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Citation: 2004TCC64
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Date: 20040119
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Docket: 2003-909(IT)I
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BETWEEN:
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PORTLAND HOTEL SOCIETY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
Agent for the Appellant: Brad Doherty
Counsel for the Respondent: Raj Grewal
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Vancouver, British Columbia, on August 14,
2003)
Mogan J.
[1] This is an appeal by the Portland
Hotel Society from an assessment issued by the Minister of
National Revenue under subsection 227(10.1) of the Income Tax
Act with respect to penalties for source deductions remitted
late. The Appellant has appealed from that assessment and has
elected the informal procedure.
[2] The Portland Hotel Society is a
non-profit corporation which provides social housing in the City
of Vancouver. It operates 500 units for people who would not
otherwise have housing. These are sometimes referred to as the
most unfortunate members of our society. Evidence was given by
Brad Doherty who is controller of the Appellant corporation. He
explained that the Appellant operates five buildings, which
provide these 500 units to people who would not otherwise be
houseable. They also operate four programs which are designed to
help these people become productive members of society in the
hope that, in the long term, they would be able to leave social
housing and become eligible for housing in the ordinary
commercial market.
[3] Sometime around 2000 or 2001, the
Appellant company was authorized to acquire two additional
buildings which could be renovated to provide additional housing.
Those buildings are identified as the Pennsylvania Hotel and the
Stanley Hotel. Mr. Doherty stated that these hotels had a
difficult clientele in the sense that they were often the scenes
of fights; and they were occupied by people who had HIV and other
similar illnesses which afflict the poor and the homeless.
[4] Having acquired these two old
buildings, the Pennsylvania Hotel and the Stanley Hotel, the
Appellant was required to renovate them before they could be
occupied for social housing. But before they could be renovated,
the Appellant was caught in a financial squeeze because of a
provincial election in the Province of British Columbia.
[5] As was reported in the media,
there was a significant election in British Columbia, in 2002 or
late 2001, when a new government was elected with promises to cut
costs and change the way the province was governed. As soon as
the new government took office, it took steps to cut costs; and
the Appellant was caught in the crossfire of changes in
government policy. The Appellant had acquired the buildings in
the expectation that it would have funds to renovate them, but
the funds were not forthcoming while the province and the City of
Vancouver reorganized the financing of social agencies.
[6] The Appellant had to incur
significant costs maintaining these buildings by way of
insurance, municipal taxes, security costs and other maintenance
costs without being able to use them. This put the Appellant in a
cash bind. It did receive regular operating funds but it had to
use those funds for the five existing occupied buildings which
had the 500 units occupied and satisfying the social purpose of
the corporation.
[7] As aresult, the Appellant was late
remitting the source deductions which had been taken on the
payroll of its employees, and those late payments occurred in the
last half of the calendar year 2002. According to the Reply to
the Notice of Appeal, on the first late payment which was only a
couple of days late, no penalty was assessed. But there were
seven occasions, in the last six months of 2002, when the
Appellant was late, usually by just a few days, in making the
remittance of the source deductions; and they were penalized by
Canada Customs and Revenue Agency with respect to those late
remittances.
[8] Mr. Doherty entered as Exhibit A-1
a summary of the penalties charged showing that from August 21,
2002 to December 12, 2002, on seven occasions, they were late
making payments and penalized each time. The seven penalties,
plus a modest amount of less than $1,000 in interest, accumulated
to a total of $19,955, although the only two amounts which are
directly under appeal are the first two penalties of August 21,
2002 for $2,942 and September 6, 2002 for $3,007.
[9] Basically, as counsel for the
Respondent pointed out, the Appellant is coming to this Court on
compassionate grounds. It is a non-profit corporation and is
totally dependent upon public authorities like the Province of
British Columbia, or the City of Vancouver, or some other
municipalities, to provide funds so that the Appellant can
discharge its obligation to provide social housing.
[10] What the Appellant encounters is the
structure of the Income Tax Act which is a statute without
emotions. The following sections of that Act are relevant.
Subsection 153(1) states in part:
153(1) Every person paying, at any time in a taxation
year
(a) salary,
or wages, or other remuneration, ...
shall deduct or withhold from the payment the amount
determined in accordance with the prescribed rules and shall, at
the prescribed time, remit that amount to the Receiver General
...
That is the basic obligation on any employer to withhold
appropriate levels of income tax from the payment of salary and
wages. Subsection 227(9) provides for a penalty and the relevant
words are:
227(9) ... every person who in a calendar year has
failed to remit or pay as and when required by this Act
... an amount deducted or withheld as required by this
Act ... is liable to a penalty of
(a) 10% of
that amount; ...
That is the 10% penalty which has been imposed on the
Appellant corporation. Subsection 227(9.4) states:
227(9.4)
A person who has failed to remit as and when required by this
Act ... an amount deducted or withheld from a payment
to another person ... is liable to pay as tax under this
Act on behalf of the other person the amount so deducted
or withheld.
Now, this last provision is important because, in the broad
scheme of employment in Canada, the employee has tax deducted at
the source and never receives that amount. That is to say, a
person who ordinarily would earn a salary of $1,000 per week
might have $150 of tax withheld, and so that person receives only
$850. The tax withheld of $150 is supposed to be remitted by the
employer to Revenue Canada. If the employer fails to remit it,
then the employer is liable, and not the employee, because it
would be unfair to turn to the employee and ask the employee to
pay the $150 when he or she never received it.
[11] That is the scheme of the Act in
transferring the liability from the employee to the employer for
amounts which are withheld but not remitted. To make that
liability work and to permit the Minister to collect from the
employer, there is a further provision in subsection 227(10.1)
which states:
227(10.1) The
Minister may at any time assess
(a) any
amount payable under ... subsection (9) ...
and, where the Minister sends a notice of assessment to the
person, ...
and then the appeal provisions kick in. That is the kind of
assessment the Minister has issued to the Appellant requiring it
to pay a penalty under subsection 227(9) on the amount that
was late remitted.
[12] This is not a case of total failure to
remit; it is a case of failure to remit within a prescribed time.
But the penalty is there because the amounts which are withheld
are deemed under another provision of the Act to be held
in trust. That is to say, on payday any employer is obliged to
pay the full amount of the salary or wages to an employee. In the
example I gave above, on payday the person who is earning $1,000
a week is entitled to receive the $1,000. But then the Act
interferes with that right of the employee to receive full salary
and says, no, you may not receive your full salary because we are
imposing an obligation on the employer to withhold and remit a
certain amount of your salary. In other words, we are going to
collect the tax on your salary as you receive it through the
year.
[13] That is the scheme and, from a
practical point of view, that is the only way it can work. The
obligations to withhold are inflexible and the obligations to
remit are equally inflexible. The penalty authorized under
subsection 227(9) is fixed by statute, and this Court does not
have authority to reduce the penalty or cancel it because it is
imposed by Parliament. If the conditions are met which permit the
penalty to come into play (a late remittance), then the liability
is fixed. And if the Minister imposes the penalty by issuing an
assessment under subsection 227(10.1), then this Court does not
have authority to set aside the penalty on compassionate grounds.
Therefore, because the appeal is based primarily on the
compassionate circumstances of the Appellant, the appeal will
have to be dismissed.
[14] I would add this note to these Reasons
for Judgment. Under subsection 220(3.1) of
theAct, the Minister has a discretion to
waive or cancel all, or any portion of any penalty payable under
the Act. This Court cannot force the Minister to exercise
his discretion one way or the other. But the Minister will not
exercise his discretion unless the taxpayer makes a specific
request, in writing, to the Minister, referring to
subsection 220(3.1), and asking for the exercise of the
discretion. It seems to me in the circumstances of this appeal,
which I am required to dismiss, that the Appellant has good
grounds to at least make the request to the Minister for the
exercise of that discretion.
Signed at Ottawa, Canada, this 19th day of January, 2004.
Mogan J.
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