Macdonald v. R., 99 DTC 1108, [1999] 4 CTC 2060 (TCC)

Hamlyn T.C.J.:

By Notice of Assessment no. 09581 dated July 19, 1995, the Minister of National Revenue (the “Minister”) assessed the Appellant for federal income tax deducted at source but not remitted by Multi-Ventures Ltd. (“Multi”).

In so assessing the Appellant, the Minister relied on the following assumptions:

7. ...

(a) the Appellant was, at all material times, a director of the Corporation; (b) the Corporation failed to remit to the Receiver General Federal income tax withheld from the wages paid to its employees as follows:

Date Assessed to Corporation	Unremitted Federal Tax
Mar. 26/93	$37,971.61
May 20/93	3,144.60
May 20/93	5,739.50
May 27/93	10,176.61
June 8/93	8,062.88
July 16/93	13,227.01
July 20/93	12,761.83
July 30/93	13,625.07
Aug. 17/93	16,652.79

(c) the Corporation failed to pay penalties and interest relating to the unremitted Federal tax;

(d) on August 23, 1993 a receiving order was made against the Corporation under the Bankruptcy Act and a claim for the amount of the corporation’s liability for Federal income tax, penalties and interest was proved within six months after the date of the receiving order; and

(e) the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the said amount by the Corporation that a reasonably prudent person would have exercised in comparable circumstances.

A Partial Statement of Agreed Facts was filed. It reads:

The Appellant, G. Royal MacDonald, and the Respondent, Her Majesty the Queen, by their solicitors, agree to the following facts provided that: 1) such admissions are made for the purpose of these proceedings only; and 2) the parties are permitted to adduce additional evidence which is not contrary to these agreed facts.

(a) The Appellant is G. Royal MacDonald of 214 Willingdon Street, Fredericton, New Brunswick, E3B 3A5.

(b) The subjection Corporation, Multi-Ventures Limited (the “Corporation”) was incorporated in 1969 and began operating in 1974.

(c) During the relevant period of time (1.e. 1992 and 1993), the directors of the Corporation were the Appellant, Royal MacDonald and Kevin Phillips who each held 50% of the Corporation’s shares.

(d) The Appellant was, at all material times, an active director of the Corporation, holding the position of president.

(e) The Appellant was, at all material times, actively involved in managing the Corporation.

(f) The Minister of National Revenue issued the Notice of Assessment #09581 dated July 19, 1995 under the Income Tax Act for assessments to the Corporation dated March 26, 1993 to August 17, 1993.

(g) The assessment referenced in paragraph (f) above, included amounts relating to wages paid to employees in both 1992 and 1993.

(h) In early 1993 a restructuring plan had been worked out with the Royal Bank of Canada. Revenue Canada was aware of the plan and had agreed to participate under certain terms and conditions.

(i) The Corporation had agreed to a payment schedule to extinguish the arrears owed to Revenue Canada and had agreed to keep remittances to Revenue Canada current.

(j) Agreed payments to Revenue Canada were not made by the Corporation and current remittances were not all made. The Corporation did not maintain its end of the agreement.

(k) The plan referenced in paragraph (h) was rejected in August 1993 when Revenue Canada made a request that certain real property be pledged as security for the Revenue Canada debt, to which the Royal Bank would not agree.

(l) At this point the Royal Bank forced Multi-Ventures Limited into bankruptcy.

(m) On August 23 , 1993 a receiving order was made against the Corporation under the Bankruptcy Act and on September 28 , 1993 a Proof of Claim in respect of Revenue Canada’s Unsecured Claim and Property Claim were filed.

(n) Revenue Canada received the following payments on account of unpaid withholdings:

September 28, 1993	$317,836.66
October 7, 1993	2,174.51
November 2, 1993	102,918.03

The amount of $2,174.51 was a garnishee payment from Warren Maritime Limited and the balance was a garnishee payment from Fundy Contractors Limited, all received pursuant to requirements to pay.

(o) Except for the payments noted above in paragraph (n), all payments applied against the corporation’s account with Revenue Canada were done so at the direction of the Corporation, or with the agreement of the Corporation.

(p) The Corporation experienced some financial difficulties beginning in 1991. In 1992 and 1993 the financial difficulties continued and its financial position became more critical.

(q) The Corporation was assessed for failure to remit source deductions for certain pay periods, beginning at least in 1991 and continuing in 1992 and 1993.

(r) Throughout the relevant period, the Appellant was aware of both the Corporation’s financial difficulties and the failure to remit.

(S) All accounts receivable or cheques received and made payable to the Corporation were deposited with the Royal Bank of Canada and deposited to the general account.

(t) The Corporation did not remit the federal income tax with respect to wages paid to its employees as assessed to the Corporation on the following dates: March 26 , 1993 — May 20 , 1993; May 20 , 1993, May 27 , 1993, June 8 , 1993, July 16 , 1993, July 20 , 1993, July 30 , 1993, and August 17 , 1993.

(u) The Corporation did not pay the penalties and interest related to the unremitted federal tax.

The Evidence

The Appellant, G. Royal MacDonald, is a civil engineer and for the period in question was a director of Multi. He was also the President of Multi. Multi was, prior to its bankruptcy, in the road construction and heavy equipment business. Multi was incorporated in 1969 and commenced business in 1974. For 17 years the business was successful and was one of the larger companies in that business. The industry suffered a downturn in 1989 and Multi was directly affected by a highly competitive market, low prices and dropping volumes. Withholding remittance problems for Multi began in 1991.

In 1992, the Appellant, facing remittance arrears, caused cheques to be issued to the Receiver General. Several of those cheques were returned by the bank with the notation “non sufficient funds”. In part, to rectify the remittance problem, the Appellant on behalf of Multi caused Mr. John Feeney to be hired as Chief Financial Officer. Mr. Feeney was a chartered accountant who had an extensive employment history with KPMG, a public accounting firm. His first role with Multi was as Vice-President in charge of Finance and that was followed by the office of Controller. The term of his retention was from March 1992 to August 1993.

Mr. Feeney’s role (April 1992) was to restructure or refinance Multi by securing an enhanced line of credit with the Royal Bank of Canada (the “Royal Bank”). The increased security to be given to the bank was to be on Multi’s equipment. The restructuring was done on notice to Revenue Canada.

Early in 1992, Mr. Alfred Lacey was retained by Multi as a project manager to attempt to settle accounts receivable. His prior work history was extensive, including a period of time as a district sales manager for General Motors, an elected official and former Cabinet Minister of the province of New Brunswick and a term as Chairman of New Brunswick Power.

Between his retention in early 1992 and September 1992, the financial situation of Multi further deteriorated. At that point, at the insistence of the Royal Bank, Mr. Lacey assumed the new role of General Manager of Multi. Mr. Lacey, amongst other things, sought to negotiate with the Royal Bank further new funding for Multi on the basis of collateral security to be given to the bank in relation to other real property owned by Multi.

This restructuring also was on notice to Revenue Canada.

The view of Messrs. MacDonald, Feeney and Lacey was their expectation with the restructuring and with the assistance of the bank that the current remittances and the arrears would be addressed.

In the Spring of 1992 the over-draft position with the bank was approximately $800,000 whereas at the point of bankruptcy (August 1993) the over-draft was $1,800,000.

No witness was called from the Royal Bank. However, the evidence of Messrs. MacDonald, Feeney and Lacey was to the effect for the remittance payment failures the bank would only allow certain cheques of Multi to be negotiated and the bank controlled all receipts. The bank returned certain arrears cheques for non sufficient funds and would not authorize the payment of gross payrolls including withholdings. The bank would only allow cheques to be issued to employees for net wages.

The problems that arose late in 1992 and 1993 included Multi’s failure to collect all receivables, the bank’s refusal to allow monies to be paid to the Receiver General and latterly, the inability of Multi to secure the transfer of property to the bank as collateral security.

For the period of March 1992 to August 1993, while Messrs. MacDonald, Lacey and Feeney were apparently concerned about source deductions, it was obvious the bank was not concerned and refused to authorize the payment of remittances from the over-draft borrowings or from the receipts of Multi.

Analysis

The decision of the Federal Court of Appeal in Soper v. R. (1997), 97 D.T.C. 5407 (Fed. C.A.) [1] , as has been stated in many recent decisions, is the leading case on directors’ tax liability for both the Act and the Excise Tax Act [2] The Court in Soper (supra) set out the following general principles:

• it is the corporation and not the director who is the trustee of the government’s money;

• the standard of care for a director’s tax liability is partly objective and partly subjective;

• the director does not have to give constant attention to corporate affairs, although there is an obligation to be informed about the financial statements and records of the company;

• a director can delegate responsibility for ensuring that source remittances are made, provided that no suspicious circumstances exist;

• once a director is aware or should be aware that there are problems with remittances, he or she has a positive duty to act; and

• an inside director will be held to a higher standard of care than an outside director.

In Soper (supra), Robertson J.A. wrote at page 5416:

This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company’s organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced businesspersons).

The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements — embodied in the reasonable person language — and subjective elements — inherent in individual considerations like “skill” and the idea of “comparable circumstances”. Accordingly, the standard can be properly described as “objective subjective”.

The standard combines the traditional objective, reasonable test with subjective elements such as the individual’s intelligence, experience and sophistication.

The obligation of a director has been further explored in Wheeliker v. R., [1999] 2 C.T.C. 395 (Fed. C.A.), where Létourneau J. at paragraph 49, has Stated:

[A]s of their [the directors] learning of the financial difficulties of the Corporation or its failure to remit, all the respondents were under a positive duty to act to prevent failure to make current and future remittances and not simply to cure default after the fact.

And further, at paragraph 57:

The obligation on the directors is to prevent a failure, not to condone it systematically, as the respondents did, in the hope of eventually correcting it because there would be enough money in the end to pay all the creditors.

Some other jurisprudence indicates that directors should not be held liable for remittances in cases where they do not have control over the financial affairs of the corporation.

In Fancy v. Minister of National Revenue (1988), 88 D.T.C. 1641 (T.C.C.), per Couture C.J., the bank of the company in question had begun monitoring all cheques issued by it and only authorizing certain payments. The bank refused to approve remittance payments to Revenue Canada and the Appellant-directors informed the latter of this fact. It was held that the directors were victims of circumstances over which they had no effective control and therefore they were exempt from liability under the due diligence provisions.

In Champeval c. Ministre du Revenu national (1990), 90 D.T.C. 1291 (T.C.C.), per Couture C.J., and Worrell v, R. (1998), 98 D.T.C. 1783 (T.C.C.), per McArthur J., the Courts held that in certain specific fact situations where the bank, and not the directors, had the ultimate authority to decide which cheques to pay, the Appellants had no freedom of choice in the matter and could not be held liable for the company’s failure to remit.

In terms of options available to directors of corporations involved in the construction industry faced with remittance problems, Dussault J. of this Court has said in Bazinet c. R. (1996), 97 D.T.C. 364 (T.C.C.), at page 373: 1 recognize that the construction industry is an extremely difficult sector: however, that does not mean that persons working in it are exempt from the application of the law.

Dussault J. also said, at page 373:

If an individual cannot himself or herself terminate the operations of a business in such circumstances, he or she should at least completely dissociate themselves from it by leaving and handing in a resignation.

And Mogan J. of this Court has commented on the issue of involuntary financing by way of unremitted source deductions in Charkowy v. Minister of National Revenue (1990), 91 D.T.C. 284 (T.C.C.), at page 287:

When a corporation reaches the point where it does not even issue the remittance cheque on June 15 for fear that it will not be honoured, it is time to lock the door and go out of business. Otherwise, the Receiver General becomes the involuntary banker of the corporation’s failing business. Part of the directors’ care, diligence and skill is the prudence of knowing when to close down a business rather than prolong the agony with the unlawful use of funds which are impressed with a trust under subsection 227(4) of the Income Tax Act.

Continuing to operate with involuntary financing by the Receiver General with respect to unremitted source deductions was neglectful and not a demonstration of care or diligence.

The Failure to Remit and the Actions of the Appellant

In 1991, the corporation failed to make regular payroll remittances. By the end of 1991 the corporation, at the direction of the Appellant, substantially addressed the remittance problem and reduced the arrears to under $13,000.

In the Spring of 1992, financial problems continued and once again remittances were not made.

In the Fall, at the insistence of the bank, Mr. Lacey was appointed as General Manager and he had the direct responsibility of dealing with the bank in all matters and with Revenue Canada in terms of remittances and arrears. A plan was structured to allow for the payment of arrears and the payment of current remittances. As the plan was never followed, the plan failed.

In January 1993, further attempts were developed involving the proposed co-operation of a major supplier, the Royal Bank and Revenue Canada. Ultimately, this proposal was not followed and therefore failed; eventually the corporation fell into bankruptcy.

Throughout the whole process, Revenue Canada was informed, advised and consulted. The major problem was the corporation did not have full access to its receivables and had no control over its line of credit. It operated throughout beyond its line of credit and the continued operation was at the sufferance of the Royal Bank.

The operating cash flow life line of the corporation was at the discretion of the Royal Bank. The bank held a registered assignment of book debts of the corporation. The monies from accounts receivable such as contract payments could only be obtained with difficulty and only with the co-operation of the Royal Bank.

Early on the Royal Bank while it paid net payrolls made it clear it had no intention of honouring any current remittance payments out of the line of credit. The Royal Bank made all the day-to-day decisions as to what cheques could be issued and honoured and what accounts could be addressed.

In the face of this position Mr. MacDonald through Messrs. Feeney and Lacey still attempted to formulate plans to pay arrears and to pay current remittances.

Conclusion

The bank financed the operation of the corporation for the period in question to the point of bankruptcy.

The Appellant caused an experienced chartered accountant to be retained and the Appellant followed the bank’s direction to engage a General Manager that the bank had confidence in.

Revenue Canada co-operated throughout the various attempts but did insist that current remittances be paid and payments made on arrears.

While plans were structured to pay arrears and commitments were made to honour current remittances, eventually all plans failed. The corporation did not maintain its end of the agreements.

I conclude from the evidence that the Appellant, the Controller and the General Manager tried to appease Revenue Canada by undertaking to address arrears and pay present remittances. The Royal Bank of Canada obviously, from its decisions and actions, would not cooperate. During this time of continuing economic crisis, the on-site consensus of Messrs. MacDonald, Feeney and Lacey was to carry on business and not pay remittances and hope the future receivables and future business would eventually solve Multi’s economic woes.

The failure to remit was not a short run event. It was long term and ongoing. To carry on in this mode took a specific decision of the directors and was taken knowing notwithstanding their plans to the contrary they would not be able to make payments to extinguish arrears and pay current remittances.

The Appellant, as a director of Multi, was a highly educated civil engineer with an extensive business and management history in the construction industry. When remittance problems arose the second time in 1992 and 1993, he did not seek independent opinion or analysis to determine if Multi was a viable continuing business. He relied on the efforts of Messrs. Feeney and Lacey to solve the problem and their solution was to not positively address the arrears and current remittances with payments but rather keep negotiating with Revenue Canada. This negotiation was done in the face of the Appellant’s knowledge that the Royal Bank would not pay the remittances from the line of credit. Further, because of his knowledge, the Appellant did not, in any way, direct the bank or specifically cause the Controller of Multi to attempt to pay remittances. Thus, the Appellant’s carry on course of action was a decision that consciously placed remittances continually and systematically in default.

The Appellant, by allowing Multi to continue on this long term basis, did nothing tangible to prevent the failure to remit. The negotiating with Revenue Canada with accompanying unproductive proposals when the director had full knowledge the bank would not pay payroll remittances under Multi’s strained line of credit did not alleviate the positive duty on a director to prevent failure to remit current and future remittances.

In conclusion, the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent director of his capabilities would have exercised in comparable circumstances.

Decision

The appeal is dismissed.

The Respondent is awarded her costs.

Appeal dismissed.