Date: 20010618
Docket: 2000-3764-IT-I
BETWEEN:
BRUCE G. LOCKHART,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1]
By Notice of Assessment No. 11922 dated June 10, 1999, the
Minister of National Revenue (the "Minister") assessed
the Appellant for federal income tax deducted at source but not
remitted by Kootenay Cutting & Coring Ltd.
("Kootenay") and for penalties and interest.
[2]
The following are the undisputed facts accepted by the Appellant
as stated in the Reply of the Respondent:
a)
the Corporation was incorporated in the Province of
British Columbia on March 30, 1995;
b)
the Corporation opened an employer account with the Canada
Customs and Revenue Agency in April 1995;
c)
the Corporation employed employees in its operations;
d)
the Corporation did not remit any source deductions for April and
May 1995;
e)
on June 5, 1995 the Minister issued a PD14 Notification to notify
the Corporation of the non-remittance of source deductions;
f)
on July 13, 1995 the Corporation remitted the appropriate source
deductions for April, May and June of 1995 to the Receiver
General;
g)
the Corporation remitted to the Receiver General the appropriate
source deductions for July and August 1995 on time as required by
the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as
amended (the "Act");
...
i)
on November 6, 1995 the Minister issued a PD14 Notification to
notify the Corporation of the non-remittance of source deductions
and gave 30 days for the Corporation to reply;
j)
the Corporation did not reply to the November 6, 1995 PD14
Notification;
k)
on January 6, 1996 the Minister issued a letter to notify the
Corporation of the non-remittance of source deductions and gave
20 days for the Corporation to reply;
...
m)
the Appellant was, at all material times, a director of the
Corporation;
n)
the Corporation failed to remit to the Receiver General federal
income tax withheld from wages paid to its employees, penalties
and interest relating to the unremitted federal tax;
o)
on January 5, 1999 the liability of the Corporation for the
unremitted federal tax, penalties and interest were registered
and certified in the Federal Court of Canada in the amount of
$6,208.99;
p)
on January 5, 1999 the Minister forwarded the Writ of Seizure and
Sale to the Sheriffs of British Columbia for seizure and sale of
the real property or immovables and the personal property or
movables within the jurisdiction of the Corporation; and
q)
on February 18, 1999 the Writ of Seizure and Sale was returned
nulla bona.
...
[3]
The issue is whether the Appellant is liable as a director for
the failure by Kootenay to remit to the Receiver General an
amount of federal income tax, with penalties and interest
thereon.
[4]
From the Notice of Appeal adopted by the Appellant as part of the
evidence, the Appellant states that while he was a director, he
acted with due diligence. He asserts that while he was a
director, he reviewed the Statements of Account for Current
Source Deductions. He states that the Statement dated
October 27, 1997 showed a balance owing of $3,958.96 with
$0.00 paid in 1996. The Appellant then said that he has records
which show that cheques in the amount of $3,900.00 were issued
for source deductions and that the CCRA did not record this
payment.
[5]
The Appellant also states that Kootenay's bookkeeper left
town and that the books and records were in disarray. He said
Kootenay's end of month statements for
March 31, 1996 and April 30, 1996 showed amounts
payable of $95.23 and $574.51, respectively. In his opinion,
these statements were misleading. He feels that he was misled as
to the status of Kootenay's accounts by his daughter Lesley
and her husband Raymond who were also directors, and this was
because they knew that he was about to lose his $25,000.00
investment in the business. He states that Lesley and Raymond
were involved in the day-to-day affairs of the business and that
he had a full-time job, a home design business and cared for his
wife and a mentally ill daughter.
JURISPRUDENCE
[6]
The foundation for the determination of whether the Appellant
exercised due diligence can be found in Soper v. The
Queen[1] in
which the Federal Court of Appeal described the standard which
was applicable. Robertson J.A. was of the opinion that the
standard of care in subsection 227.1(3) of the Act, was a
flexible one and was not governed by a single, unchanging
standard:
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".[2]
[7]
The Federal Court of Appeal in Canada v. Corsano[3] held that there is
one standard of care for all directors and that the application
of the standard is flexible because it weighs the varying and
different skills, factors and circumstances of a director in
determining whether he lived up to such standard.
[8]
It is also important to note that it is in Soper that the
Court established the distinction between inside and outside
directors. The Court defined the meaning of "inside
director" but omitted to define an "outside
director":
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.[4]
[9]
In Cadrin v. R.[5], the Federal Court of Appeal found it reasonable for
an outside director to rely on assurances from inside directors
that obligations were being met.
[10] In
Whitehouse v. The Queen[6], Rip J. stated on the subject of
subsections 227.1(3) of the Act and 323(3) of the
Excise Tax Act:
Whether a standard of care by a director has been met for
purposes of subsections 227.1(3) and 323(3) is predominantly a
question of fact to be resolved in the light of the personal
knowledge and experience of the director at issue. An entirely
possible approach on the part of a director may not help that
director's defence of an assessment but, unless there is a
reason for suspicion, the director is permitted to rely on the
day-to-day corporate managers to be responsible for payment of
statutory debt obligations. An outside director who knows or
suspects or ought to know something is amiss must take positive
steps to try to remedy the situation.[7]
ANALYSIS
[11] In
applying the standard of care in the present appeal, it is
necessary to take into account the Appellant's personal
knowledge, background and experience. The Appellant seems to be a
fairly intelligent, knowledgeable man based on his various
business ventures and employment placements. He is by profession
an architectural technician.
[12] He states
that subsequent to the bookkeeper's departure, the books and
records were a mess and he could not put things in order, as he
did not fully understand accounting procedures.
[13] The
Appellant said he was an outside director, and he was not
involved in the day-to-day management of Kootenay. He bolsters
this argument by stating his competing occupations and
endeavours. At one point he said that he was confident that his
daughter and her husband could run the business and states that
he was misled by them. At another point he said he did not have
full faith in his daughter and her husband and from the beginning
the relationship was difficult.
[14] There are
two areas of the evidence that are significant. The Appellant
said he first learned of the source deductions remission default
was in 1998 in a due diligence letter to Revenue Canada (Exhibit
R-2). However, to the contrary, from the evidence, the first
notice that there had been a source deductions remission default
that the Appellant was aware of was in July 1995
(Exhibit A-2). Otherwise from the company's
inception the Appellant knew there was a source deductions
problem. This evidence conflict was not satisfactorily
resolved.
[15] The
Appellant knew there were cash flow problems as he made several
cash advances including October 1995, (Exhibit A-2) and
April 4, 1996. While he apparently reviewed interim
monthly statements from Kootenay for 1995, as to source
deductions, he appears to have not inquired from his daughter,
his son-in-law or Revenue Canada as to the status of
the source deductions account thereafter.
[16] The
Appellant stated he received misinformation with respect to
directors' liability from his lawyer, stated he was misled
about source deductions by his daughter and son-in-law, and at
one point the bookkeeper permanently disappeared. Certainly his
daughter, son-in-law, his lawyer and his accountant[8] the alleged sources of
misinformation could have been subponaed to give evidence. None
were called.
[17] His
assertion he was an outside director is significantly qualified
in that (i) he was the principal investor, (the investment
was 75% of his personal resources); (ii) the corporation was
operated from the home of his daughter and son-in-law of which
the Appellant was the owner and landlord; and (iii) the
business operation was approximately 10 minutes from the
Appellant's own home. Further, he was in receipt of financial
reports from Kootenay for 1995, and he was the guarantor of the
corporation institution loans as well as he was the source from
time to time for funds to continue the corporate life of
Kootenay. He was not an outside director.
CONCLUSION
[18] I
conclude, the Appellant from his evidence did nothing in terms of
due diligence to ensure source deductions were remitted after the
corporation commenced business. He said he relied on his
daughter, son-in-law, the bookkeeper and the accountant. He says
he was intimidated by his daughter and son-in-law and yet in the
face of this intimidation he still provided continuing funds. He
said the documents provided to him misled him, yet he knew from
July 1995 there was a source deduction problem (Exhibit
A-1). The Appellant's claim that the Kootenay operation was
secondary to other matters in his life may well have been true
but the legal obligations of a corporate directorship were not
extinguished by these personal factors.
[19] The
Appellant did not exercise the degree of care, diligence and
skill to prevent the failure to remit by Kootenay that a
reasonable prudent person would have exercise in comparable
circumstances.
DECISION
[20] The
appeal is dismissed.
Signed at Ottawa, Canada, this 18th day of June 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE
NO.:
2000-3764(IT)I
STYLE OF
CAUSE:
Bruce G. Lockhart and
Her Majesty the Queen
PLACE OF
HEARING:
Castlegar, British Columbia
DATE OF
HEARING:
May 31, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge D. Hamlyn
DATE OF
JUDGMENT:
June 18, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Johanna Russell
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3764(IT)I
BETWEEN:
BRUCE G. LOCKHART,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 31, 2001 at Castlegar,
British Columbia, by
the Honourable Judge D. Hamlyn
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Johanna
Russell
JUDGMENT
The
appeal from assessment number 11922 dated June 10, 1999 issued
pursuant to section 227.1 of the Income Tax Act is
dismissed.
Signed at Ottawa, Canada, this 18th day of June 2001.
J.T.C.C.
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