Hrab v. R., [1996] 2 CTC 2239 (Informal Procedure)

Teskey J.T.C.C.: — The Appellant elected to have his appeal from assessment of income tax for the year 1992 heard pursuant to the informal procedure.

Issues

There are three issues before this Court, namely:

(a) Estoppel - whether the Appellant is estopped from proceeding with this appeal as he has a prior judgment from this Court dealing with a similar issue with respect to the 1991 taxation year;

(b) Appellant’s Income what was the Appellant’s gross income for 1992 and whether the Appellant is entitled to a credit for statutory deductions that should have been deducted and remitted, in calculating his tax payable for the 1992 taxation year;

(c) Jurisdiction whether this Court can order that the Appellant be given credit for tax that should have been deducted at source more than was allowed by the Minister in calculating the Appellant’s tax payable for the 1992 taxation year;

Facts acts

At no time during the hearing did either party refer to an Agreed upon Statement of Facts. The Appellant, in his written argument, attaches thereto what purports to be an Agreed Statement of Facts signed by counsel for the Respondent. The Respondent also refers to this same Agreed Statement of Facts. Notwithstanding that this should have been presented during the hearing and made an exhibit, I accept the Agreed Statement of Facts insofar as it does not conflict with the oral testimony received and accepted.

The Appellant and his brother, John J. Hrab (the “Brother”), were the sole shareholders of John Hrab Manufacturing Limited (the “Company”) in 1991. Both were employed by the Company up to July 14th, 1991. According to the Appellant, each was receiving from the Company a gross weekly pay of $1,050 (net $728 a week) and a weekly payment of $350 on account of dividends.

On July 19th, 1991, the Appellant’s employment was terminated by the Company and the license plates were taken off a 1990 Mercury Sable that the Company leased for the Appellant’s use.

On September 13th, 1991, Hawkins J., of the Ontario Court of Justice, General Division, in an application brought by the Appellant against his brother and the Company, ordered that:

4. THIS COURT ORDERS that pending the return of this motion, the respondent, John Hrab Manufacturing Limited, provide the applicant with the continuation of all monetary compensation and benefits as had been received by the applicant immediately prior to July 19, 1991, including, without limiting the generality of the foregoing:

(a) monetary compensation in the amount of $1,078 on Friday of each week; and

(b) full possession and use of the 1990 Mercury Sable leased by John Hrab Manufacturing Limited and used by the applicant.

THIS ORDER BEARS INTEREST at the rate of 11 per cent per year commencing on the date hereof.

I have not reproduced paragraphs 1, 2 and 3 of the Order, as they are immaterial to this issue.

The preamble to this Order reads: ON READING the Notice of Application dated July 3, 1990, the affidavits of Michael Hrab sworn June 29, 1990 and September 10, 1991, filed, and upon hearing submissions by counsel for the parties other than Mary Nachuk,

The September 10, 1991 Affidavit was entered as Exhibit A-4. Paragraph 5 thereof reads:

5. Since July 19, 1991,1 have not been paid any salary or benefits. My weekly net pay from the company after deductions is $1,078. The vacation pay paid to me with the lay-off notice is deficient by the amount of $1,311.52.

The Company made no attempt in 1991 to comply with this Order. The Appellant obtained the amount of $1,078 each week for the remainder of 1991 by issuing numerous garnishees against the Company’s bank account. The Company, in 1991, never issued a cheque for any of this money. In 1992, the first three weeks’ compensation were garnished by the Appellant and for the balance of the year, the company issued cheques to the Appellant each for $1,078 for the calendar year with the notation thereon of “as per Court Order”.

The Company issued a T4 in the usual course of events. The T4 shows a gross employment income of $56,056, CPP deductions of $696, UI deductions of nil and income tax deductions of nil.

The Appellant, on receiving from the Company his T4 in February of 1993, realized that the Company did not make any source deductions other than CPP. He prepared an amended T4 showing employment income at $53,900, CPP at $696, UI at $1065 and income tax deductions of $15,865. In a similar way he prepared a T5 showing actual amount of dividends at $17,500 and taxable amount of dividends at $21,875. The Appellant’s original position being that the Company should have remitted these amounts to Revenue Canada as well as declaring the $350 weekly dividend.

The Brother’s son (the “Nephew”) gave evidence which was most unsatisfactory and totally unreliable particularly in regards to the actual amount the Appellant received from the Company in 1992. He did confirm that no dividends were declared or paid in 1992.

I therefore find that the Appellant did receive from the Company in 1992 the sum of $53,900.

What the Appellant did on the realization that the Company was not making payments to Revenue Canada in regards to the Company for 18 months is unclear. It appears he did nothing in regards to the Company (until August of 1994). He attempted to put the problem unto Revenue Canada by preparing the amended T4 and TS forms. Upon a further motion by the Appellant, Hawkins J., issued a further Order on October 5th, 1994. Paragraphs 1 and 2 of this Order reads:

1. THIS COURT ORDERS that the Respondent, John Hrab Manufacturing Limited, remit the appropriate Income Tax, Canada Pension Plan and Unemployment Insurance deductions to the proper authorities on the weekly sum of $1,050 from and after the Order of the Honourable Mr. Justice Hawkins dated September 13, 1991, attached hereto as Schedule “A”;

2. THIS COURT ORDERS that from and after the date hereof, the Respondent, John Hrab Manufacturing Limited, pay to the Applicant, Michael Hrab, weekly, the sum of $1,078 net of all statutory deductions;

The Company did not comply with this second Order of Hawkins J. and made a voluntary assignment in bankruptcy on January 20th, 1995.

Analysis

Issue A - Estoppel

The Respondent raised the issue of estoppel for the first time in her written argument, not having raised this issue in her Reply to the Notice of Appeal.

Estoppel does not apply to different taxation years. Each year is separate and distinct. The Appellant’s 1992 appeal is separate and apart from his 1991 appeal. The evidence before me in the 1992 appeal and the underlying facts that have been adduced are different. The first Order of Hawkins J. was not interpreted in the 1991 decision.

This appeal must be determined upon the evidence adduced herein and the interpretation of the first Order of Hawkins J.

I do not accept the Respondent’s position on this issue.

Issue B - Appellant's Income

Having already found that the Appellant received from the Company a total amount in 1992 of $53,900, of which $3,234 was obtained through garnishees and the remainder, namely $50,666, was received by cheques. I then must interpret the Order of Hawkins J. dated September 13, 1991.

Upon review of the affidavit material before him and on the wording of the Order, I am satisfied that $1,078 figure was intended to be a net figure after all statutory deductions. The second Order interprets the first Order and does not modify it.

The $1,078 paid by the Company to the Appellant was “monetary compensation” and the Company had, pursuant to section 153 of the Income Tax Act (the “Act”), an obligation to deduct, withhold and remit statutory deductions.

I am satisfied that once the Company started issuing cheques to the Appellant in 1992, that it knew or ought to have known that it should be setting aside and remitting the statutory deductions. Thus, the income received by the Appellant in 1992 from the Company was $53,900, plus all the statutory deductions that should have been set aside or remitted to Revenue Canada.

The Appellant submits that since he received 50 payments of $1,078, net after deductions, the amount before deductions to be shown on the T4 in Box 14 should be shown as $86,900 and the income tax deducted in Box 27 should be $31,280, in Box 22, $696, and in Box 18, the sum of $1,065.

The Notice of Reassessment before the Court is attached hereto.

The Respondent at the hearing conceded that the Appellant’s income should be reduced by $21,875, which would then give an income of $54,547.58.

The Respondent also submitted that if the $1,078 were net payments, the income would have been $71,523.50 ($53,900 + $15,862.50 of income tax deductions + $696 of CPP contributions + $1,065 of UI contributions).

The Appellant said, and I accept his testimony on this, that prior to July 19, 1991, he was receiving weekly wages of $1,050 and $350 weekly in dividends. This would make an annual income of $72,800 ($1,400 x 52 =

$72,800).

Issue C - Jurisdiction

The jurisdiction of this Court arises from the provisions set out in Division J of the Act, section 169, which gives a taxpayer the right to appeal to this Court to have an assessment vacated or varied.

Section 171 gives the Court the power to dispose of an appeal by:

(a) dismissing it, or

(b) allowing it and

(i) vacating the assessment

(ii) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

I am satisfied that the jurisdiction of this Court is limited to the computation of a taxpayer’s income, taxable income, and the amount of tax that is payable. The assessment must be a challenge to one of the component parts used by the Minister to arrive at a taxpayer’s liability for the year in question. Hertzog v. Minister of National Revenue, [1991] 1 C.T.C. 2529, 91 D.T.C. 720, McMillen Holdings Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 2327, 87 D.T.C. 585.

I am also satisfied that the calculation of the credit which a taxpayer may use to offset or reduce tax that is otherwise payable by the taxpayer, does not constitute a challenge to the manner in which his or her tax payable was calculated by the Minister. It is a challenge to the manner in which the taxpayer’s liability will be paid and thus is a question of collection of tax, not the assessment of tax. Otty v. Minister of National Revenue, 52 D.T.C. 163.

The Appellant relies upon a decision of my colleague Garon, in Marchand v. Minister of National Revenue, [1990] 2 C.T.C. 2370, 90 D.T.C. 1763, for the proposition that this Court does have the necessary jurisdiction. My colleague did not have the question of jurisdiction argued before him in the Marchand case (supra) and he expressed his serious doubts on the issue of jurisdiction.

In the interest of justice, I should be able to order the Minister of National Revenue (the “Minister”) to reassess the Appellant on the basis that his gross income was ($1,050 x 52 + $350 x 52) $72,800 and that the Minister should consider that the Company withheld from the Appellant the required statutory deductions. This figure is too low and only used for illustration purposes. The $350 component cannot be a dividend. It is monetary compensation and fully taxable, therefore the $350 figure should be grossed up. Using the same percentage that was deducted from his weekly wage of $1,050, the $350 grossed up amount would be $462. Thus, the actual grossed up monetary remuneration would be $78,644 ($1,050 x 52 + $462 x 52 = $78,644). Both this figure and the Appellant’s figure would increase the Appellant’s tax liability and is moot, since I am satisfied that I do not have the jurisdiction to order the Minister to credit the Appellant with these deductions, I would do a disservice to the Appellant to order an assessment of tax on the basis of income from the Company of $72,800 or $78,644.

I therefore determine under the circumstances herein that the best result for the Appellant would be to have his income from the Company assessed, for 1992, at $53,900, the amount of money actually received by him.

The appeal is allowed, with costs, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant’s income for 1992, from John Hrab Manufacturing Ltd. was $53,900.

Appeal allowed.