Citation: 2010 TCC 169
Date: 20100325
Docket: 2007-4472(IT)G
BETWEEN:
BEVERLY A. WILLIAMSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
Issue
[1] The Appellant was
assessed pursuant to subsection 227.1(1) of the Income Tax Act (the “Act”)
as a director of 6236251 Canada Incorporated (referred to herein as “Appellant’s
Company”) for unpaid source deductions required to have been remitted in 2004 in
respect of 4 employees of 6225471 Canada Incorporated (herein referred to as
“M. Henry’s Company”), plus interest and penalties.
[2] The Appellant’s
liability under subsection 227.1(1) as a director of Appellant’s Company derives
from a prior decision of this Court that Appellant’s Company was the deemed
employer of the employees of M. Henry’s Company and was, thereby, required to
make the required remittances.
[3] The Appellant
appeals the subject assessment on the grounds that subsection 227.1(3) of the Act
relieves her of liability for the remittance failure of Appellant’s
Company. Such relief requires that she establish that, having regard to her
knowledge and experience, she exercised the degree of care, diligence and skill to
prevent the failure that a reasonably
prudent person of similar knowledge and experience would have exercised in comparable circumstances. The appeal deals
specifically with Employment Insurance Premiums and Canada Pension Plan
Contributions.
Minister’s
Assumptions and the Prior Decision of this Court
[4] The following
summarizes the relevant assumptions relied on by the Minister of National
Revenue (the “Minister”) in assessing the Appellant:
a) The
Appellant was the sole shareholder and director of Appellant’s Company;
b) Appellant’s
Company was incorporated on May 17, 2004 for the sole purpose of providing
banking services to M. Henry’s Company;
c) M.
Henry’s Company was unable to open a bank account in its own name because of
its owner’s poor credit rating;
d) The
banking services provided by Appellant’s Company ended when the business
operated by M. Henry’s Company closed in August 2004;
e) M. Henry’s Company employed 4 people;
f) Appellant’s
Company was responsible for issuing the pay cheques to the employees of M.
Henry’s Company and did in fact issue cheques to the employees of M. Henry’s
Company in the amount of their net pay after source deductions;
g) The
Appellant operated a payroll service prior to incorporating Appellant’s Company
and therefore had knowledge regarding source deductions and remittances;
h) The
Appellant was the person having the power to direct source deduction
remittances by M. Henry’s Company to the Minister; and
i) The
Appellant failed to exercise the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable circumstances to
prevent the failure of M. Henry’s Company to remit the required amounts.
[5] Further background
information is provided in the Reply relating to the decision of this Court which
found Appellant’s Company liable for the unremitted amounts. The Reply
summarizes the findings of that decision:
a) Appellant’s
Company provided banking services as a trustee to M. Henry’s Company;
b) All
funds deposited to the bank in the name of Appellant’s Company were in trust
for M. Henry’s Company and all disbursements were on behalf of M. Henry’s
Company;
c) The
Appellant had the sole signing authority on the bank account of Appellant’s
Company and issued cheques when requested to do so by the owner of M.
Henry’s Company, Mark Henry (“Mr. Henry”);
d) The
Appellant wrote cheques for net pay and gave them to Mr. Henry, who then gave
the cheques to the employees of M. Henry’s Company;
e) No
cheques were written to remit source deductions to Canada Revenue Agency
(“CRA”) by either M. Henry’s Company or Appellant’s Company or by Mr. Henry;
f) The Appellant was paid $800 for
providing the banking services;
g) The Appellant
operated a bookkeeping payroll service prior to incorporating; and
h) Appellant’s
Company was the deemed employer of the employees of M. Henry’s Company with
respect to certain of the payments from the bank account of the Appellant’s
Company.
[6] It is important to
emphasize, for greater clarity, that Porter, D.J. expressly identified those
payments made by Appellant’s Company to M. Henry’s Company employees that were net
wage amounts. Only those amounts were used to calculate the deduction (withholding)
and remittance failure of Appellant’s Company and it is only in respect of
those amounts, so calculated, that the Minister has assessed the Appellant
pursuant to section 227.1.
Appellant’s
Assertions
[7] While essentially
conceding that the findings of fact in Porter, D.J.’s decision were accurate, the
Appellant did elaborate on the background and operation of the arrangement.
[8] She confirmed that
Mr. Henry wished to operate a new business under the trade name Digital
Documents and incorporated the company that I have now referred to as M.
Henry’s Company for that purpose.
Due to his credit rating problems, the Appellant agreed to provide banking
services to M. Henry’s Company. She incorporated a company to enter into a
written agreement with M. Henry’s Company to provide such services. She did not
dispute being the sole shareholder and director of this new company, now being
referred to as Appellant’s Company.
[9] The agreement
between the two companies provided that all funds deposited into Appellant’s
Company’s account would be in trust for M. Henry’s Company and that all
disbursements would be advanced on behalf of M. Henry’s Company.
[10] The Appellant
acknowledged that she had operated a bookkeeping payroll service prior to
incorporating Appellant’s Company and was knowledgeable as to source deductions
and remittances. She acknowledged that she knew the principal, Mark Henry, of
M. Henry’s Company and that Mr. Henry asked her to provide the banking services
because he was unable to open a bank account at any bank due to his poor credit
rating.
[11] The Appellant
acknowledged that Mr. Henry deposited funds in Appellant’s Company account
which in turn issued cheques to the employees of M. Henry’s Company as directed
by Mr. Henry. However, she testified that she had no way of knowing if the
amounts, paid according to such direction, were net of source deductions or
were salary amounts versus expenses. The amounts received were simply paid out
as directed. No amounts were withheld. There was no provision for, or funding
for, remittances. She pointed out that Porter, D.J. reduced the assessments
issued against Appellant’s Company having found that some of the payments made
to employees were not salaries, as assumed by the Minister in issuing the
assessments. She argued that if the CRA could not determine what the correct
withholding and remittance amounts were, then how could she be said to have
failed in exercising sufficient care and diligence in not making that
determination.
[12] The Appellant also expressed
concern that in determining the remittance liability amounts, the Minister
grossed-up the payments as if they were net salary amounts and then assumed
that the difference between the notional grossed up amounts and the payment
amounts were source deduction amounts that were to be remitted in accordance
with the remittance requirements of the EIA and the CPP.
The
Statutory Framework
[13] The relevant statutory provisions governing this appeal
are as follows:
Provisions
of the Act
227.1(1) Liability of directors for failure to
deduct -- Where a corporation has failed to
deduct or withhold an amount as required by
subsection 135(3)
or section 153 or 215,
has failed to remit such an amount or has failed to pay
an amount of tax for a
taxation year as required under Part VII or VIII, the directors of the corporation at the time the
corporation was required to
deduct, withhold, remit or pay the amount are jointly and severally
liable, together with the corporation, to pay that amount and any interest or
penalties relating thereto.
[…]
(3) Idem -- A director 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.
Provisions of the Employment Insurance Act
83(1) Liability of
directors - If an employer who fails to deduct or remit an amount as and when
required under subsection 82(1) is a corporation, the persons who were the
directors of the corporation at the time when the failure occurred are jointly
and severally liable, together with the corporation, to pay Her Majesty that
amount and any related interest or penalties.
(2) Application of Income Tax
Act provisions - Subsections 227.1(2) to (7) of the Income
Tax Act apply, with such modifications as the circumstances require, to a
director of the corporation.
(3) Assessment provisions applicable to
directors - The provisions of this Part respecting the assessment of an
employer for an amount payable under this Act and respecting the rights and
obligations of an employer so assessed apply to a director of the corporation
in respect of an amount payable by the director under subsection (1) in the
same manner and to the same extent as if the director were the employer
mentioned in those provisions.
Provisions
of the Canada Pension Plan
21.1(1) Liability - Where an employer
who fails to deduct or remit an amount as and when required under subsection
21(1) is a corporation, the persons who were the directors of the corporation
at the time when the failure occurred are jointly and severally liable,
together with the corporation, to pay to Her Majesty that amount and any interest
or penalties relating thereto.
(2) Application of Income Tax Act
provisions - Subsections 227.1(2) to (7) of the Income Tax Act
apply, with such modifications as the circumstances require, in respect of a
director of a corporation referred to in subsection (1).
(3) Assessment provisions applicable to
directors - The provisions of this Act respecting the assessment of an
employer for an amount payable by the employer under this Act and respecting
the rights and obligations of an employer so assessed apply in respect of a
director of a corporation in respect of an amount payable by the director under
subsection (1) in the same manner and to the same extent as if the director
were the employer referred to in those provisions.
Arguments and Analysis
[14] The Appellant
argues that she acted as best as anyone could in believing that Appellant’s
Company was acting as a bank as opposed to being a payer of salary amounts to
M. Henry’s employees. However, Appellant’s Company is a deemed employer and had
to withhold and remit the required amounts. Those issues, of Appellant’s
Company being a deemed employer and determining the proper calculation of the required
withholding and remittance amounts, have been expressly or implicitly decided. That being the case, it follows that the
business of Appellant’s Company included ensuring it had the required
information and funds to deduct the required amounts and then remit them.
[15] As a knowledgeable inside
director, it could not be said that she took any steps to ensure that this latter
part of Appellant’s Company’s business was being monitored and complied with.
Inside directors have less recourse to a due diligence defence as noted by Marceau,
J.A. in Soper at paragraph 44:
… 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 defense. 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.
[16] It is true that as
long as she allowed Appellant’s Company to follow Mr. Henry’s directions to
distribute all deposited amounts to employees of M. Henry’s Company, there
would be no amounts retained in Appellant’s Company’s account to remit. It is
also true, however, that the Appellant caused Appellant’s Company to enter into
an agreement that required it to follow Mr. Henry’s directions. The Appellant
cannot rely on being handcuffed by an agreement that she herself as an inside
director, indeed as the only director and only human presence acting on behalf
of the company, acquiesced to enter into. That the Appellant knew Mr. Henry was
a credit risk suggests to me that she ought to have known that the arrangement,
in which she was becoming a part, was going to leave remittance obligations
unfunded. That is, a person in her position with her background would realize
that if Appellant’s Company did not withhold source deduction amounts, the
Company would be at risk of having a shortfall of funds to cover its remittance
obligations. The creation of Appellant’s Company and the banking arrangement
came about on a premise that leads to only one conclusion; namely, Appellant
Company’s bank account would be the only account from which deductions and
remittances could be made. Given her knowledge, experience and background and the
purpose of this arrangement, the Appellant should have realized that Appellant’s
Company could be accountable to comply with withholding and remittance
requirements when making payments to employees that she would have to have
known included wages.
[17] It appears to me
that as experienced as the Appellant is, she might not have known of or
understand the scope of the deemed employer provisions. However, in the same
way payroll service companies are caught by these provisions, so is Appellant’s Company. The failure
of the Appellant, by virtue of ignorance or possible naivety, to ensure that
company’s adherence to practices that would have enabled compliance with these
provisions, effectively frustrates the application of the subsection 227.1(3)
due diligence defence that she relies on in this appeal.
[18] Quite simply, she
knew enough to see the problem. That she did not see personal consequences to
ignoring the problem cannot assist her. In the course of the performance of her
duties as the sole director of Appellant’s Company she should have been alerted
to the problem and she should have taken positive steps to see how the problem
could be resolved. This standard of care, confirmed by the Federal Court of
Appeal in Soper has not been met by the Appellant in this case. It is
described succinctly by Marceau, J.A. at paragraph 53:
In my view,
the positive duty to act arises where a director obtains information, or
becomes aware of facts, which might lead one to conclude that there is, or
could reasonably be, a potential problem with remittances. …
[19] Indeed, this recitation of a director’s duty to act is
aimed primarily at outside directors. The suggestion then is that even if the
Appellant were an outside director, removed from the day to day operations of
the company, she would still not be able to avail herself of the due diligence
defense given her awareness of facts that suggested a very real problem
concerning remittances. As an inside director, the Appellant simply has no
ground to be exonerated from the liability imposed by section 227.1 of the Act.
[20] Accordingly, the
appeal is dismissed with costs.
Signed at Ottawa,
Canada this 25th day of March 2010.
"J.E. Hershfield"
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