Cana Construction Co. Ltd. v. The Queen, 95 DTC 127, [1995] 1 CTC 2122 (TCC)

McArthur J.T.C.C.:-This appeal was heard in Calgary, Alberta, July 12, 13 and 14, 1994 pursuant to the general procedure of this Court.

The following facts, substantially not in dispute, are contained in the appellant’s amended notice of appeal that reads, in part, as follows:

2. The appellant received notice of the assessment under appeal by notice of assessment dated February 7, 1989 and numbered 935394 whereunder the Minister of National Revenue, Taxation ("Minister”) assessed the appellant in respect of federal income tax and provincial income tax remittances in the aggregate amount of $282,460.99 plus penalty and interest in respect thereof for the period of March 1, 1988 to September 16, 1988, as confirmed by notice of confirmation dated February 28, 1992.

3. The appellant is a taxable Canadian corporation that is resident in Canada for the purposes of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and has a head office in the city of Calgary, in the province of Alberta.

4. At all times material hereto the appellant was the prime contractor for construction of the structure of Chateau Whistler Resort ("project”), a hotel complex located at Whistler, British Columbia, under an agreement between the appellant and Canadian Pacific Hotels Corporation (’’Canadian Pacific").

5. At all times material hereto Vidalin Construction (1984) Ltd. ("Vidalin") was a corporation in the business of providing concrete forming services and whose principal contact person with the appellant was Mr. Dave Vidalin (”Mr. Vidalin”).

6. By an agreement dated November 9, 1987 ("subcontract'') between the appellant as prime contractor and Vidalin as subcontractor, Vidalin agreed to provide labour, supervision and equipment in respect of concrete services for the project in consideration of payment of $1,203,000 ("contract price"), subject to additions and deductions for changes in the work as ordered in writing.

7. The terms of the subcontract provided inter alta:

(a) Vidalin agreed to provide all labour, supervision and equipment, subject to specified exceptions, to form, pour and strip poured in place concrete for walls and to form the slabs in accordance with the plans, specifications and addenda attached to the subcontract;

(b) Vidalin agreed to provide union tradesmen and supervision ("Vidalin employees") and pay all wages, fringe benefits, travel and transportation, room and board costs and similar costs in respect thereof; and

(c) The appellant had the right to terminate the subcontract if, inter alta:

(i) Vidalin failed, upon reasonable notice from the appellant, to supply enough workmen or materials; or

(ii) Vidalin did not pay promptly its employees, sub-subcontractors or suppliers of material.

8. The terms of the subcontract concerning payment of the contract price ("payment terms") provided, inter alia, that:

(a) Vidalin was to submit a progress claim ("progress claim") on or before the let day of each month to the appellant for approval and due processing covering the value of the materials delivered and the work performed by Vidalin up to the 26th day of the month, whereupon 90 per cent of the amount claimed became due from the appellant to Vidalin 45 days after the foregoing submission date of the claim by Vidalin or 30 days after the certification of the progress claim by the consultant on the project, whichever was the later; and

(b) The ten per cent holdback of the progress claim ("holdback") was due one day after all lien rights under the subcontract expired and was payable within seven days of receipt by the appellant of its holdback from Canadian Pacific.

9. Vidalin began work on the project in November 1987 under the terms of the subcontract.

10. Vidalin employees working on the project site comprised carpenters, labourers and foremen, the number of which generally varied from day to day.

11. In January 1988 it became apparent to the appellant that Vidalin was disorganized and unable to obtain sufficient manpower and, as a result, was going to have trouble fulfilling its obligations under the subcontract.

12. In response to the lack of organizational and supervisory skills on Vidalin’s part, the appellant agreed to accommodate Vidalin by supplying certain foremen, who remained within the appellant’s employ and payroll, to provide expertise in this regard and report directly to Mr. Vidalin. Generally, the appellant provided three or four such foremen and, with the exception of one such foreman, in each case charged back to Vidalin under the subcontract the gross salary paid to each such foreman. The appellant paid its foremen and all remittance obligations under the Act relating to the aforesaid foremen were paid by the appellant.

13. In February and early March 1988, a number of cheques issued by Vidalin to pay the Vidalin employees working on the project at that time were not accepted for payment due to insufficient funds.

14. In early March 1988, on-site Vidalin employees refused to work on the project due to their fears that they would not be paid. At approximately the same time, Vidalin received letters from the two unions representing the Vidalin employees concerning Vidalin’s non-compliance with terms of the collective agreements to which Vidalin was a party. In particular, the unions were concerned about payment of wages and union dues and one of the unions required that payments of wages, holiday pay and contributions to the union be made by certified cheques.

15. In a letter of March 17, 1988 (mistakenly dated February 17, 1988), the appellant advised Vidalin that:

(a) As a result of work stoppages due to Vidalin’s payroll problems, the appellant considered Vidalin to be in breach of the subcontract and, as a result, remedies available to the appellant at that time included termination of the subcontract and dismissal of Vidalin from the work site;

The procedure for the payment of the workers’ wages, during the relevant period, was as follows: Vidalin advised the appellant of the workers to be paid, their total wages, net of deductions including Income Tax (IT), Canada Pension Plan (CPP), Unemployment Insurance (UI), Workmen’s Compensation (WC) and union dues. The appellant’s site superintendent, Brian Webster, reviewed the components of Vidalin’s request for payment of funds. Vidalin prepared cheques on its Royal Bank (Victoria, B.C.) account, representing the net wages of each workman, after deductions under the Canada Pension Plan Act ("CPP Act"), the Unemployment Insurance Act ("UI Act"), Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and union dues. As an example, Exhibit R-1, Tab 43 is reproduced being the wages for the worker "Arnie Story".

Vidalin would also prepare cheques to the two unions in respect of the gross amounts due them in relation to the membership dues of the workmen. The appellant would arrange for a bank draft, drawn on its account, in the aggregate amount approved. An employee of the appellant and an employee of Vidalin would attend Vidalin’s bank in Victoria. Upon the deposit by the appellant to Vidalin’s account of the said aggregate amount, the bank, under the appellant’s scrutiny, would simultaneously certify each of the pay cheques presented together with the union cheques. The certified cheques, together with deduction details, were delivered by a Cana employee to Brian Webster, the appellant’s site superintendent. After his review and approval, the cheques were given to Vidalin for distribution to the workers and the unions. Apparently the workers were satisfied that they were paid in full, believing that the amounts deducted from their respective wages had been paid for CPP, UI, IT and union dues as set out on their cheque stubs.

The appellant’s principal witness was Brian Webster. He testified that his company, Cana, entered into a contract with Canadian Pacific Hotels Corporation, in November 1987 wherein, for the sum of $6,987,000 it contracted to construct a concrete structure known as Chateau Whistler Resort. As prime or general contractor, the appellant entered into a subcontract with Vidalin for the sum of $1,203,000 in consideration of Vidalin providing labour, supervision and equipment in respect to certain concrete work for the Whistler project. While Cana had the resources and expertise to do the work, Mr. Webster stated that his company could not complete the work for the amount agreed to by Vidalin. At the time of the contract, Cana was one of the largest construction companies in Canada.

It became quickly evident to Cana that Vidalin did not have the capabilities to handle such an undertaking particularly under difficult winter conditions. Vidalin did not have the leadership, that is a superintendent and foremen, with the knowledge or experience to fulfil its contractual obligations. Mr. Dave Vidalin, principal shareholder of Vidalin, testifying on behalf the respondent, stated that the job was more than his company could handle. He acknowledged that being unable to price the job himself prior to tender, he relied on an employee who had significantly underestimated the construction costs.

During the first week of March 1988, Vidalin workmen walked off the job because some of Vidalin’s pay cheques were not honoured by the bank. Brian Webster, already concerned that Vidalin was behind schedule, assured the Vidalin’s workers that their wages would be paid. In a letter of March 17, 1988, incorrectly dated February 17, 1988, from Cana to Vidalin, Cana stated, inter alia:

We consider you to be in breach of your contract with us dated November 9, 1987, and in particular clause 22 thereof. Remedies available to us at this time include the termination of your contract and dismissing you from the site.

At your request we have agreed to make the arrangements necessary to enable you to meet your March 18 payroll obligations in order to allow you to pay your crews, amounts owing to the Carpenters’ and Labourers’ Unions and WCB, and rent due on accommodation at Whistler for your key men. We do not consider ourselves to be obligated to accommodate you in this matter.

You have advised that you hope to arrange financing for your operations, in order to enable you to complete your contractual commitments to us, within the next two weeks. We hereby notify you that, if you have not made the necessary arrangements to enable you to meet your obligations and provided evidence satisfactory to us of such arrangements on or before March 28, 1988, we may forthwith and without further notice or accommodation to you terminate your contract and dismiss you from the site. You are to provide satisfactory evidence by the time stated to the writer.

Mr. Dave Vidalin exhausted all his financial resources within the following few weeks including borrowing from his future father-in- law and his fiancée.

The appellant had a job to complete, time limits to meet, and made a business decision to use the resources of Vidalin which consisted primarily of labourers, carpenters and an inadequate supervisory staff. It entered into the arrangement described to pay the Vidalin workers to prevent work stoppages. It paid union dues for the same reason. It did not pay the deductions for IT, CPP and UI. Brian Webster stated on behalf of the appellant that there were insufficient funds available to Vidalin under the progress advance contractual arrangements. In order to complete its primary contract the appellant determined it had to assure payment of the Vidalin workers.

Evidence of Dave Vidalin witness for respondent

Dave Vidalin on behalf of the respondent, stated that the appellant made only the payments required to prevent work stoppages, and reneged on their agreement to pay UI, IT and CPP. Vidalin did not have the funds to pay the UI, CPP and IT deductions. Mr. Vidalin stated that Brian Webster was evasive when he was asked to pay these deductions in accordance with what Dave Vidalin perceived was their oral agreement.

In March 1988, the appellant chose to amend the Cana-Vidalin subcontract rather than remove Vidalin from the premises. Cana moulded the agreement to suit their needs and to complete the work. Cana arranged to pay for the workmen, through Vidalin’s bank account, as described. Vidalin had no control over the payroll funds deposited to its account, the payroll money was deposited by the appellant into Vidalin’s account and withdrawn under the direction and control of the appellant. Vidalin had no power over or access to the money deposited into its account. At the time of the transfer of the payroll funds and certification of the payroll and union dues cheques, the account was Vidalin’s in name only. The certified payroll cheques with attached deduction details were retained by Cana until reviewed and approved before being released to Dave Vidalin for distribution.

Issues

Did the appellant pay the wages or salary of workmen during the relevant period and did it fail to deduct or withhold an amount as required by subsection 153(1) of the Act or did it fail to remit or pay an amount that was deducted or withheld?

Appellant's position

There was a contractual relationship between Cana and Vidalin. The payments of one to the other were in satisfaction of Cana’s contractual obligation under the contract. The relevant workers were, at all times, the employees of Vidalin and not Cana. Vidalin was qualified and had experience on substantial construction jobs. Therefore, there was nothing unrealistic about Cana believing or making the decision that Vidalin had the capability to complete the contract. Dave Vidalin continued to manage his company as an independent entity with respect to progress claims, extra expenses, and in authorizing overtime of his employees. Vidalin was making the decisions as a subcontractor would. Vidalin’s actions were guided by the objective to make a profit. Cana kept very detailed records of the time spent by any of its people who were loaned to Vidalin. The only change in the contractual/independent relationship related to the advancing of funds.

The appellant’s submitted that the subcontract was amended only to the extent that progress advances were made, if necessary, prior to the timing provided in the subcontract to permit Vidalin to meet its payroll requirements and that there were insufficient funds available to meet all the Vidalin’s employee deduction requirements. Further, at no time was more money advanced than work services rendered by Vidalin under the contract and that the advances were, at all times, contractual progress advances. The workers throughout the relevant period remained the employees of Vidalin. Any exercise of control by Cana was to enforce the contractual rights and obligations under the subcontract.

The appellant made no payments of any kind to the Vidalin employees; the only payments the appellant made were to Vidalin in consideration for concrete forming services for the project provided by Vidalin to the appellant. There was no payor-payee relationship between the appellant and the Vidalin employees in fact or in law. Accordingly, subsection 153(1) of the Act does not apply to the appellant in respect of the payments made by the appellant to Vidalin.

The appellant further submitted that should the Court find that the appellant was a person paying salary or wages or other remuneration to the Vidalin employees, the appellant did not fail to remit or pay an amount deducted or withheld as required by the Act and therefore subsection 227(9) of the Act does not apply to the appellant. In that event, its conduct amounted to a failure to deduct or withhold an amount as required under subsection 153(1) of the Act and therefore the appellant is liable only for the penalty and interest provided in subsection 227(8) of the Act and is not liable under any provision of the Act for the amount of federal and provincial income tax that should have been deducted or withheld.

Although the cases fix on the issue of payment, no case, except for one, finds that the taxpayer is a person paying, at any time in the taxation year, salary or wages unless the taxpayer is the person who wrote the cheque. The one exception is Graphic Realm in which the Court found that there was an agency relationship between the taxpayer who was being assessed and the shell corporation that actually issued the cheque. Therefore the bulk of the case law fixes on the issue of payment and clearly finds itself required to find actual payment in order to fix liability on the taxpayer. Since there was no actual cheque issued by Cana, the Court would be required to find that Vidalin was the agent for Cana when it issued the cheque in order to fix Cana with the liability. However, all the facts are inconsistent with that finding. If the Court chooses to find that a relationship of agency exists, then R. v. Coopers & Lybrand Ltd., [1980] C.T.C. 367, 80 D.T.C. 6281 (F.C.A.), case should be referred to and if there is any liability, it is only for failing to deduct, not failing to remit.

Respondent’s position

The respondent’s position is that the appellant was aware that the funds represented by the cheques made out by it, to Vidalin in the period March 1, 1988 to September 16, 1988 would be utilized exclusively for the purposes of the payment of net wages and that the additional amounts represented the amount due in respect of union fees and the bank charges for certification of the cheques of the net wage to the employees and that therefore the payments were made by the appellant in its capacity as the de facto employer of the workmen with a view to obtaining to itself the benefit of the work and the continuance of the construction work in respect of the project.

The respondent presented further that the appellant maintained total control and dominion in respect of the funds represented by the cheques made out by the appellant to Vidalin during the period March 1, 1988 to September 16, 1988 in relation to the wages of the workmen. The appellant also ensured that it made payment of the wages of the workmen by means of the banking facility of the Vidalin, and that the Minister had properly assessed the sum of $282,460.99 as the tax due from the appellant for the period March 1, 1988 to September 16, 1988, on the basis that it was the person who had paid the wages, salary and or other remuneration of the workmen during each of the pay periods between March 1, 1988 and September 16, 1988 and failed to remit to the Receiver General of Canada the source deductions made in respect of each payment of wages made during this period in accordance with the provisions of paragraph 153(1 )(a) and subsections 227(9), 227(9.4) and 227(10.1) of the Act. Because a deduction was made but not remitted, subsection 227(9) applies and not subsection 227(8).

The respondent added in the alternative, that the appellant was jointly and severally liable with Vidalin, the de facto employer of the workmen, and that the Minister properly assessed the sum of $282,460.99 as the tax due from the appellant.

The income tax act

Subsections 153(1), 227(8), 227(9), 227(9.4) and 227(10.1) read in part as follows:

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

(a) salary or wages or other remuneration,

shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, 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.

227(8) Penalty.-Subject to subsection (8.5), every person who in a calendar year has failed to deduct or withhold any amount as required by subsection 153(1) or section 215 is liable to a penalty of

(a) ten per cent of the amount that should have been deducted or withheld; or

(b) where the person had at the time of the failure been assessed a penalty under this subsection in respect of an amount that should have been deducted or withheld during the year, twenty per cent of the amount that should have been deducted or withheld.

227(9)...every person who in a calendar year has failed to remit or pay as and when required by this Act or a regualtion an amount deducted or withheld as required by thjis Act or a regulation or an amount of tax that he is, by section 116 or by a regulation made under subsection 215(4), required to pay is liable to a penalty of

(a) ten per cent of that amount; or

227(9.4) Liability to pay amount not remitted.-A person who has failed to remit as and when required by this Act or a regulation an amount deducted or withheld from a payment to another person as required by this Act or a regulation is liable to pay as tax under this Act on behalf of the other person the amount so deducted or withheld.

227(10.1) Idem.—The Minister may assess

(a) any person for any amount payable by that person under subsection (9), (9.2), (9.3) or (9.4), and

(b) any non-resident person for any amount payable by that person under Part XIII,

and, where he sends a notice of assessment to that person, sections 150 to 167 (except subsections 164(1.1) to (1.3)) and Division J of Part I are applicable with such modifications as the circumstances require.

Analysis

A recent case dealing with the issue of a contractor’s liability under subsection 153(1) is the Federal Court-Trial Division decision of Mollenhauer Ltd. v. The Queen, [1992] 2 C.T.C. 121, 92 D.T.C. 6399 (F.C.T.D.). Here, the contractor subcontracted certain construction to Aprok Drywall Ltd. (’’Aprok"). Subsequently, Aprok was unable to meet its payroll liability for salary or wages. In order for the construction work to continue, the taxpayer arranged to pay the amounts due by Aprok to its employees and reduced the amount due to Aprok accordingly. The taxpayer asked Aprok to indicate amounts owing to its employees on the construction site. The taxpayer then duplicated Aprok’s unsigned cheques with its own cheques. The taxpayer paid the employees of Aprok their net wages without withholding and remitting any source deductions and billed Aprok for such net amounts plus a ten per cent overhead charge and a ten per cent fee, all of which was deducted from the amount owing by it to Aprok.

The issue before the Court was whether the money paid to the employees of Aprok by the taxpayer was paid as salary or wages by the taxpayer, or whether what was paid by the taxpayer to the employees of Aprok were monies owing to Aprok and at Aprok’s direction the appellant paid the employees of Aprok.

In finding the taxpayer liable under subsection 153(1), the Court concluded that the taxpayer had voluntarily assumed the responsibility of Aprok to pay the full wages owing, in order to prevent employee and/or union disruptions at the work site. Specifically, Teitelbaum J. stated at page 126 (D.T.C. 6401):

In October 1985 Aprok was unable to meet its payroll liability for salary or wages. At that time plaintiff owed Aprok approximately $155,000 and in order that the construction work could proceed, plaintiff arranged to pay the amounts due by Aprok to Aprok’s employees. In order to do so, plaintiff asked Aprok to indicate the amounts owing to its employees. Aprok provided the necessary pay information, unsigned cheques in the names of the employees with the amounts on them together with the applicable pay stubs. Exhibits 1-4 are the documents prepared by Aprok. Plaintiff, upon receiving the documents prepared its own cheque in the name of the employee for the same amount, the net salary owing the employee.

What is apparent from the above, is that plaintiff is being told by Aprok that it owes a gross salary of $1,140.05 to its employee Ed Baker and that it has deducted $250.80 for federal income taxes, plus other deductions of no concern for the case at bar, and that there is a net sum payable to Mr. Ed Baker which plaintiff paid.

What is important is that in the case at bar the plaintiff undertook the obligation of Aprok to pay the salary and wages of Aprok’s employees in order for plaintiff to complete its project without possible disruption from the employees or the union to which they belong.

In deciding whether subsection 153(1) imposes any liability on a payor of wages or salary who is not the employer of the payees, Teitelbaum J. concluded at page 127 (D.T.C. 6401):

It is very clear that subsection 153(1) of the Act does not speak of whether persons doing the paying are employers or not. 1 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.

From the facts and the evidence put before me I am satisfied that the plaintiff paid to the employees the wages owing to them and did so with the full knowledge that it was so doing.

The relevant facts in the case at bar are similar, with the exception that in Mollenhauer, the appellant taxpayer actually wrote the cheques. Upon considering all of the facts of the present case, I agree with the respondent’s submission that the appellant maintained total control and dominion over the funds used to pay the wages of the workmen. I conclude that Cana was the person (company) paying the employees wages and did so deliberately and with full knowledge that it was doing so.

This Court finds that Vidalin acted on Cana’s instructions and direction when it prepared the pay cheques and attached stub with deduction details. Cana retained complete control over the payment procedure. Section 153 states clearly that every person paying wages to an employee must withhold tax, it does not say that only employers must do so.

I accept the testimony of David Vidalin when he stated that Cana agreed, in March 1988, to pay the Vidalin workmen wages and also pay or to remit the required and usual employee deductions including WC, IT and UI. Pursuant to that agreement, Vidalin prepared the workmen’s net pay cheques and also the pay stubs detailing deductions. The worker is entitled to conclude that the deductions as indicated were duly remitted by the person paying the wages. Cana undertook the obligation of Vidalin to pay salary and wages of Vidalin’s employees to assure that Whistler project be completed without the Vidalin workers walking off the job. Cana was aware that Vidalin did not have the funds to remit the payroll deductions. Cana paid the Union fees being aware that there would be a work stoppage if they did not.

The appellant submitted that should the Court find that it was the person paying the wages of the Vidalin employees, its conduct amounted to a failure to deduct or withhold an amount as required under subsection 153(1) of the Act, and therefore the appellant is liable only for the penalty and interest provided in subsection 227(8) of the Act and is not liable under any provision of the Act for the amount of federal and provincial income tax that should have been deducted or withheld.

The appellant relied on Coopers. In that case Coopers & Lybrand was appointed receiver and distributed cheques to workers equal to their net pay. Each employee received his customary pay but none of the regular deductions were deducted or remitted. The Federal Court of Appeal set out three requirements that must be met in order that liability may exist under subsection 153(1):

(1) Payments to employees must have been made.

(2) Such payments must have been with respect to wages or salaries due to the employees.

(3) The person sought to be held liable must have made such payments.

The Court found that the payments were wages or salary paid by the taxpayer receiver pursuant solely to directions received from its principal. Coopers failed to make the appropriate payroll deductions and was liable for a penalty of ten per cent provided by subsection 227(8). The taxpayer was not held liable to remit deductions to the federal Tax Department.

Counsel for the appellant argues that Cana did not prepare the payroll and write the cheques with attached details and therefore cannot be said not to have made deductions. Upon reviewing the facts, I conclude that Cana agreed to fund the payroll requirements of Vidalin. Cana directed Vidalin to prepare the payroll cheques with the attachment indicating to the workmen that the usual deductions were made. Initially Cana represented to Vidalin that the deductions would be paid. Vidalin provided Cana with the payroll details including deductions for IT, CPP and UIC. Cana provided Vidalin with the net payroll funds plus union fees and bank charges and approved all cheques before releasing them for delivery to the workmen. Cana was aware that it was represented to the workmen that deductions were being remitted. After some of Vidalin’s pay cheques were returned because of insufficient funds the first week of March 1988, Cana had the Vidalin workmen go back to work on an undertaking that it, Cana, would guarantee payment of their wages. Surely Cana assumed the responsibility to pay gross wages. Cana paid the workmen net wages and it is logical to conclude the net wages was after Cana deducted the relevant IT and other usual deductions. Cana was paying the wages in respect of work done. Since it did not pay the gross amount to the workers, I conclude there were deductions made by Cana.

I agree with the reasoning of the respondent’s counsel. When referring to deductions he said the following:

The fallacy lies in the assumption that somebody must remove the money and put it into his pockets. That is not what the law says. The law does not require to remove the money and put it into your pockets.

What the law says is when you make a payment which is less than the payment which you ought to make, and you do so only because you have reduced from it CPP, UIC and IT, then a deduction has taken place.

In the Coopers case, Coopers & Lybrand as receiver, was given a certain sum of money which it utilized to pay wages without making any deductions. So in Coopers case the taxpayer failed to deduct and subsection 227(8) applies. In the present case Cana deducted but did not remit and subsection 227(9) is applicable.

For these reasons the appeal is dismissed with costs to the respondent.

Appeal dismissed.