Perri v. MNR, 89 DTC 723, [1990] 1 CTC 2071 (TCC)

Christie, A.C.J.T.C.:— These appeals were heard together. The issue is the liability of the appellants as directors of a corporation in respect of tax deducted at source. Under paragraph 227(10)(a) of the Income Tax Act ("the Act") the respondent may assess a person for any amount payable by that person under subsection 227.1(1). This subsection states that where a corporation has failed to deduct or withhold an amount as required by section 153 or has failed to remit such amount, the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto. Under paragraph 153(1)(a) every person paying at, any time in a taxation year 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. Amounts to be deducted or withheld are determined in accordance with Part I and Schedule I of the Income Tax Regulations. There is no dispute in these appeals regarding the amounts deducted at source. Subsection 108(1) of the Regulations provides that amounts deducted or withheld under subsection 153(1) of the Act shall be remitted to the Receiver General on or before the fifteenth day of the month next following the month in which the amounts were deducted or withheld. Subsections 227.1(3) and (4) of the Act read:

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.

(4) No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

Subsection 1(1) and sections 109, 110 and 111 of the Company Act, R.S.B.C. 1979, c. 59, provide:

1.(1) In this Act

"court" means the Supreme Court;

109. Subject to section 122, a person who is licensed as a trustee under the Bankruptcy Act (Canada) may be appointed under an instrument, or any person may be appointed by the court, as a receiver manager of all or any part of the undertaking of a corporation, and, in either case, on being so appointed he may carry on any business of the corporation and have access to its records concerning that part of the undertaking for which he is appointed.

110. Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged.

111. Every receiver manager appointed by the court is an officer of the court and not of the corporation, and he shall act in accordance with the directions of the court.

By notice dated March 24, 1987, the respondent assessed each of the appellants $16,088 for liability under subsection 227.1(1) as directors of Olympic Hotels Ltd. This amount consists of tax of $12,069, plus $1,207 and $2,812 in penalties and interest.

These assessments are attacked on three different premises. Two relate to facts that are in dispute, namely, that the appellants:

(i) exercised the degree of care, diligence and skill to prevent Olympic’s failure to remit that a reasonably prudent person would have exercised in the circumstances thereby exonerating themselves from liability under subsection 227.1(3); and

(ii) resigned in writing [1] effective February 25, 1985, which is more than two years prior to the date of the assessments, i.e., prior to March 24, 1987, thereby affording to them a defence under subsection 227.1(4).

The third premise pertains to facts that are not in dispute and is based upon the above-cited provisions of the British Columbia Company Act, the validity of which is not challenged by the respondent. The undisputed facts are that Colonial Inn (1973) Ltd. was incorporated under the laws of British Columbia on May 25, 1973, for the purpose of engaging in the hotel business. It changed its name to Olympic Hotels Ltd. ("Olympic") on February 27, 1976. At all times material to these appeals the sole undertaking of Olympic was a hotel in downtown Victoria named Best Western Olympic Hotel. The appellants were the sole directors of Olympic. They were also the only officers. Mr. Perri was the president and Mr. Wellburn was the secretary of the company. All of the shares of Olympic were held by Giovani Holdings Ltd. and Wellburn Holdings Ltd. and, in turn, the shares of these companies were held by Mr. Perri (Giovani Holdings Ltd.) and Mr. Wellburn (Wellburn Holdings Ltd.).

Olympic failed to remit deductions at source on November 15, 1984, regarding deductions made in October 1984. It was assessed by the respondent respecting this failure on February 20, 1985, and, as already mentioned, the appellants were assessed under paragraph 227(10)(a) of the Act by notice dated March 24, 1987.

On November 28, 1984, on the application of Crown Trust Company, to which Olympic was heavily indebted, Thorne Riddell Inc. was appointed by the Supreme Court of British Columbia receiver-manager of all of the undertaking of Olympic under section 109 of the Company Act.

Mr. Gene Drennan, C.A., who is licensed as a trustee under the Bankruptcy Act was the person associated with Thorne Riddell Inc. who was made responsible for carrying out the duties and responsibilities of receivermanager of Olympic. He continued in that capacity until, after much effort, the hotel was sold in 1988. He testified that on assuming those duties he took the position that he was in charge and that the appellants did not have any say in respect of what he did. He added that it was the policy of Thorne Riddell Inc. to advise a director both orally and in writing that his powers ceased upon the appointment of a receiver-manager and he was sure that this was done with respect to the appellants.

The appellants were hired by Thorne Riddell Inc. to carry on the day-to- day operations of the hotel business, but after the appointment of the receiver-manager they did not perform any of the functions of a director.

Generally speaking legislation establishing limitation periods provide that actions or proceedings shall not be brought after the expiration of a stipulated period from the time “the right to do so arose" or "the cause of action arose". [2] Basically these limitation periods are fixed relative to the time when the act or omission complained of occurred. The limitation period under subsection 227.1(4) does not relate to the time of the failure of the corporation to remit deductions which is what triggers a director's vicarious liability under subsection 227.1(1). Rather it relates to a period of time after which a director of a corporation ceases to be a director.

As I understand it, it is the intention or object of subsection 22,7.1(4) to fix a limitation period that runs from a time when an individual ceases to be in a position in law and in fact to exercise the powers of a director to rectify the failure of the corporation to deduct or remit or both. I regard that as being the correct meaning of the phrase "ceased to be a director” in subsection 227.1(4). To hold that those words in all circumstances mean that there must be a lapse of two years from the date an individual ceases to hold office as a director in accordance with the provisions of the relevant corporate legislation would in some instances, such as those under consideration, render the limitation period devoid of meaningful substance. What could the appellants do qua director in relation to Olympic's default after the receivermanager was appointed? Nothing. As of that date their power in that capacity ceased by operation of section 110 of the Company Act. They were also then stripped of their powers as officers of Olympic under that section. It is clear from Mr. Drennan's evidence that after the appointment of Thorne Riddell Inc. as receiver-manager the role of the appellants respecting the hotel business was reduced to that of its employees under Drennan's direction.

In my opinion the appellants ceased to be directors of Olympic within the meaning of subsection 227.1(4) of the Act effective November 28, 1984, and are entitled to the benefit of the limitation period prescribed under that subsection. This being sufficient to dispose of the appeals, it is unnecessary to deal with the other two grounds of appeal.

The appeals are allowed with costs.

Appeals allowed.