The Queen v. Hoffman, 85 DTC 5508, [1985] 2 CTC 347 (FCTD)

Rouleau, J:—The plaintiff brings this action against the defendant by way of trial de novo. The Tax Review Board having set aside the reassessments by the Minister involving the taxation years 1978 and 1979. The issue concerns moneys deducted at source from the defendant's salary and paid to the US social security system.

The defendant is a citizen of the USA and a resident of Canada. He was first employed by the Firestone Tire and Rubber Company and was working in the United States until August 1, 1967 when he was transferred by Firestone to one of its Canadian subsidiaries, Firestone Textiles Company.

In March 1955, prior to the defendant joining the firm, Firestone Tire and Rubber Company entered into an agreement with the US Internal Revenue. It provided for obligatory contributions by all employees of the company under the US Social Security Act. It also extended to employees who performed services in foreign affiliates who remained US citizens, and were non-residents. Pursuant to this agreement, in the taxation years 1978 and 1979, the company withheld $1,209.63 and $1,645.10 from the taxpayer's salary and forwarded it to the US government. Though he neither directed nor concurred in the payments of the withheld amounts, he nevertheless deducted them from his earnings for the years 1978 and 1979.

By notices of reassessment dated March 1984, the plaintiff reassessed the defendant for the 1978 and 1979 taxation years disallowing the deductions of the withheld amounts. In 1982 the Tax Review Board allowed the defendant's appeal and held that the withheld amounts formed no part of the defendant's income from employment for the 1978 and 1979 taxation years.

The evidence indicates that initially the defendant was not aware of the agreement between his principals and the US government. Shortly after his arrival in Canada, in 1967, he questioned the head office about the amounts being deducted for contributions to social security in the US. He undoubtedly acquiesced to this procedure because it persisted throughout his years of employment in Canada. A letter dated September 7, 1982, was forwarded by Firestone's head office to Mr Hoffman confirming that they had entered into this agreement in 1955 and that, as an American citizen working for a foreign subsidiary of an American employer, he was covered under this agreement and had no choice but to contribute.

The defendant submits that he is not taxable with respect to the withheld amounts, as income, for the years in question because they were never received by him. This within the meaning of subsection 5(1) of the Act: that income must be received before it can be taxed; that the amounts were withheld without his direction or concurrence; further, that section 8 of the Income Tax Act provides for the moneys that a taxpayer may deduct before calculating his net income; and that his contribution is one that should be considered in the same class as an approved pension plan.

It should be noted that the defendant was being paid by Firestone Canada Inc, a Canadian corporation, and the moneys deducted were then forwarded to the US for contribution to social security.

Issue:

(A) Whether contributions deducted by defendant's employer, pursuant to an agreement entered into between the parent corporation of the defendant's employer and the United States government, constitute income received within the meaning of subsection 5(1) of the Income Tax Act.

(B) Whether those amounts, if income received by the defendant, qualify as a deductible expense in computing the taxpayer's income for a taxation year within the meaning of subsections 8(1) and 8(2) of the Income Tax Act.

Issue A

Receipt of income within the meaning of subsection 5(1) of the Income Tax Act

Defendant relies on Robert Roy Cliffe v MNR, 17 Tax ABC 207; 57 DTC 305; MNR v Claude Rousseau, [1960] CTC 336; 60 DTC 1236 and The Queen v Gerald Chrapko, [1984] CTC 594; 84 DTC 6544 for the proposition that moneys not actually “received” do not constitute “received” income within the meaning of subsection 5(1) of the Income Tax Act (ITA).

In Cliffe (supra) and Rousseau (supra), the issue to be decided was not whether certain specified sums had to be in the actual physical possession of the taxpayer before those amounts could be construed as income "received", but whether the word "received" within the meaning of subsection 5(1) of the ITA incorporates the words "received" and "receivable".

In Chrapko (supra), the determination of whether weekly wages received by a parimutuel cashier constituted income in the hands of the taxpayer was dependent upon the degree to which he complied with the terms of a contractually established condition precedent: the contract of employment provided that overpayments on winning tickets were to be deducted from employee's weekly wages. There existed a legally binding requirement; a cashier's total weekly shortages were to be deducted from his total weekly wages. It had to be determined whether moneys received by the cashier, before shortages were deducted, constituted his weekly income. The Tax Review Board and the Federal Court expressly refused to apply subsection 56(2) of the ITA and found that the cash shortages deducted from the cashier's salary were not his property to begin with.

In this case, the defendant does not dispute the ownership of the amounts contributed to the US government in the 1978 and 1979 taxation years. Nor can he argue that he will not eventually derive a benefit from these moneys. He does argue that he did not receive the sums deducted from his salary.

If the proposition that income must be in the actual possession of the employee before it can be taxed is correct, then I would have to conclude that an employee's contributions to Canadian or provincial pension plans, deducted at source by the employer, are not income in the hands of the employee. Jurisprudence does not support this proposition.

In Lucien Gingras v MNR [unreported decision dated March 26, 1973] the Tax Review Board noted (at page 4):

[Translation]

The expression “touché” (received) does not necessarily mean that the full amount of the salary must be physically received by the payee or be deposited in full in his bank account.

According to the interpretation of s 5 it is sufficient to say that the amount of the salary was paid by the employer either to the employee himself or to his benefit, or that it was handed over to a third party under a federal or provincial Statute.

The fact that defendant's employer deducted at source employee's social security contributions in the 1978 and 1979 taxation years does not support the proposition that he received income net of the withheld amounts. The amounts deducted and forwarded were for his eventual benefit.

Constructive receipt pursuant to subsection 56(2) of the Income Tax Act

In George A Murphy v The Queen, [1980] CTC 386; 80 DTC 6314 Mr Justice Cattanach listed four essential ingredients that have to be satisfied before subsection 56(2) will establish tax liability in the hands of the taxpayer (at pp 389-90 (DTC 6317-18) ):

(1) that there must be a payment or transfer of property to a person other than the taxpayer;

(2) that the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer;

(3) that the payment or transfer be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer wished to have the benefit conferred, and

(4) that the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.

At issue is whether conditions (2) or (3) are applicable to the defendant.

Transferred without direction or concurrence

Defendant argues that he did not consent, concur nor direct that payment of the withheld amounts be transferred to the US government. According to him, the obligation to pay the withheld amounts was established pursuant to a contract to which he was not a party. However, the defendant did abstain from objecting to the contractual arrangement for several years.

Ministerial policy and jurisprudence indicated that defendant's silence, over the course of several years, as to the contractual arrangement between Firestone Tire & Rubber Co and the US government constituted concurrence in the transfer of the withheld amounts, notwithstanding the fact that the defendant was not a party to the contract.

Interpretation Bulletin No IT-335 notes that the direction or concurrence of the taxpayer may be implicit. In Hartland v Diggines, [1926] AC 289 (HL) it was held that, notwithstanding the fact that neither verbal nor written agreement had been entered into between employee and his employer, wherein the employer paid income tax on the employee's salary, payment constituted income received in the hands of the employee. Viscount Cave noted (at 291):

.. . But it is said — and this is the main argument used on behalf of the Appellant

— that the sum is not an emolument because it was not paid to the Appellant or at his request, although in fact it was paid regularly over a series of years. I do not agree with that argument. There was that continuity in payment to which reference was made in the case of Blakiston v Cooper, and the effect of the payment was in practice and in fact to relieve the Appellant year after year from the liability for the payment of the tax.

In MNR v Allan Bronfman, [1965] CTC 378; 65 DTC 5235 the directors of a company bestowed gifts upon relatives and former employees in the amount of $97,000 in the absence of shareholder authorization. It was held that such gifts constituted income in the hands of the directors pursuant to subsection 16(1)[56(2)] of the ITA (RSC 1952, c 148). However all the shareholders of the company were to share, proportionately to their individual holdings, the tax liability imposed by subsection 16(1). By their failure to object to the corporate gifts at shareholder meetings, the shareholders had concurred in their directors’ generosity. Mr Justice Dumoulin noted (at 385 (DTC 5239)):

Shareholders possessing voting rights could have, had they so wished, objected to and voted down at annual or specially convened meetings their directors' generosities. And, of course, they also might have resorted to the radical remedy of voting out of office the entire Board and elected a more thrifty slate of directors. Their abstention or indifference, unbrokenly maintained, becomes tantamount to an approval of their administrators' gift distributing policies, and they should, with the latter, have shared proportionately to their individual holdings, the burden of taxation decreed by Section 16(1).

[Emphasis added.]

Thus mere absence of privity is not the sole criterion assessable in the determination of concurrence. Of equal relevance is whether subsequent behaviour — the absence of objection — constitutes tacit acceptance of the contractual arrangement.

Whether withheld amounts constitute taxable benefits when payment made without the concurrence of the taxpayer

Defendant cites Damitri Pazuk v MNR, 13 Tax ABC 264; 55 DTC 428 and Henry Butt Norris v MNR, 17 Tax ABC 257; 57 DTC 301 as authority for the proposition that defendant’s social security contributions do not constitute a taxable benefit.

In fact those cases turned on the issue of whether an employer's contribution to a pension or superannuation fund constituted a taxable benefit in the hands of the taxpayer. They did not consider the issue, presently in dispute, of whether an employee’s pension contribution retained by his employer from his remuneration constitutes a taxable benefit in the hands of the employee.

Jurisprudence indicates that employer contributions from employee remuneration constitute a taxable benefit of the employee (E H Bruce v J L S Hatton, 38 TLR 323; Jean Paul Morin v The Queen, [1975] CTC 106; 75 DTC 5061; Percy John Salter v MNR, [1947] CTC 29; 2 DTC 918).

Issue B

Section 8: Deductibility of amounts paid to the US government under social security (US)

(1) Non-Business Income Tax

Defendant has argued that the amounts of $1,209.63 and $1,645.10 for the 1978 and 1979 taxation years respectively, paid to the US government as contributions under social security, constitute non-business income tax within the meaning of paragraph 126(7)(c) of the ITA and thus were properly deducted pursuant to subsection 20(12) of the ITA.

Ministerial administrative policy and the case law indicate that US social security contributions constitute an amount which may be used either as a deduction from income or as a foreign tax credit, or considered a nonbusiness income tax within the meaning of paragraph 126(7)(c) and subsec- tion 20(12) of the ITA. However, the income tax deduction or tax credit must be applied against income from sources in the United States.

Interpretation Bulletin No IT-122R indicates that:

Normally, a United States citizen who is neither a resident of the United States nor employed by a United States resident is neither required nor permitted to pay tax under the Social Security Act. An exception occurs, however, when a corporation resident in the United States elects to pay the full tax on behalf of United States citizens resident in Canada who are employees of a Canadian corporation which is a subsidiary of the United States corporation. Where part of the tax is withheld from the salary of such an employee by the Canadian subsidiary, the amount so withheld should be regarded as an income tax paid to the United States, in respect of which a foreign tax credit will be allowable if the employee has income in the year from sources in the United States.

Interpretation Bulletin No IT-122R reflects the decision rendered in Charles E Seley v MNR, 30 Tax ABC 243; 62 DTC 565 wherein it was held that a taxpayer's contributions did constitute an income or profits tax levied in the US and therefore formed an integral part of the foreign tax credit which credit could be applied against taxpayer's income earned from a foreign source.

Paragraph 126(7)(c) was amended by SC 1980-81-82-83, c 48, s 72(1) with the addition of subparagraph 126(7)(c)(iv). By that subparagraph Parliament has expressly excluded from the definition of Non-Business Income, any income payable to a foreign country solely because: (a) the taxpayer was a citizen of that country, and, (b) such taxes could be reasonably attributable to income from a source within Canada.

It was argued that the exclusionary stipulation enunciated in subparagraph 126(7)(c)(iv) was not a provision of paragraph 126(7)(c) in the taxation years 1978 and 1979. That the absence of the relevant subparagraph permits defendant to apply his contributions as a Non-Business Income against his employment income earned in Canada. Otherwise, that I should conclude that, notwithstanding subsection 8(2) of the ITA, payments made to the US social security system constitute an allowable deduction within the meaning of subsection 8(1) of the ITA.

I disagree. In Jean-Paul Fluet v MNR, [1982] CTC 2319; 82 DTC 1319 the Tax Review Board commented on applying a liberal interpretation to the tax exemptions enumerated in subsections 8(1) and 8(2) of the ITA. It noted the following at 2323(DTC 1321-22) of the decision:

The income earned is therefore taxable whether the fine is paid directly by the employee or is deducted from his salary. Can the fine, however, be allowed as a deduction?

4.03.3 In view of the fact that all the deductions allowed against income from an office or employment are set out in section 8 of the Act and that no provision is made therein for the payment of a fine to one's employer, the deduction cannot be allowed.

The Tax Review Board, like any other tribunal in this country, must interpret the Income Tax Act strictly, since the Act falls within the realm of public law.

The need for strict interpretation obliges the tribunal to allow only such deductions as are explicitly provided for; moreover, the words used in the legislation must be interpreted according to their dictionary meaning unless they are defined in the Act.

In the instant case, the Act contains no provision, either general or particular, that would enable the Board to allow the deduction claimed. Unfortunately for the appellant, the appeal must be dismissed.

[Emphasis added.]

The fact that a contribution to a foreign social security plan is not among the listed deductions in subsection 8(1) of the ITA argues against its inclusion as a deduction to be applied against the defendant's income.

(2) Listed Section 8 Exemptions

(i) Paragraph 8(1)(m): Contribution to a Registered Pension Plan

A taxpayer may deduct, in computing his income for a taxation year from an office or employment, amounts contributed by him to a registered pension fund or plan. Subsection 248(1) of the ITA defines a registered pension fund or plan to mean a fund “accepted by the Minister for registration for the purposes of this Act in respect of its constitution and operations for the taxation year under consideration".

Information Circular No 72-13R7 discusses the administrative rules with respect to employees’ pension plans, including registration. The circular indicates that the Minister of National Revenue does not consider that employee social security payments made pursuant to social security constitute a deductible expense within the meaning of paragraph 8(1)(m).

In Renée Carmen Louise Ledwidge v MNR, [1971] Tax ABC 254; 71 DTC 188, the Tax Appeal Board held that contributions made by a former citizen of France, now resident in Canada, to a pension plan of the French government did not constitute a deductible contribution on the ground that such amount was not a contribution to “a registered pension fund or plan” within the meaning of the ITA.

Thus defendant's contributions under social security do not constitute amounts deductible within the meaning of paragraph 8(1)(m).

(ii) Paragraph 8(1 )(l)

Subsection 146(5) of the ITA stipulates that a taxpayer may deduct from his income premiums paid by him into a registered retirement savings plan. However, the amount deductible is limited by, inter alia, the taxpayer's contribution to another pension fund or plan. Subsection 146(5.2) of the ITA stipulates that the term “pension fund or plan” does not include the Canada Pension Plan, a provincial plan or any similar plan of a foreign country.

In Muriel J Stelfox v MNR, [1985] 1 CTC 2065; 85 DTC 100 taxpayer argued that since subsection 146(5.2) likens “‘similar plans of a foreign country" to the Canada Pension Plan or a provincial pension plan — the contributions thereto being deductible pursuant to paragraph 8(1)(l) of the ITA — then contributions made by the taxpayer to the British Department of Health and Social Security are similarly deductible under paragraph 8(1)(l) of the ITA. The Tax Court of Canada rejected this argument noting (at 2067 (DTC 101)) that:

It seemed quite clear that there was no provision for the specific deduction of this amount [.]

[Original emphasis]

If Parliament wanted to include, as a deduction against employment income, contributions made “to a similar plan of a country other than Canada", it would have done so. That Parliament expressly chose to include the phrase in respect of a provision concerned with the determination of maximum allowable deductibility limits of premium contributions, yet it did not expressly do so in relation to paragraph 8(1)(l), indicates that contributions paid under social security are not allowable deductions within the meaning of paragraph 8(1)(l).

The plaintiff’s claim is hereby allowed and the decision of the Tax Review Board dated November 8, 1982 is hereby set aside and varied.

The reassessment made by the Minister of National Revenue in respect to the defendant’s 1978 and 1979 taxation years is hereby restored.

Costs to the plaintiff.

Appeal allowed.