Canada: Central Springs Limited – Limitations On CRA Collections Abilities

Last Updated: June 6 2017
Article by David Rotfleisch

Central Springs Limited et al v. The Queen – Limitations on CRA Collections Abilities – Toronto Tax Lawyer Case Comment

Introduction – Limitations on CRA Collections Abilities

The Canada Revenue Agency has been granted extensive powers under the Canadian Income Tax act to help them collect tax arrears. These powers include the ability to place liens on properties and to garnishee the wages or bank accounts of taxpayers. However, the CRA does not have the power to recharacterize employment relationships or other legally implemented business decisions to aid them in collecting tax arrears. Central Springs Limited et al v. The Queen provides a clear example of the Tax Court of Canada upholding this principle of Canadian tax law.

Background – Payroll Tax Withholding Obligations

The Canadian Income Tax Act places an obligation on all persons who pay salaries or wages to employees to withhold money from those payments. These withholdings are held in trust by the employer and then paid to CRA on account of each employee's personal income tax liability. It is common for these withholdings to be large enough that their total will end up exceeding the total income tax payable by the employees. This is why many employees receive a tax refund when they file their income tax return. If you have more questions about the tax withholding obligations placed on employers under the Canadian Income Tax Act, please consider contacting one of our knowledgeable Toronto tax lawyers.

Facts – Central Springs et al v. The Queen

Mr. Eli Humby established a wood harvesting business that he operated through a corporation, Humby Enterprises Limited. Eventually Mr. Humby branched out into related businesses in precision mechanics and metal manufacturing to make better use of the mechanics and welders he already employed to service machinery necessary for the wood harvesting business. On the advice of his accountants, he set up two new corporations, Central Springs Limited and A&E Precision Fabricating and Machine Shop Inc, to handle these businesses. However, all of the employees remained employed by Humby Enterprises. Our experienced Canadian tax lawyers can help you decide on the appropriate legal structure for your business and incorporate companies as required.

Some time after Central Springs and A&E were incorporated, Humby Enterprises lost a large number of wood supply contracts and ran into financial difficulties. In order to continue operating, Humby Enterprises stopped remitting the income tax it withheld from its employees' paycheques. Central Springs and A&E were not affected by the loss of contracts and were able to maintain their financial health. Part way through 2002, Mr. Humby conducted a corporate payroll reorganization in which A&E and Central Springs became the employers of the employees necessary for their businesses instead of Humby Enterprises. Central Springs and A&E complied with their income tax withholding obligations under the Canadian Income Tax Act.

The collections officer assigned to recover Humby Enterprises' payroll remittance arrears requested that all three corporations receive a payroll audit. The CRA sent two payroll auditors to conduct a trust exam for all three companies. The tax auditors spoke briefly with Eli Humby and Winnie Humby, and reviewed the payroll records of the corporations. Nothing in the payroll records of the corporations suggested that Central Springs or A&E had any employees prior to the payroll reorganization. Nevertheless, the payroll auditors found that Central Springs and A&E paid salaries to employees prior to the payroll reorganization, and issued assessments for unpaid payroll remittances. If you need help dealing with CRA collections or responding to a tax audit, please consider contacting one of our skilled Toronto tax lawyers.

Trial Decision at the Tax Court of Canada - Central Springs et al v. The Queen

Mr. Humby decided to appeal the payroll assessments to the Tax Court of Canada. At trial, the judge came to the conclusion that none of the documentation reviewed by the tax auditors suggested that Central Springs or A&E had any employees or paid any wages prior to the payroll reorganization. Further, it was discovered that neither of the tax auditors had notes from their conversation with Winnie Humby or Eli Humby and that neither tax auditor could recall much of the contents of those conversations. As such, the court found that there was no factual basis to believe that Central Springs or A&E had any employees or paid any wages before the reorganization.

The Judge also found that the CRA does not have the legal authority to recharacterize genuine employment relationships for the purposes of payroll remittance under the Canadian Income Tax Act or to help them collect tax debts. Since the Canada Revenue Agency was unable to provide any legal or factual basis for the claims made by the auditors, the court allowed Mr. Humby's tax appeal and vacated the tax assessments against Central Springs and A&E. If you are considering an appeal to tax court, please contact one of our top Toronto tax lawyers.

Lessons for Taxpayers - Central Springs et al v. The Queen

The Canadian Income Tax Act gives CRA collections officers' extensive powers to collect tax arrears, including the ability to put liens on properties and garnish the wages and bank accounts of taxpayers. However, these powers do not include the ability to recharacterize legally implemented business decisions, including employment contracts, to make it easier to collect a tax debt. As this case demonstrates, when the CRA goes beyond its powers, taxpayers are able to use the legal system to fight back. In order to maximize their chances should a similar situation happen to them, taxpayers need two keep in mind two crucial points. First, their ability to contest the claims of the Canada Revenue Agency is dependent on them having actually legally implemented their business decisions and documented them appropriately. Having a strong evidential record will significantly increase the taxpayer's chance of success and will decrease the costs of any dispute with the Canada Revenue Agency. Second, once they are contacted by CRA, it is essential to retain Canadian tax lawyers familiar with contesting the claims made by CRA. Tax law is complex and it is unwise to proceed without proper guidance. If you need help legally implementing your business decisions or assistance in a dispute with the Canada Revenue Agency, please consider contacting one of our experienced Toronto tax lawyers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.