Citation: 2011 TCC 449
Date: 20111012
Docket: 2002-4174(IT)G
BETWEEN:
GORDON PRICE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1]
These appeals are from
assessments of the Minister of National Revenue increasing the Appellant’s allocation
of his Canadian income for the 1995, 1996, 1997, 1998, 1999 and 2000 taxation
years. He was a non-resident of Canada during the relevant years, living in
Bermuda. Pursuant to subparagraph 115(1)(a)(i) of the Income Tax
Act, (“Act”) taxable income earned in Canada by a non-resident
person is remuneration from duties of employment performed by the non-resident
person in Canada. No tax treaty exists between Canada
and Bermuda and his income earned outside of Canada
is not taxable in this country.
[2]
The question is what
part of his Air Canada (“A/C”) income is taxable in Canada?
[3]
The Appellant, formerly
a senior pilot (Captain), challenges the Minister’s methodology in calculating
the Canadian allocation of his A/C income. There are some 40 other A/C pilots
with similar appeals. This has been referred to as a test case although so was Sutcliffe
v. Her Majesty the Queen
which preceded it. It is conceded, that at all relevant times, the Appellant
(retired), was a non-resident of Canada within the meaning of the Act.
[4]
During the first three
days of the hearing in November 2010, the parties believed they had settled the
issue with respect to international flights yet some details were later
disputed. For the most part, the issues narrow down to the income allocation
for domestic flights (primarily Toronto, Vancouver and return) and for non-specific duties such as remuneration during
vacations, sickness, deadheading and other non‑flying items.
[5]
The facts include that
the Appellant was a Canadian citizen but a resident of Bermuda
during the relevant years – 1995 to 2000 inclusive. He and his wife moved there
in 1993. All his flights both international and domestic originated in Canada,
primarily from Toronto. As a senior pilot he was able to choose
his routes of travel which were, for the most part, international. To determine
his Canadian taxable income, an allocation must be made between the duties
performed inside and outside Canada. In the years 1995 to 2000 inclusive he
received the following income from A/C: $175,000, $202,000, $196,000, $212,500,
$215,500 and $261,000, respectively.
[6]
In the previous
decision, Mr. Sutcliffe was an A/C pilot who also appealed the Minister’s
allocation of his income. His claim for non-residency status was also not
challenged. Unlike in the present case, allocation for international flights
was more seriously challenged. Domestic flights and non-flying duties were also
dealt with in Sutcliffe.
[7]
In 1999, Mr. Price received
$17,000 in disability income of which $8,500 was attributed to his Canadian
income. Similarly, he received $34,500 in 2000 and $17,500 was allocated to
disability income in Canada. He contends that, as a non‑resident,
none of this income should be considered Canadian income.
[8]
The Minister takes the
position that regardless of the airspace flown in, income in respect of
domestic flights is income earned in Canada. Many flights
such as Toronto-Vancouver and Toronto-Montreal fly in part over U.S. airspace.
[9]
The terms of the
Appellant’s employment were set out in an agreement (the “contract”) negotiated
between A/C and the A/C Pilots’ Association. The Appellant was remunerated for
flying time on a per-minute basis which is set out in Schedules A to F in the
Minister’s Reply to the Notice of Appeal. It does not serve a useful purpose in
these reasons to review the agreement in great detail.
[10]
The Appellant spent a
minimum of 15 minutes in Canada on all flights on pre-flight, departure,
landing and taxiing procedures as part of his duties of employment. In addition
to receiving remuneration for flying time, he was also remunerated for
deadheading
for which income was allocated according to the departure and termination
points of the deadhead flight. He was also remunerated for stand by duty which was
allocated to the respective flight and for training which was allocated
according to the location where the training took place.
[11]
Further, he was paid
for sick leave, vacation time, displacement, bank time and other benefits as
more particularly described in the contract, in respect of which no specific
duties are performed. The income which was allocated on the same proportional
basis as income received by him in respect of actual duties performed. He was also
remunerated in respect of other incidental amounts including Duty Pay
Guarantee, Trip Hour Guarantee and Overseas Operations Pay. These amounts are
apportioned to the flights to which they pertain.
[12]
Initially, this hearing
commenced and continued on November 24, 25 and 26, 2010 when it was adjourned
to give the parties the opportunity to obtain necessary information from NavCanada
(“NavCan”) with respect to obtaining domestic
flight times over U.S. airspace and to permit the preparation of
a mathematical formula which might resolve the domestic issue. There was a
mountain of data records to be condensed into useable percentages with the hope
that the parties could arrive at reasonable allocations.
[13]
For the most part, the
present disagreement between the parties is the allocations of the U.S. and Canadian flying time for the Appellant’s flights between
Toronto and Vancouver and the allocation of non‑flying
duties while awaiting a return flight from an international location. I believe
the Appellant’s position is that almost 90% of his flights between Toronto and Vancouver
were over U.S. air. The Minister arrives at a far lesser
percentage using averages from A/C flight plan records.
[14]
As stated, in addition
to the Toronto-Vancouver allocation, the second and very substantial issue is the
between flights allocation which the Appellant estimates at 70% of his duties away
from home.
Under the heading “Reasons, the Appellant Intends to Rely On” from the Amended
Notice of Appeal, the Appellant includes:
2. The Minister disregarded the real or actual place of
employment and earning activity in this case. In making the assessment or
reassessment, the Minister relied on fiction or unreasonable and unfair
assumptions. The Appellant asserts that generalized assumptions, such as the
new allocation method, can only be rationally applied where the real or actual
facts are not known or knowable; assumptions are never a substitute for real or
actual facts.
3. The allocation method and criteria are not rationally
connected to their purpose. Applying them artificially generates more income
taxable in Canada. The relative
weight given to the various employment functions is made without rational or
justifiable reasons.
[15]
The hearing of the
appeals began in November 2010 for three days, and continued for four days in
June 2011. The parties reached agreement on some issues yet had to
re-argue them during the June hearing. It was a relatively difficult hearing.
[16]
At the end of the hearing,
counsel for the parties provided the following issues which they wished
addressed:
a) Which method
of allocation is more reasonable to determine the Appellant’s income earned in Canada? How should the present case be handled in light of
the Sutcliffe decision?
b) Which portion
of Toronto-Vancouver and Vancouver-Toronto flights were flown over Canada? Is the testimony of the NavCan witness admissible?
c) Are the disability payments
taxable in Canada?
d) For
international flights, what method should be used, minutes or the distance
flown over Canada?
e) Should the
Court recommend that the Minister waive the calculation of interest on unpaid
takes? Was the reassessment of the Appellant fair after a six-year delay from
the Notice of Objection.
I will deal with these issues in order.
(a) Method of allocation
The Respondent’s method of allocation
[17]
The Respondent’s method of
allocation for the most part follows Sutcliffe, the facts of which are
very similar to the present case. Prior to Sutcliffe, the income
allocated to international flights was not subject to Canadian income tax and
the income allocated to domestic flights was subject to Canadian income tax. An
international flight was understood to be a flight that departed from or
arrived at a place outside Canada, regardless of whether most of or a portion of the
flight was over the Canadian territory. A domestic flight was one that departed
from and arrived in Canada, regardless of whether most of or a portion of the
flight was over a territory outside Canada.
[18]
In Sutcliffe, Woods J.
departed from this method and decided that the income earned by a non-resident
pilot from a Canadian airline employer should be allocated and taxed as
follows:
·
The income earned by the pilot in
respect of the portion of a domestic flight flown in Canadian airspace is
income earned in Canada.
·
The income earned by the pilot in
respect of the portion of an international flight flown in Canadian airspace is
income earned in Canada;
·
The income earned by the pilot in
respect of remuneration paid by the airline company that is not related to
specific duties, such as vacation and sickness pay, should be allocated on a
pro-rata basis to duties performed in Canada.
The
income earned in Canada is determined by the time spent by the pilot in
Canadian airspace. She uses the following assumptions to calculate the time
spent in Canadian airspace:
·
average flight paths are
determined as the most direct route between the point of origin and the
destination using conventional navigation (e.g. great circle routes);
·
distance in Canada is computed by
distance from the point of origin (or destination) to (or from) the point on
the border or in territorial waters where the flight leaves (or enters) Canada, which
is determined from the average flight path;
·
the distance for the flight path
is from data received from a Canadian airline, and was cross-referenced to an
independent third-party source;
·
time in Canada is
determined by dividing the distance in Canada by airspeed; and
·
airspeed is the average airspeed
throughout the flight determined by reference to the distance and minutes for
the flight as indicated by the airline.
The Appellant’s method of allocation
[19]
The Appellant strongly disagrees
with the Respondent’s allocation method. He distinguishes the facts in Sutcliffe
from this case. Firstly, that Mark Sutcliffe was a first officer and later a first
year captain who flew primarily DC9 and A320 planes mainly in Canada and the U.S. On the
other hand, the Appellant was a 30‑year captain who flew larger planes
(747 and Airbus 340), mainly to overseas destinations. He states that Mark
Sutcliffe flew short haul flights, flying probably to a point in Canada or a
point in the U.S., and frequently returning to the Canadian place of
origin the same day. The Appellant flew long haul flights, resulting in his
being away from his home for days and was performing duties out of the country that
were in furtherance of his employment.
[20]
The Appellant asks the Court to
take into consideration that a more senior captain on a larger plane going
faster at longer distances has a different job and different duties than junior
pilots flying a smaller plane to a relatively close destination, either in
Canada or in the U.S. He believes his duties were different from Sutcliffe
and his allocation must, therefore, be different.
[21]
He repeatedly testified that his
conditions of employment often required him to be away from home for several
days between flights and that during this non‑flying period he was on‑duty.
Those duties included flight management, receiving instructions from authorities,
safety management, liaising with employer, risk management, crew management, dealing
with reports and updates, and his review and maintenance functions. He contends
that resting is a duty of employment because of employment regulations. He adds
that he is the manager of his aircraft from the time it leaves to the time it
returns to Toronto so that 70% of his duties were performed outside of Canada between
flights.
[22]
The following example, which is
not based on actual flight data, illustrates his methodology.
Prepared
for the Court’s assistance by the Appellant.
|
International
flight – facts
|
|
|
Departure
from Toronto on Monday at 9:00 am
Arrival
to Toronto on Wednesday at 9:00 am
|
|
|
Time
of total flight (flying time)
|
10
hours
|
|
Time
of flight over Canada
|
5
hours
|
|
Time
away from base / Time performing duties
|
48
hours (not Canadian income)
|
|
Remuneration
for flight
|
$10,000
|
In
the example, the flight leaves from Toronto at 9:00 a.m. on a Monday and comes
back to Toronto at 9:00 a.m. on a Wednesday. The Appellant is gone 48
hours overseas. The actual flying time is 10 hours recorded by A/C. The time of
the flight over Canada is five hours. This data is provided by Canada Revenue
Agency (“CRA”) and calculated as explained above. Although the Appellant
disagrees with the use of flight paths and averages to establish those numbers,
he adopted them for the purpose of applying his method. The time away from base
or the time performing duties is 48 hours. This is based on the time of the departure
and the time of return and the remuneration for the flight is $10,000.
Comparing
Methods
|
Appellant’s
method
|
|
|
Duties
in Canada
|
5
hours
|
|
Time
away from base / time performing duties
|
48
hours
|
|
%
allocation to Canada
|
10.4%
|
|
Income
allocated to Canada
|
$1,040
from a total of $10,000
|
|
Respondent’s
method
|
|
|
Duties
in Canada
|
5
hours
|
|
Time
of flight / time performing duties
|
10
hours
|
|
%
allocation to Canada
|
50.0%
|
|
Income
allocated to Canada
|
$5,000
|
[23]
Both parties arrive at a different
allocation of income in Canada with the same facts simply because the Appellant
considers that he was on‑duty in Canada only five of the 48 on‑duty hours. CRA
considers that he was on‑duty in Canada for five hours but only on a
total of 10 hours since only the time spent flying is taken into consideration
and not the time between flights spent perhaps in the far east or Europe or
other location outside of Canada. The Appellant states he left Toronto Monday
morning for work and came back 48 hours later, meaning that he worked 48 hours
for his employer, A/C, and only five hours should be Canadian income.
[24]
He was required by his employer to
remain in the location of his destination to fulfill the duty above mentioned
and this was a condition of employment. He agrees that he was earning a salary
yet the consequence is that the salary is income and the earning of that income
accrues on a daily basis throughout the entire period that it is earned,
including off-flying period.
Analysis
[25]
Woods J. applied the principle of Bowman
J. in Sumner v. The Queen.
In considering different methods of apportionment, a judge should apply the
most reasonable method. He stated as follows:
[24] In
this case the employer itself has made an allocation using the gross-receipts
method and while this is not binding and gives rise to no estoppel it is at
least prima facie evidence of an attempt to make a reasonable allocation. The
situation might well be different if Mr. Sumner were not an employee and his
employer had not made an allocation. If one were attempting to determine the income
from the business of putting on rock concerts in different countries I should
think that expert accounting evidence would be of great assistance. It may well
be that the operations in one country yielded a loss and in another a profit.
The question of the allocation of head office overhead should also be dealt
with. I do not wish this judgment to be taken as sanctioning one method over
another. I can see problems in both methods, and other allocation formulae
may be appropriate. My decision in the case of Mr. Sumner is based solely on
the fact that it has not been established that the time method is more
reasonable or appropriate than that used by the Minister. Therefore Mr.
Sumner's appeal is dismissed.
[Emphasis added]
[26]
It is not sufficient for the
Appellant to establish that the Minister’s apportionment is inaccurate, he must
provide the Court with a more reasonable method than that accepted in Sutcliffe.
[27]
The theory of the Appellant does
not stand after an analysis of the agreement negotiated between A/C and the
Pilot’s Union. A/C paid its pilots for the flying minutes and not
for the period between flights. The collective agreement contains a very
specific and precise method to calculate the remuneration of pilots. The
Appellant was paid for flying time on a per-minute basis. His income was
calculated based upon a rate that is multiplied by flight minutes. Subject to
paragraph 17.11, he was compensated for duties performed by him only
during the on-duty period, which is defined in the contract as commencing one
hour prior to the scheduled departure time or at the required reporting time,
whichever is earlier, and ending 30 minutes after the termination of the flight.
[28]
Being away from home on layovers
might be a condition of employment, but the pilot was paid based on flight time
only. Even if it is a condition of employment, it does not mean it is a
condition of employment for which the pilot is remunerated. Moreover, it is unreasonable
to give the same value to an hour spent flying an aircraft with an hour at a
hotel in Tokyo or elsewhere and this does not appear to be the
intention of the parties to the collective agreement.
[29]
There is a provision for
remuneration for layovers in section 17.11 of the contract as follows:
.02 Trip
Hour Guarantee - In the case of trips which involve legal layover(s) away
from home base, a pilot shall be guaranteed one (1) hour of flight time credits
and pay for each four (4) actual hours of trip hour time, prorated. Trip hour
shall be counted from the time a pilot is required to report to the airport at
his home base prior to operating a flight or actual reporting time, whichever
is later, to the time a pilot is released from duty thirty (30) minutes after
arrival at his home base for a legal rest.
.01 Any
trip hour special credit will be calculated for pay purposes as an extension of
the last portion of the final trip except where a combination of Overseas and
Domestic flight legs are involved; in which case the ratio of Overseas/Domestic
flight legs are involved; in which case the ratio of Overseas/Domestic Trip
hour time will be calculated as a percentage of the total Trip hour guarantee.
[30]
Trip hour guarantee provides
additional income to pilots who spend time away from their home base during
layovers. A/C attributed it to the pilots in the form of extra minutes added to
the last portion of the return trip.
[31]
Finally, there is no mention in
the written agreement of the off-flying duties that the Appellant refers to. While
recognizing inconsistencies with his methodology and the letter of the
contract, he explained that his duties were going beyond the contract and
suggested my favouring the legal doctrine of substance over form. The contract
does not provide for the off‑flying payment the Appellant is requesting.
Substance over form cannot be used to alter the clear text of the contract.
[32]
Even accepting that the
Appellant’s income was salary the definition of salary cannot be interpreted as
implying that off-flying hours are work hours or have the same value. The agreement defines
on-duty period as commencing one hour prior to the scheduled departure time and
ending 30 minutes after the termination of the flight. Further section 17.05.02 provides
that A/C will plan a suitable downtown location for layovers longer than (14)
hours. The requirement of rest during lengthy layovers and off-duty periods is
recurrent at sections 17.05.03 and 17.05.04.
[33]
I conclude that the most
reasonable method is the one which reflects the pay structure contained in the
contract of employment. This is consistent with the decision in Austin v.
The Queen.
Austin was a non-resident Canadian Football League (CFL) quarterback who
played three games out of 18 in the U.S. in 1994 and four games in 1995. He spent six days in
1994 in the U.S. and eight days in 1995 while playing for his Canadian
team. The issue was whether his income was calculable on a per day percentage basis
as presented by the Minister or on a per game basis as submitted by the Appellant.
I concluded that Mr. Austin’s approach was more reasonable because he was
essentially paid on a per game basis pursuant to his employment contract and he
was not paid for unplayed games. The Appellant’s situation of being paid per
flying minutes is analogous to the situation of Mr. Austin.
(b) Apportionment - Toronto to Vancouver and return.
[34]
During closing argument, the
Appellant referred to paragraphs 35 and 36 of Sutcliffe and argued that
they apply equally to the present case. Woods J. wrote:
35 For
the appellant, several Air Canada pilots and a dispatcher testified. In
general, they described the Agency's methodology as being grossly
oversimplified, based as it is on the idea of "average flight paths"
and speeds which are essentially fictional. It also does not take into account
delays in either take offs or landings.
36 According
to the testimony, pilots are presented with flight plans prepared by
dispatchers prior to the departure of a flight. The dispatchers use a
computerized system for calculating the shortest distance between two points
modified with reference to restricted airspace, weather patterns, and the jet
stream. Those flight plans inevitably change once the flight has begun due to
changes in weather and wind patterns. Fuel is very expensive, so taking
advantage of tail winds and avoiding head winds is important to routing. The
pilots testified that the actual flight path and time of each flight is
inherently unpredictable as a result of these variables. As a result, the
Agency's methodology was highly artificial, according to the pilots.
[35]
The flight paths recorded by
NavCan are provided by A/C. They indicate the route, the speed and when the
plane crosses the border. The flight path is the most efficient way to travel from
point A to point B according to A/C. It takes into consideration different elements
such as weather, jet stream and even volcano eruptions, if applicable. NavCan
has no knowledge of whether the actual flight path was followed by the pilot.
According to the Respondent’s witness a deviation from the flight plan is rare,
but he does not exclude that it can happen. To the contrary, the Appellant
testified that he was in control of his aircraft and was entitled to deviate
from the original flight path. A rapid change of weather can trigger a change
in the path. He argues that the Respondent’s method is based on assumptions and
does not take into consideration the actual flying circumstances. Although he
testified that approximately 90% of the Vancouver flights were flown over U.S. territory,
he accepted the 31%-49% Sutcliffe apportionment.
[36]
To alleviate any misunderstanding,
I will deal with this issue in more detail. As far as it goes, I accept the
testimony of the NavCan witness. I find it of assistance in understanding the
data upon which the Minister based his assessments. The Appellant agrees with much
of the testimony of the NavCan witness although he objected to the evidence on
the basis that it was hearsay because the NavCan witness was not the person who
drew up the flight path. I find that the numbers and the flight path details
provided by the witness are admissible because the witness was qualified to
interpret the flight document. The specific paths he referred to belonged to
the Appellant which was less than 50% over U.S. airspace on Vancouver-Toronto, Toronto-Vancouver
flights.
[37]
The Appellant also offered
evidence that, not only is the pilot entitled to follow a path deviating from
the given flight path, but that pilots do so in most flights. I believe the Respondent
was seeking a ruling to the effect that the flight paths recorded by NavCan are
a fair representation of what is happening in the reality and that the CRA
could always rely on the numbers provided by NavCan in order to assess the
pilots. While the flight paths may be a fair representation of reality and
represent the most reasonable conclusion, pilots may often vary these paths and
we have no hard evidence as to the frequency and extent. To establish that a
flight path is a fair estimation of the actual route followed by a pilot,
further and corroborating evidence is required such as the testimony of A/C pilots.
[38]
Based on the testimonies of the
Appellant and the NavCan witness, I find that the amounts of income reasonably
attributable to duties of employment performed outside of Canada by the
Appellant is 31% and 49% for the Toronto-Vancouver connection. This is somewhat
arbitrary yet it is supported by the following: i) these percentages are
somewhere between the positions of the Respondent and the Appellant and ii) they
are the percentages that Woods J. arrived at in Sutcliffe which appear more
reasonable than that presented by either party.
[39]
The Respondent’s counsel submitted
that we cannot take the findings from Sutcliffe and apply them to the
present case because they are based on different evidence. We have the numbers
given by the Respondent based on NavCan flight paths and those based on the
Appellant’s testimony. While I have difficulty accepting that the Appellant almost
never followed the flight paths, yet we have no corroborated testimony to the
contrary. I cannot conclude that the flight paths provided by NavCan are an
accurate reflection of the route actually taken by the Appellant all or mostly
all of the time. He, at least partially, refuted the Minister’s assumptions with
respect to the flights Toronto-Vancouver and Vancouver-Toronto. Woods J. heard
evidence of A/C pilot Sutcliffe and perhaps other pilots, for the same air path.
In a context where I have no clear indication as to which percentage is the
appropriate one, the findings of Woods J. are compelling. There is no better
methodology presented.
c)
Disability payments
[40]
Section 26.03.03 of the contract
stipulates that the monthly premium for the disability income insurance plan is
paid by A/C. These disability payments to pilots who are Canadian residents are
taxable pursuant to paragraph 6(1)(f) of the Act. Pursuant
to section 115 of the Act, the payment to a non‑resident such as
the Appellant is taxable in Canada.
[41]
He contends that the disability
payments he received in the years 1999 ($17,112) and 2000 ($34,655) should not
be taxed in Canada because he was a non‑resident. He referred to
the decision of Blauer v. Canada
heard under the Court’s informal procedure. Mrs. Blauer resided and was
employed in Canada before becoming disabled and leaving for Israel. As a
non-resident, she received wage loss replacement payments from a Canadian
insurance company. The employer was paying the insurance premium. The presiding
Judge concluded the following:
I agree with
the Appellant's argument. The language of subparagraph 115(1)(a)(i) does not
include all payments that are employment income when earned by a non-resident
but rather it includes only a certain type of employment income; namely, income
from the performance of the duties of an office or employment. There is no
ambiguity. That provision should not be taken to include other categories of
employment income such as the WLR payments (i.e. disability insurance benefits)
irrespective of their inclusion for residents by virtue of section 6. The essence
of such payments is not that they are consideration for services rendered. They
are disability insurance benefits not income from duties performed. If the
legislative intent was to be more inclusive under Part I of the Act, an intent
that is far from clear to me, Parliament, not this Court, must address that
concern. For all these reasons I am allowing the appeal in respect of the WLR
payments.
With
respect, I find the Minister’s position more convincing. The expression “income
from duty of employment of offices and employments” should be given a broad
meaning as stated in Sutcliffe as follows:
128 Although
income such as sickness and vacation pay are received because of sickness and vacation
in the sense of accruing during these periods, the remuneration is also
received because the employee has agreed to perform services for the employer.
The appellant would not be entitled to any sickness or vacation pay if he had
not agreed to perform duties as a pilot.
129 The
only reasonable interpretation of subparagraph 115(1)(a)(i) in my view is that
the appellant's remuneration that accrues during off-duty periods, including
statutory vacation pay, is from duties performed. The essence of the
relationship between an employee and employer is that services are rendered in
consideration of payment for those services.
130 The
connection between remuneration paid and services rendered enables employers to
deduct remuneration paid and requires employees to be taxed on it. I reject
the argument of the appellant that some portion of the remuneration has no
income-earning nexus in Canada.
[Emphasis added]
[42]
An income is taxable in Canada
pursuant to section 115 of the Act as long as a nexus can be established
with the performance of a duty in Canada. Further, the word “income” in sections 115 and 3 of
the Act should be given a broad meaning. See The Queen v. Savage. Section 115 of the Act
makes a specific reference to section 3 of the Act. Any material
acquisition which confers an economic benefit to the taxpayer such as a
disability payment, constitute an income for the purpose of sections 3 and 115
of the Act.
[43]
Finally, paragraph 6(1)(f)
of the Act, provides that income from private employment insurance plan
benefits under which the taxpayer’s employer has made a contribution is
taxable. The Federal Court of Appeal in Hurd v. R. held that:
6 Since
subparagraph 115(1)(a)(i) specifically refers to section 3, which is a
part of Division B relating to the computation of income of a taxpayer for a
taxation year and since section 7 is part of subdivision a of Division B, it is
clear to me that for purpose of subparagraph 115(1)(a)(i) regard must be had to
section 7 in the computation of income of a non-resident. It seems, then, that
the sole question requiring resolution is whether the benefit received was a
benefit arising from the duties of his employment with the company performed by
him in Canada before he left this country in 1971.
[44]
A non-resident must also consider
sections 5 through 8 of the Act in calculating Canadian income.
(d)
International flights
[45]
The Appellant adopted the numbers
of the Respondent for international flights, however, he used a somewhat
arbitrary time calculation. The Respondent’s method divided the distance by the
average air speed to obtain the minutes.
[46]
The Appellant submits there is an
inconsistency in the Respondent’s method because the international calculations
were done based on distance. The Minister divides the distance in Canada based
upon average flight paths by the average air speed of the flights to obtain the
time of flying in Canada for international flights. For all flights going to
Europe, the Minister assumes the distance over Canada is 1,229 miles. Based that
mileage and average air speed of the flight, he established the time flown in Canada
concluding that the Canadian air time between London (LHR) and Toronto (YYZ) is
168 minutes. For the flight between Shannon, Ireland (SNN) and Toronto (YYZ),
the time flown in Canada is 132 minutes. The discrepancy between those connections
is due to a different in average air speed. For unknown reasons, the
Shannon-Toronto plane has a greater air speed.
[47]
The Appellant contends that his
calculation method is more reasonable because the flight paths are changing
depending on many factors so there is no way to identify the actual air speed
of the plane. He used the same amount of minutes for flights going in the same
area of the world. He reasons that a trip from London to Toronto is much
the same as a trip from Shannon to Toronto (1,229 miles) so the time flown in Canada should
be the same for both flights. He chose the shorter period which is 132 minutes
rather than the Respondent’s 168 minutes. He believes time is the relevant
factor if pilots make efficient use of the winds the plane will arrive at its
destination faster and if the plane is flying faster over Canada, then
there are fewer duties accomplished in Canada.
[48]
His position has some merit although
the discrepancy between the two methods is minimal. He adds that if an assumption
is made that all flights to Europe follow the same route and all flights travel
the same distance over Canadian land, which is 1,229 miles for a flight from
Toronto to Europe, it is reasonable to make the same assumption for the
time.
[49]
The problem with the Appellant’s
calculation method, even if logical, is deciding upon which basis 132 minutes should
be preferred over 168 minutes. The Respondent’s method gives a disappointing
result which is a different time flown in Canada for the same distance, but at least this difference
is based on the fact that the flight path has recorded different average speeds
for different destinations. It might not be the most accurate basis, but it has
rationality. In any event, in terms of assessment dollars, the effect of implementing
one method over the other is minimal.
[50]
Moreover, an allocation method
that is based on average flight paths and not flight specific is more reasonable
in this context. I agree with Woods J. who stated that such a method is
reasonable and desirable (see paragraphs 69, 86 and 87 of the Sutcliffe
decision). I chose the Respondent’s calculation because it is based on actual flight
paths. The Appellant’s 132 minutes is uncorroborated and perhaps self‑serving.
(e)
Interest
[51]
The Appellant submits that it is
unfair to be charged interest over the six year plus period it took the
Minister to respond to his Notice of Appeal. This is not a Court of equity and
I have no jurisdiction to waive penalty or interest pursuant to subsection 220(3.1)
of the Act unless it was inaccurately calculated. The Appellant did not
advance evidence to the effect that the Minister did not proceed with due
dispatch or acted unfairly and the Minister did not have the opportunity to
refute such an argument.
General
Comments
[52]
It would be a blessing to bring an
end to all the endless maneuvering. I would venture to say that all A/C pilots
are Canadian citizens that they receive salary income from their Canadian
employer. Their place of employment is Canada and that their home base is Canada from
where their flights start and end.
[53]
Many have quite legally taken
advantage of the Income Tax Act, particularly section 115, to
substantially reduce their Canadian tax liability by becoming non‑residents
of Canada. This is entirely within the ambit of the legislation. A problem
arises with the overly aggressive maneuvering to arrive at the lowest possible
percentage for duties performed in Canada and for other amounts such as disability payments.
[54]
To compensate, the Minister
overreacts. Perhaps it is time for the legislature to say enough is enough and
set a firm percentage for non-resident A/C pilots. What makes the present
situation even worse is the complex agreement between A/C and the Pilots
Association. My obligation is to interpret and apply the legislation as it
presently exists. I cannot change the law but do make a gratuitous suggestion.
[55]
There is a serious need for a
simpler method. Perhaps the legislature should set out the apportionment of
income for non-resident pilots in a simple standardized scheme. For example,
for A/C pilots who are non-residents of Canada, having, say, 60% of their total income from A/C
designated as taxable Canadian income and the remaining 40% designated
non-taxable foreign income. It is beyond comprehension that there be a variance
between 90% and less than 50% for the U.S. portion of flights over U.S. air. Presently,
the most reasonable method of allocation is found in Sutcliffe.
[56]
I conclude that:
i) The amounts of income
attributable to flight duty of employment performed outside of Canada by the
Appellant on the Vancouver-Toronto connection is 31% and 49% for the
Toronto-Vancouver connection.
ii) The disability payments are
taxable in Canada following the Respondent’s method.
(iii) The calculation of
the Respondent for international flights based on average air speed is
reasonable.
(iv) Following the Respondent’s concessions,
the remuneration in respect of deadheading for the Vancouver-Winnipeg and
Winnipeg-Vancouver connections are to be allocated with the same pro rata formula
as the rest of the income for the year.
(v) Finally the remuneration in
respect of the training in 2000 should be considered as not taxable in Canada as
conceded by the Respondent during trial.
(vi) I reject the Appellant’s
contention that 70% of his income for international flights should be allocated
to the time, approximately 48 hours spent abroad awaiting the return to Canada.
(vii) No costs are awarded.
Signed at Ottawa, Canada, this
12th day of October, 2011.
“C.H. McArthur”
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