Susan Sheremeta v. Minister of National Revenue, 91 DTC 867, [1991] 1 CTC 2593 (TCC)

Margeson, T.C.J. [Orally]:—This is the case of Susan Sheremeta versus the Minister of National Revenue bearing court file number 90-1711(IT).

This is an appeal by the taxpayer from the Minister's confirmation dated May 9, 1990, whereby which the Minister assessed the appellant for amounts of federal tax, interest and penalties as director of Poco Wood Products Ltd., a company incorporated under the laws of the Province of British Columbia, for unremitted amounts on behalf of the company for the years 1985, 1986 and 1987.

On behalf of the appellant, she alleges that she is not responsible due to the defence of due diligence under subsection 227.1(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”). She further states that the reason she became involved in the company when the company was first incorporated was by reason of the fact that her husband had been in business before, had a judgment against him, and he was not able to carry on a business.

The appellant's general allegation is that she did not take part in or have any knowledge of the operations of Poco Wood Products Ltd., and her husband John Sheremeta had complete and total de facto control of the company. She said she had nothing whatsoever to do with the financial affairs of the company including the area of taxes and remittances. Presumably, she is arguing that she was not in a position to be able to do anything about the remittances. Further, she says she did not even know about the requirement to do so.

From her evidence before me in court and the evidence adduced on her behalf, it appears that the company was incorporated late in 1985. There was only one director. There appears to be little question that it was indeed Mrs. Sheremeta. The company got into financial problems as Mrs. Sheremeta indicated and her husband agreed that she did not want to be associated with the company in any way, and that she did not want to be a director. I understand the problem from her husband to be that they were unable to do anything more about it, legally speaking, because their lawyer was unpaid, and they did not think he would continue to act for them, the company's account was behind too far and the lawyer would not act.

The husband indicated in his evidence that he made every effort to resolve the problem with Revenue Canada but was unable to pay out the account. His evidence was that his wife did not know anything about the company: "My wife was never involved with the transactions of the company". He was the manager of the company, attended to all legal matters, and she did not become involved in any legal matter at all with respect to the company until this matter of the unremitted tax deductions came about, and Revenue Canada advised her that they were seeking payment from her as a director.

Mr. Sheremeta’s evidence was that the wife became a director for only one reason, and this is confirmed by her, because he had a judgment against him, and he wanted her name to be on as a director. His position was that he took full responsibility for the debt that was owing. He was the owner, manager, looked aiter all the transactions 100 per cent, looked after the mail and did everything with respect to the company, his wife did nothing. The facts also disclose, however, that the predecessor to the present company, Poco, was a proprietorship in which the wife was named as sole proprietor but again with the husband as the moving force in that business, which also got into financial trouble, which was owing money to Revenue Canada and subsequently Revenue Canada attached the funds by garnishing Mrs. Sheremeta's wages as a teacher.

That, of course, was another matter altogether and is only of relevance here with respect to what knowledge we can ascribe to Mrs. Sheremeta for the purposes of determining her liability here. Apparently the earlier partnership started back in 1968 and the incorporation took place in 1985. Remittances are alleged to be owing for August 14, 1985 and November 6, 1985, so it appeared that the company was in business and unremitting during that period of time, although Mr. Sheremeta, in his evidence, thought that the company had been incorporated somewhere late in 1985.

Again, he repeated that his wife had absolutely nothing to do with the company, including the mail. He did all the banking, he made all the sales, she was not informed about anything, is the way he put it. On cross-examination by the Minister, he indicated that he did not think there were any responsibilities associated with the company to which she could be ascribed any responsibility. The company apparently never enjoyed any financial success. It was strapped for money from the beginning and early on, of course, owed money to Revenue Canada.

Mr. Sheremeta indicates that he had a lawyer for the incorporation, but he did not discuss any elements of the-responsibility or liability of a director with the lawyer, nor any responsibilities of any members of the company with the lawyer, or what a director would have to do in the company. He was asked by Mr. Kennedy why was the wife the sole director of the company, and his answer was that she was the sole director only because of the fact that he had a judgment against him and that he could not carry on business. He further indicated that the company, after the incorporation, conducted very little business. They periodically paid little amounts of deductions to Revenue Canada and subsequently an audit was completed on the company.

It is obvious that no trust account was ever set up by the company for remittances and there is no evidence, either given, or was very much asked by way of cross-examination, about what process was used to pay remittances to Revenue Canada. Obviously from the small amounts paid there could have been very little process in effect in the company to ensure that remittances were made.

The Minister's solicitor asked: "Did anyone advise the wife as to a director's responsibilities" and the answer to that question was a resounding" no". When pressed, the husband said that he tried to remove her from being a director but again, as I earlier indicated, the lawyer's bill was unpaid and the filings in the company's office were not kept up-to-date. He was further asked as to why he tried to remove her sometime around late 1985 or early 1986, just after the company was incorporated. He said he was sure she wanted no more of this, meaning anything more to do with the company, and she wanted her name off anything to do with the company.

He admitted she was a shareholder but they were not delivered to her if the shares were issued, and I take it from what he said that they probably were, but [they] were not delivered to her. She was a teacher. She never inquired of him as to her responsibility. He would run it. All she did was sign papers for the incorporation. As I understand her evidence, these papers may even have been sent out to her to be signed and not even signed in the lawyer's office, although the evidence on that is not necessarily conclusive but that would be the indication.

They obviously were going through personal problems themselves and financial difficulties including the loss of their own residence. This was a reason suggested by him to the Minister's solicitor when he asked him why he did not remit the tax to Revenue Canada. He says they did make arrangements to remit small amounts from a former business. The Minister's representative asked him what he did to ensure remittances were paid and he merely said that they were carrying on, they were hoping to resolve the problems and hopefully that the money would be paid. Obviously it was not paid.

His evidence was that the papers were given to him and he brought them home for her to sign. She wanted no part or it, she wanted him to quit being in business for himself, get a job and get a wage so that they would not have to rely upon her as a sole breadwinner. For Mrs. Sheremeta's part, she gave evidence she was a teacher, what her husband says is true. She said: "I attended no meetings, it was not explained to me what a director was and I did not ask. It was John’s business, I had my profession". She does admit that her name was used only because of the financial problems that her husband had been in before and the judgment that was against him, he was in financial difficulty.

He did not discuss anything about the business with her, according to her. She did not want to be a part of it. She found it very difficult earlier, obviously, when her wages were garnished. She knew nothing about the company and his operation, the money owing, or the remittances, or what remittances were required to be made.

In cross-examination, again, she reiterated to Mr. Kennedy that she did not want to be part of it. Things were never very profitable in business and she had enough. There was nothing particular that made her want out, or nothing to do with it, but it was just a number of things over a period of time. Mr. Kennedy asked her why she would allow herself to become a director. Her evidence was she did not understand the responsibilities of using her name, and that is the way she put it, she did not admit that she was a director or that she knew she was a director. She did not understand, from her earlier testimony, what a director's duties were and she did not understand responsibilities of using her name.

When asked; "Did you know you were a director?", the answer was not clear to Mr. Kennedy's question but I am satisfied on the basis of all the evidence before me that there was a real question as to whether she even knew that she was a director. It would appear that she was a director in law, although no records were produced, but there does not seem to be any real argument with that, but there is a real question as to whether or not she even knew she was a director.

She said she first became aware of the problem with the deductions after it was owing and that her wages were going to be garnished for the company debt. “I did not consider myself as a director" is a statement that I took down directly from her cross- examination. "Again", she said, “my name was used so he could carry on his business”. Those are the salient facts.

For the Minister's part, he refers to the term "passive director". His position is that she was a teacher, she had education enough so that she should have looked into it more. I presume he is saying, look into what her responsibilities would be as a director or member of the company. You cannot just sign the corporate documents and walk away from it. Further, he says, it is more difficult when there is only one director. I presume what he is saying is that if there were a number of directors rather than one, then it would be easier for someone, as a sole director, just to sign the papers and walk away.

He said when you make one person a director and you walk away, someone has to be responsible. She should have made herself more aware of what a director's liability is, and again he emphasizes the fact that she was an educated woman and she was a teacher.

In summary, Mrs. Sheremeta says," Because I am a teacher it is alleged that I should have had a better understanding of what I was doing when I l signed the papers, I did not.” She said she just felt she was trying to help him in business. She had no knowledge about the company that he ran. She said she dealt with children, she did not even know the vocabulary that is used in his business. She had nothing to do with the financial statements. She did not feel that she had anything to do with it and her position is that she is not responsible as a director because of the operation of the provisions of subsection 227.1(3).

The relevant section, of course, states as follows:

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.

The Minister has referred to a number of cases; indeed, the cases are legion. The ones that he referred to are all relevant and important cases and there are many other cases as well.

In order for the appellant to escape liability and be advantaged by subsection 227.1(3) she must show me that she acted by exercising the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would exercise in comparable circumstances. That requires us to determine what a reasonably prudent person would have done in this case, in her place, as a director.

I have indicated this recently in several cases having to do with directors' liability. The test to be applied in this case, as in all cases of directors' liability, insofar as I am concerned, is both subjective and objective. It is objective in that there has to be a standard against which to judge a director, consequently, a reasonable man; it is subjective in the sense that the reasonable man must be in the position of the director, in her circumstances, in each case endowed with all her attributes and subject to all her limitations.

Consequently, in some cases the final standard would be high, and in some cases lower, depending upon the circumstances. Based upon the facts that have been presented before me, and which I accept, I place the director here in a very low category and would require of her in all the circumstances as described in the evidence, a low standard of care. The question then becomes, did she meet that low standard of care required of her here. On the basis of the evidence before me, I am satisfied that the answer to that is yes.

Many of the cases cited refer to different factual situations that exist here and, indeed, I think the Minister's solicitor would probably admit that this is a rarer case in many respects and certainly there is no question as he says, that it raises a question of sympathy. But again this case cannot be decided on sympathy, I decide it on the basis of facts before me.

The Minister's representative referred to the case of James White v. M.N.R., [1990] 2 C.T.C. 2566; 91 D.T.C. 54 apart from other cases, and this was a decision of my brother Taylor of this Court, dated October 18, 1990. That case, of course, involved the alleged liability of a director who was aged, retired, in ill-health, living on limited resources, whose liability would be substantial if he was found to be liable. In that case, the appellant was involved only peripherally in the operation of a fishing company from the management point of view. His skill and knowledge was in mechanical trades and mostly the upkeep of the plant and the buying of fish.

He had limited financial capabilities and was not involved in any of the financial decisions of the company. However, the facts are different and can be distinguished from this particular case because he was involved in the operation of the company. In the case at bar, this party was not involved in any way in the operation of the company. She may not even have known that she was a director, but she certainly did not have any idea of what the responsibilities of a director were, that she could be held liable as a director, and more importantly, she was not in a position at any time, as far as I am concerned, to be able to do anything about the remittances.

In the White case, supra, Judge Taylor held that the appellant was a director and that he either knew or should have known that he was a director, that he either knew or should have known his responsibilities as a director, and he either deliberately turned a blind eye to these responsibilities or he acted other than as a reasonably prudent person would have acted under the circumstances. Consequently, he found that the defence was not made out.

In the case at bar, I find to the contrary. In the appellant's case, I find that she did not know, and she should not have known under the circumstances that existed here, that she was a director; that she did not know nor should she have known her responsibilities as a director; and that she did not deliberately turn a blind eye to those responsibilities nor act in such a way that we could characterize it as other than a reasonable or prudent person.

It has recently been well established in Canadian jurisprudence that subsection 227.1(3) does not necessarily imply or mandate positive action on the part of the director to prevent the default. And in that, we can refer to Merson v. M.N.R., [1989] 1 C.T.C. 2074; 89 D.T.C. 22; Cybulski v. M.N.R., [1988] 2 C.T.C. 2180; 88 D.T.C. 1531, at 2184 (D.T.C. 1535); Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059, at 125 (D.T.C. 6062). Nor does subsection 227.1(1) render a director's responsibility for a company as absolute, viz Champeval v. M.N.R., [1990] 1 C.T.C. 2385; 90 D.T.C. 1291 at 2389 (D.T.C. 1294). In the review of the Champeval case, which is the most relevant one in recent post-Robitaille decisions of the court, I can refer to and adopt the following principles articulated by Chief Judge Couture at page 2389 (D.T.C. 1294) as being transposable to the situation at bar, where he said:

A director's responsibility for a company under subsection 227.1(1) is not absolute. It is contingent, that is, a director is relieved of it when he has acted with the degree of care, diligence and skill that a reasonable person would have exercised in comparable circumstances. If one is to be able to determine whether a director exercised the degree of care, diligence or skill required under subsection 227.1(3), that director must have had a free choice before him. If he did not have a free choice in his decisions because of factors completely beyond his control, he cannot be bound by the provisions of subsection 227.1(1), because the provisions of subsection (3) relieve him of all personal liability, since in the circumstances a reasonable person would not have acted otherwise.

The underlying test remains essentially one of reasonableness when weighing an individual's options; freedom of choice and decision-making during the relevant period or periods of time in applying the statutory exculpation of care, diligence and skill to prevent the remittance failure.

Looking at the totality of the evidence here, I am satisfied, in fact, on the balance of probabilities that the appellant had established that she was without control during the relevant periods of time; that what she did was not unreasonable under those circumstances; that she could not be seen as having acquiesced to or participated in the default or the decision-making not to remit; and that she exercised the degree of care, diligence and skill to preclude default as called for by subsection 227.1(3).

In the end result, the appeal is allowed and the subject assessment is vacated. The appellant will have her costs of the appeal.

Appeal allowed.