John M Fowlis, Receiver and Manager for Mackenzie Air Limited, Peat Marwick Ltd, Receiver and Manager for Mackenzie Air (Sask) LTD v. Minister of National Revenue, [1979] CTC 2433, 79 DTC 369

Roland St-Onge:—The appeals of Mr John M Fowlis, receiver and manager for MacKenzie Air Limited and Peat Marwick Ltd, receiver and manager for MacKenzie Air (Sask) Ltd came before me on February 12,1979 at the City of Toronto, Ontario, and were heard on common evidence. The issue is whether the appellants failed to withhold and remit any income taxes in respect of wages paid to employees in 1977.

At the hearing, counsel agreed on the following statements of facts prepared by the appellants and which is as follows:

1. In the case of Peat Marwick Limited, this is an appeal from an assessment dated November 8, 1977 wherein the Minister assessed the appellant for the 1977 taxation year in the amount of $7,251.39 and $2,049.31 in respect of federal and provincial income tax. In addition, penalty of $1,201.21 and interest of $200 was levied.

2. In the case of John M Fowlis, this is an appeal from the assessment dated June 23, 1977. The corresponding amounts were federal tax $7,251.39, provincial tax $2,049.31, penalties $1,201.21 and interest $200.

3. John M Fowlis is an employee of Peat Marwick Limited and was named as the Receiver because at that time under Alberta law a receiver had to be an individual and not a company.

4. The facts in both appeals are almost identical and my friend and I agree that they be tried together on common evidence.

5. The facts we intend to establish are these:

(a) The Receivers were appointed Receiver and Manager pursuant to three debentures held by First Empire Financial Services:

MacKenzie Air (Sask) Ltd Apr 23/76 $ 150,000

MacKenzie Air (Sask) Ltd. July 18/74 $3,978,900

MacKenzie Air Limited July 12/74 $3,978,000

(b) For services rendered prior to February 28, 1977, cheques were issued by MacKenzie Air Limited who acted as payroll agent for both companies and delivered to employees of both companies on or before February 28, 1977. Neither MacKenzie Air nor MacKenzie Air (Sask) remitted withholding tax.

(c) Notice of default was given by First Empire on February 28, 1977.

(d) Peat Marwick Limited and John M Fowlis were appointed on February 28, 1977 but their appointment was effective March 2, 1977.

(e) Employees of MacKenzie Air Limited were immediately following the appointment of the Receiver laid off and certain were rehired.

(f) New employer numbers were taken out for MacKenzie Air Limited and MacKenzie Air (Sask), BXM 05416 2 and BXM 05415 4 respectively.

(g) First Empire through the Receiver agreed with the Company’s bankers, the Bank of Montreal, to fund the payroll accounts in respect of the February payroll. Monies were then transferred by the Receiver to the Bank of Montreal to meet the paproll. However, certain cheques of MacKenzie Air (Sask) were dishonoured and in respect of these employees the Receiver issued new cheques drawn on the Receiver’s account with the CIBC.

Thus, the amounts paid to employees were paid as follows:

MacKenzie Air Limited—$25,394.14—paid through B of M.

MacKenzie Air (Sask)—$10,494.45—paid through B of M.

MacKenzie Air (Sask)—$17,910.15—paid through CIBC.

In addition, three cheques were issued by the Receiver but drawn on the Bank of Montreal:

4417—$ 115.17

4425—$ 511.75

4416—$1,390.07

(h) In respect of services performed after March 2, 1977, the Receiver withheld and remitted tax to the Receiver General of Canada.

(i) At the date hereof, First Empire is still owed approximately $2,300,000 on its three debentures.

At the hearing, Mr Albert Tucker, chartered accountant, testified that the cheques issued by the companies were made by the employer’s wife and given to the employees prior to March 2, 1977.

Then counsel for the appellants filed with the Board an argument in writing as follows:

I. RECEIVER WAS MERELY FINANCING THE DEBT OF THE COMPANIES ON BEHALF OF FIRST EMPIRE AND WAS NOT PAYING SALARY OR WAGES.

1. Section 153 of the Income Tax Act provides, inter alia, that:

Section 153. Withholding.

(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.

2. It is submitted that the Company and not the appellant paid the wages in question, in respect of past services from which the Company had benefited prior to the appointment of the appellant.

3. The appellant was merely a financier or lender of funds. It was merely providing the monies to the bank so that the employees could be paid for services performed in respect of a period prior to the appointment of the Receiver. The Receiver, or more correctly, First Empire, was merely acting as a banker or lender. If the City of New York goes to various pension plans to fund its payroll and these pension plans agree with the City’s bankers that they’ll stand behind the honouring of the cheques, it cannot be said that the pension plans were paying wages or Salary.

4. The law is clear that when a cheque is issued it is the issuer of the cheque who is paying the money and not the person who finances the payment of the cheque.

In the case of In Re Hone: ex parte the Trustee v Kensington Borough Council, the account of the drawer of a cheque was overdrawn and the bank covered the overdraft and thus acted as a financier or lender of the particular funds in question. The court held that payment was made by the drawer of the cheque even though bank funds were used. As Harman, J states:

. . . a payment by a bank, under an arrangement by which the customer has an overdraft, is a lending by the bank to the customer of the money. It is the customer who pays the money and not the bank.

5. The confusion of the Minister in this case arises because the Receiver became the employer on March 2 and was obligated to deduct for services performed after that date. But it is important to keep the two functions and the two periods separate. In respect of the period up to March 2, 1977, the appellant was acting as a financier. After that date the appellant became an employer. Thus, the payments made on February 28,1977 relate to an employment relationship dating prior to the date on which the employees became employees of the appellant.

The law is clear that once a receiver is appointed contracts of service are terminated. (Kerr on Receivers p 162). In Reid v the Explosives Company Limited 19 OBD 264 Lord Esher MR states:

... It seems to me, therefore, that the result of such an appointment is to discharge the servants from their service to their original employer, and that, as in the other cases I have put, there is a wrongful dismissal for which an action would lie.

This is in fact what happened here. In the case of MacKenzie Air Limited, the employees of the company were expressly laid off and certain employees rehired by the appellant. In the case of MacKenzie Air Saskatchewan, this happened by operation of law. Any obligation to withhold tax only arose in respect of services performed under the new contract which relates to services performed after the appellant was appointed.

II. THE WORDS “EVERY PERSON” IN SECTION 153 ARE EXTREMELY BROAD. THERE MUST CLEARLY BE SOME LIMITATION PLACED ON THESE WORDS IN ORDER TO AVOID ARRIVING AT ABSURD RESULTS.

1. It is a fundamental principle of statutory construction that absurd results are to be avoided. This so-called golden rule was set out by Parke B, in Becke v Smith (1836) 2 M & W 191 at page 195:

It is a very useful rule, in the construction of a statute, to adhere to the ordinary meaning of the words used, and to the grammatical construction, unless that is at variance with the intention of the legislature, to be collected from the statute itself, or leads to any manifest absurdity or repugnance, in which case the language may be varied or modified, so as to avoid such inconvenience, but no further.

This principle is also cited in Maxwell on the Interpretation of Statute, (12ed) p 43.

2. The words “every person” must be circumscribed by the later words “paying salary or wages or other remuneration to an officer or employee” (italics added). They must be limited to an employer or a person related to the employer.

The case of Re G & G Equipment Co Ltd is simply an illustration of a court piercing the corporate veil in recognition of modern-day corporate fact that companies act through a multiplicity of subsidiaries. This is brought out by Berger, J when he states:

Section 153 says that every person paying wages to an employee must withhold tax; it does not say that only employers must. The language must be taken to have been deliberately chosen, and to have been intended to encompass the kind of situation that exists in the case at bar. The law recognizes that these two companies are separate legal entities. At the same time the law ought to recognize that one business undertaking may be carried on through a group of related companies. The law ought to take into account the realities of modern business arrangements.

His later words that:

The fact is that the statute goes beyond the relationship of employer and employee, and binds any person who is paying the wages of an employee, including G & G. It is simple as that.

must be interpreted in light of his earlier comments and the facts of the case.

III. PAYMENT WAS LEGALLY MADE WHEN CHEQUES WERE ISSUED BY THE COMPANY WHICH OCCURRED PRIOR TO APPOINTMENT OF THE RECEIVER.

1. The relevant facts are:

(a) The company prepared its payroll account and sent out cheques, payable by the Bank of Montreal, and dated February 28, 1977. These cheques were sent to the employees prior to the appointment of the appellant as Receiver and Manager.

(b) Upon the appointment of the appellant on March 2, 1977 the Bank of Montreal refused to honour cheques which began to come in.

(c) The appellant and the Bank of Montreal entered into an arrangement whereby the Bank would honour the cheques of the Company if the appellant would fund the company account to the amounts required.

(d) The appellant advanced funds periodically to the Bank for that purpose.

(e) The employees were paid pursuant to cheques issued by the Company and drawn on the Company’s bankers, the Bank of Montreal, except for those cheques which had already been dishonoured.

2. The law is clear that the giving of a cheque is payment. It is payment that is subject to a condidtion subsequent not percedent. When the cheque is honoured it is an actual payment ab initio and the time of payment relates back to the time when the cheque was given.

3. In Marreco & Others v Richardson, the issue revolved around the question of whether the action was statute barred. The case would not be statute barred if the plaintiff could show “part payment” within the six years preceding the issuance of the writ. Thus it was necessary to determine if delivery of a cheque on May 10, 1900 but not presented (according to a verbal understanding) until June 20, 1900 constituted payment on May 10 when delivered or June 20 when honoured. The action was statute barred because it was held that the date of payment of the debt was the date when the cheque was handed by the defendant to his creditor and not the date when the cheque was in fact paid by virtue of the special arrangement; that, therefore, the only time at which a promise to pay the balance of the debt could be implied from the circumstances under which part payment was made was May 10, 1900, and that, that being more than six years before the issue of the writ, a plea of the Statute of Limitations afforded a good defence to the action. Per Lord Justice Farwell at p 593:

But none the less the payment is made at the time when the cheque was given . . . In the more recent case of Felix Hadley & Cov Hadley (1) Byrne, J held that a cheque or a bill of exchange given in respect of a pre-existing debt operated as a conditional payment thereof, and on the condition being performed by actual payment, the payment related back to the time when the cheque or bill was given. That is only expressing the same principle in another form, and I should myself prefer to say that the giving of a cheque for a debt is payment conditional on the cheque being met, that is, subject to a condition subsequent, and if the cheque is met it is an actual payment ab initio and not a conditional one.

4. This general principle has been applied, without exception, in cases involving the Income Tax Act.

In Moody v MNR the Exchequer Court held per Thurlow, J that the amounts of certain cheques received by the taxpayer should be treated as having been paid and treated as cash when the cheques were received and not when they were subsequently honoured. Per Thurlow, J at p 1054.

. . . a payment made by cheque, although conditional in some respects, is nevertheless presumably made when the cheque is delivered and, in the absence of such special circumstance, there is, in my opinion, no ground for treating such a payment other than as a payment for cash made at the time the cheque was received by the payee. The evidence discloses no reason why the cheques in question should not have been treated as income in the year or years when they were received by the appellant, and I do not think it was optional either for the appellant or the Minister to treat them as income when cashed, as opposed to when they were received, or to include them as income in any year other than the year in which they were received.

5. The principle has also been adopted by the Tax Review Board. In Frankish v MNR the taxpayer’s cheque was mailed in 1952 but the envelope containing the cheque was not opened until January 2, 1953. It was held that the cheque was received in 1952 and the amount of the cheque should be added to his 1952 and not his 1953 income. In the course of judgment, Mr Snyder at p 179 adopted the Marreco decision:

At the hearing of the appeal there was reference to a decision of the Court of Appeal (England) in Marrecco v Richardson, [1908] 2 KB 584, in which Farwell, LJ in his reasons stated, at page 593:

In the more recent case of Felix Hadley & Co v Hadley, [1898] 2 Ch 680, Byrne, J held that a cheque or a bill of exchange given in respect of a pre-existing debt operated as a conditional payment thereof, and on the condition being performed by actual payment, the payment related back to the time when the cheque or bill was given. That is only expressing the same principle in another form and I should myself prefer to say that the giving of a cheque for a debt is payment conditional on the cheque being met, that is, subject to a condition subsequent, and if the cheque is met it is an actual payment ab initio and not a conditional one.

This decision is referred to in the second edition of Falconbridge on Banking

and Bills of Exchange, where it is stated, at page 722:

If the bill is paid in due course the payment of the debt becomes absolute as of the time of the taking of the Dill.

The same comments were made by Mr Fisher in the case of W I Sheper v MNR.

6. The only area where I am aware that the Marreco case has not been followed is in bankruptcy cases, eg, re Hone & re Potter. Those cases turn on the specific wording of a section in the Bankruptcy Act.

7. Applying those facts to this case, it must be remembered that in the case of MacKenzie Air Limited the employees were paid by cheques issued by the Company, drawn on its bank, the Bank of Montreal, and sent to employees prior to the appointment of the Receiver.

In the case of MacKenzie Air Saskatchewan, the same is true for cheques totaling $10,494.45. Cheques totalling $17,910.15 were paid pursuant to cheques issued by the Receiver on its bank, the CIBC. Also the Receiver drew three cheques on the Bank of Montreal,

4426	$1,390.07
4417	115.17
4425	911.75

and these three cheques should be treated as if they were drawn on the CIBC.

Thus, with the exception of the $17,910 plus the said three cheques, all other amounts paid to employees were paid by the Company prior to the appointment of the Receiver.

IV. THE ISSUE IS WHETHER IN THE CASE OF THE ASSETS OF A DEBTOR BEING INSUFFICIENT, THE FIRST EMPIRE, A SECURED CREDITOR, OR THE CROWN, AS A PREFERRED CREDITOR, IS ENTITLED TO THE ASSETS OF THE DEBTOR.

This case is no different from the case of the Bank of Nova Scotia v Middleton Motors Ltd. The issue in that case was who was entitled to the amounts withheld by the Company from the wages of employees, when a floating debenture crystallized. The Court in that case held that the Crown was only a preferred creditor and could only collect after the secured creditor had been paid in full.

The evidence in the case at bar is that First Empire Financial Services Ltd must still recover approximately $2,300,000 and we submit that until that amount is paid, the Crown cannot be paid.

V. REPLY DISCLOSED NO BASIS FOR NOT ALLOWING THE APPEAL

The Minister in his reply pleads that the assessment is based upon the assumption that “the appellant caused certain employees to receive remuneration for the period ended February 28, 1977.” (emphasis added.)

The use of the word “caused” is extremely significant. There is nothing in section 153 or elsewhere in the Income Tax Act which imposes an obligation to withhold tax on a person who causes a payment to be made to employees for salary or wages. Section 153 imposes an obligation to withhold on “every person paying salaries or wages” not on every person who causes same to be paid. To impose a duty because someone caused something to be done leads to absurd results. For example, if the Ontario Development Corporation grants a loan to an employer on condition that the employer use the proceeds of the loan to, inter alia, pay its employees, can it be said that the ODC must withhold.

There are sections in the Income Tax Act where causing or directing the “doing of an act” is the equivalent of “actual doing’’, eg, subsection 56(2), but those sections are not applicable to a duty to withhold.

For this reason the appeal must be allowed because the reply discloses no reasonable basis of defence or reply in law.

Counsel for the respondent argued that all cheques were made out on February 28, 1977 and that there was no evidence to show when the cheques were received by the employees. Then he referred the Board to a decision already cited by the appellants in re Bankruptcy of G & G Equipment Co Ltd, 74 DTC 6407 to say that the appeals should be dismissed.

According to the evidence adduced, there are two kinds of cheques:

1) those issued by the companies and paid through their banks.

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

As may be seen, the section does not say that the employees must be those of the person who pays and consequently, when a person pays some employees, he has to deduct and remit the taxes in respect to wages paid to employees. Having said that, the Board believes that the appeals should be dismissed with respect to cheques issued by the receiver on its bank for an amount of $17,910.15.

As to the other group of cheques issued by the companies, the Board is convinced that the companies and not the appellants paid the wages in question. Herein, the appellants were merely providers of funds. The Board agrees with the re Bankruptcy of G & G Equipment Co Ltd decision when it mentions that the statute clearly goes beyond the relationship of employeremployee and binds any person who pays wages and it is why the ap- pealsare dismissed with respect to the cheques issued by the appellants. However, the issue is different with respect to the cheque issued by the companies through their banks and delivered prior to March 2, 1977 because the appellants are not the payers but only the providers of funds and herein there is no employer-employee relationship, nor payor-payee relationship, but only a provider of funds. The activity of the appellants was more that of a lender rather than that of a person paying employees and consequently, on this issue, the appeals are allowed.

On Februarey 13, 1977, counsel for the appellants sent another decision to the Board Dauphin Plains Credit Union Limited v Xyloid Industries Ltd and R, 27 BR 103 (Man QB). In that case, it is mentioned that the receiver manager is not included within the term person used in subsection 153(1) of the Income Tax Act because, by normal definition, the work person would not include a receiver manager as such and also because under the Income Tax Act there is no obligation for the receiver manager to make deductions for the payments made by himself.

In the case at bar, the evidence has revealed that the receiver managers were not appointed by an order of the court, but pursuant to three debentures held by First Empire Financial Services; that there was no bankruptcy and consequently the receiver managers were not acting as such, namely as receiver managers of a bankruptcy. For these reasons, the decision does not apply to the case at bar.

Consequently, the appeals are allowed in part for reassessment as follows:

the appeals are dismissed with respect to the cheques issued by the appellants for the amounts of $17,910.15, $115.17, $511.75 and $1,390.07. The appeals are allowed with respect to the cheques issued by the companies for the amounts of $25,394.14 and $10,494.45.

Appeal allowed in part.