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Citation: 2004TCC173
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Date: 20040603
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Docket: 2002-2926(IT)G
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BETWEEN:
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DAN HAMILTON,
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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
Hershfield, J.
[1] This is an appeal from an
assessment under subsection 227.1(1) of the Income Tax Act
(the "Act") pursuant to which the Appellant was
assessed as liable for the failure by Best Fresh Holdings
Corporation (the "Corporation") to make certain
remittances to the Receiver General on account of federal income
tax source deductions (payroll deductions) made by the
Corporation.
[2] It is not in dispute that the
Appellant was a director and general manager of the Corporation
from August 16, 1996 to March 30, 1998. It is not in dispute that
as a director of the Corporation, the Appellant is jointly and
severally liable with other directors for source deduction
amounts not remitted by the Corporation as required by the
Act. The issue in the appeal is whether the Appellant is
relieved of liability by reason of having exercised a sufficient
degree of care, diligence and skill in his role as a director
pursuant to subsection 227.1(3) of the Act.
[3] As a preliminary matter I note
that the remittance failures appear to have occurred over the
period commencing about April 1997 through some time in 1998 when
the business ceased to operate. During most of this time there
were two directors: Craig Markovic, the President of the
Corporation and the Appellant. The Appellant resigned on March
30th 1998 while Markovic stayed on much longer. Both
were assessed and both appealed. Markovic's assessment was
for a greater amount presumably for remittance failures occurring
after the Appellant's resignation. A consent Judgment was
obtained in respect of the Markovic appeal, however such judgment
does not particularize whether the liability agreed upon relates
to the period when the Appellant was also a director. Clearly, if
monies paid under the consent Judgment relate to the period when
the Appellant was a director and jointly and severally liable for
the remittance shortfalls (if that is my finding in this appeal)
then a question arises in respect of the collection of amounts
owing under this judgment as to whether payments under the
consent Judgment have relieved a payment obligation of the
Appellant. However, whether or not such question arises is not a
question before me. Subject to his due diligence defense, the
Appellant has not put in dispute the amount assessed for which he
is jointly and severally liable.
[4] To best frame the due diligence
defense to the assessment, it should be noted at the outset that
the Notice of Appeal and the position of the Appellant at the
hearing put reliance on his assertion that he was unable to do
anything to cause the required remittances to be made. It was
admitted that he was aware that the Corporation was not making
the required remittances and that he was, as well, actively
involved in the day-to-day operation of the business of the
Corporation and was not an outside director. The due diligence
defense is based on the assertion that the Appellant was in
effect a puppet, a powerless director, appointed by shareholders
who in fact controlled the day-to-day operations of the
Corporation at least in respect of the application of funds and
any major business decisions.
[5] While the shareholdings of the
Corporation and the historical dealings amongst its shareholders
would not normally be relevant to the issue before me, the
Appellant's due diligence defense as framed by his counsel,
does invite consideration of such dealings.
[6] Three individuals who were friends
since university days, and who have on other occasions combined
their respective talents to exploit commercial opportunities,
owned shares in the Corporation. These individuals and their
holdings are Jim Thompson as to 27.7%, Fraser Atkinson as to
21.4% (including indirect holdings) and Markovic as to 3.5%. They
were, if acting in concert, the controlling shareholders at all
relevant times. A fourth individual, Scott Morrice, who also had
historical dealings with this trio, held 21.4% of the shares of
the Corporation. A venture capital corporation (the
"VCC") held 26%. The Appellant owned an estimated 4% of
the shares in the VCC for which he paid some $15,000.00.[1]
[7] Markovic was an engineer and in
addition to being on the Board of Directors he was a technical
advisor to the Corporation and was actively involved at the
outset in getting things going. He was less involved in the
Corporation after that although he was the president and
secretary of the Corporation at all relevant times.[2] Morrice was a lawyer
who helped set up the corporations and do the legal work. He was
not actively involved in the operations of the Corporation.
Thompson was an accomplished businessman. Atkinson was a
chartered accountant, a partner at KPMG. Both Thomson and
Atkinson were active in the affairs of the Corporation
notwithstanding that they held no formal office with it.
[8] The Appellant and Atkinson
testified at the hearing. Atkinson testified on behalf of the
Respondent.
[9] The Appellant's background is
as follows. Prior to his joining the Corporation in 1996, he held
several positions. After graduating high school in 1975 and
working in retail sales for about six years, he obtained his
Bachelor of Arts degree. He studied history and political
science. He did not study business or accounting. Following that
he held sales, customer service and multi-level marketing
positions and spent three years with Polaris Water Products. He
started there as a tele-marketer and ended up in a supervisory
position. After that he did some contract work in the
publishing/printing business having developed skills using
word-processing and desktop publishing software. In about 1996 he
was hired on a contract basis by Thompson, acting as president of
a company operating as Glacier Water Products, to assist in sales
of that company. When that contract ended Thompson told the
Appellant about a new venture started by himself and Atkinson and
invited the Appellant to attend an investors' meeting that
was showcasing a new fresh-cut fruit packaging technology.[3] The new venture,
being undertaken by the Corporation, was to license this
technology and operate a fruit packaging business consisting of
buying, cutting and selling specially packaged fresh fruits to
retail grocery stores.
[10] Although the Appellant started work
with the Corporation as a general manager he was asked early on
to be a director along with Markovic. He was told it would be
helpful if he was a director in order to sign documents that may
require a director's signature while Markovic was away. This
never occurred although Markovic did travel quite a bit and was
away from the office frequently once things were up and running.
The Appellant was not aware of any additional actual authority,
responsibility or liability being bestowed or imposed on him by
virtue of becoming a director. He signed directors'
resolutions as presented to him. From his perspective, his bosses
were Thompson and Atkinson. He said that he reported to Thompson
and Atkinson who were both regularly involved in ongoing
discussions concerning the business of the Corporation. Thompson
was in the office daily (ostensibly as president of Glacier Water
Products with which the Corporation apparently shared space) and
the Appellant reported to him on a day-to-day basis in respect of
sales of the Corporation. Atkinson oversaw all financing and
accounting decisions. The Appellant reported to Atkinson on all
financial matters. Atkinson had signing authority with the bank.
The Appellant did not.[4]
[11] I accept that the Appellant's
principle role was that of general manager of the
Corporation's operations. In that capacity his
responsibilities included ordering inventory, making bank
deposits, maintaining the accounting systems (an Excel program
set up by Atkinson) and inputting payroll data on Revenue Canada
software. Indeed he was solely responsible for payroll deduction
and remittance calculations. However, since he could not sign
cheques, he had to defer to Atkinson to ultimately effect
payment. To assist in this process he regularly prepared a list
of payables which he sent to or kept for Atkinson for review and
payment.[5]
[12] A brief comment on the procedure for
writing cheques is worth noting at this point. The Corporation
dealt with the TD bank until about June 1997 and then with the HK
bank. The switch to the HK bank was apparently to enable a loan
to the Corporation guaranteed in part by Atkinson and Morrice. In
the case of payments from the TD, Atkinson held the cheque book
and delivered signed cheques to the Appellant with ledger
notations to "hold" particular cheques. However,
Atkinson relied on the Appellant to describe all payables. A
printout faxed to Atkinson by the Appellant in April 1997 was
tendered as an example of the Appellant's description of
payables. The printout showed a negative balance after
workers' salaries and then showed other payables. The
Appellant described some such items as "must be paid"
(e.g. telephone "to avoid disconnect"). The payable for
his salary was separated and noted as a "hold until funds
available".[6]
Revenue Canada remittances were separated as well but the
Appellant made no notations. He said he relied on Atkinson's
instruction, as he was a knowledgeable chartered accountant. He
also knew that there were no funds at that time and that payments
were dependant on future revenues or advances or refinancing
arrangements which would be for Atkinson to resolve. Later he
would have known that shortfalls in funds would have to be
advanced to the Corporation by shareholders.[7] In any event, Atkinson responded
to the fax with respect to payroll remittances as follows:
"Better to make a partial than none at all. (it has to be in
on the 15th)". The Appellant testified that he
relied on this single instruction on a going-forward basis.[8] He said he
understood that he was required to make partial payments toward
remittance obligations.
[13] While the April 1997 printout referred
to above deals with payables during the period the Corporation
was dealing with the TD, the Appellant testified that the
procedure did not really change after the switch to the HK bank
even though after the switch, cheques were held and filled out by
the Appellant and sent to or held for Atkinson to sign. No
payments were made unless Atkinson gave his approval by signing
the cheques without an instruction to hold back delivery.
[14] While the testimony of both witnesses
was that Atkinson held the TD cheque book, it does not appear
that Atkinson actually prepared the cheque for a partial
remittance for April 1997 at the time of making the
notation. No explanation was offered as to how a remittance
amount was ultimately determined. On a going-forward basis it
seems more apparent that the Appellant himself knowingly made
determinations of affordable remittances as a means of funding
operations relying on the April notation as his authority to do
so. By about June 1997 he had possession of the HK cheque book
and filled the cheques out for signature by Atkinson. It appears
that he did not always request payment (or fill out cheques) for
even partial remittances on a timely basis. While I might have
suspected that there would have been more discussion between the
parties on this question, there was no suggestion at the hearing
that that was the case. The Appellant seems to have loyally
applied amounts, required to be remitted, to the operations of
the Corporation as he saw fit, asserting reliance on
Atkinson's advice that it was acceptable to do so and on his
own belief that it would be covered at a later time.
[15] It is interesting that the Appellant
acknowledged that following Atkinson's note referred to
above, he prepared remittance cheques for Atkinson's
signature for partial remittances thinking "possibly"
it was wrong. Further, in payroll reports that he completed and
sent to the CCRA he did not show amounts owing until, in respect
of the 1997 year, he prepared T4 summaries in February 1998.[9] He said that he
understood that the payroll reports were being completed as
Atkinson wanted them to be completed. He said that he trusted
that Atkinson, as an expert, knew this was okay. He also said he
did not want to talk to others about it as it would be perceived
as an "end-run around" Atkinson who he found
intimidating and, further, he believed that there would be
catch-up payments down the road when there was more funding.[10]
[16] By March of 1998 the cash flow problems
that started in April of 1997 worsened. A major retail customer
was lost and the Hikari arrangement had ended. On March
5th 1998 the Appellant wrote Atkinson and Morrice
recommending immediate action to restructure or wind-up the
Corporation. He advised of amounts owed to him and Revenue
Canada. At this point the Appellant seemed less concerned about a
confrontation with Atkinson as he saw the writing on the wall. He
resigned shortly after this communication presumably after it was
apparent that there was no help being offered. It was also at
about this time that he said that he learned, for the first time,
of his potential liability for payroll deduction remittance
shortfalls in a conversation with his uncle, a retired
lawyer.
[17] As noted, in about a two-month period
just prior to leaving, the Appellant cashed cheques for some
three months' salary. No payroll remittances were made in
respect of these payments. There were still at least five unpaid
months for which the Appellant had signed cheques and for which
there were funds in the bank to cash on at least one occasion
prior to the Appellant's resignation. On other occasions
there were sufficient funds to cash some, although not all of
these cheques. On these occasions there would have been funds
available to make remittance payments as well. Still, the
Appellant did not attempt to cause or even encourage signing
officers to make remittance payments.
[18] As to the testimony of Atkinson, it was
not helpful. He was not a credible witness. He clearly
understated his role as minder of funds and overstated the
effective authority he and the other shareholders intended to
give the Appellant when appointing him as a director.
[19] Atkinson testified that he thought the
Appellant had signing authority at the bank and when asked why he
was not given such authority he said he did not know - it was up
to the board. This smugness in light of established routines
whereby he, Atkinson, signed every cheque and monitored cash
flows including bank loan repayments in February and March 1998
for which he was personally liable, reveals a very sharp attitude
in my view. His testimony is further betrayed by evidence that he
told CCRA auditors that he had signing authority to protect his
investment and as a partner of KPMG to protect the VCC, a client
of the firm. This is not consistent with affording the board as
constituted the power to let the Appellant sign cheques. While
there is no evidence that there was a unanimous shareholders'
agreement usurping the power of the board to manage the
day-to-day operations of the Corporation, in practical terms
there may as well have been. Atkinson testified that from the
outset Markovic (President and a director) was not to be involved
in the financial activities. Whose decision was that? The
Appellant's? The board's? Or, the principal
shareholders'? In practical terms there was no elected board
making such decisions.
[20] Atkinson denied being informed of
ongoing remittance shortfalls in spite of his notation to the
Appellant that partial remittances were better than none at all.
He signed all payroll cheques and remittance cheques. Does he
seriously expect me to believe that he did not notice remittance
shortfalls? He, on behalf of KPMG, filed T4 summaries and slips
prepared for the Corporation. He saw in late February or early
March of 1998 the amount of the payroll deductions but claimed he
did not know of the extent of the failure to remit deducted
amounts until much later. He is an experienced and knowledgeable
professional accountant. The evidence suggests that he knew the
extent of the shortfalls or intentionally turned a blind eye to
them and knowingly (as the signing authority at the bank) applied
the Corporation's funds in a manner wholly inconsistent with
its remittance obligations at times during the Appellant's
tenure as a director when funds were available for such
remittances and when he, Atkinson, knew the seriousness of the
financial problems of the Corporation. His ultimate answer to
this was he would have signed remittance cheques if the Appellant
had presented them to him.
COMMENTS
[21] The Appellant's employment duties
as general manager as set out in paragraph 11 above are distinct
from his duties as a director - a distinction the Appellant may
never have made or understood. In respect of all these duties he
felt he was under the direction of the principals, most
particularly Atkinson, in respect of accounting and financial
regulatory matters. He viewed the Corporation as basically their
company and that they were ultimately in charge of everything he
was or was not to do. Reporting to shareholders (who are neither
officers nor directors) in respect of the day-to-day management
of a corporation is not a situation contemplated by corporate law
but that is not to say it was not the real environment in the
which the Appellant worked. He was, in that real environment, a
subordinate to two de facto bosses, particularly Atkinson.
The Appellant testified that he was intimidated by Atkinson. I
accept that he was. Atkinson was an aggressive entrepreneur who I
have no doubt held himself out as the Appellant's boss.
Atkinson dictated the accounting systems used and was on top of
all financing decisions. The Appellant could not stand up to
Atkinson; nor did he ever attempt to. He took direction as a
subordinate would take direction and then went further, taking
the initiative to determine remittance amounts from time to time
for which Atkinson then signed cheques. His conduct might be
attributable simply to employee insecurity or misguided loyalty
to and trust in the principals of the Corporation. It might have
been related to his own ambition as well. These principals were
movers, capable of bringing him along on other ventures. Pleasing
them had a potential upside. Explaining (as the Appellant did) a
positively phrased letter of resignation as intending to keep
other employment opportunities with this group open is clear
evidence of conduct driven by self-interest. It cannot be
forgotten as well that the Appellant had a material financial
interest in the Corporation. That is, he had an economic interest
in applying corporate funds in a manner that best served that
interest. Based on my impression of the witness, his actions and
non-actions were the result of all of these factors.
[22] Relying on Atkinson's single
notation relating to unfunded accounts payable, the Appellant
used the payroll deductions to finance the day-to-day operations
of the Corporation. He did not keep a running total of the amount
of unpaid remittances and knowingly did not report shortfalls.
That he was encouraged by Atkinson expressly or implicitly, I
have little doubt. The Appellant's conduct saved Atkinson and
the other principals from having to fund operations. I have the
impression that Atkinson knowingly used the Appellant. There was
no bona fide reason advanced at the hearing to have put
the Appellant on the Board of Directors. He was afforded no real
role as a director per se. De facto, Atkinson was
one of a group in charge of the management of the affairs of the
Corporation.[11]
Regrettably, however, I know of no principle of law and
Appellant's counsel raised no cases on point, to the effect
that de jure directors are not responsible as directors
even though little is expected of them by shareholders. A de
jure director cannot delegate his or her director's
responsibilities. Aside from unanimous shareholder agreements
usurping authority, a director cannot rely on the notion of being
under the direction of the owners - of those that appoint him or
her to the board. Further, that Atkinson might have been assessed
as a de facto director does not help the Appellant.
That Atkinson might be held jointly and severally liable for the
amount assessed would not prevent the Respondent from looking to
the Appellant pursuant to his several liability.
[23] At the end of the day, the Appellant
allowed himself to be used. He took on an employment role that
denied him any opportunity, as a director, to claim the benefit
of a due diligence defense. Wearing his director's hat, he
cannot say that he did not know what was happening. He was at the
heart of the remittance failures. He was the responsible person.
What due diligence can he then claim? He never asked for funds
for remittances. He obtained signed cheques for his salary but
asked for none for remittances. Even sensing something was wrong
he never broached the subject with anyone. He could have
requested cheques or presented cheques to Atkinson for signature
for remittances as he did for his own salary or, at least, when
he started cashing his salary cheques and funds were available,
he could, at that time, have presented cheques to Atkinson to
sign for remittances. Appellant's counsel suggests that
presenting cheques to Atkinson to sign would have been a
fruitless exercise yet refusing to sign remittance cheques or
requesting the Appellant to "hold" them may have
exposed Atkinson to personal liability. It seems plausible to
suggest then that Atkinson would have done, in that case, what he
testified he would have done, namely sign the remittance cheques.
It seems plausible that he was counting on that not happening
since it would have been apparent to him that the Appellant had,
based on his (Atkinson's) advice, taken the initiative on a
going-forward basis to use remittance amounts to fund the
operation of the business of the Corporation. While in the
circumstances of this case I do not condone the attitude
reflected by the testimony that if presented with a remittance
cheque "I would have signed it", Atkinson may not have
a duty of care to the Appellant to protect him from liability.
Persons who accept directorships, accept this type of liability
whether they know it or not. Wearing his director's hat, the
Appellant cannot claim ignorance of what was happening and being
ignorant of the law, if he was, does not help him. Directors must
be presumed to know their duties. It is incumbent on directors to
inform themselves of the duties and responsibilities associated
with their office. While the law relating to a due diligence
defense may permit some tolerance in the application of this
principle, something approaching zero tolerance would attach
itself to directors whose employment duties include the
responsibility to administer remittance payments which is the
case here as admitted by the Appellant. Directors cannot assume a
subservient role and rely on that conflict as a ground to escape
their fiduciary duties. To say "my hands were tied as a
director because they were tied as an employee" is to
disregard the duties of the office held as director. Also, in the
case at bar, the Appellant to some extent at least acted in his
own interests in respect to the application of available funds.
This is inconsistent, indeed incompatible, with a due diligence
defense.
[24] While these comments form the basis of
my reasons to dismiss the appeal, an analysis of authorities
relied on by the parties is required.
ANALYSIS OF CASES ARGUED
[25] Subsection 227.1(1) of the Act
makes a corporation liable for unremitted amounts while at the
same time imposing joint and several liability on its directors.
That obligation is modified by subsection 227.1(3) which enables
corporate directors to escape liability for non-remittance if
they can establish that they "exercised the degree of care,
diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable
circumstances".
[26] In the case of Soper v. R.,
[1997] 3 C.T.C. 242 relied on by the Respondent,
Robertson J.A. reviews the standard of care imposed on
directors in light of the due diligence defense under
subsection 227.1(3). After confirming that the requirement
in section 227 of the Act that deems amounts deducted
or withheld to be held in trust separate and apart from the
corporation's own monies did not constitute directors as
trustees in respect of amounts so deemed to be held in trust, he
found that the standard of care imposed on a director is partly
objective (the standard of the reasonable person) and partly
subjective in that the reasonable person is judged on the basis
that he or she has the knowledge and experience of the particular
individual.[12]
Simply put, based on my comments above, I do not think the
Appellant meets this standard of care.
[27] In discussing such standard of care,
Robertson J.A. goes on to saythat 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, he notes that the statutory standard of care
will surely be interpreted and applied in a manner that
encourages responsibility.[13] To relieve the Appellant of liability in this
case would not encourage responsible acquittal of the duties
imposed on directors - duties that, in the public interest
(including the fisc), must be taken most seriously by
directors.
[28] Robertson J.A. observes as well that in
the absence of grounds for suspicion, it is not improper for a
director to rely on company officials to perform honestly duties
that have been properly delegated to them.[14] This forgives directors for the
failures of company officials. Such proposition however assumes
that the director and the company official upon whom that
director may be entitled to rely are different persons. In the
case at bar they are the same person but for the Appellant's
assertion that shareholders, particularly Atkinson, were persons
upon whom he could rely to perform, honestly, duties that had
been effectively delegated to them. To apply the notion of
defensible reliance in the way in which the Appellant seeks to
apply it, would in my view essentially and fundamentally
encourage irresponsibility in the performance of the duties of a
director. Shareholders can and indeed are expected to act in
self-interest. For a de jure director to rely on de
facto delegation of duties to a shareholder with the
expectation that they would be honestly performed in the best
interests of the corporation as opposed to the best interests of
that particular shareholder is to undermine the role of a
director. Put another way, while directors can rely on advice
honestly provided by officials inside the corporation and while
they can rely on competent outside advice, I think the
caveat to the latter would be that they can rely on
disinterested competent outside advice. A reasonable
person having the knowledge and experience of the Appellant could
and would make that distinction in my view. However, the case at
bar is not so straightforward. The outside advisor is also a
professional accountant, a partner in a large respected
accounting firm. Would not a reasonable person of any
background or experience assume that such a professional would
not put himself or herself in such a conflicted position as
Atkinson was in without at least being cautious to respond to a
remittance enquiry as a professional would respond (as opposed to
how a shareholder would respond)? This is a most troubling
question. While I do not want to suggest that a reasonable person
must assume conflicted people cannot be trusted and while I
believe Atkinson acted improperly having put himself in such a
conflicted position, I believe in this case that the Appellant
knew which hat Atkinson was wearing when dealing with payroll
deduction remittances. It was his shareholder's hat. The
Appellant's sense of wrongdoing underlines this. The
Appellant too willingly became a party to an approach to
remittances that he sensed was not appropriate. He was alert to
the notion that Atkinson may not have been responding in a
disinterested professional manner. From the Appellant's
perspective he was working for Atkinson in Atkinson's
capacity as a principal of the Corporation. Something more was
required of him to allay his sense of wrongdoing. The
Appellant's reliance on Atkinson as a disinterested
professional advisor in the circumstances of this case is not
reasonable in my view.
[29] Further, there is no doubt that the
Appellant was, in the parlance of director's liability cases,
an "inside director". Part of his role in corporate
management was to handle payroll and payroll deductions and he
ably used CCRA software in the performance of this role. He was
aware of remittance requirement shortfalls and applying both the
subjective and objective standard of care, I find it difficult to
say that he exercised any degree of care, diligence and skill to
prevent the remittance failures. In respect of inside directors
Robertson J.A. remarked as follows at paragraph 33:
... 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 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.
In the case at bar there is not only an assumption that the
Appellant, as an inside director, knew of a problem, there is his
admission that he knew something was wrong.[15]
[30] It has been noted that the purpose of
subsection 227.1(3) is to prevent failure to make remittances and
not to cure a default after the fact.[16] Accordingly I would not put too
much emphasis on my findings that the Appellant could have done
more to cure past defaults from December 1997 to his departure in
1998 given that there seemed to be sufficient funds on deposit to
pay at least some part of the shortfalls. However, the question
as to what the Appellant could have done to prevent remittance
failures in the first place is much the same question in this
case as what the Appellant could have done to prevent continuing
remittance failures from December 1997 to his departure in 1998.
He could have acted on his suspicions that not remitting was
wrong. He could have presented cheques for signing. If remittance
failures continued he could have sought advice from disinterested
persons as he ultimately did when he spoke to his uncle, a
retired lawyer. He might have approached Morrice, a lawyer and a
second person who was authorized to sign cheques.[17] It seems unlikely
that he would have been looked upon badly for seeking further
advice while continuing to work for free. A reasonable person in
the Appellant's circumstances, assumed to know the law, would
not in my view have simply gone along with the remittance
failures as a means of supporting the failing activities of the
Corporation. Directors who do "go along" with such
failures do so at their peril.
[31] Appellant's counsel argued that the
Appellant did all that a reasonable person could be expected to
do in the circumstances. He relies on the decision of
Justice Bowman (now Associate Chief Justice) in Cloutier
et al. v. M.N.R., 93 DTC 544. That case dealt with two
appellants being personally responsible as directors for Part
VIII tax pursuant to section 227.1. Associate Chief
Justice Bowman found that there was nothing that the two
directors could have done as a practical matter to prevent the
failure of the company to satisfy its Part VIII tax
liability. To resign from the board in protest would have
accomplished nothing. They acted with the advice and guidance of
a large firm of chartered accountants and were essentially
powerless to alter the course of events that led to the demise of
the company. In such circumstances Associate Chief
Justice Bowman found that a director's liability under
section 227.1 or his exoneration therefrom under
subsection 227.1(3) does not depend on his adopting postures
that would objectively have had no practical affect on the
outcome of events.
[32] I do not think the Cloutier case
is on all fours with the case at bar. The accountants relied on
in the Cloutier case were disinterested outside advisers.
Importantly as well, there is nothing in Cloutier to
suggest that the directors in that case were employed in a
capacity that put them squarely in the role of persons
responsible for administering payroll deduction and remittance
matters. Further, it appeared relevant that there was an
administrative practice which extended the deadline for the Part
VIII tax liability payment to the end of the year. Accordingly,
Associate Chief Justice Bowman found that it was open to the
Appellants to assume that the Part VIII tax liability could be
deferred. This afforded time and funds to carry out research
which was planned and which the Appellants genuinely believed
would be carried out. This is not the same as
self-generated deferral tactics being employed in the
belief that funds will be forthcoming in the future.
[33] Notwithstanding such distinctions
Respondent's counsel argues, as remarked in Cloutier,
that powerless directors cannot be insurers of the fisc and that
as a practical matter the Appellant did all he could do to
prevent the failure to make remittances. He argues that at an
early stage, possibly on the first occasion where a remittance
shortfall was identified by the Appellant, the Appellant
effectively asked Atkinson, a knowledgeable accountant, what to
do. Putting emphasis on Atkinson as a knowledgeable accountant is
to ignore the obvious conflict discussed above. Atkinson as a
shareholder who might have had to put his hand in his own pocket
to make good a remittance payment was not a disinterested
advisor. The Appellant knew this and relying on such person, who
he was afraid to challenge in any way in spite of a feeling of
wrongdoing, is simply not reasonable for a person in his
circumstances having accepted a position on the board of the
Corporation.
[34] As noted, the problem here is that the
Appellant did not understand his duties as a director. He did not
see his role as being responsible to take any further steps to
prevent the failure to make remittances once he received his
first instruction. Thereafter, he took things in his own hands.
He did not advise of ongoing shortfalls on a regular basis and
did not provide cumulative totals of shortfalls. He did not
present cheques for signature. He did not seek further direction
or advice. No such positive steps were taken where taking any one
of them might have changed the course of events.
[35] Accordingly, I must find against the
Appellant in this matter. The due diligence defense does not save
the Appellant on the facts of this case. The appeal is dismissed
with costs.
Signed at Ottawa, Canada, this 3rd day of June 2004.
Hershfield J.
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