Aubie Jacob v. Minister of National Revenue, [1980] CTC 3008, 80 DTC 1878

D E Taylor:—This is an appeal heard in the City of Winnipeg, Manitoba, on October 20,1980, against an income tax assessment for the year 1975. In filing his 1975 income tax return the appellant enclosed therein a T-4 Statement of Remuneration Paid issued by his employer PR Creations Unlimited Limited (PR) which set out the following information:

The appellant reported his total earnings before deductions to be $15,000 and the total tax deducted per information slips to be $3,751.40. The respondent reassessed the appellant, revising the amounts reported by the appellant as total earnings before deductions and total tax deducted per information slips as set out above so as to agree with the amounts reported by PR in its T4 Statement of Remuneration Paid as set out previously. In assessing the appellant, the respondent relied, inter alia, upon sections 3, 5, 153 and 227 of the Income Tax Act, SC 1970-71-72, c 63 as amended.

Contentions

For the appellant:

—The T4 slip is incorrect. It should read as follows:

Wages	$15,000.00
ITD	$ 3,751.40
CPP	$	120.60
UIC	$	134.68

PR Creations Unlimited Ltd was placed in receivership Oct 17/1975, and the attached T4 slip was prepared by the receiver, Mr S J Down of Thorn Riddell & Co Winnipeg.

My tax return has been prepared on the basis of my salary agreement with the company, and any arrears in remittances is an obligation of PR Creations Unlimited Ltd.

For the respondent:

— During all material times the appellant was employed by PR Limited as a fashion designer;

— During the period February 13, 1975 to October 15, 1975 the appellant was issued 19 cheques by PR each in the amount of $500 for the total amount of $9,500;

— No income tax deductions were recorded on the books of PR during the period January 1975-October 15, 1975 nor was any amount remitted to the Department of National Revenue for the period January 1, 1975-October 16, 1975;

—On October 15, 1975 PR went into receivership;

— During the period October 16, 1975-December 18, 1975 the appellant received gross pay plus vacation pay from PR in the amount of $2,849.56 and PR deducted and remitted to the Department of National Revenue income tax in the amount of $702.50;

—The amount of $702.50 was the only amount deducted for income tax by PR on its payroll with respect to the appellant for the 1975 taxation year and was the only amount remitted to the Department of National Revenue with respect to the appellant;

—The total earnings before deductions paid to the appellant in the 1975 taxation year by PR was $12,349.56;

—The total tax payable for the appellant’s 1975 taxation year was $2,758.30.

Evidence

The appellant recited the circumstances under which he became associated with PR, and the remuneration arrangements as he understood them. He presented an unsigned agreement which purported to represent these arrangements.

The respondent called Mr S J Down, FCA, whose testimony dealt with the following letter he had supplied to Revenue Canada:

COPY

TRUSTEE IN BANKRUPTCY

THORNE

RIDDELL

INC

January 15, 1979.

Revenue Canada, Taxation,

391 York Avenue,

Winnipeg, Manitoba.

R3C 0P5

Gentlemen:

Re: Mr Aubie Jacob,

91 Verbena Street,

Winnipeg, Man R2Y 3A6

SI N 603 589 210

I have been asked by the above named taxpayer to write to you in connection with the T-4 slip which I prepared as receiver and manager of PR Creations Unlimited Limited showing his remuneration and applicable deductions for the 1975 taxation year. It appears that Mr Jacob may have been adversely and unfairly affected by the incidence of the receivership and the basis on which his remuneration and deductions for the year were reported by me as receiver.

When I took over operation of the company as receiver on October 17, 1975, I retained Mr Jacob as an employee of PR Creations together with all other employees at their then effective rate of pay. On investigation I found Mr Jacob had been entered on the payroll twice each month up to that date as receiving $500 semi monthly with no deductions being shown. He advised me at the time that his salary rather than being $12,000 per annum, was supposed to be, by agreement $15,000 per annum. He was being paid only $12,000, the difference he understood was to have been the applicable deductions for CPP, Unemployment Insurance and Income Tax. Apparently the same practice had been followed in 1974 for the period of his employment but at the end of the year, on filing the T-4 return, the company showed Mr Jacob’s gross income as follows:

Gross		$4,100
Deductions
CPP	$ 38.61
Unemployment insurance	28.05
Income tax	683.34	750
Net (being the aggregage of cheques actually
paid to Mr Jacob by the company)		$3,350

The same procedure was followed as well for three other employees with the result that a total of $12,136.91 was shown on the T-4 summary to have been deducted in excess of what had been remitted for 1974.

When preparing the 1975 T-4 Return of Remuneration Paid, I elected to show the amounts paid and deducted as shown on the company’s records, which for Mr Jacob resulted in the following:

Gross remuneration

Aggregate of cheques paid up to date

of receivership, 19 x $500	$ 9,500.00
Aggregate of gross pay plus vacation
pay paid by me as receiver		2,849.56	$12,349.56
Deductions
Aggregate amounts deducted from
remuneration paid to him by me as receiver
CPP		42.84
Unemployment insurance		22.44
Income tax		702.50
		767.78
Additions made by the Department’s auditor
and shown on revised T-4 issued at his request
For CPP	$ 77.66
For unemployment insurance	112.20	189.86	957.64
			11,391.92
Department audit adjustment			189.86
Net amount actually received			$11,581.78

Mr Jacob maintains that his income should have been reported for 1975 on a basis consistent with 1974, in which case it would have been shown on his T-4 slip as follows:

Gross pay

Aggregate of salary entitlement

up to date of receivership, 19 x $625	$11,875.00
Aggregate of gross pay plus vacation
pay paid by me as receiver	2,849.56	$14,724.56
Deductions
CPP (including audit adjustments)	120.60
Unemployment insurance (including audit
adjustments)	134.64
Total deducted by me as receiver	$ 702.50
Amount claimed by Mr Jacob
to have been deducted, but
not shown as such in the
company’s records	2,185.04 2,887.54	3,142.78
Net amount actually received by Mr Jacob		$11,581.78

I trust this further explanation will enable you to give favorable consideration to Mr Jacob’s income tax position, as he appears to have been a victim of improper payroll administration by the Company prior to receivership.

Yours very truly,

THORNE RIDDELL INC,

Per: (Sgd) S J Down

S J Down, FCA

/jl

cc: H Plattner, CA.

Argument

The agent for the appellant reiterated his view that the Board should find in favour of the appellant, in that PR was required to and in fact did deduct the amounts in question, whether or not they had been remitted.

Two cases were presented by counsel in support of the Minister’s assessment: Roy A Hromada v MNR 34 Tax ABC 178; 64 DTC 7; The Queen v Coopers & Lybrand Limited, [1980] CTC 367; 80 DTC 6281; Counsel viewed the Income Tax Act as providing the Minister with authority in the present case to assess tax on the amount actually received by Jacob—$9,500. In counsel’s view, there was no evidence of deduction from the $9,500 in the payroll record, and that lack of evidence in the payroll records negated any claim by the appellant that there should have been deductions in accordance with his understanding with PR as he alleged.

Findings

I have considerable difficulty in reconciling the opinion of counsel that this appeal should be dismissed, with the decision given in Hromada (supra). In fact, I see little difference in the facts in Hromada and the instant appeal. Based upon Hromada alone, I would have no difficulty concluding the case in favour of the appellant. Indeed, based upon Hromada, any appeal would warrant similar favourable treatment in the case where a taxpayer simply claimed his gross pay was greater than that reflected in the employer’s records, and direct evidence could not be adduced from the employer to contradict that claim. However, in my view, Hromada must be read in the light of Coopers & Lybrand (supra) and that presents a somewhat more detailed view. In Coopers & Lybrand, if I read it correctly, the payroll record for the “final period’’ prepared by the Bank of Nova Scotia on the instructions of Coopers & Lybrand, showed clearly the deductions which were required from the gross amount of the pay; the T-4 slips of each employee showed an amount inclusive of the deduction in the ‘final period”; and the T-4 summary agreed with both of these. Yet, the Court reached the conclusion that Coopers & Lybrand had not deducted as required by subsection 153(1) of the Act. Coopers & Lybrand had never claimed it had deducted from the gross amount of $231,904.15, merely that it was not responsible for making the deductions recorded and at issue. The question as the Court saw it then became whether or not it should have been deducted from the lesser amount of $196,207.01 after the original deductions had been calculated.

Counsel for the respondent cited the following paragraphs from 376 [6287] of Coopers & Lybrand (supra) as support for dismissal of this appeal:

Section 227 deals with two distinctly different defaults by persons paying wages. First, the failure to deduct and, second, the failure to remit the amount deducted. 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; the only liability incurred by the person paying the salary or wage is a penalty calculated as a percentage of the amount he has failed to deduct.

On the other hand if a deduction is actually made and the amount deducted not fully remitted the person making the deduction becomes liable to the collector for the amount the employee is deemed to have received as his salary and credit is given to the employee on account of income tax for an amount equal to the amount deducted.

In my view, however, that quotation only identifies that there two possible problems—deduct ion and/or remittance. It can be concluded from a continuation of that quotation (to be found at 376 [6287-88] of Coopers & Lybrand (supra)) that the evidence of deductions in the records was not in itself sufficient for the Courts to conclude that deductions were made. I quote:

To fix the quantum of the liability of the respondent, it is necessary to settle whether its conduct amounted to failure to deduct or failure to remit amount deducted.

The T-4 and T-4 Supplementary tax returns for the period up to and including the final pay period, prepared by the respondent, if they stood alone and there (was) no other evidence touching upon the question, would lead to the conclusion that the income tax relevant to the earnings of the final pay period had been physically deducted and retained for transmission to the Receiver General. In fact there was nothing appearing on the T-4 Supplementary handed to each employee which would in any way disclose to him or her that the amount indicated as having been deducted for income tax had not actually been dealt with as the Income Tax (Act) require(d) it to be,—segregated and remitted to Receiver General. Each employee was entitled to assume that the amount appearing on the T-4 Supplementary form as the aggregate of deductions on account of income tax was that for which he was entitled to claim credit against the amount of income tax payable by him for the calendar year.

However, there is uncontradicted evidence to the effect that the aggregate amount of money which was provided by the debenture-holder to the Respondent for the purpose (of) “making a payment to each employee by the amount of which they (the employees) are out of pocket with respect to work done for the company as a result of the company’s failure and the company as a result of the company’s failure and the company could not pay” was the net amount after deduction, which the employees together would have received for the final pay period.

In the light of the evidence, I am of the opinion that the respondent’s default was in not making deductions for income tax rather than in failing to remit any amount actually deducted.

It is evident that the Court looked at the records available—(a) payroll, (b) T-4 Summary; and (c) T-4 Supplementary—precisely for what they represent. The payroll records (a) are the records of the employer showing the determination and the recognition of the liability for income tax deducted; the T-4 Summary (b) reports and reconciles the remittances to the collectors; and the T-4 Supplementary (c) is notification to the employee of the deduction made and remitted or owed to the collector by the employer. It would be usual that the only one of these three to be seen by the employee would be the copy of his own earnings statement for the T-4 Supplementary

(c) . The T-4 Summary (b) would normally not be available to the individual employee. In Coopers & Lybrand (supra) both forms (b) & (c) showed that the deduction at issue had been made—and yet the Court did not regard that evidence as determinative. The “other evidence touching upon the question” (portion underlined in quotation above) clearly pointed out that the relevant deductions had not been made even though the payroll records (c) showed that the deductions were made. As I see it, the only crucial physical evidence that deductions were made would be the employees’ payroll records (a) and even then, it is not conclusive to prove deductions. The T-4 Summary (b) should normally only be a reflection of the payroll record and, in its own right, not determinative of deductions, but rather only of remittances to the collector. Therefore, to return to the quotation above from Coopers & Lybrand (supra), the liability of a person for failing to deduct would be based upon the payroll records (a); the liability for failure to remit would be based upon the T-4 Summary (b) (presuming it to be in agreement with the payroll records for deductions made). It is equally clear from Coopers & Lybrand (supra) that the employee may take the full credit when both the T-4 Summary (b) and the payroll records (a) not only show but con- slusively prove that the relevant deductions were made, whether or not such deductions were properly remitted to the collector by the employer. The employee, however, may take no such credit for deductions which have not been remitted when the same records fail to prove that the relevant deductions were made. In Coopers & Lybrand, the evidence was that the deductions in question had not been made even though the primary record (payroll) showed that they had been. The Court made no allowance therein to the employees for the fact that such deductions could have, should have, or might have been made by the employer. Therefore, the crucial and allpersuasive element to prove deduction is remittance to the collector, not the payroll records alone. The appellant in this case cannot show primary evidence of deduction in the payroll records, thereby asserting that such deductions were made but not remitted; and the evidence is that no corresponding remittance was made to the collector upon which he might assert that deduction and remittance were made, but simply not recorded.

In the present appeal it is open to the Minister to conclude that the deductions claimed were not made, and it rests with the taxpayer to overturn that assumption of the Minister—a task of substantial proportions. It may be simpler for the Minister to ensure that the provisions of section 227 of the Income Tax Act have been followed or enforced than for an individual taxpayer to do likewise, but that is not a matter for the Board’s review. The fact is that remittance of the relevant funds to the collector has not been proven by this appellant, and the case law as I read it does not define with certainty any other acceptable evidence of deduction.

Decision

The appeal is dismissed.

Appeal dismissed.