Citation: 2008TCC286
Date: 20080515
Docket: 2006-3493(IT)G
BETWEEN:
NICOLINO PENTA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This is an appeal
from an assessment made under section 227.1 of the Income Tax Act
("the Act"), which pertains to the liability of the directors of a
corporation that has failed to withhold or remit tax on the income of a
transferee. According to that provision of the Act, the directors of the
corporation are jointly and severally liable, together with the corporation, to
pay such amounts, and any interest and penalties related thereto.
[2] In the instant case,
2740907 Canada Inc. ("the corporation") failed to remit to the
Receiver General for Canada the amounts withheld from its employees' wages
as required by the Act. The Appellant was the corporation's principal director.
[3] The Appellant
testified that the corporation commenced operations in 1995 and ceased carrying
on business in 1996. It was a subcontractor for a company called Groupe Arsona,
from which it obtained two major contracts. Groupe Arsona went bankrupt in
1996, and this, according to the Appellant, is why the amounts withheld from
the employees' wages were not remitted. Groupe Arsona owed the corporation
$65,000 when it went bankrupt. The Appellant claims that the corporation was
counting on that money to remit the tax withheld through source deductions.
[4] Antonio Penta, the
Appellant's brother, explained that he was the person who did the corporation's
bookkeeping. He admitted that the employees were issued T4 slips, but that no copies
were ever sent, and no money ever remitted, to the Canada Revenue Agency (CRA).
[5] Denis Paulin, the
officer representing the Minister of National Revenue ("the Minister"),
explained that an initial audit was conducted on behalf of the Minister on
November 19, 1996. Since the auditor was unable to get access to the
corporation's books, he issued an arbitrary assessment for the 1995
taxation year.
[6] Mr. Paulin was the
person who did the second audit, on December 10, 1997.
Mr. Paulin was not able to get access to the books either, even though
he went to the premises and spoke with Antonio Penta.
[7] However, Mr. Paulin
did manage to track down the names of some of the corporation's employees. In
those employees' 1995 income tax returns, and in some of those employees' 1996
returns, they enclosed a T4 slip from their employer, namely the corporation.
The corporation was then assessed on that tangible basis.
[8] Madeleine Castello,
a trust accounts auditor, testified that, on February 2, 2005, the
CRA sent the Appellant a letter notifying him of the draft assessment under
section 227.1. The third paragraph of the letter reads:
[TRANSLATION]
Subsection 227.1(3) of the Income Tax Act (Canada) relieves a
director of this liability if he acted with the care, diligence and
skill that a reasonably prudent person would have exercised in such
circumstances. If you believe that you are not jointly and
severally liable and that we should not issue an assessment, please send
our office, within 30 days, the reasons and documents which, in your view,
establish that you are not liable.
[9] On March 3, 2005,
Ms. Castello had a telephone conversation with the Appellant, who
asked for additional time. She gave him until March 15, but did not
receive anything after granting that extension.
[10] On August 26, 2005, she
assessed the Appellant.
[11] The agent
representing the Appellant argued that the Appellant exercised reasonable
diligence. He submits that if the general contractor had not gone bankrupt, the
Appellant would have seen to it that the corporation paid the source
deductions.
[12] Counsel for the
Respondent counters that there is no indication that reasonable care was
exercised to prevent the failure to remit the amounts deducted on account of
the income tax of the corporation's employees.
Analysis and conclusion
[13] Subsection 227.1(3)
reads as follows:
(3) A director is not liable for a failure under
subsection 227.1(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.
[14] The degree of
diligence required under this provision is that of a director who puts the
necessary safeguards in place to prevent the failure to remit the amounts
withheld from wages.
[15] In my opinion, the
evidence discloses a complete lack of care on the part of the director with
respect to the corporation's source deduction obligations. The corporation
never sent the CRA copies of the T4 slips which it issued to its employees and
which set out the amounts of the source deductions. The corporation never
contacted the CRA to explain the failure to remit the income tax source
deductions. In the course of its year and a half of operation, it never
remitted a penny of these monies withheld on the Minister's behalf. There is no
evidence that the Appellant instructed his brother, the bookkeeper, to do so.
The evidence shows that the Appellant was aware of this state of affairs,
and that he waited until contracts were completed before making such
remittances.
[16] I quote the Federal
Court of Appeal in Jean Ruffo v. M.N.R., 2000 DTC 6317, at
paragraphs 4-7:
4 Furthermore, as of July 15, 1992, the appellant was hoping, for
example, to get $200,000.00 pursuant to an oral cooperative agreement with
Homard Gidney Lobsters Ltd. But the only means of redress appearing on the
company's books, if this amount was paid at that time, which was not the
case, consisted of paying the accumulated overdue accounts without any steps
being taken to secure the payment of the ongoing deductions and preventing a
future breach of this obligation. In fact, no remittance was made in accordance
with this recovery plan and the failures to deduct continued in the following
months while the firm was electing to pay the other creditors.
5 As
Vinelott J. said, in relation to the duty of a company manager to make the
aforementioned deductions and remittances:
The directors of a company
ought to conduct its affairs in such a way that it can meet these liabilities
when they fall due, not only because they are not moneys earned by its trading
activities, which the company is entitled to treat as part of its cash flow...
but, more importantly, because the directors ought not to use moneys which the
company is currently liable to pay over to the Crown to finance its current
trading activities.
6 The
appellant's duty as a director was to anticipate and prevent the failure to pay
the sums owing and not to commit such failure or perpetuate it as he did from
March 1992 on in the hope that at the end of the day the firm would again
become profitable or there would be enough money, even if it were wound up, to
pay all the creditors.
7 While a
director may, under subsection 227.1(3) of the Income Tax Act, be relieved
of personal liability for unpaid deductions by showing that he acted with
diligence, the appellant has not, in the circumstances, demonstrated the
requisite diligence.
[Footnotes omitted.]
[17] The Appellant's duty
as a director was to prevent the failure to pay the sums owing and not to
commit or perpetuate it as he did throughout the corporation's fiscal year
in the hope that at the end of the day the business would have enough money to
remit the amounts withheld from its employee's wages.
[18] This is not a case
where a business which had always been concerned about fulfilling its duty
under the Act to remit to the Minister the amounts that it deducted from the total
of its employees' wages on the Minister's behalf suddenly found itself unable
to comply with its obligations because of the bankruptcy of a principal source
of income.
[19] In the case at bar,
the Appellant, as a director of the corporation, did nothing to prevent
the failure. He did not issue an instruction to the effect that the
withholdings should be remitted as they were made, and that a copy of the T4 slips
should be sent to the Minister. He never demonstrated the diligence required of
directors by the Act, namely, to make efforts to prevent breaches of the Act.
[20] Consequently, the
appeal must be dismissed, with costs.
Signed at Ottawa, Canada, this 15th day of May 2008.
"Louise Lamarre Proulx"
Translation
certified true
on this 4th day of
November 2008.
Brian McCordick,
Translator
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