Fairey (R.N.) v. M.N.R., [1991] 1 CTC 371

Muldoon, J.:—This appeal by way of trial de novo is taken by the plaintiff in consequence of a judgment of the Tax Court of Canada [85-1743-(IT)] rendered in August 1987. That judgment, in which the taxpayer's appeal was allowed, is reported as Fairey v. M.N.R., [1987] 2 C.T.C. 2204; 87 D.T.C. 534.

The question to be resolved is whether certain sums of money in excess of $3,500, retained by the defendant's employer and paid directly over to the provincial commissioner of municipal superannuation (the commissioner) appointed under the Pension (Municipal) Act, R.S.B.C. 1979, c. 317 (the provincial statute) for inclusion in the Municipal Superannuation Fund (the fund) established and maintained under that provincial statute are taxable income of the defendant. The Tax Court held such sums not to be taxable, but in his reasons the judge noted that because the parties excluded all consideration of subsection 56(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the"Act"), he would do likewise, and he further noted:

. . . The question whether the [defendant] concurred in the making of the payments to the commissioner was not explored. I do not wish to be taken to agree that the subsection does not apply. I will decide the case, however, on the issues raised by the parties.

That disregarding of the operation of subsection 56(2) of the Act is an important matter before this Court in these proceedings de novo.

The parties have prepared an agreed statement of facts, received at trial as Exhibit 1, which runs as follows:

1. Throughout 1984, the Cancer Control Agency of British Columbia (the"Agency") was an“ "employer" as defined in [the provincial statute] and the Defendant, as an employee of the Agency, was subject to the provisions thereof.

2. The [provincial statute] provides for the maintenance of the municipal superannuation fund (the "Fund"), to which contributions must be made in respect of each employee who is subject to its provisions.

3. The Fund is a "registered pension fund or plan” as defined in the Income Tax Act.

4. The salary payable to the Defendant in 1984 was $106,089.10.

5. In 1984, as required by subsection 5(1) of [the provincial statute], the Agency deducted from the salary payable to the Defendant for 1984 the sum of $7,562.11, and forwarded that amount to the Fund.

6. In 1984, the Agency paid the Defendant amounts on account of salary and issued a T-4 supplementary form relating thereto. The amount shown as "employment income” on the T-4 supplementary form for 1984 was $106,089.10.

7. In 1984, the Agency made contributions pursuant to section 7 of [the provincial statute] in respect of the aggregate salaries payable by it to its employees.

The parties, also most commendably, have furnished a book of statutory references, in which the provincial statute is replicated. Some pertinent provisions are these:

1. In this Act

"employer" means

(a) the person directly responsible for the payment of the salary of an employee, and includes a person, board or commission who acts on behalf of an employer or employers to whom this Act applies;

(b) [repealed]

"salary" means the sum of the wages, cost of living bonuses, service pay, vacation pay and allowances for housing or board and room, paid or allowed to an employee, but does not include

[not pertinent]

4. (2) The fund shall consist of all money received by the commissioner under this Act, including . . .

(c) the contributions made by employers and employees under this Act;

5. (1) From the salary payable to each employee to whom this Act applies, his employer shall deduct monthly a minimum amount equal to the sum of

(a) . . .

(b) . . .; and

(b.1)

and the employer shall forward the amount deducted under this subsection to the commissioner, who shall pay it into the fund . . .

(3) In addition to the minimum contributions required, an employee may elect, by notice in writing filed both with his employer and with the commission, to make a lump sum contribution, or to increase his contributions to the fund by a specified amount, and the amount so specified shall be deducted by the employer from the employee's salary and forwarded to the commissioner, who shall pay it into the retirement annuity account in the fund and contributions made under this subsection shall be referred to as voluntary contributions which contributions shall be applied to increase the superannuation allowance, or other amounts payable under this Act.

(6) Where an employer has not caused deductions to be made under subsection (1) from the time an employee has become eligible to contribute to the fund under this Act, the commissioner shall require the employer to cause deductions to be made forthwith, and to pay to the commissioner the amounts which should have been paid under section 7, together with compound interest at the rate of 6% per year, payable annually.

6. (1) Where an employee resigns or is dismissed, or otherwise terminates his services, and after that re-enters the service of an employer, and again becomes an employee, then, subject to repayment of money withdrawn by the employee within the time fixed by the commissioner, the commissioner shall,

(a) where ... ; or

(b) where ... ; and

(c) where . . . ;

reinstate the account of the employee in the fund and his rights under it in the same position as near as may be to that in which they were at the time his contributions were discontinued.

(2) If the employee does not comply with subsection (1), the employee shall be deemed to be a new employee from the date on which he again becomes a contributor to the fund.

7. (1) Each employer to whom this Act applies shall pay to the commissioner on the last day of each month an amount equal to

(a) . . . [to] ...(h)

(2) Notwithstanding this Act, any employer to whom this Act applies may, if the approval of the Provincial Secretary has been obtained, enter into an agreement with the commissioner whereby the superannuation allowance or refund for any employee or group of employees, or former employees, may be increased in such amount and with such modifications as are set forth in the agreement.

(3) The agreement may, however, make increase in superannuation allowances conditional on increased contributions being made by the employees in the manner set out in the agreement.

(4) The contributions required to be paid in accordance with the terms of the agreement shall be paid in addition to any contributions or deductions required to be made under this Act.

(5) There shall be paid from the fund for reimbursing employers who, by agreement under this section, are providing increases in superannuation allowances or supplementary allowances for retired employees and widows of employees or pensioners who were granted allowances on or before March 31, 1957 and who had, at that date, completed at lest 10 years of pensionable service, amounts calculated as follows:

(a) . . .; or

(b) . . .

17.1 (1) Notwithstanding any enactment, with respect to the repayment of contributions to an employee, the law shall be deemed to be and to have always been that an employee is entitled to receive only the contributions he personally made, together with interest as may be provided for, and is not entitled to and never was entitled to repayment of contributions made on his behalf by an employer or interest earned on those contributions.

(2) This section applies whether or not the employee was, at the time he received his contributions, entitled to receive a Superannuation allowance either immediately or at a future date.

31. Payment of every sum of money which an employer is required by this Act to pay or forward to the commissioner may be enforced by action in any court, in the name of the commissioner, as for a debt due by that employer to the commissioner.

Important to note in regard to the above recited provisions of the provincial statute is that" salary" as therein defined includes, and is included in,"income . . . from . . . employment", as found in the Income Tax Act, paragraph 3(a). So, when it is provided in subsection 5(1) of the provincial statute that the employer is to deduct a monthly minimum sum from the salary payable to each employee, the salary referred to is the employee's income from employment mentioned in the federal Act. That much is clear, although it is rather basic, and does not yet answer the question posed in this litigation. The provincial statute is not confiscatory, for it is provided in section 17, not above recited, and illustrated in section 17.1, above recited, that the employee retains an entitlement to his or her contributions plus interest on ceasing to be covered by the statute's provisions.

Also worth noting is an admission of fact established in the pleadings to the effect that the Minister allowed the defendant a registered retirement pension plan contribution deduction of $3,500 pursuant to paragraph 8(1)(m) of the Income Tax Act. Therefore, it appears that it is the taxability of the difference of $4,062.11, which is the outstanding matter in issue. The references to the Income Tax Act are expressed in paragraphs 1 and 3 of the plaintiff's statement of claim, which are admitted by the defendant.

Here, then, are some pertinent provisions of that federal taxing Act.

2. (1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

5. (1) Subject to this Part [Part I—Income Tax] a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities received by him in the year.

6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of. . . benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from his employer's contributions to or under a registered pension fund or plan . . .

8. (1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(m) amounts contributed by the taxpayer in the year to or under a registered pension fund or plan,

(i) not exceeding in the aggregate his contribution limit for the year under this subparagraph in respect of the fund or plan, if retained by his employer from his remuneration for or under the fund or plan in respect of services rendered in the year. . . and

(iii) not exceeding in the aggregate $3,500 minus any amount deducted under subparagraph (i) or (ii) in computing his income for the year, paid by him in the year whether into or under the fund or plan or into or under any other such fund or plan in respect of services rendered by him previous to the year while he was a contributor, to the extent not deductible in the immediately preceding year under paragraph 60(j);

[Paragraph 60(j), specially enacted and formulated for application to the 1984 taxation year by S.C. 1984, c. 45, subsection 19(2), now transcends the bounds of comprehensibility, if not those of both official languages for anyone who has less sterile things to do in this life than to grasp its arcane verbiage.]

8. (2) Except as permitted by this section, no deductions shall be made in computing a taxpayer's income [i.e., salary] for a taxation year from an office or employment.

(6) For the purposes of paragraph 1(m), a taxpayer's “ contribution limit” for a taxation year under subparagraph 1(m)(i) or (ii) in respect of a registered pension fund or plan means such amount as is designated by the taxpayer in his return of income for the year to be his contribution limit for the year under subparagraph (1)(m)(i) or (ii), as the case may be, in respect of that fund or plan, not exceeding however the amount, if any, by which $3,500 exceeds the aggregate of amounts each of which is his contribution limit for the year under subparagraph (1)(m)(i) or (ii), as the case may be, in respect of any other such fund or plan.

(8) Where an amount has been contributed by a taxpayer to or under a registered pension fund or plan . . .

(b) after 1962, in respect of services rendered by him in a year while he was a contributor,

it may be included in computing a deduction under. . .

(d) subparagraph 1(m)(iii), in the case of an amount described in paragraph (b),

for taxation years subsequent to the year in which it was contributed to the extent that it exceeds the aggregate of amounts deductible in respect thereof under this subsection, subparagraph (1)(m)(ii) or (iii) or paragraph 60(j) in computing incomes for years preceding the taxation year.

56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

The most recent jurisprudence of highest authority concerning subsection 56(2) is the split decision of the Supreme Court of Canada in the case of McClurg v. M.N.R., [1991] 1 C.T.C. 169; 91 D.T.C. 5001. In that case Mr. Justice Strayer of this Court's Trial Division [1986] 2 F.T.R. 1; [1986] 1 C.T.C. 355; 86 D.T.C. 6128, holding that subsection 56(2) is not of such wide application as the Minister contended, was upheld by the majority decision of this Court's Appeal Division [1988] 2 F.C. 356; 84 N.R. 214; [1988] 1 C.T.C. 75; 88 D.T.C. 6047, written by Mr. Justice Urie. The latter disposed of the principal issue therein by holding that subsection 56(2) of the Income Tax Act simply has no application to corporate directors’ declarations of dividends to shareholders, (including their spouses) of various classes of shareholding. This pronouncement was adopted and ratified by the majority judgment of the Supreme Court of Canada written by then Chief Justice Dickson. So the majority decisions in this Court and in the Supreme Court are of no particular relevance here to the case at bar. The minority decisions are of more likely relevance here, since they delve into the anatomy and the application of subsection 56(2) of the Act. This Court draws inspiration mutatis mutandis, if not direct quotation from those minority opinions.

An important judgment which bears rather more proximately on the present litigation is that rendered by Mr. Justice Rouleau, of this Court, in The Queen v. Hoffman, [1985] 2 F.C. 541; [1985] 2 C.T.C. 347; 85 D.T.C. 5508. No appeal was taken from that judgment, and it was cited with approval by Mr. Justice Walsh in The Queen v. Kurisko (1988), 19 F.T.R. 182; [1988] 2 C.T.C. 254; 88 D.T.C. 6434 which judgment was virtually adopted and ratified, unanimously and in very few words, by the Appeal Division in Kurisko v. The Queen, [1990] 2 C.T.C. 136; 90 D.T.C. 6376; 111 N.R. 146. Rouleau, J. penned a lucid judgment in the Hoffman case which ought to be read along with these reasons.

There, in Hoffman, the taxpayer was a U.S. citizen, residing in Canada, after he was transferred by his employer, in 1967, to one of its Canadian subsidiaries, Firestone Textiles Company. Pursuant to an agreement between the parent company and the U.S. Internal Revenue, the employer withheld sums between $1,200 and $1,700 from the taxpayer's salary paid by Firestone Canada Inc. in 1978 and 1979, and forwarded them to the U.S. government as social security remittances for Mr. Hoffman. Rouleau, J. stated the issues thus (at pages 349 (D.T.C. 5510; F.C. 546)):

(A) Whether contributions deducted by defendant's employer, pursuant to an agreement entered into between the parent corporation of the defendant's employer and the United States government, constitute income received within the meaning of subsection 5(1) of the Income Tax Act.

(B) Whether those amounts, if income received by the defendant, qualify as a deductible expense in computing the taxpayer's income for a taxation year within the meaning of subsections 8(1) and 8(2) of the Income Tax Act.

Noting that the taxpayer would eventually receive the benefit of those deducted sums, Rouleau, J. in Hoffman, wrote at pages 349-50 (D.T.C. 5510; F.C. 547):

If the proposition that income must be in the actual possession of the employee before it can be taxed is correct, then I would have to conclude that an employee's contributions to Canadian or provincial pension plans, deducted at source by the employer, are not income in the hands of the employee. Jurisprudence does not support this proposition.

In Lucien Gingras v MNR [unreported decision dated March 26, 1973] the Tax Review Board noted (at page 4):

[Translation]

The expression "touché" (received) does not necessarily mean that the full amount of the salary must be physically received by the payee or be deposited in full in his bank account.

According to the interpretation of s 5 it is sufficient to say that the amount of the salary was paid by the employer either to the employee himself or to his benefit, or that it was handed over to a third party under a federal or provincial statute.

The fact that defendant's employer deducted at source employee's social security contributions in the 1978 and 1979 taxation years does not support the proposition that he received income net of the withheld amounts. The amounts deducted and forwarded were for his eventual benefit.

Concerning constructive receipt of the deducted income in contemplation of subsection 56(2) of the Act, Rouleau, J. noted at page 350 (D.T.C. 5511; EC. 548):

In George A Murphy v The Queen, [1980] CTC 386; 80 DTC 6314, Mr. Justice Cattanach listed four essential ingredients that have to be satisfied before subsection 56(2) will establish tax liability in the hands of the taxpayer (at pp 389-90 (DTC 6317-18):

(1) that there must be a payment or transfer of property to a person other than the taxpayer;

(2) that the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer;

(3) that the payment or transfer be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer wished to have the benefit conferred; and

(4) that the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.

At issue is whether conditions (2) and (3) are applicable to the defendant.

Mr. Justice Rouleau concluded in Hoffman, after reviewing the taxpayer's contentions and the jurisprudence that "the mere absence of privity [between taxpayer and recipient] is not the sole criterion in the determination of concurrence. Of equal relevance is whether subsequent behaviour—the absence of objection lin Hoffman]—constitutes tacit acceptance of the contractual arrangement". It will be remembered that in the present case at bar, the" arrangement" was a legislated command of the provincial legislature exacting the employer's obedience in deducting the sum in dispute. That circumstance, of course, spawns another ramification. Obedience to the provincial statute's imperative, in effect, constituted a condition of the employment which the employer offered and the defendant taxpayer accepted. That is: no obedience to the law, no employment. The employer was powerless to evade the provisions of the provincial statute in order to achieve any result more acceptable to the defendant, except at the employer's own dollar-for-dollar-and-more- expense.

In the Hoffman case, Rouleau, J. went on to note at page 351 (D.T.C. 5512; F.C. 550) that there is jurisprudence establishing that employers’ contributions from employees’ remuneration constitute a taxable benefit of the employee and he cited: Bruce v. Hatton (1921), 38 T.L.R. 323 (K.B.); Morin, J.-P. v. The Queen, [1975] C.T.C. 106; 75 D.T.C. 5061 (EC.T.D.); Salter v. M.N.R., [1947] C.T.C. 29; 47 D.T.C. 918 (Ex. Ct.)).

In the case at bar, the concurrence contemplated by subsection 56(2) of the federal tax Act resides in the taxpayer's having accepted employment in an institution governed by the provincial statute, in such a way that the deduction of part of his salary and its remittance to the commissioner was as much a condition of employment for him as is the mandatory wearing of hard-hats by construction workers, also most often prescribed by provincial legislation in the construction industry. And such concurrence is not merely deemed or constructive, it is direct because in order to accept the employment, the employee must accept the mandatory conditions of employment. In order to be free of that mandatory condition, the defendant had only to decline that employment, or any other employment contemplated by the provincial statute.

The Court finds that the defendant received the disputed portion of his salary, as mentioned in subsection 5(1) of the Income Tax Act, in that it constituted part of, and was by law deducted from, his "salary" within the contemplation of both the provincial statute and the federal Act; and, as is provided in section 6 of the provincial statute, he never loses it or the eventual benefit of it. Indeed, the defendant would no doubt have been sorely aggrieved had his employer said "Right. That $4,062.11 is no part of your salary which, as you say, ought really to be, and is only $102,026.99!" The sum of $4,062.11 cannot exist in limbo nor is it a species of manna.

If the provincial legislature exacts, as it does, that the taxpayer is subject to compulsory savings ($4,062.11) for pension purposes, as it can constitutionally do, that is no concern of the Minister of National Revenue in the proper administration of the Income Tax Act. It really is just as if the defendant had bought (because the provincial legislature exacted that he buy) a guaranteed investment certificate. His eventual benefit from that tax-paid sum ought, of course, to be tax-free since it has become capitalized in his hands. That, as it turns out, is a standard condition of his employment. It may be noted, parenthetically, that if the employer sought to deduct a higher-than-standard sum in invocation of subsections 7(2), (3) and (4) of the provincial statute, that is, beyond the statutory condition of employment, and beyond the standard minimum payment, without the additional concurrence of the taxpayer, the result would be different in regard to that additional, non-standard, higher- than-minimum sum. However, the parties did not indicate that such was the case here.

Finally the defendant's argument, to the effect that he is not taxable because the provincial legislature, in subsection 5(6) and section 31 of the provincial statute imposes direct liability for payments on the employer, avails nothing. All that demonstrates is that the provincial legislature knew and invoked a most astute and effective way of inducing the employer to comply with its statute. That is a compliance and enforcement mechanism which does not relieve the taxpayer of liability for the tax assessed by the Minister.

The plaintiff's action is allowed, with costs pursuant to subsection 178(2) of the Act.

Minister's appeal allowed.