Mollenhauer Ltd. v. The Queen, 92 DTC 6398, [1992] 2 CTC 121 (FCTD)

Teitelbaum, J.:—The statement of claim filed into the Federal Court Registry speaks of Mollenhauer Ltd. as the appellant, and Her Majesty the Queen as respondent, Mollenhauer Ltd. should be referred to as plaintiff and Her Majesty the Queen as defendant. Notwithstanding the fact that the plaintiff is appealing a decision of the Tax Court of Canada to the Federal Court of Canada, Trial Division, this is done by a direct action and the proceedings before the Trial Division is a trial de novo.

At the commencement of the hearing, the parties filed an agreed statement of facts to which are attached seven exhibits (Exhibit 1).

It is necessary to incorporate into this judgment the agreed statement of facts in order to better understand this judgment.

1. The plaintiff carries on business, inter alia, as a construction contractor and in furtherance of this business the plaintiff, in its 1985 taxation year, subcontracted certain construction work to Aprok Drywall Ltd. ("Aprok") with respect to a project known as the Somitel Hotel.

2. Aprok was the drywall subcontractor for the Somitel Hotel project pursuant to a written subcontract dated December 5, 1984.

3. Aprok was in charge of its own employees, directed their work and was responsible for paying them.

4. In or about October 1985 when the subcontract was about 85% complete, Aprok was unable to meet its payroll liability for salary or wages. At that time the plaintiff owed Aprok approximately $155,000 under the subcontract. In order that construction work could proceed the plaintiff arranged to pay the amounts due by Aprok to Aprok's employees and reduced the amount due to Aprok accordingly.

5. The arrangement to pay employees of Aprok for work performed on the Somitel Hotel was consented to by Laurentian Pacific Insurance Company who managed a performance bond issued with respect to the Aprok subcontract.

6. The plaintiff asked Aprok to indicate amounts owing to its employees on the plaintiff's site. Aprok provided pay information consisting mainly of unsigned cheques in names of employees with the amounts on them, together with the applicable pay stubs. The plaintiff duplicated Aprok's unsigned cheques with its own cheques.

7. The plaintiff's cheques on its own accounts signed by a duly authorized official of the plaintiff were dated October 18, 1985 and October 23, 1985.

8. The plaintiff invoiced Aprok for the amounts paid plus a 10% overhead charge and a 10% fee and deducted these amounts from that owing to Aprok as agreed.

9. The amounts which the plaintiff paid to Aprok's employees were net of unemployment insurance premiums, Canada Pension Plan contributions and income tax deductions (“source deductions”).

10. No source deductions were withheld or remitted by the plaintiff.

11. No source deductions were withheld or remitted by Aprok.

12. The employees were not notified that source deductions had not been withheld or remitted.

13. The plaintiff and Aprok were subject to the provisions of the Builders Lien Act of the Province of British Columbia in force at the material times.

14. By Notice of Assessment dated May 20, 1986, the Minister of National Revenue assessed the plaintiff on the basis that the plaintiff paid salary or wages to Aprok's employees and failed to remit to the Receiver General, amounts on account of unemployment insurance premiums, Canada Pension Plan contributions and income tax (Exhibit 1-6 and 1-7).

15. The plaintiff filed a Notice of Objection to the defendant's assessment of the plaintiff's 1985 taxation year and on January 12, 1987, the defendant confirmed the assessment of the plaintiff's 1985 taxation year.

16. The appeal of the plaintiff before the Tax Court of Canada with respect to the defendant's assessment in regard to income tax was dismissed by Judgment dated May 12, 1989, and mailed by the Registrar of the Tax Court of Canada on May 30, 1989.

The parties have also filed, by consent, the transcript of a hearing in the case of Mollenhauer Ltd. v. M.N.R., 87-105 (unreported, T.C.C.) held before Judge A. Labelle on September 23, 1987 (Exhibit 2).

The relevant sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") are subsections 153(1), 227(8) and 227(9).

153. Withholding. (1) Every person paying at any time in a taxation year

(a) salary or wages or other remuneration,

(b) a superannuation or pension benefit,

(c) a retiring allowance,

(d) a death benefit,

(d.1) an amount as a benefit under the Unemployment Insurance Act, 1971,

(e) an amount as a benefit under a supplementary unemployment benefit plan,

(f) an annuity payment,

(g) fees, commissions or other amounts for services,

(h) a payment under a deferred profit sharing plan or a plan referred to in section 147 as a revoked plan,

(i) a training allowance under the National Training Act,

(j) a payment out of or under a registered retirement savings plan or a plan referred to in subsection 146(12) as an "amended plan”,

(k) an amount as, on account or in lieu of payment of, or in satisfaction of, proceeds of the surrender, cancellation or redemption of an income-averaging annuity contract,

(l) a payment out of or under a registered retirement income fund,

(m) an amount as a benefit under the Labour Adjustment Benefits Act,

(n) one or more amounts to an individual who has elected for the year in prescribed form in respect of all such amounts, or

(o) an amount described in paragraph 115(2)(c.1),

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.

227. (8) Idem. 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, 10% 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 that should have been deducted or withheld, at the prescribed rate per annum, for the period commencing on the later of

(c) February 16, 1984, and

(d) the 15th day of the month immediately following the month in which such amount should have been so deducted or withheld.

(9) Idem. Every person who has failed to remit or 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 section 116 or by a regulation made under subsection 215(4), required to pay,

is liable to a penalty of 10% of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the prescribed rate per annum, for the period commencing on the 15th day of the month immediately following the month in which such amount was deducted or withheld.

The issue to be determined, according to plaintiff and contained in its outline of argument is:

The issue raised on this appeal from the Tax Court of Canada is whether payments made to employees, at the direction of their employer, by a debtor of that employer, are payment of wages, thereby requiring the debtor to deduct and withhold income tax remittances pursuant to section 153 of the Income Tax Act (the "Act").

Counsel for the defendant states that she does not agree with the way in which plaintiff states the issue to be decided as she does not agree that the payments made to the employees were made at the direction of their employer by a debtor of that employer. It is counsel’s submission that the payments to the employees by plaintiff were, pursuant to subsection 153(1) salary or wages or other remunerations" and that plaintiff "shall deduct and withhold . . .”.

The issue is to determine whether the money paid to the employees of Aprok by the plaintiff was paid as salary or wages by the plaintiff or whether what was paid by plaintiff to the employees of Aprok were moneys owing to Aprok and at Aprok's direction was paid to its employees. Counsel for plaintiff submits that what was paid by plaintiff was not salary or wages,notwithstanding that the amount received by each employee was equivalent to that employee's net wage owing to him and notwithstanding the fact that the employee understood that he was receiving his net wages for the services that he performed.

Plaintiff's submissions

Plaintiff submits that the facts clearly establish that there never were any indices of an employer/employee relationship and that the payments were not made by plaintiff as wages. He submits the following facts for the above conclusion:

1. Aprok had prior to the cheques being written supervised and directed the employees;

2. Aprok performed the calculations for the payments and directed Mollenhauer as to the amount of each cheque;

3. Aprok directed Mollenhauer to pay the cheques from amounts otherwise payable to Aprok; and

4. Mollenhauer charged a fee for writing the cheques.

Plaintiff submits that what is of importance "that it is the character of the payment for the payor that is determinative and not the nature of the receipt of the payee". Counsel submits that the plaintiff, the payor, “is settling a debt by directing the funds to a third party (an employee of the creditor) who would not otherwise be entitled to sue the payor for wages or salary”.

Plaintiff also submits that each employee of Aprok would have had a claim against plaintiff pursuant to the trust provisions of the Builders Lien Act. Section 2 of this Act states:

2. (1) All sums received by a contractor . . . on account of the contract price are and constitute a trust fund in the hands of the contractor. . . for the benefit of . . . workers . . . . The contractor. . . is the trustee of all those sums received by him, and until all workers . . . are paid for work done . . . shall not appropriate or convert any part of it to his own use, or to any use not authorized by the trust.

Counsel submits that because of the Builders Lien Act plaintiff would have had to retain funds for the employees. Counsel also submits, in the alternative:

It is submitted that if the appellant ought to have deducted pursuant to subsection 153(1) of the Act it did not deduct nor did it withhold any funds and accordingly is liable only to a penalty pursuant to subsection 227(8) (Tab 2). (The Queen v. Coopers & Lybrand Ltd., [1980] C.T.C. 367, 80 D.T.C. 6281 at 376-377, (D.T.C. 6287-8))

Counsel submitted, for my consideration, the following cases:

(1) Realty Projects (1957) Inc. v. M.N.R., [1979] C.T.C. 2535, 79 D.T.C. 511 for the proposition that a general contractor which issued cheques jointly to its subcontractor and its subcontractor's employees was not liable to deduct under subsection 153(1).

(2) The Queen v. Coopers & Lybrand Ltd., supra, for the proposition that where the payments were made solely as a result of a decision of the payor, that payor is required to deduct income tax remittances.

Counsel submits that in the case at bar the plaintiff made the payments as a result of a request from the employer Aprok.

Defendant's submissions

Counsel submits that subsection 153(1) contains a simple requirement, everyone paying a salary, wages or other remuneration, must deduct and remit. She states this is an obligation on every person, employer or not employer. If this is not done, deduct and remit, the penalty as found in subsection 227(9) can be enforced.

Counsel submits that before subsection 153(1) read as it does, Every Person . . ." it stated "Every Employer . . .". Thus defendant submits that one does not need to be an employer, the wording now“ "is most general”.

Counsel for defendant submits that in October, 1985 Aprok advised plaintiff that Aprok would not be able to meet its payroll (Ex. 2, page 8) and that Aprok asked plaintiff for a cash advance. Plaintiff refused for fear that any cash advance could be used on another of Aprok's projects (Ex. 2, page 22). Plaintiff wanted to ensure that the money went to the people that earned it on the job (Ex. 2, page 23) for fear that if the employees were not paid there could be a work disruption (Ex. 2, page 16).

Counsel submits that the above indicates that Aprok wanted cash, that plaintiff was concerned of work disruptions if the employees were not paid and thus, to retain control of the funds and to ensure it would be used only for its own project, plaintiff undertook upon itself to pay the workers.

Counsel submitted the following cases for my consideration: (1) Comanche Drilling Ltd. (Deloitte Haskins & Sells, Receiver-Manager for) v. Canada, [1989] 1 C.T.C. 428, 89 D.T.C. 5225.

(2) In re Bankruptcy of G, & G. Equipment Co. Ltd., Supreme Court of B.C., 74 D.T.C. 6407, [1974], 2 W.W.R. 95.

Discussion

It is very clear that subsection 153(1) of the Act does not speak of whether persons doing the paying are employers or not. I am satisfied that if a person or company is paying "salary or wages or other remuneration" it must deduct or withhold the required amount pursuant to the Income Tax Act.

From the facts and the evidence put before me I am satisfied that the plaintiff paid to the employees the wages owing to them and did so with the full knowledge that it was so doing.

In October, 1985 Aprok was unable to meet its payroll liability for salary or wages. At that time plaintiff owed Aprok approximately $155,000 and in order that the construction work could proceed, plaintiff arranged to pay the amounts due by Aprok to Aprok's employees. In order to do so, plaintiff asked Aprok to indicate the amounts owing to its employees. Aprok provided the necessary pay information, unsigned cheques in the names of the employees with the amounts on them together with the applicable pay stubs. Exhibits 1-4 are the documents prepared by Aprok. Plaintiff, upon receiving the documents prepared its own cheque in the name of the employee for the same amount, the net salary owing the employee.

As examples of what happened, I reproduce part of Ex. 1-4 for two individual employees, Ed Baker & Maurice Lavalle [not reproduced].

What is apparent from the above, is that plaintiff is being told by Aprok that it Owes a gross salary of $1140.05 to its employee Ed Baker and that it has deducted 250.80 for federal income taxes, plus other deductions of no concern for the case at bar, and that there is a net sum payable to Mr. Ed Baker which plaintiff paid.

The same applies to Maurice Lavalle. The document indicates $1504.44 owing Mr. Lavalle as his gross salary and that a deduction was made in the sum of $386.75 for federal income taxes plus other deductions of no concern for the case at bar and that there is a net sum payable to Mr. Maurice Lavalle in the sum of $1045.63 which plaintiff paid.

The same is applicable for all the other employees paid by plaintiff.

I adopt, for the purposes of the case at bar, the words of Mr. Justice Berger in the case of In re Bankruptcy of G. & G. Equipment Co. Ltd., supra, where at page 6408 he states:

The question then is whether G. & G. was a“ person paying .. . wages . . . to an . . . employee". If G. & G. falls within section 153, the Department is entitled to be treated as a preferred creditor under section 107 of the Bankruptcy Act.

I think the Department must succeed. Section 153 says that every person paying wages to an employee must withhold tax, it doesrï't say that only employers must. The language must be taken to have been deliberately chosen, and to have been intended to encompass the kind of situation that exists in the case at bar. The law recognizes that these two companies are separate legal entities. At the same time the law ought to recognize that one business undertaking may be carried on through a group of related companies. The law ought to take into account the realities of modern business arrangements.

I understand that in the above case, the companies involved are related companies but I am satisfied that this in itself is immaterial. What is important is that in the case at bar the plaintiff undertook the obligation of Aprok to pay the salary and wages of Aprok's employees in order for plaintiff to complete its project without possible disruption from the employees or the union to which they belong.

The case of Comanche, supra, is, in many ways, similar to the case at bar. Plaintiff Deloitte was appointed receiver-manager. It failed to remit deductions submitting that no deductions were made and therefore had nothing to remit. In their case, the payroll was prepared by a company known as Comcheq Services Ltd. which company calculated the gross pay, determined the deductions and arrived at a net amount.

Therefore, Comcheq prepared the cheques and payroll stubs in the same manner as Aprok prepared the cheques and payroll stubs for plaintiff.

Mr. Justice Rouleau, after making a clear analysis of plaintiff’s and defendant's submissions and after distinguishing the case of Coopers & Lybrand, supra, at page 433 (D.T.C. 5229) [of Comanche] states:

In both cases, the prima facie evidence provided by payroll records indicate that deductions were made. In Coopers & Lybrand, however, the receiver never had access to funds to pay gross wages, let alone the deductions; in fact the moneys came directly from the debenture holder and only the net amount was provided.

At page 434 (D.T.C. 5230) Mr. Justice Rouleau states:

The plaintiff assumed the responsibility of directing this financially plagued company undoubtedly intending to maintain it as a going concern in order to retain the goodwill of its customers and, more than likely, be in a more favourable position to eventually dispose of the asset to the greater advantage of the creditors. Having assumed the responsibility of an employer the plaintiff voluntarily elected to pay the outstanding wages in order to retain the staff. To suggest that mere intention is sufficient to exonerate an employer from paying what is rightfully due to the Minister of National Revenue is ludicrous.

I am satisfied from Exhibit 1-4, that Aprok indicated the deductions owing for income tax and that the plaintiff Mollenhauer Ltd. voluntarily, and for very good reason, assumed the responsibility of Aprok to pay the full wages owing, in order to prevent employee and/or union disruptions at the work site.

The action is dismissed. Costs in favour of the defendant.

Appeal dismissed.