Citation: 2009 TCC 282
Date: 20090526
Docket: 2006-3799(IT)G
BETWEEN:
STORA ENSO BETEILIGUNGEN GMBH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Stora Enso
Benteiligungen GmbH (“SEB”) is a German corporation that has been assessed for
failing to withhold 15% on amounts paid to a Swedish company, McKinsey &
Company, Inc. (“McKinsey”), in respect of services rendered by McKinsey in
Canada for a Canadian corporation in the Stora Enso Group, Stora Enso Port Hawkesbury
Limited (“SEPH”). SEPH owned and operated a pulp and paper mill in Nova Scotia.
[2]
The assessment of SEB
was made pursuant to subsection 227(8.4) of the Income Tax Act Canada (the “Act”) for failure to withhold as
required under paragraph 153(1)(g) and regulation 105. In
addition, SEB was assessed a 10% penalty in respect of its failure to withhold
under subsection 227(8), as well as interest pursuant to subsection 227(8.3).
[3]
SEB is the successor in
title and to the liabilities of a predecessor corporation in the Stora Enso
Group, Stora Enso Publication Paper Aktiengesellschaft (“SEPPA”) as a result of
a foreign reorganisation of SEPPA. At all material times SEPPA was a German
corporation, however it has since been reorganised as a limited partnership of
some sort. The parties do not dispute that SEB is properly responsible for any
failure by SEPPA to withhold in the years in question and prior to the
reorganisation.
[4]
SEB, SEPPA and SEPH are
all members of the Stora Enso multinational group of companies. They are all
related through common ownership. Operationally SEPH reported to SEPPA.
[5]
SEPH is a Canadian
corporation that owns and operates a pulp and paper mill near Point Tupper, Nova Scotia. In 1998 a new paper-making machine had been
installed at the mill at a cost of approximately $800 million. The
installation of the line began in 1996 and production began in the middle of
April 1998.
[6]
The machine’s
productivity and efficiency was not what was expected nor was the quality of
paper as good as expected. For these reasons, the profitability of the mill was
low. In the fall of 1998, McKinsey was retained to advise on the profitability
of the line and of the mill overall. The terms of this retainer are outlined in
a proposal letter from McKinsey to SEPPA.
[7]
The taxpayer called two
witnesses, the former chief financial officer of SEPH in the years in question
as well as a SEPH accountant. Both witnesses gave very clear and credible
evidence which was not challenged in any material way in cross-examination. The
Crown did not call any witnesses but did read in some questions and
undertakings from discovery. Importantly, the parties filed a partial agreed
statement of facts in this case, a copy of which is attached hereto.
[8]
According to the Partial
Agreed Statement of Facts, McKinsey was engaged by SEPPA to do work for
SEPH. Further, pursuant to the contract, McKinsey rendered services in Canada for SEPH. Paragraph 16 d) of the
Crown’s reply provides that the appellant, presumably meaning SEPPA, entered
into a contract “on behalf of SEPH with McKinsey”. (Emphasis added)
[9]
The parties also filed
two joint books of documents.
[10]
McKinsey issued three
invoices to SEPPA for each of the months of October, November and
December 1998. The total amount of these three accounts, including out-of-pocket
expenses, converted to C$1,539,402. SEPPA paid McKinsey these invoices in full
in the ordinary course. The McKinsey invoices were denominated in Swedish Krona.
It is not clear whether SEPPA paid in German Marks, Euros or Swedish Krona.
SEPPA did not make any Canadian regulation 105 withholding from the
payments.
[11]
In January of 1999,
SEPPA advised SEPH in writing that SEPH would have to bear the expense of the McKinsey
invoices. The Stora Enso Group of companies operate an intercorporate account
netting system which ensures that each company’s intercorporate payables are
paid and receivables are received, on a net basis. Via this netting system,
SEPH reimbursed SEPPA the full C$1,539,402 on March 12, 1999 against
a final netting message dated March 10, 1999. SEPH’s reimbursement to
SEPPA for the McKinsey invoices was paid at 100% without any regulation 105
withholding.
[12]
Seemingly
coincidentally, the Canada Revenue Agency (“CRA”) was in the process of
conducting a regulation 105 withholding audit of SEPH. The CRA auditor
alerted SEPH to the need to withhold under regulation 105 and
paragraph 153(1)(g) in respect of the McKinsey services. SEPH
therefore promptly remitted an amount of $230,910 to the CRA, being 15% of the
total of the three McKinsey invoices. On April 9, 1999 SEPH sent an
account to SEPPA seeking reimbursement of the $230,910 clearly identified as
the 15% non-resident tax on the three McKinsey invoices. Further, SEPH’s
accounting staff were instructed not to pay any intercorporate accounts to
SEPPA until after the $230,910 had been fully set off. SEPH received full cash
credit for the $230,910 from SEPPA on December 21, 1999. This is
evidenced by the cashbook sheet maintained by SEPH to record its banking
transactions that was put into evidence. No reason was given for the delay. A
copy of the T4A-NR information slip filed with the CRA is also in evidence and
it indicates that SEPH was the payor and SEPPA was the payee.
[13]
There was no evidence
whether SEPPA claimed the 15% withholding back from McKinsey or tried to.
[14]
In summary, there was
only one relevant non-resident service provider and that is McKinsey. McKinsey’s
services were arranged for by SEPPA and SEPPA arranged for payment of McKinsey’s
invoices, but McKinsey’s services were for SEPH. The services provided by SEPPA
of arranging for the McKinsey contract and arranging for payment of its
accounts were not provided in Canada and the value of those services in any
event would have been only a fraction of the fees charged by McKinsey of over C$1.5
million.
[15]
It is also clear that
there is only one set of three McKinsey invoices for the services rendered in Canada by the non-resident. The amount of those invoices was
fully borne by and paid by SEPH by virtue of it having reimbursed SEPPA for 85%
of those costs and remitted a further 15% to the CRA as regulation 105
withholding. However, this is complicated somewhat by the fact that SEPPA first
paid McKinsey invoices at 100% without any withholding and has only been reimbursed
by SEPH for 85% of that amount.
[16]
In short,
1)
McKinsey provided
services in Canada worth $1,539,402 including out‑of-pocket expenses,
2)
McKinsey has been paid
in full for its services, and
3)
the CRA has received
15% of the amount paid to McKinsey for its services.
[17]
As discussed later, it
should be noted that the CRA did not receive 15% withholding in respect of the
15% withholding remitted to it, commonly referred to as a gross-up of the
withholding obligation, to reflect the fact that McKinsey received 100% not 85%
of the amount otherwise due to it.
[18]
In the assessment in
question, the Crown seeks to collect from SEB as successor to SEPPA a further
15% in respect of SEPPA’s payment to McKinsey for the services rendered in Canada for SEPH. The paragraph 153(1)(g) and
regulation 105 withholding régime in respect of services rendered in
Canada by non-residents does permit of the possibility of cascading withholding
obligations. For example, a Canadian may contract with a non-resident for
services to be rendered in Canada and that non-resident may in turn subcontract
a portion of those services to be provided by a second non-resident. In such a
case, the Canadian is subject to regulation 105 withholding on account of
the first non-resident’s services for which it is paying and the first
non-resident may in turn be liable for regulation 105 withholding in
respect of its payments to its subcontractor non‑resident for the sub-contracted
services rendered in Canada. This can have the effect of multiplying the
withholding obligations even though the first non-resident is paying the second
non-resident out of its net payments from the Canadian. However, this will only
create a temporary problem as both non-residents are entitled to claim a full
credit for the regulation 105 withholding when they file their Part I
Canadian tax return in respect of their services rendered in Canada.
[19]
In this case however it
is inappropriate for the Crown to seek to impose multiple withholding
obligations in respect of the same payment for the same services provided by a
single service provider, McKinsey. The CRA cannot expect to receive full
regulation 105 withholding in respect of the payment for McKinsey’s
services more than once. Only McKinsey provided services in Canada. There was
no other non-resident providing any of these services. Instead of multiple
service providers where cascading withholding obligations may be required, here
we have multiple payments to non-residents in respect of McKinsey as single
non-resident service provider. The CRA has received 15% withholding from one of
the Stora Enso companies paying for McKinsey’s services; it cannot also look to
collect the regulation 105 withholding again from another Stora Enso
company in the chain of payments. SEPH was not paying SEPPA for services
rendered in Canada by SEPPA; it was paying SEPPA for the services
rendered by McKinsey. Similarly, SEPPA in paying McKinsey was paying for those
same services. This is markedly and structurally different from a non-resident
service provider subcontracting all or a portion of the services. This case is
more analogous to an employer obligated to pay its employees and to withhold
under regulation 105 in respect of the salary and wages that uses a payroll
company to make the payments to the employees and the remittances to the CRA.
When the employer places the payroll company in funds in order to make the net
payroll to the employees and to pay the CRA withholding remittances, the
employer is also arguably paying the payroll company “in respect of” the
services provided by the employees to use the language of the regulation. But
query it they are “for” the services as required by the legislation. Such
payments by the employer to the payroll company are in effect reimbursements or
advances but are not payments for other services. There is a lack of logic in
the Crown’s position that SEPPA should also be withholding and remitting a
further 15% to the CRA since SEPH has already remitted 15% in respect of the
very same services provided by McKinsey.
[20]
My conclusion that the
CRA cannot collect regulation 105 withholding more than once in respect of
the same payment to a single non-resident in respect of the same services is
consistent with the decision of this Court in Weyerhaeuser Company Limited
v. The Queen, 2007 TCC 65, 2007 DTC 392. In that case,
Bowie J. in completing his textual, contextual and purposive analysis of
paragraph 153(1)(g) and regulation 105, identified the purpose
of the withholding obligations as to ensure that, if a non-resident recipient
of a payment is, after all the facts are known (i.e. when its annual Canadian
tax returns are filed), liable to pay income tax in Canada, there will be funds
available, in the form of the 15% withheld and remitted, to satisfy the
obligation. See paragraphs 6 and 7 of the reasons in Weyerhaeuser. In
that case Bowie J. concluded that while disbursements
incurred by a non-resident service provider in providing its services may
arguably be “in respect of” those services, they are not subject to
subsection 153(1) regulation 105 withholding since they are not “for”
the services and to do so would give the CRA more than 15% of the payments of a
revenue or income nature that may be taxed ultimately in Canada.
[21]
The respondent seeks to
rely on Ogden Palladium Services (Canada) Inc. et al. v. The Queen, 2001 DTC 345. However, this is not a case
where a Canadian payor to a non-resident for its services argues that there is
no need for withholding on account of the non-resident tax because the
non-resident will not have an ultimate tax liability. For this reason the Ogden
Palladium analysis on this aspect is neither relevant nor helpful. To the extent
the Ogden Palladium analysis equated the word “for” in
paragraph 153(1)(g) with the words “in respect of” in
regulation 105, it must now be read in light of the more detailed analysis
in Weyerhaeuser with which I concur.
[22]
The evidence is that
SEPPA paid McKinsey’s invoices in full. I have no evidence before me whether
SEPPA sought to reclaim the regulation 105 withholding from McKinsey after
SEPH reclaimed it from SEPPA. In any event, subsection 153(1) is clear
that the amount remitted to the CRA by SEPH in this case is for the account of McKinsey
not for the account of SEPPA. Subsection 153(1) is clear that the payor is
to “remit that amount to the Receiver General on account of the payee’s tax for
the year”. Reading subsection 153(1), regulation 105 and
paragraph 153(1)(g) together, it would defy logic to conclude that
the payee for whose credit the remitted amount is held by the CRA is an
intermediary in the payment chain and not the non-resident service provider.
[23]
Subsection 153(1)
contemplates regulation 105 withholdings being remitted to the CRA at the
prescribed time. They are to be remitted by the 15th of the month
following the month in which payment is made. In this case, SEPH paid SEPPA in
respect of the McKinsey invoices on March 12, 1999, and the
remittance had been made to the Receiver General by April 9, 1999,
prior to the time SEPH was obligated to remit in respect of its payment to
SEPPA. Paragraph 153(1)(g) and regulation 105 do contemplate
that SEPPA should have withheld and remitted 15% on its earlier payment to McKinsey
for the services. Had SEPPA done so, SEPH could have fully reimbursed SEPPA at 100%
for the net payment to McKinsey and the withholding remittance to the CRA
without having to withhold any additional amount. Since SEPPA did not withhold,
it was at risk that, had SEPH not remitted the required withholding to the CRA,
the CRA could come after SEPPA for the missing withholding. However, having
received, accepted and retained the withholding remittance made by SEPH, the CRA
cannot also look for the same withholding in respect of the same services from
SEPPA.
[24]
The respondent is
concerned that SEPH, in completing its T4A-NR information slip, identified
SEPPA as the payee and not McKinsey. Whether or not an information slip is or
is not correctly completed will not determine tax consequences as a general
rule. From SEPH’s point of view, its payee was SEPPA. From SEPPA’s point of
view it was the payee of the amounts received from SEPH and it was also the
payor of amounts paid by it to McKinsey. SEPH is only a payor, McKinsey is only
a payee, but SEPPA is both a payor and a payee given the chain of payments. I
am not prepared to conclude that SEPH was wrong in identifying SEPPA as the
payee, however nothing turns on that in any event.
[25]
There is the residual
problem that neither SEPH nor SEPPA remitted the aggregate amount of
withholding required. McKinsey billed and was paid $1,539,402. SEPPA remitted
15% of that amount, being $230,910 to the CRA. However, because that withholding
remittance is for the account of McKinsey, it is in effect an additional
payment to McKinsey for the services which will itself be subject to
withholding. The proper calculation for the regulation 105 withholding
would be 15% of the quotient obtained when $1,539,402 is divided by 0.85, being
$271,659. The difference is $40,749. This amount has not yet been remitted by
either SEPH or SEPPA in respect of the services provided by McKinsey. Subsection 153(1)
and subsection 227(8) permits the CRA to look to SEPPA for this amount. To
the extent of this amount of $40,749, the disputed assessment of SEPPA is valid.
There is no double-counting, cascading or multiple imposition of the
withholding obligation in respect of this portion of the assessment. It is the
CRA’s due.
[26]
With respect to the 10%
penalties assessed for failing to withhold and remit the required amount, there
was no evidence of SEPPA’s due diligence in trying to avoid the non-payment of
the gross-up withholding amount of $40,749. The penalty amount as it relates to
this lesser amount of gross-up withholding has been validly assessed by the CRA
against SEPPA and is due. It appears that SEPPA either did not turn its mind at
all to any withholding when it paid McKinsey or that it chose not to withhold at
all much less on a grossed-up basis. Similarly, it does not appear either SEPH
or SEPPA ever turned their mind to the issue of grossing up the 15% withholding
amount until I raised it in argument. There was no evidence that the 15%
withholding remittance was reclaimed by SEPPA from McKinsey or that SEPPA even
sought to reclaim it from McKinsey. Obviously, had SEPPA reclaimed it from McKinsey,
the additional gross-up withholding obligation would go away.
[27]
The remaining issue in
this case relates to the fact that SEPH remitted 15% of the entire amount paid
in respect of McKinsey’s services to the CRA including the amount identified in
the McKinsey invoices as being on account of out‑of‑pocket
expenses. It is the taxpayer’s position that, in reliance on the Weyerhaeuser
decision, disbursements and out-of-pocket expenses are not subject to
regulation 105 withholding for the reasons summarized above. In this case,
if the amount identified as out-of-pocket expenses were backed out, SEPH would
have remitted more than 15% but less than the grossed-up withholding required.
In Weyerhaeuser, it appears that the disbursements and out-of-pocket
expenses were, as the name implies, reimbursements by Weyerhaeuser for actual
out-of-pocket expenses and disbursements incurred by the non-resident service
providers in the course of providing the services in question. That does not
appear to be how out‑of‑pocket expenses were dealt with by McKinsey
in this case. In its proposal letter for the services, McKinsey specifies that
“additionally, we will bill you for out‑of‑pocket expenses as they
incur which arise from travel, lodging, car rentals, telephone use, etc. While
we strive to be as conservative and responsible as possible in incurring these
expenses, it typically represents a further 10% in addition to the professional
fees”. However, it appears clear from the three McKinsey invoices that they
have simply added a surcharge described as “out‑of‑pocket expenses”
in an amount equal to exactly 10% of the agreed fee for services each month.
This appears to me to be more of a single price all-inclusive bundled contract
done in the guise of a surcharge described as out-of-pocket expenses. I have no
evidence that these amounts reflected actual out-of-pocket expenses or that McKinsey
chose to cap actual the out-of-pocket expenses incurred at 10% based upon their
proposal letter and good client relations. I am not satisfied that the Weyerhaeuser
decision excluding actual reimbursements of disbursements and out-of-pocket
expenses should extend to a situation such as this.
[28]
In conclusion, I will
be allowing the taxpayer’s appeal in part and ordering the Minister of National
Revenue to reconsider and reassess the appellant in accordance with these
reasons for $40,749, being the missing withholding gross-up amount, and
reducing the penalty accordingly. The appellant will be entitled to costs in
this appeal.
Signed at Toronto, Ontario, this 26th day of May 2009.
"Patrick Boyle"
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