Addy,
J.:—The
trial
involved
an
appeal
by
the
plaintiff
from
a
decision
rendered
by
the
Tax
Court
of
Canada
regarding
the
application
of
subsections
(1)
and
(3)
of
section
227.1
of
the
Income
Tax
Act
which
read
as
follows:
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.
(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.
The
plaintiff
was
a
director
of
Placage
St-Laurent
Ltée.,
a
federally
incorporated
company
which
went
into
liquidation
on
September
2,
1983,
following
seizure
by
the
bank
of
all
of
its
assets.
National
Revenue
is
claiming
from
the
plaintiff
pursuant
to
subsection
227.1(1)
for
certain
non-remitted
deductions
at
source
from
the
salaries
of
employees
the
sum
of
approximately
$20,000
plus
accumulated
interest
for
deductions
made
during
the
period
of
September
to
November
1982
and
not
remitted
and
the
amount
of
approximately
$30,000
plus
interest
for
those
made
during
the
period
of
May
to
September
1983.
The
plaintiff's
husband,
Claude
Robitaille
and
his
brother
Guy
Robitaille,
had
been
in
business
for
some
time
as
joint
owners
in
equal
shares
of
a
company
known
as
TransCanada
Industries
Inc.
In
1987,
they
purchased
Placage
St-Laurent
Ltée.,
in
equal
shares.
At
the
time
of
purchase
of
the
shares
they
were
told
by
their
legal
advisers
that
the
law
required
a
minimum
of
three
shareholders
and
three
directors
for
a
federal
corporation
to
operate.
In
order
to
conform
to
that
requirement,
and
at
the
same
time
ensure
that
there
would
be
an
equal
division,
one
share
was
issued
to
each
of
the
two
wives
and
they
were
made
directors
with
the
two
brothers.
The
law
had
in
fact
been
changed
in
1978,
allowing
a
federally
appointed
company
henceforth
to
reduce
to
one
the
number
of
directors.
No
change
in
the
number
of
directors
was
made
by
the
company,
possibly
because
the
owners
were
not
aware
of
the
amended
legislation.
It
was
agreed
that
the
plaintiff's
husband,
Claude,
would
operate
and
manage
TransCanada
while
her
brother-in-law,
Guy,
would
manage
and
operate
the
newly-acquired
company,
Placage
St-Laurent
Ltée.,
with
any
profits
or
dividends
realized
from
either
company
being
divided
equally
between
the
two
brothers.
This
is
in
fact
what
happened.
The
last
annual
report
of
the
Placage
St-Laurent
signed
in
1981
indicates
a
50
per
cent
ownership
of
shares
in
each
of
the
two
brothers
and
none
in
the
name
of
the
wives.
The
wives
are,
however,
still
listed
as
directors
and
were
in
fact
still
holders
of
one
share
each.
Placage
St-Laurent
normally
employed
between
42
and
45
persons.
In
January
1981,
however,
things
began
to
deteriorate
as
the
number
of
orders
were
diminishing.
In
September
1982
the
deductions
at
source
were
not
forwarded
to
the
Department
of
National
Revenue
and
the
following
month
the
bank
sent
a
controller
to
the
company
who
took
control
over
all
payments
because
the
company
had
exceeded
its
authorized
credit.
No
cheques
from
then
on
could
be
issued,
nor
in
fact
were
any
issued,
without
the
authorization
of
the
controller.
From
sometime
early
in
1981,
the
company
had
been
expecting
to
receive
a
federal
loan
of
some
$160,000
provided
for
the
economic
expansion
of
certain
companies.
The
company
also
applied
for
and
eventually
received
from
the
Province
of
Québec
the
sum
of
$200,000.
The
$200,000
was
in
fact
received
at
the
beginning
of
1983.
The
bank
took
$160,000
of
these
moneys
and
applied
it
to
its
debt
and
authorized
the
issue
of
$40,000
to
pay
accounts
of
certain
creditors
of
the
company.
At
various
times
throughout
the
years
previous
to
September
1982,
various
charges
and
mortgages
against
the
plant
equipment
and
effectively
all
assets
of
the
company,
had
been
required
by
the
bank.
Following
the
taking
over
of
the
issuing
of
cheques
in
October,
the
bank
also
had
on
November
2,
pursuant
to
section
178
of
the
Bank
Act
obtained
a
general
assignment
of
inventories.
After
the
bank
had
taken
over
control
of
disbursements
in
October
1982,
it
did
not
authorize
the
reimbursement
of
salary
deductions
at
source
for
that
month
or
for
the
month
of
November
nor
for
the
arrears
for
September.
On
January
24,
1983,
a
demand
on
third
parties
was
served
on
the
bank
by
the
Department
of
National
Revenue.
Following
discussions
with
the
bank
and
in
anticipation
of
the
advance
of
certain
grants
from
the
federal
and
provincial
governments,
the
department,
on
February
12,
1983,
agreed
to
withdraw
its
demand
in
order
to
allow
the
business
to
continue,
as
the
bank
had
informed
them
that
if
they
insisted
on
payment
of
their
demands,
it
would
be
obliged
to
realize
immediately
on
its
securities
and
effectively
close
down
the
business.
Henceforth,
the
department
dealt
exclusively
with
the
bank
and
the
evidence
indicates
that
there
was
no
consultation
with
the
directors.
Guy
Robitaille
was
told
to
obtain
orders
and
see
to
the
operation
of
the
plant.
Financial
matters
were
effectively
entirely
under
control
of
the
bank.
In
1983,
cheques
covering
deductions
at
source
from
employees'
salaries
were
in
fact
authorized
by
the
bank
for
the
months
of
January
to
April
inclusively,
but
no
cheques
were
issued
for
deductions
made
during
May
to
September.
Although
the
company's
original
margin
of
credit
with
the
bank
had
been
$350,000
and
this
limit
had
been
reached
in
1981,
by
June
1983
$1,500,000
had
been
advanced
by
the
bank
but
the
repayment
of
a
good
portion
of
this
had
been
guaranteed
by
both
the
federal
and
provincial
governments.
The
Department
of
National
Revenue
was
in
effect
kept
advised
of
the
operations
and
of
the
financial
situation
throughout
and
carried
out
audits
during
1983.
In
the
first
week
of
June
of
that
year,
a
departmental
auditor
advised
it
was
impossible
for
a
cheque
to
be
issued
to
the
department
at
that
time
but
that
the
company
was
expecting
a
$160,000
grant
and
enclosed
a
copy
of
a
letter
from
the
bank
dated
June
9,1983
confirming
that
they
were
expecting
to
receive
the
$160,000
grant
during
the
month
of
July
and
requesting
that
a
second
demand
on
third
parties
which
had
been
served
on
them
on
June
2,
be
removed
to
allow
them
to
carry
on
with
the
business.
This
apparently
was
done,
or
at
least
no
action
was
taken
under
it.
On
November
2,
1983,
the
bank
took
possession
of
the
assets
of
the
company
and
the
latter
effectively
then
went
out
of
business.
Since
then,
the
two
Robitaille
brothers
declared
personal
bankruptcy.
In
March
1983,
a
certificate
covering
the
amount
owing
by
the
company
had
been
deposited
in
the
Federal
Court
pursuant
to
subsection
223(2)
of
the
Act
and
a
writ
of
fieri
facias
was
obtained
two
years
later
on
April
24,
1985.
A
nulla
bona
return
followed
and
on
August
28,
1985,
a
notice
of
assessment
was
sent
to
the
plaintiff
who
immediately
objected
to
it.
At
the
end
of
August
1983,
there
had
been
an
understanding
between
the
bank
and
the
department
that
post-dated
cheques
would
be
issued
to
cover
the
arrears.
They
were
issued
but
were
not
subsequently
honoured
by
the
bank.
The
bank
at
no
time
requested
personal
guarantees
from
the
plaintiff
or
from
any
of
the
directors.
The
representative
of
the
defendant
who
was
examined
for
discovery,
stated
that
all
negotiations
and
discussions
took
place
with
the
bank
since
there
was
no
use
discussing
matters
with
the
directors
as
the
bank
had
assumed
control
and
that
all
the
directors
would
have
replied
was
that
the
department
had
seized
the
bank
accounts
and
there
was
nothing
they
could
do
about
it.
Before
the
notice
of
assessment
of
the
plaintiff
was
sent
in
August
1985,
there
was
no
communication
whatsoever
between
the
department
and
the
plaintiff
regarding
the
debt
or
regarding
the
company.
The
aforementioned
notice
of
assessment
was
sent
to
her
some
two
years
after
the
company
had
gone
out
of
business.
It
was
the
first
inkling
she
had
of
the
possibility
of
liability
on
her
part.
Counsel,
in
addition
to
several
cases
and
articles
dealing
with
the
common
law
duty
of
directors
of
corporations
and
the
degree
to
which
that
duty
has
been
extended
by
codification
in
taxing
statutes,
referred
at
some
length
to
several
articles
and
to
12
reported
cases
decided
by
the
Tax
Court
of
Canada
since
the
enactment
of
the
section
and
also
to
the
as
yet
unreported
case
of
Gagnon
v.
M.N.R.,
appeal
87-244
(I.T.)
dated
September
22,
1989.
These
apparently
are
all
of
the
cases
decided
by
that
Court
on
the
effects
of
sections
227.1(1)
and
227.1(3)
and
they
are
listed
hereunder:
James
V.
Barnett
v.
M.N.R.,
[1985]
2
C.T.C.
2336;
85
D.T.C.
619;
Estate
of
Harold
Fraser
v.
M.N.R.,
[1987]
1
C.T.C.
2311;
87
D.T.C.
250;
Carlton
Quantz
v.
M.N.R.,
[1988]
1
C.T.C.
2276;
88
D.T.C.
1201;
Otto
Beutler
v.
M.N.R.,
[1988]
1
C.T.C.
2414;
88
D.T.C.
1286;
Dennis
John
Cybulski
v.
M.N.R.,
[1988]
2
C.T.C.
2180;
88
D.T.C.
1531
;
Ralph
M.
Moore
v.
M.N.R.,
[1988]
2
C.T.C.
2191;
88
D.T.C.
1537;
Stewart
Gordon
Edmondson
v.
M.N.R.,
[1988]
2
C.T.C.
2185;
88
D.T.C.
1542;
Bernard
Fancy
and
Dorothy
Fancy
v.
M.N.R.,
[1988]
2
C.T.C.
2256;
88
D.T.C.
1641;
Kenneth
Merson
v.
M.N.R.,
[1989]
1
C.T.C.
2074;
89
D.T.C.
22;
Dale
Pilling
and
Heather
Pilling
v.
M.N.R.,
[1989]
2
C.T.C.
2037;
89
D.T.C.
327;
Richard
Michel
et
Réal
Moreau
v.
M.N.R.
appeals
87-1893(I.T.)/87-1894(I.T.),
unreported
decision
of
His
Honour
Judge
St-Onge
of
the
Tax
Court
of
Canada,
dated
June
22,
1989.
Jeanette
Denis
&
George
Denis
v.
M.N.R.,
appeals
87-962
(I.T.)/87-963
(1.T.),
unreported
decision
of
the
Hon.
Judge
Sarchuk
of
the
Tax
Court
of
Canada,
dated
August
28,
1989.
Two
of
them,
namely,
Bernard
Fancy
and
Dorothy
Fancy
v.
M.N.R.
and
Beutler
v.
M.N.R.
are
presently
under
appeal
but
have
not
yet
been
heard.
Therefore,
the
present
case
is
apparently
the
first
one
to
be
heard
by
our
Court.
Although,
when
dealing
with
"the
degree
of
care,
diligence
and
skill”
to
be
exercised
by
“a
reasonably
prudent
person"
in
"comparable
circumstances",
each
case
must
necessarily
depend
on
its
particular
facts,
it
appears
that
the
Tax
Court
in
its
more
recent
decisions
might
have
been
more
lenient
towards
directors
than
the
previous
cases,
which
seemed
to
insist
on
a
somewhat
higher
duty,
the
duty
presumably
being
an
absolute
one
for
the
director
to
take
positive
action,
since
he
or
she
must,
in
all
cases,
regardless
of
the
situation,
prove
affirmatively
that,
both
before
and
after
the
occurrence.,
there
was
on
his
or
her
part
an
exercise
of
care,
skill
and
diligence
in
the
performance
of
the
duties
normally
incumbent
upon
a
director.
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.
Although
that
burden
would,
in
the
vast
majority
of
cases,
fall
upon
any
director
seeking
to
escape
liability
under
subsection
227.1(1)
by
qualifying
as
an
exemption
under
227.1(3),
I
cannot
accept
that
it
is
an
inflexible
rule
of
universal
application
regardless
of
the
facts
of
any
case.
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).
The
fact
that
the
bank,
to
the
knowledge
of
and
with
the
consent
of
the
defendant,
from
October
1982,
effectively
assumed
sole
control
over
all
disbursements
of
the
corporation,
constitutes
a
very
important
circumstance.
Furthermore,
where
the
effective
control
of
the
corporation
has
been
taken
over
by
a
bank
such
as
in
the
case
under
appeal,
without
the
bank
being
requested
or
invited
to
do
so
by
the
directors,
and
where
the
decisions
as
to
what
cheques
will
or
will
not
be
issued
without
consultation
with
the
Board
of
Directors,
are
exclusively
those
of
the
bank,
then
from
that
time
the
actions
of
the
corporation
regarding
the
payment
or
withholding
of
moneys
are
essentially
those
of
the
bank
and
I
would
be
prepared
to
hold
that,
even
without
considering
subsection
227.1(3),
there
would
be
no
liability
on
the
directors
under
subsection
227.1(1)
because
the
latter
obviously
contemplates
that
the
corporation
is
freely
acting
through
its
Board
of
Directors.
The
exercise
of
freedom
of
choice
on
the
part
of
the
director
is
essential
in
order
to
establish
personal
liability.
The
term
"diligence",
which
is
now
codified,
provides
a
higher
objective
standard
than
that
imposed
by
the
common
law
on
directors
generally.
Although
the
test
is
to
a
large
extent
an
objective
one,
the
question
remains,
however,
what
a
reasonably
prudent
person
would
do
in
the
circumstances
in
which
a
director
finds
himself.
These
circumstances
include
subjective
elements
such
as,
degree
of
education,
business
knowledge
and
general
ability
of
the
director.
The
plaintiff
was
not
ignorant
of
corporate
affairs
as
she
had
a
small
corporation
of
her
own
of
which
she
was
president
and
manager.
It
is
probable,
therefore,
that
she
was
aware
at
least
of
some
of
the
general
duties
of
a
director.
She
was
also
employed
by
her
husband
at
TransCanada
for
general
office
work
involving
duties
of
a
receptionist,
and
some
bookkeeping,
filing
and
payroll
duties.
She
never,
however,
at
any
time,
did
any
work
whatsoever
for
Placage
St-Laurent
Ltée.,
nor
did
she
ever
attend
any
directors'
meetings
or
any
other
meetings
or
discussions
regarding
that
company,
she
never
received
any
dividends
or
any
other
remuneration
or
any
other
emoluments
or
moneys
by
way
of
loan
or
otherwise.
She
never
carried
out
any
duties
or
work
for
the
company
either
as
a
director,
an
employee,
an
agent
or
otherwise.
Although
she
was
employed
as
aforementioned
and
received
a
salary
from
TransCanada
Industries
which
her
husband
was
managing,
she
never
attended
or
took
part
either
in
any
of
the
meetings
of
directors
of
that
corporation.
The
plaintiff
was
unaware
of
the
situation
regarding
the
failure
to
remit
deductions
until
after
the
affairs
of
the
corporation
had
been
taken
over
by
the
bank.
She
knew
things
had
been
deteriorating
because
of
lack
of
orders;
she
had
been
told
of
this
by
her
husband
but
she
was
not
at
all
aware
of
the
details
except
to
the
extent
that
reports
were
made
by
her
brother-in-law
to
her
husband
and
forwarded
to
TransCanada
where
she
was
working.
I
find
that,
except
to
the
extent
that
any
wife
might
benefit
from
the
financial
success
of
her
husband,
the
plaintiff
had
not
one
iota
of
interest
in
the
operations
of
Placage
St-Laurent
Ltée.
nor
did
she,
at
any
relevant
time,
have
any
knowledge
of
the
situation
regarding
the
non-payment
of
payroll
deductions.
Even
had
she
known
of
the
situation,
she
could
not
have
done
anything
about
it.
The
defendant
on
the
other
hand,
from
the
outset,
was
fully
aware
of
the
situation
and,
as
stated
previously,
agreed
with
the
bank
to
allow
the
condition
to
continue
and
further
non-payments
to
occur
in
the
hope
of
keeping
the
company
operating.
I
do
not
wish
to
infer
that
the
actions
of
the
defendant
were
blame-worthy
since
it
would
have
been
to
the
advantage
of
everybody
if
the
business
could
finally
have
been
saved.
The
Federal
Government
itself,
independently
of
the
tax
situation,
in
view
of
the
substantial
grants
made
to
the
company,
had
a
real
interest
in
ensuring
its
financial
survival.
My
concern
here
is
obviously
limited
to
the
issue
of
whether
the
plaintiff
should
be
held
responsible
for
the
arrears
of
payment.
In
the
circumstances
of
this
case,
I
find
that
she
should
not.
The
plaintiff
will
therefore
be
entitled
to
judgment
and
to
her
costs
throughout.
Appeal
allowed.
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