Date: 20000515
Docket: 97-2566-IT-G
BETWEEN:
MCLEOD MASONRY [1979] LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the Appellant's 1992 taxation year. The issue in this appeal is whether the Minister of National Revenue (the "Minister") properly assessed the Appellant for unremitted source deductions, pursuant to subsection 153(1) of the Income Tax Act (the "Act").
[2] The Notice of Appeal describes the Appellant's position as follows:
1. McLeod Masonry [1979] Ltd. paid employees wages in the 1992 taxation year.
2. Through the fraud of a foreman who put in false time records for himself and other employees, employees were paid excessive and unearned amounts, purported to be wages, [the 'excessive wages'].
3. Initially the company made employee deductions based on the excessive wages, and those wages and deductions were reflected in the company's accounting records.
4. On discovering the true facts, the company's management revised the accounting records to show the true level of wages paid and new payroll deduction slips were made out. The company treated the monies received by the employees as in part wages, on which employee deductions were remitted, and in part as monies paid out by fraud, and therefore not wages. Employee deductions were not remitted on these latter amounts and instead a revised payroll record was used to compute the remittances.
5. The employees were issued T4 slips at the lower wage level.
6. At the lower wage level the company was responsible for $9,583.02 plus $958.30 in penalties for a total of $10,852.84 in employee deductions, of which $10,757.00 was paid by its Receiver.
7. After audit, the Minister, on November 8, 1994, assessed the company based on the first set of wage slips and says that $42,678.47 of payroll remittances are owing plus penalties of $4,267.81 and interest of $25,878.95 for a total of $72,825.35.
[3] The Reply to the Notice of Appeal reads as follows:
8. By Notice of Assessment dated on or about November 8, 1994, the Minister of National Revenue (the "Minister") assessed the Appellant for unremited employee source deductions, interest and penalties, pursuant to the provisions of subsections 153(1) and 227(9) of the Income Tax Act (the "Act"). The amounts assessed by the Minister were as follows:
CPP $ 2,936.06
UI 3,687.15
Tax 36,055.36
Total 42,678.47
Penalty 4,267.81
Interest 5,521.00
Balance $52,467.38
9. In so assessing the Appellant, the Minister relied, inter alia, on the following assumptions of fact:
a) at all material times, the Appellant was a company incorporated and carrying on business in the Province of British Columbia;
b) at all material times, the Appellant was a person paying salary, wages or other remuneration to its employees, within the meaning of subsection 153(1) of the Act;
c) the Appellant was required to deduct or withhold from its employees' wages amounts on account of its employees' federal income tax, provincial income tax, Canada Pension Plan, and Unemployment Insurance, and did so deduct or withhold such amounts as required, pursuant to subsection 153(1) of the Act;
d) the Appellant was required to remit or pay to the Receiver General for Canada the amounts described in paragraph (c) above, but it failed to remit or pay such amounts as required, pursuant to subsection 153(1) of the Act;
e) the Appellant is liable, pursuant to subsection 227(9) of the Act, for the unremitted amounts, and also for a penalty of 10% of such amounts plus interest calculated in accordance with the provisions of the Act;
f) at all material times, the employees of the Appellant received salary, wages or other remuneration, including living out allowances, to which they were properly entitled;
g) the Appellant changed its 1992 payroll records in 1993 to show lesser amounts than those actually paid to the employees and actually deducted from the employees;
h) the Appellant did not refund the alleged "excess" deductions to its employees;
i) the Appellant did not show the amounts it actually deducted on the amended T-4 slips which it issued, and did not enable its employees to obtain refunds of the alleged "excess" deductions when filing their T1 income tax returns; and
j) the total amounts paid to the employees included living out allowances, and such amounts were correctly reported in the original payroll records as having been received by the employees.
[4] The witnesses for the Appellant were Messrs. Brian Pollock, Andrew Paine, Paul Gastner and Gordon McLeod. Mr. Pollock and Mr. Paine were bricklayers, Mr. Gastner was an accountant and Mr. McLeod was the Appellant's president. For the Respondent, the witnesses were Mr. Goldie, Ms. Margaret O'Neal and Mr. Raymond Walker. Mr. Goldie is an official with a bricklayer union, Ms. O'Neal is an agent with Revenue Canada and Mr. Walker, a foreman having worked for the Appellant in the year 1992.
[5] To understand the testimony of the various witnesses, it is worth putting down as a background a brief summary of the Appellant's version of facts as given by its president and only shareholder. The Appellant is in masonry work. In the year 1992, Mr. McLeod claims that in the course of the year the Appellant paid wages to employees who had increased their hours worked. A bookkeeping firm, Blanchard Taxation, paid the employees and made the deductions based on these excessive wages. At the end of the year 1992, Mr. McLeod said that he realised the amount of wages he paid was too great and that would have explained why the Appellant was in financial difficulty. Mr. McLeod reduced the number of hours for each employee and in so doing, reduced the employment income and the amount of deductions. The Appellant issued T4s accordingly.
[6] Mr. Brian Pollock, at the time of his testimony, was working for McLeod Masonry Ltd. as a mason. In 1992, he worked for the Appellant. He stated that he belonged to a union which had as a provision that there should not be more than 37.5 hours in a week and that overtime should be paid time and a half. He affirmed that in 1992 he had been paid for more hours than he worked, maybe eight to twelve hours more, on a pay cheque. This would have taken place over a period of seven to eight months. At the end of a week, he would tender his timesheet to a supervisor who would send it to the accounting firm. It was the supervisor or the foreman who would have increased the number of hours. The name of one supervisor was Gerry Giasson. The name of the other was Ray Walker. He also stated in cross-examination that there was an agreement between the workers and the Appellant that if one worked extra hours, the pay would be at straight time. He stated however that there was no overtime at the job sites. He did not know why he would have been given the extra hours by the foreman but he received the extra hours.
[7] The second witness, Mark Andrew Paine, worked for the Appellant as a bricklayer for a period of approximately three months in 1992. He is presently on a disability pension. He never worked overtime. However, sometimes the pay cheques were a few dollars higher than they should have been, by possibly up to two hours per day.
[8] The next witness was Mr. Paul Gaster, a chartered accountant. He met with Mr. McLeod respecting this appeal. He was therefore not involved as an accountant in the years in question and was not really knowledgeable as to what really took place. He came to produce a document prepared by someone else at his firm (Exhibit A-4). The purpose of this document was to show that the Minister issued T4s with the same employment income as determined by the Appellant. The matter of various T4s will be discussed at paragraph 22 of these Reasons.
[9] Mr. Gordon McLeod obtained a degree in mechanical engineering from the University of Alberta in 1969. While at university, in the summer, he worked as a bricklayer. He explained that finally the masonry sideline got so busy that he went into that business in 1974. He related that in 1992, the provincial government had the pulp mills upgrade their pollution control and the Appellant got quite a few of these construction contracts.
[10] During that year, the Appellant employed approximately 54 employees on various job sites. Mr. McLeod stated that the Appellant hired the employees through the union halls at the union rates. The employees were bricklayers and masons. There would be eight to ten on a site and there would be a foreman to supervise.
[11] The management was done by him only. However, the Appellant used the services of a Victoria bookkeeping company, Blanchard Taxation, to pay some bills and issue the pay cheques. Mr. McLeod lived in Comox, a four hour drive from Victoria. He stated that he did not visit his accountants in Victoria more than once during the whole year. He stated that he did not review, for the whole year, the payroll data that had been prepared by Blanchard Taxation. He had given to Blanchard Taxation pre-signed cheques that the latter would courier at the end of each week to the job sites.
[12] The employees would fill their timesheet and submit it to the supervisor. Most of these supervisors had not worked for the Appellant before. Each week, the foreman on the job site would phone Blanchard Taxation to give it the number of hours worked by each employee.
[13] At the end of the year 1992, the Appellant had little cash. Mr. McLeod had to lay off the employees and finish most of the jobs himself or with a few helpers. In January 1993, Blanchard Taxation had prepared a set of T4s and a payroll summary. It is then that, according to Mr. McLeod's testimony, he realised that employees had been paid for too many hours. He went to see a firm of chartered accountants, Wharram Standeven & Co., located in Courtenay, a location close to Comox where he resided. He asked them to adjust the amount of pay and the deductions in accordance with the number of hours that he had determined appropriate for each employee.
[14] Mr. McLeod explained that he had reduced the number of hours because no overtime was ever worked at his job sites and it was without his knowledge that the employees had been paid overtime work. This is why he reduced the number of hours for all weeks being more than 37.5 hours a week. For the other weeks that had been reduced down from 35 hours to 30 hours, or from 30 hours to 25 hours, he had no explanation. He said that this had been eight years ago and that he could not remember on which basis he reduced the number of hours.
[15] He stated that he did not pay nor authorize overtime to any employees because he would have had to pay time and a half or sometime double time, in order to be in accordance with the union contract. He said he wanted to play it by the book. Some employees got living allowances which were paid by a separate cheque. He also said that at that time there was no agreement that the extra hours would be paid at a regular rate. He has that agreement now. Mr. McLeod said that he had five job sites and he would come on a job site every two weeks for two or three days. He added that when he was on a job site, the employees were not there a minute before eight o'clock and they were gone by four o'clock.
[16] There was no definitive answer given as to whether it was the amount of the total employment income that had been included in the Appellant's expense account.
[17] Mr. McLeod never informed the police nor the union that the wages had been inflated and that he considered that he had been robbed by the employees. He admitted to counsel for the Respondent that it was possible he did not mention that problem to his accountants who had prepared the T4s, when counsel asked why, when Ms. Margaret O'Neill met with the accountants, they mentioned the matter of living allowances being taken as supplementary hours by the employees, but they never mentioned overtime.
[18] Mr. McLeod gave as an additional argument, that the number of hours were inflated, that the percentage of contract labour came to 57 percent and he had calculated 40 percent.
[19] The Appellant went into receivership in February of 1993. However, it did not become bankrupt. The receivership ended in 1996 (Exhibit A-11). The Appellant exists today in an amalgamated form.
[20] Mr. McLeod stated that the Appellant should not have to pay the assessment because the Appellant should not have to make deductions on money that was stolen from it.
[21] There was confusing evidence as to whom prepared the various T4s. In the end, it would appear that three sets of T4s were prepared. The second and the third were issued to the employees. The second one was prepared by the Appellant's new accountants on the reduced number of hours. The third set was issued by Revenue Canada, who did not modify most of the entries made by the employer when it issued its own set of T4s. Revenue Canada had amended the T4s only for the purpose of correcting the amounts of the registered pension fund and include the pension adjustment amount.
[22] Mr. Goldie, the business manager of the Bricklayers' Union, Local 1, testified at the request of counsel for the Respondent. He held that position for two years. Prior to that time, he was a business agent. He testified that the Appellant had been behind in his remittances over the years. He confirmed the number of hours that union employees had to work but stated that the union would intervene in the matter of overtime being paid straight time rate only if there was a complaint from the employees.
[23] Ms. Margaret O'Neal was a payroll auditor for the Minister in the years in question. Her audit began at the end of 1993 for the purpose of determining for each employee the amount paid in a registered pension fund and consequently, the amount of pension adjustment. She came to the accountant's office because they had issued the T4s. She found however that there were documents that did not concur. She left with boxes of documents. One of these boxes contained the pay slips that were issued to the employees with their pay cheques. These slips were produced as Exhibits-R-3, R-4, A-6, A-7 and A-8. She made a complete list (Exhibit R-5). In her final analysis and calculation, she arrived at the same figures as Blanchard Taxation. She also commented on letters sent to Revenue Canada by some workers who found out that the amounts reported by the Appellant did not concur with the totals found on their pay slips.
[24] Mr. Raymond Walker testified at the Respondent's request. He is a bricklayer. He worked as a foreman at two jobs for the Appellant for most of the year 1992. On the first job, Mr. McLeod did not know him well so Mr. McLeod himself looked after the payments of the local bills. On the second job, Mr. Walker was looking after that. He had kept all paperwork that he had to complete in his job as a foreman and brought it with him to the hearing. He explained that there was overtime worked but it was always with the general contractor's permission. The orders were filled and authorisation signed. These orders were produced as Exhibits R-14 to R-16. Although fraud was alleged by the Appellant regarding this witness, there was no evidence adduced in this respect against him at the hearing. Mr. Walker was not questioned by the Appellant on this subject, which was crucial to the Appellant's version of facts.
Argument
[25] Counsel for the Appellant submitted that there were two issues. Firstly were the employees paid more than they earned? Secondly, if the answer is affirmative, was the Appellant liable under the Act to withhold the deductions?
[26] Counsel for the Appellant submitted that the evidence of Messrs. Pollock and Paine that there was overtime should be preferred to that of Mr. Walker. The evidence of Messrs. Payne and Pollock was the evidence of two independent witnesses. Moreover, counsel for the Appellant suggested that it seemed clear that no union employee may work overtime without being paid time and a half.
[27] Counsel for the Appellant submitted that if the Court looks at the evidence as a whole, taking into account all the witnesses, the balance of probability is that employees were paid extra wages for at least an extra hour a day. This is also born out by Mr. McLeod's evidence that the jobs went over budget and that the payroll was more than it should have been and was a major contributing factor to his company becoming insolvent. In many instances, Mr. McLeod rolled back the wages in a precise fashion. For example, if the hours were over 37.5, he would roll them back to 37.5. As for the other roll backs for which he cannot remember the explanation, it is not surprising. This was eight years ago. If one looks at the level to which Mr.McLeod rolled back the wages, it is quite reasonable. It is also interesting that Revenue Canada issued T4s at the same level that the Appellant had done. For them, to not turn around and controvert their own document is a startling position to take and quite unfair.
[28] Counsel for the Appellant referred to the words used in subparagraph 153(1)(a) of the Act: salary, wages or other remuneration. He submitted that stolen money is not salary wages or other remuneration. "Salary" is not defined in Black's Law Dictionary, but "wages" is defined as follows: A compensation given to a hired person for his or her services. Compensation of employees based on time worked or output of production. He concluded by stating forcefully that clearly stolen money is not compensation.
[29] Counsel for the Respondent explained that this was essentially the story of a person whose company was beginning to get into financial trouble. There may, in Mr. McLeod's mind, have been some impression that this in fact was occurring. It is the Minister's position that fraud has not been proven.
[30] Mr. Walker has kept all copies of the work orders and extra hours orders, showing the amounts paid for the employees and the dates involved in all of those figures. He testified that there was an agreement, that if there was to be overtime, it would occur and that they would be paid straight time payment. Overtime was authorised, not only by Mr. McLeod, but certainly by the general contractor. There is no suggestion that Mr. Walker ever misused anything. His responsibilities included supervising these employees, dealing with the suppliers and paying accounts. He had pre-signed cheques so Mr. McLeod was obviously able to trust him with his funds to make payments accordingly.
[31] Mr. Pollock's evidence was that there was some agreement with the Appellant to paying extra hours at straight time, but Mr. McLeod later said that that was only for later years and not back in 1992.
[32] Mr. Goldie testified that he had been dealing with McLeod's Masonry since probably as far back as 1980. For the year 1992, he was aware that there had been some employee complaints about certain amounts of benefits. For example, medical premiums not being paid. He testified about the union contract: overtime is allowed; there is a higher rate that must be paid for it, but the union will not act unless there is a complaint.
[33] There has never been a satisfactory explanation, and Mr. Walker was not asked to give an explanation, as to why he would enter into this arrangement to pay people extra money, or himself extra money.
[34] Mr. McLeod pre-signed cheques. Some of these were left with his foreman on the sites for certain expenses, some were given to the accountant who would then fill them out according to the information he received from the sites. In his own evidence, he did not review the work done by the accountant until a whole year had passed.
[35] He also testified he did not make any efforts to recover any of the excesses that any of the employees would have taken. He is alleging that they all lived in different places and it would have been difficult for him to do so. That may be, nevertheless that does not justify trying to recoup the money from the Minister. Neither the police nor the union were contacted in this regard.
[36] Counsel for the Respondent also noted that it was interesting that we did not hear from some of the witnesses who might have shed some light on this, such as any of the former accountants.
[37] Ms. O'Neil had access to the very best material. She had the original, what she calls "the little slips of paper". They were the pay slips containing all the information from the very first pay the employees would have received, showing the higher wage level and all the deducted amounts. They match the pay stubs the employees received when they received their cheques. She did not just take a sampling of anything. She reviewed all the employees. She reviewed all of the pay periods. Regarding the T4s that were issued by the Minister, they were made for the registered pension plan and for the pension adjustment amounts in boxes 20 and 52 on the T4s. It does not necessarily mean that Revenue Canada is agreeing with all the amounts shown in the boxes. The T4 slips are issued by the employer from the employer's records. They do not have a legal weight on their own. The tax liability arises from the Act.
[38] It is admitted that the higher wage amounts were actually paid. The employees actually received the money and the deductions were taken off.
[39] Even if fraud was established, and it is not in the Minister's view, that all that would really do is remove the obligation to deduct in the first place. If it is not salary or wages, maybe there is no liability in terms of a responsibility for deducting, but what if the employer does deduct? At that point, the rest of the section 153 of the Act flows. Once the deduction has been made, it has to be withheld. It is trust money, it then has to be remitted to the Receiver General. The funds were deducted on the employees' behalf. It is their tax liability. It was deducted by the employer and then, it never went anywhere. It was supposed to go to the Receiver General.
[40] Counsel for the Appellant replied on this last aspect that subsection 153(1) of the Act should be read as a whole and that there is a condition precedent in that the amounts paid must be wages, salary or other remuneration.
Conclusion
[41] It is my view that the alleged overstatement of the number of hours worked by the employees on the basis that no overtime was ever allowed by the Appellant failed to be proven. Mr. McLeod made no mention in his testimony of the role of a general contractor on a job site and of its relationship between the latter and the Appellant. Mr. Walker produced documents completed by him for the general contractor as Exhibits R-14 to R-16. Some documents were also signed by agents of the general contractor but all were completed to obtain payments or to comply with some other requirements of the agreement between the Appellant and the general contractor. These documents showed that the employees had worked overtime. Regarding whether overtime was allowed on the job sites, it is my view that the general contractors on the various sites could have been asked to testify on the matter. It is not possible to believe that Mr. McLeod did not review the timesheets nor the cheques being issued by Blanchard Taxation for the whole of the year 1992. No one from Blanchard Taxation was asked to testify on this matter. The subsequent accountants who prepared the litigious T4s did not mention to the Minister's agent that the hours had been reduced because they had been fraudulently increased by the foremen but because they comprised living out allowances.
[42] Absence of the pertinent witnesses, absence of documents, incomprehensible alleged managerial behaviour, contradictory version of the facts, were more than sufficient indicators that the Appellant's allegations could not be substantiated. The payments made by the Appellant were for wages.
[43] In any event, it is a fact admitted by the Appellant that the employees were paid at the higher level as wages to them and that the deductions were made on the pay cheques.
[44] The pertinent part of subsection 153(1) of the Act reads as follows:
(1) Every person paying at any time in a taxation year
(a) salary or wages or other remuneration,
...
shall deduct or withhold therefrom such amount as is determined in accordance with prescribed rules and shall, at such time as is prescribed, remit that amount to the Receiver General on account of the payee's tax for the year under this Part or Part XI.3, as the case may be, and, where at that prescribed time the person is a prescribed person, the remittance shall be made to the account of the Receiver General at a financial institution (within the meaning that would be assigned by the definition “financial institution” in subsection 190(1) if that definition were read without reference to paragraphs (d) and (e) thereof).
[45] Counsel for the Respondent is right in her interpretation that once the deductions are made on an amount that has been paid as a remuneration they have to be remitted to the Receiver General. The wording and the economy of the Act necessarily ask for this interpretation.
[46] If some portion of the remuneration was earned on fraudulent grounds as is claimed by the Appellant, the matter should have been litigated between the payor and the payee. If this claim is unknown to the payee, he will include the amount in his employment income and pay his taxes and other dues as a consequence. In other terms, the amounts deducted belong to the payee. They are deducted and remitted on his behalf. They cannot be appropriated in the manner used by the Appellant. I wish to refer to a decision of this Court in The Grand Council of the Crees (of Quebec) v. M.N.R., 90 DTC 1652, at page 1654:
Moreover, the Appellant by deducting the required amounts without remitting them to the Receiver General, goes against the general scheme of the Act since subsection 153(3) of the Act states the following presumption:
(3) Effect of deduction. When an amount has been deducted or withheld under subsection (1), it shall, for all the purposes of this Act, be deemed to have been received at that time by the person to whom the remuneration, benefit, payment, fees, commissions or other amounts were paid.
Tax refunds are in effect made by the Minister and not by the person paying.
and to Dauphin Plains v. Xyloid and the Queen, [1980] 1 S.C.R. 1182, at pages 1191 and 1192:
It is important to consider the nature of the deduction for income tax. It is not a deduction for the benefit of the employer, it is a withholding for the benefit of the employee because it is to be remitted to the Receiver General of Canada on account of the employee's tax indebtedness. By virtue of other provisions of the Income Tax Act if, as happens in a large number of cases, the withholdings exceed the employee's tax liabilities, a refund will be made to the employee by the Department of National Revenue. Therefore, the amount withheld remains a part of the wages, and subs. 153(3) provides that it is "deemed to have been received" by him at the time the payment was made less the deduction. Furthermore, subs. 227(4) of the Income Tax Act provides:
(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.
... Section 153 of the Income Tax Act is the only law under which anyone can make a deduction for income tax, but this section goes on to provide in subs. (4), that the amount so deducted shall be held "in trust for Her Majesty". ...
It must also be considered that, by virtue of s. 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. ...
[47] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 15th day of May, 2000.
"Louise Lamarre Proulx"
J.T.C.C.