Don Palethorpe v. Minister of National Revenue, [1982] CTC 2632, 82 DTC 1641

D E Taylor:—This is an appeal heard in Calgary, Alberta, on March 10, 1982 in connection with income tax assessments for the years 1977 and 1978. The Notice of Appeal reads in part as follows:

(a) During 1977, I was working as a real estate commission salesman for a company called Wilroy Real Estate Ltd of Edmonton (“Wilroy”).

(b) In September of 1977, I was the listing and selling salesman on a transaction involving Skalabania Holdings Ltd and Hollyburn Properties Ltd. The real estate transaction closed on November 1, 1977. My share of commission on this deal was $27,500.

(c) Normally this $27,500 would not have been paid to me in 1977. However, Wilroy did not pay me in 1977. They argued that they did not owe me the money.

(d) I then engaged legal counsel and started an action to collect this money.

(e) In July, 1978, just before the scheduled examination for discovery, Wilroy agreed to pay me the full $27,500.

(f) Out of the $27,500 the tax department held back $7,191.05 (amounts due on 1975 and 1976 taxes) and National Trust was repaid $15,568.61 of money I had to borrow to use for living expenses while the $27,500 was tied up in Court.

(g) When I filed my 1977 income tax return, I reported this $27,500 as 1977 commission earnings. I deducted all my 1977 commission expenses; most of which had been incurred to earn the above $27,500.

(h) In 1978, Wilroy sent me a 1978 T4 showing the $27,500 as 1978 commission earnings. I filed my 1978 tax return and deducted $27,500 from my 1978 income because it had been reported on my 1977 return.

(i) Subsequently, the income tax department reassessed my 1978 return by including the $27,500 as 1978 income. The date of this reassessment was July 24, 1979.

(j) I filed a Notice of Objection in October 1979. On March 31, 1980, I received notice that this $27,500 was to be left as 1978 income. And on March 31, 1980, I received a Notice of Reassessment for 1977, deducting the $27,500 from my 1977 income.

My objection to the handling of this matter is as follows:

1. The $27,500 was earned in 1977 and should have been paid out in 1977. The fact that it was not paid out in 1977 was not my fault. Wilroy, by its actions and by not proceeding with the legal dispute, acknowledged in July, 1978 that it should have been paid out in 1977. Thus, had Wilroy done what it acknowledged it should have done, I would have received this money in 1977 and would not have had this problem.

2. The tax department’s contention is that because this money was not received until 1978, it has to be reported in 1978.

3. My contention is that I was not employed by Wilroy in 1978 and therefore this income was receivable by me in 1977. It was entirely Wilroy’s fault that I did not receive this income until 1978.

4. From the standpoint of cash flow, I did receive most of the benefit of this $27,500 in 1977 because:

a. The tax department collection office agreed to allow me to defer the payment of my 1975 and 1976 tax arrears of $7,191.05 until this issue was resolved. My point here is that had this $27,500 been paid by Wilroy in 1977, the tax department would have received the $7,191.05 in 1977. And, therefore by this process I had received the cash benefit of this $7,191.05 in 1977.

b. Similarly, National Trust advanced me $13,000 in 1977 to be liquidated from the $27,500. Again my argument is that I received the benefit of the $13,000 in 1977. Along with the $7,191.05, I received the use of over $20,000 of this $27,500 in 1977.

In his Reply to Notice of Appeal, the respondent states as follows:

In so reassessing the Appellant in respect of his 1978 taxation year, the Minister of National Revenue, Respondent, assumed, inter alia:

(a) that in July, 1978, Wilroy agreed to pay the appellant the approximate amount of $27,500;

(b) that in the 1978 taxation year, the appellant received from Wilroy an amount of $28,663.48 as commission income;

(c) that Wilroy issued to the appellant, a copy of which the appellant attached to his 1978 return, a T4-1978 Supplementary showing total earnings received from Wilroy the amount of $28,663.48 by way of commission.

In assessing, the respondent relied, inter alia, upon section 3, subsections 5(1), 6(1) and 6(3) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

There was little dispute concerning the facts in this matter. It is only regarding the application of the Act to the situation. The appellant presented both testimony and documentary evidence to establish his case. I am satisfied that the amount at issue (received in 1978) was a debt due to the appellant during the year 1977 and must be classified as arising out of the appellant’s employment contract, and is therefore “salary or wages”. The difference between $27,500 and $28,663.48 (see Minister’s Reply to Notice of Appeal) was explained at the hearing and is not critical to a determination of the issue. While the taxpayer has appealed both the 1977 and 1978 years, it would appear the relevant assessment applies only to 1978 — however, that again is not critical. The essence of the argument of counsel for the appellant was summarized:

The monies, the right to the monies did vest in him, which is subsequently borne out by the fact that it was paid to him out of the litigation, and lastly the money was transferred, was not held by the payor, it was held by the Court, and he had some control over that money in 1977. And he used it in two ways — he used it for the deferral of the payment to the tax department, and he used it as a security payment to the trust company.

Conversely, the argument for the respondent was:

The position is that the funds were received by the appellant in 1978 and are taxable by the appellant in 1978 for the reason that that is when they were received. That is one of the most simple and basic tenets of the entire Income Tax Act.

A subsidiary point was raised and discussed, which had to do with the interrelationship between subsections 5(1) and 6(3) of the Act. The troublesome phrase from subsection 6(3) of the Act reads:

. .. in Satisfaction of, an obligation arising out of an agreement made by the payer with the payee . . .

shall be deemed for purposes of section 5, to be remuneration for the payee’s services rendered . .. during the period of employment ... (Emphasis mine.)

A cursory glance might lead to the conclusion that the payment then should revert, for tax purposes, to the period of time (in this case 1977, not 1978) during which the taxpayer was actually in the employ of the payer. However, it is my view that such an interpretation cannot be sustained and that the exact opposite must be the appropriate meaning — that the period of employment is deemed to have extended to and included the time at which payment is received, whether or not such employment itself had in fact continued and existed at the time of receipt.

That leaves only the question of whether the circumstances of this case were such that the mechanics by which the taxpayer eventually obtained the funds in 1978 warrant that they should be treated as received in 1977. Counsel for the appellant has proposed that since the appellant had a right to the funds in 1977, and was permitted certain limited elements of utilization of the funds, the necessary prerequisite of receipt was fulfilled. I fail to see how the agreement by either the trust company or Revenue Canada that the taxpayer’s claim could be used as security for credit advances provides any support for actual receipt. With regard to the “vesting” agreement, it would appear to me that while the right to the funds did vest in the taxpayer in 1977, counsel did not reference case law which would equate that right to receive, to actual receipt. To carry counsel’s argument to the logical conclusion would mean that Revenue Canada would be entitled to tax a right to receive salary or wages, whether or not such amounts were ever actually received. That does not accord with the thrust of the jurisprudence on the subject.

Decision

The appeal is dismissed.

Appeal dismissed.