Section 227

A general security interest (and a charge under s. 427 of the Bank Act) in favour of the respondent represented a fixed and specific charge on the inventory of the debtor, thereby giving priority to the respondent over the statutory trust created under s. 227(4) with respect to subsequent failures to remit source deductions. Although the security interest of the respondent was limited by the licence accorded to the debtor to deal with inventory in the ordinary course of business, this limitation applied only to the extent that there was a sale of inventory and an application of proceeds to an obligation of a third party, and did not apply here, where there is no such sale of inventory in the ordinary course of business.

Before dismissing the appellant's appeal, the Court noted that s. 227(4.1) only gave the Crown the right to obtain proceeds from a property and did not alter the ownership of the property in question (here, the ownership of a skidder in respect of which the appellant had exercised its hypothecary rights.) under the applicable provincial law.

The respondents, who seized and sold movable property secured by movable hypothecs, were required to comply with a demand made upon them to pay over amounts equal to the unpaid source deductions at the time of such sale given that they should be considered to be secured creditors rather than third party purchasers.

The Appellant, who was the assignee of a conditional sales agreement for the sale of a vehicle to a purchaser ("Mega Pets") was entitled to priority over CCRA with respect to the sales proceeds received by CCRA on a sale of the vehicle after its seizure given that conditional sales agreements were not included in the definition of a security interest in s. 224 of the Act, and under the "but for" test in s. 227(4.1), the vehicle would never have become the property of Mega Pets if the sales agreement had not been entered into.

The appellant ("First Vancouver") purchased accounts receivable from a tax debtor ("Great West") that was in arrears in remitting source deductions.

Requirements to pay that were issued under s. 224(1.2) by the Minister to the person owing the accounts receivable did not attach to the accounts receivable that had been purchased by First Vancouver. The s. 227(4.1) deemed trust was similar in principle to a floating charge over all the tax debtor's assets in favour of Her Majesty. Viewed in this way, property that came into possession of a tax debtor was caught by the trust and became subject to Her Majesty's interest and, similarly, property which the tax debtor disposed of was thereby released from the deemed trust (as occurred here)

The respondent was an assignee of a general security agreement which had been registered prior to a failure of the debtor ("Tuxedo") to remit source deductions. The Court reversed a finding of the chambers judge that only property existing at the time the trust under s. 227(4) is created is subject to the trust and that property of a taxpayer that comes into existence afterwards is not subject to the trust. Donald J.A. stated (at p. 145) that "the chambers judge's interpretation effectively adds words of limitation to 'property' confining that term to that which existed when the trust became operative".

The chambers judge concluded that the deemed trust arising in respect of a failure to make source deduction from August through November 1996 did not apply to property of the taxpayer that subsequently came into existence. The Court of Appeal overturned this finding, indicating (at p. 6504) that "beginning with the date the deductions are made, the trust continues forward in time and attaches to any property of the debtor as it comes into existence".

Given that the respondent had made payments of remuneration to employees as a bare trustee for the employer and that the decision to make payments of the net salaries of the employees was that of the principals of the employer alone, it followed that the respondent was not within the scope of s. 153(1), 153(1.3) or 227(5).

A receiver was appointed to sell the defendant's Motor Carrier Commission licences by way of equitable execution.

Hollinrake J.A. found that the word "receivership" connotes "an intention to refer to all the assets of the person, and ... cannot be read to include the sale of one asset through equitable execution by a receiver".

A statutory deemed trust created by s. 3(4) of the Payment of Wages Act (Manitoba), which provided that "every employer shall be deemed to hold the wages due or accruing due to an employee in trust for the employee ... whether or not the amount of the wages has been kept separate and apart by the employer" had priority over a s. 227(4) trust because it came into effect when the wages were due, whereas a s. 227(4) trust does not come into existence until an event of receivership.

S.227(5) "created a trust fund which is artificial to the extent that trust moneys had been mixed with other assets of the deemed trustee. It obviates the necessity of tracing those funds in order to enforce the trust."

Since S.227(5) does not deem the amounts deducted to have been kept separate and apart, then if the amounts deducted are not kept separate they must be traceable as trust moneys in order to be recovered by the Crown.

The appellant partnership "grossed-up" fees paid by it to non-resident studios on the basis that the fees were subject to Part XIII tax. Later, CRA assessed the partners of the appellant on the basis that the fees were not deductible in computing its income. The effect of this treatment was that, under s. 212(13.1)(a), the fees were not subject to Part XIII tax.

The applicant brought an application against CRA for unjust enrichment (as the non-resident studios did not apply under s. 227(6) for a refund of the Part XIII tax that had been withheld by the appellant on the grossed-up fees). In dismissing this application, Feldman, J.A. stated (at para. 14) that "the Act provides a complete procedural code for the return of non-resident withholding taxes whether paid under mistake or where there was no liability for the tax" and stated (at para. 13):

"It would appear that if the person resident in Canada who was obliged to withhold and remit to CRA wants the ability to claim a refund from CRA in case of an incorrect or overpayment, it must have an assignment or other legal arrangement with the non-resident that allows the resident to assert that non-resident's rights."

In a prior decision, the Tax Court had found that the taxpayer's directors were protected from liability for unremitted source deductions under s. 227.1(1) because they had a due diligence defence under s. 227.1(3). The question in the present case was whether the taxpayer would be liable under s. 227(9)(b). The taxpayer argued that its reassessment should be barred, because the question of source deduction liability on the present facts had already been settled by the prior Tax Court decision.

The Court of Appeal affirmed the Tax Court judge's finding that the reassessment was not barred by the doctrines of res judicata and issue estoppel. Regarding s. 227(9), Noël J. stated (at para. 3):

Like the Tax Court judge, I am prepared to assume for present purposes that a defence may be validly advanced against a failure to remit where the failure is caused by events beyond the employer's control. [In the TCC decision, Bowie J. gave the examples of a failure of the post office to deliver a remittance mailed on time, or an error made by a bank clerk in transferring funds.] However, such a failure cannot possibly be justified by a decision by the employer to appropriate for its own use source deductions in order to keep the business afloat in difficult times as was done here (reasons, paras. 21 and 22). In choosing to act as it did, the appellant ignored the unconditional duty imposed on it by subsection 153(1) and is, as such, liable to the assessed penalties.

An arrangement under which the plaintiff paid the net wage amounts owing to a subcontractor of the plaintiff in financial difficulty after being advised by the subcontractor of the gross salaries of the employees and the amount of applicable source deductions was characterized as the plaintiff having undertaken the obligation of the subcontractor to pay the salary and wages of the subcontractor's employees. Accordingly, the assessment of the Minister under s. 227(9) for the amount of source deductions plus penalty was affirmed.

The receiver-manager of a corporation ("Comanche") decided to pay the employees of Comanche the amounts owing to them net of source deductions, and instructed a corporation ("Comcheg") which previously had prepared the payroll for Comanche to prepare the payroll. Comcheg paid the employees the net amounts, issued them information slips showing the amount of their gross wages and source deductions, and was reimbursed by the receiver-manager. Rouleau, J. held that the source deductions had in fact been deducted, with the result that there was a failure to remit those deductions pursuant to s. 227(9). Unlike the Coopers & Lybrand case, funds were actually available to pay the remittances.

A penalty for failure to remit employee source deductions on the due date of February 15, 1985 was not a claim provable in bankruptcy because the proposal under the Bankruptcy Act was filed on February 6, 1985.

An employer who does not remit source deductions on time is liable to the penalty even if he remits before the time of assessment. "[A] penalty comes into existence the moment the statute is breached."

The payment by a receiver-manager of the net amount of the unpaid wages of the employees of the debtor company, without any deduction or remittance on account of taxes, was characterized as a default under S.227(8) (resulting in a 10% penalty) rather than S.227(9) (under which, prior to its replacement by the present ss.227(9) and (9.4) there in effect was a 110% penalty). Kelly D.J. stated (p. 6287):

"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 authority will recover from the employee the full amount of the income tax; the only liability incurred by the person paying the salary or wages 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 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."

Interest on unremitted source deductions continues to accrue after a s. 227(10) assessment. The Minister need not make a second assessment to recover that interest.

An assessment which a junior collections official had typed up and sent to the taxpayer was found to have been made by the Minister given that the Deputy Minister was an official authorized under Regulation 900, and the assessment was done in accordance with procedures controlled by the Deputy Minister and by officials acting according to his directions. In any event, there was implied authority accorded to the Deputy Minister to subdelegate to the collections official.

A company ("IW") had made an assignment of book debts to the td Bank. After ceasing business operations, it paid salaries to its employees without withholding and paying source deductions. Revenue Canada thereafter issued a requirement to pay pursuant to s. 224(1.2)(b).

The court indicated that Revenue Canada would have had priority over the TD Bank if s. 227(10.2) had been proclaimed in force by the relevant time.