Citation: 2004TCC78
Date: 070208
Docket: 2006-1418(CPP)
BETWEEN:
ALLAN A. GREBER PROFESSIONAL CORPORATION,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Porter, D.J.
Introduction
[1] This case
concerns an Employee Profit Sharing Plan (“EPSP”). It is of interest as there
is very little of jurisprudence on the subject of these plans despite their
having been around in Canada for over 50 years.
[2] These plans are
set up, pursuant to section 144 of the Income Tax Act (“ITA”),
for the benefit of employees, principally to enable them to participate in the
profits of their employer. In contrast to regular bonuses, they enable the
employees to do some tax deferral. They also assist the employees to become
involved in a form of savings and investment plan.
[3] In the case at
hand Mr. Greber, a lawyer practicing in Grande
Prairie, Alberta, channeled all the
emoluments, which he and his wife who worked with him in the practice as his
assistant were to receive from his professional corporation, the Appellant, in
this case, through an EPSP, which he had set up upon the advice of his
accountant.
[4] In the course of
the arrangements under that plan being implemented, no deductions were made by
the Appellant for income taxes or Canada Pension Plan (the “Plan”)
contributions. By virtue of the legislation, once the trustees made an
allocation of funds to Mr. Greber and his wife, which had to be done during the
same calendar year as the funds were paid into the plan, they became taxable
income in their hands for the purposes of declaring and paying income tax,
pursuant to 6(1)(d) and 144 (3) of the ITA.
[5] At issue however
is whether the Appellant was liable to deduct CPP contributions at the time it
paid the funds into the plan. A number of Canada Revenue Agency (“CRA”)
bulletins, as well as professionally written articles filed with the Court,
opined that such contributions need not be deducted. More recently however that
position has been questioned by the CRA in situations where an owner/operator
of a business channels all of his financial emoluments from his corporation
through an EPSP.
[6] By Notice of
Assessment dated June 2, 2003 the Appellant was assessed for CPP contributions
with respect to Mr. Greber and his wife in the amount of $6,692.80 for the 2002
taxation year.
[7] On July the 15th
2003 the Appellant appealed to the Minister of National Revenue (the “Minister”)
for reconsideration of that assessment. By letter dated January 12th,
2006 the Minister informed the Appellant of his decision to confirm the
assessment. The basis for doing so, was that the employment was pensionable
during the 2002 taxation year as the employees were employed under contracts of
service and as the EPSP allocations formed part of their contributory earnings
under the Plan. The Appellant has appealed that decision to this Court.
[8] The issue to be
decided as set out by the Minister, in his Reply to the Notice of Appeal
is whether the payments received by the Grebers out of the EPSP were from
pensionable employment and were therefore contributory salary and wages
pursuant to section 12 of the Plan. At the hearing of the appeal counsel
for the Minister submitted that there is a second issue, namely whether the
Appellant was properly assessed for the Canada Pension contributions.
The Relevant
Legislation
[9] Section 6(1)(a)
of the Plan defines pensionable employment as:
(a) employment in Canada
that is not excepted employment;
…
[10] Section 12 of the
Plan reads
The amount of the contributory salary and wages
of a person for a year is the person's income for the year from pensionable
employment, computed in accordance with the Income Tax Act (read without
reference to subsection 7(8) of that Act), plus any deductions for the
year made in computing that income otherwise than under paragraph 8(1)(c)
of that Act, but does not include any such income received by the person
(a)
before he reaches
eighteen years of age;
(b) during any month that is excluded
from that person’s contributory period under this Act or under a
provincial pension plan by reason of disability; or
(c) after he reaches seventy years of age
or after a retirement pension becomes payable to him under this Act or
under a provincial pension plan.
(2) In the case of a person who is a contributor
under the Public Service Superannuation Act, there shall be included in
computing the amount of that person’s contributory salary and wages for a year
the amount of his salary, as defined in that Act, that is not otherwise
included in computing income for the purposes of the Income Tax Act.
(2.1) In the case of an Indian, as defined in
the Indian Act, to the extent provided by regulations pursuant to
subsection 7(1) and subject to any conditions prescribed by those regulations,
there shall be included in computing the amount of that person’s contributory
salary and wages for a year the amount of his income from employment that would
otherwise be excepted pursuant to paragraph 6(2)(j.1).
(3)
A reference in this Act to the contributory salary and wages of a person
for a year shall, in relation to any remuneration paid to him in respect of
pensionable employment in a province providing a comprehensive pension plan, be
construed as a reference to his income for the year from that employment as
that income is required to be computed under the provincial pension plan of
that province.
[11] Sections 21(1) and 21(2) of the Plan reads:
(1) Every
employer paying remuneration to an employee employed by the employer at any
time in pensionable employment shall deduct from that remuneration as or on
account of the employee’s contribution for the year in which the remuneration
for the pensionable employment is paid to the employee such amount as is
determined in accordance with prescribed rules and shall remit that amount,
together with such amount as is prescribed with respect to the contribution
required to be made by the employer under this Act, to the Receiver
General at such time as is prescribed and, where at that prescribed time the
employer is a prescribed person, the remittance shall be made to the account of
the Receiver General at a financial institution (within the meaning that would
be assigned by the definition “financial institution” in subsection 190(1) of
the Income Tax Act if that definition were read without reference to
paragraphs (d) and (e) thereof).
(2) Subject to
subsection (3), every employer who fails to deduct and remit an amount from the
remuneration of an employee as and when required under subsection (1) is liable
to pay to Her Majesty the whole amount that should have been deducted and
remitted from the time it should have been deducted.
[12] Section 144 of
the ITA reads:
“employees
profit sharing plan” at a particular time means an arrangement
(a)
under which payments computed by reference to
(i) an employer's profits from the employer's
business,
(ii) the profits from the business of a
corporation with which the employer does not deal at arm's length, or
(iii) any combination of the amounts described
in subparagraphs 144(1) employees profit sharing plan (a)(i) and 144(1) employees
profit sharing plan (a)(ii)
are
required to be made by the employer to a trustee under the arrangement for the
benefit of employees of the employer or of a corporation with which the
employer does not deal at arm's length; …
…
(2) No tax is payable under this Part by a trust
on the taxable income of the trust for a taxation year throughout which the
trust is governed by an employees profit sharing plan.
(3)
There shall be included in computing the income for a taxation year of an
employee who is a beneficiary under an employees profit sharing plan each
amount that is allocated to the employee contingently or absolutely by the
trustee under the plan at any time in the year otherwise than in respect of
(a) a
payment made by the employee to the trustee;
(b) a
capital gain made by the trust before 1972;
(c) a
capital gain of the trust for a taxation year ending after 1971;
(d) a gain
made by the trust after 1971 from the disposition of a capital property except
to the extent that the gain is a capital gain described in paragraph 144(3)(c);
or
(e) a
dividend received by the trust from a taxable Canadian corporation.
(f)
(Repealed by S.C. 1994, c. 21, s. 68(2).)
…
(5) An amount paid by an employer to a
trustee under an employees profit sharing plan during a taxation year or within
120 days thereafter may be deducted in computing the employer's income for the
taxation year to the extent that it was not deductible in computing income for
a previous taxation year.
(6) An amount received in a taxation
year by a beneficiary from a trustee under an employees profit sharing plan
shall not be included in computing the beneficiary's income for the year.
[13] Section 6(1)(d)
of the ITA reads as follows:
There shall be
included in computing the income of a taxpayer for a taxation year as income
from an office or employment such of the following amounts as are applicable:
…
(d) amounts allocated to
the taxpayer in the year by a trustee under an employees profit sharing plan as
provided by section 144 except subsection 144(4), and amounts required by
subsection 144(7) to be included in computing the taxpayer's income for the
year;
The Evidence
[14] The parties
entered an agreed statement of facts which reads as follows:
1.
The parties accept as proven, for the purposes of this Appeal and any
appeals therefrom or any other proceeding taken in this matter, the facts set
out herein. No evidence inconsistent with the Statement of Agreed Facts may be
adduced at the hearing of this Appeal or at any appeals therefrom. Additional evidence,
not inconsistent with this Statement of Agreed Facts, may be adduced by either
party.
2.
Unless otherwise specified, all facts relate to the period from
January 1, 2002 to December 31, 2002.
3.
The parties agree on the following facts:
The Appellant and the Workers
a.
The Appellant was assessed for Canada Pension Plan contributions in
respect of Allan Greber and Michelle Greber (“the Workers”) plus related
penalty and interest for the period from January 1, 2002 to
December 31, 2002. Those Canada Pension Plan Contributions are the
subject matter of this appeal;
b.
The Appellant is a body corporate, duly incorporated pursuant to the
laws of Alberta, which carried on the business of providing legal services;
c.
The worker, Allan Greber, is also the sole shareholder of the Appellant;
d.
The worker, Allen Greber, is also an officer and director of the
Appellant;
e.
Michelle Greber is the spouse of Allan Greber;
f.
The Workers were employed by the Appellant under contracts of service;
g.
In 1999, Allan Greber received and reported employment income from the
Appellant in the amount of $65,000 and Michelle Greber received and reported
employment income from the Appellant in the amount of $55,000.
h.
In 2000, Allan Greber reported employment income from the Appellant in the
amount of $66,000 and Michelle Greber reported employment income from the [appellant]
in the amount of $62,000.
i.
In 2001, Allan Greber reported employment income from the Appellant in
the amount of $132,000 and Michelle Greber reported income from employment in
the amount of $83,250.
The Creation of the Employees Profit Sharing Plan
j.
The Appellant established an Employees Profit Sharing Plan (the “Plan”),
as defined in subsection 144(1) of the Income Tax Act (Canada), R.S.C.
1985, 5th Supplement, as amended (the “ITA”);
k.The Plan was signed so as to become effective January 1, 2000;
l.
The Appellant entered into a trust agreement relating to the Plan on
January 1, 2000;
m. Both
the Workers were designated by the Appellant as trustees for the Plan;
n. Both of the
Workers were participants in the Plan;
o.
By letter dated October 31, 2000, the Appellant made an election
pursuant to subsection 144(10) of the ITA;
p.
Under the Plan, the Appellant’s Board of Directors was to appoint a
committee to administer the Plan and give instructions to the trustee;
q.
The committee was formed and was comprised of the Director of the
Corporation, Allan Greber;
r.
A separate bank account was opened for the Plan;
s.
Allan Greber had sole signing authority on the bank account for the
Plan;
The Implementation of the Employees Profit Sharing Plan
t.
The Appellant made monthly contributions to the Plan by way of
Resolutions of the Directors;
u.
The Resolutions of the Directors state how the income paid into the Plan
shall be allocated to the Workers, as participants;
v.
The Appellant transferred the contributions to the Plan from its
business account to the account for the Plan on a monthly basis;
w. In
2002, amounts paid into the Plan that were allocated to Allan Greber totaled
$131,508.17 and amounts paid into the Plan that were allocated to Michelle
Greber totaled $87,072.11, as set out in Schedule A of this Statement of Agreed
Facts;
x.
The amounts allocated to the Workers, as participants in the Plan, were
transferred from the account for the Plan to the personal accounts of the
Workers on a monthly basis;
y.
In 2002, the amounts transferred from the account for the Plan to the
personal accounts of the Workers totaled $131,508.17 for Allan Greber and
$87,072.11 for Michelle Greber as set out in Schedule B attached to and forming
part of the Reply to the Notice of Appeal;
z.
The retained earnings, gross revenue, wages and benefits expense and net
income (loss) of the Appellant for 2001 and 2002 were as follows:
|
|
2001
|
2002
|
|
Gross Revenue
|
$639,791.00
|
$175,231.00
|
|
Wages and Benefits Expense
|
$377,970.00
|
$219,955.00
|
|
Net Income (Loss)
|
$89,018.00
|
($43,678.00)
|
|
Retained Earnings
|
$154,936.00
|
$125,398.00
|
The Reporting of EPSP contributions for
the purposes of Income Tax
aa.
The trustee of the Plan completed and remitted to the Respondent the
necessary T4PS forms and summaries concerning amounts allocated to the Workers
as beneficiaries;
bb.
The Workers reported all amounts allocated to them by the trustee of the
Plan on their respective personal income tax returns; and
cc.
The trustee of the Plan did not withhold and remit Canada Pension Plan
contributions from amounts allocated to the Workers as beneficiaries.
SCHEDULE
A
BREAKDOWN OF AMOUNTS PAID INTO AND ALLOCATED UNDER THE
PLAN
|
Month
|
Total
Paid
Into
Plan
|
Allocated
to Allan Greber
|
Allocated
to Michelle Greber
|
|
January,
2002
|
$ 14,023.20
|
$ 8,413.92
|
$ 5,609.28
|
|
|
February, 2002
|
12,497.99
|
7,498.79
|
4,999.20
|
|
|
March, 2002
|
36,009.99
|
21,605.99
|
14,404.00
|
|
|
April, 2002
|
41,998.00
|
25,558.80
|
16,439.20
|
|
|
May, 2002
|
18,030.21
|
10,818.13
|
7,212.08
|
|
|
June, 2002
|
13,000.00
|
7,800.00
|
5,200.00
|
|
|
July, 2002
|
11,000.90
|
6,600.54
|
4,400.36
|
|
|
August,
2002
|
15,019.99
|
9,011.99
|
6,008.00
|
|
|
September,
2002
|
22,000.00
|
13,200.00
|
8,800.00
|
|
|
October,
2002
|
15,000.00
|
9,000.00
|
6,000.00
|
|
|
November,
2002
|
15,000.00
|
9,000.00
|
6,000.00
|
|
|
December,
2002
|
5,000.00
|
3,000.01
|
1,999.99
|
|
|
TOTAL
|
$
218,580.28
|
$
131,508.17
|
$ 87,072.11
|
|
|
|
|
|
|
|
SCHEDULE
B
BREAKDOWN OF AMOUNTS PAID OUT OF THE PLAN
|
Month
|
Total
Paid
Into
Plan
|
Allocated
to Allan Greber
|
Allocated
to Michelle Greber
|
|
January,
2002
|
$ 14,023.20
|
$ 8,413.92
|
$ 5,609.28
|
|
|
February, 2002
|
12,497.99
|
7,498.79
|
4,999.20
|
|
|
March, 2002
|
36,009.99
|
21,605.99
|
14,404.00
|
|
|
April, 2002
|
41,998.00
|
25,558.80
|
16,439.20
|
|
|
May, 2002
|
18,030.21
|
10,818.13
|
7,212.08
|
|
|
June, 2002
|
13,000.00
|
7,800.00
|
5,200.00
|
|
|
July, 2002
|
11,000.90
|
6,600.54
|
4,400.36
|
|
|
August,
2002
|
15,019.99
|
9,011.99
|
6,008.00
|
|
|
September,
2002
|
22,000.00
|
13,200.00
|
8,800.00
|
|
|
October,
2002
|
15,000.00
|
9,000.00
|
6,000.00
|
|
|
November,
2002
|
15,000.00
|
9,000.00
|
6,000.00
|
|
|
December,
2002
|
5,000.00
|
3,000.01
|
1,999.99
|
|
|
TOTAL
|
$
218,580.28
|
$
131,508.17
|
$ 87,072.11
|
|
|
|
|
|
|
|
[15] The parties also
entered into evidence the following exhibits:
i) The EPSP in question which
amongst other things provides for a committee to be appointed by the board of
directors of the professional corporation to administer the plan and give
instructions to the trustee.
ii) The trust agreement
appointing Allan Greber and Michelle Greber trustees of the monies and other
assets contributed to the EPSP.
iii) Various resolutions of the
board of directors of the professional corporations (Allan Greber alone)
directing payment of funds to the EPSP and how they should be allocated through
the participants.
iv) Various resolutions of the
trustees (Allan Greber and Michelle Greber) making an allocation of funds to
the participants (themselves) and directing payment of the funds, so allocated,
to themselves respectively.
v) CRA Examiner’s notes dated
May 23rd, 2003 showing the result of the audit.
[16] Mr. Greber
himself gave evidence. He said that he set up the EPSP upon the advice of his
accountant. He indicated that it was done to bonus out employees and put more
money in their pockets; to share income with his spouse; to help transition an
articling student into the partnership and to avoid having to deduct CPP
contributions.
[17] He set up a
separate bank account, on which he was the sole signatory to accommodate the EPSP.
[18] He basically
confirmed the agreed statement of facts.
[19] John Fuller, the
Grebers accountant, also gave evidence. He confirmed that he had assisted Mr.
Greber to set up the EPSP. He produced financial statements for the corporation
in 2002. He referred to his experience with EPSPs and alluded to the fact that
this one was not the only one being challenged by the Minister on the same
grounds.
The Position of the
Minister.
[20] Counsel for the
Minister clearly accepted that this EPSP was a valid and properly constituted
plan. She did so on the record. When I asked her if she was in effect saying
that what had been set up was a fiction, she stated quite clearly that no, it
was real.
[21] The Minister
starts from the position that the Grebers were both in pensionable employment.
There is not really any disagreement they were employed and that employment was
pensionable under section 6(1) of the Plan.
[22] The Minister’s
submission goes on to refer to Provincial legislation which sets standards for
minimum earnings that have to be paid. These are of course way below the
amounts actually received into income from the EPSP by the Grebers. However
counsel makes the jump that as, under provincial law there was an obligation to
pay remuneration to the Grebers as employees, that obligation was satisfied by
the allocation of funds to them in the plan and the subsequent payment to them,
out of the plan. The obligation she says was not satisfied in any other way.
[23] The submission
continues that as sections 6(1)(d) and 144 (3) of the ITA both
require funds allocated in an EPSP, to be included the income for an employee
for the year, those amounts are therefore income from pensionable employment
under section 12 of the Plan. The argument is that “Salary and Wages”
are in effect received by the employees in the guise of “Allotments to
beneficiaries of an EPSP”. Counsel pointed out that the payments made by the
trustees of the plan to the Grebers were the only source of remuneration
received by them from the Appellant. She submitted that they were not profits
shared by the Appellant with employees at all, but simply their remuneration,
and that if those payments had been made as straight remuneration there would
have been no profits to share.
[24] Counsel also
pointed out that profits are defined in Black’s Law Dictionary as “The excess
of revenues over expenditures” and that in 2002 expenditures of the Appellant
were $40,000 greater than the revenues received. She says the amounts
contributed to the EPSP were calculated before any reference to remuneration to
the Grebers and that in essence they were not profits at all.
[25] Counsel in her
brief suggested that the Appellant improperly circumvented the Plan and
denied the employees (the Grebers) the benefit of their CPP contributions by
means of using the EPSP in this manner. She relied on the decision of Weisman J
in DNS Signs Ltd. v Canada, [2006]
T.C.J. No. 352, where he said in that case:
The purpose of section 144
of the Act is to provide certainty regarding the income tax consequences
of contributions to employees profit sharing plans; of incentive allocations to
employees out of such plans; of income earned on trust assets; and of
distributions thereof. The section is not intended to be used as a means of
circumventing the Plan and avoiding the contributions required by it.
The Plan is remedial legislation designed to provide social insurance
for Canadians5. It
should therefore be given fair, large and liberal construction, and its
objectives should not be frustrated by improper use of section 144 of the Act.
[26] Counsel also
relied on the Supreme Court of Canada case of Canadian Pacific LTD v Canada
(Attorney General) [1986] S.C.J. No. 30 where Laforest J said:
26. I would
add that if the Appellant is obliged to pay premiums solely in relation to the
pat of the earnings of his employee that comes out of his pocket, then it is in
a better situation than other employers who pay these premiums in relation to
all the earnings accruing to the employee from his work. The employer obviously
benefits from the fact that some of his employees are in a position where they
can obtain tips. He is able to retain their services at a better price. It,
therefore, appears unjust that he should also be able to divest himself of a
part of the obligation that all other employers must carry, or to restrict the
amount of [page 690] benefits of his employees whose earnings come in good part
from tips.
[27] Counsel accepted
that the CRA Payroll Deductions and Remittances T4001 (E) Rev.06 “Employers
Guide”:
Excluded
benefits and payments
Do not deduct
CPP contributions from:
pension
payments, lump-sum payments from a pension plan, death benefits, amounts that a
trustee allocated under a profit sharing plan or that a trustee paid under a
deferred profit sharing plan, benefits received under a supplementary
unemployment benefit plan (SUBP) that qualifies as a SUBP plan under the Income
Tax Act, and retiring allowances or severance payments received upon or
after retirement to recognize long service or for loss of office or employment;
…
Employee
profit sharing plan (EPSP)
An EPSP is an
arrangement that allows an employer to share profits with all or a designated
group of employees. Under an EPSP, amounts are paid to a trustee to be held and
invested for the benefit of the employees who are beneficiaries of the plan.
Each year, the
trustee is required to allocate to such beneficiaries all employer
contributions, profits from trust property, capital gains and losses, and
certain amounts in respect of forfeitures.
Report
payments from EPSPs on a T4PS slip instead of a T4 slip. See Interpretation
Bulletin IT-379, Employees Profit Sharing Plans – Allocations to
Beneficiaries.
However she submitted the
Guide does not address the situation in which the total remuneration
received by employees is by means of a distribution through an EPSP.
[28] Counsel referred
to an article written on the subject by Kim G.C. Moody
in
a Canada Tax Foundation publication where he said:
Hence, some
practitioners design owner-manager remuneration so that the owner-manager is
remunerated wholly through employer contributions to an EPSP in order to avoid
withholdings such as income tax, CPP, and EI. For plans designed to avoid CPP
and EI withholdings entirely, all of the owner-manager’s remuneration is
directed through an EPSP. This leads to the obvious question whether such a
position will be challenged by the CRA. The CRA has opined in two technical
interpretations that whether or not the payment of an employee’s total
remuneration through an ESPS is acceptable is a question of fact.
[29] Counsel went on
to refer to the obligation of an employer to deduct and remit contributions
under section 21 of the Plan calculated on the amount of the
remuneration (salary and wages) paid to each employee. She pointed out that the
Appellant was in a position to know the amounts being allocated to each
employee, as a committee (in the form of Mr. Greber) was to determine these
amounts and under the EPSP it directed the trustees to allocate them
accordingly. The trustees then distributed in accordance with that “directed”
allocation. The trustees she points out were relieved of all responsibility,
which rested with the committee.
[30] Counsel submitted
that in effect the trust set up in this case under the EPSP was simply a
conduit for transmitting the salary and wages paid by the Appellant to the
employees. In this she relied on the case of Sheridan v Canada, [1985]
F.C.J. No. 230, where Heald J, speaking for the Federal Court of Appeal, said:
… If her role
was that of a mere conduit, she would simply have transmitted the remuneration
in [total]. I think also that a mere conduit would not have been involved in
fixing the quantum of remuneration….
[31] Counsel also
pointed out that there was a deficiency in the EPSP in that no committee was
ever established, but rather Mr. Greber as sole director of the corporation,
authorized the payment to the EPSP, and directed the allocation that trustees
were required to make.
[32] Finally counsel
pointed out that the trustees simply carried out the direction of the
corporation and in effect acted as its agent.
[33] The second
submission by counsel, on behalf of the Minister, was that the Appellant was
properly assessed for CPP contributions. Counsel sought to establish that
“allocations” in an EPSP can be subject to CPP contributions. She stated that
under section 12 of the Plan the commission, salary and wages of a
person for a year is his income for a year from pensionable employment computed
in accordance with the Income Tax Act. Therefore it follows, she said,
that as allocations are included in income, pursuant to section 6(1)(d)
of the ITA, they are therefore also “contributory salary and wages”
pursuant section 12 of the CPP.
[34] It is at this
point perhaps, that the Minister’s arguments became a little vague. It is one
thing to establish that the income is contributory income. It is another
question, where the legislative authority is for the Minister to assess for
those contributions.
[35] First counsel
maintained that the Appellant was properly assessed because it was the
employer. Counsel said that the position of the Minister was reliant upon three
points:
i) The Appellant was assessed as the Grebers employer
ii)
The Appellant was in a position to know the amount of salary and wages the
Grebers received because Mr. Greber determined the allocations and
iii)
Under the EPSP the Appellant, not the trustees were liable for the payments made
to the beneficiaries, the trustees being absolved of all responsibility.
[36] In hearing these
points, Miss Charlton has moved some what away from her legal agreement and
moved more into the realm of facts in this particular case, for the same could
be said of any payments made by an employer into an EPSP.
[37] Counsel referred
to two interpretation bulletins issued by the CRA, one dated April 6, 2000
(number IT280R) sets out the following questions and answers:
Salary
Paid to Epsp
April 06, 2000
Document
number: 2000-0017116
Income Tax
Act: 144(1)
Interpretation
Bulletins: IT-280R, Employees Profit Sharing Plans – Payments Computed by
Reference to profits
PRINCIPAL
ISSUES:
1) Can an employee’s total salary
be paid to an EPSP?
…
POSITION:
1) Question of fact.
…
[38] The second
bulletin December 4, 2000 reads as follows:
The second issue the CCRA was asked to comment on was whether section
144 would apply where the total salary of a shareholder-manager was paid
through an EPSP. The CCRA was not prepared to comment except in the form of an
advance ruling. We note that in a 1990 technical interpretation (see document
number ACC9276 in the Tax Window Files), Revenue Canada indicated that an EPSP
could not be established for one employee, which could be a consideration where
all of a shareholder‑manager’s remuneration was paid through an EPSP.
[39] Whilst not
legally binding, these bulletins are authoritative and it is noteworthy that in
answer to the question raised to whether an employee’s total salary could be
paid through an EPSP, the answer in both bulletins was that it was a “question
of fact”.
[40] Thus counsel
hangs her hat, on behalf of the Minister, on the basis of the facts in this
case. She points out that exactly the same amounts were channeled through to
the Grebers from the EPSP, as the amounts paid into the EPSP by the Appellant (see
Schedule to Statement of Facts). It was instantaneous. She points out that the
trustees under the plan were obliged to follow the directions of the Appellant,
ostensibly through the committee, but in fact by direction of the sole director
of the Appellant, Allan Greber, and that they were absolved of all liability
for anything they did as trustees, by the Appellant.
[41] Consequently she
says the monies were in reality “salary and wages”, conduited through the EPSP,
but still “remuneration paid to employees” by the Appellant as a matter of
fact, and thus the Appellant can be assessed for CPP contributions by the
Minister.
[42] In answer to a
question from the court, counsel was unable to demonstrate where the line, she
seeks to establish, should be drawn, that is which payments should be in or
which ones out in any given situation; for example if 80% of the remuneration
was conduited through and 20% was retained in the trust. She conceded that
there were no guidelines, and that it was a slippery slope that was being
embarked upon. However she maintained that in this case, regardless of what may
happen in any other case, the situation as a “matter of fact” was clear.
[43] Those were the
submissions made on behalf of the Minister.
The Position of the
Appellant
[44] Counsel for the
Appellant took a different tack.
[45] First he relied
on the statement of facts and the concession by counsel for the Minister that
the EPSP was properly set up. He referred to the decision of Weisman J in the
case of DNS v Canada (above), where he set out the three requirements
necessary to have a valid EPSP for the purposes of section 144 of the ITA:
1) Payments
are required to be made by an employer to a trustee under the arrangement for
the benefit of employees;
2) These
payments must be computed by reference to the profits of the employer from the
employer’s business;
3) All amounts
received by the trustee must be allocated to the employees on an ongoing annual
basis.
[46] Mr. Beck then
suggested that there were two more requirements namely:
4) That the
requirement that payments to the EPSP must be computed with reference to
profits, is modified if the EPSP is one for which the employer has made an
election under section 144(10) ITA, which in this case was done and
5) That
amounts be allocated, but not necessarily paid, to employees each year.
[47] The thrust of the
Appellant’s first submission is that this case (and others like it) represents
the long standing position of the Minister, that neither contributions to, nor
allocations within an EPSP, are subject to withholding Income Tax, EI premiums,
or CPP contributions. The reason for this, he advocates, as expressed by
Weisman J, is because allocations to beneficiaries from an EPSP are of trust
income and are not employee’s contributory salaries, wages etc.
[48] Mr. Beck went on
to rely on a ruling by the Minister, reference TE1 “conference 95 Question 5
Employee Profit Sharing Plans” July 18, 1995
Whilst the
employer’s contributions to an EPSP are included in the employee’s income under
paragraph 6(1)(d) of the Income Tax Act, there is no withholding
requirement when the employer makes the contribution nor on the allocation to
the employee by the trustee…
[49] The proposition
seems to be, first, that the payment made by the employer to the trust is not a
payment “to the employee” as the employee may never receive it so there
is no liability to contribute at that juncture. Secondly it is only when the
trustee “allocates” an amount to an employee/beneficiary, that it falls into
the latter’s income for Income Tax purposes under the ITA, when again it
may not necessarily be paid to that employee or beneficiary. Thirdly when it is
ultimately paid, it comes out from the EPSP, not in the form of salary or wages
but rather as trust income.
[50] In essence he
says that as there is no payment under section 153(1) (ITA), absent some
legislative plug to fill the hole, there would be no income tax payable in this
situation. Section 6(1)(d) and section 144 of the ITA between
them, legislatively fill that gap for income tax purposes.
[51] By analogy he
says the same reasoning applies to CPP contributions. Hence the past rulings by
the Minister.
[52] Mr. Beck then
raises the question as to why the Minister in this case has abandoned his
longstanding position. He points out that there has been no legislative change
nor has any court called into question this situation, other than the DNS case
(above).
[53] Counsel also
referred to the issue of whether the payments to the EPSP exceeded the profits
for the year in question and whether the retained earnings for that year or the
previous year should be brought into play. I do not think very much turns on
those issues. The fundamental question raised by the Minister is that of the
conduit or flow of the funds from the employer through the EPSP to the
employees. The only relevant point with reference to profits would be that if
these funds had been treated and paid as salary and wages there would have been
no profits left over to share with employees in the EPSP. That seems to be
clear from the facts, but it is not the principal issue raised by the Minister.
[54] Mr. Beck also argued
vociferously that the Appellant should have the right to direct the trustees as
to how to allocate the funds which it pays into the EPSP, and that nothing
should turn on that, nor on the fact that Mr. Greber himself wore all three
hats at the same time namely, director of the Appellant, trustee and
beneficiary.
[55] Those in essence
are the submissions of the Appellant.
Analysis
[56] There are good
arguments on both sides of this issue. A good case has been made for both
points of view.
[57] On the one hand
the Minister has accepted for 50 years or more that payments made to an EPSP
are not payments of remuneration to an employee for the purposes of deducting
Income Tax, EI payments or CPP contributions. Indeed not only has the Minister
accepted this situation throughout that time, but it has been legislatively
recognized in the ITA with respect to the deduction of income taxes at
source. No taxes are deducted at source by an employer making a payment into an
EPSP. Undoubtedly the reason for that is because the amounts (as per the IT
bulletin) are not paid to the employee and may in fact,
never be paid to the employee. More than that if the trust was completely
independent from the employer, and nothing legislatively says it has to be, the
allocation itself may not be made to any particular employee or class of
employees.
[58] Thus Parliament
in its wisdom has made provision for income tax to be payable by the
employee/beneficiary after the funds are allocated in the trust,
to that employee beneficiary and it has also made provision for refunds in the
event that the funds are never ultimately paid to the particular employee who
paid tax upon the allocation being made.
[59] In the Plan
there is no corresponding legislation dealing with the treatment of CPP
contributions on funds paid into an EPSP. There is clearly no legislation
requiring an employer to deduct and remit such contributions from payments into
the fund, they not being “payments to an employee”. There is no corresponding
requirement on the trustees or the beneficiaries to deduct or remit
contributions upon an allocation of funds being made within the plan, as is the
case with income tax; nor is there any such provision upon payment out to the
beneficiaries of the funds so allocated.
[60] It is a very
compelling argument that the principles should be the same for both income tax
and CPP contributions and indeed the Minister has accepted such, for many
decades up to now.
[61] Counsel for the
Appellant asked as to why the Minister has now changed his position. It strikes
me that the answer is obvious. Whilst a court should only look outside the
legislation, to seek its intent, if the wording of the statute is unclear or
ambiguous, where the purpose is self evident within the legislation, the court
can, and should take note of it. In this case the intent of the legislation
seems to me, to be quite clear.
[62] The whole thrust
of section 144 of the ITA, in making provision for these employee profit
sharing plans, is to enable employees generally, not necessarily only
owner/managers, to share in the profits generated by a business, and
furthermore not just to share in them but to be able to leave them in a pool of
savings, whereby they may be invested and grow to the general advantage of the employees/beneficiaries,
until they need them. It is like a forced savings and investment plan designed
to encourage employees to be interested and involved in their employers
business and encourage participation in its success, with the ability to take
out the funds, perhaps when they change jobs or retire, as a sort of nest egg.
[63] It was clearly
set up in a different era when tax was not so burdensome on the citizen and
social programs were not so available.
[64] It seems to me
that the legislation contemplated that these funds, paid into an EPSP, would
rest more long term in the trust. Section 144 of the ITA refers
specifically to income being earned on the trust funds, capital gains and
losses, credits for dividend income and so on. These are not consistent with
short term or immediate payments in and out of the plan, but are more
consistent with the investment of funds over a longer term.
[65] It is evident
from the various CRA bulletins, that the question has been more recently
raised, to whether an owner/manager’s salary can be 100% paid through an EPSP.
The evidence of Mr. Fuller, the accountant, was that these plans are being used
today by ingenious employers and their tax advisors for different reasons. Tax
can be deferred and the money used for up to one year, income splitting can
take place, and up until now CPP contributions have avoided being paid. There
is nothing to say that there is anything improper in all of this. In particular
there is nothing to say that Mr. Greber has done anything improper. Quite the
contrary, as a taxpayer he is entitled to arrange his affairs in strictly
accordance with the legislation so as to pay the minimum amount of tax
possible. Everything he has done has been perfectly straight forward and above
board.
[66] However it does
answer Mr. Beck’s question as to why the Minister is changing his longstanding
position. Clearly it is, because these plans and this legislation are being
used in a new and different manner to that originally contemplated by the
framers of the legislation.
[67] The situation in
the case at hand, stares one in the face. Far from being a profit sharing,
investment scheme, an incentive program for employees of an employer, the EPSP
here was set up and used at this time for reasons of tax planning, income
splitting and avoidance of CPP contributions. Again I stress that there is
nothing improper or illegal in that, but it is clearly a different concept to
that contemplated by the legislation.
[68] Essentially the
Minister sees an employer, working through his professional corporation, pay
himself and his wife by means of an EPSP. Mr. Greber is the sole director. He
makes the decision as to the amount of funds to be paid into the plan, in point
of fact, exactly equal to the remuneration he wishes to take out of the
corporation. He also directs the trustees how to allocate the funds, the
trustees being he and his wife. The direction is that each month as the funds
come in, they are to be allocated to him and his wife, who are the employees and
the beneficiaries. The trustees play no role, except as counsel for the
Minister says, to process the money through like a conduit. True under the EPSP
the trustees have all the powers of trustees to invest funds and do the things
trustees normally do, but they are directed to allocate and pay the funds
directly out to the beneficiaries, who are the Grebers themselves. Whilst it
may not have to be, this is far from being arm’s length and it smacks of a
certain degree of artificiality. Thus the Minister says these are in effect
wages and salary being channeled through the EPSP and thus should be treated as
such and assessed with CPP contributions.
[69] The arguments of
the Minister are very compelling. I am not sure I agree with Weisman J when he
says in the in the DNS case (above) that the CPP is remedial legislation, but
it is certainly social legislation designed to provide some social benefits for
Canadians, generally when they reach their golden years. For many of those
paying into the plan, that may seem far off, for others less so. I do agree
however that the purpose of section 144 of the ITA, whatever it may be
with respect to EPSP, was not that it to be used to circumvent the CPP.
[70] The DNS case
(above) can be distinguished on its facts, for in that case, there were no
actual payment into the EPSP, which had been set up. In the case at hand,
payments were made into the EPSP, but they passed straight through to the
employee/ beneficiaries.
[71] The real question
is to what extent the court should step in to prevent the use of an EPSP, which
has the effect of circumventing the Plan, or to what extent that should
be left to the Minister to deal with, if he wishes to do so through Parliament.
[72] It is certainly
not for this court to in effect legislate on behalf of the Minister. If the
whole thing was a sham, different considerations might apply. The Minister
however has not sought to say that. He agreed that on the whole the EPSP in
this case has been set up properly and validly. There were minor arguments
between counsel to whether the profits were sufficient, whether the trustees
were left with any discretion, whether the administrator was actually appointed
and so on, but the fundamental question was whether the use of the EPSP in this
manner where funds go straight through, using the plan as a conduit, makes
those funds “remuneration paid to an employee” liable to assessment on the part
of the employer for CPP contributions.
Conclusion
[73] Glaring as it may
be to use the legislation in this way, the movement of funds was in accordance
with the legislation setting up the EPSP, that is section 144 of the ITA.
It may not be a procedure that was originally within the purview of that
legislation, but it does conform to it.
[74] It is not a question
in my view of the Minister unilaterally changing his position on how these
things should be handled. He issued his bulletins and directions over the years
with good reason, following the wording of the legislature. That position has
been recognized legislatively. Otherwise there would be no need for the
provisions in section 144(4) of the ITA relating to the taxing of the
funds in an EPSP when they are allocated to the beneficiaries. They would have
been taxed at source either with the employer or with the trustees, during the
appropriate deduction remittances, when they made the respective payment or
allocation. That did not fit the legislation so there had to be a different
taxing provision.
[75] I do not find
that that this issue is to be decided as a simple question of fact. The
payments into and out of the EPSP were made in accordance with a strict
interpretation of the legislation. They may not have complied with the spirit
of the legislation but they did comply with the wording of it. There is nothing
in the legislation that says the funds have to be held or that if
in effect it is a salary and wages being conduited through at
exactly the same time, then different considerations should apply.
[76] It may be that
this is a loophole in the legislation, so that it can be used in a manner, not
originally intended by Parliament, but it is not for this Court to close
loopholes. If the Minister wishes to close such a loophole he has the ability
to do that through legislation. As was conceded by counsel for the Minister, it
is a slippery slope for the court to embark on deciding whether any one
situation crosses the line or not, without some legislative guidelines.
[77] I find that the
funds in question paid into the EPSP allocated to the Grebers and paid out to
them by the trustees were not remuneration, “paid” by an employer to “an
employee” and that accordingly there was no obligation on the Appellant to
deduct or remit CPP contributions with respect thereto. It follows that the
Appellant was not properly assessed. The appeal is allowed and the assessment
is vacated.
Signed at Calgary, Alberta, this 8th day of February 2007.
"M.H. Porter"
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