Neil Soper v. Her Majesty the Queen, [1995] 2 CTC 2078

Beaubier J.T.C.C.:-This matter was heard on January 30, 1995, at Vancouver, British Columbia, pursuant to the general procedure of this Court.

The appellant was assessed as a director for unremitted employee withholdings of Ramona Beauchamp International (1976) Inc., hereinafter called RBI, plus interest and penalties in the sum of $13,009.04 for the period from October 1987 to January 1988 pursuant to sction 227.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”).He appealed.

In argument, but not in the pleadings, appellant’s counsel argued that the Crown has the onus to establish its compliance with subsection 227.1(2) respecting RBI. Subsection 227.1(2) reads:

227.1(2) 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 under section 223 and execution for that 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 and Insolvency 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.

The Crown relied upon its assumptions to establish compliance with paragraph 227.1(2)(a), and did not lead evidence concerning these matters.

However the appellant’s onus to overcome the assumptions of the Crown is based upon a premise that the facts assumed were in the control of the appellant and therefore the appellant must establish them. Subsection

(2) describes what the Crown must do respecting a third party before the appellant may be liable for tax. That third party is often outside of any contact with the appellant by the time these are required of the Crown. However the appellant is not liable ’’unless” they are first done by the Crown, or they first occur, as the case may be.

In Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 48 D.T.C. 1182, Rand J, speaking for the majority, stated this respecting an appeal, at pages 489-90 (C.T.C. 202-03; D.T.C. 1183- 84):

Notwithstanding that it is spoken of in subsection 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which taxation rested.

Instead, the taxpayer abstained from making that allegation. As fact it was not raised by the defence although involved in the reference to the rule of the schedule applied by the assessor, but in the reply it was denied as fact. There, then, appeared the first reference to an allegation that should have been in the claim; and on principle I should call it an indulgence to the taxpayer, assuming that he desired to raise that point in appeal, to be permitted so to cure a defective declaration. The language of the statute is somewhat inapt to these technical considerations but its purpose is clear: and it is incumbent on the Court to see that the substance of a dispute is regarded and not its form.

I am consequently unable to accede to the view that the proceeding takes on a basic change where pleadings are directed. The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy. But unless the Crown is to be placed in the position of a plaintiff or appellant, I cannot see how pleadings shift the burden from what it would be without them. Since the taxpayer in this case must establish something, it seems to me that that something is the existence of facts or law showing an error in relation to the taxation imposed on him.

The pleadings in this case resemble those in Johnston. The appellant did not raise the question of the Crown’s compliance with subsection 227.1(2) in his notice of appeal. The Crown described its compliance with paragraph 227.1(2)(a) in the assumptions contained in its reply. The appellant did not file an answer under section 45 of the Rules of General Procedure. There was no evidence presented by either party respecting subsection 227.1(2). The appellant’s counsel first raised the failure of the Crown to lead evidence respecting subsection 227.1(2) in his argument after the close of the case.

Subsection 227.1(2) describes events which are usually outside of an appellant’s control. If the director has left the corporation’s board of directors, that director may have no knowledge of them. Paragraphs 227.1(2)(a) and (c) describe occurrences for which there should be a public record that can be searched. Paragraph 227.1(2)(b) describes occurrences for which there may be no public record.

These circumstances, which are usually outside of the appellant’s control, coupled with the introductory words of subsection 227.1(2) which say, "A director is not liable under subsection (1) unless ..." indicate that the occurrences described in subsection (2) are a condition precedent to the assessment of a director.

The question then is-Who should prove the facts contained in subsection 227.1(2) and how should they be proved?

In Johnston, Rand J, appears to say,

1. If they are disputed by the appellant, that dispute should be raised in the notice of appeal.

2. The Crown should then deal with that in its reply.

3. The onus of proving the evidence in question is then on the appellant.

In the instant case the appellant could prove its contention by certified copies of public records or searches or by calling witnesses to testify.

Furthermore, in the instant case, the appellant did not raise the question in its pleadings. Because it was not raised in the appellant’s pleadings, but was established by the respondent’s assumptions which were not upset by the evidence, the Court finds that subsection 227.1(2) was complied with by the Crown.

The appellant testified and called Lorraine Sanford, a co-director of RBI, as a witness.

Essentially the appellant and Mrs. Sanford testified that the appellant became a director of RBI at the instigation of Ramona Beauchamp for the limited purposes of advising RBI respecting direct sales and promotion, increasing its revenues and promoting it in the marketplace. In addition, it was understood by RBI and the appellant that his name as a director of RBI was important to RBI in respect to a proposed Vancouver Stock Exchange listing. He was a director from October 1987 until his resignation dated January 31, 1988 was accepted on February 10, 1988.

The appellant knew that RBI was losing money when he joined the board of directors. At the November 1987 meeting of the board he saw Exhibit R-1, the balance sheet of RBI as at September 30, 1987. It shows total assets of $78,751 and accounts payable of $75,701. The deficit at September 30, 1986 was $136,204 and there was a net loss for the year at September 30, 1987 of $132,957. There was a discussion, respecting two accounts owed, but the evidence is that neither the appellant nor anyone else on the board of directors at that, or any other meeting attended by the appellant went through the accounts payable or discussed the question of employee withholdings.

The Court accepts the testimony that Ramona Beauchamp instructed the other directors that none of the other directors were to discuss with the appellant anything other than what was dealt with at directors’ meetings at which the appellant was present, and that these instructions were followed. The appellant testified that various board members had specific functions in RBI’s operations:

A. Ramona Beauchamp and Evellyn Satchwell (Camsant) conducted the day-to-day operations and signed cheques.

B. Maude Sanford did sales and signed cheques.

C. Cheryl Stewart was to arrange the listing and promotion on the Vancouver Stock Exchange.

D. The appellant’s functions and purpose were as already described.

RBI was a talent agency and conducted a modelling school. It was in the process of starting a children’s modelling school while the appellant was a director.

The appellant was the chief operating officer of Canada-Wide Magazines and travelled to Montreal and Toronto respecting these duties. He may have also been a director of the B.C. Heart Foundation during the period in question. He resigned as a director of RBI because of his business activities in Canada-Wide Magazines and because Ramona Beauchamp resigned. He first learned of RBI’s failures to remit in 1989. Shortly after that he learned of Ramona Beauchamp’s instructions to the other directors that they were not to discuss matters with the appellant which were not raised in director’s meetings he attended.

The appellant claims that he should not be liable because his directorship was for a limited purpose and because of the ’’conspiracy of silence’’. However the Court notes that part of his purpose on the board was to allow RBI to promote his name as a businessman on its board of directors for the purpose of obtaining a Vancouver Stock Exchange listing. Exactly how this was to develop was not made entirely clear because some testimony indicated that a new corporation would be listed and capitalized which would then amalgamate with RBI.

If the appellant’s name was useful for Vancouver Stock Exchange purposes it was because he was a reliable man of sound business experience. Such a person would surely inquire into the particulars of the losses and deficits. Moreover, when payables in relation to other figures were of the magnitude described in RBI, an examination of costs and payables would surely have been instituted as a matter of course by a dutiful director.

The British Columbia Company Act states in sections 141 and 142:

Powers and functions of directors

141(1) The directors shall, subject to the Act and articles of the company, manage or supervise the management of the affairs and business of the company.

(2) No limitation or restriction on the powers or functions of the directors shall be effective against a person who does not have knowledge of the limitation or restriction.

Duties of directors

142(1) Every director of a company, in exercising his powers and performing his functions, shall

(a) act honestly and in good faith and in the best interests of the company;

and

(b) exercise the care, diligence and skill of a reasonably prudent person.

(2) The provisions of this section are in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors of a company.

No notice of the alleged limitation or restrictions of powers and functions of the appellant as a director was given to anyone, including Revenue Canada. Moreover if his name was to be useful to RBI for purposes relating to the Vancouver Stock Exchange, any such limitations or restrictions would conflict with that usefulness.

The provisions of the B.C. Company Act aside, the evidence is clear on these points:

1. The appellant joined the board of directors because of his business experience.

2. At the time he joined the board of directors he knew RBI had financial difficulties.

3. At the November meeting of the board of directors he knew the financial difficulties were extremely serious.

4. The appellant was on the board of directors for two purposes, one of which was to assist in establishing RBI’s creditability for Vancouver Stock Exchange purposes.

5. The appellant made no enquiries into the question of remissions of employee withholdings or matters respecting other payables excepting the two payables which were raised at the November meeting.

Subsection 227.1(3) reads:

227.1(3) A director is not liable for a failure under subsection (1) where 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.

In the instant case, the appellant had grounds to inquire as to the unpaid remittances from the moment he joined the board of directors, since he knew that RBI was in financial difficulties at that time. In November this knowledge was confirmed by the September financial statement, yet the appellant did nothing. The appellant’s plea of a limited status is refuted by the evidence concerning his status as a director for the purpose of the Vancouver Stock Exchange listing and, further, by the failure to comply with the B.C. Company Act.

There is no evidence of any act by the appellant to exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would exercise in comparable circumstances.

The appeal is dismissed.

The Crown is awarded its costs.

Appeal dismissed.