Source deductions

A recent Tax Court of Canada (TCC) decision, in Sutcliffe v The Queen, contains some interesting information regarding that court’s jurisdiction, specifically to its inability to decide whether source deductions have been taken or not.

A recent Tax Court of Canada (TCC) decision, in Sutcliffe v The Queen, contains some interesting information regarding that court’s jurisdiction, specifically to its inability to decide whether source deductions have been taken or not.

Although not the first time this issue has been raised in the TCC, the circumstances that preceded this trial were unique. In 2006, the appellant, Mr. Sutcliffe, was hired as a driver for the company Express Metal, which his son owned in full. This relationship continued until 2010, when Express Metal went out of business.

Throughout the employment relationship, source deductions that were to be remitted to the Canada Revenue Agency (CRA) were a source of friction between father and son. Mr. Sutcliffe preferred the corporation to remit them, but it refused to do so for an unstated reason.

Express Metal paid Mr. Sutcliffe separately for the tax, and he remitted this to the CRA regularly. However, in 2010 Express Metal went out of business before the tax payment for that year was made to him.

The crux of the dispute was whether the appellant’s regular pay was reduced to take into account the separate tax payments. He submitted that it was and provided documentary evidence showing that his bi-weekly payments were reduced from $1,400 to $1,202- the difference representing the source deductions that he remitted for each year except 2010. His son testified that the reduction in pay was not attributable to tax reasons, although he provided no alternative explanation.

Unfortunately for Mr. Sutcliffe, the TCC decided that this case was beyond its jurisdiction. The court stated: “Quite simply, it is not possible for this Court to give the relief that Mr. Sutcliffe seeks because the Tax Court of Canada does not have the authority to do so. The authority over whether source deductions have been taken resides with the Federal Court and not the Tax Court.”

For further guidance and understanding, see paragraph 11 of the judgment below. Justice Woods stated:

“This is not the first time that a taxpayer has appealed to this Court regarding source deductions based on a misunderstanding of the authority of the Court. The confusion may stem in part because the tax owing is often referred to in the notice of reassessment, but is not actually part of the reassessment. It is only the reassessment, which is the calculation of the tax and not the tax owing, that can be appealed to this Court.”

Accordingly, the court concluded that Mr. Sutcliffe’s appeals for the 2009 and 2010 taxation years must be quashed. Because the Crown did not reply to the source deduction issue before the trial, and that was the only issue mentioned by the appellant, the deficiency of the reply factored into the issue of costs; a modest amount was given to Mr. Sutcliffe. The only other action the court could take was to recommend the CRA further view the source deduction issue based on the evidence at the hearing.