Ville de Québec v. The Queen

Ville de Québec v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2007-11-09
Neutral citation
2007 TCC 329
File numbers
2004-4044(IT)G
Judges and Taxing Officers
Alain Tardif
Subjects
Income Tax Act
Decision Content
Docket: 2004-4044(IT)G
BETWEEN:
VILLE DE QUÉBEC,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on November 8, 2006, at Québec, Quebec.
Before: The Honourable Justice Alain Tardif
Appearances:
Counsel for the Appellant:
Nathalie Grenier
Counsel for the Respondent:
Bernard Fontaine
____________________________________________________________________
AMENDED JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 2000, 2001 and 2002 taxation years is allowed with costs to the Appellant and I vacate the assessments of the Appellant. The payments made by the Appellant to stop the accumulation of interest should be reimbursed with interest. The decision of the Minister of National Revenue is vacated in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 9th day of November 2007.
"Alain Tardif"
Tardif J.
Translation certified true
on this 14th day of February 2008.
Monica F. Chamberlain, Reviser
Citation: 2007TCC329
Date: 20071109
Docket: 2004-4044(IT)G
BETWEEN:
VILLE DE QUÉBEC,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from assessments made under the Income Tax Act (the Act) and the Employment Insurance Act for the 2000, 2001 and 2002 taxation years. Under the assessment, the Canada Revenue Agency (the Agency) seeks from the Appellant the tax amounts that it should have deducted and withheld from the salary and/or remuneration of its employees who are victims of an industrial accident or occupational disease, but that it did not remit to the Receiver General of Canada.
ISSUES:
[2] Does the Tax Court of Canada have the jurisdiction to render a decision on assessments of the Minister in which he seeks amounts that should have been deducted and withheld from the salary and/or benefits of employees who are victims of an industrial accident or occupational disease and that have not been remitted to the Receiver General of Canada by the Appellant?
[3] If yes, is the procedure used by the Appellant to make source deductions on the amounts it provides to its employees who are victims of an industrial accident or occupational disease, amounts that are later reimbursed by the Commission de la santé et sécurité au travail du Québec [Quebec board of occupational health and safety] (CSST), consistent with the Act, such that the Appellant may continue to operate this way in the future?
[4] Is the Appellant entitled to retain amounts that have been deducted at source, given that it retained them in the belief that they had been deducted in excess? There is some confusion as to the nature of these amounts.
THE FACTS
[5] The parties submitted to the Court a partial agreement on the facts that summarizes the dispute well. The facts are as follows:
[Translation]
1. The Appellant employs thousands of employees, whose working conditions are governed by a variety of collective agreements;
2. During the 1980s and the years under appeal, the Appellant had agreed to pay their regular net salary to employees prevented from working by an industrial accident or occupational disease;
3. Before 1986, the Appellant observed a sharp increase the number of days that its employees were absent as a result of industrial accidents or occupational disease;
4. Because the portion of remuneration paid to employees that was later recovered from the Commission de la santé et sécurité au travail ultimately was not considered taxable income, the employees were able upon filing their income tax returns to recover a significant amount of the cumulative source deductions made throughout the year, including for certain pay periods in which most of the amounts were ultimately recovered from the CSST.
Adoption of new policy by Appellant
5. In 1986, in order to put an end to the situation whereby, all other things being equal, an employee receiving his regular net salary during a period in which he was not working would (upon filing an income tax return) end up with an after-tax income greater than the remuneration he would have received if he had worked regular hours during the same period, the Appellant decided to implement a new procedure.
6. (a) This new procedure involved using a regular or amended T4 statement to reduce retroactively the year-to-date remuneration paid to the employee in order to take into account the advance payment of the income replacement indemnity by the City to the employee that was subsequently recovered from the CSST by the Appellant, as well as the cumulative amounts of the source deductions that had been made, so that only the following amounts remained:
the portion of remuneration described as a top-up;
the remuneration paid for any days and hours that were really worked, as well as sick leave and other paid leave;
a note alerting employees that the amount paid and recovered by the City was not included in box 14 of the CSST T4 slip.
(b) After this new procedure was implemented in 1986, an employee who looked closely at his statements of earnings would have noticed a discrepancy in the year-to-date amounts over the course of the year he had been absent from work. He would have observed a reduction in the year-to-date amount on one of his last statements of earnings of the year:
(c) In order to recover an amount equal to the total amounts deducted and remitted over the course of the year as a function of the amounts paid to employees targeted by the procedure described in the subparagraphs above, the Appellant subtracted from the amount it remitted for the final pay periods an amount equal to the total amounts received or expected from the CSST.
7. The Appellant's objective was to recover the amounts it considered to be payments in excess to the Receiver General of Canada, and normally, its payroll information system allowed it to issue T4 slips and summaries corresponding to the data displayed in the boxes listing the year-to-date amount as it appeared on the final statement of earnings;
8. These downward adjustments were made shortly before the end of the year, if the Appellant knew that the CSST had reimbursed or would reimburse to it the portion of the amounts paid for which the CSST was ultimately liable;
9. In cases where the information was still unknown after December 31, or at least by the time the T4 slips had to be completed and sent out, if the CSST later indicated that it would reimburse the Appellant amounts other than the amount of the top-up, the Appellant would then issue a T4 slip in which the employment income (box 14) was reduced by the amount for which the CSST was ultimately liable and in which the deductions made on that amount were reversed.
10. In certain situations, employees who were absent due to illness were being compensated pursuant to the provisions in the collective agreement governing sick leave, but were claiming that the illness was work-related; as long as the issue remained unresolved, the employee continued to be paid as though he were on sick leave, and the statements of earnings and T4 slips were completed on the assumption that the source deductions were appropriate;
11. In cases where the period of uncertainty extended beyond one year, amended T4 slips were prepared for the year preceding the end of the uncertainty, and a T4 slip for the year in which the uncertainty was resolved listed the year-to-date amounts from the final statement of earnings for the year.
12. Once the T4 was thus amended, a corresponding amendment was made to the T4 Summary and the Appellant recovered the corresponding amounts from the federal tax authorities;
13. The federal tax authorities agreed to reimburse those amounts under the circumstances;
Change of policy by tax authorities in response to Fraser
14. No change was made to the 1999 or 2000 Income Tax Act that was relevant to the dispute between the Appellant and the Respondent.
15. However, following the Federal Court of Appeal's dismissal of the appeal filed by the Respondent against the Tax Court of Canada's decision in Fraser, involving an employee of the City of Cornwall in Ontario, the Employers’ Guide for the years 2000 and following was amended to state that only in those cases where the employer has indicated in the payroll, at the time of payment, that the portion represents an advance on the amount of an indemnity from a worker's compensation board (such as the CSST) is the employer exempt from making the deductions and remittances corresponding to the amounts so identified (file decision in Fraser and Employers’ Guide). According to the policy in question, challenged by the Appellant, no source deduction is to be made with respect to that amount, as argued at paragraph 19 of the notice of appeal. Under that policy, the employer is not entitled to recover the amounts corresponding to the deductions that it has remitted, nor is it entitled not to remit the amounts deducted.
16. The Appellant has dealt with this situation by indicating [Translation] "absence—industrial accident" in its payroll beside the income replacement indemnity amounts that it pays to its employees prior to a decision by the CSST.
17. When the City makes these payments to the employee, the CSST has not yet disbursed the corresponding amount;
18. Under the new policy, employers were prevented from amending T4 statements or entering year-to-date amounts other than those appearing on the statements of earnings;
19. Quebec tax authorities were contacted to determine whether they had also changed their own policy or policies, but they said they had not;
20. Mr. Sauvageau, the person in charge of compensation services for the Appellant, became aware of the new policy before the beginning of 2000, as it affected both employment insurance contributions and deductions, as well as source deductions for federal income tax;
21. The Appellant was made aware of the new policy before the beginning of 2000 but did nothing to change its procedures. Mr. Blouin, counsel in the Appellant's legal department, was consulted;
22. The Appellant and its representatives made no attempt to contact the federal tax authorities to determine the reasons for the policy changes;
23. According to the legislation in force, the income replacement indemnity paid by the CSST is not taxable, nor does it constitute insurable earnings for employment insurance purposes;
24. During each of the years under appeal, deductions and remittances were made on behalf of employees without distinguishing between those claiming to be entitled to the indemnities provided by the CSST, those recognized by all parties as being entitled to such indemnities, and those working normal workweeks;
25. In early 2001, with respect to the T4 Summary for the year 2000, the Appellant determined that approximately $69,000 had been paid in excess in 2000 and should be reimbursed;
26. On May 31, 2001, Mr. Sauvageau wrote to the Jonquière Tax Centre to obtain the excess payment in question, explaining that the Appellant's information system did not allow for downward adjustment. The year-to-date amounts could not be adjusted downward (file letter);
27. The problem had been resolved for the 2001 pay periods;
28. During the summer of 2001, Mr. Sauvageau was informed by Ms. Tremblay that these downward adjustments to the amounts paid were not possible under the new policy, and this did not come as a surprise to Mr. Sauvageau;
29. Eventually, Jacques Côté, auditor, contacted Mr. Sauvageau. The Appellant made submissions to the Canadian tax authorities based primarily on fairness and the text of the applicable collective agreements.
30. Régent Blouin, counsel, wrote to the tax authorities on November 5, 2002, to inform them of the Appellant's position and state the reasons it considered the assessment to be incorrect; (add letter)
31. In cases where it is undisputed that the employee's absence is the result of an industrial accident, the statement of earnings indicates that the employee has been absent because of an industrial accident with the statement [Translation] "absence—industrial accident";
32. Mr. Ruel's payroll records represent those of a typical person who is the undisputed victim of an industrial accident;
33. Mr. Sauvageau estimates that most of the adjustments were made by reducing the year-to-date payment amounts and reversing the corresponding source deductions, and that approximately 5% of the adjustments were made by issuing amended T4 slips.
November 8, 2006
. . .
[Emphasis in the original.]
APPELLANT'S CLAIMS
[6] The Appellant argued strongly that the amounts so advanced to its employees claiming to be victims of an industrial accident or occupational disease did not constitute remuneration, but rather advances from which it made source deductions for the sole purpose of preventing the compounding of interest.
[7] The basis for the claim that the amounts do not constitute remuneration is that the employee who was subject to these holdbacks did not work during the period corresponding to the holdback. The Appellant had no choice, being obliged to proceed in this way by either the Act or the collective agreement, to prevent employees who are victims of industrial accidents or occupational diseases from being deprived of income. It is a means to support employees so that they do not have to go for several weeks without their salary. This procedure is practised not only by the Appellant but also, in principle, by all employers.
[8] The Appellant submitted that the procedure described by the Agency in its Employers' Guide creates an unfair distinction between active and injured employees; the Appellant argued that such a situation clearly does not reflect the legislator's intent, following the principles set out by the Supreme Court of Canada in Québec (Communauté urbaine) v. Corporation Notre‑Dame de Bon‑Secours et al., [1994] 3 S.C.R. 3.
[9] The fact that an employee who is a victim of an industrial accident or occupational disease gains a net financial advantage from the injury or illness has the effect of encouraging some employees to do whatever they can to delay their return to work, at a significant loss to the Appellant.
[10] The Appellant also challenged the Agency's procedure on the basis that in order to be considered an advance, the amount must meet two criteria: first, no source deduction may be withheld on the amount constituting the advance and, secondly, the employer must indicate in its records that it constitutes an "advance." In other words, the Appellant argued that only the nature of the payment should be taken into account; thus, the payment should be analyzed for what it is and not according to what is written in the records.
[11] Because of the procedure adopted by the Agency, the amounts at issue become taxable; in reality, however, those amounts are non-taxable because they do not constitute employment income; they are benefits resulting from an industrial accident or occupational disease.
[12] The Appellant, which has more than 5,000 employees, explained that considerable sums of money were at stake. Given the problems caused by a situation of uncertainty, the Appellant had set up a system that had the advantage of being coherent and, even more importantly, was difficult to abuse.
[13] The Appellant explained that following the decision in Fraser, the Agency had, beginning in the year 2000, changed its procedure for dealing with "advances". The Respondent refused to change its position following another decision, Cité de la santé de Laval v. M.N.R., 2004 FCA 119, despite the fact that it changed considerably the interpretation of the nature of advances.
[14] Finally, the Appellant submitted that there was no provision in the Act that prohibited it from following the procedure in question, namely doing the accounts at the end of the year so that they could be based on real figures as opposed to estimates.
RESPONDENT'S CLAIMS
[15] The Respondent argued that the source deductions that must be withheld by the employer must be calculated in accordance with the Act and its associated regulations. These deductions are a function of the remuneration paid during each pay period and the employee's personal income tax credits for the year, which are used to calculate the "notional gross earnings."
[16] In other words, the Respondent argued that the deductions must be made precisely as though there had been no accident or illness. It argued that for the purposes of subsection 117(2) of the Act, these "notional gross earnings" become the taxable amount for the year and that the employer may not take into account any deduction to which the worker is potentially entitled under subparagraph 110(1)(f)(ii) of the Act (deduction for amounts received from the CSST) to reduce this taxable amount.
[17] The Respondent is of the opinion that when the Appellant withheld the amounts at issue from its employees' remuneration and remitted them to the Receiver General of Canada, it was not open to it when preparing T4 statements and T4 summaries to reclaim these amounts by describing them as [Translation] "payments in excess," given that under subsection 227(9.4) of the Act, those amounts were paid as tax on behalf of the employee. Accordingly, the employee was entitled to claim the amounts at the end of the year; the fact that he was sick or injured therefore gave him an advantage over those who had worked throughout the year. In other words, the victim of an industrial accident or an occupational disease can claim, at the end of the year, the amounts withheld while he was not working; the deductions in question were therefore not part of the remuneration paid in exchange for work.
[18] The Respondent argued that the Appellant should have been aware of the Minister's policy with respect to source deductions and that the practice was consistent with the Act and with the Regulations validated by case law; the Respondent added that whether or not Appellant was aware of the policy, it is the Act that determines its rights and obligations in this matter.
[19] The Respondent attested that to the extent that, at year-end, the Appellant had reduced the amounts withheld because it judged that it had remitted excess deductions over the course of the year, it was not open to it not to remit to the tax authorities the full amount withheld.
ANALYSIS
Does the Tax Court of Canada have jurisdiction to hear this appeal?
[20] First we must determine whether the Tax Court of Canada has the jurisdiction to decide this issue.
[21] The Notice of Confirmation by the Minister dated August 19, 2004, states the following:
[Translation]
At page 2:
Your assessments for failing to remit the amounts of $5,878.03 for the year 2000 and $4,229.90 for 2001, deducted or withheld under subsection 153(1) of the Income Tax Act, have been issued pursuant to subsections 227(9.4) and 227(10.1) of the Act.
At page 4:
Your assessments for failing to remit the amounts of $50,726.33 for the year 2000 and $64,993.49 for 2001, deducted or withheld under subsection 153(1) of the Income Tax Act, have been issued pursuant to subsections 227(9.4) and 227(10.1) of the Act.
[22] According to the evidence, the assessments under appeal are based on the Appellant's failure to remit to the Receiver General of Canada amounts that it should have withheld from the salary of its employees.
[23] The Respondent drew on the decision of the Honourable Judge Garon (as he then was) in Ville d’Outremont v. Canada, No. 92‑683(IT)G, [1995] T.C.J. No. 1438 (QL) and submitted to the Court that such assessments could not be issued by the Minister. It suggested that the Tax Court of Canada could not decide an appeal of such an assessment. Judge Garon wrote the following at pages 21 to 23:
There is another difficulty in this case. That difficulty concerns the point that the Minister of National Revenue did not have the power, in my view, to issue the assessments under appeal.
The power to assess is given by subsection 227(10.1) of the Income Tax Act, which, at the relevant time, read as follows:
(10.1) The Minister may assess
(a) any person for any amount payable by that person under subsection (9), (9.2), (9.3) or (9.4); and
(b) any non-resident person for any amount payable by that person under Part XIII;
and, where he sends a notice of assessment to that person, sections 150 to 167 (except subsections 164(1.1) to (1.3)) and Division J of Part I are applicable with such modifications as the circumstances require.
Subsection 227(9.4) states that "a person who has failed to remit as and when required by this Act or a regulation an amount deducted or withheld from a payment to another person as required by this Act or a regulation is liable to pay as tax under this Act on behalf of the other person the amount so deducted or withheld."
Subsection 227(9) provides for the assessment of a penalty in the case of a failure to remit the amounts deducted at source as and when required. In the case of such a failure, subsection 227(9.2) provides for the payment of interest on amounts deducted but not remitted.
It is clear in the instant case that the provisions of subsections (9), (9.2) and (9.4) do not apply to the appellant because it did not fail in its obligation to remit to the Receiver General within the prescribed time limits the amounts withheld or deducted from the remuneration of the employees in question.
Subsection 227(10.1) is the only provision of Part XV of the Income Tax Act that gives the Minister of National Revenue the power to assess in respect of the obligation to remit as and when required the amounts withheld and deducted from the employees' remuneration. The respondent's appropriate remedy in those circumstances could be exercised by means of an ordinary action before the Federal Court of Canada for payment of monies owed to the respondent.
The Court thought it appropriate in the instant case to order that the hearing be reopened as it had not had the benefit of hearing the parties on the two points that it intended to consider, that is, (1) that the point at issue in this case raises the application of Part I of the Income Tax Regulations and is governed in particular by section 102 of those Regulations and (2) the absence of the power of the Minister of National Revenue to assess the appellant having regard to the circumstances of the instant case.
Draft reasons for judgment dealing with the application of Part I of the Income Tax Regulations to the facts of this case were enclosed with the letter dated August 31, 1995 issued by the Deputy Registrar of this Court confirming the reopening of the hearing. Those draft reasons for judgment were virtually identical to the portion of the present reasons that precedes the discussion of the question of the power of the Minister of National Revenue to assess the appellant in respect of the amounts withheld and deducted from the remuneration of the employees concerned. This last question was raised and briefly dealt with in the letter of August 31, 1995 mentioned above.
After considering the matter following that reopening of the hearing, I reconsidered the representations made by counsel in their supplementary arguments and I came to the conclusion that there were no grounds for altering my approach to the questions raised in these appeals.
It is therefore my view, as to the merits of the case, that the respondent is entitled to payment, in particular, of the amounts representing the tax component of the assessments at issue. The "interest" component of those assessments and the "penalty" component of the assessment of August 3, 1990 made, according to the Minister of National Revenue, under subsections 227(9) and 227(9.2) of the Income Tax Act are not valid as the appellant did not fail in its obligation to remit the amounts deducted as and when required by the Income Tax Act and the Income Tax Regulations. However, the assessments themselves are null and void on the ground that the Minister of National Revenue did not have the power to issue them. The appeals are allowed and the assessments are vacated.
[Emphasis added.]
[24] My understanding of this excerpt from the judgment is that the only grounds on which the appeals arising out of such assessments were allowed were that the Minister did not have the power to issue the assessments and not that the Tax Court of Canada lacked jurisdiction.
[25] Nevertheless, it is important to note that this case is very different from Ville d’Outremont, supra. In Ville d’Outremont, the dispute arose from the fact that the Appellant had not failed to remit the amounts deducted or withheld, while in this appeal, the Minister charges that the Appellant failed to remit the amounts that it should have deducted or withheld from its employees' salary.
[26] In this case, the assessments were validly issued pursuant to subsections 227(9.4) and (10.1) of the Act, clearly distinguishing this case from Ville d'Outremont. For these reasons, I find that this Court has full jurisdiction to decide this appeal.
[27] As for the other issue, regarding the validity of the procedure used by the Appellant to make deductions at source, in light of the somewhat contradictory case law it will be necessary to analyze the issue of source deductions when the employer is paying not a salary but rather its equivalent to an employee who is the victim of an industrial accident or occupational disease. It is therefore important to consider the concept of an advance.
Legal obligation to make deductions at source
[28] First, it is clear that the obligation to make source deductions flows from the Act and the Income Tax Regulations (the Regulations). The relevant provision of the Act reads as follows:
PAYMENT OF TAX
SECTION 153: Withholding.
(1) Every person paying at any time in a taxation year
(a) salary, wages or other remuneration, other than amounts described in subsection 212(5.1),
. . .
shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee's tax for the year under this Part or Part XI.3, as the case may be, and, where at that prescribed time the person is a prescribed person, the remittance shall be made to the account of the Receiver General at a designated financial institution.
[Emphasis added.]
[29] This provision makes reference to the Regulations, the relevant provisions of which are as follows:
DEDUCTIONS AND REMITTANCES
101. Every person who makes a payment described in subsection 153(1) of the Act in a taxation year shall deduct or withhold therefrom, and remit to the Receiver General, such amount, if any, as is determined in accordance with rules prescribed in this Part.
PERIODIC PAYMENTS
102. (1) Except as otherwise provided in this Part, the amount to be deducted or withheld by an employer
(a) from any payment of remuneration (in this subsection referred to as the "payment") made to an employee in his taxation year where he reports for work at an establishment of the employer in a province, in Canada beyond the limits of any province or outside Canada, and
(b) for any pay period in which the payment is made by the employer
shall be determined for each payment in accordance with the following rules:
(c) an amount that is a notional remuneration for the year in respect of
(i) a payment to the employee, and
(ii) the amount, if any, of gratuities referred to in paragraph (a.1) of the definition "remuneration" in subsection 100(1)
is deemed to be the amount determined by the formula
A × B
where
A is the amount that is deemed for the purpose of this paragraph to be the mid-point of the applicable range of remuneration for the pay period, as provided in Schedule I, in which falls the total of
(A) the payment referred to in subparagraph (i) made in the pay period, and
(B) the amount of gratuities referred to in subparagraph (ii) declared by the employee for the pay period, and
B is the maximum number of such pay periods in that year;
(d) if the employee is not resident in Canada at the time of the payment, no personal credits will be allowed for the purposes of this subsection and, if the employee is resident in Canada at the time of the payment, the employee's personal credits for the year are deemed to be the mid-point of the range of amounts of personal credits for a taxation year as provided for in section 2 of Schedule I;
(e) an amount (in this subsection referred to as the "notional tax for the year") shall be computed in respect of that employee by
(i) calculating the amount of tax payable for the year, as if that amount were calculated under subsection 117(2) of the Act and adjusted annually pursuant to section 117.1 of the Act, on the amount determined in accordance with paragraph (c) as if that amount represented the employee's amount taxable for that year,
and deducting the aggregate of
(ii) the amount determined in accordance with paragraph (d) multiplied by the appropriate percentage for the year,
(iii) an amount equal to
(A) the amount determined in accordance with paragraph (c) multiplied by the employee's premium rate for the year under the Employment Insurance Act, not exceeding the maximum amount of the premiums payable by the employee for the year under that Act,
multiplied by
(B) the appropriate percentage for the year, and
(iv) an amount equal to
(A) the product obtained when the difference between the amount determined in accordance with paragraph (c) and the amount determined under section 20 of the Canada Pension Plan for the year is multiplied by the employee's contribution rate for the year under the Canada Pension Plan or under a provincial pension plan as defined in subsection 3(1) of that Act, not exceeding the maximum amount of such contributions payable by the employee for the year under the plan,
multiplied by
(B) the appropriate percentage for the year;
(f) the amount determined in accordance with paragraph (e) shall be increased by, where applicable, the tax as determined under subsection 120(1) of the Act;
(g) where the amount of notional remuneration for the year is income earned in the Province of Quebec, the amount determined in accordance with paragraph (e) shall be reduced by an amount that is the aggregate of
(i) the amount that is deemed to be paid under subsection 120(2) of the Act as if there were no other source of income or loss for the year, and
(ii) the amount by which the amount referred to in subparagraph (i) is increased by virtue of section 27 of the Federal-Provincial Fiscal Arrangements and Federal Post-Secondary Education and Health Contributions Act; and
(h) [Repealed, SOR/92-667, s. 1]
(i) the amount to be deducted or withheld shall be computed by
(i) dividing the amount of the notional tax for the year by the maximum number of pay periods for the year in respect of the appropriate pay period, and
(ii) rounding the amount determined under subparagraph (i) to the nearest multiple of five cents or, if such amount is equidistant from two such multiples, to the higher multiple.
(2) Where an employee has elected pursuant to subsection 107(2) and has not revoked such election, the amount to be deducted or withheld by the employer from any payment of remuneration (in this subsection referred to as the "payment") that is
(a) a payment in respect of commissions or is a combined payment of commissions and salary or wages, or
(b) a payment in respect of salary or wages where that employee receives a combined payment of commissions and salary or wages,
made to that employee in his taxation year where he reports for work at an establishment of the employer in a province, in Canada beyond the limits of any province or outside Canada, shall be determined for each payment in accordance with the following rules:
(c) an employee's "estimated annual taxable income" shall be determined by using the formula
A – B
where
A is the amount of that employee's total remuneration in respect of the year as recorded by the employee on the form referred to in subsection 107(2), and
B is the amount of that employee's expenses in respect of the year as recorded by that employee on that form;
(d) if the employee is not resident in Canada at the time of the payment, no personal credits will be allowed for the purposes of this subsection and if the employee is resident in Canada at the time of the payment, the employee's personal credits for the year shall be the total claim amount as recorded by that employee on the return for the year referred to in subsection 107(1);
(e) an amount (in this subsection referred to as the "notional tax for the year") shall be calculated in respect of that employee by using the formula
C - [(D + E + F) × G] + H – I
where
C is the amount of tax payable for the year, calculated as if that amount of tax were computed under subsection 117(2) of the Act and adjusted annually pursuant to section 117.1 of the Act, on the amount determined under paragraph (c) as if that amount represented the employee's amount taxable for that year,
D is the amount determined in accordance with paragraph (d),
E is the amount determined in the description of A in paragraph (c) multiplied by the employee's premium rate for the year under the Employment Insurance Act, not exceeding the maximum amount of the premiums payable by the employee for the year under that Act,
F is the amount determined in the description of A in paragraph (c) less the amount for the year determined under section 20 of the Canada Pension Plan multiplied by the employee's contribution rate for the year under that Act or under a provincial pension plan as defined in section 3 of that Act, not exceeding the maximum amount of such contributions payable by the employee for the year under the plan,
G is the appropriate percentage for the year,
H is, where applicable, the tax as determined under subsection 120(1) of the Act,
I is, where the amount of total remuneration for the year is income earned in the Province of Quebec, an amount equal to the aggregate of
(i) the amount that would be deemed to have been paid under subsection 120(2) of the Act with respect to the employee if the notional tax for the year for the employee were determined without reference to the elements H, I and J in this formula and if that tax were that employee's tax payable under Part I of the Act for that year, as if there were no other source of income or loss for the year, and
(ii) the amount by which the amount referred to in subparagraph (i) is increased by virtue of section 27 of the Federal-Provincial Fiscal Arrangements Act;
(f) the employee's notional rate of tax for a year is calculated by dividing the amount determined under paragraph (e) by the amount referred to in the description of A in paragraph (c) in respect of that employee and expressed as a decimal fraction rounded to the nearest hundredth, or where the third digit is equidistant from two consecutive one-thousandths, to the higher thereof;
(g) the amount to be deducted or withheld in respect of any payment made to that employee shall be determined by multiplying the payment by the appropriate decimal fraction determined pursuant to paragraph (f).
(h) [Repealed, SOR/2001-221, s. 2]
(3) [Repealed, SOR/89-508, s. 2]
(4) [Repealed, SOR/81-471, s. 3]
(5) Notwithstanding subsections (1) and (2), no amount shall be deducted or withheld in the year by an employer from a payment of remuneration to an employee in respect of commissions earned by the employee in the immediately preceding year where those commissions were previously reported by the employer as remuneration of the employee in respect of that year on an information return.
(6) [Repealed, SOR/83-349, s. 2]
[30] Under these provisions, the employer is required to make source deductions throughout the year on the salary it pays to its employees, based on the concept of "notional gross remuneration."
[31] Because these provisions can appear complex, the Agency produced a plain-language guide to make them more accessible; this guide, entitled Employers' Guide – Payroll Deductions (Basic Information) 2000-2001 (Exhibit I‑1) was prepared to help the taxpayer comply more easily with the statutory requirements.
[32] Such a guide does not have force of law; it essentially presents the Agency's position on one procedure for making source deductions that complies with the Act.
[33] Thus, there is no sanction for failing to follow the guide if the taxpayer can establish that the procedure he used to make his deductions at source respects the provisions of the Act and the Regulations. This interpretation is consistent with the approach taken by the Federal Court of Appeal in Canada (Attorney General) v. National Bank of Canada, 2003 FCA 242.
[34] In this case, is the procedure used by the Appellant to make its source deductions consistent with the Act and the Regulations?
Procedure used by Appellant
[35] Claude Sauvageau, who was in charge of the Appellant's file, testified. Now retired, he used to work as a compensation officer for the Ville de Québec. Mr. Sauvageau began by explaining the procedure followed by the Appellant before 1986; he then stated that this practice had created problems for the Appellant, which led to the adoption of the new procedure to prevent abuses.
[36] He insisted that this new procedure had been accepted by the Agency from 1986 to 2000. It is worth reproducing an excerpt from Mr. Sauvageau's testimony:
[Translation]
Q. O.K. Can you describe for us the procedure used by the City and explain why, all of a sudden, it adopted a new procedure in 1986?
R. O.K. Over the years, let's say from '80 to '86, the medical office and human resources observed a startling increase in their industrial accident rates. Of course we are not saying that the employees were abusing the system, but we do know that there was an incentive that was not really, well, it was tempting for employees not to return to work automatically after two weeks because they knew that, even the first year, we would receive calls to the effect: "In theory, I should not be getting a tax refund, so why am I getting a tax refund?" "Well, you were absent because of your accident and you are recovering taxes that you did not owe in the first place." It seems silly to say it, but that was pretty much how it worked. So, we considered the accident rate unreasonably high, and, based on analyses it carried out, the City came to agreements with the unions to add a provision to the collective agreement to the effect that, from that moment on, the amounts collected during the accident leave period would be subtracted from the employee's earnings to prevent the employee from receiving a tax refund while absent due to an industrial accident.
. . .
[37] The Appellant's procedure was consistent with the provisions of the collective agreement, adduced in Exhibit A‑2, which sets out the following at pages 27 and 28:
[Translation]
ARTICLE 16 – OCCUPATIONAL DISEASES AND INDUSTRIAL ACCIDENTS
16.01 In the case of an industrial accident or occupational disease, a regular employee shall receive the regular net salary that he/she would have received if he/she had remained at work, and shall continue to receive it until the first day of the month following a six (6)-month period, at which time he/she becomes eligible for disability benefits under the Ville de Québec's employee benefit plan. In all other situations, the Act respecting industrial accidents and occupational diseases applies