Cabaret Les Filles D’eve Enrg v. Minister of National Revenue, [1982] CTC 2531, 82 DTC 1548

Guy Tremblay [TRANSLATION]:—This case was heard at Montreal, Quebec on November 20, 1981.

1. Point at Issue

The issue is whether the appellant was justified in refusing to pay the 10% penalties assessed by the respondent in respect to the 1978 and 1979 taxation years under the provisions of subsection 227(9) of the Income Tax Act for an amount of $5,089.65 withheld at source but not remitted to the respondent, plus interest on this amount.

The appellant contended that as manager he had deducted taxes at source every month, and had remitted these amounts by certified cheque made payable jointly to the Receiver General of Canada and Rita Sadori, the lessee of the building where the business was operated and holder of a permit from the Quebec Liquor Board, in accordance with a clause in the management contract entered into with the said Rita Sadori.

2. The Burden of Proof

2.01 The appellant has the burden of showing that the assessment of the respondent is incorrect. This burden of proof results not from any single section of the Income Tax Act, but from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The assumptions of fact on which the respondent relied are set out in subparagraphs (a) to (d) of paragraph 3 of the amended reply to the respondent’s notice of appeal. This paragraph reads as follows:

(Translation)

3. In assessing the Appellant for the taxation years in question, the Minister of National Revenue relied on the following assumptions of facts, inter alia:

(a) During the taxation years in question, Messrs Laurent Rouleau and Maurice Lemieux operated a night club business in partnership at 1224 Stanley Street in the district and city of Montreal under the name “Les Filles d’Eve Enrg”;

(b) As part of their responsibilities in operating and managing the activities of this night club, Messrs Rouleau and Lemieux hired employees on behalf of their firm “Les Filles d’Eve Enrg”;

(c) During the taxation years in question, the appellant withheld from the wages paid to his employees the following amounts on account of the taxes payable by them:

1978	$3,957.50
1979	$1,132.15

(d) The Appellant did not remit or pay to the Receiver General the above- mentioned amounts as required by the Act and Regulations.

1. Facts

3.01 On April 21, 1978, Messrs Laurent Rouleau and Maurice Lemieux entered into a contract with Rita Sadori, who described herself as the lessee of the ground floor of the building located at 1224 Stanley Street, Montreal and the holder of a permit from the Quebec Liquor Board to sell alcoholic beverages on the premises. She hired Rouleau and Lemieux as “managers to operate the club on the premises” (Exhibit A-1).

3.02 On April 28, 1978, Messrs Rouleau and Lemieux registered a partnership declaration at the Palais de Justice in Montreal as No 500-15-010226-78 (Exhibit 1-1), stating that they operate a night club business at 1224 Stanley Street, Montreal, under the name “Les Filles d’Eve”.

3.03 This two-year contract (Exhibit A-1) was supposed to end on April 30, 1980. However, a fire in the building of the rented premises terminated it in March 1979.

3.04 In addition to a $15,000 security deposit, the managers were supposed to pay $1,000 monthly to cover heating, electricity and so forth, and 200% of the cost of the alcoholic beverages bought through Rita Sadori.

As it turned out a week later, according to Mr Rouleau, the last clause was amended by an oral agreement to the effect that they would pay cost plus 85% for these beverages, and the 85% would be Rita Sadori’s sole net profit.

3.05 According to contract A-1, the managers had sole responsibility for the employees (clause (g)). In his testimony, Mr Rouleau stated that they hired and paid the dancers themselves.

They had an account at the Canadian Imperial Bank of Commerce into which all revenues were deposited and from which ali club expenses were paid. The only persons authorized to sign cheques were the two managers.

3.06 According to clauses (d) and (e) of contract A-1, the managers undertook to obey the law and pay any taxes owing.

These clauses read as follows:

(a) You undertake to respect all municipal, federal and provincial laws applicable to the operation of the said business on the said premises, including the laws governing the Quebec Liquor Board, Police, Fire, Sanitation, Health, and so forth and so on.

(b) You hereby undertake to remit regularly to us before the fifth day of every month all amounts required for the payment of Federal and Provincial source deductions . . . as well as the amounts to cover sales tax on the operation of the said premises . .. and all other amounts of taxes payable.

3.07 Mr Rouleau stated that the staff was paid and deductions at source were made every week.

Every month, a certified cheque was made payable jointly to Rita Sadori and the Receiver General (and also to the Ministère du Revenu du Québec) in payment of the deductions at source for salaries, unemployment insurance, sales tax and so forth. A series of documents issued every month by the bank, showing that the certified cheques had been issued and giving the amounts and names of the payees, was filed as Exhibit A-3.

3.08 In February 1979, Mr Rouleau gave Rita Sadori a copy of the 1978 T-4 forms issued for each employee (Exhibit A-2).

3.09 According to Mr Rouleau, in May 1978, shortly after the club opened, the police came to meet the new managers and put them on their guard concerning Rita Sadori and her father. It was then that the managers decided that the cheques for the payment of taxes, deductions and so forth, which were ultimately intended for the various governments, would be made payable jointly to Rita Sadori and the governments.

3.10 In March 1979, after the fire which partially destroyed the Stanley Street building, Mr E Sadori, Rita Sadori’s father, met with Mr Rouleau and showed him all the cheques signed by the appellant since May 1978 and made jointly payable to Rita Sadori and the governments. They had not yet been sent to the government authorities. They amounted to $70,000. He asked to have them made payable to Rita Sadori only. Mr Rouleau refused.

3.11 According to the testimony of John Keaws, detective-sergeant in the Montreal Urban Community police, E Sadori tried to cash these cheques at a bank in Las Vegas, Nevada. The bank did not want to hand over the cash until the money had been received from Canada. The Canadian Imperial Bank of Commerce in Montreal refused the cheques.

Microfilm photocopies of the cheques that had been certified in Montreal and presented by Mr E Sadori at the Bank of Nevada were given by that Bank to the Montreal Police. These documents were filed as Exhibit A-5.

According to Mr John Keaws, Rita Sadori and her father were convicted on various charges of fraud, failure to keep records and so forth in 1981. The eight counts against Rita Sadori were filed as Exhibit 1-3.

His investigation also revealed that Rita Sadori tried to obtain an operating permit from the Quebec Liquor Board, but was not successful. The permit for the Cabaret Les Filles d’Eve Enrg was held by a Mr André Laflamme.

3.12 After the fire of March 1979, the respondent’s auditor, Mr Bastien, met in May 1979 with Mr Rouleau, who told him all that had happened with respect to the certified cheques and Mr Sadori’s visit in March 1979. At that time, he gave him the documents issued by the bank and filed as Exhibit A-3 (see paragraph 3.07).

3.13 The statement of income and expenses for “Filles d’Eve Enrg” for the period from May 1, 1978 to March 19 shows a gross income of $592,787, sales costs of $206,030, operating costs of $318,887 and net income of $67,870, with each partner receiving $33,935 (Exhibit I-2).

It was stated in connection with the operating costs that $135,845 was paid out in “wages and fringe benefits”.

3.14 On July 19, 1979, Notices of assessment were issued for 1978 and 1979 to the Cabaret Les Filles D’Eve Enrg, c/o Laurent Rouleau (Exhibit 1-5). The amount claimed for 1978 is $8,558.46, including $3,957.50 for income tax withheld at source and $3,305.65 for unemployment insurance plus the employer’s contribution, and a $726.31 penalty.

The amount claimed for 1979 is $10,990.19, including the $8,558.46 assessed for the previous year, $1,132.15 for tax deductions, $1,011.24 for unemployment insurance and a $214.34 penalty. On each notice of assessment is written: “For failure to pay as required, you are liable for the amounts shown on this notice”.

3.15 On September 14, 1979, the appellant objected. After briefly explaining the facts, he said that the certified cheques had not yet been presented to his bank for collection: “Our bank does not want to cancel these cheques unless the Department undertakes not to renegotiate them in the event they are given to you in payment of any other account or debt’.

3.16 On January 16, 1980, the respondent wrote to the bank asking for new cheques to replace the originals: “You may be assured that if we ever present the original cheques and you have to honour them, and they have already been honoured, we will lose no time in reimbursing you”.

In its response on February 11, 1980, the bank refused to issue new cheques “unless the government guarantees to reimburse us if we are required to honour the first series of cheques for any reason whatever”. Be- cause of the words “for any reason whatever”, the respondent refused to provide the guarantee.Both letters are filed as Exhibit 1-4.

3.17 The bank did issue new cheques in May 1981 after receiving a letter from the respondent dated April 27, 1981 (Exhibit A-4) following the convictions of Rita Sadori and an undertaking by the Department to reimburse the $9,406.53, if the original cheques were cashed by the respondent at any time.

4. Act — Case Law — Analysis

4.01 Act

The provisions of the Income Tax Act on which the notices of assessment were based are subsections 153(1) and 227(9). They read as follows:

Sec. 153. Withholding.

(1) Every person paying

(a) salary or wages or other remuneration to an officer or employee,

(b) a Superannuation or pension benefit,

(c) a retiring allowance

(d) an amount upon or after the death of an officer or employee, in recognition of his service, to his legal representative or widow or to any other person whatsoever,

(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,

at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on account of the payee’s tax for the year under this Part.

Sec 227(9)

(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 subsection 116(5) 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 rate per annum prescribed for the purposes of subsection (8).

4.02 Case law

The decisions and legal treatises referred to by the respondent are:

1. P R Pearson, Trustee in Bankruptcy for William Pitt Hotel Limited v MNR, 35 Tax ABC 69; 64 DTC 224;

2. The Hampstead Apartments Ltd v MNR, [1971] Tax ABC 1161; 72 DTC 1022;

3. Javelin Foundries & Machine Works Limited v MNR, [1967] Tax ABC 572; 67 DTC 392;

4. HMQ v John Sakellis, [1970] CTC 342: 70 DTC 6202:

5. HMQ v Harvey P Lamothe, [1958] CTC 201; 58 DTC 1057:

6. HMQ v Coopers & Lybrand Limited, [1980] CTC 367 and 406; 80 DTC 6281;

7. Banister Construction Limited v MNR, 15 Tax ABC 426; 56 DTC 436;

8. Barthold Frederick Meyer v MNR, 21 Tax ABC 406; 59 DTC 197;

9. Théorie des obligations, Jean Pineau, p 180;

10. Traité de droit civil du Québec, Trudel, p 312;

11. Traité de droit civil du Québec, Léon Faribault, p 511;

12. Le Droit civil canadien, P-B Mignault, p 594;

13. Traité élémentaire de droit civil, Les obligations, Jean-Louis Baudoin, p 255.

4.03 Analysis

The two points at issue are penalties and interest.

A. Penalty

4.03.1 To determine whether the penalty has been correctly assessed by the respondent, it must be seen whether the conditions of sections 153(1) and 227(9) cited above have been met.

These conditions are as follows:

(a) It must be the appellant who pays the wages and who, accordingly, must deduct the appropriate amount of tax (paragraph 153(1 )(a) );

(b) The appellant must not have paid the amount deducted or withheld to the Receiver General of Canada (subsection 227(9)).

4.03.2 The facts narrated in paragraph 3.05 of the facts and clause (g) of contract A-1 clearly establish that Messrs Rouleau and Lemieux were not only supposed to pay the wages, but did in fact pay them. This is confirmed by the financial statements of the Cabaret Les Filles d’Eve Enrg (Exhibit 1-2) (see paragraph 3.13).

4.03.3 According to the appellant’s counsel, they were not obliged to make deductions at source (except under the provisions of contract A-1), because they were not actually operating the Cabaret. It was the holder of the permit from the Quebec Liquor Board, in counsel’s view, who under the provisions respecting the Board operated a business of this kind. Furthermore, the holder of the permit must be either the owner or the lessee. In the case at bar, Messrs Rouleau and Lemieux were not lessees. Counsel therefore argued that it was in fact Rita Sadori who operated the business and that Messrs Rouleau and Lemieux were only hired as managers, as the contract Stated.

These financial statements and the nature of the operations of the Cabaret Les Filles d’Eve Enrg show that Messrs Rouleau and Lemieux were not simply hired as managers. They were not merely employees of Rita Sadori. The substance of the contract and the facts adduced in evidence clearly demonstrate that Messrs Rouleau and Lemieux were carrying on a business, and that the salaries were paid out from their bank account.

The legal provisions governing the Liquor Board cannot affect the provisions of the Income Tax Act when the latter create obligations for the “person who pays a salary, a wage . . .” (paragraph 153(1 )(a) ). Rita Sadori never paid any wages.

Furthermore, uncontradicted evidence showed that Rita Sadori had never been the holder of a permit from the Quebec Liquor Board for the sale of alcoholic beverages at the Cabaret Les Filles d’Eve Enrg. The holder was actually a Mr André Laflamme (see paragraph 3.11).

4.03.4 The fact that the appellant remitted the money to Rita Sadori, because he was obligated to do so under the terms of his contract does not justify his position with respect to the Act, which provides that it is he who must deduct the tax and remit it to the Receiver General of Canada.

The wisdom shown by Messrs Rouleau and Lemieux in making the cheques jointly payable to Rita Sadori and the Receiver General of Canada is commendable and demonstrates their good faith. If they had not done this and if the Sadoris had cashed the cheques, the two managers would have been obliged to repay the governments all the amounts withheld at source as required by the Act and already remitted to Rita Sadori.

However, if Messrs Rouleau and Lemieux had really been apprised of their duty, they would have remitted the money to the Receiver General of Canada. It might be mentioned in passing that photocopies of the report, the certified cheque and the document issued by the bank were allegedly given to Rita Sadori.

4.03.5 The cases and legal treatises cited by counsel for the respondent serve to confirm that it is indeed the appellant’s obligation to deduct the tax at source and remit it to the Receiver General of Canada.

In the most recent case, HMQ v Coopers & Lybrand Limited et al, [1980] CTC 387; 80 DTC 6281, the Federal Court of Appeal decided in short that the person who paid the wage was himself an employee but that the existence of an employer-employee relationship between the person paying the wage and the person receiving it was not required to create an obligation on the person paying the wage to withhold tax and remit it to the Receiver General of Canada.

In the case at bar, the evidence showed, however, that there was an employer-employee relationship between the appellant and the dancers, and that the appellant paid the salaries. There was no such evidence with regard to Rita Sadori.

The Board has concluded therefore that the penalty in respect of the principal of $5,089.65 ( $3,957.50 — 1978 and $1,132.15 — 1979) should be upheld.

B. Interest

4.03.6 It is clear that the interest is owed by the person who owes the principal. The appellant, who was required to deduct the tax at source and remit it, also has a duty to pay the interest, if any.

The point was raised during argument that the respondent seemed to have been negligent in trying to reach an agreement with the bank in order to withdraw the money as soon as possible. Since September 1979 at least (paragraph 3.14), the bank was ready to reach an agreement. The evidence filed at that time (Exhibit I-4) showed that the respondent made efforts to reach an agreement in January 1980, but the conditions imposed by the bank were not acceptable at that time (see paragraphs 3.15 and 3.16).

The Board has therefore decided to uphold the payment of interest on the principal amount of tax deducted, or $5,089.65 ($3,957.50 (1978) and $1,132.15 (1979)).

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.