Date: 20000515
Docket: 97-2566-IT-G
BETWEEN:
MCLEOD MASONRY [1979] LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the Appellant's 1992 taxation
year. The issue in this appeal is whether the Minister of
National Revenue (the "Minister") properly
assessed the Appellant for unremitted source deductions, pursuant
to subsection 153(1) of the Income Tax Act
(the "Act").
[2] The Notice of Appeal describes the Appellant's
position as follows:
1. McLeod Masonry [1979] Ltd. paid employees wages in the 1992
taxation year.
2. Through the fraud of a foreman who put in false time
records for himself and other employees, employees were paid
excessive and unearned amounts, purported to be wages, [the
'excessive wages'].
3. Initially the company made employee deductions based on the
excessive wages, and those wages and deductions were reflected in
the company's accounting records.
4. On discovering the true facts, the company's management
revised the accounting records to show the true level of wages
paid and new payroll deduction slips were made out. The company
treated the monies received by the employees as in part wages, on
which employee deductions were remitted, and in part as monies
paid out by fraud, and therefore not wages. Employee deductions
were not remitted on these latter amounts and instead a revised
payroll record was used to compute the remittances.
5. The employees were issued T4 slips at the lower wage
level.
6. At the lower wage level the company was responsible for
$9,583.02 plus $958.30 in penalties for a total of $10,852.84 in
employee deductions, of which $10,757.00 was paid by its
Receiver.
7. After audit, the Minister, on November 8, 1994, assessed
the company based on the first set of wage slips and says that
$42,678.47 of payroll remittances are owing plus penalties of
$4,267.81 and interest of $25,878.95 for a total of
$72,825.35.
[3] The Reply to the Notice of Appeal reads as follows:
8. By Notice of Assessment dated on or about
November 8, 1994, the Minister of National Revenue
(the "Minister") assessed the Appellant for
unremited employee source deductions, interest and penalties,
pursuant to the provisions of subsections 153(1) and 227(9) of
the Income Tax Act (the "Act"). The
amounts assessed by the Minister were as follows:
CPP $ 2,936.06
UI 3,687.15
Tax 36,055.36
Total 42,678.47
Penalty 4,267.81
Interest 5,521.00
Balance $52,467.38
9. In so assessing the Appellant, the Minister relied,
inter alia, on the following assumptions of fact:
a) at all material times, the Appellant was a company
incorporated and carrying on business in the Province of British
Columbia;
b) at all material times, the Appellant was a person paying
salary, wages or other remuneration to its employees, within the
meaning of subsection 153(1) of the Act;
c) the Appellant was required to deduct or withhold from its
employees' wages amounts on account of its employees'
federal income tax, provincial income tax, Canada Pension Plan,
and Unemployment Insurance, and did so deduct or withhold such
amounts as required, pursuant to subsection 153(1) of the
Act;
d) the Appellant was required to remit or pay to the Receiver
General for Canada the amounts described in paragraph (c) above,
but it failed to remit or pay such amounts as required, pursuant
to subsection 153(1) of the Act;
e) the Appellant is liable, pursuant to subsection 227(9) of
the Act, for the unremitted amounts, and also for a
penalty of 10% of such amounts plus interest calculated in
accordance with the provisions of the Act;
f) at all material times, the employees of the Appellant
received salary, wages or other remuneration, including living
out allowances, to which they were properly entitled;
g) the Appellant changed its 1992 payroll records in 1993 to
show lesser amounts than those actually paid to the employees and
actually deducted from the employees;
h) the Appellant did not refund the alleged "excess"
deductions to its employees;
i) the Appellant did not show the amounts it actually deducted
on the amended T-4 slips which it issued, and did not enable its
employees to obtain refunds of the alleged "excess"
deductions when filing their T1 income tax returns; and
j) the total amounts paid to the employees included living out
allowances, and such amounts were correctly reported in the
original payroll records as having been received by the
employees.
[4] The witnesses for the Appellant were Messrs.
Brian Pollock, Andrew Paine, Paul Gastner and
Gordon McLeod. Mr. Pollock and Mr. Paine were
bricklayers, Mr. Gastner was an accountant and
Mr. McLeod was the Appellant's president. For the
Respondent, the witnesses were Mr. Goldie,
Ms. Margaret O'Neal and Mr. Raymond Walker.
Mr. Goldie is an official with a bricklayer union,
Ms. O'Neal is an agent with Revenue Canada and
Mr. Walker, a foreman having worked for the Appellant in the
year 1992.
[5] To understand the testimony of the various witnesses, it
is worth putting down as a background a brief summary of the
Appellant's version of facts as given by its president and
only shareholder. The Appellant is in masonry work. In the year
1992, Mr. McLeod claims that in the course of the year the
Appellant paid wages to employees who had increased their hours
worked. A bookkeeping firm, Blanchard Taxation, paid the
employees and made the deductions based on these excessive wages.
At the end of the year 1992, Mr. McLeod said that he
realised the amount of wages he paid was too great and that would
have explained why the Appellant was in financial difficulty.
Mr. McLeod reduced the number of hours for each employee and
in so doing, reduced the employment income and the amount of
deductions. The Appellant issued T4s accordingly.
[6] Mr. Brian Pollock, at the time of his testimony,
was working for McLeod Masonry Ltd. as a mason. In 1992, he
worked for the Appellant. He stated that he belonged to a union
which had as a provision that there should not be more than 37.5
hours in a week and that overtime should be paid time and a half.
He affirmed that in 1992 he had been paid for more hours than he
worked, maybe eight to twelve hours more, on a pay cheque. This
would have taken place over a period of seven to eight months. At
the end of a week, he would tender his timesheet to a supervisor
who would send it to the accounting firm. It was the supervisor
or the foreman who would have increased the number of hours. The
name of one supervisor was Gerry Giasson. The name of the
other was Ray Walker. He also stated in
cross-examination that there was an agreement between the
workers and the Appellant that if one worked extra hours, the pay
would be at straight time. He stated however that there was no
overtime at the job sites. He did not know why he would have been
given the extra hours by the foreman but he received the extra
hours.
[7] The second witness, Mark Andrew Paine, worked
for the Appellant as a bricklayer for a period of approximately
three months in 1992. He is presently on a disability pension. He
never worked overtime. However, sometimes the pay cheques were a
few dollars higher than they should have been, by possibly up to
two hours per day.
[8] The next witness was Mr. Paul Gaster, a
chartered accountant. He met with Mr. McLeod respecting this
appeal. He was therefore not involved as an accountant in the
years in question and was not really knowledgeable as to what
really took place. He came to produce a document prepared by
someone else at his firm (Exhibit A-4). The purpose of
this document was to show that the Minister issued T4s with the
same employment income as determined by the Appellant. The matter
of various T4s will be discussed at paragraph 22 of these
Reasons.
[9] Mr. Gordon McLeod obtained a degree in mechanical
engineering from the University of Alberta in 1969. While at
university, in the summer, he worked as a bricklayer. He
explained that finally the masonry sideline got so busy that he
went into that business in 1974. He related that in 1992, the
provincial government had the pulp mills upgrade their pollution
control and the Appellant got quite a few of these construction
contracts.
[10] During that year, the Appellant employed approximately
54 employees on various job sites. Mr. McLeod stated
that the Appellant hired the employees through the union halls at
the union rates. The employees were bricklayers and masons. There
would be eight to ten on a site and there would be a foreman to
supervise.
[11] The management was done by him only. However, the
Appellant used the services of a Victoria bookkeeping company,
Blanchard Taxation, to pay some bills and issue the pay cheques.
Mr. McLeod lived in Comox, a four hour drive from Victoria.
He stated that he did not visit his accountants in Victoria more
than once during the whole year. He stated that he did not
review, for the whole year, the payroll data that had been
prepared by Blanchard Taxation. He had given to Blanchard
Taxation pre-signed cheques that the latter would courier
at the end of each week to the job sites.
[12] The employees would fill their timesheet and submit it to
the supervisor. Most of these supervisors had not worked for the
Appellant before. Each week, the foreman on the job site would
phone Blanchard Taxation to give it the number of hours worked by
each employee.
[13] At the end of the year 1992, the Appellant had little
cash. Mr. McLeod had to lay off the employees and finish most of
the jobs himself or with a few helpers. In January 1993,
Blanchard Taxation had prepared a set of T4s and a payroll
summary. It is then that, according to Mr. McLeod's
testimony, he realised that employees had been paid for too many
hours. He went to see a firm of chartered accountants, Wharram
Standeven & Co., located in Courtenay, a location close to
Comox where he resided. He asked them to adjust the amount of pay
and the deductions in accordance with the number of hours that he
had determined appropriate for each employee.
[14] Mr. McLeod explained that he had reduced the number of
hours because no overtime was ever worked at his job sites and it
was without his knowledge that the employees had been paid
overtime work. This is why he reduced the number of hours for all
weeks being more than 37.5 hours a week. For the other weeks
that had been reduced down from 35 hours to 30 hours,
or from 30 hours to 25 hours, he had no explanation. He
said that this had been eight years ago and that he could not
remember on which basis he reduced the number of hours.
[15] He stated that he did not pay nor authorize overtime to
any employees because he would have had to pay time and a half or
sometime double time, in order to be in accordance with the union
contract. He said he wanted to play it by the book. Some
employees got living allowances which were paid by a separate
cheque. He also said that at that time there was no agreement
that the extra hours would be paid at a regular rate. He has that
agreement now. Mr. McLeod said that he had five job sites
and he would come on a job site every two weeks for two or three
days. He added that when he was on a job site, the employees were
not there a minute before eight o'clock and they were gone by
four o'clock.
[16] There was no definitive answer given as to whether it was
the amount of the total employment income that had been included
in the Appellant's expense account.
[17] Mr. McLeod never informed the police nor the union
that the wages had been inflated and that he considered that he
had been robbed by the employees. He admitted to counsel for the
Respondent that it was possible he did not mention that problem
to his accountants who had prepared the T4s, when counsel asked
why, when Ms. Margaret O'Neill met with the
accountants, they mentioned the matter of living allowances being
taken as supplementary hours by the employees, but they never
mentioned overtime.
[18] Mr. McLeod gave as an additional argument, that the
number of hours were inflated, that the percentage of contract
labour came to 57 percent and he had calculated
40 percent.
[19] The Appellant went into receivership in February of 1993.
However, it did not become bankrupt. The receivership ended in
1996 (Exhibit A-11). The Appellant exists today in an
amalgamated form.
[20] Mr. McLeod stated that the Appellant should not have to
pay the assessment because the Appellant should not have to make
deductions on money that was stolen from it.
[21] There was confusing evidence as to whom prepared the
various T4s. In the end, it would appear that three sets of T4s
were prepared. The second and the third were issued to the
employees. The second one was prepared by the Appellant's new
accountants on the reduced number of hours. The third set was
issued by Revenue Canada, who did not modify most of the entries
made by the employer when it issued its own set of T4s. Revenue
Canada had amended the T4s only for the purpose of correcting the
amounts of the registered pension fund and include the pension
adjustment amount.
[22] Mr. Goldie, the business manager of the
Bricklayers' Union, Local 1, testified at the request of
counsel for the Respondent. He held that position for two years.
Prior to that time, he was a business agent. He testified that
the Appellant had been behind in his remittances over the years.
He confirmed the number of hours that union employees had to work
but stated that the union would intervene in the matter of
overtime being paid straight time rate only if there was a
complaint from the employees.
[23] Ms. Margaret O'Neal was a payroll auditor for
the Minister in the years in question. Her audit began at the end
of 1993 for the purpose of determining for each employee the
amount paid in a registered pension fund and consequently, the
amount of pension adjustment. She came to the accountant's
office because they had issued the T4s. She found however that
there were documents that did not concur. She left with boxes of
documents. One of these boxes contained the pay slips that were
issued to the employees with their pay cheques. These slips were
produced as Exhibits-R-3, R-4, A-6, A-7 and A-8. She made a
complete list (Exhibit R-5). In her final analysis and
calculation, she arrived at the same figures as Blanchard
Taxation. She also commented on letters sent to Revenue Canada by
some workers who found out that the amounts reported by the
Appellant did not concur with the totals found on their pay
slips.
[24] Mr. Raymond Walker testified at the
Respondent's request. He is a bricklayer. He worked as a
foreman at two jobs for the Appellant for most of the year 1992.
On the first job, Mr. McLeod did not know him well so
Mr. McLeod himself looked after the payments of the local
bills. On the second job, Mr. Walker was looking after that.
He had kept all paperwork that he had to complete in his job as a
foreman and brought it with him to the hearing. He explained that
there was overtime worked but it was always with the general
contractor's permission. The orders were filled and
authorisation signed. These orders were produced as Exhibits R-14
to R-16. Although fraud was alleged by the Appellant regarding
this witness, there was no evidence adduced in this respect
against him at the hearing. Mr. Walker was not questioned by
the Appellant on this subject, which was crucial to the
Appellant's version of facts.
Argument
[25] Counsel for the Appellant submitted that there were two
issues. Firstly were the employees paid more than they earned?
Secondly, if the answer is affirmative, was the Appellant liable
under the Act to withhold the deductions?
[26] Counsel for the Appellant submitted that the evidence of
Messrs. Pollock and Paine that there was overtime should be
preferred to that of Mr. Walker. The evidence of
Messrs. Payne and Pollock was the evidence of two
independent witnesses. Moreover, counsel for the Appellant
suggested that it seemed clear that no union employee may work
overtime without being paid time and a half.
[27] Counsel for the Appellant submitted that if the Court
looks at the evidence as a whole, taking into account all the
witnesses, the balance of probability is that employees were paid
extra wages for at least an extra hour a day. This is also born
out by Mr. McLeod's evidence that the jobs went over
budget and that the payroll was more than it should have been and
was a major contributing factor to his company becoming
insolvent. In many instances, Mr. McLeod rolled back the
wages in a precise fashion. For example, if the hours were over
37.5, he would roll them back to 37.5. As for the other roll
backs for which he cannot remember the explanation, it is not
surprising. This was eight years ago. If one looks at the level
to which Mr.McLeod rolled back the wages, it is quite reasonable.
It is also interesting that Revenue Canada issued T4s at the same
level that the Appellant had done. For them, to not turn around
and controvert their own document is a startling position to take
and quite unfair.
[28] Counsel for the Appellant referred to the words used in
subparagraph 153(1)(a) of the Act: salary,
wages or other remuneration. He submitted that stolen money is
not salary wages or other remuneration. "Salary" is not
defined in Black's Law Dictionary, but
"wages" is defined as follows: A compensation given
to a hired person for his or her services. Compensation of
employees based on time worked or output of production. He
concluded by stating forcefully that clearly stolen money is not
compensation.
[29] Counsel for the Respondent explained that this was
essentially the story of a person whose company was beginning to
get into financial trouble. There may, in Mr. McLeod's mind,
have been some impression that this in fact was occurring. It is
the Minister's position that fraud has not been proven.
[30] Mr. Walker has kept all copies of the work orders
and extra hours orders, showing the amounts paid for the
employees and the dates involved in all of those figures. He
testified that there was an agreement, that if there was to be
overtime, it would occur and that they would be paid straight
time payment. Overtime was authorised, not only by
Mr. McLeod, but certainly by the general contractor. There
is no suggestion that Mr. Walker ever misused anything. His
responsibilities included supervising these employees, dealing
with the suppliers and paying accounts. He had pre-signed cheques
so Mr. McLeod was obviously able to trust him with his funds
to make payments accordingly.
[31] Mr. Pollock's evidence was that there was some
agreement with the Appellant to paying extra hours at straight
time, but Mr. McLeod later said that that was only for later
years and not back in 1992.
[32] Mr. Goldie testified that he had been dealing with
McLeod's Masonry since probably as far back as 1980. For the
year 1992, he was aware that there had been some employee
complaints about certain amounts of benefits. For example,
medical premiums not being paid. He testified about the union
contract: overtime is allowed; there is a higher rate that must
be paid for it, but the union will not act unless there is a
complaint.
[33] There has never been a satisfactory explanation, and
Mr. Walker was not asked to give an explanation, as to why
he would enter into this arrangement to pay people extra money,
or himself extra money.
[34] Mr. McLeod pre-signed cheques. Some of these were
left with his foreman on the sites for certain expenses, some
were given to the accountant who would then fill them out
according to the information he received from the sites. In his
own evidence, he did not review the work done by the accountant
until a whole year had passed.
[35] He also testified he did not make any efforts to recover
any of the excesses that any of the employees would have taken.
He is alleging that they all lived in different places and it
would have been difficult for him to do so. That may be,
nevertheless that does not justify trying to recoup the money
from the Minister. Neither the police nor the union were
contacted in this regard.
[36] Counsel for the Respondent also noted that it was
interesting that we did not hear from some of the witnesses who
might have shed some light on this, such as any of the former
accountants.
[37] Ms. O'Neil had access to the very best material.
She had the original, what she calls "the little slips of
paper". They were the pay slips containing all the
information from the very first pay the employees would have
received, showing the higher wage level and all the deducted
amounts. They match the pay stubs the employees received when
they received their cheques. She did not just take a sampling of
anything. She reviewed all the employees. She reviewed all of the
pay periods. Regarding the T4s that were issued by the Minister,
they were made for the registered pension plan and for the
pension adjustment amounts in boxes 20 and 52 on the T4s. It
does not necessarily mean that Revenue Canada is agreeing with
all the amounts shown in the boxes. The T4 slips are issued by
the employer from the employer's records. They do not have a
legal weight on their own. The tax liability arises from the
Act.
[38] It is admitted that the higher wage amounts were actually
paid. The employees actually received the money and the
deductions were taken off.
[39] Even if fraud was established, and it is not in the
Minister's view, that all that would really do is remove the
obligation to deduct in the first place. If it is not salary or
wages, maybe there is no liability in terms of a responsibility
for deducting, but what if the employer does deduct? At that
point, the rest of the section 153 of the Act flows.
Once the deduction has been made, it has to be withheld. It is
trust money, it then has to be remitted to the Receiver General.
The funds were deducted on the employees' behalf. It is their
tax liability. It was deducted by the employer and then, it never
went anywhere. It was supposed to go to the Receiver General.
[40] Counsel for the Appellant replied on this last aspect
that subsection 153(1) of the Act should be read as a
whole and that there is a condition precedent in that the amounts
paid must be wages, salary or other remuneration.
Conclusion
[41] It is my view that the alleged overstatement of the
number of hours worked by the employees on the basis that no
overtime was ever allowed by the Appellant failed to be proven.
Mr. McLeod made no mention in his testimony of the role of a
general contractor on a job site and of its relationship between
the latter and the Appellant. Mr. Walker produced documents
completed by him for the general contractor as Exhibits R-14 to
R-16. Some documents were also signed by agents of the general
contractor but all were completed to obtain payments or to comply
with some other requirements of the agreement between the
Appellant and the general contractor. These documents showed that
the employees had worked overtime. Regarding whether overtime was
allowed on the job sites, it is my view that the general
contractors on the various sites could have been asked to testify
on the matter. It is not possible to believe that Mr. McLeod
did not review the timesheets nor the cheques being issued by
Blanchard Taxation for the whole of the year 1992. No one from
Blanchard Taxation was asked to testify on this matter. The
subsequent accountants who prepared the litigious T4s did not
mention to the Minister's agent that the hours had been
reduced because they had been fraudulently increased by the
foremen but because they comprised living out allowances.
[42] Absence of the pertinent witnesses, absence of documents,
incomprehensible alleged managerial behaviour, contradictory
version of the facts, were more than sufficient indicators that
the Appellant's allegations could not be substantiated. The
payments made by the Appellant were for wages.
[43] In any event, it is a fact admitted by the Appellant that
the employees were paid at the higher level as wages to them and
that the deductions were made on the pay cheques.
[44] The pertinent part of subsection 153(1) of the
Act reads as follows:
(1) Every person paying at any time in a taxation year
(a) salary or wages or other remuneration,
...
shall deduct or withhold therefrom such amount as is
determined in accordance with prescribed rules and shall, at such
time as is prescribed, remit that amount to the Receiver General
on account of the payee's tax for the year under this Part or
Part XI.3, as the case may be, and, where at that prescribed time
the person is a prescribed person, the remittance shall be made
to the account of the Receiver General at a financial institution
(within the meaning that would be assigned by the definition
“financial institution” in subsection 190(1) if that
definition were read without reference to paragraphs (d) and (e)
thereof).
[45] Counsel for the Respondent is right in her interpretation
that once the deductions are made on an amount that has been paid
as a remuneration they have to be remitted to the Receiver
General. The wording and the economy of the Act
necessarily ask for this interpretation.
[46] If some portion of the remuneration was earned on
fraudulent grounds as is claimed by the Appellant, the matter
should have been litigated between the payor and the payee. If
this claim is unknown to the payee, he will include the amount in
his employment income and pay his taxes and other dues as a
consequence. In other terms, the amounts deducted belong to the
payee. They are deducted and remitted on his behalf. They cannot
be appropriated in the manner used by the Appellant. I wish to
refer to a decision of this Court in The Grand Council of the
Crees (of Quebec) v. M.N.R., 90 DTC 1652, at
page 1654:
Moreover, the Appellant by deducting the required amounts
without remitting them to the Receiver General, goes against the
general scheme of the Act since subsection 153(3) of the
Act states the following presumption:
(3) Effect of deduction. When an amount has been deducted or
withheld under subsection (1), it shall, for all the purposes of
this Act, be deemed to have been received at that time by
the person to whom the remuneration, benefit, payment, fees,
commissions or other amounts were paid.
Tax refunds are in effect made by the Minister and not by the
person paying.
and to Dauphin Plains v. Xyloid and the Queen, [1980] 1
S.C.R. 1182, at pages 1191 and 1192:
It is important to consider the nature of the deduction for
income tax. It is not a deduction for the benefit of the
employer, it is a withholding for the benefit of the employee
because it is to be remitted to the Receiver General of Canada on
account of the employee's tax indebtedness. By virtue of
other provisions of the Income Tax Act if, as happens in a
large number of cases, the withholdings exceed the employee's
tax liabilities, a refund will be made to the employee by the
Department of National Revenue. Therefore, the amount withheld
remains a part of the wages, and subs. 153(3) provides that
it is "deemed to have been received" by him at the time
the payment was made less the deduction. Furthermore, subs.
227(4) of the Income Tax Act provides:
(4) Every person who deducts or withholds any amount under
this Act shall be deemed to hold the amount so deducted or
withheld in trust for Her Majesty.
... Section 153 of the Income Tax Act is the only
law under which anyone can make a deduction for income tax, but
this section goes on to provide in subs. (4), that the amount so
deducted shall be held "in trust for Her Majesty".
...
It must also be considered that, by virtue of s. 153(3)
the employees are deemed to have received their wages in full, so
that they are liable for income tax on that basis. ...
[47] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 15th day of May, 2000.
"Louise Lamarre Proulx"
J.T.C.C.
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