William Perry v. Minister of National Revenue, 91 DTC 696, [1991] 1 CTC 2679 (TCC)

Mogan, T.C.J.:—The appellant was the director of an Ontario Corporation which, in 1983, failed to remit to the Receiver General of Canada certain amounts of tax deducted from salaries and wages under section 153 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The issue in this appeal is whether the appellant, in his capacity as a director, is liable under section 227.1 of the Income Tax Act for the amounts which the corporation failed to remit.

From 1972 to June 1981, the appellant owned all of the issued shares of 330037 Ontario Ltd., carrying on business under the “Ajax Tool & Die” and referred to herein as "Ajax". At all relevant times, Ajax did tool and die work making jigs and fixtures for use in the manufacture of tractors and other farm equipment. In June 1981, the appellant sold all the issued shares of Ajax to three individuals: Messrs. Ast ury, Babister and Bell. The sale price was $400,000 but the purchasers made no payment when the shares changed hands. The appellant as vendor received only a promise to pay the $400,000 at some future time secured by a debenture issued by Ajax pledging its machinery and equipment. There was no interest payable on the $400,000 for the first year (to June 30, 1982) and thereafter the selling price bore interest at the rate of ten per cent per annum.

The appellant was required to sell his shares in Ajax for health reasons; he had developed a serious heart condition in 1981. Acting on the advice of his lawyer, the appellant stayed on as a director of Ajax so that he could monitor the company's business until his debenture was paid down. The only other directors were the three new shareholders: Messrs. Astbury, Babister and Bell. The appellant was given the title of "Chairman of the Board" but he had no prescribed duties; he received no salary or director's fee; there were no fixed dates for directors meetings which he was expected to attend; and he was not involved in the management of Ajax.

Following the appellant's retirement from Ajax, he and his wife purchased a boat which they took south for six to eight months each winter. They would come back to Canada from time to time for family matters but he had very little contact with the new owners of Ajax after June 1981. Whenever he enquired about the Ajax business, he was told that sales had increased and that business was good. He did, however, receive some negative signals. He was told that Ajax could not pay the interest which began to accrue on his debenture after June 1982. He was told that Mr. Bell had resigned as a director in January 1982 following a dispute with Messrs. Astbury and Babister. And he learned in early 1983 that Mr. Astbury had resigned as a director in January 1983. When he discussed with Mr. Babister the Astbury departure and how the business was going, he heard for the first time that "things had slowed down”.

Around April 12, 1983, the appellant spoke with Mr. Babister and offered to come into the Ajax office to help with the administrative work while Babister would go out to increase sales. Mr. Babister appeared to agree because the appellant went to the Ajax office on April 13 or 14 and tried to determine the state of the business. He issued an Ajax cheque on April 14, 1983 to the Receiver General of Canada for $5,612.48 with respect to March source deductions. He did not compute the amount of the cheque but was given it from the March payroll records. This was the first Ajax cheque that he had signed after selling the company in June 1981. He did not know when issuing the cheque that the Ajax line of credit was exhausted and that the Bank would not honour it. Mr. Babister had resigned as a director of Ajax on April 13, 1983.

On April 22, 1983, Ajax was put into bankruptcy. There were a couple of small orders which were completed but Ajax ceased operations a few days later. On February 20, 1986, the respondent issued a notice of assessment to the appellant under section 227.1 of the Income Tax Act for $3,649.07 representing the following amounts:

The appellant was not represented by counsel but presented his own appeal. He stated more than once that he had no knowledge of section 227.1 of the Income Tax Act and had never been advised that he, as a director of Ajax, could be personally liable for any source deductions which Ajax failed to remit. I have no hesitation in believing the appellant because his evidence was given in a forthright and honest manner. It is a well established principle, however, that the appellant's lack of knowledge concerning a director's personal liability for source deductions will not assist him if he has failed to exercise the degree of care, diligence and skill referred to in subsection 227.1(3) of the Act. In Fraser, H. Estate v. M.N.R., [1987] 1 C.T.C. 2311; 87 D.T.C. 250, Bonner, J. stated at page 2314 (D.T.C. 252):

Mr. Fraser was unaware of the requirements of sections 153 and 227 of the Income Tax Act and that is why he did nothing. However, subsection 227.1(1) of the Act imposes liability on”. . . the directors of the corporation . . .” and not just on those directors of the corporation who are aware of the requirements of the Act.

The issue in this case does not concern the appellant's knowledge or lack of knowledge of the Income Tax Act but it does concern whether he did what was required of him under subsection 227.1(3) which states:

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.

In Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059, Addy, J. referred to the duty imposed on a director under subsection 227.1(3) and stated at page 125 (D.T.C. 6062):

The argument is based on the common law principle that no distinction is to be made between directors whether they are active or purely nominal directors. . . . There exists, as was decided by Chief Judge Couture, of the Tax Court of Canada in the reported case of Fancy & Fancy v. M.N.R., supra, certain exceptional situations where a distinction can and should be made. Be that as it may, the" circumstances” referred to in subsection (3) must be those which, either directly or indirectly, would have an effect on the actions or on the inaction of the person sought to be held liable under subsection (1).

Guided by the above quoted statement in Robitaille, I turn to the circumstances which in this appeal would have an effect on the actions or the inaction of the appellant.

It must be remembered that the assessment under appeal is based on the failure to remit source deductions for the months of March and April 1983. An employer like Ajax was not required to remit the source deductions for a particular month until the 15th day of the following month. The source deductions for April 1983 did not have to be remitted until May 15, 1983. Ajax was put into bankruptcy on April 22, 1983. From and after that date, the trustee-in- bankruptcy was in control of the Ajax assets.

In Currie v. M.N.R., [1991] 1 C.T.C. 2099; 91 D.T.C. 197, the corporation had failed to remit the source deductions for the months September, October, November and December 1987 and January 1988. On January 19, 1988, a creditor of the corporation appointed an agent to manage the corporation; and on January 29, 1988 the corporation made an assignment in bankruptcy. Taylor, J. allowed the Currie appeal with respect to the month of January 1988 because the directors of the corporation were no longer in control of its operations and finances on February 15, 1988 when the source deductions for January were required to be remitted; and he dismissed the Currie appeal with respect to the last four months of 1987.

Following the decision in Currie, supra, I allow the appeal herein with respect to the April 1983 source deductions of Ajax because, when those source deductions were required to be remitted on May 15, 1983, the directors of Ajax were no longer in control of its assets. The trustee-in-bankruptcy had assumed control of all Ajax assets from and after April 22, 1983. I am still left to consider the March 1983 source deductions of Ajax.

The appellant testified that while he controlled and managed the Ajax business to the end of June 1981, all source deductions were remitted on time. Having regard to the amounts in dispute, I assume that all of the Ajax source deductions were remitted for the period July 1981 to February 1983. Therefore, I conclude that Ajax as a corporation had a system in place for the timely remittance of source deductions and the system worked effectively. The source deductions for March 1983 were not required to be remitted until April 15, 1983. It was not until April 12 or 13, 1983 that the appellant had discussions with Mr. Babister and learned that the Ajax business had “slowed down". At that time, the appellant was not a shareholder of Ajax; he had not been involved in the management or operations of Ajax; but he did hold its debenture for $400,000.

It is necessary to examine what the appellant did as of April 12,1983. He could have relied on his debenture as a secured creditor of Ajax and done nothing, remembering that he had no knowledge of his risk or exposure under subsection 227.1(1). He could have pressed for payment of the interest on his debenture which was in arrears from July 1982. He did not rely on his debenture and remain passive; neither did he press for payment of the interest which was in arrears. Instead, he volunteered his services to help administer Ajax so that Mr. Babister could go out and promote more sales. He went to the Ajax office on April 12 or 13 and one of his first acts was to issue the cheque of $5,612.48 to the Receiver General of Canada for the March 1983 source deductions.

According to the appellant's sworn testimony, he did not know when issuing the cheque to the Receiver General that the Toronto-Dominion Bank had cut off Ajax's credit. He had no contact with the Bank until Ajax received a letter around April 20, 1983 demanding immediate payment of all amounts owed by Ajax to the Bank and seizing the receivables of Ajax. As stated above, Ajax was put into bankruptcy on April 22, 1983.

In my view, the appellant took positive action on or about April 12-15, 1983 and he did exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. In this appeal, the important words are “comparable circumstances". The appellant was a director but not a shareholder and not involved in management. He knew from his earlier period of control and management (before June 1981) that there was a system in place for remitting source deductions; and the system worked up to and including March 15, 1983. According to the evidence, April 15, 1983 was the first time the system failed and the appellant, freshly on the scene from retirement, did what was reasonably prudent in volunteering his services and issuing the Ajax cheque on April 14. What more could he have done?

I would impose a higher due diligence standard on the appellant if he had been a shareholder of Ajax; had been involved in the management of this small business; and had known from late March that the remittance of the March source deductions was in jeopardy. Although the appellant was a director of Ajax, none of these latter three conditions applied to him. The appeal is allowed with costs and the assessment of February 20, 1986 is vacated.

Appeal allowed.