Storrie v. Minister of National Revenue, [1996] 2 CTC 2596, 96 DTC 3227

Bell J.T.C.C.: — These reasons for judgment apply to David Storrie, Alfred D. Storrie and Kevin Storrie (each referred to as “Appellant”), all three of whom were directors of Argyle Masonry Ltd. (“Argyle”) during the period for which the assessments appealed from were made.

The issue is whether the Appellant is liable under subsection 227.1(1) of the Income Tax Act (“Act”) for tax deductions on employees’ wages not paid by Argyle to the Receiver General for Canada and penalty and interest on that amount. The appeals were heard on common evidence.

David Storrie gave evidence on behalf of the Appellants. He was an officer and director of Argyle and managed its business. He testified that until financial difficulties besieged Argyle in 1982, it had been current in remitting employee tax deductions. He testified that the company had a general bank account, a payroll account and a revolving line of credit in the sum of $50,000. He stated that he had to sign demand notes for loans to Argyle and that he had to demonstrate to the bank manager on a monthly basis that Argyle had accounts receivable. The advances were used only for company business. The bank required the monthly reports to become weekly reports and finally insisted on approving every expenditure. Argyle’s bookkeeper computed the deductions on employee salaries and prepared cheques on the payroll account for the net amount. This information was given to the bank and for early 1983 the bank authorized the company to issue the payroll cheques. In addition to loans advanced to the company on the basis of demand promissory notes made by Argyle and David Storrie, a sister company, AD Storrie Construction Ltd., supplied funds to Argyle for business purposes. In addition, Alfred D. Storrie and his wife advanced the sum of $30,000 to Argyle, such sum not having been repaid.

The evidence was clear that all expenditures made by the company in early 1983 were for business only, no money having been expended for any other purpose. The company’s current account ended up in an overdraft position at the end of each of the months of January through May. The evidence is clear that officials of the bank, in response to David Storrie’s request for moneys to meet the source deduction requirements, refused to advance funds for that purpose. The period during which Argyle did not make remittances for source deductions was from December 1982 to May 1983 and the reason expressed by Mr. Storrie for non-payment was that the company did not have the money or have access to the money so to do. No T-4 slips were introduced by the Respondent with respect to the employees in question. In response to a question as to whether they had been prepared, Mr. Storrie said that he assumed so.

Counsel submitted that the Appellant is not liable under subsection 227.1(1) of the Act for any amount under subsection 227(9) but only for 10 per cent of the amount that should have been deducted or withheld under subsection 227(8). The pertinent part of that subsection reads as follows,

Any person who has failed to deduct or withhold any amount as required by this Act or a regulation is liable to pay to Her Majesty ... if the amount should have been deducted or withheld under subsection 153(1) from an amount that has been paid to a person resident in Canada ... 10 per cent of the amount that should have been deducted or withheld....

The pertinent part of subsection 153(1) reads as follows:

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

Subsection 227(9) reads in part as follows,

227(9) Every person who has failed to remit or pay ... an amount deducted or withheld as required by this Act or a regulation ... is liable to a penalty of 10 per cent of that amount in addition to the amount itself, together with interest on the amount at the rate per annum prescribed for the purposes of subsection (8).

Appellant’s counsel submitted that Argyle did not deduct or withhold any amount as required by subsection 227(8) and therefore was liable only to the 10 per cent penalty and that this is the only sum for which the Appellant could be liable under subsection 227.1(1).

The meaning of the words “deduct or withhold” and “deducted or withheld” as they appear in the Act is not clear. Does the use of “or” imply that they have the same meaning as in “the distance is one mile or 1,760 yards” OR does it mean that “withhold” has a meaning different from “deduct”? The Shorter Oxford English Dictionary, Third Edition, defines “deduct” as follows,

To take away or subtract from a sum or amount.... To reduce....

It defines “withhold” to mean

To keep back; to keep in one’s possession...; to refrain from granting or giving…

If they have different meanings, it appears that the act of deducting means merely subtracting the amount of tax as computed on a gross amount from that gross amount. The act of withholding would then appear to mean retaining the sum deducted so that it would be physically available to be remitted. If the words have these meanings does subsection 227(8) liability arise from either the failure to deduct or the failure to withhold?

If “deduct” is described to mean a mathematical computation there can always be a deduction even if, as in this case, there is no withholding in the context of having money available to set aside. Can Argyle be said to have “failed to deduct or withhold” if it has, in this sense, deducted but not withheld?

Subsection 227(9) casts some light on this question. It provides that a person who fails to remit or pay “an amount deducted or withheld as required” is liable to pay a penalty of 10 per cent of that amount plus the amount together with interest. Surely this subsection cannot have been intended to create a liability to be visited upon a company’s directors where all the company did was compute the tax deductions on wages owing so that the net amount could be paid to its employees. In a situation, as here, where a company was unable to receive any funds from the bank to pay the tax deductions, no amount could be withheld. However, in order to keep its employees, it is natural that the company would want to pay them what they had been accustomed to receive, namely their “net pay”. The alternative would be to pay an arbitrary amount, doing no computation, or not to pay. The absurdity of this result invites one to consider whether the word “deduct” means more than simply making a mathematical computation. The use of “failed to remit or pay ... an amount deducted or withheld” in subsection 227(9) suggests that there must be moneys actually deducted and made available for remittance.

A brief examination of other subsections may be helpful. Subsection 227(4) states that every person who deducts or withholds any amount under the Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty. This implies that something be physically set aside. Subsection (5) provides that all amounts deducted or withheld shall be kept separate and apart from his own moneys. This again connotes the act of setting funds aside. Subsection 227(13) provides that the receipt of the Minister for an amount withheld or deducted by any person as required by the Act is a good and sufficient discharge of the liability “of any debtor to his creditor”. The words withheld or deducted are, albeit in the past tense, in reverse order to the words deduct or withhold as used elsewhere. This may be said to characterize “deducted” as being more in the sense of “withheld”. Although subsection (13) does not speak of remittance being made that is implicit. The context in which the words under examination are used here is such that it is not difficult to imagine it being intended that funds actually be set aside.

Appellant’s counsel said that the Appellants were liable under subsection 227(8) and submitted that the directors were not liable under subsection 227.1(1). My brief examination of the meaning of “deduct” and “withhold” as used in the provisions referred to, suggests that they were not subjected to much legislative scrutiny.

The lack of clarity in those words as employed in sections 227 and 227.1 persuades me to refer to the reasons of Estey J. in Johns-Manville Canada Inc. v. R., [1985] 2 S.C.R. 46 (sub nom. Johns-Manville Canada Inc. v. The Queen), [1985] 2 C.T.C. 111, 85 D.T.C. 5373 at 72-73 (C.T.C. 126, D.T.C. 5384) where he said that it is a basic concept in tax law that where a taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer. On that basis it is my view that the Appellants should not be liable under subsection 227.1(1) because, without even referring to that subsection’s imprecision, the lack of clarity in subsection 227(9) should not expose Argyle to liability thereunder.

In addition, the Federal Court of Appeal, in Coopers & Lybrand Ltd. v. R., (sub nom. R. v. Coopers & Lybrand Ltd.) [1980] C.T.C. 367, (sub nom. The Queen v. Coopers & Lybrand), 80 D.T.C. 6281 referred, at page 376 (D.T.C. 6287) to the liability incurred by a person paying a wage as “a penalty calculated as a percentage of the amount he has failed to deduct”. Kelly, D.J. then referred to a deduction “actually made” and to “the amount deducted not (being) fully remitted”. In that case, Coopers & Lybrand (“C & L”) were receivers and managers for a company under a debenture to a bank. C & L was held to be in the position of a payor with respect to employees. It paid only net amounts (ie. take home pay after computation of deductions) to the employees, no additional amount having been provided to it by the bank. No part of the amount which the bank had calculated to be deductible from the pay of each employee for income tax was “ever segregated and no one holds any funds which it (sic) is admittedly payable or alleged to be payable”. The learned justice said that C & L’s default was in not making deductions for income tax rather than in failing to remit any amount actually deducted and that its liability was under subsection 227(8) was 10 per cent of the amount it failed to deduct.

In Comanche Drilling Ltd. (Receiver of) v. Canada (sub nom. Comanche Drilling Ltd. (Receiver of) v. Minister of National Revenue) [1989] 1 C.T.C. 428 (sub nom. Deloitte Haskins & Sells v. The Queen), 89 D.T.C. 5225, cited by Respondent’s counsel, the Federal Court Trial Division, found that the plaintiff would be liable under subsection 227(9) for tax, interest and penalties because it had the authority and ample funds to remit the amounts which the records indicated had been deducted in respect of the employer’s tax obligation for employees. Rouleau, J. said at page 433 (D.T.C. 5229) that in both the C & L case and the Deloitte Haskins case “the prima facie evidence produced by payroll records indicate that deductions were made”. He also said that there was no evidence to rebut the prima facie inference drawn from the payroll records and that although the receiver never actually set money aside, funds were available to pay the remittances on account of the deductions it calculated. He continues with the statement that the receiver, by making bookkeeping entries to determine net wages, raised a presumption, albeit rebuttable, that it had actually withheld amounts. The Court seems to have agreed with the C & L decision by stating that C & L was neither empowered, nor had sufficient funds available, to “remit the amounts purportedly deducted”. This seems to indicate that the mathematical computation in that case was not a deduction. He then, however, says that in the Deloitte Haskins case the “Plaintiff had the authority and ample funds to remit the amounts which the record indicated had been deducted.”

The learned justice then dealt with the Appellant’s submission that it only intended to pay “net” wages and that any deductions shown on the record were simply bookkeeping entries made to determine the net wages owing. He said that to “suggest that mere intention is sufficient to exonerate an employer from paying what is rightfully due to the Minister of National Revenue is ludicrous”.

With respect, I have difficulty understanding why in one case the lack of funds leads to a conclusion that bookkeeping entries are not deductions while in the other case where ample funds were available bookkeeping entries were deductions. However, I feel directed by the Federal Court of Appeal to find that Argyle, in circumstances very similar to those outlined in the C & L case, failed to make deductions. It certainly failed to withhold.

Accordingly, I conclude that the Appellants’ liability under subsection 227.1(1) of the Act is that established by subsection 227(8) and that no other liability exists.

Accordingly, the appeals are allowed with costs.

Appeals allowed.