Citation: 2010 TCC 543
Date: 20101213
Docket: 2008-5(IT)I
BETWEEN:
CENTRAL SPRINGS
LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2008-6(IT)I
A & e
PRECISION FABRICATING
AND MACHINE SHOP
INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR AMENDED JUDGMENT
[1]
Judgments and reasons
for judgment in favour of the taxpayers in these informal appeals were signed
on October 22, 2010. On November 1, 2010, Crown counsel
wrote to the Court and copied the appellants’ counsel indicating that it
appeared that the judgments were inconsistent with the reasons for judgment.
[2]
The Court scheduled a
hearing on November 19, 2010 to discuss whether there was an
inconsistency between the judgments and the reasons for judgment. That hearing
was adjourned sine die after hearing from both counsel, and after the
Court expressed its concern that there appeared to be an unintended
inconsistency in its judgments. The adjournment was to permit the appellants’
counsel to communicate with the appellants’ accountant to see if the appellants
were in a position to agree that, in order to be consistent with the reasons
for judgment, the judgments should have vacated the assessments in respect of
2001, dismissed the appeals in respect of 2003, and allowed in part the
taxpayers’ appeals in respect of 2002 up to the date of the corporate payroll
reorganization in 2002 referred to in the reasons for judgment. Further,
taxpayers’ counsel was to see if the taxpayers could identify to the Crown’s
satisfaction, on the evidence in the hearing or otherwise, the date on which
that corporate payroll reorganization occurred; such information would permit
the Court to amend its judgments in a specific manner without directing that
2002 be referred back to the Minister for reconsideration and reassessment in
accordance with the reasons.
[3]
Before the date fixed
for resuming the hearing, the Crown filed notices of appeal to the Federal
Court of Appeal in which it is challenging the merits of the Court’s decisions
alleging errors of fact and law, as well as challenging the inconsistency
between the judgments and the reasons for judgment.
[4]
When the hearing
resumed on December 1, 2010 as to whether the Court should be issuing
amended judgments, appellants’ counsel took the position that the Court did not
have any jurisdiction to consider amending the judgments given that the Crown
had proceeded otherwise than by way of motion and because, having signed
judgment, I was functus officio. He thought his argument that I was functus
officio was further reinforced by, but not dependent upon, the Crown having
filed notices of appeal in the Federal Court of Appeal. For these reasons,
appellants’ counsel chose not to address the substantive question of whether
the judgments were inconsistent with the reasons for judgment.
[5]
Although this is an
appeal under this Court’s informal procedure and there is no analogous rule to
the Court’s general procedure rule 168(a) or rule (172)(1)(a),
this Court has jurisdiction to amend a judgment of its own motion if the Court
is satisfied that its judgment contains an error arising from an accidental
slip or omission or is otherwise manifestly inconsistent with the Court’s
intentions expressed in the reasons for judgment. The Supreme Court of Canada
has described (i) the correction of a slip in drawing up a final judgment
and (ii) the correction of an error in its judgment that is inconsistent
with the court’s intention manifest in its reasons for judgment, as exceptions
to the concept of functus officio: Chandler v. Alberta Association of
Architects, [1989] 2 S.C.R. 848. The decision of the Federal
Court of Appeal in Bujnowski v. The Queen, 2006 FCA 32,
2006 DTC 6071, confirms that this Court can correct such slips and
errors in informal procedure appeals. There is no requirement that a party draw
an alleged error to the Court’s attention by way of motion. Nor is there a
specific time period within which the Court may act, although it certainly may
well be subject to a reasonable time period requirement which in this case I am
satisfied would be met. It is clear from the courts’ consideration of so‑called
slip rules that it is limited to unintended errors by the court and it does not
allow the court to reconsider its intended decision. The scope of the slip rule
in this Court has been discussed in Highway Customs Warehouse Ltd. v. The
Queen, 2007 TCC 715, 2008 DTC 2500.
[6]
In this case it is
manifestly clear from the reasons for judgment what was intended. It is clearly
set out in paragraph 2 of the reasons for judgment. The key background
facts are set out in paragraph 5 and paragraphs 7, 8 and 21 of the
reasons. The core findings of the decision are restated again in
paragraphs 32 and 33 up to the end of the decision.
[7]
The judgments, however,
vacated the assessments in respect of 2001, being the year before the corporate
payroll reorganization, vacated the assessments in respect of 2002 being the
year partway through which the corporate payroll reorganization occurred, and
vacated the assessments in respect of 2003 being the year following the
corporate payroll reorganization. Vacating all three years in respect of the
taxpayers is clearly inconsistent with the reasons. I only faulted the Canada
Revenue Agency for assessing the taxpayers in respect of the periods which were
prior to the corporate payroll reorganization which occurred partway through
2002.
[8]
Being satisfied that I
erred in signing such judgments and being satisfied that it was manifestly and
demonstrably inconsistent with the reasons for judgment, the further question arises
whether the Court is precluded from or should refrain from correcting its error
because the Crown filed notices of appeal to the Federal Court of Appeal. In my
opinion, there is no compelling reason for me not to remedy my error given its
nature. It would be a waste of the Federal Court of Appeal’s time as well as
the time and costs of the parties to force that Court, in addition to considering
the Crown’s position that I erred in fact and law on the merits in reaching the
decision I did, to go on to consider whether, even if I was correct on the
merits, I slipped up in signing the judgments. I cannot conclude that I should compound
my error by introducing such inefficiency into the judicial process. It would
bring the administration of justice into question in the minds of the Canadian
tax‑paying public if I were to decide otherwise.
[9]
For these reasons, I am
issuing amended judgments in respect of each of the years under appeal and in
respect of each of the appellants ordering that the Minister reconsider and
reassess the taxpayers in accordance with the reasons for judgment.
[10]
Let me conclude by
sincerely apologizing to the parties and their counsel for any difficulties
that my unintended and inadvertent error introduced. I assure them it was
well‑intended as I was trying to end as quickly as possible what I
wrongly thought were the unnecessary continued dealings between the parties
given the already lengthy history to their disputes.
Signed at Ottawa, Canada,
this 13th day of December 2010.
"Patrick Boyle"
Citation: 2010 TCC 543
Date: 20101022
Docket: 2008-5(IT)I
BETWEEN:
CENTRAL SPRINGS
LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2008-6(IT)I
A & e
PRECISION FABRICATING
AND MACHINE SHOP
INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
I. Introduction
[1]
These informal
procedure appeals were heard together over two days in St. John’s in June.
Written submissions were filed by both the appellants and the respondent
thereafter. The issues involve the right of the Canada Revenue Agency (“CRA”)
to determine, redetermine or recharacterize whether or not the corporate
employer, being the entity that paid the employees and reported to the CRA as
employer, is the employer for purposes of the withholding and remittance
provisions of the Income tax Act (the “Act”) and whether the CRA
can redetermine or recharacterize the employer as another corporation in a
related corporate group because an employee works some or much of the time for
the related corporations. While it is common to refer to employers’ withholding
obligations, more accurately paragraph 153(1)(a) of the Act
imposes such withholding obligations upon the person paying the salary, wages
or other remuneration.
[2]
As described below, I
find that the CRA has no such right to redetermine or recharacterize a legal
employment relationship, absent a sham or the possible application of the
general anti-avoidance rule (“GAAR”) set out in section 245 of the Act,
neither of which was pleaded or argued. Further, the respondent has been
unable to show that a different company was either the de facto or de
jure employer or was the person actually paying the employees their salary
or wages. The respondent has not adequately put forward a legal basis under the
Act to permit recharacterization nor is there evidence to support an
argument, much less a conclusion, that the chosen employer was a sham or
otherwise not the employer at law or was not the person paying its employees.
[3]
These issues have their
genesis in this file with CRA Collections and I can only say that it appears to
be a case of Collections’ actions gone awry. It appears that, in order to have
existing employee withholding liabilities attach to more solvent companies in
the corporate group, the CRA collections and payroll audit officers set off on
some unsuccessful, unauthorized and inappropriate retroactive collection
planning.
II. Background
[4]
Humby Enterprises
Limited (“Humby Enterprises”) is a Newfoundland company that was primarily
engaged in the wood harvesting business. Its sole shareholder and director was
Mr. Eli Humby, its owner‑manager and President throughout the
relevant period. Until about 1995 all of the business activities were done
within Humby Enterprises. In 1995 or 1996 a related corporation, Central
Springs Limited (“Central Springs”), was incorporated. In 1998 or 1999 another
related corporation, A & E Precision Fabricating and Machine Shop
Inc. (“A & E”), was incorporated. Central Springs and A & E
were set up on the recommendation of Humby Enterprises’ outside chartered
accountant because Humby Enterprises had started to carry on related precision
mechanics and metal manufacturing businesses to maximize revenues from its
available workforce. Humby Enterprises’ employees included mechanics and
welders to service large machinery and equipment used in its wood harvesting
business.
[5]
These related
businesses were transferred over to A & E and Central Springs
when they were incorporated. All of the employees continued to be employees of
Humby Enterprises as before the transfer of the related businesses. Appropriate
chargebacks were made by Humby Enterprises to A & E and Central
Springs to correctly match revenues and expenses for each corporation as
required by the Act. There is no suggestion that all three businesses
were not solvent going‑concerns at the time these arrangements were put
in place.
[6]
Some years later Humby
Enterprises lost a major portion of its wood supply contracts which meant it
began facing significant financial uncertainty. A & E and Central
Springs were not as significantly adversely affected financially. Apparently,
Humby Enterprises’ loss of its wood supply was something of a cause célèbre in
Newfoundland and the then acting Premier of the Province assured Humby Enterprises
it should not close or lay off its employees as new wood supply contracts would
be forthcoming from the Crown. I understand that things did not turn out as
hoped or planned.
III. The Corporate Payroll Reorganization
[7]
Part way through 2002,
A & E and Central Springs became the employers of those workers
who were needed for their businesses. By this time Humby Enterprises was in
considerable financial difficulty and had fallen into arrears with its employer
remittance obligations as a result. A & E and Central Springs
began paying these employees and doing the withholding, reporting and remitting
to the CRA. The Humby Enterprises’ employees who did not also work in the
business of A & E and Central Springs remained as employees of
Humby Enterprises. We are talking about a small number of employees in the
overall corporate group. The heavy equipment and the shop tools remained in
Humby Enterprises. Following the transfer of these employees,
A & E and Central Springs made chargebacks to Humby Enterprises
for Humby Enterprises’ work done by these employees in order to ensure each
company’s income continued to be properly reported.
[8]
The 2002 reorganization
of the Humby related group’s employees appears to have been to the financial
benefit of the CRA as the solvent companies became the employers of several
former Humby employees. However, as described below, the CRA determined that
A & E and Central Springs should have been regarded as the
employers of these transferred employees even before the 2002 corporate payroll
reorganization. The effect of this position by CRA was to further improve the
CRA’s position as the CRA then looked to A & E and Central Spring
for Humby Enterprises’ past arrears of withholding remittances.
[9]
There is no dispute
that the payroll and accounting records, payslips, pay cheques, bank statements
and regulatory reporting reflected the above, i.e. that Humby Enterprises was
the employer of these employees up until part way through 2002 and thereafter
A & E or Central Springs was the employer of the transferred
employees. This came out clearly in the testimony of the two CRA payroll
auditors/trust examiners.
[10]
As a result, the CRA’s
assessments can only be upheld if:
(i)
the pre-2003
arrangements were a sham, ineffective or did not reflect the legal
relationships, or
(ii)
the Act gives
CRA the power to recharacterize the employment relationship to enhance its
collection rights, or
(iii)
the appellants, though
not the employer, were the persons paying the salaries, wages and remuneration
to the employees of Humby Enterprises.
IV. The CRA Payroll Audit
[11]
In the course of its
dealings with the Humby Enterprises’ arrears, the Collections Division of the
CRA requested that a payroll audit of Humby Enterprises, A & E
and Central Springs for the period 2001 to 2003 be completed.
[12]
This was requested by
Gary Peddle, the collections officer dealing with Humby Enterprises,
because “[a] review of the earnings of all 3 companies clearly shows that Humby
Enterprises Limited did not generate sufficient revenue to pay the employee
gross earnings. It is believed that [employees] who work for the associated
companies are being reported on the Source Deductions account for Humby
Enterprises Limited.” Mr. Peddle was not called to testify and this reason
is set out in the CRA reports in evidence. Mr. Peddle had also entered
notes on the CRA’s electronic taxpayer file, which were accessed by the trust
examiners but these were not in evidence. One of the CRA trust examiners
described Mr. Peddle’s involvement as “Mr. Peddle noted that
employees that were on Humby Enterprises should have been on Central Springs or
A & E”. There was no other evidence to indicate the basis for
Mr. Peddle’s belief or knowledge.
[13]
Payroll audits are now
called Trust Account Examinations and the auditors involved are now called
Trust Account Examiners. Examiners now attend at “visits” at employers’ places
of business. Examiners do not have any professional qualifications or
educational requirements and their training within the CRA consists of a two‑week
training period in which they are familiarized with operational policies and
work with experienced examiners.
[14]
In this case it was
decided that two examiners should conduct the review because, according to
notes on the CRA’s electronic files from someone, Mr. Humby could be
expected to be a difficult “client”.
[15]
The senior examiner was
Ed Madden. He has been with the CRA for over 30 years. He started
working in Trust Account Examination in 2000. From 1997 to 2000 he was a
collection officer within the CRA. Apparently, while he was a collection
officer he also did trust account examinations. The other Trust Account
Examiner was Andrew McKillop. Both Mr. Madden and Mr. McKillop
attended from St. John’s one day at the shared business premises of Humby
Enterprises, A & E and Central Springs in Gander to complete
their examination. Mr. McKillop wrote up the Trust Account Examination
Results report that is in evidence.
[16]
It is not clear if the
examiners showed up unannounced or if a scheduled appointment was made for the trust
examination visit. According to the examiners their review was scheduled though
they could not remember by whom, nor with whom they spoke, nor was any written
evidence produced of such prior contact though, if it were relevant, it might
be expected to be recorded in the CRA’s files somewhere. The office manager or
clerk, Mr. Humby’s sister‑in‑law, does not remember the meeting
being scheduled and, as discussed below, does not remember any details of the
meeting.
[17]
Upon arriving for their
visit they met with Winnie Humby, Mr. Eli Humby’s sister‑in‑law.
The trust examiners in their evidence and in their report described her as the
office manager for the companies. She described herself as the office clerk,
responsible for general office duties of the companies such as answering the
phones, attending to the mail and filing. She was responsible for payroll
although she did not describe what the extent of her involvement was.
[18]
According to the trust
examiners, Winnie Humby assembled some of the documentation they had asked
to see. There is no written record of what this was nor what they thought of
those documents. The examiners do not recall clearly what the documents were
beyond that (i) they were not given any employment agreements and they did
not ask for any, (ii) they reviewed the payroll records, and
(iii) they did some payroll cheque samplings. The document review did not
cause them to think the employers had not been properly identified. They then
met with Winnie Humby for about a half‑hour to an hour or so during
part of which she gave them verbal job descriptions for all of the employees
describing what they did and for which companies. The officers have no specific
recollection of what they were told by Winnie Humby. Their notes consist
of half dozen names with single word job descriptions beside them such as
welder or mechanic. There is no record of which company’s or companies’ work
demands occupied how much of the employees’ time. All that the two examiners
could recall is that, based upon the oral description of the job duties from
Winnie Humby, they were satisfied that the employees working for
A & E and Central Springs since the 2002 corporate payroll
reorganization should have been employees of these two corporations and not
Humby Enterprises going back to at least 2001. There was no reason for them
selecting 2001, that was simply the start date of their review period.
[19]
After this, the two
trust examiners met with Mr. Humby for the first time. They knew he had
not been on the premises earlier that day when they arrived and when their
meeting with Winnie Humby occurred. At this meeting, which lasted
20 minutes to a half‑hour, they presented to him their findings that
the transferred employees would be treated by them as having been employees of
A & E and Central Springs from the beginning of their review period in 2001
and not only from the 2002 date at which their employments had been
transferred. Mr. Humby apparently, and understandably, did not take this
well, disputed the CRA’s ability to tell him who his companies could employ,
and promptly ended the meeting. Somewhat surprisingly, both examiners in their
testimony relied on the fact that Mr. Humby had only disputed their
authority to do what they did, but did not go on to dispute their findings, as
support for their findings as having been correct.
[20]
In their report, the
examiners wrote that they relied on four factors in making their determination
that A & E and Central Springs had been the employer of the
transferred employees throughout. Firstly, they wrote it was based upon their
observation of the employees in the workplace. However, they both acknowledged
in evidence that they did not in fact make any employee observations and did
not know which of the companies even operated at the Gander premises. Secondly
in their report, they say it was based upon their review of the records.
However they acknowledged in their testimony that none of these records
suggested Humby Enterprises was not the employer up until the 2002 corporate
payroll reorganization. Thirdly, their reports say that it was based upon their
“review” of job descriptions. However, in evidence they acknowledged they did
not see written job descriptions and do not specifically recall if they even
asked for them. In testimony this was said to be a reference to the verbal job
duty outlines they received from Winnie Humby. The problem with that
explanation for their third factor is that the information they received from
their “interview” with Winnie Humby is their fourth enumerated factor upon
which they based their decision. As mentioned above, they took virtually no
notes of that meeting and have virtually no recollection of what it is they say
they were told by her. Nonetheless, their testimony was that in reality the
information from the interview with Winnie Humby was the sole basis upon
which they decided to treat A & E and Central Springs as the
employers of the transferred employees throughout the review period.
[21]
As to whether they
uncovered any evidence that A & E and Central Springs had in fact
been paying the salaries, wages or remuneration of Humby Enterprises’ employees
going back to 2001, the strongest evidence heard was that Mr. Madden
thought he saw some payments from A & E and Central Springs to
Humby Enterprises that could have been the source of the money used to pay
their wages. However, he did not consider whether these might have merely been
payment of the chargebacks described above. This is not persuasive evidence
that A & E or Central Springs was paying the employees. While
there is a stronger statement in a summary prepared by the examiners in 2007,
their testimony and contemporaneous documents do not support their statement in
their 2007 interoffice memorandum upon which I am not prepared to place much
weight.
[22]
The trust account
examination did turn up an unrelated problem with so‑called “casual
wages” paid to employees of all three companies by cheque without reporting or
withholding. This turned up from the review of the financial records and the
companies promptly divulged all of the information to the examiners. These
amounts involved were modest and I understand related to certain types of
overtime or extraordinary work.
[23]
Mr. Madden
reported the results of his trust examination to Mr. Peddle in
Collections.
[24]
The amounts assessed to
A & E and Central Springs in respect of income tax, employment
insurance and Canada Pension Plan withholdings and penalties aggregate
more than $80,000, not including post‑assessment interest since 2003.
V. The Witnesses
[25]
I have set out my
findings of fact as set out above having heard from a number of witnesses.
[26]
The two CRA trust
examiners testified. I found Mr. McKillop to be both forthright and
forthcoming in all of his answers. Mr. Madden was more inclined to try to
defend to the Court his decisions and assure the Court he was certain about his
conclusions. He was less comfortable responding to the more difficult factual
questions. I am concerned by his clear lack of candour at the opening of his testimony
when asked with whom he had discussed the matter in preparation for the
hearing. I accept Mr. McKillop’s version as truthful.
[27]
The companies’ outside
accountant Donald Farrell testified in a forthright and forthcoming
manner. He had acted for the companies for years and was involved in both the
corporate reorganization and the payroll reorganization. He knew each company’s
history very well, as one might expect of a long‑standing accountant of
an owner‑managed business. He had reviewed the chargebacks and the
cheques in payment of the chargebacks in the course of his annual professional
services.
[28]
Winnie Humby
testified under subpoena by the respondent. As stated, she had little if any
recollection of the details of her meeting with the trust examiners.
I accept that this is largely consistent with her role in the business. I
see no reason to expect her to remember details of a meeting that the two CRA
officials cannot remember in any details.
[29]
I do not draw any
adverse inference from Mr. Humby not testifying; he was in Court
throughout and available for either side to call.
[30]
The respondent had
successfully moved for an order to have a former employee of one or more of the
companies testify by videoconference from outside the province. In the end
neither party called that witness or any other former employee.
[31]
I am also not prepared
to draw any adverse inference from the fact that all possible corroborating
documentation (such as pay stubs and pay cheques and information reported to
the CRA) was not presented to the Court by the taxpayer since the respondent
could not and did not suggest that such would not be consistent with Humby
Enterprises having been the employer prior to the 2002 corporate payroll
reorganization and A & E or Central Springs being the employer of
the transferred employees thereafter. Also the T4 and remittance reporting of
the corporate group was available to the CRA to enter into evidence if it
thought otherwise.
VI. Analysis and Conclusions
[32]
I find that the
employment relationships were as reported by the three companies and that the
appellants were not the employers of Humby Enterprises’ employees. There was
virtually no evidence put forward to suggest otherwise.
[33]
I find that the
appellants were not responsible for paying, and did not pay, the salaries,
wages or remuneration of Humby Enterprises’ employees. The respondent’s
hypothesis is a far cry from the relationships, facts and evidence in such
cases as The Queen v. Coopers & Lybrand Limited,
80 DTC 6281 (FCA), Mollenhauer Limited v. The Queen, 92 DTC
6398 (FCTD) and the cases referred to therein.
[34]
The courts have, on a
number of occasions, reminded the CRA that it does not have the authority to
second‑guess business decisions legally implemented. See, for example, Gabco
Ltd. v. M.N.R., 68 DTC 5210 (Ex. Ct.), and Jolly Farmer Products Inc. v.
The Queen, 2008 TCC 409, 2008 DTC 4396 (TCC).
[35]
The Act does not
otherwise give the respondent any legislative authority to recharacterize the
legal employment relationships in a case such as this.
[36]
There was scant
evidence to support the recharacterization and the assessed withholding and
penalty amounts. The result of the trust examination was certainly very
favourable to the CRA with respect to being able to collect the remittances for
which Humby Enterprises had fallen into arrears. Upon the CRA’s
recharacterization, the remittance arrears of the financially troubled Humby
Enterprises became the legal liability of A & E and Central
Springs and collectable from them. I do not have to decide if that outcome and
result were the true reason for the trust examination. However, clearly
Mr. Humby, his companies and his advisors are not unreasonable for
thinking that the trust examiners found what they set out to find given:
(i)
Collections had
requested the audit;
(ii)
Collections’ notes
informed the examiners in preparation for the exam;
(iii)
Collections recorded
view was that Central Springs and A & E had been paying the
employees’ salaries;
(iv)
Mr. Madden had
been in Collections for a long period until shortly before the trust
examination;
(v)
Mr. Madden had
done trust examinations when he was in Collections;
(vi)
the incorrect reasons
recorded in the Trust Account Examination Results;
(vii)
that the assessments
were based solely upon short discussions with an office manager or clerk;
(viii)
Mr. Madden’s lack
of candour about whom he discussed the file with in preparation for the trial;
(ix)
that the reasons given
for the confirmation of the assessment by Appeals, being paragraph 18(1)(a)
concerns regarding the income of Humby Enterprises, are not relevant to the
taxpayers’ objections, do not make sense and are inconsistent with the
evidence; and
(x)
the paucity of the
evidence presented to the Court.
[37]
The fact that the CRA
may consider Mr. Humby and Humby Enterprises to be unsavoury characters
and difficult clients does not allow it to issue such assessments.
[38]
The respondent’s case
was baseless, with no grounding either in law or in evidence put forward. These
appeals are allowed and the assessments are vacated. As requested, the parties
have 30 days in which to file written submissions on costs.
Signed at Ottawa, Canada,
this 22nd day of October 2010.
"Patrick Boyle"
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