Fraser v. R., [1996] 2 CTC 2631 (Informal Procedure)

Lamarre J.T.C.C.: — This is an appeal from an assessment of income tax made by the Minister of National Revenue (the “Minister”) on April 11, 1994 with respect to the appellant’s 1992 taxation year. The appellant was originally assessed on April 1, 1993. A Notice of Objection was filed whereby the appellant disputed the amount credited for the total income tax deducted. The Minister reassessed the appellant on November 22, 1993, whereby an additional amount of $4,733.79 was credited to the appellant as tax withheld and remitted to the Receiver General by the appellant’s employer, the City of Cornwall. As a result, the appellant received a refund of $4,898.83. By letter dated February 24, 1994, Revenue Canada advised the appellant that an error had been made in the November 22, 1993 assessment and that the amount credited for total income tax deducted should have been $7,401.63 as per the first assessment dated April 1, 1993 and not $12,135.42 as indicated in the November 22, 1993 assessment. A Notice of Assessment was issued accordingly on April 11, 1994 with the Minister claiming reimbursement from the appellant in the amount of $5,030.74. The appellant appeals from this latter assessment on the basis that the total income tax deducted in the year 1992 was $12,135.42 as per the November 22, 1993 assessment and as per his pay stubs received from his employer for the year [1] and not $7,401.63 as is now contended by the Minister. The appellant argues that he thus does not have to pay the balance due of $5,030.74 claimed in the April 11, 1994 assessment.

At the beginning of the hearing, Counsel for the respondent raised the question of the jurisdiction of this Court in this matter. He mentioned that it was a collection matter and that this Court consequently did not have the power to deal with it in accordance with section 171 of the Income Tax Act (the “Act”). Section 171 reads as follows:

(1) The Tax Court of Canada may dispose of an appeal by

(a) dismissing it, or (b) allowing it and

(i) vacating the assessment, (ii) varying the assessment, or (iii) referring the assessment back to the Minister for reconsideration and reassessment.

I however pointed out to Counsel subsections 160.1(1) and 160.1(3) of the Act which read as follows:

160.1(1) Where at any time the Minister determines that an amount has been refunded to a taxpayer for a taxation year in excess of the amount to which he was entitled as a refund under this Act, the following rules apply:

(a) the excess shall be deemed to be an amount that became payable by the taxpayer on the day on which the amount was refunded; and

(b) the taxpayer shall pay to the Receiver General interest at the prescribed rate on the excess (other than any portion thereof that may reasonably be considered to arise as a consequence of the operation of section 122.5) from the day it became payable to the date of payment.

160.1(3) The Minister may at any time assess a taxpayer in respect of any amount payable by the taxpayer because of subsection (1) or (1.1) or for which the taxpayer is liable because of subsection (2) or (2.1), and the provisions of this Division apply, with such modifications as the circumstances require, in respect of an assessment made under this section as though it had been made under section 152.

In the present case the Minister, on April 11, 1994, assessed the appellant in respect of an amount ($5,030.74) that had, in his view, been refunded to the appellant in excess of the amount to which the appellant was entitled and this amount accordingly became payable by the appellant, within the meaning of subsection 160.1 (1) of the Act, on the day on which the amount was refunded. Interest on this amount is calculated from the date it became payable. On a reading of this section of the Act, which in my view is applicable to the present situation, I am of the opinion that the appellant here is seeking relief from an assessment of tax pursuant to the deeming provision of section 160.1 and that this Court consequently has jurisdiction to hear this appeal. [2]

In assessing the appellant on April 11, 1994 for the 1992 taxation year, the Minister relied on the facts stated in paragraph 7 of the Amended Reply to the Notice of Appeal which reads as follows:

(a) the facts hereinbefore stated and admitted;

(b) during the 1992 the Appellant was employed by the City of Cornwall (the “Employer’’);

(c) between June and December of 1992 the Appellant was entitled to receive compensation from the Workmen’s Compensation Board (the “WCB”) under a workmen’s compensation law of Canada;

(d) for the pay periods ending June 13, 1992 to December 26, 1992, the Employer paid the Appellant advances in respect of the compensation referred to in paragraph (c) above, which advances were recorded as regular payments of the Appellant’s salary, with the related deductions for tax, etc;

(e) the amount subsequently paid by the WCB was remitted to the Employer, who adjusted the Appellant’s gross income and tax withheld at source accordingly;

(f) as a result of the adjustments referred to in paragraph 7(e) of this document, the revised amount of tax withheld and remitted to the Receiver General does not agree with the total of these amounts shown on the Appellant’s pay stubs;

(g) the reassessment [November 22, 1993] referred to in paragraph 5 of this document is based on the total tax withheld as shown on the pay stubs referred to in paragraph 7(f) above;

(h) the actual amount of the tax deducted and remitted to the Receiver General by the Employer in respect of income taxes from the Appellant’s employment income for the 1992 taxation year is the adjusted amount as indicated in paragraphs 7(e) and 7(f) of this document, i.e. $7,401.63;

(i) the portion of the amount referred to in paragraph (h) above which relates to federal tax is $4,864.61;

(j) no other amount was deducted from any other remuneration of the Appellant by the Employer or any other employer in respect of income tax during the 1992 taxation year.

(k) in computing the balance of tax owing by him for the 1992 taxation year, the Appellant deducted, in addition to the amount of income tax withheld by the Employer ($7,401.63) an amount of $4,733.79 in respect of payroll deduction of tax allegedly deducted by the Employer, which amount is based on the pay stubs referred to in paragraphs 7(f) and 7(g) of this document;

(l) the Appellant is not entitled to deduct any amount(s) in excess of the income taxes withheld and remitted by the Employer, i.e. $7,401.63, in computing his balance of tax owing for the 1992 taxation year;

(m) the Appellant was issued a refund (including refund interest of $165.04) in the amount of $4,898.83 when his 1992 return was reassessed on November 22, 1993;

(n) based on the subsequent reassessment of the Appellant’s 1992 income tax return on April 11, 1994, the said refund (including refund interest) should have been nil;

(o) prescribed interest on the said “Unwarranted Refund” (including unwarranted refund interest) from the date of its issuance on November 22, 1993 to the subsequent reassessment on April 11, 1994 amounts to $165.04; and

(p) the portion of the prescribed interest which may be viewed as attributable to federal tax amounts of $86.70.

The facts of this case are not in dispute. The appellant was employed by the City of Cornwall during the 1992 taxation year. As a result of a back injury, the appellant became entitled to receive compensation from the Workmen’s Compensation Board (the “WCB”) between June and December of 1992. Pursuant to the collective agreement under which the appellant was employed, if a worker is injured and is on compensation or in a position to receive worker’s compensation, the employer “shall pay 100% of the Employee’s net salary and shall be responsible for all benefits covered by the contract, until the Employee returns to normal duties” [3]

Between June 13, 1992 and December 26, 1992, the employer paid the appellant his regular salary, less the related deductions for tax. The amount paid by the WCB was remitted directly to the employer, who adjusted the appellant’s gross income and tax withheld at source accordingly. [4] Following these adjustments, an amount of $5,235.72 representing the excess amount of tax withheld and remitted was refunded to the employer by the Receiver General.

A discrepancy therefore appeared between the amount of tax actually withheld and remitted to the Receiver General and the total of these amounts shown on the appellant’s pay stubs. As evidenced by the appellant’s pay stubs, the amount of tax withheld and remitted during the 1992 taxation year was $12,637.35. On the other hand, the appellant’s T-4 slip indicates that the adjusted amount of tax withheld was $7,401.63.

The appellant was issued a refund in the amount of $4,898.83 ($4,733.79 plus interest amounting to $165.04) when his 1992 return was reassessed on November 22, 1993. Based on the subsequent assessment of the appellant’s 1992 income tax return on April 11, 1994, the respondent established that the said refund should have been nil.

Issue

The issue in this case is whether the appellant is entitled to the refund issued by the Minister in the amount of $4,898.83. Counsel for the respondent argues that the appellant is not entitled to the refund claimed since the total income tax remitted to the Receiver General was not $12,637.35 as claimed by the appellant but $7,401.63. Indeed, the Receiver General did receive the amount of $12,637.35 in 1992 but reimbursed the City of Cornwall an amount of $5,235.72. Therefore, the appellant should have been credited only an amount of $7,401.63 as total income tax already paid in his 1992 taxation year.

Analysis

The problem here is that although the Minister did in fact receive only an amount of $7,401.63 on account of the appellant’s income tax source deductions for the year 1992, the amount that was deducted at source from the appellant’s remuneration by his employer was in fact $12,637.35. According to Mrs. Anita Roach who testified for the employer, the difference of $5,235.72 that was refunded by the Minister to the City of Cornwall was the employer’s property as it was “part of the whole wage package” [5] . The employer took the position that it only advanced to the appellant amounts in respect of the compensation to be received from the WCB and recorded it as regular payments of the appellant’s salary to comply with the Collective Agreement. As the amount received by the WCB is not taxable under the Act, the employer did not have to withhold at source and therefore was reimbursed accordingly.

In my view, the solution must be found in the interpretation of the Collective Agreement which creates the obligation of the employer vis—vis its employees [6] . Section 15.06 of this Agreement reads as follows:

An employee who is injured or ill as a result of duty shall not have sick leave days deducted for any absence under an approved compensation award. During the period between the accident or illness and the Board approval of the claim, sick leave days shall be deducted and shall be credited back to the Employee if and when the Board approves the claim.

During the period that an employee is on Workers’ Compensation, the Corporation shall pay 100% of the Employee’s net salary and shall be responsible for all benefits covered by the contract, until the Employee returns to normal duties, or retires. Any monies received from Workers’ Compensation, then becomes the property of the Corporation.

The wording of this section presupposes that the injured employee will be guaranteed his net salary plus all the benefits attached to his contract of employment. In order to pay the net salary, the employer computes the employee’s gross salary from which he subtracts the amounts required to be withheld at source under subsection 153(1) of the Act and sections 101 and 102 of the Income Tax Regulations. As was said by Garon J. in Marchand v. Minister of National Revenue, [1990] 2 C.T.C. 2370, 90 D.T.C. 1763 (T.C.C.) at page 2375 (D.T.C. 1767), in a case where the questions at issue were essentially the same as in the case at bar, “the legal nature of these payments made ... by [the employer] during the period of absence ... is obviously not changed by the fact that the CSST' [7] ... paid compensation equal to 90% of the net salary paid to the Appellant while he was off job”.

The agreement between the employer and its employees requires the employer to treat the injured employee as if he was still working. The employer’s obligation is to pay the regular salary and all benefits covered by the contract to the injured employee when he is off the job. The amounts paid by the employer during the employee’s absence are not an advance in respect of the compensation to be received from WCB. If that were the case, it is my view that it should have been clearly indicated in the Collective Agreement as such. [8] In that sense, the employer (the City of Cornwall) should not have recovered from the Receiver General the amount of $5,235.72 as this amount did not represent an excess amount of tax withheld and remitted.

This approach seems to be the one that was adopted by Garon J. in Ville d’Outremont v. The Queen (June 2, 1995), Doc. 92-683(IT)G (T.C.C.). In that case, the Minister contended that the employer (Ville d’Outremont) had failed to remit some amounts with respect to the salaries of certain employees who sustained work- related injuries in a year and subsequently received compensation from the CSST. The employer’s obligations were to pay an amount equal to the employee’s net salary while he was so injured. At the end of the year, the employer proceeded to make some adjustments and was reimbursed accordingly by Revenue Canada. As in the present case, the amounts indicated on the injured employees’ T-4 slips had thus been adjusted and were therefore different from those mentioned in the employees’ pay stubs. The issue to be determined was whether adjustments should have been made at the end of the year with respect to amounts remitted to the Receiver General out of the remuneration paid to employees who were entitled to an indemnity from the CSST. After analysing the scope of subsection 102(1) of the Income Tax Regulations, Garon J. expressed himself this way:

It follows from the foregoing that no adjustment is required in order to take into account the deduction, in computing the taxable income, of compensation received under a employee’s or workmen’s compensation law. It follows that the deductions which were made in each pay period as though the employee in question had not suffered an employment injury were the only one required and authorized. It is indisputable that Part I of the Income Tax Regulations provides for no adjustment of taxable income in respect of the amounts deducted and remitted to the Receiver General. It goes without saying that, when filing his income tax return, the employee concerned may determine his tax payable by taking into account, in particular, the deduction provided by subparagraph 110(1 )(f)(ii) of the Act for the purpose of computing his taxable income.

As it appears that the assessments under appeal represent a portion of the amounts withheld from the remuneration of the employees who suffered employment injuries and paid by the appellant to the Receiver General and subsequently refunded to the appellant by the Minister of National Revenue, I must conclude, subject to the following remarks on the power of the Minister of National Revenue to assess in the instant case, that the assessments were valid with respect to the tax component, given that, in my view, no portion of the amounts deducted from the remuneration of the employees in question and remitted to the Receiver General had to be refunded to the appellant.

[Translation.]

Accordingly in my view the employer was required to pay and did pay to the appellant while he was off the job the same gross salary as if his work had not been interrupted and as such the appellant should be credited with the whole amount deducted at source. However, while I am not in a position to decide the issue, as it was not raised before me, I will point out that, in my opinion, taking into account the interpretation that I have just given of the Collective Agreement in the present case, the amount received by the City of Cornwall from the WCB ($15,852) should not have been taken into consideration for the purposes of the appellant’s income tax return, as in fact he did not receive this amount. And even if I could consider that the amount paid by the WCB to the City of Cornwall was legally attributable to the employee, this award should for the purposes of his tax return have been added to his gross salary pursuant to paragraph 56(l)(v) of the Act and then deducted pursuant to subparagraph 110(l)(f)(ii) so that there would have been no net effect on the taxable amount. An injured employee thus would not receive a net salary that is higher or lower than the salary received by a colleague of the same rank who worked the whole year, which in my view reflects the intention behind the Collective Agreement. [9]

For these reasons, the appeal is allowed and the assessment of April 11, 1994 is referred back to the Minister for reconsideration and reassessment on the basis that, in computing the income tax to be paid for the 1992 taxation year, he should take into account that an amount of $12,135.42 (which was the amount credited in the November 22, 1993 assessment and accepted by the appellant at that time) has already been deducted at source in 1992.

Appeal was allowed.