Coopers & Lybrand Limitéé v. MNR, 94 D.T.C 1626, [1994] 2 CTC 2244 (TCC)

Tremblay J.T.C.C.:—The evidence in the instant case was heard at Montréal, Quebec, on October 6 and 7 and December 3, 1992. The Court received the last written pleading on September 7, 1993.

The parties filed particularly detailed submissions. The Court has made extensive use of them.

1. Preliminary facts and issue

1.01 General issue

Stated in its broadest terms, the issue is to determine the validity of notice of assessment 624565 issued by the Minister of National Revenue on March 9, 1982 to the appellant Coopers & Lybrand Ltd. for source deductions unpaid to employees of Canadian Admiral Corp. (hereinafter "Admiral") after a taking of possession on November 4, 1981. The amounts paid are in respect of services rendered by the employees to Admiral before November 4, 1981.

The appellant argued that it is not covered by section 153 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and so is not liable to the assessment.

The respondent maintained the contrary.

1.02 Preliminary facts

The appellant is a corporation 100 per cent of the shares of which are held by the accounting firm Coopers & Lybrand: this corporation is used to handle bankruptcy trusteeship, including taking possession of assets and realizing on securities for various creditors.

Admiral was a company incorporated under the laws of Canada.

On November 4, 1981, as Admiral had failed to pay money owed to the Mercantile Bank of Canada ($20,000,000) and the National Bank of Canada ($20,000,000), the two banks appointed Coopers & Lybrand Limited their agent to realize on the securities held by them, and in particular with instructions to take possession of all property covered by security pursuant to section 178 of the Bank Act, R.S.C. 1985, c. B-1, namely raw materials, inventories of finished goods and accounts receivable, and this was done that same day.

On or about November 4, 1981 the appellant sent round to Admiral employees the following notice (Exhibit A-9):

NOTICE TO EMPLOYEES

November 4, 1981

Coopers 8: Lybrand Ltd. has today been appointed agent on behalf of Canadian Admiral Co.'s (“company”) bankers.

Representatives of Coopers 8: Lybrand Ltd. have taken possession of the company's bank accounts, accounts receivable and inventories.

To the best of our knowledge and belief the company is not in a position to meet present payrolls. The agent has arranged financing to pay wages owing tor work done up to and including today and these payments will be made to all employees who sign a form (which the agent will provide) assigning their wages claim in the same amount as the cheque given to each employee by the agent.

Representatives of the agent will be offering to hire many of the employees on a day- to-day basis to assist the agent it [sic] its duties. The agent will pay wages for such work at the same rate as that paid by the company.

The company will be attempting to effect a refinancing or a reorganization to enable it to continue operations in the ordinary course as soon as possible. The agent's primary responsibility is to protect the interests of the company’s bankers. The company and the agent will appreciate your cooperation in these difficult times.

COOPERS & LYBRAND LTD.

[Emphasis added.]

On or about November 5, 13 and 27, 1981 the appellant purchased from Admiral employees claims the payment of which could have been required of Admiral for the work periods completed from October 26 to 30 and November 2, 3 and 4, 1981. This claim purchase took the form of the following document signed by all Admiral employees who received a payment from the appellant (Exhibit A-11):

ASSIGNMENT

IN CONSIDERATION OF the payment to me of $ , receipt of which is acknowledged, the undersigned hereby sells assigns [sic] to Coopers 8: Lybrand Ltd., agent for the Mercantile Bank of Canada and the National Bank of Canada (the "assignee") all my right to and interest in wages/salaries up to an amount of $ for services rendered to or on behalf of Canadian Admiral Corp, for the period inclusive, together with all rights of preference or priority of payment and all rights of lien, charge or trust upon any property, real or personal which I may have in respect thereof, whether statutory or otherwise, as well as any other rights I may have against any other persons for the said wages/salaries, (the “assigned claim”) and I hereby irrevocably nominate the assignee as my agent and authorize the assignee to take whatever steps the assignee may see fit to collect, obtain or enforce payment of the assigned claim.

1.03 Issues

Three questions are raised by the instant appeal:

(i) should the appellant have collected or deducted the amount specified by section 153 of the Income Tax Act from payments made to purchase claims employees could make against Admiral?

(ii) does the Court have jurisdiction to hear the appellant’s appeal regarding the rights, interest and penalties assessed pursuant to the Unemployment Insurance Act, 1971, S.C. 1970-71-72, c. 48? — if so, should the appellant have deducted the employee's contribution (and paid an equal amount as the employer's contribution) pursuant to that Act?

(iii) does the Court have jurisdiction to hear the appellant’s appeal regarding rights, interest and penalties indicated under the heading "Provincial Tax" on the notice of assessment? — if so, should the appellant have collected or deducted a prescribed amount from payments made to purchase claims employees could make against Admiral?

2. Burden of proof

The appellant has the burden of showing that the respondent's assessment is wrong in fact or in law.

It will therefore be useful to list the facts admitted by the parties and identify the facts assumed by the respondent which are disputed by the appellant.

2.01 Admitted facts

The relevant facts admitted by the two parties are as follows:

1. Coopers & Lybrand Ltd. is a company acting as an agent and mandatary for the National Bank of Canada and Mercantile Bank of Canada pursuant to the securities described in the following paragraph;

2. during 1979 and 1980 Admiral obtained credit lines for substantial amounts from the Mercantile Bank of Canada and the National Bank of Canada, and in particular gave the Mercantile Bank of Canada and National Bank of Canada, to secure repayment of the advances thus made, security pursuant to section 178 of the Bank Act (formerly section 88) as appears from the following documents:

(a) a notice, registered at the agency of the Bank of Canada in Toronto on November 30, 1979, as No. 277504, of its intention to give the defendants security pari passu pursuant to section 178 of the Bank Act, the whole as appears from the said notice filed to have effect as if set out at length as Exhibit A-1;

(b) an agreement on loans and advances dated December 23, 1980, the whole as appears from the said agreement filed to have effect as if set out at length as Exhibit A-2;

(c) a credit application and promise to give security dated February 2, 1981, the whole as appears from the said application filed to have effect as if set out at length as Exhibit A-3;

(d) an assignment of property pursuant to the Bank Act dated February 2, 1981, the whole as appears from the said assignment filed to have effect as if set out at length as Exhibit A-4;

4. On November 23, 1981 a petition in bankruptcy was filed against Admiral and subsequently granted, appointing Campbell Sharp Ltd. as Admiral’s trustee in bankruptcy;

5. part of the wages of Admiral employees for a period prior to November 4, 1981 remained unpaid when the plaintiff took possession;

6. on or about November 4, 1981 Admiral was operating various plants located at Mississauga and Cambridge in Ontario and at Montmagny in Quebec;

7. on or about November 4, 1981 Admiral had some, 1,400 employees, a part of whom were paid by the hour;

8. on or about November 4, 1981 the appellant sent round a notice to Admiral employees (Exhibit A-9, cited above in paragraph 1.02);

9. when cheques were issued to employees, the appellant caused the recipients of the cheques to sign document Exhibit A-11, headed "Assignment"; this document was cited above in paragraph 1.02;

10. on or about December 4, 1981 Admiral was declared bankrupt;

11. Admiral employees before November 4,1981 were not employees of the appellant;

12. source deductions (tax, unemployment insurance, Canada Pension Plan) totalling $163,404.56 (this amount excluding penalties and interest) were not paid either by the appellant or Admiral to the Receiver General of Canada on December 15, 1981;

13. on March 9, 1982 the Minister of National Revenue issued a notice of assessment having No. 624565, claiming a balance owing of $186,008.01 and including the statement:

You are hereby assessed the amounts indicated for failure to remit as required for November 1981;

14. the amount of $186,008.01 assessed by the notice of assessment of March 9, 1982 broke down as follows:

Assessment
Federal tax	$ 79,654.52 DR
Provincial tax	37,686.86 DR
Canada Pension Plan	13,253.76 DR
Unemployment insurance	32,809.42 DR
Penalty	16,340.45 DR
Interest	6,263.00 DR
	$186,008.01 DR

15. on June 4, 1982 the plaintiff objected to the notice of assessment of March 8, 1982;

16. on March 14, 1989 the Minister of National Revenue notified the plaintiff that the notice of assessment of March 9, 1982 was confirmed on the following ground:

The taxpayer has been properly assessed, and a penalty has been properly levied, for failure to remit amounts deducted from remunerations, within the provisions of subsections 153(1), (1.3) (1.4) and 227(9) of the Act and subsections 100(1), (3) and 108(1) and section 101 of the Income Tax Regulations.

[Translation.]

2.02 Facts denied by the appellant

The appellant denied (in bold) the following facts assumed by the respondent in paragraph 5 of his reply to the notice of appeal:

1. On November 4, 1981 the appellant took control and possession of the majority of Admiral's assets, including accounts receivable; the appellant took control and possession also of cash on hand and bank accounts, an amount of $1,522,573.45; [para. 5(d)]

(It is denied that a sum of $1,522,573.45 ended up in the appellant’s hands on November 4, 1981. This amount became the property of the banks as Admiral’s bank accounts were reconciled and accounts receivable collected. When the Admiral employees' claims were purchased the appellant’s bank account was in deficit.)

2. Accounts receivable, cash on hand and bank deposits were used inter alia to pay the net wages owed to Admiral employees (whether paid by the hour or otherwise) for the periods from October 26 to 30 and November 2, 3 and 4, 1981: [para. 5(e)]

(It is denied that net wages were paid when a purchase of claims was made; it is denied that the payments were made from accounts receivable, cash on hand and bank deposits, as the payments were made from amounts belonging to the banks and on the banks’ instructions.)

3. The appellant itself took the decision to pay the net wages owed to Admiral employees for the aforementioned periods; [para. 5(f)]

(The decision to purchase employees’ claims was made by the banks on the appellant's recommendation.)

4, On November 5, 13 and 27, 1981 the appellant paid Admiral employees their net wages for the aforementioned period; [para. 5(h)]

(It is denied that wages were paid.)

5. The payment of net wages was made on cheques with the name of Admiral and bearing the signature:

Coopers & Lybrand Ltd.

Agent — National Bank of Canada

[para. 5(j)]

(It is denied that wages were paid.)

6. The said cheques were accompanied by a slip (attached to the cheque and to be detached before cashing) titled “Statement of salary and deductions”, showing the gross salary for the period covered and the applicable source deductions (the slip also indicated all the cumulative amounts for the year); [para. 5(k)]

(It is denied that wages were paid and the process used for issuing cheques was explained.)

7. The gross pay and source deductions applicable to that amount were entered in the Admiral books; [para. 5(1)]

(The process used for issuing cheques was explained.)

8. The appellant also proceeded to submit the T-4 form on behalf of Admiral and gave employees their T-4 slips, which included gross pay and source deductions for the aforementioned periods; [para. 5(m)]

(The liability resulting from this fact lies with Admiral, not the appellant.)

[Translation.]

2.03 Legal arguments disputed by the appellant

The appellant also denied two legal arguments put forward by the respondent.

1. As the appellant was a trustee which took control of Admiral's property and authorized or arranged for the payment of salaries, wages or other remuneration to employees on Admiral’s behalf, it was deemed to be a person making the payment and is jointly and severally liable for the amount to be deducted, withheld and remitted from the employees' gross pay, namely $163,404.56; [para. 5(r)]

(It is denied that the appellant is a trustee, that it took control of Admiral’s propertv, that it paid wages, salary or other remuneration and that it acted on Admiral's behalf.)

2. As the appellant failed to remit at the proper time it is also liable for a ten per cent penalty on the amount not paid, with interest on the unpaid amount; [para. 5(s)]

(As the appellant collected nothing, it cannot be liable for a penalty.)

[Translation.]

2.04 Appellant's evidence

2.04.1 As its principal witness the appellant called Mr. André Giroux, an associate member of the firm Coopers & Lybrand. He was responsible for carrying out the mandate given by the two banks, the National Bank of Canada and the Mercantile Bank of Canada.

The witness first explained the situation at November 4, 1981, the day on which the appellant took possession of all the property covered by the security under section 88 (later 178) of the Bank Act. He said the following:

Right. We have to go back again to the situation at November 4, 1981. First, as I indicated earlier, it was an important mandate, we are talking about many employees, we are talking about many employees, we are talking about between 1,200 and 1,500 employees; and at that point, Coopers & Lybrand, as a representative of the two banks, had two main concerns regarding the employees.

First, you have to realize that overnight these employees were perhaps out of work. There was money owed to them and so then we were always concerned with the question of vandalism and safety of the property, we wanted to ensure there would be no problems with the employees.

Second, we also knew that at some places there was work in progress and that it was then perhaps in the agent's interest and to the benefit of the two banks that this work in progress should be completed.

So we recommended to our two clients, the National Bank and the Mercantile Bank, just. . . for those reasons we recommended that they meet, pay the net amounts owed to employees, and of course with assignment of their claims. So it was on the recommendation of Coopers that the two banks agreed to make available the necessary money to pay these amounts. [Translation of 6-10-92, pages 37-38]

MICHEL LEGENDRE:

Q. On November 4, you told us that a decision was made to pay former Admiral employees the net amount owing to them: can you tell the Court who made that decision?

A. Well, as I mentioned earlier, it was result of a recommendation by Coopers & Lybrand Ltd. We recommended to our two clients, the Mercantile Bank and the National Bank, that they authorize Coopers to do this and ensure that money would be available to meet these amounts through the agent.

Q. And what was the banks' decision?

A. They agreed, they said yes, they were in agreement.

Q. Could you now tell us how this decision was put into effect?

A. Right. So of course. . . .

THE COURT: I’m sorry.

Q. If I understand correctly, you did this so you could have the employees’ cooperation?

A. Yes, and cooperation at two levels: one, a somewhat negative cooperation, to ensure there would be no vandalism or violent or negative acts committed by employees; and second, we were fully aware that we would need their services either to complete work in progress or perhaps even to help us perform other tasks in the course of our mandate. So there were two main reasons. [Translation of 6-10-92, pages 40-41]

[Emphasis added; translation.]

In cross-examination on the same day the witness Giroux answered as follows, at pages 76-77:

Mr. MARECKI:

Q. Was the Coopers & Lybrand recommendation before November 4 to pay all the gross salaries or was the recommendation to the banks to pay only the net amount?

A. It was to meet the amounts owed to the employees, the net amount.

Q. The net amount. So why did Coopers & Lybrand make this recommendation to the banks?

A. Because so far as we were concerned, it was their responsibility to meet — if we wanted to meet the amounts which were owed to employees.

Q. So the strategy developed between Coopers & Lybrand and the bank was to pay the net wages to the employees?

A. The strategy was. . . well, the "strategy", the decision was to meet the amounts owed to employees before the taking of possession, and in our opinion the amount to be paid was the net amount.

THE COURT:

Q. Was there a discussion with the bank as to whether you had to pay the part which was deductions, or which would be owed to the Department of Revenue; was there a discussion of this point — do you recall that?

A. I do not recall all the details, but certainly, Your Honour, it was clear in the banks’ mind that the net amount would be paid; it was clear.

[Emphasis added; translation.]

2.04.2 Mr. Robert Savoie, senior director, National Bank task force (translation of 3-12-92, page 50), and Mr. Jacques Gagné, former account director with the Mercantile Bank (translation of 3-12-92, pages 59-60), confirmed the testimony of Mr. Giroux.

Mr. Robert Savoie:

Q. What was your bank's decision regarding the payment of arrears of wages owed to employees on November 4, 1981?

A. The National Bank's decision was to pay the net wages.

Q. How was this to be done?

A. It was to be done by the repurchasing of this claim through Mr. Giroux, who was our agent.

Q. Why did you decide to pay the wages before the taking of possession, wages owed before the taking of possession?

A. Well, at that time — at that time we were considering the problems which eventual taking of possession would cause. There was a great deal of work in progress. We needed employees to complete and maximize the realization. Obviously, we also did not want any picketing because the Admiral employees were unionized, and we considered that our social role was to pay the employees’ wages.

Mr. Jacques Gagné:

Q. You heard the testimony of Mr. Giroux this morning, and the testimony of Mr. Savoie as well, on payment of amounts owed to employees at November 4 and the procedure for repurchasing claims. Could you tell the Court what the Mercantile Bank’s position was and what decisions the Mercantile Bank took at that time?

A. We had decided with our solicitors, with Coopers and with the National Bank that the best way to proceed in order to maximize the realization and avoid trouble was precisely what Mr. Savoie said, paying the amounts owed to employees in order to avoid any breakdown and also make it possible to continue operations and finish inventories in progress and goods in progress.

Q. As to the procedure, was the procedure discussed before November 4, 1981 that is, payment of net amounts and purchase of claims?

A. Yes, this was in fact discussed and we said we had decided to pay only if the employees assigned their claims to us.

[Emphasis added; translation.]

2.04.3 Paragraph 7 of the appellant’s report to the banks on November 5, 1981 (Exhibit A-2) confirms the testimony of the three witnesses:

7. In accordance with the instructions we received before our appointment, we are trying to settle all outstanding claims for wages except for vacation pay, by obtaining from each employee an assignment of his wage claims equal to the amount we are paying.

[Emphasis added; translation.]

2.04.4 For reasons of administrative efficiency, the appellant used the Admiral payroll system to issue the cheques required to purchase the employees’ claims (André Giroux, 6-10-92, pages 43-44):

Q. So, we have got to the decision which was taken by the banks on the recommendation of the great Coopers & Lybrand to pay the employees the net amount owed to them

— can you tell us how this decision was implemented?

A. We asked former Admiral employees to first draw a line at November 4, 1981 and calculate amounts owed to the employees, all services rendered up to November 4, 1981. Then we — what we finally wanted was to know the net amount owed to employees up to November 4, 1981.

Now to do this, once again, we are talking of 1,200 to 1,400 employees, so for us — the practical aspect — the approach — the easiest and most practical possible — was to use the already existing systems, the Admiral company’s payroll system; and by using this system former Admiral employees were able to tell us — to give us information on amounts owed to each employee for services rendered up to November 4.

[Translation.]

2.04.5 The appellant had obtained the agreement of the banks to finance the purchase of claims which employees may have had against Admiral (André Giroux, 6-10-92, page 45).

Q. Could you tell the Court who financed these assignments of claims?

A. The amounts — the cheques were drawn on the agent’s account and, as representatives of the banks, we had their agreement. . .the banks agreed to finance and be responsible for these amounts.

Q. And the agreement was to finance the net amount?

Q. The net amount, yes, yes.

[Translation.]

2.04.6 The appellant’s bank account statement (Exhibit A-15) indicated the following balances on the dates the assignments of claims were purchased, about November 6, 13 and 27, 1981:

2.04.7 It further appeared from the testimony of Mr. Giroux and Exhibit 1-2 that though on November 4, 1981 the appellant did not know the amount Admiral had in its various bank accounts it later became clear from work done that on. November 4, 1981 Admiral had $1,522,573.45. Needless to say this amount was part of the realization of Admiral’s assets in favour of the two banks, the appellant's mandators. However, on November 4, 1981 the appellant was unaware of the existence of this asset. It was not until a bank reconciliation was made that it was possible subsequently to show that this amount was in the Admiral bank accounts.

2.04.8 Finally, it was clear from Mr. Giroux’ testimony that at no time did the appellant set apart money in separate funds to pay source deductions (translation of 6-10-92, page 52; translation of 3-12-92, page 44).

On this specific point Mr. Hale, the collection agent for source deductions and a witness for the respondent, confirmed Mr. Giroux’ testimony. He said the following:

Q. You also said yesterday that cheques had been issued for the net amounts?

A. That's correct.

Q. So again, no amount was segregated to cover those income tax deductions for Canada Pension Plan or unemployment insurance?

A. Not to my knowledge.

Q. Not to your knowledge, but there were bookkeeping entries?

A. That's correct. (translation 7-10-92, pages 12-13)

2.05 Respondent's evidence

2.05.1 Mr. Hale’s testimony essentially consisted of reading the “inquiry report" of a meeting with Mr. Joe Pernica, filed as Exhibit I-5. Not only was this “inquiry report" not written by Mr. Hale but the original of the document had been destroyed (Terry Hale, 7-10-92, cross-examination, pages 15-16).

As a consequence of the evidence heard regarding this report, the Court cannot accept it.

2.05.2 The close cross-examination of Mr. Giroux, without making any fundamental change, was the final part of the respondent's evidence. In Mr. Hale’s testimony the facts concerning Admiral's debt, the issuing of the cheques and the T-4s are set out below.

3. Facts in evidence emphasized by respondent

3.01 On November 5, 1981 Coopers & Lybrand Ltd. submitted an initial report to the banks (trans. of 3-12-92, page 8). This document (Exhibit A-12) mentioned inter alia:

1. On Wednesday, November 4, 1981 we took possession of the accounts receivable registers and inventory at all locations and the appropriate bank accounts were opened in our name with the National Bank of Canada.

7. In accordance with the instructions we received before our appointment we are trying to settle all outstanding claims for wages, except for vacation pay, by obtaining from each employee an assignment of his wage claims equal to the amount we pay.

[Translation.]

As to the preparation of pay cheques, Admiral had its own computerized accounting system and had no dealings with any outside agency (such as the pay services provided by banks).

Admiral had a wage register and the amount of wages was paid on various dates depending on the duties performed by employees. Admiral had three separate payrolls, weekly for plant employees, fortnightly for office employees and monthly for managers (translation of 6-10-92, pages 91-92 and 147).

Coopers & Lybrand Ltd. used the existing accounting system and proceeded to have pay cheques prepared for Admiral employees. The accounting system recorded all the usual source deductions such as provincial and federal tax and contributions to the Canada Pension Plan, Quebec Pension Plan and unemployment insurance and even union dues (see Exhibit A-10, translation of 6-10-92, pages 47 and 107).

An initial series of pay cheques for plant employees was handed on November 5 and 6, 1981 to cover the work period from October 26 to 31, 1981 (translation of 6-10-92, pages 130-148).

A second series of pay cheques for plant and office employees was handed on November 13, 1981 to cover the work period from November 1 to 3, 1981 (translation of 6-10-92, pages 130 and 149).

3.02 The issuing of pay cheques was authorized by representatives of Coopers & Lybrand Ltd. (translation of 6-10-92, page 97). The pay cheques were probably given by hand (translation of 6-10-92, pages 131-132) since Coopers & Lybrand Ltd. required employees to sign a claim assignment (see Exhibit A-11, translation of 6-10-92, page 129) cited at length above (1.02) but a part of which reads as follows:

In consideration of the payment to me of . . ., receipt of which is acknowledged, the undersigned hereby sells assigns [sic] to Coopers & Lybrand Ltd., agent for the Mercantile Bank of Canada and the National Bank of Canada (the "assignee") all my right to and interest in wages/salaries up to an amount of. . . .

The amounts entered in documents A-11 were the amount of net wages paid to the employees. The total amount of claim assignments came to $684,215.31 (translation of 6-10-92, page 128). It does not appear that the banks used the claim assignments in any way whatever (translation of 3-12-92, page 61).

In addition to the cheque, the pay cheques handed by Coopers & Lybrand to employees contained a slip indicating source deductions (Exhibit 1-4, translation of 6-10-92, page 177). Besides, the words "statement of salary and deductions” can be seen at the bottom of the pay cheque slips.

3.03 At almost the same time as the taking of possession on November 4, 1981 a representative of the Minister of National Revenue, Mr. Terry Hale, who at the time was a collection agent for source deductions (translation of 6-10-92, page 139), made a visit on November 6, 1981, as he was concerned about source deductions unpaid by Admiral for October (excluding the period from October 25 to 31, 1981).

When he learned that Coopers & Lybrand Ltd. were preparing to pay wages owed to employees Mr. Hale warned the Coopers & Lybrand Ltd. representatives on the spot that the firm would be held responsible for source deductions (translation of 6-10-92, pages 144 and 146).

Mr. Hale subsequently worked out an assessment of Admiral amounting to over $600,000 for the period from October 1 to 25, 1981, eventually submitted as a claim in the Admiral bankruptcy (translation of 6-10-92, pages 151 and 155).

3.04 Further, Mr. Hale noted with respect to Coopers & Lybrand Ltd. in December 1981 that source deductions from wages payments made on November 5, 13 and 27,1981 had not been remitted and he had an initial assessment issued to Coopers & Lybrand Ltd. (translation of 6-10-92, page 156).

Subsequently, in January 1982 the amounts assessed were revised with Coopers & Lybrand Ltd. representatives (translation of 6-10-92, page 159) and the final assessment (which is the subject of the appeal) was determined on March 9, 1982 (Exhibit 1-6, translation of 3-12-92, page 4).

Additionally, between January and March 1982 Mr. Hale ensured that:

— when they received their pay cheque from Coopers & Lybrand Ltd. employees also received a slip indicating source deductions (Exhibit 1-4);

— the T-4s issued to employees included gross wages for the period from October 25 to November 3, 1981 and source deductions (translation of 6-10-92, pages 161-173).

4. Act — case law — analysis

4.01 Act

The main provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") involved in this appeal are paragraph 153(1)(a), subsections 153(1.3) and (1.4) and 227(8) and (9), as well as subsections 100(1) and (3) and 108(1) of the Income Tax Regulations. They read as follows:

Income Tax Act

153. Withholding

(1) Every person paying

(a) salary or wages or other remuneration . . .

at any time in a taxation year shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part.

153(1.3) Payments by trustee, etc.

For the purposes of subsection (1), where a trustee who is administering, managing, distributing, winding up, controlling or otherwise dealing with the property, business, estate or income of another person authorizes or otherwise causes a payment referred to in subsection (1) to be made on behalf of that other person, the trustee shall be deemed to be a person making the payment and the trustee and that other person shall be jointly and severally liable in respect of the amount required under subsection (1) to be deducted or withheld and to be remitted on account of the payment.

153 (1.4) Definition of "trustee"

In subsection (1.3), ''trustee" includes a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator, sequestrator or any other person performing a function similar to that performed by any such person.

227. Withholding taxes

(8) Any person who has failed to deduct or withhold any amount as required by this Act or a regulation is liable to pay to Her Majesty

(a) if the amount should have been deducted or withheld under subsection 153(1) from an amount that has been paid to a person resident in Canada, or should have been deducted or withheld under section 215 from an amount that has been paid to a person not resident in Canada, ten per cent of the amount that should have been deducted or withheld, and

(b) in any other case, the whole amount that should have been deducted or withheld,

together with interest on the amount at the prescribed rate per annum.

227(9) Every person who has failed to remit to pay

(a) an amount deducted or withheld as required by this Act or a regulation, or

(b) an amount of tax that he is, by subsection 116(5) or by a regulation made under subsection 215(4), required to pay,

is liable to a penalty of ten per cent of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the rate per annum prescribed for the purposes of subsection (8).

Income Tax Regulations

Tax deductions

100(1) In this Part and in Schedule I,

"employee" means any person receiving remuneration;

"employer" means any person paying remuneration;

“remuneration” includes any payment that is

(a) in respect of

(i) salary or wages, or

(ii) commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated (referred to as "commissions" in this Part),

paid to an officer or employee. . . .

100(3) For the purposes of this Part, where an employer deducts or withholds from a payment of remuneration to an employee one or more amounts each of which is

(a) a contribution under the Canada Pension Plan or under a provincial pension plan as defined in section 3 of the Canada Pension Plan,

(b) a contribution to or under a registered pension fund or plan, or

(c) a premium under the Unemployment Insurance Act, 1971,

the balance remaining after deducting such amount or amounts, as the case may be, shall be deemed to be the amount of that payment of remuneration.

Remittances to Receiver General

108(1) Amounts deducted or withheld under subsection 153(1) of the Act shall be remitted to the Receiver General on or before the 15th day of the month next following the month in which the amounts were deducted or withheld.

4.02 Case law

The case law cited by the parties is as follows:

1. Bank of Montreal v. Hall, [1990] 1 S.C.R. 121, 65 D.L.R. (4th) 361;

2. Flintoft v. Royal Bank, [1964] S.C.R. 631, 47 D.L.R. (2d) 141;

3. Bastien v. J.M. Dessureault Inc., [1962] S.C.R. 97;

4. Place Quebec Inc. v. Desmarais et autre, [1975] C.A. 910;

5. F. Vigneron Construction générale v. Banque Royale, [1976] C.A. 367 (Que);

6. Evans Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 16 D.L.R. (2d) 123, 27 W.W.R. 38 (B.C.C.A.);

7. Royal Bank of Canada v. The Queen, [1984] C.T.C. 573, 84 D.T.C. 6439 (F.C.T.D.).

8. Société nationale de fiducie v. Québec (sous-ministre du revenue), [1990] R.D.F.Q. 134, [1990] R.J.Q. 92 (C.A.);

9. Société nationale de fiducie v. Québec (sous-ministre du revenue), [1991] 1 S.C.R. 907, 40 Q.A.C. 79, 126 N.R. 30;

10. Coopers & Lybrand Ltd. v. R., [1980] C.T.C. 367, 80 D.T.C. 6281 (F.C.A.);

11. Comanche Drilling Ltd. (Receiver of) v. M.N.R., [1989] 1 C.T.C. 428, 89 D.T.C. 5225 (F.C.T.D.);

12. British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, 59 D.L.R. (4th) 726;

13. Q.N.S. Paper v. Chartwell Shipping Ltd., [1989] 2 S.C.R. 683, 62 D.L.R. (4th) 36;

14. Aktiengesellschaft v. Québec (Ministere du revenu), [1980] 1 S.C.R. 580, 112 D.L.R. (3d) 83;

15. Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd. et al., [1980] 1 S.C.R. 1182, [1980] C.T.C. 247, 80 D.T.C. 6123;

16. Lalonde v. M.N.R., [1982] C.T.C. 2749, 82 D.T.C. 1772 (T.R.B.);

17. 299144 British Columbia Ltd. v. M.N.R., [1990] 2 C.T.C. 2427, (T.C.C.);

18. Plaskett & Associates Ltd. v. M.N.R., [1991] 1 C.T.C. 2162, 91 D.T.C. 162 (T.C.C.);

19. Mollenhauer Ltd. v. Canada, [1992] 2 C.T.C. 121, 92 D.T.C. 6398 (F.C.T.D.);

20. Corazza v. M.N.R., [1992] 2 C.T.C. 2023, 92 D.T.C. 1554 (T.C.C.);

21. Royal Bank of Canada v. The Queen, [1986] 2 C.T.C. 211, 86 D.T.C. 6390 (F.C.A.);

22. Armstrong v. Canadian Admiral Corp. (Receiver of) (1983), 53 O.R. (2d) 468, 24 D.L.R. (4th) 516 (H.C.) Judge Carruthers of the High Court of Justice of Ontario;

23. Armstrong v. Canadian Admiral Corp. (Receiver of) (1987), 61 O.R. (2d) 129, 42 D.L.R. (4th) 189 (C.A.).

4.03 Analysis

4.03.1 Principal facts

The balance of evidence regarding the facts underlying the dispute here are [sic] as follows.

4.03.01(1) The payments made to employees on November 6, 13 and 27, 1981 for the work periods at issue, namely from October 26 to 30 and November 2 to 4, 1981, consisted of net amounts after source deductions for federal income tax, Ontario income tax and unemployment insurance (2.04.1, 2.04.2 and 2.04.3).

4.03.1(2) The decision on these net payments was made by the mandator, namely the two banks, at the suggestion of the appellant’s mandatory [sic] (2.02(3), 2.04.1 and 2.04.2).

4.03.1(3) The decision not to retain a reserve in order to remit the deductions made to the respondent is not as clear (2.04.1 in fine), but I would say that in the circumstances it follows logically from the preceding fact "of paying only the net amount".

4.03.1(4) The net amounts paid were paid from money provided by the mandator (the two banks) (2.04.1). It appeared from the bank account opened in the name of "Coopers & Lybrand Ltd., Agent" (Exhibit A-15) that the amounts of $475,000, $100,000 and $175,000, inter alia, were reimbursed to the mandator.

An amount of $1,522,573.45 (2.04.7) was in the various Admiral bank accounts on November 4, 1981, but the appellant did not know of this at that time.

4.03.1 (5)(a) Securities and their effects

The securities held under section 88 of the Bank Act (Exhibit A-2) provide the following in paragraphs 1 and 4:

In consideration of the loan(s) or advance(s) made and/or to be made hereafter by THE MERCANTILE BANK OF CANADA (hereinafter called “the bank") to the undersigned (hereinafter called “the customer") the customer agrees with the bank as follows:

1. All security now or at any time hereafter held by the bank for the payment of any debt or liability of the customer (the said security being hereinafter called “the security”), including, without limiting the generality of the foregoing, security by way of warehouse receipt or bill of lading or under section 88 of the Bank Act, together with all property covered by or comprised in the security (the said property being hereinafter called "the property"), and all proceeds of the security and of the property, shall be continuing collateral security for the payment of such debt or liability and also for the payment of interest thereon calculated according to the bank's usual custom, and of all costs, charges and expenses of or incurred by the bank in connection therewith, whether in protecting, preserving, realizing or collecting the security or the property or attempting so to do or otherwise, and interest thereon at the rate and calculated in the manner aforesaid, all of which the customer agrees to pay to the bank.

4. The proceeds of all sales by the customer of the property or any part thereof, including, without limiting the generality of the foregoing, cash, debts arising from such sales or otherwise, evidences of title, instruments, documents and securities, which the customer may receive or be entitled to receive in respect thereof, are hereby assigned to the bank and shall be paid or transferred to the bank forthwith, and until so paid or transferred shall be held by the customer in trust for the bank. Execution by the customer and acceptance by the bank of an assignment of book debts or any additional assignment of any of such proceeds shall be deemed to be in furtherance hereof and not an acknowledgment by the bank of any right or title on the part of the customer to such book debts or proceeds.

[Emphasis added.]

It seems quite clear that in accordance with this document the banks held ownership of the property, including the bank accounts.

4.03.1(5)(b) In Flintoft v. Royal Bank of Canada (4.02(2)) and Bank of Montreal v. Arthur Hall (4.02(1)) the Supreme Court of Canada held to this effect.

In the latter case La Forest J. said the following for the Court, at 133-34 (S.C.R.):

The nature of the rights and powers vested in the bank by the delivery of the document giving the security interest has been the object of some debate. Argument has centred on whether the security interest should be likened to a pledge or bailment, or whether it is more in the nature of a chattel mortgage. I find the most precise description of this interest to be that given by Professor Moull in his article "Security Under Sections 177 and 178 of the Bank Act” (1986), 65 Can. Bar. Rev. 242, at page 251. Professor Moull, correctly in my view stresses that the effect of the interest is to vest title to the property in question in the bank when the security interest is taken out. He states, at page 251:

The result, then, is that a bank taking security under section 178 effectively acquires legal title to the borrower's interest in the present and after-acquired property assigned to it by the borrower. The bank’s interest attaches to the assigned property when the security is given or the property is acquired by the borrower and remains attached until released by the bank, despite changes in the attributes or composition of the assigned property. The borrower retains an equitable right of redemption, of course, but the bank effectively acquires legal title to whatever rights the borrower holds in the assigned property from time to time.

It is therefore justified to conclude that the amounts which ended up in the bank account opened in the name of "Coopers & Lybrand Ltd., Agent” were the property of the banks. Any cheque drawn by the appellant, the mandatary of the banks, was in fact according to the appellant only paid for the mandators.

4.03.1 (5)(c) The general assignments of Admiral’s accounts receivable which the banks held made them owners of Admiral’s accounts receivable.

Each assignment (Exhibit A-5) in fact stated that Admiral ‘assigns and transfers all claims, debts and demands, which without limiting the generality of the foregoing includes all book debts already due or to become due, and so on”.

In Bastien v. J.M. Dessureault Inc. (4.02(3)), at page 99, it states the following:

The words "cède et transporte” used in the transfer, in the absence of some qualifying term, mean a transfer of ownership of the debt.

[Emphasis added.]

The following cases were also decided in the same way: Place Québec Inc. v. Demarais et autre (4.02(4)), F. Vigneron Construction Générale et autres v. Banque Royale du Canada (4.02(5)) and Evans, Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (4.02(6)).

In Evans, Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd., it states the following at page 126:

The fact that the appellant permitted the assignor to collect the assigned debts does not alter the fact that they were the property of the appellant.

In Royal Bank of Canada v. The Queen (4.02(7)), there is the following at page 578 (D.T.C. 6443):

It seems clear on the strength of foregoing authorities that in the instant case, Miles Construction conveyed all of its right title and interest in its book debts to the plaintiff bank on January 10, 1981, as shown by Exhibit "A". Therefore, it is equally clear that, from that day, the book debts, actual or future, were never more the property of the assignor, Miles.

[Emphasis added.]

It is therefore clear that after the debt assignments all the accounts receivable were the property of the banks from the moment they existed and were never the property either of Admiral or the appellant.

4.03.1 (5)(d) Conclusion on banks' right of ownership

In conclusion the appellant, the mandatary of the banks, drew on the "Coopers & Lybrand Ltd., Agent" bank account cheques having the notation "Coopers & Lybrand Ltd., Agent— National Bank” (Exhibit I-1) in exchange for an assignment made to "Coopers & Lybrand Ltd. as agent of the Mercantile Bank of Canada and National Bank of Canada” (Exhibit A-11).

These cheques were paid by the banks (by their mandatory the appellant) from amounts belonging to them and which they owned.

Accordingly, the appellant did not make any payment to Admiral employees in its own name (statement, paragraph 31): all payments were made in the name of the banks. A mandatary who acts in accordance with his mandate is not responsible for the obligations of his mandator when he has disclosed his mandate as the appellant disclosed it by signing the cheques "Agent —National Bank of Canada”.

In Aktiengesellschaft v. D/.M.R. (Quebec) (4.02(14)), Pigeon J. of the Supreme Court of Canada said the following at pages 584-85 [sic]:

Under the general principles of the law of mandate, it is clear that the obligation of a mandatory towards the mandator is not a debt. The person who has bought property on behalf of a third party who wishes to remain unknown is no more indebted tor the price paid than he is the owner of the property. The true owner is the mandator, and the obligation of the mandatary nominee is to render an account to the mandator and deliver over what he has received on his behalf (C.C., art. 1713). What he receives, even if it is money, does not belong to him: he is obliged to keep it separate from his own property. It is a crime for him to take control of it so as to make himself a debtor thereof instead of a mandatary: R. v. Légaré, [1978] 1 S.C.R. 275. In the recent decision of this Court, Canadian Pioneer Management Ltd. v. Saskatchewan (Labour Relations Board), [1980] 1 S.C.R. 433, 107 D.L.R. (3d) 1, Beetz J. pointed out the importance of this distinction, citing inter alia the decision of the Privy Council on unclaimed deposits: Canada (Attorney General) v. Quebec (Attorney General), [1947] A.C. 33, [1947] 1 D.L.R. 81 (Que. P.C.).

In Chartwell Shipping Ltd. v. Q.N.S. Paper Company Ltd. (4.02(13)), La Forest J. said the following at page 698:

Having determined that the applicable maritime law is to be found in the principles of the common law of contract and agency, I shall briefly turn to that issue.

After setting down certain principles and referring to considerable case law, he cited Bridges & Salmon Ltd. v. The “Swan”, [1968] 1 Lloyd's Rep. 5 (U.K.), at page 13:

. . . if he [the agent] states in the contract, or indicates by an addition to his signature, that he is contracting as agent only on behalf of a principal, he is not liable, unless the rest of the contract clearly involves his personal liability, or unless he is shown to be the real principal

Significantly, all the cases I have cited involve maritime matters, but the principle is, of course, more general.

[Emphasis added.]

4.03.2 Is the appellant subject to provisions 153(1), (1.3) and (1.4)?

4.03.2(1) In order to answer this question properly one must first consider the Federal Court of Appeal judgment in 1980 involving the same taxpayer-appellant as in the instant case, Coopers & Lybrand Ltd.

That appeal is similar to the instant case in many respects. Further, it was on account of the Federal Court's two decisions (at trial and on appeal) that Parliament added provisions 153(1.3) and (1.4) on which the respondent chiefly relies in the instant case in support of his conclusions.

4.03.2(2) Coopers & Lybrand Ltd. (4.02(10)) (hereinafter C. & L. No. 1)

4.03.2(2)1 In C. & L. No. 1 the Federal Court of Appeal had occasion to rule on the liability of a third party (other than the actual employer) for income tax source deductions.

In that case the Mercantile Bank of Canada had made loans to Venus Electric Ltd. (hereinafter Venus) and obtained the usual securities, in particular under the Bank Act a trust deed accompanied by a bond or debenture, and so on. Venus employed 850 people.

On September 24, 1976 the bank instructed C. & L. No. 1 to act as receivermanager, and as soon as the following day, September 25, 1976, C. & L. No. 1 took possession of all the Venus property and assets.

4.03.2(2)2 At the time of this taking of possession Venus owed wages to its employees. In preparing its pay cheques Venus used the services of the bank of Nova Scotia (B.N.S.). Venus would give B.N.S. all the information needed to calculate gross wages. After this B.N.S. would calculate the source deductions and then issue a cheque for the employees' net wages together with a slip giving the deductions in detail.

4.03.2(2)3 In order to encourage the shipping of goods a decision was made to pay the net wages owed to employees.

C. & L. No. 1 asked B.N.S. to calculate the net wages owed to employees. B.N.S. followed its usual practice and gave employees their pay cheques accompanied by a slip setting out deductions.

At the suggestion of C. & L. No. 1 the Mercantile Bank paid B.N.S. directly the net wages paid to employees.

As to this Kelly D.J. wrote the following at page 370 (D.T.C. 6283):

With funds which were apparently provided to it by the bank, the paying branches of the Bank of Nova Scotia honoured the salary cheques which had been issued for the final pay period. The payment to each employee was equal to his or her “take home pay", I e . ., his or her gross earnings for the final pay period, less authorized deductions, one of which deductions was on account of income tax.

Then, a little further on the same page, Kelly D.J. added this:

Although, in pursuance of this procedure, the money did not pass through the hands of the respondent there can be no doubt that the payments by the Bank of Nova Scotia to the employees were clerical acts by which the respondent caused the moneys to be paid to the employees.

4.03.2(2)4 As appears from the decision, the Minister of National Revenue issued an assessment holding Coopers & Lybrand responsible for the full amount of the unpaid source deductions. The appeal related only to source deductions under the Income Tax Act.

4.03.2(2)5 As appears from the decision, the Federal Court of Appeal proceeded to analyse the problem in two stages: .

1. in the first stage, it had to decide whether subsection 153(1) of the Income Tax Act applied to C. & L. No. 1;

2. in the second stage, if subsection 153(1) of the Act applied, the Court had to decide on the liability of C. & L. No. 1 with respect to subsection 227(8) or (9) of the Act.

To decide whether section 153(1) of the Act applied to C. & L. No. 1, the Federal Court of Appeal suggested at page 372 (D.T.C. 6284) that three conditions should be met:

Three requirements must be met in order that liability may exist under that section.

1. payments to employees must have been made

2. such payments must have been with respect to wages or salaries due to the employees

3. the person sought to be held liable must have made such payments.

4.03.2(2)6 First, the Federal Court of Appeal at page 372 (D.T.C. 6284) of the judgment mentioned that an employer-employee relationship was not necessary for subsection 153(1) of the Act to apply, as appears from the following passage:

The appellant submits that to meet the requirements of the Income Tax Act it is not necessary that there exist between the recipient of the payments and the payor an employee/employer relationship.

I agree with this submission.

4.03.2(2)7 Second, in order to decide whether C. & L. No. 1 had paid wages, the Federal Court of appeal considered the following facts:

(a) the gross wages, source deductions and net wages were calculated (p. 178 of the judgment);

(b) employees received the same type of pay cheque with a slip indicating deductions (p. 178 of the judgment);

(c) the T-4 slips did not exclude the amounts paid by Coopers & Lybrand on the strength of the information furnished to each employee on the slip accompanying the payment made to him for the final pay period and on the T-4 Supplementary supplied to him, it was reasonable for the employee to assume the amount received with respect to the final pay period was wages upon which he or she would be taxable and that he or she was deemed to have received as wages the amount purported and have been deducted on account of income tax. (Page 373 (D.T.C. 6285 of the judgment).)

It should be noted here that in C. & L. No. 1, the respondent (C & L) tried to make the argument that no wages had been paid as this was a gift to the employees or a repurchase of claims which meant that C. & L. No. 1 was subrogated in the rights of the employees. In this regard the Federal Court of Appeal noted these facts (at page 175 et seq.), inter alia the transfer of debts signed nearly two years after the payment to each employee. The Court said the following at page 373 (D.T.C. 6284):

In this latter connection, counsel for the respondent submitted that by virtue of the payments the respondent was ipso facto subrogated to the employee’s claim for wages. This latter submission was not pressed, upon the Court pointing out to counsel the total absence of any legal foundation for subrogation under the circumstances.

4.03.2(2)8 Pursuing its analysis, the Federal Court of Appeal then considered the third question, namely whether C. & L. No. 1 was in fact the person that paid the wages.

After analysing the mandate given to C. & L. No. 1, the Federal Court of Appeal said the following at page 374 (D.T.C. 6286) of the judgment:

Since the conduct of the respondent which is alleged to have given rise to the liability under section 153 was beyond the scope of its office as receiver and fell within the ambit of the powers of a manager as distinguished from receiver simpliciter no further reference will be made to the respondent's capacity as receiver to realize the security under section 88 of the Bank Act. Subsequent comments and remarks are related to the consequence of the acts done by the respondent as manager.

It should accordingly be noted here that the Federal Court of Appeal did not have to consider the situation of a person executing securities held by a bank under the old section 88 of the Bank Act (now section 178), since the Federal Court of Appeal classified C. & L. No. 1 as a manager.

The Federal Court of Appeal described the manager's powers as follows (page 375 (D.T.C. 6286)):

The powers of the receiver and manager are really ancillary to the main purpose of the appointment which is the realization for the debenture-holder of its security. The receiver and manager is akin to a mortgagee in possession. The receiver and manager taking possession of the property subject to the charge becomes the manager of that property of the debtor but not the manager of the debtor company.

The Federal Court of Appeal further concluded that it was in fact C. & L. No. 1 which had paid the wages, regardless of the approval of the bankers (page 375 (D.T.C. 6286-87):

Having decided to circumvent these unwanted consequences of leaving the employees to realize their wage claims as best they could, the respondent of its own accord and solely on its own judgment initiated the steps which resulted in making payment to each employee of an amount equal to the amount of his or her earnings actually due. These payments would not have been made if it were not for the decision and direction of the respondent. Even if it be assumed that, so far as the respondent's responsibilities to Venus were concerned, the relationship between the respondent and Venus was that of agent and principal, the payment to the employees of the amount equal to the amount indicated to be due and payable to them personally according to the payroll calculations for the final pay period was not an act of which Venus was capable at that time. All of its property had been in the possession of the respondent from 1:00 a.m., September 25. The payment of the amounts, which I have concluded were wages, was a result of a decision taken by the respondent in complete awareness of all the circumstances and carried out under its express directions. Even if it be assumed that the bank concurred in the payments being made the person causing them to be made was the respondent.

The attendant circumstances lead to one conclusion only that the respondent was the person paying wages to employees and consequently coming within the ambit of section 153.

4.03.2(2)9 Having resolved the first stage of the dispute, the Federal Court of Appeal proceeded to analyse the second stage, which involved determining the extent of C. & L. No. 1's liability.

The Federal Court of Appeal described this second stage as follows (at page 376 (D.T.C. 6287)):

With respect to the quantum of the respondent's liability, alternative submissions were made

1. that the default of the respondent was in failing to make, from the wages paid to the employees, the appropriate deduction on account of income tax; as a result the liability of the Defendant was limited to ten per cent of the amount which it had failed to deduct;

2. that if the respondent incurred liability on account of failure to remit the deductions, made on account of income tax, the amount it failed to remit should be the aggregate of the deductions for income tax appropriate to wages equal to the actual cash paid to each employee.

After noting the existence of the deductions, the T-4 forms and the impression that the payment could make on employees, the Federal Court of Appeal concluded as follows (at page 377 (D.T.C. 6288)):

However, there is uncontradicted evidence to the effect that the aggregate amount of money which was provided by the debenture-holder to the respondent for the purpose of “making a payment to each employee by the amount of which they (the employees) are out of pocket with respect to work done for the company as a result of the company's failure and the company could not pay” was the net amount after deduction, which the employees together would have received for the final pay period.

In the light of the evidence, I am of the opinion that the respondent's default was in not making deductions for income tax rather than in failing to remit any amount actually deducted. Accordingly its liability is under subsection 227(8) — that is, ten per cent of the amount it failed to deduct.

4.03.2(3) In the instant case, C. & L. No. 2, counsel for the respondent made the following comments:

In short, judging by the brief comment of the Court of Appeal on this second stage (the extent of Iiaoility), it seems clear that when wages are paid by a third party, before concluding that this third party has assumed the obligation of honouring the employees’ gross wages it must be considered whether an amount of money at least as large as the gross wages passed through the hands of the third party destined for payment of the wages owed. Otherwise, the "net" wage paid becomes, as it were, a new "gross" wage.

Looking closely at the comments made by the Court of Appeal (in particular at pages 183 to 185 of the judgment), we cannot help expressing our deep disappointment that the Court of Appeal did not provide any further explanation regarding the legal rule on which the Court relied in making a distinction between the actual employer and the third party as regards the gross salary paid to the employee.

In the case of the actual employer, when there are accounting entries which establish source deductions, it is always deemed to have paid the gross wage regardless of whether the actual employer had sufficient money to pay the entire gross wage. The actual employer is also responsible for payment of source deductions regardless of whether it set aside the necessary amounts for the payment of source deductions. Under the Income Tax Act the actual employer becomes the mandatary of the Crown and once source deductions are entered in the accounts the employee receives credit for those amounts under section 153(3) of the Act

Strangely, according to the Court of Appeal in the case of a third party it is not deemed to have paid the gross wage to the employers unless it has the necessary funds.

[Translation.]

4.03.2(4) Following the judgment in C. & L. No. 1, Parliament adopted sections 153(1.3) and (1.4) of the Act, which are set out in paragraph 4.01 of the instant judgment.

Counsel for the respondent cited David M. Sherman in his text “Income Tax Act and Regulations Technical Notes" on the adoption of these two provisions.

This measure attempts to clear up some technical details of collection and administration under the Act. The amendment would reverse the effect of the decision in Coopers & Lybrand v. The Queen, [1979] C.T.C. 352, 79 D.T.C. 5273 (F.C.T.D.), which held that a receiver manager was not liable to withhold tax in respect of payments to employees for past services.

4.03.2(5) Counsel for the respondent then made the following comments and submissions:

In short, the person to whom sections 153(1.3) and (1.4) of the Act apply is deemed to be the person making the payment (the use of the word ''deemed" creates an absolute or irrebutable Presumption), which makes him jointly and severally liable (as is the actual employer) for the payment of source deductions. In other words, a third party falling under the definition of a trustee and paying or seeing to it that remuneration is paid (as for example in Coopers & Lybrand, where the bank paid the wages) is deemed to have paid the gross wages in full regardless of whether the third party had the necessary money available.

In our view, this is a very important economic and social measure as it reinforces the rights of employees who assume in good faith that source deductions which they are told of (by the pay slip or the year-end T-4 form) will actually be credited to them, regardless of who pays their wages. It is only in really extraordinary circumstances that employees should lose the benefit of source deductions which have allegedly been made. In the instant case, if the appellant’s position is upheld, it means that the Minister of National Revenue should have treated the amounts paid to former Admiral employees as gross wages on which there were no deductions and made the employees responsible for the payment of tax on his amount, all at the expense of the employees and for the benefit of the Admiral bankers.

The first Coopers & Lybrand judgment remains a very important one.

It is a Federal Court of Appeal judgment. It offers a two-stage method of analysis, a first stage in which it is determined whether the person is covered by section 153 of the Act ana a second stage of determining the scope of the liability.

[Translation.]

4.03.2(6) The respondent also referred to various judgments rendered after the adoption of provisions 153(1.3) and (1.4), namely Robert Lalonde (4.02(16)), Deloitte Haskins & Sells (4.02(11)), 299144 British Columbia Ltd. (4.02(17)), British Columbia v. Henfrey Samson Belair Ltd. (4.02(12)), Plaskett & Associates Ltd. (4.02(18)), Mollenhauer Ltd. (4.02(19)) and The Queen v. The Canadian Imperial Bank of Commerce (4.02(21 )).

4.03.3 Meaning of provisions 153(1), (1.3) and (1.4) of the Act according to the respondent

4.03.3(1) The respondent argued, first, that under provision 153(1) to be required to make a source deduction, it is not necessary to be an employer. The provision states "Every person paying . . . salary or wages” and not “Every employer". Further, subsection 153(1.3) provides that "the trustee shall be deemed to be a person making the payment”. Finally, subsection 153(1.4) states that "trustee" includes “a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator, sequestrator or any other person performing a function similar to that performed by any such person".

In the view of the respondent there is no question that the appellant is at the very least included in the "any other person performing a function similar to that performed by any such person".

4.03.3(2) In the view of the respondent the appellant is a receiver-manager based on the judgment of Carruthers J. in Armstrong v. Coopers & Lybrand Ltd. (4.02(22)). In fact, 55 of Admiral's employees at Cambridge, Ontario sued Coopers & Lybrand Ltd. This was the same Admiral company and the same Coopers & Lybrand Ltd. as in the instant case.

The employees were claiming vacation pay, severance pay and lay-off compensation from Coopers & Lybrand Ltd. and from the two banks. The trial court, per Carruthers J., granted the vacation pay and denied the other two claims. The trial court concluded that Ontario labour standards law had created a presumed trust taking effect before the banks could have an absolute right of ownership pursuant to its [sic] security under section 178 of the Bank Act. It is this absolute right which was alleged by the banks.

The Ontario Court of Appeal (4.02(23)) affirmed the judgment of Carruthers J. However, where the latter characterized Coopers & Lybrand as "receiver and manager", the Ontario Court of Appeal spoke in the same case of an "agent".

4.03.3(3) As agent or receiver-manager, Coopers & Lybrand Ltd. in the instant case did not only hold Admiral property as a result of the taking of possession. First, it had control of the business. Trie banks had no absolute right of ownership over this property unless the said property had a liquidated value less than the debt owed to the banks of $40 000 000. Second, the appellant also exercised control over the Admiral business. It caused the products being manufactured to be completed in order to move inventory. The payment of wages for the period ending November 4, 1981 and the subsequent hiring of most current employees until December 4, 1981, the date of the bankruptcy, was for the very purpose of carrying out this work and doing so without problems (testimony of Mr. André Giroux, 2.04.1).

4.03.4 Meaning of provisions 153(1), (1.3) and (1.4) of the Act according to the appellant

4.03.4(1) The appellant’s answer to the preceding argument is, first, that the burden of proof upon it is to show that the facts or law on which the respondent relied in support of his assessment are wrong. The notice of assessment of March 9, 1982 (Exhibit 1-6) states the following:

You are hereby assessed the amounts indicated for failure to remit as required for November 1981. Please pay the amount shown as balance ($186,008).

4.03.4(2) The appellant noted paragraph 5(r) of the respondent's reply to the notice of appeal:

5(r) as the appellant is a trustee which took control of the Admiral property and authorized or otherwise caused the payment of wages or other remuneration to employees to be made on behalf of Admiral, it is deemed to be a person making the payment and is jointly and severally liable for the amount to be deducted, withheld and paid on the employees’ gross remuneration, namely $163,404.56;

[Translation.]

The appellant then referred to the uncontradicted evidence that no money was deducted or withheld when the Admiral employees’ claims were purchased and, accordingly, the appellant had shown that the notice of assessment issued by the respondent was ill-founded since the factual basis on by the respondent was wrong.

4.03.4(3) The appellant further argued that it is neither a trustee covered by subsection 153(1.4) of the Act nor a person covered by subsection 153(1.3) of the Act.

If, it argued, it is a receiver-manager as the respondent maintained then it did not act as a liquidator, receiver and so on within the meaning of subsection 153(1.4).

4.03.4(4) Furthermore, according to Exhibit A-8 the appellant was appointed agent for the banks:

As the Mercantile Bank of Canada has the obligation to take possession of the assets owned by it under the securities pari passu with the National Bank, we wish hereby to give you the mandate, as agent, to realize on the secured assets so as to obtain the maximum amount for the bank.

[Translation.]

The appellant argued that under this mandate it was appointed to take possession of the assets owned by the banks under the securities held by them, as noted by La Forest J. in Bank of Montreal v. Hall (4.02(1)), at page 134 (S.C.R.):

. . .. the effect of the interest is to vest title to the property in question in the bank when the security interest is taken out.

According to the appellant, at no time did it act as a "receiver-manager administering, managing or controlling the property or business of another person, namely Admiral" within the meaning of subsection 153(1.3) of the Act.

4.03.4(5) The appellant further referred to Plaskett & Associates Ltd. (4.02(18)), in which the Court at pages 2162 and 2165 (D.T.C. 162 and 165) clearly stated that subsection 153(1.3) and (1.4) applied to a person acting on behalf of a debtor:

The appellant was appointed interim receiver of the property of C.J. Wilkinson Ford Mercury Sales Ltd. (the "corporation") pursuant to an order dated April 21, 1986 of the Registrar in Bankruptcy of the Supreme Court of Ontario in Bankruptcy.

The issue of whether the appellant administered, managed, distributed, wound up, controlled or otherwise dealt with the property business estate or income of the Corporation and authorized or otherwise caused the payment of salaries and wages is linked to whether the appellant was a trustee as defined in subsection 153(1.4).

The types of persons enumerated in that subsection include a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator, sequestrator or person performing a function similar to that performed by such person. In all of these cases such a person is one who is either vested with the property and assets of the debtor; is empowered to exclude the debtor from running the business; is empowered to take possession of the assets to the exclusion of the debtor; or is empowered to sell the assets of the debtor and to pay the proceeds to the creditor for whom he is acting or for the benefit of all creditors as in the case of a trustee in bankruptcy.

Coopers & Lybrand never acted on behalf of the debtor (Canadian Admiral), and in fact according to the uncontradicted evidence always acted on behalf of the bankers; accordingly, Coopers & Lybrand as agent of the banks is not a person covered by subsections 153(1.3) and (1.4) of the Act, since those subsections apply to persons who are mandataries of the debtor.

4.03.4(6) According to the respondent the appellant paid wages to the employees. This is one of the key points raised by the respondent. The cheques were issued using the Admiral payroll system with a breakdown of source deductions (3.01, 3.02 and 4.03.1(1)).

In December 1981 the T-4 forms issued to employees included gross wages for the period from October 25 to November 3, 1981 (3.04 in fine).

4.03.4(7) According to the appellant, no wages were paid to Admiral employees.

4.03.4(7)(a) The appellant referred to Coopers & Lybrand No. 1 (4.02(10)). The Federal Court of Appeal dismissed the subrogation argument made by Coopers & Lybrand, since the debt assignments were granted by Venus Electric employees to Coopers & Lybrand two years after receipt of the money.

In the instant case, it proved that it bought from Admiral employees claims in an amount corresponding to the net wages which those employees could have claimed from Admiral (Exhibit A-11). The question which had no legal basis in the Federal Court of Appeal 1981 judgment (because of the two-year delay) is the very question to be answered in the instant case, since the debt assignments were granted concurrently and simultaneously with the payments to the Admiral employees.

4.03.4(7)(b) According to the appellant, the respondent submitted no evidence to contradict the appellant's oral and documentary evidence that the latter had purchased the Admiral employees’ claims. The appellant drew the Court's attention to what the Supreme Court of Canada said in St-Joseph de Coleraine (Par- oisee) v. Colonial Chrome Co., [1933] S.C.R. 13, at page 20:

French doctrine and case law, dealing with arts. 1319 and 1320 of the Napoleonic Code, to which arts. 1210 and 1222 of the Civil Code of Quebec correspond, conclude that statements and recitals contained in authentic writings, as well as in private writings, have probative force in the absence of evidence to the contrary, not only between the parties but also against third parties.

As in the case at bar the appellant corporation presented no evidence against the said statements and recitals contained in these deeds, it follows that those statements and recitals are fully valid.

[Translation.]

The Minister of National Revenue presented no evidence to contradict the debt assignments obtained by "Coopers & Lybrand Ltd., Agent for the Mercantile Bank of Canada and the National Bank of Canada" and the statements and recitals contained in those debt assignments are fully valid and constitute evidence against the Minister of National Revenue.

Accordingly, the appellant submitted, it did not pay wages but only paid for debt assignments.

4.03.4(8) According to the respondent, the appellant had sufficient funds to remit the source deductions. In Coopers & Lybrand No. 1 the Federal Court of Appeal held that subsection 227(8) applied, not subsection 227(9) of the Act, because Coopers & Lybrand did not have sufficient funds to pay off the full amount of gross wages owed to employees.

The respondent submitted that in the instant case the absence of funds was not a defence.

How, the respondent asked, can it be determined whether there was sufficient funds and at what particular date?

Should we consider liquid funds in the hands of Admiral at the time possession was taken? If so, there was sufficient money to pay the net [amount] and source deductions.

Should we look at the proceeds of realization as a whole? If so, the sale of the assets generated millions.

Should we look only at the dates when the payments were made, namely November 6, 13 and 27, 1981?

According to Exhibit A-15, on November 6, 1981 the surplus was $604,479.75, which was sufficient to pay the deductions. On November 13, 1981 the surplus was $126,465.24. However, on November 27, 1981 there was a deficit of $295,061.30. On the other hand, the remitting of source deductions for November was from December 15, 1981, and Exhibit A-15 showed a large surplus from December 16 to 31, 1981, including a surplus of $476,757.02 on December 16, 1981 or $337,195.30 on December 18, 1981, the date on which an initial assessment was issued by the Minister in the matter (translation of 6-12-92, page 156).

We submit that the table on page 25 of the appellant’s submissions and authorities is not quite exhaustive, not to say selective. Further, it should be remembered that during this period considerable sums were returned to the banks.

We do not feel that there was a shortage of funds to pay off the source deductions.

[Translation.]

4.03.4(9) According to the appellant, it did not have sufficient liquidity to remit the source deductions.

The appellant argued that as soon as possession had been taken Admiral bank accounts became the property of the banks and not the property of Coopers & Lybrand.

The appellant further submitted that the banks gave instructions to Coopers & Lybrand to purchase Admiral employees’ claims (Robert Savoie, December 3, 1992, pages 49-50; Jacques Gagne, December 3, 1992, pages 59-60) and that Coopers & Lybrand did not act solely in its own discretion.

Coopers & Lybrand acted as mandatary for the banks and it could not dispose of the money in this bank account as it liked. According to the appellant, the respondent completely forgot that the banks advanced to Coopers & Lybrand only the amount necessary to pay the equivalent of a net amount to Admiral employees (testimony of André Giroux).

Further, according to counsel for the appellant the latter had no discretion to make or remit source deductions. The appellant had to carry out the mandate given to it by the banks and had at its disposal only the money the banks allowed it: this situation is different from Deloitte Haskins & Sells (4.02(11)). In that case Deloitte was appointed “receiver and manager" by the Alberta Court and so was a person covered by subsections 153(1.3) and (1.4).

Finally, as Terry Hale established, at the time the notice of assessment of March 9, 1982 was issued the Minister of National Revenue knew that Coopers & Lybrand was acting as the banks’ mandatary.

5. Decision of the Court

5.01 At the time the appellant seized the Admiral assets on November 4, 1981 those assets became the property of the banks:

. . . the effect of the interest is to vest title to the property in question in the bank when the security interest is taken out.

(Bank of Montreal v. Arthur Hall, 4.03.1(5)(b); 4.03.1 (5)(c)).

5.02 Neither the banks nor the appellant owed wages to Admiral employees. If the employees had not been paid anything there would have been no appeal in this Court.

5.03 Through the debt assignments the appellant paid each employee an amount equal to the net wage from the gross income earned in the week preceding November 4, 1981. The respondent argued this was wages paid to the employee and the appellant denied this.

5.03.1 In purchasing the employee's claim, did the appellant merely buy a claim? Does a claim change its nature when it becomes the subject of an assignment?

This question is fundamental. Regardless of the places in the evidence where the appellant uses the word “wage” in speaking of the money paid to the employees, these references to the word "wages" may not reflect the reality if in law a claim changes its nature by being assigned.

Commenting on article 1570 of the Civil Code of Lower Canada in the Traité de droit civil du Québec, Léon Faribault writes the following at paragraph 488:

A claim assigned retains its character and nature. . . .

[Translation.]

Everythings indicates that the same is true in doctrine at common law. On the one hand, the assignee has the same right as the assignor:

An assignee, whether statutory or not, takes subject to all equities that have matured at the time of notice to the debtor. This means that the debtor may plead against the assignee all defences that he could have pleaded against the assignor at the time when he received notice of the assignment. (Cheshire, Fifoot and Furmston’s Law of Contract, 11th ed., London, Butterworths, 1986 at page 503.)

On the other hand, the debtor retains the same rights and can put forward the same defence against the assignee:

In the case of an equitable assignment of a chose in action the debtor or fundholder has against the assignee the same equities and the same rights of set-off and other defences as he would have had against the assignor at the date at which notice of the assignment is given to him. (Halsbury's Laws of England, vol. 6, at page 41.)

5.03.2 The evidence showed at several places that the appellant, in paying the debt assignments, did intend to pay the employees' wages: the notice given to employees on November 4, 1981, Exhibit A-9 (1.02); the debt assignment, Exhibit A-11 (1.02).

The testimonies of Mr. André Giroux (2.04.1) and Mr. Robert Savoie, inter alia, are clear. The latter stated: ”. . . we considered that our social role was to pay the employees’ wages” (2.04.2). There are also several facts and references noted by the respondent in paragraphs 3.01 to 3.04. A slip was attached to the employees’ cheques showing the deductions and with the heading "Statement of salary and deductions" (3.02). The T-4s included the gross salary from October 25 to November 3, 1981 (3.04).

Further, in requiring Coopers & Lybrand to pay Admiral employees “vacation pay" (the equivalent of the four per cent premium in the province of Quebec), did the Ontario High Court of Justice and the Ontario Court of Appeal not consider that the amounts paid were in fact wages?

5.04 Moreover, even if a claim changed its nature as a result of assignment, should the amount paid to the employee not still be regarded as remuneration?

What purpose did the banks and the appellant have in offering to pay the net portion of the wages owed by Admiral to its employees for the last five unpaid days of work?

The primary purpose was to preserve good relations with employees so they would agree to continue to work for them and so to be able to carry out the mandate as profitably as possible (2.04.1, examination in chief of Mr. Giroux). See also the testimony of Mr. Robert Savoie: "There was a great deal of work in progress” and also that of Mr. Jacques Gagné (2.04.2).

In this regard, was the amount paid to purchase claims not in fact an amount offered so the employee would agree to render services in future?

In Curran v. M.N.R., [1959] S.C.R. 850, [1959] C.T.C. 416, 59 D.T.C. 1247, the Supreme Court of Canada held that an amount of $250,000 received as an incentive to work for a new employer was treated as income for services to be rendered and so taxable under section 3 of the Act in the year in which the amount was received.

Is the same not true in the instant case? The Court believes so. The amount paid by the appellant was income for the employees receiving it. The source deduction accordingly had to be made pursuant to paragraph 153(1 )(a) of the Act by the person who “paid the salary or other remuneration”, namely the appellant.

In Dauphin Plains Credit Union Ltd. (4.02(15)), dealing with the responsibility of a receiver to remit money deducted and withheld, Pigeon J. commented on paragraph 153(1 )(a) as follows, at page 252 (D.T.C. 6127):

Here the question is whether the receiver comes within the words "Every person paying salary or wages . . .” and I fail to see any reason for holding that the receiver did not come within the terms of this provision. There is no need to consider the definition of “person” in the Act. In any case this definition is not a restrictive but an extensive definition due to the word "includes".

In the instant case the appellant, whether an "agent", “receiver, receivermanager" or something else, is a person.

Moreover it is worth looking again here at the definition of the words "employee", "employer" and "remuneration" as given in the Income Tax Regulations, Part I:

100(1) In this Part and Schedule I,

"employee" means any person receiving remuneration;

"employer" means any person paying remuneration;

“remuneration” includes any payment that is

(a) in respect of

(i) salary or wages, or

(ii) commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated (referred to as “commissions” in this Part) /

paid to an officer or employee,

Accordingly, even if a claim changed its nature as a result of assignment the amount received by the employee amounts to remuneration, and the person paying it is the "employer" within the meaning of the Act. The latter must therefore make the source deduction.

5.05 Having arrived at the initial conclusion that assignment does not change the nature of the claim and that therefore, in the instant case, this was wages paid, and further considering that remuneration “includes any payment that is in respect of salary or wages", the appellant had to make the source deduction.

It is worth again citing Pigeon J. in Dauphin Plains Credit Union Ltd. (4.02(15)) at page 250 (D.T.C. 6125-26):

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 withholding 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 subsection 153(3) provides that it is "deemed to have been received" by him at the time the payment was made less the deduction.

It must also be considered that, by virtue of subsection 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. But, the position taken b the credit union means that it would get the benefit of the deductions so that the employees would have to pay income tax to the Department of National Revenue on what they have not received and for which they would get no credit. The withholdings directed by the Income Tax Act etc are not deductions that may be made by an employer, they are deductions that shall be made.

5.06 Were the source deductions made by the appellant? Undoubtedly they were not made. The banks did not intend to do it and the appellant argued that it had no discretion to make or remit source deductions, that it had to carry out the mandate given to it by the banks and only had at its disposal the money provided by the banks (4.03.4(9) in fine).

First, the obligation to make source deductions does not derive from a mandate but from the Act and applies to persons covered by section 153.

The appellant, whether an agent or a receiver-manager, is a person which has made a payment in respect of salary; it has "administered property [the] business of another person" under subsection 153(1.3). Such other person is usually the debtor but under the Act there is nothing to prevent it being someone else.

In the instant case the appellant is indeed an employer under the Act. That employer has banks as mandators. By the seizure Admiral's property and business became the property and business of the mandators. I am of the opinion that the appellant, a trustee within the meaning of subsection 153(1.3), is deemed to be the person making the payment and that accordingly the trustee and this other person (the mandators) are jointly and severally liable for the amount which subsection

(1) states must be deducted or withheld and the remittance to be made on the payment (153(1.3)).

It is worth again citing subsection 153(1.3):

153(1.3) Payments by trustee, etc.

For the purposes of subsection (1), where a trustee who is administering, managing, distributing, winding up, controlling or otherwise dealing with the property, business, estate or income of another person authorizes or otherwise causes a payment referred to in subsection (1) to be made on behalf of that person, the trustee shall be deemed to be a person making the payment and the trustee and that other person shall be jointly and severally liable in respect of the amount required under subsection (1) to be deducted or withheld and to be remitted on account of the payment.

[Emphasis added.]

The Court adopts the comment of counsel for the respondent, cited above at paragraph 4.03.2(5):

In short, the person to whom sections 153(1.3) and (1.4) of the Act apply is deemed to be the person making the payment (the use of the word "deemed" creates an absolute or irrebutable presumption), which makes him jointly and severally liable (as is the actual employer) for the payment of source deductions. In other words, a third party falling under the definition of a trustee and paying or seeing to it that remuneration is paid (as for example in Coopers & Lybrand, where the bank paid the wages) is deemed to have paid the gross wages in full regardless of whether the third party had the necessary money available.

5.07 As to the argument of the appellant that it had at its disposal only the money provided to it by the banks, the Court replies that the banks controlled the business, all the assets of which belonged to them up to the amount of the $40 million debt (4.03.3(3)), that it was not necessary to remit the deductions to the Department of National Revenue on the same day that the wages were paid, that substantial amounts were later taken out of the business, namely at least $1,522,573.45 existing in the Admiral bank accounts on November 4, 1981, although this sum was only noticed later on (2.04.7); also, over $700,000 was remitted to the mandators (4.03.1(4)). Ample liquidity passed through the hands of the trustee and its mandators to pay the source deductions. Further, as the banks were jointly and severally liable the question of whether there was money does not arise.

5.08 As I have concluded that the appeal should be dismissed, I do not have to rule on the existence or non existence of jurisdiction in this Court over the assessment issued pursuant to the Unemployment Insurance Act, 1971 and the assessment issued for fees, interest and penalties indicated under the heading “Provincial Tax" on the notice of assessment.

6. Conclusion

The appeal is dismissed without costs.

Appeal dismissed.