Ronald Cloutier and Ralph T. Molyneaux v. Minister of National Revenue, [1993] 2 CTC 2038, 93 DTC 544

Bowman, T.C.C.J.:—These three appeals were heard together on common evidence. In each case the issue is the liability of the appellants as directors under subsection 227.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for unpaid tax imposed under Part VIII of the Act upon corporations of which they were directors.

The details of the assessments are as follows:

(a) Cloutier was at all material times a director of Praetorian Holdings Ltd. ("Praetorian") and Propolis Research Corporation ("Propolis"). Molyneaux was until May 24, 1984 a director of Praetorian.

(b) On March 12, 1984, Praetorian made a designation under subsection 194(4) of the Income Tax Act in the amount of $1,000,000 in favour of a third party, resulting in a scientific research tax credit of $500,000 in favour of that third party under section 127.3 and a liability of Praetorian for tax under Part VIII of the Act of $500,000. This tax was payable by April 30, 1984.

(c) On April 3, 1984, Praetorian made a designation under subsection 194(4) in the amount of $130,000 giving rise to a tax liability under Part VIII of $65,000. This tax became payable by March 31, 1984.

(d) The Minister assessed Praetorian under subsection 195(2) in these two amounts, $500,000 and $65,000 on July 30, 1984.

(e) On February 28, 1985, Propolis made a designation under subsection 194(4) in the amount of $720,000 in favour of Praetorian, giving rise to a scientific research tax credit of $360,000 in Praetorian and a Part VIII tax liability of Propolis of $360,000.

(f) The Minister assessed Propolis in the amount of $360,000 under subsection 195(2) on December 9, 1985.

(g) The result of the designation by Propolis in favour of Praetorian was to reduce the amount owing by Praetorian under Part VIII by $360,000.

(h) Neither Praetorian nor Propolis have paid the taxes assessed against them, (after giving effect to the reduction of $360,000 in the amount owing by Praetorian). Certificates were registered in the Federal Court of Canada in respect of their liability, Writs of fi fa were issued and certificates of nulla bona were returned.

(i) Both corporations have since been dissolved.

(j) As a result of Praetorian's failure to pay the tax and interest owing under Part VIIT the Minister initially assessed the appellant Cloutier as follows:

Assessment	574498	May 23, 1986	609,480.64
Assessment	574505	May 26, 1986	79,897.40
Assessment	3365	Sept. 10, 1990	452,192.00

Assessment 3365 replaced and superseded assessment 574498 and resulted from the reduction of Praetorian's liability as a consequence of the tax credit it received on the designation by Propolis.

(k) On May 23, 1986 by assessment number 574499 the Minister assessed the appellant Molyneaux for $609,480.64, the same amount as he assessed against Cloutier under assessment 574498 in respect of Praetorian's liability arising from the $1,000,000 designation. This assessment was superseded by a subsequent assessment on September 10, 1990 for $452,192.28.

(l) On November 13, 1987, the Minister assessed the appellant Cloutier for a further $410,113.97 in respect of the liability of Propolis under Part VIII together with interest, in respect of the $720,000 designation that it made in favour of Praetorian.

Following the conclusion of argument the Court received a letter from counsel for the respondent as follows:

As a result of a recalculation of the interest due after giving the appellants credit for $360,000 (as noted in the assessments which are numbered 3365 (Mr. Cloutier) and 3366 (Mr. Molyneaux)), I have been instructed to advise the Court that the respondent accepts that the appeals should be allowed to the extent that the matter be referred back to the Minister for reassessment on the basis that the proper assessed amount unpaid as of September 10, 1990 was $395,533.64 rather than $452,192.28 on each of assessments Numbered 3365 and 3366.

In the result, the Minister claims a total of $490,011.37 against Cloutier alone and $395,533.64 against Cloutier and Molyneaux jointly and severally under subsection 227.1(1) of the Act, plus such further interest as may have accrued.

All of the other directors of the two corporations are bankrupt and accordingly whatever rights of contribution the appellants might have against them or the corporations under subsection 227.1(7) are worthless.

The trial of these appeals lasted four days. The appellants, who were the only witnesses, were unrepresented. Sixty-four exhibits were adduced in evidence by the appellants and 21 by the respondent. The sole issue is whether the appellants are exonerated from the liability imposed upon them under subsection 227.1(1) by subsection 227.1(3) of the Act which provides:

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.

The question therefore becomes one of fact and the Court must to the extent possible attempt to determine what a reasonably prudent person ought to have done and could have done at the time in comparable circumstances. Attempts by courts to conjure up the hypothetical reasonable person have not always been an unqualified success. Tests have been developed, refined and repeated in order to give the process the appearance of rationality and objectivity but ultimately the judge deciding the matter must apply his own concepts of common sense and fairness. [1] It is easy to be wise in retrospect and the court must endeavour to avoid asking the question "What would I have done, knowing what I know now?” It is not that sort of ex post facto judgment that is required here. Many judgment calls that turn out in retrospect to have been wrong would not have been made if the person making them had the benefit of hindsight at the time.

Section 227.1 is an example. That section imposes a standard of care on directors that requires reasonable prudence and skill in ensuring that the money raised through the SRTC program be in fact used for scientific research or else that the Part VIII tax be paid either out of the money so raised or otherwise. In determining whether that standard has been met one must ask whether, in light of the facts that existed at the time that were known or ought to have been known by the director, and in light of the alternatives that were open to that director, did he or she choose an alternative that a reasonably prudent person would, in the circumstances, have chosen and which it was reasonable to expect would have resulted in the satisfaction of the tax liability. That the alternative chosen was the wrong one is not determinative. In cases of this sort the failure to satisfy the Part VIII liability usually results either from the making of a wrong choice in good faith, or from deliberate default or wilful blindness on the part of the director.

I preface my review of the facts by observing that both appellants struck me as completely credible, honourable and decent men, albeit somewhat out of their depth in presenting a case of this complexity. They would have benefited by the assistance of experienced counsel. Cloutier is a businessman with no particular formal training but apparently considerable experience in commercial matters. Molyneaux is a computer salesman with a degree in engineering.

The story starts prior to 1983. One Zenon Sosnowski, a researcher at the University of Manitoba, had developed a method of extracting propolis, a substance found in beeswax and used in the production of flavonoids. The Curative powers of beeswax have been known since ancient times but Sosnowski's method of extraction was evidently unique and he had patented it. He developed from the propolis a cream that he called Herpestat or ZP99 and which he manufactured in small batches. Clinical research indicated that the antibacterial, antifungal and antiviral properties of this product might help to alleviate the symptoms of herpes. Sosnowski had obtained in 1982 a Dru Identification Number (DIN) 569194 from the Health Protection Branch (HPB) of the Federal Department of Health and Welfare. The registered owner of the Drug Identification Number 569194 was Zenon Scientific Ltd. ("Z S Ltd.”)

An Edmonton physician, Dr. Thomas MacGuire, had been made aware of the product by one Harold Utton. These men saw potential in developing a market for Herpestat and approached an Edmonton law firm, Kolthammer, Braithwaite and Vigen. The result of this approach was the incorporation of Praetorian by the partners in that firm, Messrs. Kolthammer, Braithwaite and Vigen as well as Mr. Utton and Dr. Maguire. This group, known as the Edmonton group, controlled Praetorian at all material times. On March 26, 1983, Zenon Sosnowski granted to Praetorian in a licensing agreement (Exhibit A-6) "the exclusive worldwide right and license and privilege to manufacture, distribute and sell throughout the world HERPESTAT AND/OR OTHER PRODUCTS. . . ."

The following representations were made in the preamble to the agreement:

Whereas the Licensor Zenon is a scientist, inventor and Biological specialist involved and engaged in the research, development and invention of formulas and applications and is the sole owner of all rights, title and interest in a certain new and useful invention called“ HERPESTAT", and is the owner of a certain application to Patent the process relative to HERPESTAT” in the form of an ointment for the treatment of Herpes I, Herpes II, and Herpes Zoster, known as HERPESTAT 2 per cent, Health and Welfare Canada, Health Protection Branch, Drug Identification Number 569194;

The Licensor warrants that the bioflavonoids it produces from propolis are virologically active in vivo against the Herpes I, Herpes Il and Herpes Zoster viruses;

And whereas there is a requirement under the Food and Drugs Act and Regulations concerning the active ingredients in the product that the drug be safe and effective for the purposes claimed, Zenon Sosnowski hereby warrants that he has done all the necessary work to ensure that the active ingredient supplied by Zenon Sosnowski complies with the Food and Drugs Act and Regulations;

And Whereas the Health Protection Branch of Health and Welfare may require a further detailed manufacturing data on the raw material, Zenon Sosnowski agrees to forthwith comply with such request at his expense when required by Health and Welfare or when required by Zenon Scientific Ltd. to further develop the claim and the product.

The patent application referred to in the preamble to the agreement ultimately matured into United States Patent 4,382,886 issued to Zenon M. Sosnowski dated May 10, 1983. The patent included 20 claims but it is sufficient for the purposes of these reasons to reproduce the abstract:

A new and useful method for extracting propolis from substantially clean raw material to obtain a dry propolis powder. Depending upon the method employed, either a water soluble propolis powder or an organic soluble propolis power may be obtained. A unique method for purifying the propolis extract is also disclosed.

Both the methods for extracting propolis—containing raw material and the water soluble dry propolis powder are claimed. The propolis powder exhibits, among other things, bactericidal viricidal, analgesic, anaesthetic and regenerative properties.

At the same time the shares of Z S Ltd. were purchased by Praetorian. The Edmonton group invested $100,000 in the project, evidently by way of loan.

At this point neither of the appellants was involved in Praetorian. Cloutier was approached by Utton and was invited to put together a group of investors to invest further funds in Praetorian. The result was the formation of Questech Venture Capital Corp, (originally 296958 Alberta Ltd.) the shares of which were owned by a number of investors. It was stated by Cloutier that Questech put up $355,000 and for that it received a 13.33 per cent interest in Praetorian. This is not entirely consistent with the documentary evidence. The shareholder's agreement (Exhibit A-22) stated that Kolthammer, Braithwaite, Vigen, and Maguire had a total of 50 common shares and that 296958 Alberta Ltd. had nine shares and Cloutier had two. The words "common shares" were struck out and the words "Class B” substituted. No further mention of common shares is made. Questech and Cloutier were entitled to nominate 50 per cent of the directors to the ten person board of Praetorian, one of which was to be Cloutier.

In the result, the ten person board of directors of Praetorian consisted of the following:

Molyneaux's investment in Praetorian was indirect. He and a colleague invested $15,000 each in a company known as Blueberry Holdings Ltd., which invested $30,000 in Questech. This represented about 6.224 per cent of the common shares of Questech. In the result, Molyneaux's indirect investment in Praetorian was less than one per cent. Cloutier’s investment was small as well. He stated that he personally held 2.4 per cent of Praetorian and another small percentage through a company with other members of his family. Cloutier’s evidence as to the nature and extent of his holdings in Praetorian was somewhat confusing, but I am prepared to find that it was small.

After June 3, 1983 Praetorian operated on the basis that the DIN obtained by Zenon Sosnowski was all that was required to permit the marketing of Her- pestat. They proceeded with despatch to the launch of Herpestat. On June 7, 1983 four of the directors, members of the Edmonton group, met in Toronto with Pharma Pak Ltd., which was to manufacture the product. The president of Pharma Pak referred them to Fruin & Associates who were to assist them in their marketing of Herpestat. A package was designed (Exhibit A-17) and a quality control assay to determine the activity levels. The package was submitted to the HPB and was returned with some suggested changes, which Praetorian took to constitute approval. By June 20, 1983 the tubes had been ordered. On July 4, 1983 Dr. lan French was retained to obtain approval from the United States Federal Drug Administration to sell the product in the United States. On July 8,1983 they had obtained from Kingswood Canada (a company owned by Mr. Fruin, a former president of Eli Lilly Ltd.), that had been retained to do the marketing of Herpestat a plan for the marketing of Herpestat in Canada. By August 19 50,000 tubes of Herpestat were ready for the market.

I mention these dates to show the speed with which Praetorian moved in order to get Herpestat to market.

Problems began, however, to emerge. As early as July or August Praetorian came to realize that there could be inconsistencies in the concentration of propolis in the batches, which were to contain two per cent propolis and 98 per cent encerin, an inert carrier. Moreover, the propolis used was not always of the same strength. Therefore Praetorian retained Micro Technics to prepare a report to determine whether the problem could be solved. Nonetheless this product was sent out to distributors or retailers and the product was launched on September 21, 1983. In connection with the launch Kingswood organized an aggressive media blitz. This attracted the attention of the HPB, which requested an immediate meeting in Ottawa on September 28 and 29.

It was at this meeting that the Health Protection Branch disclosed to the representatives of Praetorian a memorandum of CIBA-GEIGY (Exhibit A-14) dated February 28, 1983 which had previously not been shown to Praetorian by Sosnowski. The memorandum was a record of a meeting with Dr. Armstrong and Dr. Rathburn of the HPB. Dr. Armstrong was the Assistant Director and Chief, Drug Evaluation Division, of the Bureau of Non-Prescription Drugs. The meeting had been held at the time when Mr. Sosnowski was negotiating with CIBA-GEIGY with a view to licensing that company to manufacture and market Herpestat.

The memorandum contains a number of statements with respect to the HPB's view of Herpestat as follows:

1. General Comments:

DRUG STATUS:

— Notice of Compliance was never issued for HERPESTAT as it was considered an“ "old drug” by Bureau of Prescription Drugs.

— Was transferred to Bureau of Non-Prescription Drugs (BNPD).

— BNPD is not in agreement with old drug status for the claim of efficacy for treatment of Herpes genitalis, as the submission does not contain data in support of this claim.

APPROVED INDICATION & SUBMISSION CONTENTS:

— BNPD considers that there is evidence to support shortening the duration of cold sores.

— There is no evidence that HERPESTAT relieves the symptoms, i.e. pain and itching, of herpes labialis.

— It states that skin irritation/sensitivity studies were never filed, although asked for.

— It would not require toxicity studies.

— Manufacturing information had been asked for but had not been received.

LABELLING:

— The tradename HERPESTAT" in the opinion of the BNPD implies a claim for which there is no evidence. The BNPD would not have permitted this name.

— The text of the HERPESTAT" label has not been submitted for approval.

N.B.—The BNPD has received numerous inquiries from outside Canada including Europe about "HERPESTAT", the commercial inquirers assuming that the name"HERPESTAT" means anti-herpetic activity and also since it comes from Canada that this name has been approved by the HPB and therefore carries a certain degree of credibility. Dr. Armstrong appears to be very disturbed.

ACTIVE INGREDIENT:

— A comment passed by Dr. Armstrong on the active ingredient. In his opinion the putative active substance in beeswax extract is PROPOLIS and not just beeswax extract as on the present label.

— PROPOLIS is a substance produced by bees and which protects their hives.

It has been shown to have antibacterial and possibly anti-viral properties.

— The. BNPD has a number of applications with PROPOLIS as an active ingredient—the Bureau has classified these as New Drugs and therefore substantial, evidence in support of their claims will need to be provided.

2. Situation if CIBA-GEIGY were to be the distributor for Zenon Scientific Ltd.

— The present DIN would stand.

— Manufacturer could be Zenon Scientific Ltd. or CIBA-GEIGY.

— Labelling would have to be approved prior to marketing, and it probably will be changed substantially to reflect treatment of labialis only.

3. Situation if CIBA-GEIGY were to acquire the license and sell the product under its name, then:

— A new DIN would have to be applied for.

— Any claims would have to be substantiated and with present evidence it

would only be to shorten duration of cold sores, i.e. no relief of symptoms.

— The tradename "HERPESTAT" would probably not be allowed for reasons given above.

— Label would have to be revised accordingly.

— Further indications would have to be pursued under an IND.

— The BNPD has also received a number of inquiries from a number of Canadian companies like ourselves, being interested in a licensing agreement.

The comments in the memorandum were entirely at variance with the information upon which Praetorian had proceeded in seeking to market Her- pestat. It was obvious that Herpestat did not have the approval of the HPB and that substantially more research would have to be done before the product could be marketed. Even the name “ Herpestat” was not approved.

In the result the HPB required that all sales of Herpestat cease. On September 30, 1983 a press release was issued stating that the sale of Herpestat was discontinued and the product was recalled. It had been on the market for about a week and had generated sales of about $50,000. The result of the recall was an immediate and drastic reduction in the value of the inventory.

Praetorian was therefore left with a large stock of unsaleable product. It began looking for a new product containing propolis with a different application. Praetorian realized after HPB had effectively foreclosed the sale of Herpestat that it was necessary that it embark on a program of further research. It became aware of the new government program involving scientific research tax credits.

Board meetings were held and the directors of Praetorian, whose prospects of earning substantial income from the sale of the product had dwindled to virtually nothing, were faced with a number of options. They could let Praetorian go under, thereby losing the investment. Praetorian could do the substantial research necessary to satisfy the requirements of the HPB. For this, however, it had no available funds. They considered selling Herpestat on foreign markets but were unable to obtain permission from the HPB to do so. They considered selling a product containing propolis under a different name on the domestic market but this never materialized.

In the result the only way in which they could afford to do the scientific research necessary was to raise money through the SRTC program and Praetorian made the designations described above. The two designations of $1,000,000 and $130,000 made by Praetorian that gave rise to an initial liability under Part VIII of the Income Tax Act of $565,000 netted Praetorian about $472,000 after the amount paid to redeem the securities that were issued for the purposes of the designation under subsection 194(4).

Both appellants testified that they intended and expected that the money would be used for scientific research and to this end extensive discussions were held with the Alberta Research Council. Mysteriously, however, the money disappeared from the company’s bank account. Neither appellant was able to explain where it went. It was not suggested that either of them benefited personally or that either of them appropriated any part of it. I accept their evidence that they did not. Mr. Molyneaux did not have signing authority on Praetorian’s bank account and he ceased to be a director on May 24, 1984 at a time when there was still about $322,000 in the account. Although the Part VII tax liability had arisen prior to May 24, 1984, the administrative practice of the Department of National Revenue, as set out in a press release of June 5, 1984, (Exhibit A-54) was to modify or withhold its usual collection action where the corporation was able to satisfy the Department that its liability would be satisfied by the end of the year. It was reasonable for the appellants to rely on this administrative concession. [2] Accordingly it was open to the appellants to assume that the satisfaction of the Part VIII tax liability could be deferred until the end of the corporation’s fiscal year.

The difficulty that I have in holding either appellant personally responsible for Praetorian’s Part VIII tax liability is that on the evidence before me there appears to be nothing that they, either singly or together, could have done to prevent the failure to satisfy that liability. They were two members of a ten- person board and they held a very small minority interest in the company. The board was, according to the evidence, a fractious one and it was dominated by the Edmonton group and by an aggressive and domineering member, Mr. Plamondon, the majority shareholder of Questech. If these two appellants were to be held responsible for the entire Part VIII tax liability of Praetorian I should have expected to see some indication of what they could, as a practical matter, have done. To resign from the board in protest would have accomplished nothing. Given the position of Praetorian following the forced cessation of the sale of Herpestat it would have been futile for them to endeavour to persuade the other board members that the $472,000 raised by the SRTC designations should be paid over to the Receiver General, thereby leaving the company with a shortfall in the tax account of about $90,000 and no resources with which to carry out the scientific research which they believed was essential to obtaining the approval of the HPB and to the continued survival of the company. The only rational alternative was to pursue their plan to do additional scientific research and on the evidence this was planned and both of these appellants genuinely believed that it would be carried out. At the time that Mr. Molyneaux ceased to be a member of the board and indeed prior thereto he had no control over what happened to the money that remained in the account.

There are a number of other considerations that impel me to conclude that these appellants are exonerated under subsection 227.1(3) in respect of the Praetorian liability. In the first place they acted with the advice and guidance of a large firm of chartered accountants. They were unquestionably aware of the responsibilities of directors under section 227.1. They were, however, essentially powerless to alter the course of events that led finally to the demise of the company. The project was ill-fated from the outset and they were no more than bit players caught up in a larger drama that moved with a fatal inexorability to its conclusion. A director's liability under subsection 227.1(1) or his exoneration therefrom under subsection 227.1(3) does not depend upon his adopting postures that would objectively have no practical effect upon the ultimate course of events. I do not ignore the fact that Cloutier's involvement in the day to day affairs of the company was somewhat more extensive than that of Molyneaux. Nonetheless neither of them was in any position either effectively to influence the direction in which the company went or to forestall the ultimate debacle.

Mr. Fulcher, counsel for the respondent, conducted the case with commendable fairness and restraint. One of his contentions was that at least some of the “scientific research" that Praetorian did or contemplated doing was not scientific research at all within the meaning of section 37 of the Income Tax Act Part XXIX of the Regulations but rather was" quality control or routine testing of products”. There may well be considerable merit in this position but the evidence does not permit me to reach any concluded opinion on the point. The question of course could be relevant in an assessment against the company but where there is a genuine and bona fide belief by a director that the activity is scientific research and that belief is based on a reasonable reliance on professional advice I do not think that the technical definitions of scientific research (or scientific research and experimental development) can in themselves defeat a claim for exoneration under subsection 227.1(3).

Mr. Fulcher, in his very thorough brief of cases, referred to a number of decisions of this and other courts as well as other learned commentaries. Each case under subsection 227.1(3) turns on its own facts and the numerous decisions in this Court are not necessarily susceptible of reconciliation. In Robitaille v. The Queen, [1990] 1 C.T.C. 121, 90 D.T.C. 6059 Addy, J. stated at page 125 (C.T.C. 6062):

Although, when dealing with "the degree of care, diligence and skill” to be exercised by "a reasonably prudent person" in“ comparable circumstances”, each case must necessarily depend on its particular facts, it appears that the Tax Court in its more recent decisions might have been more lenient towards directors than the previous cases, which seemed to insist on a somewhat higher duty, the duty presumably being an absolute one for the director to take positive action, since he or she must, in all cases, regardless of the situation, prove affirmatively that, both before and after the occurrence, there was on his or her part an exercise of care, skill and diligence in the performance of the duties normally incumbent upon a director. The argument is based on the common law principle that no distinction is to be made between directors whether they are active or purely nominal directors. Although that burden would, in the vast majority of cases, fall upon any director seeking to escape liability under section 227.1(1) by qualifying as an exemption under 227.1(3), I cannot accept that it is an inflexible rule of universal application regardless of the facts of any case. There exists, as was decided by Chief Judge Couture, of the Tax Court of Canada in the reported case of Fancy & Fancy v. M.N.R., [1988] 2 C.T.C. 2256, 88 D.T.C. 1641, certain exceptional situations where a distinction can and should be made. Be that as it may, the “circumstances” referred to in subsection (3) must be those which, either directly or indirectly, would have an effect on the actions or on the inaction of the person sought to be held liable under subsection (1). The fact that the bank, to the knowledge of and with the consent of the defendant, from October 1982, effectively assumed sole control over all disbursements of the corporation, constitutes a very important circumstance.

In Merson v. M.N.R., [1989] 1 C.T.C. 2074, 89 D.T.C. 22, Judge Rip of this Court stated at pages 2083-84 (D.T.C. 28):

The words “reasonable” and "prudent" in some instances of use are synonymous: having sound judgment. A director manages or supervises the management of a business: he must have sound judgment and in any given set of circumstances must proceed with a degree of prudence. The prudence required by subsection 227.1(3) in the exercise of care, diligence and skill is different from that required by a director performing his duties, under corporate law, notwithstanding that subsection 227.1(3) and subsection 122(1)(b) of the Canadian Business Corporations Act, for example, both use identical words. The exercise of care, diligence and skill by the director contemplated by subsection 227.1(3) is not founded on the director’s obligations to the corporation; it is based on one of the corporation's obligations under the Act and the failure of the corporation to fulfil such obligation. A director who manages a business is expected to take risks to increase the profitability of the business and the duties of care, diligence and skill are measured by this expectation. The degree of prudence required by subsection 227.1(3) leaves no room for risk. However, the exercise of care, diligence and skill by a director contemplated by subsection 227.1(3) requires a degree of prudence that is not as great as that of a trustee since a director, it must not be forgotten, is neither the trustee of the fund represented by the unremitted source deductions nor is he the insurer of the Receiver General for Canada. Subsection 227.1(3) does not require the care, diligence and skill that is exercised with an unduly excessive measure of prudence.

I am in respectful agreement with these observations. The directors of a corporation are neither trustees for nor insurers of the Minister of National Revenue. They are required under section 227.1 to act with reasonable skill and prudence to ensure that the Minister is paid that which is owing to him. Where, however, individual directors who control neither the company nor the board of directors are powerless to influence the course taken by the corporation the law does not require that they should be held responsible for the corporation's obligations to the fisc. The situation is not dissimilar to that described in Fancy v. M.N.R., supra, by Couture, C.J.T.C. where he said at page 2260 (D.T.C. 1644):

There is no evidence that the appellants caused the company to divert any of its funds to their benefit or to the benefit of other creditors to the detriment of the respondent. They were frugal individuals receiving a modest salary without additional benefits. From July to October 1982 the appellants made efforts to raise funds and they were hopeful that the bank would support the company as it had in the past and allow it to meet its obligations under the Act as it did with the August 15 cheque for the employees' deductions. It was only on or about September 10 that the bank refused to honour the payment to the respondent. My appreciation of all these facts is that the appellants were victims of circumstances over which they had no effective control.

I am, however, unable on the evidence to reach a similar conclusion with respect to Mr. Cloutier’s assessment of the Part VIII tax owing by Propolis. Here there is essentially no evidence that would exonerate him under subsection 227.1(3). The designation made by Propolis in favour of Praetorian had no real effect other than to reduce Praetorian's liability under Part VIII and to shift that liability to Propolis. No money was paid by Praetorian to Propolis for the securities issued as part of the designation. A promissory note was given but it was never paid. There was no evidence that Propolis would ever have any funds with which to satisfy the Part VIII liability or to do any scientific research; or that it had any prospects of ever doing so. The opinion of December 19, 1985 from Coopers & Lybrand, chartered accountants, sets out in some detail the steps that were to be followed in forming a new company which would before January 1, 1985 make a subsection 194(4) designation in favour of Praetorian. It was anticipated that this would substantially eliminate the latter's Part VIII tax liability. The opinion was based upon a number of assumptions including the assumption that during the 12 months following December 19, 1984, scientific research expenditures totalling $800,000 would be made. The plan may have had technical merit but it failed to take into account the obvious practical problem that Propolis had no funds with which to do the contemplated research. Both companies were ultimately wound up. Whoever the other directors of Propolis may have been, they appear to be no longer available to share the burden which has fallen unfortunately on Mr. Cloutier’s shoulders. Mr. Cloutier has been the unwitting victim of a piece of fiscal legerdemain but I must, reluctantly, dismiss his appeal from the assessment relating to Propolis.

The appeal of Ronald Cloutier from assessment No. 3365 dated September 10, 1990 is allowed and the assessment vacated.

The appeal of Ronald Cloutier from assessment No. 540017 dated November 13,1987 is dismissed.

The appeal of Ralph Molyneaux from assessment No. 3366 dated September 10, 1990 is allowed and the assessment vacated.

This is not a case for costs. Each party should bear its own costs.

Appeals allowed for the most part.