Gilbert Pedeault v. Minister of National Revenue, [1991] 1 CTC 2274, 91 DTC 463

Tremblay, T.C.J. [Translation]:—This appeal was heard in Québec, Québec.

1. Point at Issue

The issue is whether the appellant is correct in not paying the amount of $12,322.76, claimed by the Minister of National Revenue as source deductions from salaries under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act").

The salaries in question were paid by the company Radio Régionale 02 Ltée. According to the respondent, the appellant was director of this company. As director, he became personally responsible for the non-payment to the Department of deductions of $12,322.76, pursuant to subsections 227(10) and 227.1(1) of the Act.

The appellant, on the other hand, submitted that he was only provisional director of the company, acting in the role of its incorporating attorney. He further argued that the claim is prescribed pursuant to subsection 227.1(4) of the Act.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessment is incorrect. This burden of proof results from several court decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court held that the facts on which the respondent bases his assessments or reassessments are also presumed to be correct until proven otherwise. In the instant case, the facts presumed by the respondent to be true are described in paragraphs (a) through (k) of paragraph 2 of the reply to the respondent's notice of appeal. This paragraph reads as follows:

2. In assessing the appellant the Minister of National Revenue relied, inter alia, on the following presumptions of fact:

(a) the company Radio Régionale 02 Ltée (hereinafter “the company") was incorporated on September 8, 1982 under the laws of Québec;

(b) as an employer, the company was legally required to deduct, withhold and remit to the Receiver General of Canada the source deductions from company employee salaries and/or benefits;

(c) the company failed to pay source deductions withheld under the Income Tax Act, as well as under the Unemployment Insurance Act, 1971, inter alia, for September, October and November 1982;

(d) The company received a notice of assessment dated March 14, 1983 for source deductions based on information provided by the company itself, in a summary of salaries paid, signed on February 24, 1983 by the accounting secretary, Mrs. Esther Harvey;

(e) the amounts that the company deducted at source but did not pay, merely with respect to the Income Tax Act, including penalties and interest, amounted to $12,322.76 as of April 7, 1987;

(f) the company in fact ceased all operations as of the end of November or the beginning of December 1982 and now has no assets;

(g) the Minister of National Revenue obtained a judgment certificate from the Trial Division of the Federal Court of Canada, as well as a writ of fieri facias (a writ of attachment);

(h) the writ of fieri facias was returned to the Minister of National Revenue by the bailiff with the notation that it could not be executed due to lack of assets; that is, with a notation of“ nulla bona";

(i) the appellant is an attorney and businessman, and he became a director at the time the company was established on September 8, 1982 and has not legally resigned from his position as director since that date;

(j) in his capacity as director of the company, the appellant is jointly and severally responsible with the corporation for payment of the sum of $12,322.76, representing source deductions pursuant to the Income Tax Act as well as penalties and interest;

(k) the appellant has not demonstrated that he acted with the degree of care, diligence or skill that a reasonably prudent person would have exercised under comparable circumstances to prevent the non-payment.

At the beginning of the trial, the appellant stated that he had no knowledge of paragraphs (a) through (h) and denied paragraphs (i) through (k).

3. Facts

3.01 In early 1982 Les Immeubles Pedeault Ltée, whose main shareholder is the appellant, was 67 per cent owner of Radio Lac St-Jean Ltée. Les Immeubles Dequens and Les Voyages Maria Chapdeleine were also involved in Radio Lac St-Jean Ltée. The latter held the licence for CFGT Alma.

On April 1, 1982 the employees stopped working because they were no longer being paid. Over the summer, the assets of Radio Lac St-Jean Ltée were repurchased by Les Immeubles Pedeault. The Canadian Radio-Television and Telecommunications Commission (C.R.T.C.) raised no objection to this.

The employees’ union (C.S.N.), however, was opposed to the reopening of the CFGT station, just as it was opposed to the reopening of the CKPB radio station in La Baie. The latter station, whose employees also belonged to the C.S.N., was administered and owned by Mr. Gérald Champagne.

3.02 During the summer, specifically on July 19, 1982, Mr. Pedeault and Mr. Champagne decided to join forces to solve their problems and re-open their radio stations. They made the following agreement, filed as Exhibit 1-10:

Memorandum of Agreement entered into this day between Mr. Gilbert Pedeault of the first part and Mr. Gérald Champagne of the second part.

The parties agree to the following:

Whereas radio stations CFGT in Alma and CKPB in La Baie are currently closed due to certain financial problems and union conflicts;

Whereas the respective owners agree to merge their companies;

Therefore, subject to approval by the unions of the aforementioned undertakings and subject to the two stations resuming operations by October 1,1982, we the undersigned agree to merge our companies and hereby mandate Mr. Gilbert Pedeault, attorney, to carry out this process.

This memorandum of agreement shall serve as a preliminary to the signing of a regular contract.

Done and signed at Alma, this 19th day of July, 1982.
Mr. Gérald Champagne	Mr. Gilbert Pedeault

3.03 On September 8, 1982 the company Radio Régionale 02 Ltée was established (Exhibit 1-2). Les Immeubles Raymonde Gaudreault Inc., whose main shareholder was the wife of Mr. Gérald Champagne, appeared as founder of the corporation on the prescribed form. A notice of address indicates that the address of the head office of Radio Régionale 02 Ltée was to be at 65 St- Joseph sud, Alma, Québec (Exhibit 1-2). This document was signed by Mr. Gérald Champagne, in his capacity as director. The notice as to the composition of the board of directors also listed the names of Mr. Gérald Champagne and Mr. Gilbert Pedeault.

3.04 On or about September 20, 1982, the radio stations resumed operation. On October 5, 1982 an employer registration application (form PD 20, Rev. 79) was sent to Revenue Canada (Exhibit I-1). It was signed by Mr. Gilbert Pedeault, in his capacity as president.

3.05 During the period from September 20 to early December 1982, 35 employees worked for Radio Régionale 02 Ltée. Some worked for radio station CFGT in Alma (two-thirds of the employees) and others for radio station CKPB in La Baie (one-third of the employees). This does not mean, however, that the 35 employees worked throughout that period of time.

3.06 According to Mr. Pedeault, he had little or nothing to do with administration. He certainly did not deal with financial matters. He did not sign cheques. Mr. Pedeault also said that Mr. Champagne dealt with collecting advertising fees from merchants and kept these funds in a special account.

3.07 According to Mr. Champagne, however, everything was centralized at Alma, both income and expenses.

3.08 According to Mr. Ghislain Emond, an investigator for the respondent, Mr. Pedeault dealt with the station's day-to-day activities. After checking with the National Bank of Canada (if the notes I took during the testimony are correct), Mr. Pedeault did not sign cheques.

3.09 In early December 1982, following a meeting with Mr. Pedeault, Mr. Champagne allegedly left with all of the books pertaining to Radio Régionale 02 Ltée.

3.10 Shortly thereafter, in December 1982, Mr. Pedeault received a letter from Mr. Champagne. The latter announced his " resignation as director" of Radio Régionale 02 Ltée and stated that "he had no further interest in it”. The letter concludes as follows: "Signed by me in La Baie, this first day of October, one thousand nine hundred and eighty-two." (A photocopy of this letter was filed as Exhibit 1-9.) [Emphasis added.]

3.11 Following receipt of the above, Mr. Pedeault himself sent a letter of resignation to Mr. Champagne on December 15, 1982 (Exhibit A-2):

Dear Colleague:

Please note that the undersigned signed your application for incorporation strictly in his capacity as an attorney and has absolutely no responsibility of any kind with regard to this company. Please consider this to be a letter of resignation as director of the said company.

3.12 On February 24, 1983, the form known as the T-4 short form regarding source deductions was sent to Revenue Canada, bearing the signature of Mrs. Esther Harvey, accounting secretary for Radio Régionale 02 Ltée.

Copies of the 1982 T-4 forms for each of the 35 employees are also part of Exhibit 1-4. On March 14, 1983, a notice of assessment was sent to Radio Régionale 02 Ltée for the amount of $12,209.09, including penalty and interest.

3.13 The Federal Court, pursuant to an application made on October 29, 1984 (Exhibit 1-5), rendered judgment on February 15,1985 against Radio Régionale 02 Ltée in the amount of $13,957.68. (Exhibit A-6)

On October 2, 1984, the matter was placed in the hands of Clermont Pellerin, bailiff, who, on March 25, 1987 made a nulla bona report stating that: "The company in question never operated in Alma, and the assets located at the address of 65 St-Joseph sud are the property of radio station CFGT". (Exhibit I-6)

3.14 On April 7, 1987, a notice of assessment was issued against Mr. Gilbert Pedeault pursuant to subsection 227.1(1), claiming $12,322.76. Interest calculated as of April 7, 1987 amounted to $3,665.30. (Exhibit 1-8)

3.15 Mrs. Esther Harvey testified in this Court that she has worked for Les Immeubles Gilbert Pedeault, Les Immeubles Desquens and Les Voyages Maria Chapdeleine for several years as accounting secretary. She was also accounting secretary for Radio Régionale 02 Ltée in 1982. She was not Mr. Pedeault's legal secretary. Mr. Pedeault's law office was apparently located in the same building as the offices of Radio Régionale 02 Ltée, but in different offices. Mrs. Harvey kept the books. Mr. Champagne came to Alma once or twice a week. He reviewed everything: the statements, the computer and so on. She was never present, however, at meetings between Mr. Pedeault and Mr. Champagne. She was the person who opened Radio Régionale 02 Ltée's bank account. As far as she remembered, she was also the person who signed the cheques, but she did not remember if Mr. Pedeault and Mr. Champagne were authorized to sign these cheques. She believed that Radio Régionale 02 Ltée had no credit line at the bank. She never saw the minute books, the charter and so on.

3.16 In cross-examination, counsel for the respondent asked Mrs. Harvey the following questions:

Q. Who kept track of expenses there? During the period in question did you report strictly to Mr. Champagne, or did Mr. Pedeault ask you "are things going well or not?"?

A. Mr. Champagne. I'm not saying that I didn't occasionally go to see Mr. Pedeault, but in general—I always believed—maybe I am wrong—but I always believed he was in charge.

The Court:

Q. Who was in charge?

A. Mr. Champagne.

4. Act—Analysis

4.01 The principal provisions of the Income Tax Act pertaining to the instant appeal are subsections 227.1(1), (2), (3) and (4). They read as follows:

227.1 (1) Liability of directors.—Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215 or has failed to remit such an amount, the directors of the corporation at the time the corporation was required to deduct or withhold the amount, or remit the amount, are jointly and severally liable, together with the corporation, to pay any amount the corporation is liable to pay under this Act in respect of that amount, including any interest or penalties relating thereto.

227.1 (2) Limitations.—A director is not liable under subsection (1), unless

(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court of Canada under subsection 223(2) and execution for such amount has been returned unsatisfied in whole or in part;

(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.

(3) Idem.—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.

(4) Idem.—No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

4.02 Analysis

4.02.1 The evidence submitted shows that Mr. Gérald Champagne and Mr. Gilbert Pedeault are contending for the "honour" of not having been de facto directors of Radio Régionale 02 Ltée. The Court is, however, of the opinion that, during the two to three months this company was actually in operation, these two individuals may be considered to have been its directors.

4.02.2 First of all, it is difficult to overlook Mr. Champagne's role as director while Radio Régionale 02 Ltée was in existence. The following facts can only serve to confirm such status:

— the presence of his name on the notice regarding the membership of the board of directors (3.03);

— the part played by his wife's company, Immeubles Raymonde Gaudreault Inc., in the incorporation of Radio Régionale 02 Ltée (3.03);

— the influence of union pressures on station CKPB, which prevented Mr. Champagne's business from re-opening and necessitated the creation of Radio Régionale 02 Ltée (3.02);

— the lack of any evidence that Mr. Champagne, following the efforts to resume the operations of station CKPB, delegated all his authority over management of the station to Mr. Pedeault; the terms of the agreement concluded on July 19, 1982 contain no such indication (3.02);

— Mrs. Harvey's testimony that Mr. Champagne performed a major share of the company's administrative tasks (3.15, 3.16);

— the responsibility for collecting fees on advertising contracts that was assumed by Mr. Champagne, as disclosed in the uncontradicted testimony of Mr. Pedeault (3.06).

Moreover, the mere existence of the letter of resignation submitted by Mr. Champagne cannot, in the opinion of the Court, detract from his role as director. The value of this letter as evidence is substantially diminished by the fact it was allegedly signed on October 1, 1982. How can such a proposition be accepted given that the company was formed in September 1982, that is, one month before this sudden loss of interest in the company? Is it not also strange that in December 1982, according to the again uncontradicted testimony of Mr. Pedeault, Mr. Champagne took all the company's books with him at the end of a meeting (3.09)? Why would he have done so if, as he contended, his responsibilities as director had ceased in October 1982?

An analysis of the evidence thus confirms Mr. Champagne's role as director. His active involvement in the company's creation and operations confirms this, while the letter of resignation of October 1, 1982, contrary to the respondent's contention, does not cast any doubt on his role as director.

4.02.3 Can Mr. Pedeault also be considered a director of the said company? This Court is of the opinion that the answer to this question should be in the affirmative. This is because the evidence showed that the creation of Radio Régionale 02 Ltée was due primarily to the difficulties experienced by Messrs. Pedeault and Champagne in reopening their respective radio stations. The merger of these two companies, according to the actual wording of the agreement concluded on September 19, 1982, was aimed at putting these companies back into operation (3.02). Since there is no evidence that would suggest to the Court that the merger resulted from a unilateral initiative by Mr. Champagne, it is difficult to believe that Mr. Pedeault suddenly wished to see his responsibilities limited simply to the role of incorporating attorney. In addition, Mr. Pedeault's signature of the notice regarding membership of the board of directors, as well as the employer registration application, is also instructive as to his involvement within the company (3.03, 3.04). Finally, Mrs. Harvey's testimony referred to a certain degree of involvement by Mr. Pedeault in the administration of Radio Régionale 02 Ltée (3.16). The evidence offered by Mr. Pedeault does not permit this Court to find he was not a director during the company's existence.

4.03 Analysis of the evidence thus requires that Messrs. Pedeault and Champagne both be considered to have been directors of the company during the corporate existence of Radio Régionale 02 Ltée.

4.04 It is however also necessary to determine if Mr. Pedeault can benefit from the exoneration provision of subsection 227.1(3) of the Act. No conclusive evidence as to this was submitted by the appellant.

4.05 Lastly, it is also important to determine if the respondent's action against the directors of the company is prescribed. This Court is of the opinion that this would be fatal to the respondent's claim. The respondent acknowledges (in paragraph 2(f) of the reply to the notice of appeal cited in paragraph 2.02 above) that Radio Régionale 02 Ltée ceased operations in December 1982 (2.02). The notice of assessment which gave rise to the instant case was dated April 7, 1987 (Exhibit A-8). Since the action provided in subsection 227.1(1) must be brought within two years of the time that the director last acted in this capacity (subsection 227.1(4)), and since, furthermore, it cannot be claimed that Messrs. Pedeault and Champagne acted as directors during the years following the end of the company's operations, this Court can only conclude that said action is prescribed.

5. Conclusion

The appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.