Réjean Marchand v. Minister of National Revenue, [1990] 2 CTC 2370, 90 DTC 1763

Garon, T.C.J. [Translation]:—This is an appeal against an assessment dated March 17, 1989 for the 1985 taxation year. In this appeal, the appellant argues that for the purpose of computing the income tax payable for the year in question, the respondent failed to take into account an amount of $551.24, included in a larger amount of $2,978.86 which represents, according to the T-4 issued by the employer in 1986, the amount of federal income tax deducted at source for the year 1985.

The appellant was a blue-collar worker employed by the City of Montreal during the 1985 taxation year. During that same year, the appellant was twice involved in an occupational accident. He was therefore absent from work due to illness from January 11 to January 14, and again for more than two months, from May 17 to July 21, 1985. Following these accidents, compensation was paid on behalf of the appellant to the City of Montreal by the Commission de la santé et de la sécurité du travail, the "CSST". An amount of $118.84 was thus paid by the CSST during the month of December 1985 for the first period of absence. As for the second period, an amount of $2,733.41 was not paid by the Commission to the City of Montreal until the end of January 1987. These reasons shall not deal with a third amount of $112.43, paid by the CSST to the City of Montreal on behalf of the appellant at the end of September 1987. Payment of this last amount was virtually ignored during the trial of this appeal.

The appellant received a T-4 information slip from the City of Montreal at the beginning of 1986, which showed employment income of $24,364.14 in box "C" and $2,978.86 as federal income tax deducted at source. The following notice appeared on the lower portion of the T-4 slip:

This T-4 slip would obviously not indicate compensation received by the City of Montreal in February 1987. In December 1988, however, according to the reply to the notice of appeal, the appellant received an amended T-4 slip for 1985 in which employment income was reduced to $20,350.55, instead of $24,364.14, as previously indicated. The amended T-4 slip also indicated that the income tax withheld amounted to $2,427.62, instead of $2,978.86, as shown in the first T-4 slip. This meant that the amount of federal income tax withheld by the employer varied by $551.24 between the first T-4 slip and the second T-4 slip.

Testifying on behalf of the respondent, Mr. Michel Delorme, an employee of the City of Montreal's Payroll Department, explained the terms and conditions of the compensation scheme that applied to an employee of the City of Montreal at the material time "in case of sickness or accident sustained in the performance of his duties”.

These terms and conditions were set out in a collective agreement signed in February 1987, [1] between the union representing the group of employees to which the appellant belonged, and the City of Montreal, which covered the years 1985, 1986 and 1987. The Court's attention was drawn to section 9 of this agreement. Section 9.01 states that:

[Translation]

In case of sickness or accident sustained in the performance of his duties, an incumbent employee shall receive an amount equal to the net regular rate salary which he would have received if he had remained on the job, considering his occupational seniority as an incumbent or his temporary occupational seniority as an incumbent

The employee continues thus to receive 100 per cent of his net salary during such a period of absence. The witness emphasized that payment of the gross salary was not guaranteed, as the guarantee applied only to net salary. The witness stated that the City pays injured employees this way until it is reimbursed by the CSST. On the other hand, an employee must reimburse the City if the CSST does not accept to pay compensation on his behalf. To illustrate how an employee was paid in the event of an occupational accident, witness Delorme gave the example of an employee who received a gross weekly salary of $500 and a net salary of $400. In such a case, if the CSST accepts to pay compensation on behalf of the injured employee, it will pay 90 per cent of his net salary ($360). In this example, the City would pay the remaining balance of $40 that is not paid by the CSST, and would later recover the amount which had been advanced, so to speak, when it receives compensation from the CSST. This is how the witness put it, referring to the appellant: [Translation] "We paid him that amount, expecting to be reimbursed by the CSST."

Mr. Michel Delorme also indicated that the City does not remit all amounts deducted on account of federal income tax to the Receiver General. He explained that in 1985, the City withheld $4,500 every month on that account with respect to employees covered by the February 1987 collective agreement, representing an amount of $540,000 per annum, based on previous years' experience, it eventually recovers these amounts when the CSST pays the expected compensation. These calculations are based on actuarial data.

It must be remembered that for the purpose of establishing an employee's gross salary as well as the amount of each deduction, including those on account of federal income tax, calculations are made on the basis that no federal income tax can be deducted from compensation received by the City of Montreal from the CSST. Although the tax treatment with respect to this type of compensation was only mentioned in a very general way during the trial of this appeal, the reason why the compensation was not included in the appellant's income may be due to the fact that the City of Montreal is not taxable under paragraph 149(1 )(c) of the Income Tax Act. The situation would have been different in the case of an employer not covered under subsection 149(1). In that case, the compensation would have been taxable in the year it was received, pursuant to subparagraph 56(1)(v) and subparagraph 110(1)(f)(ii). This was not the case before 1982, when paragraph 81(1)(h) provided that compensation received under a workman's compensation scheme was not included in the computation of the taxpayer's income for a taxation year. It is also possible that the tax treatment that was applied to the appellant by the City of Montreal and the respondent with respect to compensation received from the CSST in 1985 and again in 1987, is due to the fact that compensation received directly by the appellant would have been included in the appellant's income under subparagraph 56(1)(v), but would have been deductible for the purpose of computing taxable income under subparagraph 110(1)(f)(ii). Counsel for the respondent did not explain the exact reason why compensation received from the CSST was not taxed under the circumstances described above. I am not called upon to decide here whether the City of Montreal and the respondent acted correctly on this point.

Witness Delorme also pointed out that in cases where the CSST refuses to pay compensation following an occupational accident, the T-4 is not amended later with respect to the year during which the employee missed work, but the employee then becomes indebted towards the City of Montreal as previously mentioned.

Compensation for the first accident, in the amount of $118.84, was paid during 1985 and was included in the original T-4. Accordingly, the employee's salary was reduced by $118.84 and federal income tax was reduced by $35.18. As for the second accident, since compensation in the amount of $2,773.41 had not been received by the City until February 1987, the City asked an actuary, in August 1987, to compute the adjustments that had to be made to the deductions required to determine the gross salary from the net salary which had been paid, considering, among other things, the $2,773.41 compensation paid by the CSST.

The same witness also indicated that as long as compensation was not received from the CSST, salary deductions from the gross salary remain as if the employee was working. The pay statement reads as if the employee had not been involved in an accident. It is interesting to note that in cases where the CSST refuses to pay compensation following an accident, and the employee is no longer employed by the City, the City recovers the remuneration it paid in respect of the period of absence by reducing the employee's sick leave credits. Where the employee is still employed by the City, the City recovers the amount owed by the employee by reducing his salary payments once he returns to work. Where compensation is paid by the CSST, the actuary must make the appropriate adjustments to all deductions at year-end.

It has been established that the cheque stubs show the exact amounts deducted from the gross salary but, as was previously mentioned, these amounts are not remitted in full to the government. Certain amounts are withheld for adjustment purposes until the CSST's decision is known. In this regard, the following notice appeared on the pay cheque stubs: [Translation] "Information given on the other side of this statement is subject to change in cases where the employee has received compensation under the Workmen's Compensation Act."

The amended T-4 reflects the actuary's calculations after the CSST paid the $2,733.41 compensation in 1987.

Witness Delorme's version of the facts was confirmed for the most part by Mr. Michel Veilleux, the actuary who, in the present case, made the calculations required to establish the appellant's gross salary after the City received the $2,733.41 compensation in February 1987. He particularly explained to the Court how cumulative adjustments were calculated in cases where the City received compensation from the CSST on behalf of injured workers. He also stated that the City did not remit a certain portion of federal income tax deducted when an employee missed work following an occupational accident because, in his opinion, the amounts so deducted would be too high, considering that the compensation paid by the CSST was non-taxable and that the City would then have to ask that these overpayments be reimbursed by the government.

Analysis

We must first examine the nature of the remedy sought in the present case. The notice of appeal dated June 1 is quite terse. It states simply:

[Translation]

We wish to appeal the Notice of Confirmation by the Minister dated May 16, 1989, with respect to our objection to the Notice of Reassessment for the 1985 taxation year.

We have evidence that the taxes paid to Revenue Canada Taxation for 1985 are higher than the amount considered.

We wish to be heard by your Court as soon as possible.

The relevant part of the notice of confirmation dated May 16, 1989 to which reference is made in the notice of appeal states:

[Translation]

The Minister of National Revenue has reviewed the facts and reasons set forth in your Notice(s) of Objection and hereby confirms that this (these) assessment(s) has (have) been made in accordance with the Income Tax Act for the following reasons:

That you have not shown that the amount of $551.24 has been remitted to the Receiver General of Canada on account of your tax year in accordance with subsection 153(1) of the Act.

This notice of confirmation by the Minister dated May 16, 1989 was issued following a notice of objection by the appellant, where in the section entitled "Statement of Facts and Reasons", it is stated that: [Translation] "The total amount of revised income tax withheld does not agree with the amount withheld on my salary in 1985 as indicated in the previous assessment."

In my opinion, the crucial issue of this appeal is not directly related to whether the assessment dated March 17, 1989 was valid or not. In fact, the appellant does not argue that the income tax assessment of March 17,1989 is too high. Indeed, the amount of income tax payable under the March 17,1989 assessment is $4,031.10, whereas the initial assessment of May 28, 1986 provided that the income tax payable was $5,002. The appellant had not objected to the initial assessment.

The amount of tax payable according to the initial assessment is higher—by about $1,000—than the subsequent assessment of March 17,1989 to which the taxpayer has objected. Moreover, in his arguments during these appeal proceedings, the appellant's agent never once questioned the initial assessment's validity. I would even say that the initial assessment seems in agreement with the position put forth on behalf of the appellant. Obviously, he did not argue that the assessment of March 17, 1989 was incorrect. The appellant's sole objection is that the amount of income tax deducted shown in the notice of assessment of March 17, 1989 is too low and does not truly reflect the situation in 1985. In this respect, he submits that the amount of federal income tax deducted in 1985 should, in fact, be the amount which appears in the notice of assessment of May 28, 1986.

Because of the nature of the debate, I am far from certain that the present case is, in fact, an appeal against the assessment of March 17, 1989, since there is no objection as to the amount of tax payable under that assessment. During these appeal proceedings, I questioned this Court's jurisdiction to determine this case. Counsel for the respondent simply indicated that he believed that the Court had jurisdiction in the matter. The appellant's agent made no comment on this point. As I decide the question of jurisdiction of this Court, I recall the following comments by Jackett, C.J., of the Federal Court of Canada in the case of AG IP S.p.A. v. Atomic Energy Control Board et al., [1979] 1 F.C. 190:

As further background to the matter, I may say that, as I understand it,

(a) the Court, being a creature of statute, is a court of limited jurisdiction, and

(b) the Court has a duty, where it recognizes any real question as to its jurisdiction, to satisfy itself that it is not clearly without jurisdiction before delivering any order or judgment adversely affecting any person, even though such question is not raised by any of the parties.

Under the circumstances, despite my serious doubts on the subject, I take it for granted that this is an appeal against the income tax assessment of March 17,1989 and that this Court has jurisdiction in the matter. If this Court does not have the authority to decide the question at issue, I have no doubt that the Trial Division of the Federal Court of Canada has jurisdiction to do so, should an action be brought before it.

With regard to the substantive issue in this case, it seems obvious to me that the appellant's position is well-founded. First, it is common ground that in 1985, a amount of $2,978.86 was withheld by the employer on account of federal income tax from remuneration paid to the appellant. The original T-4 and the initial assessment both show that in this amount was deducted at source by the employer. The evidence also shows that in all respects save one, the deductions were made as if the appellant had not missed work due to illness. The sole exception relates to minor adjustments made to the deductions, which take into account the fact that the City of Montreal received $118.84 as compensation in 1985. From the evidence as a whole, therefore, I find as fact that the amount of federal income tax deducted at source by the employer in 1985 with respect to the appellant's remuneration received during that same year well and truly was $2,978.86.

The evidence shows that adjustments that should have applied to the 1985 taxation year, were actually made to the deduction on account of federal income tax after compensation in the amount of $2,733.41 was received from the CSST in February, 1987. I fail to see how these adjustments can change the situation in any way, with respect to deductions that were in fact made in 1985. Moreover, I cannot accept the proposition that a subsequent event, such as compensation paid by the CSST in 1987—equal to 90 per cent of the net salary paid to the appellant during his second period of absence in 1985—could retroactively modify the computation of the appellant's employment income, which must be done on a cash basis, pursuant to section 5 of the Income Tax Act. It also seems clear to me that the appellant's employer, who was legally bound to pay the employee's net salary and who had in fact paid it during the periods of absence, was obviously bound to continue to make the same deductions as before the sickness period. The mention of the fact that these deductions were subject to change can hardly alter the fact that these deductions were actually made.

It is true that the whole amount of federal income tax deducted from the appellant’s remuneration in 1985 was not fully remitted to the Receiver General. This question concerns the City of Montreal and the respondent. The appellant's legal situation cannot be modified by such a decision by his employer. Obviously, the City of Montreal's behaviour can in no way be prejudicial to the appellant's rights. Moreover, the duty to deduct and remit to the Receiver General pursuant to subsection 153(1) of the Income Tax Act is specified in sections 101 and 102 of the Income Tax Regulations.

No exception in Part I of the Regulations was brought to my attention. Actually, the provisions of subsection 227(9) which applied in 1985 provide a penalty for any person who does not remit or pay the amount deducted or retained pursuant to the Income Tax Act or the Regulations. Subsection 227(12) of the Act specifies that when it "requires an amount to be deducted or withheld, an agreement by the person on whom that obligation is imposed not to deduct or withhold is void.” Moreover, subsection 227(4) states: "Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty."

Even though I am not called upon to determine this issue, it seems obvious that the assessment of March 17,1989 with respect to the 1985 taxation year is incorrect, whereas that of May 28, 1986 for the same year is well-founded. In its second assessment the respondent considered that the same gross salary which continued to be paid during the appellant's second period of absence because of an occupational accident—except for certain minor adjustments with respect to $118.84 compensation received—was taxable under the Income Tax Act. In my opinion, there is no doubt that the amounts received by the appellant from employer, particularly those received during his second period of absence, were remuneration within the meaning of subsection 5(1) of Income Tax Act. Indeed, these amounts were received by the appellant from his employer, the City of Montreal pursuant to a collective agreement by which the City was bound to pay the "net salary” "in case of sickness or accident sustained in the performance of his duties". The legal nature of these payments, made in 1985 by the City of Montreal during the period of absence mentioned above is obviously not changed by the fact that the CSST, in 1987, paid compensation equal to 90 per cent of the net salary paid to the appellant while he was off the job.

Counsel for the respondent relied heavily on the decision of the Tax Review Board in the case of Richard Binette v. M.N.R., [1983] C.T.C. 2447; 83 D.T.C. 416. It is true that the questions at issue in the Binette case are essentially the same as in the case at bar. The facts in each of these cases differ on certain points, however, especially on the crucial point, in my opinion, that the compensation paid in the Binette case seems to have been received in the year in question (1978), and not in a subsequent year, such as is the case in this appeal. Indeed, the following passage of the reason for judgment of my colleague, Tremblay, J.—then a member of the Tax Review Board, as he then was—at page 2455 (D.T.C. 434)—shows that compensation had been received in the year during which adjustments to the amount withheld on account of federal income tax had been made:

Around March 1979, the appellant and the other police officers who had received workmen's compensation in 1978, having noticed the disparity between the total deductions at the end of 1979 and their T-4 and other slips issued by the MUC, discussed interpretation of the said article with the MUC.

That decision by the Tax Review Board clearly does not apply to the present case.

For these reasons, the appeal is allowed and the assessment of March 17, 1989 is referred back to the Minister for reconsideration and reassessment on the basis that in computing the income tax to be paid for the 1985 taxation year, he should take into account that an amount of $2,978.86 has already been deducted at source in 1985.

Appeal allowed.