Moore v. R., [1996] 1 CTC 2540

Rowe D.J.T.C.C.: — The appellant appealed with respect to his 1988, 1989 and 1990 taxation years. However, the assessment for the 1990 was a nil assessment and the purported appeal for that taxation year was quashed at the outset. The appellant filed his 1988, 1989 and 1990 income tax returns on March 31, 1992 with a note stating that he disagreed with the amounts shown on the 1988 and 1989 T4 slips which he had received but that he used those amounts in preparing his returns. The Minister of National Revenue (the “Minister”) assessed the appellant’s 1988, 1989 and 1990 returns as filed but assessed late filing penalties for the 1988 and 1989 taxation years.

The appellant testified that, in 1987, he met Mr. Don Charity, President of Charity Construction Ltd., carrying on business in Victoria, British Columbia. At the time, the appellant was looking for work and had approached several developers with a view to interesting them in undertaking certain construction on desirable commercial sites. He discussed a certain concept with Don Charity and, in 1988, entered into an agreement whereby he provided certain information regarding a rental development site and in return was paid the sum of $10,000.

In May, 1988, he assisted Charity Construction Ltd. in completing certain estimates in an effort to obtain work for the company regarding a project for CNCP. He received payment in the sum of $500 for his work which involved site attendances, meetings, preparation of necessary documentation. He used the office of Charity Construction Ltd. to carry out some of the work. The CNCP bid was unsuccessful. He spoke with Don Charity about the possibility of being hired as a project manager for any future projects carried out by Charity Constructon Ltd. and, as times were tough in the construction industry, he believed that the best way to be hired was to actually bring a feasible project, as a concept, to a contractor.

In July, 1988 Charity Construction Ltd. had a contract to construct two houses, known as the Forshaw project, and the appellant agreed to serve as project manager — on the basis of being an independent contractor — for which he would be paid the sum of $2,000 per month and a $500 per month completion bonus if a certain deadline was met. He stated he did not expect Charity Construction Ltd. to deduct any income tax, unemployment insurance premiums or Canada Pension Plan contributions from his cheques because he was not an employee. On October 1, 1988 he was offered work by Don Charity, on behalf of the corporation, to manage construction of a 24-unit condominium known as the Lady Diana project. His pay was set, by agreement, at $4,000 per month and he stated that, in his mind, his status with Charity Construction Ltd. was that of an employee. The project lasted a total of 8 1/2 months during which time he was being paid on an irregular basis without any pay stubs or other calculations to indicate the extent of deductions, if any, from his pay. The appellant stated that Don Charity was fully aware of his status as an employee but the corporation was always short of cash and regular pay cheques could not be paid to him. By June 15, 1989 he estimated that he was owed about $14,000 in back wages.

During construction of the Lady Diana project, he also assisted Mr. Gerard Grealy with certain problems being encountered with the City of Victoria, requiring a variance permit. When the Lady Diana project concluded, he did not receive a Record of Employment from Charity Construction Ltd. and he applied for unemployment insurance benefits. In due course, a determination was made that he had been an employee of Charity Construction Ltd. and he later received T4 slips, which he believed to have been prepared by Revenue Canada or Charity Construction Ltd. at the request of Revenue Canada. However, the ruling made with respect to his claim for unemployment insurance benefits was that all of the work he had ever done for Charity Construction Ltd. was performed as an employee. In his view, that determination was incorrect as he had regarded himself as an employee only when working on the Lady Diana project. All of the other services earlier provided by him to Charity Construction Ltd. or to Key Developments Inc. were done on the basis of being an independent contractor. Between 1981 and 1988, he had carried on business under various proprietorships and had also been an employee of others so was well aware of the distinction between an employee and a subcontractor. He did not file his return of income for the 1988 taxation year on or before April 30, 1989. He stated his 1988 income was as follows:

$10,000 — finder’s fee

500 — CNCP estimate

6,000 — Forshaw project

8,000 — 2 months wages re: Lady Diana project

9,871 - unemployment insurance benefits

The appellant stated that the finder’s fee of $10,000 was not paid to him until August 1, 1989 from an entity he believed to be Key Developments Inc. — controlled by Don Charity — but he understood that amount to be attributable to his 1988 taxation year. In addition, he received the sum of $9,500 on September 26, 1989 and reported that amount as business income. He stated that this amount was paid to him by Mr. Grealy for services rendered by him to Grealy and that said payment had no connection whatsoever with his wages due to him for working on the Lady Diana project. In effect, he had been wearing two hats — one as project manager — and the other as a consultant to Grealy on other matters. The appellant stated that he was assured by Don Charity that all proper accounting would be done and deductions would be made from his salary while working as an employee on the Lady Diana project. Therefore, in his opinion, beginning October 1, 1988 and continuing until June, 1989, remittances should have been made to Revenue Canada on his behalf for amounts withheld.

In cross-examination, the appellant identified his 1988, (Exhibit R-4) 1989 (Exhibit R-3) and 1990 (Exhibit R-l) tax returns, all of which were dated August 14, 1991 but were actually filed on March 31, 1992. In filing his 1988 return, the appellant used the amount on the T4 slip prepared by Revenue Canada. The appellant stated that he was aware of the requirement to file an income tax return by April 30 of the year following. However, in his view he should have received assistance from Revenue Canada in compelling Charity Construction Ltd. to provide him with the proper information, including T4 slips. He identified copies of cheques (Exhibit R-5) received by him, including cheques totalling $5,290 received by him in 1988, attributable to his work on the Forshaw project. The appellant identified a builder’s lien (Exhibit R-6) filed by him on July 13, 1989 against the lands comprising the Lady Diana project, claiming the sum of $14,205.83 due and owing to him, for wages, by Charity Construction Ltd., as at June 15, 1989. After filing the lien, he received payments of $800, $1,000 and $2,500 on June 16, June 23, July 27, respectively. On July 27, 1989, Charity Construction Ltd. owed him the sum of $9,900 and on September 26, 1989 he received a cheque in the sum of $9,416, which was a net amount flowing from a payment made to him pursuant to a release (Exhibit R-7) which he signed to discharge his builder’s lien. However, the appellant stated that the sum of $9,500 paid to him for the release was an amount paid to him by a corporate entity owned by Gerard Grealy for services rendered and had nothing to do with the amount owed to him by Charity Construction Ltd. for his work on the Lady Diana project.

Don Charity testified he is a businessman residing in Victoria, British Columbia and was a majority shareholder in Charity Construction Ltd. during 1988 and 1989. He entered into a verbal contract with the appellant for his services in connection with the CNCP proposal and paid him the sum of $500. The appellant was paid the sum of $2,500 per month, for three months, on the Forshaw project and $4,000 per month on the Lady Diana project, beginning October 1, 1988. He stated that the appellant had begun working on the Forshaw project as an employee but soon wanted to change the arrangement as he said he needed the gross amount of his salary in order to meet his financial needs. He stated that Charity Construction Ltd. was not receiving proper draws from the builder’s mortgage and could not make regular payments to the appellant. The sum of $9,500 paid by Grealy’s company to the appellant in return for release of the builder’s lien on the Lady Diana project was later deducted by Grealy from the money owed by his numbered company to Charity Construction Ltd.

In cross-examination, Don Charity stated he did not know of any details regarding preparation of T4 slips, deductions, payroll records, etc. as these matters were handled by Ms. Stewart, the corporate bookkeeper. Grealy informed him there was a builder’s lien filed against the project. He acknowledged that he is aware of an employer’s duties pursuant to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”) regarding remittances and knows the law defining employees as opposed to independent contractors. He identified a letter dated October 11, 1988 (Exhibit A-1) directed to Jeffery and Calder, Barristers and Solicitors, in which he referred to the appellant as an employee of Charity Construction Ltd., earning a salary of $4,000 per month. His recollection is that the appellant requested such a letter, confirming employment, to be used in connection with a court case in which he was involved. He agreed that at some point he may have offered the appellant a shareholder’s position in the company but the company ceased operations more than six years ago.

Gerard Grealy testified he is a businessman residing in Victoria, British Columbia. He entered into a contract with Charity Construction Ltd. to construct a 24-unit condominium, referred to as the Lady Diana project. He did not hire the appellant to do anything at all. He instructed his solicitor to pay out all of the builder’s liens, including that of the appellant, filed against the project. After checking with Charity Construction Ltd. to ascertain that the appellant was owed the sum of $9,500 in wages, he paid that amount to Moore to receive, in return, a discharge of his lien. There was never any separate arrangement between himself and the appellant. When he settled up with Charity Construction Ltd. upon completion of the Lady Diana project, he deducted the various sums he had paid to subcontractors and to the appellant to clear off the liens.

In cross-examination, Grealy stated that Moore was job superintendent on the Lady Diana project and that Moore told him that he (Moore) wanted to be paid as a sub-contractor. Grealy stated he was the sole shareholder in 344537 B.C. Ltd. — the corporation paying out the appellant’s lien — and that he approved of a sign on the project naming the appellant as Project Manager. Grealy stated he thought Moore started out as an employee of Charity Construction Ltd. but then wanted to be a sub-contractor so he could save money on taxes. In an advertisement (Exhibit A-3) appearing in the Victoria newspaper at the conclusion of construction on the Lady Diana, the appellant’s name did not appear as a sub-contractor alongside other sub-trades that had worked on the building. Grealy hired the assistant project manager and that person reported to him. Upon discovering the appellant’s lien against the property, he telephoned the appellant’s lawyer and made arrangements to pay an amount to discharge the lien but had no other arrangement with Moore to pay for any fees or services.

Katherine Collins testified she is a bookkeeper for Charity Construction Ltd. but did not work for the company during the 1988-1989 period. She had access to books and records of the corporation for certain projects carried on by it during those years, including the projects referred to as CNCP, Forshaw, Lady Diana. Her review of the books and records revealed that as at June 15, 1989, the following amounts had been paid by Charity Construction Ltd. to the appellant:

$500 — CNCP

$5,390 — Forshaw project

$21,278.20 — Lady Diana project

At this point — June 15, 1989 — the appellant was owed the sum of $14,831.80 but further payments to him in the sum of $4,300 reduced the indebtedness to $10,531.80 at the time the lien was filed. She found a record of source deductions in March and April, 1989, pertaining to income tax, unemployment insurance and Canada Pension Plan premiums relating to the appellant as an employee but was unable to locate any evidence of deductions before that time. The amount deducted for income tax was in the sum of $1,207.67. Payments to the appellant were irregular and in varying amounts. At some point in 1990, there was a determination that Moore had been an employee of Charity Construction Ltd., an assessment was issued and was paid.

Andrew Dreher testified he is a supervisor with Revenue Canada. He was called by an Appeal Officer to inquire into the matter of the appellant’s working relationship with Charity Construction Ltd. and he carried out an audit in 1990. Some of the cheques written to the appellant were in odd numbers that would suggest net — as opposed to gross — pay. Ms. Collins provided him with copies of cancelled cheques and a payroll book which contained certain entries pertaining to deductions taken from Moore’s salary. However, he inspected the builder’s lien — Exhibit R-6 — and noted the amount owing as at June 15, 1989 was a sum in excess of $14,000. He met with the appellant and told him that there was some information indicating he had been on the payroll of Charity Construction Ltd. After the lien had been filed, Moore received further payments totalling $4,300 and then settled

for a final payment of $9,500 in order to discharge the lien. Moore reported the sum of $9,500 as business income and deducted certain expenses against it. In December, 1990, the income of the appellant for 1988 and 1989 was grossed up to include the amounts withheld (notionally) for unemployment insurance premiums and Canada Pension Plan contributions. Moore had also reported the sum of $10,000 as self-employed income received from Key Developments Inc. Dreher visited the appellant and told him that Dreher had concluded that Moore had filed a lien and recovered an amount equal to the gross amount owed to him for wages on the Lady Diana project, including recovery of amounts that may have been deducted at an earlier point. Moore’s explanation for the sum of $9,500 was that it represented monies owed to him by Grealy and that he released the lien out of his friendship with Grealy.

In cross-examination, Dreher conceded that the release — Exhibit R-7 — did not refer to Charity Construction Ltd.

It is apparent that the appellant and others have very different views of events during the 1988-1989 period when the appellant had a working relationship with Charity Construction Ltd. The appellant’s view is that the only time he was an employee of Charity Construction Ltd. was between October 1, 1988 and June 15, 1989 when he was the superintendent on the Lady Diana project. All other income derived from that corporation was under the head of payments to himself as a sub-contractor or independent consultant. However, the ultimate ruling or determination was that he was an employee during the time he worked on the CNCP proposal and on the Forshaw project. As a result, an assessment was issued against Charity Construction Ltd. which it paid. Then, in December, 1990 the appellant’s 1988 and 1989 income was adjusted to reflect amounts relating to Canada Pension Plan contributions and unemployment insurance premiums that represented - as a result of the retroactive effect of the assessment against Charity Construction Ltd. — the amount that should have been withheld by the employer. However, that was purely a notional concept extrapolated to 1988 and 1989. As at April 30, 1989, when the appellant should have filed his 1988 tax return, he would have had no reason to include any such amounts in his return of income because, in his mind and probably in fact, he was not an employee of Charity Construction Ltd., except for the months of October, November and December on the Lady Diana project. But, a perusal of cheques paid to him — Exhibit R-5 — does not clearly indicate any cheques that were paid as wages on the Lady Diana project. For example, cheque # 3879, dated December 9, 1988 in the sum of $1,500 could well have been the $500 per month completion bonus on the Forshaw project which had then concluded. The appellant, in filing his 1988 return of income used the amounts shown in the T4 slip prepared by Revenue Canada and then claimed the Canada Pension Plan contribution and unemployment insurance premium payments in his calculation of total non-refundable tax credits.

With regard to the appellant’s 1989 taxation year, the retroactive effect of the determination re: unemployment insurance and Canada Pension Plan was added into his income and shown on a T4 slip prepared by Revenue Canada. Again, the appellant used those amounts in preparing his return of income for the 1989 taxation year. He reported the sum of $9,500 - received to discharge the builder’s lien - as business income and the Minister did not re-classify that as employment income. The evidence disclosed that in March and April of 1989, the books and records of Charity Construction Ltd. revealed a segregation of amounts withheld as income tax deducted on behalf of the appellant from a pay cheque. That amount so deducted was in the sum of $1,207.67 and whether or not the appellant later filed a lien for an excessive amount of wages due and owing has nothing to do with Revenue Canada nor does it relieve Charity Construction Ltd. from its obligation to remit, in accordance with provisions of the Income Tax Act, an amount deducted for income tax from an employee’s pay cheque.

There is no doubt that the sum of $9,500 was paid to the appellant by Grealy’s numbered company in order to obtain a discharge of lien and was a payment of wages owing to Moore by Charity Construction Ltd. for work done on the Lady Diana project. There was no other reason for the payment. There was no so-called side agreement between Moore and Grealy. In 1989, the appellant saw himself as an employee of Charity Construction Ltd. and should have been aware that he was required to file a return of income. The whole matter is further confused by his classification, as business income, of the monies received as a payout on the lien. The appellant was well aware that he had income in 1988 that should have been reported by filing a return on or before April 30, 1989. He knew there were various amounts of income that had not been subject to deductions. In fact, his point was that, except for three months at the end of the year, his income from Charity Construction Ltd. was business income and not employment income. In his tax return for the 1989 taxation year he reported various sums as business income and knew that these were not subject to any withholding or instalment payments. Therefore, he would have owed tax and was required to file a return of income for the 1989 taxation year by April 30, 1990. He did not do so and subjected himself, again, to the imposition of the appropriate penalty and interest. Mr. Moore continued to take the position that his income tax had been deducted from his pay and should have been sent in by his employer, Charity Construction Ltd., despite the fact he received the full amount of his salary by receiving payments in the sum of $21,278 before filing a lien against the project, and then the sum of $9,500 upon discharging the lien. The total amount he was paid for working on the Lady Diana project was in the sum of $30,778. But, the appellant maintained that the payment,of $9,500 was not in payment of outstanding wages but was for services otherwise rendered to Gerard Grealy.

He had to maintain that position in order for the numbers to be within a range that could justify his assertion that he had reason to believe his salary had been subject to proper deductions even though he had never seen any cheque stub or piece of paper since October 1, 1988 that would reasonably entitle him to cling to that belief. Why did he report the sum of $9,500 received in discharge of his lien — which he filed for back wages as an employee — as business income? However, in the appellant’s view, the late filing penalty should not be levied because he thought all the taxes had been paid by Charity Construction Ltd. by remitting the required deductions and there was no requirement to file any tax returns. The evidence does not support, at all, the appellant’s position. He was required to file returns of income, within the proper time frame, for both 1988 and 1989 taxation years and failure to do so resulted in a penalty being imposed by the Minister.

As noted earlier, the purported appeal for the 1990 taxation year is quashed.

Having regard to all of the evidence, the appeal for the 1988 taxation year is dismissed. The appeal for the 1989 taxation year is allowed, without costs, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the appellant be given credit for the sum of $1,207.67 — withheld in income tax by his employer but not remitted — prior to recalculation of the late filing penalty and interest on arrears.

Appeal allowed in part.