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.