Citation: 2010 TCC 268
Date: 20100514
Docket: 2008-3358(GST)G
BETWEEN:
LESLIE JOHN BAKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
Issue
[1] A corporation
(“1050560 Ontario Limited”) formed in November 1993 failed to remit net tax (GST)
payable pursuant to the Excise Tax Act (the “Act”) to the
Receiver General of Canada in the amount of $126,497.01 for the period July 1, 1994 to December 31,
2006. The corporation was assessed for the failure and for penalties of
$100,296.85 and interest of $62,383.82.
[2] A Certificate of
the corporation’s liability was registered in November 2004. The collection of
the amount payable remains unsatisfied.
[3] By Notice of
Assessment dated July 16, 2007 the Appellant was assessed under section 323 of
the Act for the corporation’s liability in the total amount of
$289,177.68.
[4] The Appellant
admits to being the sole director and sole shareholder of the corporation throughout
the relevant period.
[5] The Appellant
relies on subsection 323(3) of the Act which provides as follows:
(3)
Diligence -- A director of a corporation is not liable
for a failure under subsection (1) where the director exercised the degree of
care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised
in comparable circumstances.
[6] The only issue in
this appeal then is whether or not the Appellant has exercised the degree of
care, diligence and skill to prevent the failure to remit the subject tax that
a reasonably prudent person would have exercised in comparable circumstances.
General Background
[7] Both the Appellant
and his daughter gave evidence at the hearing.
[8] The Appellant is 64
years old and resides in Zephyr, Ontario, a community east of Toronto in the Durham region.
[9] He left school
after grade 6, completing a term that he said did not include much in the way
of attendance.
[10] He left school to do
odd jobs at the Greenwood Race Track in Toronto where he cleaned stalls and walked
horses. He continued to work at the track for a number of years and eventually did
other odd jobs including parking cars and doing part-time maintenance cleaning.
[11] Notwithstanding such
odd jobs, his testimony essentially was that since the age of 10 he worked
around horses. After the Greenwood Race Track closed down he continued to work
around the stables at Woodbine and was able eventually to operate a business as
a horse boarder and trainer.
[12] He was married at
the age of 19 to his now deceased wife when she was 18 years of age and they
had two children. His wife had a high school grade 12 education. The Appellant
himself never furthered his education and although he acknowledged that he
could read the newspaper and the like, he had no facility with paperwork or
understanding forms.
[13] The Appellant’s wife
worked at the Royal Bank since the age of 18 in various capacities starting as
a teller and eventually becoming the assistant to the bank manager. At the age
of 35 she developed breast cancer and suffered the removal of one breast. A few
years later she developed ovarian cancer and after treatment and a period of
relief she was diagnosed with bone cancer and then ultimately with brain cancer
and she died at the age of 55 in July, 2002.
[14] The cancers were
treated with chemotherapy and radiation.
[15] Up until her death,
the Appellant’s wife did all of the household accounts and managed the family’s
financial affairs to the exclusion of the Appellant. The Appellant had no
credit cards or bank cards.
The Formation of the Corporation
and Subsequent Events
[16] Prior to the
formation of the corporation the Appellant started training horses on his
parents’ 2.5 acre farm where he and his family lived in the garage.
[17] He worked with some
45 horses boarded at the farm, owning only a few himself. The Appellant’s wife
did all of the bookkeeping and paperwork including doing all the banking,
invoicing and paying the bills related to the operation.
[18] The family farm was
sold some 18 years ago and that is when the corporation was formed.
[19] A new farm was
acquired with the help of an investor who the Appellant knew through his horse
operations. The investor had an interest in the farmland itself but had no
interest in the horse boarding and training operation of the corporation.
[20] The corporation
operated as the Red Oak Training Centre (“Centre”) in Zephyr and it was
operated until 2007. The Centre from time to time boarded anywhere from 30 to
70 horses and the Appellant himself may have owned from time to time one or two
horses kept at the Centre.
[21] The Appellant’s wife
continued to do all the paperwork relating the operation of the Centre
including doing all the banking, invoicing and paying the bills related to the
operation. He knew that horse owners were being invoiced for the boarding and
training but testified that he was never aware of any financial problems or
issues relating to any liabilities arising from the operation.
[22] The Appellant
testified that the incorporation was his wife’s idea and that although he knew
that he was the sole shareholder and director of the corporation he said that
he left absolutely everything to his wife and had no inkling at all as to what
his responsibilities as a director might be. He believed his wife to be an
honest and capable person and that she was doing all things necessary to comply
with legal, business and tax requirements.
[23] In addition to not
understanding his duties as a director he acknowledged that he had no
discussions with his wife or anybody else about what being a director entailed.
He made no inquiries.
[24] Although he
acknowledged that he thought he had signing authority at the bank, he never
once wrote a cheque during the time that his wife took care of all of the
paperwork associated with the operation.
[25] He acknowledged that
he took a small salary from the corporation which he used to pay for gasoline
for his truck and to buy a few groceries.
[26] The corporation also
employed, from time to time, two or three other employees as needed but again
she wrote the cheques and utilized a payroll service to handle the various
compliance requirements relating to employee payrolls.
[27] The Appellant
acknowledged that there was an accountant that did some work for the corporation
but he was not aware of what role he played. He had never seen a financial
statement for the corporation or any tax returns for the corporation although
he did believe tax returns were filed and that his wife would have signed such
returns.
[28] He never received any
demands from the Canada Revenue Agency (“CRA”) or any notices that said there were
GST remittance failures. He was caught totally by surprise when after his
wife’s death his daughter took all of the records she could find that had been
maintained by her mother to the accountant who on reviewing such paperwork
determined that there was a GST problem.
[29] At that point
returns were filed and the remittance failures were revealed to the CRA enabling
a determination of the corporation’s liability and the issuance of the assessment. As noted, there is no indication that
it was other than a voluntary disclosure that gave rise to the determination of
the liability and to the assessment.
[30] Once the daughter discovered
the problem, quarterly GST returns were filed going forward from the
Appellant’s wife’s death and remittances were made as required. She continued to look after the
corporate paperwork after her mother’s death until the corporation ceased doing
business in 2007.
[31] The Appellant’s
daughter has a high school education and has worked for a number of years with
the benefits department of the Toronto Transit Commission.
[32] The daughter’s
testimony was that there was really no explanation as to what caused her mother’s
failure to comply with the corporation’s remittance obligations. Although she
was not well, there was no indication that she was not attending to the
corporation’s affairs. In any event, she stated that she and her father did
everything they could once they learned of the problem to rectify it. Indeed,
the Appellant testified that he cashed in all of his RRSPs to the tune of some
$20,000 in order to satisfy the corporation’s liability for arrears.
[33] Both the Appellant
and the daughter testified that the corporation ceased carrying on business in
2007 when the CRA seized the bank account of the corporation. Since that time
the Appellant’s son has been operating a horse training facility and the
Appellant has been working for his son.
Appellant’s Arguments
[34] The Appellant relies
on the proposition in the Federal Court of Appeal decision in Soper v. The
Queen, that
a director need not exhibit in the performance of his or her duties a greater
degree of skill or care than may reasonably be expected from a person of his or
her knowledge and experience. While the test can be objective in employing the
standard of the reasonable person, it is subjective in that the reasonable
person is judged on the basis that he or she has the knowledge and experience
of that particular individual.
[35] The Appellant
characterizes himself as a nominal or outside director. The decision in Soper
recognizes that such directors have more ready access to the due diligence
defence.
[36] As well, reliance is
placed on the proposition in Soper that in the absence of grounds for
suspicion it is not improper for a director to rely on company officials to
perform, honestly, duties that have been properly delegated to them. Unless
there is reason for suspicion, it is permissible to rely on the day-to-day
corporate managers to be responsible for the payment of debt obligations such
as those owing to Her Majesty. It is not necessarily a condition precedent to
the establishment of a due diligence defence that a director must take active
precautionary measures to set up controls or monitor compliance in respect of
remittance obligations.
[37] The Appellant also
relies on Smith v. Canada
where, once again, the Federal Court of Appeal enunciated the view that a
person with no business acumen or experience would have a lesser standard of
care. If a problem would not be apparent to a reasonably prudent person in
comparable circumstances, then it cannot be suggested that that person has
ignored a problem.
[38] In the case of Kenny
v. Canada
it was noted that a husband who relied on his wife to prepare company returns
and keep the books was found to have exercised reasonable diligence. The
husband, a director in that case, was assured that GST obligations were being
met. The Court found that the appellant’s lack of sophistication in business
accounting affairs and his reliance on what he believed to be accurate
information from a trusted spouse who was also a director was sufficient to
establish a due diligence defence. The appellant and his wife each owned half
the shares of the company.
[40] Similarly, the case
of Jeffrey v. Canada
was cited as an example of where one of three directors, who was only a nominal
director with a grade 10 education and who had no idea of what was going on in
the company, was exonerated from liability under the due diligence defence. He
did not know anything about the affairs of the company, never inquired and was
never told by the other two directors what was going on. He was an outside
director who did not have any information or did not become aware of any facts
that might lead him to conclude that there was a potential problem with
remittances and accordingly his appeal was allowed. It does not appear that the
appellant was a shareholder. His father, one of the other three directors, was
a shareholder.
[41] Tremblay v. Canada was relied on to
underscore that a prudent person should act once an audit determines that there
is a problem with unremitted tax. The suggestion is that expecting action is
not reasonable where before an audit or other CRA enquiry, there is no reason
to be suspicious or make inquiries. The Tremblay decision concerned a
number of cases involving several different companies heard on common evidence.
The appellant was successful under the due diligence defence in one case where
he held no shares and in another where he held all the shares. Reasons for
Judgment made no distinction between these two cases based on shareholdings.
[42] In Pascoal v.
Canada, Antonio Pascoal, a de jure director, was a
construction worker. He relied on his son for the banking, bookkeeping, signing
authorities, remittances and related office duties. The other director, Natalie
(Antonio’s daughter), did not have signing authority and was a full-time
hospital worker during the relevant periods. She and her father were in no
position to influence events and in particular to ensure that the GST and
payroll remittances were paid. The son was the educated one, highly respected
and trusted wholly by his father and Natalie. Both the father and the daughter were found to have acted
reasonably in relying on a family member and taking his advice as to their
duties as directors even if such advice was faulty. The case involved two
companies. In one, the son was a third director but in the other, he was not. The
father and daughter were held to be outside directors in both cases and not
liable for the remittance failures.
[43] The case of Sanford
v. Canada
is another authority for finding that a lower standard of care is required for a
director who is simply a nominal director.
[44] In Stevenson
Estate v. Canada, one
of three directors was exonerated from liability on the basis that he was only
nominally a director. He was elderly, of minimal education and could not have
influenced the course of events. There is no suggestion that not having any
idea what was going on made him liable even though it appears he may have had a
significant interest in the company.
[45] In Bains v. Canada, Bains was held liable for unremitted GST from the
moment he was alerted to a problem regarding the GST. At that point, he should
have done more to ensure that the GST was paid. A reasonably prudent person
would have taken steps to ensure compliance by the person charged with
remitting GST. Being alerted to the problem elevates the burden.
Respondent’s Arguments
[46] The Respondent
placed emphasis on the Appellant having made absolutely no inquiries as to any
of the financial matters concerning the business. Respondent’s counsel also
suggested that it was not credible that the Appellant could be so ignorant of
all such matters or so oblivious to how the corporation’s affairs were doing
when he was in constant contact with his wife who was handling those affairs.
[47] The Respondent focused
on aspects of the jurisprudence, embraced in Soper, that placed reliance
on the positive duty of directors. As well, contrary to the approach taken by
the Appellant, the Respondent characterizes the Appellant as an inside director.
While the evidence does not support a finding that the Appellant was involved
in the day-to-day management of the company, the Respondent put emphasis on the
sole directorship and sole shareholdings which suggest that the Appellant had
influence over the conduct of the company’s business affairs. It was submitted
that such individuals would not so easily be able to argue convincingly that they
had no duty to make enquiries.
[48] The Respondent placed
reliance on the case of Garland v. The Queen which also involved a sole
director shareholder husband who relied on his wife. The appellant in that case
was unsuccessful in using the due diligence defence even though he was “by no
means a sophisticated businessman.”
[49] The
Respondent also referred me to Woo v. Canada. In that case, a family member
director who was intentionally kept in the dark by two other family member
directors as to certain financial matters including remittance failures was
found to be liable as a director notwithstanding that he was kept in the dark.
The appellant was a substantial shareholder found to be an inside director who was
so totally passive as to the management of the business as to be found to be irresponsible.
[50] The Respondent also
referred me to Lockhart v. Canada
and Power v. Canada. Neither case seems
particularly helpful. In Lockhart the appellant was found to be an
intelligent, knowledgeable man with experience in business ventures. He knew
there were cash flow problems and apparently reviewed intra-monthly statements but
did not make inquiries as to the status of source deductions. In Power a
director was found liable on the basis that he was a sole director who knew
that he was being asked to be the director as a condition of extending his
sister’s corporation’s financing. His sister had been a bankrupt and he should
have been aware that she required more than cursory supervision in running the
business affairs.
[51] The last case Respondent’s
counsel referred me to was Penney v. Canada. This case found that willful
blindness was not a defence to director’s liability. In this case stamps were
made of the appellant’s signature and she did not question the use of her
signature which was being stamped on various documents without consulting her
as to the nature of the documents. Relying on advice that she could not be
legally responsible, she turned a blind eye to everything in relation to the
affairs of the business. She held all the shares in the company for her
brother. She was not without business experience.
Analysis
[52] The
subjective element of the standard of care required of a director relying on
the due diligence defence, was, as noted, established by the Federal Court of
Appeal in Soper. In the Soper decision, the
standard of care was described, at page 5416, as an objective subjective standard:
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 business-persons).
(Emphasis added.)
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".
(Emphasis added.)
[53] The flexibility of that standard
of care is further illustrated by making more allowances for directors who are
less involved in managing the affairs of the corporation than for those who are
so involved. In the context of section 227.1 of the Income Tax Act and
section 323 of the Act, directors can delegate their
responsibilities as directors and be exonerated from liability by reliance on
delegated persons if the circumstances permit. That is, for the purposes of
those provisions, nominal or outside directors are
not burdened by the duties that attach to directors under corporate law to the
same extent as are inside directors who take a more active role.
[54] At page 5417 of Soper,
the Court made the following observation respecting the use of the objective subjective
standard as it applies to inside directors:
… At the same time, however, it is
difficult to deny that inside directors, meaning those involved in the
day-to-day management of the company and who influence the conduct of its
business affairs, will have the most difficulty in establishing the due
diligence defence. For such individuals, it will be a challenge to
argue convincingly that, despite their daily role in corporate management, they
lacked business acumen to the extent that that factor should overtake the
assumption that they did know, or ought to have known, of both remittance
requirements and any problem in this regard. In short, inside directors will
face a significant hurdle when arguing that the subjective element of the
standard of care should predominate over its objective aspect. (Emphasis
added.)
[55] The Respondent in taking the position that the
Appellant, as the sole shareholder and director, cannot be treated as an
outside director in effect presumes that the suggestion in Soper is that
to be an outside director one must not have a substantial interest in the
company and can only be so characterized if there is at least one other
director who would be the inside director. While these are factors to consider in determining whether
a director is in a position to detect or prevent a potential remission failure,
they cannot, even together, be taken as determinative. To suggest that they are
determinative or even be given such weight as to make access to the due
diligence defence more difficult, undermines the flexibility recognized as
being inherently a major component of the defence.
[56] It is true that one might ask how a reasonable person
acting as the sole director, even with the limited knowledge and skill of the
Appellant, can rely on a due diligence defence based on being oblivious to his
duties. I do not accept however that a due
diligence defence collapses when a sole director is oblivious to his duties as
a director. It collapses if a director’s reliance was not reasonable. The
caution in Smith that the due diligence defence will probably not assist
a director who is oblivious to the statutory duties of directors is not an
inevitable barrier to the application of the due diligence defence in a case
like the one at bar. “Oblivious” in this context incorporates the idea of
acting irresponsibly or with willful blindness. In my view, it does not deny
the due diligence defence to someone like the Appellant with genuine
limitations who cannot be found to be acting irresponsibly or with willful
blindness.
[57] As well, I note that it was the Appellant’s wife who
initiated the company. If his reliance on her in respect of her being in charge of
remittances does not bar him from the due diligence defence, his reliance on
her in accepting the way in which the company was organized cannot, through the
back door, change that result.
[58] Further, a sole director, ignorant of the duties of a
director, cannot be treated more severely than a sole director who knows a
director’s duties and relies on a third person to perform a task. A better
question to pose would be: had the Appellant known his duties, would he be
entitled to rely on his wife in the circumstances of this case so as to be
exonerated under the due diligence defence? That is to say that the application
of the standard of care cannot change where there is a sole director. A sole
director, or a board composed of several directors, can delegate administrative
compliance duties and any of them can be exonerated from liability if the
conduct of that director does not suggest, in the circumstances, that he should
have done something to detect or prevent a potential remission failure.
[59] Indeed, the inside versus outside director orientation
to applying the standard of care outlined in Soper is only a helpful
tool in assessing whether the particular director, sole or not, should have
done something to prevent a remittance failure. The
subjective objective standard to be applied is applied to answer that question. This was underlined by the Federal
Court of Appeal in Wheeliker v. R.
Commenting on the
standard of care established in Soper, the Court noted at paragraph 45:
It is true that in Soper,
this Court wrote that "the standard of care laid down in subsection
227.1(3) of the Act is inherently flexible". It is obvious, however, on
the reading of the decision, that it is the application of the standard that is
flexible because of the varying and different skills, factors and circumstances
that are to be weighed in measuring whether a director in a given situation
lived up to the standard of care established by the Act. For, subsection
227.1(3) statutorily imposes only one standard to all directors, that is to say
whether the director exercised the degree of care, diligence and skill to
prevent the failure that a reasonably prudent person would have exercised in
comparable circumstances. (Emphasis
added.)
[60] As well, I point out that in Soper, it was acknowledged that not
all inside directors have been held liable. That is, even tilting the analysis
in the direction of the Appellant being an inside director need not alter a
conclusion otherwise arrived at. Holding a person such as the Appellant, given
his limitations, liable for his wife’s failures in a case like this cannot prevent
remittance failures. The due diligence defence should be open to him.
[61] There is one case of this Court, however, that suggests
a different conclusion. In his decision in Weyand v. R.,
Justice Mogan considered the question of an inside director versus an outside
director where there was a sole director who relied on her husband to be
responsible for corporate management. At paragraph 28, he came to a conclusion
that does not assist the Appellant in the case at bar:
28 I
will consider the Appellant first as an inside director and second as an
outside director. When there are two or more directors of a corporation, a
particular director may be characterized as "inside" or
"outside" depending on the role which that particular director plays
in the business affairs of the corporation. When there is only one director of
a corporation, and when that person knows that he or she is the only director,
that person in my opinion is implicitly an inside director because that person
knows that he or she cannot rely on any other individual to bear the
responsibilities of a director. Accordingly, I hold that the Appellant was an
inside director of Blackberry from and after May 24, 2000. If a sole director
(knowing that he or she is the only director) permits some third party to be
responsible for corporate management, I would regard the third party as the
agent of the sole director, and the conduct of the third party as the conduct
of the sole director. To the extent that the Appellant permitted her husband
to manage any of the affairs of Blackberry after May 24, I look upon him as her
agent and upon his conduct as her conduct.
(Emphasis added.)
[62] In Sziklai v. R.,
I considered Justice Mogan’s views on this matter and came to the same
conclusion there as I have in the case the bar:
11 By
definition then an insider is a person involved in the business.
To impute involvement to a person not involved is incompatible with that
defining factor. Further, to impute involvement to a sole director, and regard
the acts of the person who failed in a duty to be the acts of that director,
would mean there is no due diligence defense available to sole directors. That
clearly cannot be the case nor, in my view, should Justice Mogan be taken to
have meant that as a firm rule in all cases.
12 This
is not to suggest that the Appellant does not have a standard of care higher
than that placed on an outside director. The purpose for identifying
"inside" versus "outside" directors is to assist in the
determination of what a reasonably prudent person would do in the
circumstances. In this context, the issue might be better posed by asking more
simply whether the Appellant was, by virtue of his position and involvement, in
a position to detect the potential problem and deal with it. This was the
approach taken by Justice Bonner in Mariani v. R.7 At paragraph 19 he
observed:
I
cannot agree with the respondent's position. The segregation of directors into
inside and outside categories is not undertaken as part of a mechanical process
of classification into rigidly defined categories of winners and losers. Rather
it is a recognition of the self-evident. Some directors are better situated
than others, usually by reason of participation in day-to-day management, to
detect the potential for failure and to deal with it and that situation is a
relevant circumstance.
[63] The Respondent would still urge me to give weight to the
fact that the Appellant should not be taken to be so innocent of problems where
it is his wife that was in charge of remittances. Unlike the Respondent, I find
it totally credible that the Appellant’s ailing wife would not only not volunteer
any such troublesome information around the kitchen table but would
intentionally avoid alerting her husband to it. This does not frustrate his
reliance on the due diligence defence. It is credible to me that he knew
nothing of any circumstances that ought to have compelled him to action. There
is nothing in the evidence that suggests he ought to have known of
circumstances that would have led a reasonable person to make inquiries or take
some action.
[64] As to the Appellant being the sole shareholder, I
acknowledge the tendency to suggest that remittance failures arise to keep a company solvent to the benefit of
the shareholders. That tendency suggests that the Appellant as the sole
beneficiary of misapplied funds, should not escape liability to account for
them.
[65] It may be that in the present appeal, misusing funds
kept the company’s operations going. However, I have no evidence that not
remitting GST collections, if collected, was necessary to keep the corporation
solvent. Even if that was the case, there is no suggestion here that the
Appellant knew or ought to have been suspicious of that possibility. As I said,
unlike the Respondent, I find it totally credible that the Appellant’s ailing
wife would not volunteer any such troublesome information to her husband.
[66] As well, I note that the cases relied on by the
parties, raise no overriding concerns as to the weight to be given to
shareholdings even where a sole director is a sole shareholder. Even in Garland, the judge, finding that a sole
director shareholder who relied on his wife could not be exonerated under the
due diligence defence, noted that although the director was unsophisticated “he
took it upon himself to run the company”. This is a relevant distinction when
compared to the case at bar and puts emphasis where it should be placed.
[67] While the analysis
to this point should dispel any concerns regarding the Appellant being the sole
shareholder director, a different approach to that aspect of this case does so
as well. It is an approach that suggests that, in fact, the Appellant was not
a sole director.
[68] Accepting that the Appellant’s wife was the person
in charge of, and had the responsibility for carrying out, the daily management and administration of the corporation,
it is appropriate to suggest that she was a de facto director. The
evidence supports a finding that she was acting well beyond her role of being responsible for administrative
compliance relating to all statutory and regulatory compliance matters. On the evidence of two credible witnesses, I am
satisfied that she was not only responsible for the management of the business and affairs of the
corporation but must inevitably have held
herself out to third parties as the person with authority to carry out that
role and was thereby acting as a de facto director of the corporation.
[69] I have dealt with the question of de facto directors
in the context of section 227.1 and my views have not changed since expressing
them in Bonotto v. The Queen.
[70] In Bonotto,
I noted that subsection 115(1) of the Business Corporations Act (Ontario) provides that the duties of a director are to manage
or to supervise the management of the business and affairs of a corporation. This
statutory provision, confirms my view in the case at bar that the Appellant’s
wife, as the person managing the business and affairs of the corporation, was
performing the duties of a director. She was self-supervised, was in charge of
banking as the only active signing officer, she signed tax returns and, practically
speaking, she answered to, and was directed by, no one in performing, without
challenge, all the duties of a director, qua director. That is, I am satisfied
on the evidence that in spite of the Appellant being the sole de jure
director, his wife purported to act in the eyes of the outside world as a
director.
[71] In Wheeliker, it was held that persons
who purported to act as a director could be liable under section 227.1 as de
facto directors. The decision as expressed by Nöel J.A., speaking for the
majority in that case, fell short of saying that such persons were
directors.
[72] Létourneau J.A. agreed with the result of the majority
but took the view that the term “director” used in section 227.1 included both de
facto and de jure directors. Although the difference between the
approach of Nöel and Létourneau has been said to be a red herring, it seems to
me that the distinction might be relevant in some cases. Taking the Appellant’s
wife as a de facto director, for example, Nöel’s approach would make her
liable under section 323 even though she could not be considered a director for
any other purpose – such as changing the constitution of the board from a sole
directorship to a two person board for the purposes of that section.
[73] I suggested at paragraph 52 in Bonotto that Létourneau’s
view seems ultimately to have prevailed. If that is the case, I am dealing with
a two person board, one of whom is more clearly a nominal director. Such directors
are more readily accepted as outside directors, regardless of their interest in
the company and as noted, the bar for meeting the Soper due diligence standard
of care in the case of outside directors is dramatically lower than the case of
an inside director.
[74] As well, having two individuals potentially responsible
under section 323 of the Act in this case might alleviate concern that
exonerating the Appellant leaves no one accountable for the remittance
failures. While that should not be a factor, finding the Appellant’s wife (or her estate) to
have been a de facto director eases that concern. It seems unlikely that
the due diligence defence would be available to the Appellant’s wife unless
toward the end of her life she was incapacitated which is not the evidence
before me. Indeed, if that was the evidence before me, my finding in respect of
the Appellant would likely be different. In such case a reasonably prudent
person in similar circumstances might have sought someone else’s assistance
earlier, such as that of his daughter.
[75] I will conclude my
analysis by noting that the cases relied on by the Appellant demonstrate
considerable tolerance toward innocent directors who have, by reason of trust in
another and awareness of there own limited abilities, been found to have exercised sufficient care, diligence and
skill to prevent a remittance failure even where they have made no inquiries
and paid little or no heed to their duties as directors which were unknown to
them. A qualifier to such tolerance is that the failure to make inquiries and
pay heed to their duties as directors even if unknown to them, does not stem
from turning a blind eye so as to avoid seeing anything suspicious but rather stems
from a trust that is subjectively and objectively well founded and where there
is, in fact, a genuine limitation on their own abilities to carry out those
duties had they know of them.
[76] Further, it is clear from the authorities cited that
the positive duty to act arises only where a director becomes aware or ought to
have become aware of facts that could reasonably lead one to conclude there
might be a potential problem with remittances.
[77] Based on these general observations of the state of the
law concerning the circumstances when a director will be exonerated under the
due diligence defence, I find that the Appellant should be relieved of
liability for the remittance failures of the corporation. His limitations are
genuine and he cannot be said, in the circumstances, to have acted
irresponsibly or with willful blindness. The care he exercised to prevent a
failure to remit was limited to trusting his wife. A reasonably prudent person
in comparable circumstances having virtually no business acumen or skill would
not have exercised a more diligent approach to understanding his duties as a
director or taken a more active role in ensuring compliance with such duties. The
Appellant’s role was the hands-on caring for and training of horses, tasks not assigned to
directors.
He was a nominal director put there by his wife.
[78] In coming to this conclusion, I place emphasis on my
acceptance of the Appellant’s wife, upon whom he relied, being worthy of the
trust he afforded her. Her background, experience and character gave him no
reason to be suspicious. As a de jure director it was open for the CRA
to notify him of remittance failures. There is no evidence of that. There was a
voluntary disclosure as soon as the failures became known to the Appellant.
[79] Even in Woo, a case relied on by the Respondent, being
intentionally kept in the dark by a family member as to certain financial
matters including remittance failures did not alone prevent the appellant in
that case from successfully relying on the due diligence defence. It was also
found in that case that the appellant had reason to be suspicious. That is not
the case here. In Bains
liability started on being alerted to a problem. In the case at bar, necessary
action was taken to deal with the problem as soon as it became apparent. There
was no reason to be suspicious before the death of the Appellant’s wife. I am
satisfied that the absence of an inquiry is not fatal to the Appellant’s case.
[80] As in Pereira, the Appellant was an unsophisticated director whose
actual role was a far cry from being involved in the daily management and
administration of the company. As in Pascoal, the Appellant’s reliance
on a family member should not prevent his being exonerated under the due
diligence defence. The parallels in these cases, to the one at bar, are self-evident
and support the allowance of the appeals at hand.
[81] In any event, each case must be approached on its
particular circumstances that will guide the judge who hears the evidence. In Cloutier v. Minister of National Revenue, Bowman, J. (as he was then)
set out a reasonable approach that is as relevant now as it was in 1993. He
considered the appeal of directors who were facing liability for the
corporation not having remitted taxes under the Income Tax Act. At page 545
he stated:
The question therefore becomes one of fact and the Court
must to the extent possible attempt to determine what a reasonably prudent
person ought to have done and could have done at the time in comparable
circumstances. Attempts by courts to conjure up the hypothetical reasonable
person have not always been an unqualified success. Tests have been developed,
refined and repeated in order to give the process the appearance of rationality
and objectivity but ultimately the judge deciding the matter must apply his
own concepts of common sense and fairness. It is easy to be wise in
retrospect and the court must endeavour to avoid asking the question "What
would I have done, knowing what I know now?" It is not that sort of ex
post facto judgment that is required here. Many judgment calls that turn
out in retrospect to have been wrong would not have been made if the person
making them had the benefit of hindsight at the time.” (Emphasis added.)
[82] All said then, I am satisfied that the requirements of
subsection 323(3) have been met. The Appellant relied on his wife as the person responsible
for administrative functions relating to all statutory and regulatory
compliance matters. Such reliance, in this case, meets the requirements of
subsection 323(3). Accordingly,
the appeal is allowed with costs.
Signed at Ottawa,
Canada this 14th day of May 2010.
"J.E. Hershfield"
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