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Citation: 2004TCC741
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Date: 20041223
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Docket: 2001-2258(IT)G
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BETWEEN:
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GURPAL SINGH MANN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
O'Connor,J.
[1] The issue in this appeal is
whether the Appellant, one of seven directors of a corporation
named AC Vinyl Windows Manufacturing Ltd.
("Corporation") is responsible for the
Corporation's failure to remit federal income tax deducted at
source but not remitted by the Corporation.
[2] The basic facts are set forth in
the following paragraphs of the Reply to the Notice of Appeal
("Reply"):
4. By Notice
of Assessment #05128 dated October 14, 1999, the Minister
assessed the Appellant for federal income tax deducted at source
but not remitted by the Corporation in the amount of $19,553.63
(the "Amount") and for interest and penalties relating
thereto.
5. The
Appellant filed a Notice of Objection on December 24, 1999.
6. By Notice
dated March 22, 2001, the Minister confirmed the assessment.
7. In so
assessing the Appellant, the Minister relied on the following
assumptions:
a) the
Corporation was incorporated on June 6, 1995;
b) the
Corporation was in the business of manufacturing vinyl
windows;
c) on June 14,
1995, the Appellant signed a Consent to Act as a Director;
d) on June 14,
1995, the Appellant, and six other directors, were allotted 120
common shares each;
e) the
Appellant invested money in the Corporation;
f) at
all material times, the Appellant was a director of the
Corporation;
g) the
Appellant was an employee of the Corporation;
...
i) on
January 12, 1998, the Minister issued three failure to remit
source deduction assessments against the Corporation in respect
of amounts withheld in the 1997 taxation year;
j) the
Corporation ceased business in February, 1998;
k) the
Appellant resigned as director of the Corporation on or about
March 4, 1998;
l) on
July 30, 1998, the Minister issued a fourth assessment for
failure to remit source deductions against the Corporation in
respect of amounts withheld in the 1997 taxation year;
m) the Corporation
was required to deduct or withhold and remit payroll deductions
pursuant to subsection 153(1) of the Income tax Act,
R.S.C. 1985, c. 1 (5th Supp.), as amended (the
"Act");
n) in paying
wages to its employees in the 1997 taxation year, the Corporation
withheld payroll source deductions from the wages paid;
o) in paying
wages to its employees in the 1997 taxation year, the Corporation
failed to remit to the Receiver General the Amount, the details
of which are set out in Schedule A to the Reply, and failed to
pay penalties and interest related thereto;
p) a
certificate in the amount of $29,892.32 representing the
Corporation's liability for federal income tax, penalties and
interest, was registered in the Federal Court of Canada on
June 30, 1999 under subsection 223(2) of the Act;
q) a writ of
execution corresponding to the certificate was issued and was
returned wholly unsatisfied on August 16, 1999; and
...
B. ISUES TO BE
DECIDED
8. The issue
is whether the Appellant is liable under subsection 227.1(1)
of the Act for the failure by the Corporation to remit the
Amount to the Receiver General, together with penalties and
interest thereon, as required by section 153 of the
Act.
[3] The Appellant contests paragraph 7
h) of the Reply which states the Appellant was aware of the
Corporation's financial difficulty and paragraph 7 r) of the
Reply which states the Appellant did not exercise the degree of
care, diligence and skill to prevent the Corporation's
failure to remit.
[4] The Appellant testified through a
Punjabi interpreter that he and six others, all of Indian
descent, formed the Corporation in June 1995 to carry on the
business of assembling vinyl doors and windows. Two of the seven,
namely Tarnjit Singh Bagri (who became President) and Amzad Ali
Saheb (who became Secretary) were accepted by the group as the
persons who managed the business. As mentioned the Appellant was
both a director and an employee. As an employee he earned $10 per
hour.
[5] The Appellant testified as
follows:
(a) that the said two managers wished to involve all seven in
the business and consequently persuaded the remaining five to be
directors and shareholders of the Corporation;
b) that the Appellant initially contributed to the Corporation
an amount of $35,000 and received 120 shares in the
Corporation. He further subsequently, on separate occasions,
contributed amounts of $5,000, $3,000 and $1,000. These amounts
were allegedly used to run the business. When a fifth call for a
further amount was made the Appellant refused and declared that
he was no longer interested in being part of the Corporation. All
directors were asked to similarly contribute but it is not clear
whether they did;
c) that the Appellant's education ended after a grade 10
level in India and that he came to Canada in 1972;
d) that he had difficulty speaking, understanding and writing
English;
e) that he did not know the role or the responsibilities of a
director;
f) that he relied on the two managers to manage and run the
business, believing they had the experience and language skills
to do so;
g) that he was involved in production only and not in
management;
h) that he suffered an accident on August 28, 1997 involving a
knee injury and that his involvement with the Corporation after
that reduced significantly;
i) that he did not know of the Corporation's debts, in
particular with respect to amounts withheld by the Corporation
but not remitted. He referred to a letter of Alan K. Seabrook,
Barrister and Solicitor dated March 19, 1998 addressed to all
seven directors (Tab 7 of Exhibit R-1) which indicated to him
that the debts of the Corporation had been looked after. It reads
as follows:
March 19, 1998
Mr. Tarnjit S. Bagri & Mr. Jarnail S. Thandi
c/o Kennedy & Company
Barristers & Solicitors
#304-9808 King George Highway
Surrey, B.C.
V3T 2V6
Mr. Amzad A. Saheb Mr. Jaswinder S.
Kajla Mr. Piara Dardi
9351-128th
Street
9755-130th
Street
10749-141st Street
Surrey,
B.C.
Surrey,
B.C.
Surrey, B.C.
V3V 5N3
V3T
3L2
V3T 4R5
Mr. Sarbjit S. Randhawa Mr. Gurpal S.
Mann
6767-130th
Street
5305 Prince Albert Street
Surrey,
B.C.
Vancouver, B.C.
V3W
4J2
V5W 3C7
Dear Sirs:
Re: Sale of Assets of A.C. VINYL
WINDOWS MANUFACTURING LTD. to AERIE VIEW WINDOWS INC.
Our
File Number: 4529
____________________________________________________________
I refer to previous correspondence and discussions and wish to
confirm that the above described sale was completed on February
27, 1998. I further confirm that pursuant to the instructions of
the Directors and Officers of the Company that I have attended to
the following matters on your behalf:
1. Obtained the payment of
the sum of $110,000.00 being the net proceeds of the sale of
assets. I have also obtained the sum of $20,427.70 representing
the principal amount of the term deposit held by the
Toronto-Dominion Bank as security and inclusive of accumulated
interest to March 4, 1998.
2. I have paid the sum of
$31,325.17 to Gordon Bromley Holdings Ltd. and representing
payment of outstanding arrears of rent and payment for the rent
to the period of March 15, 1998.
3. I have paid the sum of
$69,049.84 to the Toronto-Dominion Bank representing payment of
the balance of the loans of the Company with that bank. For your
information I was advised that the balance of the Operating Loan
as of March 3, 1998 was $30, 146.66 plus $153.18 in accrued
interest. The balance of the small business loan was
$38,750.00.
4. On March 4, 1998 I
remitted the sum of $11,910.82 to Revenue Canada Taxation. This
sum represented your determination of the outstanding source
deductions, totaling $10,166.35 and outstanding goods and
services tax collected totaling $1,744.47. Subsequent to that
remittance I have been advised that a further $1,151.36 is owed
for source deductions in which some includes penalties plus a
reimbursement for the sum of $815.00 which was submitted on
January 8, 1997 but the cheque was dishonoured.
5. I have paid the sum of
$671.40 to myself representing payment of my then outstanding
accounts to the Company.
6. On March 10, 1998 I paid
the sum of $3,586.69 to Pamela Clarkson which represented payment
of her outstanding wages to February 28, 1998 in the sum of
$1,320.74 plus holiday pay in the sum of $1,330.27 and severance
pay in the amount of $935.68.
Pursuant to instructions from Mr. Dardi I have remitted the
sum of $7,538.77 to Mr. Chandok & Mr. Hayre and I enclose a
copy of my letter which explains how this payment is to be
applied.
I have applied the balance of the funds held by me in trust to
payment of my account, which is enclosed for your reference.
I have also enclosed copies of accounts from B.C. Hydro which
apparently are outstanding and which have been delivered to
me.
I trust you will find the enclosed to be in order and thank
you for the opportunity to be of service to you. I ask that you
contact me if you have any questions or if I can be of any
further service to you.
Yours truly,
ALAN K. SEABROOK
AKS:skd
Encl.
(j) that whenever enquiries were made of the two managers (at
first Bagri and Saheb and later Bagri and Thandi) they indicated
there was nothing to worry about.
[6] The following are extracts from
counsels' submissions:
Counsel for the Appellant:
... the central issue to be decided ... is whether the appellant
exercised the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable
circumstances to prevent the failure of the corporate entity to
remit source deductions.
If the court answers that question in the affirmative, then the
appellant is relieved of personal liability for the source
remittances owed by the corporation involved here. And the
leading case with respect to the application of subsection
227.1(3) of the Income Tax Act is the decision of Mr.
Justice Robertson of the Federal Court of Appeal in Soper v.
The Queen. And in that case, Mr. Justice Robertson indicated
that the standard to be met is partly objective and partly
subjective, and he set out a number of principles to consider in
applying that section.
The first of these was that directors are not to be equated with
trustees. Secondly, a director need not exhibit in the
performance of his duties a greater degree of skill and care than
may be expected from a person of his knowledge or his comparable
knowledge and experience. thirdly, a director is not obliged to
give continuous attention to the affairs of a company, and nor is
he bound to attend to all meetings of the board. And fourthly,
and I think this is important, is in the absence of grounds for
suspicion, it is not improper for a director to rely on company
officials to perform, honestly, duties that they have been
delegated to perform.
And ..., it is submitted that the application of this analysis to
this case leads to the conclusion that in the circumstances in
which this appellant found himself, the appellant satisfied the
requirements of Section 227.1(3).
Mr. Justice Robertson in Soper indicated that it is
sometimes helpful to consider whether a person was an inside
director actively involved in the daily management of the company
or an outside director and the evidence clearly shows that the
appellant here was an outside director who had, in fact, little
involvement in the ongoing management of the company.
In the case here, because there is partly an objective standard
and partly a subjective standard, we have to look at the
appellant's particular circumstances, and his level of
education and business knowledge. In this case the appellant was
not a person who had any advanced business degree or in fact any
business training. The appellant had only a grade 10 education in
India, and you can tell that his knowledge of English is not
strong, and English is the dominant language of business in this
province.
The second circumstance which the court ought to consider is that
the inside directors deliberately kept information from the
appellant. The appellant testified today that with his colleagues
who acted as outside directors, he sought information from the
inside directors but he was rebuffed in his efforts to obtain
that information. It's respectfully submitted that a person
in this appellant's circumstances could not have done
anything more to pressure the inside directors to obtain or
provide further information.
Another unique circumstance for this appellant is that he
suffered an injury which left him unable to work and gave him
cause to not attend at the business location, so he was even
further removed than perhaps a typical outside director would
be. And the final or further factor to be considered in
this case is that we have letters from Mr. Seabrook and related
letters from Revenue Canada itself that could be taken to imply
that all of the outstanding source remittances were
paid. I respectfully submit that if you look at the
letters from Mr. Seabrook it certainly suggests that the
outstanding source remittances have been satisfied. And certainly
for a person who does not have a sophisticated background, that
would be a reasonable conclusion to draw from Mr. Seabrook's
letters.
And I wish again to emphasize that the appellant here was at a
severe disadvantage because of his lack of knowledge of the
English language, and there was a principle laid out by Mr.
Justice Robertson in Soper that an outside director can rely on
others as long as there is nothing obviously indicating that
those persons upon whom he relies are not performing that
function.
Looked at it from this appellant's unique circumstances, I
respectfully submit that there was nothing that would suggest to
this particular appellant, as disadvantaged as he was, that there
was something wrong or improper with the operation of the
company. That knowledge only occurred when it was too late
to do anything about it.
And on that basis, Mr. Justice, I respectfully submit that the
appeal should be allowed.
...
Counsel for the Respondent:
... the respondent submits in this case that the appellant did
not meet the standard of care and diligence required of a
director ... and we submit that the appellant does not meet that
standard for two important reasons:
First, that the appellant did nothing, which could have
prevented a failure to remit the company's payroll deductions
in 1997.
And second, he did not nothing to inform himself of his roles
and responsibilities as a director ...
...
[7] Counsel for the Respondent
analyses some general principles from Soper and
continues:
The court characterizes an outside director as someone who is
more like an investor. He's not involved in management and
relies on the principals of a business to keep the business
running and ensure the finances are in order, and ... -- an
outside director usually faces a lower standard of care. But ...
the court points out that an outside director still has important
duties. An outside director is not permitted to be entirely
passive, and the court says there will come a time when even an
outside director has a positive duty to do something to try to
prevent a failure of the corporation to remit. ... The court
says: "This is not to suggest that a director can adopt an
entirely passive approach but only that, 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." The court
then concludes ... by saying: "The question remains,
however, as to when a positive duty to act arises."
And in the next paragraph, Justice Robertson says: "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. Put differently, it is indeed incumbent
upon an outside director to take positive steps if he or she
knew, or ought to have known, that the corporation could be
experiencing a remittance problem."
He then says: "The typical situation in which a director
is, or ought to have been, apprised of the possibility of such a
problem is where the company is having financial
difficulties". At that point the court says there is a legal
duty on a director to take some positive action."
It's important, I think, to note, that the test enunciated
by the Court of Appeal does not require the director to actually
know for a fact that the corporation is not making its
remittances or will be defaulting in its remittances. Merely
knowing that there could or might reasonably be a remittance
problem, is enough to trigger a duty to act under the law.
...
[8] Counsel refers to the decisions of
the Federal Court of Appeal in Cadrin, Hanson and
Smith and other authorities and concludes as follows:
The respondent submits that based on the authorities ..., the
legal principles that the court should apply in this case are
that a reasonably prudent person who lacks the experience and
knowledge required to understand their duties would take steps to
learn of their duties under the law so that they could discharge
them....
The respondent submits that if the court applies those tests
to the case before the court today, the result is that the
appellant fails the test of due diligence. Although he was an
outside director we submit firstly that the reliance -- as the
court said in Soper an outside director is entitled to rely on
the day-to-day mangers, but we submit that that must be only to
the extent that it's reasonable to rely on them. ...
And in this case, although the appellant may not have known
the intricacies of payroll tax remittances, it's clear he
understood some of the basic aspects of the business. He
understood that the company had a bank account. He understood
that the company had to collect its accounts from its customers
to have money. He understood that the company had suppliers and
employees to pay. He understood that the company made source
deductions from the pay. His own pay was subject to deductions.
And I think it also can be concluded from his evidence, although
he wasn't clear on the point, that he understood the company
was making financial statements or had to make financial
statements and some sort of tax reporting. He referred a number
of times to assuming that Bagri and Saheb were making the tax
returns.
Now, I will acknowledge that the appellant may not have known
the responsibility of the company to remit payroll deductions
although he clearly knew the company had to withhold them. He
acknowledged his own pay was subject to withholding and he
understood that. But we submit that the court should question the
reasonableness of relying on Bagri and Saheb to do this. The only
reasons the appellant could give for relying on them were that
they spoke English, for one, and that they said they had business
experience. But he did nothing to assure himself that they
actually had business experience. And on the evidence, the court
couldn't conclude that Bagri and Saheb were any more
qualified, other than language, than the appellant to run a
business. And we submit that it was not duly diligent merely to
rely on Mr. Bagri and Mr. Saheb.
Most importantly, even if it was prudent to rely on them at
the beginning, it was certainly no longer prudent once they came
to the appellant and the others calling for more money, saying
that the business needed money, either because it was just
getting underway or customers hadn't paid and they were short
of funds. At that point, that's exactly the situation that
the Court of Appeal described in the Soper case....
At that time, the appellant had a positive duty to act, to
take some steps to ensure that tax remittances were being made.
Even if he didn't realize that tax remittances weren't
being made, we submit that a reasonably prudent person in his
situation, understanding as they did the various aspects of
business, ought to have realized that there could be a problem
with tax remittances if there was a problem with paying
suppliers, for instance. They ought to have realized there could
be a problem and they ought to have taken steps. ...
...
It's also clear on the evidence that the appellant never
turned his mind to the payroll tax situation even when it was
clear to him, or ought to have been clear, that the company was
in financial trouble. And these are not the sorts of things
that satisfy the tests set out by the Court of Appeal.
...
We submit that the appellant's evidence shows an absence
of any diligence at all. He did nothing when he became a
director to find out what that was, and then he put it out of his
mind again. He did nothing in the course of the business to
ensure that tax remittances were made, that payroll deductions
withheld were remitted, even when he was told on numerous
occasions the company had a financial shortfall. He did
none of the things that the court suggested were reasonable in
the Cadrin case in terms of ensuring the viability of the
business before continuing to invest money, or ensuring that the
people he relied on were reliable and competent, or staying
generally informed about what happened. Those are the
things the Court of Appeal said an outside director should do,
and he did none of those.
...
The last point I'd like to make has to do with the
question of Mr. Seabrook, because the appellant submits that it
was reasonable to rely on Mr. Seabrook having paid off the
remittances for the company, and we submit in response that that
reliance on Mr. Seabrook, the lawyer, does not satisfy the
due diligence defence.
First of all, the lawyer wasn't even the appellant's
lawyer, and on the evidence, the appellant never discussed the
issue of tax remittances with Mr. Seabrook at all. It's not
even clear that he read the letters he received and consciously
decided that he was satisfied that remittances were made.
Secondly, he did nothing to ensure himself that
Mr. Seabrook had remitted the correct amounts. For all he
knows, Mr. Seabrook remitted the wrong amounts. As it turns out,
Mr. Seabrook did remit the wrong amounts, not because he was
misinformed, but because an assessment was raised after he made
those remittances. If you'll recall from the evidence Mr.
Seabrook made remittances to Revenue Canada in March of 1998. At
that point the company had been assessed in January, but another
assessment was raised in July of 1998. Mr. Seabrook could not
have known about that.
But it was clear that the company had failed to remit more
payroll deductions than Mr. Seabrook was aware of. The appellant
did nothing to assure himself that Mr. Seabrook's information
was correct.
And finally, and most importantly, all of Mr. Seabrook's
action was remedial. And while that can weigh in a taxpayer's
favour in some cases, we submit that in this case, in the absence
of any diligence whatsoever to prevent a failure to remit, in a
circumstance where the appellant basically walked away from the
business in September of '97, never turned his mind to the
business again, didn't think at that point there could be a
problem when he was asked for more money again, didn't think
in December when Mr. Bagri told him that the business was
non-functional because they disagreed, the two directors,
didn't think then that there could be a problem, completely
put that out of his mind; we submit that that's a failure of
the due diligence.
The appellant shouldn't be entitled to rely on the fact
that someone else's lawyer acted to pay the amount that he
was aware of at that time, as evidence of his own diligence. We
submit that there was no diligence shown by the appellant in his
case.
And again, although the law does not require the director to
succeed in preventing the corporation's failure to remit
payroll taxes, the law requires the director to have done
something and to have made some attempt, and at the very least,
there might be a point where a reasonably prudent director would
say, "It's been four cash calls, I'm not providing
any more money until I see some financial records." The
appellant didn't do that. To the extent that he asked, he
didn't pursue it. He continued to rely on those other
directors. We submit that a reasonably prudent person would not
have done that to the extent the appellant did.
...
... the respondent submits that the appeal should be
dismissed.
Analysis
[9] It must be observed that what is
being dealt with in this appeal is an issue of vicarious
liability and in my view if there is any serious doubt in the
matter, the liability should not be imposed. In this appeal the
Appellant was clearly an outside director (as admitted) and
consequently the burden of imposing liability on such a director
is considerably greater than is the case with an inside director.
In the present case the Appellant was handicapped by his
inability to understand, write and speak the English language and
this, in my view is a very important factor in deciding this
appeal. Moreover, the accident the Appellant suffered hampered
his ability to be more involved with the Corporation. Further he
has acknowledged that he did make inquiries in common with the
other outside directors and that he relied on the assurances
given to him by the corporate managers. I also believe that the
letter of the lawyer, Seabrook, which is addressed to all seven
directors, including the Appellant, must have given the Appellant
a reasonable degree of assurance that the Corporation's debts
had been looked after. For these reasons and for the further
reasons set out in the Appellant's counsel's submissions
I find that, on a balance of probabilities, the Appellant did
exercise the degree of care, diligence and skill to prevent the
Corporation's failure to remit that a reasonably prudent
person would have exercised in comparable circumstances.
Consequently the appeal is allowed with costs and the matter is
referred back to the Minister of National Revenue for
reconsideration and reassessment on this basis.
Signed at Ottawa, Canada, this 23rd day of December 2004.
O'Connor, J.
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