Date: 20020221
Docket: 2001-2234-IT-I
BETWEEN:
PATRICK JAMES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Jasmine Sidhu
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench on
November 28, 2001, at Vancouver, British Columbia)
Mogan J.
[1] The Appellant is skilled in information technology. In 1997 and 1998, he was living in Calgary but received offers of opportunity to work elsewhere. In 1998, he decided to accept an offer to provide services to the Liquor Distribution Branch of the Province of British Columbia. I am not sure whether the job offer came directly from the Liquor Distribution Branch or whether it came through a company called Computer Task Group ("CTG") located in Toronto.
[2] According to the Appellant's unchallenged evidence, he was required to incorporate a company in order to receive the fees which would be earned as a result of the services he rendered to the Liquor Distribution Branch. He incorporated Stellar Information Technology Management Inc. ("Stellar") under the laws of British Columbia. He was its sole shareholder and director. In order to accept the work, Stellar entered into an agreement dated July 6, 1998 with CTG. The first page of that agreement is attached to the Appellant's 1999 income tax return which was entered as Exhibit R-1.
[3] For the first nine months of the Appellant's services to the Liquor Distribution Branch from July 1998 to March 1999, payments went from the Liquor Distribution Branch to CTG; and Stellar submitted invoices to CTG which in turn paid Stellar. That is the route by which the Appellant's services were rewarded. I will describe below how the Appellant withdrew the money from Stellar in order to provide for his daily living requirements.
[4] Once the Appellant agreed to accept the position, he moved from Calgary to Surrey, British Columbia in July 1998. He immediately looked for a house for his family and, around September 1998, his wife moved to Surrey and they set up their domestic dwelling. The Appellant incurred significant expenses in order to move his household from Calgary to Surrey. According to the pleadings, those expenses were in the range of $19,700. Again, according to the pleadings, he attempted to deduct those expenses when computing his income for 1999 but it seems to me that he might better have deducted them in 1998 when they were actually incurred in connection with the move.
[5] According to the Notice of Appeal, the Appellant seems to have appealed the 1998 taxation year even though he in fact deducted the moving expenses in computing his 1999 income and they were disallowed as a deduction in 1999. I assume that his claim for 1998 is that he be permitted to deduct those expenses in 1998 being the calendar year in which those expenses were incurred.
[6] To review the evidence, the Appellant accepted new work in British Columbia which required him to move from Calgary, Alberta, to Surrey, British Columbia. He incurred about $19,000 in moving expenses in September 1998 to make that move. He took up his new work in July 1998 and incorporated Stellar to receive, directly or indirectly from the Liquor Distribution Branch, the fees for the work he performed. The Appellant claims that he comes within the spirit of the law and that his moving expenses should be allowed as a deduction because it is a policy of the Government of Canada to make it easy for people to move from one place to another, either to accept new employment or to carry on a business. That policy is reflected in section 62 of the Income Tax Act which is the section that permits the deduction of moving expenses in the computation of income.
[7] The position of the Respondent is somewhat technical and is based upon the manner in which the Appellant withdrew funds from Stellar. In 1998, the fees paid by the Liquor Distribution Branch to CTG were in turn paid to Stellar. There is no evidence concerning whether a commission was paid to CTG but, in any event, the money flowed from the Liquor Distribution Branch to CTG with whom Stellar had the agreement, and then Stellar received fees from CTG. Relying on advice which the Appellant received in 1998, Stellar declared a dividend payable to the Appellant in 1998 in the amount of $57,500. Stellar paid a further dividend to the Appellant in the amount of $22,000 in 1999.
[8] Revenue Canada has taken the position that the moving expenses are not deductible or cannot be applied against dividend income because it is income from property and not income from employment or business. To support that position, Revenue Canada relies on subparagraph 62(1)(c)(i) of the Act which reads:
62(1) There may be deducted in computing a taxpayer's income for a taxation year amounts paid by the taxpayer as or on account of moving expenses incurred in respect of an eligible relocation, to the extent that
...
(c) the total of those amounts does not exceed
(i) ... the taxpayer's income for the year from the taxpayer's employment at a new work location or from carrying on the business at the new work location, as the case may be, ...
Revenue Canada states that the Appellant has no income from business or employment but only dividends received as a shareholder of Stellar. He has no profit sharing arrangement with Stellar which earns all the income and pays him a dividend. Therefore, because the Appellant reported no business or employment income, there was nothing to deduct the moving expenses against within the meaning of section 62 of the Act.
[9] When section 62 was introduced into the Act more than 25 years ago, it did not take into the account the meaner and harsher world of the 1990s in which many potential employers would avoid their "employer" role by insisting that some people who render services form a corporation and submit invoices through the corporation so that the services would be rendered by an independent contractor and not an employee. This scheme allows the "employer" to avoid paying certain benefits like pensions, medical plans, and other benefits which might otherwise have been negotiated as payable to employees of the payor. That trend has certainly developed in recent years, long after section 62 was introduced into the Act. It was difficult for the Appellant to satisfy some of the conditions of section 62 because the Appellant was told by the purported future employer (the "payor") that if he wanted to provide the services and earn the fees, then he would have to incorporate and submit invoices to CTG through the corporation.
[10] The Appellant argues that because he was caught in this vice, the assessment issued by Revenue Canada goes against the spirit of the Act and he is being harshly and perhaps unfairly treated. There is some merit in his argument but there were other ways to withdraw funds from Stellar which would permit the moving expenses to be deductible. Instead of drawing money out of the company by way of dividend, if the Appellant had simply put himself on the payroll of Stellar and paid himself a salary which could have equalled about $55,000 over the last six months of 1998, he would have been an employee of Stellar; he would have had employment income; the income would have been derived from the new work location; and it seems to me that he could have deducted the moving expenses from the Stellar employment income.
[11] With regret, I have to dismiss the Appellant's appeal because he was caught in the vice of having to use the corporate entity to earn the consulting fees when he paid the moving expenses personally. Having caused the consulting fees to be earned and accumulated within Stellar, he did not withdraw any money from Stellar as a salaried employee of Stellar. That procedure would have given the Appellant employment income against which moving expenses are deductible. He withdrew money from Stellar by way of dividend which, in my view, is a non-deductible source with regard to section 62.
[12] The Appellant states that Revenue Canada has gone against the spirit of the Act. There is some merit to his argument in what I have already called the "harsher and meaner realities of 1990s". The Appellant, however, may also have gone against the spirit of the Act when he used the dividend route from Stellar to pay for his personal living requirements because there is a favourable tax treatment for dividends. I am referring, of course, to the dividend tax credit permitted by sections 82 and 121 of the Act. Therefore, if the Appellant elected to draw money out of Stellar by way of dividends with a favourable tax treatment, he may be in a weaker position to complain about unfairness if Revenue Canada adopts the position: "You have elected dividend route; moving expenses may not be deducted from dividends". Following advice which I regard as inadequate to say the least, the Appellant is put in the position where the moving expenses are not deductible from his dividend income. I am required to dismiss the Appellant's appeal for 1998.
[13] I will add one footnote. The Appellant would have filed his income tax return for 1998 in the spring of 1999 and probably was first assessed around May 1999. Therefore, he is still within what is called the "normal reassessment period" of three years which would run from the date of his first assessment for 1998. I would, therefore, suggest that the Appellant petition Revenue Canada to ask if they would accept amended returns from the Appellant and from Stellar for 1998 and 1999 changing the character of the amounts paid by Stellar to the Appellant from dividends to salary. If the Appellant were permitted to do that and sacrifice whatever dividend tax credit might have been available, he would have employment income from which the moving expenses could be deducted. If the Appellant intends to petition Revenue Canada as suggested above, he should file waivers for 1998 for himself and for Stellar.
[14] I cannot determine from the limited evidence before me whether the amended returns suggested above would be fair and equitable to both parties. The appeal for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 21st day of February, 2002.
|
"M.A. Mogan" |
J.T.C.C.
COURT FILE NO.: 2001-2234(IT)I
STYLE OF CAUSE: Patrick James and Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: November 28, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: December 4, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Jasmine Sidhu
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada