299144 British Columbia Ltd. v. Minister of National Revenue, [1990] 2 CTC 2427, 90 DTC 1883

Taylor, T.C.J.:— This is an appeal heard in Vancouver, British Columbia, on July 20, 1990, against an assessment in the amount of $15,060.44 being the amount for federal tax, provincial tax, Canada Pension Plan, Unemployment insurance, penalty and interest for amounts that were not remitted by the appellant for its 1987 taxation year. The only item of that amount before the Court in this hearing was the portion related to federal income tax deductions, and any penalties or interests directly added thereto, as provided for under the Income Tax Act ("the Act”).

The notice of appeal recited as follows:

The Appellant had no employees, did not have the ability in fact or in law to control the employer, did not pay to the employees salary or wages, did not prepare T4 slips or payroll information slips for the employees, was incapable in fact or in law of paying employee wages or salary, payments were not in the usual course of payment of salary or wages and the taxpayer was not the source of funds paid to employees as the Appellant received funds and returned cheques to party who supplied money to it and thus merely performed a clerical function.

For the respondent, the situation was detailed in the reply to notice of appeal:

— During 1987 the Appellant paid salary or wages to workers by cheque;

— the workers were employees of a company called Craftsman Wood Products Ltd.;

— Deductions were taken from the cheques for Income Tax, Canada Pension Plan, unemployment Insurance but such amounts were not remitted to the Receiver General.

— The Appellant did not withhold the amounts for Income Tax in accordance with prescribed rules and remit that amount to the Receiver General on account of the payee's tax for the year.

— The Respondent relies, inter alia, upon Subsections 153(1) and 227(9) of the Income Tax Act and subsection 108(1) of the Income Tax Act Regulations.

Evidence

Mr. Vernon Watson, president and sole shareholder of the appellant company ("299144") had been at the commencement of the period under review an employee of Craftsman Wood Products Ltd. ("Craftsman"). His own company, the appellant in this matter, had been virtually dormant—no assets, liabilities or activities of consequence for several years. During his employment with Craftsman, Mr. Watson had performed accounting and clerical functions, including preparation of the payroll and calculations related to that operation. Craftsman encountered financial difficulties, and as part of an effort to sustain the operation Mr. Watson left that employment. As a further effort to assist his long-term employer he agreed with the president of Craftsman, a Mr. Zink, to use 299144 to make certain payments to employees of Craftsman, as directed and funded by Mr. Zink. Mr. Watson's understanding of the reasons or rationale for these payments was at best unclear, or at least that was the state of his recollection of the events. His best view was that the arrangements between Craftsman (or Mr. Zink) and the continuing employees had its base in the agreement of the employees to accept reduced wages—by some 40 per cent— but to be compensated in the form of loans or advances to some employees by Mr. Zink so that between the amount of "wages" paid by Craftsman directly and the amount of the "loans" paid through 299144—at issue in this appeal — the employees would end up with approximately the same total "take home" amounts. For each "pay" period Mr. Zink—personally— provided Mr. Vernon Watson with a cheque for the total amount of the "loans" which cheque Mr. Watson then deposited in the bank account of 299144 and from which he in turn made out the individual cheques—according to a list supplied by Craftsman. Mr. Watson emphasized that of his own knowledge, he was not aware of the arrangements—indeed if there were any arrangements between Mr. Zink or Craftsman and the employees regarding these alleged "loans"—he only performed his function, using his corporation, as he described. At a later point in the proceedings, Mr. Watson was recalled to the witness stand to identify certain weekly "statements of earnings" slips which corresponded with cheques he had signed and issued while this procedure was in effect. His testimony was that he had never seen them before. (Reference will be made later to these pay slips.) Mr. Zink did not hold any shares or position in 299144 and Mr. Watson did not hold any shares or position in Craftsman. The cheques were prepared on 299144 cheque forms and signed by Mr. Watson. After preparing and signing these cheques, Mr. Watson gave them to the operations manager of Craftsman. That, according to him, was the extent of his activity, involvement and knowledge. Neither the appellant corporation nor Mr. V. Watson received any remuneration or compensation in any way for the services performed for Craftsman or Mr. Zink.

Mr. Zink, who had been excluded from the courtroom during the testimony of Mr. Watson, explained to the Court the arrangements he had made with the employees of Craftsman —basically the understanding that Mr. Watson had recounted. Mr. Zink agreed that Mr. Watson had not been party to making such arrangements, only performing the clerical functions of paying stipulated amounts to the individual recipients using 299144 as a favour to him. Mr. Zink's explanation of the reason for these circuitous procedures was less than clear or convincing but he indicated he believed he would be in a better position to recover his alleged "loans" from the employees at some later date when Craftsman was operating better, if the payment was made outside the Craftsman accounts. With regard to the "statements of earnings" slips (above) while he was not able to identify them perse, he agreed that they seemed to relate to Craftsman's operations, and that the employees' names were familiar.

Mrs. M.A. Watson, an investigator with Revenue Canada, took the witness stand for the respondent, identified and introduced as formal exhibits the "statements of earnings” slips indicating that these had been provided to her by former employees of Craftsman during her review of the situation, or as a result of formal complaints by these employees to Revenue Canada. The cheques to which these could be related had been retrieved from the 299144 records and provided by Mr. Watson.

Before commencing argument counsel for the parties were informed by the Court that certain facts appeared quite clear, and little more need be said about them. First, and most importantly, there was no basis whatsoever in the evidence for the contention that the payments at issue—whatever they were— represented loans or advances at all, despite that characterization by Mr. Zink, and the testimony of Mr. Watson. There was no documentation, no notes or other security, no interest rate, and no dates or arrangements for repayment. However they might be characterized by counsel—and the Court was open to hear any such description—they were not loans and for the Court that was one fact at least on which the decision in this matter would be based. The Court did not suggest that Mr. Watson did not believe (as he testified) that these were loans—just that there was no evidence that they were loans in reality. However, while the books and records or financial statements of 299144, as such, had not been produced at the trial (and there may well have been no reason to do so) the simple fact was that Mr. Zink—from his personal funds—had made advances to 299144 (the total amount of the list of net cheques to be distributed by 299144 to the employees), it was the conduct of 299144 itself in dealing with these advances from Mr. Zink, and in distributing the net amounts to the employees which required review and determination. In the entire process, it was necessary to remember that none of Craftsman, Mr. Zink, or Mr. Watson was an appellant in the matter, only 299144.

Argument

Counsel for the appellant relied on the case law of The Queen v. Coopers & Lybrand Ltd., [1980] C.T.C. 367; 80 D.T.C. 6281 and Deloitte Haskins & Sells v. The Queen, [1989] 1 C.T.C. 428; 89 D.T.C. 5225 (sub nom. Comanche Drilling Ltd. (Receiver of) v. M.N.R.), and took the following position:

I think clearly the most that can be said of the appellant's position in this case, that he was either acting as an agent of Craftsman Wood Products Ltd. or Milton Zink.

In my submission, Your Honour, the wrong person was assessed for failure to either deduct or to withhold.

Again, I would suggest to the Court that clearly the liability, if any exists, for making these deductions and remitting the moneys, is with Mr. Zink, either in his capacity—personal capacity or in his capacity as president of Craftsman Wood Products Ltd.

He also referred to subsections 153(1.3) and 153(1.4) of the Act, added after the Coopers & Lybrand judgment, supra, and effective February 26, 1981. They read:

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 subsection (1) 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 subsection (1) 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, receivermanager, trustee in bankruptcy, assignee, executor, administrator, sequestrator or any other person performing a function similar to that performed by any such person.

In counsel's view these sections had no bearing on the matter before the Court, since the definition in subsection 153(1.4) could not encompass the appellant corporation.

For counsel for the respondent, the main point, indeed the only point, was that subsections 153(1.3) and 153(1.4) (above) clearly placed the responsibility for deducting and remitting the income tax involved on the shoulders of 299144. He did however, refer briefly to the wording of subsection 153(1 )(a) of the Act, which in his view also covered the issue:

Every person paying . . . salary or wages . . . shall deduct or withhold . . . remit such amounts . . . .

Analysis

First, as a matter of interest, it should be noted that it is simply coincidence that the president of the appellant, the witness for the respondent, and the counsel for the appellant all have the same surname—Watson. It is not relevant to this matter, but there is no relationship between them, in the event that any such query should arise.

As I see it, there is no merit in the argument of counsel for the respondent that subsections 153(1.3) and 153(1.4) of the Act are determinative. I do not agree that the appellant herein is caught as a "trustee" by the words of subsection 153(1.4)—"any other person performing a function similar to that performed by any such person". In my view this appellant was not acting as a "trustee" even under that expanded definition. The result of this appeal may well be that the respondent has assessed the wrong person. It would not be difficult to comprehend that either or both of Craftsman or Mr. Zink might be the subject of such an assessment, but that is not the specific problem before this Court.

The respondent noted in the reply to notice of appeal that "deductions were taken from the cheques for Income Tax . . .". While that statement may be (and I am not required to so decide) correct vis-a-vis Craftsman or Mr. Zink, it is not correct with respect to this appellant corporation. The individual amounts paid to the employees—and I have already determined that they were not "loans"—totalled the amount regularly provided by Mr. Zink to 299144 and there is no evidence that the appellant corporation, or Mr. Watson in his role, had any part in the preparation of the "lists" or the "statements of earnings". Therefore, I find as a further fact that the role of this appellant corporation in this matter was no more than as an agent (perhaps not even that) carrying out the direction of either or both Craftsman or Mr. Zink. Under that set of circumstances the issue then becomes one of determining the responsibility that should be attached to that-role in this matter. Even if not as a "trustee", above, is 299144 responsible for deducting just as a "person-paying"?

It is difficult to imagine a taxpayer who could be held liable to "remit" if it is determined that the taxpayer had not deducted, nor was required to deduct. 299144, as I see it, may be liable for nothing more than the penalty of ten per cent on the amount at issue and then only if 299144 had been the "person paying . . . salary or wages or other remuneration" In effect, even to hold 299144 liable for the ten per cent penalty, it must be shown that this appellant filled a role at least equivalent to that filled by Coopers & Lybrand in that case. And even in that case Coopers & Lybrand was held to be liable only for the ten per cent penalty, on the amount they should have deducted from what was termed the "net pay" for the employees. In effect, in Coopers & Lybrand, supra, the "net pay amounts" actually became the "gross pay amounts" in the hands of Coopers & Lybrand since that is all they ever actually received from the Mercantile Bank—but even from that they should have made appropriate deductions according to the judgment.

I have already agreed that the individual amounts at issue were “wages” and that the individuals paid were "employees"—and that in the eyes of counsel for the respondent seemed to be enough to hold this appellant 299144 liable—on the basis of subsection 153(1) of the Act alone. I do not agree. On page 375 (D.T.C. 6287) of Coopers & Lybrand, supra, there is the following comment— and I do not take it to be simply obiter dicta:

The payment of the amounts, which I have concluded were wages, was a result of a decision taken by the respondent in complete awareness of all the circumstances and carried out under its express directions. Even if it be assumed that the bank concurred in the payments being made the person causing them to be made was the respondent.

The attendant circumstances lead to one conclusion only that the respondent was the person paying wages to employees, and consequently coming within the ambit of section 153.

[Emphasis added.]

The technical situation here was analogous—at best—to the circumstances found by the learned justices in Coopers & Lybrand, supra. 299144 had a limited, predetermined role to play, and was provided—exactly the same as in Coopers & Lybrand, supra, with funds equalling the total of the net cheques it was to pay according to instructions. It is a rather easy extension of the evidence to assert that Mr. Watson knew or should have known that these net amounts to be paid represented something akin to wages and that point was implied in cross-examination and argument by counsel for the respondent. However, when faced with the direct question by the Court, counsel did not so contend:

His Honour—you are saying that Mr. Watson or his company, that's the appellant, knew or should have known that these were wages.

Mr. Funnell —I'm not saying anything about knowing. That's not in the Act.

(Counsel then reverted to the point regarding subsections 153(1.3) and 153(1.4) which I have already rejected.) Even if Mr. Watson had so known, that is still some considerable distance removed from arguing that 299144 should be responsible for the deductions involved—deductions as calculated by the respondent if made at all—were made at a time prior to the list of payments and the relevant funds being provided to 299144. I say (above) “if they were made at all” because I regard it quite beyond the mandate of this Court in this appeal to even examine that particular question, even though there is some evidence on the "statements of earnings" submitted and in the testimony provided for the respondent by Mrs. M. Watson that deductions had been made—and I can only assume under the control of Craftsman.

In Coopers & Lybrand, supra, the Bank of Nova Scotia (as the paying facility used by Coopers & Lybrand) did all the calculations necessary for the total hours worked, from deductions to net pay cheques—including providing an earning statement along with the net cheque to each employee. The judgment reads however in a manner which I interpret to mean that the actual funds provided to the Bank of Nova Scotia, on orders from Coopers & Lybrand, was for the aggregate of the net pay amounts only, and I quote from page 371 (D.T.C. 6283):

No part of the amount which the Bank of Nova Scotia had calculated to be deductible from the pay of each employee for income tax for the final pay period was ever segregated and no one holds any funds which it is admittedly payable or alleged to be payable.

Under that set of circumstances Coopers & Lybrand were not held to be liable for the income tax deductions themselves, sought by Revenue Canada, nor even for the penalty on the deductions calculated from the original "gross" amounts by the Bank of Nova Scotia, but only for the penalty to be imposed on deductions which the Court held should have been made even from the net pay amounts, made available in actual funds to the Bank of Nova Scotia. As I read that conclusion, the role of the Bank of Nova Scotia as calculator of the gross pay, deductions and net pay, as provider of the statements of earnings, and as payer of the net wages did not enter into the equation—all being performed as some form of agent, or at least under the direction of Coopers & Lybrand. The Mercantile Bank (in Coopers & Lybrand, supra) as the debenture holder, provided to the Bank of Nova Scotia ”. . . the amount of money . . . which was the net amount after deductions which the employees together would have received for the final pay of the period”. On page 375 (D.T.C. 6286) of that judgment it is stated: ”. . . the respondent [3] of its own accord and solely on its own judgment initiated the steps which resulted in making payment to each employee . . .”.

As noted earlier, on the same page, the terms of the debenture worked "to exonerate the Bank [4] from any acts of its Receiver-Manager" (the restricted role filled by Coopers & Lybrand). It seems quite possible that had Coopers & Lybrand requisitioned from the Mercantile Bank the gross amount of the wages rather than the net amount to be paid to the Bank of Nova Scotia, for further payment to the employees, and in turn had the Bank of Nova Scotia made the remittances of the calculated deductions, there would not have been a problem with Revenue Canada.

Turning now to apply the analysis up to this point to the circumstances in this case, I would refer back to a comment made to counsel (above) before argument, that the Court rejected the point that the amounts at issue were somehow "loans or advances", but that the Court was willing to hear from counsel what definition or description should be attached to them. In my opinion, nothing was advanced by either party which would conflict with the view that the amounts were in reality "wages" and that the payees were indeed "employees". But in the Coopers & Lybrand case, supra, the Court noted as follows on page 375 (D.T.C. 6287) and I repeat the quotation:

The payment of the amounts, which I have concluded were wages, was a result of a decision taken by the respondent in complete awareness of all the circumstances and carried out under its express directions. Even if it be assumed that the Bank concurred in the payments being made the person causing them to be made was the respondent.

The attendant circumstances lead to one conclusion only that the respondent was the person paying wages to employees and consequently coming within the ambit of Section 153.

[Emphasis added.]

In order to reach the same conclusion as that in Coopers & Lybrand, supra, I too must determine that the two critical facts--that the amounts at issue were "wages" and that the payees were "employees" were clearly within the knowledge and understanding of the appellant corporation. That I am unable to do.

I refer back again to the quotation involving the Court and counsel for the respondent in this matter, touching on precisely that point (above). Irrespective of counsel's reluctance to press that point too directly, in my view, it would be possible on the evidence and testimony to conclude that Mr. Watson, as the president and sole shareholder of 299144, knew that the payees were employees of Craftsman—I do not think his previous experience with that company and the familiarity he had with both its operation and its employees would have permitted him any other determination—and in fairness to him he did not reject that assertion. However, it cannot be said, on the balance of probabilities, that he was aware the amounts were "wages"—hence the reluctance of counsel for the respondent, as I see it. It might well be regarded as the height of naivety and even absurdity that Mr. Watson would cause his company to perform the functions it did for Craftsman or Mr. Zink with the limited knowledge he asserts, and without any documentation, direction or formal arrangement so to do detailing the circumstances, authority and responsibilities. However, he contends that he did just that out of regard for Mr. Zink and out of his desire to be of any assistance possible in sustaining the operation.

As I see it, the role played by 299144 in this matter was even more innocuous than that of the Bank of Nova Scotia in Coopers & Lybrand, supra, recognizing that it was not the Bank of Nova Scotia assessed by Revenue Canada in that matter. Clearly in that case, the Bank of Nova Scotia performed all the functions inherent in payroll activity under review—it would have been virtually impossible for the Bank of Nova Scotia to conclude that it was doing anything other than dealing with “wages” for "employees". Coopers and Lybrand, on the other hand, in defence of their position asserted that the payments were "gratuitous benefactions" (page 372 (D.T.C. 6284))—a claim rejected by the learned justices. In Coopers & Lybrand, supra, in reaching the conclusion they did, the Court noted on page 373 (D.T.C. 6285): "The information slips which accompanied each payment . . ., and that the payments were made to each employee ”. . . by the Bank of Nova Scotia . . .” (page 370 (D.T.C. 6283)). [Emphasis added.] Accordingly, as I read the judgment, the “information slips” detailing the deductions accompanied the net cheques, and both were supplied to the employee by the Bank of Nova Scotia. That is a critical missing link in this appeal. The evidence available to the Court is that neither before, during, nor after the signing of the individual cheques in this matter did Mr. Watson have any part in the calculation of the amounts or in the provision of that information to the employees. Although the direct evidence is limited indeed, as far as could be ascertained the employees in fact received two cheques and two statements of earnings each pay period in this matter. One set—cheque and "statements of earnings" was represented by Craftsman as "wages", and the other set as the basis for the so-called "loan". Only the one cheque from 299144 for each employee (allegedly for a "loan") was within the ambit of this appellant.

In the end analysis, none of the amounts in the assessment as struck against 299144 can be sustained. As determined earlier, there is no basis for asserting that the appellant corporation made the deductions (from gross wages) implied by Revenue Canada in the main part of the assessment. That liability would have required circumstances more consistent with the case of Deloitte Haskins & Sells, supra, with 299144 having the authority, the responsibility and the conduct consistent with virtually adopting the role of an employer. I am quite aware that an employer-employee relationship is not required in order that the payor be held liable for making and remitting deductions—see Coopers & Lybrand, supra, at page 372 (D.T.C. 6284):

The appellant [5] submits that to meet the requirements of the Income Tax Act it is not necessary that there exist between the recipient of the payments and the payor an employee/employer relationship.

I agree with this submission.

And on page 377 (D.T.C. 6288):

In the light of the evidence, I am of the opinion that the respondent's default was in not making deductions for income tax rather than in failing to remit any amount actually deducted. Accordingly its liability is under section 227(8)—that is, 10% of the amount it failed to deduct.

Summary

In this matter, the “person-paying . . . salary or wages or other remuneration . . .” was not the appellant corporation. It was Craftsman or Mr. Zink perhaps, but that is not before the Court. In Coopers & Lybrand, supra, had the learned justices reached the conclusion that some "person" other than Coopers & Lybrand had been "paying", then Coopers & Lybrand would not have been held liable for not deducting. The "other" might have been the Bank of Nova Scotia—and, again, had the Court therein so decided, the result would have been to dismiss the charge against Coopers & Lybrand. In this appeal, as I have earlier noted, there is considerably less evidence to connect 299144 to the "paying . . . of salary or wages or other remuneration . . .” than there was in Coopers & Lybrand (above) for the Bank of Nova Scotia. I read Coopers & Lybrand, supra, to indicate that it is a minimum requirement that the payor should comprehend that the amounts being paid out by him do represent "salary or wages or other compensation", not merely that he is discharging some different obligation to the payee—which obligation is not a form of "compensation". While subsequently proven (in this appeal) to be an incorrect understanding of the matter, it was the view of this appellant, at the time the payments were made, that they represented some form of loans.

Before closing, I should say a word about the judgment in Deloitte Haskins & Sells, supra. Above, I have already decided this appeal—and allowed it because I do not find that these circumstances are circumscribed even by the very stringent parameters for limited responsibility outlined in Coopers & Lybrand, supra. Accordingly, it would be virtually impossible that this appellant should be found liable, not only for the ten per cent penalty determined in Coopers & Lybrand, supra, but for a larger role encompassing the actual deductions themselves. In Deloitte Haskins & Sells, supra, it was held that the deductions at issue actually had been made— by Deloitte Haskins & Sells, even though as in Coopers & Lybrand, supra, an intermediary (in Deloitte Haskins & Sells, supra, Comcheq Services Ltd.) had done the physical work of payroll calculation and preparation. It was clear to the learned justices in Deloitte Haskins & Sells, supra, that Comcheq played a role not dissimilar to that held by the Bank of Nova Scotia in Coopers & Lybrand, supra. But the learned justice reasoned there were four (as I read them) distinct differences which warranted him determining that matter (Deloitte Haskins & Sells, supra) in a manner different than Coopers & Lybrand, supra,—page 433 (D.T.C. 5229):

— the receiver—appointed by the Court

— given a broad mandate to preserve and protect the business

— guaranteed access to a one million dollar line of revolving credit

— could borrow and expend in their absolute discretion

[Emphasis added.]

In effect, therefore, it was held in Deloitte Haskins & Sells, supra, that the appellant not only had the right to withhold from gross pay, but in fact did so- granted through its intermediary (Comcheq above). None of these factors apply in the situation of 299144 as I see the circumstances.

The assessment against this appellant cannot be supported. The appeal will be allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to costs.

Appeal allowed.