A-757-97
BETWEEN:
HER
MAJESTY THE QUEEN
Appellant
AND:
GEORGE
WHEELIKER
Respondent
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REASONS FOR JUDGMENT
NOËL J.A.
[1] These are appeals from the October 3, 1997
decision of O’Connor T.C.C.J. of the Tax Court of Canada,
wherein he allowed an appeal by the respondents from an assessment pursuant to
subsection 227.1(1) of the Income Tax Act (the “ITA”) for
unremitted federal income tax withheld from the wages paid to the employees of
Louisbourg Harbourfront Park Ltd. (the “Corporation”).
[2] The appeals were heard together and these
Reasons for Judgment are applicable to all. One set of Reasons will be issued
and will be filed in each of these cases.
[3] The Corporation was incorporated in 1980 under
the Companies Act, R.S.N.S. 1967 c.42, as amended (the “Act”). It was a
non-profit corporation whose mandate was the enhancement and development of
economic activity in the Town of Louisbourg. At all relevant times to this
appeal, the Louisbourg Harbourfront Society (the “Society”) owned 96% of the
shares of the Corporation, with the remaining 4% being held by prior directors
of the Corporation in trust for the Society.
[4] The Articles of Association of the Corporation
(“Articles”) limited the number of directors to a maximum of seven and required
that each director hold at least one share of the Corporation. None of the
respondents owned a share of the Corporation as required by the Articles but
all acted as directors. Further, by March 1993, there were nine directors. No
remuneration was paid to the respondents in respect of their services.
[5] During the period January 1992 to October 1993,
the Corporation failed to remit to the Receiver General of Canada federal
income tax withheld from the wages paid to the Corporation’s employees in the
amount of $17,886.91. Pursuant to subsection 227.1(1) of the ITA
the respondents Corsano, Wheeliker and Maindiratta were assessed by the
Minister of National Revenue (the “Minister”) for source deductions not
remitted for the period from January 1992 to October 1993. The respondents
Lawrence, MacDonald and Parsons were assessed for the period from November 1992
to October 1993. Section 227.1 of the ITA reads:
|
(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.
...
(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. [emphasis added]
|
(1)
Lorsqu’une corporation a omis de déduire ou de retenir une somme, tel que
prévu au paragraphe 135(3) ou à l’article 153 ou 215, ou a omis de remettre
cette somme ou a omis de payer un montant d’impôt en vertu de la Patrie VII
ou de la Partie VIII pour une année d’imposition, les administrateurs
de la corporation, à la date à laquelle la corporation était tenue de
déduire, de retenir, de verser ou de payer la somme, sont solidairement
responsables, avec la corporation, du paiement de cette somme, incluant tous
les intérêts et toutes les pénalités s’y rapportant.
[...]
(3) Un administrateur n’est pas responsable de
l’omission visée au paragraphe (1) lorsqu’il a agi avec le degré de soin, de
diligence et d’habilité pour prévenir le manquement qu’une personne
raisonnablement prudente aurait exercé dans des circonstances comparables.
[mon souligné]
|
[6] O’Connor T.C.C.J., relying on the decision of
this Court in Her Majesty The Queen v. Kalef, held that the definition of “director” for the
purposes of subsection 227.1(1) means a de jure director as defined by
the incorporating legislation of the corporation. While stating that “there
[was] little doubt the [respondents] acted as directors by attending directors’
meetings and managing the Corporation,” O’Connor T.C.C.J. held both that the respondents were not de jure
directors as defined by the Act and that de facto directors were not
directors under the Act. As a result, the respondents were not subject to the
vicarious liability imposed by subsection 227.1(1) of the ITA.
[7] The ITA does not define “director” either
for the purposes of the ITA as a whole or for the purposes of section
227.1. As this Court held in Kalef, it is therefore appropriate to look
to the Corporation’s incorporating legislation for guidance as to who is a
“director” for the purposes of section 227.1. Under paragraph 2(1)(f) of the
Act,
“director”
includes any person occupying the position of director by whatever
name called; [emphasis added]
I agree with the conclusion of the Tax Court judge that the words
“occupying the position of director by whatever name called” brings within the
definition a director irrespective of how this position may be designated.
This is consistent with the approach of the Chancery Division in In re
Lo-Line Electric Motors Ltd. where the Court interpreted the identical
definition under the U.K. Companies Act, 1985. According to the Court:
... the
words “by whatever named called” show that the subsection is dealing with
nomenclature; for example where the company’s articles provide that the conduct
of the company is committed to “governors” or “managers.”
[8] As section 2(1)(f) speaks simply to nomenclature
and is inclusive, it is therefore necessary look to the provisions of the Act
to determine the legislative intent with respect to those who have under the
law the status of “director.”
[9] Before turning to the relevant provisions, I
note that the Act nowhere speaks of de facto or de jure
directors. Rather it uses the term director in various contexts, some of which
suggest a reference to a director who is qualified to act as such under the
Act, and others which refer to a person who in fact acts as such without being
so qualified. The question to be answered is whether the word director only
connotes a person qualified to act as such under the Act.
[10] A useful starting point is a consideration of the
qualifications imposed by the Act. Section 95 is the most important provision
in this respect. It provides in part that:
(1) It shall be the duty of every
director who is by the regulations of the company required to hold a specified
share qualification, and who is not already qualified, to obtain his
qualification within three months after his appointment, or such shorter
time as is fixed by the regulations of the company.
...
(3) The office of director of a
company shall be vacated, if the director does not within three months from
the date of his appointment, or within such shorter time as if fixed by the
regulations of the company, obtain his qualification, or if after
the expiration of such period or shorter time he ceases at any time to hold
his qualification, and a person vacating office under this Section shall be
incapable of being re‑appointed director of the company until he has
obtained his qualification.
(4) If, after the expiration of the
said period or shorter time, any unqualified person acts as a director of the
company, he shall be liable to a penalty not exceeding twenty‑five
dollars for every day between the expiration of the said period or shorter time
and the last day on which it is proved that he acted as a director. [emphasis
added]
[11] The Articles of Association provide in turn:
106. The qualification of a Director
shall be the holding of at least one share in the Company of a class entitled
to vote at general meetings of the Company. A director may be appointed and act
before acquiring a qualifying share, but, if he has not acquired it within three
months of his appointment or election, he shall be deemed to have vacated
the office of Director.
...
111. The office of a Director
shall ipso facto be vacated:
(a) if he becomes bankrupt, makes an
authorized assignment, suspends payment, or compounds with this creditors; or
(b) if he is found a lunatic or becomes
of unsound mind; or
(c) if he ceases to hold the number
of shares required to qualify him for office or does not acquire them within
three months after his election or appointment; or
(d) if by notice in writing to the
Company he resigns his office; or
(e) if he
is removed by special resolution as provided by Article 116. [emphasis added]
[12] Subsection 95(1) of the Act imposes upon a director
the obligation to own the number of shares prescribed by the regulations of the
company and provides for a grace period of three months to obtain this
qualification. Should a director not obtain the prescribed share qualification
within the specified time, or should he or she lose this qualification,
subsection 95(3) stipulates that “the office of director ... shall be vacated”
and the person concerned “shall be incapable” of holding the office until he or
she has obtained the qualification. The Articles reinforce the effect of the
disqualification by providing that the person concerned “shall be deemed to
have vacated the office of Director” and “the office of Director shall ipso facto be vacated.”
[13] However, subsection 95(4) acknowledges that persons
may act as directors without being qualified, and creates a liability for a
penalty for every day during which the breach persists.
[14] The Act also seeks to protect those who in good
faith contract with persons who purport to act as directors while not qualified
to do so. Section 30 is a codification of the common law “indoor management
rule.” It provides:
A company or a guarantor of an
obligation of the company may not assert against a person dealing with the
company or with any person who has acquired rights from the company that ...
(b) the persons named in the most recent
notice sent to the Registrar under subsection (1) of Section 98 are not the
directors and officers of the company; ...
Thus, a company is estopped from
asserting that a person who is held out as a director was not qualified to act
as such. The result is that in such circumstances, the company will be bound
as it would be if the person had been qualified.
[15] Similarly, section 97 validates the acts of a
director despite the fact that it is later found that he or she lacked
qualification at the relevant time:
The acts of a director or
manager shall be valid notwithstanding any defect that is afterwards discovered
in his appointment or qualification. [emphasis added]
Similar provisions are common in Canadian corporate legislation and
exist so as to protect third parties and ensure a degree of certainty with
respect to the effect of corporate transactions. However, section 97 does not have the effect of validating the
appointment of unqualified directors; rather it validates the “acts” of an
improperly appointed director.
[16] It is therefore apparent that the Act recognizes
that persons will act as directors without being qualified to do so, and that
the legislator has, despite this absence of qualification, chosen to validate
those acts in the circumstances that we have seen. The question then becomes
whether this statutory recognition of specified acts by persons who act as
directors despite their lack of qualification also has the effect of making
them directors under the Act.
[17] In my view, section 95 of the Act and the relevant
sections of the Articles would be rendered meaningless if the Act was construed
as granting the status of director to those who are not qualified. A director
is one who meets the requirements imposed under the Act including those
prescribed by section 95. Indeed, a penalty is imposed on those who act as
director without meeting those requirements. It would be odd if those who
breach the Act by acting as directors while not qualified thereunder would
nevertheless have the status of director under the Act. As a matter of
legislative intent, it seems unavoidable that only those who meet the
requirements prescribed by the Act, are directors under the Act.
[18] In my view, the Act cannot be construed as giving
those acting as directors without the requisite qualifications the status of
director, nor can it be said that the common law has provided such individuals
this status. What the courts have done over the years, however, is devise
remedies to assist third parties who deal with persons who act as directors or
who are held out by the company as directors although they lack the required
qualification or authority.
[19] As I understand it, one principle underlying these
common law remedies is that a person who has not obtained the requisite qualifications,
is prevented from pleading this failure in order to escape liability attaching
to a director. As held by Richards J.A. in MacDonald v. Drake,
I cannot assent to the contention that a director,
who, with his consent, has been elected and has acted as a director, should,
merely because he was not qualified to hold the office, escape liability that
he would have incurred if he had been qualified. The true principle seems to
be that a man cannot take advantage of his own wrong.
It being recognized in this instance that the respondents acted as
directors, in conformity with the will of the shareholders, I see no reason why
they should be allowed to assert their lack of qualification to escape the
liability cast upon directors by virtue of section 227.1 of the ITA.
[20] Thus, while I would agree with the conclusion of the
Tax Court judge that those acting as directors without having the requisite
qualifications are not directors under the Act, I do not believe that the respondents
can raise this lack of qualification as a defence to their liability under
subsection 227.1(1) of the ITA.
[21] On the issues of the applicable standard of care and
its application to the facts of this case, I agree with the reasons of my
colleague, Létourneau J.A. and would dispose of these appeals as he suggests.
“Marc Noël”
J.A.
“I concur.
Alice Desjardins J.A.”
[22]
[3] The
learned Tax Court judge adopted the respondents' contention that the notion of
director found in the Nova Scotia Companies Act refers to the concept of
de jure director only and does not incorporate that of the de facto
administrator recognized by the common law in Nova Scotia. On appeal, both the
appellant and the respondents from their respective perspective have argued
strenuously against and in support of this legal finding by the Tax Court
judge. With respect, I think the respondents' contention is a red herring
which has contributed to mask the real issue in the present instance and the
proper approach to be taken to the determination of the respondents' liability
towards Revenue Canada for the remittances due. As is often the case with a
red herring, it gives rise to most stimulating but generally irrelevant
discussions.
[4] As a
matter of fact, the governing provision which is in dispute here is subsection
227.1(1) of the Act. It is the scope of this provision which falls to be
determined, not the scope of the Nova Scotia Companies Act. Much of the
focus has been put, unnecessarily in my view, on the ambiguous and free use of
the word "director" in the Nova Scotia Companies Act and on
the proper scope and interpretation of that Companies Act. This is, as
we shall see, the result of the respondents misconstruing an earlier decision
of this Court and the purpose of subsection 227.1(1) of the Act.
[5] Subsection
227.1(1) of the Act imposes liability on all the directors of a corporation who
have failed to remit to Revenue Canada the sums due. The word
"directors" in the said subsection is unrestricted and unqualified.
It is a basic rule of legislative drafting, based on the corresponding rule of
interpretation which conditions drafting, that the use of a generic word
without restrictions or qualifications conveys the legislator's intention that
the word be given a broad meaning. Here, by using the word
"directors" without qualifications in subsection 227.1(1), Parliament
intended the word to cover all types of directors known to the law in company
law, including, amongst others, de jure and de facto directors.
[6] It
bears repeating that there is no disagreement between the parties, and the Tax
Court judge so found, that the Nova Scotia common law has developed the concept
of de facto director. I hasten to add that, in this regard, the legal
situation is practically the same in all common law jurisdictions across Canada.
[7] Yet,
notwithstanding that, the Tax Court judge concluded that the word
"directors" in subsection 227.1(1) of the Act refers only to de
jure directors. In coming to such conclusion he relied first upon the
decision of this Court in Her Majesty the Queen v. Kalef to which he gave an erroneous
interpretation. This is apparent from the following excerpts at pages 8 and 9
of his decision:
Since the jurisprudence is clear that, for the purposes of subsection
227.1(1) of the Act, to discover the meaning of "director" one must
look to the incorporating legislation of the Corporation, one should do so and
avoid general principles of common law. Therefore, although they may have been
de facto directors at common law, they were not under the Companies
Act and should not be held vicariously liable under section 227.1 of the
Act ...
...
It seems
clear that in analyzing the definition of "director" in the Ontario
Business Corporations Act, which definition is practically identical to
paragraph 2(1)(b) of the Companies Act, the Federal Court of
Appeal found that the definition referred to a de jure director.
[8] Let me
say outright that our Court never decided in the Kalef case that the
definition in the Ontario Business Corporations Act referred to a de
jure director. The Court was called upon to determine if the director of a
corporation ceases to be a director for the purpose of subsection 227.1(4) of
the Act when a Trustee in Bankruptcy is appointed. It concluded that Mr. Kalef
did not fulfil any of the requirements under the Ontario Business
Corporations Act which would have indicated that he had ceased to be a
director. Therefore, he had remained a director notwithstanding the
appointment of a Trustee.
[9] In
addition, our Court never decided that, in interpreting the word
"director" in subsection 227.1(1) of the Act, one can only look at
the company's incorporating legislation and not at the common law. Here is
what our colleague McDonald J.A. wrote:
The Income Tax Act neither defines the term director, nor establishes
any criteria for when a person ceases to hold such a position. Given the
silence of the Income Tax Act, it only makes sense to look to the
company's incorporating legislation for guidance.
(my
underlining)
[10] There was
no need in that case to look at the common law because the statutory law
determined when a person ceased to be a director.
[11] In
addition, as our Court indicated, the statutory law is to be looked at
"for guidance". It is certainly not exclusive and determinative,
especially in the circumstances of the present appeal where the issue is not to
determine for the purpose of section 227.1 of the Act whether a person had
ceased to be a director (an issue generally governed by statutory provisions),
but rather whether a person ostensibly acted as a director and therefore was a de
facto or acting director (an issue generally governed by common law
principles). To use the terms of McDonald J.A., "it only makes sense for
guidance" to look at the body of law which can provide the answer to the
silence of the Act. In the present instance, such body is the common law.
[12] I should
reiterate here that what is in issue through subsection 227.1(1) of the Act is
the liability of the directors of a company, as directing minds of that
company, for their own failure to prevent the prohibited act, not whether they
engage the responsibility of the company, as I think they do. As early as
1906, the Manitoba Court of Appeal in MacDonald v. Drake rejected the defendants' contention
that a statutory provision making directors jointly and severally liable for
unpaid wages could only be enforced against de jure directors. The
Court found that although the defendants were not de jure directors
because they did not hold the required shares in their own right, they were
ostensibly elected, attended and took part in the meetings as well as acted as
directors. They were de facto directors and, therefore, personally
liable. Phippen J.A., at pages 229 and 230 wrote:
The law is clear that the actions of directors "de facto"
within the powers of the Company are binding upon both the Company and the
directors...
I do not
think these defendants can now be permitted to set up a defect in their own
title to the office, of which they have enjoyed the benefit, to escape a debt,
which I do not consider a penalty, to employees in whose favour the statute
grants relief.
[13] In Northern
Trust Co. v. Butchart, the Chief
Justice of the Manitoba King's Bench Court stated in relation to an allegation
of misfeasance and breach of trust against the directors whom he found jointly
and severally liable for these acts:
Whether
they were legally elected or not makes no difference. They were de facto
directors, and for all acts of omission or commission on their part, they are
liable in the same manner and to the same extent as if they had been de jure
as well as de facto directors.
[14] In The
Law of Canadian Companies, F.W. Wegenast
writes:
The objection to the de facto directors cannot, of
course, be invoked by an unauthorized director himself as for example to escape liability...
or to escape a statutory liability for wages of workmen or for failure to
make government returns...; for a de facto director is in the
same position as an executor de son tort.
(my
emphasis)
[15] The Tax
Court judge also concluded that the term "director" in subsection
227.1(1) of the Act is to be given a narrow meaning because that subsection
imposes vicarious liability. He wrote at page 9 of his decision:
Subsection
227.1(1), in imposing a vicarious liability, refers only to a
"director". Subsection 159(3) also imposes vicarious liability on
certain transferors of property. It is notable that in subsection 159(2) the Act
casts a very wide net over who is liable. It refers to "assignee,
liquidator, receiver, receiver-manager, administrator, executor or any other
like person". Surely if the Minister wanted the net cast by subsection
227.1(1) to be wide, words in addition to "director" could have been
used, such as "whether de facto or de jure or
"including persons acting as directors" or "manager",
"officer" or "any other like person". In my opinion, a
provision imposing vicarious liability should be strictly construed and
consequently I have done so.
[16] I have
already pointed out that if Parliament intended in subsection 227.1(1) to cover
all kinds of directors, it needed only to do as it did, that is to say use the
word "director" without restriction. Looking at the terms
"assignee, liquidator, receiver, receiver-manager, administrator or
executor" to which the Tax Court judge refers in the passage quoted, it
begs the question whether Parliament should have also said in order to cast a
very wide net: "assignee whether de facto or de jure,
liquidator whether de facto or de jure..., administrator whether de
facto or de jure, executor whether de facto or de jure?
To put the question is to answer it. In drafting subsection 227.1(1) with a
view to casting a wide net, should Parliament have written, at the sure risk of
forgetting some other types of directors, that the liability extended to
"the directors of the corporation, whether de facto or de jure,
whether nominal, passive or active, whether volunteer or paid, whether
inside or outside directors and whether directors of a profit or a
not-for-profit corporation? Or is it not reasonable to assume that, by using
the word "director" in an unrestricted and unqualified manner,
Parliament intended to cover all these types of directors as well as all those
who may exist in Canada pursuant to provincial laws, including statutory laws?
[17] That
Parliament intended to give a broad and unrestricted meaning to the word
"director" in subsection 227.1(1) is evidenced by the nature of the
obligation put on the corporation and its directors, the nature of the debt
owed by the corporation and the nature of the relationship between the
corporation, the directors, the employees and the Crown. In this respect, the
learned Tax Court judge, in my view, lost sight of these elements and, as a
result, gave too restrictive an interpretation to subsection 227.1(1).
[18] Indeed,
the debts owed to the appellant are not of the same nature as the commercial
debts owed to suppliers in the ordinary course of business. Furthermore, contrary
to a supplier who elects to do business with a given corporation, the Crown is
an involuntary creditor since the amount and extent of its claim are determined
by the number of employees that the corporation hires and the remuneration it
pays. In addition, the sums due, which generally are made of taxes and
contributions to social and insurance benefits, are for the benefit of both the
employees and the public. Moreover, they are not moneys earned by the
corporation by its trading activities. It is for these reasons that the Courts
in England have treated these debts owed to the Crown as
"quasi-trust" moneys. In Re Lo-Line Electric Motors Ltd., Sir Nicolas Browne-Wilkinson V-C
stressed this fact and the prejudice resulting to a company's employees. He
quoted with approval the following excerpt from the decision of Vinelott J. in Re
Stanford Services Ltd.:
The
directors of a company ought to conduct its affairs in such a way that it can
meet these liabilities when they fall due, not only because they are not moneys
earned by its trading activities, which the company is entitled to treat as
part of its cash flow (entitled that is in that the persons with whom it deals
expect the company to do so) but, more importantly, because the directors ought
not to use moneys which the company is currently liable to pay over to the
Crown to finance its current trading activities. If they do so and if, in
consequence, PAYE, national insurance contributions and VAT become overdue and,
in a winding up, irrecoverable, the court may draw the inference that the
directors were continuing to trade at a time when they ought to have known that
the company was unable to meet its current and accruing liabilities, and was
unjustifiably putting at risk moneys which ought to have been paid over to the
Crown as part of the public revenues to finance trading activities which might
or might not produce a profit. It is, I think, misleading (or at least
unhelpful) to ask whether a failure to pay debts of this character would be generally
regarded as a breach of commercial morality. A director who allows such a
situation to arise is either in breach of his duty to keep himself properly
informed, with reasonable accuracy, as to the company's current financial
position ... or is acting improperly in continuing to trade at the expense and
jeopardy of moneys which he ought not to use to finance the company's current
trade.
[19] In my
view, subsection 227.1(1) ought not to have been given an unduly restrictive
interpretation which had the effect of compromising the valid social objectives
sought to be attained by the provision. The fact that it imposes liability on
the directors personally for their own failure to act does not justify the
restrictive interpretation put on the word "director" by the learned
Tax Court judge. In view of the broad wording of "director" in
subsection 227.1(1), a failure to recognize the responsibility and liability of
persons acting as de facto directors amounts to condoning and inviting
the performance of acts and omissions by such persons which are detrimental to
employees and the public in a trust-like situation. The words of Hodgins J.A.
in Re Owen Sound Lumber Co. are quite appropriate:
As to the
second point, I agree with the view of Middleton J., that, when the directors
assumed the fiduciary office of director, they became liable in all respects as
though rightly appointed to that office. To hold otherwise would be to say
that a man might do wrongful acts affecting the company's assets, and yet enjoy
immunity if he could show some defect in his appointment. If this were the
case, it would become fashionable to usurp the office on these terms rather
than to accept it in a legitimate but less favoured way.
[20] In my
respectful view, this is even truer when, in a trust-like situation, the
wrongful acts are prejudicial to both the employees and the public.
The standard of care
and diligence applicable in the present instance
[21] The learned
Tax Court judge was of the view, at pages 19 and 20 of his decision, that the
standard of care applicable to the directors of a not-for-profit corporation,
such as the Louisbourg Harbourfront Park Limited Corporation (Corporation), was
a standard less rigorous than the one governing the directors of corporations
run for profit. He relied upon the decision of this Court in Soper v. Her
Majesty the Queen that he
understood to mean that there were "different standards of care applicable
to inside and outside directors". I note in passing that this Court
in Soper expressly stated that it did not establish a different standard
of care for inside and outside directors. Robertson J.A., at p. 156, wrote:
At the
outset, I wish to emphasize that in adopting this analytical approach I am not
suggesting that liability is dependent simply on 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.
[22] Relying
upon the decision in Soper, the respondents argued that the standard of
care found in subsection 227.1(3) of the Act is inherently flexible and,
therefore, there are different standards to meet different situations.
Accordingly, there would be one standard for inside directors, one for outside
directors, one for directors of a not-for-profit corporation, one for volunteer
directors and another one for paid directors. To accept this approach begs the
thorny question: which of all these different standards should a Court apply
if one is, at the same time, an outside director acting without remuneration in
a not-for-profit corporation?
[23] 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.
[24] 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.
[25] In my
respectful view, it was an error for the Tax Court judge to conclude that the
standard of care was different and less rigorous in not-for-profit
corporations. As a result, he misinterpreted and misapplied the evidence that
was before him.
Application of the
standard of care and diligence to the respondents
[26] In the
present instance, the failure to withhold and remit the sums due to the Crown
began in November 1992. Some of the respondents (Lawrence, Parsons, MacDonald
and Wheeliker) learned of it at the January 13, 1993 meeting of the directors
while the others (Corsano and Maindiratta) were appraised of the fact at a
subsequent meeting on February 3, 1993. In the case of respondents Corsano,
Wheeliker and Maindiratta, they knew of the financial difficulties of the
Corporation as of November 1992.
[27] Yet,
somewhat surprisingly, the failure to withhold and remit the sums due lasted
until October 1993 when the Corporation finally went bankrupt. This means
that, as of their learning of the financial difficulties of the Corporation or
its failure to remit, all the respondents were under a positive duty to act to
prevent failure to make current and future remittances and not simply to cure
default after the fact. At best, the
duty existed for some directors for nine months. At worst, for others, the
omission to prevent failure lasted 12 months.
[28] 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.
[29] At the
March 3, 1993 meeting, respondent Corsano, upon becoming aware of the arrears
in remittances, gave an instruction to the Manager to pay such arrears with a
receivable that the corporation was expecting. Again, there is no evidence of
steps or measures taken to address the problem for current and future
remittances. Numerous cheques were co-signed by the directors up to September
1993 and remitted to suppliers. The May meeting of the Board of Directors also
gave rise to no corrective measures to prevent additional failures. There was
no follow-up on the direction to pay past dues given at the March meeting.
[30] At the
July meeting, respondent Corsano allegedly learned for the first time that his
March direction to the Manager had not been implemented and, therefore, that
the previous sums were still owing to the Crown. He also became aware that
throughout the period, the current remittances too had not been paid. He
instructed that every cent be sent to the Crown. This, however, was not meant
to be what it said since the suppliers were nonetheless to be paid in order to
keep the business going. Indeed,
shortly after the meeting, he interceded with the Manager to ensure payment of
a supplier's invoice to the detriment of Revenue Canada. Therefore, as the evidence reveals,
payment of the Crown's debts was not made and there was no follow-up of any
kind to ensure the implementation of such direction. Moreover, once again, no
positive steps were taken such as setting up controls to account for
remittances, asking for regular reports from the manager on the ongoing use of
such controls and ensuring at regular intervals that the remittances have taken
place. And the failure continued to occur for some more months. In fact, the
directors delegated their authority on this matter to the Manager, but
literally failed to control its exercise notwithstanding clear evidence of
repeated omissions and failures on the Manager's part. The delegation amounted
to nothing less than abdication.
[31] The
learned Tax Court judge gave a number of reasons to support his conclusion that
the respondents had exercised the degree of care, diligence and skills required
in the circumstances.
[32] First, he
concluded that the freedom of the Board to act was curtailed to a large extent
by the Louisbourg Harbourfront Park Society (Society) which owned 96% of the
shares of the Corporation. Such finding is not supported by the evidence with
respect to the issue at stake. It is true that the Society would not
relinquish its shares in the Corporation to let it go private. But this is a
far cry from interfering with the Corporation's obligations under subsection
227.1(1) of the Act. In his testimony, Mr. Wheeliker, who was the chairman of
the Board, admitted in cross-examination that the Society did not prevent the
Board from exercising its control over the Corporation. Nor did it get involved in the
policy decisions made by the Board or interfere with the day to day operations
of the Corporation. Although
there was undoubtedly a desire by the Society to keep the Corporation going,
there was no evidence of the Society preventing the Corporation from
withholding and remitting to Revenue Canada the source deductions.
[33] Second,
the Tax Court judge found some comfort in the fact that, at the March meeting,
the Board instructed the Manager to send to Revenue Canada a receivable
expected from Enterprise Cape Breton Corporation. In my view, this fails to
address the issue. Such payment would have corrected default and paid the past
remittances, but the issue of the current withholding and remittances was left
unaddressed. No steps were taken to put an end to the on-going failures and to
prevent the likely on-coming failures.
[34] Third,
the Tax Court judge considered as a positive factor the fact that the Board had
taken great care in hiring a qualified person as Manager and were justified in
trusting him. With respect, there was evidence that the directors knew early
in the process of the failures to remit sums to Revenue Canada. In addition,
according to the directors, the Manager did not follow their instructions to
pay Revenue Canada. Yet, no swift and diligent measures were taken to address
this alleged disobedience by the Manager and correct the situation for the past
and the future. In his testimony, Mr. Corsano admitted that he had serious
concerns about the Manager's ability to run the company, especially as he was
disregarding the directives of the directors, but yet, as a principal director,
he did not call a meeting of the Board to discuss the issue and take the
necessary appropriate corrective measures.
[35] Fourth,
in assessing the respondent's due diligence, the Tax Court judge took in
consideration the fact that the directors were satisfied that the asset values
of the Corporation would be sufficient to meet the claims of all creditors,
including Revenue Canada. With respect, this is an irrelevant consideration.
The obligation on the directors is to prevent a failure, not to condone it
systematically, as the respondents did, in the hope of eventually correcting it
because there would be enough money in the end to pay all the creditors.
[36] Fifth, he
was satisfied that the directors made inquiries at the meetings of the Board
with respect to the status of remittances. He may have been satisfied that
such behaviour was sufficient to meet the less rigorous test that he was
applying to the situation. However, this is obviously not enough to meet the
burden imposed by subsection 227.1(3).
[37] Finally,
he considered the fact that the Society dismissed all the directors of the
Corporation and send it into bankruptcy, thereby preventing these directors
from continuing to try and keep the business going and getting in a healthier
financial position.
[38] Again,
this is, in my view, an improper consideration to take into account in
assessing the degree of care and diligence exercised by the directors. At the
time of their removal, they had been in default of withholding and remitting
the source deductions for almost one year. As the Court said in Re Stanford
Services Ltd. (supra), in the passage previously quoted, the
directors ought to have conducted the affairs of the Corporation in such a way
that it could "meet these liabilities when they fall due... because the
directors ought not to use moneys which the company is currently liable to pay
over to the Crown to finance its current trading activities".
[39] In
conclusion, I believe the learned Tax Court judge took into consideration
factors, which either taken in isolation or as a whole, cannot justify his
conclusion with respect to the liability of directors pursuant to subsections
227.1(1) and (3) of the Act.
[40] As sad as
it may be, especially with respect to the respondents who acted as benevolent
directors and gave their time, it is simply not possible to find that they have
exercised the degree of care and diligence expected to prevent a failure to
withhold and remit when such known failure was allowed to repeat itself
uninterruptedly for one year. This Court would be remiss of its duty to
enforce the law if it were to condone acts or omissions performed by
experienced, informed and warned directors which fall below the standard of
care, diligence and skill expected from them pursuant to subsection 227.1(3) of
the Act.
[41] For these
reasons, I would allow these appeals, I would set aside the decisions of the
Tax Court judge, and I would dismiss the appeals by the respondents Wheeliker,
Corsano and Maindiratta from the assessments made by the Minister of National
Revenue pursuant to subsection 227.1(1) of the Income Tax Act. With
respect to the respondents Lawrence, Parsons and MacDonald, I would, rendering
the decisions that the Tax Court judge ought to have rendered, allow their
appeals in part and refer the assessments back to the Minister for
reconsideration and reassessment on the basis that the liability of these three
respondents for failure to withhold and remit begins as of January 13, 1993.
As the appellant is not seeking costs, I would issue no order as to costs.
"Gilles Létourneau"
J.A.
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