Michael W. McCandless v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2111, 95 DTC 484

Dubienski D.J.T.C.C.:-This is an appeal from an assessment dated November 26, 1992, wherein the Minister of National Revenue (the "Minister”) assessed the appellant for source deductions not remitted by a corporation known as Emerald Hotels Canada Ltd. for tax, federal penalty, provincial penalty, and others, plus interest.

The Minister, in making assessments, made the following assumptions of fact, inter alia, as disclosed in a reply to the notice of appeal:

(a) the corporation commenced operations in April 1981;

(b) the appellant became a director of the corporation in June 1983;

(c) on November 26, 1990 the appellant resigned as an officer and director of the corporation;

(d) prior to the appellant’s resignation, the corporation failed to remit to the Receiver General the following amounts of federal income tax withheld from

the wages paid to its employees in the 1990 calendar year:

Assessments Dated: May 2, 1990

Months Involved: January, 1990

Unremitted Amount of Federal Tax: $4,732.02

(e) the corporation further failed to pay penalties in the amount of $1,954.33 and interest relating to the unremitted federal tax;

On behalf of the respondent, further action was taken in that a certificate for the amount of the corporation’s liability-federal income tax, penalties, and related interest were registered in the Federal Court of Canada under section 223 of the Income Tax Act, and execution of such amount has been returned unsatisfied in whole.

The respondent alleges that the appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the said amount by the corporation that a reasonably prudent person would have exercised in comparable circumstances.

The appellant states that the corporation, the subject of this appeal known as Emerald Hotels Canada Ltd., was incorporated in Manitoba in April 1981.

It appears that the purpose of the incorporation was to buy and operate a travel lodge hotel on Highway 1 East in Winnipeg. The principals of the company were Colin Noble, Mina Harper, and Colm Madden. Colin Noble and Mina Harper were citizens of the United Kingdom, residents of Northern Ireland, and Colm Madden was a citizen of the Republic of Ireland.

When the investment was approved under the Foreign Investment Review Act, it was a condition that at least two of the three principals had to achieve landed immigrant status in Canada, and Mina Harper and Colm Madden did. As a result, the three principals became directors of the corporation, being in compliance with the Foreign Investment Review Act requirements and the Manitoba law, since the board of directors had a majority of Canadian residents.

These directors were actively involved in the running of the business, Colin Noble being the business person, chartered accountant, and supplying the capital; Mina Harper, experienced in day-to-day hotel operation; Colm Madden, a person with hotel experience. The transaction was completed in August 1981 with the help of a Winnipeg law firm.

The appellant states that his first contact with the hotel company was in the summer and fall of 1982 when he was retained by the company to do some special work for the company in the area of land use and municipal law.

In his capacity as solicitor for the company, he looked into and received approval for subdivision and rezoning, refinancing, all of which helped the expansion and improvement of the hotel. The appellant became more closely involved with the hotel company and his firm did the legal work locally thereafter.

In 1983, there was a dispute between the directors and Colm Madden resigned as a director with the result that there were insufficient directors to comply with the law. At this time, to fill out the requirement, the appellant was asked to become a nominal director, and he did so in June 1983.

His evidence is that he was to be a nominal director only, and was expected not to vote independently on any matters before the board, but only to act where necessary to facilitate the actions of the board. It was understood that he was to concur in all actions of the two remaining directors. He stated that he was there for technical reasons and follow the directions of others. He was not to intercede between any of the other two directors, and to comply with, and facilitate, the activities of the directors.

He states that he was aware of the liabilities of directors under federal and provincial law, and aware of the trust nature of funds held by the corporation for employees’ deductions and provincial taxes.

He satisfied himself that everything was under control, and that the management was sound. He was in contact with the chartered accountant who attended to the accounts of the corporation, and was aware that there was a full-time controller in the office. The president and managing director Noble was a chartered accountant who assured him there were proper controls.

Because of his concern with regard to the withholding of taxes, he made appropriate inquiries of the company chartered accountants and was satisfied that all was in hand and in order.

He was also aware at this time that the hotel business was in good financial status, and was very profitable.

From then on, he never acted in any way on behalf of the corporation except as a solicitor, and never attended any directors’ meetings, and signed all documents pro forma whenever they were presented. In fact, his input was never sought on any occasion.

As solicitor, his legal firm acted mainly to attend to refinancing of the hotel and commercial properties.

In 1989, he became aware that the business was not doing as well as it should. The company had expanded and the Winnipeg operation was being supported by thriving businesses in Belfast and in London, and the problems with the Winnipeg company were being supported by infusions of cash from there, and in the meantime, the corporation was looking for other hotels well into 1990. During all this time, the president, Noble, assured the appellant that the parent company was prospering and could carry the Winnipeg hotel, and he was told that assurances also had been given to the banks and all had complete trust in Mr. Noble.

In 1990, the appellant was contacted by telephone by a representative of Revenue Canada collection officers and advised of the defaults. At that time, the appellant advised the caller that he would do everything that he could to rectify the situation.

By this time, Mina Harper had left to manage the London hotel and the appellant spoke to Colin Noble and to the on-site manager, Paul Morgan, stressing the importance of remitting the funds. At this time, the corporation complied with the residency requirements since Colin Noble had become a landed immigrant. The appellant also phoned Mina Harper and reminded her of her personal liability in view of the unremitted deductions, and he wrote to Colin Noble advising him that this should be complied with even if the mortgage would not be paid.

The appellant received constant assurance that the remittances would be brought up to date in cash from the U.K., and he was assured that the problem would not arise.

The appellant said he did not resign at this time, firstly because he felt that he should be a director to pressure the remittance of the funds, and secondly, he felt a responsibility to Emerald Hotels that they should comply with the residency rules for its existence.

The financial situation became worse, and an arrangement could not be made with creditors; there was no more money coming from England, and because the situation appeared unsolvable and nothing could be saved, he resigned in October 1990.

Subsequent to the assessment and the delinquency when Mina Harper was approached by Revenue Canada, her due diligence explanation was accepted, although she was the actual managing director, even while she was outside of Canada. Further, when Colin Noble brought the remittances up-to-date, he applied to the Minister under the Financial Aid Act to have the penalties and interest waived, and this was granted.

It is ironical that the appellant, as the passive director, and who took the actions he did as stated above, is the one being charged by Revenue Canada for the penalties and interest.

He states that he did not inspect the books to see if a separate account had been set up or review the books to see what was being done with regard to the remittances inasmuch as he depended upon the statements of the controller and the chartered accountants in charge of the finances of the company that all was in order, nor did he make specific inquiries of the banker as to whether or not a separate bank account had been set up. He stated that moneys did come from the U.K. through his law office while he was a company director, and they were paid directly to the company to be used for financing, and it was these assurances from the executives of the company, chartered accountants, and all others, that he depended upon.

The issue to be decided is whether the appellant is liable under subsection 227.1(1) of the Income Tax Act for the failure by the corporation to remit to the Receiver General an amount of federal income tax as required by section 153 of the Income Tax Act, and the penalties and interest relating thereto because he did not exercise the degree of care, diligence, and skill to prevent the failure to remit the funds by the corporation that a reasonably prudent person would have exercised in comparable circumstances.

It can be seen from the above detailed accounting of the appellant’s actions, during his capacity as nominal director, that he certainly was aware of the responsibilities of a director and that he did take certain steps to satisfy himself that the financial system and capacity of the corporation was sufficient to meet the responsibilities of proper accounting and the remittance of income tax funds and other requirements.

It is also clear that he endeavoured to rectify the default and when it could not be done appropriately, he resigned his position as director.

It is trite to say that one must look at all of the evidence as a whole to gain a picture of the actions of the appellant to see whether or not they bring him within the subsection that absolves the director from liability for failure to remit withheld funds.

A reading of subsection 227.1(3), ’’exercised the degree of care, diligence and skill to prevent the failure’’ brings emphasis to the words "to prevent the failure".

This aspect of the responsibility of the director is emphasized in the judgment of Taylor J. in White v. M.N.R., [1990] 2 C.T.C. 2566, 91 D.T.C. 54 in which he stated at page 2574 (C.T.C. 59):

As I read that subsection, it would seem to me that the direct responsibility of a director—any director-is to prevent the failure (to deduct or remit), not to attempt to rectify or remedy the failure at a point in time subsequent to the failure itself.

This was accepted by Mogan J. in Charkowy et al. v. M.N.R., [1991] 1 C.T.C. 2095, 91 D.T.C. 284 at page 2098 (D.T.C. 286):

If the "failure” in subsection 227.1(3) is an isolated event, then the conduct of a director after that event would in most circumstances be irrelevant. In other words, a director who has not exercised the required degree of care, diligence and skill to prevent the failure cannot bootstrap himself under subsection 227.1(3) by proving how hard he tried after the event to rectify or remedy the default.

These two quoted cases are from the year 1994, and are the most recent and definitive comments on the interpretation of subsection 227.1(3).

An examination of the evidence of the appellant and his conduct during the course of his tenure as director would seem to indicate that while he took certain steps to make certain that the procedures were in order, and to endeavour to assure himself that the appropriate steps were being taken, there is no evidence that he, in fact, looked into the matter of deductions, ascertained whether or not they had been remitted, ascertained whether or not they were being held in a separate trust account, and as a result, finds himself now in the position of not being able to bring himself within subsection 227.1(3).

It would be interesting to ascertain why the Minister has seen fit to proceed against this director and absolved the others who were more actively involved in the running of the company.

Be that as it may, the director has not removed himself from the effect of personal liability being created by subsection 227.1(1) and I therefore dismiss his appeal.

Appeal dismissed.