Christie, A.C.J.T.C.: — Pursuant to subsection 227(10) of the Income Tax Act ("the Act") the respondent assessed the appellant for $4,118 plus interest and penalties alleged to be payable by the latter under subsection 227.1(1) of the Act. Subsection 227(10) authorizes the Minister of National Revenue to assess a taxpayer for any amount alleged to be payable by him under section 227.1. Subsection 227.1(1) provides that where a corporation has failed to remit an amount deducted or withheld under section 153 of the Act the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest and penalties relating thereto. A director is relieved of liability under certain circumstances set out in section 227.1, the only one of which that need be specified for the purposes of these reasons is subsection 227.1(3). It provides:
227.1(3) A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
Section 153 provides, inter alia, that every person paying at any time ina taxation year salary or wages or other remuneration shall deduct and withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee's tax for the year. In this context under subsection 248(1) "prescribed" means "prescribed by regulation".
The amounts in issue in this litigation, apart from penalties and interest, were deducted under section 153 by 479565 Ontario Limited ("the Company") which carried on business as Kirkland Lake Sanitary Services. It was incorporated under the laws of Ontario on May 8, 1981 and its shareholders were the appellant and Mr. Floyd Skuce. Each owned 50 per cent of the shares and both were directors of the Company. Skuce was its president and the appellant was its secretary-treasurer. At the hearing counsel for the respondent stated that the amounts deducted should have been remitted not later than September 15, 1984; October 15, 1984 and January 15, 1985. There is no dispute about this. What must be addressed is: (1) did the appellant cease to be a director of the Company prior to September 15,1984; and (2) if he did not cease to be a director prior to that date, is he liable to pay the amounts deducted ($4,118) and interest and penalties relating thereto.
Sometime prior to the incorporation of the Company the appellant was employed part-time as an office manager by a paving company named Delmar Paving owned by Skuce. He also worked for another corporation in the construction business in the same capacity. He divided his time approximately equally between these two employers. The construction company terminated its business whereupon the appellant was employed full-time by Delmar Paving and his duties changed to that of estimator. While working in Kirkland Lake in that capacity it came to his attention and that of Skuce that bids were being invited by the Town of Kirkland Lake for a sanitation (garbage collection) contract. They decided to have the Company (which had been incorporated for an unrelated purpose) tender on the contract and its bid was successful. At this time Skuce was associated with a business involved in sanitary services at Pembroke. The result was that the appellant became involved in sanitation services in both Pembroke and Kirkland Lake. The Company also entered into a sanitation contract with Rouyn-Noranda in Quebec.
The Company encountered serious financial difficulties because of what the appellant regarded to be irresponsible behaviour on the part of Skuce. This led to quarreling and hostility between them, the upshot of which was an end to their business relationship. Skuce offered the appellant this choice: he would terminate his relationship with the Company or the appellant could give up his interest in it. The appellant chose to leave and the next day, Ma 1, 1984, he delivered his resignation to Skuce which he had prepared in longhand. He says that in this letter he resigned both as secretary-treasurer and as director of the Company. On the same day Skuce signed a letter in his capacity of president of the Company that reads:
I, Floyd D. Skuce, President of 479565 Ontario Ltd., hereby accept the resignation of Denis J. Cybulski from the position of Secretary-Treasurer effective May 1st, 1984.
It is the evidence of the appellant that he did not make and retain a copy of his resignation because at the time he regarded the letter to be received from Skuce as sufficient for his purposes. Skuce indicated his intention of having the appellant's shares transferred to his wife, Dr. Irene Tuttle, and the appellant understood that she "would be taking over in my place and I walked out of there with a clear conscience that I was out of the company." A financial settlement was to be arrived at between Skuce and the appellant. It was to include the assignment to Skuce or his wife by the appellant of an interest that he had in a parcel of real estate in Quebec and indemnification of the appellant by Skuce in respect of any debts for which he might be liable as a result of his association with the company. These matters were not made final until approximately April or May 1985 by which time the property was transferred to Dr. Tuttle and the appellant's shares disposed of.
In the course of cross-examination counsel for the respondent placed two documents in evidence. First is copy of a resignation dated January 28, 1985 signed by the appellant. It is addressed to the Company and reads: "I hereby tender my resignation as a director and secretary-treasurer of the above corporation, to take effect upon acceptance by the shareholders of the corporation.” This document had been prepared by a lawyer and the appellant signed it along with other documents pertaining to settling his financial interest in the Company and his business relationship with Skuce. He signed even though he believed he had resigned the previous May. He added that it should have been dated May 1, 1984. Second is a copy of the Directors' Register pertaining to the Company. All it shows is that the appellant and Skuce became directors on May 8, 1981 and that the former retired on January 28, 1985 and that the offices held by them were secretarytreasurer and president. It is admitted that the appellant was a director named in the articles of incorporation.
Prior to what he believed to have been his resignation on May 1, 1984 the appellant appreciated the importance of remitting deductions at source to Revenue Canada on time. This arose out of his experience with Delmar Paving which was late on a number of occasions in remitting deductions of this kind with consequent onerous additional expenses because of penalties and interest. He spoke to the Company's bookkeeper, Lyne Galvin, from time to time about the significance of this. She was immediately responsible for remitting deductions at source. He said that there had been no failure to remit deductions on time prior to May 1, 1984. He was not cross-examined on this nor was evidence in contradiction introduced. Prior to being assessed the appellant had no knowledge of the Company's failure to remit the deductions that are in issue in this appeal.
After May 1, 1984 the appellant played no role in the affairs of the Company because he believed that he had effectively terminated his responsibility in relation to it and, further, Skuce eliminated any possibility of this. Their friendship was at an end and the appellant became the "out sider”. Any conversations he had with Skuce boiled down to threats being made by the latter. When he attempted to elicit general information about the Company he was unsuccessful. He spoke to the bookkeeper on two occasions, but she simply referred him to Skuce. That the appellant should have a continuing interest in the welfare of the Company pending a settlement in respect of his financial interest therein is understandable.
Subsections 119(1), (2) and (3); paragraph 121(1)(a) and subsection 121(2) of the Ontario Businesss Corporations Act, 1982 that came into force on July 29, 1983 provide:
119(1) Each director named in the articles shall hold office from the date of endorsement of the certificate of incorporation until the first meeting of shareholders.
(2) No director named in the articles shall be permitted to resign his office unless at the time the resignation is to become effective a successor is elected or appointed.
(3) The first directors of a corporation named in the articles have all the powers and duties and are subject to all the liabilities of directors.
121(1) A director of a corporation ceases to hold office when,
(a) he dies or, subject to subsection 119(2), resigns;
(2) A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.
In reassessing the respondent assumed that the appellant was a director of the Company on September 15, 1984; October 15, 1984 and January 15, 1985. The onus is, of course, on the appellant to establish on the balance of probability that this assumption is wrong. There is nothing in evidence regarding a first meeting of shareholders or that a successor to the appellant in his capacity of a director named in the Articles of Incorporation was elected or appointed. It is the position of the respondent that by operation of subsection 119(2) and paragraph 121(1)(a) the appellant continued in office during the times relevant to this appeal. Indeed on the basis of this argument the evidence suggests that the appellant did not even succeed in resigning on January 28, 1985 because the copy of the Directors’ Register previously mentioned does not show a successor director in respect of the appellant. I find that the words "No director ... shall be permitted to resign" in subsection 119(2) raises questions. Who is being directed to withhold the permission, the corporation or its board of directors? What are the legal consequences if, as in the case at hand, the resignation must be taken to have been permitted by either the corporation or the board of directors or both? Perhaps if a director is permitted to resign contrary to subsection 119(2) the resignation is effective, but paragraph 257(1)(j) of the Ontario Business Corporations Act, 1982 becomes applicable. It reads:
257(1) Every person who
(j) otherwise without reasonable cause commits an act contrary to or fails or neglects to comply with any provision of this Act or the regulations,
is guilty of an offence and on conviction is liable to a fine of not more than $2,000 or to imprisonment for a term of not more than one year, or to both, or if such person is a body corporate, to a fine of not more than $25,000.
Also if someone could show that he had sustained damage by reason of unauthorized permission having been granted this might be evidence of negligence in civil proceedings. The immediate predecessor to subsection 119(2) of the Ontario Business Corporations Act, 1982 is 121(1) of the Business Corporations Act, R.S.O. 1980, c. 54. It reads differently and, to my mind, more understandably, at least in the present context:
121(1) Each of the persons named as first directors in the articles of a corporation is a director of the corporation until replaced by a person duly elected or appointed in his stead.
This is traceable back in identical wording to Statutes of Ontario 1970, c. 25, ss. 123(1) and in substance in Ontario legislation to Statutes of Ontario 1874, C. 35, s. 19.
I am satisfied that apart from subsection 119(2) the appellant would have ceased to be a director on May 1, 1984. His resignation was in writing and I accept that it related to his offices of secretary-treasurer and director. I also accept his explanation regarding why he did not make and retain a copy. His resignation was received by the corporation and in the normal course it would have been effective on receipt. There is no need for a corporation to specifically acknowledge receipt of a resignation in order for it to take effect, but if it decides to do so, as will probably happen in most cases, the wording of the resignation will, as a general rule, prevail over the wording of the acknowledgement in case of conflict.
None of the questions arising out of subsection 119(2) and paragraph 121(1)(a) were touched upon at the hearing, but because of what follows they need not be answered. Even if it is conceded that the appellant was a director of the Company during any time relevant to this appeal, I am nevertheless of the opinion that he is relieved of liability under subsection 227.1(3) of the Act.
This is said with reference to the position at common law regarding the basic requirements of care and skill imposed on a director in Canadian Business Corporations by lacobucci, Pilkington and Prichard at page 287:
The common law standard of care and skill which a director must meet is generally expressed as an objective standard: he must exercise the reasonable care and skill which an ordinary person might be expected to exercise in the circumstances on his own behalf. However as Mr. Justice Romer indicated, in the leading case of Re City Equitable Fire Insurance Company, [1925] Ch. 407 at p. 428, affd [1925] Ch. 500 (C.A.), the common law standard is also partly subjective: a director need not exhibit a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. At common law the degree of care and skill demanded of a director varies with the type and size of the company he serves.
The statutory standard set out in subsection 227.1(3) of the Act first found its way into legislation in Canada with the enactment of section 144 of the Business Corporations Act 1970, Statutes of Ontario 1970, c. 25. It provides:
144. Every director and officer of a corporation shall exercise the powers and discharge the duties of his office honestly, in good faith and in the best interests of the corporation, and in connection therewith shall exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Samuel Levine in his work Business Corporations Act. . . An Analysis says at page 230: "In a phrase, the purpose of s. 144 is to substitute for the common law standard of conduct of the ‘ordinary person' the new statutory standard of conduct of the ‘reasonably prudent person'." The legislative path of this section after its enactment to the present is: R.S.O. 1970, c. 53, s. 144; R.S.O. 1980, c. 54, s. 142 and Statutes of Ontario 1982, c. 4, paragraph 134(1)(b). It became part of the law of Canada as paragraph 117(1)(b) of the Canada Business Corporations Act, Statutes of Canada 1974-75-76, c. 33. It has also been adopted in provinces other than Ontario, e.g. Business Corporations Act, Statutes of New Brunswick 1981, c. B-9.1, paragraph 79(1)(b) and the Corporations Act, Statutes of Newfoundland 1986, c. 12, paragraph 199(1)(b). It was made part of federal income tax legislation by Statutes of Canada 1980-81-82-83, c. 140, ss. 140(1) applicable after November 12, 1981.
Subsection 227.1(3) has been judicially considered on a number of occasions, but the facts of those cases are so different that they do not really assist in determining the liability of the appellant in this appeal. I have in mind: Barnett v. M.N.R., [1985] 2 C.T.C. 2336; 85 D.T.C. 619; Lloyd Youngman & Company Inc., Trustee of the Estate of Harold Fraser in bankruptcy v. M.N.R., [1987] 1 C.T.C. 2311; 87 D.T.C. 250; Quantz v. M.N.R., [1988] 1 C.T.C. 2276; 88 D.T.C. 1201; Beutler v. M.N.R., [1988] 1 C.T.C. 2414; 88 D.T.C. 1286 and Moore v. M.N.R., [1988] 2 C.T.C. 2191.
In my opinion the general principle that ignorance of the law is no excuse can have no application here. In enacting subsection 227.1(3) Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners. While at first blush subsection 227.1(3) suggests a requirement for positive assertion on the part of a taxpayer in order to bring himself within its ambit, this is not necessarily so in all situations. It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having "exercised" that degree of care, diligence and skill expected of a reasonably prudent person that creates the protection from liability afforded by the subsection. That obtains in respect of this appeal. I am satisifed that reasonable grounds existed for the appellant's belief that he had severed his connection with the Company as director and secretary-treasurer and concomitantly his responsibility for it when he placed his resignation in the hands of the Company's president and it was accepted by him. This relieves him of vicarious liability for the Company's default in remitting the deductions at source and this is so a fortiori where, as here, the appellant was effectively barred from exercising influence over the management of the company by the person in de facto control of its affairs after the resignation was submitted.
The appeal is allowed with costs.
Appeal allowed.