Date: 20000525
Docket: 97-3437-IT-G
BETWEEN:
PROVIGO DISTRIBUTIONS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal concerning the appellant's taxation
year ending on January 25, 1992.
[2] The point at issue is whether the amount of the employer
contributions in respect of wages is deductible in computing the
appellant's income for the taxation year in which the wages
were earned, as the appellant contends, or for the taxation year
in which the wages were paid, as the respondent contends.
[3] The employer contributions in question are those made
under the Unemployment Insurance Act, the Act
respecting the Régie de l'assurance-maladie du
Québec and the Act respecting the Quebec Pension
Plan.
[4] At the start of the hearing, counsel for the parties filed
an agreement as to the facts:
[TRANSLATION]
1. The appellant is a company incorporated in Quebec which
carries on a food distribution business.
2. In computing its income for the taxation year ending
January 25, 1992, the appellant deducted an amount of
$393,672 for non-remitted employer contributions in respect of
wages earned during the last week of that taxation year and not
yet paid to the appellant's employees (see the
appellant's return of income for the 1992 taxation year with
schedules and financial statements, the whole appended to this
agreement as Exhibit E-1).
3. The Minister of National Revenue disallowed the deduction
of this amount of $393,692 in computing the appellant's
income for the taxation year ending January 25, 1992 (see
notice of reassessment of March 5, 1996 and corresponding
T7W-C form and notice of confirmation of September 15, 1997
appended to this agreement as Exhibit E-2).
4. This amount of $393,692 breaks down as follows:
·
Employer unemployment insurance premiums:
$142,599
·
Employer contributions to the Régie de
l'assurance-maladie du Québec:
$161,050
·
Employer contributions to the Quebec Pension Plan:
$90,023
5. The wages earned during the first week of the period ending
on January 25, 1992 were paid during the following fiscal
year ending on January 30, 1993, that is to say on
January 29, 1992 in the case of employees paid on Wednesdays
and January 30, 1992 in the case of employees paid on
Thursdays.
· For
the purposes of presentation in its financial statements for the
fiscal year ending January 25, 1992, in computing net profit
the appellant treated as an expense the amount of these wages
earned but not yet paid as of January 25, 1992. This amount
was also entered on the appellant's balance sheet as a
short-term liability for that fiscal year.
· For
tax purposes, these wages earned but not yet paid as of
January 25, 1992 were deducted as expenses in computing the
appellant's income for the taxation year ending
January 25, 1992.
6. The employer contributions in respect of wages paid on
January 29 and 30, 1992 were paid on February 5, 1992
and computed in accordance with the relevant statutes and their
regulations, that is to say the Act respecting the
Régie de l'assurance-maladie du Québec, the
Act respecting the Quebec Pension Plan and the
Unemployment Insurance Act.
7. For the purposes of presentation in its financial
statements for the fiscal year ending on January 25, 1992,
in computing net profit the appellant treated as an expense the
total amount ($393,672) of these employer contributions in
respect of wages earned but not yet paid as of
January 25, 1992. This amount was also entered on the
appellant's balance sheet as a short-term liability for that
fiscal year under the item "Income Tax and Various Taxes
Payable".
8. The only point at issue is whether, for tax purposes, the
amount of $393,672 is deductible,
· as
the appellant contends, in computing the appellant's income
for the taxation year ending on January 25, 1992,
or,
· as
the respondent contends, in computing the appellant's income
for the following taxation year ending on January 30,
1993.
[5] Counsel for the appellant argued two points: (1) the
obligation to pay wages gives rise to an obligation to pay social
benefits costs so that employer contributions are an integral
part of remuneration paid; (2) there must be an accurate
presentation of income each year. As to this second point,
counsel for the appellant suggested that the question that should
be asked for a proper representation of income is what expenses
were incurred during the year to generate that year's income?
The answer is clearly that they must be total payroll expenses.
The wages were earned but not yet paid. The employer uses the
accrual accounting method. It deducted the amount of wages earned
in 1992 and must be allowed to deduct employer contributions
because they were also paid to generate the income for 1992.
Total payroll expenses for 52 weeks must be considered.
[6] Counsel for the appellant first referred to the Supreme
Court of Canada's decision in Canderel Ltd. v. Canada,
[1998] 1 S.C.R. 147, and in particular to the following
passage at page 162:
. . . Under our self-assessment system, each taxpayer must be
able to compute his or her income in such a way as to constitute
an accurate picture of his or her income situation, subject, of
course, to express provisions in the Act which require specific
treatment of certain types of expenses or receipts.
[7] Counsel for the appellant also referred to this
Court's decision in Fédération des caisses
populaires Desjardins de Montréal et de
l’Ouest-du-Québec v. The Queen, 99 DTC
1275. This is the decision the respondent mainly relies on.
Counsel for the appellant related the facts of that case and
argued that they are different from those in the instant case. At
the end of its 1992 fiscal year, the Fédération
included in computing its income certain approximate amounts that
had to be paid for employee vacations that might be taken the
following year or, in certain circumstances, in subsequent years.
Vacation pay was paid in accordance with the pay rate applicable
to the employee at the time he received the vacation pay. The
cost of the employees' vacation pay was deducted for 1992 and
this was allowed by the Minister of National Revenue (the
"Minister"). The Fédération also sought
to deduct employer contributions in respect of the vacation pay
during the same year. It was thus on pay not yet determined and
accordingly on approximate calculations of the employer
contributions that the Fédération sought to deduct
the amount of those contributions in computing its income.
[8] Counsel for the appellant argued that, in the instant
case, the wages had been earned by the employees and were thus
determined, whereas the Fédération had sought to
deduct employer contributions in respect of pay that would
eventually be payable. He referred to paragraphs 53, 55, 59
and 61 of that decision:
[53] . . . The employees acquire their vacation leave during
the reference year, but they cannot take that leave until after
the reference period is over. However, it is during the reference
year that the appellant becomes obliged to pay its employees
vacation pay, and that obligation subsists until the amounts are
paid in the year following the reference period. That is why the
vacation pay, although estimated, is not a reserve within the
meaning of paragraph 18(1)(e). It is not a potential
obligation for the employer. It is a real legal liability that
exists during the reference year but will be paid in a future
year. It can therefore be said that the expense associated with
the vacation pay was incurred during the reference year and is
thus deductible in calculating profit for the year under section
9 and paragraph 18(1)(a) of the Act.
. . .
[55] In this regard, I agree with counsel for the respondent
that the obligation to make those employer contributions does not
arise until the vacation pay is actually paid. The services
provided by the employees do not give rise to that obligation.
The payment of their salaries is what, under the various
applicable statutes, creates an obligation for the employer to
make the associated employer contributions. It therefore cannot
be said, as counsel for the appellant argued, that the obligation
to make the contributions exists during the reference period.
. . .
[59] I therefore feel that the obligation to make employer
contributions in respect of vacation pay to be paid after the
reference period is a potential future obligation as defined in
law. I also feel that the evidence has shown that that obligation
must be estimated and cannot be precisely determined during the
year when the vacation leave is accumulating but has not yet been
taken by the employees.
. . .
[61] Moreover, since the obligation to make those employer
contributions does not arise until the vacation pay is paid, it
cannot be argued that the appellant, in the situation that
concerns us, incurred that expense in 1992. . . .
[9] Counsel for the respondent argued that an expense is not
incurred if there is no obligation to pay. She cited the Federal
Court of Appeal's decision in The Queen v. Burns,
84 DTC 6348, at page 6348:
In our opinion, an expense, within the meaning of paragraph
18(1)(a) of the Income Tax Act, is an obligation to
pay a sum of money. An expense cannot be said to be incurred by a
taxpayer who is under no obligation to pay money to anyone. . .
.
[10] In the respondent's opinion, the obligation to pay
the employer contributions in issue does not arise when the wages
are earned but when they are paid. An expense is incurred in the
taxation year in which the obligation to pay arises; in the last
week, however, the wages had been earned but not paid. On this
point she relied on this Court's decision in
Fédération, supra, more particularly at
paragraph 55 cited above and paragraph 57, which reads
as follows:
[57] This is exactly the case here with respect to the
employer contributions. During the reference period, there is not
yet any actual relationship between the creditor of the
contributions and the employer, which will have to pay them only
from the time the vacation pay is actually paid. The
creditor’s legal interest will arise then and not before.
It cannot be said that the debt is legally in existence before
that time. In contrast, an obligation with a term presupposes
that the obligation arises immediately and is therefore legally
complete during the entire period from its creation to its
expiry. A relationship of obligation is established between a
real creditor and a real debtor (see J.-L. Baudouin,
page 470, paragraph 831, supra). It seems to me that
this is the main difference between vacation pay, in respect of
which an actual relationship is created between the debtor
employer and the creditor employees, and employer contributions,
in respect of which no such relationship can exist between the
employer and the creditor of the contributions until the vacation
pay is actually paid. This results from the various statutes
governing the payment of such employer contributions.
[11] Counsel for the respondent referred to sections 50,
52, 59 and 63 of the Act respecting the Quebec Pension
Plan, section 34 of the Act respecting the
Régie de l'assurance-maladie du Québec and
subsections 48(3), 50(1) and 53(1) of the Unemployment
Insurance Act. I will cite the Unemployment Insurance
Act provisions to which counsel for the respondent referred
and to which I add subsection 51(2) of that Act.
Sections 48, 50 and 51 are in Part II, which is
entitled "Contributory Premiums". Section 53 is in
Part III entitled "Collection of Premiums".
48(1) In respect of each year, the Commission shall, subject
to approval by the Governor in Council, fix the rates of premium
that persons employed in insurable employment and the employers
of those persons will be required to pay in that year to raise an
amount equal to the adjusted basic cost of benefit under this Act
in that year as that cost is determined under section 49.
48(2) The rates of premium for a year shall be calculated in
terms of a percentage of the insurable earnings in that year and
the employees' premiums for that year shall be a like
percentage for all insured persons.
48(3) The percentage of insurable earnings for a year that
will constitute the employers' premiums for that year shall
be determined in accordance with section 50.
50(1) Unless another rate of premium is provided for a year
pursuant to this section, the employer's premium to be paid
in a year by an employer of an insured person shall be 1.4 times
the employee's premium for that year.
51(2) Every employer shall, for every week during which a
person is employed by him in insurable employment, pay, in
respect of that person and in the manner provided in Part III, an
amount equal to such percentage of that person's insurable
earnings as is fixed by the Commission as the employer's
premium payable by employers or a class of employers of which the
employer is a member, as the case may be, for the year in which
that week occurs.
53(1) Every employer paying remuneration to a person employed
by the employer in insurable employment shall deduct from that
remuneration as or on account of the employee's premium
payable by that insured person under section 51 for any week or
weeks in respect of which that remuneration is paid such amount
as is determined in accordance with prescribed rules and shall
remit that amount, together with the employer's premium
payable by the employer under that section for such week or
weeks, to the Receiver General at such time and in such manner as
is prescribed and, where at that prescribed time the employer is
a prescribed person, the remittance shall be made to the account
of the Receiver General at a financial institution (within the
meaning that would be assigned by the definition "financial
institution" in subsection 190(1) of the Income Tax
Act if that definition were read without reference to
paragraphs (d) and (e) thereof).
[12] Counsel for the respondent also referred to Canderel,
supra, and in particular to the following passage at
page 174:
(4) In ascertaining profit, the taxpayer is free to adopt any
method which is not inconsistent with
(a) the provisions of the Income Tax Act;
(b) established case law principles or "rules of
law"; and
(c) well-accepted business principles.
[13] Counsel for the appellant's response to these
arguments was that payment to the government is due only when the
wages are paid to employees, but the obligation to pay wages and
contributions exists at the end of the year. The payroll expense
consists of the wages and all related social benefits costs. The
respondent's position represents an extremely technical view
which disregards business reality: accountants include all these
costs in the payroll expense.
Conclusion
[14] It seems to me that it is not legally tenable to argue
that the employer's obligation with respect to employer
contributions arises only if remuneration is paid, regardless of
the legal fact that work has been performed and wages actually
earned. In my view, this is not what the judge stated in
Fédération, supra. In essence what she said
is that employer contributions are not owed until the amount of
remuneration has been determined and is payable. At that point
they can be included in computing the taxpayer's income, not
before. In this sense, that decision is consistent with the
analysis by authors in the field of labour law concerning the
meaning to be given to the word "remuneration" found in
articles 2085 and 2087 of the Civil Code of
Quebec.
[15] Those articles read as follows:
2085. A contract of employment is a contract by which a
person, the employee, undertakes for a limited period to do work
for remuneration, according to the instructions and under the
direction or control of another person, the employer.
2087. The employer is bound not only to allow the performance
of the work agreed upon and to pay the remuneration fixed, but
also to take any measures consistent with the nature of the work
to protect the health, safety and dignity of the employee.
[16] In Le droit du travail du Québec, pratiques et
théories, 3rd edition, Les Éditions Yvon Blais
Inc., Robert P. Gagnon writes as follows at
page 70:
[TRANSLATION]
The notion of remuneration is very broad in scope. It in fact
covers any consideration or benefit having a pecuniary value
which the employer is required to provide to the employee in
return for his performance of work. Apart from the wages or
compensation, in the narrowest sense, paid on the basis of
performance or of the duration of the work, remuneration thus
comprises, where applicable, benefits such as vacation pay,
payment for days not worked, the employer's contribution to
the cost of certain insurance or retirement plans, etc.
[17] In Le contrat d'emploi, second edition, Les
Éditions Yvon Blais Inc., Aust and Charette write as
follows at page 86:
[TRANSLATION]
I. Pension plans, life and health insurance policies and
other benefits
The benefits which an employee enjoys as conditions of
employment, be they pension plans, medical insurance, health
insurance or disability insurance, are generally regarded as an
obligation which the employer has a duty to discharge over the
entire term of the employment contract. As seen above, such
benefits form part of remuneration if they have a pecuniary
value. Consequently, as is the case for all other elements of
remuneration, the employer may not reduce those benefits
unilaterally.
[18] It seems clear that employer contributions are to be
understood as being included within the meaning of remuneration.
I believe it is quite apparent in any case that the
employer's obligations with respect to employer contributions
arise from the employees' performance of work and not from
payment of their wages and that there has been some confusion
between the imposition of the contribution and the payment or
collection of that contribution.
[19] In Canadian Pacific Ltd. v. A.G. (Can.), [1986]
1 S.C.R. 678, at pages 682 and 683, the Supreme Court
of Canada was called upon to make the distinction between the
imposition of the contribution and the payment of the
contribution under the provisions of the Unemployment
Insurance Act. Sections 66 and 68 cited in the judgment
were, in 1992, sections 51 and 53 respectively. First I will
cite a portion of the headnote of that decision at
page 678:
. . . It is s. 66 of the Unemployment Insurance Act,
1971, not s. 68, which requires the payment of employer and
employee premiums and fixes their amounts. They are fixed at a
percentage of the "insurable earnings" of the employee.
Section 68 deals only with the manner in which these premiums are
to be collected. . . .
[20] La Forest J. states the following at
pages 682 and 683:
My first remarks relate to the scheme of the Act. Section 66
appears in Part III which is entitled "Contributory
Premiums". Section 68 appears in Part IV which is entitled
"Collection of Premiums". I would note that titles,
unlike marginal notes, are an integral part of the Act; see Elmer
Driedger, The Composition of Legislation (1957), at p.
103. As one would expect, Part III deals with the substance of
the law regarding premiums. In fact, it contains a series of
provisions whose object, according to the relevant title, is
"determining premiums". These include s. 62 already
cited. This section, we saw, provides that the Commission must
fix the amount of premiums in terms of a percentage of the
insurable earnings of the employee. Section 66, as I have just
noted, also appears there.
Even without reference to the scheme of the Act, a mere
reading of s. 66, as Pratte J. observes, clearly indicates that
it is this provision that requires payment of premiums and fixes
their amounts. In addition, it directs us to the part of the law
that prescribes the method of collecting them. Section 66(1)
deals with employee premiums while s. 66(2) deals with those
imposed on employers. They are parallel provisions and I shall
restrict my remarks to s. 66(2) which directly applies in this
case.
This provision requires, first of all, that every employer
shall deduct and pay to the Receiver General an amount equal to
the percentage of "insurable earnings" of the employee
fixed by the Commission as the employer's premium. It also
prescribes the manner in which these premiums are to be
collected, namely "in the manner provided in Part IV"
in which, it will be remembered, s. 68 appears.
[21] The statutes under which employer contributions are owed
follow the same scheme: imposition of the contribution and
collection and payment of the contribution. Like the
Unemployment Insurance Act, the Act respecting the
Quebec Pension Plan and the Act respecting the
Régie de l'assurance-maladie du Québec
clearly provide that the employer's obligation respecting
contributions arises in consideration of an employee's
performance of work during a period of time and is based on that
employee's remuneration, not on the payment of his wages.
Employer contributions may therefore be deducted in the year in
issue in accordance with the principles stated in Burns,
supra, and Canderel, supra.
[22] The appeal is accordingly allowed with costs.
Signed at Ottawa, Canada, this 25th day of May 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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