Manke v. The Queen, 98 DTC 1969, [1999] 1 CTC 2186 (TCC)

McArthur T.C.J.:

The Appellant, Ron Manke, appeals from assessments under the Income Tax Act (the “Act”) in respect of the 1990, 1991, 1992 and 1993 taxation years.

The basic facts in this appeal are as follows. The Appellant was an employee of Corporate Computers Inc., a corporation carrying on business in Edmonton, Alberta. He was a commissioned salesman selling computer hardware and software, and also had a side “business” as a computer consultant in the 1990, 1991 and 1992 taxation years.

In assessing the Appellant, the Minister of National Revenue (the “Minister”) disallowed a portion of the expenses claimed by the Appellant in the 1990 and 1991 taxation years on the basis that the Appellant was an employee of Corporate Computers Inc. and not an independent contractor. Therefore, only amounts claimed in respect of employment expenses were deductible, and any expenses, in excess of those amounts allowed, were not reasonable in the circumstances. These issues have been settled and will be included in the Court’s Order.

The Minister also disallowed credits claimed by the Appellant in respect of source deductions allegedly withheld from his wages in the 1992 and 1993 taxation years but not remitted to the Crown. The Minister’s position is that the Appellant became an independent contractor with his employer during the relevant time, and is therefore not entitled to credits in respect of source deductions. In the alternative, the Minister submits that the Appellant was paid a gross salary and no amounts were withheld from his wages. The Appellant submits that he received $3,500.00 in wages per month which was net of his gross wage of $5,000.00 per month. The T4 slips issued to the Appellant in respect of those years did not indicate that source deductions in the amount claimed by the Appellant were withheld, however, the Appellant submits that the slips understate the amount of tax actually deducted and withheld at source. The Minister disputes these submissions.

Issues, with regard to the 1990 and 1991 taxation years, have been withdrawn from the appeal. The Respondent filed a document entitled “Settlement of Issue” in which the parties have reached a settlement with respect to issues arising in respect of the 1990 taxation year. The Appellant also acknowledged by way of an “Acknowledgement of Settlement” that the 1991 taxation year was not properly before the Court as required by the Act. The issues which remain to be determined are as follows:

• Does the Tax Court have the jurisdiction to grant the Appellant the relief requested?

• Is the Appellant entitled to tax credits in the amount of $6,000.00 for each of the 1992 and 1993 taxation years ?

In reassessing the Appellant, the Minister relied upon the following assumptions of fact:

• the Appellant was, at all material times, employed by Corporate Computers Inc. (the “Employer”);

• during all material times, the Appellant worked as a commissioned salesman for the Employer;

• in addition to being a commissioned salesman for the Employer, during the period of September 1992 through to and including April 1993, the Appellant was an employee, a minority shareholder, and president of DiscMore Productions Inc. (the “Corporation”);

• all of the Appellant’s pay cheques, for his work with both the Employer and the Corporation, came from the Employer;

¢ the Appellant claimed that he was to receive $5,000.00 per month for his work with the Corporation; however, during the period of September 1992 through to and including April 1993, his pay cheques for this work showed that the Appellant was earning a sum in the amount of $3,500.00 per month;

° the Appellant has not provided the Minister with adequate documentation to show that he was to receive gross pay in the amount of $5,000.00 per month for his work with the Corporation for the period of September 1992 through to and including April 1993;

• the Appellant’s 1992 T4 slip, issued from the Employer, shows “employment income” in the amount of $52,000.27 and “income tax deducted” in the amount of $14,221.25;

• in his 1992 Tl General income tax return, the Appellant reported, on line 437, that the “total income tax deducted (from all information slips)” was a sum in the amount of $20,221.25, calculated by adding $6,000.00 to the amount of $14,221.25, referred to in the previous paragraph;

• the Appellant’s 1993 T4-RSP slip, issued from the Hong Kong Bank of Canada, shows “income tax deducted” in the amount of $67.57:

• in his 1993 Tl General income tax return, the Appellant reported, on line 437, that the “total income tax deducted (from all information slips)” was a sum in the amount of $6,067.57, calculated by adding $6,000.00 to the amount of $67.57, referred to in the previous paragraph;

• as a result of the Appellant’s Notices of Objection a payroll audit was completed on January 23, 1996 on the Employer to determine the correct T4 slips;

• as a result of the payroll audit, the Appellant was ruled to be an employee, as opposed to an independent contractor, of the Employer with respect to the Appellant’s work with the Corporation, although the Employer’s records indicated that the Appellant was a “Consultant” with the Corporation during the period of September 1992 through to and including April 1993;

¢ the Employer’s records did not indicate that the Employer withheld additional income tax in the amount of $6,000.00, as the Appellant claims; and

¢ other than the amount of $14,221.25 for the Appellant’s 1992 taxation year, and the amount of $67.57 for the Appellant’s 1993 taxation year, no amounts were deducted or withheld at source and remitted to the Receiver General by the Employer on account of income tax for the Appellant.

Analysis (L16/R4930/T0/BT0) test_marked_paragraph_end (1162) 1.037 0365_4485_4651

The position of the Respondent with respect to the jurisdictional issue is that even if the Appellant can substantiate his claims, the Court does not have the jurisdiction to direct the Minister to grant the Appellant a credit.

There are two lines of authority on this point. The first line of cases takes the position that where a taxpayer alleges that source deductions were withheld from his wages but were not remitted by the employer to the Crown, that this is a collections issue over which the Tax Court has no jurisdiction. It is not an appeal of an assessment of tax under the Act because the taxpayer is seeking declaratory relief rather than a vacation or variance of an assessment. Therefore, the taxpayer is liable for the payment of taxes owing irrespective of whether his or her employer has withheld source deductions and not remitted these amounts to the Crown.

In Brooks v. R. (1994), [1995] 1 C.T.C. 2880 (T.C.C.), Sobier, J.T.C.C. held that this Court does not have jurisdiction to order that a taxpayer is not liable for an amount of tax in the situation where tax has been withheld at source but not remitted to the Crown. He said at 2883:

l am quite sure that Mr. Brooks has a legitimate claim either against Revenue Canada for refusing to acknowledge that amounts have been withheld or against his former employer for either failing to remit or having withheld, not remitted. However, this is not a matter which the Tax Court of Canada may determine. This would be an action against the Crown which could be brought in the Federal Court-Trial Division or an action which could brought [sic] in the Superior Court in the Province of Ontario for accounting or other matters.

In my opinion the facts in this case and others cited by the Respondent[1] are significantly different from those in the case at bar, and are therefore unpersuasive.

The second line of cases[2] concerning this issue come to the conclusion that where a taxpayer has had source deductions withheld by his employer, but is assessed tax on the basis that such deductions were never remitted to the Crown, the taxpayer has properly initiated an appeal under the Act such that the Court is entitled to hear the matter and grant relief.

In Ashby v. R. (1995), [1996] 1 C.T.C. 2464 (T.C.C.), the taxpayer reported income and deductions for the 1990 taxation year, however, the Minister assessed the taxpayer on the basis that source deductions had not been made or remitted by the taxpayer’s employer. Therefore, the Minister disallowed the deductions claimed in respect of CPP contributions, unemployment insurance premiums and income tax paid. Sarchuk, J.T.C.C. held that source deductions were withheld from the taxpayer’s wages, and the fact that this income was not remitted by his employer did not alter the validity of the deductions claimed by the taxpayer. Judge Sarchuk said the following at page 2468:

This Court has original jurisdiction to hear and determine appeals in matters arising under the Act (and other statutes). I am satisfied that the matter before me is an appeal from an assessment of tax within the meaning of the provisions of subsection 171(1) of the Act. I am not inclined to follow the decision in Brooks, supra, tor two reasons. First, the prayer for relief in Brook’s Notice of Appeal discloses that he was seeking a declaratory order from this Court. Clearly such relief is not contemplated by subsection 171(1) of the Act. Second, and this point was not argued in Brooks, section 118.7 of the Act provides that for the purpose of computing the tax payable under Part I of the Act by an individual for a taxation year there may be deducted an amount in respect of an employee’s premium for the year under the Unemployment Insurance Act, 1971 and the employee’s contribution under the Canada Pension Plan. These are statutory deductions permitted to a taxpayer which this appellant says were made but have been denied to him. There is no basis upon which the respondent can reasonably argue that this Court is not entitled to determine the question whether these deductions had in fact been made and if so, to direct the Minister to reassess accordingly. A taxpayer is entitled to the benefit of each statutory exemp- tion and deduction in the Act applicable to him. I see no difference between a taxpayer’s entitlement to deduct the premiums and contributions pursuant to section 118.7 of the Act and a taxpayer’s entitlement to deduct appropriate expenses pursuant to section 18 of the Act. Disallowance of a deduction by the Minister founded on an incorrect assumption of facts is a reversible error. Furthermore, while it might be argued that income tax deducted at source is treated differently in the Act than UI premiums and CPP contributions, it seems to me inappropriate, if I were to find that First Choice made the required deductions from the appellant’s wages, to grant relief in respect of CPP and UI and to deny relief with respect to a deduction of tax at source. In my view the calculation of income tax payable is an integral part of an assessment by the Minister. If the Minister’s calculation is wrong the appellant is entitled to relief. To reject his appeal on the basis of “lack of jurisdiction” is these circumstances is not warranted.

The matter before the Court is not a “collections matter” which is outside the scope of its jurisdiction.

The Court’s jurisdiction begins once a taxpayer has appealed an assessment of tax pursuant to section 169 of the Act. The Tax Court can only grant the relief provided in subsection 171(1) of the Act, that is, it can dismiss an appeal from an assessment of tax or it can allow the appeal by vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment. It is well-established that the Tax Court cannot grant declaratory relief. The Tax Court’s jurisdiction is limited to what is expressly conferred on it by Parliament and what is necessarily implied from what is expressly conferred: Lamash Estate v. Minister of National Revenue, [1990] 2 C.T.C. 2534, 91 D.T.C. 9 (T.C.C.) per Christie A.C.J.T.C.C.

The jurisdictional issue raised by the Respondent raises two questions to be determined by the Court. The first is whether the Appellant has appealed an assessment of tax. If he has, then the appeal is properly before the Court and no question arises as to the jurisdiction of this Court to hear the appeal. There is no doubt that the Appellant has followed the proper procedure under the Act in appealing assessments of tax to this Court. The second question is whether the Appellant is seeking declaratory relief from this Court, or whether he is seeking to have an assessment vacated, varied, or sent back for reconsideration. If it is the former, then it is clear that the Court does not have the statutory power to grant the Appellant the relief he has requested.

In Aallcann Wood Suppliers v. R. (1994), 94 D.T.C. 1475 (T.C.C.), Bowman, J.T.C.C. said the following at page 1476:

In challenging the assessment for a year in which tax is payable on the basis that the Minister has incorrectly ascertained the amount of a loss for a prior or subsequent year that is available for deduction under section 111 in the computation of the taxpayer’s taxable income for the year under appeal, the taxpayer is requesting the Court to do precisely what the appeal procedures of the Income Tax Act contemplate: to determine the correctness of an assessment of tax by reviewing the correctness of one or more of the constituent elements thereof, in this case the size of a loss available from another year.

The same logic should not apply here. The ultimate question before the Court is whether the Minister’s assessment of tax is correct. One of the constituent elements of the assessment is the amount of credits to which the taxpayer is entitled. The Appellant has appealed the assessment of tax to this Court on the basis that the Minister has not properly taken into account the credits to which he was entitled. The Court is entitled to make a determination on this point so as to determine whether the Minister’s assessment of tax was correct. The Court is not making a declaratory order that the Minister shall grant the Appellant a tax credit, but rather the Court is referring the matter back to the Respondent to reassess the Appellant in accordance with the reasons, as is provided for under section 169 of the Act.

It is a question of fact whether the Appellant’s employer withheld source deductions from the Appellant’s wages. Assuming for the moment that source deductions were withheld from the Appellant’s wages but not remitted to the Crown, the question becomes whether the Appellant becomes entitled to a credit in respect of those source deductions at the time they were withheld or only at such time as those amounts were remitted to the Crown. If a taxpayer is not entitled to a credit for source deductions withheld until they are actually received by the Minister, then the Appellant cannot succeed in the appeal.

The Appellant becomes entitled to the credits when the source deductions are withheld. I say this for two reasons. First, while the Minister may not have actually received the tax withheld he was certainly in constructive receipt of the source deductions as soon as they were withheld at source. Under section 153, an employer is required to withhold prescribed amounts and remit that amount to the Receiver General in respect of the employee’s tax payable for the year, and, as noted by Sarchuk, J.T.C.C. in Ashby (supra), the employer is the agent of the Crown for the purposes of remittance. Second, in my view it would cause undue hardship on taxpayers to demand that they ensure that source deductions withheld by their employer are remitted to the Crown before entitlement to a credit in respect thereof exists. Where, as is the case here, the Minister has assumed that no employee-employer relationship exists, it is open to the Minister to assess the taxpayer on the basis that no source deductions were made. However, there are cases where it is clear to the Minister that an employee-employer relationship did exist and that the employer has withheld source deductions from the employee’s wages but has not remitted this amount. In this instance, the Minister cannot expect the taxpayer to ensure remittance. The Minister is in a much better position than the taxpayer to enforce the remittance of the source deductions. Under subsections 227(9.4) and 227 (10.1), an employer who has failed to remit withheld amounts as required by the Act is liable to pay that amount to the Crown, and may be assessed that amount by the Minister. Therefore, the Act specifically provides a mechanism by which the Minister can recover against its agent should the agent fail to remit.[3]

In conclusion, the Appellant is entitled to claim a credit in respect of deductions withheld at source, if in fact such amounts were withheld.

Were deductions withheld at source ?

The Respondent submits that the Appellant was an employee of Corporate Computers Inc. only until October 1993, after which time the Appellant became an independent contractor with a subsidiary corporation of his employer known as DiscMore Productions Inc. Therefore, the Appellant is not entitled to any credits in respect of source deductions from employment income. In the alternative, the Respondent argues that the Appellant, if found to be an employee, was paid a gross wage of $3,500.00 per month, and no source deductions were withheld from his income. Both questions are questions of fact.

The Respondent relies upon a decision of the Tax Review Board in Jacob v. Minister of National Revenue (1980), 80 D.T.C. 1878 (T.R.B.), to stand for the proposition that only where there is conclusive proof of source deductions is a taxpayer entitled to claim credits in respect thereof.[4] The Respondent submits that there is no conclusive proof in this case. As noted by Sarchuk, J.T.C.C. in Ashby (supra), the Jacob case is an unduly restrictive interpretation of the Coopers & Lybrand (supra) decision. There is no rule of evidence binding this Court to the effect that there must be T4 slips showing that source deductions were withheld. The only “rule”, as noted by Sobier, J.T.C.C. in À. v. Ursel Constructors Ltd. (1995), 96 D.T.C. 1496 (T.C.C.), is that there must be an “act of withholding” to demonstrate that source deductions were withheld although not remitted to the Crown. In determining whether there was an act of withholding in a given case, the Court must take into account all of the evidence before it, including viva voce evidence[5] , before making this finding of fact.

Were source deductions withheld from the Appellants wages?

I find that the Appellant was in an employer-employee relationship with DiscMore Productions Inc., and was in receipt of net salary rather than gross salary from his employer. It does not appear that the employer ever made an actual physical withholding of source deductions[6] , however, all that the law requires is a failure to pay full wages on account of the withholding of source deductions, and not the actual placing of the money into someone’s pockets.

The following evidence has led me to this conclusion.

The testimony of Neil Nichols - Mr. Nichols testified that he was present at a meeting of all the people involved in DiscMore Productions Inc., and that in his hand-written notes he had jotted down that the Appellant was to receive a gross salary of $5,000.00 per month, or $60,000.00 per annum. He also said that the only discussion regarding salary was that Ron Manke would be the only employee of the corporation. The figure was agreed upon at some earlier date, and the gross salary of $5,000.00 per month was con-

whether or not such deductions were properly remitted to the collector by the employer.

firmed at that meeting by the Appellant and by Graham Fletcher. He was credible, and I accept his evidence.

Tape recorded conversation - The Appellant taped a conversation he had with Graham Fletcher. In that conversation Mr. Fletcher said the following:

You re actually being taxed on, you would actually be taxed on the amount of money that you, that you made, not, not the gross amount but the net amount.

Mr. Fletcher said in examination, that all he meant by that statement is that if the Appellant was paid $3,500.00 per month, then that was the amount upon which he would be taxed. Mr. Fletcher had some experience dealing with employees, and knew the difference between “gross” and “net” and I do not accept this explanation.

In that same conversation, the Appellant repeatedly mentioned that his salary was $5,000.00 per month. Mr. Fletcher said on a few occasions that the Appellant was only in receipt of $3,500.00 per month, but never said that the Appellant’s gross salary was not $5,000.00 per month. Surely had the Appellant made up this figure of $5,000.00 per month, Mr. Fletcher would have reacted in some way.

The Appellant's previous income - Mr. Fletcher gave evidence at trial that he had no recollection about a discussion with the Appellant regarding compensation. However, in the examination for discovery, Graham Fletcher remembered a conversation with the Appellant wherein the Appellant allegedly said that he needed $3,500.00 per month to live on. Mr. Fletcher also testified at trial that the Appellant was making a very good income with Corporate Computers Inc., so it strikes me that in any salary negotiation a person would be unlikely to accept so much less money than they were previously earning. This supports the Appellant’s position that in their conversation he had said that he needed $60,000.00 to meet his expenses.

The appeal is allowed with costs fixed at $500.00.

Appeal allowed.