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Citation: 2003TCC308
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Date: 20030502
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Docket: 2002-3118(IT)I
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BETWEEN:
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AMERICAN TEXTILES INC.,
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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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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment
for the period from January 1, 2000 to December 31,
2000 whereby the Minister assessed the appellant for failure to
withhold and remit tax and Canada Pension Plan contributions in
respect of amounts that it was assessed were paid to employees of
the appellant as salary, wages or other remuneration.
[2] The only witness was
Mr. Roger (Baldev) Lubhaya.
[3] He testified that he was the
president of the appellant and also was a 75% shareholder of a
Kashel's Limited. Kashel's Limited carried on the
business of exporting non-ferrous metals. It engaged a shipping
line, Maesk, to transport about $500,000 worth of non-ferrous
metals to India. Evidently, through some sort of mix-up, it sent
the shipment to Jordan and it took a year to get it back. This
created serious financial difficulties for Kashel's with the
result that the bank seized its bank account and made it
impossible for bonuses to be paid to the employees. On
December 28, 2000, cheques were issued on the account of the
appellant to Sunil Lubhaya, Anil Lubhaya (Roger Lubhaya's
son), Peggy Martin (Roger's wife), and Roger Lubhaya in the
amounts of $20,000, $10,000, $25,000 and $31,000 respectively and
they bore the notation "Bonus 2000".
[4] At this point the evidence gets a
little murky. Roger Lubhaya testified that no one, apart from
himself, saw the cheques. He testified that he went to the branch
of the Toronto Dominion Bank at 381 King Street West in
Kitchener and immediately redeposited the cheques to the
appellant's bank account.
[5] The bank statements have the
following entries.
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DESCRIPTION
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CHEQUE/DEBIT
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DEPOSIT/CREDIT
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DATE
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DEPOSIT
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31,000.00
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DEC29
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DEPOSIT
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30,000.00
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DEC29
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DEPOSIT
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25,000.00
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DEC29
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...
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CHQ#00856-...
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31,000.00
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DEC29
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CHQ#00852-...
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20,000.00
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DEC29
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CHQ#00853-...
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10,000.00
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DEC29
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CHQ#00854-...
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25,000.00
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DEC29
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[6] He stated that his reason for
drawing the cheques on the appellant's bank account rather
than Kashel's was that the Bank of Montreal had frozen
Kashel's account and he wanted to pay the bonuses that had
been paid in previous years.
[7] The reason for immediately
redepositing the cheques was that there were insufficient funds
in the appellant's bank account.
[8] The problem was compounded by the
fact that the bookkeeper whom he retained prepared and issued T4
slips to the four family members indicating payment of employment
income and taxes withheld as follows:
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Employment Income
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Taxes Deducted
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Baldev Lubhaya
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$47,400
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$11,900
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Anil Lubhaya
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$11,000
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$800
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Margaret Martin (Peggy)
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$33,500
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$8,500
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Sunil Lubhaya
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$3,3074.08
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$6,094.52
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[9] In fact these amounts shown as
taxes were not sent to the CCRA. No CPP deductions were made or
remitted.
[10] The financial statements show a
deduction for wages and employee benefits of $92,927, which
Mr. Lubhaya said included the bonuses. I cannot reconcile
these figures. The total of the amounts of income shown on T4
slips is $124,974. The total of the bonuses is $86,000. To
compound the confusion the financial statements show an amount
receivable from shareholder of $83,453 which Mr. Lubhaya
said was the amount of the bonuses.
[11] An audit was done by the CCRA and new
T4 slips were prepared by the CCRA auditor.
[12] The new amounts shown on the amended T4
slips are as follows.
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Employment
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Income tax
deducted
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Employee CPP contribution
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Roger
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$36,694.59
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0
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$1,294.59
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Peggy
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$25,872.53
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0
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$872.53
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Sunil
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$24,020.49
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$498.92
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$774.04
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Anil
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$10,263.79
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0
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$263.79
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[13] The other family members did not
testify but Mr. Lubhaya stated that they included the bonus
in their income tax return for the 2000 taxation year, and that
they were assessed amounts and the CCRA collected the tax.
[14] The appellant was assessed for failure
to remit. The notice of assessment contains the following amounts
which it is alleged ought to have been remitted.
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Federal tax
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$365.51
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Provincial tax
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$133.41
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CPP
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$6,409.90
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Penalty
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$690.87
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Interest
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$152.21
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Total
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$7,751.90
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[15] Where does this extraordinary saga of
confusion lead us? We have to start with cheques issued by a
company, the appellant, who it is said was not the employer of
the family members. It is possible that apart from Roger the
other family members did not ever know that the cheques had been
issued to them. The cheques were immediately deposited back into
the appellant's bank account. It is clear that employment
income is taxed when received and not when receivable
(Rousseau v. M.N.R., 58 DTC 631, aff'd
60 DTC 1236). Nonetheless the employees according to
the evidence treated these amounts as income and no objection to
the assessments of the individuals have been filed.
[16] It would seem that one of two
hypotheses must be accepted. Either that the employees received
these amounts and were therefore taxable on them or that they did
not receive them and that they never became their income.
[17] If the second hypothesis is accepted
there was no payment and therefore no obligation to withhold and
remit payroll deductions. It would follow that the employees were
not taxable on the amounts, should not have included them in
their income and should not have been taxable. Therefore the
assessments of the individuals for 2000 are wrong but there have
been no objections filed.
[18] I shall not endeavour to embark on an
examination of the effect of section 78 of the Income Tax
Act which contains detailed rules for the treatment of unpaid
expenses owing to a person with whom a taxpayer does not deal at
arm's length.
[19] The first hypothesis is that the
employees received the bonuses and were taxable on them in the
year and the amounts were loaned to the appellant and can be
withdrawn tax-free at some future date. I find this hypothesis
more in accordance with all of the evidence, including the
employee's own treatment of the bonuses in their return of
income. While the second hypothesis of non-receipt has a certain
superficial appeal I do not find the evidence supporting it to be
compelling.
[20] In the result the assessment of
unremitted amounts is correct and the appeal must be
dismissed.
Signed at Toronto, Canada, this 2nd day of April 2003.
A.C.J.
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