Kenneth Murray v. Minister of National Revenue, [1987] 2 CTC 2284, 87 DTC 559

Sarchuk, T.C.J. [Orally]: —Mr. Murray appeals against his 1982 income tax assessment. In filing his return for that year Murray elected to apply the averaging provisions of section 119 of the Income Tax Act with respect to that year, and taxation years 1977, 1978, 1979 and 1980. At issue is the respondent's rejection of the appellant's election.

A brief summary of the evidence is warranted. Throughout his adult life the appellant has been engaged in the business of fishing. He began as a crew member and eventually reached the position where in 1973 he was able to purchase his own vessel. In 1975 he incorporated Cape Beale Fishing Company Limited. During the taxation years in issue he was, at all times, the principal shareholder and directing mind of Cape Beale.

From 1975 to 1979 inclusive, Murray leased the vessel to Cape Beale, and eventually sold it to Cape Beale in 1980. At all relevant times Cape Beale was exclusively involved in the business of fishing and derived virtually all of its income from that activity.

The appellant was master and crew member of the vessel during these years. The nature of the relationship which existed between Murray and Cape Beale is central to the issue before the Court. Evidence was adduced to explain the contractual arrangements normally used in the fishing business, which incidentally were specifically used by Cape Beale.

All crew members were considered to be independent contractors or coventurers. They were not paid a salary, nor were any deductions made from their share of the catch proceeds by Cape Beale with respect to such matters as income tax, Canada Pension Plan and U.I.C. There was no employment contract between the crew and Cape Beale, nor any form of minimum earnings guarantee or anything of that nature.

Each crew member shares in the proceeds of the catch on a predetermined basis. The master of the vessel, in this case Murray, is in the usual course entitled to an extra share for the responsibility of being master, and on occasion so are specialized crew, such as the engineer. The owner of the vessel, in this case Cape Beale, receives what was referred to as the boat share, generally 50 per cent of the catch proceeds. Each crew member must by law have an individual fishing licence and each crew member is a party to the marketing contract with the Fishermen's Co-Op.

Although the evidence given was somewhat imprecise it appears that the catch generally was sold to the Co-Op by Cape Beale, as owner, pursuant to this marketing contract and payment for the catch was made by the Co-Op to Cape Beale and not to the individual crew members. Upon receipt by Cape Beale the proceeds were distributed to the crew, including the master, in accordance with their respective shares.

In his returns for taxation years 1976 to 1979 Murray reported employment income from Cape Beale. In 1978 he also reported an amount as fishing income. He told the Court that these returns had been prepared by his former accountant and that the amounts reported in this manner, that is as employment income, were not wages but were in fact his crew share of the catch proceeds distribution. Mr. Murray was not able to offer any explanation regarding the manner or the reason why his accountant had treated that income in that fashion.

Murray maintained that he was not an employee of Cape Beale. It is a fact that the payments received were not made to him by Cape Beale on a regular salary basis or a draw basis. It is also a fact that no income tax deductions were made, nor were any remittances for standard deductions such as Canada Pension or Unemployment Insurance and so forth made by Cape Beale as would normally be expected of an employer.

In 1980 the appellant changed accountants. In the years 1980 to 1982 inclusive, and in fact at least until 1985, Murray reported his crew share as fishing income rather than as wages from Cape Beale. I note that there is some imprecision in his evidence as to how this crew share was made up in those years but I accept as a fact that it was crew share. In addition, during these taxation years he began to report dividend income from Cape Beale. As I already noted, I accept Murray's evidence and particularly accept that at all relevant times he was the master and a member of the crew on a share basis and that no employment arrangement existed between him and Cape Beale.

The respondent's position is that in the taxation years in question and the four taxation years immediately preceding, Mr. Murray's chief source of income was not fishing and that in fact during those years he was an employee of Cape Beale and was paid as such. The respondent maintains that the appellant's 1978 to 1982 returns disclose net fishing income, employment income and all other non-fishing income in the following amounts:

The appellant's position is that his chief source of income, as that term is used in section 119 of the Act, was clearly and unequivocally fishing. Counsel cited the decision of the Federal Court, Trial Division in The Queen v. Kuhl et al., [1973] C.T.C. 846; 74 D.T.C. 6024, and urged the Court to find this decision both analogous and applicable. In this case the two defendants were engaged in the business of farming. Until 1960 they carried on their farming operations as individuals but in that year decided to pool their resources for the growing of potatoes used in the manufacture of potato chips. Together with another person they incorporated a company in which each one took an equal one-third interest. Thereafter their potato farming operations were carried on by the company but they continued as individuals to carry on other farming activities. The company rented from each of them that portion of their farms used for growing potatoes. They had no contract of employment with the company and did not charge it for their own time but kept records of the time used by their own employees on the company-owned land and charged it at the regular rate of pay for what they paid to these employees.

This appeal arose out of the defendants' intent to apply the averaging provisions of section 42 in 1969 so as to average their income in that year with the four proceeding years. The Minister refused to permit this, claiming that their chief source of income was not from farming or fishing during each of the years in question but rather from employment by company S. Mr. Justice Walsh found that the Kuhls were entitled to average their income within the meaning of section 42 of the Act. He found that they did not come within the definitions of persons in an office or employment, but were independent contractors engaged in the business of farming for whose services the company had contracted.

The Court further concluded that even though the Kuhls received their remuneration for work done through the company and reported it as income from employment, this did not mean that their chief source of income was not from farming. Mr. Justice Walsh considered various authorities and interpreted the phrase "source of income” broadly, stating at page 859 (D.T.C. 6032):

It appears to me that these definitions are broad enough to encompass either the immediate source of the income which was the payments received from the company and designated for want of some better designation as "income from employment" or the origin of this income which was from the farming operations carried out by defendants for the company.

Counsel for the respondent attempted to distinguish the Kuhl decision from the present appeal on two grounds. At page 858 (D.T.C. 6032) of the Kuhl decision the Court had observed:

If the defendants had devoted their full time to working for the company, which was not the case, instead of at the same time carrying on independent farming operations, it might have been more difficult to conclude that they were independent contractors and not in "an office or employment under a person engaged in the business of farming” but since they carried on farming on their own and devoted the majority of their time to it, they were clearly engaged in the business of farming even if I had reached the conclusion that for the part of the time they devoted to the company’s business they were in “an office or employment under a person engaged in the business of farming”.

Counsel for the respondent urged this Court to find that Murray had worked full-time for Cape Beale and that accordingly he could not be classed as an independent contractor. In my view this argument cannot succeed. The evidence clearly establishes that the crew hired by Cape Beale were all independent contractors. There is not a shred of evidence to support the proposition that Murray was treated any differently. In his capacity as master of the vessel his duties were not supervised by Cape Beale and Murray was totally and completely in control of the methods and means of doing his job; perhaps as a master of a vessel even more so than in other circumstances might be the case.

There was no employment contract and there is no evidence that Murray was entitled to any fixed or ascertainable remuneration. Each crew member, including Murray, was paid on the basis of results. If they fished efficiently their earnings would likely increase. If weather or poor conditions or bad management or bad work disrupted their pattern they bore the brunt of the loss, or they bore a portion of the loss.

I see none of the incidences of a master/servant relationship in this situation. Furthermore, Revenue Canada itself distinguishes fishermen-em- ployees from independent contractors. I refer to Interpretation Bulletin IT-254R2, which although dealing with a totally different matter contains this comment in paragraph 1:

This Bulletin applies to "fishermen-employees" (members of the crew of a fishing vessel who are remunerated on a salary or wage basis as distinct from those entitled to a part of the profits on a share-of-the-catch basis with liability for expenses) . . .

Revenue Canada also provides a special T4(f) slip on which crew-share or share-of-catch-basis earnings are reported, a form which I note is significantly different than the standard T4 which is used by ordinary wage-earning employees.

It is obviously possible for a crew member and even a master such as Mr. Murray to enter into an employment contract. However, the evidence before me does not support such a finding. Murray was cross-examined on this issue and in my view his evidence stands unscathed. The result is that I have concluded that during the relevant taxation years Murray was indeed an independent contractor. To that extent the decision in Kuhl is not distinguishable from the case at bar and is binding upon me.

The second distinction urged by counsel for the respondent is the fact that in taxation years 1980 to 1982 inclusive the appellant received substantial income in the form of dividends from Cape Beale. That distinction does exist but in my view the payment of these dividends is not determinative of the issue before me. I will return to this subject in a moment.

For the purpose of section 119 of the Act, to determine Murray's chief source of income I must consider the whole of the five-year period referred to in that section. Subsection 119(1) reads in part:

Where an individual’s chief source of income has been farming or fishing for a taxation year (in this section referred to as the "year of averaging”) and the four immediately preceding years . . .

and it goes on to set out the mechanism to be utilized.

I do not agree with the submissions made on behalf of the respondent that reference can be made to years subsequent to the year of averaging to determine chief source of the taxation years in issue. To that limited extent cases dealing with the provisions of subsection 31(1) of the Act, often referred to as farm loss cases, are not applicable.

The conclusions reached by Fisher, Chairman of the Income Tax Appeal Board in Bekkerus v. M.N.R., 10 Tax A.B.C. 166 at 168; 54 D.T.C. 146 at 148:

In my opinion the interpretation to be given to the opening provisions of subsection (1) of section 39 of The 1948 Income Tax Act is that the whole five-year period is to be looked at, and if over that five-year period it is shown that the taxpayer's chief source of income has been either farming or fishing, then he is entitled to take advantage of the averaging provisions contained in the said section.

With the principles expressed in Kuhl and Bekkerus in mind, I have reviewed the evidence to determine what Murray's sources of income were in taxation years 1978 to 1982 inclusive. The returns filed by him disclose fishing income totalling $21,535. To this, acting on the Kuhl principle, I add the Cape Beale wage payments of $42,700. This produces fishing income for those years totalling $64,235.

In so far as other sources of income in those years are concerned we have disclosed annuity payments $3,924, Family Allowance of $4,710, interest income of $3,148, taxable benefits of $1,088, and employment income of $3,400. The latter item I believe consisted of director's fees from a marine insurance company. These items total $13,270 for the five-year period. Even if I were to add into this total the Cape Beale dividends of $32,095 the nonfishing income for this five-year period would total $45,365, an amount almost $20,000 less than the amount of fishing income for the same period.

Counsel for the appellant urged this Court to treat the dividends as fishing income, contending that the Kuhl decision supported this proposition. I am not prepared to do so. I seriously question whether the dividends paid to Murray by Cape Beale can be classed as fishing income. I note that in Kuhl Mr. Justice Walsh made comments which might be interpreted as expressing some doubts in this context. Perhaps before I quote the relevant portion I should state that Walsh, J. was dealing with the intention of the legislators in enacting section 42. He went on to say that "They", that is farmers or fishermen,

. . . are not necessarily disqualified from this averaging merely because of the manner in which they carry out their farming operations.

He then spoke of partnerships:

There are clearly more risks involved in incorporating their farming business. As was pointed out in the case of Tunstall v. Steigmann (supra) they cannot claim the advantages of incorporating their business without at the same time accepting any liabilities that may arise therefrom. Certainly, if the company had diversified to the extent that its principal source of income was no longer farming operations, it would be difficult to say, even on the broader interpretation than I have given to the words “source of income", that the source of the remuneration they received from the company was farming irrespective of the manner in which the company paid it to them,

There are obviously, if I may add to that, many situations where these comments might apply vis-à-vis company affairs and in particular where the remuneration is paid by way of dividends.

However, on the evidence before me I need not, and I do not propose to determine the issue raised with respect to the dividend payments because I have concluded that even if the dividend income came from a non-fishing source, I would nonetheless find that Murray's chief source of income for those years was fishing.

In reaching this conclusion I have applied the criteria set out in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 to the evidence before me. I note only two major factors. Murray spent 90 per cent of his time in fishing, and there can be no question that it was his major preoccupation and was the centre of his work routine. Assessing the aspect of profitability or income return from his various sources in those years, once again the only conclusion that can be reached is one favourable to the appellant. I emphasize that I am dealing strictly with the five years in issue.

The appellant has discharged the onus upon him and is entitled to succeed in his appeal with respect to the 1982 taxation year. The matter will be remitted to the Minister for reconsideration and reassessment on the basis that Mr. Murray is entitled to elect to average his income pursuant to the provisions of subsection 119(1) of the Income Tax Act. The appellant is entitled to his costs.

Appeal allowed.