A-470-79
The Queen (Appellant)
v.
Coopers & Lybrand Limited, agent for Mercantile
Bank of Canada and Receiver and Manager of
Venus Electric Limited (Respondent)
Court of Appeal, Urie and Ryan JJ. and Kelly
D.J.—Toronto, April 21; Ottawa July 14, 1980.
Income tax — Withholding tax from salaries paid
Respondent, receiver and manager caused net salaries of
employees of company in receivership to be paid — Amounts
deductible for income tax were not remitted to Department of
National Revenue — Appeal from Trial Judge's decision that
respondent was not the person required to remit amount of
withholding tax as respondent acted as agent only — Whether
respondent is liable for amounts required to be deducted
pursuant to s. 153 of the Income Tax Act — Appeal allowed
— Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C.
1970-71-72, c. 63, ss. 153(1)(a), 227(8)(a),(6).
The respondent was appointed as receiver and manager of
Venus Electric Limited. It decided that the operation of the
property should continue, and that for this purpose the goodwill
of the employees was essential. Employees of Venus received
cheques for the final pay period equal to their gross earnings
less deductions, one of which was for income tax. The cheques
were accompanied by information slips showing their gross
earnings, authorized deductions, and net amount, so that it was
reasonable for employees to assume that they were receiving
wages. The respondent did not inform employees that the
amounts received were gratuitous goodwill gestures. The
amounts calculated to be deductible for income tax for the final
pay period were not remitted to the Department of National
Revenue. The issue is whether the respondent is liable for the
amounts allegedly withheld on account of income tax. This is
an appeal from the Trial Judge's decision that the respondent
acted as an agent only.
Held, the appeal is allowed. If the respondent has any
liability to the Crown, it must be under section 153(1) of the
Income Tax Act. Three requirements must be met in order that
liability may exist: payments to employees must have been
made; such payments must have been with respect to wages or
salaries due to the employees; and, the person sought to be held
liable must have made such payments. Firstly, the persons to
whom payments were made were employees. It is not necessary
that there exist between the recipient and the payor an
employee/employer relationship. Secondly, the only inference
that can be drawn from the facts is that the payments made
were wages. Thirdly, the respondent submits that as 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. The respondent 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. The respondent was the person paying
wages to employees and consequently comes within section 153.
With respect to the quantum of the respondent's liability,
section 227 deals with the failure to deduct and the failure to
remit the amount deducted. If the person paying fails to
deduct, his failure has no effect on the liability of the employee
for income tax as 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 has failed to
deduct. If a deduction is actually made and the amount deduct
ed 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 emploÿée
on account of income tax and for an amount equal to the
amount deducted. The tax returns for the period up to and
including the final pay period, prepared by the respondent, if
they stood alone, would lead to the conclusion that the income
tax relevant to the earnings of the final pay period had been
physically deducted and retained for transmission to the
Receiver General. However, the amount of money provided by
the debenture holder to the respondent for payment to the
employees was the net amount which the employees would have
received for the final pay period. The respondent's default was
in not making deductions for income tax rather than in failing
to remit any amount actually deducted. Accordingly, its liabili
ty is under section 227(8), that is, 10% of the amount it failed
to deduct.
In re Manchester and Milford Railway Co. Ex parte
Cambrian Railway Co. (1880) 14 Ch. D. 645, referred to.
In re B. Johnson & Co. (Builders) Ld. [1955] 1 Ch. 634,
referred to.
APPEAL.
COUNSEL:
J. R. Power, Q.C. and P. Barnard for
appellant.
T. A. Sweeney for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Borden & Elliot, Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
KELLY D.J.: The issue in this action is whether
the respondent is liable for the amounts required
to be deducted, pursuant to section 153 of the
Income Tax Act, R.S.C. 1952, c. 148 as amended,
for income tax, from the wages and salaries of
employees of Venus Electric Limited (Venus) for
the pay period ended 24th September 1976 (the
final pay period). The Trial Judge [[1980] 1 F.C.
381] negatived such liability whereupon the Crown
appealed to this Court.
There is no significant disagreement concerning
the facts which I now set out despite vastly varying
contentions of the parties as to their respective
positions at law.
Venus, a company incorporated under the laws
of Ontario, was engaged in the business of assem
bling and selling electric appliances, employing
some 850 persons. It carried on business in four
locations, two in the Province of New Brunswick
and two in the Province of Ontario.
The principal banker of Venus was The Mercan
tile Bank of Canada (the Bank) to which Venus
was heavily indebted. As security for the indebted
ness Venus had:
(1) given the Bank security under section 88 of the
Bank Act, R.S.C. 1970, c. B-1;
(2) executed a debenture in favour of the Bank by
which it created
(a) a fixed charge on its real property; and
(b) a floating charge on all its other assets
including its undertaking, such floating charge
to become crystallized into a fixed charge on the
occurrence of any one of certain events in the
debenture specified; paragraphs 4.03 and 4.04 of
the debenture as set out in the appendix hereto
describe the rights and remedies of the Bank if
and when any event of default triggered the
fixation of the floating charge.
The Province of New Brunswick was financially
interested in Venus, having guaranteed its indebt
edness for sums other than the indebtedness to the
Bank. During the summer of 1976 the financial
condition of Venus was causing concern and Coop
ers & Lybrand, a firm of chartered accountants,
was retained by the Province to look into the
situation of Venus. Its findings were not reassuring
and meetings were held at which were present
representatives of the Bank and Coopers &
Lybrand. From then on Coopers & Lybrand kept
closely in touch with the progress of Venus and at
or shortly before the 24th September 1976 recom
mended that a receiver should be appointed.
On 24th September 1976 the Bank delivered to
the respondent, a company performing services as
receiver and an affiliate of the accounting firm of
Coopers & Lybrand, a letter of appointment in the
following terms:
September 24, 1976
Coopers & Lybrand Limited,
145 King Street West,
Toronto, Ontario.
Dear Sirs:
Venus Electric Limited
We hereby appoint you as Receiver and Manager of Venus
Electric Limited under and pursuant to the $10,000,000 deben
ture dated March 26, 1976 issued by Venus Electric Limited to
The Mercantile Bank of Canada.
We also appoint you as our Agent to collect all receivables of
Venus Electric Limited assigned to us pursuant to a general
assignment of debts from the above Company registered in
New Brunswick on February 27, 1976, and in Ontario on
March 11, 1976 and to realize on our security held by us
pursuant to Section 88 of The Bank Act given to us by the
above company.
THE MERCANTILE BANK OF CANADA
"James McCallion"
James McCallion
Assistant Manager
Saint John Branch
In anticipation of this appointment the respond
ent had one of its employees at each of the four
locations at which Venus carried on business and
at 1:00 a.m. on Saturday the 25th September, the
respondent, through its employees, went into
possession of all the property and assets of Venus.
On Monday, 27th September or as soon as each
employee came in contact with the respondent's
representative a letter in the following terms was
delivered to him or her.
VENUS ELECTRIC LIMITED
September 25, 1976
To the employees,
We have been appointed Receiver and Manager of Venus
Electric Limited and Agent for the Mercantile Bank of
Canada. As a result, we are now responsible for the administra
tion of the Company's affairs.
It is our present intention to continue the company's
operations.
Our staff will be involved in many aspects of the business and
we will appreciate your cooperation and continuing support.
COOPERS & LYBRAND LIMITED
Receiver and Manager
John R. Hadfield.
During the week-end, four employees of the
respondent met physically to formulate plans and
recorded minutes of their meeting which read in
part as follows:
Decision No. 1
A decision was reached by those present at the meeting, that
since it was in the company's interest to ship product, and to do
so requires the services of present employees, we will make a
payment to each employee by the amount of which they (the
employees) are "out of pocket" with respect to work done for
the company as a result of the company's failure and the
company could not pay.
Collectively, the persons who benefited by the
procedure outlined in resolution No. 1 will be
referred to as the employees.
At this stage it will be helpful to outline the
procedure which Venus had adopted with respect
to paying its employees. Venus had contracted
with the Bank of Nova Scotia for the use of the
sophisticated facilities the Bank had developed for
handling payrolls.
For each pay period, Venus furnished the Bank
with the number of hours worked by each
employee; using, inter alia, information it already
had with respect to the rates of pay applicable to
and under what headings deductions were to be
made from each employee, the Bank calculated for
each employee, the amount earned, the amount of
each deduction for income tax, Canada pension
plan, unemployment insurance or other authorized
deductions and the net amount payable, prepared
a cheque in favour of each employee and prepared
a tabulation of the amounts earned, the deductions
and amounts payable for each point of payment.
Accompanying his or her cheque each employee
received a slip on which appeared the appropriate
amounts with respect to the pay period and a
cumulative total for the calendar year of earnings
and deductions.
In the case of the Atholville and Saint John
payrolls, the local branch of the Bank of Nova
Scotia debited The Mercantile Bank; in the case of
other payrolls, Venus issued its cheques drawn on
The Mercantile Bank payable to the Bank of Nova
Scotia, for the aggregate of the earnings.
With funds which were apparently provided to it
by the Bank, the paying branches of the Bank of
Nova Scotia honoured the salary cheques which
had been issued for the final pay period. The
payment to each employee was equal to his or her
"take home pay", i.e., his or her gross earnings for
the final pay period, less authorized deductions,
one of which deductions was on account of income
tax.
With regard to the Toronto payrolls, cheques
were drawn in favour of the Bank of Nova Scotia
on the printed form of the cheque previously in use
by Venus on which appeared, in the space in which
a signature usually appears, the words:
Venus Electric Limited
COOPERS & LYBRAND LIMITED
Receiver and Manager
John R. Hadfield
The debit notes issued by the Bank of Nova
Scotia with respect to the New Brunswick payrolls
were in due course honoured. Although, in pursu
ance of this procedure, the money did not pass
through the hands of the respondent there can be
no doubt that the payments by the Bank of Nova
Scotia to the employees were clerical acts by which
the respondent caused the monies to be paid to the
employees.
In February 1977 the respondent prepared and
filed T-4 and T-4 Supplementary Income Tax
forms covering the period 1st January 1976 to
24th September 1976 inclusive. As required, to
each employee to whom wages were paid during
that period there was sent a copy of the T-4
Supplementary slip relating to him or her. The
exhibits before this Court did not include the
totality of the Bank of Nova Scotia payroll calcu
lations and the T-4 Supplementary forms but
selected samples of them were filed as Exhibit
A-10 and Exhibit A-16 respectively. The names of
seven employees appeared on both exhibits. A
comparison of the figures appearing in those
exhibits relative to those seven employees showed
that the figures for the aggregate deductions for
income tax from 1st January to 24th September on
each of the exhibits were identical and that the
figures for gross earnings for the same period on
each of the exhibits were either identical or sub
stantially the same. The conclusion I arrive at
from this similarity is that the aggregate earnings
shown on the T-4 Supplementary included earn
ings for the final pay period amounting to $231,-
904.15 and that the amount shown as the aggre
gate of deductions for income tax included the
deductions for income tax made for that period,
viz., the amount set out for that pay period in the
payroll calculations made by the Bank of Nova
Scotia, namely $28,449.78.
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 are admittedly payable or alleged
to be payable.
In May 1978 the respondent presented to all or
a large number of the employees who had received
payments pursuant to the resolutions of the 26th
September a document in the following form, save
as to the name of the addressee and the dollar
amount.
May 9, 1978
J. Cusack,
19 Porterfield Crescent,
THORNHILL, Ontario.
L5T 4T1
Dear J. Cusack: VENUS ELECTRIC LIMITED
You were an employee of the above company on September
24, 1976 at which time we were appointed Receiver and
Manager of the company. At that time the company owed you
unpaid wages.
We arranged financing for the payment to you of the follow
ing amounts in order that you would not be out of pocket as a
result of the receivership of the company, and at that time your
claim against the company for the monies owing to you was
assigned to us.
Date Amount
September 24, 1976 $508.48
We are now engaged in a dispute with the Department of
National Revenue concerning responsibility for Source Deduc
tions owing by the company to the Department of National
Revenue and it would assist us if you would confirm the
foregoing facts by signing and returning one copy of this letter
to us.
Thank you for your assistance.
Yours very truly,
COOPERS & LYBRAND LIMITED
Receiver and Manager
Robert E. Lowe,
President.
I confirm the above mentioned facts.
As requested by the respondent, a considerable
number of employees signed the form submitted.
The significance of these signed forms will be
referred to later but at this stage it should be
remarked that, under questioning from this Court,
counsel for the respondent conceded that the words
"at that time your claim against the company for
the monies owing to you was assigned to us" were
a misstatement of the facts as no written or oral
assignment had been made by or asked of any of
the employees who had received the payments
referred to.
As previously noted, the question in issue is
whether the respondent is liable for the aggregate
of the amounts allegedly withheld on account of
income tax.
If the respondent has any liability to the Crown
for the amount it failed to deduct and remit, it
must be because that liability is imposed on the
respondent by section 153(1) of the Income Tax
Act the relevant portions of which read as follows:
153. (1) Every person paying
(a) salary or wages or other remuneration to an officer or an
employee,
at any time in a taxation year shall deduct or withhold there
from 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.
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.
Each of these requirements will be dealt with in
the order in which they are stated:
(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 the
25th September 1976 the employer of the
employees. The appellant 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/employ-
er relationship.
I agree with this submission. Under all the
circumstances the persons who were employees of
Venus on 24th September 1976 were employees
within the meaning of section 153 and they are
recognized as employees by the text of the resolu
tion adopted on the 26th September; in fact the
respondent has not seriously alleged otherwise.
(2) Were the payments to the employees wages or
salary?
The submission of the respondent was that the
questioned payments to the employees were not
wages but were gratuitous benefactions made in
order to earn and preserve the goodwill of the
persons who had been employees of Venus, by
providing that the employees should not be out of
pocket with respect to work done for that
Company.
In support of this position, reference is made to
the resolution of the 26th September 1976 supra,
and the alleged assignments made in 1978 by the
employees of the amounts received. In this latter
connection, counsel for the respondent submitted
that by virtue of the payments the respondent was
ipso facto subrogated to the employee's claim for
wages. This latter submission was not pressed,
upon the Court pointing out to counsel the total
absence of any legal foundation for subrogation
under the circumstances.
Other circumstances which I consider to be
relevant to the determination of this issue are the
following:
a) by virtue of procedures carried on by Venus'
agent the Bank of Nova Scotia in anticipation of
the expected wage distribution on the 24th Sep-
tember a determination had been made with
respect thereto of
(1) the gross amount earned by each
employee;
(2) the appropriate deductions from such
gross earnings for income tax, unemployment
insurance, Canada pension plan and any other
authorized direction;
(3) the net amount which the employee was
entitled to receive in cash or in such other
form as was agreeable to him.
The aggregate of the amounts for net payments
to employees and deductions from gross earn
ings were respectively $190,270.01, $28,449.78.
The receiver and manager on appointment,
being bound to act in the interest of the deben
ture holders, not in the interest of Venus, decid
ed that it would be in the interest of the deben
ture holders that the operation of property in its
possession should continue and that, for this
purpose the goodwill and cooperation of the
employees was essential; to this end, in making
payments to the employees, it elected to make
use of the payroll procedure already set in
motion by Venus and instructed the Bank cf
Nova Scotia to honour cheques aggregating a
sum of $190,270.01. The cheques so honoured
were either the identical cheques which the
Bank of Nova Scotia prepared prior to the
receiver and manager going into possession or
cheques in all respects similar to such cheques;
the evidence is silent in this respect.
(b) the respondent did not draw to the attention
of the employees that the amounts received by
them were gratuitous goodwill gestures which
did not adversely affect their rights to prove
claims against Venus for wages. The informa
tion slips which accompanied each payment,
showing the amount of gross earnings, and the
authorized deductions, set out a net amount
which was the same amount that would have
been paid on the payroll distribution had it been
made in the usual course; the employees were
left with the impression that they were receiving
wages for which they would have to account on
their individual T-1 income tax returns.
(c) notwithstanding the fact that no part of the
amounts purported to have been deducted for
the final pay period, according to the T-4 and
T-4 Supplementary tax returns filed in February
1977, had ever been remitted, or could be identi-
fied as having been segregated, on the strength
of the information furnished to each employee
on the slip accompanying the payment made to
him for the final pay period and on the T-4
Supplementary supplied to him, it was reason
able for the employee to assume the amount
received with respect to the final pay period was
wages upon which he or she would be taxable
and that he or she was deemed to have received
as wages the amount purported to have been
deducted on account of income tax. No steps
were taken by the respondent to inform the
employees otherwise until the letter of 9th May
1978 already quoted.
In light of the decision of the learned Trial
Judge that the respondent was not a person paying
wages it was not necessary for him to decide and
he did not decide whether or not the payments to
the employees were wages. In my opinion the only
inference that can be drawn from the undisputed
facts is that the payments aggregating $196,-
207.01* made to the employees were wages within
the meaning of section 153.
(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.
In considering whether the capacity of receiver
and manager, in which it was acting, exonerated it
from itself being subject to liability under section
153, the presence of certain facts must be
recognized.
In the first instance, at the relevant times the
respondent was not a receiver/manager appointed
by the Court upon whom had been conferred by
the Court extensive powers to act. At a later date
in November such an appointment was made by
the Supreme Court of Ontario, a copy of the
receiving order being introduced as evidence; per
* [See footnote p. 185 infra re error — Ed.]
usai of that order indicates the breadth of the
powers exercisable by virtue of that order.
In the absence of any appointment by the Court,
the powers and duties of one purporting to act as a
receiver or a receiver and manager are to be found
by resorting to the instrument authorizing the
appointment of such a person. ' Exhibit A-4 is a
letter of the 24th September 1976 delivered to the
respondent by the Bank through which the
respondent traces its authority. This letter, the text
of which has already been set out, indicates that
the respondent was acting in two capacities: (1)
receiver and manager of the property which was
the subject of the charge created by the debenture
hereinbefore referred to; (2) receiver under an
assignment in favour of the Bank pursuant to
section 88 of the Bank Act.
No evidence was adduced to distinguish what
property of Venus became subject to the charge
under section 88 of the Bank Act and what prop
erty of Venus became subject to the fixed charge
of the debenture upon the crystallization of the
floating charge created by it or as to the priority
inter se of the two securities on the property of
Venus.
Since the conduct of the respondent which is
alleged to have given rise to the liability under
section 153 was beyond the scope of its office as
receiver and fell within the ambit of the powers of
a manager as distinguished from receiver simplic-
iter no further reference will be made to the
respondent's capacity as receiver to realize the
security under section 88 of the Bank Act. Subse
quent comments and remarks are related to the
consequence of the acts done by the respondent as
manager. 2
The significant features of the relevant sections
of the debenture are as follows: the debenture
confers power on the holder to enforce its rights by
entry upon the mortgaged property and by taking
possession of property charged by the debenture;
the debenture holder may appoint by instrument in
writing a receiver (under which term is included
manager) and such receiver may be vested with
Fraser and Stewart Company Law of Canada, 5th ed. p.
448.
2 In re Manchester and Milford Railway Company. Ex parte
Cambrian Railway Company (1880) 14 Ch. D. 645 at p. 648
and at p. 653.
any or all of the powers and discretions of the
debenture holder; the debenture is to be interpret
ed according to the laws of New Brunswick; the
receiver and manager is deemed to be an agent of
Venus and not of the Bank. 3
The appointment already noted (Exhibit A-4) is
a bald one in that its terms do not purport to vest
in the respondent any of the powers set out in
paragraph 4.04 of the debenture. I therefore con
sider that the respondent, before its appointment
by the Court, enjoyed only the powers inherent in
a receiver and manager at common law.
One exercising the office of receiver and manag
er is acting for the benefit of the debenture hold
ers. He is not appointed to carry on the business of
the company in the best interest of the company;
he is appointed to realize the security of the deben
ture holders. 4 While the debenture itself states
that the receiver and manager is the agent of the
debenture debtor, the chief purpose of this provi
sion (which is a contractual one between Venus
and the Bank) is to confirm the title that the
receiver and manager seeks to confer on any third
party dealing with it and to exonerate the Bank
from any responsibility for acts of the receiver and
manager. The powers of the receiver and manager
are really ancillary to the main purpose of the
appointment which is the realization for the deben
ture holder of its security. The receiver and
manager is akin to a mortgagee in possession. The
receiver and manager taking possession of the
property subject to the charge becomes the manag
er of that property of the debtor but not the
manager of the debtor company.
Having gone into possession of the property of
Venus for the purpose of realizing that property
for the benefit of the Bank and being of the
opinion it would be in the interest of the Bank to
use that property in its unquestioned possession to
continue the manufacturing and merchandising
activities for which the property was suited, the
respondent was faced with the situation where
there was reason to apprehend that the unpaid
wages of the employees of Venus (whose willing
ness and assistance was necessary to accomplish
3 See Appendix I for the text of pars. 4.03, 4.04 of the
debenture.
4 In re B. Johnson & Co. (Builders) Ld. (1955) 1 Ch. 634.
the desired end) would jeopardize the operation in
the future.
Having decided to circumvent these unwanted
consequences of leaving the employees to realize
their wage claims as best they could, the respond
ent of its own accord and solely on its own judg
ment 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 calcula
tions 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 respond
ent from 1:00 a.m. 25th September. 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 cir
cumstances and carried out under its express direc
tions. Even if it be assumed that the Bank con
curred in the payments being made the person
causing them to be made was the respondent.
The attendant circumstances lead to one conclu
sion only—that the respondent was the person
paying wages to employees and consequently
coming within the ambit of section 153.
Considerable time was engaged in the discussion
of the application of a recent decision in the
Supreme Court of Canada in Dauphin Plains
Credit Union Limited v. Xyloid Industries Ltd.
[[1980] 1 S.C.R. 1182] in which judgment was
pronounced on 18th March 1980. While many of
the statements made therein are relevant to the
respondent's conduct, due to the fact that the issue
before the Court in that case was the priority as
between the claims of the Crown and the deben
ture holders to monies which had been deducted
from wages for the purpose of income tax, all that
was said in that judgment is not necessarily appli
cable to the circumstances of this case.
With respect to the quantum of the respondent's
liability, alternative submissions were made
(1) that the default of the respondent was in
failing to make, from the wages paid to the
employees, the appropriate deduction on
account of income tax; as a result the liability of
the respondent was limited to 10% of the
amount which it had failed to deduct; 5
(2) that if the respondent incurred liability on
account of failure to remit the deductions made
on account of income tax, the amount it failed to
remit should be the aggregate of the deductions
for income tax appropriate to wages equal to the
actual cash paid to each employee.
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 au
thority 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 has 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.
5 See Appendix II, for relevant provisions of Income Tax Act.
To fix the quantum of the liability of the
respondent, it is necessary to settle whether its
conduct amounted to failure to deduct or failure to
remit amounts deducted.
The T-4 and T-4 Supplementary tax returns for
the period up to and including the final pay period,
prepared by the respondent, if they stood alone
and there were no other evidence touching upon
the question, would lead to the conclusion that the
income tax relevant to the earnings of the final pay
period had been physically deducted and retained
for transmission to the Receiver General. In fact
there was nothing appearing on the T-4 Supple
mentary handed to each employee which would in
any way disclose to him or her that the amount
indicated as having been deducted for income tax
had not actually been dealt with as the Income
Tax Act requires it to be—segregated and remit
ted to Receiver General. Each employee was en
titled to assume that the amount appearing on the
T-4 Supplementary form as the aggregate of
deductions on account of income tax was that for
which he was entitled to claim credit against the
amount of income tax payable by him for the
calendar year.
However, there is uncontradicted evidence to the
effect that the aggregate amount of money which
was provided by the debenture holder to the
respondent for the purpose of "making a payment
to each employee by the amount of which they
(the employees) are 'out of pocket' with respect to
work done for the company as a result of the
company's failure and the company could not pay"
was the net amount after deduction, which the
employees together would have received for the
final pay period.
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.
The assessment made by the Minister with
respect to liability under the Income Tax Act fixes
$28,449.78 as the amount of deductions with
respect to which the respondent is liable for the
penalty of 10% provided by section 227(8). The
aggregate payroll for the final pay period was
$231,904.15 and had that amount actually been
available and exhausted on payments to employees
and segregation of amounts authorized to be
deducted, the aggregate of the deductions for
income tax would have been $28,449.78. The
amount which the respondent had available to pay
on account of wages was however $196,207.01 *
and its obligation under the Income Tax Act was
to deduct from the amount thereof apportioned as
the wages of each employee, the appropriate
amount for income tax calculated upon the portion
of the sum of $196,207.01 which was due to him
or her. In the absence of information as to the tax
status or entitlement of each employee, the proper
amount of the deductions so to be made cannot be
calculated by this Court.
The appeal is allowed, the judgment below set
aside and in its place there should be judgment
allowing the appeal as to assessment #389649 by
varying the amount of such assessment to an
amount calculated as above described; for these
purposes the assessment is referred back to the
Minister of National Revenue for reassessment in
accordance with the judgment of this Court. The
appellant should have her costs both here and
below.
* * *
URIE J.: I agree.
* * *
RYAN J.: I concur.
APPENDIX I
4.03
Whenever the security hereby constituted shall have become
enforceable and so long as it shall remain enforceable, the Bank
may proceed to realize the security hereby constituted and to
enforce its rights by entry upon the mortgaged property, or any
part thereof, without the consent of the Company or any legal
proceeding and may use force, if necessary, to obtain entry and
may take possession and get in the property charged by this
Debenture and for that purpose take any proceedings in the
name of the Company or otherwise and may proceed in any
court of competent jurisdiction for the appointment of a receiv
er or receiver and manager or by public or private sale of the
*[See p. 196 infra for motion for Court to reconsider
judgment on ground of error — Ed.]
mortgaged property, or any part thereof, or by any other
action, suit, remedy or proceeding authorized or permitted
hereby or by law or by equity; and the Bank may file such
proofs of claim and other documents as may be necessary or
advisable in order to have its claims lodged in any bankruptcy,
winding-up or other judicial proceedings relative to the Com
pany. No such remedy for the realization of the security hereof
or for the enforcement of the rights of the Bank shall be
exclusive of or dependent on any other such remedy but any
one or more of such remedies may from time to time be
exercised independently or in combination. Provided, however,
that in the event of a sale, the Bank shall provide the Company
with written notice thereof not less than thirty (30) days in
advance of such sale and shall publish such notice once in each
week for four (4) consecutive weeks in a daily newspaper of
general circulation published in each of the Cities of Saint
John, Fredericton, Halifax, Montreal and Toronto, Canada.
Thereafter it shall be lawful for the Bank absolutely to sell and
dispose of the mortgaged property and their appurtenances or
any part thereof either by public auction or private contract or
part thereof one way and part the other for such price or prices
as to the Bank shall seem reasonable. All contracts which shall
be entered into and all conveyances which shall be executed by
the Bank for the purpose of effecting any such sale shall be
valid and effectual notwithstanding the Company shall not join
therein or assent thereto and it shall not be incumbent on the
respective purchasers of such mortgaged property or any part
thereof to ascertain or enquire whether such notice of sale shall
have been given. The Bank shall be at liberty to bid and buy at
any sale by public auction only.
4.04
Whenever the security hereby constituted shall have become
enforceable and so long as it shall remain enforceable the Bank
may by instrument in writing appoint any person or persons,
whether an agent or employee or employees of the Bank or not,
to be a receiver (which term shall include a receiver and
manager) of the mortgaged property, or any part thereof,
including any rents and profits thereof and may remove any
receiver and appoint another in his stead. Any such receiver
shall for all purposes be deemed to be the agent of the
Company and not the agent of the Bank. The Bank may from
time to time fix the remuneration of such receiver and direct
the payment thereof out of the mortgaged property. Any such
receiver may be vested with all or any of the powers and
discretions of the Bank. All moneys from time to time, received
by such receiver, shall be paid by him—first, in discharge of all
rents, taxes, rates and outgoings, affecting the mortgaged prop
erty; secondly, in payment of his remuneration and cost
incurred as a receiver, including all legal fees incurred by
solicitors engaged by him on a solicitor-and-client basis and
their agents; thirdly, in keeping in good standing all liens and
charges on the charged premises prior to the security hereby
constituted if any; fourthly, in payment of the interest accruing
due on this Debenture and/or in payment of any principal due
and payable upon this Debenture as the Bank see fit; and other
sums and the residue of any moneys so received shall be paid to
the Company. The Bank in appointing or refraining from
appointing such receiver, shall not incur any liability to the
receiver, the Company or otherwise.
APPENDIX II
Section 227(8):
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.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.