Date: 20020221
Docket: 2001-2234-IT-I
BETWEEN:
PATRICK JAMES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Jasmine Sidhu
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench on
November 28, 2001, at Vancouver, British
Columbia)
Mogan J.
[1] The Appellant is skilled in
information technology. In 1997 and 1998, he was living in
Calgary but received offers of opportunity to work elsewhere. In
1998, he decided to accept an offer to provide services to the
Liquor Distribution Branch of the Province of British Columbia. I
am not sure whether the job offer came directly from the Liquor
Distribution Branch or whether it came through a company called
Computer Task Group ("CTG") located in Toronto.
[2] According to the Appellant's
unchallenged evidence, he was required to incorporate a company
in order to receive the fees which would be earned as a result of
the services he rendered to the Liquor Distribution Branch. He
incorporated Stellar Information Technology Management Inc.
("Stellar") under the laws of British Columbia. He was
its sole shareholder and director. In order to accept the work,
Stellar entered into an agreement dated July 6, 1998 with CTG.
The first page of that agreement is attached to the
Appellant's 1999 income tax return which was entered as
Exhibit R-1.
[3] For the first nine months of the
Appellant's services to the Liquor Distribution Branch from
July 1998 to March 1999, payments went from the Liquor
Distribution Branch to CTG; and Stellar submitted invoices to CTG
which in turn paid Stellar. That is the route by which the
Appellant's services were rewarded. I will describe below how
the Appellant withdrew the money from Stellar in order to provide
for his daily living requirements.
[4] Once the Appellant agreed to
accept the position, he moved from Calgary to Surrey, British
Columbia in July 1998. He immediately looked for a house for his
family and, around September 1998, his wife moved to Surrey and
they set up their domestic dwelling. The Appellant incurred
significant expenses in order to move his household from Calgary
to Surrey. According to the pleadings, those expenses were in the
range of $19,700. Again, according to the pleadings, he attempted
to deduct those expenses when computing his income for 1999 but
it seems to me that he might better have deducted them in 1998
when they were actually incurred in connection with the move.
[5] According to the Notice of Appeal,
the Appellant seems to have appealed the 1998 taxation year even
though he in fact deducted the moving expenses in computing his
1999 income and they were disallowed as a deduction in 1999. I
assume that his claim for 1998 is that he be permitted to deduct
those expenses in 1998 being the calendar year in which those
expenses were incurred.
[6] To review the evidence, the
Appellant accepted new work in British Columbia which required
him to move from Calgary, Alberta, to Surrey, British Columbia.
He incurred about $19,000 in moving expenses in September 1998 to
make that move. He took up his new work in July 1998 and
incorporated Stellar to receive, directly or indirectly from the
Liquor Distribution Branch, the fees for the work he performed.
The Appellant claims that he comes within the spirit of the law
and that his moving expenses should be allowed as a deduction
because it is a policy of the Government of Canada to make it
easy for people to move from one place to another, either to
accept new employment or to carry on a business. That policy is
reflected in section 62 of the Income Tax Act which is the
section that permits the deduction of moving expenses in the
computation of income.
[7] The position of the Respondent is
somewhat technical and is based upon the manner in which the
Appellant withdrew funds from Stellar. In 1998, the fees paid by
the Liquor Distribution Branch to CTG were in turn paid to
Stellar. There is no evidence concerning whether a commission was
paid to CTG but, in any event, the money flowed from the Liquor
Distribution Branch to CTG with whom Stellar had the agreement,
and then Stellar received fees from CTG. Relying on advice which
the Appellant received in 1998, Stellar declared a dividend
payable to the Appellant in 1998 in the amount of $57,500.
Stellar paid a further dividend to the Appellant in the amount of
$22,000 in 1999.
[8] Revenue Canada has taken the
position that the moving expenses are not deductible or cannot be
applied against dividend income because it is income from
property and not income from employment or business. To support
that position, Revenue Canada relies on subparagraph
62(1)(c)(i) of the Act which reads:
62(1) There may be deducted in computing a
taxpayer's income for a taxation year amounts paid by the
taxpayer as or on account of moving expenses incurred in respect
of an eligible relocation, to the extent that
...
(c) the total
of those amounts does not exceed
(i) ...
the taxpayer's income for the year from the taxpayer's
employment at a new work location or from carrying on the
business at the new work location, as the case may be,
...
Revenue Canada states that the Appellant has no income from
business or employment but only dividends received as a
shareholder of Stellar. He has no profit sharing arrangement with
Stellar which earns all the income and pays him a dividend.
Therefore, because the Appellant reported no business or
employment income, there was nothing to deduct the moving
expenses against within the meaning of section 62 of the
Act.
[9] When section 62 was introduced
into the Act more than 25 years ago, it did not take into
the account the meaner and harsher world of the 1990s in which
many potential employers would avoid their "employer"
role by insisting that some people who render services form a
corporation and submit invoices through the corporation so that
the services would be rendered by an independent contractor and
not an employee. This scheme allows the "employer" to
avoid paying certain benefits like pensions, medical plans, and
other benefits which might otherwise have been negotiated as
payable to employees of the payor. That trend has certainly
developed in recent years, long after section 62 was introduced
into the Act. It was difficult for the Appellant to
satisfy some of the conditions of section 62 because the
Appellant was told by the purported future employer (the
"payor") that if he wanted to provide the services and
earn the fees, then he would have to incorporate and submit
invoices to CTG through the corporation.
[10] The Appellant argues that because he
was caught in this vice, the assessment issued by Revenue Canada
goes against the spirit of the Act and he is being harshly
and perhaps unfairly treated. There is some merit in his argument
but there were other ways to withdraw funds from Stellar which
would permit the moving expenses to be deductible. Instead of
drawing money out of the company by way of dividend, if the
Appellant had simply put himself on the payroll of Stellar and
paid himself a salary which could have equalled about $55,000
over the last six months of 1998, he would have been an employee
of Stellar; he would have had employment income; the income would
have been derived from the new work location; and it seems to me
that he could have deducted the moving expenses from the Stellar
employment income.
[11] With regret, I have to dismiss the
Appellant's appeal because he was caught in the vice of
having to use the corporate entity to earn the consulting fees
when he paid the moving expenses personally. Having caused the
consulting fees to be earned and accumulated within Stellar, he
did not withdraw any money from Stellar as a salaried employee of
Stellar. That procedure would have given the Appellant employment
income against which moving expenses are deductible. He withdrew
money from Stellar by way of dividend which, in my view, is a
non-deductible source with regard to section 62.
[12] The Appellant states that Revenue
Canada has gone against the spirit of the Act. There is
some merit to his argument in what I have already called the
"harsher and meaner realities of 1990s". The Appellant,
however, may also have gone against the spirit of the Act
when he used the dividend route from Stellar to pay for his
personal living requirements because there is a favourable tax
treatment for dividends. I am referring, of course, to the
dividend tax credit permitted by sections 82 and 121 of the
Act. Therefore, if the Appellant elected to draw money out
of Stellar by way of dividends with a favourable tax treatment,
he may be in a weaker position to complain about unfairness if
Revenue Canada adopts the position: "You have elected
dividend route; moving expenses may not be deducted from
dividends". Following advice which I regard as inadequate to
say the least, the Appellant is put in the position where the
moving expenses are not deductible from his dividend income. I am
required to dismiss the Appellant's appeal for 1998.
[13] I will add one footnote. The Appellant
would have filed his income tax return for 1998 in the spring of
1999 and probably was first assessed around May 1999. Therefore,
he is still within what is called the "normal reassessment
period" of three years which would run from the date of his
first assessment for 1998. I would, therefore, suggest that the
Appellant petition Revenue Canada to ask if they would accept
amended returns from the Appellant and from Stellar for 1998 and
1999 changing the character of the amounts paid by Stellar to the
Appellant from dividends to salary. If the Appellant were
permitted to do that and sacrifice whatever dividend tax credit
might have been available, he would have employment income from
which the moving expenses could be deducted. If the Appellant
intends to petition Revenue Canada as suggested above, he should
file waivers for 1998 for himself and for Stellar.
[14] I cannot determine from the limited
evidence before me whether the amended returns suggested above
would be fair and equitable to both parties. The appeal for the
1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 21st day of February, 2002.
J.T.C.C.
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