Temple v. R., [1997] 2 CTC 2678

Beaubier T.C J .:

This appeal was heard at Victoria, British Columbia on December 4, 1996 pursuant to the General Procedure. The Appellant testified. The Respondent called Russell Wolansky and Robert Allen, employees of Revenue Canada. The appeal is from assessments upon Mr. Temple for director’s liability for unpaid withholdings pursuant to section 227.1 of the Income Tax Act in respect to two corporations.

Assessment Number 7495 of the Appellant was withdrawn by the Respondent at the opening of the hearing. Nonetheless, it is important in relation to the remaining Assessment Number 7497 which was contested. Paragraphs 1-18 of the Notice of Appeal refer to Assessment Number 7495. The paragraphs admitted by the Respondent are italicized. They read:

Appellant

1. The Appellant resides at 611 Foul Bay Road, Victoria, B.C. V8S 4H2. Assessments

2. This Notice of Appeal relates to Assessment Number 7495 dated April 30, 1992 in the amount of $71,888.86, with respect to the Appellant’s 1990 Taxation year and to Assessment Number 7497 dated May 17, 1993 in the amount of $21,370.92 with respect to the Appellant’s 1991 Taxation year. Notices of confirmation were filed May 12, 1994. The balances presently owing are approximately $35,000.00.

Statement of Material Facts Re:#7495

3. At all times material hereto Anthony J.F. Temple was the sole director of DPD Management Ltd.

4. In 1989 DPD Management Ltd. had a contract with I toman Canada Inc. to provide construction management services on the renovations to the Harrison Hot Spring Hotel owned by J toman.

5. In August 1989 a contractor providing millwork, Shirlar Holdings Ltd., could not meet its payroll and a Receiver threatened to seize all work in progress.

6. Itoman had an unremovable deadline of October 29, 1989 for completion. A new contractor could not be found to meet that deadline. Itoman therefore decided to keep Shirlar’s men on the job by paying them directly.

7. Itoman, DPD, and Shirlar agreed that the money due on the Shirlar contract would be used to pay suppliers and workmen directly. DPD was to supervise the completion of the Shirlar work.

8. DPD agreed, as construction manager, to receive the money from Itoman and to write cheques as agents for Itoman. DPD opened up a trust account to handle the money and payments. DPD thus paid suppliers and the payroll of the workers.

9. Shirlar advised DPD that it had a credit with Revenue Canada to cover withholding remittances.

10. At no time did DPD employ labour for the Shirlar contract, prepare the payroll for the workers, or vouch for the accuracy of the information, other than to confirm the hours worked and the delivery of materials.

11. DPD contacted Revenue Canada to confirm that no withholding taxes were due from Shirlar, at which time Revenue Canada advised that Shirlar had gone into receivership and that an audit was required.

12. An audit was conducted by Revenue Canada and in March 1990 DPD was advised that there was an approximate liability of $63,000 and that DPD was liable as the “deemed” employer of the workman.

13. In March 1990 DPD contacted Itoman about the audit results. The last invoice on the Shirlar work was due and payable and DPD requested payment of that in order to pay Revenue Canada. At first Itoman agreed, then refused, because the Trustee in Bankruptcy of Shirlar had filed a lien on the property.

14. DPD then sought legal counsel to pursue Itoman for the balance payable.

15. In mid 1992 the Supreme Court of British Columbia ruled that DPD was not a party to the original contract between Itoman and Shirlar and therefore could not sue on it — even though no one else was claiming as creditor of the money.

16. In August 1993 the B.C. Court of Appeal ruled that DPD was entitled to the money as part of a tri-partite agreement made by Itoman, Shirlar and DPD and the money was payable in order to satisfy the liability to Revenue Canada.

17. Prior to proceeding with the Appeal, counsel for DPD talked to Revenue Canada about DPD’s legal costs of pursuing this money in order to pay Revenue Canada. Revenue Canada agreed that DPD’s costs could be deducted from the recovery. Full details of the legal expenses were provided to Revenue Canada.

18. As a result, from the Judgment of $90,410.92, $63,370.98 was forwarded to Revenue Canada.

The paragraphs quoted are correct, subject to the following: In respect to paragraph 12, the evidence is that the workers were employed by Shirlar and paid by Itoman. In respect to paragraph 17, the letter by Revenue Canada to labour, Sudeyko, Stewart, the solicitors for DPD (Exhibit R-7) dated August 17, 1993 agrees that the lawyers can deduct their contingency fees from the recovery, but does not make Revenue Canada liable for the fees themselves.

Revenue Canada assessed DPD because it was writing the cheques from a trust account into which Itoman deposited money for disbursement to Shirlar’s employees. DPD sued Itoman to recover the funds required for Revenue Canada. [DPD Management Ltd. v. Itoman Canada Inc. (March 30, 1992), Doc. New Westminster C911120 (B.C.S.C.)] On the appeal, the British Columbia Court of Appeal unanimously found for DPD from the bench. [DPD Management Ltd. v. Itoman Canada Inc. (\ August 30, 1993), Doc. CA014795 (B.C.C.A.)] A transcript of the oral Reasons for Judgment of the British Columbia Court of Appeal delivered on August 30, 1993 reads:

McEachern, C.J.B.C.:

We do not find it necessary to review all of the facts of this troublesome matter.

The tripartite arrangement agreed upon by these three parties additional to the existing contract arrangements that existed between them included as a term at least an agreement on the part of the defendant Itoman to furnish contract funds to DPD for the payment of proper claims arising out of the contract. In my judgment it was not open in the circumstances to Itoman, before all claims were paid and before it had advanced the full contract price, unilaterally to end the arrangement after DPD had embarked upon the program and had incurred liabilities. In my view, a cause of action arose in DPD when it became liable for contract debts which it was entitled to enforce against Itoman.

Itoman does not assert that the contract price has been paid. After first acknowledging that some $87,000 was owing, Itoman has failed to explain why the full contract amount has not been made available to satisfy contract debts.

I would allow the appeal and direct that the balance of the contract should now be paid by Itoman in trust to DPD to pay outstanding contractual debts including the income tax liability. If there are sufficient funds after re-payment of the funds garnisheed from DPD and the fees to which Shirlar had agreed then any surplus must be paid to the trustee of Shirlar.

I wish to mention, I should have mentioned earlier, that the contract is not before us but subject to that, it seems to me that Itoman got what it bargained for in its construction contract and is not able to dispute the various items of costs that were incurred in the completion of the contract to its apparent satisfaction.

In my judgment as well, the DPD is entitled to pre-judgment interest from the date the cause of action arose at the rate fixed by the Registrar from time to time, to this date. I am not persuaded that this is a case for any special order for costs. DPD is entitled to its costs in this Court and in the court below.

My brother Lambert has brought to my attention that I gave judgment for the amount owing on the contract. He points out and I agree that it would be better if we used the figure that seems to have been agreed by counsel that it is in the sum of $71,186.65.

Lambert, J.A.:

I agree with the reasons for judgment of the Chief Justice and I would dispose of the appeal as he proposes subject to the additional argument on costs which we are about to hear.

Hutcheon, J.A.:

I agree.

McEachern, C.J.B.C.:

On the question of costs we think the argument upon which the appellant has succeeded in this Court is fairly stated under point five which I need not repeat but which counsel can look at at their leisure. I think that the proceedings in trial below were not such as to give rise to a claim for costs and I would dispose of this matter by directing that both parties pay their own costs in the trial court but that the appellant recover the costs of the appeal to this Court.

Lambert, J.A.:

I agree.

Hutcheon, J.A.:

I agree.

McEachern, C.J.B.C.:

Order accordingly.

Mr. Temple testified that Revenue Canada assessed DPD for the withholdings, garnisheed its customers and ruined its contracting business in the process; this testimony is accepted as the truth of the matter. Revenue Can- ada should have assessed Itoman. Paragraph 153(1)(a) of the Income Tax Act reads:

Withholding.

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

(a) salary or wages or remuneration,

shall deduct or withhold therefrom such amount as is determined in accordance with prescribed rules and shall, at such times as is prescribed, remit that amount to the Receiver General on account of the payee’s tax for the year...

The Payor was Itoman. No doubt Revenue Canada justified the assessment to itself based upon subsection 153(1.3) which, at that time, read:

(1.3) Payments by trustee, etc. 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.

“Trustee” was then defined by subsection 153(1.4), inclusively, as follows:

(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.

The British Columbia Court of Appeal did not find DPD to be a trustee, and it was not a trustee. Rather, it was a party to a tripartite agreement. The Court of Appeal judgment only imposes a trust upon DPD respecting the Itoman funds which it directs Itoman to pay to DPD. Nor was DPD administering, managing, distributing, winding up, controlling or otherwise dealing with the property, business, estate or income of Itoman or Shirlar. DPD was not a trustee within the meaning of subsection 153(1.3). It was merely the conduit for the net salary paid by Itoman to Shirlar’s employees. Its only function was to write cheques and to confirm the hours worked. It had no fiduciary obligation. The use of a fiduciary relationship as a standard to be met before a party can be termed a “trustee” under subsection 153(1.4) was described in Canadian Imperial Bank of Commerce v. R., (1995), 95 D.T.C. 5367 (Fed. T.D.), at 537(F.C.T.D.) where Simpson J. held that the “monitor” in that case “must have exercised primary responsibility for the major aspects of the Company’s business such that he could be described as a fiduciary” at the relevant time. DPD never did that. Therefore, DPD was neither solely, nor jointly and severally liable for the amounts not withheld from the pay of Shirlar’s employees.

Mr. Temple testified as to his mental state throughout the collection proceedings by Revenue Canada. It was, and it remains, frantic. Mr. Temple borders upon being subject to a complete nervous breakdown. On the basis of his testimony, his appearance, which was distraught and in tears, and his at times disjointed description of the events, the Court finds that his state of mind at the time of these actions by Revenue Canada was bewildered, uncomprehending and close to a complete collapse. He had no one to advise him. DPD’s customers were refusing to pay, changing to other contractors and claiming that their damages were greater than any indebtedness. DPD and A.J.F. Temple could not meet their rent and Itoman was unreasonably and illegally withholding payment of enough to cover the entire Revenue Canada claim.

Based upon Mr. Temple’s history, he was at that time a mature, reasonable, experienced, competent, knowledgeable businessman. He deserved every consideration which could be accorded to such a man. He did not get it from Revenue Canada or Itoman. Despite DPD’s trust account for the Itoman-Shirlar monies, Revenue Canada persisted in its assessment of DPD respecting the “deemed” employees. It did this because, as Mr. Allen testified, DPD was writing the cheques to Shirlar’s employees. Revenue Canada did not treat DPD’s trust account for Itoman’s money as a factor in its favour. Revenue Canada did not assess Itoman. Had Jabour, Sudeyko, Stewart not carried on a successful action based upon a very reasonable contingency contract, it is obvious that Itoman never would have paid anyone. DPD’s other contracts were too small to warrant contingency legal action and Mr. Temple and his companies had no funds to pay lawyers to collect the other DPD accounts; indeed, the cost would have been prohibitive.

Schedule “A” to the Reply to the Notice of Appeal claims that the total withholdings unpaid by DPD respecting the Shirlar employees was $68,475.21 as of September 26, 1990. This includes interest of $2,802.38 and penalties of $5,924.79. Therefore the net withholdings claimed against DPD respecting the Shirlar employees was $59,748.04

Revenue Canada received the following sums from DPD’s customers: This sum does not include any credit to DPD of damages for labour, Sudeyko, Stewart’s fees of $27,039.94 for collecting from Itoman. This analysis and calculation, done within the limited jurisdiction of this Court respecting these matters, appears to be one reason for the withdrawal of Assessment Number 7495 against Mr. Temple.

The Respondent’s assumptions relating to contested Assessment Number 7497 read:

Re: A.J.F. Temple & Company Inc. & Assessment #7497

(p) A.J.F. Temple & Company Inc. (“AJF Temple”) was incorporated in the Province of British Columbia, on August 22, 1983;

(q) at all material times, the Appellant was a director of AJF Temple;

(r) about March 1990 a related company DPD had several commissions to provide consulting services over a 3 to 4 month period;

(s) after the Department of National Revenue instituted garnishee actions against DPD’s bank accounts with regard to its liability for unremitted payroll deductions, DPD terminated all its employees and AJF Temple employed them to complete the DPD consulting service contracts;

(t) after a May 1991 audit of payroll records of AJF Temple in respect of its payments to employees, AJF Temple was assessed on June 28, 1991 for unremitted tax withholdings, interest and penalty in the amount of $22,089.83. Details of this and subsequent assessments to AJF Temple for its failure to remit the aforesaid amounts are more particularly set out in Schedule B to this Reply;

(u) at all material times, AJF Temple was paying salary and wages to employees;

(v) on May 14, 1993, by Notice of Assessment Number 7497, the Appellant was assessed pursuant to s. 227.1 in the amount of $21,370.92 regarding AJF Temple’s failure to remit employee source deductions; details of this assessment are more particularly set out in Schedule B to this Reply;

(w) by Notice dated May 12, 1994, the assessment was confirmed after a Notice of Objection dated July 27, 1993;

Re: Both Assessments #7495, 7497

(x) at all material times all requirements of the Income Tax Act had been complied with by the Minister of National Revenue particularly with respect to the requirements of section 223 and 227 of the Income Tax Act;

(y) at all material times the Appellant did not act with the due diligence required of him as a director of either of these companies as stated in section 227 of the Income Tax Act;

(z) at all material times the Appellant did nothing to prevent this failure to remit and knowingly failed to confirm that the employee source deduc- tions were properly remitted or to take upon himself a responsibility to make those remittances.

DPD’s contracts were not assigned to A.J.F. Temple. When Mr. Temple was asked how he expected A.J.F. Temple to get payment, he could not explain. The evidence is clear that Mr. Temple was frantic and confused during the period following Revenue Canada’s attachment of Itoman and Roman’s refusal to pay the withholdings. DPD’s lawyers would not give him advice without payment in advance, and other law firms would not act for his corporations or Mr. Temple without a release of the files from the first lawyer. Mr. Temple was in a very difficult technical and legal position without any legal advice and without any money. He had transferred $50,000 cash into each of DPD and A.J.F. Temple in the calendar year, and he was unable to take action against Revenue Canada or Itoman in respect to Revenue Canada’s assessment of DPD in respect to the tripartite agreement. At the age of fifty, Mr. Temple’s entire business and career were crashing. He did not know what to do, nor could he get any advice from lawyers. He lacked the finances and legal means to transfer assets and contracts from DPD to A.J.F. Temple. Instead, he used A.J.F. Temple to administer DPD’s business.

Mr. Temple stated that Mr. Allen suggested that he put DPD’s employees into A.J.F. Temple and attempt to carry on. Mr. Allen stated that he did not tell Mr. Temple to do this. Mr. Temple had not the knowledge, the presence of mind, the state of mind, or the legal advice to initiate this when A.J.F. Temple began to administer DPD’s business. The Court finds that Mr. Temple got the idea from a Revenue Canada official or officials even though it may not have been voiced directly to him. The Court also finds that A.J.F. Temple administered DPD’s employees and contracts for DPD. Mr. Temple was the senior officer of both corporations, so each corporation knew what the other was doing and their mutual intent was that A.J.F. Temple act for the benefit of DPD. Any profit from the contracts A.J.F. Temple administered remained in DPD. If DPD had been paid by its customers, it would have had the money to pay the employees and the withholdings. But at this point Revenue Canada attached DPD’s other customers to obtain payment of the Shirlar withholdings which it now admits were not the responsibility of Mr. Temple as a director of DPD.

There is no evidence that A.J.F. Temple had any other employees or any other work before it acted for DPD in these matters. In doing these things, A.J.F. Temple did not need a trust account because it had no other activities. All of its activities — the administration of DPD’s of employees and contracts, the payment of employees, its failure to receive any money from DPD and its failure to pay withholdings — were done for DPD. There was no assignment of the contracts DPD had with the third parties which A.J.F. Temple administered. As a consequence of these actions of A.J.F. Temple, DPD became entitled to recover a greater profit on its contracts. A.J.F. Temple acted as the trustee of the property, business or income of DPD as that term is defined in subsections 153(1.3) and (1.4) of the Income Tax Act, and in common law. As a result, A.J.F. Temple and DPD are both liable for the unpaid withholdings assessed in the amount of $21,370.

Of the $81,670.98 paid on behalf of DPD, only $63,370.98 was Roman’s money. But the liability was Itoman’s, not DPD’s. Therefore, DPD has extinguished the following liability paid to Revenue Canada out of its own funds:

As trustee, A.J.F. Temple is entitled to the benefit of that. The remaining balance is to be reduced by the withholdings claimed on account of Ray Patterson’s alleged employment after September 14, 1990. Mr. Temple’s testimony is accepted that Ray Patterson was terminated as an employee of A.J.F. Temple on September 14. After that Ray Patterson worked as an independent contractor for A.J.F. Temple. Mr. Temple also testified that he was not an employee of A.J.F. Temple after a certain period, but based upon Mr. Temple’s income tax return which shows employment until September 30, this is not accepted by the Court.

Pursuant to the withdrawal of assessment number 7495, Mr. Temple’s appeal of that assessment is allowed. Assessment number 7497 is referred to the Minister of National Revenue for reconsideration and reassessment on the following basis:

He is to be credited against the balance of $3,070, any amount assessed on account of the alleged employment of Ray Patterson by A.J.F. Temple after September 14, 1990.

Mr. Temple was not represented by counsel at the hearing. He is unemployed and could not afford counsel. His Notice of Appeal was issued by Jabour, Sudeyko, Stewart and filed on August 4, 1994. On August 15, 1995 that law firm filed a Notice of Intention to cease to act as counsel for Mr. Temple in this matter. By that time the Reply to Notice of Appeal had been filed. Mr. Temple has been substantially successful. Therefore, party and party costs are awarded to Mr. Temple to the date upon which his lawyers withdrew their services. He is also awarded his disbursements on account of this appeal after that date.

Appeal allowed.