Partway through 2008, the taxpayer ceased to pay wages to a worker and purported to pay dividends instead. On learning in 2009 that it was not in a position to have paid dividends, the taxpayer prepared a T4 slip for 2008 for the amounts so paid and remitted applicable source deductions on a late basis. The Minister assessed penalties pursuant to s. 227(9)(b) on the taxpayer for the failure to remit source deductions on a timely basis.
C. Miller J. found that penalties were not warranted. First, s. 227(9) only applies to source deductions which were made but not remitted. Failures to make timely source deductions are caught instead by s. 227(8).
Second, the taxpayer's director's uncontradicted evidence was that the payments were dividends at the time, and the onus was on the Minister to establish that source deductions should have been withheld. C. Miller J. stated (at para. 12): "there is no proof that the so-called dividend draws were just a figment of [the director's] imagination." The taxpayer therefore had a due diligence defence.