DeWitt v. MNR, 90 DTC 1027, [1990] 1 CTC 2098 (TCC)

Kempo, T.C.J.:— These appeals were, on consent application, joined for hearing on common evidence. All three appeals dealt with assessments issued by the respondent pursuant to section 227.1 of the Income Tax Act (the "I.T.A.") commonly known as the directors' liability provisions.

Subsection 227.1(1) of the I.T.A. states that where a corporation has failed to deduct or withhold an amount as required by section 153 of the I.T.A. 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 (with the corporation) to pay that amount.

Counsel agreed that Calmax Holdings Ltd. did not remit certain source deductions withheld from its employees, that it was assessed for unremitted source deductions, penalties and interest during the periods April through July 1985 totalling $44,222.84 and that the pay periods to which these source deductions related were primarily the months of February, March and April of 1985 plus a small amount of 1984 source deductions which were unremitted and which had come to the respondent's attention during a payroll audit conducted in the spring of 1985.

Counsel for the appellants advised the Court that two of their pleaded alternate grounds of appeal were not in issue. These included matters alleging breach of the two-year limitation period under subsection 227.1(4) and failure to file the requisite certificate as required by subsections 223(2) and 227.1(2) of the I.T.A.

The narrow issue to be determined in these appeals is whether the three appellants were directors of Calmax Holdings Ltd. at the material times. The particularly unique situation here, aside from its facts, arose in respect of Alberta's new legislative approach to the election or appointment of corporate directors under its Business Corporations Act, S.A. 1981, c. B-15.

The respondent, in his reply to notice of appeal, assumed that each of the three appellants was a director of Calmax Holdings Ltd. under both the previous and the new legislative régimes.

Both sides joined issue on the question arising in the last alternative as to whether, given all the circumstances, the conduct of each of the appellants fell within the prescriptives of subsection 227.1(3) of the I.T.A. which provides that:

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 appellants, Messrs. DeWitt and Miller, testified. The appellant, Mr. Gee, died in May of 1989. These three individuals were the shareholders of Calmax Holdings Ltd. along with a Mr. Ralph Burgess (who testified) and Mr. Jack Tate (who was available but was not called to testify). The corporate solicitor, Mr. J.K. Wheatley, also testified.

The following is a pictorial representation of the historical context of the matter.

I

| Holdco I | Holdco ll | Holdco ÏÏT|

25% 45% 30%

Freeze Maxwell Co. Ltd.

Ralph Burgess 7

Jack Tate individuals

100% non-voting preferred 100% common shares common voting shares voting shares

Calmax Holdings Ltd. Fremax Holdings Ltd.

Freeze Maxwell Co. Ltd. ("Freeze Maxwell") was established in 1911 under the Northwest Territories and Alberta Act and then reincorporated under the Alberta Companies Act in 1929. It carried on the business of roofing, ventilation and related sheet metal manufacturing basically in Alberta, but also in Saskatchewan, British Columbia and sometimes into the Northwest Territories.

Prior to 1980 the shares of Freeze Maxwell were owned by each of the three appellants in the proportions shown in the above representation except that, for estate purposes, each of these holdings came to be owned by their respective holding companies under a reorganization and share transfer rollover recognized by section 85 of the I.T.A. All three appellants were directors of Freeze Maxwell at all material times.

On or about May 31, 1978 Freeze Maxwell sold its active business assets that were used in northern Alberta to Fremax Holdings Ltd. ("Fremax"), the common shareholders of which were seven former employees of Freeze Maxwell. This transaction specifically mandated, at the request of the common shareholders, that the three appellants be directors of Fremax because of the want of management experience on the part of the new shareholders. Mr. DeWitt was to be its managing director. Mr. Miller’s contribution to its management was because of his experience as a manager/estimator in the ventilation department. Mr. Gee was a practising chartered accountant with extensive fiscal/financial knowledge and experience. Mr. Gee and Mr. DeWitt, for ten years prior to this sale, had acted on behalf of Freeze Maxwell in dealings with lawyers and accountants in the company's business operations.

A few months later, on or about January 1, 1979, Freeze Maxwell sold its active business assets located in southern Alberta to the subject defaulting corporation, Calmax Holdings Ltd. ("Calmax"). The sale price was $1,535,294 which was payable as follows: $100 by deposit, $918,248 by assumption of current liabilities, $406,946 by demand promissory note and $210,000 by the issuance of 210 preferred shares of Calmax which permitted to the holder "the right to receive notice of shareholders’ meetings and attend and fully vote at such meetings about any amount of capital, dividend or premium is [sic] outstanding in relation to their share".

The two common shareholders of Calmax were Mr. Jack Tate and Mr. Ralph Burgess. Mr. Tate had been the general manager of the Calgary branch of Freeze Maxwell for six to seven years before the sale, and he had run the Calgary operations fairly autonomously excepting for banking matters. After the sale Mr. Tate became Calmax's director, president and general manager. Mr. Burgess had been employed by another roofing company in Calgary as general manager, and had gained experience in negotiating roofing subcontracts. He became Calmax's director and secretary treasurer.

Unlike the Fremax arrangement, the Calmax sale was not specifically conditioned upon the three appellants remaining actively involved in its operations and management. Mr. DeWitt's explanation for this was rested upon the hands-on operational/managerial experience of Messrs. Tate and Burgess as compared to no such comparable experience in the formeremployee shareholders of Fremax. He stated that he, Mr. Gee and Mr. Miller decided that they had adequate control over Calmax through their preferred shareholding rights. Calmax paid all of the $406,946 owing to Freeze Maxwell under the promissory note by the end of 1982.

A number of events occurred in 1982. Mr. Gee had noticed an erroneous calculation with respect to Freeze Maxwell's worth, and a consequential amending agreement was executed in September increasing the number of issued preferred shares from 210 to 233. Also, 44 of the preferred shares were redeemed by Calmax during 1982. Thirdly, a resolution was passed in February of 1983 which authorized an amount of $246,812 be paid for bonuses for the year ended December 31, 1982.

The evidence was that Calmax had required business help from Mr. DeWitt, particularly with respect to the bank, bonding companies and some suppliers. Apart from these matters the appellants were not involved in, nor had they shown any interest in, the operations and management of Calmax for the six-year period 1979 to 1984, inclusive.

Mr. DeWitt and Mr. Gee, for two consecutive years, had dinner meetings in the Calmax offices in Calgary with Mr. Tate, the company's bankers and accountants, and with an insurance broker, for the purposes of examining the year-end financial statements. At the last such meeting, recalled to be sometime in March of 1984, it was first discovered that Calmax had guaranteed the repayment of their landlord's mortgage to a maximum of $1,176,000 which, in Mr. DeWitt's view, ultimately caused their demise. In April of 1985 one of its bankers put Calmax into receivership. Mr. DeWitt said he had no prior knowledge about either the guarantee or the actual receivership, although the banks had kept him informally apprised of Calmax's growing financial difficulties.

Mr. DeWitt testified that all of the Calmax corporate minutes he may have signed, although not specifically set-up that way, were intended to be given on behalf of Freeze Maxwell as a preferred shareholder. He confirmed that having financial control over Calmax via the preferred share route was the advice given, and taken, at the outset by the lawyers and accountants involved. He also confirmed that Freeze Maxwell's lawyer, Mr. Wheatley, was involved throughout the whole plan and that he had advised on the approaches to be taken.

Mr. DeWitt said no formal meetings had ever occurred between the three appellants and Messrs. Tate and Burgess, but that at all material times documents had been mailed back and forth between Edmonton and Calgary, or vice versa. He described his actions as carelessness in his signing of Calmax directors' minutes and also with respect to his failure to note his and the names of the other two appellants being included as directors. He conceded that he took no steps with respect to the financial internal management of Calmax. This was because he believed he was not a director of that company.

The evidence of Mr. Miller was that he was never asked, nor did he believe that he was, or was to have been, a director of Calmax He said that any documents he had signed had been presented to him for his signature either by Mr. Gee or Mr. DeWitt, and that if they had signed or said it was okay then that would have been good enough for him to have followed suit. Mr. Miller did not attend any of the Calmax Calgary dinner meetings, he was not provided with any financial statements, and most of his knowledge came about as a result of the assessments under appeal and these proceedings. He did recall signing a number of documents with respect to the Calmax deal in Mr. Wheatley's office, but he could not specify or recall what they were.

Mr. Burgess testified that there was never an occasion, or a meeting, when all five individuals had been together. He also said that he had never asked the appellants to be directors of Calmax, and that Mr. Tate had looked after the details and the structuring of the transaction with Freeze Maxwell. He explained that he felt that having the signatures of the three appellants on the directors' minutes was merely a courtesy. With respect to Calmax's corporate continuance under Alberta's new legislation, Mr. Burgess said the corporate lawyer prepared all the documents, presented them for his signature without any formal meeting being held, and that as far as he was concerned nothing was to have been changed.

Counsel for the respondent called Mr. Wheatley to testify. Following a formal waiver by counsel for each of the appellants of their respective solicitor-client privilege, Mr. Wheatley testified that he had been retained by, and had received his instructions to act with respect to the Freeze Maxwell asset sales to Fremax and Calmax from, the principals of Freeze Maxwell (being the three appellants) and their accountants.

Mr. Wheatley confirmed that he was the incorporating solicitor for Calmax. Notwithstanding the passage of ten years he said he recalled the whole transaction rather specifically because it was his first one involving sophisticated tax and estate planning. He was unable to locate his Calmax incorporation file but was successful in obtaining, from a successor law firm's storage facilities, the file of the Freeze Maxwell sale to Calmax and the one of Calmax's borrowings from Canadian Commercial and Industrial Bank.

Mr. Wheatley recalled that it took some months, following the preparation of a draft agreement of sale, to get the final numbers from his clients, and that he had had long protracted discussions with an outside chartered accountant with respect to the nature and purpose of setting up the preferred share structure in the purchasing corporation.

Mr. Wheatley and his legal assistant were Calmax's incorporating shareholders and provisional directors. He had prepared the following executed documents and signed minutes which formed part of the Calmax corporate minute book (Exhibit A-6):

— February 7,1980- Minutes of a Meeting of the Provisional Directors (Mr. Wheat- ley and Ms. Watson) as to matters of incorporation, with share subscription and transfer to Messrs. Tate and Burgess.

— February 7, 1980-Minutes of a Meeting of the Shareholders (Messrs. Tate and Burgess)-as to the above matters and a motion, carried, that Messrs. Tate, Burgess and the three appellants were elected directors of the Company- signed by Messrs. Tate and Burgess.

— February 7, 1980-Minutes of a Meeting of the Shareholders (Messrs. Tate and Burgess) in the presence of the three appellants-as to the asset purchase from Freeze Maxwell and the issuance of the preferred shares-signed by all five named individuals.

— February 7,1980-Minutes of a Meeting of the Directors (Messrs. Tate, Burgess and the three appellants)-as to approval of the share matters, election of officers and banking matters-signed by all five named individuals.

— February 25,1980-Annual Corporate Summary, filed with the Registrar of Companies, stating the Directors of Calmax were Messrs. Tate, Burgess and the three appellants, signed by Mr. Wheatley.

— September 23, 1982-Minutes of Meeting of Shareholders and Directors (Messrs. Tate and Burgess)-as to the amending agreement with Freeze Maxwell-signed by Tate and Burgess.

— Register of Directors and Officers showing Messrs. Tate and Burgess and the three appellants as directors at February 7, 1980.

The Calmax corporate minute book also contained a May 2, 1980 directors' resolution signed by Messrs. Tate, Burgess and the three appellants as to the authorized use of the corporate seal. This was not prepared by Mr. Wheatley, but he had prepared, signed and filed with the Registrar of Companies on May 11, 1979 a notice that the appointed directors of Calmax were Messrs. Tate, Burgess and the three appellants.

The testimony of Mr. Wheatley was thusly:

[Mr. McNary] Q. Do you recall any discussions concerning the . . . specifically the contents of the minutes regarding directors?

A. Not specifically.

Q. Okay. Are you able to advise as to what would have happened or what should have happened?

A. If I prepared documents that said so and so were to be directors and if they were sent out and returned to me signed then I assume that that's the way I was told it was to be done.

[T.204, 11.8-17]

Mr. McNary: Q. One final question, Mr. Wheatley. Would you have included these three gentlemen as directors of this company in the absence of instructions or in the face of instructions not to include them?

A. No.

Q. So in the absence of specific recall are you quite certain that there must have been in fact some instructions or discussions concerning the appointment of directors?

A. If I prepared documents and if they were subsequently executed by the parties, then my assumption is that I would have received instructions to that effect. Would have carried them out and it would have been confirmed by the execution.

[T.212, 11.17-26; 1.213, 11.1-4]

[Mr. Cherniawsky] Q. Is there any chance that you could be mistaken about the preparation of the Calmax Notice of Directors and that you followed the Fremax documents and didn't receive instructions?

A. Not in my mind.

[T.225, 11.9-13]

The additional documents put into evidence of relevance were:

— À directors' resolution dated May 2, 1980 signed by Messrs. Tate, Burgess and the three appellants as to the corporate seal and the registered office.

— Annual Corporate Summaries filed with the Registrar of Companies for the years ending July 31, 1980 and July 31, 1981, wherein the directors were stated to be Messrs. Tate, Burgess and the three appellants. Both documents were dated August 11, 1981 and both were signed by Mr. Burgess.

— February 22,1983-Minutes of a Meeting of Directors [Messrs. Tate, Burgess and the three appellants] as to a bonus allocation of $246,812 and signed by all five individuals.

To capsulate to 1983, there was only one corporate minute that was without the names and signatures of the three appellants as directors. It was prepared by Mr. Wheatley, dated September 23, 1982 as aforementioned, and it dealt with the amending agreement.

The documents before the Court respecting Calmax’s corporate continuance under Alberta’s new corporate legislation were as follows:

— Articles of Continuance filed January 31, 1984 and ostensibly signed by Mr. Tate as president and director.

— Corporate by-laws made January 30, 1984 ostensibly signed by Mr. Tate as president and Mr. Burgess as secretary.

— Notice of Directors or Notice of Change of Directors filed January 31, 1984 and ostensibly signed by Mr. Tate as president. Sections 3 and 4 of the Notice required particulars of the date on which named persons would have been appointed or on which named persons would have ceased to hold the office as director. Both of these were noted to be “not applicable". Section 5 of this Notice was entitled “The Directors of the Corporation as of this Date” and thereafter appear the names and addresses of Messrs. Tate, Burgess and the three appellants.

— Annual Corporate Returns, filed April 15, 1985, and signed ostensibly by the corporate solicitor, for three corporate year-ends which were illegible on the document provided. Each represented that there had been no change of directors.

Mr. DeWitt submitted a total of 26 directors’ minutes extracted from the Fremax corporate minute book that had been prepared on his instructions during the period January 1, 1979 to June 30, 1985. This was intended to contrast with the mere four concerning Calmax, and to act as an objective indicator as to how Mr. DeWitt conducted himself when he subjectively believed himself to be a director. I agree that it does have that effect. However its concomitant inference is that Mr. DeWitt would therefore have been well aware of what directors' minutes were all about. He did sign the Calmax directors' minutes as they were presented to him. Both Mr. DeWitt and Mr. Gee were astute, competent and experienced businessmen with highly qualified professional advisors readily available for assistance and advice. As to Mr. Miller, he simply followed what Messrs. DeWitt and Gee had done or what they had asked for.

Analysis

Counsel for the appellants argued that the Alberta's legislative definition of "director", by its use of the phrase “occupying the position" should be interpreted in its dictionary sense of "keep busy or engaged. I disagree. Counsel for the respondent has noted the dictionary meaning to also include “hold (office)". This is the meaning to be attributed to the subject phrase. It is wider in scope. No reasons have been advanced as to why the legislative interpretive approach commands a narrow approach or meaning.

Given all of the circumstances of the case, there is sufficient evidence upon which to establish a conclusion at law that each of the three appellants occupied the position of director of Calmax at least until January 31 of 1984 which is the date of its Certificate of Continuance.

As stated earlier, a anew company law régime occurred in Alberta.

The relevant and applicable provisions of the Alberta Business Corporations Act, supra, (the “A.B.C.A.”) read as follows:

261(2) An Alberta company shall apply to the Registrar for a certificate of continuance in accordance with this section

(3) Section 181(3) to (5) and (not applicable) applies with the necessary changes to an application for a certificate of continuance under this section as if the Alberta company were an extra-provincial corporation.

(4) The shareholders of the Alberta company entitled to vote at meetings of members

(a) shall adopt articles of continuance,

(b) shall authorize the directors to provide for,

(i) the execution of the articles of continuance, and

(ii) the making of an application

181(3) Articles of continuance in prescribed form shall be sent to the Registrar together with the documents required by sections 19 [Notice of registered office] and 101 [Notice of Directors].

(4) Upon receipt of articles of continuance and the documents required by sections 19 and 101, the Registrar shall issue a certificate of continuance. . .

(5) On the date shown in the certificate of continuance

(a) (not relevant)

(b) the articles of continuance are deemed to be the articles of incorporation of the continued corporation,. . .

Subsection 99(1) of the A.B.C.A. would require the holding of a directors’ meeting after incorporation, however subsection 99(2) states that that subsection does not apply to a corporation to which a certificate of continuance had been issued under section 181.

The following parts of section 101 of the A.B.C.A. are relevant because they are encompassed within the continuance provisions of subsections 181(3) and 261(3) respectively:

101(1) At the time of sending articles of incorporation, the incorporators shall send to the Registrar a Notice of Directors . . .

(2) Each director named in the Notice referred to in subsection (1) holds office from the issue of the certificate of incorporation until the first meeting of the shareholders.

(3) . . . [The] shareholders of a corporation shall, by ordinary resolution at the first meeting of shareholders and at each succeeding annual meeting at which an election of directors is required, elect directors to hold office . . .

(7) Notwithstanding subsections (2), (3) and . . ., if directors are not elected at a meeting of shareholders, the incumbent directors continue in office until their successors are elected.

Two other A.B.C.A. provisions of relevance to these appeals are not specifically referenced in the continuance provisions, but they do impact on the issues raised.

100(5) A person who is elected or appointed a director is not a director unless

(a) he was present at the meeting when he was elected or appointed and did not refuse to act as a director, or

(b) if he was not present at the meeting when he was elected or appointed,

(i) he consented to act as a director in writing before his election or appointment . . ., or

(ii) he has acted as a director pursuant to the election or appointment.

(6) For the purpose of subsection (5), a person who is elected or appointed as a director and refuses under subsection 5(a) or falls to consent or act under subsection 5(b) shall be deemed not to have been elected or appointed as a director.

The appellants' position was that if the Court finds that they were and remained incumbent directors upon or immediately following the continuance, their want of consent or action (100(5)) and the deeming provision (100(6)) effectively nullified that status.

In the Proposals for a New Alberta Business Corporations Act, Volume 1, Report 1, given by the Alberta Institute of Law Research and Reform dated August 1980, at page 61, it submitted:

Under CBCA [Canada Business Corporations Act] s. 101, the first directors are named in a notice filed with the articles of incorporation, and thereafter directors are elected by ordinary resolution at annual meetings for terms which may be staggered and which may be up to 3 years. . . . The CBCA does not require a formal consent from the person to be elected director as does OBCA [Ontario Business Corporations Act] s. 125(3), and as does A.C.A [Alberta Companies Act] s. 75 for public companies. We incline to the opinion that the consent of the directors should be required: if a person is elected or held out as a director without his consent he might find himself under liability or faced with the necessity of taking legal proceedings to extricate himself from the directorship. If he is present at his election, or acts as a director, no formal consent should be required, but otherwise he should consent in writing. S. 100(5) of the draft Act would give effect to these views.

The Volume 2 of the above noted Proposals, entitled Draft Act and Commentary, the subsections 100(5) and 100(6) of the new legislation were proposed, followed by the Institute's comments numbered paragraph 3 and 4 appearing immediately thereafter:

3. We do not think that a person should, without his consent, be placed in a position in which he may be subjected to the liabilities of a director or compelled to take proceedings to demonstrate that he is not. S. 100(5) would at least put on the corporation the burden of proof of an allegation that a person has consented to be a director and, by so doing, might prevent the allegation being made. There is no similar provision in the CBCA.

4, S. 100(6) flows from s. 100(5).

This requirement has been recognized in jurisprudential authority, see: West Leechburg Steel Co. v. Smitton, 280 Mich 180; 273 NW 439 (Mich S.C.). The Alberta wording has legislatively incorporated the philosophy of requiring the express or implied consent of a person before he or she becomes a director. I agree with the submissions of counsel for the appellants that following the January 31, 1984 issuance of the continuance certificate there had been no meetings at which directors had been elected, that no consent to act had been obtained or tendered, and that no documentary evidence subsisted thereafter to establish express or implied consent by deeds or actions on the part of the three appellants.

As noted earlier, a "Notice of Directors or Notice of Change of Directors" had been filed along with the application for continuance. It represented that no directors had been appointed, that none had ceased to hold the office, and that Messrs. Tate, Burgess and the three appellants were directors as of that date.

Counsel for the appellants submitted that Calmax had been statutorily "re-born" under the Certificate of Continuance and therefore subsections 100(5) and 100(6) would be applicable to the factual circumstances of the case. A.B.C.A. subsection 181(5) provides:

181(5) On the date shown on the certificate of continuance .. .

(c) The certificate of continuance is deemed to be the certificate of incorporation of the continued corporation.

and by section 9:

9(1) A corporation comes into existence on the date shown in the certificate of incorporation.

(2) A certificate of incorporation is conclusive proof for the purposes of the Act and for all other purposes.

(a) that the provision of this Act in respect of incorporation and all requirements precedent and incidental to incorporation have been complied with, and

(b) that the corporation has been incorporated under this Act as of the date shown in the certificate of incorporation.

The case of Prime Investments Ltd. v. Madison Development Coloration Ltd. et al, [1983] 1 W.W.R. 697; 23 Alta. L.R. (2d), 165 (Q.B.) considered these provisions and held that the Registrar's certificate of continuance was conclusive proof as to a company's continued status under the A.B.C.A. Accordingly, submits counsel for the appellants, the deeming provision of subsection 100(6) of the A.B.C.A. is operative on a continuance and the appellants were not directors in fact and in law after January 31, 1984. Messrs. Tate and Burgess remained directors, even without any formal meeting, election or appointment, because of their actions and conduct.

But what of subsection 101(7) of the A.B.C.A.? To repeat, it provided that if directors were not elected at a meeting of shareholders, the incumbent directors would continue in office until their successors are elected and that each director named in the notice of directors holds office from the issue of the certificate of incorporation until the first meeting of shareholders. It has been specifically incorporated into the continuance provisions, and it does apply prima facie to the appellants' incumbency. However, the exculpatory provisions relied upon by counsel under subsections 100(5) and 100(6) are of general purport, and they therefore apply as equally to a continued corporation as to a newly incorporated one. Its impact and effect is the same as upon a new incorporator under subsection 7(1) of the A.B.C.A. which specifically encompasses subsection 101(2), supra, wherein the directors named in the notice of directors filed with the articles of incorporation are to hold office until the first meeting of the shareholders. No discernible reason has been provided as to why provisional directors and incumbent directors were meant to be, or should be, treated differently under the new legislative régime.

The unrefuted evidence was that the three appellants were without any knowledge of the matters and requirements concerning the Calmax continuance, that no discussions or meetings were held, and that no documents were authorized, prepared and/or signed by them for that purpose. Paragraph 105(a) has been met because there were no meetings. Subparagraphs 105(b)(i) and (ii) have been met because neither of the three appellants had consented in writing or had acted as a director pursuant to anything.

Accordingly none of the appellants at any time after January 31, 1984 were directors of Calmax and therefore they are not liable under subsection 227.1(1) of the I.T.A. for Calmax's source deductions unremitted in the spring of 1985. The above finding is sufficient to fiscally absolve the appellants as aforesaid.

The appeals are allowed and the subject assessments vacated. As the hearing proceeded on common evidence, there will be one set of costs.

Appeals allowed.