Date: 20000525
Docket: 97-3437-IT-G
BETWEEN:
PROVIGO DISTRIBUTIONS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal concerning the appellant's taxation year ending on January 25, 1992.
[2] The point at issue is whether the amount of the employer contributions in respect of wages is deductible in computing the appellant's income for the taxation year in which the wages were earned, as the appellant contends, or for the taxation year in which the wages were paid, as the respondent contends.
[3] The employer contributions in question are those made under the Unemployment Insurance Act, the Act respecting the Régie de l'assurance-maladie du Québec and the Act respecting the Quebec Pension Plan.
[4] At the start of the hearing, counsel for the parties filed an agreement as to the facts:
[TRANSLATION]
1. The appellant is a company incorporated in Quebec which carries on a food distribution business.
2. In computing its income for the taxation year ending January 25, 1992, the appellant deducted an amount of $393,672 for non-remitted employer contributions in respect of wages earned during the last week of that taxation year and not yet paid to the appellant's employees (see the appellant's return of income for the 1992 taxation year with schedules and financial statements, the whole appended to this agreement as Exhibit E-1).
3. The Minister of National Revenue disallowed the deduction of this amount of $393,692 in computing the appellant's income for the taxation year ending January 25, 1992 (see notice of reassessment of March 5, 1996 and corresponding T7W-C form and notice of confirmation of September 15, 1997 appended to this agreement as Exhibit E-2).
4. This amount of $393,692 breaks down as follows:
· Employer unemployment insurance premiums:
$142,599
· Employer contributions to the Régie de l'assurance-maladie du Québec:
$161,050
· Employer contributions to the Quebec Pension Plan:
$90,023
5. The wages earned during the first week of the period ending on January 25, 1992 were paid during the following fiscal year ending on January 30, 1993, that is to say on January 29, 1992 in the case of employees paid on Wednesdays and January 30, 1992 in the case of employees paid on Thursdays.
· For the purposes of presentation in its financial statements for the fiscal year ending January 25, 1992, in computing net profit the appellant treated as an expense the amount of these wages earned but not yet paid as of January 25, 1992. This amount was also entered on the appellant's balance sheet as a short-term liability for that fiscal year.
· For tax purposes, these wages earned but not yet paid as of January 25, 1992 were deducted as expenses in computing the appellant's income for the taxation year ending January 25, 1992.
6. The employer contributions in respect of wages paid on January 29 and 30, 1992 were paid on February 5, 1992 and computed in accordance with the relevant statutes and their regulations, that is to say the Act respecting the Régie de l'assurance-maladie du Québec, the Act respecting the Quebec Pension Plan and the Unemployment Insurance Act.
7. For the purposes of presentation in its financial statements for the fiscal year ending on January 25, 1992, in computing net profit the appellant treated as an expense the total amount ($393,672) of these employer contributions in respect of wages earned but not yet paid as of January 25, 1992. This amount was also entered on the appellant's balance sheet as a short-term liability for that fiscal year under the item "Income Tax and Various Taxes Payable".
8. The only point at issue is whether, for tax purposes, the amount of $393,672 is deductible,
· as the appellant contends, in computing the appellant's income for the taxation year ending on January 25, 1992,
or,
· as the respondent contends, in computing the appellant's income for the following taxation year ending on January 30, 1993.
[5] Counsel for the appellant argued two points: (1) the obligation to pay wages gives rise to an obligation to pay social benefits costs so that employer contributions are an integral part of remuneration paid; (2) there must be an accurate presentation of income each year. As to this second point, counsel for the appellant suggested that the question that should be asked for a proper representation of income is what expenses were incurred during the year to generate that year's income? The answer is clearly that they must be total payroll expenses. The wages were earned but not yet paid. The employer uses the accrual accounting method. It deducted the amount of wages earned in 1992 and must be allowed to deduct employer contributions because they were also paid to generate the income for 1992. Total payroll expenses for 52 weeks must be considered.
[6] Counsel for the appellant first referred to the Supreme Court of Canada's decision in Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, and in particular to the following passage at page 162:
. . . Under our self-assessment system, each taxpayer must be able to compute his or her income in such a way as to constitute an accurate picture of his or her income situation, subject, of course, to express provisions in the Act which require specific treatment of certain types of expenses or receipts.
[7] Counsel for the appellant also referred to this Court's decision in Fédération des caisses populaires Desjardins de Montréal et de l’Ouest-du-Québec v. The Queen, 99 DTC 1275. This is the decision the respondent mainly relies on. Counsel for the appellant related the facts of that case and argued that they are different from those in the instant case. At the end of its 1992 fiscal year, the Fédération included in computing its income certain approximate amounts that had to be paid for employee vacations that might be taken the following year or, in certain circumstances, in subsequent years. Vacation pay was paid in accordance with the pay rate applicable to the employee at the time he received the vacation pay. The cost of the employees' vacation pay was deducted for 1992 and this was allowed by the Minister of National Revenue (the "Minister"). The Fédération also sought to deduct employer contributions in respect of the vacation pay during the same year. It was thus on pay not yet determined and accordingly on approximate calculations of the employer contributions that the Fédération sought to deduct the amount of those contributions in computing its income.
[8] Counsel for the appellant argued that, in the instant case, the wages had been earned by the employees and were thus determined, whereas the Fédération had sought to deduct employer contributions in respect of pay that would eventually be payable. He referred to paragraphs 53, 55, 59 and 61 of that decision:
[53] . . . The employees acquire their vacation leave during the reference year, but they cannot take that leave until after the reference period is over. However, it is during the reference year that the appellant becomes obliged to pay its employees vacation pay, and that obligation subsists until the amounts are paid in the year following the reference period. That is why the vacation pay, although estimated, is not a reserve within the meaning of paragraph 18(1)(e). It is not a potential obligation for the employer. It is a real legal liability that exists during the reference year but will be paid in a future year. It can therefore be said that the expense associated with the vacation pay was incurred during the reference year and is thus deductible in calculating profit for the year under section 9 and paragraph 18(1)(a) of the Act.
. . .
[55] In this regard, I agree with counsel for the respondent that the obligation to make those employer contributions does not arise until the vacation pay is actually paid. The services provided by the employees do not give rise to that obligation. The payment of their salaries is what, under the various applicable statutes, creates an obligation for the employer to make the associated employer contributions. It therefore cannot be said, as counsel for the appellant argued, that the obligation to make the contributions exists during the reference period.
. . .
[59] I therefore feel that the obligation to make employer contributions in respect of vacation pay to be paid after the reference period is a potential future obligation as defined in law. I also feel that the evidence has shown that that obligation must be estimated and cannot be precisely determined during the year when the vacation leave is accumulating but has not yet been taken by the employees.
. . .
[61] Moreover, since the obligation to make those employer contributions does not arise until the vacation pay is paid, it cannot be argued that the appellant, in the situation that concerns us, incurred that expense in 1992. . . .
[9] Counsel for the respondent argued that an expense is not incurred if there is no obligation to pay. She cited the Federal Court of Appeal's decision in The Queen v. Burns, 84 DTC 6348, at page 6348:
In our opinion, an expense, within the meaning of paragraph 18(1)(a) of the Income Tax Act, is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. . . .
[10] In the respondent's opinion, the obligation to pay the employer contributions in issue does not arise when the wages are earned but when they are paid. An expense is incurred in the taxation year in which the obligation to pay arises; in the last week, however, the wages had been earned but not paid. On this point she relied on this Court's decision in Fédération, supra, more particularly at paragraph 55 cited above and paragraph 57, which reads as follows:
[57] This is exactly the case here with respect to the employer contributions. During the reference period, there is not yet any actual relationship between the creditor of the contributions and the employer, which will have to pay them only from the time the vacation pay is actually paid. The creditor’s legal interest will arise then and not before. It cannot be said that the debt is legally in existence before that time. In contrast, an obligation with a term presupposes that the obligation arises immediately and is therefore legally complete during the entire period from its creation to its expiry. A relationship of obligation is established between a real creditor and a real debtor (see J.-L. Baudouin, page 470, paragraph 831, supra). It seems to me that this is the main difference between vacation pay, in respect of which an actual relationship is created between the debtor employer and the creditor employees, and employer contributions, in respect of which no such relationship can exist between the employer and the creditor of the contributions until the vacation pay is actually paid. This results from the various statutes governing the payment of such employer contributions.
[11] Counsel for the respondent referred to sections 50, 52, 59 and 63 of the Act respecting the Quebec Pension Plan, section 34 of the Act respecting the Régie de l'assurance-maladie du Québec and subsections 48(3), 50(1) and 53(1) of the Unemployment Insurance Act. I will cite the Unemployment Insurance Act provisions to which counsel for the respondent referred and to which I add subsection 51(2) of that Act. Sections 48, 50 and 51 are in Part II, which is entitled "Contributory Premiums". Section 53 is in Part III entitled "Collection of Premiums".
48(1) In respect of each year, the Commission shall, subject to approval by the Governor in Council, fix the rates of premium that persons employed in insurable employment and the employers of those persons will be required to pay in that year to raise an amount equal to the adjusted basic cost of benefit under this Act in that year as that cost is determined under section 49.
48(2) The rates of premium for a year shall be calculated in terms of a percentage of the insurable earnings in that year and the employees' premiums for that year shall be a like percentage for all insured persons.
48(3) The percentage of insurable earnings for a year that will constitute the employers' premiums for that year shall be determined in accordance with section 50.
50(1) Unless another rate of premium is provided for a year pursuant to this section, the employer's premium to be paid in a year by an employer of an insured person shall be 1.4 times the employee's premium for that year.
51(2) Every employer shall, for every week during which a person is employed by him in insurable employment, pay, in respect of that person and in the manner provided in Part III, an amount equal to such percentage of that person's insurable earnings as is fixed by the Commission as the employer's premium payable by employers or a class of employers of which the employer is a member, as the case may be, for the year in which that week occurs.
53(1) Every employer paying remuneration to a person employed by the employer in insurable employment shall deduct from that remuneration as or on account of the employee's premium payable by that insured person under section 51 for any week or weeks in respect of which that remuneration is paid such amount as is determined in accordance with prescribed rules and shall remit that amount, together with the employer's premium payable by the employer under that section for such week or weeks, to the Receiver General at such time and in such manner as is prescribed and, where at that prescribed time the employer is a prescribed person, the remittance shall be made to the account of the Receiver General at a financial institution (within the meaning that would be assigned by the definition "financial institution" in subsection 190(1) of the Income Tax Act if that definition were read without reference to paragraphs (d) and (e) thereof).
[12] Counsel for the respondent also referred to Canderel, supra, and in particular to the following passage at page 174:
(4) In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with
(a) the provisions of the Income Tax Act;
(b) established case law principles or "rules of law"; and
(c) well-accepted business principles.
[13] Counsel for the appellant's response to these arguments was that payment to the government is due only when the wages are paid to employees, but the obligation to pay wages and contributions exists at the end of the year. The payroll expense consists of the wages and all related social benefits costs. The respondent's position represents an extremely technical view which disregards business reality: accountants include all these costs in the payroll expense.
Conclusion
[14] It seems to me that it is not legally tenable to argue that the employer's obligation with respect to employer contributions arises only if remuneration is paid, regardless of the legal fact that work has been performed and wages actually earned. In my view, this is not what the judge stated in Fédération, supra. In essence what she said is that employer contributions are not owed until the amount of remuneration has been determined and is payable. At that point they can be included in computing the taxpayer's income, not before. In this sense, that decision is consistent with the analysis by authors in the field of labour law concerning the meaning to be given to the word "remuneration" found in articles 2085 and 2087 of the Civil Code of Quebec.
[15] Those articles read as follows:
2085. A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer.
2087. The employer is bound not only to allow the performance of the work agreed upon and to pay the remuneration fixed, but also to take any measures consistent with the nature of the work to protect the health, safety and dignity of the employee.
[16] In Le droit du travail du Québec, pratiques et théories, 3rd edition, Les Éditions Yvon Blais Inc., Robert P. Gagnon writes as follows at page 70:
[TRANSLATION]
The notion of remuneration is very broad in scope. It in fact covers any consideration or benefit having a pecuniary value which the employer is required to provide to the employee in return for his performance of work. Apart from the wages or compensation, in the narrowest sense, paid on the basis of performance or of the duration of the work, remuneration thus comprises, where applicable, benefits such as vacation pay, payment for days not worked, the employer's contribution to the cost of certain insurance or retirement plans, etc.
[17] In Le contrat d'emploi, second edition, Les Éditions Yvon Blais Inc., Aust and Charette write as follows at page 86:
[TRANSLATION]
I. Pension plans, life and health insurance policies and other benefits
The benefits which an employee enjoys as conditions of employment, be they pension plans, medical insurance, health insurance or disability insurance, are generally regarded as an obligation which the employer has a duty to discharge over the entire term of the employment contract. As seen above, such benefits form part of remuneration if they have a pecuniary value. Consequently, as is the case for all other elements of remuneration, the employer may not reduce those benefits unilaterally.
[18] It seems clear that employer contributions are to be understood as being included within the meaning of remuneration. I believe it is quite apparent in any case that the employer's obligations with respect to employer contributions arise from the employees' performance of work and not from payment of their wages and that there has been some confusion between the imposition of the contribution and the payment or collection of that contribution.
[19] In Canadian Pacific Ltd. v. A.G. (Can.), [1986] 1 S.C.R. 678, at pages 682 and 683, the Supreme Court of Canada was called upon to make the distinction between the imposition of the contribution and the payment of the contribution under the provisions of the Unemployment Insurance Act. Sections 66 and 68 cited in the judgment were, in 1992, sections 51 and 53 respectively. First I will cite a portion of the headnote of that decision at page 678:
. . . It is s. 66 of the Unemployment Insurance Act, 1971, not s. 68, which requires the payment of employer and employee premiums and fixes their amounts. They are fixed at a percentage of the "insurable earnings" of the employee. Section 68 deals only with the manner in which these premiums are to be collected. . . .
[20] La Forest J. states the following at pages 682 and 683:
My first remarks relate to the scheme of the Act. Section 66 appears in Part III which is entitled "Contributory Premiums". Section 68 appears in Part IV which is entitled "Collection of Premiums". I would note that titles, unlike marginal notes, are an integral part of the Act; see Elmer Driedger, The Composition of Legislation (1957), at p. 103. As one would expect, Part III deals with the substance of the law regarding premiums. In fact, it contains a series of provisions whose object, according to the relevant title, is "determining premiums". These include s. 62 already cited. This section, we saw, provides that the Commission must fix the amount of premiums in terms of a percentage of the insurable earnings of the employee. Section 66, as I have just noted, also appears there.
Even without reference to the scheme of the Act, a mere reading of s. 66, as Pratte J. observes, clearly indicates that it is this provision that requires payment of premiums and fixes their amounts. In addition, it directs us to the part of the law that prescribes the method of collecting them. Section 66(1) deals with employee premiums while s. 66(2) deals with those imposed on employers. They are parallel provisions and I shall restrict my remarks to s. 66(2) which directly applies in this case.
This provision requires, first of all, that every employer shall deduct and pay to the Receiver General an amount equal to the percentage of "insurable earnings" of the employee fixed by the Commission as the employer's premium. It also prescribes the manner in which these premiums are to be collected, namely "in the manner provided in Part IV" in which, it will be remembered, s. 68 appears.
[21] The statutes under which employer contributions are owed follow the same scheme: imposition of the contribution and collection and payment of the contribution. Like the Unemployment Insurance Act, the Act respecting the Quebec Pension Plan and the Act respecting the Régie de l'assurance-maladie du Québec clearly provide that the employer's obligation respecting contributions arises in consideration of an employee's performance of work during a period of time and is based on that employee's remuneration, not on the payment of his wages. Employer contributions may therefore be deducted in the year in issue in accordance with the principles stated in Burns, supra, and Canderel, supra.
[22] The appeal is accordingly allowed with costs.
Signed at Ottawa, Canada, this 25th day of May 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]