Citation: 2009TCC133
Date: 20090312
Docket: 2008-2676(IT)I
BETWEEN:
ROBERT SHINDLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this appeal is
whether certain amounts that were withheld from the Appellant’s pay and
remitted to various states and cities in the United States should be included
in determining the amount of foreign non-business-income tax paid by the
Appellant in 2005 for the purposes of section 126 of the Income Tax Act
(the “Act”).
[2]
In 2005, the Appellant worked as a
sound engineer on the Hairspray musical tour in the United States.
The tour started in Seattle and then moved to various cities throughout the United States.
When he was working in states or cities that imposed an income tax, amounts
were withheld from his paycheque and identified as either state income tax or
local income tax (in addition to the amounts withheld for US federal income
tax).
[3]
The Appellant filed a US federal
income tax return in 2005 as well as a return for the state of Wisconsin. The
total amount that the Appellant claimed as foreign non-business-income tax paid
in 2005 was US$16,959. Of that amount US$15,033, was the amount paid for U.S. federal
income taxes and US$525 was the amount paid to the state of Wisconsin.
These amounts have been accepted by the Respondent as foreign non-business-income
tax paid by the Appellant. The balance of US$1,401 (CAN$1,697) was not accepted
by the Respondent as foreign non‑business-income tax paid. The amounts
that comprise this balance were paid to a total of 11 different states and
cities with the amount paid to a particular state or city ranging from a low of
$20 paid to Kansas City and a high of $261 paid to the state of Ohio.
[4]
When the Appellant filed his
Wisconsin state tax return his tax liability to the state of Wisconsin was
greater than the amount that had been withheld. His tax liability to the state
of Wisconsin was US$525 and the amount that had been withheld was US$507.
[5]
Paragraph 10 of the Reply sets out
the assumptions made by the Minister in reassessing the Appellant. This paragraph
provides as follows:
10.
In determining the Appellant’s tax liability for the 2005 taxation year
the Minister assumed the following facts:
a)
the Appellant earned foreign non-business income in the United States (“U.S.”)
working as a sound engineer during the 2005 taxation year;
b)
in his return of income, the Appellant reported foreign tax paid in the
amount of $20,548.07 and foreign non-business income in the amount of
$93,317.61;
c)
the Appellant provided a U.S. Non-resident Alien Income Tax Return (Form
1040NR), showing a tax liability of $15,033.00 U.S. and a Non‑resident
& Part-year resident Wisconsin Income Tax Return (Form 1NRP), showing
a tax liability of $525.00 U.S. to support his claim for foreign tax credits;
d)
the Minister allowed foreign tax credits based on the foreign taxes paid
by the Appellant in the amount of $18,850.00 Canadian (($15,033.00 + $525) x
$1.2116324 exchange rate);
e)
the Appellant failed to provide proof that the disallowed foreign taxes
paid resulted in a settlement for his foreign tax liability;
f)
the Minister was unable to determine whether or not the amounts withheld
on “Form W-2 Wage and Tax Statements” received by Appellant for working in the
United States resulted in a settlement for foreign tax liability, or if the
amount would result in a refund to the Appellant;
[6]
The Respondent did not assume that
the amounts that were remitted to the various states and cities in question
were not income taxes. It is implicit in the assumptions that were made that
the amounts remitted were income taxes. The assumption in paragraph e) is
that “the Appellant failed to provide proof that the disallowed foreign taxes
paid resulted in a settlement [sic] for his foreign tax liability”.
[7]
The assumption in paragraph f) is
not a proper assumption as the Appellant should not have the onus of showing
what the Minister was able or was unable to determine.
[8]
It seems to me from my reading of paragraph
e) that the Minister based the reassessment on an assumption that the
disallowed foreign taxes paid did not result in a settlement of the Appellant’s
foreign tax liability. That is the fact that presumably was assumed. The
reference to the failure of the Appellant to provide proof should not have been
included. The issue should not be whether the Appellant failed to provide proof
but whether the amounts paid were foreign non-business-income tax paid by the
Appellant to a government of a country other than Canada.
[9]
A settlement of the Appellant’s
foreign tax liability to a particular jurisdiction would only occur if the
actual tax liability in that particular jurisdiction was equal to or less than
the amount that was withheld and remitted to that jurisdiction. It is clear
from the state tax return that was filed for Wisconsin that the amount
withheld did not settle his tax liability, because his tax liability was
greater than the amount that was withheld. If only amounts that resulted in a
settlement of a foreign non-business-income tax liability were included in
foreign non-business-income tax paid, then if the Appellant had not paid the
balance payable of US$18 to the State of Wisconsin, he would not be entitled to
include US$507 in foreign non-business-income tax paid to the State of
Wisconsin as the US$507 that was paid did not result in a settlement of his
foreign tax liability to the State of Wisconsin. It does not seem to me that
this would be the correct result. The issue is not whether or not his foreign
tax liability has been settled, but what amount has the Appellant paid as
foreign non-business-income tax.
[10] Subsection 126(1) of the Act provides, in part,
as follows:
126. (1) A taxpayer who was resident in Canada at any time in a
taxation year may deduct from the tax for the year otherwise payable under this
Part by the taxpayer an amount equal to
(a) such part of any non-business-income tax paid by the taxpayer for
the year to the government of a country other than Canada … as the taxpayer may
claim,
[11]
The definition of “non-business-income
tax” in subsection 126(7) of the Act provides, in part, that:
“non-business-income
tax” paid by a taxpayer for a taxation year to the government of a country
other than Canada means, subject to subsections (4.1) and (4.2), the portion of
any income or profits tax paid by the taxpayer for the year to the government
of that country…
[12]
Subsection 126(6) of the Act
provides that:
(6) For the
purposes of this section,
(a) the
government of a country other than Canada includes the government of a state,
province or other political subdivision of that country;
[13]
The definition of “non-business-income
tax” does not provide that the amount paid must result in a settlement of the
tax liability. It only provides that the amount paid be income tax paid by a
taxpayer to the government of a country other than Canada.
Therefore, for the amount paid to the State of Wisconsin, if the Appellant
would have only paid US$507 when his actual tax liability was US$525, the
amount of US$507 would still be an amount of income tax paid by the Appellant
to the State of Wisconsin and hence would still have been included in his
foreign non-business-income tax paid even though the US$507 payment did not
result in a settlement of his liability for income tax to the State of
Wisconsin.
[14]
If the amount that is withheld and
remitted to any particular state or city is less than his tax liability to that
state or city, then the amount withheld is a payment of tax even though it is
not a settlement of his tax liability in that jurisdiction. If the amount that
is withheld and remitted to any particular state or city is equal to his tax
liability to that state or city, then the amount withheld is a payment of tax and
would result in a settlement of his tax liability in that jurisdiction. If the
amount withheld and remitted to a particular state or city exceeds the tax
liability to that state or jurisdiction, then the excess amount is not a tax.
[15]
In Meyer v. The Queen, 2004
TCC 199 the individual failed to claim a treaty exemption, but yet still sought
to deduct the amount of taxes paid to the United States as a foreign tax credit. In that case Justice
Hershfield made the following comments:
20 While
I have some reservations in accepting the notion that the CCRA can determine if
a foreign tax paid is a voluntary payment and therefore not a "tax",
on the facts of this case, based on the authorities cited by the Respondent, I
accept that the amount in dispute was not a "tax" paid to the foreign
jurisdiction in question. That is not to say however that all voluntary
payments are not a "tax". For example, that one might not claim
discretionary deductions and voluntarily increase the tax in a foreign jurisdiction
would not entitle the CCRA to deny a credit on that basis. Nor should the CCRA
dictate any foreign filing position on a resident taxpayer. However, where the
resident taxpayer has approached his foreign filing position without regard to
providing the information necessary to determine the tax payable, such as not
submitting required forms or return information to claim a Treaty entitlement,
and has refused to correct the error or establish that it was not in error, the
resultant overpayment can be regarded as an amount paid other than as a
"tax".
…
22 With
that said, I wish to emphasize that it is always open to the taxpayer to bring
evidence that the foreign tax paid was not gratuitously paid without basis
under the laws of the foreign jurisdiction. That is a question this Court can
determine but the onus is on the taxpayer. The Appellant chose to ignore that
onus and simply wanted the CCRA to work it out with the U.S. Treasury or Internal
Revenue Service and leave him out of it. This is not an acceptable position in
my view. That is, while the language of section 126 does not ultimately
permit the CCRA to deny a credit because it has reason to believe that the
foreign tax has been erroneously calculated under the laws of that foreign
jurisdiction or is limited by provisions of the tax Treaty between that
jurisdiction and Canada, nothing prevents it from taking that position and
putting the onus on the taxpayer to show that such belief is not well-founded.
In any event Article XVIII, paragraph 2(a), expressly provides that the U.S.
cannot charge a tax in excess of 15% in respect of pensions received from the U.S.
by a Canadian resident. Article XXIX, paragraph 3, provides that this
limitation applies to citizens of the U.S. An excess amount paid then is
not a "tax".
(emphasis added)
[16]
While Justice Hershfield in the
first part of paragraph 22 refers to the taxpayer having the onus, he confirms
that this arises when the Respondent has taken the position that the amount
paid by a taxpayer exceeds that person’s tax liability. In this case the
Minister did not assume that the amounts withheld exceeded the tax liability of
the Appellant in any of the relevant jurisdictions.
[17]
In del Valle v. Minister
of National Revenue [1986] 1 C.T.C. 2288, 86 DTC 1235, Justice Sarchuk made
the following comments:
11 The
Johnston case (supra), was considered in Hillsdale Shopping Centre Limited v.
Minister of National Revenue, [1981] C.T.C. 322, 81 D.T.C. 5261 and at 328
(D.T.C. 5266) Urie, J. made the following comments:
If a taxpayer,
after considering a reassessment made by the Minister, the Minister's reply to
the taxpayer's objections, and the Minister's pleadings in the appeal, has not
been made aware of the basis upon which he is sought to be taxed, the onus of
proving the taxpayer's liability in a proceeding similar to this one would lie
upon the Minister. This defect may be due to a number of reasons such as a lack
of clarity on the part of the Minister in expounding the alleged basis of the
taxability which could include an attempt by the Minister to attach liability
on one of two or more alternative bases thus failing to make clear to the
taxpayer the assumption upon which he relies.
12 I
believe this is the approach which should be followed in the case at bar. In my
view the respondent has failed to allege as a fact an ingredient essential to
the validity of the reassessment. There is no onus on the appellant to disprove
a phantom or non-existent fact or an assumption not made by the respondent.
13 While
it was possible for the respondent to have alleged further and other facts the
respondent did not choose to do so in this case but simply relied on the facts
assumed at the time of the reassessments. I emphasize that if the respondent
had alleged such further or other facts the onus would have been on him to
establish them. (See Minister of National Revenue v. Pillsbury
Holdings Limited, [1965] 1 Ex. C.R. 678, [1964] C.T.C. 294).
14 The
facts relied upon do not support the reassessments. For these reasons the
appeal is allowed and the matter is referred back to the respondent for
reassessment on the basis that the sum of $5,100 was improperly added in
computing the appellant's income in each of her 1980 and 1981 taxation years.
[18] In Pollock v. The Queen,
[1994] 1 C.T.C. 3, 94 DTC 6050, Justice Hugessen, on behalf of the Federal
Court of Appeal, made the following comments:
It is, of course, the general rule that every party to
litigation in this Court must plead the facts upon which he relies in such a
way as to put his opponent fairly on notice of the case he has to meet. Where a
party's pleadings are so inadequate as to disclose no case at all he runs the
risk of having them struck out and of losing for that reason. That rule is
quite irrelevant here. There is no question in the present case of the
Minister's pleadings being inadequate or of the appellant not knowing clearly
and beyond any possibility of doubt the basis upon which he was reassessed.
That basis was and is that the appellant's dealings in shares of the companies
in question constituted for him an adventure in the nature of trade so as to
make the profits therefrom taxable as income.
The special position of the assumptions made by the Minister in
taxation litigation is another matter altogether. It is founded on the very
nature of a self-reporting and self-assessing system in which the authorities
are obliged to rely, as a rule, on the disclosures made to them by the taxpayer
himself as to facts and matters which are peculiarly within his own knowledge.
When assessing, the Minister may have to assume certain matters to be different
from or additions to what the taxpayer has disclosed. While the Minister's
assumptions, if any, are generally made in the pleadings, that is not always
the case and we have seen, in this very record, an example of the taxpayer
taking pains to demolish assumptions which the Minister had not pleaded. Where
pleaded, however, assumptions have the effect of reversing the burden of proof
and of casting on the taxpayer the onus of disproving that which the Minister
has assumed. Unpleaded assumptions, of course, cannot have that effect and are
therefore, in my view, of no consequence to us here.
The burden cast on the taxpayer by assumptions made in the pleadings
is by no means an unfair one: the taxpayer, as plaintiff, is contesting an
assessment made in relation to his own affairs and he is the person in the best
position to produce relevant evidence to show what the facts really were.
Where, however, the Minister has pleaded no assumptions, or where
some or all of the pleaded assumptions have been successfully rebutted, it
remains open to the Minister, as defendant, to establish the correctness of his
assessment if he can. In undertaking this task, the Minister bears the ordinary
burden of any party to a lawsuit, namely to prove the facts which support his
position unless those facts have already been put in evidence by his opponent.
This is settled law.
[19] Justice Rothstein in The Queen v. Anchor
Pointe Energy Ltd. 2003 DTC 5512 stated that:
[23] The pleading of assumptions gives the Crown the powerful tool of
shifting the onus to the taxpayer to demolish the Minister's assumptions. The
facts pleaded as assumptions must be precise and accurate so that the taxpayer
knows exactly the case it has to meet.
[20]
In Loewen 2004
FCA 146, Justice Sharlow, on behalf of the Federal Court of Appeal, made the
following comments:
11 The constraints on the Minister that
apply to the pleading of assumptions do not preclude the Crown from asserting,
elsewhere in the reply, factual allegations and legal arguments that are not
consistent with the basis of the assessment. If the Crown alleges a fact
that is not among the facts assumed by the Minister, the onus of proof lies
with the Crown. This is well explained in Schultz v. R. (1995),
[1996] 1 F.C. 423, [1996] 2 C.T.C. 127, 95 D.T.C. 5657 (Fed. C.A.) (leave to appeal refused, [1996]
S.C.C.A. No. 4 (S.C.C.)).
[21]
Leave to appeal the
decision of the Federal Court of Appeal in Loewen to the Supreme Court
of Canada was refused (338 N.R. 195 (note)).
[22]
In Hickman Motors Ltd. v. Her
Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé of
the Supreme Court of Canada made the following comments in relation to an
Appellant's onus of “demolishing” the Minister’s assumptions:
92 It is trite law that in taxation the
standard of proof is the civil balance of probabilities: Dobieco Ltd. v.
Minister of National Revenue, [1966] S.C.R. 95 (S.C.C.), and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance Co. v. Dalton Cartage Ltd., [1982] 1 S.C.R. 164 (S.C.C.); Pallan
v. Minister of National Revenue (1989), 90 D.T.C. 1102 (T.C.C.) at
p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge
Estates Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098
(Can. Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to
“demolish” the Minister's assumptions in the assessment (Johnston v. Minister
of National Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister
of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The
initial burden is only to “demolish” the exact assumptions made by the Minister
but no more:First Fund Genesis Corp. v. R. (1990),
90 D.T.C. 6337 (Fed. T.D.), at p. 6340.
(emphasis added)
[23]
Therefore it is very important
that the assumptions clearly and accurately state the facts assumed by the
Minister as the initial burden on the Appellant “is only to “demolish” the
exact assumptions made by the Minister and no more”. In this case the only assumption
related to the amount paid as foreign non-business-income tax was that the
Appellant had failed to prove that the amounts that had been withheld and
remitted had resulted in a settlement of the Appellant’s tax liability to the
various states and cities. However, this assumption does not set out the
relevant facts that must be determined in order to decide whether the amounts
withheld should be included in determining the amount of the foreign
non-business-income tax paid by the Appellant in 2005.
[24]
The issue is not whether the
payments made by the Appellant to the various jurisdictions resulted in a
settlement of his income tax liability to these various jurisdictions but
rather whether the amounts that were paid by the Appellant were foreign
non-business-income tax that he paid to the various states and cities. To the
extent that the amounts withheld and remitted to a particular jurisdiction were
less than or equal to income tax liability to that jurisdiction, then such
payments would qualify as foreign non-business-income tax paid. To the extent
that the amounts withheld and remitted to a particular jurisdiction exceeded
his income tax liability to that jurisdiction, such excess amount would not
qualify as foreign non-business-income tax paid. There were no assumptions made
with respect to which jurisdictions had received more than the amount of his
income tax liability to such jurisdiction or the amount of such excess payment
or payments. Therefore the Respondent has the onus of proof in relation to
these facts.
[25]
The agent for the Appellant was the
Appellant’s accountant. No notice was provided to the Respondent that the agent
would be testifying as an expert. Paragraph 7 of the Tax Court of
Canada Rules (Informal Procedure) provides as follows:
7. (1) A party
who intends to call an expert witness at the hearing of an appeal shall, not
less than 10 days before the commencement of the hearing, file at the Registry
and serve on the other parties a report, signed by the expert, setting out the
expert’s name, address and qualifications and the substance of the expert’s
testimony.
(2) An expert
witness may not testify, except with leave of the presiding judge, if
subsection (1) has not been satisfied.
[26]
Since the amount of foreign taxes
in dispute is less than CAN$1,700, I granted leave for the accountant to
testify as an expert witness. His credentials were not challenged by the counsel
for the Respondent. The accountant is a Chartered Accountant. He had worked in
Toronto at a major accounting firm dealing with Canadian executives who worked
in the United States. In 1989, he formed his own firm which specializes in
clients who work in the entertainment and arts fields. He has extensive experience
in filing federal US tax returns. He has filed returns in 30 different
states in the United States. He has filed returns in every jurisdiction in question
in this case, except Akron, Ohio.
[27]
The accountant stated that the
Appellant had filed the necessary forms related to the amounts to be withheld
from his paycheques and that based on his experience, the amounts withheld
would generally be close to or equal to the actual liability of the Appellant
to the various states and cities. If a return would have been filed in each
jurisdiction, for some jurisdictions there may be a small refund. For the other
jurisdictions, the amount withheld would be less than or equal to the tax
liability of the Appellant. Any shortfall would be small. There was no evidence
to suggest that the Appellant would be entitled to a full refund of any amounts
that had been withheld and remitted.
[28]
I accept the evidence of the
accountant that the amounts withheld and remitted would be approximately equal
to the income tax liability of the Appellant to the various states and cities.
However since the accountant did acknowledge that the Appellant would be
entitled to a small refund in some of the jurisdictions, an amount should be
deducted for this refund amount since, as noted above, the excess amount paid
in a particular jurisdiction is not a tax.
[29]
The only evidence of the amount by
which the amount withheld may be different from the actual income tax liability
to a city or state is the evidence related to the state of Wisconsin. In
that case, the amount withheld was $507 while the actual liability was $525.
Therefore the amount withheld represented 97% of his actual tax liability.
Extrapolating this to the other jurisdictions and assuming that the amounts
withheld were within the same percentage range of his tax liability, would mean
that the amount by which the Appellant overpaid or underpaid his taxes would be
3%. Since the amount in dispute is CAN$1,697 (US$1,401) and since the Appellant
would not be entitled to a refund in each jurisdiction, the amount claimed
should be reduced by one-half of 3% of CAN$1,697 or CAN$25 (US$21).
[30]
As a result the appeal is allowed,
with costs, and the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that in determining the
foreign tax deduction available to the Appellant pursuant to subsection 126(1)
of the Act the amount of foreign non-business-income tax paid by the Appellant
to the government of a country other than Canada in 2005 should be increased by
CAN$1,672 (US$1,380).
Signed at Halifax, Nova Scotia, this 12th day of March 2009.
“Wyman W. Webb”
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