Laxton v. MNR, 89 D.T.C. 629, [1989] 2 CTC 2407 (TCC)

Lamarre Proulx, T.C.J.:—This is an appeal concerning the liability of directors pursuant to section 227.1 of the Income Tax Act (the Act). This appeal has been heard on common evidence with the appeals of eight other taxpayers. [1] All were represented by the same counsel except Mr. Gustav A. Panz. The latter in addition to the defence brought forward by the others, put forward his own defence of due diligence. There were in fact, ten taxpayers assessed under subsection 227.1(1) of the Act. One taxpayer, [2] although duly notified, was not present at the hearing and his appeal was dismissed for want of prosecution.

The taxpayers were assessed as being directors of the Vancouver Professional Soccer Limited (corporation). With the exception of Mr. Panz, all the taxpayers admitted being directors of the corporation. Mr. Panz's specific defence will be addressed in my reasons for judgment dealing with his appeal. The decision reached in the case of the appellant will apply to the appeals of the other appellants using the same defence.

Mr. Douglas C. Morley, the corporate solicitor of the Vancouver Whitecaps Soccer Limited Partnership, testified for the appellant. In or about 1979, a group of persons interested in promoting soccer in Vancouver formed a general partnership known as Vancouver Whitecaps Soccer Partnership (partnership). The corporation was the manager of the partnership. In October 1983 the partnership was dissolved and the Vancouver Whitecaps Soccer Limited Partnership (limited partnership) was established. Most of the former partners of the partnership became limited partners and maintained their previous obligations. The corporation became the general partner. The limited partnership was the owner of the assets: rights to contracts, equipment and interest in the franchise. The corporation had one unit in the limited partnership.

The corporation had funds in its bank account that came from the limited partnership. According to the witness, the corporation was not the owner of these funds. The limited partnership was. The cheques were drawn from the bank account of the corporation but in doing so, the corporation was acting on behalf of the limited partnership. The corporation, in its capacity as general partner, maintained the books. The payroll number was in its name. The employment contracts were signed Vancouver Whitecaps Soccer Limited Partnership by its general partner, Vancouver Professional Soccer Ltd.

In 1984, as the business of the limited partnership was not going well, there was a meeting of the limited partnership to raise additional money. The limited partners advanced additional moneys with the instruction that only the net wages of the employees be paid. This, according to the witness, was not done in their capacity as limited partners or directors but in their capacity as lenders.

In early 1985, both the limited partnership and the corporation made an assignment in bankruptcy. The records were transferred to the trustee in bankruptcy. There was a fire and all the original records were destroyed.

The appellant is a director of the corporation and a limited partner in the limited partnership.

Counsel for the appellant chose not to put forward the due diligence defence that is allowed pursuant to subsection 227.1(3) of the Act. He submitted that the essential issue to be decided by the Court is who was the payor of the wages and salary of the various limited partnership employees and that the payor, as envisaged by subsection 153(1) of the Act, was the limited partnership not the corporation, and therefore it was that entity which had the obligation to deduct not the corporation and, accordingly, the directors were not liable.

Subsections 153(1) and 227.1(1) of the Act read as follows:

153 (1) Every person paying at any time in a taxation year

(a) salary or wages or other remuneration, . . .

shall deduct or 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 under this Part.

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.

Counsel for the appellant emphasized the fact that the corporation had no moneys of its own and no employees. It was not the employer. It was in fact only acting on behalf of the limited partnership. He submitted that the corporation was nothing more than a conduit through which the limited partnership did its business and that surely section 153 cannot be interpreted as placing an obligation on conduits such as the corporation or for that matter a clerk preparing and handing over the cheques for the employees. Surely the question has to be who actually paid the amount and the only answer to that question is that the limited partnership paid the wages, not the corporation. He added that this was not a situation where the corporation was independently, with its own funds, making payments on the salary or wages and later billing the limited partnership nor is it a case of ownership of the funds actually changing hands prior to their release to the employees.

Counsel for the appellant did not refer me to any case but stated that he would distinguish the cases referred to me by counsel for the respondent which were the following:

Comité Paritaire de l'industrie de l'automobile de Montréal et du district v. M.N.R., [1980] C.T.C. 2983; 80 D.T.C. 1857;

In re Bankruptcy of G. & G. Equipment Co. Ltd., [1974] 2 W.W.R. 95; 74 D.T.C. 6407;

The Queen v. Coopers & Lybrand Limited, [1980] C.T.C. 367; 80 D.T.C. 6281;

The Queen v. Coopers & Lybrand Limited, [1980] C.T.C. 406; 80 D.T.C. 6323.

Employer-employee relationship: The Federal Court of Appeal determined in Coopers & Lybrand, supra, at page 372 (D.T.C. 6284) that it is not necessary that there exists between the recipient of the payments and the payor, an employee-employer relationship to meet the requirements of section 153 of the Act. I find the case law consistent on that aspect.

Acting on behalf of another person: This aspect was also examined in the Coopers & Lybrand case, supra, at page 375 (D.T.C. 6285-86):

Was the respondent a person paying wages or salaries to employees?

The position taken by the respondent before was that it was not personally responsible for the act of paying the wages but that, being a receiver and manager it was acting on behalf of others; and that, under the debenture, it was the agent of Venus and incurred no personal liability in result of its activities in causing to be made the payment of wages to employees.

Even if it be assumed that, so far as the respondent's responsibilities to Venus were concerned, the relationship between the respondent and Venus was that of agent and principal, the payment to the employees of the amount equal to the amount indicated to be due and payable to them personally according to the payroll calculations for the final pay period was not an act of which Venus was capable at that time. All of its property had been in the possession of the defendant from 1:00 a.m., 25th September. The payment of the amounts, which I have concluded were wages, was a result of a decision taken by the respondent in complete awareness of all the circumstances and carried out under its express directions. Even if it be assumed that the bank concurred in the payments being made the person causing them to be made was the respondent.

Counsel for the appellant put forward the proposition that the instructions to pay only the net wages came from the appellant acting as a lender and not from the appellant acting as a director, or that the corporation received its instructions from the limited partnership. I find this distinction between lenders, partners and directors unacceptable when they are the same persons. I can only find that the directors of the corporation were well aware that only the net wages were being paid and that the amounts referred to in subsection 227.1(1) were not remitted in accordance with the Act. Moreover, I do not believe that for the Federal Court of Appeal the determinative criterion was who was giving the instructions but who was the person causing the payments to be made.

I shall now deal with the submission made by counsel for the appellant that to find that the corporation is the payor in these circumstances would be tantamount to finding that a clerk preparing and delivering the pay cheques to be the payor. I find the situation to be entirely different. In the case at bar, the corporation was acting as an agent for the employer, which is not the case of the clerk. The corporation was a separate entity, having its own bank account, its own board of directors, its own powers and duties. In this respect, it is important to examine the powers and duties of the general partner and those of the limited partners as they appear in the limited partnership agreement.

7.1 The General Partner is authorized and required to manage, control, administer and operate the business and affairs of the Partnership and to represent and act on behalf of the Partnership and without limitation the General Partner shall:

(1) provide over-all management, financial, and business planning;

(2) establish and maintain all books of account, and such other records as may be required;

(3) prepare an annual budget to be presented to the Limited Partners at each annual meeting;

(4) take in, and account for, income of the Partnership

(5) make distributions and return Capital Contributions in accordance with this Agreement;

(6) pay costs and expenditures reasonably incurred by the Partnership

The General Partner may contract with any person to carry out any of the duties of the General Partner and may delegate to such person any power and authority of the General Partner hereunder, but no such contract or delegation shall relieve the General Partner of any of its obligations hereunder.

7.2 The General Partner shall hold the Property in trust for the benefit of the Partnership and will execute from time to time declarations of trust required for this purpose.

7.3 The General Partner covenants that he will exercise his powers and discharge his duties under this Agreement honestly, in utmost good faith, and in the best interests of the Limited Partners and exercise the care, diligence and skill of a reasonably prudent person. The General Partner shall be entitled to retain advisers, experts or consultants to assist him in the exercise of its powers and the performances of his duties hereunder.

2.4 No Limited Partner in his capacity as a Limited Partner will:

(1) take part in the control or management of the business of the Partnership or exercise any power in connection therewith;

(2) execute any document which binds or purports to bind any other Partner or the Partnership

(3) hold himself out as having the power or authority to bind any other Partner or the Partnership

(4) have any authority or power to act for or undertake any obligation or responsibility on behalf of any other Partner or the Partnership.

It is readily evident, from reading these articles that these powers and duties of the general partner are not those of a clerk preparing and delivering the pay cheques. Those powers and duties were to manage, control, and minister and operate the business and affairs of the limited partnership.

In view of the duties and powers of the corporation as general partner and in view of the fact that the corporation did in effect carry on these managerial duties, I find that the corporation was the entity causing the payments to be made and therefore I find it to be the payor.

I mentioned above that the solicitor for the limited partnership testified on behalf of the appellant. This gave rise to many objections grounded on the solicitor-client privilege. I took some objections under reserve. No part of the testimony taken under reserve has had any influence on my decision. However, I wish to describe here how I would have dealt with the matter had I had to do it. The fact that the solicitor testified on behalf of the appellant did not mean that the appellant had waived his right to the solicitor-client privilege. The solicitor having attended most meetings and knowing well the affairs of the limited partnership and the corporation was surely the person who was in the best possible position to testify as to what had happened and how it was happening in the management of the business. He could very well testify as to facts which were not the subject matter of the privilege without having to answer on privileged communications those being communications for the purpose of obtaining and providing legal advice or as they may be otherwise described communications made in professional confidence. There may be at times an implied waiving of privilege when there is privileged evidence adduced by the party or on behalf of the party entitled to the privilege. In this latter case, to the extent of the evidence adduced, the privilege is waived and the witness has to answer the questions of the other party on that particular subject. (See also Sopinka and Lederman on the Law of Evidence in Civil Cases, pages 182 and 183.)

The appeal is dismissed.

Appeal dismissed.