Fresh from defusing a potential strike by flight attendants, Ottawa is being asked to referee a dispute involving another group of Air Canada employees – pilots who live abroad and are fighting tax authorities over paying on only the portion of their work hours they spend in Canadian air space.
The situation has created such complicated court cases that Parliament needs to come up with new rules, according to the latest judicial ruling on a pilot's income tax dispute.
“It would be a blessing to bring an end to all the endless manoeuvring,” Mr. Justice Cameron McArthur of the Tax Court of Canada wrote in a new judgment on one of about 40 cases in which Air Canada pilots are appealing their income tax assessments.
The cases involve Air Canada pilots who have established residence in another country. Under the Income Tax Act, Canadians who live in a foreign country are taxed on income they earn for duties performed in Canada.
Pilots with foreign residency had already whittled away a chunk of their pay that was subject to Canadian income tax. Since 2005, they are no longer taxed on the portion of time on domestic routes that transits through U.S. airspace.
Another pilot tried to go further with a push to cut the taxable portion of international flights even more by including overseas layovers when calculating duty time.
Judge McArthur didn’t buy the argument, and said he had had enough.
“Many [Air Canada pilots] have quite legally taken advantage of the Income Tax Act … to substantially reduce their Canadian tax liability by becoming non-residents of Canada,” Judge McArthur says in his Oct. 12 ruling. But some pilots have been “overly aggressive” in their attempts to limit the amount of taxes they pay, triggering an overreaction when the Canada Revenue Agency reassesses their income tax filings, the judge says.
With pilots and the CRA sparring in court over what proportion of various flight routes is taxable, “perhaps it is time for the legislature to say enough is enough and set a firm percentage for non-resident A/C pilots,” he writes.
His ruling dealt with a tax assessment appeal by former Air Canada captain Gordon Price, a senior pilot who lived in Bermuda but commuted to Toronto to fly mostly international routes. About 40 other Air Canada pilots have similar appeals, the judge noted.
In the past, non-resident airline pilots were taxed for the income earned on domestic flights but not for what they earned on international flights. However, in the 2005 case of Air Canada pilot Mark Sutcliffe, who commuted to Toronto from Lewiston, N.Y., the court ruled that pilots should be taxed on only the portion of their flights that is over Canadian air space, whether the flights are domestic or international.
In the latest case, Mr. Price wanted to decrease the proportion of the tax he owed on the pay he received for a long-haul flight by extending the amount of time he could be considered to have been on duty.
He said that, as a long-haul pilot, he could be away from home for several days on each flight. During that time, he said, he remained on duty even when he wasn’t in the air: planning, dealing with reports, communicating with authorities.
Even the time he spent resting before flying back to Canada was part of his duty because of work regulations requiring minimum rest times, he argued.
Increasing his on-duty hours would effectively spread the amount of time covered by the flat fee Mr. Price received for a flight, thus decreasing the proportion of time he had spent in Canadian airspace on each trip, and the amount of taxable income.
The CRA, however, said the calculation should involve only the time Mr. Price flew his jetliner, which increased the percentage of the on-duty time in Canada.
The judge wasn’t convinced by Mr. Price. “Being away from home on layovers might be a condition of employment, but the pilot was paid based on flight time only … it is unreasonable to give the same value to an hour spent flying an aircraft with an hour at a hotel in Tokyo.”
Mr. Price and the CRA also differed on how to calculate other routes. Mr. Price, for example, testified that 90 per cent of a Vancouver-Toronto flight is spent over the United States, while the government took the position that domestic flights are fully taxable, regardless of the airspace over which they are flown.
The two sides in the case pored over data from Nav Canada, which operates the country’s air traffic control system.
“There was a mountain of data records to be condensed into useable percentages with the hope that the parties could arrive at reasonable allocations,” the ruling said.
Judge McArthur settled for figures on which Mr. Sutcliffe and the CRA had previously agreed, ruling that Mr. Price should be taxed for 31 per cent of the Vancouver-Toronto leg and 49 per cent of the return flight.
The judge suggested that legislators require non-resident pilots to be taxed at a 60-per-cent flat rate.
“There is a serious need for a simpler method,” he wrote.
Nicole Eva Pigeon, a CRA spokeswoman, said the agency is reviewing the decision and “considering our next steps” but wouldn’t comment further.
Air Canada’s 6,800 flight attendants, who have been in a dispute with the airline over wages, working conditions, pension changes and plans for a discount carrier, were forced to withdraw the strike threat this month when the federal government referred the matter to the national labour board.
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