Date: 19990923
Docket: 97-1969-IT-G
BETWEEN:
HARVEY ROLL operating as HARVEY ROLL BUSINESS SERVICES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] This appeal is from a reassessment made under section
165(3) of the Income Tax Act (the Act). It replaces
a series of earlier assessments made in reliance on sections 153
and 227 of the Act in respect of unremitted source
deductions for federal income tax, provincial income tax,
Canada Pension Plan contributions and Unemployment
Insurance Act premiums (which, for convenience, I will refer
to collectively simply as source deductions), together with
penalties for both failure to remit and late remitting. The total
amount claimed by the Minister of National Revenue (the Minister)
by the notice of reassessment for unremitted source deductions,
penalties and interest to March 28, 1997, the date of the
reassessment, is $57,028.40. This assessment is in respect of
amounts which should have been deducted from the payroll of Sea
Hornet Marine Industries (Canada) Inc. (Sea Hornet) and
remitted to the Receiver General for the period from January 1 to
July 15, 1996.[1]
It is predicated upon the theory that the Appellant was, in
respect of Sea Hornet's employees, a “person paying ...
salary or wages or other remuneration”, within the meaning
of that expression as it is used in subsection 153(1) of the
Act. The Minister also alleges that the Appellant was a
trustee within the meaning of that word as it was used in
subsection 153(1.3) prior to June 20, 1996, and in
paragraph 227(5.1)(a) after that date. The relevant
parts of the legislation read 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 is
determined in accordance with prescribed rules and shall, at such
time as is prescribed, remit that amount to the Receiver General
on account of the payee's tax for the year under this Part or
Part X1.3, as the case may be ...
153(1.3) For the purposes of subsection (1), where a trustee
who is administering, managing, distributing, winding up,
controlling or otherwise dealing with the property, business,
estate or income of another person authorizes or otherwise causes
a payment referred to in that subsection to be made on behalf of
that other person, the trustee shall be deemed to be a person
making the payment and the trustee and that other person shall be
jointly and severally liable in respect of the amount required
under that subsection to be deducted or withheld and to be
remitted on account of the payment.
153(1.4)In subsection (1.3), "trustee" includes a
liquidator, receiver, receiver-manager, trustee in bankruptcy,
assignee, executor, administrator, sequestrator or any other
person performing a function similar to that performed by any
such person.
...
227(1) No action lies against any person for deducting or
withholding any sum of money in compliance or intended compliance
with this Act.
...
(5) Where a specified person in relation to a particular
person (in this subsection referred to as the
“payer”) has any direct or indirect influence over
the disbursements, property, business or estate of the payer and
the specified person, alone or together with another person,
authorizes or otherwise causes a payment referred to in
subsection 135(3) or 153(1), or on which tax is payable
under Part XIII, to be made by or on behalf of the payer, the
specified person
(a) is, for the purposes of subsections 135(3) and
153(1), section 215 and this section, deemed to be a person who
made the payment;
(b) is jointly and severally liable with the payer to
pay to the Receiver General
(i) all amounts payable by the payer because of any of
subsections 135(3) and 153(1) and section 215 in respect of the
payment; and
(5.1) In subsection (5), a “specified person” in
relation to a particular person means a person who is, in
relation to the particular person or the disbursements, property,
business or estate of the particular person,
(a) a trustee;
...
(l) an agent of a specified person referred to in any
of paragraphs (a) to (k).
227(8) 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)10% of the amount that should have been deducted or
withheld; or
(b) where at the time of the failure a penalty under
this subsection was payable by the person in respect of an amount
that should have been deducted or withheld during the year and
the failure was made knowingly or under circumstances amount to
gross negligence, 20% of that amount.
227(9) Subject to subsection (9.5), every person who in a
calendar year has failed to remit or pay as and when required by
this Act or a regulation an amount deducted or withheld as
required by this Act or a regulation or an amount of tax
that the person is, by section 116 or by a regulation made under
subsection 215(4), required to pay is liable to a penalty
of
(a) 10% of that amount; or
(b) where at the time of the failure a penalty under
this subsection was payable by the person in respect of an amount
that should have been remitted or paid during the year and the
failure was made knowingly or under circumstances amounting to
gross negligence, 20% of that amount.
...
227(9.4)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.
Subsections 153(1.3) and (1.4) were repealed and subsections
227(5) and (5.1) were enacted by S.C. 1996, c. 21, 557(1), which
took effect on June 20, 1996. Sea Hornet met only two
payrolls after that date.
[2] The events giving rise to the assessment under appeal are
somewhat unusual, but I did not understand counsel for the
Respondent to challenge the Appellant’s version of those
facts.
[3] The Appellant is a bookkeeper. He has worked for a number
of employers over the years, and in 1992 started his own
business, doing bookkeeping for some small businesses, and some
income tax preparation for individuals and small businesses. His
income from this was not great, and he neither incorporated the
business nor opened a separate bank account for it. He operated
as a sole proprietor under the name Harvey Roll Business Services
(HRBS), and the revenues of that business were deposited to, and
the expenses were paid from, the personal joint account which he
and his wife maintained at the Hong Kong Bank. One of his sources
of work was a certified management accountant for whom he did
contract work from time to time. Through this individual he
learned of an opportunity for employment as a bookkeeper with Sea
Hornet. He applied for and obtained the position, and began to
work there in February 1995, at a salary of $2,000.00
per month.
[4] Sea Hornet at this time was a small company which was
attempting to develop a marine information recording device
similar to those used in aircraft, commonly known as black boxes.
The management of the company consisted of Ralph Richey, the
president and a director, his brother Clive Richey,
vice-president operations, and Ralph Richey’s wife,
Carol Richey, who was also a vice-president and a director. Ross
McCutcheon, a lawyer, was also a director, and influential in the
decision making. The company's capital came from a number of
investors. There were some 10 to 15 employees. The
Appellant’s duties included processing the bi-weekly
payroll, which was computer generated through an
off-the-shelf software package, which calculated the gross
pay, the various deductions, and the net pay for each employee,
and printed the cheques. The Appellant had no cheque signing
authority, but delivered the cheques to Mr. Richey for signature.
He also maintained the company's books, in particular the
accounts receivable and the accounts payable ledgers. He
continued, in his spare time, to carry on his business under the
name HRBS, and to use the joint bank account for that
purpose.
[5] There were a lot more payables than receivables during the
period from November 1995 to July 1996. In fact, there was little
evidence of any revenues being generated by the company at all.
Its only source of funds, for practical purposes, was injections
of cash obtained from time to time from the investors. Apart from
these, it had two great hopes to solve what was clearly a chronic
cash shortage. One was the expectation that it would receive an
infusion of cash through scientific research and development tax
credits. The other was the hope that it would achieve listing on
the NASDAQ exchange, with a substantial influx of investment
capital resulting. Neither of these events occurred.
[6] By the middle of 1995, Sea Hornet had serious cash-flow
problems. By the fall of that year, trade creditors were refusing
to deal with it, collection actions were being taken against it,
together with threats of execution and the seizure of its assets.
The company was by this time falling into arrears in respect of
its obligation to remit source deductions, in addition to its
other problems.
[7] There is no doubt that the Appellant was at all times well
aware of the financial difficulties which Sea Hornet faced.
Throughout much of 1995, and thereafter, his duties included
keeping the Richeys advised as to the extent of the liabilities
to be met, and as to which of the creditors were most pressing in
their demands for payment. He frequently sent messages to Clive
or Carol Richey to indicate what the short-term cash needs were
in order to meet the payroll, and to pay the creditors who were
most insistent in their demands. Typically, he would receive from
Ralph Richey a cheque from one of the investors, with
instructions to deposit it to the company’s bank account,
together with detailed instructions as to what payments were to
be made with the funds. He had no discretion as to the priority
to be accorded to the various creditors. Generally, the payroll
was a first priority, although several employees, including the
Appellant, agreed in early 1996 to accept a deferral of their
salaries in order to help the company through what, they were
told, was a temporary cash shortage.
[8] By October, or early November, 1995, Sea Hornet’s
financial situation had deteriorated to the point where any funds
deposited to its bank account would either be applied by the bank
to reduce the outstanding line of credit, or would be seized by
one or more of the other creditors. To circumvent these
possibilities, and to keep the company afloat a little longer, in
the hope that it would be rescued by the NASDAQ listing, Ralph
Richey, knowing that the Appellant was operating his business as
HRBS, asked him if he would use his business bank account to
assist the company by depositing a cheque for the payroll, and
then drawing the cheques for the employees on it. The Appellant
agreed to do this, and the November payroll was processed in this
way, but through the personal bank account which he maintained
jointly with his wife, as he had no separate business bank
account at that time. I accept the Appellant’s evidence
that the cheque he was given to deposit was for the net payroll
only, that is to say the amounts payable to the employees of Sea
Hornet, net of all source deductions.
[9] By December 1995 the Appellant had opened a separate bank
account at the Hong Kong Bank, in the name Harvey Roll Business
Services (the HRBS bank account), and for the next six and
one-half months the Sea Hornet net payroll was processed through
that account. During this period, the management of Sea Hornet
was able to obtain sufficient investment funds to meet the net
payroll twice each month, as well as some, but not all, of the
source deductions, and some, but not all, of the trade debts of
the company. As these cheques were received from the investors,
they were turned over by Mr. Richey to the Appellant to be
deposited in the HRBS bank account. At the same time, Mr. Richey
gave him precise instructions as to the payments he was to make
from the account. The Appellant did, of course, have signing
authority in respect of this bank account, and in fact was the
only person who did.
[10] The precise history of the various failures to remit, and
the late remittances, is complex, and not necessary to the
decision of the question at issue. Like all the other creditors,
Revenue Canada was paid only when funds were available. The
source deductions for January 1996 were paid in April, those for
February were paid in May, and those for May were paid in June.
Those for March, April, June and July were not paid at all. The
payments that were made, like the payroll and payments to trade
creditors, were made through the HRBS bank account.
[11] When remitting source deductions to Revenue Canada in
December, 1995 and in 1996, the Appellant, although drawing the
cheques on the HRBS bank account, continued to remit in the name
of Sea Hornet. In June 1996, however, Revenue Canada decided that
because the cheques were drawn on the account of HRBS, it must be
the payor for purposes of sections 153 and 227 of the Act.
It opened an account for payroll remittances in the name of HRBS,
and it transferred to that account the various debits and credits
previously made in the account of Sea Hornet in 1996.
Thereafter the Appellant was treated by Revenue Canada as the
payor of the employees of Sea Hornet, and the various assessments
for failure to remit and penalties and interest were charged to
his account, culminating in the reassessment which has given rise
to this appeal.
[12] This state of affairs naturally caused the Appellant
considerable alarm. Upon being notified from time to time of the
extent of his liability by Revenue Canada, he raised the matter
with Ralph Richey, and with the CMA through whom he had obtained
the job, who continued to act as the accountant for Sea Hornet.
They both assured him that the matter would be straightened out,
and that he had no reason to be alarmed. He accepted these
assurances until the middle of July 1996, at which time he
declined to permit the use of the HRBS bank account any further.
Sea Hornet soon found itself unable to carry on business any
longer, and there were, of course, no assets to which either
Revenue Canada or the Appellant could look for payment.
[13] The questions which I must decide are:
1. whether the Appellant, by his conduct, has put himself in
such a position that he is properly considered to be a "...
person paying ... salary or wages ..." to the employees of
Sea Hornet for the purposes of section 153(1) of the Act;
and
2. whether the Appellant came within subsection 153(1.3)
before June 20, 1996, or subsection 227(5) after that date, and
therefore is jointly and severally liable with Sea Hornet for the
source deductions during all or part of the period between
January and July 1996.
[14] In The Queen v. Coopers & Lybrand Limited[2] Kelly D.J.,
speaking for a unanimous Court, set out the criteria that must be
met in order to give rise to liability under section 153:
(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.
In the present case there is no doubt that the first two
conditions are met. The payments were made by Mr. Roll from his
bank account under the name "Harvey Roll Business
Services", and they were made to the employees of
Sea Hornet in payment of their wages, net of deductions. It
is argued by counsel for the Appellant that Mr. Roll was simply
doing his job as the bookkeeper for Sea Hornet, and that the
act of paying is not his act, but that of the company. I agree
that if the Appellant had done no more than his duties as the
company bookkeeper, then section 153 would not reach him. It was
never intended to impose liability personally on an employee who
is simply carrying out the normal duties of the job.
[15] Mr. Roll, however, stepped outside his job when he took
the funds of the company and deposited them in a bank account to
which only he had the signing authority, and then disbursed them
to the employees and the creditors according to the instructions
given to him. He was well aware of the company's financial
condition, and he was well aware, too, of the obligation to
withhold, and that it was not being complied with when he issued
the cheques for the net payroll from his account. Indeed, he knew
that the only reason for Sea Hornet to enter into this
arrangement with him was to keep its funds away from its
creditors, including the bank. It is clear from the judgment in
Coopers & Lybrand that section 153 imposes liability
on a person who makes payments in these circumstances, even
though that person is not the employer of the individuals to whom
the payments are made.
[16] The second question which arises is whether the Appellant
is jointly and severally liable for the full amount of the
withholdings. The Minister assessed him for the full amount,
based upon the following assumption of fact, which appears at
paragraph 3(l) of the Reply:
The Appellant, through his proprietorship known as Harvey Roll
Business Services, provided bookkeeping services to the
Corporation, which services included determining the gross wages,
insurable earnings, withholding taxes and net wages of the
employees of the Corporation, receiving sufficient amounts to
cover net wages, withholding taxes and other disbursements and
paying of the net wages to the employees of the Corporation;
However the evidence shows that the Appellant did the
calculation of the payroll and the withholdings in his capacity
as an employee of Sea Hornet, at the offices of Sea Hornet, and
not in the capacity of a contractor providing services to
Sea Hornet. Moreover, he was not given the amount of the
gross payroll by Sea Hornet, nor did he have any discretion
as to the application of the funds that were put in his hands. It
is quite clear that he was under instructions as to the payments
that he was to make from the funds deposited in the HRBS account,
and those did not include the withholdings, at least not at the
time the net payroll was paid.
[17] I agree with counsel for the Respondent that, in the
circumstances, the Appellant was a bare trustee of the funds put
in his hands by Sea Hornet. However, to bring him within the
ambit of subsection 153(1.3) it must be shown that he was, at the
relevant time, "... administering, managing,
distributing, winding up, controlling or otherwise dealing with
the property, business, estate or income ..." of Sea
Hornet. All of these verbs, and the equivalents which appear in
the French version of the text,[3] suggest that there must be some degree of
control and decision making reposed in the trustee for the
subsection to apply; the Appellant had none.
[18] After June 20, 1996, when subsection 227(5) was enacted
to replace subsection 153(1.3), the relevant words were:
|
[w]here a specified person in relation to a particular
person ... has any direct or indirect influence over
the disbursements, property, business or estate of the
payer and the specified person, alone or together with
another person, authorizes or otherwise causes a payment
... to be made by or on behalf of the payer,
...
|
[l]a personne déterminée, quant à
une autre personne ... qui a une influence directe ou
indirecte sur les décaissements, les biens,
l'entreprise ou la succession du payeur et qui, seule
ou avec quelqu'un d'autre, fait en sorte qu'un
paiement ... soit effectué par le payeur ou
pour son compte, ou autorise un tel paiement ...
|
I do not believe that the Appellant had any direct or indirect
influence over the disbursements, the property, the business or
the estate of Sea Hornet. The expression "to have an
influence"[4]
connotes some ability on the part of the person to affect the
decision making process in relation to the payments in order to
be subject to the subsection.[5] Mr. Roll clearly had no such power. It is true
that in his capacity as an employee of the company he supplied
management with information which was used in the process of
deciding what payments would be made, in what amount, and to
whom. Even if this act of furnishing information can be said to
amount to an indirect influence on the decision making process,
it was not done in his capacity as an individual separate and
apart from the company for which he worked. In this separate
capacity he did nothing but prepare and sign cheques in
accordance with precise directions given to him, and he had no
power at all to influence the decision making with respect to the
payments, the property, or the business. In my view subsection
227(5) has no application on the facts of this case.
[19] Counsel for the Respondent relied in argument on a number
of authorities for the proposition that the Appellant is subject
not simply to the penalty imposed by subsection 227(9), but to
joint and several liability, along with Sea Hornet, for the full
amount of the withholdings which were not remitted. Only two of
those cases deal with the statutory language in force during the
time period relevant to this appeal. In neither of those cases is
there any consideration of the operative part of subsection
153(1.3) which I have set out at paragraph [17] above. I do not
believe that there has yet been a decision dealing with the
language of the 1996 enactment of subsection 227(5).
[20] 299144 British Columbia Limited v. M.N.R.[6] involved a fact
situation similar to the present case. However it was held that
the Appellant was not a trustee, even within the expanded
definition of that word found in subsection 153(1.4). The result
of this conclusion was that it became unnecessary to consider
whether the Appellant's conduct fell within the language of
subsection 153(1.3). In Soltrac International Inc. v.
M.N.R.[7] Judge
Tremblay held that the Appellant, which made the payments to
employees, was a trustee as defined in subsection 153(1.4).
However, he then went on, at page 1905 of his Reasons, to
consider whether the Appellant was "acting on behalf
of" the employing company, rather than considering the
actual words of subsection 153(1.3) to which I have referred
above. He found that was, and on that basis he dismissed the
appeal. I do not find this case to be helpful, as the test to be
applied under subsection 153(1.3) is not whether the Appellant
was "acting on behalf of" Sea Hornet, which he clearly
was but whether in so doing he was administering, managing,
distributing, winding up, controlling or otherwise dealing with
Sea Hornet's property. The former does not necessarily
involve any decision making; the latter does.
[21] The appeal is allowed and the assessment is referred back
to the Minister for reconsideration and reassessment on the basis
that the Appellant's liability is only for the penalty
assessed under subsection 227(9). The Appellant has achieved
substantial success, and is entitled to his costs.
Signed at Ottawa, Ontario, this 23rd day of September,
1999.
"E.A. Bowie"
J.T.C.C.
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