In Morrison v. The Queen, 2010 TCC 429 (an informal procedure appeal), the individual taxpayers were employees of a corporation of which they were the controlling shareholders. The corporation purported to pay salary to the taxpayers by remitting amounts on account of source deductions to CRA and crediting the appropriate balance to the shareholders’ loan accounts. The taxpayers, however, didn’t include any amounts in income for the year in which the credits and remittances were made. The CRA reassessed to include all amounts credited and remitted in income; the taxpayers appealed to the Tax Court of Canada.
The Tax Court pointed out that employment income is subject to tax only when it is received. The Court held that the remitted source deductions were received by the taxpayers even though the money didn’t pass through their hands:
In any event it seems clear that they did receive the portion that was remitted as source deductions as these amounts were paid on their behalf by [the employer]. In The Queen v. Hoffman, [1985] 2 F.C. 541 Justice Rouleau of the Federal Court, Trial Division stated that:
If the proposition that income must be in the actual possession of the employee before it can be taxed is correct, then I would have to conclude that an employee’s contributions to Canadian or provincial pension plans, deducted at source by the employer, are not income in the hands of the employee. Jurisprudence does not support this proposition.
In Lucien Gingras v. M.N.R. [unreported decision dated March 26, 1973] the Tax Review Board noted (at page 4):
[Translation]
The expression “touché” (received) does not necessarily mean that the full amount of the salary must be physically received by the payee or be deposited in full in his bank account.
According to the interpretation of s. 5 it is sufficient to say that the amount of the salary was paid by the employer either to the employee himself or to his benefit, or that it was handed over to a third party under a federal or provincial statute.
The Court then found that the amounts credited to the shareholders’ loan accounts were not received (although they might have been had the credits been set-off against amounts owing by the shareholders to the corporation). The entries by themselves did not constitute payment:
[12] In Phillips v. The Queen, 95 DTC 194, [1994] T.C.J. No. 597, Justice Bowman (as he then was) stated that:
18 The unilluminating and confusing method of accounting and the lack of any logic in the method of reporting income cannot determine the outcome of this case. The fact remains that the sum of $69,263 which the Minister included in his income in 1986 was not received by him in that year. It is true that as controlling shareholder he could have required the company to pay it to him but he did not do so. Employment income must be received, not receivable, to be taxed. The decision in Minister of National Revenue v. Rousseau, [1960] C.T.C. 336, 60 D.T.C. 1236 (Ex. Ct.), is too firmly entrenched in our law to permit any erosion of the principle for which it stands.
19 Nor can I accept that the mere bookkeeping entry of moving the amount of bonus owing to Mr. Phillips from “bonus payable” to “due to shareholder” connotes receipt. Accounting entries are supposed to reflect reality, not create it and, as Lord Brampton said in Gresham Life Society Co. Ltd. v. Bishop, [1902] 4 T.C. 464 at page 476:
But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.
The Court concluded that no set-off had occurred, on the (rather) complicated facts of the case, and that therefore the taxpayers hadn’t received the amounts credited and weren’t required to include the amounts in income from employment.
