Date: 19991029
Docket: 1998-11-IT-I
BETWEEN:
CHRISTOPHER A. KENNEDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on October 4, 1999)
Mogan J.T.C.C.
[1] This is an appeal with respect to the 1996 taxation year in which the Appellant has elected the informal procedure. The Appellant is an Assistant Professor of Civil Engineering at the University of Toronto who obtained his doctoral degree in science in the summer of 1996. This appeal, however, relates to certain compensation paid to the Appellant in the months of November and December, 1996, when he was a research scientist employed in Germany.
[2] The Appellant came to Canada from England in September 1991 as a foreign student. He started doing graduate work in the field of science. He also applied for landed immigrant status, which was granted to him around 1994 or 1995. He continued his graduate studies at the University of Waterloo where he was a doctoral student. He earned a Ph.D. in science from the University of Waterloo in the summer of 1996. Also in the summer of 1996, he was granted Canadian citizenship. In the fall of 1996, he applied for a research position in Germany at what I believe is a German university but it was simply referred to as "UFZ". It was some kind of science institution in Leipzig, Germany. He was offered the position and accepted it, granted on a six-month term, and he left Canada at the end of October to commence this six months engagement, which ran from November 1, 1996, until April 30, 1997. At the end of April, 1997, the Appellant returned to Canada where he was employed for about a month. There was a period of about three months when he was not employed, and then he obtained a faculty position in civil engineering at the University of Toronto where he is still engaged.
[3] This appeal is concerned with the manner of the Appellant's remuneration while he was on this six-month assignment in Germany and, in particular, the first two months of that assignment which were the last two months of the 1996 calendar year. Entered as Exhibits A-2 and A-3 were documents in the German language and, while there was no one in court to give certified translations, the Appellant, in his casual and fragmented knowledge of German, interpreted them for the benefit of the Court. Exhibit A-2 is what the Appellant would call a notice of remuneration which identified the value of his position on an annual basis at 60,000 Deutschmarks. The stipend was actually 3,000 Deutschmarks per month with 750 Deutschmarks deducted for his accommodation which was provided at the institution. The Appellant entered as Exhibit A-3 a copy of the written contract (all in German). The Appellant again roughly translated paragraph 3 which is a statement that he would be paid 3,000 Deutschmarks per month with 750 Deutschmarks deducted for his accommodation; and a further statement that the 3,000 Deutschmarks per month was regarded by German standards as a non-taxable amount; and also that no social insurance tax would be levied on that amount. For all practical purposes, the 3,000 Deutschmarks per month was a tax-free payment in the eyes of the German taxation authorities.
[4] The Appellant was concerned about the Canadian tax status of the remuneration he received in Germany. He wrote to the Sudbury Taxation Centre on January 27, 1997, at the end of his third month in Germany, asking them how he should account for his German remuneration. There is no doubt that the Appellant was acting in good faith throughout. He filed a Canadian income tax return for 1996 on April 5, 1997 when he had not yet heard back from his original letter of January 27th to Revenue Canada. He enclosed a covering letter with his 1996 tax return stating in part:
... Please note that for the last two months of the year I was working in Leipzig, Germany. I have not included earnings from these two months on my tax return since they are tax free according to my contract. With regard to this matter, I enclose a copy of a previous letter (27 Jan 1997). ...
[5] On May 22, 1997, he received a letter from Revenue Canada which was an innocuous non-answer to his letter, enclosing a bunch of brochures and telling him if he read all the brochures he may be better informed, but it did not really help, and it was not very helpful coming that long after the fact. Ultimately, on November 3, 1997, Revenue Canada issued a notice of assessment to the Appellant in which they took his return as filed, showing total income of $14,028, and Revenue Canada increased that by $5,440 to a total income as $19,468. Both parties agree that the amount which Revenue Canada added ($5,440) is the equivalent in Canadian currency of the 6,000 Deutschmarks which the Appellant received for November and December 1996 at the rate of 3,000 Deutschmarks for each month.
[6] The question is whether Revenue Canada was entitled in the circumstances of this case to add the $5,440 to the Appellant's reported income for 1996. The Appellant presented his own case and so, as might be expected, he did not claim in his notice of appeal all of the technical positions which were available to him. For example, in the witness box, he said that he did not dispute that he was resident in Canada in November and December, 1996 but later on, when listening to his argument, I concluded that there was at least some doubt concerning his residency in Canada. He said that when he was accepted as a research scientist in Germany, he left some of his personal belongings with a friend in Waterloo; he took some of his personal belongings with him to live in Germany for six months; and some of his personal belongings were at the home of his parents in England. It appears that he did not have a dwelling in Canada from November 1996 to April 1997. He was not married at the time, and his tax return for 1996 shows that he was single. As a person who had never owned a home in Canada and had lived here for only five years, his connection with Canada was not as permanent as that of a person who was born and raised in Canada. Also, when he went to Germany, he did not have fixed employment to come back to Canada. While he was in Germany, he applied for positions in both England and Canada, and there was also the possibility that his six-month contract in Germany could be extended at the option of the institute where he was working in Leipzig. In fact, he was offered an opportunity to extend his stay in Germany but he declined that opportunity and elected to come back to Canada to seek employment.
[7] I raise these facts because I think there was an argument to be made, had the Appellant pursued it from the start, on the proposition that he was not resident in Canada in November and December, 1996, because he had no permanent dwelling here and he had no family here. He had an Ontario driver's licence but he also had an English driver's licence. He had sold his car in Canada. He had a bank account in Canada and he had some modest term deposits and a certain mutual fund investment, but his ties to Canada were much less firm than those of a person who had been born and raised here or who had left a family behind in Canada to which he would return.
[8] Although there was not much evidence on this issue, I would say that the Appellant could be regarded as resident in Canada based on his landed immigrant and citizenship status. Having left England to come here for his post-graduate studies and having obtained a doctoral degree from a highly reputable Canadian university, and having declined the opportunity to stay in Germany beyond the six months, not to go elsewhere but to return to Canada, there is enough evidence to hold that the Appellant was resident in Canada throughout the six-month period when he was working in Germany. I reach that conclusion with some reservation. For the purpose of this appeal, however, I find that the Appellant was resident in Canada in November and December, 1996. Having concluded that he was resident in Canada, he may at the same time have been resident in England (the place of his birth) because a person can have dual residence. In any event, I hold that the Appellant was a resident.
[9] As a resident of Canada, he is taxable in Canada on his world income. There is no question under Canadian law that the remuneration or the amounts paid to the Appellant on a monthly basis in Germany were income from employment because he was being compensated by the institution in Germany for services rendered as a research scientist. I am satisfied that in the eyes of the institution itself and the German tax authorities he was regarded as having an economic value of 5,000 Deutschmarks per month to the institution. That appears from a number of exhibits, primarily Exhibit A-2, which is the remuneration amount; Exhibit A-3, which is the contract itself; and Exhibit R-2, which is a statement from the German institution, which states:
Statement of Grant Payments (November, 1996, to April, 1997)
made to Dr. Christopher Kennedy
Six month payments, each of 3,000 Deutschmarks, were made to Dr. Kennedy for the months of November 1996, to April, 1997 (inclusive), for services as a Research Scientist.
The grant payments were tax free (and free of social insurance).
It is signed by some person who I would assume is an officer of the institution in Germany where the Appellant worked. As a matter of internal policy, it appears that they paid research scientists from abroad or perhaps even from Germany itself on a tax-free basis. If they were not research scientists or if they were hired full-time, they might have been paid 5,000 Deutschmarks a month. Perhaps it is to save these institutions from having to pay out 5,000 Deutschmarks per month of which they would remit 2,000 to the German government but, for whatever reason, research scientists are paid on a tax-free basis in Germany.
[10] The status of the remuneration in Germany as being tax-free has no effect on the status in Canada. That is to say, a person who is resident in Canada and taxable on his world income has to report income from any source. Section 3 of the Income Tax Act requires a person to report income from all sources. For greater certainty, that includes office, employment, business, or property. Therefore, the Appellant was required to include this amount in his income. If he could be regarded as having earned 5,000 Deutschmarks a month and be regarded as having had 2,000 Deutschmarks withheld at source as a source deduction for the German revenue authorities, then the Minister could have added to his income for 1996 the Canadian equivalent of 10,000 Deutschmarks and given him a tax credit on the basis that he had paid taxes in Germany of 4,000 Deutschmarks, all amounts being translated into Canadian currency. That might have been a better position for the Appellant. He might have been better off if that had been the deal that was arranged in Germany.
[11] Unfortunately, we have to live with the facts as they are, and that was not the arrangement that the Appellant had in Germany. His arrangement was that he would receive 3,000 Deutschmarks a month and there would be no tax levied on it in Germany; even though he testified, and the documents support him on this, that the economic value of the position he held in Germany was 5,000 Deutschmarks a month or 60,000 Deutschmarks a year. The facts are that he was not paid 5,000 Deutschmarks a month; there was no amount remitted to the taxation authorities in Germany with respect to the balance of the remuneration; and so he cannot have the benefit of a foreign tax credit in respect of amounts of tax paid in Germany because no tax was paid. He is left with the position of being taxable only in Canada with respect to the amounts he received in Germany which were free of tax in Germany.
[12] The Appellant presented in argument a useful diagram which shows how he is worse off than a person who would have been paid the full 5,000 Deutschmarks a month in Germany and been taxed on it at the 40% rate and left with after-tax income of 3,000 Deutschmarks. It appears that on the notice of assessment, which I note increases his tax burden by more than $1,200, it appears that what he really has is after-tax income of probably $2,300 or $2,400 a month. The extra $1,200 of tax distributed over two months would be $600 a month, and the $600 a month taken off the Canadian equivalent of 3,000 Deutschmarks would leave him with something probably in the range of $2,200 Canadian dollars a month. And so he is materially affected by the fact that Canada taxes this amount and the German tax authorities did not tax it. Being a resident of Canada, that is a consequence that the Appellant cannot avoid.
[13] In closing, the Appellant pointed out the anomaly that when he came back to Canada in the spring of 1997 he worked for a month and then was unemployed for awhile but was unable to collect any unemployment insurance benefits in Canada because they took the position in Canada that he had not earned any income in Canada for the preceding year. The Appellant rightly pointed out the inequitable result because he is going to be taxed in Canada on the remuneration he earned in Germany for those six months but, although those six months fell within the twelve-month period running backwards from July, 1997 he was denied unemployment insurance benefits because he had not been employed in Canada. That is just one of those anomalies that crops up from time to time. It is impossible for a Court to grant equitable relief in these areas. I have to construe the tax legislation as I read it. It sometimes leads to inconsistent results, whether they are equitable or not, and this is one of those situations.
[14] The result is that I find against the Appellant because the amount must be included in his 1996 income. As a resident of Canada, it is part of his world income. There is no foreign tax credit available to him. The appeal for 1996 is dismissed.
Signed at Ottawa, Canada, this 29th day of October, 1999.
"M.A. Mogan"
J.T.C.C.