Realty Projects (1957) Inc v. Minister of National Revenue, [1979] CTC 2535, 79 DTC 511

Delmer E Taylor:—This is an appeal heard in the City of Montreal on February 5 and April 12, 1979, against an income tax assessment for the year 1976, in which the Minister of National Revenue held the appellant responsible for payment of amounts representing income tax deductions at source from wages paid. In addition, a penalty of 10% was imposed for failing to remit such amounts during the proper period of time. In his reply to notice of appeal, the respondent relied, inter alia, on section 8, subsections 153(1), 227(8) and 227(10) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and on sections 100, 101, 102 and 108 of the Income Tax Regulations.

Facts

The appellant (hereinafter referred to as “R’, “Realty” or the “Company”) maintains its head office in the City of Montreal, Province of Quebec. The issue in this hearing arose out of business arrangements between Realty and one Real Desjardins (hereinafter referred to as “Desjardins” or “D”), regarding the construction of an apartment building for the appellant’s account.

Contentions

It was the position of the appellant that:

—the company’s only relationship with Desjardins was by virtue of a contract executed between them January 30, 1976 whereby the taxpayer, as general contractor, subcontracted to Desjardins all the carpentry work relating to an Apartment Project for Les Habitations Kotma Ltee (hereinafter referred to as “Kotma”) situate on la rue Masson, Longueuil, Quebec for a fixed price per apartment building forming part of the project.

— Desjardins began performance of the subcontract in early February 1976, with 20 and 25 employees. He regularly submitted invoices to the taxpayer which were paid pursuant to the terms of the contract. Following complaints made to the taxpayer by the employees of Desjardins that he was not paying salaries, the taxpayer undertook to make all future payments intended for Desjardins under the contract in the joint names of Desjardins and his employees. The proposal was accepted by Desjardins and on his instructions was effected by the taxpayer issuing cheques to each of his employees in the joint name of Real Desjardins and that of the employee to whom the cheque was issued, the proposal first being implemented in April 1976. The amounts of all such cheques were stipulated to the taxpayer by Desjardins’ accountants Guimond Faucher & Cie, who at all relevant times acted solely for Desjardins to the exclusion of the taxpayer.

—This method of payment continued with respect to all of Desjardins’ employees until mid-July 1976 when Desjardins, with his supervisory personnel, left the work never to return. Until this time Desjardins’ employees were under his supervision and control; but his abrupt disappearance forced the taxpayer to thereafter supervise and control his employees as if they were its own in order to complete the work which Desjardins had contracted to complete. It was from this point on that the taxpayer paid the salaries of the employees concerned, making the appropriate deductions at source and remitting the same to the tax authorities.

—All payments made by the taxpayer either to Desjardins, to Desjardins and his employees jointly, or to the employees individually, have been charged by the taxpayer to Desjardins’ account opened pursuant to the aforesaid contract. As a result of his abandonment of the work which he contracted to perform, Desjardins has caused the taxpayer appropriately $60,000 in damages which it legally may claim from Desjardins for breach of contract. The taxpayer is currently studying with its attorneys the feasibility of doing so.

—All payments made by the taxpayer prior to its assumption of the supervision and control of Desjardins’ employees in mid-July 1976 were so made:

(a) on account of payables due under the contract;

(b) at the mutual request of Desjardins and his employees to resolve an unsatisfactory situation that existed between them;

(c) in order to ensure that, within the context of the contract price, Desjardins paid his employees;

(d) in the amounts stipulated by Desjardins’ agents, Guimond Faucher & Cie.

—The payments should not be construed as indicative of the assumption by the taxpayer to pay the salaries of Desjardins’ employees.

—Without prejudice to the foregoing, even if the taxpayer did assume the payment of the salaries of the employees concerned, which is categorically denied, it did so not in relation to its employees but in relation to Desjardins’ employees. Consequently, in respect of such salary payments, the taxpayer had no obligation to deduct and remit.

— In addition to the foregoing and without admitting liability in respect of the whole or any part of the assessed amounts, the taxpayer further objects to the assessment as regards the imposition of the penalty and the application of interest on the assessed tax. The circumstances of this case warrant that, in the interests of equitable treatment to the taxpayer, both the penalty and interest assessed be totally vacated.

The contentions of the respondent were that:

— By agreement dated January 30, 1976, Real Desjardins as “sous traitant” undertook inter alia to “fournir toute la main d’oeuvre et installer tous les matériaux, équipement et ateliers requis pour la réalisation complète de” all work related to the carpentry trade following plans titled “Kotma”.

— From April 1976, the workers employed on the project were paid by the appellant.

— During the relevant period, the appellant having paid the remuneration to the employees engaged on the project, was under the obligation to deduct or withhold therefrom and remit to the Receiver General of Canada the amounts of tax as prescribed under the Income Tax Act and Regulations.

—The appellant having failed to deduct or withhold the amounts just referred to is liable to pay a penalty of 10% of the amount that should have been deducted or withheld together with interest thereon at the prescribed rate.

Evidence

Through a series of witnesses, counsel for the appellant detailed for the Board the history of the project “Kotma”, the difficulties encountered by Realty, and the efforts to overcome these difficulties which involved first the arrangement at issue during the period April through mid-July 1976, and finally the direct assumption of the work at that point by the appellant. The contract between Realty and Desjardins was submitted as Exhibit A-1 and reference will be made to it later. In addition, the following exhibits which the Board considered significant were presented:

Exhibit A-2—Two telegrams Realty to Desjardins dated April 9, 1976, the first at 1358 hrs, the second at 1720 hrs.

CRT MONTREAL QUE 09 1358

MONSIEUR REAL DESJARDINS TEL 217-5397

6262 PAPINEAU MONTREAL QUE

A PROPOS DE LES HABITATIONS KOTMA LIMITEE. DU A VOTRE MANQUE DE SURVEILLANCE AUCUN TRAVAIL N’EST EN PROGRES. SI LE TRAVAIL EN ACCORD AVEC NOTRE CONTRAT NE SE POURSUIT PAS CETTE APRES-MIDI VOUS SEREZ TENU RESPONSABLE DE TOUS DOMMAGES QUI POURRAIENT SURVENIR

REALTY PROJECT 1957 INC

2050 MANSFIELD, MONTREAL

CRT MONTREAL QUE 09 1720

REAL DESJARDINS 271-5397

6262 PAPINEAU MONTREAL QUE

A PROPOS DE “LES HABITATIONS KOTMA LTEE” LES ITEMS SUIVANTS SONT CONTRAIRE A NOTRE CONTRAT

1— VOS EMPLOYES N’ONT PAS ETE PAYES

2— LE NETTOYAGE DU CHANTIER N’A PAS ETE FAIT

3— PAS DE SURVEILLANCE DES TRAVAUX

4— LE TRAVAIL ACCOMPLI NE CORRESPOND PAS AUX EXIGENCES DE LA SOCIETE CENTRALE

LES ITEMS CI-HAUT MENTIONNES DEVRONT ETRE RECTIFIES IMMEDIATEMENT OU NOUS CANCELLERONS LE CONTRAT

REALTY PROJECTS (1957) INC

Exhibit A-4—A letter from the solicitors for Realty to Desjardins dated July 7,1976, notifying him that he was in default and that the contract was cancelled, still holding Desjardins responsible for all costs and damages.

RECOMMANDEE

Le 7 juillet 1976

M Real Desjardins

6262, rue Papineau

Montréal, PQ

SUJET: Réalty Projects (1957) Inc

Apartment Project pour

Les Habitations Kotma Ltee

Emplacement: La rue Masson, Longueuil

Cher Monsieur,

Nous avons reçu des instructions de Realty Projects (1957) Inc de vous aviser que vous êtes en défaut de la convention signée par vous le 30 janvier 1976. Parmi les quelques raisons de votre défaut, soyez informé que vous ne vous êtes pas conformé à toutes les exigences de la loi des Accidents de Travail de la Province de Québec, de la Commission de l’industrie de la Construction et/ou d’autres organismes investis d’un pouvoir de réclamation et plus particulièrement vous n’avez as rapporté à ces organismes ce que vous deviez rapporter, et vous n’avez pas payé les cotisations que vous étiez obligé de déposer contrairement au paragraphe 1 de la Clause “5C” de la convention ci-dessus mentionnée.

En plus, vous n’avez pas fourni un nombre suffisant de travailleurs compétents sur les lieux contrairement à la Clause ‘8’ de la convention.

Sans préjudice à tout autre défaut que vous avez commis, en conséquence de votre défaut prenez avis que notre client annule par cet avis la présente conven- tion et prendra possession du chantier et complétera les travaux inclus dans la convention, à vos frais et à vos coûts sous réserve de remboursement de tous dommages causés par vous.

En conséquence de ce qui précède, vous êtes ordonné quitter le chantier pas plus tard que le 9 juillet 1976, c’est-à-dire 48 heurs après la date de cet avis.

Notre client vous tient responsable pour tous les frais, pertes ou dommages qu’il subit ou qu’il subira à cause de votre conduite, action et défaut.

Bien à vous,

HALPERIN, ASHENMIL, KOTLER & SHUSTER

Par:

JK/cv Julian Kotler, cr

cc—M Bob Mayers, architecte.

2050, rue Mansfield

Montréal, PQ

Exhibit A-5—A telegram dated June 1, 1976 Realty to Desjardins, as follows:

CRT MONTREAL QUE 01 1624

REAL DESJARDINS

6262 PAPINEAU MONTREAL QUE 271-5396

RE LES HABITATIONS KOTMA LTEE CHEMIN CHAMBLY LONGUEUIL YOU HAVE NO REPRESENTATIVE AND FEW CARPENTERS ON SITE YOUR WORK IS WEEKS BEHIND CONTRARY TO OUR CONTRACT WE ARE HOLDING YOU RESPONSIBLE FOR ALL DELAYS WHICH WE MAY SUFFER

REALTY PROJECTS 1957 INC

It is also noted that counsel for the appellant provided to the Board such other documents as cancelled cheques, weekly pay sheets, the work project journal maintained by the representative of Realty on the job (Mr Howard Freed), and requests for payments from Desjardins to Realty, etc.

Argument

Counsel for the appellant reviewed the nature of Exhibit A-1 (contract between Realty & Desjardins), particularly the method therein outlined for determination of work completed, and payments warranted. Desjardins hired and supervised the employees, and all the cheques (April to July) were made out jointly to Real Desjardins and “John Smith’’ (the workman), on the direction usually over the telephone of the accountant for “D”. The cheques were delivered to “D”, who paid the employees. The representative of “R” on the site had no authority until the termination of the contract in July 1976 to involve himself in the work or interfere with the employees of “D”. During the same period “R” had paid directly to “D” about $800 per month separate and distinct from the employees’ cheques which form part of this issue. It was accepted by “R” that since “D” had other contracts, other employees and other income (at least to the knowledge of “R”), he was making the payments for income tax deductions. “R” had not taken over the responsibility to be in charge of the employees of “D”. Counsel also covered portions of the Civil Code of the Province of Quebec which in his view had some application to the matter before the Board. According to counsel there was nothing in the action taken by “R” (which consisted only of following the direction of “D” to make the cheques payable to the employees) which could be construed as the assumption by “R” of the responsibility to pay the employees, or should be regarded as placing those workmen into the category of employees of “R”.

The case of Dauphin Plains Credit Union Limited v Xyloid Industries Ltd and The Queen, [1978] 3 WWR 658 was cited by counsel as jurisprudence upon which the case should rest, particularly at 664 of that judgment:

Thus the receiver-manager for the purpose of these payments was not their employer. Both Acts speak in terms of the obligation to deduct as lying with the employer of the persons receiving the payments, and the receiver-manager, not being such an employer, therefore had no obligation to make the deductions claimed.

On the matter of the penalty, counsel contended that in normal circumstances such penalty should only apply in the event that income tax had been deducted but not remitted, and since there had been no deduction in the present case, no penalty should apply even if the Board held that such deduction was the responsibility of the appellant.

Counsel for the respondent relied heavily upon the precise wording of the critical sections of the Act which were being examined: subsection 153(1) which reads in part—“Every person paying (a) salary or wages or other remuneration to an officer or employee, . . and subsection 227(8) which reads: “Any person who has failed to deduct or withhold any amount . . . is liable to pay to Her Majesty (a) if the amount should have been deducted or ..10% of the amount that should have been deducted or withheld” (italics mine). In counsel’s view, the appellant could not escape liability merely by showing “R” might not have been the employer— “R” was certainly a person. In addition, there was some evidence that Mr Freed, “R” ’s representative on the site exercised control over the workmen. The evidence was less than clear that indeed “D” had continued to personally deliver the cheques to the employees at all times during the critical period. While there may have been other technical reasons for the procedure adopted by “R” for paying employees, the main motivation was to provide labour “peace” on the site, and continue construction. The employees had gone to Mr Freed complaining that their pay had not been received and were threatening action which could have stopped the project. Therefore, the only valid interpretation that can be placed on the facts was that “R” agreed with “D” to pay the employees, but for purposes of continuity and only for the necessary supply of workmen, left them responsible to “D” on the site. Counsel disagreed that there could be any support for the appellant’s position found in Dauphin (supra). In that case the issue revolved around the responsibility of a “receiver-manager”, a situation which did not exist in the present case. Conversely, the cases of “In re Bankruptcy of G & G Equipment Co Ltd", 74 DTC 6407, and “La Sécurité Compagnie d’Assurances Générales du Canada et le Ministre du Revenu national”, Décision du Juge- Arbitre, NR 247, together with certain articles from the Civil Code of the Province of Quebec and interpretations placed upon them by the Courts, were cited by counsel.

Findings

First, to dispose of the question of the penalty, I do not accept the contention of counsel for the appellant. In my view the law is clear, the penalty is applicable for failing to deduct as well as for failing to remit.

On the main issue, it is my opinion that the reliance of counsel for the respondent on the distinction which could be made between “person” (subsections 153(1) and 227(8)) and “employer” as it is used in other portions of both sections 153 and 227 is too narrow a ground upon which this appeal should be decided. I am unable to reach the conclusion that any of the judicial decisions referenced by counsel (and there were many in addition to those noted) established with any degree of certainty that the Board could hold that a person — who is not the employer— has a responsibility for deducting income tax from an employee as claimed in this appeal. My view is that subsection 153(1) of the Act should be interpreted as if to say—“Every person paying . . . salary or wages or other remuneration to an officer or employee OF THAT PERSON ... shall deduct . . I can find some support for that opinion in other clauses of certain sections of the Act, notably subsection 227(2) which reads:

Every person whose employer is required to deduct or withhold any amount from his remuneration under section 153 shall, from time to time as prescribed, file a return with his employer in prescribed form. (Italics mine).

In summary, therefore, on that portion of the Minister’s argument it is my finding that where an obligation has been imposed by Parliament upon a third party (in this case to virtually act as the agent of Revenue Canada in collection of income tax), that obligation to be enforceable should be clear and precise. It is at least doubtful that subsection 153(1) can be applied to a person who is not the employer, and it is very probable that it cannot be so applied.

The matter therefore comes down to whether or not, by its actions, “R” assumed the position, posture and responsibility of employer for purposes of the Income Tax Act.

In reviewing that question, the significant evidence as I see it is:

— “R” made out cheques to the employees, and included thereon the name of “D”.

—The calculation of the amounts payable to each employee was made under the direction of “D”.

—Some limited amounts were paid to “D” by “R” (about $800 per month) in addition to the amounts involved in the payroll cheques.

—Clause 8 (quoted below) of Exhibit A-1 recites the circumstances (negligence, unsatisfactory work, etc) under which the appellant could act, and essentially it was in one of two ways—after giving 48 hours notice: (a) to furnish all labour and material lacking for the proper performance of the work, and to deduct such direct cost from the payments to “D”; or (b) to cancel the contract and take possession in order to complete the work.

Si le Sous-traitant refuse ou néglige de fournir un nombre suffisant de travailleurs compétents, ou de préparer les matériaux de façon convenable, ou s’il ne réussit pas à poursuivre les travaux avec l’application voulue, (’Entrepreneur devra avoir le droit, après la remise au Sous-traitant d’un avis écrit de 48 heures, de fournir toute main-d’oeuvre ou tout matériau faisant l’objet du manquement susmentionné, et de déduire le coût d’y-ceux des paiements prévus par le contrat, ou (’Entrepreneur pourra annuler la présente Convention par ledit avis de 48 heures au Sous-traitant et prendre possession du chantier et compléter les travaux inclus dans cette Convention, aux frais et aux coûts du Sous-traitant en incluant tous les dommages. Advenant une telle annulation de la Convention, le Sous-traitant ne sera pas admis à recevoir d’autres paiements jusqu’à ce que les travaux soient terminés, en tel temps, tout solde dû devra être payé au Sous-traitant, mais si le solde impayé est insuffisant pour compléter les travaux et pour payer les dommages survenus, le Sous-traitant devra alors payer à (’Entrepreneur le montant d’une telle différence. Aucun paiment effectué, ni l’occupation partielle ou totale des lieux ne pourra être interprété comme l’acceptation de travaux défectueux ou de matériaux impropres et le Sous- traitant s’engage à offrir une compensation, sans aucuns frais pour l’En- trepreneur, pour lesdits travaux et matériaux défectueux de même que pour les conséquences découlant de ceux-ci pendant les deux ans qui suivent la date de l’acceptation finale par la Société Centrale d’Hypothèques et de Logement et par l’architecte. Nonobstant ce qui précède, si une section particulière des travaux doit nécessiter une plus longue période de garantie pour une partie déterminée des travaux, cette plus longue période de garantie devra s’appliquer.

The first telegram (in Exhibit A-2, quoted earlier) only warns “D” that he will be held responsible for any damages and the second, while spelling out in some detail the deficiencies in the work, contains a threat that the contract would be cancelled unless such déficiences were corrected. There was no contract cancellation, and there is no indication in either telegram that “R” was prepared to follow the alternate route available under the contract, ie, to provide labour and materials directly. In my view the evidence is very slim upon which to conclude that merely the procedure of making the payroll cheques in the joint names of “D” and “John Smith’’ constituted action which could be interpreted as “furnishing labour and material”. I would add further that even taking such action under this part of clause 8 (actually furnishing labour and material) might not be construed as assuming the role of employer.

Therefore, to summarize this point, I do not see that any action taken by the appellant, short of cancelling the contract, could have placed “R” in the position of liability asserted by the Minister, and such cancellation did not take place until July 7, 1976 (See Exhibit A-4). The appellant during the relevant period cannot be held responsible for obligations falling to an employer under the Income Tax Act. I have found nothing in my review of the law in the Civil Code of the Province of Quebec which would conflict with that view in any way.

There is a further point I wish to underline, however, and that is the relevant notice of assessment itself, which is addressed in the following manner:

“REALTY PROJECT (1957) INC et

Réal Desjardins ..(Italics mine)

I find it necessary to rely heavily upon this unusual form of asserting two separate and different taxpayers with the same notice, because the facts themselves, as outlined above, support the position of the appellant. Nevertheless, without making any final determination on that point, I would view the validity and enforceability of that particular notice of assessment against either taxpayer individually with considerable scepticism. While not specifically directed to the point I raise here, I do find the comments of Addy, J in Crown Trust Company v The Queen, [1977] CTC 320; 77 DTC 5173, to be found at 324 and 5175 respectively very illuminating:

Before dealing ..., I would like to add that where, as in the present case, the Minister has made for the same taxation year regarding the same asset, two absolutely contradictory and mutual exclusive assessments arising out of the same transaction, it would be ludicrous for the Court to allow the Minister, in such a case, to enjoy the benefit of the burden of proof which he normally enjoys in assessment appeal cases, since the Minister is, in the same action, seeking to have the Court confirm two contradictory statements.

Conclusion

The appellant has satisfied the Board that the circumstances evident in this case do not substantiate a position that would hold Realty Projects (1957) Inc liable as employer for the deduction of income tax from the employees in question, during the relevant months of 1976.

Decision

The appeal is allowed and the assessment vacated.

Appeal allowed.