Date: 20011003
Dockets: 1999-2147-IT-G,
1999-2152-IT-G, 1999-2154-IT-G
BETWEEN:
PATRICIA NICOL, ROBERT J. NICOL,
LINDSAY NICOL
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1]
These appeals were heard on common evidence. The appellants are
appealing assessments made against them by the Minister of
National Revenue ("Minister") pursuant to section 227.1
of the Income Tax Act ("Act"). They are
assessments for unpaid federal and provincial income tax and for
Canada Pension Plan contributions and unemployment insurance
premiums deducted at source but not remitted by R.J. Nicol
Construction (1975) Ltd. ("the Corporation") for the
1992 taxation year and for the months of January and February
1993, and for penalties and interest relating thereto.
[2]
Liability under section 227.1 of the Act has been analysed
by the Federal Court of Appeal in Soper v. The Queen, 97
DTC 5407, where Robertson J. A. summarizes the situation as
follows at page 5408:
. . . Subsection 153(1) of the Income Tax Act
("the Act")imposes a duty on corporations to withhold
taxes and other source deductions from an employee's salary
and to remit such amounts to the Receiver General of Canada.
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. However, that
obligation is tempered 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."
[3]
Section 227.1 reads as follows:
SECTION 227.1: Liability of directors for failure to
deduct.
(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.
4227.1(2)3
(2) Limitations on liability. A director is not liable
under subsection (1), unless
(a) a certificate for the amount of the
corporation's liability referred to in that subsection has
been registered in the Federal Court under section 223 and
execution for that amount has been returned unsatisfied in whole
or in part;
(b) the corporation has commenced
liquidation or dissolution proceedings or has been dissolved and
a claim for the amount of the corporation's liability
referred to in that subsection has been proved within six months
after the earlier of the date of commencement of the proceedings
and the date of dissolution; or
(c) the corporation has made an
assignment or a receiving order has been made against it under
the Bankruptcy and Insolvency Act and a claim for the
amount of the corporation's liability referred to in that
subsection has been proved within six months after the date of
the assignment or receiving order.
4227.1(3)3
(3) Idem. A director is not liable for a failure under
subsection (1) where the director exercised the degree of care,
diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable
circumstances.
4227.1(4)3
(4) Limitation period. No action or proceedings to recover
any amount payable by a director of a corporation under
subsection (1) shall be commenced more than two years after the
director last ceased to be a director of that corporation.
4227.1(5)3
(5) Amount recoverable. Where execution referred to in
paragraph (2)(a) has issued, the amount recoverable from a
director is the amount remaining unsatisfied after execution.
4227.1(6)3
(6) Preference. Where a director pays an amount in respect
of a corporation's liability referred to in subsection (1)
that is proved in liquidation, dissolution or bankruptcy
proceedings, the director is entitled to any preference that Her
Majesty in right of Canada would have been entitled to had that
amount not been so paid and, where a certificate that relates to
that amount has been registered, the director is entitled to an
assignment of the certificate to the extent of the director's
payment, which assignment the Minister is hereby empowered to
make.
4227.1(7)3
(7) Contribution. A director who has satisfied a claim
under this section is entitled to contribution from the other
directors who were liable for the claim.
Preliminary Issue
[4]
The Corporation was duly incorporated under the Ontario
Business Corporations Act. It was a family corporation of
which the appellants -- father, mother and son -- were the sole
directors. On December 18, 1992, the Corporation was petitioned
into bankruptcy under the Bankruptcy Act by three of its
creditors, and a Receiving Order officially declared the
Corporation bankrupt on March 30, 1993. On May 17, 1993, which
was within six months after the date of the Receiving Order, the
respondent filed in the matter of the Corporation's
bankruptcy proofs of claim with respect to the unremitted source
deductions at issue in these appeals (see Exhibit R-1, Tab 1). It
appears that those proofs of claim were accepted by the trustee
in bankruptcy without any question. Although the appellants
questioned the validity of the proofs of claim, I do not find
that they have adduced any evidence proving their invalidity, and
consequently, I am of the opinion that the condition imposed by
paragraph 227.1(2)(c) has been complied with by the
respondent.
[5]
It must be pointed out here that the Corporation had two accounts
during the period at issue and that the appellants have been
assessed for an amount of $31,212.46 with respect to one and
$25,925.81 with respect to the other, interest and penalties
included. Counsel for the respondent has raised the point that
those amounts included amounts of unremitted source deductions
pertaining to the month of July 1993, which came to $5,393.66 for
one account and $2,944.38 for the other one.
[6]
As the Corporation was bankrupt in July 1993, the respondent no
longer holds the appellants liable for those amounts and is ready
to consent to judgment for that portion only of the unremitted
source deductions (see Exhibit R-1, Tab 11).
[7]
For the remaining portion, the respondent takes issue with the
appellants' defence that they did exercise the degree of
care, diligence and skill to prevent the Corporation's
failure to remit the said amounts that a reasonably prudent
person would have exercised in comparable circumstances.
Due diligence issue
[8]
The evidence has revealed that the Corporation had been carrying
out construction projects for more than 20 years before the
bankruptcy. In those years, the Corporation was prosperous and,
it seems, never defaulted in remitting source deductions from its
employees' salaries. Mr. Robert Nicol was the directing mind
and the president of the Corporation. In the 1980s, Robert Nicol
began suffering from heart problems and his wife was then
appointed as a director of the Corporation. His son, Lindsay, was
also appointed as a director, on July 17, 1990 (Exhibit A-1, Tab
9).
[9]
Ms. Patricia Nicol attended to all accounting and financial
matters for the Corporation, while Lindsay Nicol was gradually
vested with responsibilities with respect to the construction
projects. In the years preceding the bankruptcy, Robert Nicol was
still involved in the day-to-day management of the Corporation
and still influenced the conduct of its activities to a certain
degree.
[10] According
to Patricia Nicol, the Corporation was a family affair and no
meetings of the board of directors ever occurred. She informally
discussed financial aspects with her husband but Robert Nicol was
never involved in paperwork such as source deduction remittances.
In Robert Nicol's own words, he did not have the time or the
inclination to handle details like source deductions. When he was
active in the corporation, he hired Ms. Doreen Paul as a
financial manager to handle the source deductions.
[11] After the
petition for bankruptcy was filed in December 1992, a deal was
reached in early 1993 between the owners of the Corporation's
uncompleted projects and Laurentian Casualty Insurance Co. for
the completion of those projects. Laurentian Casualty Insurance
Co. would act as the bonding company and would assume control of
the projects to be completed. The Corporation was to remain as
the general contractor for the projects, even though the project
owners would be dealing directly with the bonding company.
[12] Patricia
Nicol explained that from that point forward, she was not calling
the shots anymore. She had to submit reconciliation sheets to the
bonding company in order to receive money to pay the
Corporation's employees. Although the bonding company was
paying the subcontractors directly, the Corporation continued to
be responsible for paying its own employees and remitting all
source deductions.
[13] In
January 1993 Patricia Nicol received a call from a trust examiner
from Revenue Canada, as it was then called, informing her that he
wanted to audit the Corporation with respect to source
deductions. Since Ms. Doreen Paul, the employee in charge of
making the payments for the Corporation, was on holidays for the
month of January 1993, Ms. Nicol requested that the audit not be
done before the return of that employee. The audit was completed
on February 11, 1993 and, according to Ms. Nicol, the auditor
told her that with the exception of the month of January 1993,
all deductions at source were up-to-date. In actual fact,
according to the testimony of Ms. Nicole Kirouac, a
collection officer for Revenue Canada, there was a deficiency of
$877 in tax remittances for 1992, in addition to which a penalty
and interest were owed. The Corporation also defaulted on tax
remittances for four weeks in January 1993 and one week in
February 1993. In fact, the total amount assessed on
February 11, 1993 came to approximately $60,000. Patricia
Nicol said that there was no money in the Corporation's bank
account at that time, and the trust examiner agreed to accept
postdated cheques for the amount owed, which were to be cashed by
Revenue Canada on March 15, 1993. On March 16, 1993, when
the collection officer wanted to cash the cheques, he learned
that Patricia Nicol had stopped payment on them. Patricia Nicol
said that she issued a stop payment on the cheques on March 15,
1993 at the request of the bank, as there were not sufficient
funds to cover them. (Apparently, that statement has not been
corroborated by the bank.) Thereafter, according to Ms. Nicol,
she was not able to contact the trust examiner before March 23,
1993, when, at her request, he agreed to wait until April 15,
1993 for the arrears for the month of January to be paid.
[14] It
appears that in the meantime the bonding company had paid the sum
of $188,711.50 into the Corporation's account on March 15,
1993. In her testimony, Patricia Nicol said that she issued the
stop payment on the cheques before that money was deposited into
the account. She claims that she was not aware on March 15 or on
March 23, 1993, that that sum of money was put into the
Corporation's account. In her words, this was not a
significant amount of money compared to what she was used to
dealing with.
[15] As she
had reached another agreement with Revenue Canada, under which
the arrears did not have to be paid until April 15, 1993, she did
not see fit to inform Revenue Canada after that agreement that
there was money in the Corporation's bank account. A
Receiving Order was then issued against the Corporation and on
March 31, 1993, the trustee in bankruptcy seized the
Corporation's bank account; consequently, the payment was
never made to Revenue Canada.
[16] Patricia
Nicol claims that, as soon as the bonding company took over the
operations of the Corporation at the beginning of 1993, she lost
control over all payments to be made by the Corporation. She
claims that in the circumstances she could not do more than she
actually did to exercise the required degree of care, diligence
and skill to prevent the failure to remit the source
deductions.
[17] She also
claims that if Revenue Canada had moved earlier to collect the
arrears, the Corporation would not have been delinquent in its
remittances, nor would its directors be liable today. Indeed, it
appears that the bank seized the funds in the corporation's
account without previously obtaining her consent or the consent
of the Corporation's auditors, thus contravening a
forbearance agreement between the bank and the Corporation that
was to expire on October 1, 1993.
[18] On that
second point, I do not see how Revenue Canada could have
collected its arrears after the Receiving Order was made on March
30, 1993. Revenue Canada filed proofs of claim as required, but
all the money was seized by the trustee in bankruptcy who was
thereafter in possession of the estate of the bankrupt. Prior to
the Receiving Order, Revenue Canada was specifically requested by
Ms. Nicol to wait until April 15, 1993 to collect the arrears.
She herself stopped payment on the cheques made out to Revenue
Canada to be cashed on March 15, 1993. In so doing, Ms. Nicol was
giving priority to the bank to the detriment of Revenue Canada.
Clearly, she was in a position to give preference to the payment
to Revenue Canada but deliberately chose not to do so.
[19] With
respect to the due diligence defence, the appellants had a
positive duty to act to prevent failure to make current and
future remittances and not just simply cure any default after the
fact (see The Queen v. Corsano et al., 99 DTC 5658,
at page 5667 (F.C.A.) and Soper, supra, at page
5417).
[20] I do not
think it was shown that this positive duty was carried out, at
least in the case of Ms. Patricia Nicol and Mr. Robert Nicol, who
were well aware of the problems. Indeed, Mr. Robert Nicol said
that he relied on Ms. Doreen Paul and on his wife to make the
remittances. Ms. Paul was away on holidays in January 1993. Did
the Corporation's liabilities then cease because one employee
was on holidays? Obviously not! The Nicols had been in business
for more than 20 years. They had stopped paying some of their
creditors since the month of June 1992, as specified in the
Receiving Order (Exhibit R-1, Tab 2). Although, there was a
petition in bankruptcy, they reached an agreement with the
bonding company to remain as the general contractor for the
projects still to be completed. They knew their obligations
towards their creditors and towards Revenue Canada.
Patricia Nicol said that the money was put into the
Corporation's account on acceptance by the bonding company of
proof, provided by the Nicols, of the payments (referred to by
Ms. Nicol as "reconciliation payments"), including
source deduction payments, that had to be made by the
Corporation. When the money was put into the Corporation's
account, only the Nicols had control over it. Indeed, it was
neither the bank nor the bonding company but Ms. Patricia Nicol
herself that issued on March 15, 1993 the stop payment on the
postdated cheques made out to Revenue Canada. Furthermore, an
amount of $188,711.50 was deposited in the Corporation's
account on March 15, 1993. I find it strange that Ms. Nicol, who
spoke to the trust examiner on March 23, 1993, did not inform
Revenue Canada that there was money in the bank account at that
time. Her explanation that she was not aware on March 23, 1993
that amounts had been deposited into the Corporation's bank
account is simply unbelievable and does not stand up. After all,
she and her husband were the signing officers with respect to the
Corporation's bank account. In that context, I find that the
agreement supposedly reached with the trust examiner to postpone
payment to April 15 cannot be relied upon as a defense by the
appellants. Rather, I find that the way the Nicols acted
indicates that they gave precedence to other creditors (such as
the bank), and as directors they must be held jointly liable with
the Corporation for their failure to remit the source deductions
pursuant to section 227.1 of the Act. Although there were
only a few remittance payments that were not made, this does not
discharge the directors from their duty to act positively to
prevent the failure to remit source deductions.
[21] With
respect to Lindsay Nicol, I am ready to give him the benefit of
the doubt. The evidence reveals that he was appointed as a
director in 1990 following the illness of his father but was not
really involved in the business decisions. Ms. Doreen Paul
confirmed that Lindsay was not consulted on financial aspects of
the business. No questions were asked in cross-examination
concerning Lindsay's education or background or even
regarding his age at the time of the bankruptcy. Lindsay said
that he was young and that he was just doing what his parents
told him to do. He gradually learned to work on construction
projects but was obviously not the directing mind behind the
business operations. He was not the one who influenced the
conduct of the Corporation's affairs. Although he was asked
to sign, in the bankruptcy proceedings, a document providing
assurance that all accounting documents and records of the
appellants would remain intact, I do not find that this is proof
of an active role played by Lindsay. He was asked to sign because
his name appeared as a director, and again, he signed at the
request of his parents. Furthermore, although it was not filed
with the Ontario Ministry of Consumer and Commercial Relations,
Lindsay had signed a letter of resignation from his directorship
in 1992. Although I will not consider that resignation as
official, it is an indication, in my view, that Lindsay had
limited influence on the corporate management of the
business.
[22] For these
reasons, I am of the opinion that Lindsay Nicol should not be
held jointly and severally liable with the Corporation for the
unremitted source deductions. The appeal of Lindsay Nicol is
allowed and his assessment is vacated.
[23] The
appeals of Patricia and Robert Nicol are allowed only to the
extent of taking into account the amounts on which there was
consent by counsel for the respondent at the beginning of the
hearing. Their assessments are therefore referred back to the
Minister for reconsideration and reassessment on the basis that
the amounts assessed shall be reduced by an amount of $5,393.66
with respect to one account and by an amount of $2,944.38 with
respect to the other. Patricia and Robert Nicol remain liable
under section 227.1 of the Act for the balance of the
amounts assessed.
[24] Each
party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
"Lucie Lamarre"
J.T.C.C.
COURT FILE
NO.:
1999-2147(IT)G, 1999-2152(IT)G and
1999-2154(IT)G
STYLE OF
CAUSE:
Patricia Nicol, Robert J. Nicol and
Lindsay Nicol v. The Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
September 12, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge Lucie Lamarre
DATE OF
JUDGMENT:
October 3, 2001
APPEARANCES:
For the
Appellants:
The Appellant themselves
Counsel for the
Respondent:
Pierre-Paul Trottier
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2147(IT)G
BETWEEN:
PATRICIA NICOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of Robert J. Nicol
(1999-2152(IT)G)and Lindsay Nicol
(1999-2154(IT)G) on September 12, 2001, and judgment
rendered orally on September 14, 2001, at Ottawa, Ontario,
by
the Honourable Judge Lucie Lamarre
Appearances
For the
Appellant:
The Appellant herself
Counsel for the Respondent:
Pierre-Paul Trottier
JUDGMENT
The
appeals from the assessments made under section 227.1 of the
Income Tax Act ("Act"), notices of which
are dated February 1, 1994, and bear numbers 31086 and 31090, are
allowed and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on the sole
basis that the amounts assessed shall be reduced by an amount of
$5,393.66 with respect to one account and by an amount of
$2,944.38 with respect to the other (as consented to by counsel
for the respondent), the appellant remaining liable under section
227.1 of the Act for the balance of the amounts
assessed.
Each
party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
J.T.C.C.
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