Ashby v. R., [1996] 1 CTC 2464, 96 DTC 3212

Sarchuk J.T.C.C.: — This is an appeal by John Edgar (Jack) Ashby (the appellant) with respect to an assessment of tax for the 1990 taxation year. In computing income for that year the appellant reported income and deductions from First Choice Management Services Inc. (First Choice) as follows:

Employment Income Before Deductions: $36,000

Employee’s Canada Pension Plan Contributions (CPP): $730.32

Employee’s Unemployment Insurance Premiums (UI): $748.80

Income Tax Deductions (tax): $8,574.96

The Minister assessed by reclassifying the employment income as "other income" and disallowed the deductions claimed in respect of the appellant’s contributions to CPP, his employee’s UI premiums and the income tax deductions.

The evidence in this case consists of the testimony of the appellant and of Fred D. Temush (Temush), a source deduction auditor with Revenue Canada.

First Choice was incorporated in the Province of Saskatchewan in 1987; its officers and directors were Douglas H. Zabolotney (Zabolotney), Gerri Law (Law) and the appellant. Its business was fundraising by way of lotteries for professional football teams in Regina and Calgary.

In 1989 Zabolotney resigned as an officer and director. That same year the appellant declared personal bankruptcy and he too resigned as a director. Law (now Ashby’s wife) became the sole director. In 1989 First Choice moved its centre of operations to Calgary where the appellant and Law took up residence. Apparently First Choice continued to have financial difficulties and on or about December 12, 1990 went out of business. It never declared bankruptcy, it merely ceased operating.

At all relevant times throughout 1989 and 1990 the appellant was president and Law was vice-president of First Choice and in 1990 they were its only employees. The appellant, an accountant, was also responsible for First Choice’s financial affairs including such matters as the maintenance of its books of account including payroll records.

According to the appellant his monthly salary of $3,000 was paid to him by First Choice on a semi-monthly basis by way of cheque each in the amount of $1,081. He maintained that this amount reflected the fact that First Choice had deducted the appropriate amounts for CPP, UI and tax. To further demonstrate that wage payments were made to him in that year totalling $36,000 and that the appropriate deductions had been made the appellant, during his cross-examination of Temush, presented a number of cheques all in the amount of $1,081 payable to him and received from First Choice in taxation year 1990 as well as a document purporting to be a printout of First Choice’s payroll register as at December 31, 1990. [1] The appellant also filed a T4 summary of remuneration paid by First Choice to himself and to other employees, including Law, for the year ending December 31, 1989 and cheques from First Choice to the Receiver General dated June 6, 1989, June 19, 1989, June 21, 1989, July 4, 1989 and July 17, 1989 which he said represented late deduction remittances to Revenue Canada. [2] It should be noted that the June 6 cheque was certified, the June 21 cheque was cancelled and the three remaining cheques appear to be for "employee deductions/88".

According to Temush in August 1991 he attempted to conduct an audit of First Choice with respect to taxation year 1990. This audit came, about because Revenue Canada had received the employee’s (the appellant’s) T4 from First Choice but had not received the matching employer’s copy. He spoke to the appellant with respect to the payroll since on the basis of information available it appeared that no income tax deductions had been made by First Choice and was advised that the appellant did not know who prepared the payroll or signed the cheques, that he had no contact with the directors, did not know who they were and was unable to assist Temush as to whether any payroll information might be obtained.

In October 1992 Temush performed a further audit and again spoke to the appellant who on this occasion undertook to provide the names of the directors; any available documents such as payroll records, cancelled cheques, bank statements and any other relevant information. Although the appellant was specifically asked to provide this information nothing was forthcoming prior to the hearing of the appeal. The appellant’s testimony was that he assumed that he would have provided such documentation to Temush but had no recollection of either the conversation or "the process at all".

Appellant’s position

The appellant maintains that the income tax return filed by him for taxation year 1990 accurately reflects his employment income, the appropriate deductions which were in fact made and the correct calculation of tax payable. Accordingly the Minister erred in assessing as he did.

Respondent’s position

The primary position advanced is that no reasonable ground of appeal has been rasied by the appellant. Relying on Brooks v. R. (sub nom. Brooks v. Canada), [1995] 1 C.T.C. 2880 (T.C.C.), Lamash Estate v. Minister of National Revenue, [1990] 2 C.T.C. 2534, 91 D.T.C. 9 (T.C.C.), and McMillen Holdings Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 2327, 87 D.T.C. 585 (T.C.C.) counsel argues that the relief sought by the appellant in this case is not available since the issue raised does not relate to an assessment of income tax, rather it relates to whether certain amounts, being income tax, CPP contributions and UI premiums were in fact deducted at source. This, it was argued, is an issue which more properly should be considered by the Federal Court-Trial Division, since it involves a dispute as to whether the appellant or his employer owes the relevant amounts.

Counsel for the appellant contends that there is no dispute as to the correct calculation of the amount of tax payable and that the appellant merely wishes to have a determination made that all taxes owing have been withheld. This, counsel argues, is not an appeal contemplated by subsection 171(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the ’’Act”).

In the alternative counsel for the Respondent submits that no substantive evidence has been presented capable of establishing on a balance of probabilities that the source deductions in issue had been made in the 1990 taxation year by First Choice. Reference was made by counsel to Coopers & Lybrand Ltd. v. R. (sub nom. R. v. Coopers & Lybrand), [1980] C.T.C. 367, 80 D.T.C. 6281 (F.C.A.) and Jacob v. Minister of National Revenue, [1980] C.T.C. 3008, 80 D.T.C. 1878 (T.R.B.) Part of the evidence in Coopers & Lybrand was that the payroll record prepared on its instructions clearly disclosed the deductions which were required from the gross amount of the pay; the T4 slips of each employee showed an amount inclusive of the deduction in the relevant period and the T4 summary agreed with both of these. However on the totality of the facts before it the Federal Court of Appeal concluded that the amounts had not been deducted as required by subsection 153(1) of the Act. Counsel for the Respondent argues that the Federal Court of Appeal did not regard the fact that the T4 slips and T4 summaries appeared to establish that the deductions had been made as determinative of the issue. According to counsel this judgment and the subsequent decision of the Tax Review Board in Jacobs, which professed to apply the ratio in Coopers & Lybrand, stand for the proposition that the crucial and all persuasive element an appellant must establish to prove deduction is remittance to the collector, not the payroll records alone.” [3]

Counsel for the respondent urges the Court to consider the totality of the course of conduct of both First Choice and its officers, in particular the appellant, who were responsible for the deliberate failure to remit and to find on the basis of all of the evidence that First Choice had not in fact made the deductions that it is alleged to have made.

Conclusion

The basis of the respondent’s assessment is that the appellant was not entitled to a credit for CPP contributions, UI premiums or income tax deducted at source by First Choice because he has not proven that any amounts were withheld or deducted at source and remitted to the Receiver General for Canada on account of his liability for the year pursuant to subsection 153(1) of the Act and Part I of the Income Tax Regulations (the Regulations). [4]

This Court has original jurisdiction to hear and determine appeals in matters arising under the Act (and other statutes). I am satisfied that the matter before me is an appeal from an assessment of tax within the meaning of the provisions of subsection 171(1) of the Act. I am not inclined to follow the decision in Brooks, supra, for two reasons. First, the prayer for relief in Brooks’ Notice of Appeal discloses that he was seeking a declaratory order from this Court. Clearly such relief is not contemplated by subsection 171(1) of the Act. Second, and this point was not argued in Brooks, section 118.7 of the Act provides that for the purpose of computing the tax payable under Part I of the Act by an individual for a taxation year there may be deducted an amount in respect of an employee’s premium for the year under the Unemployment Insurance Act, 1971 and the employee’s contribution under the Canada Pension Plan. These are statutory deductions permitted to a taxpayer which this appellant says were made but have been denied to him. There is no basis upon which the respondent can reasonably argue that this Court is not entitled to determine the question whether these deductions had in fact been made and if so, to direct the Minister to reassess accordingly. A taxpayer is entitled to the benefit of each statutory exemption and deduction in the Act applicable to him. I see no difference between a taxpayer’s entitlement to deduct the premiums and contributions pursuant to section 118.7 of the Act and a taxpayer’s entitlement to deduct appropriate expenses pursuant to section 18 of the Act. Disallowance of a deduction by the Minister founded on an incorrect assumption of facts is a reversible error. Furthermore, while it might be argued that income tax deducted at source is treated differently in the Act than UI premiums and CPP contributions, it seems to me inappropriate, if I were to find that First Choice made the required deductions from the appellant’s wages, to grant relief in respect of CPP and UI and to deny relief with respect to a deduction of tax at source. In my view the calculation of income tax payable is an integral part of an assessment by the Minister. If the Minister’s calculation is wrong the appellant is entitled to relief. To reject his appeal on the basis of "lack of jurisdiction" in these circumstances is not warranted.

Do the facts support a finding that the amounts claimed for CPP, UI and tax were withheld by First Choice in the taxation year in issue?

It is the Respondent’s position that no evidence exists capable of supporting the appellant’s position. Furthermore, it is the Respondent’s position that the appellant himself did not remit any funds to the Receiver General for Canada with respect to his 1990 taxation year as he was required to do since at all material times he was aware that no amounts had been deducted or remitted to the Receiver General by First Choice.

No First Choice records were made available to Temush thus, given the information otherwise available, it is not surprising that the Minister assessed as he did. However this Court has before it the testimony of the appellant as well as a number of "recently discovered" documents. This evidence does raise some question regarding the correctness of the Minister’s assessment.

The sole issue before me is whether the deductions had been made. It is a fact that the appellant’s salary in 1990 was $36,000. However there is no evidence that the appellant actually received more than the amount of $1,081 twice a month in 1990. The appellant’s testimony is that the amounts paid to him were net amounts and that the difference between these payments and the gross amount of wages payable was the exact amount of premiums, contributions and income tax which should have been withheld by First Choice. The appellant’s position that the deductions had been made is also supported by the printout of First Choice’s payroll register as at December 31, 1990.

The evidence also establishes that First Choice’s practice since at least 1988 and certainly throughout 1989 and 1990 was to withhold but not to remit source deductions to the Receiver General until funds were available and even then only when it became absolutely necessary. As the appellant said:

What I am attempting to prove here is that First Choice’s practice, while it wasn’t always pretty, that they lived up to their responsibility and remitted to Revenue Canada in the past and 1990 wasn’t intended to be any exception to that.

and:

Throughout the course of 1989 and ’90 the company withheld CPP, UIC and income tax. And the intent was that the company would remit at the end of 1990 because the cash flow wasn’t sufficient during the initial course of the contract to be able to remit it on a regular basis.

I add that the series of five cheques which the appellant said represented late remittances for the 1989 taxation year are also some proof of this practice.

A word about the appellant’s testimony. He was, as previously noted, First Choice’s president, and at all material times during 1990 had control of its books and records. He equivocated regarding the extent of his involvement with First Choice during 1989 and 1990, but ultimately did concede that he acted as "general manager", had signing authority and was involved in First Choice’s decision not to remit the payroll deductions in issue. I am also satisfied that the appellant "stonewalled” Temush and made no effort to provide any available documentation to him. In this context, I reject his assertion that he had no recollection of his conversations with Temush.

This testimony is troubling as is his involvement in First Choice’s decisions not to make the required remittances. Does that entitle me to draw the inference that the amounts were not withheld? I think not. The appellant and First Choice are separate legal entities and his decision as its manager/accountant not to withhold or remit, whether proper or improper, is not relevant. What must be determined is whether First Choice made the deductions.

First, I view the interpretation of the Coopers & Lybrand judgment found in Jacob to be unduly restrictive. Second, the facts in Coopers & Lybrand are quite different as noted by Rouleau J. in Comanche Drilling Ltd. (Receiver of) v. Canada (sub nom. Comanche Drilling Ltd. (Receiver of) v. Minister of National Revenue), [1989] 1 C.T.C. 428 (sub nom. Deloitte Haskins & Sells v. R.), 89 D.T.C. 5225 at pages 433-34 (D.T.C. 5229-30) (C.B.R. 310) (F.C.T.D.). He said:

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 monies came directly from the debenture holder and only the net amount was provided.

[Emphasis added.]

In the present appeal there is no evidence to rebut the prima facie inference drawn from the payroll records. Although the receiver never actually set money aside, funds were available not only to pay wages but to pay the remittance to the Crown on account of the deductions it calculated.

Rouleau J. then concluded:

Counsel for the Plaintiff stressed that only nominal, rather than actual, deductions were made. In other words, they were only bookkeeping entries to enable the determination of net wages. As persuasive as this argument may first appear, I do not accept it. In pursuing this course of conduct, the receiver raised a presumption, albeit rebuttable, that it had actually withheld amounts on account of income tax, which it would then be liable to remit at the prescribed time.

Thus if the payroll or other relevant evidence indicates deductions were made, then there may be a presumption that these amounts were actually withheld. Clear evidence, as most certainly existed in Coopers & Lybrand, would be required to rebut such a presumption. Applying the same rationale I have concluded that First Choice, the "person paying" the employees’ wages, failed, or deliberately did not, remit rather than failing to deduct or withhold. Furthermore I find that the appellant received the net amount of wages due to him and that although the remittances were not made by First Choice the validity of the deductions is not altered thereby.

With some reluctance I conclude that the appellant’s return as filed was correct. Accordingly the appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed.