Wallace v. The Queen, docket 1999-3346-IT-G

Date: 20000927

Dockets: 1999-654-IT-G; 1999-3346-IT-G

BETWEEN:

DARLENE WALLACE, MARK GOULET,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Teskey J.T.C.C.

[1] Both Appellants herein appeal assessments assessed pursuant to section 227.1 of the Income Tax Act (the "Act"), section 21.1 of the Canada Pension Plan, and subsection 46.1(1) of the Employment Insurance Act (director's liability) for the failure of Sarnia Communications Ltd. ("Sarnia") to remit source deductions, interest and penalties in the amount of $49,445.57.

Issues

[2] Both Appellants submit that they were not liable for the failure, as they claim that both exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances as provided in subsection 227.1(3) of the Act.

Undisputed Facts and Common Facts to Both Appellants

[3] In September of 1995, Windsor Cellular Ltd. ("Windsor") and Darlene Wallace ("Darlene") each purchased one half of the outstanding shares of Sarnia from the husband of Helen Otcanasek ("Helen").

[4] Mark Goulet ("Mark") is the owner, a director and president of Windsor, and both him and Darlene were the two directors of Sarnia.

[5] Sarnia continued to employ Helen as a bookkeeper and office manager after the completion of the share purchase. Sarnia hired Charlene Langis ("Charlene") in February 1996 as the bookkeeper and office manager, to work with or under Helen until the end of March 1996.

[6] Both Darlene and Mark believed that Charlene was a competent bookkeeper. In November 1995, a new accounting software system was purchased from Avolution Service, called Business Vision Accounting, that was considered the best software accounting package for both Windsor and Sarnia. The payroll service had an annual charge of $169 and updated diskettes were forwarded to Sarnia on December 30, 1996 for use in 1997 with an urgent notice and explanatory letter.

[7] When Helen left the employ of Sarnia at the end of March 1996, the National Bank of Canada was hired by Sarnia to prepare all payroll cheques and source deductions cheques and the processing of the same. This lasted until August 31, 1996 when Sarnia took back this responsibility.

[8] No source deductions were remitted for the months of September, October and November of 1996.

[9] Charlene was a witness on behalf of the Appellants. Her memory of many details was non existant. The computer software Business Vision printed all cheques for Sarnia after September 1st, 1996. All cheques after that date were signed by both Charlene and Darlene.

[10] Charlene said that the Vision Software would calculate the payroll and the source deductions and print out the cheques. She cannot explain why the September, October and November source deductions were not paid. She claims that everything that Vision Software generated was given to Darlene.

[11] She said that all debt obligations of Sarnia were discussed with Darlene and that she believed all were met.

[12] The Respondent called Connie Battersby as a witness. She was a trust officer with Revenue Canada and did an audit of Sarnia's books once notification of the bankruptcy of Sarnia was received. She attended at the offices of Coopers and Lybrand in Sarnia and compared the T4 returns to the source deductions sent to Revenue Canada for the year 1996 and found a large shortfall between the amounts deducted at source for employees and the amounts remitted.

[13] She said that the assessments in Tab 3 of Exhibit A-2 are all reconstructed assessments. She explained that when the records are amended, such as a new address, the old address is erased and that is why the first five assessments, dated April 16, 1996, April 30, 1996, May 9, 1996, April 16, 1997 and April 27, 1997, all show Coopers & Lybrand on the address, even though Sarnia did not declare bankruptcy until May 7, 1997.

[14] She also said that the assessment dated, April 16, 1996, was actually April 16, 1997. Page 2, Tab D5 of Exhibit A-1, is photocopies of three Sarnia cheques. Particulars are as follows:

— Cheque 991, dated 18 February 1997, payable to the Receiver General of Canada, for $5,821.72;

— Cheque 1088, dated 10 March 1997, payable to the Receiver General of Canada, for $6,580.46;

— Cheque 1111, dated 10 April 1997, payable to the Receiver General of Canada, for $5,221.20;

[15] The back of these cheques show that they were all banked by Revenue Canada on the 15th day of April 1997. I therefore conclude that all these cheques were forwarded to Revenue Canada at the same time and that the first two cheques, dated February 18, 1997 and March 10, 1997 were held until the April 10, 1997 cheque was signed and delivered to Revenue Canada.

[16] There were some 96 other cheques written between February 18, 1997 and March 10, 1997 and only 32 other cheques written between March 10, 1997 and April 10, 1997.

[17] Comparing these cheques with the assessments and the trust officer's testimony, I conclude that the first assessment against Sarnia is the one dated April 30, 1996, which shows a previous balance nil and assessed federal tax, provincial tax and penalty and interest for a total of $937.55 for failure to remit.

[18] The next assessment is dated May 9, 1996 and states that a payment of $5,176.72 was received late and penalty has been assessed. The summary shows that the April 30, 1996 assessment of $939.86 was outstanding plus the assessed penalties of $489.28, for a new balance of $1,429.14.

[19] The next two assessments are the ones dated April 16, 1996, which on reconstruction had a date error and should read April 16, 1997. It stated that a payment of $5,821.72 was late and a penalty was assessed, the payment being the December 1996 payment. In the summary, it shows a previous balance of $1,551.64, which would be the balance shown on the May 9, 1996 assessment, plus accrued interest. Together with the new penalty of $532.17, the new balance becomes $2,083.81.

[20] The other assessment, dated April 16, 1997, follows immediately thereafter, stating that a $6,580.46 payment was late and assessed a penalty, the payment being the January 1997 payment. Under the summary, it shows a balance of $2,083.81, plus the new penalty of $608.04, for a new balance of $2,691.85.

[21] The next assessment is dated April 29, 1997 and states that a payment of $5,221.10 was late and a penalty is assessed, the late payment being for March 1997. Under the summary, it shows a previous balance of $2,698.57 plus the new penalty of $472.12 for a new balance of $3,170.69.

[22] No return or payment for February or April of 1997 were ever made.

[23] The next assessment is after the bankruptcy and the result of the trust officer's review of Sarnia's records. In the summary, it shows a previous balance of $3,273.26, which is the previous assessed amounts plus accrued interest, together with federal tax, provincial tax and interest, making a new balance of $46,990.19 for the taxation year 1996.

[24] This then is followed by another assessment, the date being obviously incorrect, as it shows October 4, 1997, but the summary shows a previous balance of $46,990.19 and assessed further amounts for the year 1997.

[25] From this, I conclude that the only source deductions payment made since the National Bank of Canada stopped processing the payroll and making the payments are the three cheques described above, all processed on the same date, namely April 15, 1997.

[26] Mark gave evidence that Windsor uses the same payroll system in its five stores and that there has been no problem, that the system functions properly, and I accept this as factual.

[27] I accept the trust officer's statement that there were no remittances filed for September, October and November 1996 and February 1997 and that the three remittances were for December 1996, January and March 1997, as this is what Sarnia indicated on its remittance forms.

[28] I conclude that Sarnia ceased having the National Bank do the payroll and pay the source deductions for two reasons, namely as Windsor had the same Business Vision Software that could produce the figures and cheques, so why have the expense of having outside help, and more importantly, because of the continuous losses and cash flow problems, Sarnia had to have in National Bank's hands sufficient money each month to cover the source deductions.

[29] On September 20, 1996, Revenue Canada sent to Sarnia to the attention of Charlene, the Business Number to use for corporation income tax, payroll source deduction and GST and that the starting date was September 17, 1996 (Exhibit A-1, Tab D1). This letter had to be instigated by enquiries from Charlene, as there would be no reason for the National Bank to advise Revenue Canada that they were no longer responsible for source deductions.

Facts as they Relate Exclusively to Mark

[30] Mark is university educated, is a knowledgeable businessman and is active in the day-to-day management of Windsor that has five retail outlets, two in Windsor and three in London.

[31] Mark set up a system whereby Windsor's bank and Windsor would loan money to Sarnia as required. Sarnia was loosing money before the purchase and it was expected to loose money until Darlene hopefully would be able to turn the business around by increased sales. Mark had no day-to-day responsibility in the running of Sarnia.

[32] Mark met Darlene most months on an informal basis for about an hour. These meetings were concerned with sales.

[33] Although Mark was aware that Sarnia was loosing money, he was not concerned because he had money in place to cover losses and he had a system to transfer funds to Sarnia to cover anything that had to be covered, up to the point where Sarnia's borrowing was infringing on Windsor.

[34] In Mark's liability questionnaire, sent by his lawyer to the Appeals Officer, Windsor Tax Services Office (Tab 8 of Exhibit R-2), at Question 7, his answer demonstrated that he had relied upon Darlene.

[35] Question 8 of the same questionnaire and the subportion thereto and the answers are as follow:

8. Do you know whether or not the company had an adequate internal control system to ensure payment of deductions and/or GST to Revenue Canada?

NO KNOWLEDGE

If there was an adequate internal control system –

A. Who initiated the system?

NO KNOWLEDGE

B. What essential controls were in effect to give priority to the payment of deductions and/or GST?

NO KNOWLEDGE

C. Did the company maintain a separate bank account to keep deductions and/or GST separate from other funds?

NO KNOWLEDGE

D. If the company was experiencing financial difficulties –

(a) Did you obtain from the financial institution where the line of credit was extended, an enforceable undertaking to pay all amounts to the Crown when due?

NO

(b) If the company was in receivership or bankrupt, did you advise the receiver and manager or trustee in writing of the banking arrangements in place for the payment of the deductions and/or GST?

NO

[36] I accept that Mark did not go into source deductions nor the liabilities of Sarnia with Darlene. He relied upon Sarnia's bookkeeper and its managing director Darlene.

[37] The year-end of Sarnia was August 31. The final statement of August 31, 1996 was not produced and should have shown the outstanding obligations as shown in assessments dated April 30, 1996 and May 9, 1996, and I conclude that they did so show.

Facts as they relate exclusively to Darlene

[38] Darlene, who in 1995 also had no business management experience, was 36 years of age. She had a high school education and one year of college. She started to work for Windsor in early 1991 processing orders for cellular phones, programming phones and getting them ready for delivery. She also administered commercial accounts and then moved to outside sales and ended up in charge of the sales force.

[39] In September 1995, she became a fifty percent owner of money loosing Sarnia, together with her former employer, Windsor.

[40] Darlene relied upon Helen, the existing bookkeeper and office manager, the wife of the former owner, to advise her of her obligations as a director and to explain what government returns had to be filed monthly, mainly P.S.T., G.S.T., source deductions and corporation taxes.

[41] Darlene hired Charlene to replace Helen and relied upon Helen to train her.

[42] From Darlene's total evidence, I conclude that she knew that the company had and was loosing money monthly, and that her whole interest and attention was devoted to increasing sales in an attempt to rectify the problem.

[43] All cheques were signed by both Darlene and Charlene. They met in the office for about one hour weekly. Charlene would provide a batch of cheques for Darlene to co-sign. Each cheque payable to a supplier had the invoice attached to it.

[44] It was alleged that cheques to employees and the provincial and federal government had computer printouts.

[45] When Darlene was asked why the source deductions were not paid, she responded that she had "No idea".

[46] She described how Sarnia would obtain shortfalls in funds from Windsor through its employee Luba.

[47] It does not make sense that only a computer printout would accompany the cheques payable to the provincial and federal governments. The amount of the cheque is for the bookkeeper to calculate. The payments of those amounts are all accompanied with a return document. It is the return document for PST, GST and source deductions that should be accompanied with the cheques when presented for signing.

[48] The Borrower Declaration of Inventory, dated September 20, 1996, September 30, 1996 and December 30, 1996, respectively show accounts payable of $95,627.03, $141,835.53 and $155,247.67 and shortfalls of working capital of $50,891.42, $77,450,59 and $79,717.06 (Exhibit R-1).

[49] Darlene claims that she had no monetary concerns about Sarnia. I put this down that she had no interest in the obligations of Sarnia or herself as a director. She knew that some payments of source deductions were late and said that Helen or Charlene would let her know when late, and would say "Need to get this out". Darlene, when asked "What did you do to make sure the source deductions were made on time?", responded that she asked when they had to be paid.

The Law

[50] Section 227.1 of the Act sets out that where a corporation has failed to deduct and pay source deductions, that the directors are liable. Subsection 227.1(1) reads :

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.

[51] Subsection 227.1(2) and its subparagraphs set out procedural steps, which are not relevant herein.

[52] Subsection 227.1(3) is the due diligence provision and reads:

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.

[53] The leading Federal Court of Appeal decision on these provisions is Soper v. the Queen, [1998] 1 F.C. 124. Marceau J.A. said therein:

[1] I have had the advantage of reading, in draft, the reasons for judgment prepared by my brother Robertson. I am in complete agreement with his conclusion and disposition of the appeal. On the whole, I do not dissociate myself from the reasons he gives. His analysis of the duty of care, diligence and skill imposed by subsection 227.1(3) of the Income Tax Act [S.C. 1970-71-72, c. 63 (as enacted by S.C. 1980-81-82-83, c. 140, s. 124)] was, in view of the apparent lack of consistency in the jurisprudence, quite appropriate and welcome. I wish to say, however, that I based my conclusion on much simpler reasoning.

[2] Subsection 227.1(1) [as enacted idem; S.C. 1984, c. 1, s. 100] makes a director liable for the failure of his or her corporation to remit the monies withheld as taxes and other source deductions from its employees' salaries, and subsection 227.1(3) relieves a director of his or her liability if he or she can show that he or she exercised a certain degree of care, diligence and skill to prevent such failure. By these provisions, Parliament, I think, has imposed on a director of a corporation a completely new, separate and positive duty. Such duty is owed not to the corporation but to the Crown, and consists of an obligation to do what one reasonably can to prevent such failure from occurring. I simply cannot imagine that such a duty may ever be seen as having been fulfilled by a director who, as here, has never put his or her mind to the requirement and has remained completely uninterested and passive with respect to it.

[3] I, too, would dispose of the appeal as suggested by Mr. Justice Robertson.

[54] Robertson J.A.,in lengthy reasons which were agreed with by Linden J.A., said in numerous numbered paragraphs, as follows :

[40] 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).

[41] 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".

...

[44] At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. 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.

...

[50] In order to satisfy the due diligence requirement laid down in subsection 227.1(3) a director may, as the Department of National Revenue has noted, take "positive action" by setting up controls to account for remittances, by asking for regular reports from the company's financial officers on the ongoing use of such controls, and by obtaining confirmation at regular intervals that withholding and remittance has taken place as required by the Act: see Information Circular, No. 89-2, supra, at paragraph 7.

[51] Likewise, some commentators have advised directors that, if they wish to be able to rely successfully on the due diligence defence, it would be wise for them to consider undertaking a number of "positive steps" including, in certain circumstances, the establishment and monitoring of a trust account from which both employee wages and remittances owing to Her Majesty would be paid: see e.g. Moskowitz, supra, at pages 566-568.

[52] While such precautionary measures may be regarded as persuasive evidence of due diligence on the part of a director, in my view, those steps are not necessary conditions precedent to the establishment of that defence. This is particularly true with respect to the establishment of a separate trust account for source deductions to be remitted to the Receiver General. It is difficult to hold otherwise given the fact that Parliament abolished that express requirement for the purpose of achieving other legislative goals. Above all, a clear dividing line must be maintained between the standard of care required of a director and that of a trustee. Accordingly, an outside director cannot be required to go to the lengths outlined above. As an illustration, I would not expect an outside director, upon appointment to the board of one of Canada's leading companies, to go directly to the comptroller's office to inquire about withholdings and remittances. Obviously, if I would not expect such steps to be taken by the most sophisticated of business-persons, then I would certainly not expect such measures to be adopted by those with limited business acumen. This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. This falls within the fourth proposition in the City Equitable case: see discussion supra, at page 146-147. The question remains, however, as to when a positive duty to act arises.

[53] In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties. For example, in Byrt (H.) v. M.N.R., [1991] 2 C.T.C. 2174 (T.C.C.), an outside director signed financial statements revealing a corporate deficit and thus he knew, or ought to have known, that the company was in financial trouble. The same director also knew that the business integrity of one of his co-directors, who was the president of the corporation too, was questionable. In these circumstances, having made no efforts to ensure that remittances to the Crown were made, the outside director was held personally liable for amounts owing by the corporation to Revenue Canada. According to the Tax Court Judge the outside director had, in contravention of the statutory standard of care, failed to "heed what is transpiring within the corporation and his experience with the people who are responsible for the day-to-day affairs of the corporation" (supra, at page 2184, per Rip T.C.J.).

...

[56] It is important to note that whether a company is in serious financial difficulty, such as to suggest a problem with remittances, cannot be determined simply by the fact that the monthly balance sheet bears a negative figure. For example, many firms operate on a line of credit to deal with fiscal fluctuations. In each case it will be for the Tax Court Judge to determine whether, based on the financial information or documentation available to the director, the latter ought to have known that there was a problem or potential problem with remittances. Whether the standard of care has been met, now that it has been defined, is thus predominantly a question of fact to be resolved in light of the personal knowledge and experience of the director at issue.

[55] Robertson J.A. in Ann Drover v. the Queen, at 98 DTC 6378 after reviewing some of his comments in Soper (supra) said at paragraph [7] thereof :

[7] It could not be expected that Soper would provide a ready answer to all questions dealing with directors' liability. At the same time, it did attempt to provide some general principles in order to fill the analytical void that existed. The "objective subjective " standard of care outlined above focuses on whether the surrounding circumstances are such that a person of the director's ability and business experience was under a positive duty to act as to ensure that the corporation's obligation to remit withholding taxes was fulfilled. Certainly, such a duty exists if a director is aware or should have been aware of a remittance problem, and is breached if no steps are taken to ensure compliance with the legislation. As the taxpayer in Soper was held to be under a positive duty to act and had done nothing to fulfil that obligation, the due diligence defence was not available. In these circumstances, it was unnecessary for this Court to consider what steps the director in that case should have taken once the positive duty to act arose.

[56] Noel J.A. of the Federal Court of Appeal in Wheeliker v. The Queen, [1999] 2 C.T.C. 395, noted that Robertson J.A. in Soper (supra) expressly stated that it did not establish a different standard of care for inside and outside directors. He then said in paragraphs [45], [46] and [50]:

[45] It is true that in Soper, this Court wrote that "the standard of care laid down in subsection 227.1(3) of the Act is inherently flexible". It is obvious, however, on the reading of the decision, that it is the application of the standard that is flexible because of the varying and different skills, factors and circumstances that are to be weighed in measuring whether a director in a given situation lived up to the standard of care established by the Act. For, subsection 227.1(3) statutorily imposes only one standard to all directors, that is to say whether 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.

[46] I agree with counsel for the appellant that the rationale for subsection 227.1(1) is the ultimate accountability of the directors of a company for the deduction and remittance of employees' taxes and that such accountability cannot depend on whether the company is a profit or not-for-profit company, or I would add whether the directors are paid or not or whether they are nominal but active or merely passive directors. All directors of all companies are liable for their failure if they do not meet the single standard of care provided for in subsection 227.1(3) of the Act. The flexibility is in the application of the standard since the qualifications, skills and attributes of a director will vary from case to case. So will the circumstances leading to and surrounding the failure to hold and remit the sums due.

...

[50] The evidence revealed that no positive steps were taken to prevent the Corporation's failure to remit current and future source deductions when it started to experience financial difficulties. At the January 13 and February 3, 1993 meetings, no action was taken by the directors with respect to the matter.

Analysis concerning Mark Goulet

[57] This Appellant was a knowledgeable businessman, well educated and aware of his obligations as a director.

[58] His company, Windsor, became a half owner of Sarnia with Darlene purchasing the other half. He knew that Darlene had virtually no business experience. He had known Darlene for five years and he knew that her strong suit was sales.

[59] Darlene was to be the managing director of Sarnia. Mark was also a director, as in essence he was a half owner.

[60] Although Mark had cheque signing authority, he never signed any cheques. Mark made arrangements with and through Windsor to provide money to Sarnia. He knew that Sarnia, prior to their purchase, was loosing money and that it would take continuous injections of money to keep Sarnia afloat.

[61] Both Windsor and Darlene each injected $25,000, and as of January 15th, 1996, Sarnia had borrowed from Windsor $50,000 and from Windsor's bank $55,000, with account payable of $53,530.75, together with outstanding cheques for a total of $164,427.75, some $53,073.87 over assets.

[62] Mark's position is that he put in place good computer software, and his co-director was the managing director. He arranged for Sarnia to borrow money from Windsor and that is all the obligation he had, since he relied on Darlene and Sarnia's bookkeeper and manager, he had satisfied the due diligence test.

[63] I disagree with this position. Mark knew that Sarnia had been loosing money prior to taking it over and knew that Sarnia was borrowing heavily from Windsor and through Windsor large amounts of money.

[64] By July 31, 1996 the year end of Sarnia, he would know that Sarnia had borrowed $140,000 and had accounts payable of $93,287.03, I am satisfied that is one of the reasons National Bank ceased doing payroll and deductions in August 1996.

[65] Mark made no enquiries whatsoever in regards to accounts payable, source deductions, or anything to do with the financial position of Sarnia of either Darlene or Charlene. The monthly meetings were informal and only with Darlene, who had no management experience and the meetings only dealt with sales.

[66] At the very least, he should have been enquiring as to whether the source deductions were being remitted monthly and on time after August 30, 1996. He had no idea how Sarnia was being run and made no attempt to find out, or even enquire as to what system Darlene had put in place to prevent the failure to make the necessary source deduction payments, other than the hiring of a bookkeeper and using state of the art software. This does not mean creditors are going to be paid properly or by order of priority.

[67] In essence, he set up a software system that would tell Sarnia the amount of the source deductions and how Sarnia could draw money, but no system to prevent Sarnia from deliberately or accidentally defaulting in payment of the source deductions.

[68] He never enquired about possible systems or even if the deductions were being paid, his only interest was sales. He left the running of Sarnia up to an inexperienced managing director, who was also basically only interested in sales.

[69] Under the circumstances herein, Mark has not exercised the degree of care, diligence and skill to prevent the failures that occurred, that a prudent person would have done in comparable circumstances, with his knowledge, ability and background.

[70] His appeal is dismissed with costs.

Analysis Concerning Darlene Wallace

[71] This Appellant's position is that Sarnia used state of the art computer software to calculate payroll and source deductions, had someone who appeared to be a qualified bookkeeper/office manager and financial assistance available for all necessary liabilities, therefore she had done all that was necessary. I disagree.

[72] As the managing partner, it was up to her to ensure that the employees were in fact performing their assigned tasks. Darlene totally abdicated her responsibility to Charlene. She would only spend about one hour a week with her and the rest of her time and energies were directed to sales.

[73] Weekly, Darlene would sign all cheques presented to her. Cheques for suppliers were accompanied by invoices. A very simple system would have been to require the government remittance forms to accompany the various cheques. If this had been in place, then in September, she would not have had to assume source deductions were being paid. She knew that they had to be done monthly. All she had to do on the Wednesday before the 15th of September 1996 is say: "Where is the cheque and the payment for the source deductions?", and on each and every Wednesday before the 15th of each month thereafter.

[74] I find that Darlene just had no interest in management of this type and simply worked on sales.

[75] Also, if her co-knowledgeable director had made the most minimal enquiries of her concerning source deductions, it might have been enough to trigger the payment of the source deductions if in fact, they were merely overlooked and not being deliberately withheld.

[76] Charlene claims that she went over the list of payables with Darlene every week. When the pay cheques were being signed, I would expect at the very least that Darlene should have enquired about the source deductions for the prepared cheques.

[77] Darlene fell down totally on her position as managing director and her inexperience is not a defence of due diligence as provided by the Act.

[78] Her appeal is also dismissed, with costs, however only one set of costs is awarded for the trial.

[79] In summary, the hiring of a bookkeeper and the arranging of available credit are not positive steps to prevent a corporation's failure to remit. Herein, both directors took no positive steps to prevent Sarnia's failure to remit the source deductions.

Signed at Ottawa, Canada, this 27th day of September, 2000.

"Gordon Teskey"

J.T.C.C.