Donald Thomson, Anne Taylor and John W. White v. Minister of National Revenue, [1994] 2 CTC 2136, 93 DTC 320

Rowe J.D.T.C.C.:—On September 30, 1986, the appellant was assessed in the amount of $946,815 pursuant to section 227.1 and Part VIII of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") on the basis that the appellant was a director of a company called TTW Management Ltd. at a time when the company had failed to pay Part VIII tax in 1984.

On September 30, 1986, two assessments issued against John W. White and Anne Taylor, each in the amount of $946,815, also on the basis these two individuals were directors of TTW Management Ltd. at a time when the company had failed to pay Part VIIT tax in 1984.

Counsel for the three appellants, Thomson, Taylor and White, and counsel for the respondent agreed at the outset that the evidence presented would be applied to the appeals of all three appellants. Therefore, the appeal of John White v. M.N.R., 89-169, and the appeal of Anne Taylor, 88-2368, are dealt with in this judgment together with the appeal of Donald Thomson.

On October 27, 1983 a British Columbia company was incorporated under the name of 270521 B.C. Ltd., which name was changed June 19, 1984 to CWC Research Ltd., and again on July 9, 1984 to TTW Management Ltd., referred to in these reasons as TTW. At all material times, the directors of TTW were the appellants, Anne Taylor, Donald Thomson and John White. John White was President and Anne Taylor was Secretary.

On July 4, 1984, TTW, as a taxable Canadian corporation, designated an amount of $1,730,000 pursuant to subsection 194(4) of the Income Tax Act and thereby became liable to pay tax pursuant to Part VIII of the Act in the amount of $865,000, pursuant to subsection 195(2), by August 31, 1984.

On August 17, 1984, TTW, as a taxable Canadian corporation made a further designation of $270,000 pursuant to subsection 194(4) of the Income Tax Act and thereby became liable to pay tax pursuant to Part VIII of the Act in the amount of $135,000, pursuant to subsection 195(2), by September 30, 1984.

On October 10, 1984 TTW entered into a transaction, regarding its Part VIII tax liability, with a company called SAT Research Corporation (referred to herein as SAT) through a designation, by SAT, pursuant to subsection 194(4) of the Act, in the amount of $1,970,000. After an audit, Revenue Canada invalidated SAT's designation and disallowed TTW's tax credit of $985,000 and restored its Part VIII liability. TTW did not file a notice of objection.

TTW did not pay any of this Part VIII liability and it was certified in the Federal Court of Canada pursuant to section 223 of the Income Tax Act on September 4, 1985 in the amount of $1,000,000 plus interest; execution by way of writ of fi fa was returned unsatisfied in whole on September 19, 1985.

The issue in the appeals of Thomson, Taylor and White is whether, at all material times, each of them exercised the degree of care, diligence, and skill to prevent the failure of TTW to remit its Part VIII tax owing, that a reasonably prudent person would have exercised in comparable circumstances.

James Crawford, testified he has been a chartered accountant since 1972 and currently is with the firm, BDO Dunwoody Ward Mallette. He has known John White since grade school and Taylor and Thomson since 1984. The appellants engaged his services to assist them in the sale of Scientific Tax Research Credits (SRTC), a process with which he had ained familiarity on behalf of other clients. In Crawford's opinion, the SRTC legislation was intended to enable capital to be raised for the purpose of research and development. A corporate potential investor, paying tax at a high marginal rate, could reduce income tax otherwise payable for the year, by any amount up to 50 per cent of the issue price of a specially designated security issued by a taxable Canadian corporation. The purchaser's tax credit flowed from a designation of the security made by the issuing corporation under Part VIII of the Act. By using the mechanism involved, the purchaser effectively obtained the deduction and tax credit that would have been available to the issuer arising from expenditures, by that corporation, on scientific research and development. However, when the issuer designated such an amount, representing actual and future expenditures, it became liable, at the end of the next month after the designation, for tax under Part VIII equal to 50 per cent of the amount so designated. In the case of TTW, there had been two designations pursuant to subsection 194(4) of the Income Tax Act for a total of $2,000,000. This amount was required to be spent on qualified scientific research. TTW received $700,000 cash in exchange for the sale of its tax credit. Between the two of them, the purchasers of the designated securities of TTW, after the necessary procedures were carried out, obtained a tax credit of $1,000,000. At the same time, however, TTW incurred a tax liability in the sum of $1,000,000 which would have to be remitted to Revenue Canada in two separate payments, one by August 31, and the other by September 30, 1984. However, Crawford stated that Revenue Canada did not request the payment within the time frame required by subsection 195(2) of the Act, and instead looked for payment within two months of the fiscal year end of the particular corporation having made the designation. Therefore, in a typical SRTC transaction, the corporation embarking on qualified scientific research would make a designation and then sell the resulting tax credit, equal to 50 per cent of the amount of the designation, to a purchaser. The selling corporation incurred a tax liability equal to 50 per cent of the designated amount but, typically, would receive only 55 to 80 per cent of the face value of that designation. The sale, or "quick flip”, would leave the selling company with a tax liability of $1,000,000 on a $2,000,000 designation, as was the case with TTW, at a time when it had received only $668,500 in return, after paying professional fees. The objective was for the research and development corporation to raise enough money from other investors to be able to expend $2,000,000 in research so as to entitle it to a tax credit of $1,000,000, thereby offsetting the liability. Subsequent to the flip, TTW, the selling corporation had three options. First, it could raise $300,000, add that amount to the $700,000 it received in cash, and pay off the tax liability of $1,000,000. Second, it could raise equity capital so as to be able to spend, within the next twelve months, $2,000,000 on research and then claim $1,000,000 in mitigating credit against the liability. Third, it could buy another corporation's tax credits and use that amount to mitigate its own tax liability. Crawford testified he informed all three appellants of their liability, pursuant to the Income Tax Act, as directors of TTW. He stated they had earlier received another opinion to that effect and were well aware of their liability. By letter of May 16, 1984, filed as Exhibit A-1, Crawford offered his opinion to the appellants of TTW (then still known as CWC Research Ltd.) that the proposed expenditures would meet the required definition pursuant to the Income Tax Act. Enclosed in that letter were various other documents including an opinion letter of April 23, 1984 from Crawford to the appellant, White, in his capacity as president of a corporation called Sombrio Mines Ltd. As a result of the designations of July 4, 1984 and August 17, 1984, totalling $2,000,000, TTW had a tax liability of $1,000,000 which it intended to cover by purchasing a tax credit from the corporation, SAT, in the amount of $1,970,000. The purchase of the tax credit from SAT was accomplished by the exchange of promissory notes between SAT and TTW. TTW signed a note to SAT in the amount of $1,970,000 and SAT simultaneously gave TTW a note in the amount of $1,524,075. Taking into account the exchange of notes, the balance of $445,925 owing to SAT by TTW was paid by cash in the sum of $106,370 together with stock certificates bearing a value of $339,555.

In cross-examination, Crawford stated that the net payment to TTW from its July 4, 1984 designation of $1,730,000, was $619,800, after having paid legal and accounting fees pertaining to the transaction. From the August 17, 1984 designation of $270,000, TTW received net proceeds of $97,200 after payment of legal and accounting fees. In August of 1984, TTW had cash in the amount of $688,500, of which more than $400,000 was subsequently used to purchase mining stocks. Crawford indicated a corporation called Sombrio Mines Ltd. (Sombrio) had originally been the one to do the necessary research and development to qualify for the SRTC but it transpired that TTW took over the project. Crawford stated that on October 10, 1984 Revenue Canada announced that the sale of tax credits, or "flips" would thereafter be precluded. He conceded that TTW, after its sale of designations, had a tax liability of $1,000,000, and that financial institutions would not lend money to a corporation undertaking research and development when it was already in a difficult position. He agreed with the suggestion that other investors were looking primarily for tax credits. Crawford stated the year end of TTW was changed so as to provide as much time as possible to postpone the Part VIII liability. When TTW purchased SAT's credit, Crawford stated ne held discussions with White to see it met the criteria of scientific research but, from his standpoint, it was solely for the purpose of satisfying the Income Tax Act and he did not make inquiries as to whether SAT was carrying on the scientific research. TTW had been in the position that it either had to raise an additional $1.3 million to be able to spend $2 million on qualified research or purchase a valid $1 million dollar tax credit on or before October 10, 1984 — the day the rules changed. Actually, TTW only needed $975,000 in tax credits as it had spent $30,000 on lawyers and accountants fees relating to its intended project, thereby intending to obtain a credit of $15,000. Crawford recalled he had been at a meeting, probably in April of 1986, at which the appellants were present, as was John White's accountant, who also was representing SAT. The disallowance of SAT's tax credit was discussed and he later received copies of Revenue Canada correspondence to that effect. He also stated that, in his opinion, the appellants, as directors, knew the purchase of mining shares would not qualify as research and development expense.

The 1986 corporate return for TTW,'for the year ending June 30, 1985, was signed by the appellant, Taylor, in her capacity as director as was the Part VIII return, dated December 30, 1985. Crawford stated he prepared a summary of the investments in stocks made by TTW by using statements from various brokerage houses and also prepared a list of TTW cheques by reconstructing the cheque register.

Rodney Zimmerman, B.Sc, M.Sc, is a geological engineer, working for the British Columbia Ministry of Environment since 1989. He has geochemical and geophysical exploration experience including exploration for water supply. He testified he has known the appellants since 1984, at which time he was a self- employed consulting engineer. He was asked to review a project about to be undertaken by Sombrio and to assist in preparing an SRTC application including the review of a report known as the Reimchen Urlich Report. The proposal was to use compound water cyclones, also known as hydro-cyclones, a process involving centrifugal force to separate out separate grains on the basis of specific gravity from a slurry of sands, ground rock and water. Zimmerman wrote to White, in his capacity as President of Sombrio, on April 25, 1984 (part of Exhibit A-2) saying, inter alia, "I concur with Cecil M. Urlich P. Eng. when he states that ‘successful application of this technology will advance mineral practice in Canada by several decades'." Zimmerman stated the general term of “mineral processing" would cover the area to be researched but the specific process would have wide application to various forms of mineral processing, coal cleaning and recovery of lighter non-precious metals.

Donald Thomson is employed as a health care administrator in Abbotsford, B.C., having previously served as an Assistant Deputy Minister in the Ministry of Health of the British Columbia Government. Thomson testified that in 1983 he became interested in a project at Sombrio Point on Vancouver Island. Triangle Ventures Ltd., (Triangle) had leased certain lands and a company called Nuspar Resources Ltd. (Nuspar) held an option to develop the property. Thomson became a shareholder in Nuspar. He believed the project on the Sombrio Point lands held a lot of potential as a placer mining property for gold and other minerals which were present in small sizes. The recovery of the small particles required a new technique to separate them out and a Dr. Visman had used the process successfully to separate out coal. Thomson was aware of a report by the firm of Reimchen Urlich which had looked into the feasibility of large scale use of the Dr. Visman technology at Sombrio Point to recover precious metals. In 1983, Thomson held about $95,000 of Nuspar stock, which was publicly traded on the Vancouver Stock Exchange commonly known as the VSE. However, Nuspar decided not to proceed on its option to develop the property. Thomson, and other colleagues in the civil service, remained optimistic about the project and formed Sombrio to take over the option agreement from Triangle. He saw some difficulties in the option agreement, believing it contained some unworkable conditions, and also realized that additional funds over and above an existing capital of $300,000 would be needed in order to continue to retain the services of Reimchen Urlich. Thomson became a director of Sombrio as did the other appellants, White and Taylor. A shell, numbered company, became CWC Research Ltd., which in turn became TTW Management Ltd. (TTW) composed of Thomson, Taylor and White as shareholders, officers, and directors. One of the reasons for the three appellants creating TTW was to avoid problems with some dissident shareholders in Sombrio and to protect themselves from personal liability, as some Sombrio shareholders appeared to be intent on spending money on things that had nothing to do with scientific research. As a result, TTW was to undertake the scientific research and obtained funds as a result of making the appropriate designations and then entering into the transactions which netted them some cash in exchange for a tax liability of $1,000,000. He stated that he and Taylor and White were well aware of the tax liability and that the appropriate research had to be done or the tax had to be paid. Once the funds were available from the SRTC transaction, the appellants discovered that the management of Nuspar wanted control of the project. An attempt was made to resolve the problem, including enlisting a high-profile, well- known and respected civil servant who was a Sombrio shareholder, but these overtures came to nothing and the impasse remained. Meanwhile, White, who was still president of Sombrio, attempted to raise funds from wealthy individuals in the Greater Victoria area, without success. On behalf of Sombrio, White tried for a grant from the B.C. government but that was not approved. Because Nuspar was listed on the VSE, an attempt was made to merge Sombrio and Nuspar but before application was made to the Securities Exchange Commission, he was asked to step down as a director of Nuspar. Thomson stated the money from the SRTC transactions were then invested in various mining stocks in order to try and make a capital gain. Unfortunately, the stocks seriously declined in value. White was looking at other research proposals and came up with the SAT proposal. Certain stocks, together with cash, were used to undertake the October 10, 1984 deal with SAT, which Thomson believed to a legitimate trade-off of TTW's tax liability to SAT. He stated he believed TTW had attempted to initiate a research and development program but was not successful. As a director of TTW, he agreed TTW would buy shares in mining companies listed on the VSE in an effort to make a gain and generate enough cash to pay off the tax liability. Butler Mountain Minerals Corp, was one of the investments chosen by John White on the basis of certain knowledge of its activities and he was known to the other appellants as having been involved in several complex business deals. As a result, White controlled all of the TTW trading on the VSE. White was the principal shareholder in SAT and had an office on Broad St. in Victoria which he also used for several other companies. Thomson agreed with the statement contained in paragraph 5(o) of the reply to notice of appeal that at no material time did TTW have the financial ability to meet its Part VIII tax liability which was calculated to be in the sum of $946,815. Thomson stated he felt that efforts were made by himself and other directors of TTW to raise money to pay the tax.

In cross-examination, Thomson agreed the British Columbia Companies Branch records showed him to be a director of Nuspar as at August 1, 1984 but that he had resigned on December 28, 1984 as a result of being "kicked out". At a meeting of Nuspar directors on August 1, 1984, Thomson was elected as director, Taylor was elected as senior officer of the company and special option shares were to be distributed as follows: Thomson—40,000 shares, Taylor—40,000 shares and White—60,000 shares. At the time, Thomson held 15,000 Nuspar shares and never received additional shares pursuant to the proposed option as a question later arose as to whether that particular Nuspar directors’ meeting had been properly constituted. Sombrio was incorporated in March of 1984 for the purpose of taking over Nuspar’s position in the Sombrio Point project. Anne Taylor became a director on March 13, 1984 and Thomson was a director on March 30, 1984. By May 18,. 1984, other persons had resigned as directors. Sombrio then entered into a formal agreement with Triangle to have the former option with Nuspar extended. On July 24, 1984, Sombrio, with the consent of Triangle, assigned 50 per cent of its rights under the option agreement to Nuspar. However, Triangle later took the position that Sombrio and TTW could no longer use the technical information regarding the mineral recovery process without written permission. On August 31, 1984, in a letter, Exhibit R-6, from Triangle to Sombrio, TTW, and Nuspar, Triangle threatened to sue for damages and enjoin the use of any unauthorized information about the process and further advised it retained the right to terminate the Sombrio option agreement. In July, 1984, TTW was indebted to Sombrio in the sum of $37,500. Thomson agreed that an exchange of correspondence between White, on behalf of TTW and L.E. (Buz) Sawyer, President of Nuspar, took place in August, 1984. Nuspar's position was that the funds raised by TTW through the SRTC transaction should have been made available for research on the Sombrio Point project. Sawyer indicated in his letter that he was writing in his capacity as President of Nuspar, and as a shareholder in Triangle and Sombrio, and accused Taylor, Thomson and White of being in a conflict of interest with Sombrio by having formed TTW. Thomson agreed that the letter of August 15, 1984, Exhibit R-9, sent on behalf of TTW by White made reference to the "onerous personal liability of the Directors to pay the Part VIII tax liability which is always considerably more than the actual moneys received". Thomson stated he never considered a trust agreement, letter of credit or other mechanism to ensure ability to pay the Part VIII tax liability but reiterated he felt the stock market investments, especially in Butler Mountain, would raise enough money to pay the tax bill.

Anne Taylor, C.G.A., is an employment equity officer with the Ministry of the Attorney-General of British Columbia. She had previously held positions in other ministries in B.C., including serving as Director of Finance in the Gamin Branch, and had operated her own small management company for 13 years. In the spring of 1983, Taylor stated Buz Sawyer, a communications officer in the Attorney- General's Ministry, was “talking up" the Sombrio Point project and, among civil servants, there was a lot of “hype” about it. She visited the Sombrio Point property, north of Victoria, a couple of times. Although she had never before invested in the stock market, she purchased shares in Nuspar and the stock rose in value from 42 cents to $3.65. However, on February 16, 1984, Mr. Sam Akins, President of Nuspar, announced, to a shareholders’ meeting, it was dropping its option with Triangle to develop the property. About 160 people were present ana emotions ran high. The shares dropped in value to 50 cents almost overnight. Since many of the Nuspar shareholders knew each other, about 80 of them decided to form Sombrio Mines Ltd. She met John White, who was presented to her as a real estate developer and an experienced businessman. She became a director of Sombrio and White ended up as President. Shares were sold by private placement to about 250 local people which resulted in the raising of about $300,000 in capital. This money went to build roads and install electricity to the site and to pay for the geological reports prepared by the Reimchen Urlich firm, as well as paying for a visit by Dr. Visman. Advice was obtained from Rod Zimmerman, consulting geologist, that the necessary recovery techniques would make an excellent research project. A hydro-cyclone was brought to the site and experimentations took place based on the principle of centrifugal force washing slurry materials at high speed. In order to facilitate the testing, a water reservoir had to be constructed. On December 1, 1983, Triangle had issued a report to shareholders, Exhibit A-7, in which reference was made as follows: “Understandably, people skilled in the field are incredulous that we can recover gold particles down to one micron or one millionth of a meter".

The plan had been for Triangle, which had staked the claims and leased the property, to grant an option to Nuspar to develop the property by undertaking the required scientific research. Sombrio was created because Nuspar had dropped the option. Then, TTW came into being to handle the research while Sombrio would look after the development. Once Sombrio had been able to raise $300,000, and it became clear more money was needed, John White advised he was familiar with the SRTC legislation and its operation. Taylor stated that it seemed as though Sombrio directors met three or four times a week and they were “acutely aware of personal liability if SRTC funds were obtained". At one meeting a discussion was held concerning the viability of separating the research from the development of the property for purposes of mining. The directors, Taylor stated, "got scared of personal liability and also of a shareholders’ revolt". As a result, about seven people wanted to proceed with a plan based on a separate corporate entity being formed to carry out the SRTC funding and research. However, within a short time, only she, Thomson and White proceeded, by acquiring a corporation, which, after two name changes, became TTW. The three appellants did further examination of the intended application of existing technology which had been used in Australia and New Zealand in the coal industry. Dr. Visman’s opinion was the technology would work with fine metals such as gold and titanium, both of which were in great demand worldwide. The hydro-cyclone was already on site. Taylor stated, “John White was the brains behind it all”, referring to the obtaining of the SRTC funds through the various mechanisms required. White went to Toronto and met with a lawyer who acted for certain clients interested in acquiring tax credits via the SRTC scheme. Upon White's return, all appellants met with their lawyer and with Crawford, the accountant, who explained to them the "downside". All three appellants were comfortable with the project and felt that additional funds for research could be raised through personal contacts. On July 4, 1984 TTW designated an amount of $1,730,000 pursuant to subsection 194(4) of the Income Tax Act.

Taylor stated she was aware, at all times, that the qualified research had to be properly done or it would be disallowed by Revenue Canada. She met with Buz Sawyer, at this point, president of Triangle, and discovered he had "turned into a maniac overnight". She stated Sawyer wanted to install an airstrip, erect cabins with fancy accommodation at the Sombrio Point site and wanted control over the funds raised by TTW from the SRTC deals. Over the next couple of weeks, about 17 meetings were held in an attempt to resolve the problem. Nuspar and Triangle shareholders, and the appellants, as shareholders of TTW, held various separate and joint meetings. On August 1, 1984, a meeting of Nuspar directors was held and Taylor attended as a director of TTW. She decided to take minutes of the meeting, which she later typed up, Exhibit R-5, and presented to Sawyer who informed her, "this meeting never took place”. At this point the services of an intermediary were sought. Taylor stated “it was a scary time and I knew I was in over my head’’. She asked White to find some other investors in the project and he met with some well-known businessmen, one of whom advised that if some of the technology could be proven on-site, that financial backing could be found. lan Sherwin, a former President of Triangle, at some point, had contacted some potential investors in Japan. All of these efforts were done with a view to "topping up" the fund required to be expended on research. By August, 1984, the intermediary advised Taylor there wasn't any prospect of settling the dispute with Nuspar. She wanted to give the SRTC funds back but her friend advised her she was “in the soup" and recommended TTW find another research project. As a director of TTW, Taylor refused to allow TTW to make additional payments to Sombrio, ostensibly for reimbursement of expenses, as she felt the moneys were for development and not for research, as defined by the SRTC legislation. White was a full-time manager being paid by Sombrio and was scouting for money on behalf of Sombrio and TTW. White met with some people regarding research projects in the field of forest products and saw blades. She, Thomson and White ad meetings on an ongoing basis and White was confident that “something would come along”. What did come along was White's idea to invest TTW funds in the Vancouver Stock Exchange. Taylor did not like the proposal but believed White had the background to make wise investments which could bring a profit and enable the Part VIII tax to be paid. One of the investments was shares in Butler Mountain. Taylor went to Vancouver and met with a principal of the company and, as a result of the personal encounter, returned to Victoria, confident the investment was a good one. White wanted to set up accounts in three brokerage houses in Vancouver over which he would have full control in the buying and selling of shares. TTW funded the investment accounts from its remaining proceeds of the July and August, 1984, SRTC transactions. At the insistence of White, TTW loaned $5,000 to a Mr. Auchinvole, secured by a promissory note bearing interest of 10 per cent. Taylor advised White, “this isn’t research", but the loan was made and eventually TTW received repayment of $4,000. Taylor stated she began asking White to take over TTW but he remained confident the stocks on the VSE would Bring profits to TTW and that other investors could be found to fund the research.

Early in October, 1984, Taylor became aware of an offering of a Scientific Research Tax Credit from SAT. On October 10, 1984, the transaction was completed and White, the principal of SAT, took $106,370 cash TTW had in the bank together with the entire portfolio of shares held by TTW. Taylor later prepared a spreadsheet in order to reconstruct the stock transactions carried out by White on behalf of TTW. On December 12, 1984, she wrote to three brokerage houses in Vancouver advising the TTW accounts were to be closed and that no future trading should be passed through that account. Towards the end of 1985, Taylor and Thomson met with officials of Revenue Canada who advised the validity of the SAT designation was being investigated. In April of 1986, at another meeting with Revenue Canada employees, Taylor attended with Thomson, White and their accountant, and left the meeting satisfied the SAT deal would not be disturbed.

In cross-examination, Taylor stated the TTW stock portfolio had lost $123,000 as at October 10, 1984. She had a personal account at Richardson Greenshields brokerage house and once used it to pick up 30,000 shares but only as a temporary accommodation for TTW. In 1983, she had held shares of Nuspar and eventually lost $33,000 as a result of that investment. Taylor identified brokerage statements in her name, Exhibit R-11, indicating the purchase of 30,000 shares of Nuspar in July and August of 1984. Taylor explained that she believed the Nuspar shares to be a good investment, although at TTW director's meetings she and Thomson often expressed their discomfort at investing TTW money in the stock market in order to satisfy the Part VIII tax liability. As for the research, although she admitted it had not been carried out, she felt it could have improved existing, proven, technology which could then be applied to recovery of gold and fine metals. At all times, she was well aware of the Part VIII liability resting on directors in the event the research was not undertaken. Sombrio was incorporated on March 5, 1984 and by May 18, 1984, the only directors and shareholders were herself, Thomson and White. There had not been any intention to use the SRTC funds to invest in the stock market but only did so after the difficulties arose with Nuspar and Triangle over the proposed use of the technology by TTW. Although all three of them were directors, it was White who looked after the day-to-day activities. She understood that research had to be done but remained confident an additional $1.3 million could be raised to "top-up" the $0.7 million on hand so that $2 million could be spent on research. In July 1984, TTW began to look at other research projects as investors were not forthcoming to fund the Sombrio Point project. White moved to Vancouver in October 1984, and she inquired numerous times whether he had satisfied the TTW Part VIII liability as a result of the October 10, 1984 transaction between TTW and SAT. She stated that White never did tell her that any research had begun but that he had obtained another 12 months extension on the tax liability, which would take them up to October of 1985 before it became due. Taylor stated she was not aware of the practice of obtaining advance rulings from Revenue Canada, even though it is part of an opinion letter from the accounting firm of Thorne Riddell. Taylor agreed that TTW did not have the financial ability to pay the tax liability but that this inability was as a consequence of "circumstances or the day". In response to the question as to what steps she had taken to prevent the failure of TTW to pay its Part VIII liability, Taylor replied that she had undertaken many steps to that end, including talking to geologists, trying to raise top-up funds and buying tax credits from other corporations.

John White is a Vancouver businessman who testified he has been involved for more than 20 years raising venture capital for private and public companies. Between 1983 and 1986 he put together several real estate syndicates involving 100 homes at Honeymoon Bay on Vancouver Island and 120 townhouses in Victoria. At one point, he had been President of Nuspar which had about 320 shareholders. He was also involved in the formation of Sombrio. He looked at methods of funding research to separate the fine minerals from sand, on the property at Sombrio Point. He spoke to several high-profile, wealthy, local businessmen. During other discussions with personnel from Triangle he became aware of the Reimchen Urlich report and the previous work of Dr. Visman usin a hydro-cyclone to separate coal from rock. As a result, he began looking into the SRTC potential of the process as it would apply to Sombrio Point. Initially, the SRTC application was to be done in the name of Sombrio and he was well aware of the potential personal liability of directors as a consequence of having read an opinion letter from Thorne Riddell. However, the SRTC package was prepared in the name of CWC Research Ltd., predecessor of TTW, and he contacted a law firm in Toronto which had located an investor. In July 1984, he travelled to Toronto with his lawyer and the SRTC transaction was completed but only after satisfying various requests from the investor for documentation and information concerning the proposed project. The investors inquired about the right of TTW to use Dr. Visman's technology. White, having met with Dr. Visman while in Toronto, expressed his belief that it was in the public domain.

Returning to Victoria, the funds from the SRTC transaction having been paid to TTW, White discovered that Buz Sawyer was not a shareholder of Nuspar, having sold his shares in a private placement, and that a movement was afoot among many of the 320 shareholders to remove a Mr. Akins as president of Triangle and replace him with Sawyer. At some point in the late summer or fall of 1984, Sawyer became president of Triangle. White became upset when, at a meeting, Sawyer advised he was a large shareholder in Nuspar at a time when White was satisfied that was not the case. White tried to resolve difficulties with Sawyer by enlisting a mutual acquaintance as a mediator, to no avail. At that point, White stated ne knew he had to find ways to mitigate the tax liability by doing research in another area or acquiring another corporation's tax credits. In the past, he had raised funds through the VSE and was aware that Butler Mountain had some lead-zinc property near the British Columbia-Yukon border. He met with a business associate in Vancouver, who was on the board of directors of Butler Mountain, and also with geologists, all of whom were enthusiastic about the property. After these meetings, White reported to Taylor and Thomson, his fellow directors of TTW, and an agreement was reached whereby TTW would buy a large block of shares in Butler Mountain and in another company trading under the name of Acorn. White stated, "we were looking for a major win to get the funds to pay off the government". White stated he was always aware of personal liability on the directors. It was this concern which formed part of the dispute with Sawyer, who had wanted to use SRTC funds to build an airstrip and dormitories on the Sombrio Point property, and to make other expenditures which did not qualify as scientific research. At one point, the shares in Butler Mountain were trading at over $3 on the VSE but still could be referred to as a “penny stock" within the context of the Vancouver Exchange. He had sole authority to buy and sell shares on the VSE but it required two TTW director's signatures on a cheque to fund the brokerage accounts. White stated he was looking at other research projects including one which related to the toxicity of sprays used in lumber mills. He did some legwork to locate a sawmill and intended to use it to research non-toxic insecticidal sprays as a worthwhile research project.

On October 10, 1984, he received a telephone call advising that the SRTC rules were about to be changed and that a SRTC transaction to sell or acquire a tax credit would have to be done immediately. He contacted Taylor and Thomson and, after a meeting several hours in duration held in a lawyer's office, the deal was struck with SAT to acquire a tax credit through a designation by SAT of $1,970,000. White was the sole shareholder of SAT. White stated that after October 10, 1984, the publicity surrounding SRTC flips and the new government policy to prohibit such transactions in the future, made it virtually impossible to raise money if investors saw any project as having a connection with the SRTC program. White agreed that TTW did not, at any time, initiate a research and development project nor did it remit the required Part VIII tax. However, he stated that he did not agree with the respondent's assumption of fact that TTW never had the financial ability to satisfy the Part VIII tax. In White’s view, the best-case scenario was that TTW could have worked out an arrangement with Triangle whereby the intellectual property flowing from the application of the Visman technology to the Sombrio Point site would have been TTW's to license in the future. Nuspar, a publicly traded company on the VSE, could have provided funding or Triangle and Nuspar could have arranged their affairs so as to achieve. maximum leveraged funding and a major tax write-off for Triangle. Another possibility was a merger of Nuspar and Sombrio.

In cross-examination, White stated the August 17, 1984 designation by TTW was part and parcel of the deal he had arranged in Toronto prior to July 4, 1984. He agreed that on July 9, five days after the July 4 designation, TTW was already buying shares in Sombrio. As of July 14, 1984, White stated he, Taylor and Thomson, were the subject of a telephone campaign undertaken by certain Sombrio shareholders, to the effect that they had taken SRTC funds belonging to Sombrio and put them into TTW, which they owned. After paying all of the fees involved in the July 4, 1984 deal, and after reimbursing Somorio in the sum of $37,815, there was $591,000 in the TTW bank account. The payment to Sombrio was based on the recognition by TTW that Sombrio had spent some money on its behalf for certain items, including the opinion of Thorne Riddell. White stated he tried to back out of the second part of the deal with the Toronto investors before the August 17, 1984 designation but was unable to do so. As for the SAT Part VIII liability accruing [as] a result of the deal with TTW, he was aware that liability could be brought home to him personally. He stated he had not been aware of a method of establishing an escrow account to monitor research in order to ensure it was qualified.

Gordon Gillis, Collections Supervisor with Revenue Canada, testified he began contacting Taylor on October 1, 1984, about her tax liability and on February 27, 1985, a letter was sent to TTW, care of Taylor, advising the SAT transaction was under review and disallowing $30,000 in legal and accounting fees on the basis such expense did not constitute research. Gillis stated there seemed to be a moratorium in 1984 on collecting tax within the time limit specified in the Income Tax Act.

Counsel for the appellants submitted the following reasons the appeals should succeed. It was reasonable for Taylor and Thomson to have relied on White and his expertise in financial matters. The technology was in the public domain and there was no reason to suspect any problems in applying it to the Sombrio Point property. The liability of directors under Part VIII should be considered in a different light than the strict application of the due diligence required to ensure that source deductions of employees are remitted. Further, that although unintentional, the SRTC program was proven to be seriously flawed, administered in a flexible manner, which produced strange results. In this case, the appellants undertook extensive examination of the site, relevant geological data, conducted innumerable business meetings in the context of a business plan, and sought out private investors to secure adequate funds for research. As one of the hallmarks of the SRTC program, Revenue Canada was allowing more than a year to pass before attempting to collect tax under Part VIII. The investment in stocks listed on the VSE was a method of parking funds in the interim until research could be undertaken or another project found. Having regard to White's expertise in the market, the investments were not an unreasonable use of funds on an interim basis. As for the transaction between TTW and SAT, owned totally by White, Taylor and Thomson had reason to believe the deal was valid.

Counsel for the respondent submitted the ordinary rules for due diligence of directors apply and that it is clear on the evidence the appellants did not exercise the kind of care and skill required under the circumstances to prevent the failure to pay the Part VIII tax. The investment in shares trading on the VSE was clearly not a proper expenditure of funds and the last minute effort to make the deal with SAT was nothing more than a frantic attempt to avoid Part VIII liability. At no time did TTW carry out the necessary research nor did it ever have any ability to do so.

The appellants appeal from an assessment issued against each of them as directors of TTW in respect of the failure of TTW to pay tax as required under Part VIII of the Income Tax Act. Directors are made vicariously liable for the failure of the corporation to pay by virtue of section 227.1 of the Act. However, the appellants have raised the defence of due diligence under subsection 227.1(3) of the Act which reads:

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.

In Robitaille v. The Queen, [1990] 1 C.T.C. 121, 90 D.T.C. 6059, Addy J. of the Federal Court-Trial Division, at page 126 (D.T.C. 6063), shed some light on the standard that is contemplated by the subsection by stating:

The term "diligence" which is now codified, provides a higher objective standard than that imposed by the common law on directors generally. Although the test is to a large extent an objective one, the question remains, however, what a reasonably prudent person would do in the circumstances in which a director finds himself. These circumstances include subjective elements such as, degree of education, business knowledge and general ability of the director.

There is no doubt on the evidence that all of the appellants are well educated, intelligent individuals with varying degrees of business experience. There is no suggestion on their part that they were not, at all times, acutely aware of personal liability under the Act in the event TTW was unable to pay the Part VIII tax. However, the submission on their behalf, to some extent, referred to the actions that may have been taken by a reasonably prudent person, in the context of the SRTC program, under the circumstances in which the appellants found themselves when things started to unravel with Nuspar and Sombrio. The concept of the SRTC legislation was that a taxable Canadian corporation was able to designate an amount with respect to a share or debt obligation issued or a scientific research contract granted after September 1, 1983. Upon the designation having been made, the first registered holder of that share, debt obligation or scientific research financing contract, excluding brokers or securities dealers, obtained a scientific research tax credit. However, it did not take long for the “quick flip” transactions to occur and on October 10, 1984, the Minister of Finance issued a press release announcing an end to the "flips", exempting only transactions in progress. In March, 1986, except for certain transactions covered by the "grandfather" provisions, the entire SRTC program was terminated by legislation.

In Ivezic v. M.N.R., [1992] 1 C.T.C. 2124, 92 D.T.C. 1066, The Honourable Judge Bonner of the Tax Court of Canada, considered the taxpayer's due diligence defence as a director of a corporation known as Atlantis and at pages 2126-27 (D.T.C. 1068) of his judgment stated:

With regard to the failure of Atlantis to make the payment due under subsection 195(2) of the Act on or before the last day of December, 1984, the appellant testified that his understanding was that Part VIII tax was payable at or after the company’s year end and that if qualifying research was underway when the tax would otherwise have been due under subsection 195(2), the expenditures on such research would ultimately reduce the Part VIII tax liability. Testimony as to an understanding that Revenue Canada had taken the position that it did not intend to enforce a provision of the Income Tax Act seems at first blush highly improbable. If such evidence is unsupported by clear proof such as an authoritative pronouncement by a responsible Revenue Canada official, such testimony might ordinarily be regarded as wishful thinking. However, I accept that the appellant had an honest and well-founded belief that the Part VIII tax did not have to be paid until year end despite the clear language of subsection 195(2). It would seem that Revenue Canada did, amazingly enough, make public statements which could have formed a reasonable basis for the appellant's understanding. In this regard I refer to the “advice to taxpayer” referred to in the decision of the Federal Court of Appeal in The Queen v. Optical Recording, [1990] 2 C.T.C. 524, 90 D.T.C. 6647, at page 525 (D.T.C. 6649). Though no notice similar to that quoted in the Optical Recording reasons was attached to the copy of the notice of assessment entered as Exhibit A-3, it is not at all improbable that knowledge of the unusual position which apparently had been taken by Revenue Canada came to the appellant by other means.

In my view, no great degree of care, diligence, and skill need be exercised to prevent a failure to pay at the time required under subsection 195(2) in a case such as this when the responsible director of the taxpayer believed on reasonable grounds that the corporation would be given an opportunity to eliminate the Part VIII liability by means of qualifying expenditures before year end. Subsection 227.1(3) refers to comparable circumstances and the public posture of the Minister is a relevant circumstance.

The next question then is whether the appellant exercised the diligence contemplated by subsection 227.1(3) to prevent the failure of Atlantis to extinguish the Part VIII liability by year end. Although I cannot conclude that the appellant did not exercise such diligence, more importantly, I cannot conclude that he did. There are simply too many gaps in the evidence. Following the SRTC flip transactions, Atlantis was in the position that it had to make qualifying expenditures in the amount of $4 million to satisfy the Part VIII liability. The cash on hand from the flips approximately was $1.6 million. No other particulars were supplied as to the financial position of Atlantis or as to its ability to undertake such an ambitious research program. The appellant testified that the required funds were to be obtained by leveraging the cash proceeds of the financing. He spoke in general terms of buying on credit the equipment required for the research and of mortgaging the building being erected to house research activities, but he did not point to any detailed concrete financial plan whereby the objective might have been accomplished. No research budget was produced. No particulars as to timing were given in evidence. It appears that no arrangement was ever completed for a mortgage of the building under construction. The appellant said that a decision was made by a company which supplied programs for resale by Atlantis, thus generating cash flow, to market those programs itself and in consequence Atlantis lost at a critical time a source of cash flow and in the end became insolvent. While I have no doubt that some or all of the events described by the appellant did occur, I cannot find that the ill-defined scheme for financing the $4 million of research with about $1.6 million in cash plus unknown other assets and liabilities was one on which the appellant might reasonably have relied.

In Courville v. M.N.R., [1992] 1 C.T.C. 2546, 92 D.T.C. 1888, The Honourable Judge Garon of the Tax Court of Canada also dealt with director's personal liability for unpaid Part VIII tax. In that case, the appeal of the director, Courville, was allowed while the appeal of the other director, Jacques, was dismissed. In analyzing the actions of Courville, Judge Garon, at pages 2551-53 (D.T.C. 1891) stated:

I would like first to consider the case of the appellant Courville. The major criticism made of him by counsel for the respondent was that he had at the time been a director of a company which had set off on a risky project. On this point, it was noted that one of the financing methods to which the company resorted was using what are called "quick flips" on two separate occasions during 1984. It was argued that issuing promissory notes was a particularly audacious operation in the circumstances. The consequences of this method for the company, with the designations made for the full amount of the promissory notes under the provisions of subsection 194(4), was a tax liability of $500,000, as shown in the assessments dated August 17 and November 20, 1984, respectively. However, this income tax could be cancelled, as it were, if scientific research of the necessary value were to be carried out.

It is clear from the evidence that payment of the $250,000 in income tax established by each of the two assessments was not required by the Department of National Revenue at the end of the month following the transactions in question, at the latest, as provided by subsection 195(2). The notice which accompanied each of the assessments in question, the text of which was set out earlier, leaves no doubt on this point. Moreover, the same is true of the press release of June 5, 1984.

In accordance with the policy of the Department of National Revenue, which was well established at the time, an official of that Department contacted the appellants Courville and Jacques and undertook a summary examination of the available financial statements, and concluded, as we may infer from his testimony, that this was a serious project. The evidence indicates that all the necessary information was provided to that official.. This project obviously involved some risk, but the competent authorities of the respondent did not feel that pursuing the project was so risky as to justify taking special measures in terms of collecting the tax. Payment of the tax could be delayed, I presume, for a reasonable time, in order to permit the company to do the scientific research work which was to be financed, at least in a large part, through the public offering on the American market. It was also mentioned that at the time the assessments were issued, in August and November 1984, the company's short-term liabilities exceeded its short-term assets and there was also a deficit in the working capital.

The question of whether the company’s pursuit of its development program might engender eligible expenditures for scientific research and experimental development was also argued before this Court. The evidence on this point is not the most conclusive; I do not believe that it is necessary, for the purposes of this appeal, for me to decide on this point since the issue here is whether or not the appellants met the standard set out in subsection 227.1(3) of the Act, taking into account the fact that Vidiom II failed to pay tax under Part VIII of the Income Tax Act. It will be recalled that this liability to pay had been stated in two assessments sent to Vidiom II in respect of which there was no objection or appeal.

On the evidence as a whole, I am satisfied that the company’s research program was serious and that the company was managed by people from various disciplines who were competent in their respective fields and had the necessary experience. There is no doubt that, according to the evidence, the appellant Courville believed in the possibilities for success of this company's research program, and its capacity to carry out the undertaking in which it was involved. He devoted considerable effort to preparing a prospectus for the purpose of a public share offering by this company on the American market. Several other experienced people also believed in the viability of this company; major transactions have been concluded by Vidiom II during 1984 and in early 1985. I am referring particularly to the two transactions with the American company Mathematical Applications Group Inc., referred to earlier.

In short, I am of the opinion that the appellant Courville cannot be criticized for having participated as a director in this company's financing activities. I do not believe that we can consider the mission pursued by the company during the relevant period, in 1984 and 1985, as a mission impossible or a mission so surrounded by risk that a reasonably prudent person would not have got involved in it.

If we accept that in pursuing its operations Vidiom II had a reasonable chance of success in 1984 and 1985, the evidence also shows that the appellant Courville did everything he could during the crucial period, particularly in the spring and early summer of 1985, to have the company honour its debts, and to proceed with the vital operation of the public offering of the shares in question on the American market. The appellant was not criticized for his conduct in the final weeks preceding his resignation. I am therefore of the opinion that, at all times during his tenure as director of Vidiom II, the appellant Courville met the standard of conduct required by subsection 227.1(3).

In Bvrt v. M.N.R., [1991] 2 C.T.C. 2174, 91 D.T.C. 923, The Honourable Judge Rip of the Tax Court of Canada, dealt with the matter of director's personal liability for unremitted source deductions and Part VIII tax. The taxpayer had asserted that he had relied on another director, Vassos, to ensure the proper work was being done on a wind turbine project in order to qualify under the Income Tax Act as research and development expenses. At page 2184 (D.T.C. 930) of his judgment, Judge Rip stated:

The Shorter Oxford English Dictionary on Historical Principles defines "diligence" as:

1. The quality of being diligent; industry, assiduity . . . 3. Careful attention, heedfulness, caution . . . 4. Law. The attention and care due from a person in a given situation . . . .

The same dictionary defines “diligent” as:

2. Of actions, etc: constantly or steadily applied; prosecuted with activity and perseverance; assiduous . . . .

The word “skill”, as a noun, is defined by The Shorter Oxford Dictionary on Historical Principles not only as "to have discrimination or knowledge, esp. in a specified matter”, but also as "that which is reasonable, proper, right or just”.

I agree with counsel for respondent that Byrt was more interested in his own affairs and did not pay the attention a director ought to have paid to his duties as a director. He learned nothing from his first skirmish with Vassos, that is, the necessity for legal pressure to know an undertaking; he signed the prospectus in his capacity as director in a perfunctory manner; he did nothing when he saw the complete disregard Vassos had for the directors at the time designation for the tax credit was being prepared. To put it quite simply: Byrt heard warning bells quite early in his involvement with Vassos, but used very little care, diligence and skill to prevent Parthenon from failing to remit the source deductions and pay the Part VIII tax, even when the bells started to ring quite loudly. Byrt had no reason to place his complete faith in Vassos after these past experiences and I doubt a reasonably prudent person would have acted in the way Byrt did.

A director must be prudent. A director cannot ignore disturbing actions of a president of a corporation, even if the president also controls a majority of the shares of the company. The degree of prudence required by subsection 227.1(3) leaves no room for risk. In exercising the degree of care, diligence and skill to prevent a corporation's failure to remit source deductions as Part VIII tax, the director must heed what is transpiring within the corporation and his experience with the people who are responsible for the day-to-day affairs of the corporation. Once a director knows something negative about the corporation's affairs other directors do not know and he does not even attempt to inform the other directors, he is lacking a degree of care and diligence. He lacks skill, care and diligence when after querying the integrity and sincerity of a person, he does nothing to control the actions of that person. A prudent person, in such circumstances, would have become at least suspicious and the person's degree of care and diligence ought to have increased substantially if he chooses to remain a director of the corporation. A director cannot be said to have done anything which is reasonable, proper, right or just when he permits irregularities to continue.

Byrt was an experienced businessman who may have been taken by Vassos at the outset. However, as events unfolded he, as director of Parthenon, ought to have been more cautious in his dealings with Vassos and Parthenon. Byrt did not exercise the degree of care, diligence and skill to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances.

The question then becomes focused specifically on the appellants in the instant appeals. Despite application of the evidence, by agreement, to the individual appeals, the issue to be resolved is whether any appellant has demonstrated that he or she is entitled to the relief afforded by subsection 227.1(3).

As a result of the designation of July 4, 1984 and the Toronto “flip”, TTW received net proceeds of $591,300. According to the reconstructed cheque register of TTW, Exhibit R-3, on July 9, 1984, TTW purchased 44,015 Sombrio shares at 50 cents a share, for a total acquisition cost of $23,019. Each of the appellants was a director of Sombrio and, personally or through holding companies controlled by them, were shareholders in Sombrio. The appellant, White, was President of Sombrio. Sombrio was a private company and the shares were purchased through a private placement. On July 18, 1984, TTW, by means of two cheques, each in the sum of $30,000, funded a brokerage account at McLeod Young Weir in Vancouver. Two days later, TTW paid Sombrio the sum of $37,875, ostensibly for "repayment of loan” according to the notation on the cheque stub. The explanation given in evidence was that it was to repay Sombrio for certain expenses incurred on the Sombrio Point project that were seen as providing a benefit to TTW, which was now the corporation in charge of the research. On July 24 and July 31, 1984, TTW paid Somorio two cheques totalling $8,150, again ostensibly for repayment of loan with interest and reimbursement of costs. On July 30, 1984, TTW purchased $22,000 in common stock of Sombrio. Further payments were made by TTW to brokers so as to enable White to trade, on TTW's behalf, on the Vancouver Stock Exchange. By July 31, 1984, TTW had expended funds totalling $323,704, none of which had anything whatsoever to do with scientific research and development. On July 25, TTW purchased $22,600 of Nuspar stock, the same company in which Anne Taylor had lost more than $30,000 as a result of the stock value plummeting following the announcement on February 16, 1984 by Nuspar that it was pulling out of the option agreement with Triangle regarding the Sombrio Point property. The appellants, either personally, or through holding companies controlled by them, were shareholders in Nuspar and Thomson and White both served as directors. On August 1, 1984, at a meeting of Nuspar directors that may or may not have been validly constituted, Taylor was to become a Senior Officer of the company and all three appellants were to be given special Option Shares. The fact is that one needed a program to identify the players, most of whom wore several hats. Sombrio had been formed when Nuspar dropped the Triangle option. TTW was formed by the appellants to be able to control the research project and to take it out of the control of Sombrio shareholders in the event they staged a coup. Then, Nuspar, despite having dropped its option with Triangle in March, 1984, made a deal on July 24, 1984 whereby Sombrio assigned to it, 50 per cent of its rights under the March 17, 1984 agreement with Triangle which was in effect the same agreement Nuspar had dropped out of, apparently proving, once again, that what goes around comes around.

There does not appear to have been any enforceable contractual arrangement in place at any time between TTW and Triangle, the leaseholders of the Sombrio Point property. The appellants apparently relied on the fact they were all shareholders and directors of Sombrio and that White was President. Or, that as shareholders in Nuspar, satisfactory financial arrangements could be made to proceed with the research project. However, at some point, another coup was in the offing and difficulties arose in relations with Buz Sawyer who had become president of Triangle — and whom White devoutly believed was no longer a shareholder in Nuspar, having dumped his shares privately. The technology to be applied was, to the minds of the appellants, in the public domain. However, Triangle took the position in a letter dated August 31, 1984, that it had a proprietary interest in certain information which was not to be used without consent, and threatened to sue TTW. By hand-delivered letter of August 8, 1984, (Exhibit R-7) White, as President of TTW, wrote to Sawyer at Nuspar as follows:

Anne Taylor gave me four pages of notes this morning made regarding the conversation you and Anne had on the phone last night. The concern of Anne, Don and myself is that you address the offer TTW has made to Nuspar prior to its expiry tomorrow. As you now know the TTW Director's liability is onerous and must be immediately attended to so that it is mitigated. However, last night you told Anne that on behalf of Nuspar you were working on three much larger SRTC sale proposals and consequently were not interested at tn is time in the TTW offer.

After referring to the prospect of Nuspar being able to raise large sums of money from sources other than the TTW offer, White wrote:

As a Nuspar Director, I am delighted at the prospect of such large net sums to Nuspar. I assume that you have thoroughly looked into the matter of directors’ liability to avoid a last minute frustration of your efforts.

On August 15, 1984, Sawyer, wearing his Nuspar President's hat, replied to White at TTW. In the third paragraph of his letter, Exhibit R-8, Sawyer stated:

This letter is to make it absolutely clear to you that I feel, with the limited information I have at hand, that all the tax funds which were raised by the Directors of Sombrio Mines Ltd. over one month ago should have been made immediately available for the Sombrio Point Research project. It seems to me that the Directors of Sombrio Mines Ltd. have placed themselves in a conflict of interest situation by forming a private company and placing these funds into said company (TTW). I find this morally reprehensible, and feel certain that most Sombrio Mines Ltd. shareholders will share this view.

Then, in the same letter, Sawyer went on to say:

TTW does not now, and has not at any time had any relationship with Triangle Ventures Ltd., Nuspar Resources Ltd., the Sombrio Point placer property, Dr. Jan Visman or Reimchen Urlich Geological Engineering. Yet the SRTC package (which we have finally seen), which was developed by Sombrio Mines Ltd. under a subsidiary company by the name of CWC Research Ltd. (now called TTW Management Ltd.) indicates that it does have a relationship.

By letter dated August 15, 1984, Exhibit R-9, White, on behalf of TTW, replied to Sawyer, acknowledging the rejection of TTW's offer and in the third and fourth paragraphs of the letter stated:

However, some of your letter unfortunately requires a reply. As you know CWC was never a subsidiary of Sombrio and was always the sole financial responsibility of Anne, Don and myself. There never has been a represented association with Nuspar or Triangle other than through the proposed investment relationship into Sombrio of which, need I remind you, you at one time approved.

I should also remind you again, that the original intended sale of SRTC’s by Sombrio was aborted following receipt of the enclosed six page opinion letter to Sombrio from Thorne Riddell, dated April 23, 1984, which details the liabilities of an issuing company and the onerous personal liability of the Directors to pay the Part VIII tax liability which is always considerably more than the actual moneys received.

It is obvious from all of the evidence, and without any need to resort to hindsight, that the appellants did not have any foresight. There was not any enforceable agreement between TTW and Triangle, the company that controlled access to the Sombrio Point property or with Nuspar, which once again had become involved in the project by picking up 50 per cent of Sombrio’s interest. The appellants were holding endless meetings with each other, with Sombrio (of which they were shareholders, and, at various times, directors) and with Nuspar, in which they were shareholders. There is no doubt that Anne Taylor was quite correct in her categorization of the enthusiasm in the Sombrio Point property as "hype". On any objective examination of the conduct of the appellants from July 9, 1984 onwards, any so-called plan, or plans embraced by them from time to time, were groundless, without any reasonable foundation, and they managed to elevate blind faith into a mystical bond between them. The entire exercise was characterized by conflicts of interest, a cast of changing players juggling several balls in the air, and planned, aborted and sometimes successful revolts by various cabals of dissident shareholders in Triangle, Nuspar and Sombrio. The investments by TTW in Sombrio, Nuspar and in various stocks traded on the VSE were made on White's representation that enough money could be made within the next 12 months to pay off the tax liability. However, Taylor and Thomson went along with the scheme and, at all times, one of them was required to co-sign any TTW cheques. The repeated assertions by White, to Taylor and Thomson, that their joint tax predicament would ultimately be resolved by a masterful coup in the stock market, left Taylor and Thomson with a nice, warm feeling, despite a lack of visible, objective criteria — rather like the experience, while wearing a dark suit, of having held a leaky baby on one's lap.

Counsel for the appellants reminded the Court that the VSE, in 1984, had not et received the notoriety that was to follow as a result of various alleged exposés by American TV programs or international business publications. It is clear that White, especially, having been in the venture capital business for 20 years, and the other appellants as well, were well aware the VSE was a volatile, speculative, junior stock market largely composed of "penny stocks". The appellants may well ave been better off to wait for a spectacular jackpot and then to have purchased $400,000 in Lotto tickets on a Saturday night draw. Such course of action would not have been any greater deviation from scientific research and development than the preceding activities of the appellants, as the controlling minds of TTW.

The transaction between TTW and SAT, a corporation totally owned by White, on October 10, 1984 — the last day of the “quick flips” — is illustrative of the outrageous conflict of interest played out in the sorry saga of TTW's history. It was, indeed, a frantic, last-ditch effort to evade or, at least, postpone the tax liability and was founded on nothing more than accepting, once again, White's bald assertions that everything would be fine.

While White was the major player in terms of selling the TTW tax credits, investing proceeds in the VSE and otherwise dealing with matters, there is no reason, on the evidence as a whole, to differentiate between the appellants as to their personal liability arising under section 227.1 of the Act. They were in it together and Taylor and Thomson were not novices in terms of business, stock market investments or corporate matters. Unfortunately, the appellants’ reach exceeded their grasp of what was required in order to prevent the failure of TTW to pay the Part VIII tax. None of the appellants was able to demonstrate, according to his or her individual burden, that any of them exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. The SRTC program may have been ill-conceived and, to some extent, casually administered, but there were still legal requirements to be met by directors of corporations involved in these matters. The SRTC minefield may have been largely uncharted territory, but there were still more rules in place than on a Saturday night in Dodge City. The appellants, while aware of their responsibilities in an intellectual sense, consistently acted as though their obligations were only a temporary dilemma, capable of resolution by the timely arrival of a fabulously wealthy White Knight or some other serendipitous event.

The appeal of Donald Thomson is hereby dismissed. The appeal of Anne Taylor is hereby dismissed. The appeal of John White is hereby dismissed.

Appeals dismissed.