Date: 20000531
Docket: 98-2650-IT-I
BETWEEN:
KEITH WHYBROW,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Scott Simser
____________________________________________________________________
Reasonsfor
Judgment
(Delivered orally from the bench at
Toronto, Ontario, on April 18, 2000)
McArthur J.T.C.C.
[1]
This is an appeal wherein the Appellant as director of 954228
Ontario Limited was assessed by the Minister of National Revenue
in the amount of approximately $10,000 plus a further $4,000 in
interest and penalty for having deducted income tax at source
from employees but not having remitted that money to the
Minister. The Appellant states that he met the standard necessary
to be exempted from liability under the due diligence provisions
of subsection 227.1(3) of the Income Tax Act. Also, the
Appellant states that he resigned as director of 954228 on
March 21, 1995, more than two years before the Notice of
Assessment dated July 21, 1997 and is therefore exempt under
subsection 227.1(4) of the Act. The Appellant appeared on
his own behalf and was the only witness.
[2]
The facts, as I find them, include the following. The Appellant,
from the inception of 954228 in 1992 was a 25% shareholder and
director. The corporation was carrying on a pool room business
under the name of Blues & Cues. The company lost money in
1992 and 1993 and showed a small profit of $1,600 in 1994. The
Appellant and Gene Lew were the operating partners until February
or March, 1995 when the financial partners, brothers Joe and Tom
Kovacevic, took over because the brothers had become dissatisfied
with the management by the Appellant and Mr. Lew.
[3]
Blues & Cues had 20 to 30 employees and failed to remit
income tax deductions, CPP contributions and EI premiums for the
months of July, September and December 1994 and for a further
three months in 1995, including I believe February and March. By
March 1995, the Appellant was no longer an active manager. He
states in his Notice of Appeal that after that date, he
consistently and repeatedly demanded accounting information from
Mr. Kovacevic and requested that he attend to all amounts
owing to all government departments to no avail. In or about
July 1995, through the Appellant's efforts, the
shareholders received an offer to purchase the business from a
third party. Mr. Kovacevic exercised his right to match the
third party offer pursuant to the Financing Agreement and later
failed to close the transaction as required by that Agreement,
thereby denying the Appellant and the company the opportunity to
pay all the outstanding debts.
[4]
In April 1996, the Appellant received letters from Revenue Canada
regarding director's liability from source deductions owing,
to which he promptly replied in each case. The Appellant relies
on an apparent fax (Exhibit A-4) from himself to
Paul Chadwick dated March 21, 1995, which reads as
follows:
TO:
PAUL CHADWICK
FROM: KEITH WHYBROW
RE:
954228 ONTARIO INC T/A BLUES & CUES MISSISSAUGA
PAUL,
I am resigning as a Director of the above mentioned company
effectively immediately. Would you please make the appropriate
entries and filings.
Yours sincerely,
Keith Whybrow
Original + sent via mail
[5]
The position of counsel for the Respondent is that this
resignation is not authentic and is a fabrication. I agree with
that position for the following reasons. There is no
corroborating evidence of its authenticity. No original was
produced and it is unsigned. There is no copy of the original nor
confirmation that it was faxed and it was purportedly sent to the
corporation's solicitor Mr. Chadwick, but never acted
upon. In this regard it is somewhat unclear whether
Mr. Chadwick was acting solely for the Kovacevic brothers or
for the company. His role was blended somewhat. In his detailed
account (Exhibit A-5), Mr. Chadwick refers to the following
items on March 21 and 22, 1995:
March
21/95
TELEPHONE CONVERSATION WITH CLLIENT
to Keith re issue of guarantee of $20,000 at bank;
March
21/95
MEETING WITH CLIENT
meet with Tom Kovacevic and advise that cannot release minute
books; agreed to provide with copies of proceedings in minute
book and draft shareholders agreement;
March
22/95
TELEPHONE CONVERSATION WITH CLIENT
to Gene and Keith re corporate issues;
March
22/95
DOCUMENT PREPARATION
prepare document;
March
22/95
CORRESPONDENCE
letter to Tom re minute book;
March
22/95
TELEPHONE CONVERSATION WITH CLIENT
to Keith re status as officer and director;"
With such detail, it is unbelievable that Mr. Chadwick
would not have referred to something as important as a
director's resignation. By letter dated March 22, 1995
Mr. Chadwick wrote as solicitor for the Kovacevics and
offered the Appellant $10,000 for his resignation and other acts.
The Appellant did not accept the offer. That letter (Exhibit A-6)
reads in part as follows:
... We have been instructed by Tom Kovacevic and Joe
Kovacevic to take such steps as may be necessary or desirable to
the end that Keith Whybrow and Gene Lew cease to be directors,
officers and shareholders of the corporation and have no further
right, title and interest whatsoever in Blues and Cues in
Mississauga.
[6]
In 1996, the Appellant commenced, I believe, a small claims
action against Tom Kovacevic and states in his statement of claim
that he is a shareholder and director of 954228. It is unlikely
that the Appellant would resign leaving the Kovacevic brothers
majority directors. After March 1995, he remained very active in
trying to stay on top of the finances of the operation. It is
important to note that it was while he was an active inside
director that most of the unremitted amounts were incurred. The
damage was done while the Appellant was in control of the
financing.
[7]
With respect to the defence of due diligence, I also find that
the Appellant fails. The decision of the Federal Court of Appeal
in Soper v The Queen[1] gives guidance with respect to the principles
governing the conduct of directors when applying the due
diligence test. These principles include the standard of care is
flexible and the analyst must look at all the circumstances. The
standard of care for director's liability is partly objective
and partly subjective. Once a director is aware or should be
aware that there are problems with remittances, he or she has a
positive duty to act. An inside director will be held to a higher
standard of care than an outside director.
[8]
The Appellant was aware in 1994 of a problem with remittances and
he had a positive duty to act. He did act vigorously after April
1995 but then the damage had been done and it was too late. He
had been deeply involved in the day-to-day management of the
company before April 1995 but he chose not to have the arrears to
the Minister brought up-to-date during this period. His actions,
after he was no longer active in management, did not serve a
useful purpose.
[9]
This case, like most director liability cases, turns on its
facts. The Appellant was one of two operating managers of a
billiard and bar establishment. During his period of
responsibility, the business had between 20 and 30 employees. The
Appellant was aware that payroll deductions were collected but
not remitted to Revenue Canada. Obviously, the Appellant had a
priority list of creditors and part of the money collected for
Revenue Canada from employees' wages was used to pay others.
Judge Bowman's approach to the due diligence defence is of
assistance. In Jess v The Queen,[2] he stated:
What would a reasonable person in the position of the
Appellant have done at the time to ensure that the government was
paid its tax?
In Cloutier et al v M.N.R., 93 DTC 544 I put the
approach which I follow in these cases at pages 545 and 546:
The question therefore becomes one of fact and the court must
to the extent possible attempt to determine what a reasonably
prudent person ought to have done and could have done at the time
in comparable circumstances. Attempts by the courts to conjure up
the hypothetical reasonable person have not always been an
unqualified success. Tests have been developed, refined and
repeated in order to give the process the appearance of
rationality and objectivity. But ultimately the judge deciding
the matter must apply his own concepts of common sense and
fairness.?? It is easy to be wise in retrospect and the court
must endeavour to avoid asking the question "What would I
have done, knowing what I know now?" It is not that sort of
ex post facto judgment that is required here. Many
judgment calls that turn out in retrospect to have been wrong
would not have been made if the person making them had the
benefit of hindsight at the time.
[10] In the
present situation the Appellant for the most part was an inside
director as described in Soper. He knew the business was
in financial difficulty. He knew that it had not remitted several
months of employee deductions. Up to February 1995, he took no
action, or at least insufficient positive action, to have Revenue
Canada brought up-to-date. When he was forced out of management
in March 1995, when the business was already some five months in
arrears of remittances, he began to request the new management to
make up the arrears. This is not due diligence. The appeal is
dismissed.
Signed at Ottawa, Canada, this 31st day of May, 2000.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
98-2650(IT)I
STYLE OF
CAUSE:
Keith Whybrow and Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
April 18, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
May 8, 2000
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Scott Simser
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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