2014-0547641E5 Liability to pay tax

Principal Issues: 1. What section of the Income Tax Act (the “Act”) imposes a liability or obligation on a private individual working in the private sector to pay tax, who is not the holder of a public office or employment? 2. What section of the Act requires a private employer to withhold taxes at source from the wages of a private individual? 3. For the purposes of the Act, are the T1, T2 and T3 prescribed forms? 4. Does each of the T1, T2 or T3 have the force and effect of law?

Position: 1. Section 2; 2. subsection 153(1); 3. Yes; 4. Yes.

Reasons: 1. Section 2; 2. subsection 153(1); 3. The Act and case law sets out what "prescribed" means; 4. Section 150 requires taxpayers to file a return of income in the prescribed form. In order to comply with this requirement, the taxpayer must use the prescribed form.

Author: Skulski, Katharine
Section: 2, 153(1), 162(1), (2), (5), (6), (7), (7.01), (7.02), (7.2), and (8), 227(11), 244(16), 248(1)

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                                                                                                                                                               2014-054764
                                                                                                                                                               Katharine Skulski

November 24, 2014

Dear XXXXXXXXXX:

Re:  Liability to pay tax

We are writing in response to your various enquiries in which you have asked for our comments on the following specific questions:

1.    What section of the Income Tax Act (the “Act”) imposes a liability or obligation on a private individual working in the private sector to pay tax, who is not the holder of a public office or employment?
2.    What section of the Act requires a private employer to withhold taxes at source from the wages of a private individual?
3.    For the purposes of the Act, are the T1, T2 and T3 prescribed forms?
4.    Do the T1, T2 or T3 returns have the force and effect of law?

Our comments

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

Question 1

The Act contains several provisions that impose liability for tax on persons.  In the case of residents of Canada, subsection 2(1) of the Act provides that every person resident in Canada at any time in a taxation year shall pay an income tax on their taxable income for each taxation year, as required by the Act.  Section 3 of the Act requires a taxpayer to include income from employment and business (including income from self-employment) in their income.  Section 9 provides that a taxpayer’s income from a business is the amount of the profit from that business.

The Act refers to “person” and “taxpayer” throughout.  The term “taxpayer” is defined in subsection 248(1) of the Act as being a person, whether or not liable to tax.  Subsection 248(1) defines “person” to include, among other things, any corporation.  The use of the word “includes” means that person has its ordinary meaning (that is, an individual), but also includes a corporation and any other entity listed in the particular provision.  Finally, subsection 248(1) of the Act provides that an “individual” means a person other than a corporation.  To provide some context to these definitions, an individual is a person; a person is a taxpayer; and a taxpayer is required to pay income tax on their income in accordance with the Act.  As such, the Act applies to individuals.

Question 2

Subsection 153(1) of the Act generally provides that any person who at any time in a taxation year, pays salary, wages or other remuneration, amongst other things, is required to withhold tax and remit such amounts on behalf of the person.  Further, the requirement to withhold is not limited to an obligation of an employer, but extends to any person paying an amount as set out in that provision.

In your enquiry, you have referred to the provisions of subsection 227(11) with regard to the requirement to withhold tax.  This provision clarifies that the requirement to withhold tax applies to the federal and provincial governments in the same way that it applies to anyone else.  It does not mean that the requirement to withhold only applies to the federal and provincial governments.

Question 3

Throughout the Act, reference is made to “prescribed information” and “prescribed form”.  The term “prescribed” is defined in subsection 248(1) as meaning:

(a)   in the case of a form, the information to be given on a form or the manner of filing a form, authorized by the Minister,

(a.1) in the case of the manner of making or filing an election, authorized by the Minister, and

(b)   in any other case, prescribed by regulation or determined in accordance with the rules prescribed by regulation.

Subsection 244(16) of the Act provides that “every form purporting to be a form prescribed or authorized by the Minister shall be deemed to be a form authorized under this Act by the Minister unless called in question by the Minister or by a person acting for the Minister or Her Majesty”. This means that all CRA forms are prescribed forms.

The Courts have been called upon to consider whether Form T1, General Income Tax and Benefit Return constitutes a prescribed form.  In The Queen v. Lemieux et al, 2008 DTC 6038, the Saskatchewan Provincial Court noted that the Form T1 is a prescribed form.  Similarly, the Form T2, Corporate Income Tax Return, and its corresponding schedules, is a prescribed form, as is the Form T3, Trust Income Tax and Information Return.

Question 4

Finally, you have asked whether prescribed forms have the force and effect of law.  Section 150 of the Act provides that a taxpayer is required to file a return of income in prescribed form which contains prescribed information. The Minister has set out what constitutes prescribed forms, for instance, the Forms T1, T2 and T3.  Therefore, in order to comply with the requirement to file a return of income, taxpayers must use the prescribed forms. 

It should be noted that failure to comply with the Act may lead to penalties being imposed on a taxpayer.  You can find additional information relating to penalties on the Canada Revenue Agency’s (“CRA”) website: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/ntrst/menu-eng.html

More generally, the Courts have looked at the issue of whether the Act is valid legislation as well as its applicability to individuals and determined that the legislation is valid and it applies to individuals.  For further information, please visit the CRA’s website.  In particular, the CRA has addressed certain misleading statements regarding taxes and this information can be found at: http://www.cra-arc.gc.ca/nwsrm/myths/menu-eng.html.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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