Johnstone v. Minister of National Revenue, 97 DTC 355, [1997] 2 CTC 3085 (TCC)

Teskey T.C.J.:

These two Appeals are heard on common evidence. Both Appellants appealed the assessment of the tax made pursuant to Section 227 of the Income Tax Act (the Act).

Issue

The sole issue before me is whether these two Appellants exercised a degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances as provided for in the saving provision s.227.1(4) of the Act.

I am aware that these director liability cases all are determined on the basis of the facts before the Court in each individual case. I find that both Appellants are honest businessmen. Their testimony is taken without reservation.

The Appellants, in April of 1991, became directors of Hollowcore Limited (Hollowcore) at the same time that their corporation Cameron and Johnstone Limited became a 50% owner in Hollowcore. From April 8th, 1991 to July 6th they loaned to Hollowcore $700,000.00. Neither Appellant has received any money or benefit whatsoever from Hollowcore. They were passive directors. All source deductions were remitted to Revenue Canada by Hollowcore up to January 30th, 1992. The source deductions that should have been made on February 25th and March 10, 1992 were never remitted. Hollowcore had a valid working arrangement that source deductions be made. Joseph Kist, the President of Hollowcore, the driving force behind Hollowcore had his daughter Cynthia as bookkeeper. She always prepared the source deduction cheque and necessary remittance forms ahead of time and arranged for them to be paid on the due date. Also Hollowcore had a part-time chartered accountant by the name of John McKee (McKee) acting as part-time comptroller. McKee and the Appellants were aware that if source deductions were not made penalties would be added and that directors were responsible for any source deductions not paid. All three believed that all source deductions were paid as required.

The Appellants hired Coopers & Lybrand, a well known and respected firm to assist in the properly winding down of Hollowcore. It was not until April of 1992 that McKee realized these source deductions were not paid. Obviously the cheques were prepared but never delivered.

I find that neither Appellant was aware of this and that they were relying upon management to make these payments and also relying on McKee to keep them informed. McKee should have known the cheques were not delivered and should have advised the Appellants. He did neither.

I find that Tab 16 of Exhibit R-1 speaks for itself. I also find Russell Garrard a National Bank employee who also signed the Tab 16 letter to be an unsatisfactory witness. I specifically find that neither Appellant did anything to jeopardize the position of Revenue Canada. They did not divert any money away from Revenue Canada and at all times acted in an honourable fashion. I am satisfied that their conduct falls squarely within the saving provision s.227.1(4). They were entitled in these circumstances to rely upon the management team and McKee the chartered accountant. The appeals are allowed with one set of costs on a party and party basis awarded to them and the assessments are quashed.

Appeal allowed.