Hooke (K.M.) v. Canada, [1995] 2 CTC 2705

Bowman J.T.C.C.:-These appeals, from reassessments for 1991 and 1992, involve the question whether amounts received by the appellant from the University of Manitoba for a course of lectures given by him are his income or that of his wife’s company.

The appellant is a consultant who specializes in real estate financing and development. He is also a real estate broker. In 1988, he started giving lectures at the University of Manitoba in real estate finance. Since 1988 the fees which he received from the University, about $3,500 per year, were paid by him into a company owned by his wife, Sintra Capital Corporation which carries on business as Urban Property Group. That corporation had various sources of income, such as real estate development income, consulting fees, brokerage commissions, and expert evidence fees. It appears probable that all, or substantially all, of the company’s income was generated by Mr. Hooke’s efforts.

The fees received from the University were consistently deposited to the bank account of Sintra and reported in its income and not that of the appellant. From these amounts, as well as from Sintra’s other sources of revenue, corporate expenses were paid, including Mr. Hooke’s salary.

In filing his return of income for 1990 the appellant did not include the fees received from the University. These were included in Sintra’s income. On assessment the Minister of National Revenue included them in the appellant’s income but on objection they were deleted. The appellant therefore assumed, not unreasonably, that the matter was resolved and that his method of treating the fees was acceptable to the Minister. Accordingly he continued in 1991 and 1992 to deposit the fees from the University in Sintra’s account and to declare them as part of Sintra’s income.

In 1993 he received a telephone call from someone-he could not remember the person’s name-in the Department of National Revenue who told him that he should ensure that the contract with the University be with Sintra and not with him. Accordingly, on July 29, 1993 he entered into a new contract with the University in which specific reference was made to Urban Property Group, the name under which Sintra operated. In November 1993 he was informed that the Department intended to reassess for 1991 and 1992 to remove the fees from Sintra’s income and to include them in the appellant’s income.

Mr. Hooke believes, understandably, that he has been lulled into a false sense of security. "Why", he asks, "would the Department allow my objection for 1990 and then wait until 1993, after I had filed returns for two more years, to tell me they were changing their minds? I could have altered the arrangements with the University back in 1991 if I had been told. I relied on this acceptance of my filing position in 1990."

I can understand his concern. He has acted in good faith to his detriment. Nonetheless, I cannot give effect to the argument. The Minister is not bound in assessing one year to follow what he did in a previous year. He must apply the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act") in accordance with the facts and the law as he perceives them to be in the year with which he is dealing. This may seem somewhat harsh in a particular case but any other rule would lead to far greater anomalies and inconsistencies in the overall administration of the Income Tax Act.

I turn now to the merits of the assessments. The essential question is "whose income is it-the appellant’s or Sintra’s". The question is not susceptible of a simplistic answer. Ever since the decision of the Exchequer Court in Sazio, R.J. v. M.N.R., [1968] C.T.C. 579, 69 D.T.C. 5001 it has been clear that a corporation can be formed to provide the services of an individual. Where a corporation carries on a variety of commercial activities, as Sintra does, there can be no objection to including in the corporation’s income fees for services rendered by an individual employee of the corporation, provided that the appropriate contractual arrangements are in place. Parliamentary acceptance of this principle is illustrated by the series of amendments to the Income Tax Act relating to personal services businesses that are designed to remove any tax advantage to what is sometimes described as the incorporation of an employee function. There is no suggestion here that these provisions have any application. Rather, the Crown’s position is simply that the income was earned by and belonged to Mr. Hooke in his personal capacity and not as an employee of Sintra and that the simple expedient of putting the fees into the corporation after they had been paid to and earned by him personally did not suffice to give to the money the quality of income in its hands. The respondent points to the fact that the agreement that was in place in 1990 and 1991 is between Mr. Hooke personally and the University. Sintra is not mentioned. This gives rise to a prima facie inference that the services as a lecturer are being provided by Mr. Hooke qua individual and not qua employee of Sintra. The evidence does not support the conclusion that Sintra was in some way an undisclosed principal. Accordingly, if we consider only the relationship between the University and Sintra the services were provided by the appellant personally and not as an agent or employee of Sintra.

The same conclusion can be reached if one analyses the relationship between the appellant and Sintra. Even if the contractual relationship is ostensibly between the appellant and the University, do the relationships between the appellant and Sintra support the view that as between them the income earned from lecturing belongs to Sintra? It is conceivable that the terms of a contract of employment could require that any income earned by the employee is earned for and belongs to the employer. Assuming that such an arrangement does not involve a mere disposition of income after it had been earned (Mersey Docks and Harbour Board v. Lucas (1883), 8 App. Cas. 891, 2 T.C. 25 (U.K. H.L.)) it would effectively cause the income to belong to the employer. It would have to be spelled out with a degree of specificity that does not exist here. Mr. Hooke stated that there was an understanding that the money was to go to Sintra, and his payment of the fees to Sintra is consistent with such an understanding, but the evidence does not support the conclusion that it was a part of the terms of his employment that the income belong to Sintra. He could with impunity have kept it himself.

In an ordinary employer-employee relationship it is implicit that whatever an employee does in the course of his or her employment in the ordinary course of the employer’s business is done on behalf of the employer. In this case, however, where the employer, Sintra, is engaged in a variety of commercial enterprises it is not obvious that lecturing at a university (or, more accurately, providing a lecturer) is part of the employer’s business. Therefore if the revenues from such activities are to form part of the employer’s income stronger indicia are needed than the mere payment to the employer of the fees earned by the employee. Those indicia are not evident here. Therefore, irrespective of the analysis employed, it is clear that the income is the appellant’s and not Sintra’s.

One aspect of this case troubles me. Mr. Hooke acted on the assumption that he could, by paying the fees to Sintra, make them part of Sintra’s income. Had that assumption been correct, the result would have been clear: the fees from the University would be part of Sintra’s income and the salary paid to Mr. Hooke would be deductible to Sintra and income to him.

The assessing action by the Minister complicates matters. It is true that by taxing the fees in Mr. Hooke’s hands and removing them from Sintra’s income the most obvious element of double taxation is eliminated, but it does not constitute a complete reversal of the effect of the initial inclusion of the fees in Sintra’s income. An imbalance remains. In the first place, Sintra was able to pay and, according to the appellant, did pay a larger salary to him as the result of the inclusion of the fees in its income. This resulted in a larger deduction to Sintra than it would otherwise have been entitled to. It also resulted in the appellant’s including in his income, as salary, all or a portion of the moneys attributable to the fees that he treated as belonging to Sintra. These fees have now been held to belong to the appellant personally. The long and the short of it is that there is a possibility that some portion of the fees that have been treated by the Minister as belonging to Mr. Hooke have already been taxed in his hands as salary from Sintra. The problem of determining what portion has been taxed twice in his hands is one of tracing. If Sintra’s only source of revenue were the fees from the University the matter would be simple. The corporation could, in effect, simply be excised from the sequence. Where, however, the corporation has, as here, several sources of revenue and a variety of expenses relating to those sources it is virtually impossible to determine what portion of the appellant’s salary from Sintra can be traced to the fees from the University. It is impossible on the evidence before me even to attempt to do so. One might say that the failure to eliminate the deduction in the company offsets, in a rough and ready way, the element of double taxation in Mr. Hooke’s hands, but this is really no answer since we are dealing with separate taxpayers. I can, however, do nothing about it beyond raising it as a matter of concern. The central issue is whether the fees received from the University were the income of the appellant or of Sintra and I find on the evidence that they were income of Mr. Hooke.

The appeals are dismissed.

Appeals dismissed.