Fédération des Caisses Populaires Desjardins de Montréal v. Canada, 2002 DTC 7413, 2001 FCA 27

                                                                                                                                            Date: 20010223

                                                                                                                                        Docket: A-739-99

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

NOËL J.A.

BETWEEN:

                          FÉDÉRATION DES CAISSES POPULAIRES DESJARDINS

                                      DE MONTRÉAL ET DE L'OUEST DU QUÉBEC

                                                                                                                                                       Appellant

                                                                              - and -

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                        JUDGMENT

The appeal is allowed with costs in this Court and in the Tax Court of Canada and the decision by the Tax Court of Canada is set aside. In accordance with s. 170(1)(a) of the Income Tax Act, the appeal is allowed against the assessments by the Minister of National Revenue and the assessments are referred back to the latter for reassessments to be made allowing the appellant a deduction of $752,640 for its employer contributions in its 1992 taxation year and adjusting its investment tax credit for its 1989 taxation year accordingly.

Certified true translation

Suzanne M. Gauthier, LL.L. Trad. a.

                                                    FEDERAL COURT OF CANADA

                                                                 APPEAL DIVISION

                              NAMES OF COUNSEL AND SOLICITORS OF RECORD

FILE:                                                             A-739-99

STYLE OF CAUSE:                                  

FÉDÉRATION DES CAISSES POPULAIRES DESJARDINS DE MONTRÉAL ET DE L'OUEST DU QUÉBEC

and

HER MAJESTY THE QUEEN

PLACE OF HEARING:                           MONTRÉAL, QUEBEC

DATE OF HEARING:                               JANUARY 10, 2001

REASONS FOR JUDGMENT BY:        DESJARDINS J.A.

CONCURRED IN BY:                              DÉCARY J.A.

DISSENTING REASONS:                      NOËL J.A.

DATED:                                                        FEBRUARY 23, 2001

APPEARANCES:

Mario Ménard FOR THE APPELLANT

Chantal Jacquier                                             FOR THE RESPONDENT

SOLICITORS OF RECORD:

Spiegel, Sohmer                                             FOR THE APPELLANT

Montréal, Quebec

Morris A. Rosenberg                                     FOR THE RESPONDENT

Deputy Attorney General of Canada

Ottawa, Ontario

                                                                                                                                            Date: 20010223

                                                                                                                                        Docket: A-739-99

                                                                                                              Neutral reference: 2001 FCA 27

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

NOËL J.A.

BETWEEN:

                          FÉDÉRATION DES CAISSES POPULAIRES DESJARDINS

                                      DE MONTRÉAL ET DE L'OUEST DU QUÉBEC

                                                                                                                                                       Appellant

                                                                              - and -

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

Hearing held at Montréal, Quebec on Wednesday, January 10, 2001

Reasons for judgment delivered at Ottawa, Ontario on Friday, February 23, 2001

REASONS FOR JUDGMENT:                                                                            DESJARDINS J.A.

CONCURRED IN BY:                                                                                                     DÉCARY J.A.

DISSENTING REASONS:                                                                                                    NOËL J.A.

                                                                                                                                            Date: 20010223

                                                                                                                                        Docket: A-739-99

                                                                                                              Neutral reference: 2001 FCA 27

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

NOËL J.A.

BETWEEN:

                          FÉDÉRATION DES CAISSES POPULAIRES DESJARDINS

                                      DE MONTRÉAL ET DE L'OUEST DU QUÉBEC

                                                                                                                                                       Appellant

                                                                              - and -

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

DESJARDINS J.A.

[1]         This appeal is from a decision by the Tax Court of Canada ([1999] T.C.J. No. 694, per Lamarre T.C.J.), which affirmed the decision by the Minister of National Revenue ("the Minister") denying the appellant the right to deduct the sum of $752,640. This sum represented employer contributions in respect of vacation pay earned by the appellant's employees during 1992 but payable by it in a subsequent year. The employer contributions were levied pursuant to the following statutes, which refer to them as "premiums": the Act respecting the Quebec Pension Plan (R.S.Q. c. R-9), the Act respecting the Régie de l'assurance-maladie du Québec (R.S.Q. c. R-5), the Act respecting Industrial Accidents and Occupational Diseases (R.S.Q. c. A-3.001) and the Unemployment Insurance Act (R.S.C. 1985, c. U-1). They also represent the portion of employee benefits which the appellant must pay under a pension plan created by it and a private group insurance plan.

[2]         The Minister's refusal to allow this deduction for the 1992 taxation year directly affects the carryover of the investment tax credit claimed by the appellant for the 1989 taxation year. The appellant therefore also appealed the assessment made in respect of 1989.

[3]         The Court must determine in the case at bar whether the amount of $752,640, representing the employer contributions and employee benefits which the appellant is required to pay after December 31, 1992, but which pertain to the vacation pay accumulated by its employees during 1992, is a deductible expense under s. 18(1)(a) and (e) of the Income Tax Act (R.S.C. 1985 (5^th Supp.) - "the Act"). Throughout these reasons, the term "employer contributions" will be used to refer both to the employer premiums levied under the four statutes in question and the employee benefits covered by the collective agreements, except when the legislative structure of the statutes is in question, in which case I will only use the word "premium" since, as noted above, this word alone is used.

1 - Facts

[4]         The facts are not in dispute. We need only recall the main points, described by the trial judge in paras. 3, 4, 5 and 6 of her reasons.

[5]         The appellant's technical and professional employees and its office employees were governed by collective agreements. Under those collective agreements, the employees earned their vacation during the reference period which extended from May 1 to April 30 of each year. The reference period had to be completed before the employees could take their vacation and the vacation was normally taken within the twelve months following the reference period. As the appellant's fiscal year ends on December 31 of each year, the vacation earned in a reference period had to be taken in two different fiscal years. Accordingly, vacation accumulated between May 1 and December 31, 1992 had to be taken between May 1, 1993 and April 30, 1994. However, employees could conclude an arrangement with their immediate superiors to defer their vacation after the usual vacation period. As indicated in the guide to working conditions for the employees, these rules also applied to non-union employees and managers.

[6]         According to the employer's testimony, when the employer took his or her vacation he or she received for each week of vacation a percentage (usually 2 per cent) of the total earnings for the year of the qualifying period. That percentage could vary from one employee to another, depending on the degree of seniority or level in the business. For vacation earned in 1992, for example, the employee was paid depending on the salary at the time vacation was taken in 1993 or 1994. Accordingly, at December 31 of year the employees had accumulated vacation which was not taken during the year but to which they were entitled. The appellant assessed the amount of the vacation payable in the subsequent year at 8 per cent of the payroll for the current year, which amounts to about four weeks' annual vacation for each employee.

[7]         At December 31, 1992 the amount of vacation pay payable in the subsequent year was set at $3,010,563, or 8 per cent of the 1992 salary envelope, which amounted to $37,632,000. This pay for vacation earned which had not yet been paid in 1992 was recorded as expenses during 1992 and accepted by the Minister. The appellant also estimated the amount of the employer contributions pertaining to this vacation pay at a weighted rate for 1992 for all the plans which the appellant was required to pay. The appellant set this rate at 25 % of the amount of the vacation pay payable at December 31, 1992 (25 % x $3,010,560), or $752, 640. According to Exhibit A-4 entered in evidence, that percentage breaks down as follows.

- Pension plan                                                                     8.10 %

- Unemployment insurance                                                1.80 %

- Quebec Pension Plan                                                     3.50 %

- Quebec health plan                                                          3.75 %

- Other benefits

- Group insurance including:              3.43 %

Basic life

Basic life - ADD

Survivor pension

Dependants

Hospital expenses

Dental care

Vision care

Long-term insurance

- C.S.S.T.                                        .44 %

- C.N.T.                                              .07 %

- Difference for insurance                   .24 %         4.18 %

______      _______

- Compensation tax, including

directors' fees                                                2.67%

- Sick days and maternity leave                      1.00 %       3.67 %

_______    _______

25.00 %

[8]         In calculating the appellant's income for the 1992 taxation year the respondent disallowed the deduction of this amount of $752,640 because, in her view, the amount corresponded to a provision or reserve for a future or possible obligation, and the appellant had no obligation to pay the amount at December 31, 1992.

[9]         According to that reasoning, the employer contributions expense was a conditional obligation because it was dependent on payment for the vacation itself. The respondent concluded that the deduction of that expense was prohibited by s. 18(1)(e) of the Act. However, she acknowledged that the appellant had an absolute and unconditional obligation to pay the salaries relating to the vacation payable, and as mentioned earlier she allowed the deduction for the vacation accumulated during the 1992 taxation year.

2 - Judgment a quo

[10]       The gist of the trial judge's reasoning is contained in paras. 55, 60 and 61 of her reasons.

[11]       The trial judge said that she was in agreement with counsel for the respondent in saying that the obligation to pay these employer contributions did not arise until the time at which the vacation pay was actually paid. This obligation did not result from the services rendered by the employees. It was the payment of their salaries which, in accordance with various applicable statutes, created the employer's obligation to pay the employer contributions relating thereto. It thus cannot be said, again in the opinion of the trial judge, that the obligation to pay these premiums was an obligation that existed during the reference period.

[12]       The trial judge then said that as defined by the accounting expert a reserve is a potential obligation estimated at the date the books are closed, which facts that have occurred or are ongoing makes probable. That obligation, the nature of which is clearly precise, is uncertain as to the amount and the date when it will fall due. In light of the analysis made above, the trial judge said that in her opinion the sum of $752,640, estimated at December 31, 1992 to cover the employer contributions payable in a subsequent year, constituted a reserve within the meaning of s. 18(1)(e) of the Act.

[13]       However, the trial judge said, as the obligation to pay these employer contributions did not arise before the vacation pay was paid, there was no basis for saying that the appellant incurred this expense during 1992. The sum of $752,640 was therefore also not deductible under s. 18(1)(a) of the Act during 1992. The trial judge cited Pratte J.A. in Newfoundland Light and Power Co. Ltd. v. The Queen (90 D.T.C. 6166, at 6173), according to whom, for an expense to be incurred during a given year within the meaning of s. 18(1)(a), the obligation to pay must have arisen during that year. She stated that in arriving at this decision Pratte J.A. relied inter alia on

the judgment in J.L. Guay Ltée v. M.N.R., affirmed by the Supreme Court of Canada ([1971] F.C. 237 (F.C.T.D.), aff. 73 D.T.C. 5373 (F.C.A.), aff. 75 D.T.C. 5094 (S.C.C.)).

3 - Applicable legislation

[14]       The legislation on which the respondent relied in disallowing the deduction is ss. 9 and 18(1)(a) and (e) of the Act, which read as follows:

[15] It appears from these provisions that if the appellant is able to show that the employer contributions in question are an outlay or expense "made or incurred" by the appellant in 1992, its right to the deduction must be accepted.

4 - Parties' arguments

[16] The appellant relied, first, on business principles, but particularly on the statements by the Tax Court of Canada in a decision rendered subsequently to the decision a quo. That decision is Provigo Distributions Inc. v. Canada, [2000] T.C.J. No. 314, in which Lamarre Proulx T.C.J. applied for purposes of analysis the distinction made by the Supreme Court of Canada in Canadian Pacific Ltd. v. A.G. (Can.), [1986] 1 S.C.R. 678, at 682-683, between the taxation of a premium and the payment of that premium. That distinction, the appellant submitted, should be applied in the case at bar to give the same result as that arrived at by Lamarre Proulx T.C.J. in Provigo, namely judgment in the employer's favour.

[17] The respondent argued essentially that the amount at issue was not "incurred" during the 1992 taxation year as required by s. 18(1)(a) of the Act. She argued that, as the trial judge in fact admitted, the obligation to pay the employer premiums in question did not arise until the time the vacation pay was actually paid. The employer premiums were an obligation with a suspensive condition. She noted that the amount payable was an estimate, which supports the idea that the amount was meant as a reserve, falling under s. 18(1)(e) of the Act.

5 - Analysis

[18] This Court has consistently held that an expense is only "incurred" within the meaning of s. 18(1)(a) of the Act when there is an obligation to pay a sum of money. In R. v. Burnco Industries Ltd. et al. (84 D.T.C. 6348 (F.C.A.)) Pratte J.A., speaking for the Court, said the following:

In our opinion, an expense, within the meaning of paragraph 18(1)(a) of the Income Tax Act, is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. Contrary to what was decided by the Trial Judge . . . an obligation to do something which may in the future entail the necessity of paying money is not an expense.                                            [My emphasis.]

[19] Burnco was followed in Northern and Central Gas Corporation Ltd. v. R. (85 D.T.C. 5144 (F.C.T.D.), at 5149-50) and in Northwood Pulp and Timber Ltd. v. R. (98 D.T.C. 4640 (F.C.A.)). On the other hand, in Newfoundland Light and Power Co. Ltd. v. R. (90 D.T.C. 6166 (F.C.A.)), Pratte J.A., speaking this time for himself, said:

Indeed, in order for an expense to be incurred during a year, the obligation to pay must be created during that year; similarly, there is no cost of property to a taxpayer as long as the obligation to pay that cost has not come into existence.                                                                                                 [My emphasis.]

[20] It must therefore be determined at what time the employer's obligation to pay the contributions in question arose, since it must be determined at what point the expenses were "incurred" for tax purposes. The Court must therefore look at the wording of the four statutes in question pursuant to which the employer contributions ("premiums") in question had to be paid. The trial judge did not have before her the contracts setting out the appellant's obligations under the private pension fund or group insurance plans, so that, as she noted at para. 54 of her reasons, she had to deal with them as if they were governed by statute. I will accordingly do likewise.

[21] Before doing this, however, I must comment on Canadian Pacific Ltd. v. A.G. (Can.) supra, cited by Lamarre Proulx C.T.J. in Provigo.

[22] The Supreme of Canada had to determine whether tips collected by Canadian Pacific Ltd. on behalf of its employees, and then paid to them by the employer, constituted earnings within

the meaning of the version of the Unemployment Insurance Act applicable at the time. The Minister had replied that they did and had taken these amounts into consideration when calculating the premiums the employer had to pay for 1978.

[23] The Supreme Court of Canada first undertook to determine the sections of the Act which imposed the premium and set the amounts and those which prescribed the method of collection. The umpire had held that s. 68 of the Act was the one defining the amount of the premiums the employer had to pay, while the Federal Court of Appeal considered that the applicable provision was s. 66 of the Act. La Forest J. upheld the Federal Court of Appeal's position.

[24] Speaking for the majority, La Forest J. was careful to note that titles, unlike marginal notes, form an integral part of the Act. Part III of the Act, titled "Contributory Premiums", and having as a subtitle "Determining Premiums", contains s. 62, which gave the Unemployment Insurance Commission the power to fix the amount of premiums annually in terms of a percentage of "insurable earnings". Then there was s. 66 as it stood at the time (now s. 51), also contained in Part III of the Act. That section, La Forest J. said, was the one which required payment of employee and employer premiums and fixed the amounts payable. Section 66(1) required all employees to pay the employee premium. At the same time, the parallel provision of s. 66(2) required all employers to pay as an employer premium an amount equal to the percentage of the employee's "insurable earnings" fixed by the Commission and stipulated that the money would be collected "in the manner provided in Part IV". Part IV, titled "Collection of Premiums", on the other hand, contained s. 68(1), which required the employer to deduct from the remuneration of his employees the premiums payable by the employees and pay them to the Receiver General along with premiums payable by the employer at the time and in the manner provided by the Regulations.

[25] La Forest J. then undertook to clarify the meaning of the expression "insurable earnings" in s. 66(2) of the Act. In his view, "insurable earnings" covered not only the salary paid by the employer but tips as well, even though the latter came from the employer's customers and not the employer himself. The employer thus had to calculate his premiums based not only on the part of the earnings which came from the employer but also on all the tips initially collected by the employer and then paid to his employees.

[26] As I noted above, the analysis of the legislative provisions in the Unemployment Insurance Act made by La Forest J. on behalf of the majority and the distinction he made between one section imposing a premium and another dealing with collection and payment of the premium were adopted by Lamarre Proulx T.C.J. in Provigo.

[27] The Court had to decide in Provigo whether the amount of the employer premiums related to salary was deductible in calculating the employer's income for the taxation year in which the salaries were earned or for the one in which the salaries were paid. The employer premiums in question were those mentioned by the Unemployment Insurance Act, the Act respecting the Régie de l'assurance-maladie du Québec and the Act respecting the Quebec Pension Plan. The case did not concern the employee benefits owed under private plans. Further, the term "employer contributions" which she used was not limited, as in the case at bar, to employer contributions relating to vacation pay.

[28] After noting the distinction made by La Forest J., Lamarre Proulx T.C.J. concluded at para. 21 of her reasons:

The statutes under which employer contributions are owed follow the same scheme: imposition of the contribution and collection and payment of the contribution. Like the Unemployment Insurance Act, the Act respecting the Quebec Pension Plan and the Act respecting the Régie de l'assurance-maladie du Québec clearly provide that the employer's obligation respecting contributions arises in consideration of an employee's performance of work during a period of time and is based on that employee's remuneration, not on the payment of his wages. Employer contributions may therefore be deducted in the year in issue in accordance with the principles stated in Burns, supra, and Canderel, supra.                                                                                     [My emphasis.]

[29] That decision was appealed, but the respondent, which was the appellant, subsequently withdrew its appeal.

[30] In the case at bar the legislative structure described by La Forest J. and Lamarre Proulx T.C.J., and dealing with the employer premium, is found in each of the statutes in question, as they read during the relevant fiscal years 1992 and 1993. Those sections are reproduced first.

[31] Sections 50, 52, 59 and 63 of the Act respecting the Quebec Pension Plan, and their titles, read as follows:

[32] Section 34 of the Act respecting the Régie de l'assurance-maladie du Québec at the time had no title above it and read as follows:

[33] Sections 48, 50(1), 51(2) and (3), 53(1) and 2(1) of the Unemployment Insurance Act, and their titles, read as follows:

[34] Sections 281, 290, 292, 305, 306 and 315 of the Act respecting Industrial Accidents and Occupational Diseases, and their titles, read as follows:

[35] Adopting the description given by La Forest J., ss. 50 and 52 of the Act respecting the Quebec Pension Plan deal with the premium requirement while ss. 59 and 63 of that Act deal with its collection and payment. The reference to s. 1050 of the Taxation Act (R.S.Q. c. I-3) and the applicable Regulations, found in s. 63, means that in general the payment respecting remuneration paid during a month must be made by the 15th day of the following month at the latest (Taxation Regulations, No. 1015 R. 14.1 et seq.). Section 34 of the Act respecting the Régie de l'assurance-maladie du Québec deals both with the imposition and the payment of the employer premium. In the Unemployment Insurance Act ss. 48, 50 and 51, which impose and fix the premiums, are contained in Part II of the Act, entitled "Contributory Premiums", while s. 53, dealing with collection, is contained in Part III, entitled "Collection of Premiums". Finally, ss. 305 and 315 of the Act respecting Industrial Accidents and Occupational Diseases deal with determination and payment of the employer premium, but an employer listed in the Register pursuant to ss. 281, 290 and 292 is already committed to the Commission de la santé et de la sécurité au travail for payment of the specified amounts.

[36] It is clear from these provisions - and in my opinion this was the view taken by La Forest J. - that a distinction must be made between the time the employer's obligation to contribute to the plan arises and the time when the employer has to perform that obligation. The obligation to contribute arises when a sufficient amount of service has been provided. The legislation relevant to the case at bar has social connotations, the aim being to ensure that an employee receives, in return for work done, benefits and pay proportional to the work that was done. The plans created by the legislature, whether federal or provincial, are based on the principle of a contribution imposed jointly on the employer and employee once a sufficient amount of service has been rendered. However, it is not due or payable until a subsequent date, following payment of the salary, for example, or following the time the employee takes his or her vacation, or in the days following receipt of an assessment notice. The differences in the method and time of payment from one Act to another are not significant, since in the case at bar the parties agreed that the solution arrived at would be the same whatever the legislation concerned. However, what the legislation clearly indicates, in my opinion, is that the employer's commitment to pay its contribution arises well before payment of the vacation pay.

[37] This is why I do not interpret s. 51(3) of the Unemployment Insurance Act in the way suggested by my brother Noël J.A. in paras. 41, 42 and 43 of his reasons. As its wording indicates, s. 51(3) excludes the application of subss. (1) and in (2) "for the purposes of calculating insurable earnings and premiums payable in respect thereof". The period of the insurable employment is therefore, for calculation purposes only, deemed to have occurred in the year (calendar year: see s. 2(1)) in which the insurable earnings are paid. The employee and employer premiums nevertheless originate at the time the performance of this insurable employment resulted in acquisition of vacation pay, even though the insurable earnings and premiums payable are calculated as if the performance of the insurable employment had taken place in the calendar year in which the insurable earnings were paid.

[38] This legal fiction created by s. 51(3) is clearly defined in the provision. It does not preclude the reality. It does not prevent the creation of the debt or of the insurable earnings, which legally originated at the time the vacation pay was acquired in 1992. However, the method of calculation makes it possible to take into account the salary changes and increases that may arise from one calendar year to another. Accordingly, as noted in para. 6 of my reasons, for vacation earned in 1992 the employee was paid, depending on salary, at the time he or she took vacation in 1993 or 1994.

[39] The collective agreements governing the employees in question also clearly indicate the time the vacation pay is acquired. In the case at bar, they govern technical and professional employees as

well as office employees. However, according to the working conditions guide for such employees, the same rules apply to non-union employees and managers. The rules underlying these collective agreements are in any case to be found in the labour legislation, whether provincial (Act respecting Labour Standards, R.S.Q. c. N-1.1, ss. 66 et seq.) or federal (Canada Labour Code, R.S.C. 1985, c. L-2, ss. 183 et seq.).

[40] Clause 15.01(2) of the collective agreement for technical and professional employees, which is part of clause 15, entitled [TRANSLATION] "annual vacation" (appeal book, vol. I, at pp. 93-94), states that an employee shall be entitled to days of paid vacation in accordance with certain provisions. It reads as follows:

[TRANSLATION]

15.01 PLAN

                                                                                                            . . . . .

2. Every employee covered by the collective agreement shall be entitled to days of paid vacation in accordance with the following provisions:

(a) An employee who has less than one year of service shall be entitled to one and a quarter days for each month of service, with a maximum of fifteen paid working days paid at the rate of 6 % of earnings to April 30 of the current year.

An employee who has not completed one year of service may complete his or her vacation by unpaid leave. The period may not exceed three weeks, with or without pay.

(b) An employee who has completed one year and not more than five years of service shall be entitled to fifteen working days of leave paid at the regular weekly salary.

(c) An employee who has completed five years but less than sixteen years service shall be entitled to twenty working days of leave paid at the regular weekly salary.

(d) An employee who has completed:

- sixteen years of service shall be entitled to twenty-one working days of leave paid at the regular weekly salary;

- seventeen years of service shall be entitled to twenty-two working days of leave paid at the regular weekly salary;

- eighteen years of service shall be entitled to twenty-three working days of leave paid at the regular weekly salary;

- nineteen years of service shall be entitled to twenty-four working days of leave paid at the regular weekly salary;

- twenty years of service shall be entitled to twenty-five working days of leave paid at the regular weekly salary . . .

[41] The other paragraphs of that clause contain provisions for implementing the plan. Then there follows paragraph 15.07, dealing with payment of vacation pay, and reading as follows:

[TRANSLATION]

15.07 PAYMENT OF VACATION PAY

An employee shall receive all the pay due to him or her before leaving for vacation.

[42] Paragraph 15.08 deals with payment of vacation pay in the event of an employee's resignation, dismissal or death, and reads as follows:

[TRANSLATION]

15.08 TERMINATION OF VACATION PAY

In the event of an employee's resignation, dismissal or death, all his accumulated vacation pay shall be paid to the employee or his estate in full in accordance with the calculation set out in clause 15.01 of the collective agreement.

[43] An employee who has less than one year's service, for example, acquires one and a quarter days of paid vacation for each month of service. As soon as the first month of service is complete, the appellant owes him or her one and a quarter days' vacation pay. If it subsequently happens that the employee leaves the employment voluntarily, is dismissed or dies, all his or her vacation pay is payable to the employee or to his or her estate.

[44] It follows that once the vacation pay is earned, the obligation to pay the employer contributions comes into being. The vacation pay will be paid later and the employer contributions will be paid within the next fifteen days. However, the employer's debt to the Unemployment Insurance Commission and the various provincial administrative bodies is "incurred" from the day on which the vacation pay originates was acquired.

[45] My interpretation corresponds to that adopted by the respondent herself on vacation pay. The respondent agreed that in the case at bar the vacation pay which was all accumulated by the appellant's employees during 1992 was a debt to those employees in 1992 even though the debt was not yet liquidated. The trial judge also endorsed this proposition, since she said at para. 53 of her reasons:

That is why the vacation pay, although estimated, is not a reserve within the meaning of paragraph 18(1)(e). It is not a potential obligation for the employer. It is a real legal liability that exists during the reference year but will be paid in a future year. It can therefore be said that the expense associated with the vacation pay was incurred during the reference year and is thus deductible in calculating profit for the year under section 9 and paragraph 18(1)(a) of the Act.

[My emphasis.]

[46] In my opinion, however, the respondent and the trial judge did not take into account the nexus existing between the vacation pay and the employer contributions. Once the legal obligation in respect of future vacations becomes a reality, the obligation in respect of employer contributions becomes one as well. The one does not go without the other.

[47] With respect, I cannot agree with the conclusion arrived at by the trial judge at para. 55 of her reasons, when she says that:

. . . the obligation to make those employer contributions does not arise until the vacation pay is actually paid. The services provided by the employees do not give rise to that obligation. The payment of their salaries is what, under the various applicable statutes, creates an obligation for the employer to make the associated employer contributions. It therefore cannot be said, as counsel for the appellant argued, that the obligation to make the contributions exists during the reference period.

[My emphasis.]

or when she says at paras. 59, 60 and 61 of her reasons that "the obligation to make employer contributions in respect of vacation pay to be paid after the reference period is a potential future obligation as defined in law" and that it is not an expense "incurred" pursuant to s. 18(1)(a) of the Act, but a "reserve" within the meaning of s. 18(1)(e) of the Act.

[48] Under the applicable legislation, the employer's obligation to pay these premiums is imposed at the time the vacation pay is earned. It is the services rendered by the employees which give rise to the vacation pay (which may also be called vacation salary), which was earned in its entirety in 1992. Payment of the vacation pay when the employee takes vacation in 1993 simply results in payment of the employer premium: but under s. 18(1)(a) of the Act the "expense" has already been incurred.

[49] The employer contributions are a real obligation, an existing one, not a potential one. The

obligation is so much an existing and real one that if the employee, instead of taking vacation at the arranged time, resigns or is dismissed or dies, the (earned) pay becomes payable because the debt has legally come into being. Undoubtedly the amount is not yet liquidated, but it is not liquidated in the case of vacation pay either and this does not prevent the respondent from allowing it as a deductible expense.

[50] The employer contribution is a term obligation in that it will only become payable at the time the vacation is taken or at the time of the employee's resignation, dismissal or death; but it is not an obligation with a suspensive condition.

[51] Jean-Louis Baudouin, now a judge of the Quebec Court of Appeal, explains as follows the difference between a term and a condition in his book titled Théorie générale des obligations (5th ed., Montréal, Yvon Blais, 1998, p. 452, para. 573):

[TRANSLATION]

Like a condition, a term is a future event but, unlike a condition, it is an event that is certain to occur. The term may or may not be fixed depending on whether the expiry date is known and determined when the obligation is incurred. Paying in one year is thus a fixed or definite term, whereas paying on someone's death is not, since although it is certain the person will die the exact date of death remains undetermined. In applying the Civil Code of Lower Canada the courts at times found some difficulty distinguishing a term from a condition, as the former is sometimes worded like a condition.

[My emphasis.]

[52] In the appellant's case, its obligation to pay the employer contributions was real but the term was uncertain. Accordingly, the obligation to pay was suspended until the vacation pay was paid. In this regard Beaudoin J.A. explains, in the same text (p. 454, para. 575):

[TRANSLATION]

A suspensive term in no way affects the creation of the obligation, it only postpones the due date. Unlike an obligation under a suspensive condition, and like an obligation under a resolutory condition, the term obligation thus arises at once, as does an obligation pure and simple, and so has a true legal life throughout the period from its creation to its extinction.

[My emphasis.]

(and at p. 458, para. 584):

[TRANSLATION]

Unlike the term, a condition is a future but uncertain extrinsic event, on which depends the creation (suspensive condition) or extinction (resolutory condition) of an obligation (art. 1497 C.C.).             

[My emphasis.]

[53] In his texte Des obligations: actes et responsabilités (6th ed., Montréal, Wilson & Lafleur, 1997, p. 233, para. 462) Prof. M. Tancelin says the following:

[TRANSLATION]

A condition has something in common with a term: it is a future event. However, the similarity stops there because the condition is a future event the occurrence of which is uncertain. Moreover, this event governs the very existence of the obligation: that is, it suspends the formation of the latter (suspensive condition) or cancels its effect (resolutory condition).

[My emphasis.]

[54] This is far from being a "reserve" within the meaning of s. 18(1)(e) of the Act. In a document issued by the Quebec Ordre des comptables agréés (vol. 2, No. 4), titled Terminologie comptable, the following definition can be found:

[TRANSLATION]

In accounting, a reserve means the recognition of an asset's decline in value (e.g. a reserve for depreciation of securities) or of an increase in liabilities payable in the relatively long term (e.g. a reserve for contingencies and charges); while its nature is clear, its discharge is uncertain, and events that have occurred or are occurring make it foreseeable at the balance sheet date.

[55] A reserve only exists if the occurrence of the expense is uncertain, which is not the case with an employer contribution.

[56] An employer contribution associated with vacation pay earned in 1992 is not the same as an employer contribution in respect of a period of salary earned in 1993.

[57] The appellant further argued that it used the accrual accounting method, which allows a business to deduct from its income during the year expenses incurred (but not paid) in the year in order to produce the income. It submitted that in that case it becomes important to be able to deduct each of the expenses incurred during the year in order to give an accurate picture of its financial situation. Although the payment of the employer contributions is made at the time the vacation pay is paid, it said, the rules relating to accrual accounting require that such an expense be deducted in the year during which the expense is incurred, that is during the 1992 taxation year, at the time the vacation was earned.

[58] The conclusion I have come to on the law allows the appellant to calculate its income in accordance with accepted business principles, thereby giving a true picture of its profit for the year. The law in the case at bar is consistent with accepted business principles (Canderel Ltée v. Canada, [1998] 1 S.C.R. 147, paras. 29-42).

6 - Conclusion

[59] I would allow this appeal with costs in this Court and in the Tax Court of Canada and would quash the judgment rendered by the Tax Court of Canada. In accordance with s. 170(1)(a) of the Act, I would allow the appellant's appeal against the assessments of the Minister of National Revenue and would refer the assessments back to the latter for notices of reassessment to be issued allowing the appellant a deduction of $752,640 for its employer contributions in its 1992 taxation year and adjusting its investment tax credit for its 1989 taxation year accordingly.

I concur.

Robert Décary J.A.

Certified true translation

Suzanne M. Gauthier, LL.L. Trad. a.

                                                                                                                                            Date: 20010223

                                                                                                                                        Docket: A-739-99

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

NOËL J.A.

BETWEEN:

                          FÉDÉRATION DES CAISSES POPULAIRES DESJARDINS

                                      DE MONTRÉAL ET DE L'OUEST DU QUÉBEC

                                                                                                                                                       Appellant

                                                                              - and -

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

NOËL J. A.

[1]    This is an appeal from a decision by Judge Lamarre of the Tax Court of Canada, reported at 99 D.T.C. 1275, in which she dismissed the appellant's appeal and upheld the assessments made under the Income Tax Act ("the Act") (S.C. 1970-71-72, c. 63, as applicable in the appellant's 1992 taxation year) for the 1989 and 1992 taxation years.

[2]    The assessment for the 1992 taxation year had the effect of denying the deduction of an amount of $752,640, representing employer contributions and the portion of employee benefits associated with the vacation pay earned during 1992 but paid after December 31 of that year, that is after the closing of the appellant's taxation year, which coincides with the calendar year. The adjustment for the 1989 taxation year depends on the validity of the assessment for the 1992 taxation year.

[3]    The point at issue is whether the trial judge was right to conclude that deduction of the amount of $752,640 in computing the appellant's income for its 1992 taxation year was prohibited by paragraphs 18(1)(a) and (e) of the Act.

Facts

[4]    The appellant's employees are governed by a policy according to which they accumulate their vacation during a reference period falling between May 1 and April 30 of each year. The employees must then take their vacation within the twelve months following the reference period. At the time the appellant's employees took their vacation, they received for each week of vacation an amount equivalent to 2 % of all their earnings in the year of the reference period.

[5]    For its fiscal year ending on December 31, 1992 the appellant recorded as an expense the amount of $3,010,560 in vacation pay to be paid during 1993. That amount of $3,010,560 represented 8% of the 1992 payroll, which amounted to $37,632,000, and this represented about four weeks' annual vacation per employee. For its 1992 taxation year the appellant deducted this amount of $3,010,560 for the vacation pay accumulated but not yet paid in 1992. This deduction was accepted by the respondent. As the trial judge explained at paragraph 53 of her reasons:

The employees acquire their vacation leave during the reference year, but they cannot take that leave until after the reference period is over. However, it is during the reference year that the appellant becomes obliged to pay its employees vacation pay, and that obligation subsists until the amounts are paid in the year following the reference period. That is why the vacation pay, although estimated, is not a reserve within the meaning of paragraph 18(1)(e). It is not a potential obligation for the employer. It is a real legal liability that exists during the reference year but will be paid in a future year. It can therefore be said that the expense associated with the vacation pay was incurred during the reference year and is thus deductible in calculating profit for the year under section 9 and paragraph 18(1)(a) of the Act.

[6]    The appellant also estimated the amount of the employer contributions relating to the vacation pay at $752,640, according to a weighted rate of 25 % of the amount of the vacation pay payable after December 31, 1992, that is 25 % of $3,010,560. The employer contributions break down as follows:

Pension plan                                                               8.10%

Unemployment insurance                                           1.80%

Quebec Pension Plan                                                3.50%

Quebec health plan                                                    3.75%

Other:

* Group insurance                                                 3.43%

* C.S.S.T.                                                             0.44%

* C.N.T.                                                                0.07%

* Difference for insurance                                     0.24%

Compensation tax                                                     2.67%

Sick days and maternity leave                                   1.00%

                                                                            25.00%

The appellant deducted this sum of $752,640 in computing its income for the 1992 taxation year and the deduction was disallowed by the respondent on the ground that the amount was a reserve within the meaning of paragraph 18(1)(e) of the Act, and that moreover the obligation to pay this expense was not incurred during 1992 as required by paragraph 18(1)(a).

Judgment a quo

[7]         The trial judge concluded that the employer contributions associated with the vacation pay were not deductible in computing profit for 1992 pursuant to section 9 and paragraphs 18(1)(a) and (e) of the Act. In the trial judge's view, the obligation to pay the employer contributions did not arise until the time the vacation pay was paid to the employees. That obligation therefore did not exist during the appellant's 1992 taxation year.

[8]         The trial judge noted that the parties had dealt with the tax implications of the employer contributions as a whole, without distinguishing between those contributions paid under a statute and those paid under a private plan. The employer contributions were therefore dealt with as if they form a uniform whole. (The phrase "employer contribution" is used below to identify this uniform whole and the phrase "employer premium" refers to those contributions which are imposed by statute.)

[9]         In response to the appellant's argument that paragraph 18(1)(e) of the Act did not prohibit the deduction of a reserve for a contingent liability, the trial judge concluded that the word "reserve" had its own meaning which should not be limited by adding the words "contingent liability". The trial judge concluded that the sum of $752,640 was a reserve within the meaning of paragraph 18(1)(e) of the Act and hence was not deductible for the appellant's 1992 fiscal year.

[10]       The trial judge concluded that the deduction of the employer contributions also had to be disallowed on the ground that the obligation to pay those contributions, unlike the vacation pay itself, did not arise during the appellant's 1992 fiscal year within the meaning of paragraph 18(1)(a):

[61]          Moreover, since the obligation to make those employer contributions does not arise until the vacation pay is paid, it cannot be argued that the appellant, in the situation that concerns us, incurred that expense in 1992. The $752,640 is therefore not deductible in 1992 under paragraph 18(1)(a) of the Act either.

Applicable legislation

[11]       Subsection 9(1) and paragraphs 18(1)(a) and (e) of the Act read as follows:

[12]       Sections 50, 52, 59 and 63 of the Act respecting the Quebec Pension Plan:

[13]       Sections 33 and 34 of the Act respecting the Régie d'assurance-maladie du Québec:

[14]       Sections 304, 305, 306 and 315 of the Act respecting Industrial Accidents and Occupational Diseases:

[15]       Section 1015 of the Taxation Act:

[16]       Sections 1015R14, 1015R14.1, 1015R14.2 and 1015R.3 of the Taxation Regulations:

[17]       Section 48, and subsections 50(1), 51(1), (2) and (3), and 53(1) of the Unemployment Insurance Act:

[18]       Subsections 3(1) and 4(3) of the Unemployment Insurance (Collection of Premiums) Regulations (C.R.C., c. 1575):

Parties' arguments

[19]       The appellant submits that based on the case law, its commitment to its employees was certain and absolute and the sum of $752,640 was accordingly not a reserve within the meaning of paragraph 18(1)(e) of the Act. The appellant maintained that once the appellant's obligation to its employees to pay the unpaid vacation pay arose, the employer's related obligation to contribute became absolute. The employer contributions are directly related to the payment of the unpaid vacation pay of the appellant's employees and their treatment for tax purposes should be consistent with that of the unpaid vacation pay. The appellant, relying on the use of the words "reserve" and "contingent liability" in paragraph 18(1)(e), maintained that this provision only applies in cases where the reserve is uncertain in nature. Paragraph 18(1)(e) only applies, in the appellant's submission, in cases where the expense is conditional in nature.

[20]       The respondent submitted, for her part, that the legal test governing the application of paragraph 18(1)(a) is that no expense is incurred unless there is an obligation to pay the amount in question and an expense is only incurred in the taxation year in which the obligation to pay that expense arises. Paragraph 18(1)(e) in any case prohibits the deduction of any contingent or conditional amount in calculating income from a business. According to the respondent, the word "reserve" means in accounting terms a potential obligation the amount and due date of which are uncertain. In the respondent's submission, the amount and due date of the employer contributions in question are uncertain.

Analysis

[21]       Counsel for the appellant relied essentially on subsection 9(1) of the Act and on the accounting method used by the appellant, based on the accounting principle of coupling income and expenses (also known as the matching principle), and submitted that the employer contributions with respect to the vacation pay earned during the appellant's 1992 taxation year but payable to its employees in the following year were deductible in calculating the appellant's income for the 1992 taxation year. In his submission neither paragraph 18(1)(a) or paragraph 18(1)(e) is a bar to the accounting method adopted and used by the appellant.

[22]       In my view, the trial judge correctly concluded that the obligation to pay the employer contributions did not arise during the appellant's 1992 taxation year and that accordingly these amounts are not deductible in calculating its income for the said year under paragraph 18(1)(a) of the Act.

[23]       As the trial judge noted at paragraph 50 of her reasons, even though taxpayers are free to compute their income in accordance with accepted business principles and to adopt such of those principles as are appropriate in their specific circumstances to give an accurate picture of their profit for the year, the accounting treatment is only applicable if it is not contradicted by a specific rule established by the Act (Canderel Ltée v. Her Majesty the Queen, [1998] 1 S.C.R. 147, paragraphs 32, 33, 34 and 44; see also Friesen v. Canada, [1995] 3 S.C.R. 103, paragraph 41). Paragraph 18(1)(a) of the Act does lay down a specific rule of law which precludes the accounting treatment in the case at bar.

[24]       Subsection 9(1) provides that a taxpayer's income from a business for a taxation year is his profit therefrom for the year. Paragraph 18(1)(a), when read with subsection 9(1), further provides that an expense may only be taken into account in this computation to the extent that it was made or incurred during the year (see e.g. Newfoundland Light and Power Co. Ltd. v. Her Majesty the Queen, 90 D.T.C. 6166 (F.C.A.), at 6173, per Pratte J.A.). The expenditure at issue here was not made during the year. The question that arises therefore is whether this expense was incurred in the year within the meaning of paragraph 18(1)(a).

[25]       In connection with paragraph 18(1)(a), the courts have found that an expense is not incurred in the year unless there is a legal obligation to pay an amount. For example, even though a taxpayer may reasonably anticipate during its 1992 taxation year that it will have to pay a predetermined amount in the following year, it cannot deduct that amount in computing its income for the 1992 taxation year unless it can establish that the obligation to pay the amount arose during the said year (see J.L. Guay v. M.N.R., [1971] F.C. 237 (F.C.T.D., aff. by 73 D.T.C. 5373 (F.C.A.), aff. [1975] C.T.C. 97 (S.C.C.)); Her Majesty the Queen v. Burnco Industries Ltd., 84 D.T.C. 6348 (F.C.A.); Northern and Central Gas Corporation Ltd. v. Her Majesty the Queen, 85 D.T.C. 5144 (F.C.T.D., aff. by 87 D.T.C. 5439; Co-Operators General Insurance Company v. M.N.R., 93 D.T.C. 303 (T.C.C.)). The corollary of this rule is also well established: an amount does not have to be included in computing a taxpayer's income for a given year if the right to the payment does not materialize during the year (see e.g. John Colford Contracting Co. v. M.N.R., [1960] Ex.C.R. 433, aff. by [1962] C.T.C. 546 (S.C.C.)).

[26]       In the case at bar, the obligation to pay the employer premiums which the appellant deducted for its 1992 taxation year must arise from statute and the appellant must therefore show from the applicable legislation that it incurred the obligation to pay the said premiums during the 1992 taxation year. I have set out the relevant legislation in the first part of my reasons and it seems clear to me, at least so far as the Act respecting the Quebec Pension Plan, the Act respecting the Régie de l'assurance-maladie du Québec and the Act respecting Industrial Accidents and Occupational Diseases are concerned, that the employer's obligation to pay the employer premiums, like the employee's to pay the employee premiums, arises only when the salaries are paid.

[27]       In the Act respecting the Régie de l'assurance-maladie du Québec, the employer's obligation (only the employer had to contribute to this plan at the relevant time) is created by section 34, which provides that "On the dates, for the periods and according to the terms and conditions prescribed in section 1015 of the Taxation Act, (R.S.Q., chapter I-3), every employer shall pay to the Minister of Revenue a contribution equal to 3.75% of the wages that he pays . . .". Section 1015 of the Taxation Act also refers to the Taxation Regulations, which set out the periods and terms of payment. The relevant aspects of these terms are the following: "1015 R14.1 An employer . . . shall pay to the Minister any amount required . . . in respect of a remuneration that he pays during a month, not later than the fifteenth day of the following month". The employer's obligation thus arises under section 34 when the salary is paid and a term is specified by the Regulations as of that time to allow the employer to make the payments required.

[28]       In the Act respecting the Quebec Pension Plan, the employer's obligation is created by section 52, which provides that "The employer must make a contribution equal to the contribution which each of his employees is required to make under section 50". Section 50 itself provides that "Every employee shall, by deduction at source, make a contribution . . .". Since there can be no source deduction without the payment of a salary, and without a source deduction there is no employee premium, it goes without saying that both the employee's obligation under section 50 and that of the employer under section 52 arise when the salary is paid. So far as the term allowed for making the payment is concerned, section 63 refers to section 1015 of the Taxation Act, and consequently to s. 1015R14 of the Taxation Regulations, the effects of which are those set out in the preceding paragraph.

[29]       Finally, the Act respecting Industrial Accidents uses a different model but it has the same effect. Section 305 provides that employers are assessed annually and section 315 states that "The employer shall pay the amount of his assessment" within the specified deadline while section 306 determines the amount of that assessment as the lesser of "the amount that the employer estimates he will expand for wages during the current year" and "the amount of the wages that he paid during [the preceding year]". Once again, therefore, the employer's obligation depends on the wages actually paid during the year, and if no wages are paid the employer is not subject to any obligation.

[30]       I note that by none of these Acts does the provision of service by the employee create any obligation either for the employer or the employee. It is only when the salary relating to these services is paid that the obligation to pay the employer and employee premiums arises. It seems to me the same is true for the premiums collected under the Unemployment Insurance Act, but before dealing with that I must turn to another point.

[31]       Counsel for the appellant drew the Court's attention to a recent decision by the Tax Court of Canada (Provigo Distributions Inc. v. The Queen, 2000 D.T.C. 2112), where the Court came to the contrary conclusion. The appeal filed by the Crown from that decision has since been discontinued.

[32]       In that case the Court had to determine whether the employer premiums paid by Provigo during its 1993 taxation year under the aforesaid statutes could be deducted in computing its income for the preceding year, during which the wages relating to those premiums had been earned. The Crown argued, as it is doing in the case at bar, that the obligation to pay those amounts did not arise during Provigo's 1992 taxation year and that accordingly paragraph 18(1)(a) prohibited their deduction in computing income for the said year.

[33]       The Tax Court of Canada rejected this argument. The full text of the reasons on this point reads as follows:

[14] It seems to me that it is not legally tenable to argue that the employer's obligation with respect to employer contributions arises only if remuneration is paid, regardless of the legal fact that work has been performed and wages actually earned. In my view, this is not what the judge stated in Fédération, supra. In essence what she said is that employer contributions are not owed until the amount of remuneration has been determined and is payable. At that point they can be included in computing the taxpayer's income, not before. In this sense, that decision is consistent with the analysis by authors in the field of labour law concerning the meaning to be given to the word "remuneration" found in articles 2085 and 2087 of the Civil Code of Quebec.

[15] Those articles read as follows:

2085.     A contract of employment is a contract by which a person, the employer, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction and control of another person, the employer.

2087.     The employer is bound not only to allow the performance of the work agreed upon and to pay the remuneration fixed, but also to take any measures consistent with the nature of the work to protect the health, safety and dignity of the employee.

[16] In Le droit du travail du Québec, pratiques et théories, 3^rd edition, Les éditions Yvon Blais Inc., Robert P. Gagnon writes as follows at p. 70:

[TRANSLATION]

The notion of remuneration is very broad in scope. It in fact covers any consideration or benefit having a pecuniary value which the employer is required to provide to the employee in return for his performance of work. Apart from the wages or compensation, in the narrowest sense, paid on the basis of performance or of the duration of the work, remuneration thus comprises, where applicable, benefits such as vacation pay, payment for days not worked, the employer's contribution to the cost of certain insurance or retirement plans, etc.

[17] In Le contrat d'emploi, second edition, Les Éditions Yvon Blais Inc., Aust and Charette write as follows at page 86:

[TRANSLATION]

I. Pension plans, life and health insurance policies and other benefits

The benefits which an employee enjoys as conditions of employment, be they pension plans, medical insurance, health insurance or disability insurance, are generally regarded as an obligation which the employer has a duty to discharge over the entire term of the employment contract. As seen above, such benefits form part of remuneration if they have a pecuniary value. Consequently, as is the case for all other elements of remuneration, the employer may not reduce those benefits unilaterally.

[18] It seems clear that employer contributions are to be understood as being included within the meaning of remuneration. I believe it is quite apparent in any case that the employer's obligations with respect to employer contributions arise from the employee's performance of work and not from payment of their wages and that there has been some confusion between the imposition of the contribution and the payment or collection of that contribution.

[19] In Canadian Pacific Ltd. v. A.G. (Can.), [1986] 1 S.C.R. 678, at pages 682 and 683, the Supreme Court of Canada was called upon to make the distinction between the imposition of the contribution and the payment of the contribution under the provisions of the Unemployment Insurance Act. Sections 66 and 68 cited in the judgment were, in 1992, sections 51 and 53 respectively. First I will cite a portion of the headnote of that decision at page 678:

. . . It is s. 66 of the Unemployment Insurance Act, 1971, not s. 68, which requires the payment of employer and employee premiums and fixes their amounts. They are fixed at a percentage of the "insurable earnings" of the employee. Section 68 deals only with the manner in which these premiums are to be collected . . .

[20] La Forest J. states the following at pages 682 and 683:

My first remarks relate to the scheme of the Act. Section 66 appears in Part III which is entitled "Contributory Premiums". Section 68 appears in Part IV which is entitled "Collection of Premiums". I would note that titles, unlike marginal notes, are an integral part of the Act; see Elmer Driedger, The Composition of Legislation (1957), at p. 103. As one would expect, Part III deals with the substance of the law regarding premiums. In fact, it contains a series of provisions whose object, according to the relevant title, is "determining premiums". These include s. 62 already cited. This section, we saw, provides that the Commission must fix the amount of premiums in terms of a percentage of the insurable earnings of the employee. Section 66, as I have just noted, also appears there.

Even without reference to the scheme of the Act, a mere reading of s. 66, as Pratte J. observes, clearly indicates that it is this provision that requires payment of premiums and fixes their amounts. In addition, it directs us to the part of the law that prescribes the method of collecting them. Section 66(1) deals with employee premiums while s. 66(2) deals with those imposed on employers. They are parallel provisions and I shall restrict my remarks to s. 66(2) which directly applies in this case.

This provision requires, first of all, that every employer shall deduct and pay to the Receiver General an amount equal to the percentage of "insurable earnings" of the employee fixed by the Commission as the employer's premium. It also prescribes the manner in which these premiums are to be collected, namely "in the manner provided in Part IV" in which, it will be remembered, s. 68 appears.

[21] The statutes under which employer contributions are owed follow the same scheme: imposition of the contribution and collection and payment of the contribution. Like the Unemployment Insurance Act, the Act respecting the Quebec Pension Plan and the Act respecting the Régie de l'assurance-maladie du Québec clearly provide that the employer's obligation respecting contributions arises in consideration of an employee's performance of work during a period of time and is based on that employee's remuneration, not on the payment of his wages. Employer contributions may therefore be deducted in the year in issue in accordance with the principles stated in Burns, supra, and Canderel, supra.

[34]       First, I note the fact that the two provincial statues mentioned in the last paragraph do not operate within the same scheme as the Unemployment Insurance Act, as they do not include any provision comparable to section 51 of the Unemployment Insurance Act (formerly section 66) which might suggest that the obligation to pay employer premiums arises at the time the employee provides his or her services rather than when the remuneration is paid. The only relevant provisions shared by those statutes are those requiring employers who pay remuneration to withhold and remit the employee premium and to pay the employer premium (see sections 52 and 43 of the Act respecting the Quebec Pension Plan and the Act respecting the Régie de l'assurance-maladie du Québec on the one hand and section 53 of the Unemployment Insurance Act on the other).

[35]       Second, it is not correct to say that the employer premium paid under either of those statutes forms part of the remuneration which an employer pays to his employee (paragraph 18 of the Tax Court of Canada's reasons). Unlike the employee premium, the employer premium is a tax imposed on the employer in his capacity as employer and it is calculated by reference to the wages which he pays in order to collect his own contribution to the financing of the plans underlying these statutes. While these contributions are part of the costs an employer must bear in respect of his employees they are not part of the remuneration paid by the employer to his employees.

[36]       Third, it is clear, as the Tax Court of Canada noted (paragraph 14 of its reasons), that the employer premium which has to be paid under these statutes (like the employee premium) is not paid independently of the legal fact that work has been performed: wages are not wages unless they are paid in consideration of services rendered as part of employment. However, that is not the question.

[37]       The only question before the Court pertains to the time when the employer's obligation to pay the employer premiums under these statutes arises. In Canadian Pacific Ltd. v. A.G. (Can.), [1986] 1 S.C.R. 678, the Supreme Court of Canada did not have to answer this question.

[38]       The question that arose in that case concerned the treatment of tips under the Unemployment Insurance Act:

More precisely, as Pratte J. of the Federal Court of Appeal put it, [1984] 1 F.C. 859, at p. 860, "in calculating these premiums, is it necessary to take into consideration amounts which an employer paid its employees after receiving them from its customers, who had paid them to the employer of their own accord, to be distributed to the employees as tips?" (Majority reasons, per La Forest J., at 681).

[39]       The majority of the Supreme Court held, like the Court of Appeal, that it is section 66 of the Unemployment Insurance Act (now section 51) which creates the employer's obligation to pay the employer premiums (at 683). According to the Supreme Court, the phrase "insurable earnings" found in that section had a broader meaning than the word "salary" and included tips the employer had distributed to its employees (at 683, 684 and 685). As to the requirement that this remuneration be paid by the employer to the employee in accordance with section 3 of the Unemployment Insurance (Collection of Premiums) Regulations, the Court concluded that the word "pay", like the word "earnings", should be given a broad interpretation capable of including the situation in which a tip is paid to the employer for distribution to the employees (at 689).

[40]       The two conditions capable of creating the obligation to pay employer premiums had thus been met and the Court did not deal at any length with the question before this Court. Just as the first part of the judgment, dealing with section 51, and the concept of "insurable earnings" indicates that the performance of insurable employment by the employees is sufficient to give rise to the obligation to pay employer premiums, so the conclusion that the tips were "paid" within the meaning of the Regulations suggests that payment of the tips is a second condition without which Canadian Pacific would not have owed employer premiums. Indeed, the majority judges did not have to draw this second conclusion if they considered that Canadian Pacific's obligation resulted simply from the performance of insurable employment.

[41]       However, even if I was of the view that the obligation to pay premiums arises under section 51 when insurable employment is performed, without more, subsection (3) thereof provides in effect that in this instance the appellant's obligation could not have arisen during its 1992 taxation year. Subsection (3) of section 51 precludes the application of subsections (1) and (2) when the performance of the "insurable employment" occurs in one year (the year in question being the calendar year: subsection 2(1)) and the payment of the related "insurable earnings" occurs in another year. In these circumstances, the "insurable employment" is deemed to have taken place in that other year "for the purposes of calculating insurable earnings and premiums payable in respect thereof".

[42]       In my humble opinion, there is no way around this provision. If the mere performance of insurable employment creates the employer's obligation within the meaning of subsection 51(2) (and the employee's obligation within the meaning of subsection 51(1)), that employment must still give rise to "insurable earnings". Indeed, the obligation so created is to pay a premium "equal to such percentage" of the "insurable earnings" as is fixed by the Commission. It follows that there must be "insurable earnings" before the obligation to "pay" can be said to arise. Subsection 51(3) provides in effect that "insurable earnings" cannot be calculated in the year in which insurable employment is performed when the corresponding salaries are paid in the subsequent year.

[43]       Clearly, the purpose of subsection 51(3) is to cause the obligation of the employer (and the employee) to coincide with the payment of insurable earnings in these circumstances. It has no other reason for being. In the case at bar, as the right to the vacation pay resulted from the performance of insurable employment during the appellant's fiscal year ending on December 31, 1992 and the vacation pay had to be paid in one or more of the following years, the insurable employment is deemed not to have taken place during the appellant's 1992 taxation year for purposes of computing the insurable earnings resulting from the performance of that employment. It follows that the appellant did not incur the obligation to pay the employer premiums during the said year.

[44]       In my opinion, the trial judge properly concluded at paragraph 55 of her reasons:

. . . the obligation to make those employer contributions does not arise until the vacation pay is actually paid [that is, in 1993 or 1994, as the case may be]. The services provided by the employees do not give rise to that obligation. The payment of their salaries is what, under the various applicable statutes, creates an obligation for the employer to make the associated employer contributions.

[45]       Although counsel for the appellant asked the Court to regard the obligation to pay the employer premiums as if it had resulted from the obligation to pay the vacation pay, it has to be recognized that those obligations derive from different sources. The obligation to pay the employees vacation pay (like that of paying them wages) results from the employment contract and arises from the moment the employees provide their work, whereas the obligation to pay the employer premiums derives from statute and arises when the employer performs the legal act of paying his employees. These distinct sources of obligation are those mentioned in article 1372 of the Civil Code of Quebec (article 983 of the Civil Code of Lower Canada): "An obligation arises from a contract or from any act or fact to which the effects of an obligation are attached by law".

[46]       Counsel for the appellant argued at the close of the hearing that disallowing the deduction of the employer premiums on the ground that the obligation to pay the premiums had not arisen during the 1992 taxation year results from a reasoning which while focussed on the Act ignores accounting practice. I agree, but this Court has already had occasion to reject an identical argument on at least two occasions (see Newfoundland Light and Power, supra, at 6173 and Northwood Pulp and Timber v. The Queen, 98 D.T.C. 6640, at paragraphs 6 to 10).

[47]       Paragraph 18(1)(a) enacts a fundamental rule of law which the courts have always interpreted the same way: an expense must be incurred in the year in order to be deducted in the year, and an expense is not incurred in the absence of a legal obligation to pay it. This rule, as the present case demonstrates, may sometimes lead to results which detract from those mandated by accounting principles, but it cannot be disregarded. As the Supreme Court reaffirmed in Canderel, supra, the Act, if it conflicts with accounting principles, must take priority.

[48]       Finally, the trial judge also disallowed the part of the expense consisting of the appellant's contribution to a private plan:

[54] . . . No contract establishing the appellant's obligations under private pension fund or group insurance plans was filed. It is not open to the Court to make up for the insufficiency of the evidence adduced or to guess at evidence that would seem to be essential to a satisfactory disposition of the case but was never adduced. In other words, I can render a decision based only on the evidence adduced and not on the evidence that could have been adduced. In the case at bar, the appellant bore the burden of proving any distinctions that had to be made between the employer contributions required by statute and those resulting from the application of private plans. Since that evidence is not before me, and since the parties referred in their arguments solely to the employer contributions governed by statute, I will deal with the question of employer contributions as if they were all governed by statute.

[49]       It is conceivable that the employer contributions to private plans could have been treated differently from premiums governed by legislation (on the ground that the obligation to pay these contributions arose during 1992), but it was for the appellant to establish this. In the absence of evidence, the trial judge was right to reject this other part of the expense claimed.

[50]       In my opinion, the trial judge properly concluded that deduction of the expense of $752,640 in computing the appellant's income for its 1992 taxation year is prohibited by paragraph 18(1)(a) of the Act. That suffices to dispose of the appeal, but it is perhaps worth adding that in principle an expense which was not incurred in the year within the meaning of paragraph 18(1)(a), and which moreover must be estimated, clearly could not escape paragraph 18(1)(e) of the Act.

[51]       For these reasons, I would dismiss the appeal with costs.

Certified true translation

Suzanne M. Gauthier, trad. a., LL.L.