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Citation: 2003TCC296
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Date: 20030506
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Docket: 98-526(IT)G
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BETWEEN:
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GAVIN PITCHFORD,
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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
Mogan J.
[1] The Appellant was assessed under
section 227.1 of the Income Tax Act as a director of
Technology Equity Corporation ("TEC") with respect to
the alleged failure of TEC to remit amounts deducted at source
from the salary and wages of certain employees. The Notice of
Assessment under appeal is dated August 16, 1989 (Exhibit R-2,
Tab 1) and is based on failure to remit for three specific
periods: (i) January to April 1987; (ii) October to December
1987; and (iii) all of 1988. The aggregate amount assessed is
$83,622.31 comprising federal tax of $30,867.54, provincial tax
of $11,703.31, Canada Pension Plan ("CPP") premiums of
$8,563.34, Unemployment Insurance ("UI") premiums of
$13,258.38 plus other amounts for penalty and interest.
[2] The Appellant's principal
attack on the assessment is based on his claim that TEC had no
employees of its own and that, if there were source deductions
not remitted, such source deductions were in respect of persons
who were employed by some other corporation. The Appellant also
claims that he meets the due diligence test in subsection
227.1(3) of the Act.
[3] The Appellant finished high school
in Toronto in the late 1970s and attended University of Western
Ontario where he enrolled in courses with an emphasis on computer
science. He did not complete his degree but returned to Toronto
where he started to work in October 1979 for a company which was
successful in securing and training potential employees for its
clients. The Appellant described his work as primarily a
"head hunter". Within two years, he became one of the
top producers for that company. In 1982, at the age of 23, he
left the company where he had trained as a head hunter and went
out on his own. His intention was to recruit and place people in
the information technology marketplace.
[4] He brought into his new business
as a partner a woman (Lynda) who had experience in
administration. Lynda later became his wife. In 1983, IBM brought
out its first personal computer ("p.c."). The Appellant
and his wife became experts in small computer systems. They
formed a new business called "High Tech Software" in
which they owned 45%, a law firm owned 45%, and the remaining 10%
was owned by a silent partner. Almost all of the Appellant's
time was spent developing a software package for law firms called
"Lexicalc". They started selling Lexicalc in 1984 and,
by 1985, they had a large number of "installed base"
clients. In the period 1983 to 1985, he spent 60% of his time
working on the product by creating programs, and 40% of his time
marketing the product with demonstrations and training
customers.
[5] In 1985, the Canadian Bar
Association embarked on a survey of computer programs for law
firms. In early 1985, High Tech Software had sales to law firms
in the range of $60,000 to $70,000 per month. When the Canadian
Bar Association survey was released in the summer of 1985, the
Lexicalc software product received a low rating and sales within
the Appellant's business plunged. The business of High Tech
Software collapsed. The Appellant and Lynda were forced to
regroup and start afresh.
[6] After obtaining legal advice, the
Appellant and Lynda caused the incorporation of five new
companies in the period December 1985 to March 1986:
Technology Equity Corporation ("TEC")
LAN Technologies Inc. ("LAN")
Technology Solutions Inc. ("TSI")
Lexicalc Inc. ("Lexi")
High Tech Solutions Inc. ("HTSI")
TEC was the parent company owning all of the issued shared of
LAN, TSI, Lexi and HTSI. The Appellant and Lynda were the only
shareholders of TEC and the Appellant was a director of each
corporation. According to the Appellant, each of the five
corporations had a specific business purpose. TEC owned certain
assets like computers and furniture which it leased to the other
companies but TEC was not expected to have any employees of its
own. LAN was expected to be the only employer within the
corporate group; providing personnel to the other companies and
cross-charging them for the employment overhead. LAN was also
expected to purchase all supplies and product for resale. TSI
would sell any "hard" product to customers after
purchasing such product from LAN. Lexi created computer programs
for sale and applied for research grants and tax credits.
[7] Although the Appellant was clear
in his mind about the specific business purpose of each
corporation, the documents entered into evidence indicate that
business operations within the corporate group were not always
carried on in watertight compartments. The Appellant relies on a
two-page agreement dated May 5, 1986 between LAN and TEC (Exhibit
A-1) which he drafted himself. Exhibit A-1 provides, inter
alia, that LAN will hire such employees as are required to
fulfil the personnel needs of TEC and other companies within the
corporate group; and that LAN will cross-charge the other
companies for providing such personnel plus an administrative fee
not to exceed 15%.
[8] Exhibit A-1 is important to the
Appellant's attack upon the section 227.1 assessment because
that exhibit clearly indicates that any individuals employed
within the TEC/LAN corporate group would be employees of LAN and
not TEC. The section 227.1 assessment was issued to the Appellant
in his capacity as a director of TEC. The Notice of Assessment
(Exhibit R-2, Tab 1) contains the following notation:
NOTICE OF ASSESSMENT IN RESPECT OF the liability under
Subsection 227.1(1) of the Income Tax Act and Section
36a of the Income Tax Act - Ontario, and Section 22.1 of
the Canada Pension Plan and Subsection 54.1 of the
Unemployment Insurance Act in the amount of $83,622.31
being the amount of unpaid deductions, interest and penalties
payable by Technology Equity Corp. in respect of a Notice of
Assessment dated February 28, 1989 issued against Technology
Equity
Corp.
(Underlining added)
[9] The Appellant stated that an
agreement similar to Exhibit A-1 was entered into between TEC and
each of the other three subsidiaries but such other agreements
were not entered in evidence. Also, I have some difficulty
imagining such other agreements because, in concept, only LAN was
to be the employer. The five companies were all incorporated in
the period December 1985 to March 1986. There is some
evidence that the payroll for the corporate group in the latter
part of 1986 was operated through LAN. Exhibit A-5 is a group of
three cheques dated July 16, 1986; August 16, 1986 and September
1, 1986; all payable to individuals (probably employees) and all
payable by "LAN Technologies Payroll" through its
account no. 233-0 at the Royal Bank of Canada, 131 Bloor Street
West, Toronto.
[10] The Appellant had at first banked with
the Canadian Imperial Bank of Commerce ("CIBC") but in
1986, after it had called a loan, he transferred his business to
the Royal Bank of Canada ("RBC"). Exhibit A-6 is a
draft credit/loan agreement with RBC dated November 26, 1986.
Exhibit R-2, Tab 19 is the credit/loan agreement dated December
1, 1986 between RBC and TEC signed by the Appellant and Lynda.
The Appellant thinks that it is important how the
"Security" provisions changed from the draft agreement
to the final signed agreement. I regard those changes as part of
the negotiation process, and am concerned only with the terms of
the final signed agreement (Exhibit R-2, Tab 19).
[11] The Appellant thought that the former
banking arrangements (employees paid by LAN from its account
233-0 at RBC) would continue but RBC regarded TEC as its only
banking customer. When LAN issued payroll cheques in early
January 1987, they were shown as payable out of LAN account
no. 233-0 at RBC, 131 Bloor Street West but I doubt whether
any payroll cheques were actually paid out of that account. RBC
refused to advance any funds to the LAN account and insisted that
all payroll cheques be paid out of the new TEC account no.
123-1257 at 48 St. Clair Avenue West, Toronto.
[12] Exhibit A-2 is a group of about 25
cheques all payable to individuals (apparently employees of the
Appellant's corporate group) and issued from January 2, 1987
to February 2, 1987. All 25 cheques have the words "LAN
Technologies Payroll" printed in the upper left corner,
indicating LAN as the payor; and the RBC branch at 131 Bloor
Street West is also printed on the cheque along with the LAN
account no. 233-0. All of the cheques dated January 2, 1987
must have been returned NSF because they bear the stamp
"Pursuant to clearing rules this item may not be cleared
again unless certified". On all cheques issued after January
15, 1987, some person has crossed out the printed name of the
payor "LAN Technologies Payroll" and has written by
hand "Technology Equity Corp"; and that person has also
crossed out the RBC branch address "131 Bloor Street
West" and has written by hand "48 St. Clair Ave.
West". The new credit/loan agreement (Exhibit R-2, Tab 19)
is on letterhead for the RBC branch at 48 St. Clair Avenue West;
and the only corporate client of RBC named in the agreement is
Technology Equity Corp.
[13] The Appellant introduced the group of
25 cheques (Exhibit A-2) to show how he had tried to maintain his
original plan of LAN as the only employer and payor of the
employees; and how the RBC had forced him to change and cause TEC
to be the corporation which actually issued the payroll cheques.
I do not doubt that the Appellant tried to maintain his original
plan but, on the question of source deductions and failures to
remit, the important fact is the identity of the person who
actually paid the salary and wages.
[14] Exhibit R-2, Tab 29 contains copies of
18 payroll cheques issued in the period from May 1987 to
September 1988. Not one of those cheques was issued by any
corporation other than TEC. All 18 cheques were drawn on the RBC
branch at 48 St. Clair Avenue West. Ten of those cheques were
paid out of account no. 123-130-7 with the payor identified as
"Technology Equity Corp. Payroll". The eight remaining
cheques were paid out of account no. 202-113-7 with the payor
identified as "Technology Equity Corp. o/a LAN Technology
Payroll". Even these eight remaining cheques were actually
issued by TEC but with an indication that it was operating as LAN
or as agent for LAN. Exhibit R-2, Tab 30 contains
monthly statements from RBC for the "Technology Equity Corp.
Payroll Account" no. 123-130-7 for the period May 25,
1987 to February 25, 1988. The later monthly statements from
March 25 to September 30, 1988 from RBC for account
202-113-7 are simply in the name of "Technology Equity
Corp". Notwithstanding the Appellant's original business
plan, I am satisfied that, from and after January 2, 1987, all
payments of salary or wages to employees of the Appellant's
corporate group were made by TEC alone and not by LAN or any
other company within the group.
[15] In February 1988, an auditor from
Revenue Canada (Ms. Pattischeri) came to the business premises of
TEC Group and spent about eight hours reviewing the payroll
records. The auditor determined that there were significant
deficiencies in the remittance of source deductions. On March 16,
1988, Revenue Canada seized the TEC bank account because of the
deficient remittances. The Appellant and his wife Lynda
personally raised $25,000 and paid that amount to Revenue Canada
to get the TEC bank account released. In the midst of these
negotiations, Revenue Canada wrote a letter to LAN on April 8,
1988 stating that the source deduction arrears were about
$96,000. The Appellant relies heavily on this letter and so I
shall set it out in full. The letter (Exhibits A-3 and R-2,
Tab 44) is addressed to LAN to the attention of the
Appellant and states:
Re: Account # VGF 35239 7
Lan Technologies Inc. and
Account # VHX 14194 6 High Tech Software
Ltd.
Pursuant to our telephone conversation of March 24, 1988,
please be advised that the outstanding source deductions arrears
with interest computed to March 31, 1988, are as
follows:
1) High Tech
Software
Ltd.
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$18,983.60
2) Lan
Technologies Inc.
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$77,100.97
Total
Outstanding
$96,084.57
As per our discussion and the available information there
appear to be no source deductions arrears for the other three
related companies, namely Technology Equity Corp., Technology
Solutions Inc. and Lexicalc Inc.
We understand that the company is seeking a bank loan, and
payment of $96,084.57 plus interest accrued to the date of
payment will be paid in full upon receipt of this money.
You have been cautioned that failure to comply with the
agreed-upon arrangement may result in assessing the directors,
personally, under Section 227.1 of the Income Tax
Act.
[16] The Appellant relies in particular on
the statement in the second paragraph "... there appear
to be no source deduction arrears for the other three related
companies" TEC, TSI and Lexi. The Appellant regards that
statement as something like an estoppel which should have
prevented Revenue Canada from issuing the assessment to him (as a
director of TEC) which is the subject of this appeal. That
statement, of course, is not an estoppel. It is a very much
qualified statement: "as per our discussion and the
available information there appear to be". If the Revenue
Canada auditor had reviewed only payroll records in February
1988, and had not examined the cheques issued to pay salaries and
wages, she may have concluded that only LAN had employees and
that TEC had no employees even though TEC had been paying all
salaries and wages since January 2, 1987.
[17] A subsequent audit by Revenue Canada
must have revealed the fact that salaries and wages were paid by
TEC after January 2, 1987 because, on February 28, 1989,
Revenue Canada issued four Notices of Assessment to TEC (Exhibit
R-2, Tab 5) in the aggregate amount of $82,500.40 for failure to
remit as required for 1987, 1988 and 1989. These are the
underlying assessment against TEC which, in turn, triggered the
assessment against the Appellant under section 227.1 which is the
subject of this appeal. TEC objected to the four assessments but
they were confirmed (Exhibit R-2, Tab 9).
[18] The books and records of TEC are not in
evidence. Neither are the books and records of LAN or any of the
other three companies. I cannot determine if there was careful
separate bookkeeping for each corporation or if the bookkeeping
was somewhat merged. I have an impression, however, that the
bookkeeping of the companies was mingled or merged because of
what the Appellant had to say about the T2 corporate tax return
of TEC for the fiscal year ending April 30, 1987 (Exhibit R-2,
Tab 17). The Appellant, under cross-examination, confirmed
his answer to Discover Question 337 that the TEC T2 tax return
for fiscal 30/4/87 was the only income tax return ever filed by
any of the five corporations in his group!
[19] The financial statements attached to
that T2 return show revenue of $621,489. The Appellant confirmed
that that amount ($621,489) was the total revenue of his
corporate group for the 12 months ending April 30, 1987. The
financial statements show $152,519 as the cost of wages. The
Appellant confirmed that that amount ($152,519) was the total
cost of all wages paid within his corporate group for the 12
months ending April 30, 1987. And so on! In effect, the T2 return
filed by TEC for the 12 months ending April 30, 1987 was a
consolidation of all commercial activity within the
Appellant's corporate group for that 12-month period.
[20] The remarkable fact about the 1987 T2
return filed by TEC (Exhibit R-2, Tab 17) is that it contains a
claim for investment tax credit and a claim for Scientific
Research and Experimental Development Expenditures
("SR & ED"). The SR & ED activity was supposed to
be carried on by some other corporation within the
Appellant's corporate group. The notes to the financial
statement indicate that TEC was carrying on an active business in
the 1987 fiscal year even though, according to the
Appellant's original plan, TEC was not intended to carry on
any business at all. The Appellant explained that he was content
to file the one T2 corporate return for 1987 in the name of TEC
in order to expedite the SR & ED tax credit or classification.
In so doing, he seems to have merged all or most of the
commercial activity under one corporation, TEC.
Analysis
[21] The relevant legislation is contained
in two sections of the Income Tax Act:
153(1) Every person paying at any time in a taxation
year
(a) salary or
wages or other remuneration,
(b) a
superannuation or pension benefit
(c) a
retiring allowance,
(d) ...
shall deduct or withhold therefrom such amount as may be
determined in accordance with prescribed rules and shall, at such
time as may be prescribed, remit that amount to the Receiver
General on account of the payee's tax for the year under this
Part or Part XI.3, as the case may be.
227.1(1) 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.
227.1(2) ...
227.1(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.
[22] At the commencement of the hearing, the
Appellant requested permission to amend his Notice of Appeal by
adding three new paragraphs 14A, 14B and 14C. Counsel for the
Respondent did not oppose the request. Accordingly, the
Appellant's request was granted and the Notice of Appeal is
amended by adding immediately after paragraph 14, the following
three paragraphs:
14A The Appellant states that in the
alternative, if TEC was in law liable for withholding and
remitting certain amounts of source deductions, the reasons
claimed by Revenue Canada for making such assessment did not come
into being until the payroll of February 15, 1987, and
consequently it was not TEC that was liable for withholding or
remitting monies in January 1987 or prior to February 15, 1987
and that the assessment against TEC (and therefore the bare
assessment raised against Appellant) is therefore wrong by a
corresponding amount of approximately $6,650.56 for January 1987,
and an undetermined amount for February (approximately half),
plus associated penalties and interest.
14B In addition, the Appellant
states that in the alternative, if TEC was in law liable for
withholding and remitting certain amounts of source deductions,
the Appellant states that the Minister of National Revenue also
assessed certain subsidiaries of TEC, including Technology
Solutions Inc. ("TSI"), Lexicalc Inc. High Tech
Solutions Inc. and High Tech Management Resources Inc. for the
same amounts, and issued garnishees to the clients of these
subsidiary and related companies, and admits to collecting over
$9,000 as a result, and then vacated the assessments against each
and every one of these companies except TEC for the period in
question, but did not properly either return the money to the
subsidiaries nor to TEC, nor apply it against the indebtedness of
TEC and consequently the assessment made against TEC and hence
against the Appellant is too high as a result, by a corresponding
amount.
14C In addition, the Appellant states
that in the alternative, if TEC was in law the payor of wages in
July and August 1987 and hence liable for withholding and
remitting certain amounts of source deductions, then the same
entity, TEC, made payments to Revenue Canada on each of
July 13, 1987 for $1,500 and on August 17, 1987 for $2,500.
Both of these payments were partial payments for the current
months remittances for the payroll expenses which occurred during
the prior month, but were then improperly credited to another
company: (LAN) and should properly have been credited to TEC, and
consequently the assessment made against TEC and hence against
the Appellant is too high as a result by a corresponding
amount.
[23] As stated in paragraph 2 above, the
Appellant's first attack on the assessment is his claim that
TEC had no employees. The Notice of Assessment (Exhibit R-2, Tab
1) is addressed to the Appellant in respect of his liability
under subsection 227.1(1) of the Income Tax Act (and other
statutes) in the amount of $83,622.31 "being the amount of
unpaid deductions, interest and penalties payable by Technology
Equity Corp". The Appellant's claim is quite simple: if
TEC had no employees, then it would not have any "unpaid
deductions". In my view, it is not a question of whether TEC
had any employees. The critical question is whether TEC paid any
salary or wages to its own employees or to employees of some
other corporation.
[24] Under subsection 153(1) of the
Act (see paragraph 21 above), every person who pays salary
or wages is required to deduct or withhold prescribed amounts.
The person who pays salary or wages may not be the employer of
the payees but that person is the one who must deduct or
withhold. In paragraphs 12, 13 and 14 above, I described 25
cheques issued in the first five weeks of 1987 and
18 cheques issued from May 1987 to September 1988; and I
concluded that from and after January 2, 1987, TEC was the
only corporation which paid salary or wages to employees of the
Appellant's corporate group.
[25] MollenhauerLtd. v. The
Queen, [1992] 2 C.T.C. 121 is a decision of the Federal Court
Trial Division strongly against the Appellant herein. Mollenhauer
as general contractor was constructing a hotel and awarded a
drywall subcontract to "Aprok". When the subcontract
was about 85% complete, Aprok was unable to meet its payroll. At
that time, Mollenhauer owed Aprok approximately $155,000 on the
subcontract. In order to keep the project moving, Mollenhauer
agreed to pay the amounts owing by Aprok to Aprok employees, and
then set off such amounts against the $155,000 owing by
Mollenhauer to Aprok. Mollenhauer issued cheques to Aprok's
employees but no source deductions were withheld or remitted.
When Aprok was unable to remit, an assessment was issued to
Mollenhauer under section 153 for failure to withhold and remit
the usual source deductions. When dismissing Mollenhauer's
appeal, Teitelbaum J. stated at page 126:
It is very clear that subsection 153(1) of the Act does
not speak of whether persons doing the paying are employers or
not. I am satisfied that if a person or company is paying
"salary or wages or other remuneration" it must deduct
or withhold the required amount pursuant to the Income Tax
Act.
...
I adopt, for the purposes of the case at bar, the words of Mr.
Justice Berger in the case of In re Bankruptcy of G. & G.
Equipment Co. Ltd. (supra) where at page 6408 he states:
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The question then is whether G. & G. was a "person
paying ... wages ... to an ... employee". If G.
&
G. falls within Section 153, the Department is entitled
to be treated as a preferred creditor under Section 107 of
the Bankruptcy Act.
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I think the Department must succeed. Section 153 says
that every person paying wages to an employee must withhold
tax, it doesn't say that only employers must. The
language must be taken to have been deliberately chosen,
and to have been intended to encompass the kind of
situation that exists in the case at bar. The law
recognizes that these two companies are separate legal
entities. At the same time the law ought to recognize
that one business undertaking may be carried on through a
group of related companies. The law ought to take into
account the realities of modern business arrangements.
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I understand that in the above case, the companies involved
are related companies but I am satisfied that this in itself is
immaterial. What is important is that in the case at bar the
Plaintiff undertook the obligation of Aprok to pay the salary and
wages of Aprok's employees in order for Plaintiff to complete
its project without possible disruption from the employees or the
union to which they belong.
[26] The decision in Mollenhauer
has been followed by this Court in Zanet v.
M.N.R., [1996] 2 C.T.C. 2373. A similar decision in the
Federal Court of Appeal is Cana Construction Company Limited
v. The Queen, 96 DTC 6370. The Appellant's argument about
TEC not being the employer is an argument without merit. TEC is
the corporation which paid the salaries and wages in 1987 and
1988. Accordingly, TEC was required to withhold and remit source
deductions. The assessments against TEC (Exhibit R-2, Tab 5) were
well founded.
[27] The letter from Revenue Canada to LAN
dated April 8, 1988 is set out in paragraph 15 above. The
Appellant relies on that letter but it does not help him. The
author of that letter states: "there appear to be no source
deductions arrears" for TEC. The statement is cautious and
qualified. Even if it were a blunt statement that there were no
source deduction arrears for TEC, it would not prevent the
Minister from later assessing TEC and the Appellant (as a
director of TEC) if the Minister received subsequent information
that TEC had in fact paid salary and wages. In the appeals of
Hawkes and Graham v. The Queen, 97 DTC 5060, the question
of prior statements by the Minister and estoppel came before the
Federal Court of Appeal. Strayer J.A. writing for the Court
stated at page 5062:
Paragraph 10 asserts the undisputed fact that the Victoria
office of Revenue Canada advised these appellants on April 22,
1993 that the respondent would allow the deductions in question,
apparently on the basis that the Edmonton office had allowed such
deductions in respect of Dr. Revell. This was obviously
inconsistent with the reassessments actually issued on July 19,
1993. Again the authorities are clear that it is only the final
assessment which can be attacked and that interim opinions, or
even previous assessments, cannot be relied upon to establish the
invalidity of the last assessment or reassessment provided the
latter is made within the time allowed by the statute.
...
Paragraph 11 which alleges estoppel based, apparently, on the
actions of the Minister alleged in paragraphs 9 and 10, similarly
discloses no reasonable ground for appeal. It is trite law that
estoppel cannot apply so as to prevent the Minister from
performing the duties imposed on him by the Income Tax
Act, namely the proper assessment of returns in accordance
with the law. ...
[28] I have found that TEC paid the salaries
and wages of all employees within the Appellant's corporate
group from and after January 2, 1987. The Appellant was a
director of TEC at all relevant times. Therefore, the Appellant
may be liable for failure to remit source deductions under
section 227.1 of the Act unless he can satisfy the due
diligence test in subsection 227.1(3). In Soper v. The
Queen, 97 DTC 5407, Robertson J.A. writing for the majority
set out some useful guidelines with respect to due diligence. He
stated at pages 5416 and 5417:
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).
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".
... 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.
[29] The Appellant is clearly an inside
director. He and his wife were the only shareholders and
directors of TEC and they were actively engaged in the management
of TEC and its related companies. The Appellant indicated in his
evidence that his wife, Lynda, was more involved in
administration while he was more involved in creating and selling
software, but the correspondence with Revenue Canada and RBC
shows that he was intimately involved in the financial affairs of
the TEC group and knew of the cash problems. The letter of April
8, 1988 from Revenue Canada (Exhibit A-3) on which the Appellant
relies offers very clear evidence that his corporate group had
accumulated source deduction arrears of $96,000 by March 31,
1988. It is worth noting that the letter was directed to the
Appellant's attention. The failure to remit had been a
problem for some time prior to March 31, 1988 and the Appellant
knew about that problem. Exhibit R-2, Tab 33 contains two Notices
of Assessment dated November 13, 1986 addressed to High Tech
Software Ltd. (one of the Appellant's corporations) showing a
liability of $3,323.94 for failure to remit in 1984 and
$14,140.48 for failure to remit in 1986.
[30] The Appellant stated more than once his
belief that the financial problems of his corporate group
vis-à-vis Revenue Canada would be solved when the
companies received either a substantial tax credit (SRTC?) or
some tax benefit through SR & ED. He thought that the tax
credit or benefit would offset any source deduction arrears. The
due diligence test is aimed at what a director may have done
"to prevent the failure" to withhold and remit. In
The Queen v. Corsano et al, 99 DTC 5658, Noël J.A.
writing for the Federal Court of Appeal stated in paragraph
35:
[35] Fourth, in assessing the respondent's due diligence,
the Tax Court judge took in consideration the fact that the
directors were satisfied that the asset values of the Corporation
would be sufficient to meet the claims of all creditors,
including Revenue Canada. With respect, this is an irrelevant
consideration. The obligation on the directors is to prevent a
failure, not to condone it systematically, as the respondents
did, in the hope of eventually correcting it because there would
be enough money in the end to pay all the creditors.
[31] Having regard to the defence of
"due diligence", it is important for the Appellant, as
director, to prove what he did or tried to do to prevent any
corporate failure to withhold and remit source deductions. The
Appellant knew that the TEC group of companies was accumulating
significant source deduction arrears. It was his hope that the
big expected tax credit would offset those arrears. That hope,
however genuine, is not evidence of due diligence. The Appellant
is liable for the source deduction arrears of TEC as assessed;
and his appeal will be dismissed subject to any relief he may
obtain from the amendments to his Notice of Appeal which were
permitted at the commencement of the hearing.
[32] In paragraph 14A, the Appellant claims
that TEC was not responsible for withholding or remitting prior
to February 15, 1987. Therefore, the Appellant claims that the
basic amount (before interest and penalties) assessed against him
should be reduced by $6,650 for January 1987 and an undetermined
amount (approximately one-half) for February. The Appellant's
claim is not supported by the documents. The Appellant entered 25
original cheques as Exhibit A-2. They appear to be the same as
the 25 photocopy cheques in Exhibit R-2, Tab 28. Those 25 cheques
are payable to six or seven employees for dates January 2,
January 16 and February 2, 1987. Although the cheques (as
originally written) were drawn on LAN's account at RBC, 131
Bloor Street West, they were all paid out of TEC's account
123-1257 at RBC, 48 St. Clair Avenue West. I have concluded that
after the new letter agreement with RBC dated December 1, 1986
(Exhibit R-2, Tab 19), the bank would not advance funds to any
corporation in the Appellant's group of companies other than
TEC.
[33] In paragraph 14B, the Appellant claims
that the Minister assessed other subsidiaries of TEC; issued
garnishees to clients of those subsidiaries; collected more than
$9,000 from the garnishees; and later vacated the assessments
without returning the money to the subsidiaries or to TEC.
Exhibit R-2, Tab 51 shows that the Minister (Revenue Canada)
collected $2,968.16 from its garnishee of RBC. Exhibit R-2, Tab 1
shows that the precise amount $2,968.16 was credited (as a
payment on March 17, 1989) to the final amount assessed against
the Appellant. The Appellant has offered no documents to support
his claim that $9,000 was collected by garnishees and not
credited prior to the last assessment.
[34] In paragraph 14C, the Appellant claims
that TEC made payments to Revenue Canada of $1,500 in July 1987
and $2,500 in August 1987 as partial payments with respect to the
current remittances, but that such payments were improperly
credited to LAN when they should have been credited to TEC. There
is no proof for this claim. The schedule attached to the Notice
of Assessment (Exhibit R-2, Tab 1) indicates that the Appellant
was given credit for all payments made prior to August 16, 1989,
the date of the assessment. The appeal is dismissed, with
costs.
Signed at Ottawa, Canada, this 6th day of May, 2003.
J.T.C.C.
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