Jacques Bergeron, George Demers and Michel Bouchard v. Minister of National Revenue, [1993] 1 CTC 2625, 93 DTC 700

Tremblay, T.C.C.J.:—These appeals were heard on common evidence in Montreal, Quebec, on February 6, 1992.

1. Point at issue

The question is whether the appellants are liable as directors of the corporation La Belle Carte de Souhaits Inc. for the failure to remit to the respondent source deductions for both tax and unemployment insurance amounting to $2,607.75.

First, the appellant Jacques Bergeron stated that he was the sole director who made decisions in cases where deductions were not paid to the respondent. He was solely responsible for managing the corporation's funds. He assumed complete responsibility for the negligence, if any, and maintained that Messrs. Demers and Bouchard bore no responsibility in this regard.

Additionally, the appellants argued that they exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

2. Following the evidence presented on last February 6 as to the amount of $2,607.75 at issue, the Court reduced it to $125.07. It also in an oral decision held the three appellants liable for the balance, thereby dismissing their appeals.

2.01 In brief, a first reason given by the Court for dismissing the three appellants' appeals is the interpretation to be given to subsection 227.1(3) of the Act. It reads as follows:

227.1 (3) 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 Court then referred to Merson v. M.N.R., [1989] 1 C.T.C. 2074, 89 D.T.C. 22, in which Judge Rip of this Court described the reasonable prudence of a diligent director mentioned in subsection 227.1(3) of the Act as follows at page 2083 (D.T.C. 28):

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 [sic] 122(1)(b) of the 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 fulfill 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.

[Emphasis added.]

2.02 Notwithstanding that the appellant Jacques Bergeron stated he was the sole director and assumed all responsibility for the mistakes made, the fact remains that the other directors cannot regard themselves as excused from all liability merely by the fact that they may have said to Mr. Bergeron: "You look after administration and accounting" [translation].

The liability added by section 227.1 of the Act applies to all directors. The appellants Demers and Bouchard had a duty to supervise how the corporation was run, at least as regards source deductions and their payment to the Department of National Revenue. They did not act with prudence.

2.03 Also in this case, the time limitation mentioned in subsection 227.1(4) of the Act cannot be alleged by the directors. That provision reads as follows:

227.1(4) Idem.— No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

They remain directors until the corporation is dissolved by the government. The latter had the power to create the corporation and it alone, according to the decision of the Quebec Superior Court in 1955 in Banque provinciale du Canada v. Ross, [1955] Que. S.C. 292, 35 C.B.R. 198, at page 295 (C.B.R. 200), "can terminate it and end its legal existence" [translation].

For someone to cease to be a director, he must resign in due form in writing, and this was not done in the instant case.

3. However, following this oral decision, the Court postponed its written decision until judgment had been rendered in Leung by the Federal Court- Trial Division, as the Court felt that this judgment would be rendered shortly.

The Court has been informed that this case will probably not go forward for another ten months, to say nothing of the possibility of an appeal to the Federal Court of Appeal and the Supreme Court.

The Court has accordingly decided to render its decision in the instant case, taking into account the facts in Leung v. M.N.R., [1991] 2 C.T.C. 2268, 91 D.T.C. 1020 (T.C.C.).

4. Does Leung apply to the instant case?

4.01 In Leung, Judge Rip of this Court, in analyzing the facts presented, first concluded that the appellant, a director of a company which had not paid source deductions to the Department of National Revenue, had not acted with care, diligence and skill and so would have dismissed the appeal. He had been assessed under section 227.1 of the Act.

At the same time, considering the notice of assessment, Judge Rip allowed the appeal alleging that the said notice put the amount owed by Mr. Leung at $65,773.16, but without establishing the respective amounts assessed under four statutes (three federal and one provincial) and for penalties and interest.

After citing several judgments on the nature of the assessment and notice of assessment and describing the Minister's duties, Judge Rip cited subsection 152(2) and made the following comments at pages 2276-77 (D.T.C. 1027):

Subsection 152(2) requires that:

After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

“It is well established,” wrote Mahoney, J., "that'an assessment is not made until the Minister has completed his statutory duties as an assessor by giving the prescribed notice'": Flanagan v. The Queen, [1982] C.T.C. 423, 82 D.T.C. 6341 at page 423 (D.T.C. 6342).

It is obvious, to me at least, that in enacting section 152 of the Act, Parliament required the notice of assessment to inform the person to whom it is sent of the amount of the tax the Minister has assessed under authority of that statute. That is the purpose of a notice of assessment, to inform. An assessment, therefore, is not complete unless the notice is given in such manner that the taxpayer knows the amount of tax assessed under the appropriate statute.

As I have already indicated, when a taxpayer receives a notice of assessment he is entitled to know the amount assessed, under what legislation he is being assessed and the reason for the assessment. An amount of tax is assessed under a specific statute. The Act provides for the Minister to assess a person for an amount payable under a provision of the Act. I ask myself if the appellant, reading the notice with respect to the assessment in issue, can reasonably determine the amount he was assessed under the Act and the reason for the assessment.

In my opinion, the interpretation to be given to a notice of assessment may readily be compared with the interpretation given to a taxing section in a taxation statute. If the taxing section is not clear, there is no tax. The basis for this rule, which derives from Roman law, is the freedom of the individual. The legislator has the right to limit that freedom by all kinds of obligations imposed on individuals: legislation regulating hunting, fishing, traffic and so on, and legislation imposing taxes. That reduction of freedom is valid but only in so far as the obligation is clearly stated.

The same is true of a notice of assessment stating an amount payable. As the notice of assessment is in fact the extension of a taxing section, since it gives effect to that section, it must have the necessary characteristic of the taxing section, namely clarity.

4.02 In the instant case, the notices of assessment issued to each of the appellants read as follows:

The obligation pursuant to 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") and similar provisions of the Unemployment Insurance Act, R.S.C. 1985, c. U-1, amounting to $2,607.75, which represents the total of deductions, interest and penalties unpaid by LA BELLE CARTE DE SOUHAITS INC. in respect of notices of assessment dated October 15 and 21 and November 4 and 27, 1986 and March 9 and August 11, 1987.

It is apparent that a taxpayer to whom such a notice is sent is completely unable to tell how much is owed under the Income Tax Act and how much is owed under the Unemployment Insurance Act. As to the latter, if an amount was given, it would have to be divided between the part paid by the employee and the part which the employer had to pay and which the directors must pay.

5. Conclusion

For the foregoing reasons, the appeals are dismissed.

Appeals dismissed.