35]
She explained that the
appellant’s return was originally assessed as filed based on the amended T4
included with the return that showed $3,000,000 in employment income.
[36]
Subsequently, as a
result of the T4 matching program the appellant was reassessed.
[37]
Only later did the
company file an amended T4 summary, dated 15 March 2004, reflecting a
$700,000 reduction in employment income paid. The 15 March 2004 cover
letter from Northern with the amended T4 summary states that they were unable
to find an amended T4 summary and that they completed an amended T4 summary showing
the revised balance of wages recorded in their books. The amended T4
summary shows the total employment income paid as $5,132,505.82, an amount of
$700,000 less than the original.
[38]
I also note that there
is no dispute as to the inclusion of $3,000,000 of the bonus in the appellant’s
2001 income.
Analysis
[39]
Before turning to the
appellant’s argument I will state the following findings of fact:
(a) Given that 772 and 779
were incorporated on 27 December 2001, that the appellant and his spouse took
control of and became the directors of a 772 and 779 on 1 May 2002 and that
time flows only in one direction, it is impossible for 772 and 779 to have
furnished any services to Northern prior to calendar year 2002.
(b) Further, given that
Mr. Telidetzki’s testimony that prior to his 23 April 2002 conversation
with the appellant he had never heard of any consulting fees or consulting
companies, that I was presented with no evidence that 772 or 779 provided any
services to Northern, that the appellant simply identified the invoices of 14
May 2002 from 772 and 779, each for $350,000 plus GST, to Northern for “management
services rendered” but did not testify as to the existence of any agreement for
services and that, if 772 and 779 had provided services for the amounts of
$350,000 billed, those services would have had to have been provided between 1
May and 14 May 2002, I find that no services were provided by 772 and 779 to
Northern in relation to the 14 May 2002 invoices.
(c) Northern decided to
pay the appellant a bonus of $3,700,000 for the work he did during Northern’s
taxation year ending 31 May 2001. The $3,700,000 bonus was declared no later
than the end of November 2001. At the end of November, the withholdings on the
$3,700,000 amount were withheld and remitted to the CRA and the balance of the
bonus was credited to the shareholder account.
(d) The appellant simply instructed
Mr. Telidetzki to pay (i) $350,000 of his 2001 bonus to 772 and (ii)
another $350,000 of his 2001 bonus to 779.
[40]
Counsel for the appellant
submitted that:
. . . at the end of the day the issue before
this Court is simple and straightforward. Was the Minister correct to have
added to the Appellant's income on reassessment an amount that had been paid to
another person, and that person reported the amount as income and paid tax on
that income. Put another way, do all of the circumstances of this appeal
warrant the Minister receiving tax twice on the same income.
[41]
The appellant further
submitted that what had happened was legitimate tax planning, that the
appellant as a director had the legal capacity to bind Northern to contracts
and that, after obtaining professional advice in early 2002, the appellant did
have Northern enter into contracts with 772 and 779 which resulted in the
payment of $350,000 to each of 772 and 779.
[42]
I am not sure how these
arguments assist the appellant.
[43]
With respect to double
taxation, there is no general rule against the taxation of the same amount in
the hands of two different taxpayers. Perhaps the most common example of this is
when profits of a corporation which are taxed in the hands of the corporation
are taxed again in the hands of the shareholder when they are paid out as
dividends.
[44]
In addition, in this
case one wonders why 772 and 779 each included $350,000 in their income. While
the assessments of 772 and 779 are not before me, it may well be that those two
companies should not each have included $350,000 in their income.
[45]
Individuals are free to
plan their affairs. However, the so-called “tax planning” of April and May 2002
could not change the character of what already happened; given that, it does
not matter whether the appellant could bind Northern or not.
[46]
The appellant also
argued that the bonuses were with respect to Northern’s 2002 taxation year. As
I have already found, the bonuses were clearly in relation to Northern’s
taxation year ending 31 May 2001.
[47]
The appellant then
reviewed the requirements of subsection 56(2) of the ITA:
(2) Indirect payments — A
payment or transfer of property made pursuant to the direction of, or with the
concurrence of, a taxpayer to some other person for the benefit of the taxpayer
or as a benefit that the taxpayer desired to have conferred on the other person
. . . shall be included in computing the taxpayer’s income to the
extent that it would be if the payment or transfer had been made to the
taxpayer.
[48]
There are four elements
required by subsection 56(2):
(a) that a payment or
transfer of property be made by one person to a person other than the taxpayer;
(b) that it be done at the
direction of or with the concurrence of the taxpayer;
(c) that the payment or
transfer be for the benefit of either the taxpayer or some other person the
taxpayer wished to have the benefit conferred upon;
(d) that the payment or
transfer would have been included in the taxpayer’s income if he had received
it.
[49]
Before going any
further, I should say that I did not understand the appellant to be disputing
that these four conditions were met.
[50]
Subject to one point
not raised at trial, to which I shall return below, these four conditions are
clearly met. There was (i) a payment of money to 772 and to 779, (ii) the
payments were done at the direction of the appellant, (iii) the appellant
clearly wished to confer a benefit on 772 and 779, companies he or his spouse
controlled, and (iv) he would have been taxable on the $700,000 if he had
received it.
[51]
The appellant’s primary
argument, as I understand it, turned on the existence of a fifth requirement in
subsection 56(2).
[52]
While there has been
some debate regarding the fifth element, it is not necessary for me to review
that debate.
[53]
This requirement was
set out by Marceau J.A. in Winter v. The Queen:
. . . It seems to me, however, that when the
doctrine of “constructive receipt” is not clearly involved, because the
taxpayer had no entitlement to the payment being made or the property being
transferred, it is fair to infer that subsection 56(2) may receive application
only if the benefit conferred is not directly taxable in the hands of the
transferee. . . .
[54]
In this case the
appellant did have a pre-existing entitlement to the $700,000 and chose to have
half that amount paid to 772 and half that amount paid to 779. Accordingly, to
the extent such a requirement exists, the fifth requirement could not have any
application here.
[55]
This would dispose of
the case as argued by the appellant and result in the appeal being dismissed.
[56]
However, I concluded
that this left two major questions unanswered.
Accordingly, I asked the Registry to write to the parties and ask for further
submissions on two points.
[57]
First, assuming that subsection
56(2) were otherwise applicable, I asked for submissions on whether the
$700,000 was assessed in the correct year?
[58]
Secondly, I asked for
submissions on the original assessing position, simply that the appellant
received the $700,000 amount in 2001 and was taxable thereon.
[59]
With respect to the
year, subsection 56(2) reads, in part:
(2) Indirect payments — A payment . . . shall be
included in computing the taxpayer’s income to the extent that it would be
if the payment or transfer had been made to the taxpayer.
[Emphasis added.]
[60]
Employment
income is taxed on a cash basis. The payments to 772 and 779 were made in
calendar year 2002 by means of the cheques dated 18 June 2002.
[61]
Subsection
56(2) can only apply if the $700,000 in issue has not already been paid to the
appellant.
[62]
Accordingly,
assuming the $700,000 bonus had not been paid to the appellant prior to 18 June
2002, the appellant would, under subsection 56(2), be taxable “to the extent”
that he would have been if Northern had paid the $700,000 to him.
[63]
Clearly the
appellant would be taxable on the $700,000 since he would be taxable on the
amount if he had received it directly — when?
[64]
Given the
employment income is on a cash basis I cannot see how subsection 56(2) could be
read as including the amount in any year other than 2002 (I am still assuming
that the appellant had not been paid prior to 18 June 2002). If
the appellant were paid the $700,000 prior to 18 June 2002, subsection 56(2) would
have no application and the appellant would simply be taxed on the amount when
it was paid to him by Northern.
[65]
On the
question of the year, the respondent took the position that because the correct
year was not in dispute the evidentiary record before the Court was incomplete,
and that if the Court were to pursue the issue the respondent should be
entitled to further discovery and to lead further evidence.
[66]
In support of this the
respondent stated that if evidence were reopened, it expected that it would be
able to demonstrate certain facts.
[67]
However, with some
quite minor exceptions almost all the facts that the respondent alleges that it
expects it would be able to demonstrate, if it had further discovery and led
further evidence, were in fact established in the evidence before me and set
out above.
[68]
The facts in question that
were established before me are relevant to the question whether the appellant
was paid $700,000 in 2001 and should be taxed thereon apart from subsection
56(2). I am at a loss to understand how this evidence would assist the
respondent in arguing that the appellant should be taxed under subsection
56(2); logically, if the appellant was paid in 2001 then the appellant was paid
prior to the cheques of 18 June 2002 and subsection 56(2) can have no
application.
[69]
In the circumstances, as
I do not see how allowing the respondent further discovery and the right to
lead further evidence could make a difference, it is appropriate for me to make
a decision on the question of the year without ordering any further discoveries
or a reopening of the evidence.
[70]
As a result, I conclude
that if the appellant had not been paid prior to 18 June 2002 and
consequently subsection 56(2) were applicable, then the $700,000 amount would
have to be included in the appellant’s 2002 taxation year.
[71]
I now turn to the
question whether, apart from subsection 56(2), the $700,000 should in any event
be included in the appellant’s income. This turns on whether the bonus was paid
to the appellant or, put in a slightly different way, received by the appellant,
in 2001.
[72]
I note that the
Minister assumed that “[i]n 2001, the Appellant received not less than
$3,700,000 by virtue of his employment with Northern . . .”.
[73]
The appellant’s
submission was that the $700,000 was not received in 2001. The appellant argued
that Northern only decided to pay the bonuses in the spring of 2002, that the
$700,000 was not paid until the two cheques of 18 June 2002 were issued and that
Exhibit A-8, which shows the amounts due to shareholders on 31 May 2002, corroborates
this insofar as it showed a balance owing in the appellant’s shareholder
account of $1,535,674.97 on 31 May 2002.
[74]
I would note that I do
not agree that the decision to pay the bonus was made in the spring of 2002. Earlier
in these reasons I have already made a finding that that decision was made in
2001.
[75]
The fact that Northern
paid $350,000 to 772 and $350,000 to 779 by cheques dated 18 June 2002 does not
in itself answer the question when the appellant was paid since the payments
are equally consistent with two possibilities: (i) Northern was fulfilling its
liability to pay the appellant or (ii) Northern had already paid the appellant
and was simply making a payment on his behalf.
[76]
Nor does the fact that
there was a balance owing in the appellant’s shareholder account of
$1,535,674.97 on 31 May 2002 in itself answer the question, although it is
an indicia that the appellant had been paid on or before 31 May
2002. When one examines Exhibit A-8, it is clear that on or before 31 May
2002 part of the $3,700,000 has been withheld and remitted and the balance had
become a liability from Northern to the appellant in his capacity as a
shareholder. This is all consistent with the testimony of Mr. Telidetzki.
[77]
The respondent argued
that there was “constructive receipt” of the $700,000 by the appellant in 2001
insofar as the employer had done everything it had to do to pay the employee.
[78]
At chapter 5.3 of Principles
of Canadian Income Tax Law, seventh edition, 2010, Hogg, Magee and Li
explain:
(c) — Constructive receipt
In order to constitute a “receipt” of money for tax law purposes, is
it necessary for the taxpayer to “actually touch or feel it, or have it in his
bank account?” The Court answered in Jean-Paul Morin v. The Queen
(1975):
We regret to say that this proposition seems to us absolutely
inadmissible, because the word “receive” obviously means to get or to derive
benefit from something, to enjoy its advantages without necessarily having it
in one’s hands.
When money is paid by an employer to a third party for the benefit
of the taxpayer, the payment constituted constructive receipt in the hands of
the taxpayer. For example, in Blenkarn v. Minister of National Revenue
(1963) where the money to pay the taxpayer’s salary in 1960 was available, but
he voluntarily chose not to be paid until 1961, he was considered to have
actually received the money. The payment was held to be “received” as soon as
he had an unconditional right to be paid, which was in 1960.
[Citations omitted.]
[79]
Given the facts of this
case, in particular:
(a) in 2001 there was a
decision to pay the $3,700,000 bonus, taxes were withheld on the entire bonus and
were remitted to the CRA and there was a loan back of the balance after
withholdings to the company. The loan became a liability from the company to
the appellant in his capacity as a shareholder;
(b) Northern was a family
firm and the appellant was a shareholder, director and very senior manager. There
was no suggestion in the evidence that the declaration of the bonus, the
withholding, the remission of the withholdings and the loan back of the balance
of his bonus after withholdings as a shareholder loan to Northern, were done
against the appellant’s wishes, without his knowledge or without his consent. Indeed,
as a shareholder he benefited from Northern “bonusing down” its corporate
profits in order to reduce its taxes since the practical result is to reduce
the total tax paid at the corporate and the personal level on profits
ultimately paid out. For the “bonusing down” to achieve its objective, the
bonuses have to be paid within 180 days of Northern’s 31 May 2001 year-end
given subsection 78(4). In such circumstances one would not normally expect a
person to oppose the payment of the bonus;
(c) the first T4 prepared
by Northern for the appellant and sent to the CRA was for $3,700,000; only
later did Northern send a T4 for $3,000,000 to the CRA. I also note that there
has been no suggestion that the first $3,000,000 of the $3,700,000 was not received
by the appellant as income in 2001 and yet the first $3,000,000 of the
$3,700,000 was treated in virtually the same manner apart from the fact that it
was paid by cheque to the appellant on 18 June 2002 instead of being paid
to 772 or 779;
I am satisfied that in 2001, Northern did all it
needed to do in order to pay the appellant and the appellant received payment, once
the withholdings were made and remitted and the balance, after withholdings, of
the $3,700,000 bonus was loaned back to Northern thereby becoming a liability
from Northern to the appellant in his capacity as a shareholder.
Conclusion
[80]
For these reasons the
appeal will be dismissed with costs to the respondent.
Signed at Ottawa,
Ontario, this 23rd day of January 2011.
"Gaston Jorré"
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