Electrocan Systems LTD v. Minister of National Revenue, [1984] CTC 2349, 84 DTC 1292

Rip, TCJ:—These are appeals from assessments dated October 14, 1981, November 15, 1981, January 26, 1983 and March 30, 1983 in which the respondent, the Minister of National Revenue, assessed the appellant, Electrocan Systems Ltd (“Electrocan”), penalties pursuant to subsection 227(9) of the Income Tax Act (‘‘Act’’) for failing to remit amounts deducted or withheld as required by subsection 153(1) of the Act and subsection 1 of section 108 of the regulations to the Act. The appeals were heard together under common evidence.

At all relevant times Electrocan carried on business as an electrical contractor in Vernon, British Columbia. During the months of June 1981, September 1981, October 1982 and January 1983, Electrocan withheld from salaries, wages or other remunerations paid to its employees such amounts determined by the regulations to the Act in accordance with paragraph 153(l)(a). The appellant at the time had “cash flow problems” and the amounts so withheld were remitted to the Receiver General for Canada after the dates they were required by subsection 1 of section 108 of the regulations to be remitted.

Because the amounts withheld under paragraph 153(l)(a) were not remitted to the Receiver General for Canada on or before the 15th day of the month next following the month in which the amounts were withheld, the respondent assessed penalties against the appellant pursuant to subsection 227(9) of the Act in amounts equal to 10 per cent of the amounts so withheld and not remitted on time. However the amounts withheld were remitted to the Receiver General for Canada before the assessments were issued.

The relevant provisions of the Act, paragraph 153(l)(a) and subsection 227(9), 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 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.

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

(a) an amount deducted or withheld as required by this Act or 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).

In the appellant’s view subsection 227(9) does not impose a penalty if the amount withheld is remitted to the Receiver General for Canada before the issuance of an assessment of a penalty under that subsection, notwithstanding that the amount has not been remitted by the date required by subsection 108(1) of the regulations to the Act. Counsel for the appellant also argued that the penalty imposed by subsection 227(9) is not 10 per cent of the amount withheld and not remitted, but is the aggregate of 10 per cent of the amount withheld and not remitted, the actual amount withheld and not remitted and interest on such amount. The appellant claims if a taxpayer remits the amount withheld after the date required to do so but prior to the assessment imposing the penalty he is in a worse position than a taxpayer who has remitted none of the amount withheld, since in the latter case the taxpayer would be assessed a penalty equal to the aggregate of 10 per cent of the amount withheld, the amount withheld and interest thereon, while in the former case the taxpayer would be liable for a penalty in the aggregate amounts he says are imposed under subsection 227(9) plus the amount he remitted before the assessment was issued, thus paying a sum equal to the amounts withheld two times; the taxpayer who had remitted nothing before the assessment is by virtue of the penalty assessed, according to counsel for the appellant, relieved from remitting any amount under paragraph 153(l)(a).

Counsel for the appellant argues that the words “as required by this Act or a Regulation” in paragraph 227(9)(a) modify the words “an amount deducted or withheld” and not the words “failed to remit or pay” in the opening line of the subsection. Thus, in his view, no penalty is assessable under that subsection if a remittance is not made on the date described by subsection 108(1) of the regulations to the Act if the amount is remitted before the issuance of an assessment.

In the respondent’s view the appellant did not remit the amount withheld at or prior to the time required under paragraph 153(l)(a) and section 108 of the regulations to the Act and therefore, pursuant to paragraph 227(l)(a), [sic] a penalty equal to 10 per cent of the amount withheld is to be assessed against the taxpayer. Counsel for the respondent stated the penalty is only 10 per cent of the amount withheld and not the aggregate of the amounts set forth by opposing counsel. In fact, the appellant was assessed a penalty of 10 per cent of the amount withheld.

The appellant relies on the reasons for judgment of the Federal Court of Appeal decision of The Queen v Coopers and Lybrand, [1980] CTC 367; 80 DTC 6281, at 376 [6287] where Kelly, DJ reviews subsections (8) and (9) of section 227, as follows:

Section 227 deals with two distinctly different defaults by persons paying wages. First, the failure to deduct and, second the failure to remit the amount deducted. The liability imposed in each of these instances is more easily understood if one keeps in mind that when a deduction for income tax is made from wages the employee is deemed to have received, as wages, the amount deducted and is accorded credit for the amount deducted as an instalment on account of the income tax to become due with respect to his income.

If the person paying fails to deduct, his failure has no effect on the liability of the employee for income tax it being assumed that the taxing authority will recover from the employee the full amount of the income tax; the only liability incurred by the person paying the salary or wage is a penalty calculated as a percentage of the amount he failed to deduct.

On the other hand, if a deduction is actually made and the amount deducted not fully remitted the person making the deduction becomes liable to the collector for the amount the employee is deemed to have received as his salary and credit is given to the employee on account of income tax for an amount equal to the amount deducted. In this latter event, the liability of the person paying, over and above the 10% penalty which may be assessed on account of his default in remitting is an amount equal to the deductions he had failed to remit together, with interest thereon.

Counsel for the appellant says that according to Mr Justice Kelly an employer who does not deduct or withhold amounts required by the Act is only liable to a penalty of 10 per cent of the amount he ought to have deducted and withheld. With this statement I agree. But counsel for the appellant also interprets Mr Justice Kelly’s words to mean that an employer who does deduct and withhold, but does not remit the amount so deducted and withheld, is liable to a penalty equal to the aggregate of 10 per cent of the amount withheld, an amount equal to the amount withheld plus interest, and in the circumstances of this appeal his client would be subject to payment of the amount withheld twice.

In my view Mr Justice Kelly’s statement is of no assistance to the appellant. Mr Justice Kelly explains the mechanics of subsections 227(8) and (9). Firstly, subsection 153(1) imposes an obligation to an employer to deduct and withhold from salary, wages or remuneration paid to his employees amounts prescribed and remit such amounts to the Receiver General for Canada at such time as set out in the regulations to the Act on account of the employee’s tax for the year. If the amounts are deducted and withheld and remitted on time no assessment is made. Subsection 227(8) imposes a penalty on the employer if he fails to deduct and withhold such amount; the penalty is equal to 10 per cent of the amount he was to have deducted and withheld. The taxing authorities will recover the amount that ought to have been deducted and withheld from the employee when he pays his tax for the year.

But subsection 227(9), which could have been drafted with greater clarity, applies when the amounts have been deducted and withheld by the employer but not remitted to the Receiver General for Canada. Once the amounts have been deducted or withheld, the employee is deemed to have paid tax equal to the amount withheld and the employer becomes liable to pay the amount withheld to the Receiver General for Canada. The employer is deemed by subsection 227(4) to hold the amounts deducted and withheld in trust for the Crown. The taxing authorities have no action against the employee; they must look to the employer. If the employer does not remit on time the amount withheld he is liable to be assessed a penalty of 10 per cent of the amount deducted and withheld or $10, whichever is greater; in addition the employer is assessed the amount deducted and withheld plus interest on that amount. (The Minister’s power to assess is found in subsection 227(10)). That is all subsection 227(9) states. The penalty does not double up the amount deducted and withheld; if an employer has not remitted the amount deducted and withheld on time, but does so later, but before an assessment is issued, he is simply cutting short the running of interest. He does not have to pay the amount deducted and withheld a second time.

As far as the wording of subsection 227(9) is concerned, while I have previously indicated that paragraph is not as clear as it might be, one may reasonably conclude without too much difficulty that the words “as required by this Act or regulation’’ modify the words “remit or pay’’ the amount deducted and withheld and the remittance or payment must be complied with at the times required by the Act and its regulations. Subsection 227(9) imposes a penalty if the amounts are not remitted at the time required by section 108 of the regulations to the Act.

Appeals are dismissed.

Appeals dismissed.