O'Brien v. The Queen, 85 DTC 5202, [1985] 1 CTC 285 (FCTD)

Walsh, J:—This action was heard on common proof with five other actions, No T-3319-81 — Carole I Dickinson v The Queen, No T-3322-81 — Brian C Hill v The Queen, No. T-2031-81 — James R Steven v The Queen, No T-3320-81 — Virginia L Manning v The Queen and No T-3323-81 — Peter G Comparelli v The Queen, the facts in all six cases being substantially the same save for the amounts of the income tax reassessments for the 1979 taxation year. In all six cases the plaintiffs received supplemental benefits assessed to them from the Vancouver- New Westminster Newspaper Guild to which they belonged in the year in question. For Jan C O’Brien the amount involved was $2,516.25, for Carole I Dickinson $1,635.20, for Brian C Hill $2,883.50, for James R Steven $2,724.60, for Virginia L Manning $1,635.20 and for Peter G Comparelli $4,263. The amounts are not in dispute and in the agreed statement of facts it is submitted that the Vancouver Express newspaper was published by Pugstem Publications, a joint venture comprised of the International Typographical Union, Local 226, the Printing Pressman’s Union, Local 25, the Graphic Arts International Union, Local 210, the Vancouver Mailer’s Union, Local 70 and the above mentioned Newspaper Guild, Local 115, for profit. All five unions are labour organizations within the meaning of paragraph 149(l)(k) of the Income Tax Act which exempts from taxable income the income of ‘‘a labour organization or society or a benevolent or fraternal benefit society or order.” It is also admitted that the distributions by said publication to the five unions were distributed to them on a per capita basis in accordance with their membership. Six separate actions were brought rather than merely one because the plaintiff in each case performed duties for the union of a different nature during the strike. It was desirable to present a complete picture although most probably the same objective could have been achieved by calling the other five plaintiffs as witnesses in the Jan C O’Brien action. Moreover, it is conceded that the decision in this case would be applicable to the approximately 840 members in the Guild who received such supplemental benefits. Certainly it was not desirable that each such taxpayer should be required to bring a separate action to set aside his or her assessment but I understand that some did not file a notice of objection or perhaps were not assessed.

It is also probable that the decision in this case will be applicable to the members of the other four unions mentioned above who are all craft unions involved in the same strike and who also received supplemental benefits from their respective unions, unless it should be determined that these supplemental benefits were distributed by these unions to their members on a different basis. In the present case there is no evidence before the Court as to how the distribution was made for those unions, although the parties appear to believe that it was done on the same basis.

The five unions in question were involved in a labour dispute with their employer, the publisher of the Vancouver Sun and the Province which led to a strike or lockout lasting from November 1978 to June 1979. In anticipation of the commencement of the work stoppage resulting from the dispute, and following a practice established in a similar dispute in 1973 with Victoria Press Limited, publisher of the Victoria Times and Daily Colonist, it was decided to publish a newspaper during the strike which was called the Vancouver Express. This was published three times a week, commencing November 1, 1978 and continued until the middle of June, 1979, stopping shortly before the end of the strike. It was published, according to its masthead, by Pugstem Publications, a joint venture of the International Typographical Union, Local 226, Printing Pressman’s Union, Local 25, Graphic Arts International Union, Local 210, Vancouver Mailer’s Union, Local 70, the Wholesale Division of the Printing Pressman’s Union, Local 25 and the Newspaper Guild, Local 115. The name was taken from that of a dormant limited company which had been incorporated some ten years previously and was no longer active. The joint venture did not require any registration pursuant to any British Columbia statute.

As presumably a newspaper cannot be started overnight without some arrangements for staffing, distribution and printing of it, it is not surprising that some preliminary steps were taken even before the strike or lockout commenced. Premises had to be leased and arrangements made for printing the paper in the Columbian Press. Some start-up funds were obtained from each of the unions. A joint council of the five unions involved was set up and approved the plan. According to the witness Lance Secret, who was the controller of the Vancouver Express during its existence, there was no general meeting of the membership to approve the project but on November 1, by which time the organization was pretty well completed, there was a general meeting to explain to the members what was being done and answer their questions. Mr Secret testified that there were some 1427 union members involved in the strike, of which approximately 840, including the six plaintiffs in the case before the Court, were members of the guild. According to the evidence of Reginald Pinniger, the treasurer of the guild, it had in all about 1,000 members at the time of the strike, having some members from other newspapers which were not on strike. These members continued to pay union dues to the guild but did not, of course, receive any strike benefits.

The operation of the Express was a much smaller operation than that of the Vancouver Sun and the Province, since it was only published three times weekly and had a smaller circulation and considerably less advertising so that only about 250 of the 1400-odd unionized employees actually worked on the newspaper. When it was being organized volunteers were called for and members were assigned to jobs which their experience enabled them to undertake. When they were not actually working on the newspaper they were supposed to work on the picket line, in the union office, or do other union related work during the strike in order to qualify for benefits. No member working for the newspaper received any pay for this work. The amount of strike benefits distributed to the members by the union, both general strike benefits and the supplemental strike benefits resulting from profits from the operation of the newspaper, were distributed according to a formula set out in the union’s constitution and based on a percentage of the salary which they earned in the work they performed before the strike. The amounts received bear no relationship to the hours worked. Any member who was sick and unable to work at any period during the strike received the same benefit as he would have had he been doing some sort of union work during it, the only members excluded being those who refused to do picket or any other work during the strike. For example, Jan C O’Brien, a reporter, worked for the Express 25 to 30 hours a week and did perhaps an additional three hours picketing. She was under the impression that members of the union had to either work a minimum of three days on the Express or three 4-hour shifts on the picket line. Brian Hill, a unit delegate at the time the strike began, worked for the Express for one and a half days helping set up the delivery department, then worked on the health and welfare committee of the union, of which he later became unit chairman and was put on the negotiating committee. He also did some picket duty and worked long hours in connection with his executive functions.

Carole I Dickinson, a renewal clerk for classified ads at the time did picketing during the strike, three days on and three off, working three hours at a time.

James R Steven, who was on sick leave at the time of the strike, reported in January 1979 after the company’s sick benefits expired. The union asked him to picket whenever he could but if the weather was bad, he would report in by phone but as he was doing the best he could he got strike benefits.

Virginia Manning acted in connection with the assignment of pickets. Peter Comparelli was the bureau chief for the Vancouver Sun but he worked for the Express as a reporter two or three days a week by choice.

Mr Secret testified that he maintained two accounts for the Express, a current account and a holding account in which the operating surplus was placed. He reported to one Don Brown who was the publisher. As the paper had no line of credit, newsprint and everything else had to be paid for by cash, but by the third week of November it was possible to distribute some profits to the various unions.The Crown has made no claim to reassess any of the members for any amounts received from their unions in 1978, so the present appeals only concern the 1979 taxation year.

The audited statement of the Vancouver-New Westminster Newspaper Guild, Local 115, shows that $176,597 was received from Pugstem Holdings (the newspaper) in 1978 and $1,550,404 in 1979. In addition the fund received $16,495 in 1979 as contributions from other guild locals and donations. In addition to strike benefits distributed to members, Pacific Press Limited had to be reimbursed for medical payments which they had carried on for the benefit of members during the strike which, by agreement, were to be reimbursed by the unions and there were other miscellaneous expenses in connection with the joint council, Express and negotiations leaving a strike fund surplus of $43,973 at the end of 1979.

Mr Secret testified that no liability insurance was carried by the Express as it was not possible to get same without some history on which the insurance company could calculate the rates to be charged. Similarly, no workmen’s compensation coverage was carried and since no salaries were being paid, there were no deductions for taxes, unemployment insurance or Canada Pension Plan. The union constitution prevented any strike benefits being paid after the termination of the strike so the surplus ended up in the general accounts of the several unions. He himself, and three or four others, worked after the termination of the strike winding up the business of the paper and during this period received their regular union salaries and paid tax on same in the normal way. Considerable money came in after the end of the strike however, and some of the money which he had held back to provide for contingencies before distributing same to the various unions was now freed so nearly $500,000 was involved, of which, however, a substantial amount had to be paid to the publishers of the Sun and Province as reimbursement for the medical payments. Nevertheless, the general funds of the union received substantial amounts arising from the profits of publishing the newspaper which were never distributed as members’ supplemental strike benefits since they could not be. There had never at any time been any agreement with the members as to the distribution of any such profits, this being left to the union executives.

Reginald Pinniger was treasurer of the Newspaper Guild at the time and became one of the signing officers of the Vancouver Express, from which he received periodical amounts to distribute but these were placed in the general account and then transferred to the strike account. Strike benefits from the International Union had to go direct to the strike account and no attempt is being made by the Crown to tax these benefits, the only issue being with respect to the supplemental benefits arising from the operation of the Vancouver Express as a business. Mr Pinniger pointed out that all amounts received could not be distributed as some were required for the operating expenses of the guild itself, including salaries of the guild officers, picket signs and so forth. Donations went in to the general account, together with the dues from members of units of the union of other papers not on strike. Regular strike benefits and supplemental benefits were paid to the union members at the same time, but in the receipts that they signed for them there is a breakdown showing the amounts attributable to each. For example, one such sheet was produced showing that Carole Dickinson received $67.20 of regular benefits and $62.72 of supplemental benefits for a total of $129.92 for the week in question.

While in the transfer of supplemental benefit funds from the general account to the strike account some funds from donations and contributions by the unions would have been included, this amounted to less than one per cent of the total so transferred, so it does not significantly affect the amount paid from the strike account to the union members. Any strike expenses would have been previously paid out of the general fund as nothing but benefits can be paid out of the strike fund.

It is conceded that the Express was operated as a business with the anticipation of making a profit. Another motive was to retain as far as possible newspaper readers and advertisers until such time as the strike could be settled so that there would not be problems resulting in loss of employment for any union members when publication of the Sun and Province were recommenced following the strike. There was some concern by the unions that if an outside commercial newspaper entered the field during the strike this would seriously disrupt the successful resumption of operations by the newspapers for whom they worked before the strike.

Since Pugstem Publications was merely a name used by the unions operating it as a joint venture, it was not seriously disputed that the profits made by the Vancouver Express were exempt from taxation under paragraph 149(l)(k) of the Act. The defendant does not contend that the union members, or even those actually working in the operation of the newspaper, were employees or that the amounts received as supplemental benefits constituted remuneration for work performed. The contention is, however, that the Vancouver Express was operated as a joint venture by the 1400-odd union members rather than by the unions themselves, that the members were all individual contractors and that whatever sums they received in supplemental benefits were taxable as income derived from the operation of a business in the nature of distribution of profits from its operation and that the flow-through of such payments from the unions themselves to the individual members does not alter their taxability for these receipts.

In the Federal Court of Appeal case of Joseph K Wipf et al v The Queen, [1975] CTC 79; 75 DTC 5034 (The Hutterian case) the Court of Appeal decided in a judgment later confirmed in the Supreme Court, and held at 80-81 (5035 DTC):

In my opinion neither the farming operations nor the profits therefrom are, in any relevant sense, those of the individual members of the communities. The operations in each community are those of the trustees or the corporation, as the case may be, and for their account. The profits, as well, of such operations are theirs for the purposes for which they have been established. The individual members are not entitled to such profits at any stage either in individual shares or collectively. When becoming members they engage to devote their time and effort to the operation without wages or reward and without entitlement to any form of return save the subsistence to be provided by the trustees or corporation for them and their families. Such subsistence, as I see it, is all that the individual members are ever entitled to under the arrangements and, in my opinion, its value represents the full extent of the individual member’s income for the purpose of the Income Tax Act.

It must be noted, however, that in that case there was a definite agreement upon becoming members of the community that the individuals would devote their time and effort to the operation without wages or reward save for subsistence.

In the present case there was no such agreement as to what the members of the joint council operating the newspaper would distribute to the individual un- ions or what amounts, if any, the union executives would then distribute to the members, although it was certainly implied that at least some, if not all of the profits, would eventually be received by the union members as in fact took place. It is also of interest to note the tax problem created by the Wipf case was cured by an amendment to the Income Tax Act, section 143 being substituted by 1977- 78 SC c 1, section 71 applicable to 1977 and subsequent years.

The defendant referred to a number of authorities from which counsel felt some principles might be derived which would be applicable to the present highly unusual case. The Supreme Court case of Henry Goldman v MNR, [1953] CTC 95; 53 DTC 1096, is authority for the principle that taxation cannot be avoided by using an intermediary as a conduit for the flow-through of what would otherwise be taxable income. At 102 (1100 DTC) the judgment states:

That both parties intended the money to be paid and received as remuneration for services rendered by Goldman as committee chairman is not open to doubt. The solicitor became in fact a conduit between the company and Goldman. It was urged that the payment was voluntary. Apart from the question of a declared trust, it can be assumed that the solicitor was not legally bound to make the payment; but that he was bound by the common understanding, whatever it may be called or whatever its nature, is equally beyond doubt.

There is no dispute about this principle but the facts in the present case do not support its application, since there was no agreement with the union members as to how the profits of the newspaper were to be distributed.

In the British case of Heatons Transport et al v Transport and General Workers' Union, [1973] AC 15, the President of the House of Lords states at 102:

But questions of delegation from “the top,” to use the phrase adopted by Roskill LJ do not arise if authority to take industrial action has either expressly or implicitly been conferred directly upon shop stewards from “the bottom” ie the membership of the union, whose agreement is also the ultimate source of authority of the general executive council itself.

In the present case, while the members of the union certainly did not disagree with the decision of the steering committee, the unions or joint council or whatever one wishes to call it, to publish a newspaper during the strike, their agreement to do so was never sought. In fact, the meeting of November 1 merely reported to them what steps had been taken towards such publication.

The case of Chappell et al v Time Newspapers Ltd et al, [1975] 1 WLR 482 does not help the defendant. Reference was made to the statement by Lord Denning at page 500, which is merely authority for the fact that if a press release is issued by the union on behalf of all of the men then it must bind each individual member who must be deemed to have authorized it unless he has disavowed it. The British Columbia Supreme Court case of Coast Steel Fabricators Ltd et al v Minister of Finance, [1973] 4 WWR 701, is a joint venture case. It was held that the joint venture was merely a vehicle of convenience used by two contractors jointly for co-ordinating and administering their contract which must at all times be considered as having been performed by them even though undertaken through the agency of the joint venture, which was merely an accounting device.

It is defendant’s contention that in the present case the joint council which was operating the newspaper was merely an agent for all the individual union members who were joint venturers or independent contractors. This appears to me to be an argument which does not accord with the reality of the facts. It is difficult to conceive of any agency agreement whether written, oral or even implied, in which the principal confides the operation of a business to an agent without giving any instructions as to the distribution of the profits so that the agent is free to eventually distribute all, part of (as in the present case) or none of the profits to the principal. While the general funds of the unions eventually received all of the profits from the operation of the newspaper on a pro rata basis in accordance with the numbers of their members, it was their executive who then decided how they should be distributed to the members in accordance with the union constitution during the strike and retained the rest in the general funds after the strike when no further distribution could be made in the nature of supplemental strike pay. It appears difficult to successfully contend that what they did was done as agents for the individual members, save in the very general sense that democratically elected union executives can always be said to be acting on behalf of the members in everything they do.

Defendant’s argument really is derived from Interpretation Bulletin IT-334R, which of course is no authority for the Court but merely expresses the way in which defendant contends the interpretation should be made. It states in paragraph 3:

. . . Where union members receive funds that originated, or will originate, from the operation of a business by the union, the amounts will be treated as income subject to tax regardless of whether or not the receiving members participated in the business activity.

Finally, the principal authority relied on by defendant is the Tax Review Board case of Thomas E Ferris et al v MNR, [1977] CTC 2034; 77 DTC 17, dealing with a similar situation which arose in Victoria in 1973 when there was a strike at Victoria Press Limited which published the Victoria Times and Daily Colonist and striking employees published a paper known as the Victoria Express during the strike. They were held to be taxable on the supplemental strike benefits paid to them by their unions out of the newspaper profits which were, as in the present case, turned over to their unions for distribution. This judgment was appealed but the appeal has never been proceeded with since counsel advised that as a matter of policy it was decided to appeal the present case directly to the Federal Court leaving the appeal of the Ferris case dormant until a decision on the same issue was reached in this Court. It is therefore no authority for the Crown’s position in the present case, but the judgment should be attentively read. The decision contains one statement with which I cannot agree and with which even defendant does not agree where it concludes that since there is no statutory sanction for not assessing basic strike pay it also should be taxed in the same manner as the supplemental benefits on the basis that the general strike fund is built up by a proportion of the union dues paid by each of the members which are tax deductible from income, and therefore, as in the case of pension plans or registered retirement savings plans, the amounts received should then be taxable as income when they are paid out to the taxpayer.

In the case of MNR v Eastern Abbatoirs Ltd, [1963] CTC 19; 63 DTC 1023, Noel, J, as he then was, dealing with the return of pension contributions, stated at 23 (1023 DTC) (translated):

It is true that the Income Tax Act provides in certain cases for the taxation of certain sums deducted and later recovered but this is only when a text of the law clearly so provides.

It is now common ground whether as a matter of policy or otherwise, that union benefits paid out of the general strike fund are not taxable and the defendant is not attempting to do so in this case (nor was the Minister in the Ferris case).

The Ferris judgment concludes at 2037 (19 DTC):

As to the supplementary strike pay or benefits, I do not think that placing the taxable income from a commercial venture within the four walls of a union and then getting it back by way of a distribution pursuant to a certain formula, renders it tax exempt. The form cannot change the substance.

If this were simply a flow-through from profits of the newspaper to the individual members of the unions through the intermediary of the unions themselves, this conclusion could be accepted, but as has been indicated, dealing with the facts is far more complex than that. Not only were not all of the profits distributed, but part of this distribution, although admittedly a small part, came from other sources (donations and contributions from other unions), and the individuals taxed had no right to claim them and were dependent on the unions themselves with respect to the amounts of such profits so distributed. As indicated I cannot accept the argument that the newspaper was being operated by the 1400-odd members of the union, most of whom did not even work on it but merely carried out union strike duties. It was operated by the unions themselves as appears from the masthead of the paper. They were certainly doing this for the benefit of their members but not as agents of them or under their direction.

Admittedly this conclusion hardly seems fair to the Department of National Revenue. By virtue of paragraph 149(l)(k) the unions who were actually operating the newspaper for the joint council are exempt from tax, and by virtue of the judgment herein, individual members of the union who received most of the profits from the operation are also exempt from tax, not being found to be individuals engaged in a business. As a result, the profits of a highly successful business remain tax exempt. The remedy may well lie in an amendment to the Act as was done following the Wipf case (supra), to deal with this problem, but as the law now stands I must maintain the appeals and refer the assessments of each of the plaintiffs herein back to the Minister for reassessment on the basis that supplemental strike benefits are not taxable. As all six cases were argued simultaneously on the same proof there will be only one set of costs, save for disbursements payable with respect to each of the six actions.

Appeal allowed.