Beutler v. MNR, 88 DTC 1286, [1988] 1 CTC 2414 (TCC)

Brule, T.C.J.:— These are appeals involving the taxpayer's 1982 and 1983 taxation years in which he was assessed in accordance with the provisions of subsection 227.1(1) of the Income Tax Act ("Act"). The Minister based his assessments on the fact that the appellant was a director of a corporation which failed to deduct or withhold an amount of tax as required by the Act and accordingly was jointly and severally liable together with the corporation for the tax owing. Subsection 227.1(1) of the Act reads 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.

An agreed statement of facts was filed by the parties which set out the following:

1. The Appellant was a director in Polar Heating Ltd. (Polar) at all relevant times when the corporation was required to remit deductions.

2. The Appellant was also the president and a 50 percent shareholder of Polar at all relevant times.

3. The only other director of Polar during the relevant period was Gordon Salls.

4. Gordon Salls was also the secretary-treasurer and a 50 percent shareholder of Polar during the relevant period.

5. Polar did not maintain a separate trust account for payroll deductions.

6. Polar failed to pay deductions, interest and penalties totalling $78,302.33 in respect of Notices of Assessments dated October 22, 1982; November 10, 1982; November 29, 1982; January 17, 1983; and May 4, 1983.

7. A Certificate for the amount of Polar's liability under Section 153 has been registered in the Federal Court of Canada under subsection 223(2) and execution for such amount has been returned unsatisfied.

8. On June 8, 1982, the payroll audit was completed and Polar was assessed.

9. About June 8, 1982, Polar paid $19,568.94 for the period ending April 30, 1982.

10. Polar then failed to make the monthly remittances of Section 153 withholdings as required by Regulations 101 and 108 for May, June and July.

11. On September 13, 1982, Revenue Canada Collections determined that Polar's payroll deduction account was not up to date and the collections officer (Collections) called Polar and left a message for Gordon Salls.

12. On September 15, Gordon Salls was reached by Collections. He promised to call back with the payroll deduction remittance figures.

13. On Friday, September 17, 1982, Gordon Salls called Collections and advised that he would bring in all remittance figures on the morning of Monday, September 20, along with a cheque for one-half of the amount outstanding, with the balance to be paid at the end of the month. He also said he would bring in a list of the accounts receivable of Polar.

14. A cheque in the amount of $44,899.13, dated September 30, 1982, and drawn on Polar's account at the Banque Nationale de Paris (the Bank), was delivered to Collections on September 20, 1982.

15. The cheque was deposited to the account of the Receiver General about October 4, 1982, and returned because of insufficient funds about October 7, 1982.

16. On October 20, 1982, Collections telephoned Gordon Salls who promised to go to the Bank the next day to try and get a certified cheque. Mr. Salls also promised to obtain the payroll deduction figures for the month of September.

17. On October 22, 1982, Mr. Salls advised Collections that the Bank had refused to honor the cheque due to insufficient funds but that it would take him until the first of next week to get a certified cheque for the full amount plus October (September ?) remittances.

18. On November 3, 1982, Gordon Salls delivered a cheque in the amount of $22,309.78 drawn on the Bank for the September remittance of payroll deductions. He advised Collections that the October remittance should be on time and would be approximately $6,000.00. Mr. Salls advised Collections that the Bank had cut Polar's line of credit from $500,000.00 to $350,000.00. Mr. Salls advised that he had spoken to the Bank and they could live with a cheque for $10,000 per month for five months, with the balance due to the Receiver General to be cleared up afterwards. Mr. Salls promised to bring in a post-dated cheque on November 4, 1982. He also promised to supply monthly a list of accounts receivable and keep all payroll deduction remittances current.

19. In response to a call from Collections on November 5, 1982, Mr. Salls promised to have the list of accounts receivable, the post-dated cheques, and the current remittance, by November 15, 1982.

20. On November 17, 1982, five post-dated cheques of $10,000.00 each, dated November 30, 1982; December 30, 1982; January 30, 1983; February 28, 1983; and March 30, 1983; and a list of accounts receivable were brought to Collections by Gordon Salls. Mr. Salls advised Collections that the October remittance of approximately $6,000.00 was paid through the Bank. Collections then contacted someone at the Bank and was advised that it is normal for a line of credit to be decreased in the off-season and that there were no serious problems with the company.

21. The October remittance allegedly paid through the Bank was never received by Revenue.

22. On November 24, 1982, Collections was advised by the Winnipeg Taxation Centre that the $22,309.78 cheque had been dishonored. Collections telephoned Gordon Salls and he agreed to come in to try to make further arrangements. Collections decided to advise Mr. Salls that if one more cheque was dishonored, the arrangement would be treated as broken and garnishees would issue.

23. Mr. Salls came in to Collections on November 24 to make further arrangements. He advised that the cheque was dishonored because they were at their maximum line of credit which was currently $375,000.00. Mr. Salls suggested Collections take three large accounts receivable that were then due. Those accounts were identified as Mechanical Specialties, $52,265.27; Stanton Homes Ltd., $22,880.55; and Chandos Construction, $9,833.57. The Revenue Canada docket recording the meeting uses the words "Gordon Salls suggests I garnishee 3 large accounts receivables that are due right away.”

24. Collections telephoned the three contractors and after determining that amounts were due to Polar, decided to issue third party demands. Collections telephoned the Winnipeg Taxation Centre and asked that the post-dated cheques be returned.

25. Third party demands showing Polar’s liability as $84,049.73 and requiring 100% of all amounts then due to Polar were issued to the three contractors.

26. On December 9, 1982, Collections returned the post-dated cheques to Polar.

27. On December 21, 1982, Mr. Michael Venner of Touche Ross telephoned Collections to advise that Polar had been put into receivership on December 13, 1982. Mr. Venner advised that he had contacted the three contractors who had received the third party demands and told them not to remit any funds. Mr. Venner requested that Collections issue cancellations of the demands.

28. Collections received a legal opinion that the Receiver had priority over the three third party demands and accordingly issued cancellations.

29. The Receiver liquidated all assets of Polar which proved insufficient to satisfy the Section 153(1) withholdings which had not been remitted.

Appellant's Position

Counsel for the appellant relied on the provisions of subsection 227.1(3) which provides:

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.

The facts in this case, it was said, are different from the reported cases of Lloyd Youngman & Company Inc., Trustee of the Estate of Harold Fraser in Bankruptcy v. M.N.R., [1987] 1 C.T.C. 2311; 87 D.T.C. 250; and James V. Barnett v. M.N.R., [1985] 2 C.T.C. 2336; 85 D.T.C. 619.

In the former Mr. Fraser took no steps to correct the problem while in the latter case financial matters were delegated to another person. In both these cases the appellants failed. In the present case, it was argued, the appellant tried to have the moneys paid to Revenue Canada but they were beyond his control at the bank, as set out above in the agreed statement of facts.

This then distinguishes Mr. Beutler from the other cited cases because in those the appellants did not act while here he could not act. As a result the provisions of subsection 227.1(3) were satisfied and the appeal should be allowed.

Minister's Position

The Court was presented with a variety of arguments why the appeal should fail. First of all the requirements of the Act had not been met. In the Barnett case (supra) the Court said at page 2337 (D.T.C. 620):

The amounts so withheld were not moneys which the company had any right to use for purposes of its business. By virtue of subsection 227(4) of the Act the company was deemed to hold those amounts in trust for Her Majesty. By virtue of subsection 227(5) of the Income Tax Act the company was under an obligation to keep those moneys separate and apart from its own. It cannot be suggested seriously that a director of a corporation could ever be under an obligation to the corporation to cause to be used for the benefit of the corporation moneys which it holds as bare trustee for a third party.

In the Fraser case (Supra) the Court in considering this same problem set out at page 2314 (D.T.C. 251) the following:

Section 227.1 effectively imposes a duty on directors to ensure that the corporation performs the obligations listed in subsection (1). It does so by making them vicariously liable for any failure of the corporation to perform and by creating a defence for those who exercise the requisite degree of care, diligence and skill to prevent the failure. It is not necessary to a decision in this appeal to attempt to set down in a general way what must be done to meet the standard of care required by subsection (3).

Once the moneys had been given to the Banque Nationale de Paris it had priority over the funds and the Minister of National Revenue could not have any claim to the funds from the Receiver who had been appointed. In support of this reasoning counsel for the Minister cited:

1. Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd. et al., 108 D.L.R. (3d) 257;

2. Royal Bank of Canada v. Attorney General of Canada, [1977] 6 W.W.R. 170;

3. Attorney General of Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479 (appeal of #2);

4. Re Royal Bank of Canada and Revelstoke Companies Ltd., 94 D.L.R. (3d) 692;

5. The Royal Bank of Canada v. The Queen, [1984] C.T.C. 573; 84 D.T.C. 6439.

In addition to the above, counsel offered the principle of nemo dat qui non habet being that it is a general rule that no man can give another better title than he himself has. In this case once the moneys had gone to the bank as part of the agreement with the appellant's company then any attempt to assign part of these funds to the Minister to satisfy the withholding obligations was without foundation and not possible.

Next in the Minister’s argument the Court was presented with the doctrine of estoppel saying that the accounts receivable assigned to the bank could no longer be dealt with by the appellant unilaterally. As precedent the Court was referred to:

1. George Whitechurch, Limited v. Cavanagh, [1902] A.C. 117;

2. Porter v. Moore, [1904] 2 Ch. 367.

Finally the Alberta Companies Act, Business Corporation Act and the Fraudulent Preferences Act were referenced for the determination of directors' liability for wages.

Conclusion

The sole consideration is whether or not the appellant "exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances" as required by subsection 227.1(3). I think not. When he and his associate tried to act to correct the problem it was too late.

Under cross-examination Mr. Beutler said that he knew as a director that monthly remittances were necessary to be made. These were not made, he said, because of cash flow being tight. He knew the company was using "government" funds as a loan and that he and his associate made a decision not to pay Revenue Canada.

The funds to be withheld could have been placed in a separate bank, as was the payroll, thus avoiding seizure by the Banque Nationale de Paris. When the gravity of the situation was realized it was too late. Thus it cannot be argued that the appellant met the standards set out in the Act. For this reason and those arguments made by the Minister's counsel this appeal is dismissed.

Appeal dismissed.