Citation: 2012TCC21
Date: 20120120
Docket: 2008-3655(IT)G
BETWEEN:
MARVIN G. MARSHALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant was
assessed as a director of Internorth Limited (“IL”) for unremitted source
deductions, penalties and interest in relation to amounts paid to certain
employees in 2003 and 2004. For simplicity, the unremitted source deductions,
penalties and interest will be referred to herein as the unremitted source
deductions as the penalties and interest would arise as a result of a failure
to remit source deductions as required. The issue in this appeal is whether IL
was required to remit the source deductions as assessed. At the hearing the
Appellant also raised the issue of whether he satisfied the due diligence
defence and the Respondent did not object to the Appellant raising this issue.
[2]
There are two
preliminary matters in relation to this appeal - one is related to the
pleadings and the other matter is related to proposed discovery read-ins.
Pleadings
[3]
With respect to the
pleadings, the Respondent brought a Motion to amend the Reply. At the discovery
examinations that were held on January 26, 2011, counsel for the Respondent
informed the Appellant that there were certain errors in the Reply that should
be corrected. On February 8, 2011, a copy of the proposed Amended Reply was
sent to the Appellant. Since the Appellant did not consent to the Respondent
amending the Reply, a Motion was made at the commencement of the hearing to
amend the Reply. With the exception of one minor change to paragraph 19 in
relation to the Grounds Relied On and Relief Sought, the Amended Reply included
as part of the Motion is the same as the Amended Reply sent to the Appellant on
February 8, 2011.
[4]
Most of the changes
correct the amounts for which IL was assessed and the corrections reduce the
amounts. These corrections did not change the amount for which the Appellant
was assessed as a director of IL. The amendments to paragraphs 8, 12, and 19
and subparagraph 15(m) to correct the identification of the amounts for which
IL was assessed and to correct the amounts for which IL was assessed were
allowed. These amendments clearly were made to correct the description of the
amounts for which IL was assessed and reduced the amounts stated to be amounts
for which IL was assessed and the Appellant had sufficient notice of such
amendments.
[5]
The Respondent also
requested an amendment to paragraph 4 of the Reply. The first sentence of this
paragraph had previously read as follows:
4. With respect to paragraph 4 of the Notice of
Appeal under the heading “Reasons for appeal”, he admits that the CRA issued a
requirement to pay to Internorth Ltd. in June 2004 and that Internorth Ltd. was
not in existence when Internorth Construction failed to remit its source
deductions. …
[6]
The proposed change was
to amend this part of paragraph 4 to read as follows:
4. With respect to paragraph 4 of the Notice of
Appeal under the heading “Reasons for appeal”, he admits that the CRA issued a
requirement to pay to Internorth Ltd. in June 2004. He denies that Internorth
Ltd. was not in existence when Internorth Construction failed to remit its
source deductions. …
[7]
The issue in this
appeal is related to the assessment of the Appellant as a director of IL, not
to the assessment of the Appellant as a director of Internorth Construction
Company (“ICC”), a separate company. The issue is therefore whether IL failed
to remit source deductions and not whether ICC failed to remit any source
deductions. The use of the double negative in the proposed amendment would mean
that it would be the position of the Respondent that IL was in existence when
ICC failed to remit source deductions. However, as noted, any failure of ICC to
remit source deductions is not relevant as the Appellant was assessed as a
director of IL. Counsel for the Respondent indicated that she was not concerned
about this amendment in any event. This amendment was not made to the Reply.
[8]
The final amendments
were to the assumptions. Subparagraphs 15(i) and (j) of the Reply originally
read as follows:
15. In so determining the Appellant’s tax
liability pursuant to subsection 227.1(1), the Minister relied on the following
assumptions of fact:
(i) starting on June 7, 2003,
Internorth Ltd. started paying Internorth Construction’s employees through two of
its own payroll accounts, 885XXXXXXRP0001 and 885XXXXXXRP002;
(j) starting on June 7, 2003, payroll
cheques were written on both payroll accounts of Internorth Ltd.;
[9]
The proposed amendment
would delete subparagraph 15(j) and result in subparagraph 15(i) reading as
follows:
15. In so determining the Appellant’s tax
liability pursuant to subsection 227.1(1), the Minister relied on the following
assumptions of fact:
(i) starting on June 7, 2003,
Internorth Ltd. started paying Internorth Construction’s employees through its
bank accounts;
[10]
Since the payroll
accounts described in paragraph 15(i) (as originally drafted) were the accounts
with the Canada Revenue Agency they are not bank accounts on which cheques could
be written. These amendments simply correct an assumption that was obviously
erroneous. These amendments were also allowed.
[11]
In the Appellant’s Notice
of Appeal, the Appellant focused mainly on the requirements to pay that had
been issued by the Canada Revenue Agency, which were part of the collection
process followed by the Canada Revenue Agency. The actions taken by the Canada
Revenue Agency to collect unremitted source deductions are not relevant in
determining whether the Appellant was liable as a director of IL for source
deductions that IL should have remitted.
[12]
The Appellant in his
Notice of Appeal did state that IL “never employed anyone and was purely an
administrator” which raised the issue of whether the underlying assessment
issued against IL was correct. Counsel for the Respondent acknowledged that
this was an issue raised by the Appellant.
[13]
At the commencement of
the hearing the Appellant also appeared to be referring to the due diligence
defence, which was not raised in his Notice of Appeal. Counsel for the
Respondent agreed that the Appellant would be permitted to raise the due
diligence defence during the hearing.
Discovery Read-ins
[14]
The second preliminary
matter is related to the discovery read-ins proposed by the Respondent. Counsel
for the Respondent proposed to read-in a number of excerpts from the discovery
examination of the Appellant at the conclusion of the Respondent’s case. The
Respondent’s position is simply that the provisions of Rule 100(1) of the
Tax Court of Canada Rules (General Procedure) (the “Rules”) allow
the Respondent to read-in excerpts from the discovery examination of the
Appellant.
[15]
Subparagraph 100(1) of
the Rules provides as follows:
100. (1) At the hearing, a party may read into
evidence as part of that party's own case, after that party has adduced all of
that party’s other evidence in chief, any part of the evidence given on the
examination for discovery of
(a) the adverse party,
or
(b) a person examined
for discovery on behalf of or in place of, or in addition to the adverse party,
unless the judge directs otherwise,
if the evidence is otherwise admissible, whether the party or person
has already given evidence or not.
(emphasis added)
[16]
It seems to me that the
words “if the evidence is otherwise admissible” are an important
qualification to the introduction of the discovery evidence. Counsel for the
Respondent indicated that she wanted to introduce the excerpts because the
answers that the Appellant provided at the hearing were inconsistent with the
answers that he provided at the discovery examinations or he provided a more
complete answer at the discovery examination (which seems to suggest that the
Appellant was not telling the whole truth during his testimony at the hearing).
[17]
Since the discovery
excerpts would, if admitted, be introduced to impeach the witness, the question
and answer provided during the discovery examination must be brought to the
attention of the witness. Subparagraph 100(2) of the Rules provides
that:
(2) Subject to the provisions of the Canada Evidence Act, the
evidence given on an examination for discovery may be used for the purpose of
impeaching the testimony of the deponent as a witness in the same manner as any
previous inconsistent statement by that witness.
[18]
Subsection 10(1) of the
Canada Evidence
Act provides
that:
10. (1) On any trial a witness may be cross-examined as to
previous statements that the witness made in writing, or that have been reduced
to writing, or recorded on audio tape or video tape or otherwise, relative to
the subject-matter of the case, without the writing being shown to the witness
or the witness being given the opportunity to listen to the audio tape or view
the video tape or otherwise take cognizance of the statements, but, if it
is intended to contradict the witness, the witness’ attention must, before the
contradictory proof can be given, be called to those parts of the statement
that are to be used for the purpose of so contradicting the witness,
and the judge, at any time during the trial, may require the production of the
writing or tape or other medium for inspection, and thereupon make such use of
it for the purposes of the trial as the judge thinks fit.
(emphasis
added)
[19]
In Cholakis v. Cholakis,
[2006] 2 W.W.R. 229, Justice Beard of the Manitoba Queen’s Bench dealt with the
provisions of Rule 31.11 of the Queen’s Bench Rules, which is the rule that
permits a party to read-in any part of a discovery examination. Justice Beard
stated that:
7 When
an examination for discovery is used to impeach the credibility of the witness
who was examined and who subsequently testifies during the trial, rule 31.11(2)
states that the examination for discovery is used in the same manner as any
other previous inconsistent statement. The use of a previous inconsistent
statement to impeach the credibility of a witness is codified in s. 20 of the
MEA, which requires that the witness be referred to those parts of the prior
statement that are to be used for the purpose of contradicting him.
…
11 To
the extent that questions and answers from Paul's examination are being read in
to impeach his credibility and were used for that purpose during
cross-examination, they have already been read into the record and form part of
the evidence on the issue of his credibility. Reading them in again would be
unnecessarily repetitive and add nothing to the proceeding. To the extent that
the questions and answers were not brought to Paul's attention on
cross-examination, they cannot now be read in as they do not comply with the
requirements of s. 20 of the MEA for use as a contradictory statement.
[20]
In International Corona Resources Ltd. v. LAC Minerals Ltd., [1986] O.J. No. 68, Justice Holland stated that:
By reason of
the provisions of the Evidence Act, set out above, it appears that counsel for
Lac can only read in those parts of the examination for discovery of Mr. Bell
and Miss Dragovan which are admissions and those parts that go to credibility
so long as the provisions of the Evidence Act were complied with when the
witness was in the box in connection with such parts.
[21]
In The Law of
Evidence in Canada, (Third Edition) by Justices Bryant, Lederman and Fuerst
of the Superior Court of Justice for Ontario, (2009, LexisNexis), it is stated
at page 1150 that:
16.153 A transcript of an examination for discovery is a special
species of a previous statement. In civil cases, Rules of Court generally
permit questions and answers to be read by a party adverse in interest as an
admission.* When used as previous inconsistent statements to impeach the
credibility of a party, it would appear that the statutory requirements must be
complied with. Accordingly, if a party testifies, the opposite party is obliged
to put the relevant passages from the examination for discovery to the party --
witness.*
(* denotes footnote references that are in the original text but
which have not been included)
[22]
Counsel for the
Respondent did not direct the Appellant’s attention to the specific questions
and answers from the discovery examination that the Respondent is stating were
inconsistent with the testimony of the Appellant during the hearing, including
any answers provided by the Appellant at the discovery examination that counsel
for the Respondent claimed provided more details. The Appellant was not
provided with an opportunity to explain why his answer at the discovery
examination was different from his answer during the hearing. Since the
Appellant’s attention was not drawn to these excerpts prior to the proposed
read-in of such excerpts, these excerpts cannot be read-in for the purpose of
impeaching the witness and therefore, since no other purpose for reading-in
such excerpts was identified by the Respondent, such excerpts cannot be
read-in.
Assessment for Unremitted Source Deductions
[23]
The Appellant was
assessed as a director for amounts for which IL was assessed as unremitted
source deductions. Subsection 153(1) of the Income Tax Act (the “Act”),
for 2003 and 2004, provided in part as follows:
153. (1) Every person paying at any time in a taxation year
(a) salary, wages or other remuneration, other than amounts
described in subsection 212(5.1),
…
shall deduct or withhold from the payment the amount determined in
accordance with prescribed rules and shall, at the prescribed time, remit that
amount to the Receiver General on account of the payee's tax for the year under
this Part or Part XI.3, as the case may be, and, where at that prescribed time
the person is a prescribed person, the remittance shall be made to the account
of the Receiver General at a designated financial institution.
[24]
The Appellant’s
position in relation to the assessment issued against him for the unremitted
source deductions of IL is that IL did not have any employees and therefore should
not have been assessed for unremitted source deductions. Although the
Respondent, in the Reply, denied the allegation that IL did not have any
employees, the basis for the assessment against IL was not that IL had
employees but that IL paid the employees of ICC. The Appellant controlled IL
and ICC.
[25]
The first question in
relation to the appeal itself that must be addressed is whether the assessment
of IL for unremitted source deductions is correct. The Respondent acknowledged
that, based on the decision of Chief Justice Rip in Barry v. The
Queen, 2009 TCC 508, 2009 DTC 1339, [2010] 1 C.T.C. 2189, the Appellant
could raise the issue of the correctness of the assessment of IL for the
unremitted source deductions.
[26]
In determining whether
the assessment of IL was correct, it is necessary to determine whether IL was
paying salaries or wages. Justice Teitelbaum
in Mollenhauer Ltd. v. Canada (Minister of National Revenue, [1992] 2
C.T.C. 121, 92 DTC 6398 (F.C.T.D.) stated that:
It is very
clear that s. 153(1) of the Act does not speak of whether persons doing the
paying are employers or not. I am satisfied that if a person or company is
paying "salary or wages or other remuneration" it must deduct or
withhold the required amount pursuant to the Income Tax Act.
[27]
In Marché Lambert et Frères
Inc. v. The Queen, 2008 DTC 3815, Justice Paris reviewed
several cases in which the person making the payments to employees was not the
employer. He stated his conclusions as follows:
17 First,
I agree with the Appellant that the element of decision-making power with
respect to the funds paid to the employees is determinative as to the
application of subsection 153(1).
18 The
relevant case law of the Federal Court of Appeal shows that a person is only
liable under that subsection if it had decision-making powers over the payments
to employees. In the case where a person physically makes the payments, but has
no independent authority over the funds used to make them, that person is not
liable to make remittances. In other words, if the person who makes the
payments upon the directives of another person and not on his her own
initiative, subsection 153(1) does not apply to him or her.
…
33 In my
opinion, that case law is clearly to the effect that a person will be held liable
under subsection 153(1) if he or she has decision-making power as to the
payments of wages made to employees. He or she will not be held liable if he or
she pays wages or salaries as a mere conduit or as an agent of another person.
[28]
Therefore while the
person making the payments to employees need not be the employer to become
liable for the source deductions, the person making the payments must have some
decision making power with respect to the payment of the salaries or wages and
not simply be making the payments as an agent of some other person (presumably
the employer) in order to be liable to remit the required source deductions. If,
however, the individuals who were paid were the employees of IL, then the
assessment of IL for the unremitted source deductions would be correct.
[29]
Since the Respondent
denied the allegation that IL did not have any employees, the analysis of
whether the assessment of IL for the unremitted source deductions is correct
will be based on the following questions:
(a)
Did IL have any
employees?
(b)
If IL did not have any
employees, did it pay the employees of ICC?
(c)
If IL did not have any
employees and was paying the employees of ICC, was it doing so as the agent of
ICC or did IL have any decision making power with respect to the payment of the
salaries or wages?
Did IL Have any Employees?
[30]
If the individuals who
were paid salaries or wages were employees of IL, then the assessment of IL for
the unremitted source deductions would be correct. Therefore this question must
be addressed first.
[31]
There are two related
companies – ICC and IL. The Appellant owned the majority of the shares of ICC
and all of the shares of IL. ICC was a construction company that encountered
financial difficulties in 2002. It did not remit all of its source deductions
as required. The Appellant invested $750,000 in the company in June 2002 but
the company continued to struggle. As a result of the financial difficulties
encountered by ICC, IL was formed in June 2003. IL managed construction
projects. The Appellant described the activities of IL as follows:
It would identify a
project-management opportunity; it would negotiate a contract to manage that
project for a fee; it would then hire a project manager or ask for Internorth
Construction to assign a project manager to that project, in return for paying
a fee to Internorth Construction to cover the overhead of this individual plus
additional costs associated with the general overhead of Internorth
Construction.
[32]
The Appellant was
adamant during his testimony that IL did not have any employees. The financial
statements (which were identified as “DRAFT FOR DISCUSSION”) for ICC and IL
were presented during the hearing. The financial statements for ICC as at
December 31, 2003 and the financial statements for IL as at December 31, 2003
were submitted by the Appellant in his book of documents as well as by the
Respondent. The Appellant did not include financial statements for either
company as at December 31, 2004 but these were included in the Respondent’s
book of documents. The Appellant did, however, include a draft balance sheet
for IL as of April 30, 2004 and a draft Statement of Operations of IL for the
period from June 5, 2003 to April 30, 2004.
[33]
The year end financial
statements of each company as presented are consistent with the statement that
IL did not have any employees. These statements indicate that the following
amounts were claimed by ICC and IL for salaries and benefits in 2003 and 2004:
|
|
ICC
|
IL
|
|
Amount claimed for salaries and benefits in 2003
|
$1,365,516
|
0
|
|
Amount claimed for salaries and benefits in 2004
|
$410,160
|
0
|
[34]
However, included in
the Appellant’s book of documents was a draft Statement of Operations for IL
for the period from June 5, 2003 to April 30, 2004. For some unexplained reason
this statement shows an amount of $339,249 for salaries. Neither party referred
to this statement and it seems to me that since this statement is inconsistent
with the year end statements that were presented and inconsistent with the
testimony of the Appellant, I do not give any weight to the inclusion of an
amount for salaries in this Statement of Operations for IL which was prepared
for the approximately 11 month period from June 5, 2003 to April 30, 2004.
[35]
As noted by Associate
Chief Justice Bowman (as he then was) in VanNieuwkerk v. The Queen,
2003 TCC 670, [2004] 1 C.T.C. 2577:
6 …. It has been said on
many occasions in this Court that accounting entries do not create reality.
They simply reflect reality. There must be an underlying reality that exists
independently of the accounting entries.
[36]
It seems to me that it
is more likely than not that the Statement of Operations prepared for IL for
the period from June 5, 2003 to April 30, 2004 did not reflect reality. It
seems to me that it is more likely than not that the underlying reality was as
reflected in the year end financial statements prepared for IL for 2003 and
2004 and as stated by the Appellant, i.e. that IL did not have any employees.
As noted above, although the Respondent denied the allegation that IL did not
have any employees, the basis upon which IL was assessed, as set out in the
assumptions made by the Respondent, was not that IL had employees or that the
employees of ICC became the employees of IL, but rather that IL paid the
employees of ICC. As a result, I find that IL did not have any employees in
2003 or 2004.
Did IL pay the Employees of ICC?
[37]
The assessment of IL
for unremitted source deductions is based on the assumption that IL paid the
employees of ICC. Paragraph 15 of the Amended Reply provides in part as
follows:
15. In so determining the Appellant’s tax
liability pursuant to subsection 227.1(1), the Minister relied on the following
assumptions of fact:
…
(c) Internorth Ltd. was incorporated on June 5,
2003;
…
(g) prior to June 5, 2003, Internorth Construction
was paying its employees through two of its own payroll accounts;
(h) Internorth Construction stopped paying its
employees through its own payroll accounts on June 5, 2003;
(i) starting on June 7, 2003, Internorth Ltd. started
paying Internorth Construction’s employees through its bank accounts;
(j) (deleted)
(k) Internorth Ltd. did not invoice Internorth
Construction for the salaries and wages paid;
(l) Internorth Construction did not reimburse
Internorth Ltd. for the salaries and wages paid to the employees from June 5,
2003 and thereafter;
[38]
Justice Rothstein (as he then
was), writing on behalf of the Federal Court of Appeal, in The Queen v. Anchor
Pointe Energy Ltd., 2003 DTC 5512 stated that:
[23] The pleading
of assumptions gives the Crown the powerful tool of shifting the onus to the
taxpayer to demolish the Minister's assumptions. The facts pleaded as
assumptions must be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[39]
No assumptions were
made with respect to how IL would have financed the payment of the salaries and
wages for the employees of ICC. Based on the assumptions as set out above, one
obvious question is how did IL pay the employees of ICC if ICC did not
reimburse IL? It seems to me that the only logical conclusion, based on the two
assumptions that IL paid the employees of ICC and that ICC did not reimburse
IL, is that the Minister assumed that IL was paying the employees of ICC from
its own resources.
[40]
IL was only incorporated
on June 5, 2003. It was not a company that had been carrying on business
for several years and which would have had large reserves of capital to pay
individuals who were not its employees. As of December 31, 2003 the only
assets of IL (as stated on its balance sheet) were cash and accounts receivable
of $1,220,125 in total. The balance sheet also indicates that IL had a deficit
of $105,554 as it had total liabilities of $1,325,678 and share capital of $1.
[41]
During the cross-examination
of the Appellant, the following exchange took place between counsel for the
Respondent and the Appellant:
Q. Do you agree that the
employees of Internorth Construction Company were paid by Internorth Limited,
from -- and to be clear -- from June 7, 2003, going forward?
A. I don't have any first-hand
knowledge of that. I would -- the financial managers were paying the
payroll and the bills and I believe that they were paying them through the
Internorth Construction construction accounts, is my understanding. I don't
think there was ever any sort of payroll account set up for Internorth Limited,
but there were payroll accounts for Internorth Construction. So that was my
understanding.
Q. So it's your understanding
that Internorth Limited did not pay Internorth Construction's employees from
June 7, 2003 going forward?
A. It was my -- the
understanding, the generation of the funds we were administering. Internorth
Limited, the understanding was that Internorth Limited would administer the
payroll accounts on behalf of Internorth Construction and make those payments,
you know, based on their -- providing the information as it related for
the -- as it related to the payment of payroll.
Q. So when you say Limited, so
Internorth Limited would make the payments. So does that mean that employees
were paid through Limited's bank accounts?
A. I don't know that they were.
I understood it to be paying the obligations of Internorth Construction by
whatever process. As I understood it, the payments were made. The funds were
made available to pay the payroll and that the documentation, as far as I know,
Internorth Limited never had any employees and never issued any T4s or anything
to any employees.
So it's my understanding
that we were helping to administer the process with the obligations to
Internorth Construction as far as payroll was concerned.
Q. I understand that, but who
paid the employees from June 7, 2003, going forward? Not the subcontractors.
A. It could have been
Internorth Limited had issued cheques on behalf of Internorth Construction to
pay the employees, yes. That could be the case.
Q. Do you have any evidence
that would suggest or prove that Internorth Construction actually paid those
employees from June 7, 2003 going forward?
A. No, that is what I have been
asking for --
[42]
Based on this exchange
it is not clear how the employees of ICC were paid. As part of the Appellant’s
documents the Appellant submitted two schedules that appear to have been
prepared for a meeting with the Canada Customs and Revenue Agency (as they were
then) on June 22, 2004. These schedules identify the cash deposited in the bank
accounts of IL and ICC during the period from January 1, 2003 to May 31, 2004.
The Appellant stated that these schedules indicated the total amounts deposited
to these bank accounts. During this period the following amounts were
identified as being deposited in these bank accounts:
Total amount deposited in the bank account
of ICC: $7,379,250
+
$412,805
=
$7,792,055
Total amount deposited in the bank account
of IL: $540,547
+
$2,527,116
=
$3,067,663
[43]
The financial
statements for ICC and IL for 2003 and 2004 indicate the following amounts of
revenue for each company:
|
|
ICC
|
IL
|
|
Revenue reported for 2003
|
$22,361,741
|
$2,724,625
|
|
Revenue reported for 2004
|
$241,724
|
$1,589,776
|
[44]
The revenue would be
reported on an accrual basis. However, with combined revenue of more than $25
million in 2003 for both companies, why were the total bank deposits for 2003
and the first five months of 2004 less than one-half of this amount? This does
raise questions but does not establish that IL paid the employees of ICC. Since
the Minister has assumed that ICC did not reimburse IL for any salaries that it
may have paid, in the absence of any other evidence, it will be assumed that
any revenue of ICC collected in excess of the deposits referred to above was
either deposited in the bank account of ICC or in the bank account of IL as
payment of some expense other than salaries or wages. As well, the bank
deposits identified for IL for the period from January 1, 2003 to May 31, 2004
were $3,067,663 while the total revenue for IL for 2003 and 2004 (which is a
longer period of time) was $4,314,401. It therefore seems reasonable that the
amount identified as the amount deposited in the bank account for IL would
represent its revenue that it had collected during the period from January 1,
2003 to May 31, 2004.
[45]
The financial
statements for IL indicate that for 2003 (which is only part of the period
covered by the above bank deposit schedule) the total revenue of IL was
$2,724,625 and its cost of sales was $2,697,125. Therefore the revenue being
generated by IL was only $27,500 more than its cost of sales and not sufficient
to pay the employees of ICC.
[46]
In House v. The
Queen, 2011 FCA 234, Justice Nadon,
writing on behalf of the Federal Court of Appeal, stated that:
30 In
determining the issue before us, it is important to keep in mind the Supreme
Court of Canada's decision in Hickman Motors Ltd. v. Canada, [1997] 2
S.C.R. 336 (Hickman), where Madam Justice L'Heureux-Dubé enunciated, at
paragraphs 92 to 95 of her Reasons, the principles which govern the burden of
proof in taxation cases:
1.
The burden of proof in taxation cases is that of the balance of
probabilities.
2.
With regard to the assumptions on which the Minister relies for his assessment,
the taxpayer has the initial onus to "demolish" the assumptions.
3.
The taxpayer will have met his initial onus when he or she makes a prima
facie case.
4.
Once the taxpayer has established a prima facie case, the burden
then shifts to the Minister, who must rebut the taxpayer's prima facie
case by proving, on a balance of probabilities, his assumptions (in this case,
that Hunt River held at the end of taxation year 2002 a long-term investment of
$305,000, which it transferred to the appellant in 2003).
5.
If the Minister fails to adduce satisfactory evidence, the taxpayer will
succeed.
…
57 In
my view, the Associate Chief Justice made two errors of law. First, he confused
the appellant's initial onus to "demolish" the Minister's assumptions
with the overall burden resting on the parties to prove their respective cases.
Second, he erred in failing to consider Mr. Cole's evidence. Had he considered
Mr. Cole's evidence, as he was bound to, he would necessarily have concluded,
in my view, that the appellant had made a prima facie case
"demolishing" the Minister's assumptions. In Amiante Spec Inc. v.
Canada, 2009 FCA 139, [2009] F.C.J. No. 603 (QL), our Court, at paragraph
23, explained a prima facie case in the following terms:
[23] A prima facie case is one "supported by evidence which
raises such a degree of probability in its favour that it must be accepted if
believed by the Court unless it is rebutted or the contrary is proved. It may
be contrasted with conclusive evidence which excludes the possibility of the
truth of any other conclusion than the one established by that evidence" (Stewart
v. Canada, [2000] T.C.J. No. 53, paragraph 23).
[47]
It seems to me that the
Appellant has raised a prima facie case that IL did not pay the
employees of ICC. There was not enough money deposited into the bank account of
IL to pay its cost of sales and the employees of ICC. While there appears to
have been more revenue generated by ICC and IL than what is reflected in the
bank deposit schedules, it appears that the additional revenue was revenue of
ICC and since the Minister has assumed that ICC did not reimburse IL for any
salaries or wages paid by IL, in my opinion the Appellant has raised a prima
facie case that IL did not pay the employees of ICC as IL would not have
had the financial resources to make such payments.
[48]
The only evidence
presented by the Minister was a copy of the report prepared by the officer for
the Canada Revenue Agency who determined that IL should be assessed for the
source deductions commencing June 5, 2003. The person who prepared the report
did not testify as he was no longer working for the Canada Revenue Agency. In
the report it is stated that:
Following a review of the books and records, it was determined that
all payroll activity has been routed through Internorth Ltd since June 7, 2003
(RP0001 and RP0002). The business was experiencing financial difficulties and a
number of creditors had taken legal action against Internorth Construction
Company. The business was unable to pay its employees from the bank account of
Internorth Construction Company and began paying from the account of Internorth
Ltd.
As a result, the payroll of Internorth Construction Company ceased
on June 6, 2003 and the payroll of Internorth Ltd commenced on June 7, 2003.
The assessments raised on the associated accounts of Internorth Construction
Company will be cancelled and raised on the subject payroll accounts. The 2003
T4’s filed on the associated accounts will be deleted and replaced by new T4’s
reflecting the earnings and deductions from January to June 2003 on Internorth
Construction Company and from June to December 2003 on Internorth Ltd.
[49]
There is no indication
of what books and records were actually reviewed nor were any of the books and
records that were apparently reviewed introduced at the hearing. It seems to be
the position of the Respondent that I should conclude that IL paid the
employees of ICC without hearing from the person who made this determination
and without reviewing the documents that were reviewed and which led to this
determination. Without reviewing the documents that led to the conclusions as
stated above it is impossible to determine whether I would reach the same
conclusion. As well, the officer, who wrote the report, referred to the payroll
activity being “routed” through IL and in the last sentence of the first
paragraph indicates that the “business … began paying from the account of [IL]”.
This seems to suggest that ICC was still paying the employees but simply
“routing” the funds through an account of IL which implies that IL was only the
agent to deliver payment. Even if I were to accept the statements of the officer
it does not appear that an assessment of IL could be supported as IL would not
be liable for source deductions if it was simply acting as the agent of ICC in
paying the employees of ICC (Marché
Lambert et Frères Inc., supra).
[50]
Counsel for the
Respondent indicated that there were no documents in the file of the Canada
Revenue Agency. The absence of documents means that the Respondent was unable
to produce any evidence to rebut the Appellant’s prima facie case that
IL did not pay the employees of ICC.
[51]
If IL did pay the
salaries or wages of the ICC employees and ICC did not reimburse IL, then either
IL paid the salaries or wages from its own resources or someone else financed
such salaries or wages. It seems clear that IL would not have had sufficient
resources to pay such salaries or wages (which for 2004 would have been
$410,160) unless it received the funds from someone else. There is no
indication that there was any other person who would finance the salaries or
wages of the ICC employees. As a result either the assumption that IL paid the
employees of ICC is wrong or the assumption that ICC did not reimburse IL is
wrong. Since the Respondent made the assumption that ICC did not reimburse IL,
the Appellant did not have to challenge this assumption but could rely on it to
dispute the other assumption that IL paid the employees of ICC.
[52]
In my opinion the
Appellant has raised a prima facie case that the assumption that IL paid
the employees of ICC is incorrect. The onus would then shift to the Respondent
to introduce evidence to support this assumption that IL paid the employees of
ICC. The Respondent has not submitted satisfactory evidence to rebut this prima
facie case.
[53]
As a result, the
Appellant will succeed in relation to the question of whether IL paid the
employees of ICC and I find that IL did not pay the employees of ICC. As a
result, since IL did not pay any salaries or wages, IL would not have any
liability for source deductions and the assessment of the Appellant as a
director of IL is vacated.
[54]
Since IL did not pay
the employees of ICC, the third question posed above is not relevant. However,
as noted above, based on the report of the officer for the Canada Revenue
Agency, it would appear that even if the bank account of IL was being used to
pay the employees of ICC, that IL may have been simply acting as the agent of
ICC in delivering payment to the employees of ICC. As noted above, a person who
simply acts as an agent of an employer in paying the employees of that employer
is not liable for the unremitted source deductions in relation to the amounts
paid to such employees.
[55]
Since the Appellant has
successfully challenged the underlying assessment of IL, the issue of whether
the Appellant exercised the required due diligence is not relevant.
[56]
As a result the
Appellant’s appeal is allowed, with costs, and the assessment of the Appellant
as a director of IL for the unremitted source deductions, penalties and
interest for which IL was assessed, is vacated.
Signed at Halifax, Nova Scotia, this 20th day of January 2012.
“Wyman W. Webb”
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