Graphic Realm Limited v. Minister of National Revenue, [1983] CTC 2422, 83 DTC 369

Guy Tremblay:—This case was heard on November 4, 1982, at the City of London, Ontario.

1. The Point at Issue

The point at issue is whether the appellant company is correct in contending that during the taxation year 1980 it was not obliged to make the deductions at source on the wages paid to the employees of 433387 Ontario Limited because it was only an agent of the latter, and there was no employer-employee relationship between the appellant and the persons to whom it paid wages.

The respondent contends that the appellant was the payor, and that is sufficient to meet the requirement of the Act. Moreover, the respondent imposed a penalty for having made the deductions and not having reimbursed the Department of National Revenue.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the facts are described in the reply to notice of appeal as follows:

6. The assessment was made on the basis of the following assumptions of fact:

(a) the facts hereinbefore admitted; (the facts admitted are those described in

paragraphs 1 to 7 of the Notice of Appeal. They are quoted in para 3.01 below)

(b) from on or about February 22, 1980 to in or about September 1980, the Appellant paid the salary and wages of the employees of Business World Publication;

(c) in particular the Appellant paid salary or wages to certain employees and deducted inter alia, amounts on account of income tax totalling $1,935.30 as set out below:

Employee	Dates	Gross	Tax Deducted
Beverley Balog	Mar 21/80 —	14 X $360	14 X $44.35
	Sept 19/80	$5,970	$620.90
Brian Kibbler	Mar 21/80 —	11 X $326.92	14 X $44.35
	Aug 22/80	$4,951.12= $396.00
Gabriella Gordon	Mar 21/80 —	14 X $440	14 X $65.60
	Sept 19/80	= $7,400	= $918.40
			$1,935.30

(d) all of the above-noted payments (except possibly the September 19 payments) were made by the Appellant directly by cheques drawn on the Appellant’s own bank account at the Bank of Nova Scotia in London, Ontario;

(e) none of the amounts deducted as income tax from the payments made as described in subparagraph (c) hereinabove were remitted to the Receiver General of Canada;

(f) from in or about February 22, 1980 to in or about September 1980 the Appellant has assumed responsibility for paying the salary or wages of the employees of Business World Publication and indeed, had control over the income receipts and disbursements of the said business.

3. The Facts

A. Admission

3.01 The facts described in the notice of appeal in paragraphs 1 to 7 were admitted by the respondent and they read as follows:

1. Graphic Realm Limited (hereinafter referred to as “Graphic Realm”) is a company incorporated pursuant to the laws of the Province of Ontario and carries on business as a Lithographer and Printer in the City of London, in the County of Middlesex.

2. 433387 Ontario Limited (hereinafter referred to as “433387”) is a company incorporated pursuant to the laws of the Province of Ontario, having its head office in the City of Cambridge, in the Regional Municipality of Waterloo, and carries on business aS a magazine publisher under the firm name and style of “Business World Magazine”, registered in accordance with the Corporations Information Act, SO 1976.

3. Advertising World Speciality House Limited (hereinafter referred to as “Advertising World”) is a corporation incorporated pursuant to the laws of the Province of Ontario, and was the predecessor corporation to 433387, and prior to January, 1980, carried on the business of publishing the magazine “Business World”.

4. At all material times, the sole shareholder and director of 433387 was Harold Mason, who was also the holder of the registered trademark “Business World”. At all material times, the editor and publisher of “Business World”, and the general manager of both Advertising World and 433387 was Ronald Mason, the son of the said Harold Mason.

5. In December, 1979, Graphic Realm printed the December, 1980 issue of Business World Magazine for Advertising World. A publication of Business World Magazine was assumed from Advertising World by 433387 in January of 1980, and Graphic Realm continued to print the various issues of the said magazine up until the fall of 1980.

6. In late February, 1980, 433387 encountered serious financial difficulties, and was unable to meet its obligations, not only with respect to its substantial printing account, but also with respect to its operational expenses including salaries and wages.

7. The account of Graphic Realm with respect to a portion of its printing services had been secured by an assignment of book debts dated the 12th day of December 1979 from 433387, together with personal guarantees of Harold and Ronald Mason.

3.02 In the course of the trial, paragraph 8 of the notice of appeal was also admitted by the respondent and this paragraph reads as follows:

8. Graphic Realm demanded further security for the balance of its printing account as a condition to continuing to print the magazine. In late February and early March, 1980, the parties entered into negotiations of an agreement which would provide, inter alia, as follows:

(a) Invoices with respect to advertising placed in Business World Magazine were to be paid in favour of 433387, but advertisers were directed to forward their payments to the address of Graphic Realm in London, Ontario.

(b) 433387 was to open and maintain a bank account with a branch of the Canadian Imperial Bank of Commerce in London, in which all such payments would be deposited.

(c) All expenditures of 433387 were to be approved by Graphic Realm, and were to be made from time to time as funds accumulated in the above-noted bank account, which expenditures would include the account of Graphic Realm.

(d) 433387 would enter into a general assignment of book debts in favour of Graphic Realm, and both Harold Mason and Ronald Mason would personally guarantee all outstanding liabilities of 433387 to Graphic Realm.

3.03 The counsel for the appellant admitted at the beginning of the trial the material facts and the quantum of the figures given in the assumptions of fact described in subparagraphs (b), (c), (d) and (e) of paragraph 6 of the reply to notice of appeal cited in paragraph 2.02 above. In those subparagraphs, the counsel for the appellant denied any affirmation to the sense that the appellant had an employer-employee relationship with the three persons named in subparagraph (c), and that the appellant had to make deductions on salaries, and make remittance to the respondent. Subparagraph (f) was denied.

B. Testimony

3.04 Mr Graham Rendall, President of the appellant compnay, in his direct examination testified that:

(a) Dr Mason and Ronald Mason were directors and officers of 433387 Ontario Limited;

(b) in February 1980 because of numerous financial problems, the numbered company 433387 owed the appellant around $16,000. In view, among others, of protecting its own receivable account, the witness sent a nine-point letter dated February 15, 1980, which was a tentative agreement with the numbered company. It was Exhibit A-1 and it reads as follows:

The arrangement with Business World Publication will work only if the following arrangements are made:

1. The bank account and all accounting records are located in London, Ontario with full control and signing authority we vested with Graham Rendall.

2. All invoicing for advertising be done by the Kitchener’s office of Business World and all completed invoices along with 1 copy of the publication be forwarded to London. The copy of the publication must have a cross reference beside each advertisement to an invoice number. This will assist the people in London to ensure that all advertisements are invoiced to the advertiser. This must be done monthly.

3. All advertisements in each publication must be at the rates established. Any deviation from the established rates must have the prior approval of Mr Graham Rendall.

4. Arrangements must be made to ensure that Graham Rendall and Ron Mason meet on a regular basis to discuss problems, progress etc, of the magazine. By regular, I visualize at least once per week.

5. All purchases made by the Business World Publications must be by way of a Purchase Order, authorized and counter-signed by Mr Graham Rendall.

6. Mr Mason must sign a waiver which in effect makes it impossible for him to enter into any contracts or liabilities on behalf of Business World Publications. In effect Mr Mason is not to be in a position to incur any unauthorized expenditures in excess of $200.00. All must be authorized by Mr Graham Rendall.

7. All money from the factoring company or invoiced amounts to be paid to the Publications must be forwarded direct to London to be deposited intact in the Company’s London bank account.

8. Monthly financial statements will be prepared for the Publication and a comparison of the actual income and expenses will be compared to the projected income and expenses for the same time period. These will be scrutinized very carefully and any deviation must be dealt with to make up the difference in the following month. It is essential that these projections be met on a monthly basis.

9. Business World must prepare a list of all the liabilities owed by the company (new company) but not paid as at the date. Any liabilities NOT listed will NOT be honoured by the Company and will then become the personal responsibility of Mr Ron Mason.

3.05 Following this agreement, a bank account was opened in March 1980 at the Canadian Imperial Bank of Commerce in London, Ontario, in the name of the numbered company. The account number was 71-11517. It was in full control of the witness, Mr Rendall. All the amounts to be paid to the numbered company had to be deposited in the said bank account. The deposit book of the said bank account was filed as Exhibit A-3. One can see the deposits starting March 20,1980 and ending September 10, 1980, and on the deposits, one can see the initials of Mr Rendall or Cathy, the bookkeeper.

3.06 Following the tentative agreement (Exhibit A-1), the counsel for the appellant prepared a formal agreement dated April 30, 1980 filed as Exhibit A-2. This formal document was never signed by the Masons despite the fact that the Masons first agreed; however, after it was drawn, they did not want to sign it anymore (SN pp 14-15).

3.07 Despite the fact the formal agreement was not signed, and, in fact, many things were made pursuant to the verbal agreement which in substance was in the letter of February 15, 1980 (Exhibit A-1) including the bank account at the Canadian Imperial Bank of Commerce (para 3.05), it is in the said bank account that the payments of the advertisers were deposited. These payments were made in favour of the numbered company to the address of the appellant in London. Concerning the said bank account, the required by-law and resolutions on the bank forms were filed as Exhibit A-4. They all are dated June 28, 1980 and duly signed by Mr H Mason of 433387 Ontario Ltd (SN p 18).

3.08 The T-4 and T-4A concerning the three employees, Gabriella Gordon, Brian Kibbler and Beverly Balog, in respect of the 1980 taxation year were filed as Exhibit A-5. One can see the name of the appellant as the employer. Those documents were prepared by an employee of Kitchener district income tax office (SN pp 19-20).

3.09 As part of the verbal agreement Mr Mason, concerning the payment of accounts of Business World Magazine, presented to Mr Rendall a list of the amounts that were required to be paid in order to satisfy the creditors of the numbered company. Mr Rendall went over that list of creditors, cut some of them depending on the circumstances, made the cheques out and gave them to Mr Mason who distributed them to the necessary creditors (SN p 21).

3.10 The proceeds from the advertisers that were held in the bank account 71-11517, were insufficient to meet the operational expenses of the numbered company, much less the printing account. At the request of R Mason, the appellant advanced funds to the company in order to enable it to continue its operation. Over the period of February 22 to August 31, 1980, from time to time, funds were transferred from the said bank account to the appellant (SN p 21).

3.11 As Exhibit A-6 was filed a list of creditors dated March 3, 1980 including back payroll; they totalled $4,347.99. It is indicated that they were paid (SN pp 22 to 25). As Exhibit A-7 was filed a list of wages payable for the weeks starting June 13 and June 27, 1980. As Exhibit A-8 was also filed another list of accounts payable totalling around $6,800 including $1,800 in commissions due to Kristina Msyk, the commissioned salesperson (SN pp 25-26). The amounts paid as salaries were the net amounts after the subtraction of the deductions at source. Mr Mason was supposed to take care of this.

3.12 As Exhibit A-9 was filed a two-page list of amounts to be paid to different persons including the employees. It was dated July 25, 1980. On this document which was prepared by Mr Mason there was a note concerning the employee, Mr Brian Kibbler:

“I’m not paying Brian he is on 2 weeks holiday’s.” The appellant did not pay Brian Kibbler because . . he (Ron Mason) never instructed me to pay him. It’s only what’s on the list that I was giving him cheques for” (SN pp 26-27).

3.13 Attached to the list was a projection of expenses and revenue of Business World Magazine for August 1980 — expenses $11,833.99, revenue $10,150.49 for a loss of $1,683.50 (SN pp 27-28).

3.14 The forecasts for September 1980 (loss $6,622.31) and for October 1980 (loss $8,902.19) were filed as Exhibit A-10 and A-11, to which were attached the list of accounts payable (SN pp 28-29).

3.15 The cash disbursement journal “keeping track of what was going on with Business World” from March 5, 1980 to August 31, 1980 was filed as Exhibit A-12. It was prepared by Mr Rendall’s secretary. This document contained the list of all cheques that were written on the account of Business World Magazine. There were also entries to payroll cheques. The amounts listed in Exhibits A-6 and A-7, etc paid to the employees from March to August 1980 were traced in Exhibit A-12 (SN pp 31 to 33).

3.16 Mr Rendall said he had no control or supervisory authority over the three employees to hire them. He never saw two of them. He saw the other one only on two occasions. They were working in Kitchener and the appellant company was in London. They were employed by Advertising World (SN pp 34-35).

3.17 Concerning the deductions from the salaries, the appellant was not instructed to deduct anything.

3.18 In cross-examination, Mr Rendall recognized that the appellant signed an agreement dated December 12, 1979 with Advertising World Specialty House Corporation (Exhibit R-1). In this document, it appears that the said corporation owed the appellant $16,000. It is agreed, however, “to continue to bind and box the December, 1979 issue of Business World Magazine upon receipt of the following securities’, on the guarantee of the two Masons and of the numbered company, a general assignment of book debts of the numbered company, etc (SN pp 39-40). This is admitted in paragraph 7 of the notice of appeal quoted above.

3.19 On December 13, 1979, another agreement (Exhibit R-2) was signed between the same two companies to agree that the accounts payable of the appellant would be paid by monthly payments of $1,000.

3.20 In consequence of the Agreement R-1, the advertisers of Business World Magazine received a notice to pay to the appellant all debts owing by them to 433387 Ontario Ltd and Business World Magazine Specialty House Corporation (Exhibit R-3).

3.21 Mr Rendall admitted that if the appellant company had not helped the numbered company, the latter would have been a bankrupt company. The appellant’s interest in keepting it afloat was to eventually get its $16,000 back.

3.22 Mr Rendall also admitted that the money used to pay the payroll came from Graphic Realm Ltd’s bank account at the Bank of Nova Scotia in London. However, 4 to 6 cheques were made from the bank account 71-11517 at the Canadian Imperial Bank of Commerce to the Graphic Realm Ltd’s bank account.

3.23 In re-direct examination, Mr Rendall said that Mr Mason told him concerning the deductions that “it was being taken care of at Kitchener”.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are 153(1 )(a), 227(8), 227(9) and 227(10). They read as follows:

153. (1) Every person paying

(a) salary or wages Or other remuneration to an officer or employee,

at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on account of the payee’s tax for the year under this Part.

227. (8) 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

(a) 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, or should have been deducted or withheld under section 215 from an amount that has been paid to a person not resident in Canada, 10% of the amount that should have been deducted or withheld, and

(b) in any other case, the whole amount that should have been deducted or withheld,

together with interest thereon at a prescribed rate per annum.

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 subsection 116(5) 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).

227. (10) The Minister may assess any person for any amount payable by that person under Part XIII, this section or section 235 and, upon his sending a notice of assessment to that person, Divisions I and J of Part I are applicable mutatis mutandis.

4.02 Cases at Law

The cases at law to which counsel for both parties referred the Board were:

1. Realty Projects (1957) Inc v MNR, [1979] CTC 2535; 79 DTC 511;

2. Canadian Pacific Hotels Limited v MNR, [1979] CTC 2370; 79 DTC 274;

3. Comité paritaire de l’industrie de l’automobile de Montréal et du district v MNR, [1980] CTC 2983; 80 DTC 1857;

4. The Queen v Coopers & Lybrand Limited, [1980] CTC 367; 80 DTC 6281.

4.03 Analysis

4.03.1 After studying the different cases, the Board arrived at the conclusion that the most appropriate one is the Coopers & Lybrand Limited, (supra), case decided by the Federal Court of Appeal in 1980. It is indeed the most recent one by the highest Court. This case is summarized as follows at 6281 of the DTC:

The taxpayer company was appointed receiver and manager of V Ltd under the terms of a debenture. The taxpayer decided to continue the business of V Ltd in order to repay the amount owing under the debenture. To maintain the goodwill of the employees of V Ltd, the taxpayer decided to distribute to them the net payroll accrued but not yet paid as of the date of the taxpayer’s appointment as receiver and manager. The debenture holder supplied funds for the net payroll and the taxpayer caused such funds to be paid to the employees. Each employee received his customary net pay, but none of the regular payroll deductions from gross pay were ever deducted or remitted to the federal tax department. The Crown assessed the taxpayer for failing to deduct and remit the appropriate payroll deductions. When the taxpayer’s appeal to the Federal Court — Trial Division (79 DTC 5273) was allowed, the Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was allowed. The Court found that the payees were employees and that the existence of an employer-employee relationship between the taxpayer and the payees was not required to fix liability on the taxpayer. The payments were in fact wages or salary paid by the taxpayer pursuant solely to its own decision and direction. The taxpayer failed to make the appropriate payroll deductions from the net payroll funds which were made available to it by the debenture holder. Accordingly, its liability was fixed at ten per cent of the amount it failed to deduct. The Crown’s appeal was therefore allowed.

After quoting paragraph 153(1 )(a), Mr Justice Kelly said that:

Three requirements must be met in order that liability may exist under that section.

(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.

Concerning the first requirement, he said that:

(1) Were the payees employees?

It is not denied by the respondent that the persons to whom payments were made were employees although the appellant does not allege that the respondent was at any time prior to September 25, 1976 the employer of the employees. The appellant submits that to meet the requirements of the Income Tax Act it is not necessary there there exist between the recipient of the payments and the payor an employee/employer relationship.

I agree with this submission. Under all the circumstances the persons who were employees of Venus on September 24, 1976 were employees within the meaning of section 153 and they are recognized as employees by the text of the resolution adopted on September 26; in fact the respondent has not seriously alleged otherwise.

The second question is not involved in the present case. It is really a salary, and not a gift as it is contended in the Coopers & Lybrand Limited case.

The third question is the most appropriate for the instant case and it reads as follows:

(3) Was the respondent a person paying wages or salaries to employees?

The position taken by the respondent before this Court was that it was not personally responsible for the act of paying the wages but that, being a receiver and manager it was acting on behalf of others; and that, under the debenture, it was the agent of Venus and incurred no personal liability in result of its activities in Causing to be made the payment of wages to employees.

After studying the facts of the case, he continued to say:

Having decided to circumvent these unwanted consequences of leaving the employees to realize their wage claims as best they could, the respondent of its own accord and solely on its own judgment initiated the steps which resulted in making payment to each employee of an amount equal to the amount of his or her earnings actually due. These payments would not have been made if it were not for the decision and direction of the respondent. Even if it be assumed that, so far as the respondent’s responsibilities to Venus were concerned, the relationship between the respondent and Venus was that of agent and principal, the payment to the employees of the amount equal to the amount indicated to be due and payable to them personally according to the payroll caculations for the final pay period was not an act of which Venus was capable at that time. All of its property had been in the possession of the defendant from 1:00 am, September 25. 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.

4.03.2 Applying those principles and the wording of section 153 to the facts adduced in the instant case, what is the conclusion?

First, it seems obvious that there was no employer-employee relationship between the appellant and the three persons, B Balog, B Kibbler, and G Gordon. The appellant indeed had no responsibility to them, no orders to give them, no control over their work. Mr Rendall practically never saw them (para 3.16).

4.03.3 Pursuant to Exhibit A-1 and the facts described in paragraphs 3.04(b), 3.18, 3.19 and 3.21, it also seems obvious that the numbered company had no choice not to constitute the appellant its agent because it would have become bankrupt, and that the appellant had no choice not to become the agent because it was the only way to try to get its $16,000 back. Moreover, the numbered company had no choice not to give to its agent the full control over everything (paras 3.09, 3.10, 3.11, 3.12, etc). The agent had the first control and the last decision.

All the accounts receivable had to be and in fact were received by the appellant who paid the expenses. It even advanced money to the numbered company during the year involved.

It is true that Mr Mason said to Mr Rendall concerning the deductions ‘it was being taken care of at Kitchener’’. But how was it possible to reimburse those deductions to the Department of Revenue, when it had no money to pay them? Even if Mr Mason had other businesses in Kitchener, the appellant knew that the numbered company had no other income than the accounts receivable cashed in the bank account at the Canadian Imperial Bank of Commerce in London.

The Board finds that the numbered company was in the same situation as Venus company in the Coopers & Lybrand Limited case. It was not capable in fact and in law either to pay the employee or to reimburse the deductions. The only capable person, in fact and in law, (after the agreement) was the appellant. It is true that Mr Mason said once: “I’m not paying Brian he is on 2 weeks holiday’s”. In substance, this was not his capability to pay, or an order to Mr Rendall, but only information given to Mr Rendall.

The Board concludes that the appellant company, in fact and in law, made the payment within the ambit of subsection 153(1).

4.03.4 Concerning the penalty, the appellant’s contention is to the effect that it did not make the deductions, and hence it is subsection 227(8) (quoted above) which applies with 10% of penalty on the amounts that should have been deducted with interest, and not subsection 227(9) which applies to the employer that has deducted and not remitted to the Department of Revenue and which provides 10% of penalty plus the amounts themselves not remitted with interest.

Pursuant to the evidence, can it be said that the appellant deducted or did not deduct the said amount?

Whereas the appellant, in fact, made the payment within subsection 153(1); whereas it was the only person that could pay and make the deductions (para 4.03.3); whereas the amounts paid to the employees were the net amounts computed after the deductions (para 3.11); the Board concludes that the deductions were legally made or withheld and that the assessment pursuant to subsection 227(9) is correct.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.