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Citation: 2004TCC243
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Date: 20040325
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Docket: 2003-3327(IT)I
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BETWEEN:
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MICHAEL TENN-YUK,
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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
Sarchuk J.
[1] This is an appeal by Michael
Tenn-Yuk from an assessment by the Minister of National Revenue,
notice of which is dated April 29, 2003 and bears number 20571,
made pursuant to sections 227 and 227.1 of the Income Tax
Act (the Act) for the failure of 839399 Ontario
Limited (839399) to remit to the Receiver General the amount of
federal income tax with penalties and interest thereon as
required by section 153 of the Act.
Background
[2] In or about 1978, the Appellant
and Cecil Thomas began to operate an automobile repair shop,
Tryman's Transmissions ("Tryman's"). The
Appellant, in addition to removing and installing transmissions,
was responsible for the day-to-day office obligations which
included the keeping of relevant records, payment of accounts and
remittances. Thomas' responsibilities were related primarily
to transmission repairs and management of the shop. At some point
of time after Tryman's commenced business, Brian Caffrey was
hired as an apprentice. In due course, he became a licensed
transmission mechanic and continued to be employed in that
capacity for approximately five years, at which time he indicated
that he wished to go out on his own. The issue was discussed and
the Appellant, Thomas and Caffrey agreed to incorporate a new
company, 839399, to carry on a transmission business operating
under the same name (Tryman's), but from different premises
at a new location. All three were named directors with Caffrey
being the president, Thomas the vice-president and the Appellant,
the secretary-treasurer. From inception, the arrangement was that
Caffrey would be in charge of 839399 and handle the day-to-day
activities while the Appellant and Thomas remained at the
existing location. The new business was funded by way of a loan
in the amount of $60,000 from their current banking institution.
Each partner signed for this loan and the funds were deposited
directly into the 839399 account. Caffrey was to use these funds
to purchase all of the equipment, tools and other material
required.
[3] The Appellant considered himself
to be an experienced businessman. At Tryman's, in addition to
his other duties, he took responsibility for and attended to its
financial statements and books on a regular basis, made all of
the deductions and remitted all of the payroll and sales taxes.
Although Caffrey had no similar experience, the Appellant said he
had no concerns about going into business with him and leaving
him with the responsibility to run it. This certainty was
premised almost solely on his personal relationship with Caffrey
and his family. They lived in the same neighbourhood and in the
Appellant's words "got to know him quite well, I know
his family, I know his parents. I knew his fiancée at the
time and her family. I even went to his wedding, so it was pretty
close." As a result when the new business commenced, he
assumed that Caffrey would carry out the same responsibilities
that he attended to at Tryman's. It would appear that the
only involvement by the Appellant was that when 839399 began
operation he arranged to have Tryman's accountants put in
place a bookkeeping system for it and Francis Rodriguez, the
individual attending to Tryman's books was assigned to do so.
He agreed that as a director, he should have checked its books
but, notwithstanding that he was aware of Caffrey's lack of
experience, he simply "left that to the accountant, you
know". It is a fact that during the nine or ten years that
839399 was operating he had no discussions with Rodriguez about
the books and records other than asking "is everything
OK" and receiving the answer "yes".
[4] According to the Appellant, the
goal set for the new business was to produce an additional
financial return to the partners. Although it took approximately
six years for the bank loan to be repaid and there had been no
distribution of any profits in any of the years that the business
was carried on, the Appellant says he believed 839399 was doing
well. Thus, he said, it came as a surprise to him when in 1999,
Caffrey called to say he intended to close the business, as he
was "getting himself in a hole" and for that reason
"found a buyer" and had received an offer of $70,000
for it including all equipment and customers. These negotiations
had taken place without the Appellant's knowledge. Caffrey
also said that the lease termination date was coming due and that
he had no intention of renewing it but would rather let the
purchaser enter into a lease. Faced with what appears to have
been a fait accompli, he made but one stipulation which was that
the name, Tryman's, would not be included in the sale. As it
turned out, this transaction did not go through, the lease was
permitted to terminate, and Caffrey removed and stored all of the
equipment. The Appellant says he was not informed as to where
that was.
[5] In the fall of 2002, the Appellant
was contacted by Sandra Shaw of the Collections Division, Canada
Customs and Revenue Agency, with what she described as "a
pre-proposal assessment to a director's liability
letter", and he learned that she was investigating the
non-remittance of GST by 839399. Shaw had a further conversation
with the Appellant after she raised the assessment on April 29,
2003 during which the Appellant acknowledged that he received it
and indicated that while he was a director, he had not taken part
in the business affairs and believed that the assessment should
not have been raised against him.
Conclusion
[6] Section 227.1 of the Income Tax
Act reads in part as follows:
227.1(1)
Where a corporation has failed to deduct or withhold an amount as
required by subsection 135(3) or 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.
(2) ...
(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.
[7] The Appellant is a well-educated
individual having earned a B.Sc. in chemical engineering and
worked as such as a consultant. He was also employed for several
years at the Bank of Montreal. In the 25 years he was with
Tryman's, he was the individual responsible for all of its
business affairs. Although it would not be correct to describe
the Appellant as an inside director since he was not involved in
the day-to-day management of 839399, the fact that he was the
only director who was experienced in both business and financial
matters must be taken into consideration in determining what
standard of care can logically be expected from him in these
circumstances. As previously noted, the Appellant's testimony
was that when 839399 commenced operation, Caffrey was mandated to
attend to all aspects of its business. It is evident from his
testimony that although he must have been aware of Caffrey's
total lack of management experience, he provided him with
absolutely no advice, assistance, or direction of any kind. His
approach appears to have been:
"The concern was - if there was a problem I would hear
about it. That's how I looked at it. If everything is running
smoothly, I don't hear from the accountant, I don't hear
from the government, I have to assume ... you know when
you're running one company, it's hard, you know, to try
to - if you didn't trust that person, you couldn't have him.
That's how I look at it. A handshake, and that's how I
looked at it."
[8] In Gordon E. Smith v. The
Queen,[1] the
Federal Court of Appeal observed:
10 The subjective
aspect of the standard of care applicable to a particular
director will depend on the director's personal attributes,
including knowledge and experience. Generally, a person who
is experienced in business and financial matters is likely to be
held to a higher standard than a person with no business acumen
or experience whose presence on the board of directors reflects
nothing more, for example, than a family
connection. However, the due diligence defence probably will
not assist a director who is oblivious to the statutory
obligations of directors, or who ignores a problem that was
apparent to the director or should have been apparent to a
reasonably prudent person in comparable circumstances (Hanson
v. Canada (2000) 260 N.R. 79, [2001] 4 C.T.C. 215, 2000 DTC
6564 (F.C.A.).
[9] As a director of both Tryman's
and 839399, he knew that his obligations included assuring that
the appropriate tax and GST remittances were made to the
Government. He conceded that with respect to 839399,
directors' meetings should have been held but in fact not one
had ever taken place. He also testified that at Tryman's he
looked at the financial statements and the books on a regular
basis since he considered that to be his responsibility, but at
no time during the years that 839399 carried on business had he
ever received any financial statements or drafts thereof and,
more to the point, had never asked for them. His reliance on the
accountant, Rodriguez, was also misplaced in that that firm's
engagement was limited.
[10] In Soper v. The Queen,[2] the Court noted that a
director is not obliged to give continuous attention to the
affairs of the company, nor is he or she even bound to attend all
meetings of the board. However, the Court also went on to
say:
... Notwithstanding such authorities, it would be silly
to pretend that the common law would stand still and permit
directors to adhere to a standard of total passivity and
irresponsibility. At the risk of getting ahead of myself, it
should be noted here that the law today can scarcely be said to
embrace the principle that the less a director does or knows or
cares, the less likely it is that he or she will be held liable.
Further to this point, the statutory standard of care will surely
be interpreted and applied in a manner which encourages
responsibility. Accordingly, the director who acts irresponsibly,
for example, by failing to attend all board meetings now does so
at this own peril: See McCandless v. M.N.R., 95 DTC 484
(T.C.C.). That being said, the matter of director passivity will
have to re-evaluated in light of the statutory standard discussed
below.
With respect to the standard of care which may reasonably be
expected from a person having the skill and knowledge and
experience that this Appellant had, I adopt the following
comments of Marceau J.A. in Soper:
Subsection 227.1(1) makes a director liable for the failure of
his or her corporation to remit the monies withheld as taxes and
other source deductions from its employees' salaries, and
subsection 227.1(3) relieves a director of his or her liability
if he or she can show that he or she exercised a certain degree
of care, diligence and skill to prevent such failure. By these
provisions, Parliament, I think, has imposed on a director of a
corporation a completely new, separate and positive duty. Such
duty is owed not to the corporation but to the Crown, and
consists of an obligation to do what one reasonably can to
prevent such failure from occurring. I simply cannot imagine that
such a duty may ever be seen as having been fulfilled by a
director who, as here, has never put his or her mind to the
requirement and has remained completely uninterested and passive
with respect to it.
[11] In my view, the Appellant, knowing the
nature and extent of his duty as a director, totally failed to
fulfil it. Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of March, 2004.
Sarchuk J.
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