BETWEEN:
and
THE MINISTER OF NATIONAL REVENUE,
____________________________________________________________________
Appeal heard on June 30, 2006, at Toronto, Ontario
Before: The Honourable N. Weisman, Deputy Judge
Appearances:
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____________________________________________________________________
JUDGMENT
The appeal is dismissed and the assessment of the Minister is confirmed in accordance with the attached Reasons for Judgment.
Signed at Toronto, Ontario, this 28th day of July 2006.
BETWEEN:
DNS SIGNS LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
[1] This is an appeal by DNS Signs Ltd., (the "Appellant"), from an assessment by the Respondent, the Minister of National Revenue (the "Minister") of Canada Pension Plan contributions on monies purportedly allocated in 2002 and 2003 out of the Appellant's Employees Profit Sharing Plan (the "EPSP"), to Douglas and Kimberley Paterson (the "Patersons") and their two children Melanie and Shayne.
[2] The Patersonseach own fifty per cent of the common shares of the Appellant and are officers of the company, Douglas, being its president and Kimberley, its secretary.
[3] In the Reply to the Notice of Appeal, the Minister challenges the validity of the Appellant's EPSP. It is the position of the Minister that the amounts allocated to the four members of the Patersonfamily in 2002 and 2003 were pensionable salaries and wages. They were therefore subject to deduction and remittance of Canada Pension Plan contributions by the Appellant as their employer under subsections 8.(1), 12.(1), and 21.(1) of the Canada Pension Plan[1] (the "Plan") which provide as follows:
8.(1) Every employee who is employed by an employer in pensionable employment shall, by deduction as provided in this Act, from the remuneration for the pensionable employment paid to the employee by the employer, make an employee's contribution for the year in which the remuneration is paid to the employee of an amount equal to the product obtained when the contribution rate for employees for the year is multiplied by the lesser of
(a) the employee's contributory salary and wages for the year paid by the employer, minus such amount as or on account of the basic exemption for the year as is prescribed; and
(b) the employee's maximum contributory earnings for the year, minus such amount, if any, as is determined in prescribed manner to be the employee's salary and wages paid by the employer on which a contribution has been made for the year by the employee under a provincial pension plan.
12.(1) The amount of the contributory salary and wages of a person for a year is the person's income for the year from pensionable employment, computed in accordance with the Income Tax Act ... plus any deductions for the year made in computing that income ...
21.(1) Every employer paying remuneration to an employee employed by the employer at any time in pensionable employment shall deduct from that remuneration as or on account of the employee's contribution for the year in which the remuneration for the pensionable employment is paid to the employee such amount as is determined in accordance with prescribed rules and shall remit that amount, together with such amount as is prescribed with respect to the contribution required to be made by the employer under this Act, to the Receiver General ... .
[4] The Appellant counters that while subsection 21.(1) of the Plan requires pension contributions to be deducted from employees' remuneration, it is only salaries and wages that are pensionable earnings under subsection 8.(1) of the Plan. It contends that the Patersons and their children were not employed by the Appellant under contracts of service in 2002 and 2003, and accordingly received no contributory salaries and wages or income from pensionable employment from the Appellant in those years as did the Appellant's arms length employees who were paid on an hourly basis. Rather, they were the beneficiaries of allocations of profits from a trust.
[5] The Appellant has established an EPSP, the beneficiaries of which are Douglas and Kimberley Paterson and their two children Melanie and Shayne. In 2002 and 2003, all four members of the Paterson family took monthly or quarterly draws out of shareholders' loans previously made by Douglas and Kimberleyto the Appellant. At years' end, the trustees of the EPSP, by direction, required the Appellant to repay a percentage of its pre-tax profits for the year back into the Patersons' shareholders' loan accounts. This was accomplished by a bookkeeping entry. Accordingly, no payments were ever made by the Appellant to the trustee, and the trustee therefore received no amounts to allocate to the employees.
[6] The percentage of profits purportedly allocated to the beneficiaries fluctuated from year to year depending upon what the Appellant could afford to pay. In 2002, the trustees directed the Appellant to put $85,631.00 or 52.9% of the Appellant's profits back into the shareholders' loan accounts. In 2003, the figure was $82,727.57, which represented 51.7% of the Appellant's profit for that year.
[7] Although the Patersonsperformed services for the Appellant ten hours per day, seven days per week, while their children worked for it on a part-time basis, it is their contention that they all did so for free. They argue that since they were not remunerated by the Appellant, they were not employees under contracts of service with it[2].
[8] In the Patersons' view, they are nonetheless employees of the Appellant by definition and are eligible to be beneficiaries under its EPSP, because as its president and secretary, they are officers of the company, and section 248(1) of the Income Tax Act (the "Act")[3] provides that "employee includes officer".
[9] There are two problems with the Appellant's position. In the first place, the Appellant's arrangement does not qualify as an employees profit sharing plan under subsection 144(1) of the Act.
[10] The relevant portions of subsection 144(1) are as follows:
"employees profit sharing plan" at a particular time means an arrangement
(a) under which payments computed by reference to:
(i) an employer's profits from the employer's business,
...
are required to be made by the employer to a trustee under the arrangement for the benefit of employees of the employer...
(b) in respect of which the trustee has, since the later of the beginning of the arrangement and the end of 1949, allocated, either contingently or absolutely, to those employees
(i) in each year that ended at or before the particular time, all amounts received in the year by the trustee from the employer...
[11] There are accordingly three requirements:
1) Payments are required to be made by an employer to a trustee under the arrangement for the benefit of employees;
2) These payments must be computed by reference to the profits of the employer from the employer's business;
3) All amounts received by the trustee must be allocated to the employees on an ongoing annual basis.
[12] Under the Appellant's EPSP, no payments were ever made by the Appellant to the trustees, and the trustees accordingly never received any amounts to allocate to the employees. Requirements 1 and 3 were accordingly not met. Further, the participation of the two Paterson children who, according to the Appellant were not employees of the Appellant, was not consistent with the arrangement being an EPSP.
[13] It also fails to qualify as an employee benefit plan or an employee trust as defined in the Act. There is no evidence that either was intended by the Appellant and neither is consistent with the inclusion of the two Patersonchildren.
[14] The second problem with the Appellant's argument is that the Patersonsdid not work 70 hours per week for free. They received pensionable salary and wages in the guise of allotments to beneficiaries of an EPSP. This was a colourable device designed to save employment insurance premiums and Canada Pension Plan contributions. Had the Patersonfamily drawn the salaries and wages they earned, there would have been no profit left to share among the beneficiaries of the EPSP. Further, the right of the two Paterson children to draw upon their parents' shareholders' loan accounts was not explained.
[15] In the normal course of events, allocations to beneficiaries of bona fide employees profit sharing plans are not subject to source deductions. Canada Revenue Agency's Interpretation Bulletin IT-379R "Employees Profit Sharing Plans - Allocations to Beneficiaries" dated September 29, 1999 states that withholding under subsection 153(1) of the Act is not required when an employer contributes to an EPSP even though the employer's contributions are included in the beneficiary's income as employment income under paragraph 6(1)(d). It further states that no withholding is required when the trustee makes an allocation to the beneficiary. Accordingly, the T4PS summary, on which trustees report to the Canada Revenue Agency employees profit sharing plan payments and allocations, has no box for Canada Pension Plan contributions. While Interpretation Bulletins do not have the binding effect of law, they do have persuasive force in the event of ambiguity[4].
[16] This exemption from source deductions stems from the fact that allocations to beneficiaries from employees profit sharing plans are of trust income computed with reference to an employer's profit from the employer's business, and are not employees' contributory salaries and wages within the meaning of the Plan.
[17] In the matter before me, however, the Appellant's EPSP was not a bona fide employees profit sharing plan as aforesaid.
[18] The purpose of section 144 of the Act is to provide certainty regarding the income tax consequences of contributions to employees profit sharing plans; of incentive allocations to employees out of such plans; of income earned on trust assets; and of distributions thereof. The section is not intended to be used as a means of circumventing the Plan and avoiding the contributions required by it. The Plan is remedial legislation designed to provide social insurance for Canadians[5]. It should therefore be given fair, large and liberal construction, and its objectives should not be frustrated by improper use of section 144 of the Act.
[19] The Appellant has failed to discharge the burden of demolishing the assumptions contained in the Minister's Reply to the Notice of Appeal. The appeal is therefore dismissed and the assessment of the Minister is confirmed.
Signed at Toronto, Ontario, this 28th day of July 2006.
"N. Weisman"
Weisman D.J.
STYLE OF CAUSE: DNS SIGNS LTD. AND M.N.R.
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: June 30, 2006
REASONS FOR JUDGMENT BY: The Honourable N. Weisman, Deputy Judge
DATE OF JUDGMENT: July 28, 2006
APPEARANCES:
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Agent for the Appellant: |
David G. Masters |
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Counsel for the Respondent: |
Jocelyn Espejo Clarke and Charmaine De Los Reyes |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] R.S.C. 1985 c. C-8.
[2] Fournier v. Canada (Department of National Revenue), [1997] F.C.J. No. 211 (F.C.A.)
[3] R.S.C. 1985 (5th Supp.) c.1.
[4] Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175.
[5] Granovski v. Canada (Minister of Employment and Immigration), [2000] 1 S.C.R. 703.