Michael H. Hrab v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2105

Teskey J.T.C.C.:—The appellant elected to have his appeal from assessment of income tax for the year 1991 heard pursuant to the informal procedure.

Issue

The sole issue is whether the appellant, in 1991, is entitled to a credit for source deductions in excess of amounts actually deducted and remitted by John Hrab Manufacturing Ltd. (the ’’employer”).

Facts

The appellant and his brother, John J. Hrab (the "brother"), were the sole shareholders of the employer in 1991. Both were employed by the employer up to July 14, 1991. According to the appellant, each was receiving from the employer a gross weekly pay of $1,050 (net $728 a week) and a weekly payment of $350 on account of dividends.

On July 19, 1991, the appellant’s employment was terminated by the employer and the license plates were taken off a 1990 Mercury Sable that the employer leased for the appellant’s use.

On September 13, 1991, Hawkins J., of the Ontario Court of Justice, General Division, in an application brought by the appellant against his brother and the employer, ordered that:

2. THIS COURT ORDERS that the respondent, John Hrab Manufacturing Limited, do pay the sum of $7,779.52 to the applicant.

and: 4. THIS COURT ORDERS that pending the return of this motion, the respondent, John Hrab Manufacturing Limited, provide the applicant with the continuation of all monetary compensation and benefits as had been received by the applicant immediately prior to July 19, 1991, including, without limiting the generality of the foregoing:

(a) monetary compensation in the amount of $1,078 on Friday of each week; and

(b) full possession and use of the 1990 Mercury Sable leased by John Hrab Manufacturing Limited and used by the applicant.

THIS ORDER BEARS INTEREST at the rate of 11 per cent per year commencing on the date hereof.

I have not reproduced paragraphs one and three of the order, as they are immaterial to this issue.

The employer made no attempt in 1991 to comply with this order. The appellant obtained the lump sum of $7,779.52 and the amount of $1,078 each week for the remainder of 1991 by issuing numerous garnishees against the employer’s bank account. The employer, in 1991, never issued a cheque for any of this money.

The employer issued a T4 and T5 in the usual course of events. The T4 shows a gross employment income of $59,326.22, CPP deductions of $632.50, UI deductions of $443.70 and income tax deductions of $9,158.20. The T5 shows actual amount of dividends of $10,150, taxable amount of dividend of $12,687.50 and federal tax deduction of ($12,687.50 - $10,150 = $2,537.50) $2,537.50.

The appellant on receiving from the employer his T4 and TS realized that the employer did not make any source deduction payments on the moneys garnished and prepared an amended T4 by grossing up the Ul premium amount from $443.70 to $795.60 and the income tax deductions from $9,158.20 to $16,679, and (he did not gross up the income) in a similar way he prepared an amended T5 but he did gross up the actual amount of dividends. The appellant’s position being that the employer should have remitted these amounts to Revenue Canada.

The brother’s son (the "nephew") gave evidence and produced the employer’s 1991 payroll book, which he alleges he maintained. I have grave doubts about their authenticity.

What the actual income and dividends are, is difficult to determine. There was 29 weeks from January 1, 1991 to July 19, 1991 and eight weeks from July 19, 1991 to September 13, 1991.

The T5 issued by the employer substantiates an amount of dividends of $350 a week for 29 weeks ($350 x 29 = $10,150). The income tax deduction, as shown on the T4 issued by the employer, substantiates weekly deductions of $315.80 for a gross amount of ($315.80 x 29 = $9,158.20) $9,158.20, as shown thereon. I cannot reconcile the CPP amount of $632.80 as shown on the original T4 and the amended T4 and the payroll account book (Exhibit A-3).

The nephew testified to the effect that the employer took the position that as of July 19, 1991, the appellant was no longer an employee and that no dividends were declared after July 19, 1991. I cannot determine what the lump sum of $7,779.52 ordered by Hawkins J. represents. The appellant testified that the $7,779.52 was to represent the net amount he should have received for the eight-week period from July 19, 1991 to September 30,

What the appellant did on the realization that the employer was not making payments to Revenue Canada in regards to the employer for two years is unclear. It appears he did nothing in regards to the employer and attempted to put the problem onto Revenue Canada by preparing the amended T4 and T5 forms. Hawkins J., issued a further Order on October 5, 1994. Paragraphs one and two of this order reads:

1. THIS COURT ORDERS that the respondent, John Hrab Manufacturing Limited, remit the appropriate income tax, Canada Pension Plan and unemploy- ment insurance deductions to the proper authorities on the weekly sum of $1,050 from and after the order of the Honourable Mr. Justice Hawkins dated September 13, 1991, attached hereto as Schedule "A";

2. THIS COURT ORDERS that from and after the date hereof, the respondent, John Hrab Manufacturing Limited, pay to the applicant, Michael Hrab, weekly, the sum of $1,078 net of all statutory deductions;

The employer did not comply with this second order of Hawkins J. and made a voluntary assignment in bankruptcy on January 20, 1995. The order in no way clarifies anything in regards to the lump sum of $7,779.52.

Analysis

The appellant relies upon the reasons for judgment in Marchand v. M.N.R., [1990] 2 C.T.C. 2370, 90 D.T.C. 1763. Therein, my colleague Garon determined that:

1. The amount of federal tax deducted from the appellant by his employer was $2,978.06.

2. That a lesser amount was remitted to Revenue Canada.

3. That the appellant’s employer, who was legally bound to pay the appellant’s net salary pursuant to a union agreement during periods of absence, was bound to continue to make and remit the same deductions as before.

4. That the appellant’s legal situation could not be modified unilaterally by the employer.

I do not believe this decision assists the Court herein. The September 13 order does not reinstate the appellant as an employee.

The operative portion of section 153 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act”) reads:

153(1) Every person paying at anytime in a taxation year

(a) salary or wages or other remuneration...shall deduct and withhold therefrom...and remit that to the Receiver General.

The $7,779.52 lump sum and the $1,078 weekly sum are ’’other remuneration” within the meaning of this provision. Pursuant to the order of September 13, 1991, the employer should have paid the appellant the lump sum of $7,779.52 and the weekly sum of $1,078 after making the required deductions therefrom and remitted these deductions to the Receiver General. Instead the employer did nothing and the appellant received the gross amount by use of repeated garnishees.

The appellant obviously knew no deductions were being remitted in February 1991. He chose to prepare and submit an amended T4 and TS rather than take further action against the employer (which he eventually did in late summer of 1994).

The second order does not deal with the lump sum and since the employer should have deducted from this sum the statutory deductions and remitted the same and since the appellant received this whole amount through garnishees, his appeal on this amount must be dismissed.

I must also determine if the October 5, 1994 order assists the appellant in regards to the weekly compensation of $1,078 that he garnisheed. I think not. Up until October 5, 1994, the employer should have deducted the statutory deductions from the $1,078 and remitted the same to the Receiver General and paid the net amount to the appellant. Since the appellant received the whole amount through garnishees, this was not done. There was no legal obligation prior to October 5, 1994 to do anything more than as stated above. This is what takes the facts of this case out of the dicta of Marchand, supra. The October 5, 1994 order in essence increases the amount the appellant is to receive from the employer. The respondent is not a party to this order. It was up to the appellant to enforce the order of October 5, 1994. I am not aware of any contempt proceedings against the employer or its directors. The October 5, 1994 order cannot retroactively amend the September 13 order vis-à-vis the Minister of National Revenue (the "Minister") who issued the assessment herein.

I believe that the Federal Court of Appeal in R v. Cooper & Lybrand, [1980] C.T.C. 367, 80 D.T.C. 6281, is authority for the dismissal of this appeal, when it said at page 376 (D.T.C. 6287):

The liability imposed in each of these instances is more easily understood if one keeps in mind that when a deduction for income tax is made from wages the employee is deemed to have received, as wages, the amount deducted and is accorded credit for the amount deducted as an instalment on account of the income tax to become due with respect to his income.

If the person paying fails to deduct, his failure has no effect on the liability of the employee for income tax it being assumed that the taxing authority will recover from the employee the full amount of the income tax....

In this instance, given no money was deducted or withheld by the employer, the appellant needs to pay income tax on the money he seized from the employer’s bank account.

The appellant’s complaint is against the employer and not against the assessment. Therefore this portion of the appeal also has to be dismissed.

The respondent did consent to the appeal being allowed and the matter being sent back to the Minister for reconsideration and reassessment on the basis that the appellant’s income from taxable dividends for 1991 totalled $10,150 (as apparently the Minister assessed on the amended T5). There shall be no further relief.

Appeal allowed in part.