R. v. O'Dare, 79 DTC 5243, [1979] CTC 407 (B.C. Co. Ct.)

Hardinge, J:—This is an appeal by the Crown from the acquittal of the respondent on two counts of failing to remit income tax deducted from the wages of the employees of a company of which he was an officer contrary to subsection 238(2) of the Income Tax Act, SC 1970-71-72, c 63.

The facts are that Sage Land & Cattle Co Ltd, as it was required by law to do, deducted $3,386.65 from the wages of its employees for the month of September 1976 and $4,037.68 for the month of October 1976. However, these monies were not, as they should have been, remitted to the Receiver General of Canada by the middle of the month following that when they were deducted. What happened was that cheques for the required amounts were dispatched to the Department of National Revenue but, before they could clear the company’s bank, the funds necessary to cover them were diverted to other purposes. Consequently, the cheques were dishonoured.

The respondent is a certified general accountant who, at the relevant time conducted most of his business in the village of Bella Coola. He was a major shareholder and a director of the company as well as being its secretary-treasurer. His duties necessitated his travelling twice a month from Bella Coola to the village of 100 Mile House, where the company was engaged in logging operations. During these visits he apparently made up the company’s payroll for its employees and prepared the required cheque to the Receiver General for the monies held back in respect of the tax obligations of its employees.

According to the respondent’s evidence the company was experiencing financial difficulties. Its main source of income seems to have been an organization identified only as “Wildwood”. The respondent testified that on the 15th day of each month he caused cheques to be sent to the Receiver General in amounts equal to what had been deducted from the wages of the company’s employees during the preceding month. However, at the time these cheques were mailed, he knew that there were insufficient fundsinthe company’s bank account to cover them. He testified that the company received payment from Wildwood on the 20th of each month. So, by the time the cheques to the Receiver General were received by the Department of National Revenue through the mail and deposited for payment, he expected there to be sufficient funds in the company’s bank account to cover them.

Unfortunately, the respondent’s system of financing failed in September 1976 when, because of poor logging conditions, the monies received from Wildwood were insufficient to cover the company’s liabilities in respect of its employee deductions. As a result of the decrease in the company’s revenues its bank then reduced its line of credit which in turn, caused the same thing to happen in respect to the October 1976 cheque to the Receiver General.

It is quite clear from the record that the respondent was intimately involved in the affairs of the company and particularly its financial affairs. He and his wife owned 50% of its shares and received a salary of between $800 and $1,200 per month. He made up the payroll for the employees of the company and, prior to moving from 100 Mile House to Bella Coola in September 1976 his signature, together with that of the other principal shareholder, was required on all cheques issued by the company. After he moved to Bella Coola, he was still authorized to sign company cheques but his signature was no longer required. He did in fact sign the two cheques to the Receiver General that were dishonoured.

The respondent was also fully aware of the relevant provisions of the Income Tax Act. He has been practising his profession as an accountant since 1965 and became a Certified General Accountant in 1966. Both the company and the respondent had previously been charged with identical offences of failing to remit monies deducted from employees’ wages for income tax. On the previous occasion the company had been convicted although no final disposition was ever made of the charge against the respondent. I mention the previous charge only because it seems to me to be relevant to the issue of mens rea. In any event the respondent stated in cross-examination that he believed that monies deducted from wages of employees pursuant to the requirements of the Income Tax Act were not the company’s money but were akin to monies impressed with a trust.

On behalf of the respondent it was submitted that there was no intention on his part that the cheques would not be honoured when presented for payment at the company’s bank. It was likewise submitted that his expectation that the cheques would be honoured was not, in the circumstances unreasonable.

With deference to the learned trial judge, I have had difficulty understanding the reasons on which he based his finding that the respondent was not guilty. He suggests that if the respondent had been charged ‘’as an individual”, he would have had no valid defence. The learned judge then went on to rule that a different test should be applied when a person is charged in his capacity as an officer of a company with failing to remit tax monies deducted from its employees’ wages.

The only issue at the trial and on this appeal was whether the respondent’s conduct was such as to make him personally responsible for the offences admitted to have been committed by Sage Land & Cattle Co Ltd. Section 242 of the Income Tax Act, SC 1970-71-72, c 63 provides:

242. Where a corporation is guilty of an offence under this Act, an officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in, or participated in, the commission of the offence is a party to and guilty of the offence and is liable on conviction to the punishment provided for the offence whether or not the corporation has been prosecuted or convicted.

There can be no doubt but that the respondent was effectively the chief financial officer of the company and was intimately familiar with its precarious financial position. His own testimony also makes it clear that he was aware of and acquiesced in the practice of the company of not setting aside monies deducted from its employees’ wages pursuant to section 153 of the Act and remitting them to the Receiver General. He knew when he made up and remitted cheques to the Receiver General that there were not sufficient funds in the bank account of the company to cover the cheques. Therefore, he must have known that the monies being deducted pursuant to section 153 of the Act were being diverted from their intended purpose.

Section 153 of the Act may not by its terms specifically impress a trust on monies deducted from employees’ wages pursuant to the Act. The section does, however, provide in part, that the employer, “shall, at such time as may be prescribed, remit that amount ...”. (italics added). This wording suggests to me that it was the intention of the legislative draftsman that [it is] the money that is deducted from employees’ wages for tax purposes and not merely a sum of money equal to the amount deducted that is required to be remitted. In other words, if section 153 does not explicitly impress monies deducted pursuant to it with a trust, it does so by necessary implication. Accordingly, if an officer or director of a company acquiesces in the diversion for other purposes of money deducted from the wages of its employees pursuant to section 153 and , because of such diversion, the company is unable to meet its obligation under that section, the officer or director may be virtue of section 242 of the Act become a party to the offence committed by the company.

In any event, it is my opinion that mens rea, in the traditional sense, is not an essential ingredient of the offence of failing to remit money deducted from the wages of employees pursuant to section 153. It may well be that certain offences under the Income Tax Act would, by their very nature, require proof of “full”, mens rea. Other offences may be offences involving strict liability when no mens rea need be proved. I would place offences such as that created by section 153 under the third category that was recognized by the Supreme Court of Canada in Reg v Sault Ste Marie (1978), 85 DLR (3d) 161.

On the facts of the present case my view is that the respondent, at the very least, failed to exercise due diligence in his capacity as Secretary- Treasurer, and Director of the Company to ensure its compliance with the requirements of section 153 of the Act. The belief of the respondent that the cheques would be honoured was not, having regard to what he knew of the company’s straitened financial situation, a reasonable belief. Nor did the respondent, having issued the cheques to the Receiver General, take reasonable care to ensure they would be honoured.

For the foregoing reasons the appeal is allowed, the verdict of the learned trial judge is set aside, and the respondent is found guilty of both counts set out in the Information herein.

As counsel did not, during the course of the hearing of the appeal, make any submissions on the matter of sentence or costs in the event that the appeal was allowed, these matters will have to be spoken to at a date to be fixed.