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Citation: 2004TCC64 |
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Date: 20040119 |
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Docket: 2003-909(IT)I |
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BETWEEN: |
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PORTLAND HOTEL SOCIETY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Agent for the Appellant: Brad Doherty
Counsel for the Respondent: Raj Grewal
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REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Vancouver, British Columbia, on August 14, 2003)
Mogan J.
[1] This is an appeal by the Portland Hotel Society from an assessment issued by the Minister of National Revenue under subsection 227(10.1) of the Income Tax Act with respect to penalties for source deductions remitted late. The Appellant has appealed from that assessment and has elected the informal procedure.
[2] The Portland Hotel Society is a non-profit corporation which provides social housing in the City of Vancouver. It operates 500 units for people who would not otherwise have housing. These are sometimes referred to as the most unfortunate members of our society. Evidence was given by Brad Doherty who is controller of the Appellant corporation. He explained that the Appellant operates five buildings, which provide these 500 units to people who would not otherwise be houseable. They also operate four programs which are designed to help these people become productive members of society in the hope that, in the long term, they would be able to leave social housing and become eligible for housing in the ordinary commercial market.
[3] Sometime around 2000 or 2001, the Appellant company was authorized to acquire two additional buildings which could be renovated to provide additional housing. Those buildings are identified as the Pennsylvania Hotel and the Stanley Hotel. Mr. Doherty stated that these hotels had a difficult clientele in the sense that they were often the scenes of fights; and they were occupied by people who had HIV and other similar illnesses which afflict the poor and the homeless.
[4] Having acquired these two old buildings, the Pennsylvania Hotel and the Stanley Hotel, the Appellant was required to renovate them before they could be occupied for social housing. But before they could be renovated, the Appellant was caught in a financial squeeze because of a provincial election in the Province of British Columbia.
[5] As was reported in the media, there was a significant election in British Columbia, in 2002 or late 2001, when a new government was elected with promises to cut costs and change the way the province was governed. As soon as the new government took office, it took steps to cut costs; and the Appellant was caught in the crossfire of changes in government policy. The Appellant had acquired the buildings in the expectation that it would have funds to renovate them, but the funds were not forthcoming while the province and the City of Vancouver reorganized the financing of social agencies.
[6] The Appellant had to incur significant costs maintaining these buildings by way of insurance, municipal taxes, security costs and other maintenance costs without being able to use them. This put the Appellant in a cash bind. It did receive regular operating funds but it had to use those funds for the five existing occupied buildings which had the 500 units occupied and satisfying the social purpose of the corporation.
[7] As aresult, the Appellant was late remitting the source deductions which had been taken on the payroll of its employees, and those late payments occurred in the last half of the calendar year 2002. According to the Reply to the Notice of Appeal, on the first late payment which was only a couple of days late, no penalty was assessed. But there were seven occasions, in the last six months of 2002, when the Appellant was late, usually by just a few days, in making the remittance of the source deductions; and they were penalized by Canada Customs and Revenue Agency with respect to those late remittances.
[8] Mr. Doherty entered as Exhibit A-1 a summary of the penalties charged showing that from August 21, 2002 to December 12, 2002, on seven occasions, they were late making payments and penalized each time. The seven penalties, plus a modest amount of less than $1,000 in interest, accumulated to a total of $19,955, although the only two amounts which are directly under appeal are the first two penalties of August 21, 2002 for $2,942 and September 6, 2002 for $3,007.
[9] Basically, as counsel for the Respondent pointed out, the Appellant is coming to this Court on compassionate grounds. It is a non-profit corporation and is totally dependent upon public authorities like the Province of British Columbia, or the City of Vancouver, or some other municipalities, to provide funds so that the Appellant can discharge its obligation to provide social housing.
[10] What the Appellant encounters is the structure of the Income Tax Act which is a statute without emotions. The following sections of that Act are relevant. Subsection 153(1) states in part:
153(1) Every person paying, at any time in a taxation year
(a) salary, or wages, or other remuneration, ...
shall deduct or withhold from the payment the amount determined in accordance with the prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General ...
That is the basic obligation on any employer to withhold appropriate levels of income tax from the payment of salary and wages. Subsection 227(9) provides for a penalty and the relevant words are:
227(9) ... every person who in a calendar year has failed to remit or pay as and when required by this Act ... an amount deducted or withheld as required by this Act ... is liable to a penalty of
(a) 10% of that amount; ...
That is the 10% penalty which has been imposed on the Appellant corporation. Subsection 227(9.4) states:
227(9.4) A person who has failed to remit as and when required by this Act ... an amount deducted or withheld from a payment to another person ... is liable to pay as tax under this Act on behalf of the other person the amount so deducted or withheld.
Now, this last provision is important because, in the broad scheme of employment in Canada, the employee has tax deducted at the source and never receives that amount. That is to say, a person who ordinarily would earn a salary of $1,000 per week might have $150 of tax withheld, and so that person receives only $850. The tax withheld of $150 is supposed to be remitted by the employer to Revenue Canada. If the employer fails to remit it, then the employer is liable, and not the employee, because it would be unfair to turn to the employee and ask the employee to pay the $150 when he or she never received it.
[11] That is the scheme of the Act in transferring the liability from the employee to the employer for amounts which are withheld but not remitted. To make that liability work and to permit the Minister to collect from the employer, there is a further provision in subsection 227(10.1) which states:
227(10.1) The Minister may at any time assess
(a) any amount payable under ... subsection (9) ...
and, where the Minister sends a notice of assessment to the person, ...
and then the appeal provisions kick in. That is the kind of assessment the Minister has issued to the Appellant requiring it to pay a penalty under subsection 227(9) on the amount that was late remitted.
[12] This is not a case of total failure to remit; it is a case of failure to remit within a prescribed time. But the penalty is there because the amounts which are withheld are deemed under another provision of the Act to be held in trust. That is to say, on payday any employer is obliged to pay the full amount of the salary or wages to an employee. In the example I gave above, on payday the person who is earning $1,000 a week is entitled to receive the $1,000. But then the Act interferes with that right of the employee to receive full salary and says, no, you may not receive your full salary because we are imposing an obligation on the employer to withhold and remit a certain amount of your salary. In other words, we are going to collect the tax on your salary as you receive it through the year.
[13] That is the scheme and, from a practical point of view, that is the only way it can work. The obligations to withhold are inflexible and the obligations to remit are equally inflexible. The penalty authorized under subsection 227(9) is fixed by statute, and this Court does not have authority to reduce the penalty or cancel it because it is imposed by Parliament. If the conditions are met which permit the penalty to come into play (a late remittance), then the liability is fixed. And if the Minister imposes the penalty by issuing an assessment under subsection 227(10.1), then this Court does not have authority to set aside the penalty on compassionate grounds. Therefore, because the appeal is based primarily on the compassionate circumstances of the Appellant, the appeal will have to be dismissed.
[14] I would add this note to these Reasons for Judgment. Under subsection 220(3.1) of theAct, the Minister has a discretion to waive or cancel all, or any portion of any penalty payable under the Act. This Court cannot force the Minister to exercise his discretion one way or the other. But the Minister will not exercise his discretion unless the taxpayer makes a specific request, in writing, to the Minister, referring to subsection 220(3.1), and asking for the exercise of the discretion. It seems to me in the circumstances of this appeal, which I am required to dismiss, that the Appellant has good grounds to at least make the request to the Minister for the exercise of that discretion.
Signed at Ottawa, Canada, this 19th day of January, 2004.
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"M.A. Mogan" |
Mogan J.
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CITATION: |
2004TCC64 |
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COURT FILE NO.: |
2003-909(IT)I |
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STYLE OF CAUSE: |
Portland Hotel Society and Her Majesty the Queen |
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PLACE OF HEARING: |
Vancouver, British Columbia |
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DATE OF HEARING: |
August 14, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice M.A. Mogan |
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DATE OF JUDGMENT: |
August 29, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Brad Doherty |
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Counsel for the Respondent: |
Raj Grewal |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |