Date: 19981019
Docket: 96-2537-IT-G
BETWEEN:
RON MANKE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] The Appellant, Ron Manke, appeals from assessments under
the Income Tax Act (the “Act”) in
respect of the 1990, 1991, 1992 and 1993 taxation years.
[2] The basic facts in this appeal are as follows. The
Appellant was an employee of Corporate Computers Inc., a
corporation carrying on business in Edmonton, Alberta. He was a
commissioned salesman selling computer hardware and software, and
also had a side “business” as a computer consultant
in the 1990, 1991 and 1992 taxation years.
[3] In assessing the Appellant, the Minister of National
Revenue (the “Minister”) disallowed a portion of the
expenses claimed by the Appellant in the 1990 and 1991 taxation
years on the basis that the Appellant was an employee of
Corporate Computers Inc. and not an independent contractor.
Therefore, only amounts claimed in respect of employment expenses
were deductible, and any expenses, in excess of those amounts
allowed, were not reasonable in the circumstances. These issues
have been settled and will be included in the Court’s
Order.
[4] The Minister also disallowed credits claimed by the
Appellant in respect of source deductions allegedly withheld from
his wages in the 1992 and 1993 taxation years but not remitted to
the Crown. The Minister’s position is that the Appellant
became an independent contractor with his employer during the
relevant time, and is therefore not entitled to credits in
respect of source deductions. In the alternative, the Minister
submits that the Appellant was paid a gross salary and no amounts
were withheld from his wages. The Appellant submits that he
received $3,500.00 in wages per month which was net of his gross
wage of $5,000.00 per month. The T4 slips issued to the Appellant
in respect of those years did not indicate that source deductions
in the amount claimed by the Appellant were withheld, however,
the Appellant submits that the slips understate the amount of tax
actually deducted and withheld at source. The Minister disputes
these submissions.
[5] Issues, with regard to the 1990 and 1991 taxation years,
have been withdrawn from the appeal. The Respondent filed a
document entitled “Settlement of Issue” in which the
parties have reached a settlement with respect to issues arising
in respect of the 1990 taxation year. The Appellant also
acknowledged by way of an “Acknowledgement of
Settlement” that the 1991 taxation year was not properly
before the Court as required by the Act. The issues which
remain to be determined are as follows:
- Does the Tax Court have the jurisdiction to grant the
Appellant the relief requested ?
- Is the Appellant entitled to tax credits in the amount of
$6,000.00 for each of the 1992 and 1993 taxation years ?
[6] In reassessing the Appellant, the Minister relied upon the
following assumptions of fact:
- the Appellant was, at all material times, employed by
Corporate Computers Inc. (the “Employer”);
- during all material times, the Appellant worked as a
commissioned salesman for the Employer;
- in addition to being a commissioned salesman for the
Employer, during the period of September 1992 through to and
including April 1993, the Appellant was an employee, a
minority shareholder, and president of DiscMore Productions Inc.
(the “Corporation”);
- all of the Appellant’s pay cheques, for his work with
both the Employer and the Corporation, came from the
Employer;
- the Appellant claimed that he was to receive $5,000.00 per
month for his work with the Corporation; however, during the
period of September 1992 through to and including April 1993, his
pay cheques for this work showed that the Appellant was earning a
sum in the amount of $3,500.00 per month;
- the Appellant has not provided the Minister with adequate
documentation to show that he was to receive gross pay in the
amount of $5,000.00 per month for his work with the Corporation
for the period of September 1992 through to and including
April 1993;
- the Appellant’s 1992 T4 slip, issued from the
Employer, shows “employment income” in the amount of
$52,000.27 and “income tax deducted” in the amount of
$14,221.25;
- in his 1992 T1 General income tax return, the Appellant
reported, on line 437, that the “total income tax
deducted (from all information slips)” was a sum in the
amount of $20,221.25, calculated by adding $6,000.00 to the
amount of $14,221.25, referred to in the previous paragraph;
- the Appellant’s 1993 T4-RSP slip, issued from
the Hong Kong Bank of Canada, shows “income tax
deducted” in the amount of $67.57;
- in his 1993 T1 General income tax return, the Appellant
reported, on line 437, that the “total income tax
deducted (from all information slips)” was a sum in the
amount of $6,067.57, calculated by adding $6,000.00 to the amount
of $67.57, referred to in the previous paragraph;
- as a result of the Appellant’s Notices of Objection a
payroll audit was completed on January 23, 1996 on the Employer
to determine the correct T4 slips;
- as a result of the payroll audit, the Appellant was ruled to
be an employee, as opposed to an independent contractor, of the
Employer with respect to the Appellant’s work with the
Corporation, although the Employer’s records indicated that
the Appellant was a “Consultant” with the Corporation
during the period of September 1992 through to and including
April 1993;
- the Employer’s records did not indicate that the
Employer withheld additional income tax in the amount of
$6,000.00, as the Appellant claims; and
- other than the amount of $14,221.25 for the
Appellant’s 1992 taxation year, and the amount of $67.57
for the Appellant’s 1993 taxation year, no amounts were
deducted or withheld at source and remitted to the Receiver
General by the Employer on account of income tax for the
Appellant.
Analysis
[7] The position of the Respondent with respect to the
jurisdictional issue is that even if the Appellant can
substantiate his claims, the Court does not have the jurisdiction
to direct the Minister to grant the Appellant a credit.
[8] There are two lines of authority on this point. The first
line of cases takes the position that where a taxpayer alleges
that source deductions were withheld from his wages but were not
remitted by the employer to the Crown, that this is a collections
issue over which the Tax Court has no jurisdiction. It is not an
appeal of an assessment of tax under the Act because the
taxpayer is seeking declaratory relief rather than a vacation or
variance of an assessment. Therefore, the taxpayer is liable for
the payment of taxes owing irrespective of whether his or her
employer has withheld source deductions and not remitted these
amounts to the Crown.
[9] In Brooks v. Canada [1995] 1 C.T.C. 2880 (T.C.C.),
Sobier, J.T.C.C. held that this Court does not have jurisdiction
to order that a taxpayer is not liable for an amount of tax in
the situation where tax has been withheld at source but not
remitted to the Crown. He said at 2883:
“I am quite sure that Mr. Brooks has a legitimate claim
either against Revenue Canada for refusing to acknowledge that
amounts have been withheld or against his former employer for
either failing to remit or having withheld, not remitted.
However, this is not a matter which the Tax Court of Canada may
determine. This would be an action against the Crown which could
be brought in the Federal Court-Trial Division or an action which
could brought [sic] in the Superior Court in the Province of
Ontario for accounting or other matters.”
[10] In my opinion the facts in this case and others cited by
the Respondent[1]
are significantly different from those in the case at bar, and
are therefore unpersuasive.
[11] The second line of cases[2] concerning this issue come to the conclusion
that where a taxpayer has had source deductions withheld by his
employer, but is assessed tax on the basis that such deductions
were never remitted to the Crown, the taxpayer has properly
initiated an appeal under the Act such that the Court is
entitled to hear the matter and grant relief.
[12] In Ashby v. The Queen, [1996] 1 C.T.C. 2464
(T.C.C.), the taxpayer reported income and deductions for the
1990 taxation year, however, the Minister assessed the taxpayer
on the basis that source deductions had not been made or remitted
by the taxpayer’s employer. Therefore, the Minister
disallowed the deductions claimed in respect of CPP
contributions, unemployment insurance premiums and income tax
paid. Sarchuk, J.T.C.C. held that source deductions were withheld
from the taxpayer’s wages, and the fact that this income
was not remitted by his employer did not alter the validity of
the deductions claimed by the taxpayer. Judge Sarchuk said
the following at page 2468:
“This Court has original jurisdiction to hear and
determine appeals in matters arising under the Act (and
other statutes). I am satisfied that the matter before me is an
appeal from an assessment of tax within the meaning of the
provisions of subsection 171(1) of the Act. I am not
inclined to follow the decision in Brooks, supra, for two
reasons. First, the prayer for relief in Brook’s Notice of
Appeal discloses that he was seeking a declaratory order from
this Court. Clearly such relief is not contemplated by subsection
171(1) of the Act. Second, and this point was not argued
in Brooks, section 118.7 of the Act provides that
for the purpose of computing the tax payable under Part I of the
Act by an individual for a taxation year there may be
deducted an amount in respect of an employee’s premium for
the year under the Unemployment Insurance Act, 1971 and
the employee’s contribution under the Canada Pension Plan.
These are statutory deductions permitted to a taxpayer which this
appellant says were made but have been denied to him. There is no
basis upon which the respondent can reasonably argue that this
Court is not entitled to determine the question whether these
deductions had in fact been made and if so, to direct the
Minister to reassess accordingly. A taxpayer is entitled to the
benefit of each statutory exemption and deduction in the
Act applicable to him. I see no difference between a
taxpayer’s entitlement to deduct the premiums and
contributions pursuant to section 118.7 of the Act and a
taxpayer’s entitlement to deduct appropriate expenses
pursuant to section 18 of the Act. Disallowance of a
deduction by the Minister founded on an incorrect assumption of
facts is a reversible error. Furthermore, while it might be
argued that income tax deducted at source is treated differently
in the Act than UI premiums and CPP contributions, it
seems to me inappropriate, if I were to find that First Choice
made the required deductions from the appellant’s wages, to
grant relief in respect of CPP and UI and to deny relief with
respect to a deduction of tax at source. In my view the
calculation of income tax payable is an integral part of an
assessment by the Minister. If the Minister’s calculation
is wrong the appellant is entitled to relief. To reject his
appeal on the basis of “lack of jurisdiction” is
these circumstances is not warranted.”
[13] The matter before the Court is not a “collections
matter” which is outside the scope of its jurisdiction.
[14] The Court’s jurisdiction begins once a taxpayer has
appealed an assessment of tax pursuant to section 169 of the
Act. The Tax Court can only grant the relief provided in
subsection 171(1) of the Act, that is, it can dismiss
an appeal from an assessment of tax or it can allow the appeal by
vacating the assessment, varying the assessment, or referring the
assessment back to the Minister for reconsideration and
reassessment. It is well-established that the Tax Court
cannot grant declaratory relief. The Tax Court’s
jurisdiction is limited to what is expressly conferred on it by
Parliament and what is necessarily implied from what is expressly
conferred: Lamash Estate v. The Queen, [1990] 2 C.T.C.
2534, 91 DTC 9 (T.C.C.) per Christie A.C.J.T.C.C.
[15] The jurisdictional issue raised by the Respondent raises
two questions to be determined by the Court. The first is whether
the Appellant has appealed an assessment of tax. If he has, then
the appeal is properly before the Court and no question arises as
to the jurisdiction of this Court to hear the appeal.
There is no doubt that the Appellant has followed the proper
procedure under the Act in appealing assessments of tax to
this Court. The second question is whether the Appellant is
seeking declaratory relief from this Court, or whether he is
seeking to have an assessment vacated, varied, or sent back for
reconsideration. If it is the former, then it is clear that the
Court does not have the statutory power to grant the Appellant
the relief he has requested.
[16] In Aallcann Wood Suppliers Inc. v. The Queen, 94
DTC 1475 (T.C.C.), Bowman, J.T.C.C. said the following at
page 1476:
“In challenging the assessment for a year in which tax
is payable on the basis that the Minister has incorrectly
ascertained the amount of a loss for a prior or subsequent year
that is available for deduction under section 111 in the
computation of the taxpayer’s taxable income for the year
under appeal, the taxpayer is requesting the Court to do
precisely what the appeal procedures of the Income Tax Act
contemplate: to determine the correctness of an assessment of tax
by reviewing the correctness of one or more of the constituent
elements thereof, in this case the size of a loss available from
another year.”
[17] The same logic should apply here. The ultimate question
before the Court is whether the Minister’s assessment of
tax is correct. One of the constituent elements of the assessment
is the amount of credits to which the taxpayer is entitled. The
Appellant has appealed the assessment of tax to this Court on the
basis that the Minister has not properly taken into account the
credits to which he was entitled. The Court is entitled to make a
determination on this point so as to determine whether the
Minister’s assessment of tax was correct. The Court is not
making a declaratory order that the Minister shall grant the
Appellant a tax credit, but rather the Court is referring the
matter back to the Respondent to reassess the Appellant in
accordance with the reasons, as is provided for under section 169
of the Act.
[18] It is a question of fact whether the Appellant’s
employer withheld source deductions from the Appellant’s
wages. Assuming for the moment that source deductions were
withheld from the Appellant’s wages but not remitted to the
Crown, the question becomes whether the Appellant becomes
entitled to a credit in respect of those source deductions at the
time they were withheld or only at such time as those amounts
were remitted to the Crown. If a taxpayer is not entitled to a
credit for source deductions withheld until they are actually
received by the Minister, then the Appellant cannot succeed in
the appeal.
[19] The Appellant becomes entitled to the credits when the
source deductions are withheld. I say this for two reasons.
First, while the Minister may not have actually received the tax
withheld he was certainly in constructive receipt of the source
deductions as soon as they were withheld at source. Under
section 153, an employer is required to withhold prescribed
amounts and remit that amount to the Receiver General in respect
of the employee’s tax payable for the year, and, as noted
by Sarchuk, J.T.C.C. in Ashby (supra), the employer
is the agent of the Crown for the purposes of remittance. Second,
in my view it would cause undue hardship on taxpayers to demand
that they ensure that source deductions withheld by their
employer are remitted to the Crown before entitlement to a credit
in respect thereof exists. Where, as is the case here, the
Minister has assumed that no employee-employer relationship
exists, it is open to the Minister to assess the taxpayer on the
basis that no source deductions were made. However, there are
cases where it is clear to the Minister that an employee-employer
relationship did exist and that the employer has withheld source
deductions from the employee’s wages but has not remitted
this amount. In this instance, the Minister cannot expect the
taxpayer to ensure remittance. The Minister is in a much better
position than the taxpayer to enforce the remittance of the
source deductions. Under subsections 227(9.4) and 227
(10.1), an employer who has failed to remit withheld amounts as
required by the Act is liable to pay that amount to the
Crown, and may be assessed that amount by the Minister.
Therefore, the Act specifically provides a mechanism by
which the Minister can recover against its agent should the agent
fail to remit.[3]
[20] In conclusion, the Appellant is entitled to claim a
credit in respect of deductions withheld at source, if in fact
such amounts were withheld.
Were deductions withheld at source ?
[21] The Respondent submits that the Appellant was an employee
of Corporate Computers Inc. only until October 1993, after
which time the Appellant became an independent contractor with a
subsidiary corporation of his employer known as DiscMore
Productions Inc. Therefore, the Appellant is not entitled to any
credits in respect of source deductions from employment income.
In the alternative, the Respondent argues that the Appellant, if
found to be an employee, was paid a gross wage of $3,500.00 per
month, and no source deductions were withheld from his income.
Both questions are questions of fact.
[22] The Respondent relies upon a decision of the Tax Review
Board in Jacob v. M.N.R., 80 DTC 1878, to stand for the
proposition that only where there is conclusive proof of source
deductions is a taxpayer entitled to claim credits in respect
thereof.[4] The
Respondent submits that there is no conclusive proof in this
case. As noted by Sarchuk, J.T.C.C. in Ashby (supra), the
Jacob case is an unduly restrictive interpretation of the
Coopers & Lybrand (supra) decision. There is no rule
of evidence binding this Court to the effect that there must be
T4 slips showing that source deductions were withheld. The only
“rule”, as noted by Sobier, J.T.C.C. in The Queen
v. Ursel Constructors Limited, 96 DTC 1496
(T.C.C.), is that there must be an “act of
withholding” to demonstrate that source deductions were
withheld although not remitted to the Crown. In determining
whether there was an act of withholding in a given case, the
Court must take into account all of the evidence before it,
including viva voce evidence[5], before making this finding of
fact.
Were source deductions withheld from the
Appellant’s wages?
[23] I find that the Appellant was in an
employer-employee relationship with DiscMore Productions
Inc., and was in receipt of net salary rather than gross salary
from his employer. It does not appear that the employer ever made
an actual physical withholding of source deductions[6], however, all that the
law requires is a failure to pay full wages on account of the
withholding of source deductions, and not the actual placing of
the money into someone’s pockets.
[24] The following evidence has led me to this conclusion.
[25] The testimony of Neil Nichols - Mr. Nichols
testified that he was present at a meeting of all the people
involved in DiscMore Productions Inc., and that in his
hand-written notes he had jotted down that the Appellant
was to receive a gross salary of $5,000.00 per month, or
$60,000.00 per annum. He also said that the only discussion
regarding salary was that Ron Manke would be the only
employee of the corporation. The figure was agreed upon at some
earlier date, and the gross salary of $5,000.00 per month was
confirmed at that meeting by the Appellant and by Graham
Fletcher. He was credible, and I accept his evidence.
[26] Tape recorded conversation - The Appellant taped a
conversation he had with Graham Fletcher. In that conversation
Mr. Fletcher said the following:
“You’re actually being taxed on, you would
actually be taxed on the amount of money that you, that you made,
not, not the gross amount but the net amount.”
[27] Mr. Fletcher said in examination, that all he meant
by that statement is that if the Appellant was paid $3,500.00 per
month, then that was the amount upon which he would be taxed.
Mr. Fletcher had some experience dealing with employees, and
knew the difference between “gross” and
“net” and I do not accept this explanation.
[28] In that same conversation, the Appellant repeatedly
mentioned that his salary was $5,000.00 per month.
Mr. Fletcher said on a few occasions that the Appellant was
only in receipt of $3,500.00 per month, but never said that the
Appellant’s gross salary was not $5,000.00 per month.
Surely had the Appellant made up this figure of $5,000.00 per
month, Mr. Fletcher would have reacted in some way.
[29] The Appellant’s previous income -
Mr. Fletcher gave evidence at trial that he had no
recollection about a discussion with the Appellant regarding
compensation. However, in the examination for discovery,
Graham Fletcher remembered a conversation with the Appellant
wherein the Appellant allegedly said that he needed $3,500.00 per
month to live on. Mr. Fletcher also testified at trial that
the Appellant was making a very good income with Corporate
Computers Inc., so it strikes me that in any salary negotiation a
person would be unlikely to accept so much less money than they
were previously earning. This supports the Appellant’s
position that in their conversation he had said that he needed
$60,000.00 to meet his expenses.
[30] The appeal is allowed with costs fixed at $500.00.
Signed at Ottawa, Canada, this 19th day of October 1998.
" C.H. McArthur "
J.T.C.C.
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