Corazza v. R., [1996] 1 CTC 2668, 96 DTC 3210 (Informal Procedure)

O’Connor J.T.C.C.: These appeals were heard in Toronto, Ontario on October 27, 1995 on common evidence pursuant to the informal procedure of this Court.

Issue

The sole issue to be decided in these appeals is whether the appellants are liable under subsection 227.1(1) of the Income Tax Act (“Act”) as directors of a corporation which failed to remit source deductions as required by section 153 of the Act.

Facts

The basic facts are set forth in the Replies to the Notice of Appeal as follows:

3. By Notice of Assessment ... mailed March 21, 1991, the Minister of National Revenue (the “Minister”) assessed the Appellant for federal income tax deducted at source but not remitted by Debcor Electric Inc. (the “Corporation”) and for penalties and interest relating thereto as follows:

FEDERAL TAX: $11,280.73

PENALTY: $1,581.27

INTEREST: $1,581.27

4. In so assessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant was, at all material times, a director of the Corporation;

(b) the Corporation failed to remit to the Receiver General federal income tax withheld from the wages paid to its employees as follows:

	UNREMITTED AMOUNT
MONTH	OF FEDERAL TAX
January 1988	$ nil
February 1988	$ 1,825.03
March 1988	$ 2,063.67
April 1988	$ 3,119.65
May 1988	$ 2,191.98
June 1988	$ 2,337.79
July 1988	$ 828.79
August 1988	$ 1,188.85
September 1988	$ 1,039.09
1988 T4 Discrepancy	$ 1,217.99*
Less: Payment	($ 4,532.10)
	$11,280.73

* amount actually required to be remitted in respect of 1988, less amount required to be remitted per T4 Summary prepared by the corporation

(c) a certificate for the amount of the Corporation’s liability for federal income tax, penalties and interest was registered in the Federal Court of Canada under section 223 of the Income Tax Act (the “Act”) and execution for such amount has been returned unsatisfied in whole;

(d) the Corporation failed to pay penalties and interest relating to the unremitted federal tax in the amount of $9,199.39....

Submission of Counsel for the Appellants

Counsel submits in the first instance that the assessments in question are statute barred under subsection 227.1(4) of the Act as they were issued more than two years after the purported resignations of the two Appellants as directors. In the alternative counsel argues that the Appellants exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances as contemplated in subsection 227.1(3) of the Act.

Submissions of Counsel for the Respondent

Counsel for the Respondent submits that the assessments are not statute barred because there is no adequate proof of the date of the written resignations. Moreover she submits that the Appellants did not exercise the degree of care, diligence and skill to prevent the failure to remit the deductions withheld that a reasonably prudent person would have exercised in comparable circumstances.

Discussion and Analysis

On the first issue of whether the assessments are statute barred the resignations as officers and directors of the company filed as Exhibits A-17 and A-18 are apparently signed by the Appellants respectively and witnessed. The resignations are dated the 8th day of December 1988. If that date is correct the assessments, which issued more than two years after that are statute barred.

In this regard, counsel for the Respondent called Mr. J. Mahal, an appeals officer with Revenue Canada. He testified in essence that he concluded that there was not sufficient corroboration of the date of these resignations and he concluded that that date of December 8, 1988 was not true. Mr. Mahal admitted on cross-examination that had he known the business operations had ceased in late 1988 he may have considered that as corroboration.

It is to be noted that the witness to the resignations was not called to substantiate the date.

It is clear that after December 8, 1988 the Appellants continued to carry on certain functions of the Corporation related mainly to the collection of receivables and remittances to Revenue Canada.

The Appellant, Frank Corazza, stated that late in 1988 the Appellants in essence turned over the Corporation to a Mr. Tony Bannister. This was accomplished by the handing over to him of the minute book and the execution of a document worded as follows:

We, hereby appoint Tony Bannister as President and Sole Director of the Corporation, known as Debcor Electric Inc., to be effective immediately.

Frank Corazza, Debbie Corazza

I, Tony Bannister hereby accept the position of President and Sole Director of the Corporation known as Debcor Electric Inc. to be effective immediately.

Tony Bannister, R. Butler (witness)

Dated, at Woodbridge this “8th” day of “December”, 1988

There was no transfer of shares executed and shortly after the minute book had been handed over it was returned to the Appellants because Tony Bannister realized the futility of carrying on the business.

Counsel for the Respondent points out that the actual resignations were not submitted to Revenue Canada until a date long after December 8, 1988 namely July 6, 1992 and that this coupled with the other aspect of the Appellants continuing to carry out certain functions on behalf of the Corporation indicates that the resignations were backdated.

Based on all of the evidence I am satisfied that the resignations were backdated and that the assessments were not statute barred. Mr. Mahal’s reply on cross-examination did not alter this conclusion. It appeared rather evident that the resignations were only signed after the Appellants realized they might be liable as directors. Further the handing over of the minute book to Tony Bannister is not convincing evidence that the Appellants ceased to be directors on December 8, 1988.

On the second issue of due diligence the written and oral evidence indicates that at all relevant times the Appellants ensured that there were sufficient accounts receivable of the Corporation to pay the source deductions once the receivables had been collected. Further, it was the testimony of Frank Corazza that he was trying to keep his business afloat, always bearing in mind that source deductions had to be paid to Revenue Canada at some point. The efforts of Frank Corazza in attempting to pay the source deductions were described in great detail and numerous exhibits were entered demonstrating the continuing efforts of the Appellants to have the source deductions paid. The Appellants mortgaged their home to the extent of $25,000 and put it into the Corporation to assist in meeting its liabilities. A statement was produced as Exhibit A-2 describing the employee deductions payable. It indicates that as of September 1988 the balance payable to Revenue Canada was $30,749.28 and that by January 1989 this amount, as a result of the efforts of the Appellants in collecting receivables and paying Revenue Canada, had been reduced as of January 1989 to $12,275.31.

In all of the foregoing circumstances I must decide whether the actions of the Appellants in (i) maintaining the accounts receivable of the Corporation at a level sufficient, when collected, to pay Revenue Canada,

(ii) exercising considerable efforts to make this happen by collecting receivables and (iii) mortgaging their home to provide funds to the Corporation coupled with the fact that Revenue Canada accepted the deferrals of payments over a considerable period of time are sufficient to justify the submission of the Appellants that they exercised the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances.

The burden on the Appellants is a difficult one because the monies they have withheld from their employees should have been segregated, held in trust for the Receiver General and remitted. This was not done. We know that certain amounts withheld were used to pay the bank loan and suppliers so that the business could survive.

I am aware that there are many instances of small businesses using source deductions for other operational purposes such as, in the present case, paying suppliers and banks to keep the business going. This practice, no matter how prevalent, will not however be sufficient alone to exonerate directors.

The real question is whether the directors acted as a reasonably prudent person would have in comparable circumstances.

In the present appeals I was considerably impressed by the continued efforts of the Appellants to keep the business going. I am also impressed by the fact that even after operations ceased the Appellants continued to collect and hand over receivables to Revenue Canada and by the fact that the Appellants mortgaged their home to put more funds into the business. Moreover, the Appellants made sure that the accounts receivable of the Corporation were sufficient to cover the shortfall in the amounts remitted. Moreover, Revenue Canada tolerated the deferrals and late payments which may have led the Appellants to believe their approach was reasonable.

Given all of these factors, I am satisfied that the Appellants exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.

Consequently, the appeals are allowed, with costs.

Appeals allowed.