Couture,
C.J.T.C.:—These
appeals
were
heard
on
common
evidence.
They
relate
to
assessments
for
the
1982
taxation
year
issued
against
the
appellants
by
Revenue
Canada
on
May
31,
1984
in
respect
of
their
alleged
liability
under
subsection
227.1(1)
of
the
Income
Tax
Act
(the
Act).
They
were
assessed
a
total
of
$62,239.20
each
as
directors
of
Bernard
Fancy
Trucking
Limited
("the
company").
This
sum
is
the
aggregate
of
amounts
withheld
by
the
company
from
employees'
salaries
for
income
tax
together
with
interest
and
penalties.
This
is
set
out
in
a
certificate
dated
December
10,
1982
and
registered
by
the
respondent
with
the
Federal
Court
of
Canada.
A
copy
of
it
is
in
evidence
in
these
proceedings.
The
evidence
adduced
by
the
appellants
may
be
summarized
as
follows.
Bernard
Fancy
lives
with
his
wife
in
Harrietsfield,
Nova
Scotia.
He
has
a
grade
8
education.
After
leaving
school
he
went
to
Halifax
and
worked
at
construction
jobs
until
1961
when
he
began
acquiring
equipment
for
his
own
purposes.
In
1970
he
incorporated
the
company
to
carry
on
an
excavation
business.
Its
officers
and
directors
were
the
appellants.
Initially
only
Mr.
Fancy
operated
the
equipment
and
his
wife
assumed
the
duties
of
bookkeeper,
but
she
was
also
familiar
with
most
aspects
of
the
business
and
together
they
discussed
its
management.
In
1975
an
office
manager
was
hired,
but
Mrs.
Fancy
kept
control
over
the
payroll
and
the
preparing
and
signing
of
all
cheques.
From
its
inception,
the
company
was
financed
by
bank
loans
with
the
usual
collateral
in
favour
of
the
bank
of
a
personal
guarantee
by
the
appellants
and
a
general
assignment
of
its
accounts
receivable
(the
assignment).
In
1975
Bernard
Fancy
was
approached
by
the
manager
of
a
competitor
of
the
company’s
bank
who
offered
to
cancel
the
personal
guarantee
given
by
the
appellants
and
to
lend
money
to
the
company
at
a
better
rate
of
interest.
The
appellants
were
satisfied
with
the
company's
bank
and
were
not
keen
to
make
the
change.
Bernard
Fancy
discussed
the
competitor's
proposal
with
the
company's
bank
manager
who
agreed
to
deal
with
the
company
on
the
same
terms
and
conditions
that
had
been
offered
by
the
competing
bank.
The
company
remained
with
its
original
banker
and
the
appellants’
personal
guarantee
was
cancelled.
The
company
expanded
and
prospered
throughout
the
70s
and
became
a
large
excavating
contractor
with
about
95
employees.
In
early
1980
the
general
economy
of
the
area
where
the
company
did
business
deteriorated
mainly
because
of
rising
interest
rates
and
the
recession
that
followed
and
the
company's
business
consequently
declined.
By
1981
the
economic
situation
had
not
improved
and
the
company's
financial
position
because
of
a
cash
flow
problem
was
worsening
notwithstanding
that
its
balance
sheet
as
at
the
end
of
its
fiscal
year
October
31,
showed
retained
earnings
of
$706,231.
By
the
end
of
1981
it
had
reached
its
borrowing
limit
with
the
bank.
The
appellants'
concern
led
to
a
meeting
early
in
July
1982
between
Bernard
Fancy
and
its
auditors,
a
firm
of
chartered
accountants,
at
which
their
advice
was
sought
regarding
what
should
be
done.
He
was
informed
that
one
option
was
to
dispose
of
some
of
the
company's
heavy
equipment,
and
a
second
option
was
to
try
to
obtain
an
additional
line
of
credit
from
the
bank.
The
equipment
was
heavily
financed
with
United
Dominion.
The
auditor
also
informed
him
of
the
personal
responsibility
and
obligations
of
a
director
of
a
company
vis-à-vis
Revenue
Canada
for
withholding
and
remitting
deductions
from
employees'
salaries.
Following
this
meeting
he
met
with
representatives
of
United
Dominion
to
try
to
arrange
for
the
disposition
of
some
of
the
equipment.
The
finance
company
was
not
interested
in
taking
over
the
equipment,
but
agreed
to
remit
to
the
company
any
proceeds
of
sale
in
excess
of
its
book
value.
The
appellant
believed
that
any
money
remitted
by
the
finance
company
would
not
be
subject
to
the
assignment
in
favour
of
the
bank.
An
unsuccessful
auction
was
held.
For
example,
a
three-year-old
piece
of
equipment
that
had
been
purchased
for
$612,000
was
sold
for
$150,000
which
was
far
below
its
book
value.
There
simply
was
no
advantageous
market
for
second-hand
equipment
at
that
time.
The
bank
refused
to
extend
further
credit
to
the
company.
By
August
the
financial
situation
of
the
company,
that
is,
its
cash
flow
had
been
further
aggravated
and
the
bank
was
monitoring
all
cheques
issued
by
it
and
only
authorizing
certain
specified
payments.
Copies
of
the
financial
statements
for
the
year
ending
October
31,
1980
and
1981
were
entered
as
exhibits.
They
show
that
the
company
realized
a
net
income
of
$83,717
in
1980
and
$113,747
in
1981
and
that
the
company
had
retained
earnings
as
of
the
same
date
of
$592,484
and
$706,231
respectively.
Neither
appellant
ever
received
a
bonus
from
the
company
and
their
salaries
were
$27,000
for
Bernard
Fancy
and
roughly
$12,000
for
his
wife.
It
did
not
make
an
assignment
under
the
Bankruptcy
Act
and
a
receiving
order
has
not
been
made
against
it
under
that
Act.
Mrs.
Fancy
confirmed
her
husband's
testimony
and
added
a
few
details
regarding
the
payroll
and
remittances
to
Revenue
Canada.
For
instance,
after
the
office
manager
was
hired
in
1975,
she
retained
control
over
the
payroll
and
signed
all
the
cheques.
She
would
do
the
monthly
remittances
to
Revenue
Canada
and
she
had
not
been
late
throughout
the
12
years
that
the
company
was
operating.
In
answer
to
a
question
by
counsel
for
the
respondent
she
explained
her
practice
regarding
the
payroll
which
she
prepared
every
month,
making
the
statutory
deductions
and
then
proceeding
to
the
bank
and
paying
these
accounts
on
or
before
the
15th
of
the
following
month.
The
cheque
for
the
July
1982
deductions
that
was
due
by
August
15
was
paid
by
the
bank
without
question.
However,
with
respect
to
the
September
cheque
for
the
August
deductions
when
she
communicated
with
the
bank
to
seek
its
approval
to
issue
it,
the
bank
refused.
She
then
got
in
touch
with
the
company's
auditors
who
advised
her
to
inform
Revenue
Canada
of
this
situation
which
she
did
immediately.
Dorothy
Fancy
estimated
that
when
the
company
ceased
operations
she
and
her
husband
lost
roughly
$700,000.
The
respondent
invokes
the
provisions
of
subsections
227.1(1)
and
(2)
in
support
of
his
assessments
as
they
read:
227.1
(1)
Where
a
corporation
has
failed
to
deduct
or
withhold
an
amount
as
required
by
subsection
135(3)
or
section
153
or
215
or
has
failed
to
remit
such
an
amount,
the
directors
of
the
corporation
at
the
time
the
corporation
was
required
to
deduct
or
withhold
the
amount,
or
remit
the
amount,
are
jointly
and
severally
liable,
together
with
the
corporation,
to
pay
any
amount
that
the
corporation
is
liable
to
pay
under
this
Act
in
respect
of
that
amount,
including
any
interest
or
penalties
related
thereto.
(2)
A
director
is
not
liable
under
subsection
(1),
unless
(a)
a
certificate
for
the
amount
of
the
corporation's
liability
referred
to
in
that
subsection
has
been
registered
in
the
Federal
Court
of
Canada
under
subsection
223(2)
and
execution
for
such
amount
has
been
returned
unsatisfied
in
whole
or
in
part;
(b)
the
corporation
has
commenced
liquidation
or
dissolution
proceedings
or
has
been
dissolved
and
a
claim
for
the
amount
of
the
corporation's
liability
referred
to
in
the
subsection
has
been
proved
within
six
months
after
the
earlier
of
the
date
of
commencement
of
the
proceedings
and
the
date
of
dissolution;
or
(c)
the
corporation
has
made
an
assignment
or
a
receiving
order
has
been
made
against
it
under
the
Bankruptcy
Act
and
a
claim
for
the
amount
of
the
corporation's
liability
referred
to
in
that
subsection
has
been
proved
within
six
months
after
the
date
of
the
assignment
or
receiving
order.
The
certificate
referred
in
paragraph
2(a)
was
registered
with
the
Federal
Court
of
Canada
and
execution
was
returned
unsatisfied.
Also
those
things
enumerated
in
paragraphs
227.1(2)(b)
and
(c)
did
not
happen.
The
appellants
rely
on
the
provisions
of
subsection
227.1(3)
and
claim
that
they
exercised
the
degree
of
care,
diligence
and
skill
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances
to
prevent
the
failure
by
the
company
to
comply
with
the
provisions
of
section
153
of
the
Act
and,
therefore,
as
directors
of
the
company
they
are
relieved
from
the
liability
imposed
under
subsection
227.1(1).
Subsection
227.1(3)
reads:
(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
that
every
person
paying
at
any
time
in
a
taxation
year
salaries,
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
for
Canada
on
account
of
the
payee's
tax
for
the
year.
In
this
context
under
subsection
248(1)
"prescribed"
means
"prescribed
by
regulation.”
The
provisions
of
subsection
227.1(3)
are
clear
that
the
liability
of
a
director
of
a
company
under
227.1(1)
is
contingent
upon
his
personal
conduct
as
a
director
in
relation
to
the
circumstances
that
gave
rise
to
the
omission
by
the
company
to
withhold
or
remit
the
deductions
from
em-
ployees'
salaries.
Accordingly,
previous
decisions
rendered
by
this
Court
are
not
of
great
assistance
in
arriving
at
a
determination
of
liability
in
respect
to
subsequent
appeals
unless
the
Court
is
dealing
with
comparable
facts.
Christie,
A.C.J.
in
the
recent
decision
of
Denis
John
Cybulski
v.
M.N.R.,
[1988]
2
C.T.C.
2180;
88
D.T.C.
1521
said
this
regarding
subsection
227.1(3):
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
the
requirement
for
positive
assertion
on
the
part
of
a
taxpayer
in
order
to
bring
himself
within
its
ambit,
that
is
not
necessarily
so
in
all
situations
and,
in
particular,
it
is
not
a
requirement
in
the
circumstances
of
this
appeal.
The
evidence
is
that
at
the
time
that
the
company
began
carrying
on
business
in
1970
its
operations
were
financed
by
the
bank.
Its
balance
sheet
indicates
its
paid
up
capital
was
only
$50.
When
the
appellants
made
the
previously
mentioned
assignment
to
the
bank,
it
was
in
effective
control
of
the
company's
cash
flow,
at
least
to
the
extent
of
its
advances
to
it
and
it
could
intervene
at
any
time
it
believed
that
its
loans
were
in
jeopardy.
The
bank
was
in
a
position
to
dominate
the
finances
of
the
company
and
to
dictate
its
fate.
Its
main
concern
is
to
recoup
its
money.
This
was
the
situation
of
the
company
since
1970
and
at
the
beginning
of
August
1982.
The
bank
was
in
control
of
the
movement
of
its
funds.
Under
such
a
situation
and
from
the
evidence
can
it
be
said
that
the
appellants
did
not
exercise
the
degree
of
care,
diligence
and
skill
referred
to
in
subsection
227.1(3)
thereby
being
liable
under
the
provisions
of
subsection
227.1(1)?
In
my
opinion
the
answer
is
no.
It
appears
to
me
that
the
appellants
did
everything
that
could
reasonably
be
expected
of
them
to
meet
the
requirements
of
subsection
227.1(3)
of
the
Act.
There
is
no
evidence
that
the
appellants
caused
the
company
to
divert
any
of
its
funds
to
their
benefit
or
to
the
benefit
of
other
creditors
to
the
detriment
of
the
respondent.
They
were
frugal
individuals
receiving
a
modest
salary
without
additional
benefits.
From
July
to
October
1982
the
appellants
made
efforts
to
raise
funds
and
they
were
hopeful
that
the
bank
would
support
the
company
as
it
had
in
the
past
and
allow
it
to
meet
its
obligations
under
the
Act
as
it
did
with
the
August
15
cheque
for
the
employees'
deductions.
It
was
only
on
or
about
September
10
that
the
bank
refused
to
honor
the
payment
to
the
respondent.
My
appreciation
of
all
these
facts
is
that
the
appellants
were
victims
of
circumstances
over
which
they
had
no
effective
control.
They
were
also
entangled
in
a
legal
network
which
had
its
origin
when
the
company
began
its
operations
and
assigned
its
receivables
to
the
bank,
a
situation
that
legally
restrained
their
control
over
its
cash
flow
as
long
as
it
owed
money
to
the
bank.
They
were
conscious
of
the
company's
obligation
under
the
Act
and
of
their
respective
personal
liability
and
in
my
opinion
under
the
prevailing
circumstances
they
exercised
the
degree
of
care,
diligence
and
skill
referred
to
in
subsection
227.1(3)
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances
to
remove
themselves
from
the
ambit
of
subsection
227.1(1).
To
find
otherwise
would
require
to
impute
to
them
a
lack
of
care,
diligence
or
skill
because
at
the
outset
of
the
company's
operations
in
1970
they
caused
it
to
give
the
bank
an
assignment
of
its
receivables,
a
proposition
that
I
cannot
accept.
In
Cybulski,
supra,
Christie,
A.C.J.
also
said:
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
Corporation
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'."
These
reasons
are
not
to
be
construed
as
suggesting
that
an
employer
who
assigns
his
receivables
to
a
third
party
automatically
escapes
from
the
application
of
subsection
227.1(1).
To
the
contrary
they
relate
to
the
particular
set
of
facts
and
the
circumstances
pertaining
to
these
appeals.
Counsel
for
the
respondent
suggested
that
when
the
appellants
were
aware
of
the
company's
serious
financial
problems
around
the
beginning
of
August
1982
they
should
have
caused
it
to
cease
its
operations.
By
continuing
to
operate
he
contended
they
accepted
the
risk
of
becoming
personally
liable
for
the
company's
debt
to
the
respondent
under
subsection
227.1(1).
I
cannot
subscribe
to
such
a
proposition
because
it
does
not
reflect
the
true
intent
of
the
legislation.
The
personal
liability
of
directors
created
by
subsection
227.1(1)
is
not
an
absolute
liability.
It
is
conditional
upon
their
personal
conduct
in
respect
of
the
circumstances
linked
to
the
omission
by
their
company
to
remit
the
deductions
from
its
employees'
salary.
The
exercise
of
the
care,
diligence
and
skill
referred
to
in
subsection
227.1(3)
exempts
them
from
that
personal
liability.
For
the
above
reasons
these
appeals
are
allowed.
The
appellants
are
entitled
to
one
set
of
costs
on
a
party-party
basis.
Appeals
allowed.
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