Electrocan Systems Ltd. v. The Queen, 86 DTC 6089, [1986] 1 CTC 269 (FCTD), aff'd 89 DTC 5079 (FCA)

Dubé, J.:—This action turns on the interpretation of subsection 227(9) of the Income Tax Act which reads as follows:

227. (9) Every person who has failed to remit or pay

(a) an amount deducted or withheld as required by this Act or a regulation, or (b) an amount of tax that he is, by section 116 or by a regulation made under subsection 215(4), required to pay,

is liable to a penalty of 10% of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the rate per annum prescribed for the purposes of subsection (8).

The plaintiff is a British Columbia corporation carrying on the business of an electrical contractor in the City of Vernon, B.C. It withheld amounts as required by section 153 of the Act from wages paid to its employees during each of the months of June and September 1981, October 1982 and January 1983 which were remitted to the Receiver General of Canada. Subsequent to each remittance the Minister of National Revenue assessed the plaintiff, pursuant to subsection 227(9) aforementioned.

The remittances were not effected within the time prescribed by Regulation 108(1) of the Income Tax Act, which prescribes that amounts deducted shall be remitted to the Receiver General on or before the 15th day of the month next following the deduction. In all four cases, however, the remittances were effected before the Minister assessed the plaintiff to a penalty pursuant to the above subsection.

In a nutshell, the position of the Minister is that under the said subsection a taxpayer who has failed to remit to the Receiver General the amount deducted under section 153 within the time prescribed by Regulation 108(1) is liable to a penalty of 10 per cent, together with interest. (In this instance, however, the Minister does not and will not claim interest whatever the outcome of this case. By consent, there will be an order to that effect.)

The Tax Court of Canada confirmed the Minister's assessments and dismissed the plaintiffs appeal. Rip, T.C.J., conceded that subsection 227(9) “could have been drafted with greater clarity” but concluded that it “imposes a penalty if the amounts are not remitted at the time required by section 108 of the Regulations to the Act”.

The subsection is indeed badly written. If the subsection read ‘‘Every person who has failed to remit or pay as and when required by this Act or a Regulation”, there would be no problem. Other penalty sections of the Act are so written. For example, “162.1 Every person who has failed to file a return as and when required by”. “235. (1) Every person who has failed to make a return as and when required by.” “238. (1) Every person who has failed to file a return as and when required by”.

By any rules of construction the modifier “as required by this Act or a Regulation” of paragraph 227(9)(a) modifies only that paragraph and not the whole subsection 227(9). In construing a penal section words that are capable of an interpretation that would or would not inflict the penalty must be given the latter interpretation. (See M.N.R. v. Donald M. Weeks, [1972] C.T.C. 60 at 62; 71 D.T.C. 6001 at 6002.) In other words, if this penal provision is ambiguous, the taxpayer must be given the benefit of the doubt.

For a provision to be ambiguous, there must be more than one valid interpretation. The interpretation submitted by the Minister, as already mentioned, is that failure to remit or pay means failure to remit or pay on time. The taxpayer’s suggested interpretation is that failure to remit or pay means failure to remit or pay at all. The second interpretation, however, must imply a time limit to have any meaning. Otherwise employers could delay forever without penalty. The time limit submitted by the plaintiff is

the time of the assessment: if you remit before the assessment you are not subject to a penalty.

I have found no provision in the Act, and was referred to none, which would create this penalty or any penalty by way of assessment. In my view, a penalty is created by a breach of the Act, not by the issue of an assessment. It is now well established (see The Queen v. Simard-Beaudry Inc., [1971] F.C. 396 at 403; 71 D.T.C. 5511 at 5515) that the taxpayer's debt is created by his taxable income and by the Act, not by an assessment. In principle, the debt comes into existence the moment the income is earned. Similarly, a penalty comes into existence the moment the statute is breached.

In this instance the penalty arose on the 16th day of the month following the deduction. The assessment which followed did not create the penalty, it merely notified the taxpayer to pay it.

Even if the provision is not as clear as it ought to be, it must be construed within the general framework or the scheme of the Act. The basic section on withholding is section 153 which stipulates that an employer shall deduct or withhold from wages and shall “‘at such time as may be prescribed, remit that amount to the Receiver General". Subsection 227(8) imposes a penalty of 10 per cent of the amount not deducted or withheld when an employer has failed to deduct or withhold as required by section 153. Similarly, subsection 227(9) imposes a penalty of 10 per cent of the amount not remitted when an employer has failed to remit or pay. Subsection 108(1) of the Regulations provides that the amounts deducted or withheld under section 153 shall be remitted to the Receiver General on or before the 15th day of the following month. Viewed in that context, subsection 227(9) is capable of only one reasonable interpretation, namely, that it imposes a penalty on the employer who fails to remit on time.

The action, therefore, is dismissed with costs. At the request of both parties it is also adjudged that the plaintiff shall not be assessed interest on any of the four assessments.

Appeal dismissed.