McCullough v. MNR, 89 DTC 446, [1989] 2 CTC 2236 (TCC)

Bonner, T.C.J. (orally):— Ideal Ship Repairs Ltd. ("Ideal") failed from May to August 1982 to remit amounts which it had withheld at source from employee wages as required by subsection 153(1) of the Income Tax Act. The appellant was, at the time, a director of Ideal. By the assessment now under appeal the respondent invoked section 227.1 of the Income Tax Act ("Act") in an effort to collect from the appellant as director of Ideal a sum of money equal to the amount which Ideal had withheld from its employees.

Ideal was formed in 1976. At all relevant times there were three directors of the company, the appellant, Lucio Sandrin and Robert Pearson. The appellant as director of Ideal did very little. He said that he attended one or two meetings a year at which corporate matters were discussed such as borrowing money and the increase of the business of the company. It was not until August of 1982 that he first became aware of a tax problem, that is to say, the failure of Ideal to remit the source deductions. He did not before that time apply his mind to the question of causing Ideal to meet the obligations imposed on it to withhold and remit source deductions. In that month a company which owed Ideal a lot of money was put into receivership and Ideal’s bank then called its loan. The financial collapse of Ideal followed.

In September of 1984 the respondent assessed the appellant under section 227.1 of the Act in respect of amounts covered by three assessments against Ideal for failure to remit. The respondent failed at least initially to furnish the appellant with copies of all three notices of assessment despite requests therefor.

The appellant testified that following the assessment and up to the end of 1984 he was in frequent contact with a Mr. Bronson, a collections officer of Revenue, with regard to the payment of the amount assessed against him. Then all correspondence from Mr. Bronson stopped. The explanation appears to lie in the evidence of Lucio Sandrin given by means of a written statement from Mr. Sandrin which was admitted by agreement of counsel for both parties. In that statement Mr. Sandrin says in part:

4. On September 14, 1984 an assessment was issued against me personally pursuant to section 227.1 of the Income Tax Act in respect of Revenue Canada’s said claims against Ideal Ship.

5. Between the date of the September 14, 1984 assessment and the date of filing a Notice of Objection thereto in December 1984, Revenue Canada seized approximately $27,000 from me by third party demand, garnishment, or otherwise. The basis and justification relied upon by Revenue Canada when it seized these funds was the assessment against me under section 227.1 for Revenue Canada's claim against Ideal Ship. The funds seized from me were sufficient to cover the full amount of the section 227.1 assessment against me.

6. Following the seizure I made representations concerning it to my federal Member of Parliament.

7. Following the representations, Revenue Canada several months after obtaining the funds, voluntarily repaid the full amount to me. I understand that Revenue Canada takes the position that the funds were returned because I had filed an objection to the assessment.

On February 3, 1987 the respondent further assessed the appellant under section 227.1. Again, the appellant duly objected. The respondent then wrote to the appellant's counsel setting forth details of the three assessments of the liability of Ideal in respect of unremitted payroll deductions. A copy of the notice of one of those assessments was produced to the appellant. It is to be found at the last page of Tab 3 of Exhibit A-1. Copies of the other two notices of assessment were never provided. Mr. Bronson, the Revenue official, explained in his evidence that the two assessments were "computer generated" and that the respondent "cannot generate a second original”.

The first submission made by counsel for the appellant is that valid assessments of Ideal must exist for the appellant as director of Ideal to be vicariously liable. Counsel asserted that the respondent must, at least on request, furnish the taxpayer with copies of the notices of assessment against the company. In light of Mr. Bronson's evidence I cannot infer from the respondent's inability to produce copies of the notices of two of the three assessments made against Ideal that those assessments had not in fact been made. A distinction must be drawn between an assessment and a notice thereof. The former is an operation, the latter is a piece of paper [1] . There is no suggestion in the evidence that the computer could not generate a record of the two assessments. Indeed the evidence of Mr. Bronson, which I accept, suggests the opposite.

I categorically reject any suggestion that production of copies of the notices of the assessments against the principal debtor is a condition precedent to the imposition of liability on a director under section 227.1. Nothing in the legislation suggests the existence of such a condition precedent. No doubt full details of the circumstances giving rise to the liability of the company which liability the Minister seeks to enforce against the director must be provided to the director. However, the director's liability does not depend on the ability of the Minister to produce either the piece of paper that was the notice of the assessment or a photostatic or other copy of it. The original notice of assessment must, after all, have been sent by the Minister to the company.

The next argument made by counsel for the appellant was that the respondent realized or collected the full amount of the liability of Ideal as a result of the seizure from Mr. Sandrin. Counsel pointed out, correctly, that payment by one of joint or joint and several debtors discharges all.

Counsel for the respondent says that there was no payment; there was, she said a seizure of Mr. Sandrin's funds and that is not a payment. In this regard she cited some authorities [2] as to the meaning of the word "payment". In my view those authorities were quite beside the point. They deal with the meaning of statutory language used in a different context. Further, counsel made reference to the doctrine of relation back, a doctrine which doesn't seem to have any bearing on the circumstances now under consideration.

The position as I see it is this. The respondent seized and, for some months, held Mr. Sandrin's money and he justified his action in doing so by reference to section 227.1 and the Ideal debt. The amount seized was sufficient to discharge the Ideal debt. There is no basis for a suggestion that following the seizure either Ideal or Mr. Sandrin continued to be liable to the respondent. The whole purpose of section 227.1 is to enable the Minister to look to a director for payment in cases where that director has not exercised due diligence in an effort to cause his corporation to discharge its obligations to the Crown. The section is spent when it has served its purpose by putting the Minister in funds. Nothing in the language of the statute suggests a legislative intention to empower the Minister to utilize the section to collect from a director after the Minister has fully recovered the debt from someone else. Mr. Sandrin's statement makes it clear that the money owing by Ideal to Revenue Canada was recovered in full by means of the seizure. There is no basis for a conclusion that the money seized went into some sort of suspense account or was applied to some purpose other than the discharge of the Ideal liability. If that had happened counsel for the respondent would, without doubt, have adduced evidence to that effect. It was not suggested that the Minister returned the money to Mr. Sandrin because the latter was successful in establishing by virtue of a due diligence defence or otherwise that the Minister was not and never had been entitled to keep the money. I cannot see how the original Ideal liability was in some mysterious way revived simply because the Minister chose to reimburse Mr. Sandrin. The intention of section 227.1 is to enable the Minister to collect once and once only. Having served its purpose the section cannot be invoked to justify the subsequent collection proceedings against the appellant. Accordingly judgment will go allowing the appeal with costs and vacating the assessment of February 3, 1987.

Appeal allowed.