Farris, C.J.:—In this matter Graham was operating a logging operation in British Columbia in the year 1943, during which time he deducted from his employees an amount of approximately $1,700.00, but did not keep the money so deducted separate and apart from his other funds as required by Section 92, Subsection (7) of the Income War Tax Act.
Graham also became indebted to the Workmen’s Compensation Board in British Columbia in the sum of $1,800.00, and in the summer of 1944 the Workmen’s Compensation Board sued for the amount and garnisheed one Barrow who paid into Court approximately the sum of $1,800.00 upon the garnishee. summons.
The Workmen’s Compensation Board notified the Dominion Government of the proceedings, and in pursuance of such notification the Department of Income Tax has intervened, claiming that it is entitled to receive the said moneys in priority to the Workmen’s Compensation Board of British Columbia under Section 92, Subsection (7), of th Dominion Income War Tax Act.
It is contended by the Intervener in effect that the Dominion Government has a prior claim on all moneys withheld or deducted by an employer and not paid to the Dominion Govern- ment under all circumstances as against any other claim, and as against all or any of the assets of the employer in default, and relied upon the authority of the C.F.L. Engineering Company and Duclos, [1944]' Canada Tax Cases 63.
The Compensation Board contended that Subsection (7) of Section 92 simply meant this:
1. That the employer upon deducting or withholding any moneys from an employee for Income Tax purposes was to place the money so held in a separate account, and that the employer should be the Trustee therefor, and his failure so to do would subject him to a penalty. Secondly, that in the event of any liquidation or assignment in bankruptcy the moneys so set aside should not form any part of the estate of the person in liquidation, assignment or bankruptcy, and thirdly, that even in the event of there being no liquidation, assignment or bankruptcy, and any claim being made against the employer, that the funds so set apart should be paid to the Dominion Government in priority of any other claims.
It was further contended that save as aforesaid it did not extend the rights of the Dominion Government to have a general prior claim against any or all of the assets of the employer and that as in this case the moneys garnisheed by the Workmen’s Compensation Board were not the moneys deducted or withheld and set apart, that the Dominion Government had no priority and that. the Workmen’s Compensation Board was entitled under the general rule of law, having succeeded in its garnishee, to recover the amount paid into Court as a result of its proceedings.
In my opinion the deducting or withholding the Income Tax by the employer is a bookkeeping transaction only, and when the wage is paid to the employee showing to the employee that the wage so paid is the net amount coming to the employee after deducting or withholding the Income Tax, that it matters not from what source the money was obtained to pay the employee, and whether or not the employer had on hand the funds necessary to pay the amount to the Dominion Government on account of Income Tax. To this extent I am in agreement with the learned Judge in the case of the C.F.L. Engineering Co. (supra).
It is further my opinion that when the employee has been paid and the tax deducted or withheld as aforesaid, that the drastic provisions of Subsection (6) of Section 92 of the Income War Tax Act become effective and whether or not such employer has in hand the actual funds to pay such Income Tax, he is, nevertheless, deemed to have such funds on hand and is the trustee thereof for the Dominion Government, and is liable as is any trustee for the failure to account for trust moneys, and is also liable to a penalty for failing to keep such money separate and apart as required by Subsection (7) of Section 92.
It does not seem to me that the Act contemplates giving the Dominion Government any greater right than any person would have against a trustee handling trust funds, save and except the penalty against such trustee for failing to keep such trust funds separate and apart from his other funds.
It is my opinion, therefore, that the Dominion Government has not a general priority for the payment of the Income Tax due it, except as against the funds in the trust account, or which can be followed as having come from the funds, either which should have been paid into the Trust account or which had been improperly paid out of the Trust account.
If it were otherwise it would mean an entire disruption of the credit life of the country. To illustrate : Supposing A, an executor of an estate, had loaned to Graham in 1940 the amount of $1,700.00 on a mortgage as authorized for the investment of trust funds, the property being at the time of the granting of the mortgage worth say $5,000.00, and in 1944 it had depreciated in value until it was worth only $1,700.00, the amount of the mortgage, A, the executor of the estate, is a secured creditor of Graham’s. Yet, if Section 7 is to be construed as sought by the Dominion Government, the Dominion Government’s claim, being approximately $1,700.00, would be paid in priority to the secured claim of the estate represented by A, and the estate’s investment would be entirely wiped out. Surely, if there was such an intention it should have been expressed in the clearest language. The language could have been simple, such as this: "‘In any event whether the amount so deducted or withheld shall have been paid into a separate account or not, or whether the employer is in liquidation, bankruptcy, or has made an assignment or not that the amount withheld by the employer shall rank as a claim of the Dominion Government in full priority of any secured or unsecured creditors, whether such security has been given prior to the withholding or deducting of the tax or not, and including any claim of His Majesty in right of any Province of Canada and against all or any of the assets of the estate.” No such language or similar language is found in the Income War Tax Act.
It has not been established here that the funds garnisheed by the Workmen’s Compensation Board either have come out of the Trust fund or were funds that should have been paid into the Trust fund, and therefore the Workmen’s Compensation Board of British Columbia is entitled as against the Dominion Government to priority for the amount brought into Court as the result of the proceedings instituted by the Workmen 3 Compensation Board.